M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, January 7, 2015

Unusual Boardroom Battle

I've basically stayed out of this since it bubbled up. It's kind of like watching over your backyard fence as your neighbors get into an embarrassing argument.  In any event, main stream media (Dealbook) has decided this was worth paying attention to, so here we are.  In article by Andrew Ross Sorkin yesterday in the Dealbook, Sorkin shined a light on the West Coast - East Coast corporate law rock fight that started in December:

At the heart of the dispute is an academic paper written last month by Daniel M. Gallagher, a member of the Securities and Exchange Commission, and Joseph A. Grundfest, a professor at Stanford Law School and himself a former S.E.C. commissioner, that was titled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.”

The paper took aim at Lucian A. Bebchuk, a Harvard Law School professor who has long researched corporate governance issues and has been an outspoken advocate for increased democracy in corporate America’s boardrooms. Through Harvard’s Shareholder Rights Project, a group he created, Mr. Bebchuk, on behalf of public pension funds, has helped wage proxy contests at 129 companies to change policies that prevent shareholders from electing, or overthrowing, an entire board at once.

Typically, academic disagreements are pretty small bore stuff.  "How dare you say that my dependent variable is not significant!"  This is ... well ... it's a little more serious.  Accusing another professor of violating securities laws and egging another institution into shutting down that professor's work?  I don't know. Don't we all have other things to do?  And why is a sitting SEC commissioner accusing a professor of securities violations in a paper? Not quite sure what that's all about. Anyway, it's confusing to me. Like watching my neighbors fight over my back fence.



January 7, 2015 | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 6, 2015

Dual-class stock and staggered boards

Talk about belts and suspenders.  Now, there's a paper from Mira Ganor, Why Do Dual-Class Stock Companies Have Staggered Boards?

Conventional wisdom regards the combination of a staggered board with a dual-class capital structure as superfluous. However, the incidence of this combination in U.S. firms, identified in this Paper, is not trivial. This Paper considers a few possible motivations for this practice and reports the results of empirical studies conducted on dual-class firms with staggered boards. Significantly, even in the universe of dual-class capital structures, effective staggered boards are associated with lower firm value. These findings suggest that entrenchment may not fully explain the correlation between lower value and staggered boards in single-class firms.

I suppose founders who are going public with dual-class stock are looking forward and thinking about how they can maintain control way into the future...but I don't know. Belts and suspenders.


January 6, 2015 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, January 5, 2015

C&J Energy and Revlon

Before the holiday there was a bit of attention to the Delaware Supreme Court's opinion in the C&J Energy case. You'll remember that Vice Chancellor Noble issued an order to enjoin a merger between C&J Energy and a division of its competitor, Nabors Industries Ltd., until such time as the board of C&J could shop the company.  The Supreme Court then overturned the Vice Chancellor's order. In doing so, the court reminded us what Revlon "requires".  It turns out, when the board is disinterested and there is no competing bid on the horizon, Revlon doesn't require much:

Not only did the Court of Chancery fail to apply the appropriate standard of review, its ruling rested on an erroneous understanding of what Revlon requires. Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the board's CEO disliked the new bidder, after the target board had agreed to sell the company for cash. Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.

But Revlon does not require a board to set aside its own view of what is best for the corporation's stockholders and run an auction whenever the board approves a change of control transaction. As this Court has made clear, "there is no single blueprint that a board must follow to fulfill its duties," and a court applying Revlon's enhanced scrutiny must decide "whether the directors made a reasonable decision, not a perfect decision." ...

In prior cases like In re Fort Howard Corporation Shareholders Litigation, this sort of passive market check was deemed sufficient to satisfy Revlon. But as the years go by, people seem to forget that Revlon was largely about a board's resistance to a particular bidder and its subsequent attempts to prevent market forces from surfacing the highest bid. QVC was of a similar ilk. But in this case, there was no barrier to the emergence of another bidder and more than adequate time for such a bidder to emerge. The Court of Chancery was right to be "skeptical that another buyer would emerge." As important, the majority of C&J's board is independent, and there is no apparent reason why the board would not be receptive to a transaction that was better for stockholders than the Nabors deal.

