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UCLA Rules the UCs

Via Paul Caron:

Modesty prevents me from taking the full credit for UCLA's performance I so richly deserve, of course.

Back to the Future: Warner and Paramount Come Full Circle

Back in the 1980s, Time Inc. was principally a print publishing company. It's lineup included such stalwarts as Time, People, Sports Illustrated, and so on. Along the way, however, Time had picked up cable network HBO. Video entertainment was anticipated to play an increasing role in Time's future, which meant HBO and its other video enterprises need a constant flow of new content. 

Time management developed a strategic plan, which the board adopted, to grow the video side of the business by combining with a major motion picture studio. After searching for acquisitions that would advance that plan, Time’s board of directors eventually approved a merger with Warner Communications. The deal was billed as a merger of equals, although the former Warner shareholders would receive newly issued shares representing approximately 62 percent of the shares of the combined Time-Warner entity. 

By the way, the negotiations between Time and Warner were a claassic clash of massive Wall Street and Hollywood egos. Which company got its name first in the new title? Which firm's CEO could become CEO of the combined company? Who was the acquirer and who the target, a question that became even more fraught whenParamount entered the picture. All of which is chronicled by Connie Bruck in Master of the Game: Steve Ross and the Creation of Time Warner.

As I describe in my book, Mergers and Acquisitions:

Shortly before Time’ shareholders were to vote on the merger agreement,[1] Paramount made a cash tender offer for Time. Time’s board rejected the offer as inadequate, without entering into negotiations with Paramount. To forestall Paramount, the Time and Warner boards then agreed to a new structure for the transaction, under which Time would make a cash tender offer for a majority block of Warner shares to be followed by a merger in which remaining Warner shares would be acquired, thus obviating the need for shareholder approval. The new plan required Time to incur between 7 and 10 billion dollars in additional debt. Finally, and perhaps most damningly from the perspective of a Time shareholder, it foreclosed the possibility of a sale to Paramount. If the new plan succeeded, Time’s shareholders therefore would end up as minority shareholders in a company saddled with substantial debt and whose stock price almost certainly would be lower in the short run than the Paramount offer.

[1]      The plan of merger called for Warner to be merged into a Time subsidiary in exchange for Time common stock. Although Time was not formally a party to the merger and approval by its shareholders therefore was not required under Delaware law, New York Stock Exchange rules required a vote of Time shareholders because of the number of shares to be issued.

Paramount faced the obverse of Time's strategic problem. Time had a conduit for delivering video entertainment directly to consumers in their homes but insufficient content. Paramount had lots of content but no conduit for delivering it to consumer homes. So Paramount prized Time for HBO. But Paramount had no interest in Warner; indeed, Paramount would be unable to raise financing to buy the combined Time Warner entity even if it had wished to do so.  Paramount thus needed to stop the Time-Warner merger. On the other hand, as the Delaware Supreme Court later explained, Time’s revisions to the Warner deal was motivated by a desire to advance legitimate corporate interests. The revised plan had not been cobbled together simply to justify takeover defenses, but was only intended to carry forward “a preexisting transaction in an altered form.” As a result, Paramount was essentially asking the court to enjoin Time’s board from continuing to operate the corporation’s business and affairs during the pendency of the takeover bid. The Delaware courts were properly reluctant to do so, as a hostile bidder has no right to expect the incumbent board of directors to stop an ongoing business strategy in mid-stream. Accordingly, in a landmark decision I still teach in M&A 30+ years later, the Delaware Supreme Court allowed Time to go forward with the revised acquisition.

Time shareholders probably would have preferred the Paramount deal. Paramount ultimately offered $200 per share in cash. Time's board claimed that the Warner deal would eventually result in a combined entity whose stock would trade in "ranges of $159-$247 for 1991, $230-$332 for 1992 and $208-$402 for 1993. ... The latter being a range that a Texan might feel at home on." Paramount Commun. Inc. v. Time Inc., 1989 WL 79880, at *13 (Del. Ch. July 14, 1989), aff'd, 565 A.2d 281 (Del. 1989).

