Wednesday, October 14, 2015
Gov. Markell has announced the nomination of Tamika Montgomery-Reeves, a Wilson Sonsini partner, to replace retiring Vice Chancellor Donald Parsons. Ms. Montgomery-Reeves will be the first African-American to serve as Vice Chancellor in the Chancery Court and the first woman since Justice Carolyn Berger was elevated to the Supreme Court in 1994. Ms. Montgomery-Reeves recently represented the defendants in the Riverbed Technologies litigation.
Riverbed may mark the beginning of the end for the litigation industrial complex. Vice Chancellor Glasscock began his opinion there with the following paragraph:
As a bench judge in a court of equity, much of what I do involves problems of, in a general sense, agency: insuring that those acting for the benefit of others perform with fidelity, rather than doing what comes naturally to men and women— pursuing their own interests, sometimes in ways that conflict with the interests of their principals. In this task, I am generally aided by advocates in an adversarial system, each representing the interest of his client. Of course, these counsel are themselves agents, but their actions are generally aligned with that of their principals in a way that does not require Court involvement. The area of class litigation involving the actions of fiduciaries stands apart from this general rule, however, especially in litigation like the instant case, involving the termination of ownership rights of corporate stockholders via merger. Such cases are particularly fraught with questions of agency: among others, the basic questions regarding the behavior of the fiduciaries that are the subject of the litigation; questions of meta-agency involving the adequacy of the actions of the class representative—the plaintiff—on behalf of the class; and what might be termed meta-meta-agency questions involving the motivations of counsel for the class representative in prosecuting the litigation. At each remove, there may be interests of the agent that diverge from that of the principals. This matter, involving the deceptively straightforward review of a proposed settlement, bears a full load of such freight.
While Glasscock hesitated, he signaled in this opinion that the Vice Chancellors have had enough. So... Welcome to the bench Ms. Montgomery-Reeves!
Wednesday, October 7, 2015
Gov. Markell is about to announce his nomination to replace Vice Chancellor Parsons who announced his retirement this past summer. Here's the thing. The Chancery Court has not had a female chancellor since Vice Chancellor Berger left the court to join the Supreme Court in 1994. Now, according to press reports Gov. Markell is considering three nominees - all women:
According to sources, the candidates are Abigail M. LeGrow, who is a Master in Chancery or judicial officer who assists the court; Tamika Montgomery-Reeves, a corporate lawyer and partner at Wilson Sonsini Goodrich & Rosati in Wilmington; and Elena C. Norman, a partner and corporate lawyer at Young Conaway Stargatt & Taylor in Wilmington. LeGrow and Montgomery-Reeves declined to comment. Norman could not be reached for comment.
The Senate will consider Gov. Markell's nomination on Oct. 28. That's the sound of glass cracking. Good.
Friday, September 25, 2015
Given that the Rural Metro appeal will be heard by the Delaware Supreme Court next week, it's probably appropriate for me to post the abstract to Andrew Tuch's new paper on Banker Loyalty in Mergers & Acquisitions.
Abstract: Investment banks often face conflicts of interest in their role as advisors on merger and acquisition (“M&A”) transactions. In performing their advisory role, are banks fiduciaries of their clients, and thus obliged to act loyally; gatekeepers, and thus required to perform a guardian-like function for investors; or simply arm’s length counterparties with no other-regarding duties? The prevailing scholarly view resists characterizing M&A advisors as fiduciaries, putting faith in the power of contract law and market constraints to discipline errant bank behavior. This Article develops a theoretical account of investment banks as fiduciaries of their M&A clients, showing why they should act loyally toward their clients unless they obtain informed client consent.
Second, the Article develops an analytical framework for assessing what liability rules will best deter disloyalty by investment banks toward their M&A clients. The framework applies optimal deterrence theory, drawing an analogy between bank disloyalty and tortious conduct. It shows why holding only banks liable for disloyalty is unlikely to adequately deter such disloyalty. It suggests the need for fault-based liability rules on corporate directors (of M&A clients) for their oversight of banks and for public enforcement to supplement private enforcement of liability rules.
