Friday, September 28, 2012
OK, so you've heard this from me before....and this is directed at all those juniors about to start. Don't do it. Sure, there are lots of academic debates about why insider trading is ok. I get that. But don't do it. Today's installment: idiot former investment analysts. Did you pick that up? Former. In any event, the SEC just charged Jason Lee and his friends from college, one of whom lived in the saame condo complex with him, with insider trading. The complaint itself is full of lots of cicumstantial evidence. It doesn't look like the giovernment had access to a wiretap or that any of the alleged co-conspirators has flipped, so the case is a series of internal investment emails lining up with times of cell phone calls and text messages, the kind of stuff you get from a pen register, and bank cash withdrawals and deposits.
In any event, this is where everything seems to go really south for Jason Lee:
OK, so a decision point for Lee. Come clean and say that you know Chen. Or ... well ...
Yeah ... this isn't going to turn out well. Don't do it. It's not a good career choice. Ok, off my soapbox.
Wednesday, September 26, 2012
In an opinion in South v Baker, Vice Chancellor Laster ruminates on the number three:
[P]laintiffs‘ counsel was forced to retreat during oral argument to a more reductionist position: knowledge can be inferred because three safety incidents occurred within one year. ... And concededly the number three has a lot going for it. Three Graces. Three Fates. Three wishes from the djinni in Aladdin‘s lamp. It‘s the number of licks it takes to get to the center of a Tootsie Pop, and for fans of Schoolhouse Rock, it will always be a magic number. But three mining accidents in a year does not support a reasonable inference of board involvement, much less bad faith, conscious wrongdoing, or knowing indifference on the part of a board of directors, particularly where the incidents appear unrelated.
Visions of that wise owl chomping on that poor kid's lollipop appear. And ... is that how you spell genie of the lamp? I'll have to check that... In fairness, the issue for the court was a real one: to what extent can one impute knowledge or involvement to the board following the happening of corporate events, like mining accidents, when making a Caremark claim. Vice Chancellor Laster believes you can't. Better to file a Section 220 action first, do the investigation of the corporate books and records to find out what the board actually knew and then file a derivative claim. Absent the investigation it may be impossible to state the "particularized facts supporting a reasonable inference that a majority of the Board faces a substantial risk of liability". Without which, demand won't be excused.
So, again, the court returns to its mantra of using all the tools at hand before filing a derivative suit. This is now a familiar refrain and it's one way the court attempts to reduce the flow of placeholder litigation that in recent years has been flooding the court.
Although Laster dismisses the case with prejudice as to the named plaintiff, the board is not off the hook. Laster makes it clear that his dismissal is not an adjudication on the merits of any potential claims against the board, it's just a determination the instant plaintiff brought the case prematurely. Laster makes it clear that a subsequent, more diligent, plaintiff could file a 220 action and then bring a Caremark claim based on the same set of facts.
Tuesday, September 25, 2012
OK, so you are about to start as a young, corporate associate at a fancy firm. For whatever reason, because it conflicted with Evidence, or because it was scheduled at the same time as the student associations's weekly softball game, whatever, it doesn't matter. You didn't take an M&A class. Truth be told, your Business Associations class covered mergers, but you weren't really paying attention. Doesn't matter. All that matters is that you are about to go into the belly of the beast and M&A will take up much of your time... No fear! MoFo just posted an 1.5 hour review of M&A basics for private company acquisitions -- here. It's like Khan Academy for laywers! If you are going to listen/watch make sure you get the CLE credit...
Monday, September 24, 2012
The Delaware Supreme Court denied Grupo Mexico's motion for reargument following its ruling to uphold the Chancery Court's opinion - including a $300 million legal fee award. Now Grupo Mexico responds. Presumably they'll be sending a check soon.
"This ruling sets a dangerous precedent, if not a new high for court sanctioned legal fees in a derivative action. Excluding the defendants shares, it represents an award of 80 percent of the benefit obtained for their clients. On an hourly basis, it comes to$35,000 per hour. This is an unwarranted transfer of wealth from the shareholders of a publicly traded company to plaintiffs' attorneys. It turns the well established legal principle that 'those who profited from the litigation should share its costs' on its head, and sends a clear if disturbing message to plaintiffs' attorneys they can be made wealthy by an award out of proportion to the benefit they actually win for their clients." – Grupo Mexico General Counsel Mauricio Ibanez-bjmq
Profs. Ron Gilson and Alan Schwartz have a new paper, Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review. It's a contribution to the rules vs. standards debate. Gilson and Schwartz are a great writing pair. This paper is another add to their now lengthy collaboration.
