Among the many questions about the City of Portland's proposed acquisition of Portland General Electric is whether it would be legal. Greg Chaimov, formerly the state legislature's main lawyer, had a piece in The Oregonian the other day raising that question, and so far I haven't heard anything close to an answer.
To understand the potentially deal-killing legal problem, a little corporate merger and acquisition talk is in order. There are two ways to buy a corporate business. You can buy all the stock from the stockholders; or you can buy the assets of the business from the target company (and its stockholders can then liquidate the target company and take out your money). For a lot of reasons, including several relating to taxes, sellers tend to want buyers to buy stock; for their own reasons, buyers often prefer to buy assets. The two deal structures are sometimes known as the "stock deal" and the "asset deal," respectively.
The PGE deal would almost certainly be a stock deal. PGE's sole shareholder is Enron, whose CEO -- essentially working for Enron's bankruptcy trustee, who in turn represents Enron's frustrated creditors -- has said over and over that the sale has to be a stock deal, period. Although it would technically be possible (albeit hideously complicated), an asset deal for PGE has been ruled out. As the O reported on April 20, Enron CEO Stephen Cooper "has made it clear that he's looking for more money this time around and only is interested in selling stock, not assets. Otherwise, he says, Enron is content to give its creditors stock in PGE and let financial markets decide what the company is worth."
So the City of Portland, if it buys PGE, is going to have to buy the stock. And that's where the legal problem comes in. The Oregon Constitution forbids local government from owning stock of a corporation. Article XI, Section 9, added in 1917, reads as follows:
Section 9. Limitations on powers of county or city to assist corporations. No county, city, town or other municipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association. Provided, that any municipal corporation designated as a port under any general or special law of the state of Oregon, may be empowered by statute to raise money and expend the same in the form of a bonus to aid in establishing water transportation lines between such port and any other domestic or foreign port or ports, and to aid in establishing water transportation lines on the interior rivers of this state, or on the rivers between Washington and Oregon, or on the rivers of Washington and Idaho reached by navigation from Oregon's rivers; any debts of a municipality to raise money created for the aforesaid purpose shall be incurred only on approval of a majority of those voting on the question, and shall not, either singly or in the aggregate, with previous debts and liabilities incurred for that purpose, exceed one per cent of the assessed valuation of all property in the municipality."No county, city, town or other municipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever...." That's pretty absolute language, and according to Chaimov's article, the state's courts and attorney general have interpreted the rule strictly. The city, with Commissioner Erik Sten in charge, apparently thinks the rule is a "technicality" that can be circumvented for purposes of the PGE transaction, but Chaimov's not so sure.
And in order for the deal to go down, the people with the money are going to have to be quite sure.
Back when Sten was still a kid at Fernwood Middle School, there was a little fiasco called the Washington Public Power Supply System (WPPSS, pronounced "whoops"). WPPSS issued a gajillion dollars' worth of public bonds to finance nuclear power plants, and it turned out that, because of a few "technicalities," the bonds weren't enforceable, even though fancy lawyers had originally opined that they would be. Lots of folks got burned, and I doubt Wall Street has forgotten about those worthless public power bonds from out in the Pacific Northwest.
In order to sell the billions of dollars of City of Portland bonds that are being proposed to finance the public takeover of PGE, the city is going to have to come up with a way to make the bond buyers of the world very, very comfortable with the legal aspects of the deal. I'm sure the city's investment banker consultants and out-of-state lawyers, who are all more or less working on commission, are telling the city fathers that they've got a way to get around what the Constitution plainly says. But they haven't convinced Chaimov.
The city has already blown well over $1 million of general fund money on the PGE adventure, by even conservative estimates. Before we get too many more millions down the road, maybe somebody from City Hall ought to get up at a press conference or City Club luncheon with a couple of PowerPoint slides showing exactly how the structure is going to satisfy the constitution.