Sales and Elections as Methods for Transferring Corporate Control

Delaware case law has rendered the tender offer obsolete as a method for purchasing a company whose directors oppose the acquisition. A potential acquirer facing target opposition today must run an insurgent director slate, in the expectation that its directors are more likely to sell. The Delaware courts have not justified their preference for elections over markets as the preferred vehicle for implementing changes in control. Informal scholarly analyses ask transaction cost questions, such as whether proxy contests are more costly than takeovers. This article attempts to break new ground by asking whether there are systematic differences in the performance of elections and markets in the corporate context. Recent models of voting processes, we argue, strongly suggest that elections are inferior to markets. Proxy contest elections sometimes can be won by incumbent managements when a transfer of control would be efficient, a conclusion consistent with the sparse data; and the proxy election process aggregates information regarding the sale decision less well than markets do, thereby implying that proxy voters are less well-informed. Theory and data thus suggest, at the least, that the intellectual burden of proof should change: the task now is to justify using elections to transfer control despite their apparent deficiencies. The article briefly considers the policy implications of this change in perspective

Understanding Macs: Moral Hazard in Acquisitions

The standard contract that governs friendly mergers contains a material adverse change clause (a MAC ) and a material adverse effect clause (a MAE ); these clauses permit a buyer costlessly to cancel the deal if such a change or effect occurs. In recent years, the application of the traditional standard-like MAC and MAE term has been restricted by a detailed set of exceptions that curtails the buyer\u27s ability to exit. The term today engenders substantial litigation and occupies center stage in the negotiation of merger agreements. This paper asks what functions the MAC and MAE term serve, what function the exceptions serve and why the exceptions have arisen only recently. It answers that the term encourages the target to make otherwise noncontractable synergy investments that would reduce the likelihood of low value realizations, because the term permits the buyer to exit in the event the proposed corporate combination comes to have a low value. The exceptions to the MAC and MAE term impose exogenous risk on the buyer; the parties cannot affect this risk and the buyer is a relatively superior risk bearer. The exceptions have arisen recently because the changing nature of modern deals make the materialization of exogenous risk a more serious danger than it had been. The modern MAC and MAE term thus responds to the threat of moral hazard by both parties in the sometimes lengthy interim between executing a merger agreement and closing it. The paper\u27s empirical part examines actual merger contracts and reports preliminary results that are consistent with the analysis

Understanding Macs: Moral Hazard in Acquisitions

The standard contract that governs friendly mergers contains a material adverse change clause (a MAC ) and a material adverse effect clause (a MAE ); these clauses permit a buyer costlessly to cancel the deal if such a change or effect occurs. In recent years, the application of the traditional standard-like MAC and MAE term has been restricted by a detailed set of exceptions that curtails the buyer\u27s ability to exit. The term today engenders substantial litigation and occupies center stage in the negotiation of merger agreements. This paper asks what functions the MAC and MAE term serve, what function the exceptions serve and why the exceptions have arisen only recently. It answers that the term encourages the target to make otherwise noncontractable synergy investments that would reduce the likelihood of low value realizations, because the term permits the buyer to exit in the event the proposed corporate combination comes to have a low value. The exceptions to the MAC and MAE term impose exogenous risk on the buyer; the parties cannot affect this risk and the buyer is a relatively superior risk bearer. The exceptions have arisen recently because the changing nature of modern deals make the materialization of exogenous risk a more serious danger than it had been. The modern MAC and MAE term thus responds to the threat of moral hazard by both parties in the sometimes lengthy interim between executing a merger agreement and closing it. The paper\u27s empirical part examines actual merger contracts and reports preliminary results that are consistent with the analysis

Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review

We ask how to regulate pecuniary private benefit consumption. These benefits can compensate controlling shareholders for monitoring managers and investing effort in implementing projects. Controlling shareholders may consume excessive benefits, however. We argue (a) ex post judicial review of controlled transactions dominates ex ante restrictions on the controlled structures: the latter eliminate efficiencies along with abuses of the controlled company form; (b) controlling shareholders should be permitted to contract with investors over private benefit levels. Both work with better courts. Hence, we recommend creating a European-level corporate court, whose jurisdiction parties can invoke by contract