Applying this framework, the Article assesses recent Delaware decisions, including Del Monte, El Paso, and Rural Metro, generally supporting them but suggesting that private enforcement alone under-deters bank disloyalty and includes certain gaps in liability. It proposes modest but potentially significant doctrinal shifts, including subjecting directors’ decisions to “contract out” of fiduciary protections in engagement letters to heightened judicial scrutiny, and argues for increased regulatory oversight of banks in M&A deals. The Article nevertheless argues against imposing aiding and abetting liability on banks, regarding that doctrine as ill-suited to deterring bank disloyalty and, to the extent it hinges on treating banks as gatekeepers, as lacking theoretical justification.
Friday, September 4, 2015
A new paper, The Value of Venue, attempts to quantify the effect of exclusive forum provisions. The author concludes that exclusive forum provisions create value for shareholders by reducing duplicative litigation and deterring opportunistic litigation. Here's the abstract:
In response to the increased threat of shareholder litigation filed in multiple states, firms have adopted exclusive forum provisions which limit lawsuits to a single venue of the board of director’s choice. It is unclear whether these provisions impose increased costs on shareholders’ ability to discipline managers and directors or provide benefits to shareholders by eliminating duplicative lawsuits. I use the Delaware Chancery Court’s announcement upholding the adoption of these provisions as a natural experiment to evaluate their wealth implications. Overall, my findings suggest that exclusive forum provisions create value for shareholders by specifying a required venue for corporate litigation.
Friday, August 28, 2015
The JLEO has a new paper, Merger Remedies in Oligopoly under a Consumer Welfare Standard:
Abstract: We analyze the welfare effects of structural remedies on merger activity in a Cournot oligopoly if the antitrust agency applies a consumer surplus standard. We derive conditions such that otherwise price-increasing mergers become externality-free by the use of remedial divestitures. In this case, the consumer surplus standard ensures that mergers are only implemented if they increase social welfare. If the merging parties can extract the entire surplus from the asset sale, then the socially optimal buyer will be selected under a consumer standard.
Thursday, August 27, 2015
Vice Chancellor Laster just released his post-trial opinion in Dole. You'll remember that in Dole, Murdock, the CEO, structured the transaction to include all of the structural protections required under then-Chancellor Strine's MFW opinion. Well, even with all those protections in place, the stockholders got the short end of the stick. From today's opinion:
But what the Committee could not overcome, what the stockholder vote could not cleanse, and what even an arguably fair price does not immunize, is fraud. Before Murdock made his proposal, Carter made false disclosures about the savings Dole could realize after selling approximately half of its business in 2012. He also cancelled a recently adopted stock repurchase program for pretextual reasons. These actions primed the market for the freeze-out by driving down Dole‘s stock price and undermining its validity as a measure of value. Then, after Murdock made his proposal, Carter provided the Committee with lowball management projections. The next day, in a secret meeting that violated the procedures established by the Committee, Carter gave Murdock‘s advisors and financing banks more positive and accurate data. To their credit, the Committee and Lazard recognized that Carter‘s projections were unreliable and engaged in Herculean efforts to overcome the informational deficit, but they could not do so fully. Critically for purposes of the outcome of this litigation, the Committee never obtained accurate information about Dole‘s ability to improve its income by cutting costs and acquiring farms.
By taking these actions, Murdock and Carter deprived the Committee of the ability to negotiate on a fully informed basis and potentially say no to the Merger. Murdock and Carter likewise deprived the stockholders of their ability to consider the Merger on a fully informed basis and potentially vote it down. Murdock and Carter‘s conduct throughout the Committee process, as well as their credibility problems at trial, demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith.
...intentional and in bad faith. Those are rare words.
From the law school at the University of Richmond:
The University of Richmond School of Law seeks to fill three entry-level tenure-track positions for the 2016-2017 academic year, including one in corporate/transactional law. Candidates should have outstanding academic credentials and show superb promise for top-notch scholarship and teaching. The University of Richmond, an equal opportunity employer, is committed to developing a diverse workforce and student body and to supporting an inclusive campus community. Applications from candidates who will contribute to these goals are strongly encouraged.
Inquiries and requests for additional information may be directed to Professor Jessica Erickson, Chair of Faculty Appointments, at firstname.lastname@example.org.