None of those predictions panned out. To the contrary, a 2003 WSJ article observed that:

[Time's] shareholders didn't fare so well, particularly with the double whammy of the AOL combination. If you were a shareholder of Time back in 1989 and held your shares through various splits over the years, they would now be worth $113.76 each, about where they were trading more than 14 years ago and far below the Paramount offer. Meanwhile, if you'd just bought the stocks in the S&P 500 index, you would have almost tripled your money.

In 2021, I calculated that if you had taken the Paramount deal in 1989 and invested the $200 per share in the S&P 500, you'd have had $5,182.69 in 2021.

Of course, as that WSJ article reminds us, Time-Warner later went on to be acquired by AOL in a disastrous deal chronicled by Alec Klein in Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner. At the time, AOL's stock price was hugely inflated by the doc-com bubble. The then-management and board of Time Warner thus agreed to a stock for stock deal, which went through mere months before the dot-com bubble burst. AOL Time Warner stock fell by pover two-thirds in the wake of the burst bubble. Over the next decade, trying to repair the damage required management to divest "the Time Warner Book Group, Warner Music Group, Time Warner Cable, and AOL." 

The WSJ provided a simplified map of the complex series of deals that created today's Warner-Discovery entity:

All of which brings us up to this week. Despite decades of unwise deals, Warner is back in the news because it's thinking about coming full circle:

The Wall Street Journal and other media outlets reported late Wednesday that Warner Chief Executive David Zaslav met with Paramount CEO Bob Bakish earlier this week to discuss a possible deal. 

Would this deal turn out any better than the ones that preceded it? The WSJ suggests caution:

Combining the owners of the Max and Paramount Plus streaming services also makes a certain amount of sense in a world where every streamer not named Netflix is losing money or owned by a tech giant (Amazon and Apple) that can stomach the losses. Warner and Paramount combined have about 158 million subscribers, which exceeds those of Disney’s core streaming services and would come second only to the 247 million subscribers Netflix currently boasts. 

But such a combination would bring together two companies under a mountain of debt—$61 billion combined as of the end of the third quarter. Meanwhile, the benefits from combining the scale and reach of two media titans would also likely draw the ire of regulators. 

One wonders whether an alternative deal structure, such as a joint venture between Warner's Max and Paramount's Paramount+ streaming services would not make more sense. 

In any case, this is a fitting Hollywood twist to a long running story, as Warner is now trying to woo the suitor it spurned 3 decades ago.

On the lack of viewpoint diversity in academia: "The nation’s faculty are now the most politically homogeneous since the 1800s, when universities were divinity schools"

From today's WSJ:

By 2018, the ratio of Democrats to Republicans was 70 to 1 among faculty who taught religion, 48 to 1 in English, 17 to 1 in philosophy, history and psychology and 8 to 1 in political science, according to a study of the political affiliations of faculty at 51 of the top liberal-arts colleges. More than three quarters of Harvard’s faculty of arts and science now characterize their political leanings as liberal or very liberal, while less than 3% identify as conservative or very conservative, according to a Harvard Crimson survey. 

The nation’s faculty are now the most politically homogeneous since the 1800s, when universities were divinity schools, according to Jonathan Haidt, a professor of ethical leadership at New York University’s business school who co-founded Heterodox Academy, which advocates viewpoint diversity on campus.

And then we get to the scary part:

Student tolerance for opposing ideas declined and attempts to disinvite or cancel speakers on campuses increased about fourfold since the year 2000, according to a database maintained by the Foundation for Individual Rights and Expression. A majority of the speakers canceled have been conservative.

Today, 46% of college students agree that “it is sometimes appropriate to shout down or disrupt a speaker on my campus,” according to a 2023 Buckley Institute survey.

