Monthly Archives: July 2007

The Return of the Tender Offer

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

It’s not the Jedi, to be sure, but it is a bit of Back to the Future.  The tender offer–the technique that started the whole corporate-governance ball rolling, which in its devilish way has slip-slided around the board and management to get to the “owners”–is making a comeback.

The tender offer has been spurned since some really bad judicial decisions turned the SEC’s “best-price” rule into a liability monster, allowing plaintiffs to claim that any and all side deals with managers who happened to own stock resulted in extra pay for management’s shares–and thus requiring every stockholder to be “topped up” in like amount.  Tenders are now making a comeback, though, thanks to the SEC’s speedy (what’s a dozen years or so?) amendment to Rule 14d-10.

In this recent Memorandum, Mark Gordon lays out the tactical and other considerations being weighed by deal planners who now have this tool back in their toolboxes.  It’s enough to bring a tear to even the most hard-eyed veteran of the ’70s and ’80s.

The full Memorandum is available for download here.

New Wave of M&A Litigation Attacks Private Equity Deals

This post comes to us from Joseph S. Allerhand and Bradley R. Aronstam of the Securities and Corporate Governance Litigation Group at Weil, Gotshal & Manges.

The increasing involvement of private equity firms in M&A transactions has not gone unnoticed in the courts.  Our recent article in the New York Law Journal, entitled New Wave of M&A Litigation Attacks Private Equity Deals, addresses several recent decisions from the Delaware Court of Chancery involving private equity firms and management buyouts.  The article concludes that, while the players in the M&A market may have changed, the rules of the game remain the same where the board of directors decides that it’s time to sell the company.

The full article is available here.

The SEC, Corporate Governance, and the Election of Directors

Editor’s Note: This post is from J. Robert Brown, Jr. of the University of Denver.

Last week, The Race to the Bottom blog posted on a story in the Wall Street Journal about the SEC’s circulation of a proposal to amend Rule 14a-8.  The SEC’s proposed amendment, according to the article, would allow shareholders to submit proposals that relate to the election of directors, apparently addressing the issue raised by the Second Circuit’s decision in AFSCME v. AIG.  The article indicates that the authority to submit such proposals would be limited to shareholders–or, presumably groups of shareholders–owning more that 5% of the outstanding shares.

The approach raises a fundamental question about the role of the SEC in the corporate governance process, and that question is the subject of my paper, Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.  The topic is much too broad to address in a single post.  Suffice it to say that those who debate whether the SEC should be involved are behind the curve. 


Has SOX Made New York Less Competitive in Global Markets?

This post was authored by Guest Contributor Rene M. Stulz of the Fisher College of Business at The Ohio State University.

In a paper entitled Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices Over Time, Craig Doidge, G. Andrew Karolyi, and I show that Sarbanes-Oxley (“SOX”) cannot be blamed for the decrease in foreign listings on the New York Stock Exchange and NASDAQ.  A recent revision of the paper, posted here, provides additional supporting evidence for our conclusions.  Before reviewing that additional evidence, I summarize the main results of the paper below.

A popular explanation for the decrease in foreign listings on the exchanges in New York is that the passage of SOX has made U.S. listings significantly less attractive to foreign companies–so much so, it is argued, that many listed firms would delist and deregister if it were easy to do so.  (That explanation, among others, is set forth in a recent report entitled Sustaining New York’s and the US’s Global Financial Services Leadership, prepared for Senator Charles Schumer of New York.)  The argument is that SOX makes a U.S. listing less advantageous because it imposes severe costs on companies and their managers, especially through the compliance requirements of Section 404.  (Section 404 aims to reduce the market impact of accounting “errors” by assuring effective management control over reporting; and, in turn, creates significant legal exposure for companies as well as executives.)

For this popular explanation to be correct, it would have to be that firms that would have chosen to list in the U.S. before SOX are no longer willing to do so.  Our paper shows that:


Conservative Tilt or Shareholder Victory? The Supreme Court of the United States and Tellabs v. Makor

Editor’s Note: This post is from J. Robert Brown, Jr. of the University of Denver Sturm College of Law.