Saturday, August 1, 2015
From our appointments chair I have the following announcement:
BOSTON COLLEGE LAW SCHOOL expects to make two faculty appointments in fields that might include constitutional law and/or taxation. Hiring rank would be dependent on the background and experience of the applicant. Applicants must possess a J.D. or equivalent degree and outstanding academic credentials. Relevant experience in private practice, government service, or a judicial clerkship is strongly preferred. Boston College is an Affirmative Action/Equal Opportunity Employer and does not discriminate on the basis of on the basis of race, color, sex, age, religion, ancestry, national origin, sexual orientation, disability, veteran status, or any other classification protected under federal, state or local law. We strongly encourage women, minorities and others who would enrich the diversity of our academic community to apply. To learn more about how BC supports diversity and inclusion throughout the university please visit the Office of Institutional Diversity at http://www.bc.edu/offices/diversity. Boston College, a Jesuit, Catholic university, is located in Newton, Massachusetts, just outside of Boston. Interested applicants should contact: Diane Ring, Chair, Appointments Committee, at email@example.com, or at Boston College Law School, 885 Centre Street, Newton, MA 02459.
Thursday, July 30, 2015
Since the financial crisis in 2008, the DOJ has been teaching yet another generation of insider traders the important lesson that one shall not trade on confidential inside information. However, that campaign took a big - one might say devastating - hit when the Second Circuit overturned Judge Rakoff and threw out insider trading convictions in US v Newman. In Newman, the court held:
[W]e hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties.
Under Dirks, in order for an insider to generate 10b-5 liability, they have to breach their fiduciary duty by receiving some personal benefit. Until Newman, courts have generally construed the personal benefit requirement fairly broadly. So, where friends share inside information until Newman courts have generally agreed with the government's position that that was sufficient for purposes of Dirks' personal benefit requirement. Newman narrowed that area of agreement significantly:
We have observed that "[p]ersonal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend." Jiau, 734 F.3d at 153 (internal citations, alterations, and quotation marks deleted). This standard, although permissive, does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature. If that were true, and the Government was allowed to meet its burden by proving that two individuals were alumni of the same school or attended the same church, the personal benefit requirement would be a nullity. To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee's trades "resemble trading by the insider himself followed by a gift of the profits to the recipient," see463 U.S. at 664, 103 S.Ct. 3255, we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. In other words, as Judge Walker noted in Jiau, this requires evidence of "a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter]."
I suppose an explicit quid pro quo requirement is consistent with where the US Supreme Court has been going in recent years in its political corruption cases, so one shouldn't be too surprised that a circuit court also goes this way.
Judge Rakoff who heard the Newman case at the District Court level was obviously none to happy with being overruled. Why do I say that? Well, because of a Ninth Circuit case handed down this past June. In US v. Salman, the Ninth Circuit, in an opinion written by ... Judge Rakoff sitting by designation, declined to follow Newman:
[Appellant] Salman reads Newman to hold that evidence of a friendship or familial relationship between tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit. In particular, he focuses on the language indicating that the exchange of information must include "at least a potential gain of a pecuniary or similarly valuable nature," id. at 452, which he reads as referring to the benefit received by the tipper. Salman argues that because there is no evidence that Maher received any such tangible benefit in exchange for the inside information, or that Salman knew of any such benefit, the Government failed to carry its burden.
To the extent Newman can be read to go so far, we decline to follow it. Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an "insider makes a gift of confidential information to a trading relative or friend." Dirks, 463 U.S. at 664. Indeed, Newman itself recognized that the "`personal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, . . . the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.'" Newman, 773 F.3d at 452(alteration omitted) (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)).
In our case, the Government presented direct evidence that the disclosure was intended as a gift of market-sensitive information. Specifically, Maher Kara testified that he disclosed the material nonpublic information for the purpose of benefitting and providing for his brother Michael. Thus, the evidence that Maher Kara breached his fiduciary duties could not have been more clear, and the fact that the disclosed information was market-sensitive — and therefore within the reach of the securities laws, see O'Hagan, 521 U.S. at 656 — was obvious on its face. If Salman's theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return. Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading.
And just like that - a circuit split! According to Alison Frankel, the DOJ has just filed for cert in Newman to resolve this split. No doubt, this is going to be the biggest and most consequential insider trading case before the Supreme Court in recent years if the court decides to grant cert.