Was Michael Milken railroaded?

A new book by Michael Milken's former personal lawyer Richard Sandler argues that Milken was largely innocent of the charges brought against him back in the 1980s: Witness to a Prosecution: The Myth of Michael Milken.  A review in today's WSJ finds it largely persuasive:

After reading Mr. Sandler’s account, I no longer believe in Mr. Milken’s guilt, and neither should you. The author argues that most of what we know about Mr. Milken’s misdeeds is grossly exaggerated, if not downright wrong. What the government was able to prove in the court of law, as opposed to the court of public opinion, were mere regulatory infractions: “aiding and abetting” a client’s failure to file an accurate stock-ownership form with the SEC, a violation of broker-dealer reporting requirements, assisting with the filing of a false tax return. There was no insider-trading charge involving Mr. Boesky or anyone else, because the feds couldn’t prove one. ...

When you digest the reality of the case against Mr. Milken, you find that much of it was nonsense.

Sounds like a must read, which is why I just bought it.

 

How Effective are Activist CEOs?

Very interesting results reported by Christopher Poliquin and Young Hou at CLS Blue Sky Blog. 

In our new working paper, we conduct two experiments on 500 elected officials from across the U.S. to examine whether policymakers are moved by CEO stances on contentious issues. In the first experiment, we asked the officials about their support for police reform after randomly exposing half the sample to a Business Roundtable message advocating for the reforms. In the second experiment, we measured their’ willingness to engage with a CEO who was considering relocating to their community, and we varied whether the CEO was described as publicly expressing views on social issues that clash with those of the officials’ constituents.

CEO advocacy for police reform ineffective: Exposure to the CEO message supporting police reform didn’t sway the opinions of local elected officials. While support for police reform was highest among Democrats and lowest among Republicans, members of neither party reported higher levels of support after seeing the Business Roundtable statement. Furthermore, this pattern held regardless of a community’s exposure to police shootings, Black resident share, or history with Black Lives Matter protests or the self-reported views of the community’s policmakers on police-community relations in their area.

Lower willingness to engage with activist CEOs: Strikingly, local policymakers are reluctant to engage with CEOs who speak out on social issues. Policymakers who were told a CEO expressed controversial opinions were less willing to meet privately with the CEO and less willing to publicly advocate for the relocation of the CEO’s company.

In short, there's little potential upside to social justice warrior activism by CEOs and plenty of potential downside.

Verstein on "Incorporating Responsibility"

My friend and UCLAW colleague Andrew Verstein has posted a new article on limited liability:

“Limited liability” is the rule that shareholders are not liable for the debts of the corporations they own. Critics of limited liability argue that it encourages corporations to ignore the harms they cause and cuts off recovery for deserving plaintiffs. Defenders of limited liability reply that it helps the economy by reassuring investors that they cannot lose their life savings merely by buying a single corporate share. Both claims are clearly right, so the debate rages on.

This Article proposes a solution to the dilemma of limited liability that gives both sides what they want: recovery for tort victims and safety for investors. The solution is “incorporation responsibility” – the rule that whatever state incorporates a business becomes responsible for that business’s unpaid debts. Thus, if a Delaware corporation commits a tort that it cannot rectify, the State of Delaware would compensate the victims.

This proposed scheme of incorporation responsibility tracks the logic and law of American corporate federalism. The “genius” of American corporate law is that states compete for incorporation fees by offering appealing laws. This process works well for many corporate rules, but it currently malfunctions for limited liability because states are rewarded for expanding limiting liability, even where the doing so imposes disproportionate costs on victims. With incorporation responsibility, states will internalize the costs and benefits of limited liability and can be trusted to craft rules that are both just and efficient.

Verstein, Andrew, Incorporating Responsibility (October 16, 2023). Yale Journal on Regulation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4604095

Recommended reading.

