Friday, February 28, 2014
Professors Davidoff, Fisch and Griffith have posted a new paper, Confronting the Peppercorn Settlement in Merger Litigation. Their empirical study takes on the vexing problem of merger litigation from the settlement angle. Maybe if litigants weren't rewarded with fees for low-value disclosure-only settlements, perhaps they wouldn't bring them. The abstract is below:
Abstract: Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result are beneficial to shareholders.
This Article offers a new approach to assessing the value of these claims by empirically testing the relationship between merger litigation and shareholder voting on the merger. If the supplemental disclosures produced by the settlement of merger litigation are valuable, they should affect shareholder voting behavior. Specifically, supplemental disclosures that are, in effect, “compelled” by settlement should produce new and unfavorable information about the merger and lead to a lower percentage of shares voted in favor of it. Applying this hypothesis to a hand-collected sample of 453 large public company mergers from 2005-2012, we find no such effect. We find no significant evidence that disclosure-only settlements affect shareholder voting.
These findings warrant a reconsideration of Delaware merger law. Specifically, under current law, supplemental disclosures are viewed by courts as providing a substantial benefit to the shareholder class. In turn, this substantial benefit entitles the plaintiffs’ lawyers to an award of attorneys’ fees. Our evidence suggests that this legal analysis is misguided and that supplemental disclosures do not in fact constitute a substantial benefit. As a result, and in light of the substantial costs generated by public company merger litigation, we argue that courts should reject disclosure settlements as a basis for attorney fee awards.
Our approach responds to critiques of merger litigation as excessive and frivolous by reducing the incentive for plaintiffs’ lawyers to bring weak cases, but it would have an additional benefit. Current practice drags state court judges into the task of indirectly promulgating disclosure standards in connection with the approval of fee awards. We argue, instead, for a more efficient specialization between state and federal courts in the regulation of mergers: public company merger disclosure should be policed by the federal securities laws while state corporate law focuses on substantive fairness.
Thursday, February 27, 2014
Lucian Bebchuk and Robert Jackson think the answer there might be yes. They have just posted their new paper, "Toward a Constitutional Review of the Poison Pill."
Abstract: In 1968, the Williams Act established a federal regime regulating attempts by outside buyers to acquire control of publicly traded companies through unsolicited tender offers. In the subsequent four decades, however, the states have developed a body of rules that impose additional impediments on such attempts. Recognizing the tension between the Williams Act and these state-law rules, between 1972 and 1985, the federal courts, including the Supreme Court, held some of these rules preempted by the Williams Act. To date, however, federal courts have not examined, and commentators have not analyzed, whether the state-law rules that authorize the use of the poison pill—the most powerful impediment to outside buyers of shares—are also preempted.
In this Article, we examine this subject and conclude that there is a substantial basis for questioning the continued validity of current state-law rules that authorize broad use of the poison pill. Because these rules enable incumbents to block shareholder consideration of outside tender offers for lengthy periods of time, they may well impose tighter restrictions on unsolicited offers than the state antitakeover regulations that federal courts invalidated on grounds of preemption during the 1970s and 1980s. Indeed, we show that, upon a close examination of the state-law rules governing poison pills, the federal courts are likely to conclude that these rules are preempted.
Finally, the Article provides a framework for lawmakers seeking to ensure that state-law poison-pill rules are not preempted. We explain that state-law rules that empower directors to block tender offers for long periods of time are least likely to withstand constitutional scrutiny. Thus, we argue, state corporate law that substantially limits the length of time during which a poison pill can be used to delay tender offers would be more likely to survive a preemption challenge. Whether preemption challenges lead to invalidation of existing state-law poison-pill rules or to their substantial modification, we show, these challenges could well have a major impact on the corporate-law landscape.
Wednesday, February 26, 2014
OK, so one more thing. All of the amici refer in an off-hand way to the fact that these proceedings aren't really secret. Sure, the proceedings are confidential -- and they don't even appear in the docketing system. But! In the event, the resulting order is appealed, the proceeding is public. The Business Roundtable sums it up nicely:
Arbitration proceedings shall be considered confidential and not of the public record until such time, if any, as the proceedings are the subject of an appeal.
Here's the thing. At first glance we might think that that means that the entire record is made public and that the Delaware Supreme Court will be able to provide perhaps a de novo review of the arbitral order. That would be okay, I guess, because novel questions would reach the Delaware Supremes and they could continue to build the common law.