It is also contextually relevant that C&J's stockholders will have the chance to vote on whether to accept the benefits and risks that come with the transaction, or to reject the deal and have C&J continue to be run on a stand-alone basis. Although the C&J board had to satisfy itself that the transaction was the best course of action for stockholders, the board could also take into account that its stockholders would have a fair chance to evaluate the board's decision for themselves. As the Court of Chancery noted, "[t]he shareholders are adequately informed."

Note also, the court's reluctance - in the absence of a competing bid - to step in between fully informed shareholders who have a vote and an opportunity to turn down the transaction and the transaction itself.  Directors are required to make reasonable, not perfect decisions. And, if directors are unconflicted, and shareholders have the material information related to the transaction and an opportunity to say no, don't look for a court to step in between them and their decision. 


January 5, 2015 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 23, 2014

Barbarians for Christmas

 Because it's Christmas and everyone should be enjoying themselves, unless you are a law professor still grading exams, here's Barabarians at the Gate.  Always worth watching:


December 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, December 18, 2014

Who is a controller?

There have been a number of recent cases that raised the question, "Who is a controller?"  The answer is important because in the context of a going private transaction, the presence of a controlling stockholder will affect the standard of review a court will deploy in reviewing the deal (See Kahn v Lynch and Kahn v M&F).  Absent procedural protections, going private transactions with controllers will be subject to entire fairness review. 

But, who is a controller?  In the easy cases, the controller holds a majority of the stock. But in the harder cases, the controller holds less than a majority but still exerts control.  In In re KKR Financial Holdings LLC Shareholder Litigation, the Chancelor Bouchard ruled that KKR, a 1% stockholder, was not a controller because ecause (1) KKR, had no control over the company's board of directors at the time the merger was approved, and (2) plaintiffs failed to show that a majority of the comapny's board was not independent of KKR.  Bouchard laid out the inquiry that a court will apply when asked to determine whether a less than majority stockholder is a controller:

[I]n deciding whether a stockholder owes a fiduciary obligation to the other stockholders of a corporation in which it owns only a minority interest, the focus of the inquiry is on whether the stockholder can exercise actual control over the corporation’s board.

 The issue of when a less than 50% holder is a controller cameup again recently in In re Zhongpin. In Zhongpin, a 17% stockholder offered to take the company private.  The transaction was approved by a special committee and a "slim majority of unaffiliated stockholders."  Plaintiffs challenged the transaction on M&F footnote 14 issue -- the interestedness and independence of the special committee, and the fact that the initial proposal did not contain the M&F conditions. Plaintiffs argued that the special committee members were not independent because they were beholden to the 17% stockholder.  Consequently, rather than get the benefit of the business judgment presumption, plaintiffs argued the transaction should be subject to entire fairness review. 

In determing whether the 17% stockholder was a controller, Vice Chancellor Noble explained:

A stockholder who owns less than 50% of a corporation’s outstanding stock is presumptively not a controlling stockholder.  However, Delaware law recognizes that a stockholder can achieve controlling status with less than 50% ownership, in which case “a plaintiff must allege domination by [the] minority shareholder through actual control of corporate conduct.”  A plaintiff cannot rely on conclusory allegations that a minority stockholder possessed control; rather, a complaint must contain well-pled facts showing that the minority stockholder “exercises ‘such formidable voting and managerial power that [it], as a practical matter, [is] no differently situated than if [it] had majority voting control.’” “[T]here is no absolute percentage of voting power that is required in order for there to be a finding that a controlling stockholder exists.” Instead, the Court considers whether or not a stockholder’s voting power and managerial authority, when combined, enable him to control the corporation. 


The Court has recognized several attributes of controlling stockholders, including “the power to elect directors . . . and to adopt or reject fundamental transactions proposed by directors.”  Voting power gives latent control to a stockholder, even if he does not exert active control as “a direct participant in operational decisions or in the formulation of strategic policy.”  However, as the disjunctive proposition laid out in Kahn v. Lynch makes clear, one may be a controller by virtue of owning a majority interest or exercising control over a corporation’s business affairs.  Actual control over business affairs may stem from sources extraneous to stock ownership, and the Court does not take an unduly restrictive view of the avenues through which a controller obtains corporate influence. Again, a dominating stockholder relationship can “exist in the absence of controlling stock ownership.”

