Another Reason Why Companies Avoid IPOs

In a recent New York Times article, Steven Davidoff Solomon listed several possible explanations for a significant decline in the number of initial public offerings (IPOs). Among the most interesting was that there are many large and successful high-tech acquirers such as Facebook, Google, and Microsoft that are willing to pay top dollar for high flying unicorns (private companies with equity values greater than $1 billion) before they become public companies. The ability of the private markets to provide financing may have matured to the point where the advantages of financing through the public markets are no longer as … Read more

A Simple Plan to Liberate the Market for Corporate Control

It’s time to exempt a certain type of hostile bid – an all-cash, all-shares tender offer – from a poison pill defense.  In essence, I propose a statutory rule requiring a board to remain neutral in the face of such an offer unless the company’s certificate of incorporation allows otherwise.  This would be similar to but less general than Rule 21 of the UK’s Takeover Code.

Argument for Change

In Unocal Corp. v. Mesa Petroleum, the Delaware Supreme Court created the so-called Unocal test, a standard of review for board actions aimed at warding off a hostile bidder … Read more

How Dual Class Shares in IPOs Can Create Value

The shareholder empowerment movement (the “movement”), driven primarily by public pension funds and union-related funds with over $3 billion in assets, has renewed its effort to eliminate, restrict, or at least discourage companies from creating dual class share structures in initial public offerings (IPOs).  The impetus was the issuance of non-voting stock in the recent Snap Inc. IPO.  Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

The movement’s vigorous response to Snap Inc.’s hugely successful IPO … Read more

Mutual Fund Advisors’ “Empty Voting” Raises New Governance Issues

The creation of the mutual fund will go down as one of the greatest innovations in financial history. It has provided tens if not hundreds of millions of unsophisticated and uninformed stock market investors with easy access to low cost portfolio diversification. Moreover, for those investors who do not want to spend time and money searching for portfolio managers who can earn excess risk-adjusted returns, passively managed index funds provide tremendous value.

But mutual funds also have their downside. They generate what Ronald Gilson and Jeffrey Gordon would call the “agency costs of agency capitalism.” Mutual funds generate these costs … Read more

The Recommendations of Activist Hedge Funds

A major criticism of activist hedge funds, and one that allegedly supports the argument that they suffer from short-termism, is that their recommendations almost always focus on disinvestment. For example, they will typically recommend raising the dividend, cutting costs, spinning off divisions or subsidiaries or preparing the company for sale.[1] Since we should expect activist hedge funds to be indifferent to the types of recommendations they make as long as they believe the recommendations will result in the highest possible stock price, then why do these recommendations seem to be so heavily biased in the direction of disinvestment?

One … Read more

The Implications for Shareholder Voting when an Activist Hedge Fund Interacts with an Independent Board

In a recent post, Some Lessons from DuPont-Trian, Martin Lipton identified shareholder voting in a proxy contest as a problem with hedge fund activism. According to Mr. Lipton, “ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.”[1] My interpretation of this statement is that voting for a slate of hedge fund nominees that goes against the recommendations of a well functioning board of directors (Board) is the wrong vote … Read more

Shareholder Wealth Maximization and its Implementation under Corporate Law

The following comes to us from Bernard S. Sharfman, Visiting Assistant Professor of Law at Case Western Reserve University School of Law.

When should courts participate in determining if a corporate decision maximizes shareholder wealth? That is the question at the heart of my article, Shareholder Wealth Maximization and its Implementation under Corporate Law (forthcoming, Florida Law Review). This article takes a very traditional approach to answering that question.  It notes with approval that courts have historically been very hesitant to participate in the process of determining if a corporate decision is wealth maximizing.  The most obvious example of this … Read more

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Editor's Tweet: Bernie Sharfman on Shareholder Wealth Maximization and its Implementation under Corporate Law

Finding Value in Shareholder Activism

The following comes to us from Bernard S. Sharfman, Visiting Assistant Professor of Law at Case Western Reserve University School of Law.

In this era of shareholder activism, there are still many attorneys and academics who believe that the traditional authority model of corporate governance (the “traditional model”) leads to optimal corporate decision-making and shareholder wealth maximization for large organizations.  This model favors the views of management over those of outside shareholders like institutional investors.  In the words of Professor Stephen Bainbridge, it is an approach to corporate governance where the “preservation of managerial discretion should always be the null … Read more