But, as A-Rod recently found out after he came to his senses, that is not what the court will be permitted to do. Appeals of arbitral orders - to be consistent with the FAA - are much narrower and do not involve a de novo appeal. As noted in NASDAQ's brief:
[Appeals are limited] under Federal Arbitration Act to cases of fraud on or corruption, misconduct, or abuse of power by the arbitrator.
So, no de novo review of arbitral awards from Chancery.
So let's say, Delaware notwithstanding the FAA, Delaware decides that no, it's arbitral program is 'special'. And, unlike any other arbitral program in the United States, the Delaware program will have the benefit of de novo - or substantive - review by a public court. That would be unique -- in fact -- by not having FAA-consistent review as the current procedure suggests (but only suggests), the whole Chancery Court arbitration procedure would look exactly like a trial. (Inconvenient, no?)
Well, I'd love to be a litigator on the first substantive appeal to the Delaware Supreme Court of an arbitral award, cause after they are done with it, we're going straight to the US Supreme Court where the nine have consistently ruled that there is no de novo review of FAA-consistent arbitrations, only reviews for fraud, corruption, or misconduct by the arbitrator.
So, if you want the Delaware Supreme Court to provide a substantive review of an arbitral award our of Chancery litigants would have to come to the court prepared to argue that the Chancellor who handled to the arbitration was incompetent, drunk, or otherwise. Yeah. Good luck with that.
Ok, I'm done.
Of the three, the law firm memo is the most strident and, I think, given the source, the most puzzling. The basic gist of the law firm's amicus brief is that there is just way too much public access of the courts in this country and that it's about time that the Supreme Court did something about it! ("The Court should grant certiorari in this case to restore the Fist Amendment right of access to its properly narrow scope.") Lawyers, in particular, litigators who make their living in the courts you would think would be among the most sensitive to the importance of information and precedent to facilitate the work of advising clients and structuring transactions. But here, they appear to be going 'all in' to ask the Supreme Court to limit the qualified right of access under the First Amendment solely to criminal trials.
What would the world be like if, as the Business Roundtable brief suggests, "Chancery Court arbitration is likely to become an increasingly preferred method of dispute resoultion"? Well, they start, but don't finish, to answer to their own question: "[A]s [deal lawyers] counsel their clients to specify Chancery Court arbitration in their agreements, we can expect that it will be an increasinly utilized tool for dispute resolution."
And...then this is my fear...someone will wake up in ten years time and ask a question, "What's a MAC?" You'll have to dust off an old case book to see what it was once. But, you won't really know. And when your clients ask you,"Will a court uphold this deal structure, what's my risk?" You won't really know. How could you? All or most of the disputes that are the fodder of the Delaware corporate common law will have gone dark. Although dispute resolution will not have stopped, law generation through the courts will have.
That's what's at stake here. It's frustrating to me that so many involved haven't looked down the road to recognize that.
Or, let's think about it this way. The chancellors will continue to hear cases and the 'law' as applied by the Chancellors in arbitration will continue to evolve. However, it won't be precedential and diffusion of knowledge will be limited. Rather than being able to look up recent decisions - or better read The Chancery Daily in your inbox every morning - practitioners will be forced to rely on meetings with 'lawyers in the know' and relationships to understand the current state of the law. While that's not an impossible condition, it raises the relative costs of knowing the "Delaware corporate law". Over time, lawyers who might have previously advised clients to incorporate in Delaware might find the costs of learning the Delaware law to be too expensive. Why not just rely on California law instead? The cases are all online and if something happens, we will learn about it cheaply. That's the long-term threat to Delaware that may well stem from 'success' with Chancery arbitration.
Anyway, like I said, it's frustrating.
There are a couple of points in the amici briefs that are worth commenting on. First, the 'experience and logic test' is all about framing. The Third Circuit (and the District Court) looked at the proceeding and reached the conclusion that the publicly-funded finding of fact by judges who normally hear this kind of dispute had enough attributes of a civil trial that it was in fact a civil trial. Just because you call something and arbitration doesn't make it an arbitration.
The Third Circuit felt the procedure looked like a trial and then applied the experience and logic test to civil trials. The amici say, "No, no, this is an arbitration, so no openness with the experience and logic test." Where you starts dictates where you end to a certain degree when applying the test.
Second, the amici extoll the virtues of arbitration because it is so much more efficient that the normal judicial system. Think about that for a second. The Delaware Secretary of State describes the state's judicial system in the following way:
The Delaware Court of Chancery is a specialized court of equity with specific jurisdiction over corporate disputes. Without juries, and with only five expert jurists selected through a bipartisan, merit-based selection process, the Court of Chancery is flexible, responsive, focused and efficient.
