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.

WSJ, T. Boone Pickens Calls It Quits on Energy Trading

T. Boone Pickens, a famous oilman and investment manager, said he is closing the energy-focused hedge fund he has run for the last two decades as his health declines.

See also David A. Vise, Delaware Court Changes Rules of Takeover Game, Wash. Post, June 16, 1985

Morris James, Where Is Delaware Corporate Litigation Going?

To begin with, it is clearly a good thing for Delaware to reject disclosure-only settlements when little value has been generated for the stockholders. Trulia is a good decision given the current legal landscape. Under it, clearly meritorious disclosure settlements still will be approved. Other cases can proceed on the merits to a pre-close injunction hearing, and may be resolved through voluntary supplemental disclosures that can benefit stockholders, or through post-close litigation where damages may be pursued. Moreover, Corwin will not affect post-close litigation where the challenged transaction is among the most scrutinized under Delaware law: deals involving a conflicted, controlling stockholder. Nor will Corwin affect post-close litigation in third-party deals where the stockholder vote was uninformed, or coerced. E.g., In re Saba Software, Inc. S’holder Litig., Cons. C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017).

Antitakeover Statutes: Nevada Considers Rejecting Revlon & Unocal

As introduced, SB 203 includes the following statements of legislative intent:

Except in the limited circumstances set forth in NRS 78.139, an exercise of the respective powers of directors or officers of a domestic corporation, including, without limitation, in circumstances involving a change or potential change in control of a corporation, is not subject to a heightened standard of review.

The standards promulgated by the Supreme Court of Delaware in Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), and their progeny have been, and are hereby, rejected by the Legislature.

via DealLawyers

Cooley on Rep & Warranty (R&W) Insurance

Previously, transaction insurance (or R&W insurance) was used sparingly and predominantly by East Coast private equity funds. PE funds have historically found R&W insurance to be attractive on the buy-side to enable them to make more competitive buyout bids for private targets by foregoing large escrows and significant post-closing indemnifications from targets. At the same time, when the PE fund is on the sell-side, it will insist that the buyer purchase R&W insurance to protect the fund’s risk exposure to breaches of representations and warranties by its portfolio company in the sale. Outside of the US, R&W insurance has already become widely used in private M&A deals in Europe by both PE funds and strategic buyers alike.

As the underwriting process has streamlined, and premiums have come down in the US, R&W insurance has secured a significant position in the M&A toolbox for middle-market M&A nationwide (outside of the PE context). Most financial buyers and now many strategic buyers increasingly use these policies as a means to manage risk and to help facilitate a deal.

via DealLawywers

Matthew D. Cain et al., The Shifting Tides of Merger Litigation (2017)

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award.

We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger litigation, to increase the number of cases that are dismissed, and to reduce the size of attorneys’ fee awards. At the same time, we document an adaptive response by the plaintiffs’ bar in which cases are being filed in other state courts or in federal court in an effort to escape the application of the new rules.

This responsive adaptation offers important lessons about the entrepreneurial nature of merger litigation and the limited ability of the courts to reduce the potential for litigation abuse. In particular, we find that plaintiffs’ attorneys respond rationally to these changes by shifting their filing patterns, and that defendants respond in kind. We argue, however, that more expansive efforts to shut down merger litigation, such as through the use of fee-shifting bylaws, are premature and create too great a risk of foreclosing beneficial litigation. We also examine Delaware’s dilemma in maintaining a balance between the rights of managers and shareholders in this area.