Business Law Prof Blog

Do The Right Thing

Dow Chemical publicly announced today that it had terminated two high-ranking executives, one a member of its board of directors and former chief financial officer, for unauthorized discussions with third parties (read private equity firms) concerning a leveraged buy-out of the company.   Dow, a company with a $45 billion market capitalization, has recently been rumored as one of the next "mega" private equity LBOs.

As the private equity craze continues to froth, it is becoming increasingly hard for boards to control insiders who otherwise wish to participate.  Officers, and even independent directors, are initiating sales processes themselves or otherwise requesting to join in the bidding with or against other potential acquirers.  These insiders usually stand hand-in-hand with private equity shops who provide necessary LBO financing.  Hint of this problem recently surfaced when it was reported by the Wall Street Journal back in September, 2006 that the top management at Kinder Morgan waited more than two months to inform their board of directors that they were contemplating an ultimately agreed to LBO.  The risk here for all companies is that these executives or directors will have an undue head start or inside track on bidding, and this is a risk largely regulated today through traditional duty of loyalty analysis.  The Delaware Chancery Court has previously criticized such conduct, but it has yet to consider the parameters of the duty of loyalty in this context.  In the interim, boards would do well to be mindful of this potential and amend their codes of conduct to require insiders to report commencement of active planning for a management buy-out. 

Steven M. Davidoff   

London Regulating?

The FT reports here that the Financial Services Authority, the U.K.'s financial markets regulator, announced last week that it is going to study toughening up the requirements for foreign listings on the London Stock Exchange.  Currently, foreign issuers cross-listing on the LSE are subject to "light touch" regulation which principally requires maintenance of their primary listing and the furnishing of certain documents to the FSA.  The FT reports increasing fear in the City community that this light regulation will tarnish the LSE's reputation through scandal or generally perceived diminished quality.

The move is surprising on two levels.  First, the LSE had a spectacular year last year with respect to foreign issuers; of the £28 billion raised in IPOs on the LSE fully £10 billion was from foreign listings, the majority from the CIS states and India.  Second, London has been furiously marketing itself as an alternative market for Sarbanes-Oxley "refugees".  Why the FSA would act now to tighten regulation when things are going so well is uncertain and perhaps harmful to its own markets at a time of rising competitiveness.  But, I suspect part of the reason lies with the AIM, the LSE's similarly lightly regulated junior market.  It had a mixed year last year; attracting a large number of foreign IPOs itself but being criticized repeatedly for a number of scandals.  Moreover, the AIM was slightly down in 2006 and half of its largest IPOs were trading below their offering price by the end of last year.  The LSE has announced that it is considering raising regulatory standards for the AIM, and the concerns over light regulation have likely spilled over to the LSE.  But, London knows it has a good thing going in distinguishing itself from the United States.  The FSA may increase regulation of foreign issuers on the LSE at a later date, but they will be careful to set it apart from claimed "over-burdensome" U.S. regulation.  The bottom line is that any additional regulation will be measured.  Until the United States effects radical change, London is likely to continue to differentiate itself from the U.S. markets and better cater to its foreign issuers/customers by offering regulation more tailored to their needs. 

Steven M. Davidoff