Monthly Archives: August 2012

The Geography of Revlon-Land

The following post comes to us from Stephen M. Bainbridge, Professor of Law at the UCLA School of Law. Professor Bainbridge blogs on corporate law and other topics at 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 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., [1] the Delaware Supreme Court explained that when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.” [2]

Unfortunately, the Court’s colorful metaphor obfuscated some serious doctrinal problems. What standards of judicial review applied to director conduct outside the borders of Revlon-land? What standard applied to director conduct falling inside Revlon-land’s borders? And when did one enter that mysterious country?

By the mid-1990s, the Delaware Supreme Court had worked out a credible set of answers to those questions. As for the borders of Revlon-land, the Court had explained that:


The Carlyle Group Tries to Bar Investors From Court

Mark Lebovitch is a partner at Bernstein Litowitz Berger & Grossmann LLP specializing in corporate governance litigation. This post is based on an article by Ann M. Lipton, an associate at BLB&G.

As private equity giant Carlyle Group LP prepared to join rivals Blackstone Group LP and KKR & Co. as a publicly traded company this year, it made headlines with a stunningly “shareholder-unfriendly” proposal to eliminate the litigation rights of its future public owners.

On January 10, Carlyle amended its registration statement in advance of its forthcoming initial public offering (“IPO”) to include a provision declaring that any and all investor disputes would be decided in private arbitration proceedings rather than in a court of law.

Although Carlyle ultimately removed the provision after widespread publicity and SEC objections, it is likely only a matter of time before more companies attempt to insert similar provisions in their registration statements and corporate charters. Because class action claims are usually unavailable in arbitrations — Carlyle’s clause explicitly prohibited them — and because arbitration proceedings generally disadvantage individual plaintiffs to the benefit of corporate defendants, if such clauses become widespread, it will take away an important check on corporate conduct and deal a tremendous blow to investor rights.


Stakeholder Dialogue in Germany, Italy, and the United States

Matteo Tonello is managing director of corporate leadership at the Conference Board. This post is based on an issue of the Conference Board’s Director Notes series by Lorenzo Patelli, professor at the School of Accountancy of the University of Denver. This Director Note was based on a paper coauthored by Professor Patelli, available here.

Consistent with corporate social responsibility (CSR), firms strive to engage stakeholders through various initiatives aimed at fostering dialogue between managers and external stakeholders. Diverse forms of dialogue and broad involvement are critical to the success of stakeholder dialogue (SD) initiatives. This Director Notes describes the results of an international survey on 249 SD initiatives undertaken by firms in Germany, Italy, and the United States. The survey results highlight the limitation of current SD practices and identify a strong link between the national approach to corporate social responsibility and the firm approach to SD.

Firms seek the involvement of stakeholders in order to maximize the alignment of business activities with the interests of different organizational and social actors. [1] In particular, SD refers to all initiatives undertaken by firms to listen and communicate to stakeholders regarding a vast array of topics. [2] Many researchers have noted the positive effects SD is expected to produce:


Principles of Corporate Governance 2012

The following post comes to us from Alexander M. Cutler, chairman & CEO of The Eaton Corporation and chair of Business Roundtable’s Corporate Governance Committee. This post is based on the foreword and introduction of a Business Roundtable publication; the full version is available here.

Business Roundtable is recognized as an authoritative voice on matters affecting American business corporations and, as such, has a keen interest in corporate governance. Business Roundtable is an association of chief executive officers of leading U.S. companies with more than $6 trillion in annual revenues and more than 12 million employees. Member companies comprise nearly a third of the total value of the U.S. stock markets and represent nearly a third of all corporate income taxes paid to the federal government. Annually, they return more than $267 billion in dividends to shareholders and the economy. Business Roundtable companies give more than $7 billion a year in combined charitable contributions, representing nearly 60 percent of total corporate giving. They are technology innovation leaders, with $86 billion in annual research and development spending—nearly half of all total private R&D spending in the U.S. Only through sustainable, non-inflationary, long-term economic growth will America’s citizens, communities and companies remain competitive in the rapidly changing international economy. Business Roundtable asserts that to do this, the United States must create policies that foster a flexible and available workforce, sustainable cost structures and fair rules.


The Anatomy of a Credit Crisis

Raghuram Rajan is Professor of Finance at the University of Chicago.

How important is the role of credit availability in inflating asset prices? And what are the consequences of past greater credit availability when perceived fundamentals turn? In our recent NBER paper, The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s, my co-author, Rodney Ramcharan, and I broach answers to these questions by examining the rise (and fall) of farm land prices in the United States in the early twentieth century, attempting to identify the separate effects of changes in fundamentals and changes in the availability of credit on land prices. This period allows us to use the exogenous boom and bust in world commodity prices, inflated by World War I and the Russian Revolution and then unexpectedly deflated by the rapid recovery of European agricultural production, to identify an exogenous shock to local agricultural fundamentals. The ban on interstate banking and the cross-state variation in deposit insurance and ceilings on interest rates are important regulatory features of the time that allow us to identify the effects of credit availability that we incorporate in the empirical strategy.


Steering Financial Institutions Toward the High Road

Editor’s Note: Sarah Bloom Raskin is a member of the Board of Governors of the Federal Reserve System. This post is based on Governor Raskin’s speech at the Graduate School of Banking at Colorado, available here. The views expressed in this post are those of Governor Raskin and do not necessarily reflect those of the Federal Reserve Board, the other Governors, or the Staff.

