Monday, March 2, 2015
The Business Law Prof Blog is pleased to announce that Professor Marc Edelman will be joining us as a guest blogger for the month of March. Quoting from his online bio, "Marc Edelman is an Associate Professor of Law at the Zicklin School of Business, Baruch College, City University of New York. He specializes in sports law, antitrust, intellectual property, and gaming law." During the summers, he also teaches at Fordham University School of Law.
I was previously familiar with Marc Edelman's work through my interest in sports and through a bit of reading in the antitrust area. All of his areas of interest have significant intersections with business law and I look forward to reading his posts. Given that he is one of the most recognized experts in the area of law & sports, we are especially privileged to have him with us right before March Madness.
Friday, February 27, 2015
I've enjoyed getting to know a bit about University of Pennsylvania Psychology Professor Angela Duckworth's work on "grit." Duckworth and her co-authors call grit "perseverance and passion for long-term goals," and they claim that grit can be predictive of certain types of success.
Can we, as educators, teach grit? If so, how? Duckworth asks, but doesn't fully answer these questions in her popular TED talk. She does, however, think Stanford Psychology Professor Carol Dweck's work on growth mindset, which I wrote about a few months ago, offers the most hope.
Do readers have any thoughts on this subject? Feel free to leave a comment or e-mail me your thoughts.
Thursday, February 26, 2015
Startup Stash is a beautifully simple set of curated resources for entrepreneurs. The categories of resources range from Naming to Hosting to Market Research to Marketing to Legal to Human Resources to Finance. And more.
As a law professor, I was obviously most curious about the legal resources. The list has the controversial and well-known Legal Zoom, but also has some relatively unknown resources. For example, UpCounsel ("get high-quality legal services from top business attorneys at reasonable rates") was new to me. You can see the full list of legal resources here.
As previously stated, the Startup Stash list is curated, so there are only 10 legal resources, all of which look interesting, if also potentially dangerous for those without legal training. As I tell my business students, an ounce of prevention is worth a pound of cure and consulting with a knowledgeable attorney early in the start-up process can be invaluable.
Monday, February 23, 2015
The Chancery Daily reports that Governor Markell has nominated Collins "C.J." Seitz, Jr. to the Delaware Supreme Court. The January 31, 2015 retirement of Justice Henry duPont Ridgely created the vacancy.
C.J. Seitz, Jr. has over thirty years of corporate/commercial/IP litigation experience and is a respected, influential member of the Delaware bar. He has also served as mediator, arbitrator, or special master in numerous cases. He currently serves as a founding partner of Seitz Ross Aronstam & Moritz LLP.
I serve on the Tennessee Bar Association Business Entity Study Committee (BESC) and Business Law Section Executive Committee (mouthfuls, but accurately descriptive). The BESC was originated to vet proposed changes to business entity statutes in Tennessee. It was initially populated by members of the Business Law Section and the Tax Law Section, although it's evolved to mostly include members of the former with help from the latter. The Executive Committee of the Business Law Section reviews the work of the BESC before Tennessee Bar Association leadership takes action.
Just about every legislative session of late, these committees of the Tennessee Bar Association have been asked to review proposed legislation on benefit corporations (termed variously depending on the sponsors). A review request for a bill proposed for adoption for this session recently came in. Since I serve on both committees, I get to see these proposed bills all the time. So far, the proposals have pretty much tracked the B Lab model from a substantive perspective, as tailored to Tennessee law. To date, we have advised the Tennessee Bar Association that we do not favor this proposed legislation. Set forth below is a summary of the rationale I usually give.
February 23, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Haskell Murray, Joan Heminway, Social Enterprise | Permalink | Comments (14)
Friday, February 20, 2015
Joan Heminway and I must be thinking similar thoughts because before I even saw her helpful post on business law jobs, I asked my former research assistant Samuel Moultrie to share his thoughts and advice on finding legal employment in this economic environment.