In this case, the court found that notwithstanding the fact that the 17% holder did not have a majority of the stock in the company that the 17% holder  could "exercise significant influence oer shareolder approvals for the election of directors, mergers and acquisitions, and amendments to Zhongpin's bylaws" such that he could be deemed a controller.  The court also found that the 17% holder also excercised active control over Zhongpin's day-to-day operations. Because the procedural protections were not included as part of the initial offer and because the special committee was not independent of the controller, the court applied entire fairness to the transaction.

To a certain extent, Zhongpin is an easy case - a significant blockholder and founder exert day to day control over the business he set up.  Other cases might not be so clear-cut. Think about Michael Dell, a 14% holder in the then-public Dell.  A big, important stockholder, and the founder, but a controller?




December 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 16, 2014

Forum Selection through an Agency Lens

Deborah Demott has an addition to the whole forum selection clause debate with her new paper Forum Selection Bylaw Refracted Through an Agency Lens.  Here's the abstract:

Forum-selection bylaws are controversial when they are unilaterally adopted by directors of public companies acting pursuant to a generic bylaw power. The legitimation of such bylaws by the Delaware Court of Chancery in Boilermakers Local 154 Retirement Fund v. Chevron Corp. cleared the way for ever-more-aggressive uses of bylaw power in provisions mandating arbitration of internal-governance claims or imposing one-way fee shifting on shareholder plaintiffs. This Article uses the oblique perspective afforded by agency law to critique these bylaws and clarify the underlying issues they raise. In particular, agency doctrine includes precise articulations of concepts of consent and knowledge. The Article's analysis undermines the assumption that underpins the reasoning in Boilermakers: by investing in a corporation in which directors hold generic power to adopt, amend, or repeal bylaws, shareholders become parties to a "flexible contract" through which they impliedly consent to directors' later uses of their bylaw power (subject to ex-post judicial review under equitable doctrines). In the world of the "flexible contract," shareholders are deemed to know facts not in existence when they invest, which is inconsistent with the knowledge required by agency doctrine for effective consent by a principal. Even when considered alongside boilerplate consumer contracts, the "flexible contract" is a singular instance, in part because its subject matter is an ongoing governance relationship. The article proposes statutory revisions to the Delaware General Corporation Law to address these vulnerabilities by making forum-choice for shareholders more parallel to section 3114 (applicable to the assertion of personal jurisdiction over directors and officers) and section 102(b)(7), which enable but also regulates provisions that exculpate directors against monetary liability.


December 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, December 8, 2014

Determining the standard of review

Gibson Dunn recently posted this very helpful chart over at the HLS Governance Project as a cheat sheet for determining which standard of review a challenged transaction will likely get.  For the same chart - but with all the footnotes - go here.


December 8, 2014 | Permalink | Comments (0) | TrackBack (0)

Delaware Arbitration Makes a Comeback

News from Delaware is that Delaware's Chancery arbitration procedure is making a comeback, but this time without the Chancery bit.  According to DelawareOnline, Chief Justice Strine said: 

[T]he new arbitration program will not involve state-paid sitting judges, which was one of reasons the federal courts struck down the earlier arbitration law passed in 2009.

You'll remember that the earlier version of the Delaware Chancery procedure involved sitting judges hearing disputes in private.  The combination of sitting judges and confidentiality went too far, violating the First Amendment implied right of access to the courts. Presumably, this new approach - relying on adjudicators not on the government payroll - will likely comply with the requirements of access to the courts while permitting parties to avail themselves of arbitrators in Delaware.  We shall see. 


December 8, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, December 5, 2014

One year later, Michael Dell is happy

From Bloomberg:

MICHAEL DELL, FOUNDER AND CEO, DELL:  You know, we’re enjoying the freedom and flexibility we have as a private company.  We are not bound by 90-day periods.  We’re focusing on our future out several years from now.

And we have an enormous opportunity and we’ve had a great year.  We’re growing our — all of our businesses, all of our businesses are performing quite well relative to the industry.  And it’s just a lot easier to focus 100 percent on our customers.

And —

SCHATZKER:  Not have to worry about the investors?

