Shareholder voting, once given up for dead as a vestige or ritual of little practical importance, has come roaring back as a key part of American corporate governance. Where once voting was limited to uncontested annual election of directors, it is now common to see short slate proxy contests, board declassification proposals, and “Say on Pay” votes occurring at public companies. The surge in the importance of shareholder voting has caused increased conflict between shareholders and directors, a tension well-illustrated in recent high profile voting fights in takeovers (e.g. Dell) and in the growing role for Say on Pay votes. Yet, despite the obvious importance of shareholder voting, none of the existing corporate law theories coherently justify it.
Posts Tagged ‘Randall Thomas’
Companies and their investors have been battling over the value of representative shareholder litigation since at least the 1940’s. Investors argue that managerial agency costs are high and that class actions and derivative suits are key shareholder monitoring mechanisms that they can deploy to keep managers in line. Companies believe that representative litigation claims are lawyer-driven, reflecting the agency costs that arise out of contingency fee suits that make the lawyer the real party in interest in these cases. Over the decades, there have been numerous skirmishes between these two sets of actors. Yet, even though one side or the other may temporarily gain the upper hand, the war continues today unabated.
The latest round of this extended fight comes over multijurisdictional deal litigation. Many M&A transactions attract shareholder litigation challenging the fairness of the economic terms of the deal for the target shareholders. Since the end of the financial crisis, however, there has been a documented increase in the number of jurisdictions in which each individual transaction is attacked. The potential for multijurisdictional litigation over a single deal arises because shareholders that wish to challenge the proposed terms of an M&A transaction can, under existing rules of civil procedure, choose to do so either in a state court in the target corporation’s state of incorporation, in a state court in the location of the company’s headquarters (assuming the defendants have the necessary presence in the jurisdiction), or in a federal court in one of those two jurisdictions.
In our recent working paper, When Do CEOs Have Covenants Not to Compete in Their Employment Contracts?, we undertake the first comprehensive study of contractual restrictions on CEOs’ post-employment competitive activities. The large random sample of nearly 1,000 CEO employment contracts for 500 companies was selected from the S&P 1500 from the 1990s through 2010. We find that about 70% of CEO contracts have post-employment competitive restrictions. We also find more covenants not to compete (CNCs or noncompetes) in longer-term employment contracts and at profitable firms. In addition, our study uses a nuanced state-by-state CNC strength of enforcement index to test the variance of CEO noncompetes across jurisdictions.
In our forthcoming Indiana Law Journal paper, Selectica Resets the Trigger on the Poison Pill: Where Should the Delaware Courts Go Next?, we discuss a novel form of rights plan that has recently been developed (the NOL rights plan), which has a 5% trigger level that is particularly onerous for hostile bidders. The legitimacy of an NOL rights plan was first put to the test in Delaware litigation, applying the preclusion prong of the Unocal test for defensive tactics. Trilogy argued that the NOL pill unduly restricted its ability to win a proxy contest and therefore violated Moran and Unitrin. The Delaware Supreme Court rejected this claim in a decision that leaves us with little guidance about how they would rule on other poison pills with a 5% (or less) trigger level.
This lack of guidance is troubling both for potential bidders and their targets. Presumably the Delaware courts would uphold other NOL rights plans with similar trigger levels but is the court’s decision limited to companies, like Selectica, who have suffered significant economic losses? Or, does it apply more broadly? What about target companies that drop their pill trigger to 5% claiming that hedge fund activists pose a serious threat to their corporate well-being?
Litigation is often triggered by the announcement of a merger or acquisition (M&A) proposal. Using hand-collected data, we document the types of suits triggered by M&A offers, the factors that influence whether offers are targeted by litigation, the impact of M&A lawsuits on offer outcomes (offer completion rates and takeover premium in completed deals), and the factors that influence whether these cases settle for positive monetary damages.
We find that about 12% of M&A offers announced in our sample period, 1999-2000, lead to litigation. Shareholder lawsuits form the vast majority of all lawsuits. We document that (a) federal court lawsuits, though far fewer than state court lawsuits, attract a significantly higher proportion of bidder and target initiated litigation than state courts; (b) bidder and target lawsuits have significantly lower rates of settlements than other types of lawsuits, and deals involving target lawsuits have lower completion rates, but higher takeover premiums if completed. Target managers typically want to either kill the deal as originally proposed or obtain a higher premium, which will lead to both a lower completion rate and a higher average premium in completed deals; and (c) Offer completion rates are the highest for controlling shareholder squeeze-out offers relative to other M&A offer types. This is not surprising given that a controlling shareholder can unilaterally insure that a deal is completed, simply by having a target board of directors propose a merger transaction and then voting its controlling share interest in favor of the transaction.
In our paper, Comparing CEO Employment Contract Provisions: Differences between Australia and the U.S., forthcoming in the Vanderbilt Law Review, we compare and contrast CEO employment contracts across two very different common law countries.
