ProfessorBainbridge.com

GM Goes From Bad to Worse Despite Obama Bailout

The UAW got their political payoff. And GM, according to Forbes writer Louis Woodhill, is headed to bankruptcy again.

Is this really what Obama wants to do for all manufacturing across America? Let's hope not. 

via www.realclearpolitics.com

It's an unbelievable mess of politically motivated autos that people don't want to buy because they're inferior. Perfect example of industrial policy at work. --TS

via rightcoast.typepad.com

The Institute of Delaware Corporate & Business Law » Blog Archive » Synthes-is: Strine on Pro Rata Treatment in a Sale of a Company with a Controlling Stockholder

Should courts permit deal litigation to go forward when there’s no evidence that the sale process was rushed, or was tainted by an interest on the part of those influencing the process in favoring themselves at the expense of public shareholders generally?

In his typically colorful opinion in In re Synthes, Inc. Litigation (Aug. 17, 2012), Chancellor Strine says no, because facts matter.

via blogs.law.widener.edu

A very interesting analysis of the "the question of dismissing deal litigation at the pleading stage."

I can't believe Romney just blessed Obama's heart

Growing up in a Baptist home located for the most part on Army bases in the South, I early learned the "bless their heart" rule:

Jokes.com
Henry Cho: Insults
comedians.comedycentral.com
Jokes Joke of the Day Funny Jokes

Which makes me appreciate this tweet all the more:

Romney in Iowa: "President Obama, bless his heart, has tried to substitute government for free people, and it has not worked.”

That's pretty mild for a "bless his heart" line. But maybe Romney's just getting warmed up.

CU-Boulder: Profs have no right to cancel classes over gun-carrying students

University of Colorado Chancellor Phil DiStefano notified the Boulder campus faculty Tuesday afternoon that professors "do not have the right to shut down a class or refuse to teach" should they learn that one of their students is lawfully carrying a gun under a concealed-carry permit.

via www.dailycamera.com

Via Instapundit. Yeah, well, I'm for the Second Amendment and all, but I would just as soon students in my class not be armed. Smart phones are bad enough. --TS

via rightcoast.typepad.com

Ditto.

Judge: Poker Betting Not Gambling But Game of Skill

A federal judge has ruled that poker is a game of skill and that therefore betting money on it is not gambling.

AP (“NY federal judge gives winning hand to poker fans, calling it a game of skill, not chance“):

A federal judge ruled Tuesday that poker is more a game of skill than chance and cannot be prosecuted under a law created to stop organized crime families from making millions of dollars from gambling.

The decision by Judge Jack Weinstein in Brooklyn was embraced by advocates of card games pushing to legalize Internet poker in the United States. The judge relied extensively on the findings of a defense expert who analyzed online poker games.

via www.outsidethebeltway.com

It's not often I agree w/ Judge Weinstein, but stranger things have happened.

Conflict minerals disclosure is here ... and complex and costly

Jim Hamilton has a detailed description of the newly adopted SEC conflict disclosure rules. As you;ll see, the rules go way beyond mere disclosure. they require considerable (and costly) audits, due diligence, and documentation.

The always perspicacious Commissioner Troy Paredes dissented, arguing that:

Although the Commission finds itself in a difficult position by having to undertake a rulemaking that falls far outside its zone of expertise, the agency still must base its final rule on a reasoned assessment that considers the potential consequences of its judgments. Otherwise, one cannot determine whether the rule is likely to do more good than harm.

Regrettably, notwithstanding the time that has been taken, the effort that has been expended, and the comment that has been received, the Commission has not met its obligation in this respect. The SEC’s conflict minerals rulemaking suffers from an analytical gap that I cannot overlook – namely, there is a failure to assess whether and, if so, the extent to which the final rule will in fact advance its humanitarian goal as opposed to unintentionally making matters worse. Indeed, based on some of the comment that the Commission has received, there is reason to worry that, contrary to the aims of Section 1502, a chief consequence of the final rule could be that it actually worsens conditions in the DRC.

