• Selected
• Entire List

Abstract:
An implicit dichotomy of the corporation exists in legal scholarship. On one side of the dichotomy rests the publicly-held corporation suffering from a significant conflict of interest between its managers and dispersed shareholders; on the other side, the closely-held corporation plagued by intershareholder conflict.

This Article argues that understanding the agency problems that can exist within a firm demands a rejection of this traditional dichotomy and the theories of the firm built upon it. Using venture capital (VC) finance, this Article demonstrates how this dichotomy obscures how all firms - public and private - often face the same agency problems. Start-up companies receiving VC investment are uniquely situated to examine this dichotomy, as they represent closely-held firms structured to transition quickly to public equity markets. Additionally, by separating investment from company management, VC investment creates many of the investor-manager conflicts inherent in public companies.

By analyzing VC investment contracts, this Article reveals that start-up companies are indeed plagued by both vertical agency problems between investors and managers and horizontal agency problems among VC investors themselves. Significantly, academic scholarship has ignored the potential for interinvestor conflicts, using instead an analytical framework associated with public corporations that focuses exclusively on investor-manager agency problems. In so doing, VC scholarship provides a clear example of how the dichotomy of the corporation forces scholars to wear blinders in analyzing the agency problems in firms. To understand the full scope of these problems - and their implications for corporate investors - a new model of the firm is required that applies to all firms, public and private. This Article outlines this dynamic agency cost model and articulates its implications for corporate investors, corporate scholars, and corporate law in general.

Venture Capital, Agency Costs, Private Equity, Corporate Finance, Antidilution, Governance, Theory of the Firm, Corporate Law

Abstract:
This article examines whether the cost of complying with the Sarbanes-Oxley Act of 2002 (SOX) contributed to the rise in going-private transactions after its enactment. Prior studies of this issue generally suffer from a mistaken assumption that by going-private, a publicly-traded firm necessarily immunizes itself from SOX. In actuality, the need to finance a going-private transaction often requires firms to issue high-yield debt securities that subject the surviving firm to SEC-reporting obligations and, as a consequence, most of the substantive provisions of SOX. This paper thus explores a previously unexamined natural experiment: To the extent SOX contributed to the rise in going-private transactions, one should observe after 2002 a transition away from high-yield debt in the financing of going-private transactions towards other forms of "SOX-free" finance.

Using a unique dataset of going-private transactions, this paper examines the financing decisions of 468 going-private transactions occurring in the eight year period surrounding the enactment of SOX. Although SOX-free forms of subordinated debt-financing were widely available during this period, I find no significant change in the overall rate at which firms used high-yield debt-financing in structuring going-private transactions after SOX was enacted. Cross-sectional analysis, however, reveals that the use of high-yield financing marginally declined after 2002 for small- and medium-sized transactions, while significantly increasing for large-sized transactions. These findings are consistent with the hypothesis that the costs of SOX have disproportionately burdened small firms. They also strongly suggest that non-SOX factors were the primary impetus for the "name brand" buyouts commonly evoked as evidence that SOX has harmed the competitiveness of U.S. capital markets.

Sarbanes-Oxley, Securities

Abstract:
Economic analysis of corporate takeovers has traditionally advocated legal doctrines that ensure a target company in a takeover contest is acquired by the bidder willing to pay the most for it. The reason stems from the conventional assumption that a bidder's offer price should reflect its ability to put target's assets to productive use.

This Article challenges this assumption by turning to the success of private equity firms in outbidding publicly-traded, strategic bidders during the recent takeover wave. Using standard valuation modeling, the Article reveals how a critical component of any bidder's valuation of target stems from its source of acquisition financing. Specifically, a bidder's ability to finance a takeover with debt can lead to a significant increase in its valuation of target owing to a de facto government subsidy created by the deductibility of interest payments. Simultaneously, however, not every bidder has the ability to utilize debt-financing to the same extent - a point emphasized in forty years of finance research. The result is that during periods of robust credit markets such as occurred during 2004-2007, the highest bidders in takeover contests may often be those bidders such as private equity firms who are capable of using large amounts of debt-financing.

By highlighting the critical role of finance in explaining bidder valuations, this Article illustrates how accurate economic analysis of takeovers requires careful attention to bidders' divergent financing decisions. Indeed, by failing to take finance seriously, traditional takeover scholarship may very well be advocating legal rules that promote inefficient takeovers.

corporate takeovers, private equity, acquisition financing