Takeovers
Takeovers: Where Are We? Where Do We Go?
John T. Subak, 41(4): 1255–64 (Aug. 1986)
Court decisions and various reform proposals relating to unfriendly takeovers show a lack of understanding of the corporate decisionmaking process. This Article urges a better understanding of that process and of the effect that court decisions and proposed remedies have on corporate decisions.
Model Business Corporation Act: Implications for Takeover Contests
Takeover Defense Task Force of the Committee on Corporate Laws, 42(2): 575–601 (Feb. 1987)
The Report considers the extent to which antitakeover measures are available under the Revised Model Business Corporation Act. It also reviews the antitakeover activities of state legislatures in the wake of the Supreme Court's decision in Edgar v. MITE Corp., 457 U.S. 624 (1982), which held an Illinois antitakeover statute to be unconstitutional under the Commerce Clause.
Open-Market and Privately Negotiated Purchase Programs and the Market for Corporate Control
David J. Segre, 42(3): 715–46 (May 1987)
Large-scale, open-market, and privately negotiated purchase programs have become a frequently employed tactic in corporate takeover battles. This Article evaluates the use of open-market and privately negotiated purchase programs primarily in the current pre-tender offer takeover arena, although it also briefly discusses the use of such programs during and after tender offers. How these programs may be designed to remain outside the regulation of the Williams Act and the scope of appropriate regulatory means are also discussed.
Poison Debt: The New Takeover Defense
Richard G. Clemens, 42(3): 747–60 (May 1987)
The Article discusses the issuance by a company of debt securities ("poison debt") containing terms and provisions designed to discourage a hostile takeover. The Article examines the typical terms of poison debt, how poison debt has been employed in takeover situations, and the legality of these securities.
The Delaware Takeover Law: Some Issues, Strategies and Comparisons
E. Norman Veasey, Jesse A. Finkelstein, and Robert J. Shaughnessy, 43(3): 865–86 (May 1988)
On February 2, 1988, the State of Delaware adopted a new takeover statute, which targets certain abusive and coercive aspects of the takeover process. This Article reviews the new law's drafting and legislative history and discusses its substantive provisions and operation. The Article also briefly compares the Delaware statute with other states' takeover statutes and reviews the constitutional issues raised in lawsuits challenging the new law.
New Jersey Shareholders Protection Act: Validity Questioned in Light of CTS Corp. v. Dynamics Corp. of America
Michael H. Hurwitz, 44(1): 141–57 (Nov. 1988)
On August 5, 1986, the New Jersey legislature enacted into law one of the most stringent antitakeover statutes to be adopted in the United States since the Supreme Court invalidated the Illinois statute in Edgar v. MITE Corp ., 457 U.S. 624 (1982). This Article discusses the scope of the New Jersey legislation and discusses its constitutionality in light of recent Supreme Court and lower court decisions interpreting similar legislation adopted in other states.
Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?
Ronald J. Gilson and Reinier Kraakman, 44(2): 247–74 (Feb. 1989)
This Article traces the origins of the proportionality test and explores the analytical questions that are central to evaluating the substance of the test. The Article concludes by describing how key elements of the test can effectively screen a target management's claim of shareholder coercion by an underpriced offer.
The Obligation of a Director of a Delaware Corporation to Act as an Auctioneer
Barry Reder, 44(2): 275–82 (Feb. 1989)
Lower courts and commentators have read Revlon expansively to impose on directors of Delaware corporations a duty to conduct an auction when a company is for sale. Revlon imposes such a duty only when the corporation is to be broken up. The board may consider the effect of a transaction on a variety of constituencies to determine whether the corporation is being broken up.
A Conversion Paradox: Negative Anti-Dilution
Martin Riger, 44(4): 1243–58 (Aug. 1989)
The current rash of corporate restructurings as a defense against takeovers may produce unique problems in applying the antidilution provisions in indentures for target companies' outstanding convertible debentures. Where the restructuring includes a per share asset distribution to stockholders in excess of the current market price of the stock, a standard provision for adjustment of the conversion price in such an event can produce a negative price, as in the case discussed in this Article.
The Fiduciary Duties of Insurgent Boards
John M. Olson, 47(3): 1011–29 (May 1992)
Many recent corporate takeover attempts have employed the combination of a tender offer and a proxy contest. This Article analyzes the fiduciary duties of directors elected through the efforts of tender offerors and suggests that there may be problems in combining the two takeover methods.
Indopco, Inc. v. Commissioner: The Deductibility of a Target's Acquisition Costs
Jeffrey A. Friedman, 48(3): 1243–57 (May 1993)
In Indopco, Inc. v. Commissioner, 503 U.S. 79 (1992), the Supreme Court affirmed the decision of the U.S. Court of Appeals for the Third Circuit, which held that costs relating to a friendly takeover should be capitalized and not expensed for federal taxation purposes. The thrust of this Note relates to the effect the Supreme Court's opinion will have in friendly and hostile takeover transactions.
The Squeeze on Directors—Inside Is Out
James M. Tobin, 49(4): 1707–60 (Aug. 1994)
With the decline in takeover frenzy, the primary focus for most corporate boards has shifted to examination of general corporate performance over time—not single event transactions such as takeover defense mechanisms or change of control proposals. Currently, the primary pressure is on outside directors and comes from advocacy by institutional investors, their advisors, and those members of the media and government who are sympathetic to institutional investors' causes. Activist focus today is on developing standards of performance for corporations and their boards and management that will improve share values and investment return over time. The business judgment rule provides limited guidance in this environment. The fiduciary duty concepts underlying this rule are more relevant but are too general to provide either guidance or comfort. This Article explores the business practices likely to form the basis for fulfillment of director duties. These practice standards currently emphasize a pro-active role for outside directors as a principal means for improved corporate performance.
