Posts Tagged ‘Firm valuation’

Crossing State Lines Again—Appraisal Rights Outside of Delaware

Editor’s Note: Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, Matthew Solum, David B. Feirstein, and Laura A. Sullivan. 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.

Even as the Delaware appraisal rights landscape continues to evolve, dealmakers should not assume that the issues and outcomes will be the same in transactions involving companies incorporated in other states. Although once an afterthought on the M&A landscape, in recent years appraisal rights have become a prominent topic of discussion among dealmakers. In an earlier M&A Update (discussed on the Forum here) we discussed a number of factors driving the recent uptick in shareholders exercising statutory appraisal remedies available in cash-out mergers. With the recent Delaware Supreme Court decision in CKx and Chancery Court opinion in Ancestry.com, both determining that the deal price was the best measure of fair price for appraisal purposes, and the upcoming appraisal trials for the Dell and Dole going-private transactions, the contours of the modern appraisal remedy, and the future prospects of the appraisal arbitrage strategy, are being decided in real-time. These and almost all of the other recent high-profile appraisal claims have one thing in common—the targets in question were all Delaware corporations and the parties have the benefit of a well-known statutory scheme and experienced judges relying on extensive (but evolving) case law. But, what if the target is not in Delaware?

…continue reading: Crossing State Lines Again—Appraisal Rights Outside of Delaware

Limited Commitment and the Financial Value of Corporate Law

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 17, 2015 at 9:04 am
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Editor’s Note: The following post comes to us from Martijn Cremers, Professor of Finance at the University of Notre Dame, and Simone Sepe of the College of Law at the University of Arizona. 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.

For at least 40 years, a large body of literature has debated the effects of state competition for corporate charters and the value of state corporate laws. The common assumption of these studies is that interstate competition affects the way state corporate laws respond to managerial moral hazard, i.e., the agency problem arising between shareholders and managers out of the separation of ownership from control (Jensen and Meckling, 1976). Nevertheless, scholars have been sharply divided about the importance of interstate competition, and particularly whether interstate competition fosters a “race to the top” that maximizes firm value (Winter, 1977; Easterbrook and Fischel, 1991; Romano, 1985, 1993) or a “race to the bottom” that pushes states to cater to managers at the expense of shareholders (Cary, 1974; Bebchuk, 1992; Bebchuk and Ferrell, 1999, 2001).

…continue reading: Limited Commitment and the Financial Value of Corporate Law

Tying Incentives of Executives to Long-Term Value Creation

Posted by Joseph E. Bachelder III, McCarter & English, LLP, on Thursday January 22, 2015 at 9:15 am
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Editor’s Note: Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal. Research from the Program on Corporate Governance on long-term incentive pay includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

There is an important difference between the price paid for a business enterprise and the intrinsic value of that enterprise. As Benjamin Graham said, “Price is what you pay; value is what you get.” Warren Buffett has made himself and many others wealthy by understanding this difference and making investments accordingly.

Part I of this post looks briefly at the intrinsic value versus the market price (sometimes the latter is referred to as market value or market cap) of a publicly traded corporation. Part II looks at current design of long-term incentives awarded to the management of such corporations. These awards tend to be tied to short-term increase in the market price of the corporation’s stock. Part III suggests a way in which long-term incentive awards might be tied more to generators of long-term value of the corporations awarding them.

…continue reading: Tying Incentives of Executives to Long-Term Value Creation

A Strong Cautionary Note for M&A Practitioners and Professionals

Posted by Jack B. Jacobs, Sidley Austin LLP, on Thursday January 8, 2015 at 9:07 am
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Editor’s Note: Jack B. Jacobs is Senior Counsel at Sidley Austin LLP, and a former justice of the Delaware Supreme Court. The following post is based on a Sidley update, and 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.

The volume of Court of Chancery decisions has been proceeding apace. We have culled out two that we believe are worthy of your attention:

Cigna Health & Life Ins. Co. v. Audax Health Solutions, 2014 WL 6784491 (Del. Ch.).

This is a “must read” for all M&A and Private Equity practitioners and professionals, given the use of certain of the deal devices found to be invalid in the specific circumstances of this case.

Cigna, a large stockholder of Audax, the acquired company, sued to invalidate certain conditions of an arm’s length negotiated cash-out merger of Audax into United. Essentially, the defendant merging corporations conditioned receipt of the merger consideration not only upon surrender of the (to-be-cancelled) shares, but also upon the execution of a Letter of Transmittal, wherein each surrendering stockholder agreed to the “Obligations” set forth therein. Cigna refused to execute a Letter of Transmittal, and in response the defendants refused to pay Cigna the merger consideration. Cigna sued in the Court of Chancery for a judgment declaring the Obligations invalid and mandating payment of the merger consideration to Cigna. The Court of Chancery (V.C. Parsons) held the obligations invalid under 8 Del. C. §251 and (relatedly) for lack of consideration.

…continue reading: A Strong Cautionary Note for M&A Practitioners and Professionals

Buybacks Around the World

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday November 4, 2014 at 9:14 am
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Editor’s Note: The following post comes to us from Alberto Manconi of the Department of Finance at Tilburg University and Urs Peyer and Theo Vermaelen, both of the Finance Area at INSEAD.

Due to regulatory changes, share repurchases have become increasingly common around the world in the last 15 years. As such, in our paper, Buybacks Around the World, which was recently made publicly available on SSRN, we first examine whether the findings based on U.S. data hold up in an international setting, and whether examining non-U.S. data can change the way we think about buybacks. Second, we examine whether the original concerns about managers using buybacks to prop up the share price were somewhat warranted in countries outside the U.S.

