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This just in: Microsoft withdrew its most recent bid for Yahoo and announced it will not be making a hostile move for Yahoo. This comes on the heels of the announcement a mere day ago that Yahoo and Microsoft were sitting down to try to hammer out a friendly deal.  Fickle, that Microsoft is!

Allow me to answer questions folks might ask in the aftermath:

1.  Question:  What does this retreat by Microsoft say about the economy and the M&A market?

Answer:  Nothing.  Nada.  Microsoft wanted to buy Yahoo for cheap.  Yahoo wanted no part of that.  Over the past 20 months, while Yahoo’s stock has been weak, it has traded on-and-off in the $30-ish range.  Microsoft’s final $33 per share bid was nothing to write home about.  If Microsoft was making a credible bid and they thought Yahoo was a good long-term strategic acquisition, we would have seen bid prices moving up further than they have over the past three months.

2.  Question:  What is going to happen on Monday to Yahoo’s stock price?

Answer:  Yahoo’s stock price is going to get pummeled by arbs exiting their short-term investment.  The drop in Yahoo’s stock price will mean nothing of substance.  I promise.  So, while the media is going to get all excited on Monday about the drop in price, and the 5 p.m. news on Monday is going to talk about Yahoo being the day’s biggest loser, ignore the chatter.  Or buy Yahoo stock while it is cheap.

3.  Question:  Is the Yahoo board going to get sued?  Wasn’t this a good deal for Yahoo and the Yahoo board just gave it away?

Answer:  No and no.  Well, “yes” and no.  Yahoo’s board has already gotten sued both by shareholders who thought the Yahoo board should have taken the Microsoft offer and, oddly, from shareholders who thought Yahoo was favoring Microsoft.  Either way, I think those suits are non-starters.  Again, Microsoft was not offering a huge premium for Yahoo.  If I were on the Yahoo board, I would have said “no,” too.

4.  Question:  Is Microsoft just bluffing?  Will they come back with a better bid?

Answer:  I hope not.  I am not convinced that Microsoft yet has a really solid reason for why they need to buy Yahoo, other than thinking they could get Yahoo for cheap.  Now that Microsoft realizes it cannot buy Yahoo for cheap, I doubt they will be circling back around in the short term.  The fact that Microsoft announced tonight that it did not intend to make a hostile bid speaks further to the dim chances they will circle back around in the short term.

To that end, Microsoft should thank the Yahoo board that the Yahoo board stopped Microsoft from making a purchase that does not make a whole lot of sense.  Am I the only person who remembers the AOL-Time-Warner deal from just under a decade ago that is NOW being unwound?  That deal NEVER made sense, and, LOOK, ten years later, it is being unwound.

Note to Microsoft CEO Steve Ballmer:  Send Yahoo CEO Jerry Yang a nice fruit basket on Monday, to thank him from saving Microsoft from its urge to merge.

The DC Madam killed herself today, about a week after being found guilty by a jury on prostitution-related charges of money-laundering (among other things).

Among her alleged clients are Louisiana Senator David Vitter, former U.S. Deputy Secretary of State Randall Tobias, and Harlan K. Ullman, a senior associate with the Center for Strategic and International Studies, who developed the “shock and awe” doctrine.

I titled this post with a “Dammit,” something I am not inclined to do normally in this academic setting, because I am just disgusted and disheartened at how this has played out.  Anyone who has paid attention to how women versus men have been treated in the context of prostitution could have seen this train coming down the tracks. Women who are exposed as having been involved in prostitution scandals often kill themselves.  Men tend to waltz away, unscathed in the long term.  I realize these are gross generalizations for which I have no empirical substantiation, but I am thinking about Brandy Somethingorother, from about a year ago.  Without going back and looking the story up, I think Brandy was a professor (or used to be) who was also a prostitute.  When she was publicly revealed as a prostitute, and when it seemed that she was going to be in huge legal trouble, she killed herself.  I do not recall that any of her male clients, nor any of the DC Madam’s male clients, killed themselves.  Just the DC Madam and this Brandy Somethingorother killed themselves.  Why is it that the women are scorned and shamed and kill themselves but the same thing does not happen on the male side?