Much has been written about the conservative shift at the Supreme Court; among other things, there is the perception that the Court is taking an increasingly pro-business approach in its decisions.  As an example, commentators often point to Tellabs, Inc. v. Makor Issues, an 8-1 decision that toughened the pleading standards in securities class actions.  Defendants, according to attorneys at Wachtell, Lipton, “won an important battle in the fight against meritless litigation.”  (The firm’s analysis was covered on this blog here.)  The blog Legal Pad labeled Tellabs the latest in a series of setbacks that class action plaintiffs in business related cases have been dealt by the High Court.”

In fact, the case was a victory for shareholders.  And to the extent there was a surprise, it was the refusal of Chief Justice Roberts and Justices Kennedy and Thomas to side with their conservative brethren, Justices Scalia and Alito, both of whom wrote concurring opinions that favored an even stricter interpretation.


Supreme Court Enforces Strict Pleading Standard for Private Securities Actions

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

Warren Stern, John Savarese, George Conway, and Garrett Moritz of Wachtell, Lipton, Rosen & Katz have released this Memorandum assessing the Supreme Court’s recent ruling in Tellabs, Inc. v. Makor Issues & Rights, LtdIn Tellabs, the Memo explains, “[s]ecurities class action defendants . . . won an important battle in the fight against meritless litigation,” for the Court has held that, in order to survive a motion to dismiss, a securities fraud plaintiff must now plead facts establishing a “cogent and compelling” basis to conclude that defendants intended to deceive.  The circuits had split on the pleading standard for securities fraud plaintiffs; and, the Memo explains, by rejecting the relatively lax standard set forth by the Seventh Circuit, the Court has adhered to the pleading requirements set forth in the Private Securities Litigation Reform Act of 1995.  The Memo concludes:

Tellabs is a welcome development for defendants facing costly securities fraud litigation.  It recognizes, as the Supreme Court put it, that “[p]rivate securities actions . . . if not adequately contained, can be employed abusively to impose substantial costs on companies and individuals whose conduct conforms to the law,” and that the Reform Act must be interpreted to carry out Congress’s intent “to curb frivolous, lawyer-driven litigation.”

The full Memorandum is available here.

The Aardvark in the Boardroom

Editor’s Note: This post is from Joseph Hinsey of Harvard Business School.

Okay–that was a shameless play on the classic elephant metaphor.  But perhaps it’s a worthwhile way to remind us (once again?) of a fundamental issue long embedded in the corporate governance dialogue about shareholder rights and “shareholder democracy.”  That issue is called to mind by the introductory sentence of Professor Lucian Bebchuk‘s paper, The Myth of the Shareholder Franchise: “The power of shareholders to replace the board is a central element in the accepted theory of the modern public corporation with dispersed ownership.”

Who are the shareholders possessing this power “to replace the board”?  That question is, of course, not new.  Whenever it is posed in the course of the corporate governance discourse, however, the typical response is a simple assertion that the identity of the shareholders is irrelevant to the debate.  But we do need to acknowledge that–notwithstanding the time-honored debates about the influence of day-trading market speculators, managers of fixed-portfolio mutual funds, and other long term investors–the conventional wisdom that there is some monolithic shareholder able to control the board is inconsistent with dispersed public ownership that characterizes most major public companies.

It is quite true, of course, that dispersed shareholders can occasionally act to defeat management proposals–for example, removing an incumbent director or voting down a proposed transaction.  Proxy advisory firms like ISS and Proxy Governance, Inc. can substantially influence shareholder activism.  However, in most instances dispersed shareholders suffer from a leadership vacuum and are thus incapable of initiating action on their own.  On occasion, a mutual fund executive or corporate governance activist will step forward to provide leadership–but that leadership can be tainted by a private agenda.  In most cases, a leadership vacuum is an unfortunate hallmark of dispersed share ownership.

The baseline legal tradition–the fundamental principle that underlies the “shareholder franchise” with which Professor Bebchuk deals–posits that the board is to be subservient to the shareholders.  Today, such textbook legality must yield to practicality: dispersed shareholders can and should look to a properly functioning board for leadership on company decisionmaking.  The key to having a board capable of providing leadership for a dispersed group of shareholders is an independent board chair (“IBC”) who possesses not only the requisite skills to balance the board’s role with that of management but also an awareness of the Chair’s responsibility to provide leadership for dispersed stockholders.