Apparently, according to the amici, it's not really all that efficient nevermind what the Secretary of State says.
Honestly, I find that hard to stomach. Hello! Men's Wearhouse filed a suit in the Delaware Chancery Court on Monday. Yesterday - Tuesday - it got a hearing on a motion to expedite. Please. Enough with the 'Delaware courts aren't efficient' nonsense.
Okay, let's say for arguments sake the amici are right and Delaware is not an efficient place to resolve disputes. Why would arbitration organized by the same inefficient courts be any better? This is a bad argument.
Finally -- not really finally, but I am getting tired you really don't want to read all this -- the amici argue that arbitration is valuable because the entire process is confidential. 'Sure, the Delaware Chancery Court has procedures for confidential treatment of sensitive materials, but just between us, the Delaware rules for confidential treatment suck. Right, amIright?'
Seriously. Does the Chancery Court seriously believe that its own rules with respect to confidential treatment of trade secrets are inadequate? I find that hard to believe.
Anyway. I'm going to finish off this post with a uncategorical statement with which you are free to disagree:
The US capital markets benefit and are strengthed when stockholders of publicly-traded corporations have access to information about the way in which their investments are managed and the law that governs them. Period. Full stop.
Tuesday, February 25, 2014
There's a difference between family law and Delaware's Chancery Arbitration program. In appearance before a legislative budget committee, Chief Justice-designate Strine argued against the idea of opening up Family Court proceedings to the public:
During a presentation on behalf of the judiciary to legislative budget writers, Leo Strine Jr. said the idea of opening Family Court proceedings regarding sensitive issues such as child custody makes him "really uncomfortable."
Strine, who will be sworn in Friday as chief justice, noted that people often are forced to go to Family Court to deal with "the most intimate, painful things of human life."
"I just think we better pause and think about that," he told members of the Joint Finance Committee. "We have to be very careful."
Delaware's constitution says all courts shall be open, but many Family Court proceedings are nevertheless closed to the public because of laws passed by the General Assembly. Those closed proceedings include hearings involving adoption, termination of parental rights, custody rights and visitation, guardianship, paternity and divorce.
Some readers might find it odd that Delaware is considering opening closed Family Court proceedings, especially since Family Court proceedings in Delaware and in just about every other state are traditionally closed to the public. So what gives?
Apparently, in response to the Third Circuit's decision that Delaware's Chancery Court arbitration program may not be confidential, some people in Delaware are reading into that that Family Law courts must also open. Uh...no.
This is where the proponents of the Chancery Arbitration program typically go awry. Here's the thing. The qualified right of access is just that. It's a qualified right of access to the courts and proceedings:
A proceeding qualifies for the First Amendment right of public access when “there has been a tradition of accessibility” to that kind of proceeding, and when “access plays a significant positive role in the functioning of the particular process in question.”
This 'experience and logic test' is the touchstone for determining whether there should be a qualified right of access. When the Third Circuit examined the Chancery Arbitration program it looked sufficiently like a typical corporate law trial except for the fact that the proceedings were to be confidential. Experience and logic determined that the arbitration program be kept open.
Apparently, observers of the Family Court in Delaware interpreted the Third Circuit's opinion to mean that perhaps the family courts would also have to be opened to the public. Fortunately, for all the reasons Chief Justice-designate Strine alluded to today, that's not the case. Why? Well, applying the experience and logic test to the functioning of the family courts in Delaware (and everywhere else in the country) will firmly place most proceedings behind closed doors where they traditionally have been.
In other news, a series of amici have been filed by firms all over the country asking SCOTUS to take up Delaware's appeal in the arbitration case. I'll post them soon.
Wednesday, February 19, 2014
Tuesday, February 18, 2014
It's no surprise that the proposed Comcast-TWC merger raises questions about consolidation in the cable business. But it's hard to say that there are any simple answers. The issues that are raising some of the loudest concerns stem from the fact that this merger will be a merger of number 1 and number 2 in a business where there are only really 5 significant players left. In all seriousness, questions about the consolidation of the cable business and that issue left the station years ago. A couple of decades ago there were hundreds of cable businesses in the country. Through subscriber swaps and consolidation smaller systems we have seen the sector get more and more consolidated over time.
That's not likely going to change anytime soon, if ever. Ideally, consumers would benefit from increased competition for the last mile. We're not going to get that from this transaction. In fact, to the extent there was marginal competition for franchises along the edges of the consolidated territory, that competition is going away. The potential for competition for the last mile is really muted. Verizon has largely given up any hopes of expanding its current base. Satellite is a poor second choice, really ideally suited for the hard to serve rural areas that cable systems aren't really interested in. Overbuilders? They exist, but they are will forever be, niche players.
