Monday, February 6, 2023
Carney & Sharfman: Whither Judicial Valuation?
I teach a unit on the legal aspects of valuation in my Corporate Finance planning and drafting seminar every year. I have often been able to secure as a guest speaker on one day during that unit a friend of mine who is a seasoned valuation expert (and was the expert whose opinion carried the day in the most recent Tennessee Supreme Court case on valuation in an M&A context).
There is a relatively large body of academic literature on appraisal (a/k/a dissenters') rights and, more generally, the history of valuation law and practices in the M&A context. In the Business Associations textbook of which I am a coauthor, I excerpt from Mary Siegel's 1995 article, Back to the Future: Appraisal Rights in the Twenty-First Century (32 Harv. J. on Legis. 79). Her 2011 follow-on article, An Appraisal of the Model Business Corporation Act's Appraisal Rights Provisions (74 Law & Contemp. Probs 231 (2011)), also is a good read on appraisal rights history. Other legal academics who have dipped their toes into these waters include George Geis, Bayless Manning, Brian JM Quinn, Randall Thomas, and Barry Wertheimer (who is no longer a law professor), and many more.
I am excited to report that there is a new kid (really, two coauthor new kids) on the block. Bill Carney has coauthored a new article on appraisal rights with Keith Sharfman entitled: The Exit Theory of Judicial Appraisal (28 Fordham J. Corp. & Fin. L 1 (2023)). The SSRN abstract follows.
For many years, we and other commentators have observed the problem with allowing judges wide discretion to fashion appraisal awards to dissenting shareholders on the basis of widely divergent, expert valuation evidence submitted by the litigating parties. The results of this discretionary approach to valuation have been to make appraisal litigation less predictable and therefore more costly and likely. While this has been beneficial to professionals who profit from corporate valuation litigation, it has been harmful to shareholders, making deals costlier and less likely to complete.
In this Article, we propose to end the problem of discretionary judicial valuation by tracing the origins of the appraisal remedy and demonstrating that its true purpose has always been to protect the exit rights of minority shareholders when a cash exit is otherwise unavailable, and not to judge the value of the deal. So understood, judicial appraisal should not be a remedy for dissenting shareholders when a market exit or equivalent protection is otherwise available.
While such reform would be costly to valuation litigation professionals, their loss would be more than offset by the benefit of such reforms to shareholders involved in future corporate transactions. Shareholders presently have adequate protections, both from private arrangements and legal doctrines involving fiduciary duties.
I am grateful that Bill passed a copy of the article along to me yesterday. This is a topic that generates significant interest in a variety of business law courses that I teach/have taught (including, in addition to Corporate Finance, Advanced Business Associations, Business Associations, and Mergers & Acquisitions). Students love puzzling through the issues, asking, e.g.:
- Why do appraisal rights exist?
- Why do we not see many reported appraisal rights opinions?
- How do planners and drafter address the existence of appraisal rights in practice?
Based on a quick peek at the table of contents of Bill's and Keith's article, I sense their work will offer the reader some answers to these and other related questions.
February 6, 2023 in Business Associations, Corporate Finance, Corporations, Joan Heminway, M&A | Permalink | Comments (0)
Monday, October 10, 2022
M&A Teaching/Learning Resources for the Academy and the Bar - A Reprise
It's been a minute since I mentioned and promoted my coauthored series of annotated model business combination agreements published with UT Law's business law journal, Transactions: The Tennessee Journal of Business Law. I offer a list below, with a hypertext link to the SSRN posting of each. These forms of agreement can be used as teaching or training resources.
Buying Assets in Tennessee: An Annotated Model Tennessee Asset Purchase Agreement
Buying Stock in Tennessee: An Annotated Model Tennessee Stock Purchase Agreement
Bank Mergers in Tennessee: An Annotated Model Tennessee Bank Merger Agreement
Acquisition Escrows in Tennessee: An Annotated Model Tennessee Acquisition Escrow Agreement
Acquisition Licenses in Tennessee: An Annotated Model Tennessee Acquisition License Agreement
Bills of Sale in Tennessee: An Annotated Model Tennessee Bill of Sale
This video is offered as a bonus: What is a Merger Anyway? from the 2019 Business Law Prof Blog Symposium (Connecting the Threads III). The edited transcript is published in our Transactions journal and published here.
Enjoy! Holler at me with any questions.
October 10, 2022 in Joan Heminway, M&A, Teaching | Permalink | Comments (1)
Friday, October 7, 2022
How to Contract Conference- February 16-17 in Miami
I had originally planned to post Pt. 2 of the blog post I did a couple of weeks ago, but this announcement is time sensitive.
I'm thrilled to announce that the Transactional Skills Program at the University of Miami School of Law is partnering with Laura Frederick for the second How to Contract conference. It's time sensitive because we are considering holding a side event with a contract drafting and negotiation competition for law students if there's enough interest. If you think you would be interested, please email me at firstname.lastname@example.org.
For lawyers, there are virtual and live options for the contract conference. I've cut and pasted from the website so you can see why you should come to sunny Miami (and it won't be hurricane season):
It is not about the mega deals.
ContractsCon is about the contracts you work on EVERY DAY. We want to help you learn how to draft and negotiate the deals you see all the time.
Because for every 100-page specialized contract sent to outside counsel, there are thousands of smaller but important ones that in-house counsel and professionals do day in and day out.
ContractsCon focuses on how we manage risk and make the tough decisions with less time and information than we need.
It is not a summary of recent case law.
ContractsCon is about providing actionable advice to help you do the work that you have sitting in your inbox RIGHT NOW.
It's not about case names or citations and we don't get into academic explanations.
ContractsCon focuses on the real-world expertise from experienced practitioners that you need to improve your contract skills and expertise and become better at drafting and negotiating in the real world.
It is not going to put you to sleep.
ContractsCon is about the fun and awesomeness of contracts. We are organizing it to be a true lovefest for everything contracts.
Why not combine learning about contracts with having fun?
You'll meet other lawyers and professionals passionate about contract drafting and negotiating. Our sessions and workshops feature contracting superstars who love what they do and will share their excitement with you. Plus we're planning a ton of activities on-site and online to keep you engaged.
ContractsCon is designed for in-house lawyers and professionals who want to learn:
- the insights and techniques needed to handle the commercial contracts filling their inbox every day,
- how experienced lawyers manage risk, work efficiently, and make the hard decisions in challenging circumstances,
- WHAT to say, WHY to say it that way, and HOW to reach the best-negotiated deal you can with your contract counterparties.
Virtual ticket holders get access to 6 HOURS of no-fluff practical contract training by experienced practicing lawyers.
People who attend in person in Miami get 12 HOURS of training, including 6 hours of interactive skills workshops.
I hope to see you in Miami in a few months. Don't forget to follow Laura Frederick on LinkedIn for great contract drafting tips and to let me know whether you and your students might be interested in participating in a contract drafting competition.
October 7, 2022 in Commercial Law, Conferences, Contracts, Corporations, Law Firms, Law School, Lawyering, LLCs, M&A, Marcia Narine Weldon, Negotiation, Teaching, Unincorporated Entities | Permalink | Comments (0)
Friday, July 29, 2022
Practical Tips for Teaching or Training Adult Learners
Millions of law school graduates around the US just took the bar exam. Others are preparing to enter colleges and graduates schools in a few weeks. How will these respective groups do? While a lot depends on how much and how well they study, a large part of their success or failure may depend on how they've been taught. I recently posted about how adults learn and what the research says we should do differently. In this post, I'll show how I used some of the best practices in the last ten days when I taught forty foreign lawyers from around the world and thirty college students in separate summer courses offered by the University of Miami as well as nine Latin American lawyers who were taking courses in business law from a Panamanian school. I taught these disparate groups about ESG, disclosures, and human rights. With each of the cohorts, I conducted a simulation where I divided them into groups to prioritize issues based on whether they were a CEO, an investor, a consumer, the head of an NGO, and for the US college students, I added the roles of a member of Congress or influencer. In a future post, I will discuss how the groups prioritized the issues based on their demographics. Fascinating stuff.
Depending on what you read, there are six key principles related to adult learning:
1. It seems obvious, but adults need to know why they should learn something. Children learn because they are primed to listen to authority figures. Too often in law school or corporate training, there's no correlation to what they learn and what they actually do. When I taught the two groups of foreign lawyers, I talked about the reality and the hype about ESG and how the topic could arise in their practices with specific examples. When I spoke to the college students who were considering law school, I focused on their roles and responsibilities as current consumers and as the future investors, legislators, and heads of NGOs. Same powerpoint but different emphasis.
