Thursday, April 23, 2015
For what it's worth, Chu and Zhao have released a paper, The Dark Side of Shareholder Litigation: Evidence from Corporate Takeovers, and the abstract:
Exploiting the staggered adoption of universal demand (UD) laws by 23 states between 1989 and 2005 as quasi-natural experiments, we show that reduced shareholder litigation threat improves corporate takeover efficiency. Using a difference-in-differences approach, we find that acquirers from states that adopt UD laws experience significantly higher abnormal announcement returns. We also document that UD laws are associated with better long-run post-merger operating performances. Taken together, our findings suggest that the threat of shareholder litigation leads to inefficient mergers and acquisitions and therefore destroys value ex ante.
This is a pretty good example of what financial economists do, I suppose. Except, here's the thing. The authors are focused on the effect of universal demand in derivative litigation on efficiency of the takeover market. OK, I get it. Transaction related litigation is bad. So, if we raise the hurdles to bringing transaction related litigation, then we should improve efficiency of the market. But...transaction related litigation of the type that one reasonably believes is value reducing is never brought as derivative litigation. It's brought as direct litigation. There's a difference.
In the paper, the authors point to two examples of derivative litigation in the context of a merger as an example of what they are talking about. The two examples are Oracle's acquisition of Pillar (100% owned by Oracle CEO Ellison) and the FreePort-McMoRan Copper acquisition of MMR. Excuse me, but neither of those pieces of litigation are examples of value-reducing litigation. Thank goodness for derivative litigation in those cases!
The challenge for everyone in this business isn't transaction-related derivative litigation. It's the direct litigation. Example: an independent board, sells control of the corporation to a third party in an arm's length deal that has been fully-shopped. Shareholders file direct litigation claiming that the board violated its duties under Revlon to get them the highest price in the sale. There's a very good argument that this kind of litigation is value-reducing, but this kind of litigation, which makes up the vast majority of transaction-related litigation, is not covered by this study.
Notwithstanding the fact that the authors are measuring the effect of an irrelevant variable they find the variable to be significant. OK. Well. There you go.