Posts Tagged ‘Lucian Bebchuk’

Rethinking Basic: Towards a Decision in Halliburton

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Wednesday April 9, 2014 at 9:02 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper that is forthcoming in the May 2014 issue of The Business Lawyer and available here.

We have recently revised our paper Rethinking Basic (discussed earlier on the Forum here). Our revision, which will be published in the May issue of the Business Lawyer, takes into account, and relates our analysis to, the Justices’ questions at the Halliburton oral argument. As our revision explains, questions asked by some of the Justices at the oral argument suggest that the fraudulent distortion approach we support might appeal to the Court.

In the Halliburton case, the United States Supreme Court is expected to reconsider the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory, which has since facilitated securities class action litigation. Our paper seeks to contribute to this reconsideration by providing a conceptual and economic framework for a reexamination of the Basic rule.

…continue reading: Rethinking Basic: Towards a Decision in Halliburton

75% of 2014 Engagements Have Already Produced Agreements to Declassify

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is a counsel at the SRP. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

In a news alert released last week, the Shareholder Rights Project (SRP), working with SRP-represented investors, announced the high level of company responsiveness to engagements during the 2014 proxy season. In particular, as discussed in more detail below, major results obtained so far include the following:

  • Following active engagement, about three-quarters of the S&P 500 and Fortune 500 companies that received declassification proposals for 2014 annual meetings from SRP-represented investors have already entered into agreements to move towards board declassification.
  • This outcome reinforces the SRP’s expectation (announced in a blog post available here) that, by the end of 2014, the work of the SRP and SRP-represented investors will have resulted in about 100 board declassifications by S&P 500 and Fortune 500 companies.

…continue reading: 75% of 2014 Engagements Have Already Produced Agreements to Declassify

Toward a Constitutional Review of the Poison Pill: A Reply to Wachtell Lipton

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on Monday March 17, 2014 at 9:27 am
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Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law, Milton Handler Fellow, and Co-Director of the Millstein Center at Columbia Law School. They are co-authors of Toward a Constitutional Review of the Poison Pill, a Harvard Law School discussion paper that is forthcoming in the Columbia Law Review, available here and discussed on the Forum here. This post replies to the criticism of their work put forward in a Wachtell, Lipton Rosen & Katz memorandum, posted on the Forum by Martin Lipton here.

We recently placed on SSRN a draft of a new paper, Toward a Constitutional Review of the Poison Pill, which will be published by the Columbia Law Review in the Fall of 2014. Last week, six senior partners of the law firm of Wachtell, Lipton, Rosen & Katz, including founding partner Martin Lipton, published a strongly-worded response, available on the Forum here. In this post, we rebut Wachtell’s criticism.

Wachtell’s response is a twelve-page, single-spaced Memorandum that describes us as “extreme” and “eccentric,” and characterizes our paper as “tendentious,” “misleading,” and “not a work of serious scholarship.” The Memorandum also attempts to offer a substantive rebuttal of the analysis in our paper. Given that Wachtell Lipton prides itself for creating the poison pill, we understand why an article raising doubt about the validity of the state-law rules authorizing the use of poison pills touches a sensitive nerve at the Firm. Wachtell’s response, however, fails to dispel those doubts—and, indeed, shows why there are serious questions about the constitutionality of state-law poison-pill rules today.

Wachtell does not dispute the analysis in our paper showing that state-law poison-pill rules today impose tighter restrictions on tender offers than those that federal courts have viewed as preempted by the Williams Act. Instead, Wachtell’s response asserts that the “true state of the law,” about which there is “no doubt,” is that the Williams Act “governs procedure, not substance,” and that the Act therefore does not preempt any antitakeover devices that states choose to authorize. As we explain below, this is not an accurate description of the state of the law: Wachtell’s view (1) is not established by Supreme Court precedent; (2) gives undue weight to two lower federal court opinions; and (3) discounts or ignores opinions of other lower federal courts that have expressed views that differ from Wachtell’s.

