February 19, 2011
In re Oracle Corp--Maybe Chancellor Strine Was on to Something
We recently covered In re Oracle Corp., 824 A.2d 917 (Del. Ch. 2003), in my Corporations class. That's the case wherein Chancellor Strine concluded that the connections between Oracle and Stanford University were sufficiently strong enough to raise questions of material fact about the independence of the two Stanford professors that made up Oracle's special litigation committee, which was reviewing the appropriateness of maintaining a derivative action filed against various Oracle directors in connection with an alleged insider trading scheme. Suffice it to say that at least some have considered Chancellor Strine's examination of independence in that case to be on the excessive side. However, I was reminded of that case this morning when I took a look at the picture on the front page of today's Business & Finance section of the Wall Street Journal (you can view the picture here, though you may need a subscription). The accompanying write-up notes that:
On Thursday, Mr. Obama had a dinner near San Francisco with a dozen high-tech CEOs, including Apple Inc.'s Steve Jobs, Facebook Inc.'s Mark Zuckerberg, Google Inc.'s Eric Schmidt and Oracle Corp.'s Larry Ellison. The White House said topics included research and exports, and the president's incentives for companies to grow and hire.
Know who else is pictured at the table? Stanford University president John Hennessy. Now, obviously there are a laundry list of good reasons why Hennessy should be at that table along with everyone else--but maybe Klein, Ramseyer & Bainbridge will want to add that picture to the next edition of their casebook nonetheless.
February 18, 2011
SEC Finds Real Climate Change Hoax
In January 2005, Senator James M. Inhofe famously called "the threat of catastrophic global warming the 'greatest hoax ever perpetrated on the American people,'" in a speech on the floor of the U.S. Senate. A lot of people take issue with that statment for a variety of reasons (and I'm one of them).
Today, in a move far less likely to raise a lot of national debate, the SEC announced that it charged seven people in a "smaller scale" climate-change-related hoax. According to the SEC press release, the SEC charged seven people
who perpetrated a fraudulent pump-and-dump scheme in the stock of a sham company that purported to provide products and services to fight global warming.
The SEC alleges that the group included stock promoters, traders, and a lawyer who wrote a fraudulent opinion letter. The scheme resulted in more than $7 million in illicit profits from sales of stock in CO2 Tech Ltd. at artificially inflated prices. Despite touting impressive business relationships and anti-global warming technology innovations, CO2 Tech did not have any significant assets or operations. The company was purportedly based in London, and its stock prices were quoted in the Pink Sheets.
Of course, here, the hoax (allegedly) is that the company didn't actually do what it claimed it would do, not that claims about climate change were the hoax itself.
As I look at these two items together, I can't help but wonder if Senator Inhofe and people who agree with him would support SEC charges against companies who use concerns about climate change (and efforts to address climate change) as part of their company materials, such as Spectra Energy or PG&E.
Fortunately, given that the SEC issued an Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change, it's unlikely the SEC would choose that path, even if the SEC isn't planning to do much else with that guidance, either.
The SEC's Campaign Against Small Business
I just came across an article that anyone interested in small business financing should read: Stuart R. Cohn & Gregory C. Yadley, Capital Offense: The SEC’s Continuing Failure to Address Small Business Financing Concerns. As the title suggests, Cohn and Yadley take the SEC to task for failing to enact rules to make capital more easily available to small businesses. I have written several articles on small business exemptions, and this subject is near and dear to my heart. The Securities Act rules are a serious hurdle for entrepreneurs, and it's time to do something about it.
Cohn and Yadley make several recommendations, including the following:
-Broader preemption of state law
-Greater reliance on disclosure and antifraud provisions
-Elimination of the general solicitation and general advertising restrictions
-Elimination or substantial limitation of the integration and aggregation doctrines.
-Increasing exemption ceilings
-Elimination of or a substantial increase in the the numerical limits on purchasers
-Permitting private placement brokers and finders
All of these recommendations make sense to me (and they have some other recommendations that I haven't repeated here). It has always seemed to me that the Securities Act registration requirement and the accompanying SEC rules have several pernicious effects: (1) due to economies of scale in compliance, they give a competitive advantage to larger businesses; (2) they make it almost impossible for a small business to raise money without the involvement of a registered broker: and (3) they divert SEC resources from the more productive activity of policing fraud.
