Monthly Archives: May 2007

Toward Common Sense and Common Ground?: Remarks from Vice Chancellor Strine

The Law School’s Program on Corporate Governance has recently issued a discussion paper by Vice Chancellor Leo Strine, Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance.  The paper presents the Vice Chancellor’s recent remarks at the Spring Banquet for the Journal of Corporation Law at the University of Iowa College of Law.  The Abstract is as follows:

In this essay, Vice Chancellor Strine reflects on the common interests of those who manage and those who labor for American corporations.  The first part of the essay examines aspects of the current corporate governance and economic environment that are putting management and labor under pressure.  The concluding section of the essay identifies possible corporate governance initiatives that might–by better focusing stockholder activism in particular and corporate governance more generally on long-term, rather than short-term, corporate performance–generate a more rational system of accountability, that focuses on the durable creation by corporations of wealth through fundamentally sound, long-term business plans.

The full essay is available for download here.  The essay will be appearing in the Journal of Corporation Law with responses by a number of prominent commentators.  In a subsequent post, Guest Contributor Hillary Sale will offer some background on that issue of the Journal and the responses to the Vice Chancellor’s remarks.

The SEC, the Supreme Court, and Enron

This post is by J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

The Wall Street Journal carried a story yesterday on the pressure building on the SEC to file an amicus brief supporting the petition for certiorari filed by the plaintiffs in the Enron securities litigation against the firm’s former financial advisors.  In Regents of the University of California v. Credit Suisse, the Fifth Circuit reversed the certification of a class bringing securities claims against investment banking firms that worked with Enron, holding that Section 10(b) does not provide for primary liability for such advisors and deepening the split among the federal appellate courts on that issue.

The Supreme Court has already agreed to decide whether financial advisors may be liable under Section 10(b) in Stoneridge Investment Partners v. Scientific Atlanta, an appeal from the Eighth Circuit, and The Race to the Bottom Blog will explore the issues raised by these cases next week.  But there is a crucial–and largely overlooked–difference between Stoneridge and the Enron litigation that may well affect the outcome.  It concerns the makeup of the justices who will be deciding the case.  If the Court grants review in the Enron litigation as well, it may well tell us something about the likely outcome in Stoneridge itself.


Buyer Beware: The Fiduciary Duties of a Buyer’s Board

This post is by Mark A. Morton of Potter Anderson & Corroon LLP.

Michael Pittenger, Michael Reilly, and I have prepared an article, Buyer Beware: The Fiduciary Duties of a Buyer’s Board, on Vice Chancellor Parsons‘s decision in Energy Partners, Ltd. v. Stone Energy CorpThe article discusses the fiduciary duties of buyer boards and posits that buyer boards may, in the appropriate circumstances, need to bargain for contractual flexibility to deal with jumping bids for the buyer.  The article was published in the Spring 2007 issue of Deal Points, the official publication of the Negotiated Acquisition Committee of the American Bar Association.

The full article is available for download here.  In addition, the article may be found on the Potter Anderson & Corroon website in our publications collection.

Appraisal Arbitrage: Will It Become a New Hedge Fund Strategy?

This post is by Charles M. Nathan of Latham & Watkins LLP.

I have recently prepared this M&A Deal Commentary, Appraisal Arbitrage: Will It Become a New Hedge Fund Strategy?, explaining that the recent decision in the Transkaryotic shareholder litigation may spawn a new “market” in appraisal rights that will allow purchasers of shares after the record date to bring appraisal actions.  As the Commentary notes, the decision raises, for the first time, the specter of arbitrage in appraisal rights.

Chief Justice Steele’s Remarks on the Duty of Good Faith

This post is by Andrea Unterberger of the Corporation Service Company.

Chief Justice Myron T. Steele of the Delaware Supreme Court offered his views on the duty of good faith on October 5, 2006, as part of the Delaware State Bar Association‘s Third Annual Symposium on the Law of Delaware Business Entities, Good Faith After Disney: The Role of Good Faith in Organizational Relations in Delaware Business Entities.

The transcript of Chief Justice Steele’s remarks, prepared for our readers with the generous assistance of his law clerks, is available here.

Go-Shops With Matching Rights: Reimbursing Topping Bidders

We’re pleased to host the following dialogue between Mark Morton of Potter Anderson and Corroon and Larry Hamermesh of Widener Law School, precipitated by Mark’s ruminations about sellers’ insistence that a go-shop provision with a matching right in a merger agreement be accompanied by a right to reimburse the expenses of a topping bidder who is subsequently matched.  As always, we welcome reader comments on the discussion below.

