Monthly Archives: September 2007

ABA Study on Private Equity Deal Points

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Friday, September 14, 2007

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This post on a recent study of the characteristics of private equity acquisitions of public companies comes to us from Keith Flaum of Cooley Godward Kronish.

Earlier this month, the Committee on Negotiated Acquisitions of the American Bar Association’s Section of Business Law released the 2007 Private Equity Buyer/Public Target M&A Deal Points Study.  I am the Chair of the Committee’s Market Trends Subcommittee which, in association with the Private Equity M&A Subcommittee, compiled the Study.

The Study examines key deal points in financial sponsor-backed acquisitions of publicly traded companies announced in 2005 and 2006.  Among the many interesting findings of the Study is that, for transactions announced in 2006, more than three-fourths of the acquisition agreements in the Study did not contain a financing condition.

My colleague Rick Climan, former Chair of the Committee on Negotiated Acquisitions, acted as special advisor on this project.  Wilson Chu and Larry Glasgow, the former co-chairs of the M&A Market Trends Subcommittee–and more than 15 M&A lawyers from major law firms across North America–assisted in its compilation.

Later this year, the Committee on Negotiated Acquisitions will be releasing a Strategic Buyer/Public Target Deal Points Study.  That Study will analyze more than 200 agreements in the 2005 to 2006 timeframe involving acquisitions of publicly traded companies by strategic (i.e., non-financial) buyers.  It will be very interesting to compare the results of these two studies.

The full Study is available here.

Delaware’s Judges on Good Faith After Disney

Posted by Andrea Unterberger, Corporation Service Company, on
Thursday, September 13, 2007
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This post is from Andrea Unterberger of Corporation Service Company. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Last year the Delaware State Bar Association sponsored a symposium entitled Good Faith After Disney: The Role of Good Faith in Organizational Relations in Delaware Business Entities.  The Judicial Panel of the symposium featured Chief Justice Steele and Justice Jack Jacobs of the Delaware Supreme Court, as well as Chancellor Chandler of the Delaware Court of Chancery.  The panel was moderated by Judge Thomas Ambro of the United States Court of Appeals for the Third Circuit.  Professor Anne Conaway of the Widener University School of Law introduced the group.

This compelling panel included reflections from all four judges on a wide range of subjects, including the differences between trial judging and the work of appellate courts, the specifics of the Disney case itself, and practitioners’ and academics’ reactions to recent developments in the evolution of good-faith doctrine in Delaware.  (Since Justice Jacobs authored the Supreme Court’s opinion in Disney, and Chancellor Chandler authored the trial-court decision, the audience had the benefit of a number of perspectives on the case.)

The question that the audience might have been most curious about, however, was whether an independent duty of good faith–if such a duty was indeed recognized in Disney–can or should serve as a “gap filler” to establish liability in cases not reached by traditional fiduciary duties under Delaware law.  Judge Ambro thus starts the discussion with the following question: “What gaps are people perceiving that need to be filled between loyalty and care?”

The judges’ fascinating analysis–as well as a complete transcript of their remarks–is available for download here.

Weisbach on Pay without Performance

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Wednesday, September 12, 2007
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The most recent issue of the Journal of Economic Literature contains an essay in which Michael Weisbach, who recently joined us as a Guest Contributor, reviews Lucian Bebchuk’s and Jesse Fried’s Pay without Performance.  Weisbach reviews and evaluates in detail Bebchuk’s and Fried’s normative and positive claims on executive pay.  He concludes that the positive claims–Bebchuk’s and Fried’s account of the executive compensation landscape–are fairly persuasive.  However, with respect to their normative claims, Weisbach expresses doubts as to how effective their proposed reforms are going to be in practice in achieving the improvements Bebchuk and Fried seek.  The full review is available here.

More than thirty academic reviews of–and responses to–Pay without Performance have now been published, including pieces by Stephen Bainbridge; John Bogle; William Bratton; John Core, Wayne Guay, and Randall Thomas; Jeff Gordon; Bengt Holmstrom; Glenn Hubbard; Ira Kay; Arthur Levitt; and Bevis Longstreth.  A collection of those reviews is available here.

Nonprofits Scramble Under New Scrutiny

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, September 11, 2007
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The National Law Journal recently published Nonprofits Scramble Under New Scrutiny, an article describing nonprofits’ search for meaningful guidance on corporate governance standards in the wake of recent scandals at several nonprofits.  Congressional investigations, regulatory attention, and media scrutiny of loose financial controls at nonprofits have prompted several, including the American Red Cross, to undertake detailed reviews of their governance practices.

This is a difficult task in light of the absence of substantive statutory or regulatory guidance as to what is expected of nonprofit boards.  Directors of public companies who have experienced governance overhauls in the wake of Sarbanes-Oxley, however, are apparently using SOX standards for guidance as they reform governance at the nonprofits they serve.  The Article explains: 

Congressional committees, state attorneys general and now the Internal Revenue Service (IRS) are placing nonprofit organizations under scrutiny and sending them scrambling for legal advice on sound governance practices. . . .

Nonprofit board members who are also public company executives have lived through their corporation’s governance overhauls, and they are realizing that the organizations they volunteer for need to make changes.

The full Article is available here.

