Monthly Archives: January 2007

The Fine Line of Selling, Selling Out, the Firm

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An article by Dennis Berman in today’s Wall Street Journal describes the increasingly common phenomenon of CEOs engaging in discussions with buyout firms about a potential transaction without notifying their Board.  In some cases, the CEO enters into a confidentiality agreement and detailed negotiations over buyout terms without the Board’s knowledge.  (I described Vice Chancellor Lamb‘s skepticism about such an arrangement in his opinion in In re SS&C Technologies in this previous post.)

The WSJ article notes Leo Strine‘s commentary on the matter at a recent discussion hosted by the Program on Corporate Governance.  That panel, which also included experts Marshall Cohen, Rob Spatt, Robert Kindler, and Paul Rowe, discussed, among other things, the efficacy of special transaction committees in the merger context.  The full video of that discussion can be accessed from the Program’s webpage here. (video no longer available)

Transatlantic Financial Services Regulatory Dialogue

Editor’s Note: This post is by Howell Jackson of Harvard Law School.

The Program on Corporate Governance has just issued A Report on the Transatlantic Financial Services Regulatory Dialogue, a detailed analysis of the critical dialogue among U.S. and E.U. regulators on how to oversee increasingly interdependent international financial markets.  The Report‘s authors, Kern Alexander, Eilis Ferran, Howell E. Jackson, and Niamh Moloney, describe a recent roundtable including officials of the SEC, European Commission, and academics addressing a wide range of issues in international securities regulation. 

The highlights included:


Rewarding Outside Directors

Editor’s Note: This post is by Reinier Kraakman of Harvard Law School.

The Program on Corporate Governance recently issued my new discussion paper with Assaf Hamdani, Rewarding Outside Directors.  The Abstract describes our piece as follows:

While they often rely on the threat of penalties to produce deterrence, legal systems rarely use the promise of rewards.  In this Paper, we consider the use of rewards to motivate director vigilance.  Measures to enhance director liability are commonly perceived to be too costly.  We, however, demonstrate that properly designed reward regimes could match the behavioral incentives offered by negligence-based liability regimes but with significantly lower costs.  We further argue that the market itself cannot implement such a regime in the form of equity compensation for directors.  We conclude by providing preliminary sketches of two alternative reward regimes.  While this paper focuses on outside directors, the implications of our analysis extend to other gatekeepers as well.

The full text of our Article can be downloaded here.

The M&A “Frenzy” of 2006: Top Bankers and Lawyers

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Last week the Wall Street Journal published its annual year-end review of merger activity for 2006.  In what the paper’s Dennis Berman called a vertiable “frenzy,” 2006 saw more than $3.7 trillion in deals worldwide, a 38% jump over transaction volume in 2005 and higher even than the previous record of $3.4 trillion, set in 2000.  The Journal‘s report highlighted several key trends in the merger world, in addition to providing an analysis of the investment banks and law firms who played the biggest part in setting a new record in 2006.


Initial Public Offerings Increase in 2006: Are We Entering a “Hot Period”?

A recent report by Renaissance Capital shows that IPO volume increased to $43 billion in 2006, a 26% increase over the previous year. Since offerings reached a peak of $97 billion in 2000, public offerings have been fairly slight, reaching a low of just $15 billion in 2003. But after a small drop-off in 2005, offerings substantially increased last year. The report points to several interesting dynamics in the current public offering market–and a number of potential implications for corporate governance.

First, the report shows that investors in IPOs were rewarded with above-market returns for the fourth straight year. From 2003 to 2006, investors in IPOs at the offering price have earned no less than 18%, and as much as 34%, in total return. Even aftermarket returns–the returns on IPO shares purchased at the close on the day of the offering–reached as high as 21% during this period.


Yes, Many CEOs of US Public Companies Really Are Overpaid…

Editor’s Note: This post is by Broc Romanek of

Here is a response to Professor Kaplan’s comments on the recent New York Times article about private equity funds. While it’s true that some private equity funds are luring sitting CEOs with higher pay, I think it’s far from a widespread trend. There are about 14,000 sitting CEOs today; maybe a dozen have been lured away, if that.

And since the terms of the pay arrangements given to privately held CEOs are not publicly available, we don’t really know what those arrangements consist of. Will private owners continue to pay for poor corporate performance? Will they pay out a huge severance package–or any severance–to a fired CEO? I doubt that private owners would follow the lead of so many public companies in these criticized areas. 

But more importantly, we must remember the difference between CEOs of private companies and public companies. Private owners are free to pay someone as much as they want; it’s their money. In the public company context, the board of directors have their fiduciary duties to consider when paying someone and appropriate processes must be used. Unfortunately, the processes followed today often are broken – and have been for some time.


National Bureau of Economic Research / Review of Financial Studies Conference on Corporate Governance

This post is by Lucian Bebchuk of Harvard Law School.

Michael Weisbach and I are co-organizing a conference, jointly sponsored by the corporate governance project of the NBER and The Review of Financial Studies.

Here is the call for papers:

Corporate governance deals with the set of institutions designed to ensure that suppliers of finance recieve a return on their investment.  It is now widely recognized to have a significant role in determining the performance of firms and the economy.  This conference aims to contribute to a better understanding of corporate governance.  The conference organizers encourage the submission of papers relating to all aspects of the field.  Topics of interest include but are not limited to:


Are CEOs of U.S. Public Companies Really Overpaid?

Editor’s Note: This post is by Steven Kaplan of the University of Chicago

I was shocked (but encouraged) to read the New York Times yesterday. Instead of writing another article about how CEOs are massively overpaid, dishonest, or both, Andrew Sorkin and Eric Dash make a strong argument that U.S. CEOs are underpaid! According to the article, private equity firms are increasingly successful in luring talented public company executives to run private equity-funded firms. A big part of the reason is that private equity firms pay those executives more.

Consider what this exodus of talented public company executives to private equity-funded companies means. These executives can certainly get hired as CEOs of public companies. If they were so overpaid, they would not leave the public companies. The fact is that many of them are leaving to run private equity-funded companies.


One Bite of the Apple

This post is by Lucian Bebchuk of Harvard Law School

The Wall Street Journal published today my op-ed piece on backdating and corporate governance. The piece, which builds on the Lucky CEOs and Lucky Directors studies discussed earlier in this blog, discusses backdating in Apple Computer and beyond. Here is what it says:

Apple Computer annoucned a week ago the conclusions of a special board committee that examined the “improper dating” of over 6,000 option grants during 1997-2002. The committee found no basis for having less than “complete confidence in [CEO] Steve Jobs and the senior management team,” placing full responsibility for past problems on the company’s former CFO and general counsel. But the company’s report fails to dispel concerns about Apple’s governance.

In reviewing past grant awards, the report discusses separately grants awarded to directors and to Mr. Jobs, but in lumps grants to senior managers other than Jobs together with all other grants. The company is surprisingly silent on whether any of these senior managers received “improperly dated” grants.

The report indicates that Mr. Jobs “was aware of recommended the selection of some favorable grant dates,” but states that “he did not receive or financially benefit from these grants.” But even though Mr. Jobs did not personally benefit from these grants, it turns out that he did benefit from other improperly timed grants.

In particular, Mr. Jobs received in 2002 an award of at-the-money options to buy 7.5 million Apple shares, roughly 2% of the total shares then outstanding. The grant was backdated by two months, which significantly increased the award’s value. Surprisingly, Apple did not disclose the backdating of this large CEO grant in October when it announced the committee’s “key findings.”