Mark Morton: In the typical M&A deal, there’s generally a match right.  As a result, the target can’t actually terminate the merger agreement for the superior proposal until the first bidder decides whether or not to match.  If the first bidder matches, he wins (unless he’s topped again).  In that case, the target will not have signed a merger agreement with the interloper, so the interloper doesn’t get a termination fee.  As a result, the interloper gets nothing for his superior bid–other than a large chunk of unreimbursed expenses.  I would argue, therefore, that the presence of a match right creates a significant disincentive to topping bids.


Lessons from the Recent Motorola/Icahn Proxy Contest

This post is by Theodore Mirvis of Wachtell, Lipton, Rosen & Katz.

Sometimes good things happen to good people.  This Memorandum provides some lessons learned from the recent Motorola/Icahn proxy contest, where even the twinning of Icahn and ISS proved not invincible.

The Topps Company Shareholders Litigation

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.

Robert K. Payson and Bradley W. Voss of Potter, Anderson & Corroon have released this Memorandum summarizing Vice Chancellor Strine‘s recent decision in In re: The Topps Company Shareholders Litigation.  In Topps, the Court builds on the narrative Chancellor Chandler offered in Ryan v. Gifford, explaining why the Delaware courts will not stay a later-filed Delaware action in a shareholder derivative suit in favor of a first-filed action in another state if the Delaware courts are persuaded that the issues are important and novel under Delaware law.  Although the general rule favors deference to the speedier plaintiff in the first-filed action, since plaintiffs in derivative suits (in theory, at least) are not suing on their own behalf, Delaware courts have not hesitated to proceed with a later-filed Delaware action notwithstanding ongoing proceedings elsewhere.

The Ryan and Topps decisions represent an interesting nuance in the debate over competition among states with respect to corporate law.  Although that scholarship emphasizes where firms will choose to incorporate, there may be competition among courts over shareholder derivative suits as some plaintiffs file in Delaware and others in different jurisdictions (such as the venue where the company’s headquarters is located).  If some plaintiffs file suit outside of Delaware courts–believing, perhaps, that a foreign state’s court will apply Delaware law in a manner more favorable to shareholders–which court takes control of the case will be particularly important.  And, of course, the fact that dueling suits are proceeding side by side raises a host of interesting issues, including whether the courts or the parties will “race” to an outcome to gain collateral estoppel effect and whether having two costly suits proceeding simultaneously is an efficient use of judicial resources.

The Effect of Enhanced Disclosure on Open Market Stock Repurchases

The John M. Olin Center has just posted a new paper by Michael Simkovic, an Olin Fellow in Law and Economics, entitled The Effect of Enhanced Disclosure on Stock Market Repurchases.  The paper studies the effect of the SEC’s rule requiring quarterly disclosure of shares purchased under share-repurchase programs on opportunistic use of share-repurchase announcements.  (Guest Contributor Jesse Fried also explored this issue in Informed Trading and False Signaling with Open Market Repurchases.)  The Abstract of Michael’s paper is as follows:

Publicly traded companies distribute cash to shareholders primarily in two ways–either through dividends or through anonymous repurchases of the company’s own stock on the open market.  Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock.  Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them.  Scholars and regulators became concerned that such announcements might be used by insiders to exploit public investors.  To increase transparency and reduce opportunities for exploitative behavior, the SEC required that companies disclose their repurchase activity for the past quarter in the 10-Q and 10-K filings beginning in January 2004.  This paper tracks the 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.

Commentary is especially welcome on this fascinating new piece.  The full article can be downloaded here.

Is Shareholder Democracy Encouraging Private Buyouts of Public Firms?

Editor’s Note: This post is by Lynn A. Stout of the UCLA School of Law.

Last month I published this op-ed in the Financial Times questioning whether the push for greater “shareholder democracy” may end up harming public investors by driving companies into the arms of private equity firms.  After assessing the substantial increase in private equity activity in recent years, the piece concludes:

There is reason to suspect that the modern trend towards greater “shareholder power” has gone too far and is beginning to harm the very shareholders it was designed to protect.  A certain level of investor protection and power is, of course, essential to an honest and healthy public market.  But you can have too much of a good thing.  The buyout trend suggests we may already have too much “shareholder democracy”–at least, too much for shareholders’ own good.

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