Wednesday, April 6, 2016
Yesterday, the Obama administration announced new rules to stem tax inversions. Today, Pfizer announced that it was terminating its merger agreement with Allergan, citing adverse changes in tax laws as the reason. The merger agreement defines Adverse Tax Law Change as:
“Adverse Tax Law Change” shall mean (x) any change in applicable Law (whether or not such change in Law is yet effective) with respect to Section 7874 of the Code (or any other U.S. Tax Law), (y) the issuance of an official interpretation of applicable Law, as set forth in published guidance by the IRS (other than News Releases) (whether or not such change in official interpretation is yet effective), or (z) the passage of a bill or bills that would implement such a change in identical (or substantially identical such that a conference committee is not required prior to submission of such legislation for the President’s approval or veto) form by both the United States House of Representatives and the United States Senate and for which the time period for the President of the United States to sign or veto such bill has not yet elapsed, in each case, that, once effective, in the opinion of a nationally recognized U.S. Tax counsel, would cause Parent to be treated as a United States domestic corporation for United States federal income Tax purposes following completion of the Transactions (it being agreed that, for this purpose, U.S. Tax counsel shall be entitled to make such reasonable assumptions as to the relevant facts and, with respect to notices described in Section 7805(b) of the Code published in the Internal Revenue Bulletin that announce the intention to issue future regulations, the most likely form that such regulations will take).
An Adverse Tax Law Change triggers a mutual right to terminate the merger agreement. Upon a termination, Pfizer agreed to reimburse Allergan's expenses up to $400 million. In the press release Pfizer indicated that the amount to be reimbursed would be $150 million.
According to the WSJ, the Pfizer-Allergan deal was the largest ever deal at $150 billion to be terminated. If the Obama administration was gunning for the Pfizer deal when it announced its new anti-inversion regulations yesterday, it hit its mark.
Tuesday, April 5, 2016
In its ongoing battle to stem the inversion tide, the Treasury Dept has just announced new anti-inversion "temporary regulations." The first of these provides companies with guidance that the Treasury will disregard stock acquired in prior inversions/acquisitions that may have been acquired in order to get around previous inversion rules:
It is not consistent with the purposes of section 7874 to permit a foreign company (including a recent inverter) to increase in its size in order to avoid the inversion threshold under current law for a subsequent acquisition of an American company. For the purposes of computing the ownership percentage when determining if an acquisition is treated as an inversion under current law, today’s action excludes stock of the foreign company attributable to assets acquired from an American company within three years prior to the signing date of the latest acquisition.
So structuring transactions to get around the anti-inversion rules won't work. Strikes me that Treasury is like a little Dutch boy trying plug holes in the dike with his fingers. Or, maybe a better metaphor, it's like Treasury is playing Whack-a-mole. It's hard to imagine Treasury will ever really win this fight. But, it won't be for lack of trying.
The second set of temporary regulations Treasury announced yesterday was a ban on earnings stripping (for some reason, I thought they already did this):
Under current law, following an inversion or foreign takeover, a U.S. subsidiary can issue its own debt to its foreign parent as a dividend distribution. The foreign parent, in turn, can transfer this debt to a low-tax foreign affiliate. The U.S. subsidiary can then deduct the resulting interest expense on its U.S. income tax return at a significantly higher tax rate than is paid on the interest received by the related foreign affiliate. In fact, the related foreign affiliate may use various strategies to avoid paying any tax at all on the associated interest income. When available, these tax savings incentivize foreign-parented firms to load up their U.S. subsidiaries with related-party debt.· Today’s action makes it more difficult for foreign-parented groups to quickly load up their U.S. subsidiaries with related-party debt following an inversion or foreign takeover, by treating as stock the instruments issued to a related corporation in a dividend or a limited class of economically similar transactions. For example, the proposed regulations:o Treat as stock an instrument that might otherwise be considered debt if it is issued by a subsidiary to its foreign parent in a shareholder dividend distribution;o Address a similar “two-step” version of a dividend distribution of debt in which a U.S. subsidiary (1) borrows cash from a related company and (2) pays a cash dividend distribution to its foreign parent; ando Treat as stock an instrument that might otherwise be considered debt if it is issued in connection with certain acquisitions of stock or assets from related corporations in transactions that are economically similar to a dividend distribution.