2. Adults are self-directed. Under one definition, "self-directed learning describes a process by which individuals take the initiative, with or without the assistance of others, in diagnosing their learning needs, formulating learning goals, identifying human and material resources for learning, choosing and implementing appropriate learning strategies, and evaluating learning outcomes." This may seem radical because many of my colleagues complain that today's students need a lot of hand holding and spoon feeding, and I agree to some extent. But I also think that we don't give students enough credit and we underestimate them. I developed my curriculum for the practicing lawyers but I also asked what they wanted to learn and what would be most useful for them. I only had a few hours with them, so I wasn't able to explore this much as I would have. But in some of my traditional courses at the law school and when I train adults in other contexts, I often give a choice of the exam type and topic. This ensures that they will submit a work product that they are passionate about. At the end of my traditional classes at the law school, I also ask them to evaluate themselves and me based on the learning outcomes I established at the beginning of the semester. They tend to be brutally honest about whether they've taken responsibility for their own learning.
3. Adults filter what we tell them through their life experiences. In my traditional classes, I send out a survey to every student before the semester starts so that I understand their backgrounds, perspectives, and what's important to them. I often pick hypotheticals in class that directly address what I've learned about them through the surveys so it resonates much more clearly for them. With my three groups this week, I didn't have the chance to survey them but I knew where they were all from and used examples from their countries of origin, when I could. When the college students entered the Zoom room, I asked them to tell me why they picked this class. This helped me understand their perspectives. I also picked up on some of their comments during discussion and used those data points to pivot quickly when needed. It would have been easy to focus on my prepared lecture. But what does ESG mean to a lawyer in Bolivia, when that's not a priority? College students quickly grasped the context of socially responsible investing, so I spent more time there than on the Equator Principles, for example. The cultural and generational differences were particularly relevant when talking about the responsibility of tech companies from a human rights perspective. The lawyers and students from authoritarian regimes looked at social media and the power to influence the masses in one way, while the college students saw the issues differently, and focused more on the mental health issues affecting their peers. Stay tuned for a future post on this, including interesting discussion on whether Congress should repeal Section 230.
4. Adults become ready to learn only when they see how what they are learning applies to what they need to do at work and at home. With the foreign lawyers, I focused on how their clients could have to participate in due diligence or disclosure as part of a request from a company higher up in the supply chain. I focused on reputational issues with the lawyers who worked at larger companies. College students don't deal with supply chains on a regular basis so I spent more time focusing on their role as consumers and their participation in boycotts at their universities and their activism on campus and how that does or does not affect what companies do.
5. Adults need a task-centered or problem-focused approach to learning. I had to lecture to impart the information, but with each group, they learned by doing. I had 12 hours with the Latin American lawyers so to test them on their understanding of US business entities, instead of having them complete a multiple choice quiz, I asked them to interview me as a prospective client and develop a memo to me related providing the advice, which is what they would do in practice. They, with the other groups, also prioritized the issues discussed above from their assigned roles as CEO, NGO head, institutional investor, or consumer. When I teach my compliance course to law students, they draft policies, hold simulated board meetings, and present (fake) CLEs or trainings. My business and human rights students have the option to draft national action plans, write case studies on companies that they love or hate, or write develop recommendations for governments for their home country. Students are much more likely to engage with the material and remember it when they feel like they are solving a real problem rather than a hypothetical.
6. Adults need extrinsic and intrinsic rewards. Everyone I taught this week will get some sort of certificate of completion. But they all chose to take these courses and those who weren't part of the UM program either self paid or were reimbursed by their employers. None of them were required to attend the classes, unlike those in elementary and high school. When students choose a course of study and learn something relevant, that's even more important than the certificate or diploma.
I hope this helps some of you getting ready for the upcoming semester. Enjoy what's left of the summer, and if you try any of these suggestions or have some of your own, please leave a comment.
July 29, 2022 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Business, Law School, Lawyering, LLCs, M&A, Marcia Narine Weldon, Teaching | Permalink | Comments (0)
Friday, June 10, 2022
Why Transactional Lawyers Need to Educate Themselves on Compliance
Prior to joining academia, I served as a compliance officer for a Fortune 500 company and I continue to consult on compliance matters today. It's an ever changing field, which is why I'm glad so many students take my Compliance, Corporate Governance, and Sustainability course in the Fall. I tell them that if they do transactional or commercial litigation work, compliance issues will inevitably arise. Here are some examples:
- In M&A deals, someone must look at the target's bribery, money laundering, privacy, employment law, environmental, and other risks
- Companies have to complete several disclosures. How do you navigate the rules that conflict or overlap?
- What do institutional investors really care about? What's material when it relates to ESG issues?
- What training does the board need to ensure that they meet their fiduciary duties?
- How do you deal with cyberattacks and what are the legal and ethical issues related to paying ransomware?
- How do geopolitical factors affect the compliance program?
- Who can be liable for a compliance failure?
- What happens when people cut corners in a supply chain and how can that affect the company's legal risk?
- What does a Biden DOJ/SEC mean compared to the same offices under Trump?
- Who is your client when representing an organization with compliance failures?
- and so much more
I'm thrilled to be closing out the PLI Compliance and Ethics Essentials conference in New York with my co-panelist Ben Gruenstein of Cravath, Swaine, & Moore. It's no fun being the last set of presenters, but we do have the ethics credits, so please join us either in person or online on June 28th. Our areas of focus include:
- Risk assessment, program assessment, and attorney-client privilege
- Ethical obligations for lawyers and compliance officers
- Which compliance program communications can (and should) be privileged?
In addition to discussing the assigned issues, I also plan to arm the compliance officers with more information about the recent trend(?) of Caremark cases getting past the motion to dismiss stage and compliance lessons learned from the Elon Musk/Twitter/Tesla saga.
Here's the description of the conference, but again, even if you're not in compliance, you'll be a better transactional lawyer from learning this area of the law.
Compliance and ethics programs are critically important to the success of any organization. Effective programs allow organizations to identify and mitigate legal risks. With an increasingly tough enforcement environment, and greater demands for transparency and accountability, an effective compliance program is no longer just “nice-to-have.” It’s essential.
Whether you are new to the area or a seasoned compliance professional, PLI’s program will give you the tools you need to improve your organization’s compliance program. We will review the principal elements of compliance programs and discuss best practices and recent developments for each. Our distinguished faculty, drawn from major corporations, academia, law firms and the government, can help you improve your program, increase employee awareness and decrease legal risk. Compliance and Ethics Essentials 2022 is highly interactive and includes case studies, practical tools and real-time benchmarking.
What You Will Learn
- Designing and conducting effective compliance risk assessments that enhance your program
- Structuring your program for appropriate independence and authority
- The evolving role of the board
- ESG and your compliance program
- Using data analytics to improve your program
- Encouraging reporting and investigating allegations of wrongdoing
- Best practices in compliance codes, communications, training and tools
- Ethics for compliance professionals
Who Should Attend
If you are involved in any aspect of corporate compliance and ethics as in-house counsel, a compliance and ethics officer, human resources executive, outside counsel, or risk management consultant, this event should be on your annual calendar.
Special Feature: Special luncheon presentation with guest speaker
If you do come to the conference, I would love to grab a cup of coffee with you, so reach out.
June 10, 2022 in Compliance, Conferences, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Lawyering, Legislation, M&A, Marcia Narine Weldon | Permalink | Comments (0)
Friday, September 24, 2021
Ten Ethical Traps for Business Lawyers
I'm so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here's the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren't the only ethical traps, of course, but there's only so many things you can talk about in a 45-minute slot.
All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.
Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing with an unrepresented person), 7.1 (communications about a lawyer’s services), 8.3 (reporting professional misconduct); and 8.4 (dishonesty, fraud, deceit).
Discussion topics will include:
- Do lawyers have an ethical duty to take care of their wellbeing? Can a person with a substance use disorder or major mental health issue ethically represent their client? When can and should an impaired lawyer withdraw? When should a lawyer report a colleague?
- What ethical obligations arise when serving on a nonprofit board of directors? Can a board member draft organizational documents or advise the organization? What potential conflicts of interest can occur?
