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The Most Controversial Lawyer in United States M&A

Richard Hall

In 2005, I boldly awarded the title of “The Most Significant M&A Lawyer in the United States” to Delaware vicechancellor Leo Strine. On this occasion, I will pursue a more controversial title: “The Most
Controversial M&A Lawyer in the United States”, and I bestow it on Professor Lucian A Bebchuk, from the Harvard Law School.

Richard Hall, Cravath Swaine & Moore LLP 

From my fellow US M&A practitioners, I can already hear the groans and howls of outrage, but I ask that you note my careful use of the adjective “controversial”, rather than important or even influential. There can be no doubt that Professor Bebchuk, through a combination of aggressive writing, popular ideas, decent press relations and good luck, has attained a stature in the US among practising M&A lawyers, corporate counsel and commentators that is unmatched by any other academic.

In the United States, unlike many other jurisdictions, there is extensive contemporary academic discussion and commentary on matters of corporate and M&A law, particularly with respect to policy objectives and desirable developments in M&A law. This academic activity is driven in part by advocates of law and economics theories and also by the many former practising lawyers who have moved to academia. In the United States, leading M&A academics participate in key conferences and testify as witnesses in litigation, and law review articles are frequently cited in court decisions. In addition, empirical studies conducted by academics influence public perception as well as rulemaking by the United States Securities and Exchange Commission. Even within this activist group, however, Professor Bebchuk stands out.

The first notable aspect of Professor Bebchuk’s work over the last several years has been his remarkable willingness to jump into controversial topics in the most confrontational fashion possible. Early this decade, he was among a number of academics who sought to reopen, from the policy perspective, the question of the appropriate role of boards of directors in response to hostile takeovers. The longstanding debate in the US between leading M&A practitioners (who do not in general support the notion that boards of directors should remain passive in the face of hostile takeovers) and academics (many of whom advocated such passivity) had been dormant through most of the 1990s. Thanks to, among others, Professor Bebchuk, that issue appears to have returned. The academic research has reignited shareholder opposition to takeover defences such as poison pills and classified boards of directors.

Having stoked the fires of takeover defences, Professor Bebchuk then moved on to the question of executive compensation – or as he would put it “pay for performance”. The professor’s work in this area has attracted substantial attention from the press, activist investors and the SEC, contributing to substantially heightened scrutiny of executive compensation practices and enhanced disclosure requirements. Most recently, Professor Bebchuk has focused on issues relating to shareholder voting and the protection of the shareholder franchise, and he has become influential with corporate government commentators and the SEC with respect to the protection and expansion of the rights of shareholders to vote. In the current US environment, a popular perception that he supports the little guy has won the professor many supporters.

A second aspect of Professor Bebchuk’s work that has raised controversy is the extent to which his views are grounded in empirical evidence that could or could not be consistent with others’ perceptions and views as to the functioning of the United States’ M&A environment. He is opposed to takeover defences because he believes the evidence shows that management entrenchment devices are in fact inconsistent with maximising shareholder value. On this subject, Professor Bebchuk is sceptical of those who rely on their own experience, rather than data, to reach different views on the effects of takeover defensive mechanisms. Professor Bebchuk also believes – strongly – that the prevailing compensation philosophies of public companies in the United States are inconsistent with the best interests of shareholders because that is what the data show. Professor Bebchuk believes improved shareholder access to company proxy statements and enhanced shareholder control over the process for nomination of directors are important, because the data establish that under the current US legal regime shareholder influence is as a practical matter more limited than many believe. It seems clear that the professor genuinely wants to know whether the evidence actually supports his theories and is concerned about the correctness of his theories if the evidence is not supportive. Not surprisingly, many are critical of his empirical work, and these criticisms seem to fall broadly into two camps. One set of criticisms relates to methodology – alternative explanations, non-random samples, correlation v causation and the like. Professor Bebchuk seems willing to engage with these critics in a civil fashion. Other critics have simply rejected his overall approach and asserted the benefits of traditional legal models, in effect characterising him as a theoretical academic with no sense of how well as a practical matter the current legal rules function, or how badly his proposed reforms would function in the real world of M&A lawyering. It would be fair to say that Professor Bebchuk shows little sympathy for those of his critics who are unwilling to engage in discussion of hard evidence.

