M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, January 19, 2012

Corporate governance overreach by Carlyle?

The Deal Prof looks at The Carlyle Group's proposed IPO and figures it's a corporate governance dud.  I agree. Carlyle's Amended and Restated Limited Partnership Agreement (Appendix A to the S-1A) has a dispute resolution provision that is reprinted in relevant part below (it's lengthy, sorry).  It does two things.  First, it requires that limited partners in Carlyle's soon to be publicly traded firm resolve all their dispute only in private arbitration and not in any court.  Second, it prohibits any arbitration be brought in a representative capacity.

Now, I'm the first one to admit that there is plenty of abuse of shareholder litigation. These days, one can't imagine a merger announcement not being accompanied by shareholder litigation.  But still, the correct answer can't be to eliminate representative shareholder litigation altogether.  The way this arbitration provision is written, it's pretty clear that no one should ever bring any litigation against management at all ... ever.  That can't be the correct result.  For all its warts, in a world where shareholding is increasingly dominated by institutional shareholders who don't have incentives to provide intense monitoring and are not permitted to perform the "Wall Street walk", shareholder litigation is one of the few governance arrows left in the corporate governance quiver.

Sure, there are plenty of suits that aren't worth more than their nuisance value.  (Steven Davidoff highlights the sheer volume of these transaction related lawsuits in his new paper examining the "Great Game" and the rise of transaction-related litigation). But, at the same time, there are other valuable cases like Delmonte or Southern Peru. If Carlyle's approach becomes the norm as firms go public there are real downsides to firms opting out of the formal legal regime.

First, there's a threat to the development and maintainence of the corporate law.  This arbitration provision goes further than Delaware's optional arbitration system that I've blogged about before.  If parties are required to bring all corporate litigation to private arbitrators, then corporate law litigation will quickly disappear from the courts and the law will begin to atrophy.  Rather than having a deep and rich common law, the corporate law will become nothing more than an inside game with only a small number of litigators and professionals being in the "know" as to the current state of the private law.  

Second, even if one accepts that a private law system is acceptable, and I don't think that's correct, then there are still important incentive effects associated with the elimination of representative litigation.  If arbitration may not be pursued in a representative capacity, then the incentives for any plaintiff's counsel to be in this business quickly fall away. The result is, effectively, that shareholder arbitration for a publicly traded issuer would disappear.  

Now, I guess if you are incumbent management eliminating pesky shareholders is a good thing.  On the other hand, if you are an investor, you have less reason to be sanguine about managers taking away one more tool for you to monitor their behavior.

I've previously recommended exclusive forum provisions as a middle ground to reduce incentives to engage in nuisance-like shareholder litigation while leaving open avenues for litigants to bring claims before courts.  That middle-ground strikes me as a better result than the more extreme route taken by Carlyle.  Of course, Carlyle's managers have different incentives and care about different things than do the courts in Delaware or investors. The Deal Prof doesn't think that the SEC will permit Carlyle to go public with this provision intact.  I hope he's right. In that event, Carlyle's Section 16.9(c) provides for an exclusive forum provision to govern disputes should the arbitration provision be voided by a court or otherwise be found to be as uneforceable. 



