ProfessorBainbridge.com

What does Facebook's post-IPO performance tell us about SecondMarket and its ilk?

A provocative chart.

A prediction about the law teaching job market for 2012-13

The significant downturn in applications to law school is going to put significant financial pressure on 50-75% of all law schools in the country, and one way many schools will respond is by doing less faculty hiring or no faculty hiring at all, until they see how their enrollment situations stabilize (if they do).

via leiterlawschool.typepad.com

Sounds plausible to me.

10 Things about Barack Obama

When I read the news these days, I am constantly dumbfounded by how petty and stupid our politics have become. Here, for example, are 10 things about Barack Obama that seem to get some folks on my side of the aisle all excited but about which I really could care less:

1. Where he was born. He's the President. Get over it.
2. His college grades. He's a smart guy. A lot of smart guys don't have great college grades.
3. He smoked pot. As long as he's not toking when deciding whether to have one of his drone killers bump somebody off, I'm okay with it.
4. He occasionally misspeaks (e.g., referring to sons or the current flap about a "Polish death camp.") Anybody who speaks in public is going to misspeak occasionally.
5. He went to Jeremiah Wright's church.
6. He supported Derrick Bell's crusade to get Harvard law to hire more minorities.
7. His religion or lack thereof.
8. He shook Hugo Chavez's hand.
9. He and Michelle celebrate with fist bumps.
10. He took a principled position against wearing flag lapel pins (which I think are silly) and then caved.

If you want to have a serious conversation about Obama, here's 10 things I take very seriously:

1. The way he screwed GM and Chrysler's creditors
2. The amount of debt he's piling up
3. His determination to avoid entitlement reform
4. His embrace of industrial policy, which inevitably leads to the government trying 9and always failing) to pick winners and losers
5. His attacks on the profit motive, business, and finance
6. His embrace of assassinations by killer drones as a routine practice
7. His dismal civil liberties record
8. His "evolving" to take positions that are politically advantageous at the moment
9. His efforts to bully the Supreme Court
10. His smug paternalism and holier than thou attitude

Why rightwing bloggers and talking heads waste so much time blathering about crap that doesn't matter instead of those that do is one of the leading reasons I'm feeling alienated from the right.

Instead of spending so much time on the manufactured faux controversy of the day, we ought to be talking about the things that really matter. Not least of all, because there's a strong case to be made against Obama precisely on the things that ought to really matter.

I wonder what Instagram shareholders are thinking?

Remember just last month when Facebook bought Instagram for $1 billion, "agreeing to pay roughly 30 percent in cash and 70 percent in stock, according to people briefed on the negotiations .... At that level, Facebook [was] pegging its own stock price at roughly $30 a share." (Source) More precisely, "Facebook paid 23 million shares of Facebook common stock as well as $300 million in cash" to buy Instagram. (Source)

At today's price of $28.11 per share of Facebook common stock, the price for Instagram has fallen to a total of $946.5 million.

This drop raises a couple of questions. Most stock acquisition merger agreements have a provision for adjusting the number of acquirer shares to be issued in the event the acquirer's stock price changes between the signing of the merger agreement and closing. Many also have a floor at which, if the acquirer's stock price drops below it, the deal terminates. Does the Facebook-Instagram have such a provision?

Second, back when the Instagram deal was first announced, I noted that Instagram CEO Kevin Systrom could face potential liability under cases like Smith v. Van Gorkom. In particular, it seems his board was informed of the deal rather than making an informed decision to approve it. In addition, Facebook seems to have made a Zucker out of Systrom:

When Systrom and Zuckerberg were working out terms for the deal, Systrom reportedly asked for $2 billion. But Zuckerberg got him to accept $300 million in cash and just under 23 million shares, telling his 20-something counterpart to look at the deal as a percentage of Facebook's total value. That way, according to a Wall Street Journal report, Systrom would eventually get his number -- assuming Facebook would someday be worth $2 billion.

just like Pritzker suckered Van Gorkom, Zuckerberg seems to have (perhaps unintentionaly) pulled a fast one on Systrom.

The lower Facebook stock drops, the more likely a lawsuit becomes and the higher the potential damages. If the question becomes, "did Instagram's board have an informed basis for believing Facebook stock was worth at least $30 per share," hindsight increasingly suggests a negative answer to that question. Of course, hindsight isn't supposed to come into play in these cases, but still ....

More on elements of value arising from the accomplishment or expectation of the merger

Steve Bainbridge was a good sport, as usual, and shared with me his recent comments on DGCL § 262(h)’s exclusion of value arising from the accomplishment or expectation of the merger. I sent him a few reactions, more or less as set forth below:

via blogs.law.widener.edu

Larry's the acknowledged expert in the field, with multiple articles in this area. But I'm still puzzled as to what elements of future value can be included in the appraisal price and how you tell the difference between them and synergistic values.