Monday, July 27, 2015
Christina Sautter has a new paper - Fleecing the Family Jewels, which is set to appear in the Tulane Law Review. The paper argues that crown jewel deal protections have made a comeback in recent years and reminds us why courts are often wary of them. Here's the abstract:
Crown jewel lock-up options, a common deal protection device during the 1980s mergers and acquisitions boom, are back. During their popularity in the 1980s, these options took the form of agreements between a target company and a buyer pursuant to which the buyer was granted the right to purchase certain valuable assets, or crown jewels, of the target corporate family in the event the merger did not close. After both state and federal courts questioned the validity of these lock-ups in the 1980s, lock-ups lost their luster and dealmakers stopped using them. But as the saying goes, “everything old becomes new again,” and crown jewel lock-ups have made a return in recent transactions. This time around, dealmakers and have been quick to distinguish the modernized crown jewel lock-ups from their predecessors. Although there has been limited case law addressing the validity of these lock-ups, courts appear more likely to uphold the lock-up if the lock-up can be attributed to a business purpose other than the merger and if the lock-up could be a standalone agreement, separate and apart from the merger. This Article argues, however, that today’s lock-ups are not significantly different from their predecessors. Practitioners and courts should not lose sight of the 1980s jurisprudence that closely scrutinized the sale process preceding the lock-up as well as the deterrent effects of the lock-up on potential bidders. Failing to consider these factors and not giving these factors proper weight potentially results in companies and their shareholders being fleeced of their corporate family jewels and their value. At the same time, however, dealmakers should not be as quick to shy away from lock-ups as they have done in the past. As the 1980s jurisprudence made clear, lock-ups can be used to enhance shareholder value. In particular, this Article argues that dealmakers may use lock-ups after an extensive sale process to incentivize bidders and extract additional value for shareholders.
Monday, July 20, 2015
Lynne Dallas and Jordan Barry have posted an interesting paper on tenure voting, or what they call time phased voting. Some of you will recognize tenure voting systems from the J.M. Smuckers experience (described in a recent WSJ piece) and then the Williams v. Geier case. Here's the abstract of Dallas and Barry's paper:
We explore Time-Phased Voting (“TPV”), an arrangement in which long-term shareholders receive more votes per share than short-term shareholders. TPV has gained prominence in recent years as a proposed remedy for perceived corporate myopia.
We begin with theory, situating TPV relative to other corporate voting structures such as one-share-one-vote and dual-class stock. By decreasing the influence of short-term shareholders, TPV may encourage managers to act in the long-term interests of their firms. It may also facilitate controlling shareholder diversification and firm equity issuances by enabling controlling shareholders, who are generally long-term shareholders, to maintain their control with lower levels of ownership. In this respect, it resembles a milder form of dual-class stock, but is more targeted toward myopic behavior.
We then investigate U.S. companies’ experiences with TPV in practice. Due to limited U.S. experience with TPV, our sample size is small from a statistical standpoint. Nevertheless, our findings are consistent with our theoretical analysis. Our ownership and voting data suggest that TPV empowers long-term shareholders, but that it does little to encourage long-term shareholding; this may be due to a lack of investor awareness regarding the few companies that have TPV. In the short term, TPV empowers insiders, increasing their control and creating a wedge between their ownership and control of the firm (though a smaller wedge than is typical of dual-class firms). However, in the long term we find that TPV is associated with reduced insider ownership and control. We see a transition in TPV companies, which are mainly mature, family-owned companies, from a concentrated to a more dispersed ownership structure. Relatedly, we find that TPV is associated with significant insider diversification and the issuance of additional equity.
Overall, TPV firms significantly outperformed the market as a whole; an investor who invested in our TPV firm index in 1980 would have more than six times as much money at the end of 2013 as an investor who invested in the S&P 500. While it is not clear that TPV contributed to this strong performance, we believe that shareholders and corporations should be free to experiment with reasonable TPV plans if they so choose.
Friday, April 24, 2015
Mylan, which moved its domicile last year to the Netherlands in an inversion transaction, has a new tool to deploy in its defense against an unwanted bid from Teva. Yesterday, the Financial Times noted that Mylan was preparing to deploy a Dutch poison pill:
Dutch law is somewhat unique to the rest of Europe with respect to anti-takeover measures as it allows companies to adopt poison pill type structures.
In most other European countries, the UK principle of a board remaining passive in a takeover situation applies. Thus, many boards in Europe cannot adopt poison pills as defensive measures.
Mylan has put in place a poison pill that is customary in the Netherlands, involving the formation of an independent foundation, which is known as a ‘stichting’.
Under the terms, the foundation can exercise a call option agreement set up between it and the company that would dilute the voting rights of the company’s ordinary shareholders.
