Monthly Archives: June 2007

Topps and Lear: Another View of the Cathedral

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

Latham & Watkins has recently issued this Client Alert on Vice Chancellor Strine‘s recent decisions in Topps and Lear.  These two new opinions, also covered here and here, offer critical guidance to directors going through the acquisition process, and particularly boards contemplating going-private transactions.  The Alert offers clients a number of considerations to guide deal processes in the wake of these decisions, concluding that:

From a process perspective, in both Topps and Lear, the court expresses significant concern regarding the discussions between management and the successful bidder in advance of the board becoming aware of the bidder’s interest.  The consequences of leaving the bag early can be twofold:

–The court is likely to order additional disclosure if contacts between management and the private equity sponsor are not fully articulated, with attendant delay in the proxy solicitation process; and

–Such activities can play a significant role in changing the court’s perception of the process from one properly led by independent directors to one dominated by management and/or the interested directors, such that the entire process loses credibility.

More details on the implications of these decisions for directors and practitioners alike are described in the full Client Alert, which is available here.

Topps and Bottoms: A Dubious Performance By Dissident Directors

This post is from Lawrence A. Hamermesh of the Widener University School of Law. 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.

Vice Chancellor Leo Strine last week produced another wonderfully detailed and thoughtful opinion, this time in In re The Topps Company Shareholders Litigation, the case challenging the proposed sale of Topps (think baseball cards) to a private equity firm run by Michael Eisner (think Disney).  There are already a number of descriptions and comments on the opinion (see, for example, here and here), and this case surely is significant even in its obvious ways.  While the Vice Chancellor grants a preliminary injunction halting the transaction in order to permit additional disclosure–a remarkably common remedy of late, as in Netsmart and Caremark, covered here and here–it takes the further and notable step of requiring the Topps board to free a competing bidder (Upper Deck, think baseball cards again) from a standstill agreement it had entered into with Topps during the go-shop period following execution of the Eisner merger agreement.

The Vice Chancellor is particularly critical of the board’s failure to pursue negotiations with Upper Deck once it became clear that Upper Deck could offer a transaction that would be significantly superior to the Eisner deal.  The court evidently concluded that this failure was likely driven–at least in part–by the fact that Eisner had given assurances that Topps’s incumbent managers (including the son of its founder) would continue in office after the merger, while the new bidder, Upper Deck, had made no such assurances.  On the other hand, Vice Chancellor Strine found that the original agreement with Eisner was a reasonable step for the board to take–a step that involved a 40-day go-shop period, a match right, a 3% termination fee for a superior bid accepted during the go-shop period, and a 4.6% termination fee for bids accepted after the go-shop period.  Most notably, the Eisner merger agreement permitted the board to pursue negotiations, even after the go-shop period, with a person the board concluded offered a reasonable probability of presenting a superior bid.

The lessons for M&A practitioners, however, aren’t what caught my attention here.  I was taken, rather, by the interesting and not altogether flattering light shed on the role of dissident directors.  In an environment in which proxy access tops the charts for corporate governance issues, a real-life example of how dissident directors actually performed in the heat of exploring a merger may say a great deal about the desirability of enhancing proxy access.  And the story in the Topps case, at least as told in the Vice Chancellor’s opinion, is not a strong testimonial in support of proxy access.  That story, and my analysis of its implications, follow below.


You Say Ph.D., I Say Toast

For those interested in the vigorous debate among academics and practitioners on the virtues and vices of shareholder activism, Part V of Storming the Castle, Lawdragon‘s recent profile on the discussion panels held last year here at Harvard as part of Professor Robert Clark‘s and Vice Chancellor Leo Strine‘s course Mergers, Acquisitions, and Split-Ups, is a real treat.  (I’ve encouraged readers to check out other parts of this fascinating piece in posts here, here, and here.)  In this Part–which Lawdragon has aptly entitled You Say Ph.D., I Say Toast–the piece gives a behind-the-scenes look at a clash among many of the major players in today’s shareholder activism debates.

