Starr International, a firm headed by former AIG CEO Hank Greenberg, has recently sued the federal government, claiming that some provisions of the 2008 AIG bailout violated AIG shareholders’ constitutional rights (Starr was a major AIG shareholder at the time of the bailout). One of the claims Starr has advanced is that the takeover violated the Takings Clause of the Fifth Amendment by taking various shareholder rights without paying compensation. This claim raises several interesting issues, but on balance I doubt that it will succeed.
Federal courts have long recognized that the Takings Clause applies to intangible property, including shareholder rights. However, Greenberg and Starr must still overcome several other difficult hurdles. First, there can be no taking if the property owner agreed to give up his or her rights to the government voluntarily. In this case, the bailout was approved by AIG’s board. As I understand it, Starr claiming that the board exceeded its legal authority. If they lose that part of their argument, there can be no taking.
If the transfer of rights is held to be involuntary, Starr could easily win if it could show that the takeover destroyed 100% of the value of their rights, as the Court ruled in Lucas v. South Carolina Coastal Council. However, it seems to me unlikely that they can prove any such thing, since the stockholders shares were not completely taken away. Assuming there was no 100% loss of value, the case would be analyzed under the three-factor Penn Central test, which considers 1) the economic impact of the government action on property, 2) the extent to which the government action undermined “investment-backed expectations,” and 3) the character of the government action. Application of the Penn Central test is often imprecise and murky. The bottom line, however, is that the government usually wins, as I discuss in greater detail in this article. I’m no fan of Penn Central myself, both because it is vague and because it provides insufficient protection for property rights. But it seems unlikely that the Court will use this case as the vehicle for changing the test. There is, however, uncertainty about the application of the test to this case, since – as far as I know – federal courts have never applied the test to anything remotely resembling the AIG bailout.
Finally, if Starr proves that there was no voluntary transfer of rights and prevail under Penn Central, they will face one last major challenge: proving that they are entitled to a more than nominal amount of compensation. The standard rule is that a taking entitles the owner to “fair market value” compensation for the loss of their rights. But prior to the bailout, AIG was on the verge of bankruptcy. Therefore, any shareholder rights may have had little or no market value at that point. The rule is that the “fair market value” must be assessed as it existed prior to the taking. So courts will not take account of any additional value added by the bailout. However, I’m no expert on either AIG’s assets in particular or the valuation of stockholder rights more generally. So it’s possible that these rights had greater value than is apparent to me. Experts on corporate law and finance are welcome to weigh in on this point.