Monday, April 4, 2016
As I sit here watching inches and inches of snow pile up outside, I am reminded that it's actually Spring and the academic year is rapidly coming to a close. End of the academic year usually means piling up a few good reads to accompany some writing projects. I enjoy reading business history, so this summer should be fun. I have two books - I haven't read either of them yet, so this is not a review. First, though, is Dear Chairman. It's the story of some of Wall Street's best known activists over the years. I've already read the chapter on Benjamin Graham and it's good enough to keep me around. Second on my list for this summer is Bloodsport. It's a history of the beginnings of our current M&A wave - way back to the LBO buyout era of the 1980s. I suspect it covers a lot of the same ground as Bruce Wasserstein's Big Deal - a book I recommend to everyone. In addition to the stories of the best known deals of the 1980s, Bloodsport has a couple chapters on M&A's most iconic lawyers, including Joe Flom as well as Marty Lipton and the back story to the creation of the poison pill. That should be worth the price of admission.
Friday, April 1, 2016
Earlier this week when Starwood announced that Anbang had upped its bid for the hotelier, they were very careful with their language. The previous weekend when Anbang made its first topping bid, Starwood declared that bid a "superior offer" and started the process to terminate its merger agreement with Marriott:
On March 18, 2016, Starwood notified Marriott that Starwood had received the binding proposal from the Consortium that Starwood’s Board has determined that the Consortium’s proposal constitutes a “Superior Proposal” and that Starwood’s Board intends to terminate the Marriott merger agreement and enter into a definitive agreement with the Consortium. Consistent with the terms of the Marriott merger agreement, Marriott has the right until 11:59 p.m. ET on March 28, 2016 to negotiate revisions to the existing merger agreement between Marriott and Starwood so that the proposal from the Consortium no longer constitutes a “Superior Proposal”. Starwood will negotiate in good faith with Marriott during this period, and the Starwood Board will consider in good faith any changes to the Marriott agreement that Marriott may propose during this period. Starwood is not permitted to terminate the Marriott agreement to enter into the Consortium’s binding agreement unless the Starwood Board has determined that the Consortium’s offer continues to be a “Superior Proposal” once the negotiation period with Marriott has concluded, and taking into account any revisions to the existing Marriott agreement that are proposed by Marriott during this period. The Consortium has confirmed that its offer will remain outstanding until the expiration of Marriott’s negotiation period.
On March 26, 2016, Starwood received a non-binding proposal from the Consortium, under which the Consortium would acquire all of the outstanding shares of Starwood common stock for $81.00 per share in cash. Starwood’s Board of Directors, in consultation with its legal and financial advisors, determined that this proposal is reasonably likely to lead to a Starwood Superior Proposal (as defined in the Merger Agreement), allowing Starwood to engage in discussions with, and provide diligence information to, the Consortium in connection with the Consortium Proposal. Starwood commenced discussions with the Consortium on March 26, 2016 and, in those discussions, the Consortium made a revised proposal with an increased purchase price of $82.75 in cash per share of Starwood common stock. Starwood and the Consortium are continuing to discuss non-price terms related to the Consortium Proposal, and are working to finalize the other terms of a binding proposal from the Consortium, including definitive documentation.
Thursday, March 31, 2016
Apologies for disappearing from the Internet. I've been sucked into law school administration in recent months and ... frankly ... it's a lot of work. Anyway, I have resolved to carve out time and return to the blog. Lots going on ... Starwood, Yahoo, etc. So, lots to think about.
Thursday, December 31, 2015
A new paper suggests they are good for someone , but perhaps not you and me. Here's the abstract for Are Corporate Inversions Good for Shareholders?:
In 2014 alone, U.S. firms worth over half a trillion dollars announced their intention to expatriate to a foreign country -- a corporate inversion -- in order to reduce corporate income taxes. To discourage expatriation, U.S. law requires shareholders of inverting firms to realize a personal capital gains tax liability at the completion of the transaction. Thus, while reduced corporate taxes benefit all shareholders equally, a corporate inversion results in a personal tax cost that depends on the individual investor's tax basis and standing. We develop a model to value the net benefits of inversion and we show that the private returns to investors varies widely across individuals. We find that the benefits of inversion disproportionately accrue to the CEO, foreign shareholders, and short-term investors, while many long-term investors suffer a net loss.