Sam is one of the hardest workers I know and took his job search seriously. He also took a big risk by going beyond the typical employers we had recruiting on campus when we were at Regent Law – mostly non-profits, government agencies, and a few VA and NC law firms. Sam wanted to practice in the state that has the greatest influence on U.S. corporate law and has made it happen. His journey was not and is not easy, but I thought his story might be inspiring. Recently, Sam was also selected as a 2015 Leadership Delaware Fellow. Sam’s thoughts on finding legal employment are reproduced below.
By: Samuel L. Moultrie
The job market for recent law school graduates is, without a doubt, miserable. While the statistics seem to vary, I think it is safe to say that the supply of new law school graduates exceeds the number of legal job openings. Nevertheless, graduates should not lose all hope. Any law school graduate can find a job, if they are motivated, willing to work hard, and take steps to distinguish themselves.
[More after the break]
Friday, February 13, 2015
As one of Belmont University’s pre-law advisors, I have been getting an increasing number of e-mails from law school representatives across the country who are trying to recruit our students. One thing that I have been pushing for is better employment data. For the most part, the law school representatives simply send me the ABA required data, which I can already find on my own.
The ABA required data is somewhat helpful to me as an advisor, but the data is insufficient. We really need better salary data and complete (or near complete) employer/job title lists. Longitudinal studies, though difficult to do well, might be interesting.
The ABA required data tells us how many of a law school's graduates for a given year are employed in law firm jobs, judicial clerkships, government, public interest work, etc. The ABA data does not distinguish between an associate attorney position (~$160,000 + prestige + career mobility) and a staff attorney position (~$50,000 + no prestige + dead end, in most cases) at the same large firm - assuming both are full-time, long-term positions, which they can be. While I readily admit that salary is often not the most important part of a job, when prospective law students are considering taking out $100,000+ in loans, they do need to think about how they are going to pay it all back.
On the job title side, a management track job in a bank is a good bit different than working as a teller at that same bank. On the employer side, some small law firms are prestigious boutiques and others are akin to hanging your own shingle; if you had the employer names, you could look them up and uncover the type of work they do and their reputation.
I applaud The University of Michigan Law School for their employer list. According to the list, none of their graduates, over three years, opted out of the list. Only 7 out of over 1000 employment outcomes were unknown. Other schools have provided me with employer lists, but those lists are usually very incomplete, cherry-picked lists. I am not sure how Michigan pulled together this complete of a data set, but other law schools should ask and attempt to replicate.
Add more complete salary data--could we get 75+% reporting?--to an employer list like Michigan’s and prospective students would have a much better look at their likely employment outcomes. (Michigan actually does have over 75% reporting salaries, but many schools are well under 50% reporting). Law School Transparency has been pushing for and organizing some of this data, but we can all join in the attempt to obtain even better employment data so that prospective law students can make more informed decisions.
Friday, February 6, 2015
My co-blogger Anne Tucker inspired me with her useful conference list this week, and led me to create a list of my own.
Just in time for law review submission season, below are links to the submission webpages for the top-15 “Corporations and Association” specialty law journals as ranked by Washington & Lee University. The starred journals were not included in the “Corporations and Associations” dropdown ranking, but I found them in the full list and placed them in their respective spots (according to the overall rankings). I am not sure Yale Journal on Regulation belongs in this grouping, but I will leave it in since W&L includes it.
- Yale Journal on Regulation
- Harvard Business Law Review
- The Journal of Corporation Law
- American Business Law Journal
- Delaware Journal of Corporate Law
- Columbia Business Law Review
- Berkeley Business Law Journal*
- University of Pennsylvania Journal of Business Law*
- Stanford Journal of Law, Business & Finance*
- Virginia Law & Business Review*
- The Hastings Business Law Journal*
- The Business Lawyer
- Fordham Journal of Corporate & Financial Law
- New York University Journal of Law & Business*
- Northwestern Journal of International Law & Business*
For what it is worth, I am not sold on the W&L law journal rankings. The list is included mainly for the links to the submission webpages, not for the ranking (though you may want to use the W&L rankings as one reference point since some schools consider it).
