If it is true that “a good thing cannot last forever,” the recent turn of events concerning appraisal arbitrage in Delaware may be a proof point. A line of cases coming out of the Delaware Court of Chancery, namely In re Appraisal of Transkaryotic Therapies, Inc., No. CIV.A. 1554-CC (Del. Ch. May 2, 2007), In re Ancestry.Com, Inc., No. CV 8173-VCG (Del. Ch. Jan. 5, 2015), and Merion Capital LP v. BMC Software, Inc., No. CV 8900-VCG (Del. Ch. Jan. 5, 2015), have made one point clear: courts impose no affirmative evidence that each specific share of stock was not voted in favor of the merger—a “share-tracing” requirement. Despite this “green light” for hedge funds engaging in appraisal arbitrage, the latest case law and legislation identify some new limitations.

What Is Appraisal Arbitrage?

Under § 262 of the Delaware General Corporation Law (DGCL), a shareholder in a corporation (usually privately-held) that disagrees with a proposed plan of merger can seek appraisal from the Court of Chancery for the fair value of their shares after approval of the merger by a majority of shareholders. The appraisal-seeking shareholder, however, must not have voted in favor of the merger. Section 262, nevertheless, has been used mainly by hedge funds in a popular practice called appraisal arbitrage, the purchasing of shares in a corporation after announcement of a merger for the sole purpose of bringing an appraisal suit against the corporation. Investors do this in hopes that the court determines a fair value of the shares that is a higher price than the merger price for shares.

In Using the Absurdity Principle & Other Strategies Against Appraisal Arbitrage by Hedge Funds, I outline how this practice is problematic for merging corporations. Not only can appraisal demands lead to 200–300% premiums for investors, assets in leveraged buyouts already tied up in financing the merger create an even heavier strain on liquidating assets for cash to fund appraisal demands. Additionally, if such restraints are too burdensome due to an unusually high demand of appraisal by arbitrageurs seeking investment returns, the merger can be completely terminated under “appraisal conditions”—a contractual countermeasure giving potential buyers a way out of the merger if a threshold percentage of shares seeking appraisal rights is exceeded. The article also identifies some creative solutions that can be effected by the judiciary or parties to and affected by a merger in absence of judicial and legislative action, and it evaluates the consequences of unobstructed appraisal arbitrage.

The Issue Is the “Fungible Bulk” of Modern Trading Practices

In the leading case, Transkaryotic, counsel for a defending corporation argued that compliance with § 262 required shareholders seeking appraisal prove that each of its specific shares was not voted in favor of the merger. The court pushed back against this share-tracing requirement and held that a plain language interpretation of § 262 requires no showing that specific shares were not voted in favor of the merger, but only requires that the current holder did not vote the shares in favor of the merger. The court noted that even if it imposed such a requirement, neither party could meet it because of the way modern trading practices occur.

Continue Reading Guest Post: Tides May Be Slowly Turning in Delaware Appraisal Arbitrage

Whether we’re ready or not (we mostly are), classes start tomorrow for West Virginia University College of Law. Orientation for new students started last week, and I had the chance to teach a group of our new students. I had three sessions with the group where we discussed some cases, how to brief a case, and did some writing exercises.  It’s been a while since I worked with first-year students, and it was a lot of fun.  

In addition to the assigned work, I answered a lot of questions, in and out of the classroom.  Questions focused mostly on how to succeed as a law student. Although there’s plenty of advice on the internet, and whole books dedicated to subject, and even my own blog posts.  Last year, I provided my Ten Promises For New Law Students to Consider.   This year, I had enough similarly themed questions, that I thought I’d add some detail to my basic advice for new law students. 

1) Do the work. 

Some students ask — if I work law school like a job, is that a good idea?  As with everything, it depends.  I don’t know how you work.  If you work regular hours, every day, where you focus on the task before you, then it can work well.  If you’re someone who sits in front of a computer doing everything but your work until a deadline is looming, it’s not so likely to work for you. 

So, if you work it like a job where you are the boss, and you have no employees.  And the work absolutely has to get done, then yes.  There will be days when you can work a normal 8 to 5 with a lunch break and get your work done, and there will be times when 80 hours a week is insufficient. If you work until the job is done, you’ll be served well.  