Wednesday, December 9, 2015
Kudos to LUMA Partners for their very creative re-creation of Queen's Bohemian Rhapsody. Seriously. It's above and beyond what one might expect for a closing dinner. I really enjoyed. But, if you listen to the lyrics closely, it's a very melancholy inside look into the recent desperation of online advertisers. It's the kind of melancholy that lead to a sale of the corporation. It's not all wine and roses in M&A land...
Tuesday, December 1, 2015
No, no, no. The sky isn't falling. Yes, it's true that the $75 million damage award against RBC for aiding and abetting a duty of care violation by the board of Rural/Metro in connection with the company's sale was upheld, but the sky is not falling.
In the Rural/Metro Chancery Court opinion, Vice Chancellor raised the spectre of a falling banker sky when he emphasized the role of bankers as gatekeepers of the M&A process:
The threat of liability helps incentivize gatekeepers to provide sound advice, monitor clients, and deter client wrongs. Framed for present purposes, the prospect of aiding and abetting liability for investment banks who induce boards of directors to breach their duty of care creates a powerful financial reason for the banks to provide meaningful fairness opinions and to advise boards in a manner that helps ensure that the directors carry out their fiduciary duties when exploring strategic alternatives and conducting a sale process, rather than in a manner that falls short of established fiduciary norms. It is not irrational for the General Assembly to have excluded aiders and abettors from the ambit of those receiving exculpation under Section 102(b)(7). The statutory language therefore controls.
By holding bankers' feet against the fire and expanding liability for bankers, the fear of aiding and abetting liability might ensure financial advisors are more attentive to their obligations to clients. This prospect sent some shockwaves through the world of bankers. But that fear might have been a little over-wrought.
In yesterday's ruling, the Delaware Supreme Court made it clear that although the facts in this particular case supported an aiding and abetting claim, the ruling was not an expansion of banker liability along the lines suggested in the Chancery Court opinion: "[O]ur holding is a narrow one that should not be read expansively to suggest that any failure on the part of a financial advisor to prevent directors from breaching their duty of care gives rise to a claim for aiding and abetting a breach of the duty of care."
In narrowing its ruling, the court expanded on Vice Chancellor Laster's gatekeeper analysis and in the process narrowed its bite:
In affirming the principal legal holdings of the trial court, we do not adopt the Court of Chancery’s description of the role of a financial advisor in M & A transactions. In particular, the trial court observed that “[d]irectors are not expected to have the expertise to determine a corporation’s value for themselves, or to have the time or ability to design and carryout a sale process. Financial advisors provide these expert services. In doing so, they function as gatekeepers.” Rural I, 88 A.3d at 88 (citations omitted). Although this language was dictum, it merits mention here. The trial court’s description does not adequately take into account the fact that the role of a financial advisor is primarily contractual in nature, is typically negotiated between sophisticated parties, and can vary based upon a myriad of factors. Rational and sophisticated parties dealing at arm’s-length shape their own contractual arrangements and it is for the board, in managing the business and affairs of the corporation, to determine what services, and on what terms, it will hire a financial advisor to perform in assisting the board in carrying out its oversight function. The engagement letter typically defines the parameters of the financial advisor’s relationship and responsibilities with its client. Here, the Engagement Letter expressly permitted RBC to explore staple financing. But, this permissive language was general in nature and disclosed none of the conflicts that ultimately emerged. As became evident in the instant matter, the conflicted banker has an informational advantage when it comes to knowledge of its real or potential conflicts. See William W. Bratton & Michael L. Wachter, Bankers and Chancellors, 93 TEX. L. REV. 1, 36 (2014) (“The basic requirements of disclosure and consent make eminent sense in the banker-client context. The conflicted banker has an informational advantage. Contracting between the bank and the client respecting the bank’s conflict cannot be expected to succeed until the informational asymmetry has been ameliorated. Disclosure evens the field: the client board has choices in the matter . . . and needs to make a considered decision regarding the seriousness of the conflict.”). The banker is under an obligation not to act in a manner that is contrary to the interests of the board of directors, thereby undermining the very advice that it knows the directors will be relying upon in their decision making processes. Adhering to the trial court’s amorphous “gatekeeper” language would inappropriately expand our narrow holding here by suggesting that any failure by a financial advisor to prevent directors from breaching their duty of care gives rise to an aiding and abetting claim against the advisor.
