An Uber Technologies Inc. self-driving car struck and killed a pedestrian in Arizona in the first known fatality involving an autonomous vehicle, an accident that could stir regulators to action and damage the public perception of the young industry.
- Yair Listokin & Inho Andrew Mun, Rethinking Corporate Law During a Financial Crisis, Harvard Business Law Review (forthcoming)
Since the Financial Crisis of 2008, most reform measures and discussions have asked how the law of financial regulation could be improved to prevent or mitigate future crises. These discussions give short shrift to the role played by corporate law during the Financial Crisis of 2008 and in other financial crises. One critical regulatory tool during the Crisis was “regulation by deal,” in which healthy financial firms (“acquirers”) would hastily acquire failing firms (“targets”) to mitigate the crisis. The deals were governed by corporate law, so corporate law played an outsize role in the response to the Crisis. But few observers have asked how corporate law — in addition to financial regulation — should govern dealmaking in financial crises. To fill in this gap, this Article focuses on the role played by corporate law during the Financial Crisis, and asks whether corporate law should be different during a financial crisis than in ordinary times. Using an externality framework — the failure of large financial firms harms the entire economy, and not just the shareholders of the failed firm — this Article identifies a key problem with the current corporate law regime as applied in financial crises: the shareholder value maximization principle as applied to failing target companies. This principle, manifested in the form of shareholder voting rights on mergers and board fiduciary duties to shareholders, is inapplicable to systemically important target firms whose failure would have enormous negative externalities on the rest of the economy. This Article contends that corporate law as applied to systemically important and failing target firms during crises should change as follows: (1) replace shareholder merger voting rights with appraisal rights, and (2) alter fiduciary duties so that directors and officers of those failing target firms consider the interests of the broader economy.
- The Praetorian Group, Registration Statement (Form S–1) (Mar. 6, 2018)
NO REPRESENTATIONS AND WARRANTIES
The Company and/or the Distributor does not make or purport to make, and hereby disclaims, any representation, warranty or undertaking in any form whatsoever to any entity or person, including any representation, warranty or undertaking in relation to the truth, accuracy, and completeness of any of the information set out in this Prospectus.
- Last Week Tonight with John Oliver, Cryptocurrencies (2018)
- Davis Polk, First Wave of Pay Ratio Disclosures Filed
Financials: 1:1 – 429:1
Health Care: 6.4:1 – 388:1
Industrials: 50:1 – 428:1
Real Estate: 14.84:1 – 111:1
Utilities: 55:1 – 190:1
Energy: 0.9:1 – 25:1
Information Technology: 46:1
Telecommunications Services: 85:1
Statistical Sampling. No companies disclosed the use of statistical sampling for purposes of identifying their median employee.
Virtual-only annual meetings seem to be gaining traction – as Broc blogged last summer, despite opposition from a number of prominent investor groups, the number of companies going virtual-only increased significantly in 2017. However, this Bloomberg article says that some big companies are having second thoughts about the virtual-only approach:
Railroad operator Union Pacific Corp. will revert to an in-person annual meeting this year, after its 2017 virtual-only gathering drew a shareholder rebuke and a proposal to end the practice, a company lawyer told the Securities and Exchange Commission in a letter dated Monday. ConocoPhillips is also backpedaling after investors objected to the oil producer’s online meeting last year.
“A virtual-only meeting is a totally disembodied event online — there’s no exchange or opportunity for investors to look the board in the eye,” said Tim Smith, a director at Boston-based Walden Asset Management who worked with shareholders of ConocoPhillips and Comcast Corp. opposed to virtual-only meetings.
The article points out that some investors prefer the hybrid meeting approach – where shareholders can attend in-person or online. However, according to Broadridge, only 1-in-5 virtual meetings last year adopted the hybrid approach.
- Warren E. Buffett, Annual Letter to Shareholders (2018)
Berkshire’s gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of both our Class A and Class B stock by 23%. Over the last 53 years (that is, since present management took over), per share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually.*
The format of that opening paragraph has been standard for 30 years. But 2017 was far from standard: A large portion of our gain did not come from anything we accomplished at Berkshire.
The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code. (Details of Berkshire’s tax-related gain appear on page K-32 and pages K-89 — K-90.)
This is an important case for its comments on the Dell decision of the Delaware Supreme Court. The Court declined to use the deal price as evidence of the fair value despite the favorable comments on the use of deal price in Dell. Hence, this may mean that some commentators are wrong in their views that deal price is conclusive in valuation cases in the Delaware courts. Note, however, that again the fair value determined by the Court is less than the deal price, a loss for petitioners.
The decision is also important for its review of when the “operative reality” of a company includes the value of a new deal not yet concluded but sufficiently certain that its value needs to be part of the fair value of the company.
via Morris James
- Verition Partners Master Fund Ltd. V. Aruba Networks Inc., C.A. 11448-VCL (Feb. 15, 2018)
The forceful discussion of the efficient capital markets hypothesis in Dell and DFC indicates that Aruba’s unaffected market price is entitled to substantial weight.
[C]orporate finance theory reflects a belief that if an asset-such as the value of a company as reflected in the trading value of its stock-can be subject to close examination and bidding by many humans with an incentive to estimate its future cash flows value, the resulting collective judgment as to value is likely to be highly informative . . . .
