M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, January 28, 2015

Spin, spin, spin

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.

Matt Levine at BloombergView  notes that Yahoo's spin-off structure is similar to that used by Liberty to spin off its stock of TripAdvisor in a tax efficient manner.  

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.


January 28, 2015 | Permalink | Comments (1) | TrackBack (0)

Tuesday, January 13, 2015

The Great Litigation Game

Cain and Solomon have published their paper, A Great Game: The Dynamics of State Competition and Litigation.  They find evidence of competition, perhaps inadvertant, for corporate litigation: 

We theorize a multi-dimensional picture of jurisdictional competition for corporate litigation. We test this theory by examining merger litigation in a hand-collected sample of 1117 takeovers from 2005 to 2011. We find evidence of state competition for merger litigation. Entrepreneurial plaintiffs’ attorneys drive this competition by bringing suits in jurisdictions which have previously awarded more favorable judgments and higher fees and by avoiding unfavorable jurisdictions. States with an apparent interest in attracting corporate litigation respond in-kind by adjusting judgments and awards to re-attract litigation. These states award higher attorneys’ fees and dismiss fewer cases when attorneys have been migrating to other jurisdictions. Our findings illuminate the dynamics and existence of jurisdictional competition for corporate litigation.


January 13, 2015 | Permalink | Comments (0) | TrackBack (0)

Insider trading may derail merger

In China, a merger between two large state-owned railroad companies may be heading for trouble. Why? Apparently 20 executives in both companies AND their families were engaged in insider trading in the 6 months leading up to the announcement of the deal. According to the China Daily

Last October's merger plan actually disclosed the stock holdings of the executives and their relatives. It claimed that the executives were unaware of the plan when they engaged in the stock trading, and their various investment decisions were made solely based on the value and prospect of the companies.

The merger document showed that Cui Dianguo, president of the CNR, bought 15,000 shares in CSR at an average of price 5.14 yuan (87 cents) per share and sold 50,000 shares at the price of 5.96 yuan from April to October last year, according to the public information. But the company did not disclose how many shares Cui owned before April.

The largest amount of stocks traded were by Gao Zhi, CNS's vice-president and his relatives. They bought and sold nearly 2 million shares in CSR with total investment exceeding 10 million yuan prior to the trading suspension, according to the information.

So, the president of one of the two companies involved in this transaction claims not to have known that the deal was pending?  You know ... we can see you. 


January 13, 2015 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, January 9, 2015

Bill like a banker

Don't like the billable hour? Then bill like a banker.  AmLawDaily has been poking around the CVR docket and they pulled a copy of Wachtell's fee letter.  

The American Lawyer has obtained what appears to be a standard fee agreement that Wachtell sent a client in 2012. It shows that the firm typically charges fees for M&A deals that range from 1 percent to 0.1 percent of the transaction amount. The fee agreement was signed by CVR Energy Co., an oil refining and fertilizer business headquartered in Sugar Land, Texas. The company paid Wachtell $6 million for a three-month failed takeover defense against corporate raider Carl Icahn, and is now suing Wachtell and two of its partners for malpractice in Manhattan federal court and seeking return of the $6 million. Wachtell maintains that CVR's claims are meritless.

A fee ranging from 1% on matters where the estimateed transaction size is less than $250 million and 10% of 1% on matters where the estimated transaction size is greater than $25 billion. Hmm. That seems better than billing in six minute increments. 


January 9, 2015 | Permalink | Comments (2) | TrackBack (0)

Thursday, January 8, 2015

Of Record Holders and Appraisal Arbitrage

 Since In re Transkaryotic in 2008 appraisal arbitrage has been an issue bubbling just below the surface. Every now and then it pops up and then it disappears for a while.  This week, Vice Chancellor Glasscock provided more justification for investors pursuing appraisal arbitrage as an investment strategy when he handed down an opinion in the Ancestry.com appraisal proceeding.  To get the gist, you only need to read the first few paragraphs:

Ancestry.com, Inc. (“Ancestry”) was acquired in 2012 by a private equity firm in a cash-out transaction. Merion Capital L.P. (“Merion”), one of the Petitioners in this appraisal action, purchased its shares of Ancestry after the record date for that transaction. The shares were held in fungible bulk by a record owner, Cede & Co. (“Cede”). Merion caused Cede to file a timely appraisal demand for the shares beneficially owned by Merion. A stockholder may seek appraisal only for shares it has not voted in favor of a merger; Cede had at least as many shares not voted for the merger as those for which Merion sought appraisal. That is, Cede had sufficient shares it had not voted in favor of the merger to “cover” its demand on behalf of Merion. Merion then filed this petition for appraisal of the shares.

A plain reading of the appraisal statute as it existed prior to 2007—and case law construing it—indicates that it is the record holder of shares whose actions with respect to the merger determine standing to seek appraisal; the beneficial owner’s actions are irrelevant. Ancestry points out, however, that Section 262 as it existed prior to 2007 required the record owner to file the appraisal action on behalf of the beneficial owner, that the 2007 amendment to Section 262(e) allowed, for the first time, the beneficial owner to file suit in its own name, and that Merion did so here. Thus, argues Ancestry, it is Merion, not Cede, that must show it did not vote in favor of the merger. Moreover, according to Ancestry, because Merion purchased its stock after the record date, it must show that its predecessors did not vote in favor of the merger with respect to these shares as well. Since it cannot demonstrate the latter fact, Ancestry posits, Merion lacks standing here. Ancestry accordingly seeks summary judgment. 

Ancestry’s arguments notwithstanding, a plain reading of the statute discloses that, for standing purposes, it remains the record holder who must not have voted the shares for which it seeks appraisal. Even if the focus were on the beneficial owner rather that the record owner, Merion did not vote in favor of the merger—to have standing, the statue requires that the stockholder must not have voted the stock for which appraisal is sought in favor of the merger; Section 262 imposes no requirement that a stockholder must demonstrate that previous owners also refrained from voting in favor. Accordingly, Ancestry’s Motion for Summary Judgment is denied.

Key is that the record holder is the one with the right to an appraisal udner the statute. The statute recognizes that beneficial holders come and go so it is unconcerned with them. The fact that a beneficial holder appears after the merger is announced isn't relevant if the record holder is and remains a record holder through the merger.

For all you corporate law geeks out there - you know who you are - the opinion is also worth reading because it's got a nice little history of appraisal and the appraisal statute.  Because....of course you want to be able to drop all that appraisal knowledge on junior associates who wander into your office!


January 8, 2015 | Permalink | Comments (0) | TrackBack (0)

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)