I am one of three daughters, raised in an all-girl household (save my long-suffering father).  All three of us Nowicki girls have graduate degrees.  We were raised completely unaware of the notion that being a girl ever mattered in the bigger-picture sense.  (It mattered in terms of whether I needed to lift the toilet seat and whether I was likely to grow to a size to be able to compete on the football field with any chance of success, but it did not matter – or so I thought – in terms of justice and fairness in life.)  We were raised with the belief that everyone – women, men – are judged equally on the basis of their achievements and missteps, and gender is irrelevant.

But, yet, the DC Madam was left dangling by her neck in some shed in Florida, while Vitter, Tobias, and Ullman are out there, happily employed, likely soon to put their affiliation with the blissfully deceased (likely their view) DC Madam far, far behind them.  *That* is what prompts me to title this post “Dammit.”  We all could have seen this coming.  *That* is why this post is titled “Dammit.”

It strikes me as ironic that I just learned today that corporate and securities law professor Jill Fisch was hired by UPenn, such that there is now one fewer top top law school with basically no women among the corporate/securities law faculty.  Score one for the women.  Congratulations Professor Fisch.  Tough to juxtapose that, however, with “RIP Deborah Jean Palfrey.”  I guess today is a wash in terms of equality for women.  Dammit.

My condolences to Ms. Palfrey’s mother.  Regardless of the legality or illegality of Palfrey’s actions, it should not have ended this way.

The Financial Times reported yesterday that an embarrassed GE CEO Jeffrey Immelt had to tell GE shareholders that the 10% growth in earnings for 2008 that he had promised analysts in March was not going to be possible.  GE missed its quarterly forecasts and halved its 2008 forecast to 5% growth in earnings (as opposed to the 10% growth promised).  The Financial Times article mentioned a “sense of shock among the investor community” and noted that one analyst, after Immelt’s downward revision, “compared GE’s promise of long-term improvements to the Chicago Cubs, the US baseball club that hasn’t won a championship in 100 years.”

Upon reading this FT article this morning, I thought “oh, dear God.  Do we remember none of the lessons learned just a few years ago about the perils of over-promising results to analysts?”  Why, exactly, does Immelt feel the need to promise a 5% increase in earnings for 2008 when (a) we are in a credit crunch, (b) GE is likely going to have to do more write-downs this year, (c) the cost of inputs is increasing, if not skyrocketing, (d) inflation is high, and (e) the economy is weak (among other things)?  Why is Immelt promising *growth* in earnings when the reality is that just achieving positive earnings for 2008 is likely to be good thing?  Why is Immelt putting pressure on himself and his officers to produce growth?

Memo to Immelt:  Earnings do not have to grow each year.  In some markets, in some economies, in some industries, in some “downturns,” simply having earnings – any positive earnings – is a good thing.  Matter of fact, sometimes earnings should NOT be growing each year.   Were I a GE investor, I would not want Immelt promising 5% growth for 2008 because I would figure that the only way he can promise to hit that number in such an uncertain market and gloomy economy is by commiting to fudge year-end 2008 numbers if needed.  And, as we learned several years ago, fudging year-end numbers tends to catch up with companies, and, when it does catch up, the valuation fall-out is worse than if the forthright disclosure (e.g. “2008 earnings might be flat”) had been made initially. Am I the only one who remembers back to the not-so-distant past, when unrealistic promises made to analysts by corporate officers led to companies cooking their books at year end to make the numbers?  As I recall, things did not always work out so well in those cases.  Enron, anyone?