Ridge Lytton Springs (Dry Creek Valley) 2008

Legally this is not a Zinfandel. At 74% Zin, it's a point short of qualifying for labeling as such. Of course, Ridge has long treated Lytton Springs as a proprietary blend. In any case, it's also got 21% Petite Sirah and 5% Carignane.

Although the alcohol is higher than I'd prefer at 14.4%, it's not overly hot. To the contrary, it's got ripe dark fruit by the ton. Black cherry, blackberry, and plum. Enlivened with spice and black pepper.

The tannins are firm, suggesting potential for more extended aging than is the case with most Zinfandels. At the same time, however, it is drinking pretty well already. Even so, double decanting wouldn't be amiss.

Grade: A-

“Top Ten Reasons Why Companies Are Leaving California”

“Top Ten Reasons Why Companies Are Leaving California”

by Walter Olson on May 23, 2012

The hassle, the tax complications, the legal risks, the permitting difficulties just go on and on. Business relocation specialist Joseph Vranich has the details [North County Times] Earlier here (on small business survey).

via overlawyered.com

The Need for Improved Cost-Benefit Analysis of Dodd-Frank Rulemaking

The broad scope of new regulation under Dodd-Frank, issued by agencies including the SEC, Commodity Futures Trading Commission (CFTC) and others, will result in fundamental changes across the financial industry. Sound cost-benefit analysis must be a part of this process, to ensure that in each case, the proposed rule is optimal among all reasonable alternatives.

via blogs.law.harvard.edu

I couldn't agree more. The statistics in the full post are just appalling.

A puzzling case of corporate cowardice

Bradley Voss reports that:

In February 2012, several purported class action lawsuits were filed in the Delaware Court of Chancery challenging corporate bylaw amendments adopted by companies pursuant to 8 Del. C. § 109. Generally speaking, the challenged bylaw amendments would require that certain types of corporate law claims by shareholders be brought and resolved in the Delaware Court of Chancery, and not elsewhere. [1] In the Delaware class actions, the shareholder plaintiffs sued a dozen companies, as well as members of their respective boards of directors. Each of the cases was assigned to Chancellor Leo E. Strine, Jr.

The complaints in the various actions are similar. Plaintiffs allege that the forum selection bylaw amendments are invalid under Delaware and other law, that they violate shareholder rights because they were adopted by boards of directors without the consent of the shareholders, and that the directors who adopted the bylaw amendments violated their fiduciary duties.

Of the 12 companies that were sued, the majority repealed the challenged bylaw prior to the deadline for responding to the complaint. In those cases, the parties stipulated that the claims were moot, and the actions were dismissed.

Personally, I think these bylaws are perfectly valid, but that's neither here nor there. What puzzles me is this rash of corporate cowardice. Why would corporate directors and managers go through the hassle of evaluating and adopting a forum selection only to drop them at the first challenge? I just don't get it.

Elements of value arising from the accomplishment or expectation of the merger

DGCL § 262(h) provides that shareholders who succeed in an appraisal proceeding are entitled to the "fair value" of their shares "exclusive of any element of value arising from the accomplishment or expectation of the merger." Query whether that language makes control premia irrelevant? In Armstrong v. Marathon Oil, , 513 N.E.2d 776 (Ohio 1987), Marathon merged with U.S. Steel on March 11, 1982. U.S. Steel previously had acquired a majority of Marathon's stock in a cash tender offer at $125 per share. In the merger, U.S. Steel paid $100 per share in the form of newly issued U.S. Steel bonds. In a subsequent appraisal proceeding, the Ohio Supreme Court held that the $125 paid in the cash tender offer was irrelevant to determining the fair value of the shares subject to the appraisal proceeding.  Applying the Ohio appraisal statute, which was substantially similar to that of Delaware, the court deemed control premia to be irrelevant to the value of shares by a stockholder who already had control of the company. Instead, the value of plaintiffs' shares was to be determined by their market value on March 10, 1982, which was about $75, adjusted downward to the extent that the market price anticipated the pending merger.

In Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del.1983), by way of contrast, the Delaware Supreme Court held that only "speculative elements of value that may arise from the 'accomplishment or expectation' of the merger are excluded" from the determination of fair value under DGCL § 262(h). The word speculative nowhere appears in the statutory text, of course. The court nevertheless went on to describe the disallowance of "speculative elements of value" as "a very narrow exception to the appraisal process, designed to eliminate use of pro forma data and projections of a speculative variety relating to the completion of a merger." The chancery court thus may consider "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation...."  I have always assumed that Weinberger thus allowed the chancery court to consider evidence of, among other things, control premia paid in comparable acquisitions.