1A) Doing the work does not mean looking at the cases.

Reading for class is not about checking the box. There may have been times when “looking” at all 40 pages that were assigned would do the trick. Maybe as an undergrad.  Of course, I was a mostly terrible undergrad, so I didn’t even do that often enough.  But law school is about figuring out what matters. That means you need to read the cases more than once.  I have seen twice as the rule of thumb, though I think three times is the right place to start.  It’s not just about recognizing that something happened.  It’s knowing what happened and what that means, in the context of the case and beyond.  And that requires time and careful reading. And, by the way, class is far more interesting when you know what’s being discussed. Seriously. 

2) Be a good classmate and be the best possible you.

You can be competitive without being a jerk.  Your competition is really with yourself.  UCLA basketball coach John Wooden always reminded his players to be the best they could be — not to try to be better than someone else.  If you always use someone else as the bench mark, you may be holding yourself back, even if you do better than them.  Try to remember that. There will be people who are better than you, at some point, at everything.  Be the best you that you can be.  Good things will follow.  And if it doesn’t go as well as you hoped, if you did the work the best you could, you will still be okay.  (See 1 and 1A above.) 

3) Most people aren’t cheating, but if they are, turn them in.

Every once in a while, I hear some students who are convinced that there is rampant cheating. “Some people worked together on their memo.” Maybe, but usually not.  “Someone’s (uncle/sister/cousin) who is a (prosecutor/M&A lawyer/judge), wrote their memo!”  Probably not.   Most lawyers understand the ethical problems with that. And who wants to write another law school memo after you passed the bar exam?  It would take a pretty odd combination of work ethic and lack of basic morals to make that a common occurrence.   

But even worse — give us some evidence if you do know something.  Or some names, and we will investigate.  I hate cheating, and I want it stopped.  I went to law school with my wife, and we didn’t even leave out any of our legal writing materials in our home.  The rules matter.  And you need to practice following them from day one.  That said, I don’t think most of my students are or were cheaters, and they have rarely given me any reason to doubt their integrity.  

More than once over the years, I have also heard students say, “well, I don’t want to hurt anyone’s career.”  First, what?  If you know someone is not following the rules, they need to be turned in. Lawyers have such an obligation, though I think it is one that is not often enough fulfilled.  I have heard of attorneys who had opposing counsel forge their signature, and the attorney still did not turn them in.  If we allow it, it continues.  

In addition, I have also heard students say, “I can’t prove it, but I KNOW they are cheating.”  If you can’t point to facts that show it it, you probably don’t KNOW, anything.  Your strongly suspect. And might be wrong. Don’t forget, lots of people posture when they are stressed or fearful.  Focus on your work, and good things are likely to follow. 

4) Everything is harder.

I wonder if poor grades are sometimes the reason some students decided others are cheating.  I suspect it is sometimes.  The numbers suggest that most of our students are used to getting good grades, so a B can seem like something went wrong.  But law school is the next step up.  I often use a sports analogy — law school is like an athlete going from college to the pros (or the olympics).  The competition is better because everyone at the next level has a better skill set.  If there is a curve (and there usually is, official or unofficial, in the first year), then students are being compared to one another.  It’s not just how well did you do — it’s how well did you do relative to others.  That may seem unfair, but those are (usually) the rules.  Be prepared to work hard, and know others will be, too.  There is room for everyone to succeed, but not everyone can be at the top.  

5) You are not your grades.

Don’t let a grade define you.  Your paper may be a C+.  But you are not.  Your A* (which was how the highest grade in the course was noted when I was in law school), doesn’t make you an A*, either.  Your work can be a reflection of you, but it is not you. Sometimes things don’t go well. Sometimes you might not have worked hard enough.  Sometimes you’re sick.  And, yes, sometimes the professor’s view of the world is flawed.  Other times, a student might have studies three things all semester. And it’s the three things tested on the exam.  You can only control your work and your effort.  You must react and respond to the rest.  

So, I know I am biased.  I loved law school. It’s why I do what I do.  Not everyone will feel that way.  But give yourself a chance. Prepare. Engage. Ask questions. Be wrong.  And learn.  

