May 14, 2020



A Conversion Paradox: Negative Anti-Dilution
      Martin Riger, 44(4): 1243–58 (Aug. 1989)
The current rash of corporate restructurings as a defense against takeovers may produce unique problems in applying the antidilution provisions in indentures for target companies' outstanding convertible debentures. Where the restructuring includes a per share asset distribution to stockholders in excess of the current market price of the stock, a standard provision for adjustment of the conversion price in such an event can produce a negative price, as in the case discussed in this Article.

Solving Antidilution Problems
      Stephen I. Glover, 51(4): 1241–1302 (Aug. 1996)
This Article examines the impact of various dilutive corporate transactions on warrants, rights, and options to acquire common stock and other securities convertible into common stock. The Article concludes that the standard adjustment formulas rely on simplistic assumptions and ignore many of the variables that affect the value of options and convertible securities. As a result, the traditional formulas will often produce adjustments that are either too large or too small. The Article describes various ways in which these problems might be corrected, including the adoption of adjustment mechanisms that use the Black-Scholes option pricing model and other modern pricing formulas. These alternatives are quite complex, and in many circumstances the traditional formulas will be preferable because they are relatively easy to apply. At a minimum, however, lawyers who are drafting or negotiating documents that contain antidilution provisions should understand the theories that underlie the formulas they choose and the ways in which these formulas may produce flawed results.

Understanding Price-Based Antidilution Protection: Five Principles to Apply When Negotiating a Down-Round Financing
      Robert P. Bartlett, III, 59(1): 23-42 (Nov. 2003)
This Article provides a practical guide for applying and understanding price-based antidilution protection-one of the principle financial terms negotiated by venture capitalists when making a portfolio company investment. The economic downturn of the past two years has forced venture capitalists and entrepreneurs to grapple with the often surprising and unintended consequences of standard antidilution formulas, particularly on a company's new investors. To this end, the Article provides five guiding principles for venture capitalists to apply when negotiating an investment in a company having antidilution protection.

Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
     Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.

In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.

This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

Dilution, Disclosure, Equity Compensation, and Buybacks
      Bruce Dravis, 74(3) 631-658 (Summer 2019)
Equity compensation and company share buybacks are complementary: Equity compensation share issuances increase outstanding shares; buybacks decrease outstanding shares. Yet the two types of transactions require very different approval processes and securities and financial disclosures, and generate different financial and tax results, all of which are described in this article, and illustrated by data collected from fifty-nine of America’s largest public companies. This article encourages critics of buybacks to consider the complexity and interrelationship of buybacks and equity compensation.