Despite the Delaware Supreme Court's departure from the plain language of the statutory text, the court's approach makes substantial policy sense. The real issue, after all, ought to be whether the dissenting shareholders received a fair premium over market. In order to answer that question, one must start with the price paid in the merger and, if appropriate, work up from there.

Yet, there is that stubborn statutory language requiring exclusion “of any element of value arising from the accomplishment or expectation of the merger.” Also, one must take into account the historical purpose of the appraisal statute, which was to dissenting shareholders the same value they would have received had the business remained in existence as a going concern without the merger taking place.

Suppose plaintiff sought to admit evidence relating to synergistic effects the merger would have, making the combined entity more valuable than the separate companies, such as might be the case if the merger created a vertically integrated company that achieves great economies of scale. What relevance would such information have to valuation in an appraisal proceeding?

The Delaware Supreme Court addressed that issue in one of its many Technicolor decisions, holding that in a two step acquisition value added by the acquiring corporation subsequent to its initial purchase of a controlling block of shares was properly to be considered part of going concern value that dissenting shareholders who sought appraisal were entitled to share. The Chancery Court had refused to consider such elements of value on grounds that doing so "would be tantamount to awarding [the dissenting shareholder] a proportionate share of a control premium, which the Court of Chancery deemed to be both economically undesirable and contrary" to precedent. The Supreme Court disagreed, opining that "[t]he underlying assumption in an appraisal valuation is that the dissenting shareholders would [have been] willing to maintain their investment position had the merger not occurred."  Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 298 (Del.1996).

But Technicolor was a case in which there had been a significant lapse of time between the acquirer’s initial purchase of a controlling block of stock and the subsequent freeze out merger, during which the acquirer had made changes in the corporation's business plans that added new value. What about a case in which the acquirer effects a merger before making planned changes to the business? Should the appraisal valuation take into account the potential synergies to be gained? What about any pre-offer market appreciation anticipating such synergies?

The plain language of the statute would seem to preclude including such “elements of value” in the appraisal price. On the other hand, assuming evidence of such valuations is not speculative, Weinberger would seem to require taking them into account. Likewise, the policy of giving dissenting shareholders a fair price for their shares calls for taking synergistic elements into account, while the policy of giving the shareholders the fair value of their stock in the company as a going concern calls for exclusing such elements.

It is a puzzle.

My attention was drawn once again to this issue by Francis Pileggi’s detailed post exploring the recent Chancery Court decision in Gearreald v. Just Care, Inc., C.A. No. 5233-VCP (Del. Ch. April 30, 2012):

Issue Addressed

In this appraisal proceeding pursuant to 8 Del. C. § 262, the post-trial issue addressed by the Court was whether the “fair value” of the company was worth more than the $40 million acquisition price. 

Short Answer

In an unusual twist, the Court found that the “fair value” of the company for appraisal purposes was only $34 million – - $6 million less than the cash acquisition price.

A stunning Marathon Oil like outcome!

VC Parsons held that:

The Court … must determine the fair value of “the company to the stockholder as a going concern.” Determining the value of a “going concern” requires the Court to exclude any synergistic value, that is, “the amount of any value that the selling company’s shareholders would receive because a buyer intends to operate the subject company, not as a stand-alone going concern, but as a part of a larger enterprise, from which synergistic gains can be extracted.” (8-9)

Parsons cited Union Illinois 1995 Inv. Ltd. Partnership v. Union Financial, 847 A.2d 340 (Del.Ch. 2004), in which then-VC (now-C) Leo Strine opined that:

By its plain terms, § 262 only excludes from the amount awardable to the petitioners “value arising from the accomplishment or expectation of the merger” that gave rise to the petitioners' right to appraisal. The literal terms of § 262 do not preclude a court from considering, in using a comparable-companies analysis for example, that acquirers typically share a portion of synergies with sellers in sales transactions and that that portion is value that would be left wholly in the hands of the selling company's stockholders, as a price that the buyer was willing to pay to capture the selling company and the rest of the synergies. For that matter, the literal terms of § 262 do not preclude a court from using a comparable-transactions analysis that considers the price at which the subject company would likely sell in an auction. Again, such an approach would not award the petitioners value from the particular merger giving rise to the appraisal; it would simply give weight to the actual price at which the subject company could have been sold, including therein the portion of synergies that a synergistic buyer would leave with the subject company shareholders as a price for winning the deal.

