Yearly Archives: 2008

The Geography of Block Acquisitions

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, April 10, 2008
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This post by Jun-Koo Kang and Jin-Mo Kim is part of the series of posts on corporate governance articles accepted for publication in prominent Finance Journals.

Our forthcoming article in the Journal of Finance entitled The Geography of Block Acquisitions, extends the literature on geographic proximity by studying how corporate governance activities of block acquirers in targets and target announcement returns are affected when the acquirers are located near the targets.

Using a sample of 799 partial acquisitions in the U.S. during the 1990 to 1999 period, we find that:

  • Block acquirers exhibit a strong preference for targets located near them, indicating that geographic proximity plays an important role in determining acquirers’ choice of targets.
  • Geographically proximate block acquirers are more likely to be involved in post-acquisition governance activities in targets than are remote block acquirers. Specifically, we find that these acquirers are more likely to have their representatives on the target’s board and to replace poorly performing target management after block share purchases.
  • Geographically proximate targets experience both higher abnormal announcement returns and better post-acquisition operating performance than those of other acquisitions. The positive valuation effects are more pronounced when there are greater information asymmetries, and when acquirers have their representatives on the targets’ boards.

The full paper is available for download here.

Dangerous Dithering

Posted by Peter J. Wallison, American Enterprise Institute, on
Wednesday, April 9, 2008
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This post is from Peter J. Wallison of the American Enterprise Institute.

It is often said of Congress that it can’t act on anything important except in a crisis. What is seldom noticed is the corollary that Congress puts off acting until ordinary problems develop into crises. For years, Congress has had before it two serious problems—the gradual loss of U.S. preeminence in financial transactions and the inadequate regulation of Fannie Mae and Freddie Mac—and has done nothing about either. This gives rise to a suspicion that we face these crises because a dysfunctional Congress can’t act until a crisis actually occurs. The developing situation with Fannie Mae and Freddie Mac is a test of this proposition. If the Senate Banking Committee doesn’t act on the current GSE legislation, which would give their regulator receivership powers, the outcome will be a crisis in which the necessary congressional action will be devastating for the taxpayers.

These issues are addressed in a recently circulated AEI Financial Services Outlook entitled “Dangerous Dithering: Congressional Inaction Plants the Seeds of Crisis”. It is available here.

Litigation Kennel?

Posted by Rodman Ward, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, April 8, 2008
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This post is from Rodman Ward of Skadden, Arps, Slate, Meagher & Flom 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.

Vice Chancellor Lamb’s recent memorandum opinion in the Delaware Court of Chancery, In Re SS&C Technologies, Inc. Shareholders Litigation, adds an interesting twist to the “readily available plaintiff” question.

The SS&C opinion and order imposes sanctions on the plaintiffs and their counsel for filing, in bad faith, a motion to withdraw. The defendants contended, and the Court found, that the motion was filed in an effort to cover up the discovery record relating to the “litigation spawning purpose” of a web of partnerships alleged to have been formed to provide plaintiffs in derivative and class litigation against publicly traded companies.

In the recent and well known Lerach and Weiss cases, the lawyers had ensured a stable of potential representative plaintiffs by paying them about ten percent of the attorney’s fees awarded by the court. In SS&C, the defendants allege that the managing partner of one of the plaintiff partnerships manages “a web of small investment partnerships – for the sole purpose of bringing stockholder lawsuits through his attorney.” Each of the nine investment partnerships cited “owns only a few shares … in roughly 60 to 80 public companies.” That would amount to about 500-700 companies subject to suit. Although the managing partner denied that the partnerships served only to bring stockholder lawsuits, he admitted that they were “economically irrelevant to him.” He acknowledged that he had, himself, been a party in fourteen proceedings and had been involved in “bringing roughly 30 stockholder lawsuits on behalf of himself and many of … [the partnerships].” The partnerships are consistently represented by the same law firm.

The Court’s opinion is highly skeptical of the managing partner’s claims. He and his counsel were found to have made a number of statements in documents filed with the Court which, the Court wrote, “are easily susceptible to the inference that they were made to conceal the existence of this web of partnerships and their evident litigation spawning purpose.” (emphasis supplied) The defendants, for their part, characterized the entire operation as “a litigation kennel.”

