A number of companies have recently gone public with dual-class share structures, allowing founders to retain control. Most of these companies’ articles of incorporation contain a provision that requires any merger consideration to be distributed pro rata among all shareholders. These equal treatment clauses, in effect, give away founders’ control premium to minority shareholders. On first glance, these clauses seem to provide some protection to minority shareholders, who know that, in the event of a change-of-control, they will be compensated at the same rate as founders. But, as my recent paper explores, there are agency costs lurking beneath the surface … Read more
In a new paper, “Worthless Companies,” I explain how companies with worthless assets can have substantial equity value on efficient markets and debt that trades near par, so long as an irrational bidder may acquire the company.
Consider a firm with a market value of more than $1 billion. The firm has sales under $1 billion and has never been profitable. The firm describes its mission as, “to make incredible home cooking accessible to everyone,” and its business is to sell ready-to-prepare meals. Or consider a firm with a market value of more than $8 billion with revenues of just … Read more
On December 14, the Delaware Supreme Court issued its much-anticipated opinion in the appraisal proceeding from the 2013 acquisition of Dell Inc. Along with August’s DFC Global opinion, the court’s pronouncements in Dell will have lasting effects on the way that appraisal valuations play out for years to come. In particular, the case(s) will have a durable impact on (a) how courts weigh competing financial methodologies for assessing fair value, (b) how to scrutinize the bidding process and procedures, and (c) whether courts should distinguish among strategic bidders, financial bidders, and management bidders in making fair-value assessments.
The … Read more
In U.S. and global M&A activity for November 2017, total deal volume by dollar value increased to a 12-month high, while the total number of deals decreased to a 12-month low. In the U.S., deal volume increased by 179.0% to $236.40 billion while the number of deals decreased by 15.6% to 712. Globally, deal volume increased by 43.7% to $390.00 billion while the number of deals decreased by 12.9% to 2,839. These large increases in deal volume were, however, driven by one transaction in particular, Broadcom Ltd.’s $130 billion (including assumed debt) unsolicited offer for Qualcomm, Inc. If we excluded … Read more
Over the past two years, the deal litigation landscape has changed dramatically. In early 2016, the Delaware Court of Chancery announced a new rule for evaluating disclosure-based settlements in deal litigation — the “plainly material” standard — and expressed a preference for disclosure claims either to be litigated or mooted, rather than settled. In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016). Trulia created a ripple effect across deal litigation in Delaware and beyond, with some interesting, and perhaps unforeseen, results.1
Disclosure-based settlements before the Court of Chancery are all but extinct. Litigation … Read more
Post-merger appraisal rights have attracted more than their fair share of controversy in recent years. When activated, appraisal rights give the shareholders of a Delaware target corporation the option to eschew the consideration of the proposed deal, pursuing instead a judicial determination of the “fair value” of their shares. By statutory requirement, this judicially-crafted valuation imposes no explicit burden of proof on the parties, and it must be based on all relevant factors (excluding buyer side synergies).
Although historically a sleepy corner of mergers and acquisitions litigation, appraisal proceedings have awoken dramatically in the last decade. An important … Read more
There were more than $1 trillion worth of cross-border mergers and acquisitions in 2016, according to the United Nations Conference on Trade and Development, making them a prominent form of foreign direct investment and an important way for multinational entities (MNEs) to invest and restructure. When MNEs from various countries bid for a foreign target, each country’s system for taxing foreign dividends and capital gains affects deal prices and may determine who wins the bid.
A big question in the theoretical tax literature on capital ownership neutrality (CON) has been how to neutrally tax M&A (e.g., Desai and Hines (2003), … Read more
Following the Great Recession, low interest rates coupled with high levels of cash reserves propelled companies to grow through mergers and acquisitions rather than organically through capital investments. The year 2015 saw a record number of M&A deals totaling $4.9 trillion.
Firms merge for a variety of sound reasons, such as to create synergies, to consolidate in response to industry shocks like deregulation, to deal with increased competition, or to take advantage of developments in how acquisitions are financed. But companies also merge for more questionable reasons: because an overconfident chief executive overestimates a target firm’s value or seeks to … Read more
In U.S. and global M&A activity for October 2017, deal volume increased by total dollar value, while the total number of deals decreased in some cases to or nearing 12-month lows. In the U.S., deal volume increased by 23.4% to $112.34 billion, while the number of deals decreased by 12.8% to 810. Globally, deal volume increased by 1.8% to $298.33 billion, and the number of deals decreased by 13.7% to 3,053.
Strategic vs. Sponsor Activity
In the U.S., strategic deal volume increased by 5.3% to $84.45 billion, and the number of deals decreased by 18.8% to 618. Globally, strategic deal … Read more
On November 8, 2017, a bipartisan group of lawmakers introduced a long-awaited bill that could significantly alter the process by which the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) reviews foreign investment in the United States.
The proposed Foreign Investment Risk Review Modernization Act of 2017 (“FIRRMA”) would modernize the CFIUS review and approval process, which has struggled to keep pace with a surge of foreign investment in the United States over the last several years. If passed, the bill would revamp the CFIUS review process and update the regulations to address the national … Read more
Takeover transactions are often the most significant activity affecting corporations and their shareholders. Accordingly, there are intense debates about the value and impact of takeovers and the extent to which law should regulate such transactions. One area of focus for takeover regulation has been the potential impact of takeovers on minority shareholders. The focus on minority shareholders is not surprising as research suggests that laws which protect minority shareholders are associated with stronger financial markets.