Surely it is enough for a company in some years to produce returns that are merely equal to the prior year’s, as opposed to “besting” the prior year’s earnings. Didn’t we learn this lesson several years ago?  Investors are supposed to invest for the long term and diversify.According to the FT, one of the reasons why GE missed its quarterly numbers recently is because GE was unable to close “$900m-worth of real estate asset sales,” which the FT referred to as “a traditional way for GE to boost quarterly returns.”  If I were a GE investor, I would be peeved to read this.  I would rather GE just do the real estate deals when they make the most sense, when the market is most favorable for the deals at issue, regardless of when the gain/loss woulbe be booked.  If that means GE misses its numbers sometiemes due to the lack of a crystal ball regarding the best time to sell the assets, and I take a short-term valuation hit (on paper) as a GE investor, so be it.   It doesn’t create long-term value for shareholders if GE rushes through real-estate transactions just to make the numbers if the timing is not sensible for the transactions and waiting a little bit of time would garner value for shareholders.(The FT reports that “GE slashed its 2008 earnings forecast from $2.42 per share to $2.20-$2.30 – still an increase of as much as 5 per cent from last year.”  Slashed?  Slashed?  Are you KIDDING me?  “Slashed” implies something negative.  Earnings of $2.20-$2.30 per share for a year that is not likely to shape up particularly well  would be good.)

I am blogging today from the Tulane Corporate Law Institute, here in New Orleans, at the stunning Westin Hotel. I am set to appear on the Private Equity panel tomorrow, where I will talk about, among other things, the implications of 2007’s string of failed private equity deals.  In preparation for this conference, I drafted a memo on the top few lessons to learn from the 2007 private equity deals. Among the lessons learned, I observed, was that “merger agreements mean what they mean.” What I was referring to was the string of deals that got into trouble in 2007 because the buyers tried to evade the deals, arguing that there was a material adverse change in the condition of the target, and the sellers tried to press for specific performance, in the shadow of a merger agreement that was clear on neither the definition of material adverse change nor when specific performance was justified.

Deal lawyers have long kept the not-so-secret secret that we really don’t know what most material adverse change provisions mean, in the abstract. If pressed, we might admit that, indeed, they are often painfully ambiguous. We cannot necessarily opine, again in the abstract, whether they would cover a given set of facts. And we are ok with that because we like the idea that, in court, we can argue whatever way will help our case (that there was or was not a material adverse change).

Setting aside the “we,” and speaking no longer as a deal lawyer but as a corporate governance aficionado, I have to say that I have long thought that target boards of directors should not be ok with signing off on material agreements – merger or otherwise – that are not clear (at least on material points). Or boards should not be content to sign off until they understand why the ambiguity is acceptable. The reality is that I suspect that little has changed since Smith v. Van Gorkom, where the Trans Union board never even *saw* the merger agreement, much less read it and debated “material adverse change” provisions. And that troubles me.

Today’s panels here at the Deals Conference confirmed my concerns. Three people made interesting comments: First, a high-profile investment banker made clear that the bankers just don’t *know* what events fall within “material adverse change,” such that the deal could fall apart. Meaning, the investment bankers don’t really know how the merger agreement language reads, as a legal matter. (This is not surprising in light of the URI case opinion making clear that UBS (bankers for URI) had no idea they were basically selling an option on URI (as opposed to signing a deal to buy URI).) My view is that, since bankers are the ones STRUCTURING financial aspects of the deal and opining on the totality of the deal, including pricing of the risk that the deal will not consummate, they need to be very clear on what can implode the deal and how the risks of non-consummation due to “material adverse change” play out. Second, a high-profile deal lawyer on the same panel both (a) basically confirmed that we are still in a deal world where the “material adverse change’ language is admittedly looser than it could be and (b) confirmed that deals would still get signed even if the target board insisted on tighter materiality language. Third, Vice Chancellor Strine opined that …. “[i]f I were going to obsess about something, it would be Keira Knightley.” I seem to have been distracted by that comment, because, though Strine later *did* say something about “material adverse change,” I failed to write it down. I do believe Strine said something to the effect that boards should understand, prior to signing, what a material adverse change that would get the buyer out of the deal would include.