MICHAEL DELL:  There you go.

SCHATZKER:  Is it that different, being private versus being public? You’ve had it for a year now.

MICHAEL DELL:  I think about 20 percent of my time has been freed up.



SCHATZKER:  Twenty percent of a CEO’s time? That’s pretty remarkable. 

MICHAEL DELL:  Well, you think about all of the time spent dealing with governance and preparing for investor activities and dealing with various shareholder requests.  If I watch your show, I see the constant discussion of should there be a bigger dividend, should there be a share repurchase, should they spin off this, should they split off that, should they merge with this?

This is really — can be quite distracting, right, if you try to grow a business, right, so…


December 5, 2014 in Going-Privates | Permalink | Comments (0) | TrackBack (0)

Thursday, December 4, 2014

Revlon review

Are you a law student with corporate law exams and maybe an M&A exam on the horizon? Are you in desperate need of a quick a review of Revlon?  What does Revlon require?!  If so, the Chancery Court is here to help.  Vice Chancellor Parsons provides you a nice review of the Revlon standard in Comverge (pp 20-22) and then applies Revlon in the context of deal protection measures (pp 35-43)

You're welcome.


December 4, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 3, 2014

Interim risk and M&A

Bhagwat, Dam and Harford have a paper, The Real Effects of Uncertainty on Merger Activity. The authors using VIX as a proxy for interim uncertainty and find that merger activity is negatively related to increases in VIX.  Also, "a 10% increase in VIX reduces bid premia in aggregate by 17.4%."  Here's the abstract:

Deals for public targets take significant time to complete. During the interim, firm values can change substantially, inducing one of the parties to prefer renegotiation of the deal. We hypothesize that increases in interim risk therefore attenuate deal activity. We find that increases in market volatility decrease subsequent deal activity, but only for public targets subject to an interim period. Consistent with option theory, the effect is strongest when volatility is highest, for deals taking longer to close, and for larger targets. The effects of firm-level uncertainty dominate those of macro-uncertainty when both are included in the model, suggesting the results are not simply driven by unobserved macro-level effects. While we find some evidence that firms adjust other deal terms to partially offset the option value, interim uncertainty is an important factor in understanding the timing and intensity of merger waves.

They're finance guys, so I won't quibble much except to say, when the authors turn to deal terms, they start with the statement that courts have set the upper bound of termination fees that targets must pay at 3%.  To that I say, although termination are ubiquitous, they are not required.  Second, there is no upper bound set at 3%. Finally, it's not obvious in the paper that they know how termination fees actually work.  But, like I said, I'm only pausing to quibble a little, not a lot.  


December 3, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 2, 2014

Exam review - ripped from the headlines

OK, so if you are a law student, now is the time you are desperately looking to review all that material you crammed into your head over the course of the semester. Try as you might, there are never enough hypotheticals to use. No fear, reality is always there to provide a near exam-like experience!  For instance

Hackers with Wall Street expertise have stolen merger-and-acquisition information from more than 80 companies for more than a year, according to security consultants who shared their findings with law enforcement.

A group dubbed FIN4 by researchers at FireEye Inc. has been tricking executives, lawyers and consultants into providing access to confidential data and communications, and probably using the information for insider trading, FireEye said in a report Monday. The hackers’ sophistication suggests they’ve worked in the financial sector, Jen Weedon, FireEye’s manager of threat intelligence, said in an interview. ...

A team at FireEye has been tracking the attacks for more than a year and believes they began in mid-2013. Targets included more than 100 publicly traded companies, law firms, outside consultants and investment bankers, the report said.

Of the targets, 68 percent were publicly traded health-care and pharmaceutical companies and 12 percent were public companies in other industries, according to the report. Advisers made up the remaining 20 percent.

The emails targeting executives, lawyers and others were written by native English speakers who knew investment terms and the inner workings of public companies, according to the report.

“FIN4 knows their targets,” the report said.

Instead of infecting target computers with malware, the hackers obtained email passwords and logged in to monitor communications, the report said.

“In order to get useful inside information, FIN4 compromises the email accounts of individuals who regularly communicate about market-moving, non-public matters,” the report said.

