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The Business Lawyer
THE BUSINESS LAWYER - MAY 2007, VOLUME 62, NUMBER 3 ARTICLES Freezeout Doctrine: Going Private at the Intersection of the Market and the Law Faith Stevelman, 62(3): 775–912 (May 2007) Delaware's fiduciary doctrine governing going private transactions by controlling shareholders is presently in disarray. Controllers generally select between single step cash-out mergers and tender offers followed by short-form mergers to do these freezeouts, and they are subject to very different equitable standards depending on the format selected by the controller. Furthermore, the courts' longstanding commitment to applying strict scrutiny in the adjudication of freezeouts is in tension with the popular disfavor towards private class-action litigation. This disarray threatens minorities' interests in freezeouts and capital market values more generally. This Article reviews the foundations of freezeout doctrine and proposes that the Entire Fairness doctrine should apply as the standard of review in all freezeouts unless prior to accepting the controller's offer the target company's independent directors conducted an auction or market check to ascertain if better offers were available. The Origin, Application, Validity, and Potential Misuse of Rule 10b5-1 Allan Horwich, 62(3): 913–954 (May 2007) The SEC adopted Rule 10b5-1 to define what it means to trade securities "on the basis of" material nonpublic information. This was to address decisions and commentary that found no insider trading violation of Rule 10b-5 where the defendant did not "use" inside information in deciding to trade, even if one "possessed" the information when the decision was made. Rule 10b5-1 specifies exclusive affirmative defenses for one charged with trading on the basis of material nonpublic information, the essence of which are that there is no violation if the trade was made pursuant to a pre-arranged plan, even if the seller or buyer later became aware of the information before the trade was made. There is, however, a substantial argument that the SEC exceeded its powers in adopting exclusive criteria for what it means to trade "on the basis of" material nonpublic information, rather than creating a safe harbor. Non-use of inside information in deciding to trade remains a defense even if the trade was not made pursuant to a Rule 10b5-1 plan. Although the SEC abandoned a proposal to require detailed disclosure of some Rule 10b5-1 plans, other SEC rules require disclosure of a plan in some circumstances, although compliance may be deficient. Irrespective of mandated disclosure, there are reasons both for and against voluntary disclosure of a Rule 10b5-1 plan. Some have suggested that Rule 10b5-1 is being misused in that executives establish such plans, know when a trade will occur under the plan and then, in order to maximize their profits when the trade is made, delay or accelerate disclosure of corporate news that would affect the stock price. In most situations, any such timing of corporate disclosure would not violate the securities laws. Meeting Daubert Standards in Calculating Damages for Shareholder Class Action Litigation Linda Allen, 62(3): 955–970 (May 2007) Current practice in class action litigation entails a series of arbitrary assumptions about fundamental parameters that may not meet Daubert standards of scientific evidence. This Article surveys the commonly used models used to estimate stock price inflation and the number of damaged shares for the purposes of damage calculations in shareholder class action litigation. This Article proposes tractable methods for improving current practice using: (1) a regression approach to event studies and (2) a new model (denoted the Theoretically-grounded Microstructure Trading Model or TMTM) that incorporates the well-established literature of market microstructure and trade direction into a model that can be estimated utilizing publicly available data. Actual trading data are used to validate the assumptions of the TMTM approach and to refute the assumptions of extant trading models such as the Proportional Trading Model (PTM) and the Two Trader Model (TTM). Tontine or Takeback: Reversion Provisions in Class Action Settlement Agreements Ralph C. Ferrara and Riva Khoshaba Parker, 62(3): 971–982 (May 2007) Class action litigation rages on in securities, antitrust, mass torts and products liability sectors; these actions are more often settled than litigated to verdict. As the classes and claims grow larger, the damages claimed greater, and the potential for entanglements with regulatory and criminal investigations increases, settlement agreements grow increasingly complex as litigants attempt fairly to put to rest claims and allegations from multiple sectors. Inevitably, at the end of the day in most settlements, there is still some money left over in the settlement fund after all the claiming class members have been paid. The dilemma arises as to what to do with this residual amount: one possible, underutilized option is to permit the reversion of any residual funds to the defendants. Solvency Tests J.B. Heaton, 62(3): 983–1006 (May 2007) This Article explains the basic economic function of solvency tests and the relations among the three solvency tests applied in bankruptcy and corporate law. It also explains why solvency diagnoses can differ, depending on the test that is applied. Although one of these tests—the ability-to-pay test—is probably best, it may suffer from significant measurement error in practice. Multiple solvency tests ultimately make sense because the costs of failing to detect insolvency when it exists exceed the costs of detecting insolvency when it does not exist. Pandora's Ballot Box, Or a Proxy with Moxie? The Majority Voting Amendments to Delaware Corporate Law (The Legend of Martin Lipton, Re-Examined) J.W. Verret, 62(3): 1007–1058 (May 2007) In August 2006 the Delaware General Assembly adopted an amendment to the Delaware General Corporation Law which provides that where shareholders have adopted a majority voting bylaw for corporate elections over the traditional plurality scheme, a corporation may not subsequently amend its bylaws to return to plurality voting without shareholder approval. This Article compares this provision to other approaches and explains the reasons underlying its adoption. It also briefly summarizes the evolving shareholder empowerment debate and analyzes the majority voting provision in the context of that discussion. The presence of activist shareholders will be an especially important phenomenon affecting this analysis. This Article then describes some unique and unanticipated interactions between majority voting bylaws and various other working parts of corporation and securities laws affecting the shareholder franchise. The most prevalent corporate strategies responding to this movement are explored and the difficulties of implementing majority voting are described. Finally, voting schemes from the political sphere are analyzed to find analogous lessons for the corporate arena, including exploring a runoff election proposal for corporate elections. The Article concludes with some predictions about future developments which will hinge on the outcome of SEC rules proposals, further DGCL revisions, New York Stock Exchange regulatory initiatives, and the responses from Delaware incorporated entities. This Article blends financial regulatory theory, interpretation of Delaware Court of Chancery cases, and practical analysis on the future of the majority voting movement and the strategic choices facing board of directors. The result is a developed framework for how majority voting could serve to alter significantly the balance of power between shareholders and board members. Summary of Mendes Hershman Student Writing Contest Prize Essay: Difficult, Duplicative and Wasteful?: The NASD's Prohibition of Class Action Arbitration in the Post-Bazzle Era Matthew Eisler, 62(3): 1059–1060 (May 2007) REPORT Changes in the Model Business Corporation Act— Amendments Relating to Chapters 8 and 13 Committee on Corporate Laws, ABA Section of Business Law, 62(3): 1061–1064 (May 2007)
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