Lefteris Pitarakis/Associated Press

The United States Justice Department said on Wednesday that it was considering legal action to block British Petroleum from paying dividends to make sure the company covers all costs related to the oil spill in the Gulf of Mexico. Interior Secretary Ken Salazar has said BP would be asked to pay energy companies for losses if they had to lay off workers because of the moratorium on deepwater drilling.

BP, whose shares dropped 7 percent in London on Thursday, said it would decide next month whether keep a quarterly dividend of 14 cents a share for the second quarter, a payout of about $2.6 billion. Needless to say, investors in Britain were furious because BP dividends accounted for some 12 percent of all dividends handed out by British companies last year.

Should the U.S. stop BP from paying dividends to its shareholders? What would be the consequences of this action?

The Justice Department Is Right

Lynn A. Stout is the Paul Hastings professor of corporate and securities law at U.C.L.A. and an expert on corporate governance.

Suppose you own shares in a company that causes a disaster. Perhaps your company blows up a village in India, or sells an arthritis drug that proves to cause heart attacks, or negligently causes the largest oil spill in the history of the United States. As a shareholder, you have limited liability and are not personally responsible for the damages. You do, however, have to worry about losing your investment. There is a chance, slim but not zero, the company will eventually have to pay out damages that exceed its net assets. What should you do?

It’s not out of the question to think that BP might eventually find its assets insufficient to cover the bill.

As any corporate finance expert would tell you, you should immediately start draining any and all cash out of the firm into your own pockets. The best and quickest way to do this, of course, is to pay yourself a very large dividend.

This scenario explains why, on Wednesday, the U.S. Justice Department announced that it was “concerned” about BP’s plan to pay its shareholders approximately $10 billion in dividends. On first inspection, it might be tempting to dismiss the Justice Department’s protests as blown out of proportion. Surely BP has enough money to pay for the costs of the spill and a dividend, too. After all, BP is one of the largest public companies in the world.

Read more… But the disaster unfolding in the Gulf of Mexico is also one of the largest — and still ongoing — environmental disasters in the world. Experts fear that the oil may eventually spread not only throughout the Gulf, but across the Florida Keys and up the Atlantic coast. Meanwhile, BP has stated publicly that whatever the legal limits on its liability, it will pay all “legitimate” claims for damages resulting from the spill. These public statements themselves offer a legal basis for BP’s liability. Is it really entirely out of the question that, should the spill end up permanently destroying one of the most productive and fragile ecosystems on the planet, BP might eventually find its assets insufficient to cover the bill? If it’s not entirely out the question, the Justice Department is right to be concerned. As the BP spill illustrates, what’s good for shareholders is not always what’s good for the rest of us.

Crossing the Line

Jeffrey A. Miron is a senior lecturer and the director of undergraduate studies at Harvard University and a senior fellow at the Cato Institute. He blogs at jeffreymiron.com and is the author of “Libertarianism, from A to Z.”

In an unprecedented move, the Obama administration is calling on BP to abandon the protection of the Oil Pollution Act of 1990, which limits BP’s liability under federal law to $75 million in damages, plus cleanup costs.

As horrible as the damage from the spill might be, abandoning the rule of law, which is what the administration’s proposals imply, is worse.

As horrible as the damage from the spill might be, abandoning the rule of law, which is what the administration’s proposals imply, is worse. BP has not been convicted of anything yet, nor is the magnitude of damages known, so BP should be free to operate as a legal company in the meantime. This might mean that, when judgments occur in future years, BP will be bankrupt and unable to pay. That is unfortunate, but it is what the rule of law requires.

BP has every right to avail itself of the protections of the 1990 Act. The company may choose to pay more than its legal obligation out of concern for public relations, but that should be BP’s choice, not the result of strong-arming by politicians.

Read more… And BP did not cause workers to be idled at other deep-water drilling sites; the administration caused that by imposing its moratorium. The lessons learned from the BP spill may ultimately suggest that future drilling should be curtailed or that oil companies should pay more up front as a “down payment” against possible damages. But that is relevant to future decisions, not existing arrangements. The rule of law can have unpleasant consequences in specific cases. But abandoning that rule is worse because it means that politicians can reward the business or individuals they like without regard for consistency, fairness or economic efficiency. Businesses operating without rule of law learn that political connections, not good business decisions, are the path to profits. The U.S. should not fix past mistakes, by government or BP, by punishing BP in inappropriate ways. The way to balance cheap oil and the environment is to hold BP accountable as much as possible under existing policies and then design better policies for the future.

BP Needs to Regain Credibility

Nils Pratley is financial editor of the Guardian in Britain.