An Efficiency Analysis of Defensive Tactics

For thirty five years, courts and scholars have divided over the effects of defensive tactics in the market for corporate control. Strong defensive tactics locate authority to accept a hostile bid in the target’s board. The board can bargain for a higher takeover price than uncoordinated shareholders could realize but high takeover prices may reduce shareholder returns by reducing the likelihood of receiving a bid. The Delaware Courts themselves disagree. The Delaware Chancery Court would locate ultimate decision authority in the target’s shareholders, while the Supreme Court, by permitting strong defensive tactics, allocates extensive power to the target’s board. Though the Supreme Court’s view settles the legal issue in Delaware for now, the normative debate among scholars and decision-makers regarding whether the shareholders or the board should decide remains unresolved. The Delaware courts ask whether defensive tactics maximize target shareholder welfare: the shareholders’ expected return from acquisitions. But the more important question concerns social welfare: do defensive tactics reduce efficiency in the market for corporate control? Empirical difficulties so far have prevented analysts from answering either the private or social welfare question rigorously. Regarding private welfare, the analyst cannot observe bids a target’s defensive tactics level deterred. Regarding public welfare, the analyst cannot observe how an otherwise identical market would behave under weak and then strong defensive tactics levels. We address the two empirical questions by creating a structural model that predicts how the market for corporate control performs under varying defensive tactics levels and then testing the model by simulating market performance. A simulation permits us to isolate the effect of different defensive tactics levels. It also permits us to solve for a target’s optimal tradeoff between the increased share of an acquisition’s gain strong defensive tactics can permit a target to capture and the reduced probability of receiving bids in consequence of the acquirer’s reduced gain. The simulated corporate control market performs poorly, making 15% fewer acquisitions under strong defensive tactics than under weak defensive tactics. Target boards, however, apparently have been faithful fiduciaries for their shareholders, choosing defensive tactics levels that optimize the tradeoff between bid frequency and bid returns. On the other hand, we show, the privately optimal target defensive tactics level greatly exceeds the socially efficient level. Finally, we suggest that some firms’ recent efforts further to strengthen defensive tactics, such as combining a staggered board with a poison pill, reduce both efficiency and target shareholder welfare. Our results do not support a call for an immediate regulatory response. Initially, we do not rigorously analyze other possible justifications for defensive tactics, such as that they encourage potential targets to take long-term projects that the market may undervalue. Also, simulations raise an external validity question: do the researcher’s assumed simulation parameters capture real world patterns? We argue that our parameters do well on this measure, but a simulated market cannot perfectly capture real world behavior. On the other hand, the magnitude of our results and their consistency with theoretical predictions strongly support our central claim: today’s market for corporate control is so unlikely to maximize the number of value increasing acquisitions that scholars, regulators and courts should revisit the defensive tactics debate

Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review

We consider how the state should regulate the consumption of pecuniary private benefits of control by controlling shareholders. These benefits have efficient aspects: they compensate the controlling shareholder for monitoring managers and for investing effort to create and implement projects. Controlling shareholders, however, have incentives to consume excessive benefits. We argue here that ex post judicial review of controlled transactions is superior to ex ante restrictions on the creation of controlled structures: the latter form of regulation eliminates the efficiencies as well as the abuses of the controlled company form. We also argue that controlling shareholders should be permitted to contract with minority investors over permissible private benefit consumption. Neither ex post regulation nor contract works well, however, when courts are inefficient and inexpert. Hence, our principal normative claim is that a European level corporate court should be created, whose jurisdiction parties can invoke in their charters or other contracts

Corporate Control and Credible Commitment

The separation of control and ownership – the ability of a small group effectively to control a company though holding a minority of its cash flow rights – is common throughout the world, but also is commonly decried. The control group, it is thought, will use its position to consume excessive amounts of project returns, and this injures minority shareholders in two ways: there is less money and the controllers are not maximizing firm value. To the contrary, we argue here that there is an optimal share of the firm that compensates the control group for monitoring managers and otherwise exerting effort to implement projects while inducing investors to fund the firm’s projects. This result assumes that a controlling group can credibly commit not to consume more than its efficient share of firm cash flow. When potential entrepreneurs cannot solve this credibility problem, some ex ante efficient firms fail to form because their potential principals cannot raise money at a price that does not reflect inefficient levels of private benefits of control. The ability of controllers to commit is increasing in the accuracy of judicial review of controlled transactions. Private contracting, we argue, would materially improve judicial accuracy. Our principal normative recommendation therefore is to demote corporate fiduciary law from mandatory to a set of defaults. Many developing countries, however, lack an effective legal system, but their public corporations nonetheless commonly have a controlling shareholder and minority shareholders. We explore various non-legal methods by which this shareholder credibly commits to a cap on private benefits of control, although we also show that these methods are less efficient than contracting in a mature legal system would be

Selective catechol oxidations with diphenyl selenoxide. Applications to phenolic coupling.

Diphenyl selenoxide was used as a mild and selective oxidant in the synthesis of aporphines and homoaporphines. An intramolecular coupling between a phenol and a catechol is believed to proceed catechol selenurane intermediates.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/23763/1/0000736.pd

Constraints on Private Benefits of Control: Ex Ante Control Mechanisms versus Ex Post Transaction Review

This paper takes as its foundation four central facts. First, control blocks in corporations with public shareholders are pervasive. Only a handful of countries have capital markets that are dominated by companies whose control is in the public float (the evidence is summarized in Gilson, 2006). Second, control blocks do not exist, as the Law and Finance literature (La Porta et al., 1998) would have it, only in consequence of weak corporate governance law