Yearly Archives: 2016

Dual Ownership, Returns, and Voting in Mergers

Posted by Andriy Bodnaruk, University of Notre Dame and Marco Rossi, Texas A&M University, on
Wednesday, May 25, 2016
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Andriy Bodnaruk is Assistant Professor of Finance at University of Notre Dame; Marco Rossi is Visiting Assistant Professor of Finance at Texas A&M University. This post is based on a recent paper authored by Mr. Bodnaruk and Mr. Rossi.

In our paper, Dual Ownership, Returns, and Voting in Mergers, recently published in the Journal of Financial Economics, we study how the joint ownership of target’s equity and debt affects investors’ behavior and outcomes of M&A transactions.

Prior research in this area implicitly assumes that each investor holds either stocks or bonds, but not both types of securities simultaneously. We document, however, that a significant (and steadily rising) percentage of the equity of many U.S.-listed corporations is owned by financial conglomerates whose affiliates are also major company bondholders. If affiliated fund managers coordinate their actions around M&A deals, financial conglomerates with dual ownership of target equity and debt—“dual holders”—have different incentives than pure shareholders. Our results could be broken down in the following three groups.

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Redacting Proprietary Information at the Initial Public Offering

Posted by Audra Boone, U.S. Securities and Exchange Commission, on
Wednesday, May 25, 2016
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Audra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone; Ioannis Floros, Assistant Professor of Finance at Iowa State University; and Shane Johnson, Professor of Finance at Texas A&M University. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

The U.S. Securities and Exchange Commission (SEC) mandates that publicly-traded firms disclose a large array of information to investors. Because certain disclosures could cause competitive harm, the SEC allows firms to request confidential treatment of competitively sensitive information contained in material agreements that it would otherwise be required to disclose to the public. If the SEC grants the request, the firm receives a Confidential Treatment Order (CTO), enabling them to redact specific content from their material, such as pricing terms, specifications, deadlines, and milestone payments. For the duration of time that the confidential treatment is awarded, which coincides with the length of the agreement, the redacted details are not subject to Freedom of Information Act (FOIA) requests. While a CTO shields proprietary information from competitors, it also prevents investors from obtaining potentially value-relevant information from SEC disclosures, which can be even more critical at the initial public offering (IPO) stage when it is often the first opportunity for the public to learn details about the firm.

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Antitrust Executive Order and Common Ownership

Posted by Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Tuesday, May 24, 2016
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Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Aidan Synnott, Andrew Finch, William Michael, and Joseph Simons. The complete publication, including footnotes, is available here.

On April 15, 2016, President Obama issued an Executive Order entitled “Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy.”

The Order called on federal agencies to identify potentially anticompetitive practices and to furnish to the Director of the White House National Economic Council a list of actions each agency can take, including rulemaking, to promote competition. The same week, the White House Council of Economic Advisers released an antitrust-themed issue brief, which stated that “many industries may be becoming more concentrated” and enumerated a number of “potential areas for future consideration” for additional regulation. Included among those areas was “common ownership of stock by large institutional investors.”

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Inside Lawyers: Friends or Gatekeepers?

Posted by Sung Hui Kim, UCLA School of Law, on
Tuesday, May 24, 2016
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Sung Hui Kim is Professor of Law and Faculty Director of the Program on In-House Counsel at the UCLA School of Law. This post is based on a recent article by Professor Kim.

What should the role of inside (in-house) lawyers be within the corporation? What, if any, obligations to the corporate entity should inside lawyers have to disrupt the material misconduct of their client representatives (to wit: senior managers, including the CEO)? Should inside lawyers conduct themselves as if they are “close friends” of senior managers or is there another, more appropriate model that would facilitate good corporate governance? To what extent should an inside lawyer think of herself as a “gatekeeper”—defined as a “private intermediary who can prevent harm to the securities markets by disrupting the misconduct of his/her client representatives? Would the imposition of some gatekeeping obligations ultimately backfire by foreclosing access to critical information about corporate misconduct? These controversial questions are, at least partially, addressed in my article, Inside Lawyers: Friends or Gatekeepers? 84 Fordham L. Rev. 1867 (2016), the fifth article of mine on the subject of gatekeeping.

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SEC Monitoring of Foreign Firms’ Disclosures

Posted by James Naughton, Northwestern University, on
Tuesday, May 24, 2016
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James Naughton is Assistant Professor of Accounting Information and Management at Northwestern University. This post is based on a discussion paper authored by Professor Naughton; Rafael Rogo, Assistant Professor of Accounting at the University of British Columbia; Jayanthi Sunder, Associate Professor of Accounting at the University of Arizona; and Ray Zhang of the Accounting Division at the University of British Columbia.

Foreign firms represent a significant proportion of firms trading in US markets. These firms, like listed US firms, are subject to monitoring by the Securities Exchange Commission (SEC). However, because of SEC’s tripartite mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, it is not obvious how SEC monitoring of foreign firms compares with US firms. In particular, SEC may balance the need for rigorous monitoring of foreign firms to protect US investors with an approach that facilitates capital formation by attracting foreign firms to list in the US. In addition, due to the heterogeneity of foreign firms and their home institutions, it is not obvious how the intensity of SEC monitoring is distributed across different countries. In our paper SEC Monitoring of Foreign Firms’ Disclosures, which was recently made publicly available on SSRN, we examine whether SEC’s monitoring activities differ for US versus foreign firms and whether it varies based on attributes of the home country’s institutions.