The exclusion of synergy value, rather, derives from the mandate that the subject company in an appraisal be valued as a going concern. Logically, if this mandate is to be faithfully followed, this court must endeavor to exclude from any appraisal award the amount of any value that the selling company's shareholders would receive because a buyer intends to operate the subject company, not as a stand-alone going concern, but as a part of a larger enterprise, from which synergistic gains can be extracted.

The parties in this case accept, as do I, that this mandate binds me and that my attempt to value UFG must center on determining its value as a going concern. That requires me to exclude from any valuation analysis a consideration of even the portion of synergies that might be expected to be left with the UFG stockholders in a sale of the entity as a whole.

This understanding is an important one in this case. Because the definition of fair value used in a § 262 proceeding is not based on fair market value and involves policy considerations, such as the need to exclude synergies in order to value the entity as a going concern, the petitioners in an appraisal proceeding can be awarded a sum that deviates—upward or downward—from what an economist or investment banker or Warren Buffett would believe was the market value of the petitioners' shares.

This passage raises several interesting and difficult questions. First, and perhaps foremost, given that appraisal is now a crap shoot in which one can end up with less than the price offered in the merger, why would any sane investor invoke appraisal rights?

Second, if one must exclude synergies, why would the target ever have a higher value as a going concern post-merger than pre-merger? Put another way, can the Chancery Court consider such elements of value as (1) eliminating quasi-rents by vertically integrating the target and buyer, (2) increasing the combined entity’s market share, (3) intra-firm diversification, (4) terminating and replacing inefficient incumbent target managers? Don’t all of these elements of value also arise from “the accomplishment or expectation of the merger”? But if you also exclude them, what’s left?

Third, if most strategic takeover deals are at least partly motivated by desired synergies (which I suspect is true), doesn’t excluding those synergies put the appraisal statute in direct conflict with modern economic realities? Put another way, don’t we want target management to bargain for a price that extracts a share of anticipated synergies for the benefit of target shareholders? (I set aside the issue of whether a diversified shareholder would care about allocation of the gains.) If the appraisal proceeding backs those elements of value out of the fair value, however, what incentive does the bidder have to acede to those demands? This would seem a particularly pertiennt concern in freezeout mergers involving a controlling shareholder, where we would want to incentivize both bidder and the target’s representatives to strike a price reflecting those synergies despite the latter’s conflict of interest.

Fourth, and following directly from the preceding, what useful purpose does the appraisal remedy now serve?

Fifth, can you really square use of a comparable transaction-based valuation method with the need to exclude elements of synergistic values? If those comparable transactions were motivated even in part by expected synergies, would not the comparable transaction method inevitably reflect some element of value driven by synergies?

Sixth, if elements of value arising out of synergistic values are non-speculative, how do you square excluding them with Weinberger?

Seventh, how do you measure the appropriate amount of synergistic value to be backed out of the calculation? In Just Care, VC Parsons went through a lengthy and laborious examination of the target’s post-acquisition business deals to determine which of them likely could have been undertaken by the company as a going concern. It is an exercise that strikes the reader as one of speculative reasoning of the sort Weinberger would seem to implicitly condemn.

In sum, this issue presents yet another area in which the law governing appraisal rights appears to be broken. Once again, the student comes away from the cases with the unavoidable impression that the Delaware courts are just sort of making this stuff up as they go along. Accordingly, one again comes to the conclusion that the best thing to do would be to toss out current law in its entirety and start over with a blank sheet of paper.

For a valiant effort to grapple with these issues, see Hamermesh, Lawrence A. and Wachter, Michael L., The Fair Value of Cornfields in Delaware Appraisal Law. Delaware Journal of Corporate Law (DJCL), Vol. 31, Pg. 119, 2005; U of Penn, Inst for Law & Econ Research Paper No. 05-24. Available at SSRN: http://ssrn.com/abstract=810908 or http://dx.doi.org/10.2139/ssrn.810908

Politics, profits and private equity

Mr Obama then goes on to characterise the role of the executive branch in terms that would make James Madison flip his powdered wig. The task of the president of the United States of America, as Mr Obama seems to see it, is personally to oversee all industry everywhere in the 50 states (and Puerto Rico and Guam, et al) and ensure that fairness prevails, as the task of the father of a great family is to ensure that none among his children fall behind, that none get too small a piece a cake, that the roof over all their little heads remains in good repair. The president is a one-man countervailing force and dispensary of justice.

via www.economist.com

That might be the best summary of Obama's world view and why I find it paternalistic, statist, and full of messianic hubris.

An Amalgamation of Facebook IPO Theories

5. Zuckerberg: Christine observed months ago that Zuckerberg has almost secured paranoiac control of the company. And he couldn't be bothered to lose the hoodie. 

via www.theconglomerate.org

# 5 seems the most pertinent and plausible to me.