His explanation as to why that is the case is a must read.

In reading Commissioner Parede's cogent critique, I was struck by the language he choise to deploy. In particular, consider this line from his dissent:

... the adopting release acknowledges that the Commission did not assess how effective the final rule will be in addressing the crisis in the DRC. As the Commission’s adopting release explains, Section 1502 “aims to achieve compelling social benefits, which we are unable to readily quantify with any precision, both because we do not have the data to quantify the benefits and because we are not able to assess how effective Section 1502 will be in achieving those benefits.”

In other words, the Commission has declined to analyze whether the choices it has made will advance the rulemaking’s objective.

Why is that so striking? Let's revisit Business Roundtable v. SEC, 647 F.3d 1144 (DC Cir. 2011), in which the court struck down SEC Rule 14a-11, the so-called proxy access rule, which required "public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors." The court did so "because, among other reasons, the Commission failed adequately to consider the rule's effect upon efficiency, competition, and capital formation."

If a rule is struck down when the SEC considers the rule's effect, but fails to do so "adequately," how much more should the rule be struck down when the SEC "did not assess" the rule's effect at all or, perhaps even worse, "declined to analyze" the rule's effect? After all, Business Roundtable teaches that the SEC has a "statutory obligation to assess the economic consequences of its rule." 

If somebody challenges the validity of the Rule, I expect they will be citing Commissioner Paredes' critique early and often.

Skeel on the eroding rule of law

David Skeel has a wonderful op-ed in today's WSJ, which should be read widely. In it, he argues that:

The notion that we are governed by rules that are transparent and enacted through the legislative process—not by the whims of our leaders—is at the heart of that commitment. If legislators exceed their authority under the Constitution, or if otherwise legitimate laws are misused, courts must step in to prevent or remedy the potential harm.

During the 2008 financial crisis, the government repeatedly violated these principles. ...

Examples follow at distressing length. (To be clear, it's the examples -- not the length of the discusison -- that is distressing!)

A sad irony of these developments is that rule-of-law values have been one of America's greatest contributions to world-wide economic development in recent decades. When the economist Hernando de Soto tried in the 1990s to determine why economic growth is so limited in much of the world, he concluded that respect for basic property rights is essential.

America, where this commitment gradually emerged in the 19th century, was Exhibit A in Mr. de Soto's story. In the years after the Berlin Wall fell in 1989, American markets served as a model of the importance of privatization and protection of property rights as the nations of Eastern Europe charted a new economic future. Now we increasingly are the ones that need to learn these lessons. ...

Each candidate should be asked: Do you believe that the rule of law was abused during the recent crisis, and what would you do to protect it in the future?

Although Skeel doesn't explicitly make the case, it's clear that the blame falls squarely on Obama. As President, Obama has perpetuated--indeed, expanded--Bush's disregard for the rule of law abroad (drone killings of Americans, for example), while extending a disregard for the rule of law into the domestic spheres as Skeel details.

Unfortunately, we know Obama would deny abusing the rule of law and we also know that that would be yet another lie.

The prosociality of short selling

Short selling is under attack. In 2010, the SEC adopted new restrictions on it. Spain and Italy have adopted purportedly temporary bans on it.

I've noted many times over the years that short selling has many pro-social aspects, while being unfairly blamed for problems whose root causes lie elsewhere. A new paper brings to our attention an important additional prosocial benefit of short selling:

We hypothesize that short-selling has a disciplining role vis-à-vis the managers forcing them to reduce earning manipulation. Using firm-level short-selling data over the sample period of 2002 to 2009 across 33 countries, we document a significantly negative relationship between lending supply and activism in the short sell market and earnings manipulation. Additional tests using ETF ownership as an instrument or based on market-wide short-selling restrictions further confirm that short selling potential strongly discourages earnings manipulation. Meanwhile, the impact is more pronounced for firms with weaker corporate governance. Collectively, our findings suggest that short selling provides an external governance mechanism to discipline managerial incentives. 

