Last week, the American International Group (AIG) board considered whether to join a lawsuit against the U.S. government alleging the terms of the company’s $182 billion bailout and takeover were too onerous. The company’s directors heard arguments from the plaintiff in the case, former AIG CEO Maurice Greenberg, and lawyers for the Treasury Department. After the presentations, the board decided not to join.
The initial class action suit was filed in 2011 in both the Southern District of New York and the Court of Federal Claims by Mr. Greenberg’s new company Starr International Co. The suit, filed on behalf of AIG shareholders, alleges that the Federal Reserve’s and the Treasury’s bailout resulted in dilution of AIG shareholder equity violating the takings clause of the Fifth Amendment. The complaint alleges that issuing additional shares was necessary to accommodate the government’s demand for an 80 percent equity stake. Eventually, the shares were issued without shareholder approval and in contravention of a shareholder vote rejecting the issuance, states the complaint. The complaint alleges that the resulting dilution of shareholder equity and voting power from the additional shares constituted a taking of private property without due process of law. The complaint similarly alleges that the 14.5 percent interest rate charged on federal loans was a punitive attempt to provide a backdoor bailout to the rest of the financial industry.
In July 2012, the Court of Federal Claims rejected the Treasury’s motion to dismiss as to the takings claims, finding that the complaint sufficiently identified government actions requiring just compensation. In so doing, the court rejected the government’s argument that shareholders did not have a cognizable property interest in the equity and voting power associated with their shares. The Southern District of New York Court, however, dismissed the claims as to the Federal Reserve. That case is currently pending appeal in the Second Circuit.
AIG’s consideration of the lawsuit spurred controversy given the perception of success regarding the bailout. AIG has been running commercials exclaiming “Thank you America.” However, its decision not to join the suit could open it to potential additional shareholder litigation if it misses out on a sizeable settlement attained by Mr. Greenberg.