So, bankers are not insurers of bad director behavior. Bankers are insurers of their own behavior. If bankers want the benefit of conflict waivers, then specific disclosure is the answer. If you are going to act in a way that might raise a conflict, then disclose the facts and allow the client board to make an informed waiver of those specific acts. I suspect that for the vast majority of the investment banking community, this is not going to be an issue. Conclusion: sky intact.
Friday, November 20, 2015
More change in Chancery now that word has come down that Vice Chancellor Noble is retiring in February, 2016. In recent years, there has been a new wholesale change on the bench in Chancery. Could it be that Vice Chancellor Laster will now be the most senior tenured Vice Chancellor? Time flies.
Wednesday, October 14, 2015
Gov. Markell has announced the nomination of Tamika Montgomery-Reeves, a Wilson Sonsini partner, to replace retiring Vice Chancellor Donald Parsons. Ms. Montgomery-Reeves will be the first African-American to serve as Vice Chancellor in the Chancery Court and the first woman since Justice Carolyn Berger was elevated to the Supreme Court in 1994. Ms. Montgomery-Reeves recently represented the defendants in the Riverbed Technologies litigation.
Riverbed may mark the beginning of the end for the litigation industrial complex. Vice Chancellor Glasscock began his opinion there with the following paragraph:
As a bench judge in a court of equity, much of what I do involves problems of, in a general sense, agency: insuring that those acting for the benefit of others perform with fidelity, rather than doing what comes naturally to men and women— pursuing their own interests, sometimes in ways that conflict with the interests of their principals. In this task, I am generally aided by advocates in an adversarial system, each representing the interest of his client. Of course, these counsel are themselves agents, but their actions are generally aligned with that of their principals in a way that does not require Court involvement. The area of class litigation involving the actions of fiduciaries stands apart from this general rule, however, especially in litigation like the instant case, involving the termination of ownership rights of corporate stockholders via merger. Such cases are particularly fraught with questions of agency: among others, the basic questions regarding the behavior of the fiduciaries that are the subject of the litigation; questions of meta-agency involving the adequacy of the actions of the class representative—the plaintiff—on behalf of the class; and what might be termed meta-meta-agency questions involving the motivations of counsel for the class representative in prosecuting the litigation. At each remove, there may be interests of the agent that diverge from that of the principals. This matter, involving the deceptively straightforward review of a proposed settlement, bears a full load of such freight.
While Glasscock hesitated, he signaled in this opinion that the Vice Chancellors have had enough. So... Welcome to the bench Ms. Montgomery-Reeves!
Wednesday, October 7, 2015
Gov. Markell is about to announce his nomination to replace Vice Chancellor Parsons who announced his retirement this past summer. Here's the thing. The Chancery Court has not had a female chancellor since Vice Chancellor Berger left the court to join the Supreme Court in 1994. Now, according to press reports Gov. Markell is considering three nominees - all women:
According to sources, the candidates are Abigail M. LeGrow, who is a Master in Chancery or judicial officer who assists the court; Tamika Montgomery-Reeves, a corporate lawyer and partner at Wilson Sonsini Goodrich & Rosati in Wilmington; and Elena C. Norman, a partner and corporate lawyer at Young Conaway Stargatt & Taylor in Wilmington. LeGrow and Montgomery-Reeves declined to comment. Norman could not be reached for comment.
The Senate will consider Gov. Markell's nomination on Oct. 28. That's the sound of glass cracking. Good.
Friday, September 25, 2015
Given that the Rural Metro appeal will be heard by the Delaware Supreme Court next week, it's probably appropriate for me to post the abstract to Andrew Tuch's new paper on Banker Loyalty in Mergers & Acquisitions.
Abstract: Investment banks often face conflicts of interest in their role as advisors on merger and acquisition (“M&A”) transactions. In performing their advisory role, are banks fiduciaries of their clients, and thus obliged to act loyally; gatekeepers, and thus required to perform a guardian-like function for investors; or simply arm’s length counterparties with no other-regarding duties? The prevailing scholarly view resists characterizing M&A advisors as fiduciaries, putting faith in the power of contract law and market constraints to discipline errant bank behavior. This Article develops a theoretical account of investment banks as fiduciaries of their M&A clients, showing why they should act loyally toward their clients unless they obtain informed client consent.
