Thursday, April 28, 2011
These are not good facts for Sokol. From the Berkshire board's report on Sokol's trading:
Mr. Buffett was initially unimpressed with Lubrizol as apotential acquisition, but told Mr. Sokol to let him know what he learned at the meeting. He also told Mr. Sokol that he was unfamiliar with the lubricants and additives part of the chemicals industry. During the conversation, Mr. Buffett asked Mr. Sokol how he had become familiar with Lubrizol. Mr. Sokol mentioned that he owned the stock. He did not disclose:
the amounts and timing of his purchases;
the fact that he bought the shares after discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol;
the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) hadasked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and
the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board.
It did not cross Mr. Buffett’s mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol. Because Mr. Sokol’s comment about owning the shares was inresponse to Mr. Buffett’s question how Mr. Sokol had come to know the company, it implied that Mr. Sokol had been following Lubrizol as an owner of itsshares, and in that way came to think of Lubrizol as a possible Berkshire Hathaway acquisition.
As I have noted before this looks more like a loyalty claim than a federal insider trading case. And it doesn't look good for Sokol on that level. The report concludes that even if Sokol was not in the possession of material information required to make a federal case, he was in possession of confidential information, Berkshire's confidential information. And by trading on Berkshire's confidential information, he was usurping a corporate opportunity.
It's worth noting that there is a derivative suit already pending - no surprise ( Download Kirby v Sokol complaint). In that complaint, the directors are named as defendants in addition to Sokol. Prof Bainbridge notes that there is no case against the directors. And he's right. I suspect that what going on here is that the plaintiffs are just looking for a way to argue that demand would be futile - based on the argument that directors would be personally liable in the event plaintiffs were to win. I don't think this is really going to be a winning argument - mostly because the plaintiffs allege no actual facts to back that up.
Anyway, this new report from the directors of Berkshire provides more evidence to use against Sokol in a Kirby's case against him. Though, if I were counsel to Berkshire, my next step would be to try to take over the case from the shareholder plaintiffs and have the board pursue it on behalf of the company themselves.
Update: Yikes! This is starting to get ugly! Sokol's attorney responds with a statement:
am profoundly disappointed that the Audit Committee of Berkshire Hathaway would authorize the issuance of its report to the public without the care and decency to ask even a single question of Mr. Sokol. Mr. Sokol had been associated with the Berkshire Hathaway companies for 11 years. During this time, his indefatigable efforts helped create enormous value for the Berkshire shareholders. He deserved better. While I take issue with much of the Committee's report, I briefly make the following points. If the Audit Committee had asked, it would have learned that:
Mr. Sokol had been studying Lubrizol for personal investment since the summer of 2010; such investments are specifically allowed by his employment agreement.
Mr. Buffett was told twice, not once, about Mr. Sokol's ownership of Lubrizol stock before Mr. Buffett engaged in any discussions with Lubrizol.
Contrary to the Audit Committee's statement, Mr. Sokol's Lubrizol shares were not acquired pursuant to a "100,000 limit order." Rather, they were purchased as a result of several limit orders, over a period of days, at specified prices, for the day only, in order to acquire the stock at low prices. At that time, Mr. Sokol had no reason to anticipate that Mr. Buffett would have any interest whatsoever in Lubrizol.
I have known Mr. Sokol and have represented his companies in business litigation since the mid 1980s. I know him to be a man of uncommon rectitude and probity. He would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies.
Wednesday, April 27, 2011
Here's the job announcement as posted on the employment section of the Delaware Courts' website.
There are requirements of political balance under the Delaware Constitution Art. IV § 3 and, in this case, the appointee must be either a Republican (including a current judicial officer who is a Republican) or a Democrat who is a current Vice Chancellor or Supreme Court Justice. There also is a requirement that the appointee be a resident of the State of Delaware. There are no other geographical requirements for this office. The position provides a current annual salary of $185,750. The Commission solicits candidates for this office.
Candidates for Chancellor also will be simultaneously considered by the Commission for a potential derivative vacancy in the office of Vice Chancellor if a sitting Vice Chancellor is nominated to be Chancellor. In the event a sitting Vice Chancellor is nominated to be Chancellor, the Commission may not solicit further applications for the office of Vice Chancellor. Applicants for Vice Chancellor must be a resident of the State of Delaware and a Republican (including a current judicial officer who is a Republican) or a Democrat who is a current Supreme Court Justice. There are no other geographical requirements for the office of Vice Chancellor. The position provides a current annual salary of $174,950.