Abstract: We consider how the state should regulate the consumption of pecuniary private benefits of control by controlling shareholders. These benefits have efficient aspects: they compensate the controlling shareholder for monitoring managers and for investing effort to create and implement projects. Controlling shareholders, however, have incentives to consume excessive benefits. We argue here that ex post judicial review of controlled transactions is superior to ex ante restrictions on the creation of controlled structures: the latter form of regulation eliminates the efficiencies as well as the abuses of the controlled company form. We also argue that controlling shareholders should be permitted to contract with minority investors over permissible private benefit consumption. Neither ex post regulation nor contract works well, however, when courts are inefficient and inexpert. Hence, our principal normative claim is that a European level corporate court should be created, whose jurisdiction parties can invoke in their charters or other contracts.
Tuesday, September 18, 2012
The Southern Copper case has generated lots of attention - and for good reason. The courts don't often hand out $2 billion verdicts. Over at the WSJ Dealpolitik column, Ronald Barusch takes a look at the hefty legal fee - an eye popping $304 million (or an approximate $35,000/hour fee) and suggests it might be time for state legislatures to step in and reform shareholder litigation -- perhaps by relyiong on administrative remedies against directors. That's not altogether a unique recommendation. My colleague, Renee Jones, recently published a piece in the Vanderbilt Journal of Transnational Law recommending director bars as an alternative administrative remedy for director violations of the duty of care. It's an idea worth pursuing especially given the ubquity of 102(b)(7) protections.
In any event, I'm getting far afield. Rather than see Southern Copper as an example of judicial overreach, it might be better to put it in the context of Delaware trying to muddle through the problem of transaction-related litigation. By now, it's pretty well known that almost every public transaction is bound to be the subject of litigation. Most of that litigation is, to be perfectly frank, nuisance litigation. That said, shareholder litigation remains an important quiver in the corporate governance arrow. So, how to encourage good suits and discourage bad ones? There have been lots of attempts to get a handle on this problem - PSLRA for example. In recent years, the courts in Delaware have (I supposed relying on the hive-mind) decided that policing down fees on "bad" cases and being generous with fees on "good" cases is one way to set the incentives. Southern Copper falls into the "good" case category. Chancellor Strine presumably wants to signal to potential litigants that these kinds of cases, where the duty of loyalty is at issue, will be cases that pay off and that plaintiffs should invest their resources in pursuing these cases over the garden variety disclosure cases that often accompany merger announcements.
Thursday, September 13, 2012
Tom Hals at Reuters has a good piece on the potential for Chancery arbitration following the recent district court decision. Backers of Chancery arbitration are looking to appeal the ruling that struck down teh ability of parties to maintain confidentiality of the proceedings. That seems like the right result. Now, they are seeking to appeal the ruling and get Chancery arbitration back on track. This struck me in Hals' piece:
Supporters said that despite the legal setback, they expect that Delaware Chancery arbitrations, in some form, will likely take root in the coming years.
"In five years, we could see substantial growth in the number of these cases, said Gregory Varallo, of Richards, Layton & Finger in Wilmington, "It could even rival the number of public business cases."
That's what I'm afraid of. I'm working on a paper on Chancery arbitration (now have to rework parts of it given that it's been overtaken by events in the district court). The key problem as I see it with respect to arbitration for me is the long-term impacts of having a significant number of public business cases decided by arbitration before the Delaware courts rather than by the Delaware courts themselves. Though backers seem to think Chancery arbitration is critical to maintaining Delaware's competitive position, I take the position over the long term - or even five years if there is a significant move in that direction - Chancery arbitration could in fact weaken Delaware's position with respect to its corporate law franchise. Sure, there may be a lot of cases (arb/formal) being decided, but the number of precedents being set and the continued maintenance of the law will suffer. Good for the short term but bad for the long term -- and not just for Delaware if one thinks that there are positive network effects associated with the Delaware corporate law franchise.
But that's just me and I don't know much.
Tuesday, September 11, 2012
Our friends at LawMeets and Apprennet LLC are doing some interesting programming that should be of interest to law students and junior associates who might be just getting going. They are announcing “The Basics of Acquisition Agreements”. Faculty include our own Afra Afsharipour! See below.
The Basics of Acquisition Agreements
LawMeets is launching the first “MOOC” or massive open online course to teach transactional lawyering skills. LawMeets two-week online course on the Basics of Acquisition Agreements includes four video lectures, four interactive learning exercises and two panel discussions by leading transactional attorneys moderated by LawMeets faculty. The course is free and open to everyone.
WHO will teach the course?
