In November 2013 I delivered the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. My lecture, entitled “Delaware’s Choice,” presented four uncontested facts from my prior research: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a “meaningful opportunity for success” in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed—so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success.
Posts Tagged ‘Delaware articles’
“Leximetrics,” which involves quantitative measurement of law, has become a prominent feature in empirical work done on comparative corporate governance, with particular emphasis being placed on the contribution that robust shareholder protection can make to a nation’s financial and economic development. Using this literature as our departure point, we are currently engaging in a leximetric analysis of the historical development of U.S. corporate law. Our paper, Law and History by Numbers: Use, But With Care, prepared for a University of Illinois College of Law symposium honoring Prof. Larry Ribstein, is part of this project. We identify in this paper various reasons for undertaking a quantitative, historically-oriented analysis of U.S. corporate law. The paper focuses primarily, however, on the logistical challenges associated with such an inquiry.
My article, Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions, examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. The settled rules of direct and derivative standing break down at the “singularity of the effective time” of a merger, yielding to conflicting principles of standing, corporation law and policy, and basic equity. The path-dependent network of rules and exceptions that has developed is an outgrowth of case-by-case adjudication that now begs for a one-time, wholesale reconfiguration.
The article takes on that task, proposing three straightforward rules that need no exceptions:
Historically, buyouts by controlling shareholders (also known as “going-private transactions,” “squeeze-outs,” and hereinafter “freezeouts”) were subject to different standards of judicial scrutiny under Delaware corporate law based on the transactional form used by the controlling shareholder to execute the deal. In a line of cases dating back at least to the Delaware Supreme Court’s 1994 decision in Kahn v. Lynch Communications, a freezeout executed as a statutory merger was subject to stringent “entire fairness” review, due to the self-dealing nature of the transaction. In contrast, in a line of cases beginning with the Delaware Chancery Court’s 2001 opinion in In re Siliconix Inc. Shareholder Litigation, a freezeout executed as a tender offer was subject to deferential business judgment review.
Subramanian (2007) presents evidence that, after Siliconix, minority shareholders received less in tender offer freezeouts than in merger freezeouts. Restrepo (2013) finds that these differences in outcomes occurred only after Siliconix, and that the incidence of tender offer freezeouts increased after this opinion, also supporting the idea that controlling shareholders took advantage of the opportunity provided by Siliconix. Subramanian (2005) describes why these differences in outcomes for minority shareholders create a social welfare loss and not just a one-time wealth transfer from minority shareholders to the controlling shareholder.
The recent discovery that corporate law litigation very often takes place in courts outside of Delaware has rattled the academic consensus that Delaware won the corporate law “race” by providing a well-managed forum staffed with expert judges willing to decide complex deal cases quickly. In an apparent affront to this settled understanding, recent research shows that more cases are filed against Delaware corporations in other states than in Delaware itself.  As a forum for corporate litigation, in other words, Delaware no longer dominates.
Shaken from their settled understandings, commentators have sounded the alarm that fewer cases decided in Delaware could, over time, reduce the expertise of the Delaware judiciary in corporate law matters. Worse, the decisions reached by non-Delaware “dilettantes” threaten to adulterate and degrade the basic Delaware product. In sum, prior commentary on the out-of-Delaware trend has treated it as very bad for corporate defendants, very bad for shareholder plaintiffs, and very bad for Delaware.
In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,  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.” 
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:
Standstill agreements are ubiquitous in public company M&A deals. In fact, the execution of a standstill has been described as the “cost of entry” into negotiations and serves to indicate a bidder’s seriousness. Despite their ubiquity, there is surprisingly little Delaware case law on standstills and even less academic literature on the subject. In my paper, Promises Made to be Broken? Standstill Agreements in Change of Control Transactions, forthcoming in the Delaware Journal of Corporate Law, I attempt to begin to fill this gap in academic literature by examining and providing a blueprint for the resolution of various issues raised by the execution and enforcement of standstills in the context of sales resulting in a change of corporate control.
