October 17, 2009
Just realizing that this website is apparently worth more than Business Week. I'm not sure how I feel about that.
October 16, 2009
Don't Lie to the Feds
OK, so here's some more unsolicited advice: don't lie to the Feds. If they're calling you and asking about your trades, there's a reason. That's especially true if you have been engaging in insider trading in connection with a merger that you're working on. The BLT has been faithfully following the story of lawyer Melissa Mahler. It was a civil case, but now comes the criminal complaint. Here is the relevant paragraph from the criminal complaint:
10. On or about November 29, 2004, two attorneys with the SEC’s Division of Enforcement in Washington, D.C. conducted a voluntary telephone interview of MAHLER. Prior to asking MAHLER questions, the SEC attorneys advised MAHLER that it was a federal crime to make false statements to the SEC. The SEC attorney asked MAHLER, among other things, whether MAHLER had placed an order to purchase 10,000 shares of TPCV stock on July 28, 2004, through the broker-dealer in Florida. MAHLER falsely denied that she had placed the order to purchase10,000 shares of TPCV on July 28, 2004, when, in truth and in fact, MAHLER knew that she had placed the order to purchase those shares. …
The false statements act (18 USC Sec. 1001) is very broad in its application, and that makes it relatively easy to prosecute. For example, it doesn't require scienter or all the complexities of whether there was inside information or not. All it requires is that the Fed prove you willfully (1) make a material (2), false statement (3) in a matter within the jurisdiction of the executive branch (4). For prosecutors looking to make a case, it's much easier to prove false statements to investigators than it is to prove insider trading. So, it's a go to charge in cases like this.
Martha Stewart learned this lesson the hard way. It appears that Ms. Mahler is about to as well.
If you are interested in the intricacies of the false statements act, take a look at Steven Morrison's When is Lying Illegal? When Should It Be? A Critical Analysis of the Federal False Statements Act, John Marshall Law Review (2009). Here's the abstract:
First, this article explores the element of section 1001 that requires a false statement. Other articles have accepted the meaning of this element. What is “false,” however, is open to debate. Second, this article explores section 1001 in light of how we communicate. It notes that lying is prevalent in society and especially within the criminal justice system, and also argues that even when we’re not lying, we engage in “purposive communication,” which is a form of deception necessary for effective communication. I also discuss what lies are, and what types of lies there are. I do so to show that the conduct that section 1001 prohibits in a black-and-white way is actually a multicolor phenomenon. Third, I discuss section 1001’s materiality element. No other article has discussed this element in detail, even though, as I show, it is the central controversial element of section 1001 and is the source of the statute’s problems as well as its potential solution. Furthermore, I discuss the varying interpretations of the materiality element among jurisdictions. For example, some circuits have adopted what amounts to an objective reasonable person standard, while others have adopted a subjective standard. As I show, this variation goes to the heart of what section 1001 prohibits. Fourth, I discuss two different versions of the definition of materiality applied by section 1001. One version requires that the false statement be capable of influencing a government agency “to which it is addressed,” and another version need only be capable of influencing some government agency. This is a meaningful difference that hasn’t been explored in other articles or resolved in the courts or Congress. Fifth, I discuss the materiality analysis established in United States v. Gaudin, which may solve the “to which it is addressed” split. Courts have largely ignored Gaudin’s analysis, as have other commentators.
October 15, 2009
Bruce Wasserstein, 1947-2009
October 14, 2009
Triggering Revlon Duties
It's a recurring question. We know that an all cash transaction will constitute a change of control and thus require directors attempt to get the highest price reasonably available for the benefit of target shareholders. A stock-for-stock deal where the shareholders of the target remain in the fluid aggregate doesn't constitute a change of control, so directors are free to take into considerations other issues when deciding whether to accept an offer. But what if you are taking a combination of stock and cash - how much cash will result in Revlon duties being triggered?
In In re NYMEX Shareholder Litigation, the chancery court had chance to slap down another data-point to help narrow the band of when Revlon duties might be triggered. In the NYMEX-CME transaction, at the time the board initially approved the transaction, NYMEX shareholders were to receive 36% cash and 64% CME stock. Whether Revlon was triggered by this consideration mix was an issue of some debate between the parties when they were before the court.
October 13, 2009
Some Tender Offer Quirks
Williamson and Deals
I think it’s great that Oliver Williamson was awarded the Nobel Prize in Economics with Elinor Ostrom. Williamson’s work in organizational economics and transaction-cost economics goes to the heart of why and how private actors form firms, vertically integrate and pursue acquisition strategies. It’s also the intellectual center of much of what happens in the “Deals” class. Although it’s offered in a law school, the Deals class is not really a “law” class. It’s more like a course in applied organizational economics (for lawyers).
