February 18th, 2019 (Monday) at 12:10 PM
- Professor and Thomas A. Renyi Endowed Chair in Banking, Rutgers Business School
- Senior Fellow, Columbia Law School
Jerome Greene Hall, room 502
Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders?
(co-authored with John Coates & Ge Wu)
Merger and acquisition deals are governed by merger contracts which are negotiated between bidder and target in order to communicate deal terms, specify risk sharing between the parties, and describe dispute management provisions in case of litigation. In a large sample of manually collected U.S. deal contracts involving publicly traded bidders and targets, we construct indices of M&A contract clauses based on legal scholars’ and practitioners’ a priori predictions and examine the relationship between announcement abnormal returns and different types of clauses. We find that bidder protective clauses correlate with higher bidder abnormal returns while target protective clauses and competition clauses correlate with higher target abnormal returns. Further analysis shows that bid premiums are increasing in target protective clauses and competition clauses, and deal completion probabilities are lower with more bidder protective clauses. These results are consistent with the expert lawyer/efficient contracting view of Cain, Macias, and Davidoff Solomon (2014), and Coates (2016), and against M&A contracts as immaterial boilerplate agreements.
March 4th, 2019 (Monday) at 12:10 PM
- Visiting Professor of Law (Spring 2019), Columbia Law School
Jerome Greene Hall, room 602
Golden Parachutes and the Limits of Shareholder Voting
(co-authored with Andrew Lund & Robert Schonlau)
With the passage of Dodd-Frank Act in 2010, Congress attempted to constrain executive compensation triggered by change-in-control (golden parachute) payments by giving shareholders the right to approve or disapprove the payments on an advisory basis. This Article is the first to empirically examine the experience with the Say-on-Golden-Parachute (“SOGP”) vote. We find that the SOGP voting regime is likely ineffective in controlling GP compensation. First, proxy advisors tend to adopt a one-size-fits-all approach to recommendations on SOGP votes. Second, shareholders tend to adhere to advisor recommendations. Finally, the size of golden parachutes appears to be increasing in the years following 2010 and the golden parachutes that are amended immediately prior to SOGP votes tend to grow rather than shrink. These findings contrast with the research that has examined Say-on-Pay (“SOP”), and we suggest that the differences between the two regimes lie in the absence of second-stage discipline for SOGP votes. We offer potential avenues for improving SOGP’s ability to shape change-in-control compensation practices, such as making SOGP votes (partially) binding, and making the GP payment and SOGP voting information more readily available to shareholders of corporations where the target directors also serve as directors and also of acquiring corporations.
March 6th, 2019 (Wednesday) at 12:10 PM
- Short Term International Visiting Associate Professor of Law (Spring 2019), Columbia Law School
- Associate Professor, National University of Singapore
Jerome Greene Hall, room 602
Related Party Transactions in Commonwealth Asia: Complicating the Comparative Paradigm
(co-authored with Umakanth Varottil)
The World Bank’s influential Doing Business Report (DBR) has been a key platform for the American-driven dissemination of global norms of good corporate governance. A prominent part of the DBR is the related party transactions (RPT) index, which ranks 190 jurisdictions from around the world on the quality of their laws regulating RPTs. According to the RPT Index, the regulation of RPTs in Commonwealth Asia’s most important economies is stellar. In the 2018 RPT Index, Singapore ranked 1st, Hong Kong and Malaysia tied for 3rd, and India came in at 20th. However, despite the uniformly high RPT Index scores in all of Commonwealth Asia’s most important economies, empirical, case-study, and anecdotal evidence overwhelmingly suggests that there are in practice significant inter-jurisdictional and intra-jurisdictional differences in the actual function and regulation of RPTs in Commonwealth Asia.