…continue reading: Toward a Constitutional Review of the Poison Pill: A Reply to Wachtell Lipton

A Response to Bebchuk and Jackson’s Toward a Constitutional Review of the Poison Pill

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Theodore N. Mirvis, George T. Conway III, Jeffrey M. Wintner, and William Savitt. This post responds to a recent Harvard law School Discussion paper by Lucian Bebchuk and Robert Jackson that is forthcoming in the Columbia Law Review. The paper, Toward a Constitutional Review of the Poison Pill, is available here and a blog post describing it is available here.

In a recent paper, Professors Lucian Bebchuk and Robert Jackson have extended Professor Bebchuk’s extreme and eccentric campaign against director-centric governance into a new realm—that of the Constitution of the United States. They claim that “serious questions” exist about the constitutionality of the poison pill—or, more precisely, “about the validity of the state-law rules that authorize the use of the poison pill.” It is likely, they argue, that these state-law rules violate the Supremacy Clause of the Constitution, and are thus preempted, because they frustrate the purposes of the Williams Act, the 1968 federal statute that governs tender-offer timing and disclosure.

Bebchuk and Jackson cite leading academic textbooks and articles that either recognize the preeminence of the poison pill in takeover defense or demonstrate the weakness of preemption challenges to state takeover statutes. The scholars authoring these books and articles, we are told, “overlooked” or “ignored” the obvious fact that poison pills may delay tender offers for lengthy periods of time. Bebchuk and Jackson profess “surpris[e]” that the constitutional issue they discuss “has received little attention, or even notice, from commentators,” and assert that it is rather a shocking “oversight” that, despite a “large literature” on Williams Act preemption, “commentators and practitioners” have devoted “little attention to the question of whether the state-law rules with the most powerful antitakeover effect—the rules authorizing use of the poison pill—are preempted.”

…continue reading: A Response to Bebchuk and Jackson’s Toward a Constitutional Review of the Poison Pill

Remarks on the Halliburton Oral Argument (3): The Consistency of a Fraudulent Distortion Approach with Not Resolving Merit Issues at Class Certification

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Thursday March 13, 2014 at 8:00 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper forthcoming in the May 2014 issue of The Business Lawyer, that is available here. This post is the third in a three-part series in which they remark on the oral argument at the Halliburton case; the first two posts are available here and here.

As we discussed in our first two posts, the Halliburton oral argument (transcript available here), provided encouraging signs that a number of the Justices might choose to avoid making a judgment on the state of efficient market theory and to focus on the presence of fraudulent distortion (sometimes also referred to as price impact). In this post, we respond to arguments that the adoption of such an approach would be inconsistent with or at least in tension with the Court’s earlier rulings that merit issues should not be resolved at the class certification case.

In Rethinking Basic, we explain that class-wide reliance should depend not on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price, and that focusing on fraudulent distortion would provide a coherent and implementable framework for identifying class-wide reliance in appropriate circumstances. We also go on to explain that, in contrast to some claims to the contrary, determining fraudulent distortion would not usurp the merits issues of materiality and loss causation.

In responses to our paper (see, e.g., Kevin LaCroix of D&O blog’s thoughtful post here http://www.dandodiary.com/2014/01/articles/securities-litigation/dump-fraud-on-the-market-yet-preserve-securities-plaintiffs-ability-to-establish-reliance/) and in reactions to the oral argument in Halliburton, commentators raised the possibility that adopting a fraudulent distortion approach would create tension with some recent Supreme Court rulings.

In particular, questions were raised as to (1) whether a finding of fraudulent distortion would necessarily imply a finding of materiality, an issue that the Court held in Amgen to be a merits issue?, and (2) whether such a finding would necessarily imply a finding of loss causation, an issue that the Court in the earlier Halliburton case held also to be a merits issue?

As we explain below, based on our analysis in Rethinking Basic, the answer to both questions is no. We first address the question of materiality and then turn to loss causation.

