Mergers and Acquisitions
Consolidating Bank Trust Departments: Are Common Trust Fund Mergers Still Tax Free?
William F. Drew, Jr. and Michael S. Hawley, 41(3): 773–84 (May 1986)
Prior to the Treasury Department's adoption of final regulations under 1954 I.R.C. § 584, as amended, common trust fund mergers generally were assumed to be tax free. The Article reviews the tax consequences of common trust fund mergers, emphasizing and criticizing the new diversification requirements for tax-free mergers.
Negotiated Acquisitions: The Impact of Competition in the United States
Leo Herzel and Richard W. Shepro, 44(2): 301–22 (Feb. 1989)
This Article analyzes the legal rules governing acquisitions of publicly held companies and concludes that they strongly encourage competing offers. This conclusion is consistent with the statistical evidence. The benefits from acquisitions go to the stockholders of acquired corporations. The stockholders of acquiring corporations are probably, on the average, losers.
Financial Statement Representations in Acquisition Transactions
Barry S. Augenbraun and Ernest Ten Eyck, 47(1): 157–66 (Nov. 1991)
Most acquisition agreements contain representations with respect to the financial statements of the acquired company. The authors argue that the standard form of representations, based upon general purpose financial statements, may not effectively serve the needs of the buyer and may result in future disputes or litigation against the seller. This is because certain fundamental premises of financial reporting and the auditing process do not readily lend themselves to the economics of these transactions. They suggest ways in which buyers, sellers, and outside auditors might better approach these issues.
Loss of State Claims as a Basis for Rule 10b-5 and 14a-9 Actions: The Impact of Virginia Bankshares
Scott E. Jordan, 49(1): 295–325 (Nov. 1993)
In Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977), the Supreme Court implied in a footnote that if, during the course of a freeze-out merger, management omitted to state a fact that would have provided a basis for a state law remedy, such omission could possibly serve as the basis for a federal securities action under rule 10b-5 of the Exchange Act. Some appellate courts interpreted Santa Fe to allow federal securities actions to be premised solely on the loss of state law claims caused by management's misleading statements. Commentators have argued that interpreting Santa Fe to allow such actions is contrary to the pronouncement in the text of the opinion. Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), turns the tide. Virginia Bankshares indicates that the Supreme Court would be unwilling to allow shareholders to bring federal securities actions based upon the loss of a state law claim. This Article provides guidance to securities law practitioners and offers a solution to the courts in light of Virginia Bankshares .
Purchasing the Stock of a Privately Held Company: The Legal Effect of an Acquisition Review
Committee on Negotiated Acquisitions, 51(2): 479–509 (Feb. 1996)
The acquisition review (more commonly known as a due diligence investigation) has become a routine practice in business acquisitions. The Article addresses the legal implications of this review in the context of the purchase of all the stock of a closely held business. Its focus is from the perspective of the purchaser and generally differentiates between the rights of the purchaser in connection with misrepresentations of the seller discovered by the purchaser at two junctures in the acquisition process: first, after execution of an acquisition agreement but before closing, and second, those discovered after closing. The Article also discusses several recent cases in the first situation dealing with the right of a purchaser to "close and sue" for misrepresentations, which include consideration of whether the purchaser's decision to close with knowledge of the misrepresentation amounts to a waiver of that right.
Technicolor IV: Appraisal Valuation in a Two-Step Merger
Jesse A. Finkelstein and Russell C. Silberglied, 52(3): 801–14 (May 1997)
The recent decision of the Delaware Supreme Court in Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (Del. 1996), will have an important impact on the planning and litigation issues surrounding two-step acquisitions. This Article analyzes some of the legal and practical implications of the Technicolor decision, including the effect that the decision will have upon the structuring of future transactions and certain litigation strategies that the decision is likely to engender.
SEC Enforcement and the Internet: Meeting the Challenge of the Next Millennium—A Program for the Eagle and the Internet
Joseph J. Cella III and John Reed Stark, 52(3): 815–49 (May 1997)
The information revolution orchestrated by the Internet has created fantastic opportunities in the areas of securities, investments, and commerce, bringing about a remarkable boom for investors. Investors can now communicate with almost every conceivable market participant and find libraries of information about companies—all at little cost, with little effort, and from the comfort of their own living rooms. Unfortunately, a small minority of Internet users are attempting to ruin it for the rest, using this extraordinary and exciting futuristic medium to commit securities fraud and steal from investors. This Article (i) provides an introduction to the Internet and its many uses for investors; (ii) analyzes the Internet as it relates to the federal securities laws; and (iii) discusses the SEC Division of Enforcement's Internet program to combat the use of the Internet to commit securities fraud. The Internet program, implemented during the past year, needs no new laws, rules, or regulations and has emerged as one of the most successful programs to date amongst federal, state, and local law enforcement agencies.
The Meaning of Item Four of Schedule 13D of the Securities Exchange Act of 1934: A New Framework and Analysis
Albert J. Li, 52(3): 851–84 (May 1997)
Five-percent beneficial ownership in registered equity securities subjects persons who acquire stock in a company to the troublesome disclosures required under Item Four of Schedule 13D of the Exchange Act. This item, which requires divulging the "Purposes of [the] Transactions," is generally considered the most important disclosure item in the schedule, especially when corporate control is at issue. The SEC and courts have struggled with what information the item requires because the motives of stockholders, corporate management, and bidders toward information disclosure are at odds. As a result, the Item Four disclosure often wavers between "over" and "under" disclosure, questioning the accuracy and veracity of its informative value. This Article synthesizes and elaborates on much of the current law used to approach this issue, proposes a new framework to use when approaching this issue which helps to define the disclosure process, and provides a detailed view of its application.
The Line Item Veto and Unocal: Can a Bidder Qua Bidder Pursue Unocal Claims Against a Target Corporation's Board of Directors?
J. Travis Laster, 53(3): 767–97 (May 1998)
Although the issue of a potential acquiror's standing to raise a breach of fiduciary duty claim under Unocal Corp. v. Mesa Petroleum Co. , 493 A.2d 946 (Del. 1985), and its progeny is frequently litigated, the fundamental question remains unresolved. Existing Delaware decisions rely on a problematic analytical framework and reach conflicting results. This Article attempts to answer the question by considering the nature and role of standing doctrine, reviewing the conflicting precedents, and discussing the conceptual problems with the competing results. The Article concludes by setting out the pragmatic solution that recent Delaware decisions have crafted sub silentio to permit potential acquirors to raise breach of fiduciary duty claims under certain circumstances.