The panel, entitled Stockholder Activism and M&A: Has Just Say No Become Always Say Yes?, featured Martin Lipton, of Wachtell, Lipton, Rosen & Katz; Jay Lorsch, of Harvard Business School; Lucian Bebchuk, from Harvard Law School; Josh Friedman of Canyon Capital Advisers; James Morphy, of Sullivan and Cromwell; and Ed Haldeman of Putnam Investments.  The discussion, which played to a packed house, began with Professor Bebchuk explaining his role in offering a proposed bylaw as a Computer Associates stockholder that would require a unanimous board vote in order to adopt a poison pill.  The CA board sought to exclude the proposal from the proxy under Rule 14a-8 on the ground that, if adopted, the bylaw would violate the DGCL.  Professor Bebchuk sought a declaration from Chancery that the bylaw, if adopted, would not violate the General Corporation Law; and although he did not reach the merits because the case was unripe, Vice Chancellor Lamb’s opinion strongly suggested that the bylaw could not be left off the proxy under Rule 14a-8.  The bylaw eventually got 41% of the shareholder vote, and CA eventually adopted a pill that shareholders can redeem under certain circumstances.

Aside from Professor Bebchuk, virtually no panelist at Has Just Say No Become Always Say Yes? thought this was a good thing.  Martin Lipton, who authored a two-page Memorandum that described this sequence of events as “very disturbing,” suggested that Professor Bebchuk’s analysis, while perhaps sound in theory, was rather disconnected from the daily realities faced by corporate boards.  “Lucian,” Lipton said, “has never met a board of directors that he trusts,” and thus has concluded that “the key to proper functioning of a corporation is to give shareholders a stick to club the board of directors” with.  Lipton also treated the audience to a description of his work in conceiving the poison pill, noting that his invention was not “designed to entrench management” but to “rest in the business judgment of the board of directors what should be done.”

James Morphy, head of Sullivan and Cromwell’s esteemed merger practice, also suggested that, while the proposed bylaw represented some “lofty ideas,” corporate law is often practiced “down in the weeds . . . on a daily basis.”  Even fellow academic Jay Lorsch, of Harvard Business School, suggested that CA’s directors acquiesced in a more shareholder-friendly version of the pill because they were “annoyed,” not because they were persuaded that the revised pill was in the interests of shareholders.  For his part, Professor Bebchuk insisted that the data we have on poison pills (and their use with effective staggered boards) suggests that their use reduces shareholder returns.

This panel had something for everyone interested in corporate governance: the debate on the social optimality of shareholder activism, the history and purpose of the very first poison pills, and the relationship between corporate law scholarship and practice.  The Lawdragon piece describing the debate is available here, and the Program on Corporate Governance has made video of the entire discussion available here. (video no longer available)

Creditors Cannot Bring Direct Claims for Breach of Fiduciary Duty–But Substantial Questions Remain

This post comes to us from John L. Reed of Edwards Angell Palmer & Dodge.  We thank John and his colleagues for allowing us to bring this insightful Memorandum to our readers. 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.

In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, the Delaware Supreme Court, in a case of first impression, provided some clarity on the controversial issue of whether and to what extent creditors have the ability to assert fiduciary duty claims against directors.  The Supreme Court held, unequivocally, that “creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against [a] corporation’s directors.”  Rather, the court noted, creditors can protect their interests by asserting derivative fiduciary duty claims on behalf of an insolvent corporation or by asserting any applicable direct non-fiduciary duty-based claims.  In the opinion, the Court pointed out that the plaintiff asserted only a direct claim for breach of fiduciary duty and waived any basis to pursue such a claim derivatively.

While the Gheewalla decision put to rest the issue of a creditor’s ability to pursue direct claims for breach of fiduciary duty, there remain unresolved questions about (1) whether the Delaware Supreme Court has modified the historical “insolvency” test under Delaware’s corporate law; (2) the rights and roles of creditors and the timing of derivative claims by creditors; and (3) exactly how directors are supposed to balance the competing interests of corporate constituencies when the company is insolvent but nonetheless operating.

Those questions, and others, are discussed in a Memorandum available for readers here.  Below, I summarize some of the crucial considerations for directors of distressed companies in the future.