- What level of technology competence does an attorney need? What level of competence do attorneys need to advise on technology or emerging legal issues such as SPACs and cryptocurrencies? Is attending a CLE or law school course enough?
- What duties do lawyers have to educate themselves and advise clients on controversial issues such as business and human rights or ESG? Is every business lawyer now an ESG lawyer?
- What ethical rules apply when an in-house lawyer plays both a legal role and a business role in the same matter or organization? When can a lawyer representing a company provide legal advice to an employee?
- With remote investigations, due diligence, hearings, and mediations here to stay, how have professional duties changed in the virtual world? What guidance can we get from ABA Formal Opinion 498 issued in March 2021? How do you protect confidential information and also supervise others remotely?
- What social media practices run afoul of ethical rules and why? How have things changed with the explosion of lawyers on Instagram and TikTok?
- What can and should a lawyer do when dealing with a businessperson on the other side of the deal who is not represented by counsel or who is represented by unsophisticated counsel?
- When should lawyers barter with or take an equity stake in a client? How does a lawyer properly disclose potential conflicts?
- What are potential gaps in attorney-client privilege protection when dealing with cross-border issues?
If you need some ethics CLE, please join in me and my co-bloggers, who will be discussing their scholarship. In case Joan Heminway's post from yesterday wasn't enough to entice you...
Professor Anderson’s topic is “Insider Trading in Response to Expressive Trading”, based upon his upcoming article for Transactions. He will also address the need for business lawyers to understand the rise in social-media-driven trading (SMD trading) and options available to issuers and their insiders when their stock is targeted by expressive traders.
Professor Baker’s topic is “Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis.” Professor Baker will provide an overview of the regulation of Texas’ electric power system and the severe outages in February 2021, explaining why Texas is on the forefront of challenges that will grow more prominent as the world transitions to cleaner energy. Next, it explains competing electric power business models and their regulation, including why many had long viewed Texas’ approach as commendable, and why the revealed problems will only grow more pressing. It concludes by suggesting benefits and challenges of these competing approaches and their accompanying regulation.
Professor Heminway’s topic is “Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.” Professor Heminway will discuss how for many small business projects that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, and maintaining a tax-exempt nonprofit corporation may be daunting (or even prohibitive). Yet there would be advantages to entity formation and federal tax qualification that are not available (or not easily available) to unincorporated business projects. Professor Heminway addresses this conundrum by positing a third option—fiscal sponsorship—and articulating its contextual advantages.
Professor Moll’s topic is “An Empirical Analysis of Shareholder Oppression Disputes.” This panel will discuss how the doctrine of shareholder oppression protects minority shareholders in closely held corporations from the improper exercise of majority control, what factors motivate a court to find oppression liability, and what factors motivate a court to reject an oppression claim. Professor Moll will also examine how “oppression” has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief.
Professor Murray’s topic is “Enforcing Benefit Corporation Reporting.” Professor Murray will begin his discussion by focusing on the increasing number of states that have included express punishments in their benefit corporation statutes for reporting failures. Part I summarizes and compares the statutory provisions adopted by various states regarding benefit reporting enforcement. Part II shares original compliance data for states with enforcement provisions and compares their rates to the states in the previous benefit reporting studies. Finally, Part III discusses the substance of the benefit reports and provides law and governance suggestions for improving social benefit.
All of this and more from the comfort of your own home. Hope to see you on Zoom today and next year in person at the beautiful UT campus.
September 24, 2021 in Colleen Baker, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Ethics, Financial Markets, Haskell Murray, Human Rights, International Business, Joan Heminway, John Anderson, Law Reviews, Law School, Lawyering, Legislation, Litigation, M&A, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Teaching, Unincorporated Entities, White Collar Crime | Permalink | Comments (0)
Friday, August 6, 2021
Testing Our Intuitions About Insider Trading - Part I
In January of 2020, The Bharara Task Force on Insider Trading released its report recommending that Congress adopt sweeping reforms of our insider trading enforcement regime. And it appears there is at least some momentum building to act on this recommendation. In April of 2021, the House of Representatives passed the Promoting Transparent Standards for Corporate Insiders Act, and in May of 2021, the House passed the Insider Trading Prohibition Act. I have expressed some concerns about these bills (see, e.g., here and here). But, as I argue in my book, Insider Trading: Law, Ethics, and Reform, I am in complete agreement with the claim that our current insider trading regime is broken and needs to be reformed.
We should not, however, rush to adopt a new insider trading regime without first thoughtfully considering what constitutes insider trading; why it is wrong; who is harmed by it; and the nature and extent of the harm. The answers to these questions have been subject to endless academic debate, but are crucial for determining whether insider trading should be regulated civilly and/or criminally (or not at all), as well as for determining the nature and magnitude of any sanctions to be imposed.
Historically, insider trading regimes around the globe can be grouped (roughly) into four categories (listed from the least to most restrictive): (a) laissez-faire regimes, which permit all trading on information asymmetries, so long as there is no affirmative fraud (actual misrepresentations or concealment); (b) fiduciary-fraud regimes, which recognize a duty to disclose or abstain from trading, but only for those who share a recognized duty of trust and confidence (with either the counterparty to the trade, or with the source of the information, or both); (c) equal-access regimes, which preclude trading by those who have acquired information advantages by virtue of their privileged access to sources that are structurally closed to other market participants (regardless of whether such trading violates a duty of trust and confidence); and (d) parity-of-information regimes, which strive to prohibit all trading on material nonpublic information (regardless of the source).
The following scenario illustrates conduct that would expose the trader to liability under a parity-of-information regime, but not under an equal access, fiduciary-fraud, or laissez-faire regime. As you read through the fact pattern, ask yourself: (1) Is this trading wrong? (2) Who (if anyone) is harmed by it? (3) What is the nature and extent of the harm? (4) Should this trading be regulated (civilly or criminally)? (Please share any answers/thoughts in the comments below!):
A high-school janitor is traveling home from work late at night on a public bus. She looks down and sees a trampled piece of paper. She picks up the paper and reads it. It appears to be someone’s notes from a meeting—though there is nothing to identify the paper’s owner/author. The paper reads as follows:
Meet at HQ of XYZ Corp at 3PM on Jan. 3 to finalize the merger with BIG Corp. Merger to be announced to public on Jan 10. Note: the announcement of merger will send shares of XYZ through the roof, so everyone must maintain strict confidentiality.
The janitor looks up and sees the bus is totally empty. There is no chance of finding the person who dropped the paper. It is January 4. The janitor opens an online brokerage account when she gets home and buys as many shares of XYZ Corp as she can afford. She makes huge profits when the merger is announced on January 10.
If you do not think the janitor has done anything wrong or harmful in this scenario, then you will probably not favor the parity-of-information model for insider trading regulation—which would render this conduct illegal. You will likely favor some version of one of the other insider-trading models instead. My next post will offer a scenario to test our intuitions about the equal-access model (the second-most restrictive regime).
The hope is that walking through these scenarios will help bring some clarity to our shared understanding of when trading on material nonpublic information is wrong and harmful—and (given our answer to this question) the nature and extent to which it should be regulated.
August 6, 2021 in Ethics, Financial Markets, John Anderson, M&A, Securities Regulation, White Collar Crime | Permalink | Comments (2)
Friday, May 28, 2021
Transactional Law, Skills, and Tech Competency
A reminder that Emory’s 2021 conference on transactional law and skills education is next Friday, June 4, 2021. It is virtual and registration is only $50. Register here.
Today, I'm submitting a guest post by Professor Jen Randolph Reise of Mitchell Hamline School of Law. On Friday the 11th, I'll post my reflections from the Emory conference. Jen and I have bonded over our mission to bring practical skills into the classroom. Her remarks are below:
I’m looking forward to hearing from many leaders in transactional legal education, including keynote speakers Joan MacLeod Heminway, Marcia Narine Weldon, and Robert J. Rhee on the theme of “Emerging from the Crisis: Future of Transactional Law and Skills Education.” Marcia will also be talking about her experience launching a transactional program at Miami, joined by three of her adjunct professors.
For my part, I’ll be presenting a Try-This session sharing how I have used exercises that integrate key technological resources and techniques into teaching doctrinal courses. I’ve written in this blog before in praise of practice problems, especially in the asynchronous or flipped classroom. These exercises take that one step farther by creating a self-paced, guided discovery and low-stakes practice of some skills and resources they will need to be transactional lawyers.
