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John C. Coates, Mergers, Acquisitions and Restructuring: Types, Regulation, and Patterns of Practice, in The Oxford Handbook of Corporate Law and Governance (Jeffrey N. Gordon & Wolf-Georg Ringe eds. 2017).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
,
Corporate Law
,
Corporate Governance
Type: Article
Abstract
An important component of corporate governance is the regulation of significant transactions – mergers, acquisitions, and restructuring. This paper (a chapter in Oxford Handbook on Corporate Law and Governance, forthcoming) reviews how M&A and restructuring are regulated by corporate and securities law, listing standards, antitrust and foreign investment law, and industry-specific regulation. Drawing on real-world examples from the world’s two largest M&A markets (the US and the UK) and a representative developing nation (India), major types of M&A transactions are reviewed, and six goals of M&A regulation are summarized – to (1) clarify authority, (2) reduce costs, (3) constrain conflicts of interest, (4) protect dispersed owners, (5) deter looting, asset-stripping and excessive leverage, and (6) cope with side effects. Modes of regulation either (a) facilitate M&A – collective action and call-right statutes – or (b) constrain M&A – disclosure laws, approval requirements, augmented duties, fairness requirements, regulation of terms, process and deal-related debt, and bans or structural limits. The paper synthesizes empirical research on types of transactions chosen, effects of law on M&A, and effects of M&A. Throughout, similarities and differences across transaction types and countries are noted. The paper concludes with observations about what these variations imply and how law affects economic activity.
John C. Coates, Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications, 124 Yale L. J. 882 (2015).
Categories:
Banking & Finance
Sub-Categories:
Finance
,
Financial Reform
,
Economics
Type: Article
Abstract
Some members of Congress, the D.C. Circuit, and the legal academy are promoting a particular, abstract form of cost-benefit analysis for financial regulation: judicially enforced quantification. How would CBA work in practice, if applied to specific, important, representative rules, and what is the alternative? Detailed case studies of six rules—(1) disclosure rules under Sarbanes-Oxley section 404; (2) the SEC’s mutual fund governance reforms; (3) Basel III’s heightened capital requirements for banks; (4) the Volcker Rule; (5) the SEC’s cross-border swap proposals; and (6) the FSA’s mortgage reforms—show that precise, reliable, quantified CBA remains unfeasible. Quantified CBA of such rules can be no more than “guesstimated,” as it entails (a) causal inferences that are unreliable under standard regulatory conditions; (b) the use of problematic data; and/or (c) the same contestable, assumption-sensitive macroeconomic and/or political modeling used to make monetary policy, which even CBA advocates would exempt from CBA laws. Expert judgment remains an inevitable part of what advocates label “gold-standard” quantified CBA, because finance is central to the economy, is social and political, and is non-stationary. Judicial review of quantified CBA can be expected to do more to camouflage discretionary choices than to discipline agencies or promote democracy.
John C. Coates, Darius Palia & Ge Wu, Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders? (June 2019).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Mergers & Acquisitions
,
Shareholders
,
Empirical Legal Studies
Type: Other
Abstract
Merger and acquisition deals are governed by merger clauses which are negotiated between the bidder and target in order to communicate deal terms, specify risk sharing between the parties, and describe dispute management provisions in case of litigation. In a large sample of manually collected U.S. deal contracts involving publicly traded bidders and targets, we construct merger clauses indices based on legal scholars’ ex-ante prediction and examine the relationship between announcement returns and different types of merger clauses. We find that bidder protective clauses correlate with higher bidder returns while target protective clauses and pro-competition clauses correlate with higher target returns. We also find that bidder and target protective indices have larger impacts on announcement abnormal returns for “bad” deals than for “good” deals. Finally, we find that the inclusion of more bidder protective clauses leads to lower deal completion rates while the inclusion of more target protective clauses and pro-competition clauses has no impact on deal completion rates. These results are consistent with the expert lawyer/efficient contracting view of Cain, Macias, and Davidoff Solomon (2014), and Coates (2016), and against merger contracts as boilerplate agreements.
John C. Coates, IV, The Future of Corporate Governance Part I: The Problem of Twelve (Sept. 20, 2018).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
Type: Other
Abstract
Three ongoing mega-trends are reshaping corporate governance: indexing, private equity, and globalization. These trends threaten to permanently entangle business with the state and create organizations controlled by a small number of individuals with unsurpassed power. The essay focuses on indexation. After providing background, the essay describes the rise of and reasons for indexation, noting that “passive” indexed investing takes a variety of forms. Data on indexation are presented — with the bottom line that indexation has progressed farther than most realize, because foreign ownership, institutional indexation, and “closet” indexation are often neglected by observers. Index providers’ incentives, resources, and methods are reviewed, with an emphasis on the how such providers have greater practical importance than simpler analytical approaches might suggest. The essay ends with an outline of policy options, and preliminary analyses of which seem likely to address the “Problem of Twelve” — the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.