In the event a sitting member of a court other than the Court of Chancery is appointed to the office of Chancellor or to a derivative vacancy in the office of Vice Chancellor, the Commission will provide a separate notice soliciting candidates for the vacancy caused thereby.
Delaware residents only!
Tuesday, April 26, 2011
My colleague, Renee Jones, recently posted her paper The Role of Good Faith in Delaware: How Open-Ended Standards Help Delaware Preserve Its Edge that is now appearing in the NY Law School Law Review. Given the current interest in Chancellor Chandler's tenure on the court, the paper's treatment of Disney and the good faith doctrine is worth reading.
Abstract: This Article traces the development of the good faith doctrine in Delaware and links shifts in the doctrine to events occurring in the national economy and in Washington. It shows that in 2003 Delaware judges seemed open to the possibility of imposing liability on directors in a case (Disney) where facts suggested that the directors were overly passive in approving the terms of an employment contract for a senior corporate executive. After the 2001-2002 corporate governance scandals faded, however, the courts abandoned this course. A trio of decisions in Disney, Stone v. Ritter, and Lyondell reiterated what had long been clear prior to 2003, that directors will not face personal liability for the breach of the duty of care. Instead, such liability is limited to situations where directors’ actions or omissions evidence intent to harm the corporation.
The Article also assesses Delaware’s response to the 2008 financial crisis. Thus far, Delaware courts have avoided staking out territory with respect to financial oversight. However, on central governance issues such as shareholder voting the legislature and courts are making an effort to preserve state primacy. The legislature, led by Delaware’s bar, moved quickly in 2009 to try to blunt progress on federal proxy access. In spring 2009 the legislature amended Delaware’s corporate statute to affirm shareholders’ rights to gain access to a corporation’s proxy machinery through binding bylaw amendment. In addition, the Delaware Bar Association formally opposed the Securities and Exchange Commission’s more comprehensive proxy access proposal.
In contrast, the judiciary’s renewed commitment to shield corporate directors from personal liability tied the courts’ hands in ways that made it difficult to respond doctrinally to the financial crisis. Thus, in Citigroup the court declined to break new ground on directors’ obligations to monitor corporate risk, but on the core issue of executive compensation the court reopened a path for recovery that had seemed until then to be firmly shut. The survival of the plaintiffs’ waste claim in Citigroup seems part of Delaware courts’ efforts appear engaged on compensation issues.
Monday, April 25, 2011
According to Delaware online:
In a surprise announcement, Chancellor William B. Chandler III, one of the most influential business court judges in the world, has announced he will leave the bench.
Chandler has been speaking his mind recently about the Airgas opinion and the steady erosion of Unocal over time. He'll be hard to replace.
Thursday, April 21, 2011
Jason Goldfarb, a lawyer, who along with Arthur Cutillo, former Ropes & Gray associate, and Zvi Goffer occupied a far corner of the Galleon web, pleaded guilty this afternoon according to the AP.
Jason Goldfarb told a Manhattan federal court judge Thursday he made a "horrible mistake" by agreeing to accept money and arrange for secrets about mergers and acquisitions to be passed to a securities trader.
According to reporting in the WSJ
Mr. Goldfarb told the judge that Mr. Goffer, whom he called a friend, had approached him soon after he graduated from law school, around 2004, and asked him if he knew anyone doing corporate work. A few years later, Mr. Goldfarb said, he ran into his old college roommate, Mr. Cutillo, whose firm was merging with another firm and was doing more corporate work.
Mr. Goldfarb said he remembered what Mr. Goffer had said, and arranged a dinner with Messrs. Goffer and Cutillo. Mr. Goffer told them he was interested in any information "where he might be able to make some money," Mr. Goldfarb said. Later, Mr. Goldfarb said, he began getting together with Messrs. Cutillo and Santarlas and started relaying confidential information from them to Mr. Goffer.
The Times today had an op-ed on how people stumble into bad behavior:
They overlook transgressions — bending a rule to help a colleague, overlooking information that might damage the reputation of a client — because it is in their interest to do so.
It's a bit of slippery slope, I suppose, but if Goldfarb's experience tells us anything, it's a quick trip down that slope once it starts.
