Tuesday, July 31, 2012
Imagine that...no honor among thieves...
Bloomberg has a lengthy piece on the 17 year long insider trading ring in which an M&A lawyer handed inside information to his friends. This time from the lawyer's perspective.
Professor Bainbridge has posted a very helpful draft of his paper, The Geography of Revlon-land. Here's the abstract:
In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Delaware Supreme Court explained that when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”
Unfortunately, the Court’s colorful metaphor obfuscated some serious doctrinal problems. What standards of judicial review applied to director conduct outside the borders of Revlon-land? What standard applied to director conduct falling inside Revlon-land’s borders? And when did one enter that mysterious country? By the mid-1990s, the Delaware Supreme Court had worked out a credible set of answers to those questions. The seemingly settled rules made doctrinal sense and were sound from a policy perspective.
Indeed, my thesis herein is that Revlon and its progeny should be praised for having grappled — mostly successfully — with the core problem of corporation law: the tension between authority and accountability. A fully specified account of corporate law must incorporate both values. On the one hand, corporate law must implement the value of authority in developing a set of rules and procedures providing efficient decision making. U.S. corporate law does so by adopting a system of director primacy.
In the director primacy (a.k.a. board-centric) form of corporate governance, control is vested not in the hands of the firm’s so-called owners, the shareholders, who exercise virtually no control over either day-to-day operations or long-term policy, but in the hands of the board of directors and their subordinate professional managers. On the other hand, the separation of ownership and control in modern public corporations obviously implicates important accountability concerns, which corporate law must also address.
Academic critics of Delaware’s jurisprudence typically err because they are preoccupied with accountability at the expense of authority. In contrast, or so I will argue, Delaware’s takeover jurisprudence correctly recognizes that both authority and accountability have value. Achieving the proper mix between these competing values is a daunting — but necessary — task. Ultimately, authority and accountability cannot be reconciled. At some point, greater accountability necessarily makes the decision-making process less efficient. Making corporate law therefore requires a careful balancing of these competing values. Striking such a balance is the peculiar genius of Unocal and its progeny.
In recent years, however, the Delaware Chancery Court has gotten lost in Revlon-land. A number of Chancery decisions have drifted away from the doctrinal parameters laid down by the Supreme Court. In this article, I argue that they have done so because the Chancellors have misidentified the policy basis on which Revlon rests. Accordingly, I argue that Chancery should adopt a conflict of interest-based approach to invoking Revlon, which focuses on where control of the resulting corporate entity rests when the transaction is complete.
Monday, July 30, 2012
A summer guest post from Claire Hill (Minnesota Law) with a question for readers. Let the wisdom of the crowd rule...
Thursday, July 19, 2012
On this blog and elsewhere there was a palpable sense of change with respect to the vigor of antritrust enforcement and pre-merger review when the Obama administration came to power. Now, a new essay at the Stanford Law Review Online by Prof Daniel Crane calls "BS" to that idea:
The merger statistics do not evidence “reinvigoration” of merger enforcement under Obama. Focusing on the last two fiscal years under Bush and the first two fiscal years under Obama, the numbers are comparable. In those periods, the Bush Administration conducted more total merger investigations (Bush 185, Obama 154) and more Hart-Scott-Rodino investigations (Bush 152, Obama 127). The two administrations had almost exactly the same number of “second requests” for information under Hart-Scott (an investigatory mechanism that delays the closing of a merger and often forces the merging parties to either negotiate with the government or abandon the merger). From 2007 to 2008, Bush made 52 second requests, and from 2010 to 2011, Obama made 53. The Obama Administration challenged slightly more mergers (Bush 16, Obama 19), and challenges announced by the Obama Administration resulted in more transactions restructured or abandoned prior to filing a complaint (Bush 9, Obama 15), although the numbers are small under both metrics.
These raw comparisons may not be sufficiently informative because of the reduced numbers of mergers due to the effects of the financial crisis. But even adjusted for the number of Hart-Scott filings, the numbers remain comparable, although with a tick up in second requests under Obama. The Bush Administration conducted 0.04 investigations per Hart-Scott filing; Obama conducted 0.05 investigations per filing. The Bush Administration made 0.013 second requests for information per Hart-Scott filing; Obama’s made 0.020—a 50% increase on a per capita basis.
Well. How about that. Prof Crane notes that statistics don't tell the entire story and that there may have been a change in attitude that prevented otherwise antitrust sensitive deals from going forward, etc. Still, it's eye-opening.
Wednesday, July 18, 2012
Cheseapeake Energy has not been a paragon of corporate governance these days. So no one should be surprised by the fact that Reuters is now reporting that Chesapeake has instituted "tin parachutes" for approximately 1,6000 mid-level employees. A tin parachute is a program in which a large number of mid-level employees are given payaments upon a change of control as a takeover defense. In the event there is a change of control and then employees with these tin parachutes are let go, then a large number of relatively small payments are triggered. In Chesapeake's case the estimate cost would be $140 million. By raising the back end costs of restructing a takeover target, it becomes more expensive for potential acquirers. Peoplesoft famously instituted a tin parachute while trying to fend off Oracle.
According to Reuters, Chesapeake has not disclosed the tin-parachutes in its SEC filings. That's strange. I did a quick search and couldn't come up with any description, but I imagine the folks over at Footnoted.com can find it if it's been filed.