Breaking Up Is Hard to Do: Avoiding the Solvency-Related Pitfalls in Spinoff Transactions
Richard M. Cieri, Lyle G. Ganske, and Heather Lennox, 54(2): 533–605 (Feb. 1999)
This Article examines several of the legal traps that may accompany a typical spinoff transaction. Specifically, it discusses the issues surrounding officers' and directors' fiduciary duties and the spinning corporation's solvency, the possibility for a veil-piercing analysis, and the potential unwinding of the transaction as a fraudulent conveyance or illegal dividend. Throughout, the Article offers practical suggestions for the practitioner advising a client in a spinoff situation.
The Merger Wave: Trends in Merger Enforcement and Litigation
Richard G. Parker and David A. Balto, 55(1): 351–404 (Nov. 1999)
The merger wave is one of the most significant developments in the U.S. economy. Practically every day there is an announcement of some substantial merger that may transform an entire industry. In this Article, two government antitrust enforcers explain why the merger wave is occurring and how regulatory agencies are responding to the increase in merger activity with a sensible and careful program of enforcement. In particular, this Article describes several trends in merger litigation and enforcement that respond to the merger wave.
REIT M&A Transactions—Peculiarities and Complications
David M. Einhorn, Adam O. Emmerich, and Robin Panovka, 55(2): 693–734 (Feb. 2000)
The emergence of REITs and the continuing consolidation in the real estate markets have resulted in an ongoing stream of mergers and acquisitions involving publicly traded REITs. Although M&A transactions involving public REITs have much in common with M&A transactions involving other public companies, the special tax rules applicable to REITs and other peculiarities tend to complicate REIT transactions, often in unexpected ways. Business and strategic objectives typical of other industries often face friction in the REIT world in both friendly and unsolicited transactions. This Article examines some of the peculiarities and complications that are unique to REIT transactions, with special focus on the effectiveness of REIT charters' ownership restrictions as takeover defenses (including a comparison with poison pills), special conflict of interest issues that arise in change of control transactions involving certain REITs, and various REIT tax qualification rules which raise potentially complex issues for prospective acquirers of REIT shares.
A Process-Based Model for Analyzing Deal Protection Measures
Gregory V. Varallo and Srinivas M. Raju, 55(4): 1609–47 (Aug. 2000)
Recent case law has led to debate regarding the appropriate standard of review for so-called deal protection measures (i.e., "no shop" clauses, stock options, termination fees and related provisions). In the authors' view, the debate is neither necessary nor productive. Because courts consistently have focused their analysis upon the process designed and executed by the board and its advisors in connection with negotiating and eventually agreeing to deal protection measures, this should also be the principal focus of lawyers called upon to advise directors concerning the discharge of their fiduciary duties in this regard. This Article contends that a process-centric model for reviewing deal protection measures not only explains the existing caselaw but should also be of great utility to corporate practitioners in advising directors in merger and acquisition transactions.
A Byproduct of the Globalization Process: The Rise of Cross-Border Bank Mergers and Acquisitions—The U.S. Regulatory Framework
Joseph J. Norton and Christopher D. Olive, 56(2): 591 (Feb. 2001)
This Article examines the U.S. regulatory framework as it pertains to foreign bank acquisitions of U.S. banking interests, particularly from the "regulatory approval" perspective. Over the past two decades, the United States has endeavored to establish a domestic "level playing field" for the U.S.-based operations of U.S. and foreign banking institutions through the legal and practical imposition of a "national treatment" approach. The U.S. banking authorities have also used an international standards-based "gateway" for foreign banking institutions to initially enter the United States. In order to provide some practical insights and reference points, this Article endeavors to address these issues in the context of two recently completed foreign bank M&A transactions in the United States. This Article then considers the issue of access to "nonbank," but financially related, activities for banking institutions in the United States as a result of, and motivating factor behind, foreign bank M&As of U.S. banking institutions and other U.S. financial institutions. In this context, the possible relevant implications of the most recent U.S. bank reform legislation is considered. The Article concludes with selective observations.
Categorical Confusion: Deal Protection Measures in Stock-For-Stock Merger Agreements
Vice Chancellor Leo E. Strine, Jr. , 56(3): 919 (May 2001)
In this Article, Vice Chancellor Leo E. Strine, Jr. explores several practical and doctrinal issues bearing on the standard of judicial review applied to the deal protection measures commonly contained in stock-for-stock merger agreements. In particular, the Article asks searching questions about whether the world of mergers and acquisitions can be divided neatly into two categories: (i) change of control transactions subject to searching judicial review under the Revlon doctrine; and (ii) stock-for-stock mergers subject only to deferential business judgment rule review, even as to deal protection measures. Instead of this binary approach that treats economically similar transactions in markedly different ways, the Article suggests that the case law may articulate a more nuanced and coherent approach that permits a closer, but still deferential, judicial examination of all objectively defensive measures—including deal protection measures—under the Unocal standard. The Article closes with the suggestion that a judicial focus on whether target stockholders have a free and uncoerced opportunity to turn down the stock-for-stock merger at the ballot box reconciles many of the arguably divergent policy values articulated by key mergers and acquisitions decisions of the last decade, such as Time-Warner, QVC, and Quickturn.
Hart-Scott-Rodino Merger Investigations: A Guide for Safeguarding Business Secrets
Robert S. Schlossberg and Harry T. Robins, 56(3): 943 (May 2001)
To keep the world's markets competitive during the present worldwide merger wave, antitrust enforcers in the United States and abroad will continue to scrutinize closely transactions that appear to affect the competitive status quo. As regulatory review increases worldwide, so do the risks to the individual firm that an investigating agency may disclose the business secrets it discovers in the course of its investigation. In this atmosphere, the business lawyer must be vigilant in safeguarding a client's business secrets. This Article focuses on confidentiality issues in merger investigations brought under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act). Specifically, this Article: (i) outlines the various statutes, agency rules, and agency practices that safeguard the sensitive information that agencies examine during the HSR Act investigation; (ii) discusses the circumstances and laws under which the agencies share information with state and foreign governments; and (iii) addresses important issues that counsel should consider in seeking to prevent unwanted disclosures during an HSR Act investigation.