Wednesday, April 20, 2011
Steven Davidoff, et al's chapter on Fairness Opinions in M&A is now appearing in THE ART OF CAPITAL RESTRUCTURING: CREATING SHAREHOLDER VALUE THROUGH MERGERS AND ACQUISITIONS. If you're interested in fairness opinions, and let's be honest - who isn't?, then this an excellent place to start.
Abstract: When evaluating a merger or acquisition proposal, boards frequently seek fairness opinions from their financial advisors. This fairness opinion ratifies the consideration being paid or received as "fair from a financial point of view" to shareholders. This chapter describes how a Delaware Supreme Court ruling and Delaware corporate law combined to institutionalize fairness opinions and how the form and content of a fairness opinion results from concerns over limiting the liability associated with delivering the opinion. It then surveys the limited finance literature that examines whether fairness opinions provide value to shareholders or serve the interests of the board and management at the expense of shareholders. It also highlights the difficulties associated with conducting such empirical tests because of the way fairness opinions are sought and provided. It concludes with some conjectures about the potential value of fairness opinions, and raises questions for future research.
OK, so this is a post that is focused for profs. You all are very familiar with this issue. If you're like me, you also almost at a loss as to what to do. Our students are all hopelessly distracted. I'm in the "ban the laptop" crowd. But, this year the smart phones have started to come out. What to do, what to do...
One thing is for certain, multitasking is not conducive to education. A couple of years ago there were two sides to this argument, but new research is making it more clear that multi-taskers are suckers for irrelevance.
If you're not distracted enough, here's the recent Frontline episode on this issue:
What did you expect when you started these experiments?
Each of the three researchers on this project thought that ... high multitaskers [would be] great at something, although each of us bet on a different thing.
I bet on filtering. I thought, those guys are going to be experts at getting rid of irrelevancy. My second colleague, Eyal Ophir, thought it was going to be the ability to switch from one task to another. And the third of us looked at a third task that we're not running today, which has to do with keeping memory neatly organized. So we each had our own bets, but we all bet high multitaskers were going to be stars at something.
And what did you find out?
We were absolutely shocked. We all lost our bets. It turns out multitaskers are terrible at every aspect of multitasking. They're terrible at ignoring irrelevant information; they're terrible at keeping information in their head nicely and neatly organized; and they're terrible at switching from one task to another.
So what do you make of that?
... We're troubled, because if you think about it, if on the one hand multitasking is growing not only across time, but in younger and younger kids we're observing high levels of multitasking, if that is causing them to be worse at these fundamental abilities -- I mean, think about it: Ignoring irrelevancy -- that seems pretty darn important. Keeping your memory in your head nicely and neatly organized -- that's got to be good. And being able to go from one thing to another? Boy, if you're bad at all of those, life looks pretty difficult.
And in fact, we're starting to see some higher-level effects [of multitasking]. For example, recent work we've done suggests we're worse at analytic reasoning, which of course is extremely valuable for school, for life, etc. So we're very troubled about, on the one hand, the growth, and on the other hand, the essential incompetence or failure. ...
One would think that if people were bad at multitasking, they would stop. However, when we talk with the multitaskers, they seem to think they're great at it and seem totally unfazed and totally able to do more and more and more. We worry about it, because as people become more and more multitaskers, as more and more people -- not just young kids, which we're seeing a great deal of, but even in the workplace, people being forced to multitask, we worry that it may be creating people who are unable to think well and clearly.
... Are there certain kinds of thought that suffer more than others?
It's a great question. The answer is yes. So we know, for example, that people's ability to ignore irrelevancy -- multitaskers love irrelevancy. They get distracted constantly. Multitaskers are very disorganized in keeping their memory going so that we think of them as filing cabinets in the brain where papers are flying everywhere and disorganized, much like my office.
And then we have them being worse at switching from one task to another. ... It's very troubling. And we have not yet found something that they're definitely better at than people who don't multitask.
Tuesday, April 19, 2011
Thursday, April 14, 2011
Allen & Overy recently released its Q1 Global M&A Overview. It's a nice 26 page review of current trends. Among other things, it includes this chart:
Deals are back, but activity is well short of where things were in 2007/2008. Well, be thankful for what you have, I suppose.
That's the name given by the FBI to the most recent extensive insider trading investigation. Why "Perfect Hedge"? According to CNBC:
An FBI source says the name "Perfect Hedge" was chosen because that is what the alleged offenders thought they had—a perfect hedge, or an investment with no risk.
So, now we know.
