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Abstract:
Throughout the Fall 2007 and into the new year 2008 private equity firms repeatedly attempted to terminate pending acquisitions. The litigation surrounding these purported terminations and heightened scrutiny directed upon the terms of private equity agreements opened a revealing window on a number of supposed "flaws" in the private equity structure. This Article seeks to understand whether these failures existed, and if so, what caused them. It does so by examining the forces driving the construct and evolution of private equity and the rationale for private equity's structure and specific contractual terms. I find that the private equity structure to be a rich, textured environment. The terms of the contractual relationship between the private equity firm and the acquired company are analogous to an iceberg; they form only the publicly available view of a much deeper understanding between the parties. In the non-public sphere, parties to private equity contracts utilize norms, conventions, reputational constraints, language and relational bonding to fill contractual gaps, override explicit contractual terms, and achieve a negotiated solution beyond the four corners of the contract. The attorney as transaction cost engineer in the private equity context consequently structures the private equity contract by paying heed both to contractual terms and law, contractually created forces and non-legal factors. But attorney reliance on these extra-contractual factors and forces makes the private equity structure path dependent and resistant to change. In light of these findings, the failures of the pre-Fall 2007 private equity structure were particularly a failure by attorneys for acquired companies to innovate and negotiate terms in full contemplation of such events. Reliance upon extra-legal forces permitted these attorneys to negotiate facially flawed private equity contracts and otherwise justified sloppy and ambiguous drafting.

private equity, reverse termination fee, contract, law and norms, mergers and acquisitions, path dependency, transaction negotiation

Abstract:
How should we understand the federal government's response to the financial crisis? The government's team, largely staffed by investment bankers, pushed the limits of its statutory authority to authorize an ad hoc series of deals designed to mitigate that crisis. It then decided to seek comprehensive legislation that, as it turned out, paved the way for more deals. The result has not been particularly coherent, but it has married transactional practice to administrative law. In fact, we think that regulation by deal provides an organizing principle, albeit a loose one, to the government's response to the financial crisis. Dealmakers use contract to avoid some legal constraints, and often prefer to focus on arms-length negotiation, rather than regulatory authorization, as the source of legitimacy for their actions, though the law does provide a structure to their deals. They also do not always take the long view or place value on consistency, instead preferring to complete the latest deal at hand and move to the next transaction. In this paper, we offer a first look at the history of the financial crisis from the fall of Bear Stearns up to, and including, the initial implementation of the Economic Emergency Stability Act of 2008. We analyze in depth each deal the government concluded, and how it justified those deals within the constraints of the law, using its authority to sometimes stretch but never truly break that law. We consider what the government's response so far means for transactional and administrative law scholarship, as well as some of the broader implications of crisis governance by deal.

Abstract:
This Article re-examines the fairness opinion, as well as its role and necessity in corporate control transactions. This Article argues that today's fairness opinion regime is deeply flawed and, as a consequence, a fairness opinion has little meaning. The reasons are primarily this: the financial analyses underlying fairness opinions, as currently prepared by investment banks, are prone to excessive subjectivity and are frequently the product of valuation techniques that are not in accord with best practices. These defects are exacerbated by the recurring problem of these same investment banks who are conflicted in their provision of these opinions. Meanwhile, SEC and FINRA regulation of fairness opinions does not adequately address these fundamental issues while the Delaware courts continue to periodically reassert, without question, Smith v. Van Gorkom's implicit fairness opinion requirement, thereby bestowing excessive significance to the fairness opinion.

This Article, though, does not call for the fairness opinion's death. Rather, I argue that the fairness opinion regime should be reformed through a quasi-public, standard-setting body. Creation of this body and its adoption of standards and guidelines for preparation of a fairness opinion and its undergirding financial analyses, as well as heightened disclosure requirements, should enhance the economics and usefulness of the fairness opinion by reducing subjectivity in valuation, ensuring proper grounding and permitting increased market scrutiny. Implementation of these reforms would also do more to alleviate the related and repeatedly cited problem of investment bank conflicts of interest than prior disclosure-based and other proposals.