So, if consolidation is the way things are going to be, why not more regulation of this natural monopoly? Perhaps regulation of natural monopolies is out of fashion. That's unfortunate. Consoldidation without regulation may be responsible in part for why we pay so much for the service we have.
Other issues that get raised by this particular transaction is the tendancy of the cable providers to consolidate vertically as well as horizontally. As consolidated cable moves up the chain to control content as well as the pipes there are serious questions about access that are raised. The deal Comcast reached with the government when it purchased NBC Universal last year to treat content fairly is good, but the cable providers still face the economic incentives to shift content whenver they can to their favored providers.
In any event, perhaps Leo Hindery is correct and that when asked, this transaction will sail through the regulatory process. Perhaps. But there are more questions than easy answers with this transaction.
Update: Felix Salmon thinks broadband access in the US blows...and is expensive to boot.
Monday, February 17, 2014
We write to ask two small (but important) favors of you that are directly related to law schools' pedagogical mission as well as the rapidly changing future of legal education.
As you may know, an ABA task force has recently proposed to establish minimum requirements within ABA-accredited law schools for "experiential" learning related to building practical skills and competencies. (Similar proposals are percolating up from state bar association task forces as well.) We believe this endeavor to be an intriguing and important invitation for law schools to re-imagine how they deliver legal education, and on this basis we are generally supportive. At the same time, a challenging question that the ABA and other task forces face is the question of what topics constitute "skills and competencies." Within business law, this challenge is perhaps greatest for attorneys whose practice is principally "transactional" in nature (in contrast to work that is oriented around litigation). It is unclear how much input transactionally-oriented business law practitioners (attorneys, other professionals, educators) have had on the process of drafting the proposed guidelines, or whether there has been much systematic analysis of what topics constitute important "skills" for entering transactional attorneys.
To address these gaps, we have developed an on-line survey instrument to help gauge what sorts of core competencies established professionals in transactional practice areas consider important. We hope the results of the survey will help both practitioners and legal educators assess (and if necessary, work to amend) the current proposed guidelines. Although largely directed to practicing attorneys, the survey is also open to other professionals who work closely with practicing attorneys in transactional practices (such as bankers, accountants, financial advisers, etc.).
Here are the two favors we ask of you:
(2) Please ask your colleagues, partners, associates, co-workers, and other professional contacts to consider filling out the survey.
The survey is available on-line, at
When complete, results of the survey will be made available on the website for the Berkeley Center for Law, Business and the Economy (BCLBE), at http://www.law.berkeley.edu/bclbe.htm.
Thursday, February 13, 2014
Delaware Law Weekly (reg requ'd) is reporting that Andre Bouchard may be the only applicant for the job of Chancellor, notwithstanding speculation that Vice Chancellor Laster, Judge Jan Jurden and Young, Conway's David McBride are likely applicants.
Last month, Bouchard resigned his position as chair of Delaware's Judicial Nominating Committee.
Wednesday, February 12, 2014
Since Men's Wearhouse announced its tender offer for Joseph A. Bank, that deal -- for a while a deal that seemed like it would be a lot of fun to watch play out -- has basically fallen off the radar. Increasingly, it's looking like it might not happen afterall. Men's Wearhouse will probably be okay with that outcome, as will a now cowed JOSB board who stirred this whole hornet's next to begin with.
Why don't I think it's going to happen? Three things. First, Men's Wearhouse has already announced that it has no plans to extend the tender offer beyond the March 28 date. So, the tender offer gets done between now and then or it doesn't happen at all.
Second, according to a letter from JOSB to MW, the FTC has issued a second request. In th eHSR premerger notification process, the second request is a big deal and can be a deal stopper -- or at least tie the parties down for a long time as they work out the antitrust concerns of the federal government. In this case, you can imagine that in their initial HSR filing that JOSB filled it with as much evidence of the anticompetitive effects of the transaction as possible -- remember this is a trasnaction that JOSB initially wanted and extolled. Now, that they are on the sell side, well, suddenly it doesn't look so good ... for consumers!
No doubt that the second request will drag this deal well past March 28. Unless Men's Wearhouse extends its tender offer, the transaction may just be dieing a slow death.