In this article, we assert that the conspicuous gap between what the RPT Index suggests should be occurring and what is actually occurring in Commonwealth Asia exists because it fails to capture the complexity of RPTs in three respects, which we term: (1) regulatory complexity; (2) shareholder complexity; and, (3) normative complexity. First, it appears that the RPT Index overly emphasizes the role played by a jurisdiction’s formal corporate and securities laws in determining the effectiveness of its RPT regulation, and it fails to pay due regard to its corporate culture and rule of law norms in determining the efficiency of its RPT regulation. Second, the RPT Index erroneously assumes that controlling shareholders are a homogeneous group driven by similar incentives. Third, the general assumption that RPTs per se are evidence of defective corporate governance and that stricter regulation of RPTs consequently equates to “good law” is erroneous.
Demonstrating the frailties of the RPT Index is important in practice because jurisdictions – especially developing ones – commonly look to the DBR and its indices when reforming their laws. In addition, the RPT Index is built on some of the most influential research in the field of comparative corporate law, which makes our challenge to the validity of the RPT Index academically significant.
March 25, 2019 (Monday) at 12:10 PM
- Scott Hemphill is a Professor of Law at NYU Law School
- Marcel Kahan is the George T. Lowry Professor of Law at NYU Law School
Jerome Greene Hall, room 602
The Strategies of Anticompetitive Common Ownership
last revised (on SSRN): 15 March 2019
Scholars and antitrust enforcers have raised concern about the anticompetitive effects that may arise when institutional investors hold substantial stakes in competing firms. Empirical evidence reporting that common concentrated owners are associated with higher prices and lower output poses a sharp challenge to antitrust orthodoxy and corporate governance scholarship.
In this article, we undertake a systematic examination of the causal mechanisms that might link commonownership to anticompetitive effects. We consider whether each mechanism is tested by the existing empirical evidence, and whether it is plausible as employed by an institutional investor.
Our main conclusion is that most proposed mechanisms either lack significant empirical support or else are implausible. In particular, some widely discussed mechanisms are, in fact, not empirically tested. These non-tested mechanisms include strategies where common owners facilitate the formation of a cartel or where common owners, by being passive, fail to encourage firms to compete more aggressively. Moreover, institutional investors have only weak incentives to increase portfolio value, and therefore would not benefit from pursuing mechanisms that carry significant reputational or legal liability risks.
We also identify a new mechanism, which we call “selective omission,” that is both consistent with the evidence and plausibly employed by institutional investors. Looking ahead, our analysis supports a searching examination of the actions actually taken by common owners and firms — the who, where, when, and how predicted by the most plausible mechanisms.
April 3rd, 2019 (Wednesday) at 12:10 PM
- Shibley Family Fund Professor of Law, Yale Law School
Jerome Greene Hall, room 646
Law & Macroeconomics: Legal Remedies to Recessions (Introduction)
(Harvard University Press, Publication Date: March 11, 2019)
Book website, flier
Book description (from publisher):
After the economic crisis of 2008, private-sector spending took nearly a decade to recover. Yair Listokin thinks we can respond more quickly to the next meltdown by reviving and refashioning a policy approach whose proven success is too rarely acknowledged. Harking back to New Deal regulatory agencies, Listokin proposes that we take seriously law’s ability to function as a macroeconomic tool, capable of stimulating demand when needed and relieving demand when it threatens to overheat economies.
Listokin makes his case by looking at both positive and cautionary examples, going back to the New Deal and including the Keystone Pipeline, the constitutionally fraught bond-buying program unveiled by the European Central Bank at the nadir of the Eurozone crisis, the ongoing Greek crisis, and the experience of U.S. price controls in the 1970s. History has taught us that law is an unwieldy instrument of macroeconomic policy, but Listokin argues that under certain conditions it offers a vital alternative to the monetary and fiscal policy tools that stretch the legitimacy of technocratic central banks near their breaking point while leaving the rest of us waiting and wallowing.
April 17th, 2019 (Wednesday) at 12:10 PM
- Fellow, Ira M. Millstein Center for Global Markets & Corporate Ownership, Columbia Law School
Jerome Greene Hall, room 546
Stickiness and Incomplete Contracting:
Explaining the Lack of Forum Selection Clauses in Commercial Agreements
(To view the paper, please contact the author.)