John C. Coates, Mergers, Acquisitions and Restructuring: Types, Regulation, and Patterns of Practice, in The Oxford Handbook of Corporate Law and Governance 570 (Jeffrey N. Gordon & Wolf-Georg Ringe eds. 2018).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
,
Corporate Governance
Type: Book
Abstract
This chapter examines how mergers, acquisitions, and restructuring are regulated, both within the formal body of corporate law and as that law interacts with other bodies of law such as securities (including listing standards), antitrust, industry-specific regulation, and regulations of cross-border transactions. It begins with an overview of relevant terminology and scope of M&A and restructuring and how they differ from other corporate transactions or activities. It then considers major types of M&A transactions, the core goals of corporate law or governance, and other bodies of law (antitrust, industry-based regulation, regulation of foreign ownership of business, and tax) that give special treatment to M&A and restructuring, and sometimes interact with corporate law and governance. It also looks at laws that constrain M&A transactions and those that facilitate them. It concludes by summarizing empirical research and discussing what variations in types and modes of regulation governing M&A and restructuring transactions imply.
John C. Coates, IV, Darius Palia & Ge Wu, Reverse Termination Fees in M&A: Design, Signals, and Bidder Returns (Aug. 11, 2017).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Other
Abstract
Reverse termination fees (RTFs) are required payments for bidders to “walk away” from a merger or acquisition, and vary significantly in size and design, even within apparently similar deals. Using a large sample of manually collected U.S. deal contracts involving publicly traded bidders and targets, we examine the impact of different types of RTFs. Consistent with efficient contract theory, we find that inefficient RTF sizes and triggers correlate with significantly lower bidder abnormal returns, while efficient RTF sizes and triggers correlate with significantly higher bidder abnormal returns. Consistent with signaling theory, we also find evidence that the inclusion of some RTF triggers in the merger agreements reveals private information to the market, correlating with significant abnormal returns. Our findings have implications for how practitioners approach the design and negotiation of RTFs.
John C. Coates, John D. Dionne & David S. Scharfstein, GE Capital After the Crisis (Harvard Bus. Sch. Case 217-071, Apr. 2017).
Categories:
Banking & Finance
Sub-Categories:
Financial Markets & Institutions
,
Risk Regulation
Type: Other
Abstract
Keith Sherin, CEO of GE Capital, faced a decision on which hinged billions of dollars and the fate of one of America’s most storied companies. On his desk sat two secret analyses: Project Beacon, a proposal to spin off most of GE Capital to GE shareholders, and Project Hubble, a proposal to sell off GE Capital in parts. A third document sketched out the implications should GE “stay the course” on its present strategy: a continued, massive build-up of regulatory and compliance personnel to meet GE Capital’s obligations as a “SIFI”—systemically important financial institution—in the wake of the 2010 Dodd-Frank Act. No path forward was clear. A divestiture, either through a spin-off or sell-off, would reduce GE’s size and financial connectedness and address market unease about GE’s position as the seventh-largest U.S. financial institution. It would also unlock substantial value not currently reflected in the stock. Each faced major obstacles and execution risks, however. In particular, no one knew the precise cut-off for a SIFI designation or the time required to shed the designation. If the process took too long, or generated unexpected costs, a divestiture might destroy more value than it would create. Retaining GE Capital was risky, too, of course. Which set of risks was the right one to propose that the GE board accept?
John C. Coates, IV, M & A Contracts: Purposes, Types, Regulation, and Patterns of Practice, in Research Handbook on Mergers and Acquisitions (Steven Davidoff Solomon & Claire A. Hill eds. 2016).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Book
John C. Coates, IV, Lucian A. Bebchuk, Reinier Kraakman & Mark J. Roe (with Bernard S. Black, John C. Coffee, James D. Cox, Ronald J. Gilson, Jeffrey N. Gordon, Lawrence A. Hamermesh, Henry Hansmann, Robert J. Jackson, Marcel Kahan, Vikramaditya S. Khanna, Michael Klausner, Donald C. Langevoort, Brian J.M. Quinn, Edward B. Rock & Helen S. Scott, Supreme Court Amicus Brief of 19 Corporate Law Professors, Friedrichs v. California Teachers Association, No. 14-915 (U.S. Nov. 6, 2015).