If these reforms are adopted, the fairness opinion, in and of itself, is still not a panacea. It will always be an inferior substitute for a market-based approach to determine the fairness of the consideration in a corporate control transaction. However, a valuation conducted with rigor and in accordance with disclosed standards and guidelines can inform materially as to value when a market-based price is unavailable or unobtainable. In such a context, a fairness opinion can have meaning. Even in such situations, though, the inherent limitations of state-of-the-art valuation should be recognized; a fairness opinion should only be one of many tools to assist a board in gauging what is a fair price. The Delaware courts should recognize this, repudiating Van Gorkom's wholesale, implicit fairness opinion requirement when the agreed price is a market-based one. In other circumstances, a fairness opinion should not be required, but if received, should be considered by the Delaware courts as only one indicative factor to be utilized in assessing a board's satisfaction of its duty of care.

fairness opinion, Van Gorkom, corporate control transaction, takeovers

Abstract:
This case study is based on the 2007 material adverse change dispute between Accredited Home Lenders and Lone Star Funds. It is designed to familiarize law and other students with the principles and case law governing material adverse change clauses as well as the structure and usage of these clauses.

material adverse change, material adverse effect, MAC, MAE, merger agreements, tender offers

Abstract:
Hedge funds and private equity offer unique investing opportunities, including the possibility for diversified and excess returns. Yet, current federal securities regulation effectively prohibits the public offer and purchase in the United States of these hedge fund and private equity investments. Public investors, foreclosed from purchasing hedge funds and private equity, instead seek to replicate their benefits. This demand drives public investors to substitute less-suitable, publicly available investments which attempt to mimic the characteristics of hedge funds or private equity. This effect, which this Article terms black market capital, is an economic spur for a number of recent capital markets phenomena, including fund adviser IPOs, special purpose acquisition companies, business development companies and specialized exchange traded funds all of which largely attempt to replicate private equity or hedge fund returns and have been marketed to public investors on this basis. Black market capital has not only altered the structure of the U.S. capital market but has shifted capital flows to foreign markets and engendered the creation of U.S. private markets. This Article identifies and examines the ramifications of black market capital. It finds this effect to be an irrational by-product of current hedge fund and private equity regulation, one likely harmful to U.S. capital markets. These are external costs inherent in the current regulatory scheme which the SEC has not recognized. The SEC should consequently undertake a thorough cost-benefit analysis of its hedge fund and private equity regulation. Based on the available evidence, such an analysis is likely to conclude that the benefits of a regulatory scheme permitting the public offer of hedge funds and private equity funds not only exceed its costs but is superior to current regulation. Black market capital is also an example of the unintended effects of regulating under the precautionary principle and difficulty of regulating in an era of market proliferation.

Hedge Funds, Private Equity, SEC, Investment Company Act, Investment Advisers Act, special purpose acquisition companies, business development companies, administrative law, market regulation

Abstract:
In May 2007, Oaktree Capital Management LLC, a U.S.-based hedge fund adviser with over forty billion dollars in assets under management, sold approximately fourteen percent of its equity for more than $800 million in a widespread offering made to a number of prospective purchasers. This equity offering was not made on the New York Stock Exchange or Nasdaq. Instead, Oaktree's initial offering was made on the U.S. private market. The company thereafter listed its equity securities on Goldman Sachs & Co.'s non-public market, the GS Tradable Unregistered Equity OTC Market. This offering is emblematic of a paradigm shift occurring in the capital markets: the market for capital is increasingly competitive and global, viable public and private markets are proliferating world-wide, domestic investing patterns are changing as intermediary investing and deretailization occur, and financial innovation is quickening. The result is an on-going, perhaps revolutionary, transformation in the scope and structure of the global and domestic capital markets. This essay is about this paradigm shift, its implications for the SEC regulatory process and the future of federal securities regulation. It was prepared for and presented at the 2008 meeting of the AALS securities regulation section.

