October 22, 2007
KKR and Goldman Negotiate Settlement of Harman LBO
KKR and Goldman Sachs terminated its $8 billion takeover for Harman International Industries and avoided both litigation and a $225 million termination fee. The takeover, like so many others, fell victim to the credit crunch. Instead, KKR and Goldman will buy $400 million in convertible debt securities and appoint a representative to the Harman board. WSJ, Harman Takeover Canceled, Fight Avoided.
Bear Stearns Plans Joint Venture in Asia
Bear Stearns and Citic Securities, a state-controlled investment bank in China, plan a joint venture in Asia that involves each company investing $1 billion in the other. NYTimes, Bear Stearns and Chinese Bank to Form Joint Venture ; WSJ, Bear Stearns, Citic Near a Deal.
October 21, 2007
Cunningham on Gatekeepers' Rewards
Beyond Liability: Rewarding Effective Gatekeepers, by LAWRENCE A. CUNNINGHAM, George Washington University Law School, was recently posted on SSRN. Here is the abstract:
This Article adds to the emerging literature on rewards to promote effective capital market gatekeeping. Capital market gatekeeping theory traditionally relies heavily on threats of legal liability for failure to perform legally mandated functions (along with a presumed constraint imposed by reputation effects). The ineffectiveness of many gatekeepers in the past decade revealed limitations of the liability strategy and yet reforms continue to emphasize legal duties and liability for gatekeepers. This emphasis also has the negative side-effect of discouraging gatekeepers from willingness to perform desired functions - such as to detect for fraud. Using rewards can induce gatekeepers to perform desired functions and add positive incentives to encourage them to be more effective in vetting enterprises seeking access to capital.
Barzuza on Cross-Listing
Lemon Signaling in Cross-Listing, by MICHAL BARZUZA, University of Virginia - School of Law, was recently posted on SSRN. Here is the abstract:
This paper develops a model of signaling of private benefits of control and applies it to the decision to cross-list. It suggests that cross-listing signals that a manager or a controlling shareholder can not extract large amounts of private benefits.
This signaling effect creates opposite incentives for managers and controlling shareholders. While the opportunity to bond and signal limited extraction encourages managers to cross-list, it discourages controlling shareholders from cross-listing, since such a signal decreases the control premium they receive if they sell their control block.
The paper derives implications for the cross-listing market, the desirability of international regulation and the likelihood of international convergence of corporate law and structures.
Since this paper is the first to develop a signaling model of private benefits, it also has implications for other issues in corporate law and corporate finance such as the desirability of mandatory corporate law and dividend distribution.
Alexander and Hanley on Regulatory Monitoring
Regulatory Monitoring Under the Sarbanes-Oxley Act , by CINDY R. ALEXANDER and KATHLEEN WEISS HANLEY, both from the SEC, was recently posted on SSRN. Here is the abstract:
This paper examines the economic relevance of the factors set forth under Section 408 of the Sarbanes-Oxley Act to guide the enhanced regulatory scrutiny of public company financial disclosures, as required under the Act. We interpret two of the factors, volatility and firm size, as predictors of a public company's relative risk of non-compliance or the prospective loss to investors, conditional upon non-compliance. We use disclosures of material weaknesses in internal controls under Section 404 as indicators of the potential for non-compliance. Our evidence is that the Section 408 factors that we associate with a relatively high risk of non-compliance – high stock-price volatility, and whether a company is emerging with a disparate PE ratio – are good predictors of reported material weaknesses in internal controls. In addition, while Section 408 calls for enhanced review of large firms – those with high market capitalization and a material affect on the economy – we find that relatively few large firms have disclosed material weaknesses in internal controls. The large firms that have disclosed material weaknesses, however, comprise 92% of the market capitalization of all companies disclosing a material weakness. In contrast with the focus of the public debate on the compliance problems of smaller public companies, our evidence points to high volatility as a stronger predictor of compliance problems under the Act than small firm size. Finally, we discuss alternate explanations for our findings and the potential for unintended consequences for shareholders.
