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.
Wednesday, March 25, 2015
Kraft announced its acquisition by Heinz this morning. And, I sense a trend. Although Kraft hasn't filed a copy of the merger agreement, yet, it has filed an 8-K with amendments to its bylaws. In what I sense is becoming a trend, the board of Heinz amended its bylaws prior to approving the merger agreement to specify Virginia as the exclusive forum for the resolution of shareholder disputes. Seems like that will be the path of least resistance as firms continue to search for ways to battle the transaction related litigation. Don't fight ISS by adopting a provision in the certificate of incorporation. Rather, wait until you have a deal, then your legal team will attend to a number of housekeeping issues in the immediate run-up to the consideration of the deal. One of those issues will be to ensure the board adopts an exclusive forum provision prior to adoption of the merger agreement. Once the transaction is announced, litigate exclusively in the home state. Does that stop litigation from happening? No, of course not. But it does limit the amount of expected total litigation and it gives the courts the ability to better sort good claims from litigation flotsam.
Saturday, March 21, 2015
Ted Mirvis and Bill Savitt of Wachtell Lipton have weighed in on Delaware's anti-fee shifting legislation. Basically, they argue that this is the kind of thing that doesn't require legislation - that we should all defer to the wisdom of Delaware's chancellors. All the while, they know they will encourage every client they have to adopt the fee shifting provisions. That's the way it goes I suppose. Here's their white paper on the fee shifting issue (and an abstract):
The frenzy over fee-shifting bylaws and charter provisions is no surprise. Anything that addresses the economics of the game so directly is cause for either alarm or implementation, depending on the side of the caption. And in a world where intracorporate litigation is ubiquitous, and very profitable even though far more derivative and class suits lose than win, no change in substantive law would have quite the bite. In our view, however, the calls to resolve the fee-shifting debate by legislative fiat are misguided. The Delaware courts should be allowed to do what only they can: address the propriety of fee-shifting provisions carefully, contextually, and incrementally.
Wednesday, March 18, 2015
Usually amendments to the corporate law are pretty sleepy affairs. This year is different. There's anti-fee-shifting legislation, In the slew of amendments generating interest this year, there's the new Chancery facilitated arbitration procedure, and then there are the amendments to the appraisal statute. If you would have told me two years ago that arbitration would be the least controversial of all the amendments, I would have laughed at you, but there you have it.
The amendments to the appraisal statute (262 Appraisal) come in response to the rise in appraisal arbitrage. There are a number of important changes to the way Section 262 operates. First, the amendment follows what is common practice in other states by setting a floor with respect to appraisal petitions before getting access to the remedy. Going forward, stockholders will only be entitled to an appraisal if all the shares seeking an appraisal exceed 1% of the outstanding shares or at least $1 million in merger consideration. In any event a transaction done pursuant to Sections 253 and 267 would always have appraisal rights.
To give you a sense of what this floor means, Dell generated valid petitions for only 2% of the stockholders - though the value of the merger consideration would have easily exceeded $1 million. The floor makes sense and will likely get rid of nuisance litigation to the extent there is any nuisance appraisal litigation. I don't think that's a real problem, but I suppose if you are going in to tinker, you might as well tinker.
Of larger import, is the amendment that permits the acquirer to pay some portion of the consideration immediately and stop the accruing of interest on the amount paid, leaving interest to accrue only on the amounts still in controversy. Because of the statutory interest rate, that one change might go quite a way to reducing some incentives for hedge funds to pursue appraisal arbitrage as a business. In CKx, defendants made a motion to require petitioners to accept the uncontested portion of the merger consideration in order to stop the clock on the accrual of interest. Vice Chancellor Glasscock refused to issued such an order. However, this amendment would explicitly permit that maneuver.
These changes may not go far enough for some - who were seeking things like stock tracing. Stock tracing would require the beneficial holder to prove that she was a beneficial stockholder prior to announcement of the merger. Right now, so long as the record holder was a holder prior to the merger, the beneficial holder need not establish that they were owners prior to the announcement of the merger. This is a loophole that appraisal arbs have driven trucks through.