Anabtawi on "The Limits of Shareholder Ratification"

My friend and UCLAW colleague Iman Anabtawi has posted a new article on shareholder ratification in corporate law:

In this Article, I explore the expanding common law doctrine of shareholder ratification, whereby shareholder approval can, for all practical purposes, absolve directors of fiduciary liability for damages related to their conflicted business decisions. The Delaware Supreme Court now allows a shareholder vote to perform substantially more work than ever before. To take just one example, recent court decisions have extended shareholders’ cleansing power to third-party merger and acquisition transactions that would otherwise have been subject to heightened judicial scrutiny. Under prevailing law, in transactions between a company and any party other than a controlling shareholder, shareholder ratification reinstates the business judgment rule and makes it irrebuttable, other than for waste. Substantive judicial review is effectively avoided for such transactions. Despite its extraordinary importance in corporate governance, the shareholder ratification doctrine’s foundations are feeble and its limits uncertain. Theoretically, there is no well-established basis for equating shareholder approval with either the informed, disinterested, and good faith decision of a board or judicial review. Doctrinally, the shareholder ratification doctrine’s expansion from its traditional context of self-dealing transactions has been a judicial innovation, rather than an elaboration of precedent. And historically, the shareholder ratification doctrine, which originated in early 20th century state interested-director statutes, was motivated by fairness principles that were lost in translation into the common law.

This Article recovers the fairness genealogy of the shareholder ratification doctrine and, in doing so, provides useful guidance for the doctrine’s development, limits, and application.

Anabtawi, Iman, The Limits of Shareholder Ratification (September 19, 2023). UCLA School of Law, Law-Econ Research Paper No. 23-06, Available at SSRN: https://ssrn.com/abstract=4576584

Recommended reading.

Milestone Birthday Dinner # 2

Sunday night we celebrated my milestone birthday at Rao's in Hollywood, our favorite Italian restaurant in LA.

I love the atmosphere:

Helen had called ahead to make sure they would reserve an order of Sunday gravy dinner for us:

Amazing. The meatball was especially tasty, but the braciole was a close second. The sausages were also great. My only real complaint was that the short rib could have been cooked a while longer.

We drank a 2017 Antinori Pian delle Vigne Brunello di Montalcino. It was a great match for the meat and pasta. It was a little tight when opened but our waiter kindly decanted it for us, which loosened it up quite a bit. Scents of black cherry, blackberry, and cranberry emerged. Long finish with oak and herbs.

Spring 2024 Update to Business Associations: Cases and Materials on Agency, Partnerships, LLCs, and Corporations

Foundation Press announces that: 

The Spring 2024 Update to Business Associations: Cases and Materials on Agency, Partnerships, LLCs, and Corporations, 11th Edition is now available to download. Teacher's Notes are also available to accompany the update.

Download the Spring 2024 Update

Download the Teacher's Notes

Do state law fiduciary duties forbid directors from selectively disclosing confidential information?

In other words, does state law impose duties resembling Reg FD? ASt the outset, one should note that Reg FD was necessary precisely because a director or officer's fiduciary duties did not prohibit him from selectively disclosing information when doing so for a corporate purpose. Put another way, Reg FD was necessary because the SEC wanted to go far beyond cases in which a director or officer could be liable for tipping. 

It has long been Delaware law that:

The directors of a Delaware corporation are required to disclose fully and fairly all material information within the board's control when it seeks shareholder action. When the directors disseminate information to stockholders when no stockholder action is sought, the fiduciary duties of care, loyalty and good faith apply.

Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998).

I take it that the question is whether a Reg FD-type disclosure obligation arises under those state law duties of loyalty and good faith. I am not aware of any law directly on point.

Donna Nagy has argued that “insiders who deliberately leak information in violation of Regulation FD have failed to act in good faith and thereby breach their duty of loyalty ‘by causing the corporation to violate the positive laws that it is obligated to obey.’” Donna M. Nagy, Salman v. United States: Insider Trading's Tipping Point?, 69 Stan. L. Rev. Online 28, 33–34 (2016). But even if true, of course, this does not mean there is an free standing state law equivalent of Reg FD.