Carlyle Amended & Restated Limited Partnership Agreement

Section 16.9.  Dispute Resolution.
 (a) The Partnership, each Partner, each Record Holder, each other Person who acquires an interest in a Partnership Security and each other Person who is bound by this Agreement (collectively, the “Consenting Parties” and each a “Consenting Party”) (i) irrevocably agrees that, unless the General Partner shall otherwise agree in writing, any claims, suits, actions or proceedings arising out of or relating in any way to this Agreement or any Partnership Interest (including, without limitation, any claims, suits or actions under or to interpret, apply or enforce (A) the provisions of this Agreement, including without limitation the validity, scope or enforceability of this Section 16.9(a) or the arbitrability of any Dispute (as defined below), (B) the duties, obligations or liabilities of the Partnership to the Limited Partners or the General Partner, or of Limited Partners or the General Partner to the Partnership, or among Partners, (C) the rights or powers of, or restrictions on, the Partnership, the Limited Partners or the General Partner, (D) any provision of the Delaware Limited Partnership Act or other similar applicable statutes, (E) any other instrument, document, agreement or certificate contemplated either by any provision of the Delaware Limited Partnership Act relating to the Partnership or by this Agreement or (F) the federal securities laws of the United States or the securities or antifraud laws of any international, national, state, provincial, territorial, local or other governmental or regulatory authority, including, in each case, the applicable rules and regulations promulgated thereunder (regardless of whether such Disputes (x) sound in contract, tort, fraud or otherwise, (y) are based on common law, statutory, equitable, legal or other grounds, or (z) are derivative or direct claims)) (a “Dispute”), shall be finally settled by arbitration conducted by three arbitrators (or, in the event the amount of quantified claims and/or estimated monetary value of other claims contained in the applicable request for arbitration is less than $3.0 million, by a sole arbitrator) in Wilmington, Delaware in accordance with the Rules of Arbitration of the International Chamber of Commerce (including the rules relating to costs and fees) existing on the date of this Agreement except to the extent those rules are inconsistent with the terms of this Section 16.9, and that such arbitration shall be the exclusive manner pursuant to which any Dispute shall be resolved; (ii) agrees that this Agreement involves commerce and is governed by the Federal Arbitration Act, 9 U.S.C. Section 1, et seq., and any applicable treaties governing the recognition and enforcement of international arbitration agreements and awards; (iii) agrees to take all steps necessary or advisable, including the execution of documents to be filed with the International Court of Arbitration or the International Centre for ADR in order to properly submit any Dispute for arbitration pursuant to this Section 16.9; (iv) irrevocably waives, to the fullest extent permitted by law, any objection it may have or hereafter have to the submission of any Dispute for arbitration pursuant to this Section 16.9 and any right to lay claim to jurisdiction in any venue; (v) agrees that (A) the arbitrator(s) shall be U.S. lawyers. U.S. law professors and/or retired U.S. judges and all arbitrators, including the president of the arbitral tribunal, may be U.S. nationals and (B) the arbitrator(s) shall conduct the proceedings in the English language; (vi) agrees that except as required by law (including any disclosure requirement to which the Partnership may be subject under any securities law, rule or regulation or applicable securities exchange rule or requirement) or as may be reasonably required in connection with ancillary judicial proceedings to compel arbitration, to obtain temporary or preliminary judicial relief in aid of arbitration, or to confirm or challenge an arbitration award, the arbitration proceedings, including any hearings, shall be confidential, and the parties shall not disclose any awards, any materials in the proceedings created for the purpose of the arbitration, or any documents produced by another party in the proceedings not otherwise in the public domain; (vii) irrevocably agrees that, unless the General Partner and the relevant named party or parties shall otherwise mutually agree in writing, (A) the arbitrator(s) may award declaratory or injunctive relief only in favor of the individual party seeking relief and only to the extent necessary to provide relief warranted by that party’s individual claim, (B) SUCH CONSENTING PARTY MAY BRING CLAIMS ONLY IN ITS INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF, CLASS REPRESENTATIVE OR CLASS MEMBER, OR AS A PRIVATE ATTORNEY GENERAL, IN ANY PURPORTED CLASS OR REPRESENTATIVE PROCEEDING, and (C) the arbitrator(s) may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class or consolidated proceeding; and (viii) agrees that if a Dispute that would be arbitrable under this Agreement if brought against a Consenting Party is brought against an employee, officer, director or agent of such Consenting Party or its affiliates (other than Disputes brought by the employer or principal of any such employee, officer, director or agent) for alleged actions or omissions of such employee, officer, director or agent undertaken as an employee, officer, director or agent of such Consenting Party or its affiliates, such employee, officer, director or agent shall be entitled to invoke this arbitration agreement. Notwithstanding Section 16.10, each provision of this Section 16.9(a) shall be deemed material, and shall not be severable and this Section 16.9(a) shall be enforced only in its entirety.



