M & A Law Prof Blog

It's worth remembering today.

Davidoff on Selection of Governing Law

Steven Davidoff - The Deal Professor - has a new paper with Matthew Cain in which they evaluate the selection of choice of law provisions in merger agreements and find that Delaware dominates: Delaware's Competitive Reach (SSRN).

Abstract:   We evaluate the selection of governing law and forum clauses in merger agreements between public firms from 2004-2008. In contrast to prior research, we find that Delaware is the dominant choice among merging parties. During the sample period approximately 66.4% of agreements select Delaware for their governing law and 60% of agreements select Delaware as their choice of forum. This compares to 61.8% of targets during this time that are incorporated in Delaware, and 54.8% of acquirers that are similarly incorporated. Delaware’s attractiveness has increased in recent years in response to exogenous events, and is evidenced by the fact that top-tier legal advisors, foreign acquirers, transactions surrounded by greater financial uncertainty, and larger transactions tend to select Delaware’s forum over other venues. Results are robust to controls for simultaneity and endogeneity. Our results provide support for the theory that Delaware competes by providing quality governing law, and particularly, adjudicative services. They also highlight the contestability of Delaware’s dominance; parties adjust their choices of law and forum during our sample time period in response to legal and other events. We conclude that Delaware competes strongly in other legal products beyond its primary one, the public company charter.

-bjmq

Hummer fails to get Chinese approval

Believe me, I'm all for the Chinese central bank reducing its huge foreign exchange surplus by permitting Chinese companies to buy esssentially worthless US assets.  That said, I'm not really surprised by this report.

-bjmq

 

Cuomo taking a run at BAC?

The WSJ has an article on C1 today suggesting that New York will soon be charging BAC with state securities law violations in connection with its acquisition of Merrill Lynch last year.   The article includes a link to a letter from the head of the Investor Protection Bureau in which Cuomo's office makes it clear that they are nearing "charging decisions" with respect to this case and asks for more information and a waiver of attorney-client privilege.  Apparently, BAC's defense consists solely of 'after speaking with our lawyers we decided not to disclose ML's losses to shareholders in advance of a vote. Oh, and we're not going to tell you what our lawyers told us.  Now go away.'   

Hmm. That's a pretty weak defense.  Did your lawyers tell you that a $21 billion losss was material and needed to be disclosed?  Or, did they advise you that the amounts involved weren't material and not necessarily the kind of information a reasonable investor would want to know? It matters, no?

Now, Ken Lewis has offered up a more interesting defense elsewhere -- the Fed basically ordered him to commit securities fraud.  That's more like it.  This defense has the added benefit of possibly being true - remember where we were about a year ago.  On the one hand, your lawyers say the amounts are material and need to be disclosed.  On the other, the Fed tells you that if you disclose the losses and the deal goes down the tubes, the whole economy will go with it.  No wonder the SEC took such a  meek stance with respect to its BAC litigation- so meek, in fact, that Judge Jed Rakoff refused to approve BAC's settlement. 

No doubt, Cuomo's more aggressive posture in this case is motivated by the fact that he doesn't have to walk on egg-shells the same way his counterparts in the Federal government have to - and because we are three or four steps away from the edge of the abyss by now.  

Presumably, Cuomo is considering charging BAC under the Martin Act (NY's anti-fraud secruties statute).  While many feel that the Martin Act is essentially a carte blanche for New York state to meddle in what should be the regulatory purview of the SEC and the DOJ, I'm a little more sanguine about it.  Where was Harvey Pitt's SEC after Enron, Worldcom, Tyco, et al?  If it wasn't for the NY AG's office there would have been almost no accountability at the federal level.  And where is the SEC now?  

For a summary of the issues leading up to the BAC-ML shareholder vote, William Cohan (House of Cards) has recently published a very good essay on the last days of Merrill in The Atlantic Monthly.   It's definitely worth reading. 

-bjmq

Update:  The Dealbook posts a response from BAC to the NY AG letter in which BAC says it is not asserting an advice of counsel defense. 

Stapled Financing in Poor Credit Markets

Foulds, a clerk for Vice Chancellor Parsons, has a paper on conflicts of interest in stapled financing.  Stapled financing is a practice in which the seller's advisor offers potential acquirors financing to undertake an acquisition.  Of course this is a practice where there are serious potential conflicts of interest because in a competitive setting a seller's advisor has an incentive to favor a buyer who will take the financing over a buyer who won't.   The Delaware Chancery Courts have looked warily at the practice and it's been the subject of some discussion by practitioners.  Hey, I've even got stapled financing on my list of "to do" papers.   

Foulds puts an interesting twist on the stapled financing debate by suggesting that in poor credit markets the presence of stapled financing will make a deal more likely to close.  Why?  Foulds argues that the conflict of interest is doing all the work and keeping the financing available in conditions when any other normal provider of credit would have long walked away.  It's an interesting argument.  It doesn't necessarily resolve the question of whether the presence of stapled financing has an influence on the competitive sale, but it's an interesting approach.  

The paper, My Banker's Conflicted and I Couldn't Be Happier: The Curious Durability of Staple Financing, is appearing in the Delaware Journal of Corporate Law.

-bjmq

Tinker Bell has her Say on SEC Shareholder Access Proposal

On Friday, The Dealbook helpfully linked to some of the comments submitted in response to the SEC's "shareholder access" proposal.  There are lots of comments and they cover a wide variety of issues related to the access proposal.  A general line of argument submitted by many is one, I think, that makes a lot of sense.  While more shareholder access is good, the SEC's proposal may be moving too quickly.  

OK, I know that's hard to imagine that an issue like this that has been floating around for years in one form or another is "moving too quickly", but Delaware just amended its code to permit shareholders to adopt bylaws requiring the corporation to include sharheolder nominees on the ballot and bylaws requiring reimbursement of shareholder expenses in connection with such nominations.  

The comments from the Delaware Bar Association provide a nice summary of the issues related to DGCL 112 and 113 and the proposed rule 14a-11.  As the comments from Wachtell and O'Melveny point out, after 2006 when Delaware adopted amendments permitting the adoption of majority voting proviions, there has been a flood of private ordering in that area.  My sense is that while O'Melveny is neutral on that outcome, Wachtell is predictably less happy.  

In any event, rather than move forward now on a "one-size-fits-all" shareholder access proposal, why not wait some more and see what the impact of the DGCL amendments is?  The response by shareholders following the majority voting amendments has been significant. There's no reason to believe that there won't a similar response by shareholders in the wake of the 2009 DGCL amendments with respect to shareholder access - all that without additional moves by the SEC.  If the SEC is serious about allowing shareholders more power, then it seems obvious that they should sit back and wait before adopting 14a-11. 

OK, let's put the serious issues aside during this holiday weekend.  What I find most intriguing are some of the other commenters.  I mean, who knew that Tinker Bell had an opinion on shareholder access?  Or that she's got a 401(k) with Disney?!  I'm also impressed that Thomas Paine made his way back to give an opinion on latter-day tyrranny. 

-bjmq