securities regulation, stock exchanges, hedge funds, regulatory competition, globalization, international securities regulation, SEC, intermediation, deretailization

Abstract:
Non-U.S. companies increasingly spurn U.S. stock markets and choose to list their securities and raise capital abroad. The drivers behind this shift are complex, but many believe that a principal cause is regulatory. The SEC has promulgated arguably over-burdensome, one-size-fits-all rules which fail to account for non-U.S. companies' heterogeneous desires for differing levels of regulation. And this was before the Sarbanes-Oxley Act.

Previous proposals to ameliorate this problem have all suffered from the same analytical flaw: they have approached this issue from the supply side and argued that regulation should be structured to meet the desires of issuers. This Article is an attempt to reformulate this debate. I argue that analysis of the proper level of U.S. regulation for non-U.S. companies should take into strong account the demand side interests of U.S. retail investors who are deprived of investing opportunities abroad when non-U.S. companies choose not list in the United States. The SEC should therefore craft regulation to foster investor equality and opportunity, and ensure that global investments are, to the extent feasible, available to U.S. investors.

To achieve this, the SEC should adopt a different regulatory standard for non-U.S. companies listing both in the United States and in their home market. This regulatory standard would borrow from mutual recognition principles embedded in Conflict of Laws jurisprudence. Under this standard, a non-U.S. company's compliance with its home market rules would be deemed satisfactory unless the quality of home market regulation was deemed to be sufficiently incomparable to United States regulation such that the benefits of investor access were outweighed by insufficient investor protections. This approach would create a regulatory scheme which would serve U.S. interests by attracting foreign listings while sufficiently protecting domestic investors. It would also benefit U.S. stock markets by allowing them to differentiate and provide regulatory product tailored to the individualized nature of the non-domestic listing decision.

bonding, competition among regulators, cross-listing, globalization, going public, international securities regulation, listing requirements, SEC, stock exchange

Abstract:
In this Article, I argue that the current federal takeover law is a failure. I do this by first exploding the commonly accepted academic myth of the federal government as an active regulator of takeovers. Rather, since the twilight of the 1980s, the SEC has abandoned its earlier presence as the nation's primary takeover regulator. The consequence of this abstention is that the federal takeover code has become obsolete. It oftentimes regulates incongruously, does not regulate important areas, or regulates in a manner inconsistent with the welfare of its relevant parties. Moreover, in the SEC absence the Delaware courts have emerged as the nation's takeover regulator. Yet, Delaware's interests are narrower and more manager-oriented than the federal government's. The consequence is that today's Delaware-erected takeover code is suboptimal and contrary to national interests. This Article exposes these deficits and argues that they can be cured through an SEC-initiated review and update of the federal takeover law and a going-forward active, reengaged SEC as a principal regulator of takeovers.

Williams Act, Takeovers, SEC, Mergers and Acquisitions, Delaware

Abstract:
On October 22, 1999, the SEC in the Cross-Border Adopting Release adopted new rules relating to cross-border tender and exchange offers, business combinations, and rights offerings. These rules were enacted as part of an ambitious program by the SEC staff to shepherd the U.S. federal securities laws into the international age by facilitating the inclusion in cross-border takeovers of previously excluded U.S. holders. Five years on, the full impact of the Cross-Border Rules on the international market remains uncertain and rules that were expressly intended to facilitate the inclusion of U.S. security holders in cross-border takeovers have, in many instances, encouraged exclusion. This Article attempts, on the basis of five years of practice and legal development, to pinpoint those areas where the Cross-Border Rules appear to be working; highlight where changes might be beneficial; and suggest possible improvements, reforms, and revisions that would better provide participants with the flexibility that the SEC originally intended.

cross-border, takeovers, securities regulation, Williams Act, cross-border release

Abstract:
The current financial regulatory system is fractured and archaic. In my testimony I recommend that Congress consolidate the present system into three regulators: a financial markets regulator, bank capital regulator and systemic risk regulator. To the extent full financial integration is not politically achievable, Congress should create regulatory champions in each of these three areas who can dominate the remaining other regulators and grow and absorb them or their responsibilities over time.