OK, students, any liability for insider trading if the hackers trade on information they steal?

For the rest of us, FireEye has published their report on FIN4 here.


Because hackers appear to be targeting lawyers and other corporate advisors ("spearfishing") in order to get access to deal information, Fire Eye's report raises serious issues for M&A lawyers.  In fact, take a look at the bait mail that FireEye identified:


Geez, that's pretty tempting. Nothing there about Nigerian princes.  Well, let's just all be careful out there.


December 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 25, 2014

Law & Finance of Anti-Takeover Statutes

Catan and Kahan have a paper on The Law and Finance of Anti-Takeover Statutes

Lawyers and financial economists have fundamentally different views of anti-takeover statutes. While corporate lawyers and academics generally dismiss these statutes as irrelevant, economists study them empirically and find that they - and hence the threat of a takeover - affect firm and managerial behavior. This article seeks to bridge the divide between the law and the finance approach to anti-takeover statutes. We first explain why these statutes, as used by financial economists, are not a proper metric of the takeover threat facing a firm. We then review three empirical studies published in leading finance journals. For each study, we show that the results are affected by omitted variables, large scale coding errors, or improper specifications. When corrected for these problems, the associated between anti-takeover statutes and the hypothesized effect disappeared. Our paper calls into doubt most of the understanding of the effect of takeover threat, which is based to a large extent on studies of anti-takeover statutes.

Importantly, the authors focus attention on the interaction between state anti-takeover statutes and poison pills, which developed later in time. 

If a pill is valid, it is easy to see how many of the most common anti-takeover statutes become irrelevant. A flip-in pill effectively prevents a raider from becoming a major shareholder. As a result, business combination statutes, fair price statutes, and control share acquisition statutes, which deal with what a raider can do once it becomes a major shareholder, are moot. Similarly, flip-over pills, which regulate business combinations involving a major shareholder, render business combination and fair price statutes superfluous. Control share acquisition statutes, moreover, do not even purport to offer
meaningful protection against hostile bids that are opposed by the board of the target, but are favored (as most “hostile” bids are) by a majority of the target’s shareholders.

Moreover, the principal mechanism to overcome a pill – obtaining board control before
acquiring a significant stake – would also work to neutralize these anti-takeover statutes. Business combination statutes, fair price statutes, and control share acquisition statutes apply only to raiders or transactions not sanctioned by the incumbent board. Thus, for example, just like a board can redeem a pill before a bidder acquires a significant stake, a board can also approve an “interested shareholder” and thus eliminate the constraints imposed by a business combination statute.

Give it a read. 


November 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, November 24, 2014

MFW's influence

In a sign that Delaware's approach to going private transactions has some legs, an appellate court in NY recently applied the principles of MFW to a going private transaction, thereby aligning New York's law in this area with Delaware's. According to the National Law Review:

The New York Appellate Division, First Department, ruled yesterday that the business-judgment rule – not the entire-fairness standard of review – can apply to a going-private transaction with the majority shareholder where the majority shareholder did not participate in the board’s vote on the merger, the remaining directors were not alleged to be self-interested, and the merger required the approval of the majority of the minority shareholders.  In re Kenneth Cole Productions, Inc. Shareholder Litigation, Index No. 650571/12 (N.Y. App. Div. 1st Dep’t Nov. 20, 2014).

These kinds of transactions have been litigation magnets for years.  MFW goes a long way to reducing some of the litigation flotsam that has accompanied announcement of freezeout deals with a controller.  In the independent directors and unaffiliated stockholders are in fact independent and have the ability to mimic an arm's length transaction, then MFW is the best result. Interesting to see the principle being adopted outside of Delaware as well.


November 24, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 18, 2014

More on ATP and fee-shifting

Stephen Bainbridge weighs in on fee-shifting bylaws and makes the argument that they are necessary to resolve the litigation crisis:

There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.

Fee shifting bylaws are an appropriate means of addressing the problem through private ordering. On the one hand, they likely will prove an effective deterrent to frivolous litigation:

Fee-shifting bylaws, if widely adopted, would raise the risk associated with filing these lawsuits and could weed out the weakest ones, said Sean Griffith, a professor at Fordham University's law school.