BP’s attempt to cling to its dividend is not smart. Oil is still belching from the seabed. While that is so, nobody can estimate confidently the size of the final bill, even to the nearest $10 billion. So don’t send out a message that you’ve assessed the likely costs and concluded that a $10 billion-a-year payment to shareholders is affordable.

A suspension of dividends would be an expression of good intent toward an understandably skeptical U.S. audience.

Things may yet turn out that way — and we should certainly hope so because a bankrupt BP would serve nobody’s interests — but it’s too early to judge.

True, some shareholders would be alarmed by a suspension of payments. In Britain, dividends are seen as the firmest expression of a management’s bond with shareholders. Tony Hayward knows this. Two years ago, when a falling oil price represented the biggest threat to BP’s dividend, he said: “I pay taxes so I don’t go to jail; I pay dividends so I don’t get fired.”

Read more… But in those days the trade-off was between cash for shareholders and cash for capital expenditure. BP today is fighting for its reputation. Its priority should be to protect its assets and ensure it is in a position to pay dividends in two and 20 years’ time. If that implies a short-term dividend sacrifice, so be it. The biggest threat to BP’s future seems to be the increasingly shrill and populist tone adopted by the Obama administration. The notion that BP should have to pay the wages of other companies’ workers laid off by the moratorium on deepwater drilling is absurd. BP cannot be expected to pick up bills of that sort — the trail would be never-ending. BP needs to make that point diplomatically and sensitively. To do so, it must try to regain a little moral credibility. A suspension of dividends, as an expression of good intent toward an understandably skeptical U.S. audience, would be a start.

Good Financial Sense

Steven Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business where he focuses on issues in corporate finance and corporate governance.

Companies cut or eliminate their dividends when the net cash flows generated by the company no longer support the dividend payment. A dividend cut is usually met with a large stock price decline precisely because it reveals that fact to the world.

A dividend cut could actually help raise BP’s stock price — but the government forcing BP’s hand would be harmful.

A cut tells shareholders that the company is in worse shape than they thought. That is one reason why companies try hard to maintain their dividends.

In BP’s case, a dividend cut is unlikely to have the usual negative effect and may, in fact, have a positive one. Everyone already knows the predicament BP is in. BP has incurred and continues to incur large and unknown costs from the oil spill. BP is responsible for all cleanup costs of the spill under the Oil Pollution Act.

Read more… BP is potentially liable for economic damages like lost wages and lost tourism dollars. This will occur if the company is found to have acted negligently or criminally. It may also occur if Congress succeeds in raising liability limits. BP’s stock price has fallen precipitously as the expected costs and liabilities have increased. A dividend cut, therefore, will not reveal any new bad news. At the same time, ironically, a dividend cut will pay an unusual dividend. Part of the reason the stock price has plunged is because of the likelihood that BP will face increased legal liabilities and political costs. Paying the dividend will further enrage U.S. politicians and increase the likelihood that those legal liabilities and political costs grow. If BP cuts the dividend, President Obama, Nancy Pelosi and others will no longer be able to accuse BP of paying shareholders before paying the victims of the spill. On this dimension, a dividend cut should actually help raise the stock price. Cutting the dividend may be a good idea for another reason. Last year, BP generated cash flow from operations of $27 billion and spent $20 billion on capital and exploration expenditures for a next cash flow from operations of $7 billion. BP paid more than this, $10 billion, in dividends, leading to a cash flow deficit of $3 billion. Counting the dividend, BP lost money last year. With the substantial cleanup costs this year, BP is certain to lose money again if it pays the same $10 billion in dividends. The shortfall will have to be made up by borrowing. And, BP’s borrowing costs have increased substantially (again because of the risk of high liabilities). If BP pays the dividend, it will be forced to borrow additional money at what are likely to be high interest rates. While it makes good sense for BP to cut or eliminate its dividend voluntarily, it is not a good idea for the U.S. to enjoin BP from paying its dividend. While it may score some immediate political points, the overall effects are likely to be harmful because it would be yet one more indication that the U.S. government and Congress are hostile to business and are trying to tell business what to do. Such government hostility increases uncertainty and makes it unattractive to do business in the U.S. And this is part of the reason (possibly a large part) why more companies do not hire and invest in the U.S.

Creditor Competence

William K. Black, an associate professor of economics and law at the University of Missouri–Kansas City, is a former top federal financial regulator. He is the author of “The Best Way to Rob a Bank is to Own One.”

My answer comes from the perspective of a former litigation director of the Federal Home Loan Bank Board and regional enforcement director of the Office of Thrift Supervision during the savings and loan crisis. We successfully brought preliminary civil and administrative actions on behalf of the United States to “freeze” assets of private citizens or corporations against whom we had legal claims.