So where do we end up? We end up right where we have always been. It is not ideal to have merger agreements with ambiguous “material adverse change” language. But everyone – drafting lawyers, investment bankers, boards- seems to let it slip by. It is only a matter of time before a target board gets successfully sued in a fiduciary duty lawsuit for failing to act “in good faith” by signing a *sale* document without reading it and realizing it is ambiguous on an important topic. Then it is only a matter of time before the board spins around and sues both (a) their lawyers and (b) their bankers for failing to explain the deal-impacting aspects of the deal terms struck (such as “material adverse change,” specific performance conditions, and reverse termination fee outs). Mark my words. You heard it here first.

Today, Treasury Secretary Henry Paulson is set to present some comments about the Treasury’s Blueprint for Financial Regulatory Reform, released on Saturday.  (A summary of the proposal is here.)

The summary of the proposal report provides:  “In this report, Treasury presents a series of “short-term” and “intermediate-term” recommendations that could immediately improve and reform the U.S. regulatory structure. The short-term recommendations focus on taking action now to improve regulatory coordination and oversight in the wake of recent events in the credit and mortgage markets. The intermediate recommendations focus on eliminating some of the duplication of the U.S. regulatory system, but more importantly try to modernize the regulatory structure applicable to certain sectors in the financial services industry (banking, insurance, securities, and futures) within the current framework.”

I have a few comments on the proposals:

1.  The report contemplates consolidation of market regulators for the securities markets and the commodities markets.  This is a difficult issue.  Intuitively, I like the notion of consolidating regulation, as the regulatory authority dealing with commodities (the CFTC) and regulators of the general securities markets (SEC) both regulate the markets for securities.  That said, commodities regulation is (a) incrementally more sophisticated than the regulation of the generic securities markets due to the increased complexity in products, their evolution, and their likely economic/market impact and (b) different in sort than the regulation of plain vanilla securities.  Moreover, my impression – based on my experience working at the SEC and my experience as a corporate/securities/business scholar – is that the CFTC does a bit of a better job than the SEC in avoiding political pressure.  (Think about it – while we can easily recall a series of SEC Chairmen resigning under pressure, can we easily recall a series of CFTC Chairmen resigning under pressure?)  Is it sensible to combine agencies and lose that market niche insulation?

2.  The motivation for Treasury’s proposals strikes me as questionable.  The report summary says:  “Market conditions today provide a pertinent backdrop for this report’s release, reinforcing the direct relationship between strong consumer protection and market stability on the one hand and capital markets competitiveness on the other and highlighting the need for examining the U.S. regulatory structure.”  Indeed, the argument was made in connection with last spring’s Paulson report that the US capital markets are becoming less competitive, in part due to mis-regulation (and overregulation).

But the argument that the US capital markets are becoming less competitive continues to be the subject of robust academic debate.  (For example, Howell Jackson, Jack Coffe, Kate Litvak, and Don Langevoort, all very credible scholars, expressed differing views on the issue at the AALS annual meeting this past year.)  I, for one, do not believe that the US capital markets are becoming less competitive.  Instead, I believe that the overseas markets are becoming *more* competitive.  That is not a bad thing, nor is it reason to overhaul US market regulation.  In reality, maybe the increasing competitiveness of overseas capital markets counsels in favor of our holding the status quo, to see how things shake out with the fundamentals that make the overseas markets increasingly competitive in the short term.