Defensive Tactics in Consent Solicitations
Eric S. Robinson, 51(3): 677–701 (May 1996)
Consent solicitations are increasingly being used by hostile bidders to facilitate takeovers and by stockholder activists to challenge corporate strategies. This Article discusses some of the principle defensive tactics that can be employed by a Delaware corporation facing a consent solicitation, including setting the record date, establishing a deadline for delivery of consents, and contesting dual consent solicitation/proxy fights. The Article also examines the legal principles and practices involved in tabulating consents, including their application in hypothetical cases.
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.
Using Bankruptcy Law to Implement or Combat Hostile Takeovers of Targets in Chapter 11
Josef S. Athanas, 55(2): 593–623 (Feb. 2000)
Although most business lawyers are familiar with the strategies for implementing or combating hostile takeovers of targets outside of Chapter 11, few are familiar with the additional concerns that arise when the target is in Chapter 11. Meanwhile, investors have become less fearful of the bankruptcy process and more willing to attempt hostile takeovers of targets in Chapter 11. This Article provides a detailed review of the bankruptcy law weapons available to a hostile bidder and a debtor's management in their battle for control of the debtor. In particular, Part I provides an overview of the applicable legal principles; Part II discusses the use of claims trading to gain leverage and standing to file a competing plan; Part III discusses the role of nonbankruptcy corporate governance principles in the context of competing plan proposals; Part IV discusses the debtor's use of its exclusive right to file a plan to combat a hostile takeover in bankruptcy; and Part V discusses issues arising when competing plans are proposed, including the requirements that plans be proposed in, and that votes be cast in, good faith.
Displacing Delaware: Can the Feds Do a Better Job Than the States in Regulating Takeovers?
Jonathan R. Macey, 57(3): 1025 (May 2002)
This Article explores whether the current structure of U.S. corporate law, which features robust competition for corporate chartering business among rival jurisdictions, should be replaced by a system in which shareholders are required to vote about whether to "opt-into" a new corporate governance regime that would regulate contests for corporate control. This alternative recently was proposed by Professors Lucian Bebchuk and Alan Ferrell, who are particularly critical of the takeover jurisprudence of Delaware, the state that dominates the jurisdictional competition for corporate charters. The Article analyzes the legal basis for Delaware's takeover decisions, particularly the decisions validating the use of the poison pill. Contrary to the Bebchuk- Ferrell analysis, Delaware judges have shown themselves to be quite sensitive to shareholders' concerns, and quite welcoming of lawsuits against corporate officers and directors. There is no reason to believe that the quality of U.S. corporate governance would improve if new federal takeover rules were enacted. It is quite likely that the quality of the market for corporate control would deteriorate substantially if the changes proposed by Bebchuk and Ferrell were implemented. There is no theoretical or empirical support for the notion that the federal government would be willing to engage in the sort of power-sharing arrangement that Bebchuk and Ferrell propose.
Takeover Law and Regulatory Competition: A Reply
Lucian Arye Bebchuk and Allen Ferrell , 57(3): 1047 (May 2002)
This paper defends, and further develops, our earlier work on the effects of regulatory competition on takeover law. We have argued that competition for corporate charters provides incentives to states to protect incumbent managers from hostile takeovers, and that the empirical evidence is consistent with this account. To improve the performance of regulatory competition, we have put forward the possibility of choice-enhancing federal intervention; such intervention would expand shareholder choice and encourage states to become more attentive to shareholder interests, without imposing any mandatory arrangements. Replying to Jonathan Macey's response in this issue to our work, we show that none of his claims weaken our analysis.
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 article 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.
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.
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)
Hostile Bidders a Meaningful Opportunity for Success
A. Gilchrist Sparks, III and Helen Bowers, 65(3): 761–770 (May 2010)
A Practical Response to a Hypothetical Analysis of Section 203's Constitutionality
Stephen P. Lamb and Jeffrey M. Gorris , 65(3): 771–778 (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)
Preemption as Micromanagement
Larry Ribstein, 65(3): 789–798 (May 2010)
Is Delaware's Antitakeover Statute Unconstitutional? Further Analysis and a Reply to Symposium Participants
Guhan Subramanian, Steven Herscovici, and Brian Barbetta, 65(3): 799–808 (May 2010)
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.
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)
Harmony or Dissonance? The Good Governance Ideas of Academics and Worldly Players
Robert C. Clark; 70(2): 321-346 (Spring 2015)
This lecture asks questions concerning ideas about what constitutes good corporate governance that are espoused by academics, such as financial economists and law professors, and by more worldly players such as legislators, rule makers, governance rating firms, large institutional investors, law firms that represent corporate clients, and courts. Are there discernible trends and patterns in the views espoused by these different categories of actors, despite all the differences among individual actors within each category? I propose that there are such patterns, offer some initial thoughts about the characteristic themes and differences, and hypothesize about the reasons for the differences. At the end I reflect on what a benign policy maker interested in increasing overall social welfare might do with these observations.
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.
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.
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.