The U.S. is BP’s biggest creditor — it should act like it.

The fundamental truth of litigation is that it does little good to eventually win a legal claim for damages or restitution if you cannot collect on the claim. If the corporation puts assets out of the reach of the U.S., the citizens will lose.

Dividends not only put money out of the reach of the U.S., but also reward the people most responsible for causing the damage. BP’s officers and employees, in their capacity as shareholders, are the most obvious example of this, but shareholders are also responsible as owners of the corporation. The deal shareholders make when they invest is that if the corporation cannot pay its debts to creditors the shareholders get nothing.

Read more… BP could be insolvent if it is held responsible for the tremendous damages it has caused. The U.S. should not have to tell BP not to pay dividends (or senior executive bonuses). Of course, if BP acted prudently it would not have a horrific record of regulatory violations, several of which led to multiple deaths. It is no surprise that BP intends to pay dividends and bonuses. But any smart huge, unsecured creditor of BP should act to protect its ability to recover damages by suing to block the dividend payment. This is not “socialism” or government putting its boot on BP’s neck — this is a question of competence as creditor. In the savings and loan debacle, a holding company (Pinnacle West) owned 100 percent of a deeply insolvent savings and loan (MeraBank). The holding company refused to honor the agreement it signed with the U.S. to maintain the bank’s capital (keep it solvent and healthy). The holding company tried to evade the agreement by paying an unusual “dividend” to its shareholders. The dividend would consist of its stock in the insolvent bank. The holding company would no longer “control” the bank (because its shareholders would now own it), so the holding company would no longer be subject to the “net worth maintenance agreement.” The federal government threatened to sue to block the dividend and brought an emergency enforcement action. The government acted even though the holding company was very large and politically connected. The result was that the holding company paid $450 million to the United States. Had we not acted to block the dividend, the taxpayers would have lost an additional $450 million. Will the Department of Justice show similar competence and determination in blocking BP’s dividend?

No Legal Grounds

J.W. Verret is an assistant professor at George Mason Law School, where he teaches corporate and securities law. He is also a senior scholar with the Mercatus Center, the director of the Corporate Federalism Initiative and a contributor to Truth on the Market.

There are no legal grounds for the Department of Justice to seek an injunction against British Petroleum to prohibit its scheduled dividend. The law offers options to stop dividend payments in the case of bankruptcy, but there is no indication that BP is facing bankruptcy.

Even if BP’s dividend distribution is a bad idea, it is not the Justice Department’s call to make.

Despite actor Alec Baldwin’s hopes to the contrary, BP has a sufficient cushion to pay for its expected clean-up costs even if they are greater than expected.

In the absence of a bankruptcy threat, the company has the authority to issue dividends. If the dividend is halted, everyday citizens who hold shares through their pensions will be harmed. But the harm stretches even beyond that group.

Read more… Legal procedure is not as interesting as the closing arguments in an episode of “Law and Order” or even the president’s remarks on NBC’s “Today Show.” Yet careful attention to legal procedure remains the vital foundation of our rule-of-law culture. We make judges, lawyers and litigants follow established rules because we don’t trust any one person or institution with too much power. The minute we set those protections aside for one case against a defendant whom we all dislike, we set aside the procedures that protect our rights as well. But this decision should come as no surprise. The Obama administration also casually ignored the rule of law in its management of the financial bailout. Even if BP’s dividend decision is a bad idea, it is not the Justice Department’s call to make. The timing of this development, when the BP disaster has brought the president’s poll numbers to an all-time low, indicates that the independence of the Justice Department may be at risk. The Founding Fathers were mindful of politically motivated prosecutions by the English Crown. That concern was the primary impetus for the constitutional protections in the Bill of Rights. The decision under consideration by the Justice Department undermines its integrity and threatens the rule of law.

Extraordinary Remedy, Extraordinary Case

Tom Baker is a professor at the University of Pennsylvania Law School.

When there aren’t enough lifeboats on a sinking ship, who gets left behind? The passengers in first class? Probably not. More likely, it’s the working stiffs booked in steerage, along with the maids and porters.

BP can, and should, pay governments, the fishing industry and the owners of coastal properties for their losses.

What if the owner happens to be on board? He got the ship cheap, because the builder skimped on lifeboats. Does he go down with the ship, as his just reward?

Not when it’s the good ship BP, taking on water as it spews oil across the Gulf. BP wants to let the owners — the shareholders — board the lifeboats first, by paying them a dividend.

Not so fast, says the Justice Department. That’s not fair.