To support its findings, the Court sets out an extensive series of misstatements, mischaracterizations, inconsistencies and misrepresentations which the plaintiffs described at argument as “honest mistakes.” Although the Court could not find, based on the “sparse record before it,” that the partnerships could never serve as representative plaintiffs, it nevertheless sanctioned the plaintiffs for bad faith and abuse of judicial process in filing a spurious motion to withdraw as counsel.

The full opinion can be found here.

JANA Master Fund, Ltd. v. CNET Networks, Inc.

Posted by James Morphy, Sullivan & Cromwell LLP, on
Monday, April 7, 2008
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This post is from James Morphy of Sullivan & Cromwell 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.

In a decision issued on March 13, 2008, the Delaware Chancery Court in JANA Master Fund, Ltd. v. CNET Networks, Inc. held that CNET’s advance notice bylaw applied only to shareholder proposals that are sought to be included in the company’s proxy materials pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934, as amended, and therefore did not apply to independently financed shareholder proxy solicitations. The decision is based upon the somewhat unusual wording of the CNET advance notice bylaw, the relevant portion of which is quoted below. Chancellor Chandler cited three principal reasons based on the specific language for limiting the bylaw’s applicability: (i) the language that “any stockholder…may seek to transact other corporate business at the annual meeting” does not make sense outside of the context of Rule 14a-8 because shareholders using their own proxy materials do not need management approval; (ii) the bylaw’s deadline for shareholder notice to the company is tied to the mailing date of the company’s prior year’s proxy materials, as is the deadline under Rule 14a-8 and unlike most advance notice bylaws; and (iii) in the Court’s view, most importantly, the final sentence of the bylaw (which states that “such notice must also comply with any applicable federal securities law establishing the circumstances under which [CNET] is required to include the proposal in its proxy statement…”) makes it clear that the scope of the bylaw is limited to proposals that shareholders seek to have included in the company’s proxy materials.

A memorandum summarizing the decision is available here.

Diller vs. Malone

Posted by The Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, April 4, 2008
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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.

The Delaware Chancery Court has issued its decision in the closely watched trial between Barry Diller and John Malone and their respective companies, IAC and Liberty Media.
Liberty owns all the high-voting stock and a majority of the votes in IAC but it has granted Diller, IAC’s CEO, an irrevocable proxy to vote these shares. IAC has proposed to spin-off four of its subsidiaries as independent public companies, and the dispute between IAC’s management (including Diller) and Liberty (including its Chairman, John Malone) is whether or not to replicate the IAC two-tiered voting structure in these spin-offs. Diller is contemplating voting Liberty’s shares in favor of the proposal which Liberty vehemently opposes.

The clear winner in this round seems to be Diller. The court concluded that Liberty failed to demonstrate that Diller breached or threatened to breach any contractual duty he owes to Liberty, and rejected Liberty’s claim that the proposed single-tier spin-off gives rise to any right of consent on Liberty’s part. The court held that it was premature to rule on claims relating to the fiduciary duties of the IAC board of directors. IAC was represented by our frequent blog contributor Theodore Mirvis and his partners at Wachtell Lipton Rosen & Katz.

The full opinion can be found here.

JCPenney Joins Firms Agreeing to Adopt my Poison Pill Bylaw

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, April 3, 2008
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Editor’s Note: This post is from Lucian Bebchuk of Harvard Law School.

JCPenney became the third company this proxy season to reach an agreement with me to amend its by-laws to limit the adoption of poison pills.

The adopted by-law is based on a shareholder proposal to amend the company’s by-laws that I submitted for the company’s upcoming annual meeting. Following my agreement with the company, the company’s board adopted the new by-law and I withdrew the shareholder proposal. The company’s amended by-laws were filed yesterday and are available here.

Under the new by-law provision, any extension of a poison pill plan not ratified by the shareholders must be approved by at least 75% of the members of the board of directors, and a pill not so extended will expire one year after its adoption or last such extension. An article about my model pill by-law on which this provision is based is available here.