In the wake of the global financial crisis, executive compensation is front page news, with soaring rhetoric about excessive pay to ungrateful bank employees and personal attacks on CEOs and other executives. Frequently missing from the discussion, however, are basic facts surrounding the terms and conditions of the executives’ relationships with their firms. While several recent studies in the United States have begun to fill in some of the details surrounding American executive employment contracts, or the lack thereof, none have fully captured the U.S. experience, particularly from a legal perspective. Likewise, none of these studies even touch on Australian CEOs’ contractual employment relationships.
In a recent paper, Paul Edelman and I critically examine the Delaware Chancery Court’s recent decision in Selectica, Inc. v. Versata Enters., Inc., 2010 Del. Ch. LEXIS 39 (Del. Ch. March 1, 2010). In that case, applying the Unocal test to the use of the NOL pill against a potential acquirer, the Court rejected Versata’s claim that this new type of Rights Plan precluded a successful proxy contest for corporate control. The Court held that a Rights Plan must “render a successful proxy contest a near impossibility or else utterly moot, which was given the specific facts at hand,” a standard that it felt that Versata did not meet and therefore it upheld the NOL pill. While NOL pills can only be used in a limited set of circumstances, typically by companies suffering severe financial distress, the Chancery Court’s language in its opinion could easily support extending this result to all Rights Plans, leading the standard trigger level on all Rights Plans to drop to 4.99 percent.
In the paper, Executive Compensation in the Courts: Board Capture, Optimal Contracting and Officer Fiduciary Duties, forthcoming in the Minnesota Law Review, my co-author, Harwell Wells, and I identify a theoretical impasse in our understanding of executive compensation and looks to recent developments in corporation law to find a practicable way out. At present, debates over executive compensation are waged between two scholarly camps. Advocates of Board Capture theory claim that, because boards of directors are dominated by corporations’ chief executive officers, those CEOs are able to set their own compensation and take home pay packages that are both too high and provide too few incentives for improved corporate performance. Optimal Contracting theorists disagree; while admitting that some compensation packages are inequitable, these theorists contend that, given the constraints of the current legal and regulatory system, most current CEO compensation agreements should be pretty good, rewarding CEOs appropriately and, equally important, providing for increased shareholder value. Despite vigorous scholarly debate, however, little progress has been made in the theory of, and little done in practice to curb, excessive compensation packages.
In our paper, Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms [Lynn Bai, James D. Cox & Randall S. Thomas, Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms, 158 U. Pa. L. Rev. (forthcoming July 2010)], we examine the effect of securities class action settlements on targeted firms. Private suits have long been championed as a necessary mechanism not only to compensate investors for harms they suffer from financial frauds but also to enhance the deterrence of wrongdoing. But many critics have claimed that there a hidden dark side to the successful prosecution of a securities class action. In this paper, we shed light on these issues by examining whether the revelation of earlier misstatements, the initiation of private suit, and the payment of a substantial settlement, weaken the defendant firm so that the firm is permanently worse off as a consequence of the settlement.
Does private equity create value when it acquires a company in a leveraged buyout? If so, how? This question has fascinated scholars ever since the first big wave of buyouts occurred in the mid-1980’s, but has yet to be resolved. A second, even bigger wave of LBO transactions in 2003-2007, brought to a shuddering halt by the recent sub-prime mortgage crisis, has raised the question again even more forcefully as the current market for private equity deals has collapsed. In our recent article “Does Private Equity Create Wealth? The Effects of Private Equity and Derivatives on Corporate Governance,” Ronald W. Masulis and I offer an important new motivation for private equity deals in the future: private equity firms and managers can do a better job of monitoring of derivative transactions and derivative contract positions than their public company counterparts.
As the subprime crisis has illustrated vividly, the growing use of, and trading in, derivative instruments by corporations has eroded the effectiveness of several critical corporate governance mechanisms – the board of directors, the financial accounting system and oversight by regulatory authorities – because firms lack effective means of monitoring derivative risk exposure on a real time basis. This change has increased the importance of attracting financially sophisticated, highly motivated corporate directors, who can deliver intensive monitoring of corporate risk management strategies, who are capable of independently and effectively controlling firm management as part of regulating derivative exposure and who will make the appropriate choices in creating managers’ financial incentives to insure that these executives’ personal risk exposures are aligned with the interests of the firm.
In this paper, we argue that private equity concentrated ownership is now, and will continue to be in the future, a very effective way of attaining all of these objectives. Private equity involvement strengthens boards monitoring of derivative exposures by reducing board size, increasing boards’ control over managers, improving information flows to the board, sharpening director financial incentives to monitor derivative exposure carefully, and attracting better qualified, more financially sophisticated directors, who better understand the associated risks. Further, debt holders and institutional investors can further improve firm monitoring since they are also large investors (who frequently hold both debt and equity positions in private equity controlled firms), which gives them strong incentives to monitor and good access to proprietary firm information flows to accomplish this goal.
The paper is available here.