Specifically, participants in the Try-This session will be introduced to, and invited to try, three exercises I have created and used in Business Organizations and M&A:
1) a State Filings Exercise, which facilitates student discovery of their state’s business entity statutes and secretary of state filing site (for example, they learn how to form an LLC, and what information on LLCs is publicly accessible);
2) a Public Company Filings Exercise, which guides students through accessing and understanding the structure of public company SEC filings and how to retrieve pertinent information from EDGAR; and
3) a Working with Definitive Agreements Exercise, which introduces M&A students to drafting based on samples and from a term sheet, and requires them to learn to create a redline using Word’s Compare feature.
I’d love to have you attend on Friday and share your experiences and feedback. Or, feel free to contact me at email@example.com or on Twitter @JensJourneyOn anytime for copies or to share ideas. As a transactional in-house lawyer, newly come to the academy, I’m passionate about students getting a foothold in the distinct perspective, skills, and technology they need to become successful transactional lawyers.
May 28, 2021 in Conferences, Joan Heminway, Law School, M&A, Marcia Narine Weldon, Teaching | Permalink | Comments (0)
Sunday, December 27, 2020
Should We Call it Moral Money?: Ownership Matters and Commitment Too
In my previous post on the "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") that Ernst & Young prepared for the European Commission (Commission), I focused on the transformative power of corporate governance. I said that stakeholder capitalism would have a practical value if supported by corporate governance rules based on appropriate standards such as the ones provided by the Sustainable Development Goals (SDGs).
Some of my pointers for the Commission were the creation of a regulatory framework that enables the representation and protection of stakeholders, the representation of “stakewatchers,” that is, non-governmental organizations and other pressure groups through the attribution of voting and veto rights and their members’ nomination to the management board (similar to German co-determination). I also suggested expanding directors' fiduciary duties to include the protection of stakeholders’ interests, accountability of corporate managers, consultation rights, and additional disclosure requirements.
In my last guest post in this series dedicated to the Study on Directors’ Duties, I ask the following questions. Do investors have a moral duty to internalize externalities such as climate change and income inequality, for example? Do firm ownership and investor commitment matter? Should investors’ money be “moral” money?
In their study Corporate Purpose in Public and Private Firms, Claudine Gartenberg and George Serafeim utilize Rebecca Henderson’s and Eric Van den Steen’s definition of corporate purpose, that is, “a concrete goal or objective for the firm that reaches beyond profit maximization.” In their paper, Gartenberg and Serafeim analyzed data from approximately 1.5 million employees across 1,108 established public and private companies in the US. In their words:
[W]e find that employee beliefs about their firm’s purpose is weaker in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among private firms, purpose is lower in private equity owned firms. Among public companies, purpose is lower for firms with high hedge fund ownership and higher for firms with long-term investors. We interpret our findings as evidence that higher owner commitment is associated with a stronger sense of purpose among employees within the firm.
With institutional investors on the rise, these findings are important because they redirect our attention from the board of directors’ short-termism discussion to shareholders' nature, composition, ownership, and long-term commitment. When it comes to owner commitment, Gartenberg and Serafeim say:
Owner commitment could lead to a stronger sense of purpose for multiple reasons. First, to the extent that commitment translates to an ability to think about the long-term and avoid short-term pressures, this would enable a firm to focus on its purpose rather than on solely short-term performance metrics. Second, committed owners may invest to gain and evaluate more soft information about firms, which in turn may allow managers to invest in productive but hard to verify projects that otherwise would not be approved by less committed owners (e.g., Grossman and Hart, 1986). Third, committed owners might mitigate free rider problems inside the firm, allowing employees to make firm-specific investments with greater confidence that they will not be subject to holdup by firm principals (Alchian and Demsetz 1972; Williamson 1985), which in turn could enhance the sense of purpose inside the organization. A similar argument could hold for customers, suppliers, and other stakeholders, who could see a strong sense of corporate purpose from owner commitment as a credible signal that enables the development of trust or ‘relational contracts’ (Gibbons and Henderson 2012; Gartenberg et al. 2019).
Gertenberg’s and Serafeim’s paper also discloses other findings. They found that firms are more likely to hire outside CEOs when less committed investors control the firms. Additionally, those firms are more likely to pay higher executive compensation levels, particularly relative to what they pay employees. Those firms also engage more frequently in mergers and acquisitions and other corporate restructuring processes. A simple explanation for this would be that such firms have higher agency costs since their ownership is more dispersed.
If we understand the company’s ownership structure, we know the purpose of the company. Therefore, there must be an underlying mechanism to better understand the company’s ownership structure because it will help us understand the company's purpose better.
Besides, Gertenberg’s and Serafeim’s findings spell out that financial performance and corporate ownership positively impact corporate culture, employees' satisfaction, and employee work meaningfulness. Putting it differently, the corporate culture, employees' satisfaction, and employee work meaningfulness can be standards for evaluating the impact of corporate ownership, governance, and leadership.
Now that the focus is on investors, what can they do to change corporate behavior and consequently impact stakeholders like employees? They can be actively engaged through proxy voting. In their paper Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance, Barzuza, Curtis, and Webber explain that index funds often are considered ineffective stewards. The authors also explain how index funds have claimed an active role by challenging management and voting against directors to promote board diversity and sustainability.
Still, institutional investors manage their companies’ portfolios depending on the market, which is heavily impacted by systemic shocks we know will eventually occur. The Covid-19 pandemic has shown us how volatile markets are and our current economic model is.
Corporate laws of most European Union (EU) countries determine that the board of directors must act in the company's interest (e.g., Unternehmensinteresse in Germany, l'intérêt social in France, interesse sociale in Italy, etc.). Defining what the interest of the company is has shown to be a rather tricky endeavor. Gelter explains that, in all cases, one side of the debate claims that the company's interest is different from the interest of shareholders. In the US, the purpose of the company is commingled with the idea of shareholder wealth maximization.
To overcome the tension between prioritizing shareholders' wealth maximization and corporate purpose that considers shareholders' and stakeholders' interests, the Commission should take into account the following dimensions in developing policies in corporate law and corporate governance.
- Investors’ ownership and their impact on intangibles like employees’ satisfaction and employee work meaningfulness.
- Governance structure and how it relates to the company’s ownership structure.
- Governance structure and how it integrates stakeholders’ interests in the decision-making process.
- Board diversity and recruitment.
- Institutional investors’ financial resilience.
Finally, investors should demand CEOs and boards of directors show how they are changing the game and moving the needle toward a more sustainable and resilient conception of the corporation. Why? Because ownership matters and commitment too.
December 27, 2020 in Agency, Business Associations, Comparative Law, Corporate Governance, Corporations, CSR, Financial Markets, Law and Economics, M&A, Private Equity, Shareholders | Permalink | Comments (0)
Monday, November 16, 2020
Relational Contracts in a COVID-19 World
A number of years ago, I became acquainted with Kate Vitasek, a colleague in The University of Tennessee's Haslam College of Business. She introduced me to a way of supply contracting called "vested." Vested relationships are characterized by the following attributes that may differentiate them from traditional contractual relationships (as identified in the FAQs on the vested website):
- "Uses flexible Statements of Objectives, enabling the service provider to determine 'how'”
- "Measures success through a limited number of Desired Outcomes"
- "Uses a jointly designed pricing model with incentives that optimize the overall business and fairly allocates risk/reward"
- "Focuses on insight, using governance mechanisms to manage the business with the supplier"
When I first talked to Kate and her colleagues about vested, I remember noting for her that the vested approach sounded like a specific type of relational contract . . . .
Recently, Kate and I reconnected. She informed me about her recent coauthored Harvard Business Review article. It merits promotion here.
The main point of the article is to highlight the possible advantages of relational contracting in the current environment. Here's the crux:
For procurement professionals at large multinational companies, the temptation is to use their company’s clout to pressure suppliers to reduce prices. And when the supplier has the upper hand, it is hard to resist the opportunity to impose price increases on customers. Witness how the shortage of personal protective equipment (PPE) and ventilators led to skyrocketing prices. . . .
A better alternative is formal relational contracts that are designed to keep the parties’ expectations continuously aligned. This kind of agreement is a legally enforceable written contract (hence “formal”) that puts the parties’ relationship above the specific points of the deal. The parties embrace the fact that all contracts are incomplete and can never cover all the contingencies that may occur. This time it is a pandemic. Next time it will be something else.