Categories:
Corporate Law & Securities
,
Constitutional Law
Sub-Categories:
First Amendment
,
Corporate Law
,
Shareholders
Type: Article
Abstract
The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt out” rights or practical ability to avoid subsidizing corporate political expression with which they disagree. Nor do individuals have the practical option to refrain from putting their savings into equity investments, as doing so would impose damaging economic penalties and ignore conventional financial guidance for individual investors.
John C. Coates, IV, Thirty Years of Evolution in the Roles of Institutional Investors in Corporate Governance, in Research Handbook on Shareholder Power ch. 4 (Jennifer G. Hill and Randall S. Thomas, eds., 2015).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
,
Shareholders
Type: Book
Abstract
Much of the history of corporate law has concerned itself not with shareholder power, but rather with its absence. Recent shifts in capital market structure require a reassessment of the role and power of shareholders.
John C. Coates, IV, Jesse M. Fried, & Kathryn E. Spier, What Courses Should Law Students Take? Lessons from Harvard’s Big Law Survey, 64 J. Legal Educ. 443 (2015).
Categories:
Corporate Law & Securities
,
Legal Profession
,
Banking & Finance
Sub-Categories:
Finance
,
Legal Education
,
Legal Services
Type: Article
Abstract
We report the results of an online survey, conducted on behalf of Harvard Law School, of 124 practicing attorneys at major law firms. The survey had two main objectives: (1) to assist students in selecting courses by providing them with data about the relative importance of courses; and (2) to provide faculty with information about how to improve the curriculum and best advise students. The most salient result is that students were strongly advised to study accounting and financial statement analysis, as well as corporate finance. These subject areas were viewed as particularly valuable, not only for corporate/transactional lawyers, but also for litigators. Intriguingly, non-traditional courses and skills, such as business strategy and teamwork, are seen as more important than many traditional courses and skills.
John C. Coates, IV, Cost-Benefit Analysis of Financial Regulation: A Reply, 124 Yale L.J. F. 305 (Jan. 22, 2015).
Categories:
Government & Politics
Sub-Categories:
Administrative Law & Agencies
Type: Article
John C. Coates & Suraj Srinivasan, SOX after Ten Years: A Multidisciplinary Review, 28 Accounting Horizons 627 (2014).
Categories:
Corporate Law & Securities
Sub-Categories:
Securities Law & Regulation
Type: Article
Abstract
We review and assess research findings from more than 120 papers in accounting, finance, and law to evaluate the impact of the Sarbanes-Oxley Act. We describe significant developments in how the Act was implemented and find that despite severe criticism, the Act and institutions it created have survived almost intact since enactment. We report survey findings from informed parties that suggest that the Act has produced financial reporting benefits. While the direct costs of the Act were substantial and fell disproportionately on smaller companies, costs have fallen over time and in response to changes in its implementation. Research about indirect costs such as loss of risk taking in the U.S. is inconclusive. The evidence for and social welfare implications of claimed effects such as fewer IPOs or loss of foreign listings are unclear. Financial reporting quality appears to have gone up after SOX but research on causal attribution is weak. On balance, research on the Act's net social welfare remains inconclusive. We end by outlining challenges facing research in this area, and propose an agenda for better modeling costs and benefits of financial regulation.
John C. Coates, IV, Jesse M. Fried & Kathryn E. Spier, What Courses Should Law Students Take? Harvard's Largest Employers Weigh In (HLS Program on the Legal Prof. Research Paper No. 2014-12, Harvard Pub. Law Working Paper No. 14-20, Feb. 17, 2014).
Categories:
Legal Profession
,
Corporate Law & Securities
Sub-Categories:
Corporate Law
,
Legal Education
,
Legal Services
Type: Other
Abstract
We report the results of an online survey, conducted on behalf of Harvard Law School, of 124 practicing attorneys at major law firms. The survey had two main objectives: (1) to assist students in selecting courses by providing them with data about the relative importance of courses; and (2) to provide faculty with information about how to improve the curriculum and best advise students. The most salient result is that students were strongly advised to study accounting and financial statement analysis, as well as corporate finance. These subject areas were viewed as particularly valuable, not only for corporate/transactional lawyers, but also for litigators. Intriguingly, non-traditional courses and skills, such as business strategy and teamwork, are seen as more important than many traditional courses and skills.