Second, the Article develops an analytical framework for assessing what liability rules will best deter disloyalty by investment banks toward their M&A clients. The framework applies optimal deterrence theory, drawing an analogy between bank disloyalty and tortious conduct. It shows why holding only banks liable for disloyalty is unlikely to adequately deter such disloyalty. It suggests the need for fault-based liability rules on corporate directors (of M&A clients) for their oversight of banks and for public enforcement to supplement private enforcement of liability rules.
Applying this framework, the Article assesses recent Delaware decisions, including Del Monte, El Paso, and Rural Metro, generally supporting them but suggesting that private enforcement alone under-deters bank disloyalty and includes certain gaps in liability. It proposes modest but potentially significant doctrinal shifts, including subjecting directors’ decisions to “contract out” of fiduciary protections in engagement letters to heightened judicial scrutiny, and argues for increased regulatory oversight of banks in M&A deals. The Article nevertheless argues against imposing aiding and abetting liability on banks, regarding that doctrine as ill-suited to deterring bank disloyalty and, to the extent it hinges on treating banks as gatekeepers, as lacking theoretical justification.
Friday, September 4, 2015
A new paper, The Value of Venue, attempts to quantify the effect of exclusive forum provisions. The author concludes that exclusive forum provisions create value for shareholders by reducing duplicative litigation and deterring opportunistic litigation. Here's the abstract:
In response to the increased threat of shareholder litigation filed in multiple states, firms have adopted exclusive forum provisions which limit lawsuits to a single venue of the board of director’s choice. It is unclear whether these provisions impose increased costs on shareholders’ ability to discipline managers and directors or provide benefits to shareholders by eliminating duplicative lawsuits. I use the Delaware Chancery Court’s announcement upholding the adoption of these provisions as a natural experiment to evaluate their wealth implications. Overall, my findings suggest that exclusive forum provisions create value for shareholders by specifying a required venue for corporate litigation.
Friday, August 28, 2015
The JLEO has a new paper, Merger Remedies in Oligopoly under a Consumer Welfare Standard:
Abstract: We analyze the welfare effects of structural remedies on merger activity in a Cournot oligopoly if the antitrust agency applies a consumer surplus standard. We derive conditions such that otherwise price-increasing mergers become externality-free by the use of remedial divestitures. In this case, the consumer surplus standard ensures that mergers are only implemented if they increase social welfare. If the merging parties can extract the entire surplus from the asset sale, then the socially optimal buyer will be selected under a consumer standard.
Thursday, August 27, 2015
Vice Chancellor Laster just released his post-trial opinion in Dole. You'll remember that in Dole, Murdock, the CEO, structured the transaction to include all of the structural protections required under then-Chancellor Strine's MFW opinion. Well, even with all those protections in place, the stockholders got the short end of the stick. From today's opinion:
But what the Committee could not overcome, what the stockholder vote could not cleanse, and what even an arguably fair price does not immunize, is fraud. Before Murdock made his proposal, Carter made false disclosures about the savings Dole could realize after selling approximately half of its business in 2012. He also cancelled a recently adopted stock repurchase program for pretextual reasons. These actions primed the market for the freeze-out by driving down Dole‘s stock price and undermining its validity as a measure of value. Then, after Murdock made his proposal, Carter provided the Committee with lowball management projections. The next day, in a secret meeting that violated the procedures established by the Committee, Carter gave Murdock‘s advisors and financing banks more positive and accurate data. To their credit, the Committee and Lazard recognized that Carter‘s projections were unreliable and engaged in Herculean efforts to overcome the informational deficit, but they could not do so fully. Critically for purposes of the outcome of this litigation, the Committee never obtained accurate information about Dole‘s ability to improve its income by cutting costs and acquiring farms.
By taking these actions, Murdock and Carter deprived the Committee of the ability to negotiate on a fully informed basis and potentially say no to the Merger. Murdock and Carter likewise deprived the stockholders of their ability to consider the Merger on a fully informed basis and potentially vote it down. Murdock and Carter‘s conduct throughout the Committee process, as well as their credibility problems at trial, demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith.
...intentional and in bad faith. Those are rare words.