Massa, Massimo, Zhang, Bohui and Zhang, Hong, The Invisible Hand of Short-Selling: Does Short-Selling Discipline Earnings Manipulation? (August 5, 2012). Available at SSRN: http://ssrn.com/abstract=2124464 

 

Earnings manipulation is an important source of agency costs in public corporations. By constraining management's ability to do so, short selling thus provides an important market check on potentially destructive misconduct. Which, once again, calls into question the wisdom of restricting it.

Federal Courts Hold that Negative Shareholder Say-on-Pay Votes Did Not Negate Business Judgment Rule Presumption

There is a growing consensus among federal courts that, under Delaware law, a negative shareholder say-on-pay vote does not rebut the business judgment rule presumption normally accorded to a company’s board of directors. Applying Delaware law, a federal judge (ND Ill) ruled that a negative shareholder advisory vote on executive compensation did not rebut the business judgment rule and excuse demand in a shareholder derivative action alleging a breach of fiduciary duty by company directors. Section 951 of the Dodd-Frank Act requires public companies to allow a shareholder advisory vote on executive pay at least once every three years. According to the court, the plain language of the statute makes clear that the non-binding shareholder vote does not create or imply any change in the fiduciary duty of the company’s board of directors. (Gordon v. Goodyear, ND Ill., July 13, No. 12 C 369, July 13, 2012)

via jimhamiltonblog.blogspot.com

As well they should.

The Harvard Law School Forum on Corporate Governance and Financial Regulation and Moi

The Forum published a precis of my article on The Geography of Revlon-Land.

Briefs in Support of Judge Rakoff

Last week ... a group of securities law scholars [filed] an amicus brief in SEC v. Citigroup Global Markets Inc., in support of the district court's order that refused to approve the proposed settlement between the parties.  In the brief we express our concern about the SEC's settlement practices and the constraints on judicial discretion in approving consent settlements advocated by the parties, which, if adopted by the Second Circuit, will reduce the effectiveness of judicial review as an independent check on agency action. (Download Citigroup AmicusBrief Aug 15)

In addition, yesterday Harvey Pitt, who has served both as SEC Chairman and as its General Counsel, filed an amicus brief in support of Judge Rakoff's order.  Mr. Pitt asserts that the Commmission applies exacting standards before it approves the filing  or settlement of an enforcement action and therefore its attorneys should have no difficulty supplying the court with the information it needs in order to review the proposed consent judgment.  The questions posed by the district court, if answered, would have enabled the court to approve the settlement.  (Download Pitt.AmicusBrief)

via lawprofessors.typepad.com

Interesting.

Was this a bad year to quit rooting for the Redskins?

Regular readers will recall my annual suffering at the hands of my once-beloved Washington Redskins. I go back a long way with the 'Skins. When I first started rooting for them, Sonny Jurgensen was still their starting QB (and how I loved him). The first Joe Gibbs tenure, of course, was like heaven. And, better still, I was living in Virginia and DC for most of that time.

Then came the evil one-- little Daniel Snyder and his parade of bad coaches and worse decisions. And the suffering began.

Last year, I finally through in the towel. I bought stock in the Green Bay Packers (how appropriate for a corporate law professor) and decided to root for them until hell freezes over and the NFL finally decides to let us have a team in Los Angeles (USC is already semi-pro, why not just give them a franchise?).

So, naturally, this year things are finally looking up:

• RGIII may not be the second coming of Cam Newton, but he's likely the best QB Washington has had since Doug Williams
• Mike Vick is getting his ribs x-rayed and over on Twitter we learn that "If it's ribs again for Vick, note that he broke ribs 11.13.11 and didn't play again for 28 days. Eagles' opener is in 20 days." 
• Even setting aside his looming criminal problems, Dez Bryant has patellar tendinitis (and with respect to Vick and Bryant, may I just say karma's a bitch?).
• Miles Austin has a hamstring injury.