To that end, the report summary says “[g]lobalization of the capital markets is a significant development. Foreign economies are maturing into market-based economies, contributing to global economic growth and stability and providing a deep and liquid source of capital outside the United States. Unlike the United States, these markets often benefit from recently created or newly developing regulatory structures, more adaptive to the complexity and increasing pace of innovation.”  Until we know how these more newly developed regulatory structures fare in the long term, is seems unwise to jump to action to keep up with them.    Moreover, the summary of Saturday’s report indicates that its authors looked closely at the UK, Australia, and Netherlands financial markets regulatory regimes in designing the proposals in the report.  Basing reform of the US capital markets on regulation in the UK, Australia, and the Netherlands, however, does not strike me as sound.  If we are entertaining notions of wholesale reform, why not instead pin down what the conceptual optimal model would look like, as opposed to mining for inspiration from other regulators?  That said, the report purports to so do, to a degree, as discussed below in point three.

3.  The report touts a new “objectives based regulatory approach.”  This approach, however, while radically different from the current US capital markets regulatory structure in terms of how it is implemented, is nothing new in terms of goals.  (Indeed, the summary says the new structure is motivated in part by “the convergence of financial services providers and financial products has increased over the past decade.  Financial intermediaries and trading platforms are converging.   Financial products may have insurance, banking, securities, and futures components.”  But wasn’t this dealt with in the Gramm- Leach-Bliley Act?  Why now do we need to revisit what appears to have been sensible reform less than a decade ago?)

The report summary says “[l]argely incompatible with these market developments is the current system of functional regulation, which maintains separate regulatory agencies across segregated functional lines of financial services, such as banking, insurance, securities, and futures,” and the report instead argues for an objectives based regulatory scheme, based on the objectives of “[m]arket stability regulation…, [p] rudential financial regulation…, and [b]usiness conduct regulation.”  But our current functional regulatory scheme operates with a focus on these exact objectives.  A consolidation of power into one regulatory authority for each objective seems to do nothing other than allow for (a) tunnel vision by a given objective’s regulator and (b) decreased input in terms of how to regulate to the goal of meeting these objectives.  With respect to point “b,” I believe that it is useful to have the leaders at the SEC, the CFTC, and the Federal Reserve all making calls to each other, giving input to the President and Congress, and agitating for ways to secure better regulation.  Yes, there is tension and a bit of repetitive regulation, but it seems to me that that is healthy when dealing with a matter as important as the United States capital markets.

4.  I have not worked through exactly how Saturday’s report proposes, if at all, to restructure the actual Board of Governors of the Federal Reserve System.  I will note, however, that I am generally leery of restructuring the Federal Reserve, both in terms of authority and operation.  Part of what makes the Federal Rserve work is the fact that the Governors serve for 14 year terms, allowing for insulation from political pressure (to a degree) and a link between immediate decision-making and longer-term implications.  (Contrariwise, the SEC Commissioners are usually long gone before the fall-out from their decisions becomes manifest.)  The Federal Reserve System has worked well for almost 100 years.  Does it really make sense to tamper with it?

5.  To paraphrase, “regulate in haste and repent in leisure.”  I am never thrilled to see a massive proposal for overhaul and reform on the heels some major business or economic event.  Did the aftermath of the Sarbanes-Oxley Act (which is an act that I support, by the way) teach us nothing?

David Zaring and Gordon Smith have some interesting comments over on the ‘Glom, as does Larry Ribstein on his blog.

Tulane’s annual “Corporate Law Institute” is coming up!  The conference – widely viewed as the must-attend deal conference of the year is April 3 and 4 (only two weeks away).

The roster for this year’s conference reads like a who’s who of the deal world, with a range of Delaware jurists, investment bankers, top lawyers, and Wall Street media on the two days worth of panels.

The conference, which is organized by practitioners (not Tulane folks), was started twenty years ago by former Delaware jurist and Tulane Law alum former Justice Andrew Moore.  (As you corporate law wonks know, Justice Moore wrote several of the big takeover opinions from Delaware in the mid-1980s.  Many in the corporate law world were scandalized when Justice Moore was not reappointed when his term expired, but, based on the takeover opinions he penned, those of us who are cynical about just how political and pro-defendant Delaware tries to be were not surprised.)  Justice Moore will be making an appearance on the 20th year retrospective panel at the Tulane conference.