From the law school at the University of Richmond:
The University of Richmond School of Law seeks to fill three entry-level tenure-track positions for the 2016-2017 academic year, including one in corporate/transactional law. Candidates should have outstanding academic credentials and show superb promise for top-notch scholarship and teaching. The University of Richmond, an equal opportunity employer, is committed to developing a diverse workforce and student body and to supporting an inclusive campus community. Applications from candidates who will contribute to these goals are strongly encouraged.
Inquiries and requests for additional information may be directed to Professor Jessica Erickson, Chair of Faculty Appointments, at firstname.lastname@example.org.
Saturday, August 1, 2015
From our appointments chair I have the following announcement:
BOSTON COLLEGE LAW SCHOOL expects to make two faculty appointments in fields that might include constitutional law and/or taxation. Hiring rank would be dependent on the background and experience of the applicant. Applicants must possess a J.D. or equivalent degree and outstanding academic credentials. Relevant experience in private practice, government service, or a judicial clerkship is strongly preferred. Boston College is an Affirmative Action/Equal Opportunity Employer and does not discriminate on the basis of on the basis of race, color, sex, age, religion, ancestry, national origin, sexual orientation, disability, veteran status, or any other classification protected under federal, state or local law. We strongly encourage women, minorities and others who would enrich the diversity of our academic community to apply. To learn more about how BC supports diversity and inclusion throughout the university please visit the Office of Institutional Diversity at http://www.bc.edu/offices/diversity. Boston College, a Jesuit, Catholic university, is located in Newton, Massachusetts, just outside of Boston. Interested applicants should contact: Diane Ring, Chair, Appointments Committee, at email@example.com, or at Boston College Law School, 885 Centre Street, Newton, MA 02459.
Thursday, July 30, 2015
Since the financial crisis in 2008, the DOJ has been teaching yet another generation of insider traders the important lesson that one shall not trade on confidential inside information. However, that campaign took a big - one might say devastating - hit when the Second Circuit overturned Judge Rakoff and threw out insider trading convictions in US v Newman. In Newman, the court held:
[W]e hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties.
Under Dirks, in order for an insider to generate 10b-5 liability, they have to breach their fiduciary duty by receiving some personal benefit. Until Newman, courts have generally construed the personal benefit requirement fairly broadly. So, where friends share inside information until Newman courts have generally agreed with the government's position that that was sufficient for purposes of Dirks' personal benefit requirement. Newman narrowed that area of agreement significantly:
We have observed that "[p]ersonal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend." Jiau, 734 F.3d at 153 (internal citations, alterations, and quotation marks deleted). This standard, although permissive, does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature. If that were true, and the Government was allowed to meet its burden by proving that two individuals were alumni of the same school or attended the same church, the personal benefit requirement would be a nullity. To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee's trades "resemble trading by the insider himself followed by a gift of the profits to the recipient," see463 U.S. at 664, 103 S.Ct. 3255, we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. In other words, as Judge Walker noted in Jiau, this requires evidence of "a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter]."
I suppose an explicit quid pro quo requirement is consistent with where the US Supreme Court has been going in recent years in its political corruption cases, so one shouldn't be too surprised that a circuit court also goes this way.
Judge Rakoff who heard the Newman case at the District Court level was obviously none to happy with being overruled. Why do I say that? Well, because of a Ninth Circuit case handed down this past June. In US v. Salman, the Ninth Circuit, in an opinion written by ... Judge Rakoff sitting by designation, declined to follow Newman:
[Appellant] Salman reads Newman to hold that evidence of a friendship or familial relationship between tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit. In particular, he focuses on the language indicating that the exchange of information must include "at least a potential gain of a pecuniary or similarly valuable nature," id. at 452, which he reads as referring to the benefit received by the tipper. Salman argues that because there is no evidence that Maher received any such tangible benefit in exchange for the inside information, or that Salman knew of any such benefit, the Government failed to carry its burden.
To the extent Newman can be read to go so far, we decline to follow it. Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an "insider makes a gift of confidential information to a trading relative or friend." Dirks, 463 U.S. at 664. Indeed, Newman itself recognized that the "`personal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, . . . the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.'" Newman, 773 F.3d at 452(alteration omitted) (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)).
In our case, the Government presented direct evidence that the disclosure was intended as a gift of market-sensitive information. Specifically, Maher Kara testified that he disclosed the material nonpublic information for the purpose of benefitting and providing for his brother Michael. Thus, the evidence that Maher Kara breached his fiduciary duties could not have been more clear, and the fact that the disclosed information was market-sensitive — and therefore within the reach of the securities laws, see O'Hagan, 521 U.S. at 656 — was obvious on its face. If Salman's theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return. Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading.