Wednesday, April 13, 2011
A couple of weeks ago there was some talk of collusive settlements and forum shopping (here). In a case before the Delaware Chancery Court, Vice Chancellor Laster appointed a special counsel in the case of Scully v Nighthawk to answer the question whether the settlement reached in a foreign jurisdiction was collusive and what role, if any, the court should have when it receives notice of an apparent collusive settlement. The Special Counsel's report is here. The bigger issue here relates to merger related litigation leaking out of Delaware to other jurisdictions. I've got a paper on that issue (forthcoming in the UC Davis Law Review).
In any event, the Special Counsel reported back to the Vice Chancellor in the Nighthawk case:
Nevertheless, considering the results reached by courts in the cases discussed above, Special Counsel does not believe that the facts here lead to a conclusion that the settlement in this case was collusive. Settlements in multi-jurisdictional deal litigation are nearly always reached quickly—defendants trying to preserve their transactions need to resolve potential injunction motions before the deals close. The timing of settlement here was consistent with similar cases. The amount of fees ultimately agreed to was within the range of fees generally awarded in disclosure settlements. The amount of discovery provided to plaintiffs was similarly within the bounds of discovery often shared by defendants before settling these types of cases. While this Court’s comments suggested that additional discovery might be warranted, theArizona plaintiffs did provide for post-settlement discovery, likely including depositions.
Now, in a letter to counsel in which he also stayed the Delaware case in favor of the Arizona case, Vice Chancellor Laster has added to the record a mea culpa of sorts. He makes it clear that his questioning of the settlement as collusive was "regrettable and misplaced" and that his question "unfairly cast defense counsel in a negative light."
So, while collusive settlements and forum shopping may continue to be an issue that academics worry about, at least in this case, the court is convinced it was not an issue.
Friday, April 8, 2011
Sanofi said more than 237 million Genzyme shares were tendered in the transaction, representing 89.4 percent of outstanding shares. Sanofi then exercised a top-up option, resulting in ownership of more than 90 percent of Genzyme's shares.
I wish I had this class in high school. The NY Times dealbook has a rather heartwarming story about high school students figuring out the latest M&A deals in a business and entrepreneurship class at Martin Luther King Jr. High School of the Arts and Technology. The class splits its time between its retail business and its deal advisory projects, and even works on hypothetical deals like a purchase of the NY Times by Google. For those high school student readers of our blog (are there actually any??) or parents of high-schoolers (the more likely), you may also want to take a look at Whatrton's new Web-based project called Knowledge@Wharton High School which promotes financial literacy among students and teachers.
Wednesday, April 6, 2011
The SEC is alleging that the insider trading scheme began in 1994 while this guy was a summer associate and continued until very recently. That's really incredible. This guy apparently sat through a legal ethics class, presumably a corporate law class, and a securities reg class at NYU where he went to law school. I'm sure he was taught all about insider trading laws while there. Presumably, he also took and passed the MPRE where there is undoubtedly an emphasis on client confidences and the obligations of the profession. I'm also assuming he sat through countless CLE sessions at the various firms he worked where people were admonished to take client confidences seriously and where they were presumably instructed on their obligations with respect to inside information. All that ... and still ...
Here's a pictorial of today's allegations against the former M&A lawyer at WSGR(c/o the SEC):
This from NBC News:
The FBI has arrested a banker and a Washington, D.C., attorney on insider trading charges, law enforcement officials said.
Garrett Bauer was arrested Wednesday morning and was taken to the FBI offices in New Jersey. He is expected to be arraigned in federal court in Newark on the securities fraud charges.
Officials said for years, attorney Kluger revealed information about mergers his prominent law firm, Wilson, Sonsini, Goodnick and Rosato, was working on and they said Bauer was able to trade on that information.
Investigators said they believe more than $30 million in illegal profits were made over the years.
This arrest comes as some Justice Department officials have called insider trading on Wall Street "rampant."
According to Reuters, authorities are describing this as a "decades long scheme." Goodness.
From the wiretaps...
Hmm. Seems like a clever fellow...
By now, everyone and his brother has had an opinion on the l'affaire Sokol. I've poked around a little and given it some thought. I think there are two issues. First is the corporate opportunity issue. I think that's pretty clear. The second, and more ambiguous issue, is the potential insider trading liability. I have thoughts on that one, but I'm clearly still in the elevator stage of my thinking there.