The conference should be stupendous, and I hope those of you who are reading this and will be attending the conference will make it your business to introduce yourselves to me.  I will be on the private equity panel on Friday, but I will be attending both days of the conference in full.

The specifics of the conference are here.

The news has just broken that New York State Governor Eliot Spitzer intends to resign on Monday.  This means that Lieutenant Governor, David Paterson, a relative unknown, will become the governor of New York State. More importantly, this means Joe Bruno, New York State Senate Majority Leader, will be tapped to “perform all the duties of lieutenant governor,” as per Article IV, Section 6 of the New York State Constitution.  (Many thanks to Marc Hodak for that most helpful citation (and correction to my earlier posting).)Â

And here’s the rub – Bruno is Republican; Paterson and Spitzer are Democrats.  Moreover, Bruno was been very obviously and very painfully at odds with Spitzer.  Bruno’s ascension, then, is interesting for three reasons:  (1) It splits the Governor’s office power (to the extent that Bruno will be able to exercise some power as acting lieutenant governor, whatever that means) between Dem. and Republican, (2) it forces Bruno and Paterson to work together despite the Bruno-Spitzer animosity, and (3) it relieves the pressure on the very narrowly Republican New York State Senate.  That last point is the most curious one for me, an Albany, NY, native.Â

Bruno, the majority leader in the Senate, has been trying to hold on to the very narrow Republican margin in the Senate.  Paterson, the lieutenant governor, has had the authority to act as a tie-breaker for Senate ties, which put pressure on Bruno’s one person Republican margin in the Senate.  Even just one Republican defector on a vote could force a tie that would give the Dems an extra vote (by Paterson).  That’s a fair amount of Dem. power and Republican tension… that now appears to go away if Paterson is no longer the lieutenant governor.  Right?  (I cannot find the provision of the NYS Constitution or Senate Rules that addresses this point.  I am now sort of waiting to see if Marc Hodak concurs….  (See his helpful comments in the “comments” section.))

Also, in doing research, I see that this is the third time in recent history that our NYS Lieutenant Governor has had to step in for an exiting governor.  Hmmm.  Maybe the back door way to power, then, in New York State, is by becoming Lieutenant Governor and keeping your fingers crossed that your boss will drop the ball.

According to the Associated Press, New York State Governor Eliot Spitzer is reported to be or have been a client of a “high-end prostitution ring called Emperors Club VIP.”  This morning, Governor Spitzer publicly apologized to his family and the public, “but did not not elaborate on a bombshell report that he has been involved in a prostitution ring.”

The story is still breaking, but it forces me to wonder if Governor Spitzer will be prosecuted for patronizing a prostitute, if it turns out that is what he did.  As we all know, both parties involved in prostitution are breaking the law.

More to the point, as the DC Madam, Deborah Jeane Palfrey, is prosecuted in federal court for running a prostitution ring, it will be interesting to see how things develop with Governor Spitzer.  One of the DC Madam’s big gripes is that, though the government has the names and identities of plenty of her customers and *ahem* female contractors, only she – Deborah Jeane Palfrey – is being prosecuted.

Back when I was in law school at Columbia, I did research for the late Professor Curt Berger, who was a property expert.  Professor Berger once asked me to research how many women versus how many men were arrested for prostitution (in New York state, as I recall).  By far, the women outnumbered the men.  Lovely….  Will the Eliot Spitzer situation, when juxtaposed with the DC Madam prosecution, prove the point further?

Stay tuned.

UVA Law School announced today the appointment of esteemed corporate law scholar Paul Mahoney as dean.

Congratulations.  (Corporate law scholar, Sullivan & Cromwell alum, former Second Circuit clerk – it all bodes well…..)