Couple with both of those news that JOSB looking for a deal with Eddie Bauer. It's not a white knight strategy by any stretch. What they appear to be doing is setting up a Time defense to any potential litigation -- 'we are pursuing our own strategy, no need for us to deviate from it to let you acquire us.' Sure. Given the recent history of this transaction, I suppose you can say that with a straight face if you practice long enough.
Tuesday, February 11, 2014
So, rumors are flying that Charter will nominate its own slate for the Time Warner Cable board today. This is all part of the ongoing effort by Charter to get the board of Time Warner Cable to the table to negotiate a sale of the corporation. So far, TWC has said no and sat on its hands, as it's permitted to do. There is no legal requirement that a fully informed board must depart from its corporate strategy to accept an unsolicited offer, especially if the board believes it to be unwise.
TWC hasn't followed the Airgas 'just say no' route - adopt a poison pill and rely on its staggered board to hold off an unwanted suitor. It hasn't done this so far because frankly it can't. TWC doesn't have a staggered board. Its board is up for election every year. Because TWC can't rely on a staggered board to give it the time to defeat a proposal by Charter, it's vulnerable to a proxy fight. And without a staggered board, the poison pill isn't much of a defense.
And so no surprise that Charter's next move is the proxy contest. Charter is seeking to replace TWC's entire board through a proxy contest. If Charter were to win the contest, that would be a signal from TWC shareholders that they are in favor of a deal with Charter at $132.50. The new board would face no obstacle to quickly getting a friendly deal done. Of course, it's a long road between here and there. Lots of things can happen.
Some have said, well it's possible that shareholders vote out the incumbent board and the new board comes in and does an "Airgas" - that is, the new board decides not to pursue a deal with Charter. I find that scenario highly unlikely. Why? Well, when the short slate of three Air Products nominated directors entered the Airgas board room, the remaining board members were there and able to frame the questions and make all sorts of arguments why the Air Products offer was a bad idea for Airgas. Those arguments ultimately won the day when the Air Products nominated directors sided with incumbent board members.
If Charter were to succeed in its proxy contest, the board room atmosphere post-contest would be wholly different. First, the entire board would be brand new. There will be no one around the frame questions or argue against a Charter bid. If Charter learned anything from Airgas, it's probably that they have thoroughly quizzed their nominees and they are convinced that all of them think the acquisition of TWC by Charter is a good idea already. That's not to say as directors they won't seek to informed themselves before doing a deal, but where you starts affects where you end.
All this being said, I'm confident that Charter would be happier if the effect of the proxy contest were to force the incumbent board to the table to negotiate a friendly deal.
Tuesday, February 4, 2014
So, you'll remember the Boilermakers case in which the validity of Chevron and FedEx's forum provision bylaws were challenged in the Delaware Chancery Court. In that case, Chancellor Strine was asked to rule on the facial validity of the forum selection provisions in the bylaws of both Chevron and FedEx. The case was important because in Galaviz v Berg, a federal court in California had ruled invalid a forum provision bylaw that was adopted unilaterally by the board after the challenged act occurred. Although Boilermakers drew a lot of attention - from me as well - I think there was very little doubt by most observers that when asked a Delaware court would say that such a provision was facially valid. Strine did not disappoint (Boilermakers opinion).
However, Chancellor Strine was restrained and made it clear that although such a provision was facially valid, he would leave it to other courts - in other jurisdictions - to consider as applied challenges to these provisions. He also encouraged the parties to bring an appeal so that the Delaware Supreme Court could weigh in on the issue. Although the plaintiffs initially sought an appeal of the Chancellor's ruling, they later voluntarily dismissed it, perhaps believing that a little ambiguity might help them later in other cases.
The issue has now shifted to the West Coast. There is parallel litigation in front of Judge Tigar in the Norther District of California. In that litigation, plaintiffs are - among other things - challenging whether the forum selection provision is proper. Chevron is now moving for the appellate review that Boilermakers avoided in Delaware -- apparently seeing blood, counsel wants to stamp on this victory and get the conclusive word on the question of the facial validity of forum selection bylaws.
Chevron has now asked the Calfornia to certify a question to the Delaware Supreme Court on the validity of the forum selection bylaws (Chevron Certified Question Motion).
Delaware is one of the very few states that will entertain certified questions. They do this because they believe it is important for their franchise for the Supreme Court to always be available to provide definitive guidance on novel corporate law questions as they arise. In this case, Chevron is asking for Judge Tigar to certify the question of validity of the provision to Delaware. If Delaware affirms the facial validity of the provision, which I suspect they would, then that would effectively end that challenge.
So, if Judge Tigar certifies this question, the whole show will move back to Dover. We'll see.