Minority Discounts and Control Premiums in Appraisal Proceedings
Richard A. Booth, 57(1): 127 (Nov. 2001)
In a merger, a stockholder often has a statutory right of dissent and appraisal under which the stockholder may demand to be paid fair value exclusive of any gain or loss that may arise from the merger itself. Most courts and commentators agree that a dissenting stockholder should ordinarily receive a pro rata share of the fair value of the corporation without any discount simply because minority shares lack control. In several recent cases, the courts have indicated that a minority stockholder is thus entitled to a share of the control value of the corporation even though the merger does not constitute a sale of control (as in a going private transaction) and even though control of the subject corporation is not contestable (as where a single stockholder owns an outright majority of shares). In a similar vein, several courts have ruled that reliance on market prices for purposes of appraisal results in an inherent minority discount, thus requiring that a premium for control be added. In short, the emerging rule appears to be that fair value is the price at which a controlling stockholder could sell control, because failure to do so amounts to imposition of a minority discount. It is the thesis here that the routine addition of a control premium is inconsistent with settled corporation law and good policy, because (among other reasons) it is based on the unwarranted assumption that the source of a control premium must be a minority discount. To be sure, the courts should adjust for a minority discount if one is found. But the routine addition of a control premium as part of fair value creates a windfall for dissenting stockholders and infringes the legitimate rights of majority stockholders.
The Effect of Corporate Acquisitions on the Target Company's License Rights
Elaine D. Ziff, 57(2): 767 (Feb. 2002)
Mergers and acquisitions are increasingly driven by the desire to obtain the target company's intellectual property rights-namely, patents, copyrights, and trademarks. Where, however, such rights are merely licensed to the target company, the acquirer must consider whether such rights will survive the transaction intact. The transferability of intellectual property license rights is not is not governed solely by general contract principles, due to federal policies that support authors and inventors. This Article examines the specialized body of precedent dealing with the assignability of intellectual property license rights under a variety of acquisition structures, including asset sales, mergers, and stock purchases. Understanding the factors that have influenced courts in this area will assist practitioners in assessing the risk of whether the target company's license rights will be adversely affected by the consummation of the transaction.
Acquiring a Business in France: A Buyer's Guide
Laura Snyder, 57(2): 793 (Feb. 2002)
France is an important place for international investors. An investor contemplating the acquisition of a company or of assets located in France should understand the legal environment in which businesses in France operate. This Article provides an introduction to selected areas of French law which are of particular relevance. More specifically, this Article: (i) examines the choices a buyer has in structuring an acquisition, (ii) analyzes the pre- and post-acquisition authorizations and declarations that may be required, (iii) exposes the myriad of labor issues raised, directly and indirectly, by the acquisition, (iv) summarizes the manner in which industrial facilities are regulated under French environmental law, (v) addresses recent changes in French law as regards foreign corrupt practices and the implications of these changes for the American parent of a French subsidiary, and (vi) describes the various forms of companies that exist under French law and their most pertinent features.
Mergers and Acquisitions: Antitrust Limitations on Conduct Before Closing
M. Howard Morse, 57(4): 1463–86 (Aug. 2002)
U.S. antitrust authorities have brought a number of enforcement actions in recent years challenging conduct of firms proposing mergers, acquisitions, and joint ventures. These cases have attacked covenants restricting activities pending closing of proposed transactions as well as initial efforts to integrate operations and even exchanges of information among parties proposing to merge. The government is proceeding on theories that such conduct is illegal "gun-jumping" or "price-fixing," and is unlawful under the Hart-Scott-Rodino Act, the Sherman Act, or the Federal Trade Commission Act. This Article outlines the legal framework for analyzing pre-closing conduct by parties proposing transaction, describes the conduct that has gotten firms in trouble in the recent enforcement actions, and provides practical guidelines as to what is lawful and unlawful in this confusing area of the law.
Proposed Model Inter-Entity Transactions Act
The Ad Hoc Committee on Entity Rationalization, 57(4): 1569–1663 (Aug. 2002)
This proposed model state statute authorizes mergers, interest exchanges, and conversions involving different forms of entities. For example, a limited liability company and a limited partnership could use the act to merge into a corporation, or a limited partnership could use the act to convert into a limited liability company. The act includes detailed suggested changes to other model and uniform entity laws as a guide for states when integrating the act with their existing entity laws.
Delaware's Going Private Dilemma: Fostering Protections for Minority Shareholders in the Wake of Siliconixand Unocal Exploration
Bradley R. Aronstam, R. Franklin Balotti, and Timo G. Rehbock , 58(2): 519 (Feb. 2003)
This Article responds to two recent Delaware cases, In re Siliconix Inc. Shareholders Litigation and Glassman v. Unocal Exploration Corp., which confront the issue of the appropriate standard of review when a majority shareholder purchases the minority shares in a subsidiary. The Article examines the foundations upon which the two decisions rest and questions their validity. It then suggests alternative fairness mechanisms in the context of going-private transactions and invites the Delaware Judiciary to apply a "limited fairness" test to short-from merger transactions that requires majority shareholders to demonstrate how the price was arrived at and whether the transaction was timed or structured in a fashion designed to take undue advantage of the minority. Alternatively, the Article proposes that the Delaware General Assembly amend the appraisal statute so as to compel parent corporations to pay all minority shareholders (including those who failed to exercise their appraisal right) the court's appraised share value should that value exceed that which the corporation offered to pay.
Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions
Subcommittee on Recent Judicial Developments, Negotiated Acquisitions Committee , 58(4): 1521–40 (Aug. 2003)
This Survey summarizes significant judicial decisions during 2002 and early 2003 in the area of mergers and acquisitions ("M&A"). The summarized cases are important cases of interest to a wide range of M&A practitioners. Topics addressed in the summarized cases include: interpretation of agreements (reformation of a merger agreement based upon mistake; the meaning of "reasonable best efforts;" enforcement of a merger agreement by third-party beneficiaries; interpretation of preferred stock voting rights provisions; and enforcement of deed restrictions against subsequent acquirors); successor liability (employee benefit plan liability); and fiduciary duties (relative fairness of transaction to holders of separate classes of stock; application of entire fairness standard to tender offer by controlling shareholder; effect of waiver of fiduciary duties in operating agreement on fairness analysis; and extent of director "interest" required to constitute conflict of interest).
Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions
Subcommittee on Recent Judicial Developments, Negotiated Acquisitions Committee, ABA Section of Business Law , 59(4): 1521–51 (Aug. 2004)
The annual survey, written from the perspective of the practicing M&A lawyer, summarizes cases believed to be of greatest interest to a wide range of M&A practitioners, no including those exclusively dealing with federal law, securities law, tax law, and antitrust law. To be included in the survey, cases must meet two criteria regarding the type of transaction involved and the substantive holding of the court. First, the decision must involve a merger, an equity sale of a controlling interest, a sale of all or substantially all assets, a sale of a subsidiary or division, or a recapitalization resulting in a change of control. Second, the decision must (i) interpret or apply the provisions of an acquisition agreement or an agreement preliminary to an acquisition agreement; (ii) interpret or apply a state statute that governs one of the constituent entities; (iii) pertain to a successor liability issue; or (iv) decide a breach of fiduciary duty claim.