Any regulatory reform must also encompass the entirety of the financial system. It cannot leave gaps, black holes (i.e., deliberately unregulated areas) or financial institutions without potential oversight. To do otherwise would allow for regulatory arbitrage. In particular, any systemic risk regulator should have potential oversight over the entire financial market and all financial institutions, including insurance companies, should be subject to financial regulatory oversight. Here, I emphasize that when I speak of providing "oversight" responsibility over the entire financial system, it does not necessarily equate with heightened substantive regulation, but the potential for regulation if a regulator exercising its prudent authority deems it appropriate.

Congress should additionally build flexible regulators and a sustainable financial architecture but should leave the details of specific rules to be filled in by the selected regulator. Otherwise, Congress risks erecting rules that are either not adaptable to future changes or are not fully informed by later research on the financial crisis and our capital markets. In particular, Congress should require cost-benefit analysis for any rule-making by these new agencies.

Abstract:
We evaluate the selection of governing law and forum clauses in merger agreements between public firms from 2004-2008. In contrast to prior research, we find that Delaware is the dominant choice among merging parties. During the sample period approximately 66.4% of agreements select Delaware for their governing law and 60% of agreements select Delaware as their choice of forum. This compares to 61.8% of targets during this time that are incorporated in Delaware, and 54.8% of acquirers that are similarly incorporated. Delaware’s attractiveness has increased in recent years in response to exogenous events, and is evidenced by the fact that top-tier legal advisors, foreign acquirers, transactions surrounded by greater financial uncertainty, and larger transactions tend to select Delaware’s forum over other venues. Results are robust to controls for simultaneity and endogeneity. Our results provide support for the theory that Delaware competes by providing quality governing law, and particularly, adjudicative services. They also highlight the contestability of Delaware’s dominance; parties adjust their choices of law and forum during our sample time period in response to legal and other events. We conclude that Delaware competes strongly in other legal products beyond its primary one, the public company charter.

Abstract:
Gods at War is about the factors that drive and sustain deal-making, particularly mergers and acquisitions. Gods at War examines these issues through a history of deal-making in the sixth takeover wave and thereafter in the financial crisis. It is about the private equity boom and its implosion, return of the strategic transaction and hostile takeover, material adverse change wars of 2007, failure of the investment banking model, emergence of sovereign wealth funds, government deal-making during the financial crisis, and revolution occurring in the capital markets during this time. Gods at War details how capital market participants construct deals, with a particular focus on the intricacies of deal-making’s legal aspects and deal theory, while placing this deal-making in economic and recent historical context. The downloadable paper includes the Table of Contents and the First Chapter of Gods at War.

takeovers, mergers and acquisitions, private equity, hedge funds, strategic takeovers, hostile takeovers, corporations, shareholder activism, sovereign wealth funds, foreign investment, deals, deal-theory, distressed takeovers, financial crisis, regulation by deal

Abstract:
This is a treasure hunt I assigned my Spring 2007 securities regulation class. It was a successful pedagogical exercise. It not only provided hands-on practice locating SEC and other governmental sources, but the items required and questions asked (hopefully) forced them to think practically about the securities law issues previously covered. Not to mention that everyone had a fun time while learning.

I welcome comments or additional items. I will keep a database of them and update this post periodically for any colleagues who wish to use these materials.

securities regulation, pedagogy, treasure hunt

Abstract:
This essay contrasts the Jewish system of capital punishment with the United States judicial experience. It examines the why and how of capital punishment's sparing employment in the Jewish law and oftentimes judicially encouraged use in the United States.

Jewish Law, Capital Punishment, Comparative Law, Talmudic Law