It is quite true that the pool of qualified candidates for IBC positions is comparatively limited.  But an effective IBC need not have a career background geared to the enterprise’s business activities.  In reality, the most important qualification is a talent for leadership.  A useful way to describe a successful relationship between an independent board (i.e., a board providing effective management oversight) and management might be the phrase “constructive tension.”  Shareholders might ask themselves: does a candidate for the IBC position have the talent to lead such a board?  If so that director, in all likelihood, will be a quick study with respect to the enterprise’s business activities.

Rather than flogging away at general notions of shareholder democracy, activists would better serve the noble interests of corporate governance reform by articulating reasonable expectations with respect to the performance of independent boards and independent board chairs–i.e., feasible ways for the directors to serve the legitimate interests of shareholders.  Wouldn’t the “shareholder franchise” be better described as an entitlement to a responsive board exercising independent judgment rather than the pursuit of shareholder “dominance” over boards, a notion that ignores the impracticality of dispersed shareholders exercising leadership over corporate affairs?  Identifying the shareholder franchise as a theory of shareholder “dominance”–and recognizing that stockholder “dominance” would require supervision of corporate affairs–reveals the flaw of that approach, because dispersed shareholders are fundamentally incapable of providing ongoing supervision of the work of the board.

The legal traditions that conceived shareholders as “principals” and directors as “agents” have long since been overtaken in light of dispersed share ownership.  But the “aardvark” in the boardroom–the lack of leadership on behalf of dispersed shareholders–can best be resolved by an independent board that, in the words of section 2.01 of the ALI Principles of Corporate Governance, has “as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.”

Disney’s Board Adopts a Bylaw Amendment Based on My Proposal

Editor’s Note: This post is from Lucian Bebchuk of Harvard Law School.

The Board of Directors of the Walt Disney Company has adopted a bylaw amendment based on a revision of a proposal that I submitted last fall and which won 57% of the votes cast at Disney’s last annual meeting.

Although my proposal fell short of the majority necessary to amend the bylaws, the majority vote in its favor reflected strong shareholder support, and Disney’s chair John Pepper announced at the annual meeting that the board would give the proposal “prompt and serious consideration.” This consideration has now led to the board’s adoption of the bylaw amendment.

The Disney proposal is similar to a proposal I submitted to CA last spring. After initially seeking to exclude the proposal from the ballot, CA enabled shareholders to vote on it following a decision by Vice Chancellor Lamb of the Delaware Chancery Court. An article about the litigation and the model bylaw I developed is available here.

A Delaware Deal Law Two-Fer: Topps and Lear

This post is from 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.

Two opinions within 24 hours is enough to exhaust anyone.  Two important decisions on the interaction of Delaware deal law and private equity deals requires the stamina only high caffeination can sustain.  But here we have it: a true two-fer.  This Memorandum describes the implications of these cases in detail.

Vice Chancellor Strine in the Journal of Corporation Law

Editor’s Note: This post is from Hillary Sale of the University of Iowa College 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.

The University of Iowa College of Law’s Journal of Corporation Law will publish a unique symposium issue in the Fall of 2007 featuring an essay by Vice Chancellor Leo Strine of the Delaware Chancery Court.  The essay is based on the Vice Chancellor’s keynote speech delivered at the Journal‘s annual banquet.  (The essay was described in a previous post on this Blog located here.)  Past speakers at the banquet have included Chief Justice Myron Steele (whose remarks before the Delaware Bar Association last year were covered in this Blog here) and Justices Randy Holland, Jack Jacobs, Henry Ridgley, as well as former Chief Justice Norman Veasey and former Justice Joseph Walsh.

Vice Chancellor Strine’s essay is provocative and interesting.  The title, Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance,  provides a teaser for the essay’s content.  In the essay, Vice Chancellor Strine explores some of the key corporate governance challenges facing corporate actors today.  What makes his essay unique is his emphasis on bringing both labor and management into the governance picture.  Vice Chancellor Strine urges shareowners to focus their activism on long-run corporate performance and stresses that labor and management ought to work together on these issues.


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