The coauthors conclude:
Given the uncertainty that lies ahead, it is especially important now that companies try to avoid antagonizing the members of their ecosystems. Formal relational contracts, which can turn adversarial relationships into mutually beneficial partnerships, is a proven means to such an end.
This all makes great sense to me, especially for contracting parties who have long-term relationships or are repeat players in the same market. The article both explains the concept and offers several examples of how relational contracting can foster more collaborative relationships that enable contracting parties to "ride the bumps" in their relationship. Specifically the parties are incentivized to work together to devise solutions to transactional problems as they arise.
The article reminded me about the relational aspects of M&A contracting and, more specifically, Cathy Hwang's Faux Contracts as well as her work with Matthew Jennejohn--including their Deal Structure article. In Deal Structure, Cathy and Matthew write that "[r]elational contracts blend formal contract terms, which are enforceable in court, with informal constraints, such as reputational sanctions, to create strong relationships between parties." [p. 311]
Law folks and business folks should talk more often. As the pandemic continues, parallel avenues of work like this in business and law can have important practical implications for business. This collective body of business and legal scholarship may have significant value to both business managers and the legal advisers who represent them. Collaboration between business and law experts can only enhance that value.
November 16, 2020 in Contracts, Joan Heminway, M&A | Permalink | Comments (2)
Friday, October 2, 2020
Sex, Lies, and M&A- Part II
No. You didn't miss Part 1. I wrote about Weinstein clauses last July. Last Wednesday, I spoke with a reporter who had read that blog post. Acquirors use these #MeToo/Weinstein clauses to require target companies to represent that there have been no allegations of, or settlement related to, sexual misconduct or harassment. I look at these clauses through the lens of a management-side employment lawyer/compliance officer/transactional drafting professor. It’s almost impossible to write these in a way that’s precise enough to provide the assurances that the acquiror wants or needs.
Specifically, the reporter wanted to know whether it was unusual that Chevron had added this clause into its merger documents with Noble Energy. As per the Prospectus:
Since January 1, 2018, to the knowledge of the Company, (i), no allegations of sexual harassment or other sexual misconduct have been made against any employee of the Company with the title of director, vice president or above through the Company’s anonymous employee hotline or any formal human resources communication channels at the Company, and (ii) there are no actions, suits, investigations or proceedings pending or, to the Company’s knowledge, threatened related to any allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above. Since January 1, 2018, to the knowledge of the Company, neither the Company nor any of its Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above.
Whether I agree with these clauses or not, I can see why Chevron wanted one. After all, Noble’s former general counsel left the company in 2017 to “pursue personal interests” after accusations that he had secretly recorded a female employee with a video camera under his desk. To its credit, Noble took swift action, although it did give the GC nine million dollars, which to be fair included $8.3 million in deferred compensation. Noble did not, however, exercise its clawback rights. Under these circumstances, if I represented Chevron, I would have asked for the same thing. Noble’s anonymous complaint mechanisms went to the GC’s office. I’m sure Chevron did its own social due diligence but you can never be too careful. Why would Noble agree? I have to assume that the company’s outside lawyers interviewed as many Noble employees as possible and provided a clean bill of health. Compared with others I’ve seen, the Chevron Weinstein clause is better than most.
Interestingly, although several hundred executives have left their positions due to allegations of sexual misconduct or harassment since 2017, only a small minority of companies use these Weinstein clauses. Here are a few:
Except in each case, as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, to the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.
- Merger between Genuine Parts Company, Rhino SpinCo, Inc., Essendant Inc., and Elephant Merger Sub Corp.:
To the knowledge of GPC, in the last five (5) years, no allegations of sexual harassment have been made against any current SpinCo Business Employee who is (i) an executive officer or (ii) at the level of Senior Vice President or above.
- AGREEMENT AND PLAN OF MERGER BY AND AMONG WORDSTREAM, INC., GANNETT CO., INC., ORCA MERGER SUB, INC. AND SHAREHOLDER REPRESENTATIVE SERVICES LLC:
(i) The Company is not party to a settlement agreement with a current or former officer, employee or independent contractor of the Company or its Affiliates that involves allegations relating to sexual harassment or misconduct. To the Knowledge of the Company, in the last eight (8) years, no allegations of sexual harassment or misconduct have been made against any current or former officer or employee of the Company or its Affiliates.
- AGREEMENT AND PLAN OF MERGER By and Among RLJ ENTERTAINMENT, INC., AMC NETWORKS INC., DIGITAL ENTERTAINMENT HOLDINGS LLC and RIVER MERGER SUB INC.:
(c) To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any officer of the Company or any of its Subsidiaries, and (ii) the Company and its Subsidiaries have not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer of the Company or any of its Subsidiaries.
Here are just a few questions:
- What's the definition of "sexual misconduct"? Are the companies using a legal definition? Under which law? None of the samples define the term.
- What happens of the company handbook or policies do not define "sexual misconduct"?
- How do the parties define "sexual harassment"? Are they using Title VII, state law, case law, their diversity training decks, the employee handbook? None of the samples define the term.
- What about the definition of "allegation"? Is this an allegation through formal or informal channels (as employment lawyers would consider it)? Chevron gets high marks here.
- Have the target companies used the best knowledge qualifiers to protect themselves?
- How will the target company investigate whether the executives and officers have had “allegations”? Should the company lawyers do an investigation of every executive covered by the representation to make sure the company has the requisite “knowledge”? If the deal documents don't define "knowledge," should we impute knowledge?
- What about those in the succession plan who may not be in the officer or executives ranks?
Will we see more of these in the future? I don’t know. But I sure hope that General Motors has some protection in place after the most recent allegations against Nikola’s founder and former chairman, who faces sexual assault allegations from his teenage years. Despite allegations of fraud and sexual misconduct, GM appears to be moving forward with the deal, taking advantage of Nikola’s decreased valuation after the revelation of the scandals.
I’ll watch out for these #MeToo clauses in the future. In the meantime, I’ll ask my transactional drafting students to take a crack at reworking them. If you assign these clauses to your students, feel free to send me the work product at firstname.lastname@example.org.
Take care and stay safe.
October 2, 2020 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Lawyering, M&A, Management, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)
Tuesday, July 28, 2020
M&A In The Business Law News!
As I have been working on a few projects involving law firms and legal education in the pandemic, I have come across a number of fun business law items involving mergers and acquisitions. The news reports I have noted cover regulatory changes, case law, and planning/drafting. Both small and large transactions are receiving attention. I shared these with Business Law Section colleagues in the Tennessee Bar Association about a week ago. I got some positive response. So, I am sharing them here, too. Feel free to post what you are seeing in this regard in the comments.
In the small business arena, a recent American Bar Association (ABA) Business Law Today article focuses in on clawback provisions in equity sale agreements. These provisions, the article avers, “enable the former owner to participate in the consideration received in a subsequent sale of the business by the remaining owner or owners.” The article lists a number of key things to consider in drafting these kinds of provisions.
Another ABA Business Law Today piece notes the trend toward glorifying deal price in valuation determinations, as evidenced in recent Delaware court opinions on appraisal rights. The article cites to three leading cases, two in 2017 and one in 2019, that address fair value determinations under Delaware law. As to the most recent case, Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Apr. 16, 2019) (per curiam), the article importantly notes that “the Delaware Supreme Court sides with the Chancery Court’s position—and reinforces recent Delaware jurisprudence—by holding that the deal price should act as a ceiling for a valuation, a result that will likely reinforce the trend in place since 2016 toward decreasing numbers of appraisal petitions.”
Another noteworthy M&A news item is the recent release by the Federal Trade Commission (FTC) and Department of Justice (DoJ) of final Vertical Merger Guidelines. As multiple sources report (see, e.g., here and here), formal guidelines for non-horizontal mergers were last issued in 1984. The most recent articulation of the FTC and DoJ Horizontal Merger Guidelines occurred in 2010.
Finally, an article in the National Law Review reminds us that it may be a good time to review client charters and bylaws to ensure that anti-takeover protections are up-to-date and adequate. A helpful list of possible anti-takeover devices is included in the article. The article also covers general corporate governance upgrades that may be warranted at this time. Specifically, the article recommends “that boards evaluate potential revisions to their bylaws to allow for greater flexibility and clarity relating to shareholder meetings and board actions.” Suggestions for shareholder meeting enhancements include ideas relating to virtual meetings and meeting procedures. Advice on board action provisions relates to remote meetings and emergency bylaws.
