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Thursday, November 1, 2007

Wachtell's Client Memos

Wachtell regularly sends out one to two page client memos notifying clients of recent developments and commenting upon them.  It is great marketing for the firm; it daily keeps them in the minds of clients and other industry actors and positions them as superbly on top of M&A developments. 

Nonetheless, a few of the memos that have crossed my in box in the past few weeks have made me wonder.  The new generation at Wachtell is continuing to take the pro-board stances Marty Lipton has historically taken.  These memos often set out an ideological position on this side of the fence.  This is likely good business -- Wachtell is still the go-to law firm for takeover defense.  But, I'm not sure that the new generation is making their case in the same thoughtful manner.  Moreover, is Wachtell necessarily serving their clientele well by taking an ideological stance in a client memo and asserting it as truth to their clients? 

So, let's take a few examples.  The first is the Wachtell memo which went out last week on the new FINRA fairness opinion rules.  After summarizing the rule in the first page, the memo ends with the following statement:

The disclosure and procedural requirements of Rule 2290 should address many of the concerns arising from potential or perceived conflicts of interest resulting from relationships and arrangements that are not inappropriate but may be of interest to stockholders in determining whether or not to support a particular transaction.

Well, OK then.  You mean this rule, which everyone acknowledges largely overlaps SEC requirements and has been described by Debevoise as "not likely to result in significant changes to current practice" solves all of these concerns?  Of course not.  It does nothing to address the inherent conflicts in investment bank fairness opinion practice (contingent consideration, stapled financing, the need for future business, etc.).  A conflict which is exacerbated by the subjectivity in fairness opinion valuation and  the failure to follow best practices by many banks in the preparation of these opinion (use Fama French factors folks not CAPM).  And just to pile on, remember, this memo went out the same week a Wachtell partner called fairness opinions "the Lucy sitting in the box: 'Fairness Opinions, 5 cents.'"  David Katz, the partner at Wachtell who prepared this memo is their go-to partner for the highly complex cross-border stuff.  He is very smart and should know better. 

Then, also last week, Theodore Mirvis of Wachtell posted a Wachtell memo on staggered boards to the Harvard Corporate Governance Blog, with the following introduction: 

When you’re right, you’re right. And when you’re wrong, you are very wrong. Here is yet more evidence of the value to stockholders of staggered boards. Anyone listening up there in that ivory tower?

The memo, entitled, Classified Boards Once Again Prove Their Value to Shareholders in Recent Takeover Battle, states:

Takeover protections such as classified boards continue to be under assault from academics and shareholder activists, who argue that they reduce the opportunity of shareholders to receive takeover premiums by making takeovers more difficult to complete. In response to shareholder proposals and the current governance environment, the number of companies in the S&P 500 Index with classified boards has decreased from 56% to 45% since 2004.

Academic theory, however, is often divorced from the real world of corporate takeover practice. The use of classified boards to increase shareholder value was demonstrated again in the recent takeover battle for Midwest Air.

This memo cites to two sources for this.  The first is the recent takeover battle for Midwest where Midwest eventually received a much higher bid than AirTrans initially offered.  Well that never happens. . . . The note also cites a recent paper by Thomas Bates et al., Board Classification and Managerial Entrenchment: Evidence from the Market for Corporate Control which found that "the evidence is inconsistent with the conventional wisdom that board classification is an anti-takeover device that facilitates managerial entrenchment."  Nonetheless, the study still finds significantly lower value for firms with a staggered board and a lower bid rate.  And the Wachtell memo did not mention that a significant body of research finds that the staggered board's primary justification is to ward off challenges for control.  This includes a recent paper authored by former Wachtell partner John Coates with Lucian Bebchuk and Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy.  Nowhere does the memo mention this substantial evidence on the other side to Wachtell's clients.  So, Wachtell may ultimately prove right here but as of now the evidence is at best mixed, leaning against their position. 

Additionally, I am one of those academics Mirvis criticizes in his post (though in Michigan my tower ain't so ivory), but I also practiced M&A for ten years and know anecdotally what Mirvis knows in his own heart.  In my experience, bidders, particularly foreign ones, are strongly deterred by staggered boards.  They know any takeover battle could be very long and public and are unwilling to risk spending their scarce management resources on the time-consuming activity of a hostile bid for the extended amount of time it could take in the presence of a staggered board.  Moreover, the current takeover system discourages toe-holds meaning that a bidder may not even be able to hedge their risk and take a position which would pay off if their bid is unsuccessful and another bidder acquires the company. 

Ultimately, Wachtell would have done better to inform their clients of the conflicted academic and practitioner evidence than promoting their platform.  The two examples they cite -- Midwest and this lone paper do not make a case.  It is sort of like saying that because my wife likes me everyone else does.  Assuming the truth of the former does not also mean the latter is true.  Attacking academics isn't going to get you past that. 

And finally, there was this gem the other day also on the Harvard Corporate Governance Blog by Theodore Mirvis:

Many car advertisements on TV bear a legend explaining that the driving depicted is by professional drivers on a closed track–and warning viewers not to try the twists and turns at home. Well, maybe something like that could or should be said of the European Court of Justice’s recent decision, a precis of which appears here, striking down Germany’s “Volkswagen law” and seeming to pave the way for Porsche to acquire the company.

One might recall the earlier periods over here when state anti-takeover statutes bit the dust one by one, yielding to a perceived national policy of unrestrained takeover activity and opposition to the local interest of states (especially non-chartering states) in preserving the independence of their corporate residents. There are probably more twists and turns to come as the EC works out what is meant by the “free movement of capital.”

So, Mirvis thinks European state protection of companies is a good thing for their economies and their shareholders (e.g., French protection of Danone, their chief yogurt maker, as a national champion)?   Has he been getting enough sleep lately? 

And I close with the following query:  Are Wachtell client memos the ultimate in "Lucy in the Box".  Five cents please. 

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