Twenty—Five Years After Takeover Bids in the Target's Boardroom: Old Battles, New Attacks and the Continuing War
Martin Lipton, 60(4): 1369—1382 (August 2005)
Twenty—five years after the publication of Takeover Bids in the Target's Boardroom, Martin Lipton reflects on the development of, and current discourse regarding, the key principles presented in Takeover Bids --a rejection of board passivity and the endorsement of the board as gatekeeper. These theories were affirmed by both common law and legislative guidance in the years following the publication of Takeover Bids. Mr. Lipton identifies the next wave of challenges to these core principles, as evident in the recent multi—level and multi—jurisdictional attack on the ability of the board and management to manage effectively the corporation. He discusses how proposals from special—interest shareholders and proxy advisory firms, as well as new state common law theories of director liability, pose significant threats to the fundamental principles that underlie the business judgment rule and that fuel entrepreneurialism through the corporate structure.
When the Existing Economic Order Deserves a Champion: The Enduring Relevance of Martin Lipton's Vision of the Corporate Law
William T. Allen and Leo E. Strine, Jr., 60(4): 1383—1398 (August 2005)
Deepest understanding comes when we see in the particular events before us the working out of the most general forces. In this essay, the authors seek to view Martin Lipton's important contribution to the development of corporation law of his era in terms of the largest economic and ideological forces at play over the last twenty—five years. They conclude by looking forward and see in the development of powerful institutional investors a new set of problems for those interested in the responsible control of private economic power.
UNOCAL Revisited: Lipton's Influence on Bedrock Takeover Jurisprudence
R. Franklin Balotti, Gregory V. Varallo, and Brock E. Czeschin, 60(4): 1399—1418 (August 2005)
When Martin Lipton published Takeover Bids in the Target's Boardroom twenty—five years ago almost none of the now familiar takeover jurisprudence had been decided. Delaware, as well as other state and federal courts, were struggling to articulate a standard of review which balanced concerns about a board's independence when faced with a takeover with the more traditional deference to directors' decision—making authority. Mr. Lipton argued that a target's board--as opposed to its shareholders--should have primacy in responding to a takeover bid. Five years later, in Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court announced the legal standard that would govern target directors of Delaware corporations in the takeover context. With Unocal, Delaware takeover law gained a series of principles which in many respects form the bedrock of modern takeover jurisprudence. This article investigates how Lipton's articleÂ influenced the Delaware Supreme Court's approach to takeover law in the Unocal decision.
Takeovers in the Boardroom: Burke versus Schumpeter
Ronald J. Gilson and Reinier Kraakman, 60(4): 1419—1434 (August 2005)
This article, written on the occasion of the 25th anniversary of Martin Lipton's 1979 article, Takeover Bids in the Target's Boardroom expresses the view that Takeover Bids is a Burkean take on a messy Schumpeterian world that, during 1980s, reached its apex in Drexel Burnham's democratization of finance through the junk bond market. The authors of this article reflect on the irony that today, long after the Delaware Supreme Court has adopted many of Lipton's views, there is a new market for corporate control that no longer poses the threats--or supports the opportunities--that the market of the 1980s created. Today's strategic bidders and their targets share the same boardroom views. And for precisely this reason, "just say no" is no longer the battle cry that it once was. It stirred the crowds in the past precisely because hostile takeovers could be credibly depicted as a sweeping threat to the status quo--a claim that no one would make about today's strategic bidders. The market for corporate control now is a process of peer review, rather than an instrument of systemic change. What is lost as a result is just what, in the conservative view, has been gained: the capacity of the market for corporate control to ignite the dynamism that in our view has served the U.S. economy so well. Although Lipton may still lose today's battle to allow targets to just say no to intra—establishment takeovers, he will still have won the larger war. The authors of this article conclude that for now, at least, boardrooms are insulated from much of the force of a truly Schumpeterian market in corporate control of the sort we briefly glimpsed during the 1980s.
Takeovers in the Ivory Tower: How Academics Are Learning Martin Lipton May Be Right
Lynn A. Stout, 60(4): 1435—1454 (August 2005)
In 1979, Martin Lipton published an essay arguing that corporate law gives directors and not shareholders the authority to decide whether a company should sell itself at a premium, and that this is a good thing for both shareholders and society. After years of vocal disagreement many academics are starting to suspect Martin Lipton is right. Much of the academic hostility that initially greeted Lipton's claim was based on two important ideas in finance economics: efficient market theory and the "principal—agent" model of the public corporation. Scholars have begun to examine each of these ideas more closely, and neither is holding up especially well. This article questions whether maximizing share price is always in the best interest of society, the firm, or shareholders themselves.
M&A Today--Practical Thoughts for Directors and Deal—makers
Peter Allan Atkins, 60(4): 1455—1468 (August 2005)
The publication of Marty Lipton's Takeover Bids in the Target's Boardroom 25 years ago reflected the need for guidance to directors and other key participants in the M&A world. An important perspective on that guidance involves considering where we are today in the M&A arena. This article addresses that inquiry from a practitioner's viewpoint. It offers directors and deal—makers practical, common—sensical and experience—tested advice on how director decisions and deal—making efforts can comport with the substantial responsibilities and goals of these key participants in today's M&A world. The author underscores that the rules of engagement in the M&A arena for directors and deal—makers today are quite often, and importantly, about basics, common sense and sound process--and that there is a clear and continuing need to develop a plain—English understanding of these rules.
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.
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
Form or Substance? The Past, Present, and Future of the Doctrine of Independent Legal Significance
C. Stephen Bigler and Blake Rohrbacher, 63(1): 1–24 (November 2007)
The "bedrock" doctrine of independent legal significance provides that, if a transaction is effected in compliance with the requirements of one section of the Delaware General Corporation Law ("DGCL"), Delaware courts will not invalidate the transaction for failing to comply with the requirements of a different section of the DGCL—even if the substance of the transaction is such that it could have been structured under the other section. Two recent decisions of the Delaware courts have caused commentators to question the doctrine's status, but this Article looks to the foundation of the doctrine and the Delaware courts' use of equitable review (and substance–over–form doctrines) to clarify when the doctrine of independent legal significance does and does not apply and when it may be relied on with confidence by corporate practitioners in the future. The doctrine as applied by the courts is narrower than sometimes assumed by corporate practitioners, and the Delaware courts may reserve the equitable power to look through a transaction's form to its substance even if the doctrine does apply.