Have a great year!  Oh, and by the way, take Business Organizations before your graduate.  It’s pretty much essential.  

As many of you know, I often like to post on issues relating to advising students (witness my cover letter posts, the most recent of which can be found here).  I also like to post from time to time on issues relating to fashion and the law (e.g., this post).  And sometimes, I fuse the two in a single post.  This post is one of those fusion posts.

Many of us intuitively understand that clothing affects not only the perceptions others have of us but also the perceptions we have of ourselves.  Some of us may even have done research to unearth evidence that these intuitions have some empirical traction.  But can what you wear affect your performance?  Research provides some evidence that it can.

Researchers at Northwestern University have identified a “systematic influence that clothes have on the wearer’s psychological processes” that they term “unclothed cognition.”  Their research, published in the Journal of Experimental Social Psychology in 2012, found that the attentiveness of the subjects was higher when wearing a lab coat than it was when they were not wearing a lab coat or were wearing a lab coat described as a painter’s coat. The research was fairly widely reported at the time.  Although the study explored the effects of wearing a lab coat, one can see how the results may also hold for people wearing other performance-linked clothing, like athletic wear or other professional clothing, including business suits.  (A subsequent study on the cognitive effects of business suits can be found here.  More general commentary is available here and elsewhere.)

Admittedly, the results of these studies and others like them are qualified and the research in this field is at an early stage.  Having said that, as our students start interviewing for jobs and engaging in clinical practice and other experiential learning in the new semester, the possible effect of clothing on performance may be a relevant footnote for them.  I admit that I am not a fan of dress codes, as a general rule.  However, I may mention these studies to my students so that they can use the information in their decision-making, if they so choose.

One of the more interesting aspects of state corporate law – and Delaware law in particular – is the blurring of the line between substantive regulation and procedural regulation.  Delaware gives corporate directors a great deal of leeway ex ante to structure transactions as they see fit, but if they structure them in a way that arouses suspicions – like, for example, failing to create an independent committee to negotiate a deal with a controlling shareholder – Delaware increases judicial scrutiny of the transaction, which, in practical terms, means that when the inevitable class action is filed, the defendants cannot win a quick dismissal on the pleadings.  The “carrot” that Delaware offers directors to adopt best practices is the possibility of a quick, cheap dismissal of claims.  Delaware regulates, in part, via threats of civil procedure.

This particular mode of regulation was on full display in In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016).  There, Chancellor Bouchard held that Delaware would only approve disclosure-only settlements in deal class actions where the new disclosures were “plainly material.”  Note, this is not the substantive standard for disclosures – it is not the standard necessary to win at trial.  It is not the standard that an individual plaintiff would have to meet.  It is only the standard for the settlement of a merger class action.

Which immediately begged the question: What happens if another state is entertaining a merger case involving a Delaware company?  Does the Trulia standard count as a substantive rule of law, subject to the internal affairs doctrine, or a procedural one, that varies based on the forum?

It’s a critical issue, obviously, because if Trulia does not apply outside of Delaware, it will be very easy for plaintiffs and defendants to reach collusive settlements in foreign fora.

Well, we now have some answers, though they point in different directions:  In Vergiev v. Cooper, a New Jersey state court held that Trulia is a substantive rule of law, and thus it applies even for cases brought outside of Delaware.  (Opinion here; Alison Frankel blogs here).  And just a few days ago, the Seventh Circuit applied Trulia in a case involving an Illinois corporation – implicitly suggesting that Trulia is a procedural (but persuasive) rule.   Either way, it appears Trulia is on its way to general acceptance in the context of merger litigation.

That said, this only partly takes care of part of the problem of destructive competition among plaintiffs’ firms; as I’ve blogged before, there is still no real cure for the problem of plaintiffs who compete by racing to a settlement.  Forum selection bylaws are not necessarily a panacea, because defendants can waive them – which may allow them to strategically pick off stronger plaintiffs and settle with weaker ones.  The next step, therefore, is coming up with something like an MDL process for corporate litigation (a suggestion that others have made, see, e.g., Minor Myers, Fixing Multi-Forum Shareholder Litigation, 2014 U. Ill. L. Rev. 469; Elizabeth Cosenza, The Persistent Problem of Multi-Forum Shareholder Litigation: A Proposed Statutory Response to Reshuffle the Deck, 10 Va. L. & Bus. Rev. 413 (2016)).

