M & A Law Prof Blog

Frequent Filers

Vice Chancellor Laster of the Delaware Chancery Court is apparently not impressed by attorneys who are able to file lawsuits within minutes sometimes of a merger's announcement – “frequent filers.”  I wonder if one can get a concierge card after 100 lawsuits?  In any event, VC Laster recently replaced lead counsel in a case against Revlon and order new counsel to investigate the work of the previous lead counsel.  According to Reuters in doing so VC Laster said: 

"Their advocacy has been non-existent. ... When forced to defend their conduct and leadership role, original plaintiffs' counsel approached the concept of candor to the tribunal as if attempting to sell me a used car."

In replacing the lead counsel, VC Laster is doing something about a problem that people have long talked about.  Although there are many salutary effects of shareholder litigation such as a check on management power and abuse, there are also downsides.  In particular is the tendency for shareholder litigation to fall victim to agency problems when the attorneys drive the litigation without regard to needs of their ostensible principals - the shareholders.  This is an old problem with hardly a simple solution.  

Thompson and Thomas have a good paper on the issue, The New Look of Shareholder Litigation, that appeared some years ago in the Vanderbilt Law Review.  They do an empirical study of merger related litigation.  While they find some abuses, on balance, they come out in favor of shareholder litigation:

Placing our findings in the historical context of the debate over the value of representative shareholder litigation, we believe that the positive management agency cost reducing effects of acquisition-oriented class actions are substantial, while the litigation agency costs they create do not appear excessive. For these suits, we therefore disagree with earlier studies that have claimed that all representative shareholder litigation has little, if any, effect in reducing management agency costs and should be evaluated solely in terms of its litigation agency costs.

The PSLRA included lead counsel provisions to attempt to deal with this problem with some success.  Maybe VC Laster has stumbled on to another avenue for constraining abuses – a more active bench.

-bjmq

Astellas Launches Proxy Battle

You'll remember that Astellas made a hostile offer for OSI Pharmaceuticals earlier in the month.  Along with their offer, they sued in Delaware to get the OSI board to consider the offer.  Well, the board has considered the offer ($52/sh cash, a 40% premium) and has rejected it.  Here's part of their statement:

"After carefully analyzing and considering Astellas' offer, the Board has unanimously concluded that the offer does not fully reflect OSI's fundamental, intrinsic value. We believe that OSI is a unique asset - the only profitable, mid-cap biotech company with a growing, high quality and fully integrated oncology franchise and a strong diabetes and obesity franchise which also has a proven track-record of success. The OSI Board takes its fiduciary duties seriously and will continue to do what's right for OSI stockholders. In that regard, the Board of Directors has instructed OSI management, with the assistance of the Company's financial advisors, to contact appropriate third parties in order to explore the availability of a transaction that reflects the full intrinsic value of the Company.".

The full text of the OSI board's letter to shareholders can be found here.

None too happy with that response, Astellas has now launched a proxy battle at the next annual shareholders meeting of OSI - putting up a slate of 10 director nominees whose jobs it will be to deliver the company to Astellas.  OSI responded this morning by simply stating, "OSI believes the Astellas director nominees’ only mandate is to support Astellas in acquiring OSI at an inadequate price."  OK, so not a full-throated endorsement.

This is starting to have the feel of the 1980s again.  Who said the hostile acquisition was dead?!

-bjmq

Sources of Value Destruction in Acquisitions

Harford, Humphrey and Powell have a new paper, Sources of Value Destruction in Acquisitions by Entrenched Managers.  One conclusion is pretty straightforward and consistent with my first impression - if managers have excess cash, they tend not to be careful with it.  Sounds like a reason for a dividend policy over an acquisition strategy when firms are generating excess cash.

Abstract: Prior work has established that entrenched managers make value-decreasing acquisitions. Here we ask how exactly they destroy that value. We hypothesize that rising equity values loosen financial constraints, much like free cash flow does, allowing entrenched managers to pursue more acquisitions. We further test whether entrenched managers simply overpay for good targets or actually choose targets with lower synergies. We find support for the latter. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, they are particularly active during times of high equity valuation, even though their own equity is not as highly valued as other bidders’ equity. Finally, they choose targets with low synergies, as shown by combined announcement returns and post-merger operating performance.

-bjmq

Fiduciary Duties and Illegal Acts

It's a little pet peeve of mine.  I really dislike those law professor hypotheticals that try to get students to rationalize how it might be a director's duty to have the corporation violate the law.  Why?  Well, because the courts are pretty clear that illegal acts are ultra vires and when a director causes the corporation to violate the law the director is not acting in the corporation's best interests and thus violates his/her duty of loyalty to the corporation.  So you can imagine how happy I was to see in the Lehman autopsy this short restatement of that law: 

The business judgment rule does not protect decisions that involve fraud or illegality. See Smith v. Van Gorkom, 488 A.2d at 873; Litt v. Wycoff, C.A. No. 19083‐NC, 2003 WL 1794724, at *6‐7 (Del. Ch. Mar. 28, 2003); In re W. Nat’l Corp. S’holders Litig., Consolidated C.A. No. 15927, 2000 WL 710192, at *26‐27 (Del. Ch. May 22, 2000). Under Delaware law, intentionally causing a corporation to violate the law is a breach of the duties of loyalty and good faith. Gifford, 918 A.2d at 357‐358. “A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006); see also Desimone v. Barrows, 924 A.2d 908, 934 (Del. Ch. 2007) (“[I]t is utterly inconsistent with one’s duty of fidelity to the corporation to consciously cause the corporation to act unlawfully.”); Metro Commc’n Corp. BVI v. Advanced MobileComm Techs., Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (“Under Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity.”); Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003) (“[O]ne cannot act loyally as a corporate director by causing the corporation to violate the positive laws it is obliged to obey.”). Directors “have no authority knowingly to cause the corporation to become a rogue, exposing the corporation to penalties from criminal and civil regulators.” Desimone, 924 A.2d at 934.

-bjmq