Kamin v. American Express Co.
86 Misc.2d 809, 383 N.Y.S.2d 807 (N.Y.Supp. 1976)
AmEx bought about $30M worth
of stock in DLJ. The stock dropped like a rock and soon it was only worth
$4M. AmEx decided to give the stock away as a dividend to AmEx
If AmEx sold the stock, they
would have to take a loss of $30M-$4M=$26M on their income. This would
reduce their tax liability, but would make their earnings-per-share look
a lot lower and possibly hurt the price of AmEx stock.
If AmEx gave away (aka
'distributed') the stock as a dividend, they would be allowed to leave
their income statement alone, and just reduce retained earnings by $30M.
The stock price wouldn't suffer, but they'd get no tax benefit.
Stockholders, led by Kamin,
Kamin argued that AmEx could
save $8M in taxes by selling the DLJ shares, so giving them out as a
dividend was a bad business decision and was only being done to
fraudulently prop up the AmEx stock price.
Instead of getting $4M of
crappy stock as their dividend, the stockholders could have gotten $4M
in cash plus $8M in savings = $12M of cash for their dividend.
The Trial Court found for
The Trial Court found that
what AmEx did with their DLJ stock was a business judgment and the courts
wouldn't interfere with that because of the business judgment rule.
The Court noted that the
investors specifically raised this issue at the AmEx board meeting, and
the Board considered and rejected their arguments.
Taking a $26M loss could
have seriously lowered the stock price, and that could have potentially
hurt the stockholders more than the loss of a tax break. It wasn't for
the Court to figure out how much the stock price would have dropped.