So Dallas and Philidelphia are both starting the season with nicked up stars.

Naturally.

Fortunately, I think I can count on little Danny to frak things up.

Strine on the borders of Revlon-land

My article The Geography of Revlon-Land (forthcoming 81 Fordham L Rev ___ (2013)), explains that when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”

A critical question then is to identify the checkpoints at which target boards cross the border into Revlon-land. My article argues that a number of Chancery Court decisions in the last decade have erred by holding that certain cases fall within the borders of Revlon-land even though both binding Delaware Supreme Court precedents and sound policy argue that those cases do not do so.

The cases towards which my analytical ire are directed are In re Lukens Inc. Shareholders Litig., 757 A.2d 720 (Del. Ch. 1999); In re NYMEX Shareholder Litig., 2009 WL 3206051 (Del. Ch. 2009); In re Smurfit-Stone Container Corp. S’hlder Litig., 2011 WL 2028076 (Del. Ch. 2011); Transcript of Ruling of the Court on Plaintiffs’ Motion for a Preliminary Injunction, Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011) (copy on file with author).

Properly understood, there are three checkpoints through which one enters Revlon-land. Checkpoint #1 requires the target corporation to initiate “an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company,” with it being unclear whether the reference to a “break-up” modifies both halves of this checkpoint or only the latter.  Checkpoint #2 requires that, “in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company.”  Checkpoint # 3 requires “a sale or change of control” of the target.  See Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 (Del. 1994).

It is the third checkpoint that has been the problem child. It is well-settled law that in a merger of equals of publicly held companies in which the shareholders receive stock of the post-transaction combined entity there is no sale or change of control because control of the combined entity after the merger remained “in a large, fluid, changeable and changing market.” But what if some or all of the merger consideration were cash? Would that change the result? In my article, I put forward three variants of this hypothetical:

In this hypothetical, change the facts by changing the form of consideration. Version A entails a merger between Acme and Ajax in which Ajax shareholders get cash for their stock. Version B entails a triangular merger between Ajax and a wholly owned Acme subsidiary in which the Ajax shareholders get cash. Version C is a tender offer for any and all Ajax shares for cash to be followed by a freeze-out merger in which and remaining Ajax shareholders will be squeezed out in return for cash.

Checkpoint # 1 is not triggered on the bare facts of any of these versions of the hypothetical. Ajax did not initiate an active bidding process seeking to sell itself. Likewise, none of the transactions will result in a business reorganization involving a clear break up of the company.

Checkpoint # 2 is not triggered, inter alia, because none of Ajax’s actions were responsive to an unwanted offer.

As for checkpoint # 3, the key issue is whether a cash sale constitutes “a sale or change of control.” A going private transaction in which the target is acquired for cash by a private equity firm obviously would enter Revlon-land via this third portal,  but what if the acquirer is publicly held and has no controlling shareholder? To answer that question, one must know whether control modifies both “sale” and “change” or only modifies “change.” If the former, cash sales do not trigger Revlon duties if the acquirer is publicly held.

Lukens and its progeny have found Revlon duties to be triggered by transactions in which all or part of the acquisition consideration consisted of cash. As noted, my article argues that Lukens and progeny misapply binding precedents (most notably In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59 (Del. 1995)), and also get the policy wrong.

I am delighted to report, however, that not all of the Chancellors are going down the Lukens road. In an opinion issued last Friday (how's that for being up to date?), In re Synthes, Inc. S’holder Litig., C.A. No. 6452 (Del. Ch. Aug. 17, 2012) (copy on file with author), Chancellor Leo Strine held that:

[P]laintiffs are also wrong on the merits of their argument that Revlon applies. Their sole basis for claiming that Revlon applies is that the Synthes stockholders are receiving mixed consideration of 65% J&J stock and 35% cash for their Synthes stock, and that this blended consideration represents the last chance they have to get a premium for their Synthes shares. But under binding authority of our Supreme Court as set forth in QVC and its progeny, Revlon duties only apply when a corporation undertakes a transaction that results in the sale or change of control. … [T]he mixed consideration Merger does not qualify as a change of control under our Supreme Court’s precedent. A change of control “does not occur for purposes of Revlon where control of the corporation remains, post-merger, in a large, fluid market.” Here, the Merger consideration consists of a mix of 65% stock and 35% cash, with the stock portion being stock in a company whose shares are held in large, fluid market. In the case of In re Santa Fe Pacific Corp. Shareholder Litigation, the Supreme Court held that a merger transaction involving nearly equivalent consideration of 33% cash and 67% stock did not trigger Revlon review when there was no basis to infer that the stock portion of that consideration was stock in a controlled company. That decision is binding precedent.

Id. at 42-43 (footnotes omitted). Accordingly, Chancellor Strine held, “plaintiffs are also wrong on the merits of their argument that Revlon applies.” Id. at 42. Chancellor Strine’s holding is fully consistent with the understanding of Revlon and its progeny advanced in my article.

Curiously, Chancellor Strine failed to discuss my article! (I am, of course, jesting.) Even more curiously, however, Chancellor Strine did not discuss any of the contrary Chancery Court precedents. Perhaps the issues were not properly briefed?

In any case, I do wish the Chancellor had engaged Lukens and its progeny. Among other reasons, those cases tried to finesse Santa Fe by treating that case as simply setting a floor—33% cash—below which one did not enter Revlon-land.  As for higher ratios, the Chancery Court in NYMEX relied on Lukens for the proposition that the Delaware “Supreme Court has not set out a black line rule explaining what percentage of the consideration can be cash without triggering Revlon.” It would have been helpful if Chancellor Strine had addressed that interpretation.

Chancellor Strine also could have addressed another argument advanced in Lukens and progeny. As I explain in my article:

The logic of the Chancery Court decisions rests on the policy that target shareholders who get cash have no opportunity to participate in the potential post-acquisition gains that may accrue to shareholders of the combined company:

Defendants emphasize that no Smurfit–Stone stockholder involuntarily or voluntarily can be cashed out completely and, after consummation of the Proposed Transaction, the stockholders will own slightly less than half of Rock–Tenn. … Defendants lose sight of the fact that while no Smurfit–Stone stockholder will be cashed out 100%, 100% of its stockholders who elect to participate in the merger will see approximately 50% of their Smurfit–Stone investment cashed out. As such, like Vice Chancellor Lamb’s concern that potentially there was no “tomorrow” for a substantial majority of Lukens stockholders, the concern here is that there is no “tomorrow” for approximately 50% of each stockholder’s investment in Smurfit–Stone. That each stockholder may retain a portion of her investment after the merger is insufficient to distinguish the reasoning of Lukens, which concerns the need for the Court to scrutinize under Revlon a transaction that constitutes an end-game for all or a substantial part of a stockholder’s investment in a Delaware corporation.

As we have seen, however, this concern makes no sense.  As long as the acquirer is publicly held, shareholders who get cash could simply turn around and buy stock in the post-acquisition company. They would then participate in any post-transaction gains, including any future takeover premium. Only if there has been a change of control is that option foreclosed.

In Synthes, the plaintiffs likewise argued that Revlon was triggered by a deal “represent[ing] the last chance they have to get a premium for their [target company] shares.” Id. at 43. Chancellor Strine rejected that argument, holding that the plainitffs were “wrong on the merits.” Id. at 42. At least implicitly, Chancellor Strine thus rejected the focus in Steinhardt on the final period aspect of the transactions at bar. It would have been helpful, however, if he had squarely rejected Smurfit et al.