Monday, July 16, 2012
Justin Fox and Jay Lorsch have a piece, What Good Are Shareholders?, in the new Harvard Business Review. They join Lynn Stout (The Shareholder Value Myth) and others call into question the question of whether pursuit of short-term stock prices is the best way to run a railroad. Fox and Lorsch conclude:
Given how many unintended and unwelcome consequences have flowed from the governance and executive pay reforms of the past few decades, we’re wary of recommending big new reforms. But we do think that giving a favored role to long-term shareholders, and in the process fostering closer, more constructive relationships between shareholders, managers, and boards, should be a priority. So should finding roles for other actors in the corporate drama—boards, customers, employees, lenders, regulators, nonprofit groups—that enable those actors to take on some of the burden of providing money, information, and especially discipline. This is stakeholder capitalism—not as some sort of do-good imperative but as recognition that today’s shareholders aren’t quite up to making shareholder capitalism work.
They, like Stout, recommend a new stakeholder capitalism. One that's focused on value, but long term value, and not necessarily social constituencies (though the two goals need not be mutually exclusive). Along the lines of long term shareholder value, Andrew Schwartz has an article, The Perpetual Corporation, that argues that directors have a legal obligation to manage for the long term. That might be a bit strong, but the article is a good marker for the long-term value argument.
Still 90+ degrees and melting in Massachusetts...
Thursday, July 12, 2012
You'll remember back in May we posted about Vice Chancellor Laster's innovation in settlement of a derivative suit. Back then objectors to a settlement appeared. VC Laster challenged them to put up a bond if they really thought the claim was worth more than the settlement. At the time, I really didn't know if the objectors would step up and take over the suit. Afterall, VC Laster made it clear that if the objectors took up the suit and won, they would only receive their pro-rata share of any settlement or judgment. So, the delta between what they think it is worth and the initial settlement would have to be pretty large to induce them to put up a bond. Lo and behold, Reuters is reporting that the objectors put up a bond yesterday:
To the surprise of many lawyers who followed the case, the objectors said in court documents last week they had found the money to keep the case going. They said they would post a $13.25 million bond funded in part by a unit of UK litigation finance firm Burford Capital.
Now, I know from the comments last time that not everyone thinks this kind of innovation in shareholder litigation is a good thing. I get that. But, I think it's worth experimenting. Cause what we've got going now is definitely in need of improvement.
Monday, July 2, 2012
What? Was it a slow news week last week? Nothing else newsworthy to write about? [jk] That can be the only explanation for this piece that appeared in this weekend's NYTimes, "How Delaware Thrives as a Tax Haven". There are two issues pushed in the article: first, the "tax haven" thing. Firms use Delaware corporations to avoid state, not Federal, tax liabilities on trademarks, patents, and investments. Here's the strategy as they described in a 2009 NY Times piece ("Critics Call Delaware a Tax Haven"):
Corporations are allowed to establish these shell companies in Delaware, as well as in Nevada and Wyoming.
Typically, they then transfer to these subsidiaries ownership of things like trademarks, patents and investments. Delaware does not tax holding companies set up to own and collect income from such lucrative intangible assets.
The parent companies of these shells usually pay royalties to the Delaware subsidiaries to lease back those assets. By doing so, they can claim income tax deductions in states where they actually do business. The shells also funnel profit, tax free, back to their parents, in the form of dividends and loans.
OK. So I guess one can get some tax savings at the state level by structuring this way. But, is that news? My guess is no. How can it be? The Times published a 2009 piece on the exact same subject.
In any event, the tax thing is just a set up for the second issue raised in the article, which is the more nefarious one...Delaware corporations are secretive, more secretive than Cayman corporations!
Big corporations, small-time businesses, rogues, scoundrels and worse — all have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks. Federal authorities worry that, in addition to the legitimate businesses flocking here, drug traffickers, embezzlers and money launderers are increasingly heading to Delaware, too. It’s easy to set up shell companies here, no questions asked. ...
What does it take to incorporate a company in Delaware? Not a lot, tax experts say. Shell companies — those with no employees, no assets and, in fact, no real business to speak of — are remarkably easy to establish here, and it doesn’t always matter who you are or what business you are in. Viktor Bout, the Russian arms dealer known as “the merchant of death,” used two Delaware addresses. In April he was sentenced to 25 years in prison on terrorism charges resulting from an American sting operation.
Did you know that if someone incorporates a business in Delaware, that no one, not even the state of Delaware knows who the beneficial owners are! And that's the reason why Delaware is such a popular location for incorporations. Wait ... what?
Now, if Delaware were the only state in the U.S. to shield the identities of beneficial owners, I might be interested in the rest of what this article has to say. But, let me just state as a matter of fact, most - if not all - states in the U.S. have the same basic rule with respect to beneficial ownership. And that is, the identities of beneficial owners of corporations incorporated in the US states are not known to the state government by default. Can you imagine what the paperwork burden would be on the state and start-ups if everytime an employee at a start-up was issued an immediately exercisable stock option the corporation had to make a report to the State? Uh ... hellooo!
It's really a non-starter of an idea and the resistance to the idea won't come primarily from Delaware, it'll come from California, home of most of America's start-ups. Anyway, if you want to go after anyone for excessive privacy with respect to corporations, why not go after someone who really deserves it, like Nevada. That was their schtick for a long time. Not only do you not have to report the identities of your beneficial holders, you can report "nominee" directors and officers on your annual reports. That's even more secret than Delaware!
Michal Barzuza has a very good recent paper on Nevada as a "liability-free zone" for incorporations. The Times should have started there rather recyle an old story in a "slow news week".