John C. Coates, Explaining Variations in Takeover Defenses: Blame the Lawyers, in Law and Economics of Mergers and Acquisitions (Steven M. Davidoff & Claire A. Hill eds., 2013).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Book
John C. Coates, Corporate Politics, Governance, and Value Before and After Citizens United, 9 J. Empirical Legal Stud. 657 (2012).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Corporate Governance
,
Shareholders
,
Empirical Legal Studies
Type: Article
Abstract
How did corporate politics, governance, and value relate to each other in the S&P 500 before and after Citizens United? In regulated and government-dependent industries, politics is nearly universal, and uncorrelated with shareholder power, agency costs, or value. However, 11 percent of CEOs in 2000 who retired by 2011 obtained political positions after retiring and, in most industries, political activity correlates negatively with measures of shareholder power, positively with signs of agency costs, and negatively with shareholder value. The politics-value relationship interacts with capital expenditures, and is stronger in regressions with firm and time fixed effects, which absorb many omitted variables. After the shock of Citizens United, corporate lobbying and PAC activity jumped, in both frequency and amount, and firms politically active in 2008 had lower value in 2010 than other firms, consistent with politics at least partly causing and not merely correlating with lower value. Overall, the results are inconsistent with politics generally serving shareholder interests, and support proposals to require disclosure of political activity to shareholders.
John C. Coates, Evidence-based M&A: Less Can Be More When Allocating Risk in Deal Contracts, 27 J. Int'l Banking & Fin. L. 708 (2012).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Article
John C. Coates, Explaining Variation in Takeover Defenses: Blame the Lawyers, in Mergers and the Market for Corporate Control (Fred S. McChesney ed., 2012).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Book
John C. Coates, Managing Disputes Through Contract: Evidence from M&A, 2 Harv. Bus. L. Rev. 295 (2012).
Categories:
Corporate Law & Securities
,
Banking & Finance
,
Civil Practice & Procedure
Sub-Categories:
Contracts
,
Mergers & Acquisitions
,
Arbitration
,
Choice of Law
,
Dispute Resolution
,
Litigation & Settlement
Type: Article
Abstract
An important set of contract terms manages potential disputes. In a detailed, hand-coded sample of mergers and acquisition (M&A) contracts from 2007 and 2008, dispute management provisions correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases. A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration––covering price-adjustment clauses––is common even in the largest private target bids.Specific performance clauses––prominently featured in recent high-profile M&A litigation––are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
John C. Coates & Taylor Lincoln, A Campaign Finance Job for the SEC, Wash. Post, Sept. 7, 2011, at A19.
Categories:
Corporate Law & Securities
,
Government & Politics
Sub-Categories:
Shareholders
,
Securities Law & Regulation
,
Elections & Voting
Type: News
Abstract
The Supreme Court's January 2010 Citizens United decision to permit corporations to spend unlimited sums to influence federal elections was premised on a pair of yet-unfulfilled promises: Corporations would disclose their expenditures, and shareholders would be able to police such spending. The best chance to fulfill those promises may now rest with the Securities and Exchange Commission. The SEC could require disclosure of political spending by public companies and facilitate action by shareholders to sign off on such spending.
John C. Coates & Taylor Lincoln, Fulfilling the Promise of Citizens United, Wash. Post, Sept. 6, 2011, Opinion.
Categories:
Corporate Law & Securities
,
Government & Politics
Sub-Categories:
Securities Law & Regulation
,
Elections & Voting
Type: News
Abstract
The Supreme Court’s January 2010 Citizens United decision to permit corporations to spend unlimited sums to influence federal elections was premised on a pair of yet-unfulfilled promises: Corporations would disclose their expenditures, and shareholders would be able to police such spending. The best chance to fulfill those promises may now rest with the Securities and Exchange Commission. The SEC could require disclosure of political spending by public companies and facilitate action by shareholders to sign off on such spending. Contrary to the consensus view, however, SEC action may prove to be a favor to the owners of the affected corporations. Despite reflexive opposition to the disclosure of political spending from many self-appointed business advocates, research we are publishing Wednesday suggests that disclosure of political activity might benefit corporate valuations and, at the least, mandatory disclosure would pose no threat of a detrimental effect.
John C. Coates, Michele M. DeStefano, Ashish Nanda & David B. Wilkins, Hiring Teams, Firms, and Lawyers: Evidence of the Evolving Relationships in the Corporate Legal Market, 36 Law & Soc. Inquiry 999 (2011).