Hopefully these submission webpage links will be useful to some readers. I know not everyone has access to ExpressO (especially in business schools) and some of these journals do not follow the typical submission windows, so you will want to check the links if you are interested in these journals. For example, NYU Journal of Law & Business' spring submission window closes February 15, whereas many journals stay open deep in to March or April in the spring.
Friday, January 30, 2015
I recently purchased and read two Cass Sunstein (Harvard) books: Simpler: The Future of Government and Wiser: Getting Beyond GroupThink to Make Groups Smarter (with Reid Hastie (Chicago))
Cass Sunstein is a enjoyable writer to read, and Simpler was an easy, relatively short read (though he admits that his editor prompted the cutting of 30,000 words from the original manuscript). I may do a separate post on Wiser at a later date.
Simpler provides an inside look at Cass Sunstein's time at the head of the Office of Information and Regulatory Affairs ("OIRA") from 2009-2012. Supposedly, OIRA was created by the Paperwork Reduction Act in 1980. OIRA plays an important role in overseeing federal regulation.
A few random thoughts about Simpler:
- If you have read Sunstein's earlier work, Kahneman (Princeton), and Ariely (Duke) much of Simpler will be familiar behavioral economics;
- Sunstein's political confirmation process sounds absolutely awful. I wonder how many qualified potential civil servants are scared away by processes like this;
- The Food Plate (below) is much simpler than the Food Pyramid I grew up with;
- Sunstein reminded me that sometimes rule-makers (including professors - e.g. with our syllabi) can become experts in rule systems, and not realize how complex their rules may seem to outsiders;
- The impact of the complex regulation is felt by many, including by small businesses (and by all of us during tax season);
- Sunstein admits that there is a tenancy to regulate from hunches, anecdotes, and to please (or not upset) special interests, but he claims he tried to favor statistics, cost-benefit analysis, randomize controlled trials, and public comments;
- Government has a long way to go before it gets "simple." Sunstein's biggest challenge was explaining the ACA and Dodd-Frank in the context of this book; I don't think he rose to this challenge and he did not even try very hard. He pointed to a few simple parts of the complex laws, but then concluded by saying "Rome was not built in a day."
For those who are interested, Cass Sunstein's talk on Simpler at University of Chicago is here.
Monday, January 26, 2015
PrawfsBlawg has posted its Submission Angsting thread, which prompted me to write this post to ask our readers (including my co-bloggers) two questions:
- In your opinion, what is the ideal date to submit a spring law review article?
- When deciding between offers, how do you evaluate specialty law reviews?
Ideal Submission Date. When I first started as a professor, I heard that March 1 was the date most people thought was the best for spring submissions. The ideal date seems to be moving earlier and earlier, and I have heard February 1 or February 15 mentioned with increasing frequency. Some might suggest not worrying about the submission date -- just submit when your article when it is ready. While I agree that you should wait to submit an article until it is ready (whenever "ready" is...), I have had colleagues who seemed to seriously under-place articles because they submitted at a poor time. Admittedly, most of these professors submitted well outside of the traditional windows.
Evaluating Specialty Law Reviews. The question about how to evaluate specialty law reviews reoccurs every time I submit an article. The conventional wisdom is - find out how your P&T committee values those journals and follow their lead. That is good advice, though I imagine some readers would like to hear how the market, in general, values specialty law reviews. Personally, I have published in a number of specialty law reviews -- for two main reasons -- (1) readership (e.g., I used to see the Delaware Journal of Corporate Law on my judge's desk regularly) and (2) name recognition (the Harvard Business Law Review is probably going to go much further with many readers (and my P&T committee) than many flagship law reviews). I've heard formulas to rank specialty journals like -- take ~25 spots [the PrawfsBlawg post in the update below says +25 to +50] off the publishing school's rank if it is a specialty journal (this doesn't work well when a top journal in your area is published by a low-ranked school) OR the top 10% or so specialty journals in your area are roughly equal to a 31-100 ranked flagship journal; and you should take a top-30 flagship journal over virtually any specialty journal. I know different schools will treat the question of specialty journals differently, and ideally we wouldn't have to play this game (because the articles all end up on WestLaw), but I am truly interested in the different approaches.