To play devil’s advocate as to that final point, is it possible that we would be better off eliminating the Securities Act registration requirements entirely and focusing more on investor education and fraud prevention?
February 17, 2011
(More) Airgas Commentary
(NOTE: I'm jumping right into the Airgas fray here. If you want an introduction to the case, go here.)
So, a Delaware corporation's board of directors can effectively "just say no" to a takeover attempt--despite protestations to the contrary. (Compare Jay Brown ("The court emphatically concluded that it was not validating the 'just say no' approach to tender offers. But in fact it was.") with Stephen Bainbridge ("[T]he case finally gives us a clear statement of Delaware law to the effect that: 'A board cannot 'just say no' to a tender offer.'"). Stephen Bainbridge has a great summary of the commentary here (including our own Josh Fershee). In my initial review of what other people are saying, I found the following from Steven Davidoff particularly worth passing on:
Chancellor Chandler asserted that he wanted to order the poison pill redeemed because this contest had lasted more than 16 months, Air Products’ offer was noncoercive, and shareholders could now decide the matter on a fully informed basis. But Delaware Supreme Court jurisprudence did not allow it. . . . The Airgas board was responding to "substantive coercion," a term that refers to what two professors, Ronald J. Gilson and Reinier Kraakman, call “the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management’s representations of intrinsic value.” . . . Like the good professors, it appears that the judge thinks that substantive coercion is a straw man, which is too vague to be used and can serve to protect an entrenched board. The lower court opinions he cites support this position. By citing them, Chancellor Chandler passive-aggressively rebuts the contrary position of the Delaware Supreme Court. The judge contends that when takeover contests reach an end stage, the courts should step in to ensure that there is a sale process. But the Supreme Court does not agree; instead assessing an undervalued offer is the domain of the board.
February 16, 2011
Hate Insider Trading Restrictions? Take a Close Look at Poison Pills, Too
Chancellor Chandler issued his ruling yesterday upholding the poison pill Airgas, Inc.'s board of directors adopted in response to Air Products and Chemicals, Inc.'s $5.8 billion hostile takeover ($70/share, all cash). Chancellor Chandler determined that the Airgas board of directors "acted in good faith and in the honest belief that the Air Products offer, at $70 per share, is inadequate.” (PDF of the case here, thanks to Francis G.X. Pileggi.)
One reason this decision bugs me is that I suspect a good number of people who don't like insider trading restrictions would be supportive of this decision. To me, it's the same question: What does the shareholder want for his or her shares? Period.
For some who don't like insider trading restrictions, they argue that, at least in non-face-to-face insider trading transactions, the sharedholder did not suffer harm. (See, e.g., Henry Manne.) Sharedholders were offered a price they deemed acceptable, and sold. Who cares who was on the other side of the transaction? I find parts of this rationale compelling, although I also find the property rights concerns related to insider trading even more compelling. (See, e.g., Professor Bainbridge.)
For me, the anti-insider-trading rationale holds true in this case, too. If shareholders would accept the price, and there is no concern about the value of the payment (and there can't be in an all-cash offer), the board should make their case and get out of the way.
The board is supposed to facilitate profit maximizing for shareholders. This can take many forms, and the process is subject to legitimate board decisions to balance short- and long-term prospects. Thus, there should be a lot of latitude for the board to exercise their authority, expertise, and judgment.
That said, I can't see a good justification for not presenting an all-cash offer to shareholders once (as was the case here) ample time has been given to entice other potential bidders into the game. That's one decision that should always be the sharedholder's call.
February 15, 2011
Book on the Futures Markets
I recently read The Futures: The Rise of the Speculator and the Origins of the World’s Biggest Markets, by Emily Lambert (Basic Books 2011). It is a history of the commodity futures exchanges in the United States, with a focus on the Chicago exchanges. I was looking for a good popular history of the futures markets that I could recommend to students, and saw a couple of good reviews of this book.