My paper concentrates on three issues the Delaware courts have yet to tackle: a target board’s ability to consider a third-party superior offer made in contravention of a standstill; a board’s promise not to waive a standstill; and a board’s ability to grant a “winning” bidder the right to enforce a previously executed standstill against a “losing” bidder. Each of these issues raises a conflict between two fundamental principles of Delaware M&A law: 1) a board’s Revlon duty to maximize stockholder value in a sale of corporate control; and 2) the sanctioning of certain deal protection provisions as permitted by the Delaware Supreme Court’s decision in Unocal Corp. v. Mesa Petroleum Co. and its progeny. As commonly argued, the availability of deal protection devices, including standstills and other promises made in relation to standstills, may assist a target board in extracting more value from bidders, thereby facilitating satisfaction of a board’s Revlon duties. Thus, at the pre-signing stage there may be good reason for a target board to agree to a standstill, and the provision may be permissible under Unocal but, pre-closing, the provision may inhibit the fulfillment of a board’s Revlon duties. Specifically, standstills may prevent a board from considering a third-party offer or deter a third party bound by a standstill from making an overbid in the first place.
In response to concerns that the plaintiffs’ bar is rushing  to sue Delaware corporations “anywhere but Delaware,” to avoid the predictability and speed of Delaware courts and potentially to obtain larger settlements, 195 Delaware corporations (including Chevron, DIRECTV, Life Technologies and 24 other members of the S&P 500) have adopted or proposed adopting charter or bylaw provisions requiring that derivative actions, fiduciary duty claims and other intra-corporate disputes be litigated exclusively in the Delaware Court of Chancery. Among other things, these provisions seek to address the phenomenon of Delaware corporations facing parallel, competing litigation in Delaware and another state or in federal court,  often in connection with M & A activity. The January 2012 edition of my Study of Delaware Forum Selection in Charters and Bylaws analyzes these provisions and the trends they reveal.
At the Columbia Law School conference on the Delaware Chancery Court this November, I summarized my recent working paper The Corporate Shareholder’s Vote and Its Political Economy, in Delaware and in Washington. I discuss this paper below. Related work includes Delaware’s Competition, Delaware’s Politics, and Delaware and Washington as Corporate Lawmakers.
Shareholder power to effectively nominate, contest, and elect the company’s board of directors became core to the corporate governance reform agenda in the past decade, as corporate scandal and financial stress put business failures and scandals into headlines and onto policymakers’ agendas. As is well known to corporate analysts, the incentive structure in corporate elections typically keeps shareholders passive, and incumbent boards largely control the electoral process, usually nominating and electing themselves or their chosen successors. Contested corporate elections are exceedingly rare. But shareholder power to directly place their nomination for a majority of the board in the company-paid-for voting documents, as the SEC has pushed toward, could revolutionize American corporate governance by sharply shifting authority away from insiders, boards, and corporate managements. During the past decade, the SEC proposed, withdrew, and then promulgated rules that would shift the control of some corporate election machinery, to elect a minority of the board, away from insiders and into shareholders’ hands. Then, in July 2011, the D.C. Circuit Court of Appeals struck down the most aggressive of the SEC’s rules.
In our paper, Good Monitoring, Bad Monitoring, which was recently made publicly available on SSSRN, we estimate the value of monitoring in publicly traded corporations by exploiting as a “natural experiment,” an unexpected and controversial decision of the Delaware Supreme Court that significantly tightened scrutiny over board decisions in Delaware-incorporated firms in 1985. We analyze the impact of the decision on stock returns using matching and differences-in-differences techniques. We find that, compared with appropriately matched non-Delaware firms, Delaware-incorporated firms in high-growth industries lost, while firms in low-growth industries gained significantly around the announcement of the decision.
These results are robust, and are further corroborated by an out-of-sample test. A later regulatory reform to the Delaware Code that essentially reversed the effects of the Supreme Court decision had opposite results: firms in high-growth industries gained and firms in low-growth industries lost significantly. We interpret these results as implying that “one-size-fits-all” models represent inadequate solutions to the corporate governance problem.