Why should we care about these developments, observations, and recommendations? Changes in the economy and in specific client circumstances relating to the COVID-19 pandemic may make M&A a more significant part of corporate governance and transactional activity for the next year or two. As a result, it will be important for business lawyers to remain up-to-date on current M&A activity as well as related regulatory pronouncements and practice points. As academics, we, too, may be engaged in related activities for the same reason. Food for thought . . . .
July 28, 2020 in Corporate Governance, Joan Heminway, M&A | Permalink | Comments (2)
Monday, March 2, 2020
The Health Care Crisis Through A Business Law Frame
I recently had occasion to offer background to, and be interviewed by, a local television reporter about a publicly traded firm that owns several health care facilities in East Tennessee and has been financed significantly through loans from and corporate payments made by a member of its board of directors. The resulting article and news clip can be found here. Since the story was published, a Form 8-K was filed reporting that the director has resigned from the board and the firm is negotiating with him to cancel its indebtedness in exchange for preferred stock.
In reviewing published reports on the firm, Rennova Health, Inc., I learned that it had been delisted from NASDAQ back in 2018. The reason? The firm engaged in too many stock splits.
I also came across an article reporting that another health care firm, a middle Tennessee skilled nursing provider, Diversicare Healthcare Services, Inc., had been delisted in late 2019. The same article noted two additional middle Tennessee health care firms also were in danger of being delisted from stock exchanges. One was subsequently delisted.
Health care mergers and acquisitions also have been in the news here in Tennessee. A Tennessee/Virginia health care business combination finalized in 2018 is one of two under study by the Federal Trade Commission. The combining firms, Mountain States Health Alliance and Wellmont Health System, avoided federal and state antitrust merger approvals and challenges through the receipt of a certificate of public advantage (COPA) under Tennessee law and a coordinated process in Virginia. The resulting firm, Ballad Health, is an effective health care monopoly in the region and has had well publicized challenges in meeting its commitment to provide cost-effective, quality patient care.
I can only assume that these health care corporate finance issues in Tennessee are a microcosm of what exists nationally.
All of this has made me interested in the U.S. healthcare industry as an engaging and useful lens through which one could teach and write about the legal aspects of corporate finance . . . . Many of the current business law issues in U.S. health care firms stem from well-known financial challenges in the industry and the related governmental responses (or lack thereof). With public debates--including in connection with this year's presidential caucuses, primaries, and election--over the extent to which the federal government should provide financial support to the health care industry under existing conditions and whether the health care industry has become too big to fail, health care examples and hypotheticals seem very salient now, in the same way that banking or telecomm examples and hypotheticals may have had pedagogical and scholarly traction in corporate finance in the past.
Some of the business law issues facing U.S. health care firms may be quite the same as they are for firms in any other industry. Yet, some also may be unique to the health care industry and worth further, individualized exploration in the classroom or in the research realm. For example, innovation and entrepreneurship--intricately tied to corporate finance--may be different in the health care space, as currently configured in the United States. This article makes arguments in that regard.
In all, it seems there is a synergy worth examining in the connections between the U.S. health care crisis and business law teaching and research. Unless and until something fundamental changes in the U.S. health care delivery system, corporate finance lawyers and professionals are likely to have important (if somewhat hidden) roles in ensuring that health care firms survive while providing cost-effective care to those who need it. Business law analyses and innovations are sure to play strong roles in this environment, making business law professors key potential contributors. Time for us to step up and take the challenge!
March 2, 2020 in Corporate Finance, Current Affairs, Entrepreneurship, Joan Heminway, M&A, Research/Scholarhip, Teaching | Permalink | Comments (0)
Monday, September 30, 2019
What is a Merger Anyway?
I want to follow on Colleen's post from yesterday with my own Business Law Prof Blog Symposium commentary. But first, I want to thank Colleen, Ben, Josh, Doug, Haskell, and Stefan for participating with me in the symposium this year. Our continuing legal education attendees, as well as our faculty and students, love this symposium each year. It always turns out to be a wonderful pot pourri of business law topics that literally connect the threads of what we do as business lawyers and business law educators.
Rather than being a featured presenter this year, I chose to present panel-style with two of my UT Law colleagues. (That's us, plus our student commentator, Dixon Babb, in the photo above. Thanks for capturing that, Haskell!) The panel was designed to describe different conceptions of mergers based on distinct areas of legal expertise, together with related professional responsibility commentary. I chose my colleagues Don Leatherman and Tom Plank to join me for this session--Don a tax law practitioner and teacher and Tom a property law practitioner and teacher. The reason for these choices was simple: the three of us had covered this issue before in an informal conversation, and I had found it really stimulating. Don and Tom are amazingly good at what they do, are humorous in their own unique ways, and were exceedingly good sports about joining me on Friday and trying to re-create the atmosphere, as well as the content, of our prior discussion.
An edited excerpt (the introduction) from the abstract for our panel is included below. I may have more to say about this panel in a later post. A transcript of the full panel discussion and Q&A will be published in the spring 2020 issue of Transactions: The Tennessee Journal of Business Law. I will try to remember to post a link after that book is published. (Last year's symposium volume can be found here, by the way.)
Anyway, here is our introduction. This panel discussion was so much fun to do, as you might imagine. I can only hope others enjoyed it as much as the three of us did!
This contribution to “Connecting the Threads III,” the third annual Business Law Prof Blog symposium, involves a conversation between and among three law professors with diverse law practice backgrounds—a corporate finance lawyer, a tax lawyer, and a property lawyer who has served as bankruptcy counsel and Uniform Commercial Code sales and securitization counsel. About ten years ago, these three lawyers, all professors at The University of Tennessee College of Law, found themselves by a water cooler talking about mergers, equity sales, and assets sales. As the corporate finance lawyer recalls, the conversation moved into high gear when the property lawyer questioned her classroom depiction of merger transactions as creatures of statutory magic . . . .
In their conversation that day, the three law professors began to scope out various conceptions of mergers and acquisitions (in common parlance, M&A transactions or business combinations) based on the distinct perspectives provided by their professional backgrounds, their scholarship, and the courses they teach that intersect with M&A transactions. The conversation emanates from the distinct policy objectives (and resulting broad, conceptual substantive focuses) of different legal regimes. The observations each made—both as to their own areas of expertise and those of their colleagues—together offered an appropriately complex picture of these intricate transactions, which often are executed using a team of lawyers representing various areas of practice. As the colleagues parted company that day, one of them made mental note that the conversation should have been recorded—for her own benefit and for the benefit of students who, depending on their upper-division course selections, may not get exposure to this more complete and rich portrayal of business combinations.
At “Connecting the Threads III,” these three law professors . . . attempt to recreate and expand on the content of their impromptu water-cooler conversation. While the precise discussion cannot, after all of these years, be faithfully replicated, its overall nature—updated to reflect current legal doctrine, policy, theory, and norms—can be reconstructed. The discussion addresses a series of broad questions, the threshold one being what a merger is, from the standpoint of each professor’s area of practice, scholarship, and teaching.
September 30, 2019 in Conferences, Joan Heminway, M&A | Permalink | Comments (2)
Friday, July 26, 2019
Sex, Lies, and M&A
I'm at the tail end of teaching my summer transactional lawyering course. Throughout the semester, I've focused my students on the importance of representations, warranties, covenants, conditions, materiality, and knowledge qualifiers. Today I came across an article from Practical Law Company that discussed the use of #MeToo representations in mergers and acquisitions agreements, and I plan to use it as a teaching tool next semester. According to the article, which is behind a firewall so I can't link to it, thirty-nine public merger agreements this year have had such clauses. This doesn't surprise me. Last year I spoke on a webinar regarding #MeToo and touched on the the corporate governance implications and the rise of these so-called "Harvey Weinstein" clauses.
Generally, according to Practical Law Company, target companies in these agreements represent that: 1) no allegations of sexual harassment or sexual misconduct have been made against a group or class of employees at certain seniority levels; 2) no allegations have been made against independent contractors; and 3) the company has not entered into any settlement agreements related to these kinds of allegations. The target would list exceptions on a disclosure schedule, presumably redacting the name of the accuser to preserve privacy. These agreements often have a look back, typically between two and five years with five years being the most common. Interestingly, some agreements include a material adverse effect clause, which favor the target.
