Monthly Archives: May 2016

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

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

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?

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

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 »

Prioritizing Cybersecurity: Five Questions for Portfolio Company Boards

Glenn Davis is Director of Research for the Council on Institutional Investors. This post is based on a report prepared by Mr. Davis and the CII Staff.

As the frequency and severity of cyber attacks against global businesses continue to escalate, both companies and their investors are coming to terms with a grim reality: Data breaches, or cyber incidents, are no longer a matter of if but when. Having put to rest rose-colored notions of eliminating this threat, investors are looking to boards for leadership in addressing the risks and mitigating the damage associated with cyber incidents.

Cybersecurity is an integral component of a board’s role in risk oversight. Directors have the authority, capacity and responsibility to make pivotal contributions in this area by ensuring adequate resources and management expertise are allocated to robust cyber risk management policies and practices, and ensuring disclosure fairly and accurately portrays material cyber risks and incidents.

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Creditor Rights, Claims Enforcement, and Bond Returns in Mergers and Acquisitions

Luc Renneboog is Professor of Corporate Finance at Tilburg University. This post is based on a recent paper authored by Mr. Renneboog; Peter Szilagyi, Associate Professor of Finance at CEU Business School, Central European University, and Judge Business School, Cambridge University; and Cara Vansteenkiste of Tilburg University.

The market for corporate control has become increasingly global over the past decades, with cross-border mergers and acquisitions (M&As) now accounting for more than a third of M&A activity worldwide. To date, empirical studies that have investigated the potential cross-country spillovers in governance and legal standards mainly focused on the economic implications for shareholder wealth, relating the governance regimes in the countries of bidder and target to shareholder returns, to the takeover premium demanded by target shareholders in deals involving equity offers, to changes in the valuation of non-targeted rival firms and even of entire industries in which cross-border deals occur.

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Weekly Roundup: May 13–May 19, 2016


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This roundup contains a collection of the posts published on the Forum during the week of May 13–May 19, 2016.
















Intersection of Deal-Related Indemnification and D&O Advancement

Daniel Wolf is a partner focusing on mergers and acquisitions at Kirkland & Ellis LLP. The following post is based on a Kirkland memorandum by Mr. Wolf. This post is part of the Delaware law series; links to other posts in the series are available here.

A recent Delaware case highlights potentially unexpected results from the intersection of provisions in a private company purchase agreement relating to advancement of D&O legal expenses and indemnification of a buyer for seller breaches.

Purchase agreements in many private company transactions contain some form of two seemingly unrelated provisions: (1) an agreement by the sellers to indemnify the buyer for certain losses arising out of breaches of representations and warranties made by the sellers and (2) an agreement by the buyer to maintain or assume the rights of former directors and officers of the target contained in the target’s organizational documents to indemnification and advancement of expenses for actions taken prior to closing.

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The Post Dodd-Frank Evolution of the Private Fund Industry

Wulf Kaal is professor of law at the University of St. Thomas School of Law. This post is based on a recent paper authored by Professor Kaal.

Surveys conducted in the immediate aftermath of the enactment of Title IV of the Dodd-Frank Act suggested that private fund advisers successfully addressed compliance demands associated with the Dodd-Frank Act and absorbed the increased compliance costs of the registration and disclosure rules relatively quickly after registration. Refuting industry concerns over the effects of Title IV of the Dodd-Frank Act on the private fund industry, the Author showed in a survey conducted in 2012 that the private fund industry adjusted well to the regulatory landscape post Dodd-Frank. For example, the 2012 survey found that private fund investors’ rate of return was not adversely impacted by the registration and disclosure requirements. While private fund adviser firms that planned a strategic response were smaller than those firms that did not plan a strategic response, respondents in the 2012 survey did not take the Dodd-Frank Act changes into account in determining the assets under management (AUM) size of their funds and did not envisage a strategic response to the Dodd-Frank Act registration and reporting requirements. Moreover, compliance cost estimates in the 2012 survey were equally moderate, suggesting total compliance costs for the majority of advisers would range from $50,000 to $200,000. The long-term implications of Title IV’s unprecedented registration and reporting obligations for the private fund industry were at the time of the 2012 survey largely unclear.

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ValueAct, Activism Tactics, and Beneficial Ownership

Ethan A. Klingsberg is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg, Steven J. Kaiser, and Elizabeth Bieber. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The filing by the DOJ of a complaint in federal court on April 4, 2016 against ValueAct—claiming that ValueAct’s purchase of shares of two public companies violated the HSR Act’s notification and waiting period requirements and seeking $19 million in civil penalties (based on the $16,000 per day penalty provisions of the HSR Act)—has the potential to have an immediate impact on the tactics used by brand name “activist hedge funds,” such as ValueAct, to accumulate shares without prior notice to either the issuers in question or the market generally.

As some of the activism advocates from academia have observed, the imposition of any limitations on the ability of these hedge funds to accumulate shares without prior public disclosure that these accumulations are or will be occurring “can be expected to reduce the returns to [activist] blockholders and thereby reduce the incidence and size of outside [activist] blocks as well as [activist] blockholders’ investments in monitoring and engagement.” [1] In other words, impediments to the ability to buy shares “under the radar” will hit activist hedge funds where it counts most—i.e., by increasing their upfront investment costs.

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