Update: On the second question I found this helpful post on PrawfsBlawg from 2011, but I am still interested in other thoughts.
Feel free to share thoughts in the comments, or e-mail me directly.
Friday, January 23, 2015
I recently updated my research chart entitled Corporate Forms of Social Enterprise: Comparing the State Statutes. Always open to suggestions on how to improve the chart.
As the number of corporation-based social enterprise state statutes has grown, the chart has become a bit unwieldy. Previous versions of the chart went state by state, detailing the differences from the Model statute. I think the new format (a short summary chart with details in the footnotes) is better for comparing/contrasting the state statutes, but is still far from perfect. For example, some of the abbreviations used in the summary chart require going to the footnotes for explanation, but it is difficult to remedy that and keep the summary chart short.
Also, here is a link to the latest report of Delaware Public Benefit Corporations ("PBCs"). [This is my first time linking to an outside Excel sheet, but it worked for me by saving to my Desktop and then opening.] The number of Delaware PBCs has grown to 234 entities. This is still tiny in comparison to the more than 1 million total entities in Delaware, but it is still early.
Friday, January 16, 2015
Every semester, in an attempt to learn my students' names and a bit about them, I ask my students to fill out a student information form with a few questions. This semester I added the question: "What do you think makes a professor effective?"
The vast majority of the responses fell into one of the four categories below (listed in order, from most to least responses):
- Real world experience/real world examples
- Fairness in grading
- Clarity in teaching
- Approachability and accessibility
I am teaching over 100 total students (undergraduate and MBA) this semester, and nearly every student mentioned something that would fall into at least one of those four categories.
Perhaps these responses do not surprise readers, and they were not incredibly surprising to me. The ordering, however, was a bit surprising, and I am not sure I would have expected to see "approachability" in the responses as much as I did. In any event, the responses were helpful in confirming that my time "staying current," meeting with local attorneys/business people, and consulting is well spent - at least in the eyes of my students.
Is there anything in the students' responses that is surprising to readers? Is there anything missing from the list? (There were plenty of other answers but most of the repeated answers fell into one of the four categories.)
Friday, January 9, 2015
There are many Delaware cases from 2014 that are worth reading, but below are three relatively recent Delaware cases that I found worthwhile. I provide the case name, my very short takeaway, and links to the case and additional commentary for those who wish to dive deeper.
In re Zhongpin Inc. Stockholders Litigation, controlling stockholders, decided Nov. 26, 2014. In denying a motion to dismiss, the Delaware Court of Chancery found a reasonable inference that a 17.3% stockholder/CEO could be a “controlling stockholder.” I have not done an exhaustive search on this issue, but this is a lower percentage of ownership for a “controlling stockholder” than I have seen in most cases, though (of course) the analysis is case specific. Additional commentary by Toby Myerson (Paul Weiss).
C.J. Energy Services, Inc. et al v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, M&A/Revlon, decided Dec. 19, 2014. The Delaware Court of Chancery held that “there was a ‘plausible’ violation of the board’s Revlon duties because the board did not affirmatively shop the company either before or after signing.” (pg. 3). The Delaware Court of Chancery enjoined the shareholder vote on the transaction at issue for 30-days and “required [the defendant] to shop itself in violation of the merger agreement . . . which prohibited [the defendant] from soliciting other bids.” Id. In this case, the Delaware Supreme Court reserved, stating that the Court of Chancery did not fulfill the stringent requirements for issuing a mandatory injunction, reminding that there are various ways to satisfy Revlon, and mentioning that this case did not have evidence of “defensive, entrenching motives,” as seen in Revlon and QVC. Note that the 38-page opinion was cranked out in just two days after the case was submitted. The handling of these expedited cases by the Delaware courts is one of the things that make Delaware attractive to corporations. Additional commentary by Brian Quinn (Boston College).