Shareholder Activists Risk Destroying Board Effectiveness

David A. Katz and Laura A. McIntosh of Wachtell, Lipton, Rosen & Katz have released this Memorandum detailing several proxy-access and executive-compensation proposals voted on during this year’s proxy season.  The Memorandum offers a highly insightful analysis of the effects of shareholder activism on corporate governance, concluding that “the specific interventions that are the subject of recent stockholder proposals are becoming less justified as more companies move towards a majority-voting standard in the election of directors,” and thus that shareholder activists “would be wise . . . to let the current round of reforms play out rather than attempting to accelerate the pace of reform still further.”

The full Memorandum is available here.

Go Dick! Smile.

Lawdragon‘s recent six-part profile on the corporate law curriculum at Harvard, Storming the Castle, has offered readers fascinating insights on a series of panel discussions sponsored by the Program on Corporate Governance and hosted here in Cambridge as part of Mergers, Acquisitions, and Split-Ups, a new course taught by Professor Robert Clark and Vice Chancellor Leo Strine.  (I introduced readers to the Lawdragon piece in earlier posts here and here.)

Part IV of the profile, however–entitled Go Dick! Smileis the showstopper.  That Part describes the panel on Spinoffs and Breakups: The Case of Time Warner, where opponents in the Carl Icahn/Time Warner proxy saga came before a packed room at Harvard Law to debrief the battle and its implications for the future of corporate governance.  Several of the major players in the proxy fight came to offer their perspective: Richard Parsons, CEO of Time Warner; Bruce Wasserstein, CEO of Lazard; Gene Sykes of Goldman Sachs; and Paul Cappuccio, Time Warner’s General Counsel.

All four offered candid and insightful reflections on Icahn’s attempt to influence corporate decisionmaking at Time Warner.  After acquiring about 3.5% of Time Warner’s stock, Icahn–who thought the shares badly undervalued–asked Parsons to spin off Time Warner’s massive cable division and undertake a $20 billion share buyback program to boost the stock price.  When Parsons–and other major shareholders–resisted, Icahn retained Lazard, who promptly prepared a 343-page report recommending that the Time Warner board split the company in four and proceed with Icahn’s proposed buyback.  Although Time Warner eventually agreed to buy back nearly $20 billion in shares, the company successfully resisted Icahn’s proposed asset sales.  (Whether that result was good for shareholders, of course, remains to be seen.)

All of the panelists, along with Professor Clark and Vice Chancellor Strine, seemed to agree that Icahn’s tactics revealed that Parsons did not as close a bead on the pulse of the investor community as he might have.  But the speakers also seemed to conclude that the Time Warner/Icahn story points to some of the limits of the influence even a well-heeled shareholder activist can exert on a major public company: as Gene Sykes, who advised Time Warner, indicated, Icahn was only able to push Parsons as far as fellow investors would allow.

Readers should absolutely check out the Lawdragon piece, available here, to see what lessons can be drawn from this rare and candid look inside a major proxy fight.  And if you’d like a firsthand look at the panelists and their debate, the Program on Corporate Governance has posted the video of the discussion here. (video no longer available)

Michael Jensen’s New Work on Integrity

This post is by Lucian Bebchuk of Harvard Law School.

Michael Jensen has a new work on integrity. Co-authored with Werner Erhard and Steve Zaffron, the work is titled Integrity: a Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality. (This link is to the authors’ PowerPoint presentation on the subject which is available on SSRN; the paper itself wil be publicly released in the fall.) The paper will be presented at HLS at the end of October.

A Friendly Tale of Hot Dogs and Trainwrecks

As I mentioned last week, Lawdragon has recently published a six-part profile, Storming the Castle, that describes the innovative integration of insights from practice into the newest corporate law course offerings here at Harvard.  The profile emphasizes how Professor Robert Clark and Vice Chancellor Leo Strine, who last year co-taught Mergers, Acquisitions, and Split-Ups, populated their syllabus with both the doctrinal building blocks favored by professors and the pragmatic lessons practitioners have gleaned from decades of experience negotiating mergers.