In a recent book chapter, I focus on how deal structures affect the protection of minority shareholders in two common law jurisdictions, the U.S. and … Read more
During the 2008 financial crisis, the U.S. government viewed the survival of large consolidated banks as inextricably linked to the welfare of the overall economy, prompting such institutions to be labeled too-big-to-fail (TBTF) and granted government assistance. The primary and preferred means of bank resolution by federal regulators was, however, mergers and acquisitions (M&A). The basic idea was that through a merger a healthy bank would acquire a failing bank, saving the economy from the full cost of the distressed bank’s collapse. This private-sector solution was preferred because the government did not have to use public funds to bail out … Read more
Continuing a relatively flat year so far, M&A activity showed mixed results in September 2017, with the global market switching positions with the U.S. from last month and generally faring better. In the U.S., total deal volume, as measured by dollar value, decreased by 31.2% to $90.51 billion, while the number of deals increased by 7.8% to 927. Globally, deal volume increased by 1.5% to $289.22 billion, and the number of deals increased by 6.7% to 3,456.
Strategic vs. Sponsor Activity
In the U.S., strategic deal volume increased by 4.9% to $81.04 billion, and the number of deals increased by … Read more
Directors of regulated financial institutions have exceedingly difficult jobs with many demands. The aftermath of the financial crisis led to countless new regulatory requirements and expectations, many of these unwritten and evolving based on political currents or varying views at different levels of the regulatory hierarchy. Governance processes and actions are examined and second-guessed like never before. For many companies, new and shifting compliance burdens tend to crowd out other business on board agendas.
At the same time, these boards have faced prolonged operating and economic challenges. Initially, defaults and delinquencies in loan portfolios and low interest rates choked financial … Read more
Corporate planners and practitioners know well that it takes quite a long time to close a long-form merger, with the shareholder approval requirement accounting for the bulk of the delay in almost half of such mergers. But we have not yet identified mechanisms for shortening the delay, in part because we assume that shareholder approval and related procedures are necessary. In a forthcoming article, I question this assumption and find that shareholder approval in the context of long-form mergers is in fact not nearly as valuable as we might expect.
Contrary to conventional wisdom, merger votes are rarely close. … Read more
On September 26, 2017, the US Department of Justice’s Antitrust Division (DOJ) sued to unwind Parker-Hannifin Corporation’s (Parker’s) consummated acquisition of CLARCOR Inc. (CLARCOR) on the ground the transaction created a monopoly in the US market for aviation fuel filtration systems and filter elements, in violation of Section 7 of the Clayton Act. DOJ’s complaint demands divestitures sufficient to replace CLARCOR’s pre-acquisition position in the marketplace, among other relief.[i]
Notably, Parker’s US$4.3 billion acquisition of CLARCOR had already cleared US antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act). According to company filings and press reports, Parker announced … Read more
The market for corporate control is widely regarded, at least theoretically, as an important corporate governance mechanism for aligning the interests of managers and shareholders of a firm. A healthy takeover market can also help countries attract domestic and foreign capital to their stock markets, increase the global standing of their economies, and strengthen protections for minority shareholders. In a recent article, I examine how takeover laws enacted in 13 countries between 1995 and 2004 affect managers’ decisions about financial reporting. I find that such laws can lead to more earnings management and financial reporting opacity by making managers fearful … Read more
On September 19, 2017, the Committee on Foreign Investment in the United States (CFIUS or the “Committee”) released its annual report (“Report”) to Congress. One day later, CFIUS also released more limited data on foreign investment activity in 2016 (the “2016 Table”). CFIUS is an interagency body with authority to review investments that could result in foreign control of U.S. businesses—referred to as “covered transactions”—for potential national security concerns.
The Report summarizes CFIUS activities in 2015, the most recent year for which complete data on foreign investment activity is available. Notably, CFIUS has historically published its statutorily mandated annual report … Read more
Global M&A activity declined in August 2017, with total deal volume, as measured by dollar value, decreasing 4.0% to $277.65 billion and the number of deals decreasing 5.6% to 3,119. The U.S. remained a bright spot in the M&A market, however, with mostly gains from July levels. In the U.S., total deal volume increased by 38.1% to $130.26 billion and the number of deals increased by 12.8% to 838.
Strategic vs. Sponsor Activity
In the U.S., strategic deal volume increased 29.3% to $78.12 billion, and the number of deals rose 8.7% to 673. By comparison, global strategic deal volume increased … Read more
Global and U.S. M&A activity in July 2017 increased in total deal value, despite a decline in the number of deals. Globally, total deal volume by dollar value increased by 14.6% to $303.85 billion, while the number of deals decreased by 8.9% to 3,029. Similarly, in the U.S., total deal volume by dollar value increased by 13.1% to $108.99 billion, while the number of deals decreased by 9.6% to a 12-month low of 644.
Strategic vs. Sponsor Activity
Strategic activity drove the market, with strategic deal volume, as measured by dollar value, increasing by 14.8% to $213.90 billion globally and … Read more