And just like that - a circuit split! According to Alison Frankel, the DOJ has just filed for cert in Newman to resolve this split. No doubt, this is going to be the biggest and most consequential insider trading case before the Supreme Court in recent years if the court decides to grant cert.
Monday, July 27, 2015
Christina Sautter has a new paper - Fleecing the Family Jewels, which is set to appear in the Tulane Law Review. The paper argues that crown jewel deal protections have made a comeback in recent years and reminds us why courts are often wary of them. Here's the abstract:
Crown jewel lock-up options, a common deal protection device during the 1980s mergers and acquisitions boom, are back. During their popularity in the 1980s, these options took the form of agreements between a target company and a buyer pursuant to which the buyer was granted the right to purchase certain valuable assets, or crown jewels, of the target corporate family in the event the merger did not close. After both state and federal courts questioned the validity of these lock-ups in the 1980s, lock-ups lost their luster and dealmakers stopped using them. But as the saying goes, “everything old becomes new again,” and crown jewel lock-ups have made a return in recent transactions. This time around, dealmakers and have been quick to distinguish the modernized crown jewel lock-ups from their predecessors. Although there has been limited case law addressing the validity of these lock-ups, courts appear more likely to uphold the lock-up if the lock-up can be attributed to a business purpose other than the merger and if the lock-up could be a standalone agreement, separate and apart from the merger. This Article argues, however, that today’s lock-ups are not significantly different from their predecessors. Practitioners and courts should not lose sight of the 1980s jurisprudence that closely scrutinized the sale process preceding the lock-up as well as the deterrent effects of the lock-up on potential bidders. Failing to consider these factors and not giving these factors proper weight potentially results in companies and their shareholders being fleeced of their corporate family jewels and their value. At the same time, however, dealmakers should not be as quick to shy away from lock-ups as they have done in the past. As the 1980s jurisprudence made clear, lock-ups can be used to enhance shareholder value. In particular, this Article argues that dealmakers may use lock-ups after an extensive sale process to incentivize bidders and extract additional value for shareholders.
Monday, July 20, 2015
Lynne Dallas and Jordan Barry have posted an interesting paper on tenure voting, or what they call time phased voting. Some of you will recognize tenure voting systems from the J.M. Smuckers experience (described in a recent WSJ piece) and then the Williams v. Geier case. Here's the abstract of Dallas and Barry's paper:
We explore Time-Phased Voting (“TPV”), an arrangement in which long-term shareholders receive more votes per share than short-term shareholders. TPV has gained prominence in recent years as a proposed remedy for perceived corporate myopia.
We begin with theory, situating TPV relative to other corporate voting structures such as one-share-one-vote and dual-class stock. By decreasing the influence of short-term shareholders, TPV may encourage managers to act in the long-term interests of their firms. It may also facilitate controlling shareholder diversification and firm equity issuances by enabling controlling shareholders, who are generally long-term shareholders, to maintain their control with lower levels of ownership. In this respect, it resembles a milder form of dual-class stock, but is more targeted toward myopic behavior.
We then investigate U.S. companies’ experiences with TPV in practice. Due to limited U.S. experience with TPV, our sample size is small from a statistical standpoint. Nevertheless, our findings are consistent with our theoretical analysis. Our ownership and voting data suggest that TPV empowers long-term shareholders, but that it does little to encourage long-term shareholding; this may be due to a lack of investor awareness regarding the few companies that have TPV. In the short term, TPV empowers insiders, increasing their control and creating a wedge between their ownership and control of the firm (though a smaller wedge than is typical of dual-class firms). However, in the long term we find that TPV is associated with reduced insider ownership and control. We see a transition in TPV companies, which are mainly mature, family-owned companies, from a concentrated to a more dispersed ownership structure. Relatedly, we find that TPV is associated with significant insider diversification and the issuance of additional equity.
Overall, TPV firms significantly outperformed the market as a whole; an investor who invested in our TPV firm index in 1980 would have more than six times as much money at the end of 2013 as an investor who invested in the S&P 500. While it is not clear that TPV contributed to this strong performance, we believe that shareholders and corporations should be free to experiment with reasonable TPV plans if they so choose.