Categories:
Legal Profession
,
Disciplinary Perspectives & Law
,
Corporate Law & Securities
Sub-Categories:
Corporate Law
,
Empirical Legal Studies
,
Legal Services
Type: Article
Abstract
How are relationships between corporate clients and law firms evolving? Drawing on interview and survey data from 166 chief legal officers of S&P 500 companies from 2006–2007, we find that—contrary to standard depictions of corporate client-provider relationships—(1) large companies have relationships with ten to twenty preferred providers; (2) these relationships continue to be enduring; and (3) clients focus not only on law firm platforms and lead partners, but also on teams and departments within preferred providers, allocating work to these subunits at rival firms over time and following “star” lawyers, especially if they move as part of a team. The combination of long-term relationships and subunit rivalry provides law firms with steady work flows and allows companies to keep cost pressure on firms while preserving relationship-specific capital, quality assurance, and soft forms of legal capacity insurance. Our findings have implications for law firms, corporate departments, and law schools.
John C. Coates, IV, Clayton S. Rose & David Lane, In a Pickle: Barclays Capital and the Sale of Del Monte Foods (A) (Harv. Bus. Sch. Gen. Mgmt. Unit Case No. 312-003, Aug. 19, 2011).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Fiduciary Law
,
Fiduciaries
,
Securities Law & Regulation
,
Shareholders
,
Corporate Law
,
Corporate Governance
Type: Other
Abstract
n February 2011, Judge Laster of the Delaware Chancery Court was considering a suit claiming that Del Monte board members had breached their fiduciary duty to shareholders by not pursuing the best transaction for Del Monte. In the course of the discovery phase of the trial, the plaintiffs, and Del Monte's board, had learned that the company's financial advisor, Barclays Capital, had also been working with KKR and its partners to create a bid process that could favor them. In addition to the fee from Del Monte for advising on a successful sale, Barclays also desired to play a leading role in the lucrative financing that the private equity firms would organize to fund the deal following a successful bid. The plaintiffs asked the court to delay the shareholder vote on the merger to solicit additional bidders.
John C. Coates, M&A Break Fees: U.S. Litigation Versus UK Regulation, in Regulation versus Litigation: Perspectives from Economics and Law 239 (Daniel P. Kessler ed., 2011).
Categories:
Corporate Law & Securities
,
Civil Practice & Procedure
,
Disciplinary Perspectives & Law
,
International, Foreign & Comparative Law
Sub-Categories:
Mergers & Acquisitions
,
Litigation & Settlement
,
Law & Economics
,
European Law
Type: Book
Erik Ramanathan & John C. Coates, Corporate Purchasing Project: How S&P Companies Evaluate Outside Counsel (Harvard L. Sch. Program on the Legal Profession, 2011).
Categories:
Legal Profession
,
Corporate Law & Securities
Sub-Categories:
Corporate Law
,
Legal Services
Type: Other
Abstract
This report marks the culmination of the Program on the Legal Profession's Corporate Purchasing Project—more than four years of scholarly research dedicated to examination of the ways in which S&P 500 legal departments hire and manage outside counsel, drawing from six academic papers. How are relationships between clients and service providers in the corporate legal market evolving, and why? Answering this critically important question requires both the availability of unbiased quantitative information about how large corporations make law firm hiring and assessment decisions and a robust qualitative and theoretical framework to evaluate broader variations and trends. This novel empirical data is drawn from surveys and interviews of 166 chief legal officers (“CLOs”) of S&P 500 companies—one-third of all such large publicly traded companies. Specifically, this paper explores four topics of substantial importance about which there is little systematic information: • How do these companies evaluate the quality of legal service providers when making hiring and legal management decisions? • Under what circumstances do these companies discipline or terminate their relationship with their law firms? • How do these companies evaluate whether to follow “star” lawyers when they change law firms? • In what ways do these companies manage the intersection between law and public relations?
Carol Bowie, John C. Coates, Justice Jack B. Jacobs, Stephen P. Lamb & Theodore N. Mirvis, Corporate Governance After the Financial Crisis, 6 N.Y.U. J.L. & Bus. 171 (2010)(Proceedings of the 2010 Annual Symposium: Legal Aftershocks of the Global Financial Crisis).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
Type: Article
John C. Coates, The Keynote Papers and the Current Financial Crisis, 47 J. Accounting Res. 427 (2009).
Categories:
Banking & Finance
Sub-Categories:
Finance
,
Financial Markets & Institutions
,
Risk Regulation
Type: Article
Abstract
One hesitates to write history as it happens, or to draw policy lessons from current events. The conference took place in May 2008 - after the government-assisted takeover of Bear Stearns but before a capital market downturn fueled a system-wide liquidity crisis, with successive insolvencies at IndyMac, Fannie Mae, Freddie Mac, Lehman, AIG, WaMu, and, as I write, Citigroup. But it would be odd to comment on capital market regulation without mentioning the events of the last three months. I am first to acknowledge that anything I might have written in May would not have foreseen the crisis or linked capital market regulation to financial institutions, which in the US have been conventionally treated as discrete in discourse and institutions (e.g., U.S. Treasury 2008; Leuz and Wysocki 2008).