The LawMeets® faculty for this course include:
- Afra Afsharipour, Professor of Law at UC Davis School of Law and former attorney at Davis, Polk & Wardwell LLP
- Jay Finkelstein, DLA Piper Partner and Adjunct Professor of Law at Stanford Law School and American University Washington College of Law
- Karl Okamoto, Professor of Law at Drexel University Earle Mack School of Law and former Dechert LLP and Kirkland & Ellis LLP Partner
Whitehead, Professor of Law at Cornell Law School and former senior counsel at
various international financial institutions
The faculty will be joined by a group of experts from law firms and corporate legal departments from around the world who will interact with the course participants through written feedback, online discussion boards and streaming video.
WHAT will the MOOC cover?
- The Why and How of Acquisitions
- A discussion of the economic and strategic motivations for acquisitions and the role lawyers play.
- Overview of the steps for completing acquisition transactions.
of an Acquisition Agreement
- An introduction to the provisions of an agreement and their interplay.
- An in-depth look at the primary “battleground” in the negotiation of an acquisition agreement.
- Due Diligence
- Why it matters. How it works. Common issues.
WHEN does the MOOC occur?
- October 23, 2012 through November 7, 2012
HOW do I participate?
- Interested participants can register for the MOOC by visiting www.LawMeets.com. Early registrants will receive email updates and the opportunity to complete a practice online exercise.
- To learn more, please visit www.LawMeets.com or email us at firstname.lastname@example.org.
Monday, September 10, 2012
Now, I don't often say that, but things are happening up there that we should pay a little attention to. Canada has for a long time been much less solicitous towards the poison pill than Delaware (or other US) courts. In Canada, boards have the authority to adopt poison pills, subject to review by the provincial securities commissions. The commissions have the authority to order pills redeemed. In making the determination with respect to whether or not to order a pill redeemed, the commissions consider, among other things, whether the shareholders have voted to ratify the adoption of the plan. (I've blogged about Candadian pill standards before, see here).
In any event, the Canadians take a position that is very Gilson/Bebchuk-like on the scale of things in the long-standing takeover debate: the corporation is ultimately owned by the stockholders. In response to an unsolicited offer, boards may use defensive measures in order to help negotiate a higher price, but in the end, a board may not stand between shareholders and the opportunity to tender into a non-coercive offer. I suspect there's a finance study out there on takeover premia in Canada. If not, that sounds like a study/summer project.
Contrast the Canadian position with the Delaware position, which, following Airgas and Versata, can only be called a reluctant endorsement by the Chancery Court of "just-say-no". In that long-standing debate, it's pretty clear that Marty Lipton has won the day.
So, and this is where Canada is interesting, it looks like Canada is making increasing noises about moving away from its long-standing position with respect to poison pills and its more shareholder-centric approach to the takeover law and towards a more Delaware-like approach. Already last year, it was bubbling under the surface. High profile takeovers of Canadian firms by foreign acquirers tends to ignite the passions of nationalism. Recently, it's been proposed acquisition of Rona Inc by Lowe's Co - we can't have the Yanks owning our big-box hardware stores afterall. In any event, the acquisition played an important role in the recent provincial elections in Quebec, which saw the Quebec nationalist party put back in power. During that election, both the Liberal and PQ included anti-takeover legislation in their party platforms. Liberal leader Charest went so far as to announce a $1 billion "foreign-takeover fund" that would be used to finance domestic acquisitions of Quebecois companies. No clue whether he intended to use the proposed fund to fend off interlopers from Alberta, but we won't ever find out. Charest lost and he's on his way out. The incoming PQ has already signaled that they aren't supportive of a Lowe's/Rona deal (and here). I suppose the PQ could try to stymie foreign takeovers by requiring that all tender offer documents be in French. Or, it could repeat what the Canadian government did last year in the proposed Potash aquisition - declare the Rona hardware retailer a vital national asset and a transaction not to Canada's benefit block the deal. Uh ... too much?
Short of that, it looks like the more obvious path would be to adopt a constituency statute that would place more power in the hands of the board and permit them to more aggresively resist unwanted offers.
So, something to watch. Of course, putting more power in the hands of boards doesn't ensure that Canadian businesses stay Canadian, but I suppose that's a lesson our friends up North will have to learn on their own.
Wednesday, September 5, 2012
Following the recent federal district court ruling on the constitutionality of the Delaware Chancery Court arbitration procedure, I've gotten a lot of questions about the procedure, so I figured it might be helpful to post links to all the arbitration related posts from past couple of years.
- Delaware’s new arbitration rules
- Arbitration in Delaware
- Arbitration for merger agreements
- Skyworks arbitration
- Arbitration system challenges in Delaware
- Skyworks fireworks
- Thoughts on challenge to Delaware arbitration procedure
- Delaware’s fragile network
- WSJ on Delaware arbitration
- Chancery arbitration ruling handed down
I have to admit being a little disappointed. Now that the district court opinion has been published, I'll have to reframe a paper on Chancery arbitration that I've been writing. Oh well, those are the risks of trying to current.