The Nobel Prize citation summarizes some of Williamson’s contributions here:
Although Williamson’s main contribution was to formulate a theory of vertical integration, the broader message is that different kinds of transactions call for different governance structures. More specifically, the optimal choice of governance mechanism is affected by asset specificity. Among the many other applications of this general idea, ranging from theories of marriage (Pollak, 1985) to theories of regulation (Goldberg, 1976), one has turned out to be particularly important, namely corporate finance.
Williamson (1988) notes that the choice between equity and debt contracts closely resembles the choice between vertical integration and separation. Shareholders and creditors not only receive different cash flows, but have completely different bundles of rights. For example, consider the relationship between an entrepreneur and different outside investors. One class of investors, creditors, usually do not acquire control rights unless the entrepreneur defaults, whereas another class of investors, stockholders, typically have considerable control rights when the entrepreneur is not in default. Williamson suggests that non-specific assets, which can be redeployed at low cost, are well suited for debt finance. After a default, creditors can simply seize these assets from the entrepreneur. Specific assets on the other hand are less well suited for debt finance, because control rights lose their value if they are redeployed outside the relationship.
Williamson’s work along is critical to thinking about how and why market participants undertake deals and the structures they adopt. In particular, his insights into the importance of asset specificity, opportunism and the hold-up problem to investment decisions is critical to thinking about structuring transactions and private ordering.
His books, Mechanisms of Governance as well as The Economic Institutions of Capitalism, are dog-eared and kept close at hand. In addition, Corporate Finance and Corporate Governance (J. Fin., 1988) is an excellent application of his ideas to corporate finance and the problem of organizing firms.
All in all, good choice.
“This is a stew of great complexity”
The BAC-ML legal stew continues to simmer. In the SEC-BAC case, parties are gearing up for trial and BAC has signaled its intention to waive the attorney client privilege. Remember, in the federal case, BAC is arguing, in effect, that it relied on advice from counsel regarding which disclosures were material. Indeed, I think Lewis' defense is something like, "I don't do disclosures. That's lawyer work."
Here's the statement from the SEC:
"We have reached agreement with theon proposed terms of a court order governing disclosure of information previously withheld on the basis of legal privileges. The order is subject to the approval of Judge Jed Rakoff. If entered by the court, the order would result in a broad waiver of the attorney-client and other legal privileges on matters that are the subject of our pending action against the Bank as well as ongoing investigation.
In the BAC-ML shareholder suit in Delaware, Vice Chancellor Strine refused to dismiss the case. The two sides' arguments can be summarized as follows (HT: Bloomberg):
Lawyer Lawrence Portnoy, representing the bank’s directors, told Strine they didn’t act in bad faith toward shareholders, and that Merrill’s distress “was not a secret” and the losses weren’t unexpected.
Investors’ lawyer Robert J. Kriner Jr. told Strine bank directors showed a “lack of care,” and said in court papers that “directors faithlessly subverted the best interest of Bank of America and its stockholders.”
This case is interesting. And if the plaintiff's duty of care argument is going to work, then the case may turn on whether in the face of a known duty to disclose (as told to them by their counsel) the directors chose not to. Myself, I'm waiting for someone at BAC to try to raise a statutory defense (DGCL Sec. 122(12)), but that's just me.
This Time is [Not] Different
Just finished reading Carmen Reinhart and Kenneth Rogoff's This Time is Different. This book isn't intended to provide the details to answer the question what happened to us last year. Rather, the book is intended to take three steps back and provide the reader with a broader view of crises and point out themes that tie together the the financial crisis of 2008 with previous crises. Looking at the data from 1860 to 2006 they pull together it's pretty clear that that this time is, in fact, not different.
Although we hadn't experience a panic like this in many, many years, it turns out that financial and banking crises are all too common. It's a theme that Martin Wolf also argued in his Fixing Global Finance, though Reinhart and Rogoff are able to draw on much more data (global) and over a longer span of time to make their point.
I put the book down and came away with a couple of important lessons. First, financial liberalization and financial crises seem to go hand in hand. That's not to say that financial repression is a good thing, just that all those who argue this will be better if we "just let financial markets do their thing" are, well, dooming themselves to a never-ending cycle of booms and calamitous busts.
Second, when market participants are able to leverage up to the hilt, they do. Moral hazard usually takes them and the rest of the economy over the cliff. Third, stock market bubbles are better than real estate bubbles - mostly because the recovery periods from the collapse are much faster. Fourth, following a real estate bubble, it's not the bailout costs that will get you, it's the long term collapse of tax revenue associated with lower growth over time. Finally, surprise, surprise, (all) governments can and do default on their sovereign debt eventually.
There's a lot in this book to digest and it's well worth reading.
p.s. for the graduate students out there not interested in actually buying the book, a 124 page paper by the authors that covers the same material from April 2008 is online. But, buy the book.
October 11, 2009
Pre-Merger Notification in Japan
Jones Day's overview of pre-merger notification rules in Japan.