I was disappointed and really can’t recommend it. Both the writing and the history are choppy. The book is a loosely connected collection of snippy anecdotes and colorful descriptions of some of the market participants. Lambert never really provides an overall picture of the exchanges and their development.
Not bad if all you’re looking for is some colorful anecdotes, but it’s not the full history and explanation of the futures markets that I was hoping for. I'm still looking, so let me know if you're aware of a good popular history/explanation of the futures markets.
February 14, 2011
What is this Groupon thing?: Social Media as an Investment Strategy
At least, that seems to be the message from investment banks. Following Goldman's Sachs' dance with Facebook last month, JP Morgan recently announced plans to start a social media fund, says the NYT Dealbook. The article notes that
Several popular social media companies, including the professional social network LinkedIn and the Internet radio company Pandora, have already filed to go public. Those filings presage even more eagerly anticipated stock sales by Groupon and especially Facebook.
Interest in these companies has been running high recently. Groupon raised $950 million in financing from several big investment firms, after having spurned a $6 billion takeover offer from Google. And trading in existing shares of these companies on private markets has been frenzied in recent months, with Facebook valued at $53 billion on SharesPost, a so-called “secondary market.”
I live in a place where Groupon is still irrelevant, but LinkedIn and Pandora are sites I know pretty well. Of course, I also know Plaxo, and Avvo, and Slacker.com, and Grooveshark (great site, by the way), etc. Social media obviously has created some new markets or at least greatly changed how old ones work. But this whole craze, especially from the investment community, reminds me of the first Internet boom, where companies doing traditional things suddenly started doing them "online." And most of them failed. (I realize, of course, that I am not the only person who thinks this might be the case. Shocking.)
Even the start-ups that succeed were often not long for the evolving internet world. Just ask Yahoo about that Geocities investment. Of course, that wasn't a disaster for everyone. David Bohnett & John Rezne made out very, very well on the deal. I'm simply saying that Groupon's Andrew Mason may just end up kicking himself for turning down that $6 billion takeover offer from Google. Then again, maybe they'll be in Grand Forks, North Dakota, soon. After all, our FIve Guys opens tomorrow.
Is the CCH Federal Securities Law Reporter Obsolete?
Does anyone still use the CCH Federal Securities Law Reporter?
At one time, learning to use the CCH Federal Securities Law Reporter was a rite of passage for securities lawyers. I remember my own efforts to struggle through it when I began practicing as a securities litigator.
It has never been a user-friendly product. It is poorly indexed and it is organized in such a way that one needs a fairly substantial knowledge of securities law just to use it. But, in the pre-digital era, it was the best, most thorough source available. In particular, it was the only source that provided systematic access to SEC releases and no-action letters.
Today, there are a lot of other ways to find securities law. Westlaw and Lexis obviously, but even the SEC’s own web site provides all the releases and significant no-action letters. A multitude of blogs and RSS feeds, including the SEC’s own news and regulatory feeds, provide almost everything anyone could want to know about securities law. And the daily and weekly reports available from BNA, especially the electronic versions, are, in my view, better than what CCH provides.
So I’m wondering if time has passed by the CCH securities law system.
February 13, 2011
The New York Times has a story on a series of leaked documents that at least some view as implicating the Chamber of Commerce and other large corporations in various smear campaigns designed to undermine opponents.
[A] PowerPoint presentation prepared for Hunton & Williams said the research that HBGary Federal and its partners could do for the law firm on behalf of the Chamber of Commerce would “mitigate effect of adversarial groups” like U.S. Chamber Watch. . . . [T]he goal of its research would be to “discredit, confuse, shame, combat, infiltrate, fracture” the antichamber organizations.
Apparently, the tactics discussed included planting fake documents, threatening people's careers, and using data such as group affiliation and family composition.
Jonathan E. Turner, who runs a Tennessee-based business that gathers intelligence for corporate clients, said that companies nationwide relied on investigators to gather potentially damaging information on possible business partners or rivals.