M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, October 25, 2012

Strine: "No Big Fees for Junk"

At a conference DC, Chancellor Leo Strine made his position clear - he will not grant large fees in disclosure-only "junk lawsuits".  On the other hand, he's not going to lose any sleep in making large awards of attorney fees in good cases (e.g. Southern Peru).  If you look at actual awards, this has been true for some time.  The problem though is that being miserly with junk suits isn't enough to dissuade plaintiffs from bringing them. It just pushes them out of Delaware where judges may be less constrained:

Strine agreed such nuisance suits are a problem, especially since lawyers have now mastered the art of filing competing lawsuits in multiple jurisdictions to make it harder for their targets to fight them. “They almost play like a tag team,” Strine said. “You think they’re fighting with each other, but it’s almost a triangulation.”

Defendants bear a lot of the blame for these settlements as well, however. Since they face the same lawyers over and over, both sides have worked out a simple bargain: In exchange for fees, the plaintiff lawyers sell absolution in the form of a blanket settlement of their claims.

“There are defense lawyers who have looked at me with piteous eyes and said `don’t blow up our deal,’” Strine said. “For $375,000, we can get a global release — which sounds like something Sting would have enjoyed — and move on.”

Strine called the proliferation of securities litigation a serious threat to the U.S. economy since it encourages companies to incorporate in other countries. And he expressed scorn for judges in other states who hang on to cases that would be better heard in Delaware. He told the attendees they need to pressure big institutional investors like Fidelity and Vanguard to “get off their duff” and press for changes in corporate bylaws that would require disputes over mergers to be heard in a company’s state of incorporation.

He's right, of course.  There's only so much that the courts can do.  It's left now to firms to engage in some self-help through forum provisions in bylaws/articles of incorporation to funnel cases into Delaware where the economic incentives can start to have some bite.  That was an argument I made in a recent paper.  There is some evidence now that notwithstanding a "status quo bias" against changes like this, firms are starting to include forum provisions in their IPO charters (e.g. Facebook among others).  That's an important step and over time that may have an impact on this issue.

The US Chamber's Institute for Legal Reform issued a report on transaction-related litigation in conjunction with the conference.  The report can be found here.




October 25, 2012 | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 24, 2012

The fog of deal-making

Our friend the Deal Professor had an interesting piece yesterday about the M&A activity heating up among cellphone companies. He warns that

"We’ve seen this story before — in the battle over RJR Nabisco that was made famous by “Barbarians at the Gate” and in deal-making frenzy during the dot-com boom. When faced with a changing competitive landscape, executives spend billions because they believe they have no other choice. The cost to the company — and to shareholders — can be immense. In this world, executive hubris tends to dominate as overconfidence and the need to be the biggest on the block cloud reason.
. . .

The rush to complete deals is an investment banker’s dream.

But the hunt may lead these companies to not only overpay but acquire companies that are underperforming or otherwise don’t fit well. Then they have to find a way to run them profitably."

Investors in these companies, and the people running them, should carefully consider his warnings.

As I explored in a recent paper, various empirical studies on the overall return to acquisitions find that they may lead to destruction of value, particularly for shareholders of the acquiring firm, who suffer significant losses. Finance and legal scholars who have evaluated the roots of bidder overpayment have pointed both to agency problems and to behavioral biases. The paper has a somewhat long overview of recent studies which suggest that, in many transactions, the acquirer’s directors and management benefit significantly from the deal, whether it is through increased power, prestige, or compensation—including bonuses and/or stock options. Other studies confirm a long-held view that managements’ acquisition decisions can be affected by various behavioral biases such as overconfidence about the value of the deal or managements’ overestimation of and over-optimism regarding their ability to execute the deal successfully.

In addition, last year Don Langevoort published a terrific essay in the journal Transactions which explored the behavioral economics of M&A deals. In the same issue, Joan Heminway published a thought-provoking essay which explored whether "fairness opinions, nearly ubiquitous in M&A transactions, can be better used in the M&A transactional process to mitigate or foreclose the negative effects of prevalent adverse behavioral norms." Both essays are worth a read!


October 24, 2012 in Deals, Fairness Opinions, Mergers, Transactions | Permalink | Comments (0) | TrackBack (0)

Dividend recaps are back

They're apparently back, and now they are getting attention.  Marketplace provides a nice "whiteboard" overview: 



October 24, 2012 | Permalink | Comments (1) | TrackBack (0)

Tuesday, October 23, 2012


From Karl Okamoto:



SAVE THE DATE. This year’s Transactional Clinical Conference will be held on Saturday, April 6, 2013. The Pre-Conference Dinner will be held on Friday evening at 6PM. Plan to attend.

CALL FOR PROPOSALS. The Organizing Committee is seeking proposals for Presentations. Our theme for this year’s Conference is "Serving the Economy." We are hoping to engender discussion on topics like crowdfunding, measuring and improving impact, who should we serve, and other topics on the role of clinics in the economy. We strongly encourage proposals that use an interactive format. Proposals must be submitted by January 31, 2013 to Ashlyn Lembree at ashlyn.lembree@law.unh.edu.