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Challenges to Going-Private Mergers in New York

Posted by Jason M. Halper, Orrick, Herrington & Sutcliffe LLP, on
Monday, May 23, 2016
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Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper, Richard V. Smith, and Gregory Beaman.

In a landmark decision on May 5, 2016, the New York Court of Appeals held that challenges to going-private mergers where there is a controlling stockholder must be reviewed under the deferential business judgment rule rather than the more exacting “entire fairness” standard of review, as long as certain protections for minority stockholders are in place from the time the transaction is proposed. See In the Matter of Kenneth Cole Productions, Inc., S’holder Litig.,—N.E.3d—, 2016 WL 2350133 (N.Y. 2016). In so holding, New York’s highest court adopted the same standard of review announced by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635, 648-49 (Del. 2014).

New York now joins Delaware in its view that going-private mergers with a controlling stockholder will be insulated from “entire fairness” review as long as the transaction is, at the time an offer is first made, conditioned on approval by (1) a truly independent and empowered special committee, and (2) an informed majority of the minority stockholders.

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Divided Loyalties? The Role of Defense Litigation Counsel in Shareholder M&A Litigation

Posted by C. N. V. Krishnan, Case Western Reserve University, on
Monday, May 23, 2016
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C. N. V. Krishnan is Professor of Banking and Finance at Case Western Reserve University. This post is based on a recent paper by Professor Krishnan; Randall Thomas, Vanderbilt University; and Steven Davidoff Solomon, University of California Berkeley School of Law.

In our paper Divided Loyalties? The Role of Defense Litigation Counsel in Shareholder M&A Litigation, we examine the role of defense litigation counsel in merger and acquisitions (M&A) litigation. We theorize that defense litigation counsel may have two possibly conflicting roles in this litigation. First, defense litigation counsel will aim to defend the target company and its directors from claims that the directors breached their fiduciary duties to the target’s shareholders. Second, counsel will seek to ensure that the negotiated transaction is not enjoined, or otherwise halted by shareholders, and that in the absence of competing bidders, the transaction completes on its initial terms and price. These two goals may conflict as defense litigation counsel seeks to settle potentially worthy claims quickly and cheaply in order to ensure deal completion.

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Italian Boards and The Strange Case of the Minority Becoming Majority

Posted by Marco Ventoruzzo, Bocconi University and Pennsylvania State University, and Piergaetano Marchetti, Bocconi University, on
Monday, May 23, 2016
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Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law, and Bocconi University; Piergaetano Marchetti is Professor of Commercial Law at Bocconi University. This post comes to us from Professors Ventoruzzo and Marchetti.

Italian law provides for a fairly unique and interesting mechanism allowing “minority” shareholders to appoint a percentage of board members. In a nutshell, this system—called “list voting” or “slate voting” and regulated by the “Consolidated Law on Financial Markets”—injects an element of proportionality in the election of the board. It is profoundly different from “proxy access” in the U.S., but it shares with it the underlying goal of granting a stronger voice to institutional investors and qualified minorities. Significant differences also exist with “cumulative voting,” a rule more familiar to American readers, because list voting is more simple and leads to more predictable outcomes. As the discussion on proxy access and active investors unfolds in the U.S. and other countries, and also considering the significant investments of international funds in Italian listed corporations, it is interesting to take a closer look at these rules and their actual impact.

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Equity in LLC Law?

Posted by Mohsen Manesh, University of Oregon School of Law, on
Sunday, May 22, 2016
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Mohsen Manesh is Associate Professor at University of Oregon School of Law. This post is based on a recent paper authored by Mr. Manesh. This post is part of the Delaware law series; links to other posts in the series are available here.

To what extent does equity play a role in limited liability company (“LLC”) law? To what extent do courts retain the judicial discretion “to do right and justice” [1] in circumstances in which the LLC statute and the applicable LLC agreement do not otherwise offer an adequate remedy to an aggrieved LLC member or manager?

This question is particularly relevant in Delaware, which plays an outsized role in LLC law due to its status as the leading legal haven for LLCs. Unlike many other states’ statutes, Delaware’s LLC statute purports to “give maximum effect to the principle of freedom of contract and to the enforceability of [LLC] agreements.” [2] Exercising this freedom of contract, LLC parties routinely agree to limit or wholly eliminate fiduciary duties, the judge-made duties that courts have traditionally applied to ensure equity in business associations. And in deference to the LLC statute, Delaware courts have found themselves robotically enforcing these agreements, without ever seriously questioning whether such enforcement is fair, reasonable, or just given the circumstances. Thus, until recently at least, based on statute and precedent, the role of equity in LLCs seemed clear: Equity is subordinate to the freedom of contract and the express terms of the agreement governing an LLC.

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Resource Accumulation through Economic Ties

Posted by Mark Westerfield, University of Washington, on
Saturday, May 21, 2016
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Mark Westerfield is Assistant Professor of Finance at the University of Washington. This post is based on an article authored by Professor Westerfield; Yael Hochberg, Professor of Finance at Rice University; and Laura Lindsey, Associate Professor of Finance at Arizona State University.

In our new paper, Resource Accumulation through Economic Ties: Evidence from Venture Capital, which was recently published in the Journal of Financial Economics, we develop a robust and generalizable methodology that allows us to separately identify the seeking of similar versus highly or differently endowed partners. We estimate our model in a setting in which organizational networks are of primary importance: the VC industry.

Our findings suggest that concerns over agency conflicts are not a primary concern for ties among VC firms, but instead are dominated by the desire to accumulate distinct resources for the production function. Furthermore, in the VC setting, value-added resources other than capital appear to be able to exist separately from capital and still be exploited effectively.  READ MORE »

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