I found it amusing that in his CNBC "defense" of his trading, Sokol took away from his experience the conclusion that in the future it would be better for managers not to share opportunities with their employers. Uh... no. That's not the right answer. The Lubrizol deal presents a pretty straightforward example of a corporate opportunity. Here's the clearest statement of the doctrine from Broz v Cellular Info. Systems:
The corporate opportunity doctrine, as delineated by [Guth v Loft] and its progeny, holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation. The Court in Guth also derived a corollary which states that a director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.
Now, this doctrine is not a 'check-the-box' approach to corporate opportunities. Rather, directors must consider all of elements as a whole. In any event, Sokol apparently first learns about the Lubrizol in his corporate capacity at a meeting with Citigroup bankers who are pitching potential acquisition targets for Berkshire Hathaway. The bankers say they are "shocked" that Sokol bought shares after their meeting with them. It's hard to imagine too many things that will shock a group of bankers pitching deals, but there you have it. In any event, Berkshire Hathaway is clearly in a financial position to exploit the opportunity to acquire Lubrizol. Berkshire Hathaway is in the business of making acquisitions of promising targets and has an expectation that when such opportunities are presented to its agents that it [Berkshire Hathaway] will have first crack at them. Finally, when Sokol acquired $10 million worth of Lubrizol stock a week before presenting the deal to Buffet, he clearly put his thumb on the scale and put himself in conflict with Berkshire with respect to doing the deal. At the very least, he should have recused himself and not taken the lead with respect to the deal.
I think the case that Sokol, by buying ahead of Berkshire and then pushing the deal on his employer violated his duty of loyalty to the corporate by usurping a corporate opportunity. So what measure of damages is appropriate? Disgorgement of the approximately $3 million of profits he made on his $10 million investment would seem right. He should turn that over to Berkshire on his way out the door.
Now ... on the question of whether Sokol's trading constistutes insider trading, I haven't convinced myself to pull the trigger on that yet. But ... I don't think there is any question that when Citigroup presented a list to Sokol of potential targets for Berkshire that the content of this list was material information. I mean ... would a reasonable investor find it useful to know that of the thousands of companies out there, that Citigroup was pitching twenty or so to Warren Buffet's guys and that a deal might be in the offing? Let me venture a guess that if Rajaratnam knew what Sokol knew, he'd be trading on it and that can't be good for Sokol.
The Deal Professor has some very relevant thoughts on the question of materiality. They're right on point and worth reading.
Tuesday, April 5, 2011
Daniel Sokol (Univ. FL) and James Fishkin (dechert) has posted Antitrust Merger Efficiencies in the Shadow of the Law:
Abstract: This Essay provides an overview of U.S. antitrust merger practice in addressing efficiencies both in terms of actual practice before the agencies and in scholarly work as a response to Jamie Henikoff Moffitt‘s Vanderbilt Law Review article Merging in the Shadow of the Law: The Case for Consistent Judicial Efficiency Analysis.
Monday, April 4, 2011
Steven Davidoff (The Deal Professor, OSU Law) will be chairing a symposium sponsered by the Delaware Journal of Corporate Law at Widener Law School on Monday, April 11. The symposium, Irreconcilable Differences: Director, Manager, and Sharehyolder Conflicts in Takover Transactions promises to be a great event.
TAKEOVER TRANSACTIONS involving directors, managers, and shareholders are rife with conflicts. These conflicts can be stark as in a freeze-out or management buy-out. They can also be more subtle. Management can be requested to remain part of the management group, a so-called management buy-in. A controlling shareholder can receive a differential benefit in a takeover. Directors and management can skew the takeover process to preferred bidders through control of the sale process and negotiation of acquisition agreement lock-ups. From a buyer perspective, directors can structure the takeover to further entrench themselves. The Delaware courts have recently grappled with many of these issues. Recent opinions have addressed poison pills, the appropriate standard to govern judicial review of freeze-out transactions, differential treatment of controlling and non-controlling shareholders, the parameters of lock-ups, and issues arising from undue management influence in the management buyout process.
The Delaware courts are also grappling with the appropriate remedy when proper procedures are not utilized in a takeover. This conference hosted by The Delaware Journal of Corporate Law will bring together academics, judges, and practitioners to discuss the current Delaware case-law on these issues, appropriate standards to regulate these conflicts, and related research.
Steven and the folks over at the DJCL look like they've put together a really interesting group. It'll be a great day. If you're in the Wilmington area, drop by!