The Missing Link in Sarbanes–Oxley: Enactment of the "Change of Control Board" Concept, or Extension of the Audit Committee Provisions to Mergers and Acquisitions
Samuel C. Thompson, Jr., 63(1): 81–124 (November 2007)
To address (1) the conflicts of interest that can arise in the acquisition of publicly held target corporations in various types of hostile and consensual merger and acquisition ("M&A") transactions, and (2) the risk of overpayment in major acquisitions by publicly held acquirors, Congress should require the appointment by the U.S. Securities and Exchange Commission ("SEC") of a disinterested Change of Control Board for such targets and acquirors. This Board would have complete authority over the acquisition process, and a federal uniform standard of review, the business judgment rule, would apply in determining if the board acted properly, thereby significantly reducing litigation in M&A transactions. Many features of the Change of Control Board proposal are similar to those provided for audit committees in the Sarbanes–Oxley Act of 2002; thus, this proposal is a logical extension of those audit committee provisions. In the event Congress does not enact the Change of Control Board proposal, many of the concepts underlying the proposal should be implemented by the SEC through its rulemaking authority under the audit committee provisions.
Reassessing the "Consequences" of Consequential Damage Waivers in Acquisition Agreements
Glenn D. West and Sara G. Duran, 63(3): 777–808 (May 2008)
Consequential damage waivers are a frequent part of merger and acquisition agreements involving private company targets. Although these waivers are heavily negotiated, the authors believe that few deal professionals understand the concept of consequential damages and, as a result, the inclusion of such waivers may have an unexpected impact on both buyers and sellers. The authors believe that this Article is the first attempt to define "consequential damages," as well as some of the other terms used as purported synonyms, in the merger and acquisition context. After tracing the historical derivation of the term and its current use by the courts, this Article considers the impact of such waivers in a hypothetical business acquisition and proposes some specific guidelines for the negotiation of these waivers.
Consumer Arbitration: If the FAA "Ain't Broke," Don't Fix It
Alan S. Kaplinsky and Mark J. Levin, 63(3): 907–920 (May 2008)
During 2007, Congress showed significant interest in mandatory pre–dispute consumer arbitration agreements. Some in Congress focused on whether to prohibit them altogether. This Article argues that such legislation is unnecessary because the current system of consumer arbitration works well and needs no fix. The authors review case law and empirical studies showing that the current system of checks and balances in the area of consumer arbitration law is sufficiently protective of consumers' rights. These protections emanate from: (1) the Federal Arbitration Act ("FAA") itself, (2) the careful drafting of arbitration agreements, (3) the use of third–party arbitration administrators, and (4) the rigorous enforcement of the FAA by state and federal courts.
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.
Contracting to Avoid Extra-Contractual Liability—Can Your Contractual Deal Ever Really Be the "Entire" Deal?
Glenn D. West and W. Benton Lewis, Jr., 64(4): 999–1038 (August 2009)
Although business lawyers frequently incorporate well-defined liability limitations in the written agreements that they negotiate and draft on behalf of their corporate clients, contracting parties that are dissatisfied with the deal embodied in that written agreement often attempt to circumvent those limitations by premising tort-based fraud and negligent misrepresentation claims on the alleged inaccuracy of both purported pre-contractual representations and express, contractual warranties. The mere threat of a fraud or negligent misrepresentation claim can be used as a bargaining chip by a counterparty attempting to avoid the contractual deal that it made. Indeed, fraud and negligent misrepresentation claims have proven to be tough to define, easy to allege, hard to dismiss on a pre-discovery motion, difficult to disprove without expensive and lengthy litigation, and highly susceptible to the erroneous conclusions of judges and juries. This Article traces the historical relationship between contract law and tort law in the context of commercial transactions, outlines the sources, risks, and consequences of extra-contractual liability for transacting parties today, and surveys the approaches that various jurisdictions have adopted regarding the ability of contracting parties to limit their exposure to liability for common law fraud and misrepresentation. In light of the foregoing, the authors propose a series of defensive strategies that business lawyers can employ to try to limit their clients' exposure to tort liability arising from contractual obligations.
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.
Attacking the Classified Board of Directors: Shaky Foundations for Shareholder Zeal
Michael E. Murphy, 65(2): 441–486 (February 2010)
The practice of dividing the corporate board into classes, with each class up for election in successive years, has venerable roots in corporate practice. However, it has recently come under concerted attack by institutional shareholders that fear its misuse as a takeover defense. Examining the issue from several perspectives, this Article argues that the possible misuse of the classified board as a takeover defense justifies no more than case-by-case consideration. A separate concern is that the classified board may constitute a barrier to a minority shareholder voice. While this concern has some merit, this Article argues that the classified board is a redundant barrier to a minority shareholder voice that has importance only if preceded by other reforms to enfranchise minority shareholders.