Finally, in a newly added section of the article, I ask whether the Chancery Court is groping towards a new understanding of Revlon, which would necessitate a broader application to a wider array of transactions. I argue that, if so, this evolutionary process is misguided. In Synthes, Chancellor Strine reminds us that it is not the Chancery Court's role to overturn Supreme Court precedents. The Chancellor explicitly based his holding on the “binding authority of our Supreme Court as set forth in QVC and its progeny,” pursuant to which “Revlon duties only apply when a corporation undertakes a transaction that results in the sale or change of control.” Id. at 43. A few lines later he referred to Santa Fe as "binding precedent." As suggested by his use of the word “binding,” trial courts are supposed to follow higher court precedents even when they disagree with them.

The trouble is that Lukens et al claim fidelity to Santa Fe. Hence, once again, it would have been helpful if Strine had met those cases head on. Are they consistent with the binding Supreme Court precedent or not? (Perhaps Strine feels a reprimand for his Chancery cooleagues also should come from the Supreme Court.)

In any event, this is a strong opinion that gets it exactly right (IMHO). Chancellor Strine has done it again.

Tweeting second fantasy football draft of the year--Updated w/ results

12 team. PPR. I'm picking 12th in first round (but also 13th in second). I hate the wheelhouse.

https://twitter.com/ProfBainbridge

Here's my team and evaluation by Footballguys.com:

QB: Matthew Stafford, Andrew Luck
RB: Matt Forte, Steven Jackson, Kendall Hunter, Isaiah Pead
WR: Hakeem Nicks, Eric Decker, Brandon Lloyd, Greg Little, Jonathan Baldwin
TE: Jermaine Gresham, Kyle Rudolph
PK: Dan Carpenter
TD: Houston Texans

Overview: We'll start by complimenting you on your strength at quarterback and receiver. As you know, it's very difficult in a competitive league to assemble a team that is strong at QB, RB, and WR, so just about every team will have a weakness. As you probably suspect, we perceive yours to be at running back.

In 2012, that's not an instant fantasy team killer like it might have been five years ago. And in this particular case, we absolutely think you're strong enough elsewhere to overcome it. You've definitely got a good team here, but we'd feel better if we knew you were committed to keeping an eye out for the 2012 version of 2010's Peyton Hillis or LeGarrette Blount or 2009's Ricky Williams, Jamaal Charles, or Fred Jackson.

Players we particularly like on this team include Eric Decker, Brandon Lloyd, Andrew Luck, Greg Little, Kyle Rudolph, and Steven Jackson. We have all these guys ranked ahead of where they are typically being drafted.

Bottom line:

• With great inseason management, we think you have about a 80 percent chance of making the playoffs.
• With good inseason management, we think you have about a 70 percent chance of making the playoffs.
• With average inseason management, we think you have a 58 percent chance of making the playoffs.

I think I'm okay at RB, actually. But I concede that this is a team on which I need the sleepers to pan out. If guys like Decker, Hunter, and Rudolph end up having good to breakout seasons, I could be in good shape.

Update: Our friend Tung Yin is playing in this league and evaluates his team here. I'm not sure "Drizzles" is the scariest team moniker, however.

What if Ernest Hemingway or Oscar Wilde wrote The Lord of the Rings?

Perhaps you've already read the Ayn Rand version of J.R.R. Tolkien's The Lord of the Rings, but how might the epic change in the hands of Ernest Hemingway, Oscar Wilde, Ian Fleming, or Lewis Carroll? Or, for that matter, George Lucas or Gene Roddenbury?

Alison Brooks' Alternative authors' versions of Lord of the Rings reimagines the adventures of Frodo, Sam, and Gandalf through the writing styles of a number of unexpected authors. Her Ernest Hemingway, for example, includes a terse description of the One Ring itself:

Frodo Baggins looked at the ring. The ring was round. It was a good ring. The hole at the heart of the ring was also round. The hole was clean and pure. The hole at the heart of the ring had an emptiness in it that made Frodo Baggins remember the big skies of the Shire when his father had taken him out and taught him to tear the heads off the small, furred things that walked there, even though he hated blood in those days and the stink of the blood was always part of the emptiness for him then and ever after.

via io9.com

I am amused. Especially by the Wodehouse version.