The foundation has the right to exercise the option if it determines it is in the best interests of the company and if it allows the company’s management to explore alternative scenarios. ...
One person familiar with the use of Dutch foundations as a takeover defence said that it is clear in Dutch case law that its use can only be temporary and it is not allowed to be used permanently to deter a bidder.
The Perrigo-Mylan-Teva thread is turning into quite a show...
Thursday, April 23, 2015
For what it's worth, Chu and Zhao have released a paper, The Dark Side of Shareholder Litigation: Evidence from Corporate Takeovers, and the abstract:
Exploiting the staggered adoption of universal demand (UD) laws by 23 states between 1989 and 2005 as quasi-natural experiments, we show that reduced shareholder litigation threat improves corporate takeover efficiency. Using a difference-in-differences approach, we find that acquirers from states that adopt UD laws experience significantly higher abnormal announcement returns. We also document that UD laws are associated with better long-run post-merger operating performances. Taken together, our findings suggest that the threat of shareholder litigation leads to inefficient mergers and acquisitions and therefore destroys value ex ante.
This is a pretty good example of what financial economists do, I suppose. Except, here's the thing. The authors are focused on the effect of universal demand in derivative litigation on efficiency of the takeover market. OK, I get it. Transaction related litigation is bad. So, if we raise the hurdles to bringing transaction related litigation, then we should improve efficiency of the market. But...transaction related litigation of the type that one reasonably believes is value reducing is never brought as derivative litigation. It's brought as direct litigation. There's a difference.
In the paper, the authors point to two examples of derivative litigation in the context of a merger as an example of what they are talking about. The two examples are Oracle's acquisition of Pillar (100% owned by Oracle CEO Ellison) and the FreePort-McMoRan Copper acquisition of MMR. Excuse me, but neither of those pieces of litigation are examples of value-reducing litigation. Thank goodness for derivative litigation in those cases!
The challenge for everyone in this business isn't transaction-related derivative litigation. It's the direct litigation. Example: an independent board, sells control of the corporation to a third party in an arm's length deal that has been fully-shopped. Shareholders file direct litigation claiming that the board violated its duties under Revlon to get them the highest price in the sale. There's a very good argument that this kind of litigation is value-reducing, but this kind of litigation, which makes up the vast majority of transaction-related litigation, is not covered by this study.
Notwithstanding the fact that the authors are measuring the effect of an irrelevant variable they find the variable to be significant. OK. Well. There you go.
Wednesday, April 22, 2015
Tuesday, April 21, 2015
Tuesday, April 7, 2015
A nice little retrospective in the Delaware Law Weekly on Chief Justice Leo Strine's first year as chief:
Strine became Delaware's eighth Supreme Court chief justice on Feb. 28, 2014. Since then, he has issued more than 100 opinions and orders, welcomed three new justices to the court, formed a committee to overhaul problem-solving courts, and started a commission for access to justice.
More than a year already. Where has the time gone?
Monday, April 6, 2015
Emory Law School sends along the employment announcement below. The Transactional Law program at Emory is really first-rate. Long before anyone was thinking about it, Emory (with Tina Stark at the helm) was building a transactional law program. This looks like an excellent opportunity for a practitioner seeking to transition to the academy. Here's the announcement:
Emory Law School seeks an Assistant Director of the Center for Transactional Law and Practice to teach in and share the administrative duties associated with running the largest program in the Law School. Each candidate should have a J.D. or comparable law degree and substantial experience as an attorney practicing or teaching transactional law. Significant contacts in the Atlanta legal community are a plus.
Initially, the Assistant Director will be responsible for leading the charge to further develop the Deal Skills curriculum. (In Deal Skills – one of Emory Law’s signature core transactional skills courses – students are introduced to the business and legal issues common to commercial transactions.) The Assistant Director will co-teach at least one section of Deal Skills each semester, supervise the current Deal Skills adjuncts, and recruit, train, and evaluate the performance of new adjunct professors teaching the other sections of Deal Skills.
As the faculty advisor for Emory Law’s Transactional Law Program Negotiation Team, the Assistant Director will identify appropriate competitions, select team members, recruit coaches, and supervise both the drafting and negotiation components of each competition. The Assistant Director will also serve as the host of the Southeast Regional LawMeets® Competition held at Emory every other year.