United Technologies Corp. v. Lawrence Treppel, books and records, decided Dec. 23, 2014. The Delaware Supreme Court reversed the Delaware Court of Chancery’s holding that the Court of Chancery did not have authority to restrict documents produced in a books and records inspection to use only in cases filed in Delaware courts. The Delaware Supreme Court remanded to the Delaware Court of Chancery to decide whether the Court of Chancery will exercise its discretion to so restrict the use of the information obtained in the books and records inspection. In this case, United Technologies insisted that Treppel sign a confidentiality agreement when he sought to inspect books and records, which is fairly common, but the confidentiality agreement also limited the forum, of any claim brought using the information inspected, to Delaware courts. At the time of the inspection request, United Technologies did not have a forum selection clause in its bylaws, but it later adopted one. As the broader forum selection debates continue, it will be interesting to see how the Delaware Court of Chancery handles this case in the books and records context, especially because the Delaware Court of Chancery has been encouraging plaintiffs to use the “tools at hand,” such as books and records requests, before filing derivative lawsuits. Beyond the substance, one remarkable thing about this decision is that Chief Justice Leo Strine authored an opinion that was only 14 pages. When he was on the Court of Chancery he would author 100+ page opinions with some regularity. Granted, the Court of Chancery is a trial court and their opinions tend to be a good bit longer than the Delaware Supreme Court opinions, regardless of the judge. Additional commentary by Celia Taylor (Denver Law).
For reading beyond these three cases, former Delaware Supreme Court Justice Jack Jacobs comments on two additional recent Delaware cases here (M&A related).
Friday, January 2, 2015
One of my new year's resolutions for 2015 is to fast from e-mail every Saturday. Now that I have posted this, my co-bloggers and readers can keep me accountable. Currently, I probably check my e-mail 20+ times a day, every day -- a habit formed during law firm life.
I thought about fasting from the internet/electronics entirely on Saturdays, and I am still going to try to avoid the internet/electronics on Saturdays as much as possible, but I wanted to set a realistic goal.
An acquaintance of mine in New York City, Paul Miller, went without the internet for an entire year (with less promising results than he had hoped). While I remember a time before the internet -- and a time when the internet was so slow it was almost useless -- it is hard for me to imagine going without the internet for a week, much less for a year. That said, I think it healthy to loosen the electronic leash a bit every once in a while.
I'd also like to cut back the number of times I check e-mail and the amount of time I spend responding to e-mails in general. If any readers, have suggestions on the appropriate amount of time on e-mail (for a professor), I would be interested. Obviously, it may vary a bit from week to week, but I am thinking about moving to checking e-mail twice a day during the week for 15 minutes each. I think this will allow me to continue being "responsive" to students and colleagues, but will also free up a great deal of time. Most of the longer e-mails I write could probably be much shorter or would be better as conference calls or in-person meetings.
What are your 2015 resolutions, or are you among the roughly 55% who do not set new year's resolutions?
Sadly, according to one study, only about 8% of people keep their new year's resolutions. For those of you who have set new year's resolutions, here is Professor Cass Sunstein with advice for keeping resolutions. Also, StickK.com (co-created by Yale University economics professor Dean Karlan) is a website where you can create commitment contracts, appoint a referee, and set the stakes for achieving or failing to reach your goals.
Tuesday, December 30, 2014
I continue to document how courts (and lawyers) continue to conflate (and thus confuse) LLCs and corporations, so I did a quick look at some recent cases to see if anything of interest was recently filed. Sure enough, there are more than few references to "limited liability corporations" (when the court meant "limited liability companies." That's annoying, but not especially interesting at this point.