“This could be a gut check for plaintiffs' lawyers,” Mr. Griffith said. “They would have to ask—for the first time, really—how good is my case?”

It is, of course, a question that plaintiff lawyers should have been asking all along. The problem, of course, is that they never do.

On the other hand, bylaws are subject to shareholder amendment, so the most likely result will be a process of give and take between directors and shareholders that results in bylaws whose terms are broadly acceptable to the key constituencies (other than lawyers, of course).

I'm of two minds on fee-shifting. First, clearly shareholder litigation, particularly transaction-related litigation is out of control. Something needs to be done so that litigation is not just a transactions tax.  On the other hand, there are examples of valid suits where plaintiffs have rooted out real fiduciary violations of directors. There is value in ensuring some level of oversight with respect to board actions, but how much? Fee-shifting strikes me as using a sledgehammer to pound in a nail: effective, but necessary? I don't have an answer for that right now, I'm looking for a smaller hammer though.


November 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, November 17, 2014

Deal Advisors, Wilmington

If you are hanging around Wilmington this afternoon, go listen to Afra Afsharipour's talk on Deal Advisors! Here's the info: 

Presented by The Institute of Delaware Corporate and Business Law of Widener Law Delaware and The Delaware Counsel Group LLP, Attorneys at Law

Deal Advisors

By Afra Afsharipour, Professor of Law and Martin Luther King, Jr. Hall Research Scholar, University of California (Davis) School of Law

Deal Advisors will examine the role of financial and legal advisors in merger and acquisition transactions, a topic that has received a great deal of attention in recent Delaware litigation, notably in the Rural Metro case.

Monday, November 17, 2014 – 4:00 p.m.

The Wilmington Club
1103 North Market Street
Wilmington, Delaware

Business Attire Required.

One substantive CLE credit in Delaware and Pennsylvania; New Jersey attorneys can self-report.

For additional information or for accessibility and special needs requests, contact Carol Perrupato atcaperrupato@widener.edu or 302-477-2178.

Register here.

November 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 11, 2014

When is a controller a controller?

A recent opinion in the Chancery Court, In re Crimson Exploration, deals with the question of when is a stockholder a controlling stockholder. This case deals with an application of the proper standard of review in a transaction with an alleged controller.  When does one become a controlling shareholder sufficient to overcome pleading requirements? In this case one investor, Oaktree, controlled 33.7% of Crimson's stock.  

If Oaktree were a controller, then entire fairness would be the standard of review if plaintiffs had demonstrated that the challenged merger fell into one of two categories: "(a) transactions where the controller stands on both sides; and (b) transactions where the controller competes with the common [non-controlling] stockholders for consideration."

While being a majority holder is typically sufficient to establish that one a controlling shareholder, one may be a controller with less than a majority. In such circumstances "a plaintiff would have to allege facts to show that the blockholder actually controlled the board's decision about the transaction at issue." The court in Crimson provides a non-exhaustive list of cases (below) where the question at issue was whether a non-majority stockholder was in fact a controller.


After examining the pleading the court held that plaintiffs had not pleaded sufficient facts to establish that the 33.7% blockholder actually controlled the board's decisions with respect to the challenged merger.  Without a controller, the challenged transaction received the presumption of business judgment. 



November 11, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, November 7, 2014

Do Takeover Laws Matter?

Cain, McKeon, and Solomon have a new piece, Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers.  Has it been 5 decades already?! Where does the time go?  The paper starts with one of my most favorite hostile takeover vignettes: 

The takeover battle for Erie Railroad is legend. In 1868, Cornelius Vanderbilt, the railroad baron, began to build an undisclosed equity position in Erie. When the group controlling Erie discovered this, they quickly acted to their own advantage, issuing a substantial number of additional shares of Erie stock for Vanderbilt to purchase. One of the managers, James Fisk, purportedly said at the time that “if this printing press don’t break down, I’ll be damned if I don’t give the old hog all he wants of Erie.” The parties then arranged for their own bought judges to issue dueling injunctions prohibiting the other from taking action at Erie. The battle climaxed when Erie’s management fled to New Jersey with over $7 million in Erie’s funds. By the time the dust settled, they were still in control and Vanderbilt was out over $1 million.

