Although the structure of the board of directors has been the topic of considerable debate and academic research over the past two decades, much of this prior literature focuses on aggregate measures of board composition such as board size or the fraction of independent outside directors. More recent studies recognize that directors with differing backgrounds and expertise are likely to bring different sources of value to the board. However, empirical studies of the importance of these attributes are limited by the ‘stickiness’ of board structures. Specifically, transactions costs associated with board structure adjustments can result in board structures that evolve only very slowly. As a result, observing board structures and their determinants at any given point in time can provide a misleading picture of how boards are formed; most notably, how and why particular individual directors are matched with the specific set of assets that they help govern.

In our paper, Matching Directors with Firms: Evidence from Board Structure Following Corporate Spinoffs, which was recently made publicly available on SSRN, we aim to overcome some of these limitations by analyzing board structure following corporate spinoffs. As part of the spinoff, a board of directors must be created from scratch for the spun off unit. This ‘de novo’ feature provides a unique opportunity to observe boards that are unlikely to be affected by the factors that contribute to the ‘stickiness’ of ongoing boards. In addition, the separation of one publicly traded firm into two publicly-traded firms leads to large discrete differences in asset and operating structure and significant variation in CEO identity and origin. This allows us to examine both the formation of new boards by the spun off units and the changes in parent board structure occasioned by a significant operational restructuring. Perhaps more importantly, our experimental design allows us to link specific assets with specific directors, thereby providing unique evidence on how directors are matched with the assets they govern. Similarly, by tracking the movement of individual CEOs and individual directors, our data can enhance our understanding of the extent to which individual directors are matched with specific CEOs.

…continue reading: Matching Directors with Firms

Even with the recent slowdown in M&A activity, spin-offs have been among the transactions of choice in the past year. With everyone from economic mainstays like ConocoPhillips and Kraft to high-profile new players like TripAdvisor engaging in separation deals in the latest round of deconsolidation, it is an opportune time for dealmakers to consider the general implications of a spin-off on transformational corporate merger activity and certain structures that may allow for a combination of the two.

Corporations engage in spin-offs for a variety of business and financial reasons. A corporation’s goals can be accomplished without U.S. federal income tax to the distributing corporation and its stockholders so long as the transaction meets the requirements of Section 355 of the Internal Revenue Code.

Failure to meet these requirements either before or after the transaction can cause a spin-off to be taxable to the distributing parent company (in the form of corporate- level gain generally equal to the appreciated value of the spun-off subsidiary), to the distributing parent’s stockholders (in the form of dividend income equal to the value of the spun-off business), or both. These taxes can be prohibitively or even catastrophically expensive.

…continue reading: Spin-offs and Reverse Morris Trusts

The Delaware Chancery Court has issued its decision in the closely watched trial between Barry Diller and John Malone and their respective companies, IAC and Liberty Media.

Liberty owns all the high-voting stock and a majority of the votes in IAC but it has granted Diller, IAC’s CEO, an irrevocable proxy to vote these shares. IAC has proposed to spin-off four of its subsidiaries as independent public companies, and the dispute between IAC’s management (including Diller) and Liberty (including its Chairman, John Malone) is whether or not to replicate the IAC two-tiered voting structure in these spin-offs. Diller is contemplating voting Liberty’s shares in favor of the proposal which Liberty vehemently opposes.

The clear winner in this round seems to be Diller. The court concluded that Liberty failed to demonstrate that Diller breached or threatened to breach any contractual duty he owes to Liberty, and rejected Liberty’s claim that the proposed single-tier spin-off gives rise to any right of consent on Liberty’s part. The court held that it was premature to rule on claims relating to the fiduciary duties of the IAC board of directors. IAC was represented by our frequent blog contributor Theodore Mirvis and his partners at Wachtell Lipton Rosen & Katz.

The full opinion can be found here.