March 24, 2012
I'm a muppet of a client
The little ditty that is taking the internets by storm, lyrics re-written by Frank Partnoy (USD):
Firms surrender on exclusive forum bylaw
You may remember that in February Navistar and about a dozen other companies that had adopted exclusive forum bylaw provisions were sued by shareholders in the Delaware Chancery Court. The suits challenged the enforceability of the bylaw provisions. A similar bylaw was struck down last year by a Cxalifornia district court in Galaviz v Berg as lacking sufficient indicia of consent. That's probably the right result with respect to bylaw provisions (as compared to exclusive forum provisions in certificates of incorporation).
In any event, one reason why it can be hard to convince clients to adopt such provisions in their bylaws or charters is that it's a pain in the next to be the first ones to do so. You get sued, get an ISS negative vote, etc. It's a real bother. Such a bother that sometime clients just say "to heck with it." Which is apparently what Navistar did the other day. Quietly, it filed a 8-K announcing that it had dropped it exclusive forum provision from its bylaws. AutoNation also did the same thing yesterday:
On March 23, 2012, the Board of Directors (the “Board”) of AutoNation, Inc. (the “Company”) approved an amendment to the Company’s By-Laws (as amended, the “Amended and Restated By-Laws”), effective immediately, to remove Article VIII, in its entirety, from the By-Laws. Prior to the amendment, Article VIII provided that the Court of Chancery for the State of Delaware would be the exclusive forum for certain corporate legal actions and proceedings involving the Company or its directors, officers or employees, including derivative claims, breach of fiduciary duty claims, claims under the General Corporate Law of the State of Delaware, the Company’s Certificate of Incorporate or the Company’s By-Laws, and claims governed by the internal affairs doctrine. As part of the amendment, Article IX of the Company’s By-Laws was renumbered as Article VIII.
No doubt, Navistar and AutoNation will appear in the Chancery Court sometime in the next few days asking to have the case dismissed for mootness. But wait, upon further inspection, these two aren't alone! Superior Energy, Franklin Resources and Curtiss Wright also deleted their provisions. Goodness, it's a wholesale surrender of the exclusive bylaw forces.
Who's left? Solutia (just sold to Eastman), Chevron, SPX, and Danaher. My guess all of those - except Solutia - will be walking away from their bylaws early next week as well. (Update: Tom Hals at Reuters also has the story.)
March 23, 2012
Harvard symposium today
The Harvard Business Law Review is holding a symposium this afternoon and tomorrow with a super set of papers. I'm looking forward to the first one in particular: Managing M&A Disputes Through Contract by John Coates:
Abstract: An important set of contract terms manages potential disputes. In a detailed, hand-coded sample of mergers and acquisition (M&A) contracts from 2007 and 2008, dispute management provisions correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases. A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
I know it's a beautiful Spring day (70 degrees under blue sky in Boston), so what's stopping you from spending the afternoon in a conference room in Cambridge? Nothing! So head over this afternoon if you can.
March 22, 2012
Lamb on transaction related litigation
The Deal caught up with Former Vice Chancellor Stephen Lamb on the evolution of shareholder litigation down at the Tulane conference. Here's the video:
We tend to steer very clear of politics on this site, so I wouldn't usually weigh in on a bill before Congress, but please permit me to vent. Apparently, in a fit of bipartisan insanity, the Congress has decided that the proper lesson to be learned from the Financial Crisis of 2008 and the Dot Com bubble of the previous decade is that we need not protect investors!
Put simply, the proposed JOBS bill is a potential disaster for investors and for the integrity of US capital markets.
The proposed legislation (HR 3606) will exempt "emerging growth companies" from most disclosure requirements for up to five years following their IPOs. Okay, maybe small public companies can't afford the costs of compliance. But wait ... what's this?
The term `emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 during its most recently completed fiscal year.
$1 billion in revenue is "emerging"?! I've just fallen off my chair. Someone pick me up. Here's a representative list of companies with less than $1 billion in revenue that might potentially fall under this definition. This is really just a license to for low quality firms to go public at the expense of the investing public. If investors really want to invest in crappy small companies, they should go to London's AIM. I don't understand why everyone in Congress is happily racing towards this cliff.
One of the biggest criticisms of Sarbanes Oxley after it passed was that it represented "quack corporate governance". There's something to that, but I don't think the best response is to roll it back and replace it with quack deregulation.
Professor John Coates analysis of the various proposals working their way through Congress is well worth a read.
March 20, 2012
Why buyers should care
Ordinarily, the focus for legal liability in the context of an acquisition is on the board of the seller. Fried Frank has posted a memo on why the boards of acquirers should care.
March 19, 2012
Shareholder suit against Sokol dismissed
The shareholder suit against Berkshire Hathaway's David Sokol (here, here, and here) was dismissed for failure to make demand. You'll remember that Sokol was accused by shareholders of taking a corporate opportunity when he learned about a corporate opportunity for Berkshire and then bought stock before bringing the opportunity to Buffet. Mr. Buffet wasn't too happy about it when he found out. Sokol was shown the door. Shareholders brought suit against Sokol and the Berkshire Hathaway board.
The question before the court today was whether the shareholders should have made demand of the corporation before bringing the derivative lawsuit. For derivative suits, shareholders have to make a demand that the board vindicate the corporation's rights or state why making such a demand would otherwise be futile. The shareholders argued that demand in this case would be futile for three reasons:
1) The fact that the board had not yet sued Sokol was evidence that they had no intention of doing so;
2) The board faced a substantial likelihood of liability such that it would cloud their ability to objectively resolve the question on their own; and finally,
3) That Warren Buffet is such a high-profile person that the board cannot be trusted to exercise their own independent business judgment in assessing the merits of a potential action against Mr. Sokol.
Looking at these questions, the court correctly determined that this is a case where demand should have been made, thus dismissing the case on the board's motion.
Of course, the board has already conducted an investigation into Mr. Sokol's trading and fired him for it. It might still bring a suit, but there is no requirement that it do so. It's well within the board's perogatives to determine what the proper level of "punishment" is for Mr. Sokol's trading. The substantial likelihood factor is unlikely to apply. There's allegation that the board itself did anything wrong. In fact, it appears that once the board found out about Mr. Sokol's trading, it took actions. Finally, I have no doubt that Mr. Buffet has a lot of influence over the Berkshire board. No doubt at all. But, I doubt that Mr. Buffet is all that happy about what Sokol did. He's already demonstrated that he isn't interested in ignoring it or sweeping it under a rug.
Anyway, rightly decided. That's enought corporate litigation review for today.