Giffen Behavior: Theory and Evidence

This paper provides the first real-world evidence of Giffen behavior, i.e., upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, we find strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu. The data provide new insight into the consumption behavior of the poor, who act as though maximizing utility subject to subsistence concerns, with both demand and calorie elasticities depending significantly, and non-linearly, on the severity of their poverty. Understanding this heterogeneity is important for the effective design of welfare programs for the poor.

Stock Market Value and Deal Value In Appraisal Proceedings

This Essay considers two methods of valuing public companies in the context of appraisal proceedings under section 262 of the Delaware General Corporation Law (DGCL). The first method relies on the efficient capital markets hypothesis (ECMH) and values the company based on the market price of its shares before any public disclosure of the possibility of a transaction (the unaffected market price). The second relies on the price that an unrelated party agrees to pay to acquire the company in a transaction negotiated at arm’s length after a robust sales process by the selling board (the deal price). Both the unaffected market price and the deal price are determined by market forces, albeit in different markets: with the unaffected market price, the relevant market is the stock market generally, while with the deal price, the relevant market is the market for corporate control. The deal price is almost always much higher than the unaffected market price, commonly thirty to fifty percent higher. Each valuation method raises technical legal issues under the statutory language of section 262, and although such issues are often important in appraisal proceedings, I shall largely set them aside. My purpose is to explore why two different market prices diverge so significantly and systematically and to determine what in general this implies for the use of the two prices in Delaware appraisal proceedings

Smith v. Van Gorkom and the Kobayashi Maru: The Place of the Trans Union Case in the Development of Delaware Corporate Law

Although it is dangerous to attempt to say anything new about Smith v. Van Gorkom, the most controversial decision in the history of Delaware corporate law, this Article tries to do so by arguing that the extensive development of Delaware law since the time of the case allows us a perspective on Van Gorkom not available when the case was decided in 1985 or, indeed, for a long time thereafter. In particular, Van Gorkom had as important a role in the evolution of Delaware law as the three other outstanding cases decided by the Delaware Supreme Court in the miracle year of 1985: Unocal v. Mesa Petroleum, Revlon v. MacAndrews & Forbes, and Moran v. Household International. This Article argues, first and foremost, that Van Gorkom was an attempt by the Delaware Supreme Court to respond to widespread concern about the vast increase in merger-and-acquisition activity in the early 1980s. In particular, the case was the court’s first attempt to devise a regime of directorial fiduciary duties to regulate negotiated transactions. Van Gorkom should have been Revlon, and what the Delaware Supreme Court got wrong in Van Gorkom in January of 1985—the creation of a new duty of care based on dicta from the 1984 case of Aronson v. Lewis—it got right in Revlon in November of 1985 by creating what we now call Revlon duties. Nevertheless, Van Gorkom was not simply a botched first attempt at articulating duties for directors selling their company. The reasoning in Van Gorkom was in many ways inadequate, but its essential holding—that the directors breached their duties—would certainly have been the same under the reasoning in Revlon. In other words, the basic holding in Van Gorkom—that the Trans Union directors breached their fiduciary duties in selling the company—is correct, albeit for not quite the reasons the Van Gorkom court gave for this holding. What was truly disastrous about Van Gorkom was not the holding that the Trans Union directors breached their duties, but rather the remedy the court imposed on the breaching directors—enormous monetary damages. Since Revlon was a pre-closing action, when the court found in that case that the directors breached their duties in agreeing to sell the company, the court could order relief by means of a preliminary injunction. By contrast, Van Gorkom was a post-closing action decided long after the merger was completed, and so that option was not available. Rather, when the Van Gorkom court found that the directors breached their duties, the axiom of the common law that every right has a remedy required imposing enormous liability on the directors. We now know that such a system was untenable, for it made the expected costs of serving as a director greatly exceed the expected benefits. Neither the justices of the Delaware Supreme Court nor anyone else could have known it in 1985, but in fact there was no right answer the court could have reached in Van Gorkom. If the court got the holding on the merits right (the directors breached their duties), it had to get the holding on remedies wrong (enormous monetary damages). Smith v. Van Gorkom was the Kobayashi Maru of Delaware corporate law—a problem in which all the possible solutions prove disastrous

The Economics of Deal Risk: Allocating Risk Through Mac Clauses in Business Combination Agreements

In any large corporate acquisition, there is a delay between the time the parties enter into a merger agreement (the signing) and the time the merger is effected and the purchase price paid (the closing). During this period, the business of one of the parties may deteriorate. When this happens to a target company in a cash deal, or to either party in a stock-for-stock deal, the counterparty may no longer want to consummate the transaction. The primary contractual protection parties have in such situations is the merger agreement’s “material adverse change” (MAC) clause. Such clauses are heavily negotiated and extremely complex, and when parties dispute whether one of them has been MAC’d between signing and closing, the fate of the transaction (and thus often billions of dollars in value) depends on the proper interpretation of the MAC clause. This article reports the results of an empirical study of MAC clauses in over 350 business combination agreements filed in the SEC’s EDGAR database between July 1, 2007, and June 30, 2008, argues that prior theories of the allocation of risk in MAC clauses are inconsistent with the empirical data, and then explains why the complex allocations of risk typically made in public company merger agreements are in fact efficient