2013 Organizing Committee

Ashlyn Lembree (New Hampshire)

Karl Okamoto (Drexel)

Eliza Platts-Mills (Texas)

Michael Schlesinger (John Marshall)

Judith Sharp (UMKC)


October 23, 2012 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

2012 MAC survey

Nixon Peabody has posted their 2012 MAC survey.  It's a useful overview of what people are negotiating into their MACs.  


October 23, 2012 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Thursday, October 11, 2012

Better bureaucrats, please ... and Benefit Corporations

Like many other states, Massachusetts has recently passed an amendment to its corporate law that permits the incorporation of "Benefit Corporations" (Chapter 238, Section 52).  I have opinions about whether this is anything more than just a marketing effort, but let me put those to the side for the time being.  Here, I'd like to focus on the fact that the Secretary of State of the Commonwealth of Massachusetts apparently has a tenuous grasp on what the corporate law of Massachusetts presently is.   In the Commonwealth's official notice and FAQ for Benefit Corporations, the Corporations Division describes the need for Benefit Corporations, thusly: 

What are benefit corporations?

Benefit corporations are corporations organized under Chapter 156A (the professional corporation statute) or Chapter 156D (the business corporations statute) that have elected to be a benefit corporation in their Articles.

Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.

For example, the directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation's directors faced with similar economic circumstances could prioritize retaining the corporation's workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation's public benefit goals. 

Or ... the board of a for-profit corporation could simply decide to not lay-off employees and not face any repercussions from shareholders for a decision (not to lay-off workers when times are tough) that already is well within their rights.  

I've written on this before in the context of state anti-takeover laws.  Constituency statutes were adopted here in the Commonwealth during LBO boom to help give directors the power to resist unwanted offers.  Currently, the directors of a Massachusetts corporation can put "shareholder maximization" behind the interests of employees, suppliers, creditors, whatever.  Here's 156D, Sec. 8.30:


(a) A director shall discharge his duties as a director, including his duties as a member of a committee:

(1) in good faith;

(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and

(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.

So ... a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees.  It's true that constituency statutes were originally adopted as anti-takeover statutes and they still play that role.  But, for a publicly minded corporate board, the constituency statutes in place already provide plenty of legal cover to pursue public benefit in the corporate form.  

I'll have more to say on Benefit Corporations later.  For now, I am wondering whether Benefit Corporations might be a back door into supercharged state anti-takeover protections for firms that opt in?  I don't think it's necessary, but lawyers have been known for pursuing belt-and-suspender defenses. 



October 11, 2012 in State Takeover Laws, Takeover Defenses | Permalink | Comments (2) | TrackBack (0)

Wednesday, October 10, 2012

Clubbing back in the headlines

Thanks to a motion by the NY Times, a shareholder lawsuit against a number of private equity firms is back in the headlines.  "Clubbing" is the alleged practice of competitor private equity firms colluding rather than competing to take companies private at price lower than they might have gone private had their been vigorous competition.  The DOJ gave it a look a while ago and walked away from their investigation.  Shareholders from firms sold to private equity bidders have been a little more patient.

Now, the largely unredacted 220 page amended complaint in Dahl v Bain Capital, et al is available.  And does it make for some good reading.  Here's a taste: 

6. The $31 billion buyout of HCA illustrates how the operation of Defendants' conspiracy. On July 24, 2006, at the height of the conspiracy, a consortium comprised of Defendants KKR and Bain, along with co-conspirator Merrill Lynch, announced their plan to acquire HCA. To ensure the deal was consummated, KKR expressly requested "the industry to step down On HCA."9

7. The other private equity firms followed KKR's directive and agreed not to bid for HCA. Immediately after the announcement and during the 50-day "'go shop"' period when other Defendants had the opportunity to submit competing bids for HCA, James Attwood, a managing director at Carlyle, informed Alexander N avab, a managing director at KKR, that Carlyle would not compete for HCA.10 Likewise, Defendants Blackstone, TPG and Goldman Sachs informed KKR that they would not compete for HCA. Defendants adhered to their conspiracy not to compete on large LBOs, even though they all viewed HCA as an attractive asset. Blackstone went so far as to state that KKR and Bain's purchase was "highway robbery."11 Nevertheless, it did not compete for HCA.

8. HCA illustrates that Defendants would forego competing for a potentially lucrative deal- even one where the purchase price was "highway robbery"- to reap the long term financial gains from collusion. Two TPG senior executives discussing TPG' s decision not to compete against KKR and Bain for HCA admit this fact: "All we can do is do [u]nto others as we want them to do unto us . .. it will pay off in the long run even though it feels bad in the short run. "12

Hmm.  Kind of takes the wind out of the sails of a go-shop provision when you ask everyone else in the industry not to make a bid.  I'm going to take some time to work through the rest of this, but it certainly promises to be full of dirty laundry.


October 10, 2012 in Private Equity | Permalink | Comments (0) | TrackBack (0)

Are lawyers suckers?