The world's first poison pill! Sadly, the authors call this story apocryphal. Too bad. In any event, here's the abstract to the paper:

This study evaluates the relation between 16 U.S. takeover laws and hostile takeover activity from 1965 to 2013. Using a hand-collected dataset of largely exogenous legal changes covering 198,845 firm years, we find that certain takeover laws, such as poison pill laws, have had an effect on takeover activity running counter to their original intent, in some instances actually correlating with increased hostile activity. We also provide evidence that our Takeover Index, constructed from the full array of takeover laws, provides a better measure of firms’ governance environment than prior studies that have focused almost exclusively on business combination statutes. We conclude by examining the relation between the Takeover Index, firm value, and takeover premiums, and find a non-linear effect across time vintages.


November 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, November 6, 2014

Proxy access movement 2.0

Gretchen Morgenson has an interesting article about an initiative being run by NYC's comptroller, Scott Stringer.  The Boardroom Accountability Project is planning on pushing for shareholder access to the director nomination process, a laudable goal, at 75 different corporations this nomination season.  But a quick look at their proposal raises the question whether the comptroller's effort is serious or just poorly advised. What do I mean? Well, take a look at what they want to put before shareholders:

RESOLVED: Shareholders of the “Company” ask the board of directors (the “Board”) to adopt, and present for shareholder approval, a “proxy access” bylaw. Such a bylaw shall require the Company to include in proxy materials prepared for a shareholder meeting at which directors are to be elected the name, Disclosure and Statement (as defined herein) of any person nominated for election to the board by a shareholder or group (the “Nominator”) that meets the criteria established below. The
Company shall allow shareholders to vote on such nominee on the Company’s proxy card. 

The number of shareholder-nominated candidates appearing in proxy materials shall not exceed one quarter of the directors then serving. This bylaw, which shall supplement existing rights under Company bylaws, should provide that a Nominator must:

a) have beneficially owned 3% or more of the Company’s outstanding common stock continuously for at least three years before submitting the nomination;

b) give the Company, within the time period identified in its bylaws, written notice of the information required by the bylaws and any Securities and Exchange Commission rules about (i) the nominee, including consent to being named in the proxy materials and to serving as director if elected; and (ii) the Nominator, including proof it owns the required shares (the “Disclosure”); and

c) certify that (i) it will assume liability stemming from any legal or regulatory violation arising out of the Nominator's communications with the Company shareholders, including the Disclosure and Statement; (ii) it will comply with all applicable laws and regulations if it uses soliciting material other than the Company’s proxy materials; and (c) to the best of its knowledge, the required shares were acquired in the ordinary course of business and not to change or influence control at the Company.

The Nominator may submit with the Disclosure a statement not exceeding 500 words in support of the nominee (the "Statement"). The Board shall adopt procedures for promptly resolving disputes over whether notice of a nomination was timely, whether the Disclosure and Statement satisfy the bylaw and applicable federal regulations, and the priority to be given to multiple nominations exceeding the one-quarter limit.

OK, we are close enough to the end of the semester that this is a fair question - hey, law students, if you were advising the comptroller, what might you tell him about this proposal? 

First things first. This is a precatory proposal asking the board to adopt a bylaw proposal to present to the shareholders. Huh? Hey, I have an idea. DGCL Section 109 gives stockholders the right to amend the bylaws of the corporation without the intermediation of the board:

...After a corporation other than a nonstock corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote...

There is no need for a precatory proposal and there is certainly no need to ask the board to adopt and present the proposed bylaw to the stockholders. The stockholders can do that themselves without the board.  In fact, DGCL Section 112 specifically provides that a corporation's bylaws may include this kind of bylaw:

§ 112 Access to proxy solicitation materials.