In the spring of 2012, around the time that Facebook purchased Instagram for roughly $1 billion, I was teaching an M&A class.

At the time, I had difficulty explaining why Facebook would pay that amount of money for a company that was not only not profitable, but also had no revenue. I spoke as someone trained to use multiples EBITDA and as someone who did not (and still does not) have an Instagram account.

Now, over four years later, Forbes estimates Instagram’s value at $25billion to $50billion. That valuation still requires some creativity, as Instagram had sales of “only” $630 million in 2015. Instagram, however, has added roughly 100 million new users in the last 9 months and is projected to have revenue of $1.5billion this year. While there is reason to be wary of projections, the projected sales for Instagram in 2018 is an impressive $5billion.

This drives home that valuation is as much art as science, and the conventional valuation methods will not work well for every company. In that deal, I imagine Instagram’s technology, brand, and the user base were all large value drivers. With the benefit of hindsight, Instagram is looking like a good acquisition for Facebook, even if the current projections end up being a bit optimistic. 

From an e-mail I received:

———

The University of Richmond School of Law seeks to fill two entry-level tenure-track positions for the 2017-2018 academic year, including one in corporate/transactional law.  Candidates should have outstanding academic credentials and show superb promise for top-notch scholarship and teaching.  The University of Richmond, an equal opportunity employer, is committed to developing a diverse workforce and student body and to supporting an inclusive campus community.  Applications from candidates who will contribute to these goals are strongly encouraged. 

Inquiries and requests for additional information may be directed to Professor Jessica Erickson, Chair of Faculty Appointments, at lawfacultyapp@richmond.edu. 

Today marked the end of the 2016 conference of the Southeastern Association of Law Schools (SEALS).  My discussion session on small business finance capped off the Workshop on Business Law, a series of business law programs at the conference, and closed out the conference itself just after Noon.  It was great to share programs, at various points in the conference, with co-bloggers Josh Fershee, Ann Lipton, Haskell Murray, and Marcia Narine.

Here is a list of the three business law programs in the Workshop on Business Law from this year’s conference:

  • Discussion Group: Sustainability & Sustainable Business
  • Discussion Group: Perspectives on the Future of White-Collar Crime
  • Discussion Group: The Legal Aspects of Small Business Finance in the Crowdfunding Era

Other business law programs included several of the new scholar paper panels, the annual “Supreme Court Update” on “Business, Administrative, Securities, Tax, and Employment Issues,” a discussion group focusing on “Big Data: Big Opportunities in Business and Government, and Big Challenges in Law and Ethics,” and a discussion group in the SEALS “Works-in-Progress Series” that featured papers by veteran scholars on topics ranging from international food labeling regulation, to self-interest in financial regulation, to developing a better understanding of informational intermediaries in financial transactions, to the domestic and international regulation of non-financial disclosures.

I admit to jubilant exhaustion.  As an organizer of SEALS programming, the week is always a bit of a marathon for me.  But the effort is worth it.  When I first came to the SEALS conference back in 2002, there was no organized business law programming.  I am glad that a number of us working together ensure each year that the conference features robust, timely programming for business law teachers and scholars.

And that reminds me to mention two more things.  

First, SEALS also is a great place to pick up new teaching and curricular ideas.  This year’s conference was no exception.  I participated in a discussion session on “Strategies for Designing and Integrating Transactional Simulation Capstone Courses into the Curriculum” that covered a variety of different approaches to synthesis courses in the curriculum.  I also moderated an engaging session on “Law School Specialization and Certification Programs.”

Second, if you have ideas for programs for the 2017 conference, please let me know.  Better yet, submit the program yourself through the SEALS website submission platform.  Make sure if it is a business law session that you designate it for inclusion in the Workshop on Business Law.