January 19, 2012 in Litigation | Permalink | Comments (1) | TrackBack (0)

Wednesday, January 18, 2012

Galleon 2.0: Watch it live

You can watch Preet Bharara's press conference announcing the Galleon 2.0 insider trading arrests here (1:00pm, ET):


"A circle of friends who formed a lucrative club...to make $62 million in profits ..." That's as big as Galleon. That made all that money on trades related to Dell.  Wow.

Three of the seven defendants have already pleaded guilty and are cooperating.

Bharara says that the group's trading in advance of Dell earnings announcements was "the big illegal short". Too cute.


"But cheating on the test and getting away with it are two different things."

Here is the civil complaint filed by the SEC against Level Global, Diambondback Capital, and the seven individual defendants in the criminal case.


January 18, 2012 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 17, 2012

Kodak and AMR can breathe easy

For now at least, they won't have to worry about Allen Weintraub trying to engineer an acquisition of their respective companies.  Allen Weintraub?  What? You don't remember him?  He caused a minor stir last year when he faxed in unsolicited offers to the boards of Kodak and AMR.  He even went down to his local bank branch to seek financing for his offers.  In any event, the SEC went after him and late last week the US District Court in Florida entered a final judgment against Mr. Weintraub

On January 10, 2012, the U.S. District Court for the Southern District of Florida in Miami entered final judgments against Allen E. Weintraub and his company, AWMS Acquisitions, Inc., d/b/a Sterling Global Holdings (Sterling Global), in connection with purported tender offers they made for the common stock of Eastman Kodak Company (Kodak) and AMR Corporation (AMR), the parent company of American Airlines. The Court’s order imposes permanent injunctions against Weintraub and Sterling Global and requires them to pay $400,000 in civil money penalties.

So there you have it. If you're going to try to takeover Kodak, follow the proxy rules and know that your local Citi branch isn't going to give you a $1 billion loan to do the deal!


January 17, 2012 | Permalink | Comments (0) | TrackBack (0)

Olympus shareholder suit filed

According to Reuters, an Olympus shareholder has now sued the board for "damaging trust" due to the accounting scandal there.   Of course, the board has already filed suit against itself, so I wonder where this suit stands.  I'm no expert in Japanese corporate law, in fact I know almost nothing about it.  Any readers from Japan - and we have a number - who wish to comment on how this shareholder suit stands next to the board's suit, please feel free.


January 17, 2012 in Asia | Permalink | Comments (0) | TrackBack (0)

Hedge funds, M&A, and private information

In their new paper, Hedge Funds in M&A Deals, Dai, et al find evidence "consistent with informed abnormal short selling" by hedge funds prior to M&A announcements. The authors observe larger stakes where there is evidence of private information.  I'm shocked. ... Actually I'm not really shocked, given what's come out over the past year or two.

Abstract: This paper investigates recent allegations regarding the misuse of private insider information by hedge funds prior to the public announcement of M&A deals. We analyze this issue by using a unique and comprehensive data set which allows us to analyze the trading pattern of hedge funds around corporate mergers and acquisitions in both the equity and derivatives markets. In general, our results are consistent with hedge funds, with short-term investment horizons (henceforth, short-term hedge funds) taking advantage of private information and engaging in trading based on such information. We show that short-term hedge funds holdings of a target’s shares in the quarter prior to the M&A announcement date are positively related to the profitability of the deal as measured by the target premium. In addition, we also find that the target price run-up before the deal announcement date is significantly greater for deals with greater short term hedge fund holdings. We also find evidence consistent with informed abnormal short selling and put buying in the corresponding acquirer’s stock prior to M&A announcements. This is particularly evident when hedge funds take larger stakes in target firms. In addition, we show that such a strategy is potentially very profitable. We consider alternative explanations for such short term hedge fund holdings in target firms; however our results seem inconsistent with these alternative explanations but rather, seem to be consistent with trading based on insider information. Overall, our results have important implications regarding the recent policy debate on hedge fund regulation.


January 17, 2012 in Hedge Funds, Insider Trading, Mergers | Permalink | Comments (0) | TrackBack (0)