JCPenney’s adoption of my poison pill by-law was preceded in this proxy season by an adoption by Safeway and an adoption by CVS Caremark, as well as an earlier adoption by Disney and an adoption by Bristol-Myers Squibb. Disney amended its by-laws after my proposal won 57% of the votes in Disney’s annual meeting. Safeway, CVS Caremark, and Bristol-Myers Squibb, like JCPenney now, amended their by-laws following an agreement with me that made a shareholder vote unnecessary. I hope that other public companies will follow the example set by these five companies.

I would like to express my appreciation again to Michael Barry and Ananda Chaudhuri from the law firm of Grant & Eisenhofer for their valuable legal advice and legal representation in connection with my shareholder proposals in general and the pill by-law proposals in particular. I also wish to thank again Greg Taxin and Julie Gresham of Spotlight Capital Management for advising me on engagement with companies.

Delaware General Corporation Law

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, April 2, 2008
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Editor’s Note: This post is from Lawrence A. Hamermesh of 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.

The materials generated in the drafting of the 1967 revision to the Delaware General Corporation Law (including the report by Professor Ernest Folk to the Corporation Law Revision Committee and the minutes of that committee’s deliberations) are now available online here.

These materials, not widely available before, provide extensive background about the substance and process of the major 1967 corporate law revision project. Janet Lindenmuth and the staff of the Widener Law School Legal Information Center arranged to gather, scan and post this material.

Consequences of Delayed SEC Filings

Posted by Robert J. Giuffra, Jr., Sullivan & Cromwell LLP, on
Tuesday, April 1, 2008
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This post is from Robert J. Giuffra, Jr. of Sullivan & Cromwell LLP.

Three federal district courts have now ruled that a company’s delay in filing its Form 10-Q or 10-K with the SEC does not violate either (1) a widely used indenture provision that requires issuers to deliver copies of such reports to an indenture trustee within a specified time after their filing with the SEC or (2) the federal Trust Indenture Act. See UnitedHealth Group, Inc. v. Cede & Co., No. 06-cv-4307 (D. Minn. Mar. 10, 2008); Affiliated Computer Services, Inc. v. Wilmington Trust Co., No. 06-cv-1770, 2008 WL 373162 (N.D. Tex. Feb. 12, 2008); Cyberonics, Inc. v. Wells Fargo Bank N.A., No. H-07-121, 2007 WL 1729977 (S.D. Tex. June 13, 2007).

Applying New York contract law, these courts rejected the reasoning of a New York trial court decision finding that an issuer with similar language in its indenture was obligated to file such reports with the trustee within the time limit for their filing with the SEC. The Cyberonics decision is currently on appeal to the Fifth Circuit, and dispositive motions are pending in at least two similar cases in federal courts.

These decisions demonstrate the need to consider carefully the language of new indentures relating to the delivery of SEC reports to the indenture trustee.

A summary of the decisions is available here.

Healthy Hedge Funds, Sick Banks

Posted by Peter J. Wallison, American Enterprise Institute, on
Monday, March 31, 2008
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This post is from Peter J. Wallison of the American Enterprise Institute.

I recently circulated an AEI Financial Services Outlook entitled Healthy Hedge Funds, Sick Banks. The essay discusses the regulatory implications of the unregulated hedge fund industry’s apparent health when compared to the financial weakness of the heavily regulated banking industry in the current subprime crisis. The principal question addressed in the essay is whether the regulation of banks allows an industry that is inherently unstable to function with a reasonable degree of stability or whether the regulation itself is responsible for the instability that has historically afflicted banking.

I argue that risk-taking and instability in the banking industry is enhanced because market discipline is reduced by moral hazard. In this context, moral hazard refers to the sense among investors and depositors that in the end the government will rescue banks and other private sector institutions from the consequences of their own errors. The numerous actions by the Federal Reserve to increase liquidity in the face of the subprime crisis provide direct support for this belief. As a result, I suggest that the actions taken to shore up banks adversely affected by the subprime collapse has increased the level of moral hazard, and thus increased the likelihood that another similar crisis will result in the future.