…continue reading: Buybacks Around the World

Corporate Governance and the Creation of the SEC

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday October 20, 2014 at 8:59 am
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Editor’s Note: The following post comes to us from Arevik Avedian of Harvard Law School; Henrik Cronqvist, Professor of Finance from China Europe International Business School (CEIBS); and Marc Weidenmier, Professor of Economics at Claremont Colleges.

Severe turmoil in financial markets—whether the Panic of 1826, the Wall Street Crash of 1929, or the Global Financial Crisis of 2008—often raises significant concerns about the effectiveness of pre-existing securities market regulation. In turn, such concerns tend to result in calls for more and stricter government regulation of corporations and financial markets. It is widely considered that the most significant change to U.S. financial regulation in the past 100 years was the Securities Act of 1933 and the subsequent creation of the Securities and Exchange Commission (SEC) to enforce it. Before the SEC creation, federal securities market regulation was essentially absent in the U.S. In our paper, Corporate Governance and the Creation of the SEC, which was recently made publicly available on SSRN, we examine how companies listing in the U.S. responded to this significant increase in the provision of government-sponsored corporate governance. Specifically, did this landmark legislation have any significant effects on board governance (e.g., the independence of boards) and firm valuations?

…continue reading: Corporate Governance and the Creation of the SEC

Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday September 29, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from John Core and Rodrigo Verdi of the Accounting Group at MIT, and Luzi Hail of the Department of Accounting at the University of Pennsylvania.

Whether mandatory disclosure regulation and insider ownership affect a firm’s cost of capital is an important question in financial economics. In our paper, Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital, which was recently made publicly available on SSRN, we examine this question on a large global sample of more than 10,000 firms across 35 countries.

Theory predict that disclosure regulation is negatively related to the cost of capital due to two separate effects: (i) an information effect in which better disclosure improves investors’ prediction of future cash flows, or (ii) a stewardship effect in which better disclosure improves managerial alignment with shareholders and therefore increases expected cash flows. The stewardship effect is not unique to disclosure, but is also present in other governance mechanisms that increase managerial alignment such as inside ownership. As a result, these alternative alignment mechanisms potentially reinforce or substitute for the stewardship effect of disclosure. We test this argument by examining whether inside ownership is negatively associated with the cost of capital and how inside ownership affects the relation between disclosure and the cost of capital.

…continue reading: Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

Why Delaware Appraisal Awards Exceed the Merger Price

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 23, 2014 at 9:17 am
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Editor’s Note: The following post comes to us from Philip Richter, partner and co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank publication by Mr. Richter, Steven Epstein, David Shine, and Gail Weinstein. The complete publication, including footnotes, is available here. 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.

As has been widely noted, the number of post-merger appraisal petitions in Delaware has increased significantly in recent years, due primarily to the rise of appraisal arbitrage as a weapon of shareholder activists seeking alternative methods of influence and value creation in the M&A sphere. The phenomenon of appraisal arbitrage is to a great extent a product of the frequency with which the Delaware Chancery Court has appraised dissenting shares at “fair values” that are higher (often, far higher) than the merger consideration in the transactions from which the shareholders are dissenting. Our analysis of the post-trial appraisal decisions issued in Delaware since 2010 indicates that the court’s appraisal determinations have exceeded the merger price in all but two cases—with the appraisal determinations representing premiums over the merger price ranging from 8.5% to 149% (with an average of 61%).

…continue reading: Why Delaware Appraisal Awards Exceed the Merger Price

Stakeholder Governance, Competition and Firm Value

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday September 4, 2014 at 9:11 am
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Editor’s Note: The following post comes to us from Franklin Allen, Professor of Economics at the University of Pennsylvania and Imperial College London; Elena Carletti, Professor of Finance at Bocconi University; and Robert Marquez, Professor of Finance at the University of California, Davis.

Academic literature has typically analyzed corporate governance from an agency perspective, sometimes referred to as separation of ownership and control between investors and managers. This reflects the view in the US, UK and many other Anglo-Saxon countries, where the law clearly specifies that shareholders are the owners of the firm and managers have a fiduciary duty to act in their interests. However, firms’ objectives vary across other countries, and often deviate significantly from the paradigm of shareholder value maximization. A salient example is Germany, where the system of co-determination requires large firms to have an equal number of seats for employees and shareholders in the supervisory board in order to pursue the interests of all parties (see Rieckers and Spindler, 2004, and Schmidt, 2004). Similarly, stakeholders’ interests are pursued through direct or indirect representation of employees in companies’ boards in countries like Austria, the Netherlands, Denmark, Sweden, Luxembourg and France (Wymeersch, 1998, and Ginglinger, Megginson, and Waxin, 2009), or through other arrangements and social norms in countries like China and Japan (Wang and Huang, 2006, Dore, 2000, Jackson and Miyajima, 2007, and Milhaupt 2001).

…continue reading: Stakeholder Governance, Competition and Firm Value

Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 12, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Albert H. Choi, Albert C. BeVier Research Professor of Law at University of Virginia Law School.

In mergers and acquisitions transactions with privately-held (or closely-held) target companies, transacting parties will often agree to make payments to the target shareholders contingent upon some post-closing measures. Two often used arrangements are purchase price adjustments (PPAs) and earnouts. With a purchase price adjustment mechanism, payment to the target shareholders will be adjusted based on an accounting metric (such as the net working capital or shareholders’ equity) calculated shortly after the deal is closed. For instance, with a purchase price adjustment based on the target’s net working capital, as the target’s post-closing net working capital goes up or down compared to a pre-closing estimate, consideration to the target shareholders increases or decreases in accordance. Similarly, with an earnout, the transacting parties will agree upon post-closing performance targets, using measures such as earnings, net income, or gross revenue, and the amount of consideration that the target shareholders are entitled to receive will depend on whether such targets are met over the earnout period.

…continue reading: Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments

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