I head back to Knoxville tomorrow morning to prepare for the new semester, which begins next week.  No doubt some of you already are in the classroom and others will not be there for a week or more yet.  Regardless, I wish you all well.  I am happy to be recharged with new ideas from the SEALS conference–ideas that are a great stimulus to a productive semester and year.  I hope you also find something to motivate and inspire you.

I am not the first to notice that law professors, and academics generally, have their own jargon and favorite buzzwords.  Some websites do a nice job of highlighting (or mocking) many of the odds turns of phrase many of us use.  Lawyers in the practicing bar do this, too, of course, and other professionals, especially business people (see, e.g., Dilbert) and public relations professionals.

I try not to be too jargon-y, but I have caught myself more than a few times.  I am big on “incentivize,” for example.   After attending a great SEALS Conference (likely more on that to come), I came away with a bunch of new ideas, a few new friends, and some hope for future collaboration.  I also came away noticing that, sometimes, as a group, “we talk funny.”  On that front, two words keep coming to my mind: “unpack” and “normative.”

So, when did we all “need” to start “unpacking” arguments?

This seemed like a relatively recent phenomenon to me, so I checked.  A Westlaw search of “adv: unpack! /3 argument” reveals 140 uses in Secondary Sources.  The first such reference appears in a 1982 law review article: Michael Moore, Moral Reality, 1982 Wis. L. Rev. 1061 (1982).  The phrase doesn’t appear again until 1988, in this article: Jeffrey N. Gordon, Ties That Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 Cal. L. Rev. 1 (1988). Of the 140 citations, 113 (or 80%) of those have appeared since January 1, 2000 (69, or nearly 50%, have appeared since 2010). Relatively modest numbers, frankly, compared to how often I think I heard it said, but maybe we’re just getting ramped up.  

And when did things become “normative?”

It also seemed to me that it’s relatively recent that the things we expect to happen (or people to do) became “normative” in legal academic circles. Before that, I think we called things the standard or the norm, but it was far less common that legal academics discussed “normative” behavior in the way we do now.   

A Westlaw search bears this out, too. A search of all secondary sources on Westlaw before January 1, 2000, revealed that the term had been used in 2,668 pieces. Since that date, normative has shown up in 7,270.  The term has obviously been around for a long time, and has value in many contexts, but saying “normative” is the new normal.  

To be clear, I don’t think the use of all jargon is bad, and I appreciate that as law professors do more interdisciplinary work, we will expand our jargon into other fields.  Sometimes specific words help us communicate more precisely in a way that increases usefulness and understanding.  I like terms of art and specificity.  (See, e.g., any of my rants about LLCs.) I’m just observing what seems like a shift in how we talk.  That’s not necessarily a bad thing. Maybe it’s just a thing. 

I welcome any comments on these terms, or even better, a list of other words or phrases I missed.  I know there’s a lot more out there.  

Do you value diversity? At California Western School of Law, we pride ourselves on the diversity of our student body.  This year, around 50% of our incoming students are from diverse cultural and ethnic backgrounds.  We are committed to having a faculty that reflects our student body and our community. 

Do you want to influence legal education at an established but innovative law school?  California Western recently celebrated its 90th anniversary – but we have never been stale or ordinary.  We were on the forefront of innovative, experiential education three decades ago.  As a result, our graduates have a reputation for being uniquely practice-ready.  California Western continues to rethink the status quo in legal education – balancing a rigorous practical education with cutting edge scholarship and community service. 

Who are you?  We are seeking candidates with an entrepreneurial spirit who are eager to put their own stamp on a law school with an expanding faculty and many growth opportunities.

What do you want to teach?  We can prioritize your teaching preferences regardless of subject matter. 

Where do you want to live?  California Western is in downtown San Diego, California, literally overlooking the Pacific Ocean.  A city of breathtaking beauty, we have perfect weather, miles of beaches, and nearby mountains.  We are a family-friendly, diverse city with small city traffic and walkable neighborhoods. 

If you are excited about teaching a diverse student body, shaping the next iteration of an innovative and successful law school, and living in “America’s Finest City,” we want to hear from you.

Candidates should email their materials by September 30, 2016 to Professor Ken Klein at kklein@cwsl.edu.  Candidates are encouraged to submit a statement to our Appointments Committee addressing how they can contribute to the goal of creating a diverse faculty.