One case did grab my eye, though, because because of the way the court lays out and resolves the plaintiffs' claim. The case is McKee v. Whitman & Meyers, LLC, 13-CV-793-JTC, 2014 WL 7272748 (W.D.N.Y. Dec. 18, 2014). In McKee, theplaintiff filed a complaint claiming several violations of the Fair Debt Collection Practices Act against defendants Whitman & Meyers, LLC and Joseph M. Goho, who failed to appear and defend this action, leading to a default judgment. After the default judgment was entered, defense counsel finally responded.
This case has all sorts of good lessons. Lesson 1: don't forget that all named parties matter. Get this:
Defense counsel admits that he was under the mistaken assumption that default was to be taken against the corporate entity only. See Item 17. However, default was entered as to both the corporate and individual defendants on July 3, 2014 (Item 9). Defense counsel did not move to vacate the default and in fact did not respond in any way until the default judgment was entered on September 17, 2014. Item 12. Even then, the defense motion was framed as one for an extension of time in which to file an answer (Item 14), rather than a motion to vacate the default or default judgment. Inexplicably, in his papers, defense counsel states that a default judgment has not been entered. See Item 17. Since good cause is to be construed generously and doubts resolved in favor of the defaulting party, see Enron Oil Corp., 10 F.3d at 96, the court will accept the explanation of defense counsel as evidence of a careless lack of attention to procedural detail rather than an egregious and willful default on the part of defendant Goho [the individual and apparent owner of the LLC].
This week I received the notice below from Professor Jason Gordon. Professor Gordon is a legal studies and management professor at Georgia Gwinnett College, School of Business. As explained below, he is offering copies of two entrepreneurship books that he thought might be useful to BLPB readers.
I recently published two texts entitled Business Plans for Growth-Based Ventures and Understanding Business Entities for Entrepreneurs and Managers. These books are designed for use by clinical law professors and as a supplement in entrepreneurship courses. The second text concerns entity selection considerations, but includes entity funding and conversion considerations and specific considerations for startup ventures.
The texts also contain supplemental electronic material available for free at TheBusinessProfessor.com.
If any of you would like a free copy of either text in Amazon e-book format, please send me your email address at jgordon10 [at] ggc [dot] edu.
A preview of the Business Plans E-Book is available here.
A preview of the Business Entities E-Book is available here.
Friday, December 26, 2014
Over the past few months, I have received a number of e-mails from the alumni associations of each of my two former law firms.
In theory, I think these alumni networks are good ideas. They could help us keep in touch and could introduce us to people with common ties to those law firms. They could also help the law firms maintain ties with alums who could become clients.
In practice, however, I rarely use any of the alumni services offered.
One of the main reasons is that my former firms do not have offices where I currently live (in Nashville) and they rarely, if ever, have events here. If I still lived in Atlanta or New York City, I would probably attend some of the offered alumni CLE events, but I am probably never going to travel for them.
As to the online alumni networks on the law firms' websites, I think the contact information for alums probably stays relatively out of date (as people choose to update their information on major social networks, but may forget about the ones at the law firms). LinkedIn law firm alumni groups are probably the most useful thing that the law firms do, but I find the content posted there is generally not that helpful and can be dominated by some desperate group member salesperson. (I also think LinkedIn is the least user friendly of the major social networks, but that is a topic for another post).
What law firm alumni network efforts have you seen be successful? Are they worth the effort that major law firms seem to be putting into them?
Friday, December 19, 2014
This week I had nice conversations with Brad Edmondson (Author of Ice Cream Social: The Struggle for the Soul of Ben & Jerry’s) and Michael Pirron (CEO of ImpactMakers, a certified benefit corporation).*
Both conversations turned to a topic that has been on my mind recently – that of social businesses that are acquired by large conglomerates that do not seem to have a similar mission.
A few of the parent/sub relationships that spring to mind (or that were discussed) include:
- Campbell Soup / Plum Organics
- Coca-Cola / Honest Tea
- Colgate-Palmolive / Tom’s of Maine
- Clorox / Burt’s Bees
- Group Danone / Stonyfield Farm
- Unilever / Ben & Jerry’s
I may update this list from time to time, so feel free to suggest additions in the comments.