John C. Coates & David S. Scharfstein, The Bailout is Robbing the Banks, N.Y. Times, Feb. 18, 2009, at A27.
Categories:
Banking & Finance
Sub-Categories:
Banking
,
Financial Markets & Institutions
Type: News
Abstract
Many Americans are angry at banks for taking bailout money while still cutting back on lending. But the government is also to blame. For reasons that remain unclear, the Troubled Asset Relief Program has channeled aid to bank holding companies rather than banks. The Obama administration’s new Financial Stability Plan will have more influence on bank lending if it actually directs its support to banks. To see why, it’s important to understand the distinction between banks and bank holding companies. Banks take deposits and make loans to consumers and corporations. Bank holding companies own or control these banks. The big holding companies also own other businesses, including ones that execute trades both on their clients’ behalf and for themselves.
John C. Coates, The Goals and Promise of the Sarbanes-Oxley Act, 21 J. Econ. Persp. 91 (2007).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
,
Corporate Law
Type: Article
John C. Coates, Ownership, Takeovers and EU Law: How Contestable Should EU Corporations Be?, in Reforming Company and Takeover Law in Europe 677 (Guido Ferrarini, Klaus J. Hopt, Japp Winter & Eddy Wymeersch eds., 2004).
Categories:
Corporate Law & Securities
,
International, Foreign & Comparative Law
,
Disciplinary Perspectives & Law
Sub-Categories:
Mergers & Acquisitions
,
Corporate Governance
,
Shareholders
,
Securities Law & Regulation
,
Fiduciaries
,
Law & Economics
,
Empirical Legal Studies
,
European Law
Type: Book
Abstract
In this paper, I draw on economic theory of ownership structure; empirical research on ownership, value and takeovers; and comparisons to US law to argue that the proposed break through rule (BTR) is not clearly better than the status quo, from either a political perspective, or an economic perspective, with implications for any directive on takeover bids (DTB). The good (a step toward an integrated EU capital market) cannot wait on the perfect (ideal takeover rules), but neither should it be pursued without regard for the difference between the two. This suggests that if the BTR is adopted, it should be kept flexible with a mixture of regulatory tools - sunsets, opt-outs, and industry-based exemptions - that reflect the fact that regulation will inevitably be both imperfect and difficult to modify once adopted. The best rationale for the BTR - that many ownership structures in EU reflect historic national market structures and may increasingly impede achievement of economies via cross-border mergers - would be better addressed by rules requiring control of such firms be made contestable on a periodic rather than a continual basis.
Lucian A. Bebchuk, John C. Coates & Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Further Findings and a Reply to Symposium Participants, 55 Stan. L. Rev. 885 (2002).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
,
Corporate Law
,
Mergers & Acquisitions
Type: Article
Abstract
This paper develops and defends our earlier analysis of the powerful antitakeover force of staggered boards. We reply to five responses to our work, by Stephen Bainbridge, Mark Gordon, Patrick McGurn, Leo Strine, and Lynn Stout, which are to be published in a Stanford Law Review Symposium. We present new empirical evidence that extends our earlier findings, confirms our conclusions, and demonstrates that the alternative theories put forward by some commentators do not adequately explain the evidence. Among other things, we find that having a majority of independent directors does not address the concern that defensive tactics might be abused. We also find that effective staggered boards do not appear to have a significant beneficial effect on premia in negotiated transactions. Finally, we show that, unlike our approach, the approach that our critics advocate for Delaware takeover jurisprudence to follow is both inconsistent with its established principles and takes an extreme position in the overall debate on takeover defenses. Our analysis and new findings further strengthen the case for limiting the ability of incumbents armed with a staggered board to continue saying no after losing an election conducted over an acquisition offer.