Is Delaware's Antitakeover Statute Unconstitutional? Evidence from 1988–2008
Guhan Subramanian, Steven Herscovici, and Brian Barbetta, 65(3): 685–752 (May 2010)
Delaware's antitakeover statute, codified in Section 203 of the Delaware corporate code, is by far the most important antitakeover statute in the United States. When it was enacted in 1988, three bidders challenged its constitutionality under the Commerce Clause and the Supremacy Clause of the U.S. Constitution. All three federal district court decisions upheld the constitutionality of Section 203 at the time, relying on evidence indicating that Section 203 gave bidders a "meaningful opportunity for success," but leaving open the possibility that future evidence might change this constitutional conclusion. This Article presents the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success. The question has become more important in recent years because Section 203's substantive bite has increased, as Exelon's recent hostile bid for NRG illustrates. Using a new sample of all hostile takeover bids against Delaware targets that were announced between 1988 and 2008 and were subject to Section 203 (n=60), we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer. At the very least, this finding indicates that the empirical proposition that the federal courts relied upon to uphold Section 203's constitutionality is no longer valid. While it remains possible that courts would nevertheless uphold Section 203's constitutionality on different grounds, the evidence would seem to suggest that the constitutionality of Section 203 is up for grabs. This Article offers specific changes to the Delaware statute that would preempt the constitutional challenge. If instead Section 203 were to fall on constitutional grounds, as Delaware's prior antitakeover statute did in 1987, it would also have implications for similar antitakeover statutes in thirty-two other U.S. states, which along with Delaware collectively cover 92% of all U.S. corporations
A Timely Look at DGCL Section 203
Eileen T. Nugent, 65(3): 753–760 (May 2010)
A Trip Down Memory Lane: Reflections on Section 203 and Subramanian, Herscovici, and Barbetta
Gregg A. Jarrell, 65(3): 779–788 (May 2010)
Reinterpreting Section 141(e) of Delaware's General Corporation Law: Why Interested Directors Should Be "Fully Protected" in Relying on Expert Advice
Thomas A. Uebler, 65(4): 1023–1054 (August 2010)
Directors of Delaware corporations often rely on lawyers, economists, investment bankers, professors, and many other experts in order to exercise their managerial power consistently with their fiduciary duties. Such reliance is encouraged by section 141(e) of the General Corporation Law of the State of Delaware, which states in part that directors "shall . . . be fully protected" in reasonably relying in good faith on expert advice. Section 141(e) should provide all directors of Delaware corporations a defense to liability if, in their capacity as directors, they reasonably relied in good faith on expert advice but nevertheless produced a transaction that is found to be unfair to the corporation or its stockholders, as long as the unfair aspect of the transaction arose from the expert advice. The Delaware Court of Chancery, however, has limited the full protection of section 141(e) by confining it to disinterested directors in duty of care cases. That limitation, which is not expressed in the statute, unfairly punishes interested directors who act with an honesty of purpose and reasonably rely in good faith on expert advice because it requires them to serve as guarantors of potentially flawed expert advice. This Article concludes that Delaware courts should reconsider the application and effect of section 141(e) and allow directors, regardless of their interest in a challenged transaction, to assert section 141(e) as a defense to liability in duty of care and duty of loyalty cases if they reasonably relied in good faith on expert advice.
The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions
Corporation Law Committee of the Association of the Bar of the City of New York, 65(4): 1153–1204 (August 2010)
One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?
Leo E. Strine, Jr., 66(1): 1–26 (November 2010)
This essay poses the question of how corporations can be managed to promote long–term growth if their stockholders do not act and think with the long term in mind. To that end, the essay highlights the underlying facts regarding how short a time most stockholders, including institutional investors, hold their shares, the tension between the institutional investors' incentive to think short term and the best interests of not only the corporations in which these investors buy stock, but also with the best interests of the institutional investors' own clients, who are saving to pay for college for their kids and for their own retirement. Although the primary purpose of the essay is to highlight this fundamental and too long ignored tension in current corporate governance, the essay also identifies some modest moves to better align the incentives of institutional investors with those of the people whose money they manage, in an effort to better focus all those with power within the corporation—i.e., the directors, the managers, and the stockholders—on the creation of durable, long–term wealth through the sale of useful products and services.
Law of Private Placements (Non–Public Offerings) Not Entitled to Benefits of Safe Harbors—A Report
Committee on Federal Regulation of Securities, ABA Section of Business Law, 66(1): 85–124 (November 2010)
Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions
M&A Jurisprudence Subcommittee, Mergers and Acquisitions Committee, ABA Section of Business Law, 67(2): 491 - 536 (February 2012)
Trademark Licensing in the Shadow of Bankruptcy
James M. Wilton and Andrew G. Devore, 68(3): 739-780 (July 2013)
When a business licenses a trademark, transactional lawyers regularly advise that if the trademark licensor files for bankruptcy, the licensee could be left without a right to use the mark and with only a bankruptcy claim for money damages against the licensor. Indeed, the ability of a trademark licensor to reject a trademark license and to limit a licensee’s remedies to a dischargeable claim for money damages has been a significant risk for licensees for twenty-five years based on the Fourth Circuit case, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. This result is grounded in the Bankruptcy Code prohibition on remedies of specific performance for non-debtor parties to rejected contracts and is in accord with Bankruptcy Code policy of affording debtors an opportunity to reorganize free of burdensome contracts. In the summer of 2012, however, the Seventh Circuit, in its decision Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, held that a non-debtor trademark licensee retains rights to use licensed trademarks following rejection of the contract by the debtor-licensor. The decision, derived from a pre-Bankruptcy Code paradigm for understanding the rights of non-debtors under rejected executory contracts that convey interests in property, creates a circuit split over the implications of trademark license rejection. This article asserts that the Sunbeam Products case misconstrues the rights of a trademark licensee as a vested property right and is therefore incorrect under both the holding of the Lubrizol case and the pre-Bankruptcy Code paradigm on which the Sunbeam Products case relies.
Putting Stockholders First, Not the First-Filed Complaint
Leo E. Strine, Jr., Lawrence A. Hamermesh, and Matthew C. Jennejohn, 69(1): 1-78 (November 2013)
The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction and the historical development of doctrines limiting parallel state court litigation—the doctrine of forum non conveniens and the “first-filed” doctrine—this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.
Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions
S. Michael Sirkin; 69(2): 429-474 (February 2014)
This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders xi of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.
That Pesky Little Thing Called Fraud: An Examination of Buyers’ Insistence Upon (and Sellers’ Too Ready Acceptance of ) Undefined “Fraud Carve-Outs” in Acquisition Agreements
Glenn D. West, 69(4): 1049-1080 (August 2014)
In those states that have a high regard for the sanctity of contract, a wellcrafted waiver of reliance provision can effectively eliminate the specter of a buyer’s post-closing fraud claim based upon alleged extra-contractual representations of the seller or its agents. But undefined “fraud carveouts” continue to find their way into acquisition agreements notwithstanding these otherwise well-crafted waiver of reliance provisions. An undefined fraud carve-out threatens to undermine not only the waiver of reliance provision, but also the contractual cap on indemnification that was otherwise stated to be the exclusive remedy for the representations and warranties that were set forth in the contract. Practitioners continue to exhibit a limited appreciation of the many meanings of the term “fraud” and the extent to which a generalized fraud carve-out can potentially expand the universe of claims and remedies that can be brought outside the remedies specifically bargained-for under the parties’ written agreement. Given the frequent insistence upon (and continued acceptance by many of) undefined fraud carve-outs, and recent court decisions that bring the undefined fraud carve-out issue into focus, this article will examine the various (and sometimes surprising) meanings of the term “fraud”, and the resulting danger of generalized fraud carveouts, and will propose some possible responses to the buyer who insists upon including the potentially problematic phrase “except in the case of fraud” as an exception to the exclusive remedy provision of an acquisition agreement.