Bratton and Wachter on "The Modern Corporation"
Shareholder Primacy's Corporatist Origins: Adolf Berle and 'The Modern Corporation,' by WILLIAM W. BRATTON, Georgetown University Law Center; European Corporate Governance Institute (ECGI), and MICHAEL L. WACHTER, University of Pennsylvania Law School, was recently posted on SSRN. Here is the abstract:
Many corporate law discussants think of themselves as picking up where Adolf Berle and E. Merrick Dodd left off in a famous, precedent-setting debate in the 1930s. The generally accepted historical picture puts Berle in the position of the original ancestor of today's shareholder primacy position while Dodd is cast as the original ancestor of today's corporate social responsibility (CSR). This Article shows that both categorizations amount to mistaken readings of old material outside of its original context. The Article corrects the mistakes, offering new readings of some of corporate law's fundamental texts, texts that recently reached their 75th anniversaries and include Berle's famous book with Gardiner C. Means, The Modern Corporation and Private Property. Seventy-five years ago the normative issue of the day was the appropriate policy response to the crisis of the Great Depression. Both Berle and Dodd addressed the issue from a corporatist perspective which views the corporation as an entity that operates as an organ of the state and assumes social responsibilities. In so doing Berle took on the fundamental question “for whom is the corporation managed” at a time when the answer had crucial implications for social welfare. In answering the question, Berle articulated a political economy that integrated a theory of corporate law within a theory of social welfare maximization. It was a great accomplishment, but it was in a context very different from today's debates about corporate management and responsibility. Accordingly, Berle was not advocating shareholder primacy as we understand it today. Nor is there a strong claim that Berle was a CSR advocate; he never did make the final jump of advocating reorganization of the legal firm as a social welfare maximizer. His unqualified statements on the subject all presupposed a strong regulatory state and a public consensus against a corporate profit maximand. Dodd does not present a clear picture either. Dodd's Depression-era writing, once contextualized, offers only indirect support to today's CSR advocates. He is most plausibly read as a managerialist, and social responsibility within management's discretion is not what CSR tends to be about. The biggest lesson from this analysis is that the shareholder primacy school impairs its own position by making a claim on Berle.
Black on Stoneridge
Stoneridge Investment Partners v. Scientific-Atlanta (8th Cir. 2006) What Makes it the Most Important Securities Case in a Decade?, by BARBARA BLACK, University of Cincinnati - College of Law, was recently posted on SSRN. Here is the abstract:
Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. is scheduled for oral argument before the U.S. Supreme Court on October 9, 2007. It has been described as “arguably the most important securities law case to reach the Court in a decade” and as securities lawyers' “Roe v. Wade.” What is the legal issue that has occasioned this much attention? Phrased as a technical legal argument, plaintiff asserts that it may establish that outside actors committed a Rule 10b-5 violation on a theory of “scheme liability;” in contrast, defendants assert that Central Bank of Denver v. First Interstate Bank of Denver, which found no statutory basis for aiding and abetting liability, precludes plaintiff's theory of liability.
What is on trial before the Supreme Court, however, may be the future of private securities fraud litigation. Beyond the legal issue, the parties' positions reflect the differing views in the ongoing debate on the value of private securities fraud litigation. Does scheme liability enhance the compensatory and deterrent functions of private litigation or does it contribute to abusive private litigation that jeopardizes the US markets' competitive position? Thirty one amicus briefs have been filed in the case, about equally divided between the plaintiff's and the defendant's position. There was disagreement within the executive branch as to which side the Solicitor General should support. Most recently, the SEC announced that it would hold a spring 2008 roundtable to debate the various positions on private securities litigation.
This paper will first analyze the legal issue in Stoneridge, describe the policy issues from the perspective of the amicus briefs and then provide some commentary on the case's significance to the law and policy of private securities fraud litigation. This paper is a work-in-progress, to be continued upon the Court's opinion.
Khanna and Dickinson on Corporate Monitors
The Corporate Monitor: The New Corporate Czar?, by VIKRAMADITYA S. KHANNA, University of Michigan at Ann Arbor - Law School, and TIMOTHY DICKINSON, Paul, Hastings, Janofsky & Walker, LLP - Washington, DC, was recently posted on SSRN. Here is the abstract:
Following the recent spate of corporate scandals, government enforcement authorities have increasingly relied upon corporate monitors to help ensure law compliance and reduce the number of future violations. These monitors also permit enforcement authorities, such as the Securities & Exchange Commission and others, to leverage their enforcement resources in overseeing corporate behavior. However, there are few descriptive or normative analyses of the role and scope of corporate monitors. This paper provides such an analysis. After sketching out the historical development of corporate monitors, the paper examines the most common features of the current set of monitor appointments supplemented by interviews with monitors. This is followed by a normative analysis that examines when it is desirable to appoint monitors and what powers and obligations they should have. Based on this analysis, we provide a number of recommendations for enhancing the potential of corporate monitors to serve a useful deterrent and law enforcement function without being unduly burdensome on corporations. This involves, among other things, discussion of the kinds of powers monitors should have and the fiduciary duties monitors should owe to the shareholders whose businesses they are monitoring.