Here's an example of a representation related to "Labor Matters" from the June 9, 2019 agreement between Salesforce.com, Inc. and Tableau Software, Inc.
b) The Company and each Company Subsidiary are and have been since January 1, 2016 in compliance with all applicable Law respecting labor, employment, immigration, fair employment practices, terms and conditions of employment, workers' compensation, occupational safety, plant closings, mass layoffs, worker classification, sexual harassment, discrimination, exempt and non-exempt status, compensation and benefits, wages and hours and the Worker Adjustment and Retraining Notification Act of 1988, as amended, except where such non-compliance has not had, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
c) To the Company's Knowledge, in the last five (5) years, (i) no allegations of sexual harassment have been made against any employee at the level of Vice President or above, and (ii) neither the Company nor any of the Company Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or misconduct by any employee at the level of Vice President or above.
The agreement has the following relevant definitions:
"Knowledge" will be deemed to be, as the case may be, the actual knowledge of (a) the individuals set forth on Section 1.1(a) of the Parent Disclosure Letter with respect to Parent or Purchaser or (b) the individuals set forth on Section 1.1(a) of the Company Disclosure Letter with respect to the Company, in each case after reasonable inquiry of those employees of such Party and its Subsidiaries who would reasonably be expected to have actual knowledge of the matter in question.
Even though I like the idea of these reps. in theory, I have some concerns. First, I hate to be nitpicky, but after two decades of practicing employment law on the defense side, I have some questions. What's the definition of "sexual misconduct"? What happens of the company handbook or policies do not define "sexual misconduct"? The Salesforce.com agreement did not define it. So how does the target know what to disclose? Next, how should an agreement define "sexual harassment"? What if the allegation would not pass muster under Title VII or even under a more flexible, more generous definition in an employee handbook? When I was in house and drafting policies, a lot of crude behavior could be "harassment" even if it wouldn't survive the pleading requirements for a motion to dismiss. Does a company have to disclose an allegation of harassment that's not legally cognizable? And what about the definition of "allegation"? The Salesforce.com agreement did not define this either. Is it an allegation that has been reported through proper channels? Does the target have to go back to all of the executives' current and former managers and HR personnel as a part of due diligence to make sure there were no allegations that were not investigated or reported through proper channels? What if there were rumors? What if there was a conclusively false allegation (it's rare, but I've seen it)? What if the allegation could not be proved through a thorough, best in class investigation? How does the target disclose that without impugning the reputation of the accused?
Second, I'm not sure why independent contractors would even be included in these representations because they're not the employees of the company. If an independent contractor harassed one of the target's employees, that independent contractor shouldn't even be an issue in a representation because s/he should not be on the premises. Moreover, the contractor, and not the target company, should be paying any settlement. I acknowledge that a company is responsible for protecting its employees from harassment, including from contractors and vendors. But a company that pays the settlement should ensure that the harasser/contractor can't come near the worksite or employees ever again. If that's the case, why the need for a representation about the contractors? Third, companies often settle for nuisance value or to avoid the cost of litigation even when the investigation results are inconclusive or sometimes before an investigation has ended. How does the company explain that in due diligence? How much detail does the target disclose? Finally, what happens if the company legally destroyed documents as part of an established and enforced document retention and destruction process? Does that excuse disclosure even if someone might have a vague memory of some unfounded allegation five years ago?
But maybe I protest too much. Given the definition of "knowledge" above, in-house and outside counsel for target companies will have to ask a lot more and a lot tougher questions. On the other hand, given the lack of clarity around some of the key terms such as "allegations," "harassment," and "misconduct," I expect there to be some litigation around these #MeToo representations in the future. I'll see if my Fall students can do a better job of crafting definitions than the BigLaw counsel did.
July 26, 2019 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Law School, Lawyering, Litigation, M&A, Management, Marcia Narine Weldon, Teaching | Permalink | Comments (0)
Monday, July 8, 2019
Family Business: Churchill's
Avid BLPB readers may have noticed that I failed to post on Monday of last week. I was traveling from Portugal to Spain that day. I did plan to make this post then, but travel scrambles (thanks to the Porto metro) and delays (thanks to Ryanair) prevented me from getting to a computer with Internet access until late in the day. By then, I was too exhausted to post. So, you get last Monday's post this Monday! No harm done; this post is not time-sensitive.
Ever heard of Graham's port? The Graham's port lodge was founded by brothers William and John Graham back at the beginning of the 18th century. Fast-forward 150 years, and the Graham family sells the then-very-successful Graham's port business to another family. That second family still runs the Graham's business today.
But a Graham descendant still wanted to be in the port business. He thought he had a "better way." So, 11 years after the Graham family sold Graham's, John Graham (not the same one, obviously!) established the Churchill port lodge. Here's what the Churchill's website says about its formation as a business:
Churchill’s was founded in 1981 by John Graham, making it the first Port Wine Company to be established in 50 years. The Founder wanted to continue his family’s long Port tradition but at the same time create his own individual style of Port. He named the Company after his wife, Caroline Churchill.
I went to a port wine tasting at the Churchill's lodge in Vila Nova de Gaia, Portugal last Monday with my husband and daughter. We tasted the uniqueness of the Churchill's product. (My daughter, who is not a port wine fan, actually enjoyed what she tasted at Churchill's.) The wine is less sweet than one would expect from a port wine. John Graham himself explains why:
My Ports are made with as much natural fermentation, and with as little fortification brandy, as possible. I like to make wines in the most natural way. Above all I look for balance. I believe I brought this balance to Churchill’s Ports. There is a consensus around the characteristics that define our house style which are easily identified.
While we were at the tasting, we took a tour and learned the basic facts I relate here.
I was enchanted by the business story! Headline: A Graham founds Churchill's after the Graham family sells Graham's. A bit confusing, but a great narrative involving family business, M&A (and corporate finance more generally), intellectual property, business formation, and more. We learned, for example, that the grapes are foot-treaded (stomped on by human feet). Imagine the interesting employment questions. (The shifts are twelve hours and there are stems and seeds in with the grapes . . . .) And the tasting is still done by John Graham himself, raising questions about key man insurance and business succession planning. (We were told that John Graham has chosen a successor taster--not a member of the family. But we did not ask about management.) Finally, a major real estate acquisition--buying a vineyard (Quinta da Gricha) with a special terroir--is part of the tale.
I am scheming to find ways to integrate what I learned into my teaching this year. I know I will find places to work aspects of the story in--particularly in Advanced Business Associations and Corporate Finance. Because I teach on a dry campus, no wine tasting will take place during the lessons. But maybe an optional out-of-class session could be planned. Hmmm . . . .
July 8, 2019 in Corporate Finance, Employment Law, Family Business, Joan Heminway, M&A | Permalink | Comments (0)
Saturday, June 29, 2019
M&A Sleuth in Sintra . . .
Greetings from sunny Portugal. I am enjoying some vacation time here after attending and presenting at the European Academy of Management conference in Lisbon this past week. I will have more to say about that conference in a later post. But for today, I offer some light thoughts and an Internet "treasure hunt" relating to mergers and acquisitions.
I arrived at my hotel in Sintra earlier today to find a notice in the room stating that "[o]n the 30th June 2019, the Hotel Tivoli Sintra will be changing the legal business entity which will be reflected in future invoices." The notice went on to ask that, "to avoid possible delays relating to the billing" each guest pay up his or her bill to date on June 30th "in a partial invoice," noting that "[t]he remaining services will be invoiced at the departure time with the new entity." Apologies were made for "the inconvenience" and thanks were offered for "the understanding."
Of course, as an M&A practitioner and instructor, I wanted to know what led to this change in "legal business entity." I suspected a merger or acquisition transaction. Was it an asset transaction in which the hotel brand was being changed? That's what I suspected. Since I ask my advanced business law students to try to identify the nature of business combination transactions from news reports and public filings, I thought I would see what I could find out by doing a bot of Internet research. Here's what I learned.
Minor Hotels "completed the acquisition of the entire Tivoli portfolio in early 2016." I read this in the Minor International Public Company Limited 2016 Annual Report. See also here. The Tivoli Hotel Sintra was part of this final stage in acquiring the Tivoli hotels. See here. Minor International (known as MINT) is registered under the laws of the Kingdom of Thailand.