The positive experience of the hedge fund industry suggests strongly that market discipline is a powerful mechanism for controlling risk. In fact, it implies that market discipline may be more effective than regulation in maintaining an industry’s stability. I also argue that regulation itself must be significantly improved in order to be effective in overcoming the moral hazard it fosters. I incorporate both implications in my suggestion to introduce specialized subordinated debt into the banking industry. The subordinated debt would be designed to provide bank supervisors with a market-based signal about bank risk-taking that is roughly equivalent to what the market would do in the absence of government regulation.

The full outlook is available here.

AFL-CIO Proxy Voting: A Response to Agrawal and Kaplan

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, March 27, 2008
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Editor’s Note: This post is from Daniel F. Pedrotty pf the AFL-CIO. The Agrawal study is described on our blog here; the initial AFL-CIO response is available on our blog here; two reactions to that AFL-CIO response – from Ashwini Agrawal and from Steven Kaplan – are available here.

Regarding the recent posting by Mr. Agrawal and Professor Kaplan,

Ashwini Agrawal, a graduate student at the University of Chicago, posted a paper on this blog that used a statistical model whose key variables were custom built by him to assert that the AFL-CIO votes its public company proxies based not on proxy voting guidelines, but on the union affiliation of public company employees. Through a series of e-mails (he has refused to meet in person or communicate over the phone) we told him he was completely and utterly wrong and asked him to release his data set. Mr. Agrawal accused the AFL-CIO of not responding to his questions after refusing to meet or release his data. University of Chicago Professor Steven Kaplan, who is advising Mr. Agrawal on this project, wrote a lengthy post defending these opaque methods.

Mr. Agrawal’s claim that he contacted the AFL-CIO and was denied information is false. Mr. Agrawal has never contacted a member of the AFL-CIO program staff to discuss his paper or ask for any data, and has refused every opportunity to meet and ask us questions.

Both posts also contain a series of important contradictions. Professor Kaplan and Mr. Agrawal repeatedly assert that the study can be easily replicated using publicly available sources of data. Kaplan emphasizes that this is “an important point. It does not rely on data that can be shaded by an interested party.”

Despite this, Kaplan later asserts that “in putting together a data set, a researcher spends a great deal of time and effort.” Which is it then? Is it a lengthy endeavor worthy of “great time and effort,” or something that’s “easily replicated?”

We continue to demand access to Agrawal’s data because it cannot be replicated. His data collection efforts were more subjective than mechanical. For example, when data on company unionization was incomplete Mr. Agrawal relied on information “from the Investor Relations departments of firms themselves.” [Appendix A, pg. 29]

The difficulty of replicating this skewed effort at data collection is obvious. How would the AFL-CIO go about determining which companies he contacted directly? Should we selectively call random Investor Relations departments and ask for the individual who spoke with Mr. Agrawal two years ago? What if the person he spoke with no longer works at the company? How do we know what source the Investor Relations Department used, and was it the same across all companies? Was a record of his phone conversations kept to back up his methodology?

Mr. Agrawal and Professor Kaplan assert that his paper has not been published, and that because it is not published they should be able to keep their data secret. It’s true that it hasn’t appeared in any peer reviewed setting–but it has been twice cited on the editorial page of the Wall Street Journal as evidence for repeated false accusations against the AFL-CIO, as well as being posted on this blog and widely circulated in academic and business circles.

Professor Kaplan’s defense that they won’t release data to a competing researcher is misplaced. We are the subject of a widely published study which makes false accusations based on unreproduceable statistical models. We are not seeking to complete a research project for a rival journal, but instead correct the record.

We would be happy to receive Mr. Agrawal’s data on the strict condition that we won’t turn it over to competing researchers or publish it in a competing paper. As outlined above, we need to review the accuracy of Mr. Agrawal’s data and statistical model, and when given the opportunity to talk to him, inform him of the serious flaws in his research.

A copy of the AFL-CIO’s recent report, Facts About the AFL-CIO’s Proxy Votes, is available here. We repeat our request that Mr. Agrawal release his data set or withdraw his paper.

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