Leveraged Buyouts and Fraudulent Transfers: Life After Gleneagles
David A. Murdoch, Linda D. Sartin, and Robert A. Zadek, 43(1): 1–26 (Nov. 1987)
As a result of the significant increase in leveraged buyout transactions over the past ten years, both sellers and lenders face a vast array of complex legal and financial questions as they plan their buyout strategy. This Article analyzes the risks of a possible fraudulent conveyance finding by the courts in connection with a leveraged buyout under the Bankruptcy Code, the Uniform Fraudulent Conveyance Act, and the Uniform Fraudulent Transfer Act. It focuses particularly on the Third Circuit's 1986 decision in the Gleneagles case. See United States v. Tabor Realty Corp ., 803 F.2d 1288 (3d Cir. 1986), cert. denied sub nom. McClellan Realty Co. v. United States , 483 U.S. 1005 (1987). The Article also provides sellers and lenders with practical guidance in reducing or eliminating risks of voidability of leveraged buyouts as fraudulent conveyances.
Fraudulent Conveyance Concerns in Leveraged Buyout Lending
Matthew T. Kirby, Kathleen G. McGuinness, and Christopher N. Kandel, 43(1): 27–49 (Nov. 1987)
This Article reviews—from a lender's perspective—the applicability of and risks posed by fraudulent conveyance laws to leveraged buyouts. It discusses methods used to minimize those risks and sets in broader context issues raised by the Gleneagles case.
The Emerging Role of the Special committee—Ensuring Business Judgment Rule Protection in the Context of Management Leveraged Buyouts and Other Corporate Transactions Involving Conflicts of Interest
Scott V. Simpson, 43(2): 665–90 (Feb. 1988)
In an era of complex corporate transactions, the role of a board of directors is often further complicated by conflicts of interest involving some or all of the members of the board. Recent judicial decisions also indicate that the actions taken by directors may not be upheld in the courtroom unless certain procedural steps are observed in the boardroom. The special committee, consisting of disinterested directors and advised by independent legal and financial experts, has evolved as a mechanism capable of facilitating a careful review of complex issues while at the same time minimizing the effects of actual or potential conflicts of interest. In appropriate circumstances, establishing a special committee may represent the most significant procedural step that a board of directors can take to ensure that its actions will withstand judicial scrutiny.
ESOPs: What They Are and How They Work
Henry C. Blackiston III, Linda E. Rappaport, and Lawrence A. Pasini, 45(1): 85–143 (Nov. 1989)
The rapid expansion in the number and size of employee stock ownership plans has put ESOPs under increasing public scrutiny. This Article reviews the legal rules applicable to ESOPs, including tax qualification requirements, ESOP stock allocation rules, tax benefits and incentives, ERISA fiduciary considerations, accounting treatment, and securities law considerations. The Article also explores the current use of ESOPs in financial transactions, including leveraged buy-outs and securitized ESOP loans. Finally, the Article identifies and discusses issues of practical importance to practitioners in the ESOP area.
An Introduction to Legal and Practical Considerations in the Restructuring of Troubled Leveraged Buyouts
Richard M. Cieri, David G. Heiman, William F. Henze II, Carl M. Jenks, Marc S. Kirschner, Shawn M. Riley, and Patrick F. Sullivan, 45(1): 333–95 (Nov. 1989)
This Article provides some historical background on LBOs—the 1980s' most notable contribution to "dealmania." It analyzes a number of issues that will be encountered when an LBO falls on tough times and restructuring becomes necessary.
Revisiting Consolidated Edison—A Second Look at the Case that Has Many Questioning Traditional Assumptions Regarding the Availability of Shareholder Damages in Public Company Mergers
Ryan D. Thomas and Russell E. Stair, 64(2): 329-358 (February 2009)
In October 2005, the U.S. Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v. Northeast Utilities ("Con Ed") ruled that electric utility company Northeast Utilities ("NU") and its shareholders were not entitled to recover the $1.2 billion merger premium as damages after NU's suitor, Consolidated Edison, refused to complete an acquisition of NU. This case surprised many M&A practitioners who believed that the shareholder premium (or at least some measure of shareholder damages) would be recoverable in a suit against a buyer that wrongfully terminated or breached a merger agreement. If Con Ed proves to have established a general rule precluding the recovery of shareholder damages for a buyer's breach of a merger agreement, the potential consequences to targets in merger transactions would be substantial—shifting the balance of leverage in any MAC, renegotiation, or settlement discussions decidedly to the buyer and effectively making every deal an "option" deal. This ruling, therefore, has left some target counsel struggling to find a way to ensure that the merger agreement allows for the possibility of shareholder damages while also avoiding the adverse consequences of giving shareholders individual enforcement rights as express third-party beneficiaries of the agreement.