The bylaws may provide that if the corporation solicits proxies with respect to an election of directors, it may be required, to the extent and subject to such procedures or conditions as may be provided in the bylaws, to include in its proxy solicitation materials (including any form of proxy it distributes), in addition to individuals nominated by the board of directors, 1 or more individuals nominated by a stockholder. Such procedures or conditions may include any of the following:

(1) A provision requiring a minimum record or beneficial ownership, or duration of ownership, of shares of the corporation's capital stock, by the nominating stockholder, and defining beneficial ownership to take into account options or other rights in respect of or related to such stock;

(2) A provision requiring the nominating stockholder to submit specified information concerning the stockholder and the stockholder's nominees, including information concerning ownership by such persons of shares of the corporation's capital stock, or options or other rights in respect of or related to such stock;

(3) A provision conditioning eligibility to require inclusion in the corporation's proxy solicitation materials upon the number or proportion of directors nominated by stockholders or whether the stockholder previously sought to require such inclusion;

(4) A provision precluding nominations by any person if such person, any nominee of such person, or any affiliate or associate of such person or nominee, has acquired or publicly proposed to acquire shares constituting a specified percentage of the voting power of the corporation's outstanding voting stock within a specified period before the election of directors;

(5) A provision requiring that the nominating stockholder undertake to indemnify the corporation in respect of any loss arising as a result of any false or misleading information or statement submitted by the nominating stockholder in connection with a nomination; and

(6) Any other lawful condition.

So, what's the comptroller up to? If he were serious, why not simply offer the proposal as a bylaw amendment? I'm pretty sure that most of the corporation's on his list are Delaware corporations. Maybe the strategy is to fail for a few years or even to have these pass and then confront boards that don't present bylaws to the shareholders. So, if the strategy is to make a stink and have something to yell about - and perhaps get an article in the NYTimes - well congratulations.  If the strategy is to actually change the bylaws to allow stockholders access to the nomination process then this falls short.


November 6, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 4, 2014

Advice for deal advisors

In the context of a merger and in the making of other decisions, boards are entitled to rely on advice from experts and advisors. When they do so in good faith, board members are "fully protected" to use the words of 141(e).  In the wake of Rural Metro, bankers now seem to feel that the target is on them and that they will forever be liable for bad choices of boards.  Not so.  Chief Justice Leo Strine has posted a paper that lays out some straightforward advice for legal and financial advisors in the wake of Rural Metro.  In short, if you do the right thing by your clients, you won't have anything to fear:

This article addresses what legal and financial advisors can do to conduct an M&A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for plaintiffs’ lawyers

Chief Justice Strine sums up the problem facing independent directors in going private transactions in the following way: 

The worst of all worlds is for independent directors to wake up one day, and find that they not only cannot rely upon the impartiality of management, but that management has also co-opted the company’s long-standing financial and legal advisors, so all of the
most knowledgeable sources of advice are suspect.

When that happens the independent directors must get the strongest possible outside advisors. But often, this does not happen. Instead of getting the best advisors, they often get second- or third-rate financial and legal advisors, while management  (advantaged already by its deep knowledge of the company) arms itself with the best.

This is a DANGER SIGNAL, akin to the one at Niagara about the approaching falls. You don’t guard Dwight Howard with Nate Robinson — however much you enjoyed their teamwork in the NBA slam dunk contest a few years ago.  If independent directors get weak advisors, they will screw up. They will not do right by the stockholders, they will get sued, and they may lose or at the very least, get publicly embarrassed.

This paper is well worth reading for a number of reasons, including its forthright advice to directors and their advisors. For example, independent directors are well served by examining red-lined versions of the merger agreement. They are also well served by red-lined versions of the financial advisor's power point presentations where changes can happen, but are often overlooked because they are not highlighted or brought to the attention of independent directors:

I am told that the United States of America’s technology capacity is not sufficient to allow for the production of a legible PowerPoint redline or compare rite version. Count me as patriotic. My law clerks over the years have demonstrated an ability to do a compare rite version of most anything. If this is the only hurdle, I believe our nation is capable of vaulting it. Only someone who does not like hot dogs, hamburgers, cheesesteaks, lobster rolls, clam chowder, shrimp and grits, jambalaya, pit beef sandwiches, brisket, barbecue ribs, Good Humor ice cream bars, spaghetti and meatballs, fish tacos, Kentucky Fried Chicken, or things fried at state fairs could question our nation’s ability to do this; in other words, only someone who despises America itself.

Download it and read it for your clients' sake.


November 4, 2014 in Investment Banks, Lawyers | Permalink | Comments (0) | TrackBack (0)