In a memorandum issued by the law firm of Wachtell, Lipton, Rosen & Katz (Wachtell) last week, Do Activist Hedge Funds Really Create Long Term Value?, the firm’s founding partner Martin Lipton and another senior partner of the law firm criticize again my empirical study with Alon Brav and Wei Jiang, The Long-Term Effects of Hedge Fund Activism. The memorandum announces triumphantly that Wachtell is not alone in its opposition to our study and that two staff members from the Institute for Governance of Private and Public Organizations (IGOPP) in Montreal issued a white paper (available here) criticizing our study. Wachtell asserts that the IGOPP paper provides a “refutation” of our findings that is “academically rigorous.” An examination of this paper, however, indicates that it is anything but academically rigorous, and that the Wachtell memo is yet another attempt by the law firm to run away from empirical evidence that is inconsistent with its long-standing claims.
Posts Tagged ‘Lucian Bebchuk’
About a year ago, Professor Lucian Bebchuk took to the pages of the Wall Street Journal to declare that he had conducted a study that he claimed proved that activist hedge funds are good for companies and the economy. Not being statisticians or econometricians, we did not respond by trying to conduct a study proving the opposite. Instead, we pointed out some of the more obvious methodological flaws in Professor Bebchuk’s study, as well as some observations from our years of real-world experience that lead us to believe that the short-term influence of activist hedge funds has been, and continues to be, profoundly destructive to the long-term health of companies and the American economy.
Professor Lucian Bebchuk was recently included in the list of most highly cited authors in academic research during 2002-2012 issued by Thomson Reuters.
Spotlighting the standout researchers of the last decade, Thomson Reuters has issued Highly Cited Researchers, a compilation of influential names in science. These researchers earned the distinction by writing the greatest numbers of reports officially designated by Essential Science Indicators as Highly Cited Papers—ranking among the top 1% most cited for their subject field and year of publication—between 2002 and 2012. According to Thomsen Reuters, “the listings of Highly Cited Researchers feature authors whose published work in their specialty areas has consistently been judged by peers to be of particular significance and utility.”
This year’s list of the Ten Best Corporate and Securities Articles, selected by an annual poll of corporate and securities law academics, includes two selections from Harvard Law faculty associated with the Program on Corporate Governance: Professor Lucian Bebchuk and Professor John Coates.
The top ten articles were selected from a field of 550 pieces. Professor Robert Thompson of Georgetown Law School conducted the annual poll, and the selected articles will be reprinted in an upcoming issue of the Corporate Practice Commentator.
Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law
Leo Strine, Chief Justice of the Delaware Supreme Court Review and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently published in the Columbia Law Review a response essay to an essay by Professor Lucian Bebchuk published in the Columbia Law Review several months earlier. Professor Bebchuk’s essay, The Myth that Insulating Boards Serves Long-Term Value, is available here and was featured on the Forum here. Chief Justice Strine’s essay, titled Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, is available here.
The abstract of Chief Justice Strine’s essay summarizes it briefly as follows:
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.
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.
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.
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.”
Remarks on the Halliburton Oral Argument (3): The Consistency of a Fraudulent Distortion Approach with Not Resolving Merit Issues at Class Certification
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.