The Evolving Role of Special Committees in M&A Transactions: Seeking Business Judgment Rule Protection in the Context of Controlling Shareholder Transactions and Other Corporate Transactions Involving Conflicts of Interest
Scott V. Simpson and Katherine Brody, 69(4): 1117-1146 (August 2014)
Special committees of independent, disinterested directors have been widely used by corporate boards to address conflicts of interests and reinforce directors’ satisfaction of their fiduciary duties in corporate transactions since the wave of increased M&A activity in the 1980’s. In 1988, The Business Lawyer published an article titled The Emerging Role of the Special Committee by one of this article’s co-authors, examining the emerging use of special committees of independent directors in transactions involving conflicts of interest. At that time, the Delaware courts had already begun to embrace the emergent and innovative mechanism for addressing corporate conflicts. Now, after over thirty years of scrutiny by the Delaware courts, it is clear that the special committee is a judicially recognized (and encouraged) way to address director conflicts of interest and mitigate litigation risk. This article will examine the role of the special committee in the context of conflict of interest transactions, with a particular focus on transactions involving a change of control or a controlling stockholder, from a U.S. perspective (in particular, under the laws of the State of Delaware), and will briefly consider international applications of the concepts discussed. To this end, this article will examine recent case law developments and compare the special committee processes at the heart of two high-profile Delaware decisions, and, finally, provide guidance to corporate practitioners on the successful implementation of a special committee process.
Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
70(2): 319-320 (Spring 2015)
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.
An Overview of the General Counsel’s Decision Making on Dispute-Resolution Strategies in Complex Business Transactions
E. Norman Veasey and Grover C. Brown; 70(2): 407-436 (Spring 2015)
This Article is an overview of the hard choices that face a general counsel (GC) when weighing the pros and cons of whether and when a particular complex business dispute is better suited for litigation in the public courtroom or through a carefully constructed alternate dispute-resolution (ADR) process, including mediation and/or arbitration. Is either choice inherently more expensive, time consuming, or problematic than the other? The obvious answer is that each of these decisions is fact-intensive, dependent on myriad factors, and neither choice is “inherently” better or worse than the other.
We have focused exclusively on complex commercial disputes between businesses and we analyze the issues that would likely be considered by the GC and other corporate decision makers in choosing and navigating the route that provides the best opportunity for optimal results in resolving a domestic or international business dispute. These dispute resolution choices often must be faced in the negotiation of the terms of a business transaction, and thus before there is a dispute.
We explore the pros and cons of how the panoply of dispute-resolution mechanisms may play out down the road. In doing so, we are mindful of the complicated job of the GC in foreseeing at the negotiation stage how the optimal dispute-resolution process should be analyzed and drafted.
We have learned through our experience, current discussions with GCs, and the abundant literature on the subject that there are divergent views about the efficacy of domestic arbitration, in particular. We believe that the bad anecdotal experiences of some general counsel with arbitration should not pre-ordain a generally negative bias. Nor should good experiences dictate a generally positive bias. Like many questions, the common-sense answer is that “it depends.”
Documenting the Deal: How Quality Control and Candor Can Improve Boardroom Decision-making and Reduce the Litigation Target Zone
Leo E. Strine, Jr.; 70(3): 679-706 (Summer 2015)
This Article addresses what legal and financial advisors can do to conduct an M&A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for plaintiffs’ lawyers.
Proceedings of the 2014 Delaware Business Law Forum: Director- Centric Governance in the Golden Age of Shareholder Activism
Diane Holt Frankle, Holly J. Gregory, Gregory V. Varallo, and Christopher H. Lyons; 70(3): 707-718 (Summer 2015)
In October 2014, leading corporate governance practitioners from around the United States convened at the biennial Delaware Business Law Forum, along with current and former jurists of the Delaware Supreme Court and Court of Chancery, to discuss and debate developing topics in corporate governance. Participants also included representatives of “activist” investors, institutional investors, public company directors and those who advise them, academics, and others. The participants considered and debated the extent to which corporate governance remains “board-centric,” the extent to which the rise of shareholder activism is changing that paradigm, and what implications such changes may have for the future. This Article reports on the key questions discussed at the Forum and attempts to summarize the discussion and consensus (if any) reached with respect to these questions.
Consequential Damages Redux: An Updated Study of the Ubiquitous and Problematic “Excluded Losses” Provision in Private Company Acquisition Agreements
Glenn D. West; 70(4): 971-1006 (Fall 2015)
An “excluded losses” provision is standard fare as an exception to the scope of indemnification otherwise available for the seller’s breach of representations and warranties in private company acquisition agreements. Sellers’ counsel defend these provisions on the basis of their being “market” and necessary to protect sellers from unreasonable and extraordinary post-closing indemnification claims by buyers. Buyers’ counsel accept such provisions either without much thought or on the basis that the deal dynamics are such that they have little choice but to accept these provisions, notwithstanding serious questions about whether such provisions effectively eviscerate the very benefits of the indemnification (with the negotiated caps and deductibles) otherwise bargained for by buyers. For buyers’ counsel who have given little thought to (or who need better responses to the insistent sellers’ counsel regarding) the potential impact of the exclusion from indemnifiable losses of “consequential” or “special” damages, “diminution in value,” “incidental” damages, “multiples of earnings,” “lost profits,” and the like, this article is intended to update and supplement (from a practitioner’s perspective) the legal scholarship on these various types of damages in the specific context of the indemnification provisions of private company acquisition agreements.
Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations
Eric S. Klinger-Wilensky and Nathan P. Emeritz, 71(1): 53-86 (Winter 2015/2016)
The liability of RBC in last year’s In re Rural/Metro decision was derivative of several breaches of fiduciary duty by the Rural/Metro directors, including those directors’ failing “to provide active and direct oversight of RBC.” In discussing that failure, the Court of Chancery stated that a “part of providing active and direct oversight is acting reasonably to learn about actual and potential conflicts faced by directors, management and their advisors.” In the year since Rural/Metro, there has been an ongoing discussion—in scholarly and trade journals, courtrooms and the marketplace—regarding how, if at all, the process of vetting potential financial advisor conflicts should evolve. In this article, we set out our belief that financial advisor engagement letters are an efficient (although admittedly not the only) tool to vet potential conflicts of a financial advisor. We then discuss four contractual provisions that, we believe, are helpful in providing the active and direct oversight that was found lacking in Rural/Metro.
Appraisal Arbitrage—Is There a Delaware Advantage?