How Judges Talk to Lawyers: The Role of Informal Guidance in Business Law

Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on
Monday, September 10, 2007

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This post comes to us from J.W. Verret, a recent Harvard Law graduate and Olin Fellow in Law and Economics who has written extensively on corporate governance matters.  Jay previously posted on our Blog here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Chief Justice Myron Steele of the Delaware Supreme Court recently delivered the keynote address to the American Bar Association’s Section of Business Law this year, entitled How Court Judges Talk to Lawyers: The Role of Informal Guidance in Business Law.  In that talk, the Chief Justice presented a thesis that he and I have elaborated on in an article called Delaware’s Guidance: Ensuring Equity for the Modern Witenagemot, forthcoming this fall in the Virginia Law and Business Review.

Delaware’s status as the belle of the ball for corporate chartering has befuddled corporate academics for over three decades.  The various theories for why and how Delaware emerged as the leader in chartering continue to spring eternal–with skepticism about Delaware’s role a popular theme.

Two commentators, Jonathan Macey and Ehud Kamar, have emphasized what they call the “indeterminacy” of Delaware’s corporate jurisprudence.  They argue that vagueness in Delaware’s corporate common law functions as a litigation boon for the Delaware bar and keeps other states from plagiarizing Delaware’s General Corporation Law.  Our Article takes a dim view of this notion.

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Diffuse Ownership in the United States: A Myth?

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 7, 2007

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Ever since Berle and Means published The Modern Corporation and Private Property in 1932, diffuse ownership has been considered the norm for U.S. public corporations.  And at least since La Porta et al.’s Law and Finance (1998) and Corporate Ownership around the World (1999), this aspect of US corporate governance has been considered exceptional from a global perspective–with only the U.K. and some other developed, common-law countries showing similarly low levels of ownership concentration.

In The Myth of Diffuse Ownership in the United States, Clifford Holderness challenges this view.  Using a more representative sample of U.S. firms than have previous studies, Holderness finds that ownership concentration in the US is about the same as the world average.  Moreover, in Holderness’s data, U.S. blockholding does not look qualitatively different from the world average in terms of blockholders type (as demonstrated in Table 5) and board representation (Table 6).  These results are robust to controlling for certain firm attributes relevant to ownership concentration, such as firm size. Given the amount of research that has been based on the assumptions that Holderness challenges, his article is bound to have considerable impact.  Here’s his abstract:

This paper offers evidence on the ownership concentration at a representative sample of U.S. public firms. 96% of these firms have blockholders; these blockholders in aggregate own an average 39% of the common stock. The ownership of U.S. firms is similar to and by some measures more concentrated than the ownership of firms in other countries. These findings challenge current thinking on a number of issues, ranging from the nature of the agency conflict in domestic corporations to the relationship between ownership concentration and legal protections for investors around the world.

The full paper is available here.

The Reyes Conviction and Federal Intervention in Compensation Decisions

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, September 6, 2007
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Editor’s Note: This post is from J. Robert Brown, Jr. of University of Denver.

One of the most interesting aspects of the recent conviction of Gregory Reyes, the former CEO of Brocade, concerns the use of federal criminal law to police executive compensation matters.  Reyes was accused of participating in a backdating scheme.  The most intriguing fact in the case was that Reyes himself didn’t benefit from the backdating at issue.  (A pending civil case alleges that Reyes benefited from other backdating; that case is analyzed in a recent post here.)  In other words, Reyes used backdating as a form of compensation for other employees–and is now going to jail because of it. The case is part of a pattern of increased federal intervention in compensation decisions. 

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Trading Places

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, September 5, 2007
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The National Law Journal recently published Trading Places, a fascinating profile describing the increased demand Sarbanes-Oxley has generated for former federal prosecutors with expertise in corporate-governance litigation to serve as white-collar defense counsel to executives after leaving government.  The profile describes the experience of, among others, David Anders, who joined Wachtell, Lipton, Rosen & Katz following his tenure at the United States Attorney’s Office for the Southern District of New York–during which time he helped secure the high-profile convictions of WorldCom executive Bernard Ebbers and investment banker Frank Quattrone.  The profile begins:

The enactment of Sarbanes-Oxley in 2002 created a big demand for attorneys who could handle more corporate governance business.  David Anders, who left the U.S. Attorney’s office in New York’s Southern District last year, says he is comfortable on the defense side of white-collar practice, but the shift requires adjusting to the practicalities of bottom lines and billable hours.

The full profile is available here.

Chancery: Rescheduling a Stockholder Vote on a Proposed Merger Satisfies Blasius Standard of Review

Posted by A. Gilchrist Sparks, Morris, Nichols, Arsht & Tunnell LLP, on
Tuesday, September 4, 2007
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This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Since Chancellor Allen‘s landmark 1988 decision in Blasius Industries, Inc. v. Atlas Corp., the Delaware courts have grappled with the appropriate standard of review for board actions directly affecting the stockholder voting process.  In this Memorandum, Mark Hurd, Jay Moffitt, and I discuss the courts’ most recent effort to resolve that question, Mercier v. Inter-Tel.  Vice Chancellor Strine‘s opinion makes clear that properly motivated, disinterested directors have discretion to postpone a stockholder vote on a proposed merger for a reasonable period of time where the directors believe that the transaction will benefit stockholders–even if the directors know that a majority of stockholders would vote against the transaction if the vote were held on the originally scheduled date.

The full Memorandum is available here.

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