…continue reading: Remarks on the Halliburton Oral Argument (3): The Consistency of a Fraudulent Distortion Approach with Not Resolving Merit Issues at Class Certification

Remarks on the Halliburton Oral Argument (2): Implementing a Fraudulent Distortion Approach

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Wednesday March 12, 2014 at 9:10 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper forthcoming in the May 2014 issue of The Business Lawyer, that is available here. This post is the second in a three-part series in which they remark on the oral argument at the Halliburton case; the first post is available here.

In our first post on the Halliburton oral argument (transcript available here), we discussed the encouraging signs that a number of the Justices might choose to avoid making a judgment on the state of efficient market theory and to focus on the presence of fraudulent distortion (sometimes also referred to as price impact). In this post, we remark on how a fraudulent distortion approach could be implemented should the Court indeed adopt such an approach. In particular, we discuss the financial econometric tools for assessing the presence or absence of fraudulent distortion and we explain that these tools are not limited to event studies at the time of the misrepresentation.

In Rethinking Basic, we present a detailed case for using a fraudulent approach and explain why it would provide a conceptually superior framework than a focus on market efficiency. We go on, however, to show that an approach focusing on fraudulent distortion would have significant administrability and implementation advantages over the federal courts’ practice in this area.

Because the courts have thus far had to provide a yes/no answer to whether the market for a given security is efficient, significant problems of over- and under-inclusion have arisen (as has been noted by the Supreme Court in its Amgen decision). Focusing on the presence of fraudulent distortion in the case at hand would avoid these significant problems. Furthermore, as we describe in Rethinking Basic, there are standard and sound methods drawn from the academic finance and accounting literature for ascertaining the presence of a distortionary price impact (a toolkit that should displace the current exclusive focus on the Cammer factors, which test for market efficiency). Without attempting to be comprehensive, we discuss below three tools that are potentially available for implementing a fraudulent distortion approach.

…continue reading: Remarks on the Halliburton Oral Argument (2): Implementing a Fraudulent Distortion Approach

Remarks on the Halliburton Oral Argument (1): Toward a Fraudulent Distortion Approach

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Tuesday March 11, 2014 at 8:22 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper forthcoming in the May 2014 issue of The Business Lawyer, that is available here. This post is the first in a three-part series in which they remark on the oral argument at the Halliburton case.

Last week the Supreme Court heard oral arguments in the Halliburton case (transcript available here), which is expected to have a major impact on the future of securities litigation. Encouragingly, there were signs that a number of the Justices might choose to avoid making a judgment on the state of efficient market theory and to focus on the presence of fraudulent distortion (sometimes also referred to as price impact). As we explain in our recent paper, Rethinking Basic, adopting such an approach would be the desirable outcome of this major case both conceptually and practically.

In this first post of a three-part series on the Halliburton oral argument, we comment on prospects of the fraudulent distortion approach in light of what was said at the oral argument. The two subsequent posts will discuss (1) the implementation of such an approach and, in particular, the availability of tools other than events studies for this implementation, and (2) the consistency of the fraudulent distortion approach with not resolving merit issues at the class certification stage. In their briefs, one side of the case argued that the Justices should overrule the Basic ruling in part because of the evidence of market inefficiency that has accumulated over the past twenty five years. The other side, however, urged the Justices to recognize the substantial support that the efficient market hypothesis still has among financial economists.

…continue reading: Remarks on the Halliburton Oral Argument (1): Toward a Fraudulent Distortion Approach

Still Running Away from the Evidence: A Reply to Wachtell Lipton’s Review of Empirical Work

Posted by Lucian Bebchuk, Harvard Law School, Alon Brav, Duke University, and Wei Jiang, Columbia Business School, on Wednesday March 5, 2014 at 9:02 am
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Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Alon Brav is Professor of Finance at Duke University. Wei Jiang is Professor of Economics and Finance at Columbia Business School. This post responds to a Wachtell Lipton memorandum by Martin Lipton, Empiricism and Experience; Activism and Short-Termism; the Real World of Business, available on the Forum here. This memorandum presents a review of empirical work on activism and uses this review to criticize the empirical study by Bebchuk, Brav, and Jiang on The Long-Term Effects of Hedge Fund Activism. The study is available here, and its results are summarized in a Forum post and in a Wall Street Journal op-ed article. Bebchuk and Lipton will discuss the evidence on hedge fund activism at the Harvard Roundtable on Activist Interventions, which will take place later this month.