Gaurav Jetley and Xinyu Ji; 71(2): 427-458 (Spring 2016)
The article examines the extent to which economic incentives may have improved for appraisal arbitrageurs in recent years, which could help explain the observed increase in appraisal activity. We investigate three specific issues. First, we review the economic implications of allowing petitioners to seek appraisal on shares acquired after the record date. We conclude that appraisal arbitrageurs realize an economic benefit from their ability to delay investment for two reasons: (1) it enables arbitrageurs to use better information about the value of the target that may emerge after the record date to assess the potential payoff of bringing an appraisal claim and (2) it helps minimize arbitrageurs’ exposure to the risk of deal failure. Second, based on a review of the recent Delaware opinions in appraisal matters, as well as fairness opinions issued by targets’ financial advisors, we document that the Delaware Chancery Court seems to prefer a lower equity risk premium than bankers. Such a systematic difference in valuation input choices also works in favor of appraisal arbitrageurs. Finally, we benchmark the Delaware statutory interest rate and find that the statutory rate more than compensates appraisal petitioners for the time value of money or for any bond-like claim that they may have on either the target or the surviving entity.
Our findings suggest that, from a policy perspective, it may be useful to limit petitioners’ ability to seek appraisal to shares acquired before the record date. We also posit that, absent any finding of a flawed sales process, the actual transaction price may serve as a useful benchmark for fair value. We conjecture that, while the statutory interest rate may not be the main factor driving appraisal arbitrage, it does help improve the economics for arbitrageurs. Thus, the proposal by the Council of the Delaware Bar Association’s Corporation Law Section to limit the amount of interest paid by appraisal respondents—by allowing them to pay appraisal claimants a sum of money at the beginning of the appraisal action—seems like a practical way to address concerns regarding the statutory rate. However, paying appraisal claimants a portion of the target’s fair value up front is akin to funding claimants’ appraisal actions, which may end up encouraging appraisal arbitrage.
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.
The Real Problem with Appraisal Arbitrage
Richard A. Booth, 72(2): 325-352 (Spring 2017)
In the controversial practice of appraisal arbitrage, activist investors buy up the shares of a corporation to be acquired by merger in order to assert appraisal rights challenging the price of the deal. The practice is controversial because the appraisal remedy is widely seen as intended to protect existing stockholders who are (or will be) forced to sell their shares in the merger. But the real puzzle is why appraisal arbitrage is profitable, given that an appraisal proceeding’s goal is to determine the fair price of target shares using the same techniques of valuation used by financial professionals who advise the parties to such deals. Thus, commentators have argued that the profit derives from (1) a free option to assert appraisal rights at any time until target shares are canceled, (2) the award of prejudgment interest at a too-generous rate, and (3) the use of a too-low supply-side discount rate in the valuation of shares. As this article shows, none of these explanations has merit, but the third may be on the right track in that it has become almost standard practice among appraisal courts to reduce the discount rate for the so-called terminal period beyond five years into the future by the projected rate of inflation plus general economic growth. The fallacy in doing so is that the discount rate implicit in market prices already incorporates these factors because investors demand and expect returns commensurate therewith. Although it may be appropriate to adjust the terminal period discount rate for company-specific growth funded by the plowback of returns at a rate implicit in projected terminal period cash flow, assuming that growth will simply happen in lockstep with the economy as a whole would be incorrect. Thus, awards that are skewed to the high side by erroneous valuation practices likely encourage appraisal arbitrage.
Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies
Lawrence A. Hamermesh and Michael L. Wachter, 73(4) 961-1010 (Fall 2018)
This article examines the evolution of Delaware appraisal litigation and concludes that recent precedents have created a satisfactory framework in which the remedy is most effective in the case of transactions where there is the greatest reason to question the efficacy of the market for corporate control, and vice versa. We suggest that, in effect, the developing framework invites the courts to accept the deal price as the proper measure of fair value, not because of any presumption that would operate in the absence of proof, but where the proponent of the transaction affirmatively demonstrates that the transaction would survive judicial review under the enhanced scrutiny standard applicable to fiduciary duty-based challenges to sales of corporate control. We also suggest, however, that the courts and expert witnesses should and are likely to refine the manner in which elements of value (synergies) should, as a matter of well-established law, be deducted from the deal price to arrive at an appropriate estimate of fair value.
Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions
Annual Survey Working Group of the M&A Jurisprudence Subcommittee, Mergers and Acquisitions Committee, ABA Business Law Section, 74(2) 437-488 (Spring 2019)
Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets
Jonathan Macey and Joshua Mitts, 74(4): 1015-1064
In this article, we make several contributions to the literature on appraisal rights and similar cases in which courts assign values to a company’s shares in the litigation context. First, we applaud the recent trend in Delaware cases to consider the market prices of the stock of the company being valued if that stock trades in an efficient market, and we defend this market-oriented methodology against claims that recent discoveries in behavioral finance indicate that share prices are unreliable due to various cognitive biases. Next, we propose that the framework and methodology for utilizing market prices be clarified. We maintain that courts should look at the market price of the securities of a target company whose shares are being valued, unadjusted for the news of the merger, rather than at the deal price that was reached by the parties in the transaction.
Uncovering the Hidden Conflicts in Securities Class Action Litigation: Lessons from the State Street Case
Benjamin P. Edwards and Anthony Rickey; 75(1): 1551-1570 (Winter 2019-2020)
Courts, Congress, and commentators have long worried that stockholder plaintiffs in securities and M&A litigation, and their counsel, may pursue suits that benefit themselves, rather than absent stockholders or the corporations in which they invest. Following congressional reforms that encouraged the appointment of institutional stockholders as lead plaintiffs in securities actions, significant academic commentary has focused on the problem of “pay to play”—the possibility that class action law firms encourage litigation by making donations to politicians with influence over institutional stockholders, and particularly public sector pension funds.
Interview with Marty Lipton
Jessica C. Pearlman; 75(2): 1709-1724 (Spring 2020)
In September of 2019, after wrapping up meetings of the Mergers and Acquisitions (“M&A”) Committee of the Business Law Section of the American Bar Association (“ABA”), I took the train from Washington, D.C. to New York City to meet with Marty Lipton—the well-known founder of Wachtell, Lipton, Rosen & Katz—in a conference room at his firm. It was perfect timing to have this conversation with Mr. Lipton, given recent developments relating to corporate views on the constituencies corporations may take into account in their decision-making.
Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions
Annual Survey Working Group of the M&A Jurisprudence Subcommittee, Mergers and Acquisitions Committee, ABA Business Law Section; 75(2): 1869-1900 (Spring 2020)