We’ve all faced business decisions that offer the opportunity to choose between taking the high road and the low road. In the banking industry, the high road offers a way to do business and to succeed over the long term by building enduring relationships; structuring profitable, win-win arrangements; and treating customers and communities as meaningful stakeholders in the bank’s work. But sometimes choosing this high road just doesn’t seem to take us where we want to go fast enough. Suddenly, the low road can seem attractive and tantalizing, and it may offer short-term rewards that can be hard to resist. Taking the low road can be an exhilarating and profitable ride for a while, but it almost always leads to disaster and wreckage, and, when banks are the vehicle, taking the low road can cause significant economic and financial problems. As we’ve experienced over the last several years, when your car is wrecked, it’s a long walk home.

At the Federal Reserve, we are working with our fellow regulators to realign the restraints and incentives–the guard rails and HOV lanes, if you will–of the regulatory system to promote use of the high road and warn bankers off of the low roads where the rocks are falling, the curves are sharp, and many calamitous accidents happen.


Don’t Discourage Outside Shareholders

Editor’s Note: Lucian Bebchuk is a Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School.

The New York Times DealBook published today a piece I wrote, titled Don’t Discourage Outside Shareholders. The piece, available here, focuses on the SEC’s ongoing consideration of a rulemaking petition that advocates tightening the rules governing how quickly shareholders must disclose when they hold 5 percent or more of a company’s shares. I argue that such tightening could well unduly discourage the creation and activism of outside blockholders.

In contrast to the claims of the petition’s authors, the proposal should not be viewed as a “technical” closing of a loophole but rather as one that raises significant policy issues. In considering these issues, considerable weight should be given to the significant empirical evidence that the presence and involvement of outside blockholders enhances a company’s value and performance. Furthermore, the rules governing the balance of power between incumbents and outside blockholders are now substantially tilted in favor of insiders — both relative to earlier times and to other countries — rather than outside shareholders. This tilt counsels against tightening SEC rules in ways that would further disadvantage outsiders.


Securities Class Action Filings

John Gould is senior vice president at Cornerstone Research. This post is based on a report from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, available here. For more information, contact Mr. Gould or Alexander Aganin. A report from Cornerstone Research about last year’s class action filings is available here.

Federal securities class action filing activity in the first half of 2012 has decreased compared with 2011. There were 88 filings in the first six months of 2012, down 6 percent from both the first half and second half of 2011. If current trends hold, there will be 176 filings in 2012 by year-end, less than the 1997 to 2011 average of 193 but in line with the 2009 to 2011 average of 177.

The slight decrease in total filings was largely due to a substantial decline in Chinese reverse merger (CRM) and merger and acquisition (M&A) filings. There were five CRM-related filings and seven M&A-related filings in the past six months. Compared with the first half of 2011, CRM filings were down 79 percent and M&A filings were down 67 percent. Compared with the second half of 2011, CRM filings were down 44 percent and M&A filings were down 68 percent. Despite the drop in CRM-related filings, filings against foreign issuers as a percentage of all filings were greater than every year except 2011. The decrease in M&A filings easily exceeds the 15 percent decline in the number of M&A deals in the first half of 2012 compared with the first half of 2011. [1] While the number of nontraditional filings has declined, traditional securities class action filings have increased by 23 percent since the second half of 2011.


IPOs and Innovation

The following post comes to us from Shai Bernstein of the Department of Finance at Stanford University.

Corporate managers, bankers, and policy makers alike have expressed concerns that the recent dearth of initial public offerings (IPOs) has caused a breakdown in the engine of innovation and growth. In the paper, Does Going Public Affect Innovation?, which was recently made publicly available on SSRN, I explore whether the transition to public equity markets indeed affects innovation, and if so, how. Theoretically, the effect of IPOs on innovation is ambiguous. On the one hand, going public provides improved access to capital that may allow firms to enhance their innovative activities; on the other hand, market pressures and potential departure of employees following the IPO may lead to opposite results.

To answer this question, I use standard patent-based metrics to capture changes in innovative activity in the years around the IPO and focus on three important dimensions of firms’ innovative activity: internally generated innovation, the productivity and mobility choices of individual inventors, and the acquisition of external innovation.


NDA Use Restrictions — Use With Caution

David Fox is a partner at Kirkland & Ellis LLP, focusing on complex mergers and acquisitions as a member of the firm’s Corporate Practice Group. This post is based on a Kirkland & Ellis M&A Update by Mr. Fox and Daniel E. Wolf.

Much attention deservedly has been focused on the recent Delaware Chancery and Supreme Court decisions in the high-profile Vulcan/Martin Marietta case where the courts found that a “use restriction” in a confidentiality agreement (i.e., a provision that limits the recipient’s “use” of the disclosing party’s confidential information to a specified purpose) could in certain circumstances preclude the recipient from later commencing a hostile offer for a target company even absent an explicit standstill. A recent decision by Judge Rakoff in the Southern District of New York refusing the defendant’s motion to dismiss shows that “use restrictions” may also limit the ability of a recipient party to pursue an alternative opportunity after receiving confidential information under a non-disclosure agreement (NDA).

In the New York case (which at these preliminary stages accepts as true the factual allegations of the plaintiffs), a private equity investor signed an NDA with a broker/advisory firm that was seeking financing for a corporate client to implement a business idea in the cash management industry. The NDA stated that the PE firm would only use the confidential information shared by the broker to explore a potential business transaction involving the broker and the broker’s client. After actively considering a number of transaction opportunities with the broker and its client, the broker asserted that the investor later pursued and completed an acquisition of one of the potential targets allegedly identified by the broker without including the broker and its client.


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