Tag: Contracts


Negotiation in Good Faith—SIGA v. PharmAthene

Philip Richter is a partner and Co-Head of the Mergers & Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Richter, Peter Simmons, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court’s decision in SIGA Technologies Inc. v. PharmAthene Inc. (Dec. 23, 2015) has increased the risk associated with entering into a “preliminary agreement”—i.e., an agreement to negotiate in good faith a definitive agreement based on, for example, a term sheet or letter of intent, where some material terms have been set forth and others remain to be negotiated.

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The Biases of an “Unbiased” Optional Takeover Regime

Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law and Bocconi University. This post is based on a recent article authored by Prof. Ventoruzzo and Johannes Fedderke, Professor of International Affairs at Pennsylvania State University School of International Affairs.

The conundrum of the perfect balance between mandatory and enabling rules and the role of private ordering in takeover regulation is one of the most relevant and interesting issues regarding the optimal regime for acquisitions of listed corporations. The issue is rife with complex questions and implications, both from a more technical legal perspective and in terms of public choice.

In a recent and compelling article (available here and published in the Harvard Business Law Review in 2014, and discussed on the Forum here), Luca Enriques, Ron Gilson and Alessio Pacces have argued the desirability of an optional, default regime to regulate takeovers particularly in the European Union. According to this approach, which the proponents call “unbiased,” listed corporations should be allowed to opt out of the default regime and use private ordering to tailor more desirable rules on the “pillars” of the European approach: mandatory bid, board neutrality, and breakthrough. More precisely, they suggest a dichotomy, distinguishing already listed corporations and new IPOs: for the former, the default regime should be the one currently in place; for the latter, a regime crafted against the interests of the existing incumbents should be introduced. With adequate protections and procedural rules, the theory goes, it would be easier to achieve a more efficient regulatory structure.

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Insurers: Retirement Plans Look Less Golden

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, Armen Meyer, and Chris Joline.

Earlier this year, the Department of Labor (“DOL”) released a proposed regulatory package impacting the way investment advisors and brokers are compensated. [1] Under the proposal, recommendations to an employee retirement benefit plan or an individual retirement account (“IRA”) investor will be considered “fiduciary” investment advice, thus requiring the advice to be in the “best interest” of the client rather than being merely “suitable.” As a result, insurance brokers and agents who provide investment advice will face limits on receiving commission-based (as opposed to flat fee) compensation. [2]

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Corporate Law and The Limits of Private Ordering

James D. Cox is the Brainerd Currie Professor of Law of Duke Law School. The following post is based on an article forthcoming in the Washington University Law Review. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Solomon-like, the Delaware legislature in 2015 split the baby by amending the Delaware General Corporation Law to authorize forum-selection bylaws and to prohibit charter or bylaw provisions that would shift to the plaintiff defense costs incurred in connection with shareholder suits that were not successfully concluded. The legislature acted after the Boilermakers Local 154 Retirement Fund. v. Chevron Corp ATP Tour, Inc. v. Deutscher Tennis Bund, broadly empowered the board vis-à-vis the shareholders through the board’s power to amend the bylaws. Repeatedly the analysis used by each court referenced the contractual relationship the shareholders had through the articles of incorporation and the bylaws with their corporation. The action of the Delaware legislation hardly puts the important question raised by each opinion to bed: are there limits on the board of directors to act through the bylaws to alter the rights shareholders customarily enjoy? Stated differently, can the board of directors’ authority to amend the bylaws extend to changing both the procedural and substantive relationship shareholders have with their corporation. In examining this question, the article, Corporate Law and The Limits of Private Ordering, develops two broad points: the shareholder’s relationship is more than just a contract and, even if the relationship was contractual, bedrock contract law does not support the results reached in Boilermakers and ATP Tour, Inc. In conclusion, the article also uncovers an issued overlooked in the debate over the relative prerogatives of shareholders and the board of directors, namely that bylaws proposed by the board of directors carry a strong presumption of propriety whereas those proposed by shareholders do not.

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Development of Corporate Governance in Toulouse from 1372 to 1946

Sébastien Pouget is Professor of Finance at Toulouse School of Economics. This post is based on an article authored by Professor Pouget; David Le Bris, Assistant Professor of Finance at KEDGE Business School; and William Goetzmann, Professor of Finance at Yale University.

In our recent NBER working paper, The Development of Corporate Governance in Toulouse 1372-1946, we study the birth and evolution of the oldest shareholding companies in the world: the grain-milling companies of Toulouse. Shareholding companies that began in the 11th century formally incorporated themselves into two large-scale, widely held firms: the Bazacle Company (1372) and the Castel Company (1373). In the years that followed, they experienced the economic challenges and conflicts we now recognize as inherent in the separation of ownership and control.