Lucian A. Bebchuk, John C. Coates & Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 Stan. L. Rev. 887 (2002).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
,
Corporate Law
,
Mergers & Acquisitions
Type: Article
Abstract
Staggered boards, which a majority of public companies now have, provide a powerful antitakeover defense, stronger than is commonly recognized. They provide antitakeover protection both by (i) forcing any hostile bidder, no matter when it emerges, to wait at least one year to gain control of the board and (ii) requiring such a bidder to win two elections far apart in time rather than a one-time referendum on its offer. Using a new data set of hostile bids in the five-year period 1996-2000, we find that not a single hostile bid won a ballot box victory against an 'effective' staggered board (ESB). We also find that an ESB nearly doubled the odds of remaining independent for an average target in our data set, from 34% to 61%, halved the odds that a first bidder would be successful, from 34% to 14%, and reduced the odds of a sale to a white knight, from 32% to 25%. Furthermore, we find that the shareholders of targets that remained independent were made worse off compared with accepting the bid and that ESBs did not provide sufficient countervailing benefits in terms of increased premiums to offset the costs of remaining independent. Overall, we estimate that, in the period studied, ESBs reduced the returns of shareholders of hostile bid targets on the order of 8-10%. Finally, we show that most staggered boards were adopted before the developments in takeover doctrine that made ESBs such a potent defense. Selected by academics as one of the “top ten” articles in corporate/securities law for 2002, out of 350 articles published in that year.
John C. Coates, Explaining Variation in Takeover Defenses: Blame the Lawyers, 89 Calif. L. Rev. 1301 (2001).
Categories:
Corporate Law & Securities
,
Legal Profession
Sub-Categories:
Securities Law & Regulation
,
Shareholders
,
Corporate Governance
,
Legal Services
Type: Article
Abstract
Traditional law and economics scholarship predicts that no companies will adopt takeover defenses prior to IPOs, because defenses increase agency costs between shareholders and managers, and reduce IPO proceeds. In fact, data from 357 IPOs in the 1990s show that many companies adopt defenses prior to IPOs. Even more puzzling for conventional scholarship, defenses vary widely at the IPO stage. Analysis shows that more of this variation in defenses can be explained by characteristics of law firms advising owner-managers than by traditional theories about defenses. Among other findings: (1) Companies advised by larger law firms with more takeover experience adopt more defenses; (2) In 1991-92, companies with Silicon Valley lawyers adopted almost no defenses; by 1998, Silicon Valley lawyers' clients were as likely to use defenses as clients of other lawyers; (3) Companies with high-quality underwriters and venture capital backing adopt more defenses; (4) The overall rate of defense adoption increased in the 1990s. Together, these findings provide strong evidence that lawyers determine key terms in the "corporate contract," due to agency costs between owner-managers and their lawyers.
John C. Coates & Bradley C. Faris, Second-Generation Shareholder Bylaws: Post-Quickturn Alternatives, 56 Bus. Law. 1323 (2001).
Categories:
Corporate Law & Securities
Sub-Categories:
Shareholders
,
Corporate Governance
Type: Article
John C. Coates, Private vs. Political Choice of Securities Regulation: A Political Cost/Benefit Analysis, 41 Va. J. Int'l L. 531 (2001).
Categories:
Corporate Law & Securities
Sub-Categories:
Securities Law & Regulation
Type: Article
John C. Coates, Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence, 79 Texas L. Rev. 271 (2000).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Article
Abstract
Two decades of research on poison pills and other takeover defenses does not support the belief - common among legal academics - that defenses reduce firm value. Even by their own terms, defense studies produced weak and inconsistent results, and failed to discriminate among information effects of defense adoptions. But prior studies suffer from serious, previously unrecognized design flaws: (1) pill studies assume pill adoption has an effect on takeover vulnerability and fail to recognize that nearly every firm already has a "shadow pill," making pill adoption relatively unimportant; and (2) all studies fail to account for ways defenses interact, such as the way that the shadow pill has made fair price and supermajority vote provisions unimportant. Not only do these flaws help explain the weak results of such studies, but the flaws are consistent with new evidence on bid outcomes, and recognizing them should improve future research on defenses.
John C. Coates & Guhan Subramanian, A Buy-Side Model of M&A Lockups: Theory and Evidence, 53 Stan. L. Rev. 307 (2000).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Article
Abstract
Lockups are an increasingly important element of M&A deals in the United States. We present, for the first time, descriptive data on lockup incidence, trends, and their relationship with Delaware case law. Prior commentators have used theoretical models to argue that lockups should have little or no impact on allocational efficiency in the market for corporate control. We use data from twelve years of M&A activity in the United States to show that prior models have little predictive power in real-world transactions. We then offer a new theoretical model of lockups that includes six "buy-side" distortions: agency costs, tax effects, informational effects, switching costs, reputational effects, and endowment effects for bidders. The implications of this new model suggest that courts and corporate boards should scrutinize lockups more closely than prior commentators have advocated.