At The Guardian, Kyle Westaway argues that Burt Bees worked from within Clorox to make the entire company more sustainable. Similarly, some argue that Unilever has become more sustainable after (and maybe because of) their acquisition of Ben & Jerry’s.
I have heard others argue that social businesses like Burt's Bees and Ben & Jerry’s “sold out,” and that the acquiring large conglomerates tend to cut many socially beneficial initiatives. The conglomerates, these folks argue, are only doing enough for society to keep the customer goodwill and the resulting profits.
While each acquisition is different, I imagine both sides of the argument can find some support in the facts.
As someone interested in corporate governance, I hope to explore the governance issues involved when a conglomerate owns a social subsidiary in future articles. In Ben & Jerry’s case, I know they put a number of interesting clauses into the acquisition agreement, such as restricting certain action by Unilever regarding employees and local operations (for a period of time) and establishing an independent (and I believe self-perpetuating) board of directors for Ben & Jerry’s. I am still investigating exactly how much power the Ben & Jerry’s board of directors has, and Unilever did eventually lay off some Ben & Jerry’s employees and close some local plants. In addition, Unilever and Ben & Jerry’s have not always agreed and have taken different, public stances on issues like GMO labeling. But Unilever has become a champion of sustainability among larger companies.
Personally, I am not sure whether social businesses will tend to have more impact as independent businesses or as social subsidiaries of larger companies – and it may be impossible to generalize – but I will continue to watch future acquisitions and development in this area with interest.
* My co-bloggers Joan Heminway and Marcia Narine may remember Michael Pirron from a Regent Law symposium they spoke at on social enterprise law. That was a fun conference and it was good to catch up with Micheal and hear how much his company has grown in the past year and a half.
Friday, December 12, 2014
The Delaware Court of Chancery recently denied a motion to dismiss in In re Comverge, Inc. Shareholders Litigation. In this case, the plaintiff claimed bad faith by the board of directors that approved an allegedly unreasonable termination fee in a merger agreement. Transactional attorneys and professors who teach M&A will want to read this case.
I am deep into grading my business associations exams, so I will outsource to a nice client alert on the case by Steven Haas at Hunton & Williams. A bit of the alert is below, and you can access the entire alert here.
The court then found that the termination fees of 5.55% of equity value (or 5.2% of enterprise value) during the go-shop period and 7% of equity value (or 6.6% enterprise value) after the go-shop period “test the limits of what this Court has found to be within a reasonable range for termination fees.” The court also analyzed the termination fee in connection with the convertible note held by the buyer in connection with the bridge financing. The plaintiff alleged that the conversion feature in the note, which allowed the buyer to purchase common stock at a price below the merger consideration, would significantly increase the cost to a topping bidder of acquiring the company. Factoring in that cost to the existing termination fee, the plaintiff argued, would result in a total payment equal to 11.6% of the deal’s equity value during the go-shop period and 13.1% of the deal’s equity value after the go-shop period.
The court concluded that, for purposes of surviving a motion to dismiss, it was “reasonably conceivable that the Convertible Notes theoretically could have worked in tandem with the termination fees effectively to prevent a topping bid” from a buyer that might otherwise offer greater value to the company’s stockholders. Perhaps more importantly, the court found that the plaintiff adequately alleged that the board of directors acted in bad faith in approving these terms....
Despite the amount of litigation challenging M&A transactions, there are not many Delaware rulings that have upheld challenges to deal protections such as termination fees, matching rights, and no-shop provisions. This is because the Delaware courts have generally created a body of precedent that provides helpful guidance to buyers and sellers and also recognized the value of such terms. In Comverge, the parties appear to have deviated from this precedent, but more importantly, the court looked to the bridge loan to view the aggregate effect of the various terms on the ability of a third party to make a topping bid.