Both economic and legal theory assumes that sophisticated parties routinely write agreements that maximize their joint surplus. But more recent studies analyzing covenants in corporate and government bond agreements have shown that many contract provisions are highly path dependent and “sticky,” with future covenants only rarely improving upon previous ones.
This Article demonstrates that the stickiness-hypothesis explains the striking lack of choice-of-forum provisions in commercial contracts, which are absent in more than half of all material agreements reported to the SEC. When drafting these agreements, external counsel relies heavily on templates and whether or not a contract includes a forum selection clause is almost exclusively driven by the template that is used to supply the first draft. There is no evidence to suggest that counsel negotiates over the inclusion of choice-of-forum provisions, nor that law firm templates are revised in response to changes in the costs and benefits of incomplete contracting.
Together, the findings reveal a distinct apathy with respect to forum choice among transactional lawyers that perpetuates the existence of contractual gaps. The persistence of these gaps suggests that default rules may have significantly greater implications for the final allocation of the contractual surplus than is assumed under traditional theory.
April 22nd, 2019 (Monday) at 12:10 PM
- Isidor and Seville Sulzbacher Professor of Law
- Co-Director, Millstein Center for Global Markets and Corporate Ownership
Jerome Greene Hall, room 502
Fiduciary Obligations in the Presence of Multiple Classes of Stock
(co-authored with Sarath Sanga)
This paper develops a game theoretic framework to study the increasingly common conﬂict between common and preferred shareholders regarding whether to liquidate the ﬁrm or continue. In our model, common tend to ineﬃciently continue while preferred tend to inefﬁciently liquidate. Taking a cue from recent case law, we explore whether it is possible to use damages (for either “wrongful exit” or “wrongful continuation”) to align the interests of common and preferred in maximizing ﬁrm value. We show that there always exists an eﬃcient damages rule if the interests of preferred shareholders control the exit/continue decision. When common control the decision, however, an eﬃcient damages regime may either fail to exist or may require supra-compensatory damages. Our framework also suggests that ex ante contracting need not give rise to an eﬃcient damages rule, particularly if investment capital is relatively scarce. Our ﬁndings have implications for the ongoing debate about how to assign ﬁduciary duties and rights within privately held ﬁrms with multiple classes of stock.
April 29th, 2019 (Monday) at 12:10 PM
- Professor of Law, Yale Law School
Jerome Greene Hall, room 546
Law firms don’t just go bankrupt—they collapse. Like Dewey & LeBoeuf, Heller Ehrman, and Bingham McCutchen, law firms often go from apparent health to liquidation in a matter of months or even days. Almost no large law firm has ever managed to reorganize its debts in bankruptcy and survive. This pattern is puzzling, because it has no parallel among ordinary businesses. Many businesses go through long periods of financial distress and many even file for bankruptcy. But almost none collapse with the extraordinary force and finality of law firms. Why?
I argue that law firms are fragile because they are owned by their partners, rather than by investors. Partner ownership creates the conditions for a spiraling cycle of withdrawals that resembles a run on the bank. As the owners of the business, the partners of a law firm are the ones who suffer declines in profits and who have to disgorge their compensation in the event the firm becomes insolvent. So if one partner leaves and damages the firm, it is the remaining partners who bear the loss. Each partner’s departure thus has the potential to worsen conditions for those who remain, meaning that as each partner departs, the others become more likely to leave as well, eventually producing an accelerating race for the exists bank. This kind of spiraling withdrawal is sometimes thought to be an unavoidable consequence of financial distress. But if law firms were not owned by their partners, this would not happen. Indeed, the only large law firm in the history of the common law world that has ever survived a prolonged insolvency is also one of the only large law firms that has ever been owned by investors. These insights have extensive implications for how we understand law firms and corporate organization more generally.