Interestingly, although not directly on point, a letter ruling by VC Noble stated that:

A director may not harm the corporation by, for example, interfering with crucial financing efforts …. Moreover, he may not use confidential information, especially information gleaned because of his board membership, to aid a third party which has a position necessarily adverse to that of the corporation.

That is what Michael did.

… [T]he disclosure of confidential information to a potential investor (an adverse party at that particular moment), especially when the director knows (and hopes) that the disclosure would benefit the potential investor to the substantial detriment of the Company, is conduct which, in and of itself, is a breach of the duty of loyalty.

Shocking Techs., Inc. v. Michael, No. CIV.A. 7164-VCN, 2012 WL 4482838, at *9-10 (Del. Ch. Oct. 1, 2012), vacated, (Del. Ch. 2015). This is, I suppose, sort of the inverse of the Reg FD question.

Milestone Birthday Dinner Number 1

American "wagyu" ribeye steak and fries.

Ridge Vineyards Monte Bello (Santa Cruz Mts.) 2005. The Monte Bello still had tons of vibrancy. It drank like a much younger wine. Deep purple. Lush blackberry, currant, and plum flavors. Some spice and chocolate on the finish. Will improve with more age.

What is the "Impact of the Duty to Maximize Short-Term Value in Mergers and Acquisitions"?

My friend and UCLAW colleague Fernan Restrepo has a new paper asking and answering the titular question:

For nearly four decades, Revlon v. MacAndrews and Forbes has required the boards of target companies in change-of-control transactions to maximize immediate shareholder value – that is, to expose the firm to a market canvass before closing any transaction and refrain from favoring one bidder over another for reasons unrelated to short-term value. Although Revlon is certainly one of the most famous and controversial decisions in the history of corporate law, it remains unclear whether the case had any effect on shareholder welfare. This paper examines that question. The results show that, in fact, the returns of the target shareholders in Revlon deals increased significantly after Revlon – not only in absolute terms, but also in relation to transactions not subject to the decision. From a policy perspective, this finding suggests that if courts continue to limit the scope of the Revlon doctrine (as they have in recent cases), there might be a point after which that trend will harm the welfare of the target shareholders.

Restrepo, Fernan, The Impact of the Duty to Maximize Short-Term Value in Mergers and Acquisitions: An Analysis of Revlon (November 8, 2023). Available at SSRN: https://ssrn.com/abstract=4626391 or http://dx.doi.org/10.2139/ssrn.4626391

Recommended reading.

Bishop Barron on the Ivy League Presidents

@BishopBarron on "Ivy League Presidents and the Collapse of Moral Reasoning." The great man of God asks "what has made this kind of moral opaqueness and muddle-headedness possible"?https://t.co/w3DZbxSefJ

— Steve Bainbridge (@PrawfBainbridge) December 9, 2023

Fourth Edition of my Mini-treatise Agency, Partnerships & LLCs is Now Available

The Fourth Edition of my book Agency, Partnerships & LLCs (Concepts and Insights) is now available via Amazon.  This thoroughly-updated edition provides a comprehensive guide to the law of agency relationships, partnerships, and limited liability companies. In addition to detailed treatment of the key legal issues, the text also provides balanced analyses of the policies underlying the law. The reader thus comes away not only with a knowledge of the law but also an understanding of why courts and legislatures chose those rules. The text incorporates frequent references to the most up-to-date sources of the law, including those most frequently encountered in law school courses, such as the Restatement (Third) of Agency, the Uniform Partnership Act, and the Uniform Limited Liability Company Act. In addition, to account for the increasing dominance of Delaware as the state in which limited liability companies are formed, the new edition pays considerable attention to the Delaware Limited Liability Company Act.