“Market prices are typically viewed superior to other valuation techniques because, unlike, e.g., a single person’s discounted cash flow model, the market price should distill the collective judgment of the many based on all the publicly available information about a given company and the value of its shares.” “[I]n many circumstances a property interest is best valued by the amount a buyer will pay for it” and “a well-informed, liquid trading market will provide a measure of fair value superior to any estimate the court could impose.”
In this case, because Aruba’s shares “were widely traded on a public market based upon a rich information basis,” the fair value of the petitioners’ shares “would, to an economist, likely be best reflected by the prices at which their shares were trading as of the merger.” Aruba had “a deep base of public shareholders” and “highly active trading,” so “the price at which its shares trade is informative of fair value.” The unaffected thirty- day average market price of Aruba’s stock was $17.13 per share.
Dell and DFC teach that the deal price is also entitled to substantial weight. “In economics, the value of something is what it will fetch in the market. That is true of corporations, just as it is true of gold.” For a court to give weight to the deal price, it need not be the most reliable evidence of the Company’s value as a going concern.472 This court has authority “to determine, in its discretion, that the deal price is the most reliable evidence of fair value … , and that’s especially so in cases … where things like synergy gains or minority stockholder discounts are not contested.”
The deal price in this case resulted from an arm’s-length transaction involving a publicly traded company without a controlling stockholder. The deal price in this case contained synergies, so it logically exceeded fair value. There is also the fact that the petitioners failed to identify a bidder who would pay more than HP. “Fair value entails at minimum a price some buyer is willing to pay ….” Taken together, these propositions indicate that the deal price in this case operates as a ceiling for fair value.
The Dell and DFC decisions recognize that a deal price may include synergies and endorse deriving an indication of fair value from the deal price by deducting synergies. In this case, the evidence shows that the deal generated significant synergies. Using the low-end synergy range implies a standalone value of $21.08 per share. Using the high-end synergy range implies a standalone value of $15.32 per share. This decision has adopted the midpoint of $18.20 per share as its deal-price-less-synergies value.
This decision does not give any weight to the discounted cash flow analyses. As in Dell, “this appraisal case does not present the classic scenario in which there is reason to suspect that market forces cannot be relied upon to ensure fair treatment of the minority.” Discounted cash flow models are “often used in appraisal proceedings when the respondent company was not public or was not sold in an open market check.”
The reason for that is not that an economist wouldn’t consider the best estimate of a private company’s value to be the price it sold at in an open sale process of which all logical buyers were given full information and an equal opportunity to compete. Rather, the reason is that if such a process did not occur, corporate finance instructs that the value of the company to potential buyers should be reflected in its ability to generate future cash flows.
“But, a single person’s own estimate of the cash flows are just that, a good faith estimate by a single, reasonably informed person to predict the future. Thus, a singular discounted cash flow model is often most helpful when there isn’t an observable market price.” When market evidence is available, “the Court of Chancery should be chary about imposing the hazards that always come when a law-trained judge is forced to make a point estimate of fair value based on widely divergent partisan expert testimony.”
The unaffected market price provides direct evidence of the collective view of market participants as to Aruba’s fair value as a going concern during the period before the announcement of the transaction, which could be different than Aruba’s fair value as of closing. The same disconnect exists for the deal price, which provides evidence of how the parties to the merger agreement valued Aruba during the price negotiations, which could be different than Aruba’s fair value as of closing. Addressing a similar issue in the Union Illinois case, Chief Justice Strine described the temporal gap as a “quibble” and “not a forceful objection,” noting that “[t]he negotiation of merger terms always and necessarily precedes consummation.”484 Observing that “[n]othing in the record persuades me that [the company] was more valuable by [closing] than it was when the Merger terms were set,” he continued to use the deal price as an indicator of value.485 Similarly in this case, neither side proved that Aruba’s value had changed materially by closing, so this decision sticks with the unaffected market price and the deal price less synergies.
For Aruba, using its unaffected market price provides the more straightforward and reliable method for estimating the value of the entity as a going concern. I could strive to reach the same endpoint by backing out shared synergies and a share of value for reduced agency costs, but both steps are messy and provide ample opportunities for error. For Aruba, the unaffected market price provides a direct estimate of the same endpoint. Rather than representing my own fallible determination, it distills “the collective judgment of the many based on all the publicly available information about a given company and the value of its shares.” “[T]he price produced by an efficient market is generally a more reliable assessment of fair value than the view of a single analyst,” particularly when a trial judge is playing the analyst’s role.
This approach does not elevate “market value” to the governing standard under the appraisal statute. The governing standard for fair value under the appraisal statute remains the entity’s value as a going concern. For Aruba, the unaffected public market price provides the best evidence of its value as a going concern.
In this case, the best evidence of Aruba’s fair value as a going concern, exclusive of any value derived from the merger, is its thirty-day average unaffected market price of $17.13 per share. I recognize that no one argued for this result. I also recognize that the resulting award is lower than Aruba’s proposed figure of $19.75 per share. That figure relied on its expert’s discounted cash flow analysis, which this decision has found unpersuasive.
“When … none of the parties establishes a value that is persuasive, the Court must make a determination based on its own analysis.” The appraisal statute requires that “the Court shall determine the fair value of the shares.” This means that I must reach my own, independent determination of fair value. That determination is $17.13 per share.
via Morris James