The historian of law, Germain Sicard, in his 1953 landmark study of the Toulouse companies in the Middle Ages that has recently been translated in English by the Yale University Press, shows that they resembled modern corporations in many respects. We build upon the archival research by Sicard and extend the analysis of the archives of these early firms from the 16th through the 19th centuries in order to trace the evolution of corporate governance mechanisms over the “longue durée.”

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A Framework for Understanding Financial Institutions

Robert Merton is Professor of Finance at the MIT Sloan School of Management. This post is based on an article authored by Professor Merton and Richard Thakor, also of the Finance Group at the MIT Sloan School of Management.

Many financial intermediaries provide “credit-sensitive” financial services—the effective delivery of these services depends on the credit-worthiness of the provider. This potential sensitivity of the perceived value of the intermediary’s services to the intermediary’s credit risk has important ramifications. In the paper, Customers and Investors: A Framework for Understanding Financial Institutions, which was recently made publicly available on SSRN, we examine how this affects the design of contracts between intermediaries and their customers, and how it illuminates ubiquitous features in a wide variety of contracts, institutions, and regulatory practices.

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Binding Spincos to Parent Obligations Requires Specificity

Matt Salerno is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Salerno, Christopher Condlin, and Christina Prassas. 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 Miramar Police Officers’ Retirement Plan v. Murdoch [1] the Delaware Court of Chancery dismissed plaintiff’s claims, refusing to hold that an “unambiguous” boilerplate successors and assigns clause operated to bind a spun-off company to the terms of a contract entered into by its former parent company. The contract at issue generally restricted the former parent company from adopting a poison pill with a term of longer than one year without obtaining shareholder approval. The decision will serve as a reminder to practitioners to carefully consider the impact that significant corporate transactions could have on their clients’ contractual rights and obligations.

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NY Court: RMBS Statute of Limitations Runs from Time of Securitization

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, George T. Conway III, Elaine P. Golin, Graham W. Meli, and Justin V. Rodriguez.

In an important decision for financial institutions and investors in residential mortgage-backed securities (RMBS), the New York Court of Appeals unanimously ruled yesterday (June 11, 2015) that claims for breach of representations and warranties made in an RMBS securitization accrue when the representations and warranties are made, which typically occurs when the securitization closes. ACE Securities Corp. v. DB Structured Products, Inc., No. 85 (June 11, 2015) (see our prior memo). The court held that New York’s six-year statute of limitations for breach-of-contract claims thus begins to run at that time—and not when the securitization sponsor refuses, possibly years or decades later, to comply with a securitization trustee’s demand for the contractual remedy of cure or repurchase of non-compliant loans. Accordingly, claims arising out of most pre-financial crisis RMBS securitizations are now time-barred.

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State Contract Law and Debt Contracts

The following post comes to us from Colleen Honigsberg and Sharon Katz, both of the Accounting Division at Columbia Business School, and Gil Sadka of the Department of Accounting at the University of Texas at Dallas.

In our recent JLE paper, State Contract Law and Debt Contracts, we examine the association between state contract law and debt contracts. A recent stream of papers in finance and economics studies the role debt contracts play in mitigating agency problems between equity and debt holders (for example, Baird and Rasmussen, 2006; Chava and Roberts, 2008; Roberts and Sufi, 2009; Nini, Smith, and Sufi, 2009). This area of literature examines both the contract terms and the implications of covenant violations. While these studies generally treat contract law as a uniform product across states and assume that all contracts are enforced in a similar fashion, in practice lenders and borrowers select the state law that will govern the contract. Because the legal rights of both parties vary depending on the law chosen, the state contract law may be associated with enforcement. To examine this relationship, we first categorize each state’s contract law by whether it is favorable or unfavorable to lenders, and then we examine the characteristics of the contracts and the relevant parties across states. Lastly, we test whether the contract terms, frequency of covenant violations, and repercussions of covenant violations are related to the state contract law.

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CEO Contractual Protection and Managerial Short-Termism

The following post comes to us from Xia Chen and Qiang Cheng, both of the School of Accountancy at Singapore Management University; Alvis Lo of the Department of Accounting at Boston College; and Xin Wang of the Accounting Area at the University of Hong Kong.

In our paper, CEO Contractual Protection and Managerial Short-Termism, which was recently made publicly available on SSRN, we investigate whether CEO contractual protection, can address managerial short-termism by reducing managers’ incentives to engage in myopic behavior. Managers generally have incentives to boost short-term performance to increase their welfare, potentially at the expense of long-term firm value. However, CEOs with contractual protection are protected from short-term performance swings and downside risk, and consequently are likely to have weaker incentives to engage in myopic behavior.

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