The Con Ed case, however, merits a second look. This Article revisits the Con Ed decision and challenges the conclusion of some observers that the court in Con Ed established a general precedent denying the availability of shareholder damages. This Article also discusses how the holding of Con Ed may very well be confined to the facts and the specific language of the merger agreement at issue in the case. Notwithstanding, the uncertainty surrounding how any particular court may approach the issues raised in Con Ed, this Article proposes model contract language that a target might employ to avoid creating a " Con Ed issue" and to minimize the risk of a result that was not intended by the parties.
Business Successors and the Transpositional Attorney-Client Relationship
Henry Sill Bryans, 64(4): 1039–1086 (August 2009)
This Article focuses on the potential right of a business successor to assert various elements of a predecessor's attorney-client relationship and the implications to practitioners of a successor's ability to do so. An attorney-client relationship that the courts permit to be asserted by a business successor is referred to in the Article as a "transpositional" relationship. The Article examines in what context a successor may (1) enforce the duty of confidentiality of the predecessor's counsel; (2) assert the predecessor's attorney-client privilege; (3) disqualify the predecessor's counsel under the principles of Model Rule 1.9, or its equivalent, on the ground that such counsel should be viewed as the successor's former counsel for purposes of the Rule; and (4) assert a malpractice claim against the predecessor's counsel based exclusively on services provided to the predecessor. The Article concludes with some general observations about the decisions examined, the need of transactional lawyers to be familiar with the principles that courts have relied on, and transaction provisions that might be used to blunt the surprising, and arguably unfair, results that this line of decisions can sometimes produce.
Did Corporate Governance "Fail" During the 2008 Stock Market Meltdown? The Case of the S&P 500
Brian R. Cheffins, 65(1): 1–66 (November 2009)
In 2008, share prices on U.S. stock markets fell further than they had during any one year since the 1930s. Does this mean corporate governance "failed?" This Article argues generally "no," based on a study of a sample of companies at "ground zero" of the stock market meltdown, namely the thirty-seven firms removed from the iconic S&P 500 index during 2008. The study, based primarily on searches of the Factiva news database, reveals that institutional shareholders were largely mute as share prices fell and that boardroom practices and executive pay policies at various financial firms were problematic. On the other hand, there apparently were no Enron-style frauds, there was little criticism of the corporate governance of companies that were not under severe financial stress, and directors of troubled firms were far from passive, as they orchestrated CEO turnover at a rate far exceeding the norm in public companies. Given that corporate governance functioned tolerably well in companies removed from the S&P 500 and that a combination of regulation and market forces will likely prompt financial firms to scale back the free-wheeling business activities that arguably helped to precipitate the stock market meltdown, the case is not yet made for fundamental reform of current corporate governance arrangements.
The Impact of Transaction Size on Highly Negotiated M&A Deal Points
Eric Rauch and Brian Burke, 71(3): 835-848 (Summer 2016)
When negotiating mergers or acquisitions, deal lawyers will often support their position by asserting that it is in accord with the “market” based on published deal points studies. However, as many of these lawyers intuit based on their experience, terms vary across the market based on a number of factors including deal size, a factor that no previously published study has examined or accounted for. This article confirms that intuition by surveying the middle market at deal sizes from several million to several billion dollars and showing, for the first time, that highly negotiated deal points tend to become more seller favorable as transaction value increases. This conclusion is based on a review of five terms (liability cap, liability basket amount and type, sellers’ catchall representations, the “no undisclosed liabilities” representation, and closing conditions) across 849 deals from 2007 to 2015, a sample larger than that used in any previously published deal points study of mergers and acquisitions.
Simple Insolvency Detection for Publicly Traded Firms
J.B. Heaton, 74(3) 723-734 (Summer 2019)
This article addresses current limitations of financial-market-based solvency tests by proposing a simple balance-sheet solvency test for publicly traded firms. This test is derived from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation. The solvency test requires only the assumption that the market value of assets equals the sum of the market value of the firm’s debt plus the market value of the firm’s equity. The solvency test is a generated upper bound on the total amount of debt the firm can have and still be solvent or, alternatively, the minimum amount of stock-market capitalization the firm must have if it is solvent at current debt prices. The virtue of the method—apart from its ease of implementation—is that it makes possible the detection of balance-sheet insolvent firms notwithstanding the possibility that not all of the firm’s liabilities—including hard-to-quantify contingent liabilities—can be identified. As a result, the method allows for the detection of balance-sheet insolvent firms that otherwise might escape detection. The method proposed here can identify insolvent firms that should be retaining assets and not paying them out to shareholders as dividends or repurchases, identify stocks that brokers and investment advisers should treat as out-of-the-money call options that may be unsuitable investments, and can help auditors identify publicly traded firms that are candidates for going-concern qualifications and other disclosures.