Topics ranged from poison pills to shareholder activism, and rarely does a one-semester syllabus dare to cover so much ground.  But what truly made the course unique was the panel discussions, hosted by the Program on Corporate Governance, in which expert practitioners were invited to explain and defend their views before overflow crowds of students and faculty.

Part III of Lawdragon‘s profile, A Friendly Tale of Hot Dogs and Trainwrecks, offers a fascinating description of the first panel presentation, which emphasized the notion that a merger functions, in many ways, as an extraordinary experience in contract negotiation.  (The role of contract law as an analytical tool for assessing mergers has been a frequent subject of courts and commentators alike.) The panelists included Richard Climan of Cooley Godward and Eileen Nugent and Lou Kling of Skadden Arps, each of whom brought decades of negotiating merger agreements–occasionally, apparently, with each other–to bear on the discussion.

The Hot Dogs and Trainwrecks profile, available here, is a must-read, giving readers insights on the negotiation of the famed material-adverse-change clause and its implications for buyer’s remorse in the merger market. In addition, the Program on Corporate Governance has posted a video of the entire panel discussion here. (video no longer available)

Response: Bringing Directors and Stockowners Together

This post is by Broc Romanek of

I can’t help but post a brief response to Carl Olson’s recent post about allowing shareholders to directly communicate with directors. Although I agree that many companies should be doing a better job of ensuring that directors hear the perspective of shareholders–and even hear directly from shareholders under certain circumstances–I think it is unreasonable and impractical for shareholders to have unfettered access to directors.

The reality is that most communications sent to directors are of a trivial nature and would distract directors from the valuable (and limited) attention they can give to overseeing the company. Do we really want directors reviewing emails and letters from shareholders, who might also be customers with petty complaints about a product or service being defective? Shareholders don’t have unfettered access to senior managers at a company; why should they have that kind of access to directors who serve on a part-time basis?

As for the role of corporate secretaries in the “vetting shareholder communications” process, I can tell you from first-hand experience–I know many of the folks that serve in this capacity, and serve on the National Board and as head of the Mid-Atlantic Chapter of the Society of Corporate Secretaries–that secretaries view their primary duty as one of serving directors, not senior management. Thus, if a shareholder sends a communication that truly deserves to be seen by independent directors, corporate secretaries will ensure that directors see it.

Moreover, for those companies listed on the NYSE, under Section 303A.03 of the NYSE’s Listed Company Manual (as clarified in FAQ D.1, issued by the NYSE Staff in January 2004), corporate secretaries are required to follow instructions from non-management directors regarding “what, when, and how they want to review” any communications sent to the directors. In other words, the corporate secretary isn’t permitted to make any independent decisions as to what communications the directors see–and, of course, can’t share any communications with management unless instructed to do so by the non-management directors. This seems to me to be the most reasonable approach to ensuring that shareholders can communicate with directors–and hopefully is a solution that addresses Carl’s concerns about inappropriate screening of valuable shareholder communications.

Bebchuk’s “Case for Increasing Shareholder Power”: An Opposition

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

Paul Rowe, William Savitt, and I have just released Bebchuk’s “Case for Increasing Shareholder Power”: An Opposition.  The Article argues that the sweeping changes in corporate law proposed in Lucian Bebchuk‘s The Case for Increasing Shareholder Power–in particular, vesting in shareholders the power to change the company’s charter and to authorize mergers–represent radical, risky changes in Delaware corporate law that would be both unwise and impractical.  In short, the case for Bebchukian revolution falls short.  The abstract describes the Article as follows:

This paper sets out the view that Lucian Bebchuk’s “case for increasing shareholder power” is exceedingly weak.  It demonstrates that Bebchuk’s proposed overthrow of core Delaware corporate law principles risks extraordinarily costly disruption without any assurance of corresponding benefit; that Bebchuk’s case is unsupported by any empirical data; that Bebchuk’s premise that corporate boards cannot be trusted to respect their fiduciary duty finds no resonance in the observed experience of boardroom practitioners (perhaps not surprisingly, as the proposal comes from the height of the ivory tower), and that its obsession with shareholder power is particularly suspect (if not downright dangerous) in light of the palpable practical problems of any shareholder-centric approach.

The full Article is available here.

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