Although much of Professor Bebchuk’s recent work can be characterised as preferring shareholders over directors, it is not a fair criticism of the professor that he is ideologically inclined to favour the shareholders on a policy issue in the absence of evidence. For example, many shareholder activists in the US have focused extensively over the last several years on alleged objective indicators of good corporate governance, such as enhanced independence of directors. So far, Professor Bebchuk has been quiet on this issue. At least one explanation for his silence, notwithstanding his normal interest in controversial topics, is that in the United States the empirical evidence regarding whether these indicators of good corporate governance are positively correlated with better financial or operating performance is at best equivocal, which prevents Professor Bebchuk from taking a position (for the moment). In addition, he does, in his attitude towards takeover defences, differ from the academic supporters of the rule of passivity in the 1980s. The earlier academic analysis was heavily theoretical and concluded that directors should remain completely passive in the face of a hostile takeover offer. That is not Professor Bebchuk’s stance. His data does not support the conclusion that, for shareholders, complete passivity maximises value. Accordingly, he is not opposed to some measure of board resistance to hostile offers; he merely wants to see more control and more limits on duration.

Another issue that has contributed extensively to Professor Bebchuk’s notoriety is his willingness to leave the ivory tower of academia and engage actively with corporations and shareholders. Over the past several years, the professor has become well known for advocating specific amendments to the constitutions (primarily the by-laws) of United States public companies. Professor Bebchuk has demanded that companies put to their shareholders proposed by-law amendments with respect to mandatory shareholder approval of various employment arrangements, enhanced disclosure of compensation packages and majority election of directors.

Earlier this year, Professor Bebchuk found a way to combine a number of his pet interests – his opposition to takeover defences, his view that the ability of shareholders to vote on key matters involving public companies should be enhanced and his desire to propose amendments to the bylaws of public companies – in a manner that significantly raised his profile and, if ultimately successful, could have a significant effect on the United States M&A environment.

Professor Bebchuk proposed that a US public company (CA Inc) include in its by-laws a provision specifically prohibiting a poison pill of greater than one year in duration. This squarely raised the question of whether boards of directors should be entitled to restrain hostile takeover offers for longer than one year, and also raised the question, as between the board of directors and its shareholders, of what might be the appropriate allocation of management responsibility for the strategic direction of the corporation. To the surprise of many, the professor’s proposed by-law was not struck down by the Delaware courts, notwithstanding the strong views of a number of lawyers that such a bylaw improperly impinges on the statutory authorities of a board of directors. The Delaware court in fact declined to rule on the validity of the proposed by-law. In the particular instance of CA Inc, the proposed by-law failed to win support from a majority of the company’s shareholders.

Despite this indecisive outcome, the ‘Bebchuk pill bylaw’ now looms large as most United States public companies move into the 2007 shareholder meeting season. It seems highly likely that a United States public company will within the next six months face a successful vote by shareholders to implement a by-law amendment along the lines proposed by Professor Bebchuk, and it is very clear that such an amendment will, if upheld by the Delaware courts, dramatically change the face of M&A in the United States. Such a successful vote will most likely be due to the urging of activist shareholders or potential hostile bidders, but any credit for it would properly belong to Professor Bebchuk.

The M&A Bar in the United States has a long and distinguished tradition of deriding academic commentators as crackpots with little understanding of the real world. I suspect that even the legal or commercial validation of his pill by-law amendment will not protect Professor Bebchuk from that continuing criticism. If, however, his pill bylaw amendment survives judicial scrutiny, he will have a lasting impact on United States M&A that will last for a long time.

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