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.
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!
Dividend recaps are back
They're apparently back, and now they are getting attention. Marketplace provides a nice "whiteboard" overview:
October 23, 2012
SAVE THE DATE & CALL FOR PROPOSALS
From Karl Okamoto:
12TH ANNUAL TRANSACTIONAL CLINICAL CONFERENCE APRIL 6, 2013 UNIVERSITY OF TEXAS, AUSTIN, TX
PRE-CONFERENCE DINNER ON APRIL 5TH, 6PM
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 email@example.com.
2013 Organizing Committee
Ashlyn Lembree (New Hampshire)
Karl Okamoto (Drexel)
Eliza Platts-Mills (Texas)
Michael Schlesinger (John Marshall)
Judith Sharp (UMKC)
2012 MAC survey
Nixon Peabody has posted their 2012 MAC survey. It's a useful overview of what people are negotiating into their MACs.