Additionally, the Assistant Director will be responsible for the creation of two to three new capstone courses for the transactional law program. (A capstone course is a small, hands-on seminar in a specific transactional law topic such as mergers and acquisitions or commercial real estate transactions.) The Assistant Director will identify specific educational needs, recruit adjunct faculty, assist with curriculum design, and monitor the adjuncts’ performance.
Besides the specific duties described above, the Assistant Director will assist the Executive Director with the administration of the transactional law program and the Transactional Law and Skills Certificate program. This will involve publicizing the program to prospective and current students, monitoring the curriculum to assure that students are able to satisfy the requirements of the Certificate, and counselling students regarding their coursework and careers. The Assistant Director can also expect to participate in strategic planning, marketing, fundraising, alumni outreach, and a wide variety of other leadership tasks.
Emory University is an equal opportunity employer, committed to diversifying its faculty and staff. Members of under-represented groups are encouraged to apply. For more information about the transactional law program and the Transactional Law and Skills Certificate Program, please visit our website at:
To apply, please mail or e-mail a cover letter and resumé to:
Emory University Law School
1301 Clifton Road, N.E.
Atlanta, GA 30322-2770
APPLICATION DEADLINE: April 30, 2015
Friday, April 3, 2015
Wednesday, April 1, 2015
Brian Broughman has a new paper, CEO Side Payments in M&A Deals. Side payments are different from golden parachutes. They are often structured as completion bonuses. So, for example, it's not uncommon that a general counsel of a target is promised a bonus if they stay on long enough to steer a merger through closing. These bonuses are akin to bonuses paid to senior managers in firms in bankruptcy to entice them to stay. Broughman examines these payments and concludes that such side-payments to CEOs may not be efficient. Here's the abstract:
In addition to golden parachutes, CEOs often negotiate for personal side-payments in connection with the sale of their firm. Side-payments differ from golden parachutes in that they are negotiated ex post in connection with a specific acquisition proposal, whereas golden parachutes are part of the executive’s employment agreement negotiated when she is hired. While side-payments may benefit shareholders by countering managerial resistance to an efficient sale, they can also be used to redistribute merger proceeds to management. The current article highlights an overlooked distinction between pre-merger golden parachutes and merger side-payments. Similar to a legislative rider attached to a popular bill, management can bundle a side-payment with an acquisition that is desired by target shareholders. Thus, even if shareholders would not have approved the side-payment for purposes of ex ante incentives, it may receive shareholder support as part of a take-it-or-leave-it merger vote. Because side-payments are bundled into a merger transaction, voting rights cannot adequately protect shareholders against rent extraction. My analysis helps explain empirical results which show that target CEOs sometimes bargain away shareholder returns in exchange for personal side-payments. I conclude with legal reforms to help unbundle side-payments from the broader merger vote.
Tuesday, March 31, 2015
At a seminar the other night on shareholder activism, I noted that battle over shareholder activism is really nothing more than a continuation of the takeover battles of the 1980s. Both sides are the same, the arguments reasonably familiar. From their trenches the sides claim victories in yards and feet like armies during WWI. The cover article in the most recent The American Lawyer profiles Martin Lipton and Lucien Bebchuk, two long-time generals, and the most recent front: shareholder activism. The article notes, I think correctly, the recent turn away from the academic style of debate that has characterized this back and forth over the years to something a little more hard-ball.
In 2012, Lipton still referred to Bebchuk with senatorial decorum, as "my friend," and teased him about reenacting the Hamilton-Burr duel. But something soon changed. Perhaps Lipton was disturbed by the effort to debunk his deepest belief about the long-term effects of activism. Or perhaps what changed were the tides of fortune. For the only thing that the two can agree on is that, in Lipton's words, the "activist hedge funds are winning the war." And so the iconoclast is no longer amusing to the icon.
With a revolving cast of big-name partners, Lipton has churned out ever more frequent and vicious memos. He called Bebchuk's paper "extreme and eccentric"; "tendentious and misleading"; and "not a work of serious scholarship." He gleefully noted that a sitting SEC commissioner called another paper by Bebchuk so "shoddy" as to constitute securities fraud. (Thirty-four professors rallied in Bebchuk's defense and jumped on the commissioner for abusing his power.) Bebchuk and Lipton lobbed posts back and forth on the Harvard corporate governance blog with "na-na-na-na-na" titles. "Don't Run Away From the Evidence" led to "Still No Valid Evidence," which led to "Still Running Away From the Evidence."
It's well worth a read.