Dole has complained that the changes are too timid and is pushing Delaware to go further. Indeed, Dole is even threatening to "pull out of Delaware" if it doesn't do more to eliminate appraisal arbs. Frankly, it's a ridiculous threat that I would have thought Delaware legislators would be sophisticated enough to discount. The inference is that if Delaware doesn't eliminate the appraisal arb business through stock tracing, that Dole would close its shipping business in Delaware. Umm. Okay. Hard to see how the two are related. If they close that business they will do so for business reasons, not because of the appraisal statute. If Dole means it will reincorporate elsewhere. Ok, where? Have fun.
Anyway, it's going to be a more interesting summer than previously thought in Wilmington.
Thursday, March 12, 2015
As Lawrence Cunningham noted, tenacity, thy name is Delaware! Along with the recent proposed amendments to the corporate law, the Delaware General Assembly will also consider the new Delaware Rapid Arbitration Act - to replace the Chancery Arbitration procedure that was deemed unconstitutional.
Regular readers of this blog might remember that I was opposed to Chancery arbitration as it was originally conceived. Here's a paper I wrote on the subject. Ultimately, the Federal Appellate Courts agreed with my view. Public judges sitting in public courts conducting confidential hearings is not a good look for many reasons.
In any event, the new approach - Chancery facilitated arbitration - an improvement and will likely pass constitutional muster. Also, the way the act has been written, there is little fear that firms might attempt to put Chancery arbitration provisions in corporate charters. In order to be eligible for Chancery arbitration, among other conditions, the arbitration agreement has to be signed by both parties, thus making it difficult to make constructive notice arguments in connection with the purchase of stock. Consequently, as it is currently drafted, the scope of arbitration-eligible disputes is relatively narrow - merger agreements and other commercial agreements that might typically appear before the Chancery Court. Also, although the arbitral proceedings are facilitated by the Chancery court, the arbitrators are not sitting judges and are paid directly by the parties. Proceedings will be confidential, judgments will be treated consistent with the FAA.
This attempt to create an arbitration regime will likely stick. All in all, not a bad effort.
Tuesday, March 10, 2015
The Delaware General Assembly is considering its annual amendments to the corporate law. This time, the proposed amendments (2015 Amendment text here) are doing more than just some ministerial changes/fixes to the text. The amendments purport to deal with two big issues. First, the amendments add a new section 115 that would explicitly permit corporations to include forum selection provisions in their certificates of incorporation or bylaws. I proposed as much in a 2011 article, so it's nice to see that take shape. By including forum selection provisions as a permissible menu option, the legislature is clearing the deck and making it much more likely that Delaware firms will opt in going forward. It's not a total solution to the problem of transaction related litigation, but it does help reduce the volume of litigation that must be managed. By the way, 94.9% of all deals were accompanied by litigation last year. This is a problem that's not going away on its own.
The other proposed amendment is much more controversial. The new sections 102(f) and 109(b) reverse the Delaware Supreme Court's decision in ATP Tour, Inc. In ATP, the court upheld a fee shifting bylaw that, if widely adopted, would likely have shut down most, if not all, shareholder litigation, good and bad. ATP would be like using a sledgehammer to hang paintings in your house. These new sections make such provisions illegal. You'll remember that last year the legislature tried to move an ATP amendment through in the aftermath of the decision. While corporate law amendments are usually a fairly boring affair, that one drew the attention of the US Chamber of Commerce. This time, the US Chamber is back, arguing that the adoption the anti-fee shifting provision "could threaten Delaware's billion dollar incorporation franchise." That seems like a bit of excessive rhetoric.
Stay tuned. I suspect this year will be anything but a quiet ride through the amendment process.