We must all be desparate for business.  What else explains the email I received this morning that somehow made it throw my spam filter:

We have communicated with the company whom is customers of ours in your state 
in regards to merging, we like to merge with the company to increase revenue,
market share, and cross-selling opportunities.

We would like to retain you to help us in the process to review proposed transactions
for acquisitions or purchase of businesses, and creation of contracts for acquisition (merger), 
if you are interested please advise us on your initial retainer fee and agreement and 
we shall forward you the company informationand letter of intent. if this is not 
your practice please pass it on to the appropriate attorney

Best Regards

Kunio yamada


Chairman and ceo  Rohto Pharmaceutical Co., Ltd.
1-8-1 Tasumi-nishi, ikuno-ku,
Osaka 544-8666

I guess this must work with someone somewhere.  I suppose we lawyers, particularly M&A lawyers, are vulnerable to this kind of thing. But how exactly is this supposed to work?  What?  The Chairman and CEO of Rohto is writing emails to random law professors on his Yahoo account?  Doesn't Rohto have its own email system? Also, you'd think a big international company like his would have their own lawyers? Why does he write e-mails without punctuation?  

I find it interesting that lawyers now seem to be getting this kind of specific attention from spammers.  It used to just be Nigerian princes... Must be something about us. 

Anyway, Rao and Reiley have a good paper on the Economics of Spam for those of you who, like me, are fascinated by this.



UPDATE:  Oh!  We lawyers are suckers!  See here.  Word to the wise. (h/t JLL)

October 10, 2012 | Permalink | Comments (0) | TrackBack (0)

Thursday, October 4, 2012

FSA hates controlling shareholders

I suppose that will happen when a large, influential company with a controlling shareholder finds itself in the middle of a phone hacking scandal.  That said, the proposed changes to the FSA listing standards are at first glance a relatively extreme move against the power of controlling shareholders.  

The FSA proposes to further strengthen the Listing Regime by adopting greater corporate governance requirements for companies with a dominant shareholder.  The FSA will increase the tools available to independent shareholders to influence the governance of the companies in which they have invested. These proposals include:

    • introducing the concept of a ‘controlling shareholder’;
    • requiring an agreement is put in place to regulate the relationship between such a shareholder and the listed company;
    • and ensuring that this agreement is complied with on an ongoing basis. This will ensure that the company is managed independently from that shareholder.  

The FSA also recognises the important role that the independent directors play in these circumstances. Therefore it will also insist on a majority of independent directors on the board where a controlling shareholder exists and introduce a new dual voting procedure to allow independent shareholders to have more say in their appointment.

The idea here appears to be to take the "control" out of controlling shareholders and put more power to elect directors in the hands of minority/non-controlling shareholders.  That's a pretty big move.  By isolating controlling shareholders from the boards of the companies that presumably own, that would change the nature of a control position.  I know the phone hacking scandal was bad, but this seems like an over-reaction.  So, going forward if you own more than 50% of the stock of a UK listed firm, you'll have scarcely more influence over the direction of the firm than a minority shareholder?  I wonder whether, following implementation of these listing standards, control premiums will go down for UK listed companies.  Worth following as this develops.


October 4, 2012 in Europe, Regulation | Permalink | Comments (2) | TrackBack (0)

Wednesday, October 3, 2012

Presidential Order Prohibiting a Chinese-Owned Company From Acquiring U.S. Wind Farm Projects

It is one of those things that rarely happens in an M&A deal. Late last week, President Obama issued an order prohibiting Ralls Corporation, a U.S. affiliate of the Chinese machinery manufacturer Sany Group, from acquiring four U.S. wind farm project companies.  The wind farms are near restricted air space the U.S. Navy uses for flight training.  President Obama’s order followed a recommendation from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency group headed up by the Treasury Department that evaluates the national security risks of foreign investments in U.S. companies or operations. See here for the Treasury Department’s press release on the order. WilmerHale also has a useful short release on this rather unusual Presidential action.

Reuters reports that Ralls has sued CFIUS and the President, although the chance of a successful suit is really slim given the President’s broad authority on national security matters. It will be interesting to see whether the court will even entertain Ralls’ arguments.  The case is Ralls Corp. v. Committee on Foreign Investment in the U.S., 1:12-cv-01513, U.S. District Court, District of Columbia (Washington).

-    AA

October 3, 2012 in Cross-Border, Miscellaneous Regulatory Clearances | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 2, 2012

Notice of appeal filed in arbitration case

Yesterday, attorneys for Delaware filed a brief notice of appeal in DCOG v Strine et al.   I think Delaware is wrong and district court had it right, but I guess we'll see what the appelate court thinks. 


October 2, 2012 | Permalink | Comments (0) | TrackBack (0)

Monday, October 1, 2012

Key to success

Whenever a new lawyer asks me the key to being a successful practioner, one thing tops my list.  Mark Herrmann lays it out very well here

His last line is something that has always baffled me, because, as he notes, there's nothing to it.  So why do so many people mess this up?


October 1, 2012 in Lawyers | Permalink | Comments (1) | TrackBack (0)