In a 17-page memorandum issued by the law firm of Wachtell Lipton (Wachtell), Empiricism and Experience; Activism and Short-Termism; the Real World of Business, the firm’s founder Martin Lipton put forward new criticism of our empirical study, The Long-Term Effects of Hedge Fund Activism. Lipton’s critique is based on a review of a large number of works which, he asserts, back up empirically the view that our study questions. Following our examination of each of the studies noted by Lipton, this post responds to Lipton’s empirical review. We show that Lipton’s review fails to identify any empirical evidence that is inconsistent with our findings or backs the claim of Wachtell that our study questions.

Our study shows that the myopic activisms claim that Lipton and his firm have long asserted—the claim that that interventions by activist hedge funds are in the long term detrimental to the involved companies and their long-term shareholders—is not supported by the data. Seeking to cast doubt on the validity of our finding, Lipton’s memorandum cites twenty-seven works by academics or policymakers, and asserts that these studies demonstrate that our conclusion—that the myopic activism claims is not supported by the data—is “patently false.” In this post, we explain that this assertion is not supported by the cited studies; most of the studies are not even related to the subject of the consequences of hedge fund activism, and those that are related to it do not provide evidence contradicting our findings.

Below we begin with discussing the relevant background and then review the cited studies and explain why, in contrast to the impression Lipton’s memo seeks to make, they do not provide an empirical basis for the myopic activists view. Instead of running away from the empirical evidence, while constantly shooting back, Wachtell Lipton should accept that its myopic activists claim is not supported by the data. Indeed, as one of us plans to discuss in a separate post, despite its repeated attacks on our study, Wachtell is shifting its position toward avoiding reliance on the myopic activism claim in its opposition to hedge fun activism, and this shift should lead Wachtell and its clients to rethink their attitude to hedge funds activists.

…continue reading: Still Running Away from the Evidence: A Reply to Wachtell Lipton’s Review of Empirical Work

Toward a Constitutional Review of the Poison Pill

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on Tuesday March 4, 2014 at 9:15 am
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Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law, Milton Handler Fellow, and Co-Director of the Millstein Center at Columbia Law School. This post is based on their recent working paper, Toward a Constitutional Review of the Poison Pill, available here.

In a new paper, Toward a Constitutional Review of the Poison Pill, we argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate-law landscape.

The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills—the most powerful impediment to outside buyers of shares—are also preempted.

Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. We show that these rules impose tighter restrictions on unsolicited offers than state antitakeover regulations that federal courts invalidated on the grounds of preemption. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts.

Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing state-law poison-pill rules or to their substantial modification, such challenges could well reshape the market for corporate control.

Here is a more detailed overview of our analysis:

…continue reading: Toward a Constitutional Review of the Poison Pill

Toward Board Declassification in 100 S&P 500 and Fortune 500 Companies: The SRP’s Report for the 2012 and 2013 Proxy Seasons

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is a counsel at the SRP. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

The Shareholder Rights Project (SRP) just released its final report for the 2012 and 2013 proxy seasons, the SRP’s first two years year of operations. As the report details, major results obtained include the following:

  • 100 S&P 500 and Fortune 500 companies (listed here) entered into agreements to move toward declassification;
  • 81 S&P 500 and Fortune 500 companies (listed here) declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
  • 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
  • Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by all proponents.

…continue reading: Toward Board Declassification in 100 S&P 500 and Fortune 500 Companies: The SRP’s Report for the 2012 and 2013 Proxy Seasons

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