Wednesday, February 25, 2015
I talk a lot of students about life as a lawyer and finding ways to balance the needs of the profession with having a life. There's no way around it. It's not easy. It's particularly tough on women. In response to issues in the profession and in M&A that are specific to women, the ABA's M&A Committee has formed a Women in M&A Task Force Task Force:
The primary goal of the Women in M&A Taskforce is to increase the participation and retention of women lawyers in M&A through four key initiatives: (i) work with law schools to educate women law students about the profession; (ii) increase awareness at law firms; (iii) promote networking and provide business development tools to women in the profession; and (iv) provide avenues of communication among Taskforce members to enable the sharing of materials, experiences and best practices. The American Bar Association’s Women in M&A Taskforce is Co-Chaired by Jennifer Muller at Houlihan Lokey and Leigh Walton from Bass, Berry & Sims. Any questions may be directed to firstname.lastname@example.org.
It's a worthy effort that everyone should get behind. I'll post links to any reports or recommendations the Taskforce may generate.
Tuesday, February 24, 2015
Our friends at Cal are looking to hire a Fellow for the Berkeley Center for Law, Business, & the Economy. This would be an excellent opportunity for an associate looking to transition to academia.
Here's the ad:
The Berkeley Center for Law, Business and the Economy is seeking to hire a Research Fellow.
The Berkeley Center for Law, Business and the Economy (BCLBE) is Berkeley Law’s hub for rigorous, relevant, empirically based research and education on the interrelationships of law, business, and the economy. BCLBE informs students, policymakers and the public of the implications of this innovative work to promote positive outcomes on business operations, economic growth, and market efficiency. BCLBE’s interdisciplinary approach to basic research, timely policy research, curriculum innovation, and public education empowers current and future leaders in business, law and policy to tackle the most pressing problems of today and tomorrow.
The Fellow’s primary responsibilities will include:
• Working with the BCLBE faculty and staff to arrange and implement programming, including student events, conferences workshops and alumni and practitioner events.
• Working with the BCLBE faculty and staff, to develop research topics in law, business and the economy;
• Researching and writing white papers of publishable quality for policy-focused audiences, under the direction of faculty and staff;
• Speaking at workshops, to the academic community and the press about research initiatives;
• Assisting with other necessary aspects of the operation of BCLBE; and
• Assisting faculty in research questions involving data collection.
In addition, the Fellow will be provided with a significant opportunity to develop a research and writing agenda, including authorship of their own research work.
• J.D. degree or equivalent is required at the time of application
• Relevant experience in corporate finance, programming, and/or quantitative research is preferred;
• Excellent research, analytical and writing skills;
• Excellent communication and interpersonal skills;
• Organizational skills;
• Self-starter able to prioritize and function both independently and collaboratively;
• The ideal candidate will have a high degree of organization skills, experience and knowledge of business law and the ability to work capably with faculty and staff. The candidate should also have an interest in research and academia.
Monday, February 23, 2015
Gov. Markell has nominated Collins J. Seitz to replace Justice Ridgely. Mr. Seitz is a well-known Delaware litigator with some very big cases under his belt. He also has a judicial pedigree. His father, Collins Seitz, was a judge on Federal Third Circuit Court of Appeals and before that Chancellor of the Delaware Chancery Court.
Friday, February 13, 2015
Shareholder activists have been in the headlines a lot in recent months. The Staples-OfficeDepot deal was credited to Starboard Capital. Starboard was also around the Yahoo/Alibaba spin. The Economist recently published an overview of the current state of stockholder activism. Included in the overview is some data on activists' relatively outsized influence:
Activists are a small sliver of the hedge-fund world. Hedge Fund Research (HFR), a research firm, says that of about 8,000 hedge funds activists number just 71—less than 1%. But they are larger than most; at $120 billion under management the activists account for about 4% of the hedge-fund total (see chart 1). Their clients now include many of the world’s big endowments, family offices and sovereign-wealth funds. And their assets have risen by a factor of five over the past decade. In 2014 they raised $14 billion of new money, a fifth of all flows into hedge funds.