In the fall of 2018, MINT launched a compulsory tender offer for shares of NH Hotel Group SA. The tender offer was commenced as a result of MINT's acquisition of a >30% equity stake in NH Hotel Group in a series of transactions earlier in the year. A news report reveals that MINT's significant stock acquisitions were part of an initial unsolicited bid for NH Hotel Group, which Hyatt Hotels & Resorts also desired to acquire. (Spain has a compulsory tender offer law that kicks in when control of a public company--which includes the direct or indirect acquisition of 30% or more of the public company's voting rights--changes. See here.) By the end of October, MINT had acquired sufficient additional shares of NH Hotel Group's common stock to bring its equity stake in NH Hotel Group to over 94%. See here and here and here. A subsequent news report indicates that "NH Hotels and Minor Hotels are seeking to further integrate their brands." The same posting noted that "[p]lans are already underway in Brazil and Portugal to rebrand some Minor Hotels as NH Hotels, with 15 hotels in the two countries undergoing the transformation."
Accordingly, it seems that I may be among the last hotel guests to stay at the Tivoli Hotel Sintra as a Tivoli branded hotel. At least that's my guess based on what I have read. Although I was not correct in my original guess as to the nature of the transaction that led to the change in "legal business entity" of my Sintra hotel, if my assessment is correct, I wasn't far off. An asset acquisition was involved at the outset, but the posited rebranding happened later and was more the result of a series of stock acquisitions in a hostile, competitive takeover environment. Not a bad day's work in M&A sleuthing. Just call me Nancy Drew, right, Ann?
June 29, 2019 in Ann Lipton, Joan Heminway, M&A | Permalink | Comments (1)
Tuesday, April 9, 2019
Court Says No Successor Liability Attaches When There Was No Entity
A 2017 opinion related to successor liability just posted to Westlaw. The case is an EEOC claim "against the Hospital of St. Raphael School of Nurse Anesthesia (“HSR School”) and Anesthesia Associates of New Haven (“AANH”), alleging gender discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964 . . . ." The plaintiff was seeking to join Yale New Haven Hospital (“YNHH”). MARGARITE CONSOLMAGNO v. HOSPITAL OF ST. RAPHAEL SCHOOL OF NURSE ANESTHESIA and ANESTHESIA ASSOCIATES OF NEW HAVEN, P.C., 3:11CV109 (DJS), 2017 WL 10966446, at *1 (D. Conn. Mar. 27, 2017).
There is no evidence that the HSR School had an existence that was independent of AANH. In fact, the HSR School was going to cease operating due to the fact that AANH was going to cease operating. The HSR School was not a limited liability corporation (“LLC”), private corporation (“P.C.”), or other legal entity registered with the Connecticut Secretary of State. (Tr. 141-142). There is no evidence that the HSR School had its own assets, bank account, or tax identification number. There is no evidence that the HSR School itself (as opposed to AANH) ever paid anyone for rendering services to the HSR School. There is no evidence that anyone other than AANH had operated the HSR School. Consequently, the Court finds that the predecessor in interest, for the purpose of assessing successor liability, is AANH.
April 9, 2019 in Business Associations, Corporations, Joshua P. Fershee, Lawyering, LLCs, M&A, Partnership | Permalink | Comments (0)
Friday, March 15, 2019
What Happens When the CEO or the Face of the Business Is a Risk? #MeToo and Corporate Governance
Hundreds of men have resigned or been terminated after allegations of sexual misconduct or assault. Just last week, celebrity chef/former TV star Mario Batali and the founder of British retailer Ted Baker were forced to sell their interests or step down from their own companies. Plaintiffs lawyers have now found a new cause of action. Although there a hurdles to success, shareholders file derivative suits when these kinds of allegations become public claiming breach of fiduciary duty, unjust enrichment, or corporate waste among other things. Examples of alleged corporate governance missteps in the filings include: failure to establish and implement appropriate controls to prevent the misconduct; failure to appropriately monitor the business; allowing known or suspected wrongdoing to persist; settling lawsuits but not changing the corporate culture or terminating wrongdoers; and paying large severance packages to the accused. Google, for example, announced earlier this year that it had terminated 48 people with no severance for sexual misconduct, but until it became public, the company did not disclose a $90 million payment to a former executive, who had allegedly coerced sex from an employee. Earlier this week, Google acknowledged another $35 million payment to a search executive who had been accused of sexual assault. This second payment was revealed after lawyers filed a shareholder derivative suit in January. CBS, on the other hand, denied a $120 million severance package to its former head, Les Moonvies, who has demanded arbitration.
So what happens when a company knows that a prominent executive has engaged in misconduct? How does a company prevent the conduct and then react to it? Board members and rank and file employees are undergoing more training even as people talk of a #MeToo backlash. But is that enough? Should companies now discuss potential or alleged sexual harassment by executives as a material risk factor in SEC filings? One panelist speaking at the 37th Annual Federal Securities Institute last month suggested that board counsel needed to consider this as an option.
#MeToo has also affected M&A deals with over a dozen companies now inserting a "Weinstein clause" representing, for example that “To the knowledge of the company, no allegations of sexual harassment have been made against any current or former executive officer of the company or any of its subsidiaries” Other "#MeToo reps" require a target company to confirm that it “has not entered into any settlement agreements” with perpetrators of sexual misconduct. Clawbacks are also increasingly common both in M & A deals and executive compensation agreements. Some companies have even asked newly-hired executives to represent that they have not been accused of or engaged in sexual misconduct.
I expect these #MeToo reps, clawbacks, and other disclosures to become more mainstream for a few reasons. First, there's a steady stream of news keeping these issues in the headlines, and many states have banned or are considering banning nondisclosure agreements in sexual harassment cases. Second, women leaders may now play a larger role in changing corporate culture. California requires that publicly held corporations whose “principal executive office” is located in California include at least one female board member by 2019 and even more depending on the size of the board. See here for some perspective on whether more female board members would lead to fewer sexual harassment scandals. Third, proxy advisory firms sounded the alarm on #MeToo in early 2018 and both ISS and Glass Lewis have issued statements about what they plan to recommend when there are no women on boards. Finally, BlackRock, the world's largest asset manager has made it clear that it expects to see women on boards. Some people do not agree that these guidelines/laws will work or are even necessary. Indeed, it will take a few years for empirical evidence to reveal whether having more women on boards and in the C suite will make a meaningful difference.
Personally, I believe it will take a combination of new leadership, successful shareholder derivative suits, and a continuation of the social due diligence in the hiring and M & A context. Sexual misconduct is wrong but it's also expensive. Companies are spending hundreds of thousands of dollars and sometimes more to investigate claims and prepare reports that they know will likely be made public at some time. Conduct won't change unless there are real financial and social penalties for wrongdoers.
March 15, 2019 in Compliance, Corporate Governance, Current Affairs, Ethics, M&A, Marcia Narine Weldon | Permalink | Comments (1)
Monday, March 11, 2019
Call for Papers - Takeovers and Value Creation: Comparative Perspectives
This "just in" from BLPB friends Beate Sjåfjell and Afra Afsharipour:
We are thrilled to co-organise a workshop at UC Davis School of Law on 26 April 2019, with the aim of facilitating an in-depth comparative analysis of the relationship between takeovers and value creation.
We invite submissions on themes concerning takeovers and value creation from any jurisdiction around the world as well as comparative contributions. Themes include but are not limited to:
What are the implications of a takeover on sustainability efforts?
What is the scope for using sustainability arguments as a defense by the target board in a takeover?
What should be the role of the bidder board?
What are the implications of large M&A transactions for building/growing a culture of sustainability at a firm?
Is there a distinct difference between planned mergers and uninvited takeovers?
How could takeovers be regulated to promote sustainable value creation?
We especially encourage female scholars and scholars from diverse backgrounds to submit abstracts. Participation at the workshop will be limited to the presenters, to facilitate in-depth discussions. Deadline for submission of abstracts: 27 March 2019!
Please feel free to send this call for papers on to colleagues who may be interested, and don’t hesitate to get in touch if you have any questions!
This looks like a great opportunity for those of us who work in the M&A space. But the deadline is fast upon us! Another thing to consider as a Spring Break activity . . . .
March 11, 2019 in Call for Papers, Conferences, Corporate Finance, Joan Heminway, M&A | Permalink | Comments (0)