John C. Coates, Empirical Evidence on Structural Takeover Defenses: Where Do We Stand?, 54 U. Miami L. Rev. 783 (2000).
Categories:
Disciplinary Perspectives & Law
,
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
,
Empirical Legal Studies
Type: Article
John C. Coates, "Fair Value" as an Avoidable Rule of Corporate Law: Minority Discounts in Conflict Transactions, 147 U. Pa. L. Rev. 1251 (1999).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Article
Abstract
At the center of every management buyout or freezeout is the question, how should minority shares be valued?, and in valuing minority shares, the principal valuation question is, should value be "discounted" to reflect the non-controlling status of minority shares? Minority discounts impact both ex post deal prices and ex ante share value. For example, in the 1996 Levi Strauss buyout, a minority discount of 35% would have reduced total fair value by $1.5 billion. Yet the law governing minority discounts is unpredictable and obscure. Although the Delaware Supreme Court has rejected discounts in theory, case law analysis reveals that lower courts have (erratically) applied them in practice. While the law on fair value is thought to be mandatory, it is not. Firms and investors may contract around law regarding discounts, as with nearly all rules of corporate law (a fact that has led Bernard Black to ask whether corporate law should be characterized as "trivial"). Firms can contract around the currently unpredictable discount law by adopting fair price charter provisions, entering into buy/sell agreements, or issuing redeemable stock. These two legal facts present an economic puzzle. Parties have an incentive to contract around nonmandatory (or "default") rules that create uncertainty. Yet issuing firms have generally not contracted for a clear discount rule. In fact, firms rarely contract around unclear default rules of corporate law. Economic theory provides three compatible answers: First, the cost of contracting for a ban on discounts -- including the cost of potential signalling effects -- may exceed the benefits of such a contract. Second, firms that attempt to contract around discount rules may encounter network and innovation externalities. Third, investors may overpay for minority shares by taking Delaware law at face value, an answer that is at odds with the efficient market hypothesis but supported by the lack of adequate disclosure and commentary regarding discount law. These constraints suggest that default rules of corporate law may be far from trivial. Minority discounts raise two difficult legal policy questions. First, what should the discount rule be? I argue that a rule excluding discounts is the better rule because it appears more likely to be the efficient rule and because non-efficiency rationales for accepting discounts are weak. This conclusion is contrary to a recent proposal by Benjamin Hermalin & Alan Schwartz, who argue for using minority share market prices in setting fair value, but who are too sanguine about the ability of existing laws to adequately constrain value-reducing transactions. This conclusion is supported by evidence of actual bargains and theoretical approaches that take account of the asymmetric information confronting firms and investors in the securities markets. Excluding discounts is also more likely to reduce transaction costs. Second, should the discount rule remain nonmandatory? I argue that, in the context of initial public offerings accompanied by adequate disclosure, the rule should remain nonmandatory. In my concluding remarks, I describe the practical difficulties of separating minority discounts from control premiums, and propose a procedural rule to assist courts in doing so.
John C. Coates, Reassessing Risk-Based Capital in the 1990s: Encouraging Consolidation and Productivity, in Bank Mergers and Acquisitions 207 (Yakov Amihud & Geoffrey Miller, eds., 1998).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Banking
,
Financial Markets & Institutions
,
Risk Regulation
,
Mergers & Acquisitions
Type: Book
Abstract
As the financial services industry becomes increasingly international, the more narrowly defined and historically protected national financial markets become less significant. Consequently, financial institutions must achieve a critical size in order to compete. Bank Mergers & Acquisitions analyses the major issues associated with the large wave of bank mergers and acquisitions in the 1990's. While the effects of these changes have been most pronounced in the commercial banking industry, they also have a profound impact on other financial institutions: insurance firms, investment banks, and institutional investors. Bank Mergers & Acquisitions is divided into three major sections: A general and theoretical background to the topic of bank mergers and acquisitions; the effect of bank mergers on efficiency and shareholders' wealth; and regulatory and legal issues associated with mergers of financial institutions. It brings together contributions from leading scholars and high-level practitioners in economics, finance and law.
John C. Coates, Freezeouts, Management Buyouts and Going Private, in Takeovers & Freezeouts (Martin Lipton & Erica H. Steinberger eds., 1998).
Categories:
Corporate Law & Securities
Sub-Categories:
Mergers & Acquisitions
Type: Book
John C. Coates, State Takeover Statutes and Corporate Theory: The Revival of an Old Debate, 64 N.Y.U. L. Rev. 806 (1989).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Law
,
Mergers & Acquisitions
Type: Article