That's a lot of money for just 71 firms. The Economist believes the longer term implications of the rise of the activist will be positive. I'll reserve judgment for now. Activists, like boards, are not a homogenous group.
Thursday, February 12, 2015
This from Delawareonline:
Six men, including three current or former judges, have applied for the vacant seat on the Delaware Supreme Court following the recent retirement of Henry du Pont Ridgely, according to sources close to the judicial nominating process.
The applicants for the state's highest court include Superior Court judges William L. Witham Jr and Calvin L. Scott Jr.; former Superior Court Judge Joseph R. Slights III; Collins J. Seitz, Jr. a founding partner of Seitz Ross Aronstam & Moritz LLP; Martin S. Lessner, a partner at Young Conaway Stargatt & Taylor; and John R. Williams, a lawyer in the Delaware Department of Justice appeals unit, the sources said.
Seems unfortunate that we have apparently exhausted the supply of female and minority candidates for this court. In any event, this pick will be Delaware Governor Markell's opportunity to temporarily put a stamp on this court. Under the Delaware constitution, the courts are required to be politically balanced with an equal number of Republicans and Democrats. However, in cases where the court is odd numbered, like the Supreme Court, the Governor is permitted to appoint the swing member from his own party affiliation. In this case Ridgely is a Republican, but since there are already two sitting Republicans and two sitting Democrats, Markell is free to appoint a Democrat to replace Ridgely. I am not sure how many other states follow Delaware's lead with balanced judicial appointments but I like the way it lessens the political stakes involved in judicial selections. If the US Supreme Court followed the same process we might all be better off.
Friday, January 30, 2015
In local Massachusetts news, a state Superior Court judge refused to approve a consent agreement permitting PartnersHealthcare to close its merger with three smaller hospitals. The transactions had been opposed by the MA Attorney General on grounds that they stifled competition in the healthcare markets in the affected communities. Partners and the AG had reached an agreement to permit the transactions to close under certain conditions. These conditions included a series of regulations on pricing, price caps, and other conduct-based regulations over a ten year period as well as oversight by the Superior Court. When presented with the consent agreement, the court balked. The court refused to approve the agreement for two reasons:
1. The court believed the merger was not in "public interest" as defined by the case law. In the view of the court, the proposed consent agreement did not adequately address the harm alleged by the AG in her complaint, namely that transaction would limit competition in this sector.
2. The court through up its hands when it came to implementation of the consent agreement. The court noted that the agreement was not self-enforcing and that implementation as well as oversight would be complicated. For its part, the court admitted that it was "ill-equipped" to stay abreast of the many rapid changes in the healthcare industry such that the court would be able to adequately oversee implementation of the agreement.
Result, the court refused to sign on. Partners and the AG are left to decide how to move forward, with the AG threatening to take up litigation again in the event Partners decides to close the transaction without its approval.
What's interesting here is that this is an example of a local AG moving to enforce state level anti-competition/antitrust laws in the context of a transaction that has either cleared HSR or was too small to require an HSR filing. It's a reminder that even for small deals, antitrust counsel have important roles early on in the transaction planning process.
Wednesday, January 28, 2015
Yesterday, Yahoo announced a plan to spin off its Alibaba stock in a "tax efficient" spin. Rather than distribute its Alibaba stock directly to shareholders, Yahoo will distribute the stock to a SpinCo. Presumably the only asset of SpinCo will be Yahoo's Alibaba stock. SpinCo will then go public and Yahoo will distribute SpinCo stock to its shareholders.
Levine thinks the end game here is not that Yahoo shareholders hold Alibaba through the SpinCo vehicle forever. Rather, he believes that the ultimate goal here is still for Alibaba to buy back the stock via a merger with SpinCo. That's a definite possibility and seems to make more sense than holding SpinCo stock at a discount to is asset value.
Yahoo's spin-off of its Alibaba stock is just one of many recent spin-off transactions, including eBay's planned spin-off of PayPal and a favored strategy of activists.