Tis the spring law review submission season (almost, depending on your view)!  This is the time of year where many members of law school faculties wrap up their law review draft articles and begin submitting them to various journals for consideration for publication.  Tomorrow Tulane is having a faculty roundtable on law review publishing, at which we will exchange our ideas on when to submit, how to submit (mail, e-mail, Expresso or otherwise, rounds or otherwise), etc.  In that vein, I am soliciting opinions, thoughts, and anecdotes here, regarding the submissions process.  (If you are a law school faculty member reading this, please consider forwarding this link to your law review editors to see if they have any comments they would be willing to share here regarding how, why, or when they select articles.)

Some topics for discussion here on the blog (or e-mail to me your thoughts if you would prefer not to share them here) (***Note scholars are posting their responses in the “comments” below.):

1.  When do you submit your winter/spring draft to law reviews for publication consideration?  February?  First week of March?  Last week of March?  Never in March?

2.  Do you submit in “rounds,” whereby you submit to certain publications first to gauge their interest, and then submit to different journals beyond that?  If so, how do you determine which journals should be part of your first “round” of submissions?

3.  Do you pull a piece if you do not get a law review placement that you want?  Or do you believe that, if you submit it, you had better be willing to take a placement that you get?

4.  Do you submit your drafts in the traditional manner using the mail, do you e-mail your articles to law reviews, do you use Expresso, or do you use some other service?

5.  Do you judge your colleagues or your peers based on the placement of their law review articles?

6.  Has your “best” article (in your own professional view) received the “best” placement of all your law review placements?  To that end, how do you explain how you scored your “best” placement?

7.  What is the most important tip you would give a junior colleague on your faculty on the law review submission and placement process?

Microsoft has made a bid for Yahoo, and the Yahoo board of directors is anticipated to use the Nancy Reagan “Just Say No” defense.  I feel like I’m back in the 1980s merger boom.Â

Several thoughts:

1.  Rumor has it we are in a recession.  It is likely then that Yahoo stock is currently trading at a price that is not its highest.  Indeed, Microsoft’s bid for Yahoo is basically a big fat memo to Wall Street, in bolded all caps, indicating it (Microsoft) thinks Yahoo is a good buy.  How long before other bidders get the clue and come knocking on Yahoo’s door?

2.  Debt is cheap these days.  Super cheap.  Cheaper than it was in the 1980s when we saw a wave of debt-financed takeovers.  If Yahoo really is a bargain at its current price, other bidders will appear, using a good chunk of debt-financing, if necessary, to make their bids.

3.  If other bidders show up, can the Yahoo board members continue to “just say no” without violating their fiduciary duties?  At least for now, I am of the view that the Yahoo board can easily continue to keep the door to bidders closed.  Yahoo stock traded around $27-ish over the past year, and Microsoft is now offering $31 per share.  Given that, back in Jan. of ’06, when the S&P 500 and the DJIA were both weaker, Yahoo was trading in the vicinity of $40 per share, I have no problem thinking the Yahoo board can embrace their inner Nancy Reagan until a bidder steps forward with an offer well over $40 per share.

4.  Yahoo’s dance with Google is an interesting defensive move, making me think of the white knights, crown jewels, and lock-ups of the days of yore.

5.  Am I the only one who finds it *very* ironic that Microsoft is making a bid for Yahoo only days after AOL Time Warner has made clear it is going to try to undo its mega-merger from seven years ago between AOL and Time Warner?  Note to Microsoft:  It is important to have very specific business justifications – and related business plans – before indulging your urge to merge.

The M&A world seems to be flashing back to the 1980s.  Debt is cheap, private investors are bold, and some mega-mergers from the late 1990s might be perfectly situated for bust-ups.  It is just a matter of time before everyone is wearing parachute pants again.  You heard it here first.Â

The Supreme Court’s opinion in Stoneridge Investment Partners v. Scientific-Atlanta was issued today.  This case involved investors in Charter Communications’ common stock who sued under Section 10(b) of the Securities Exchange Act of 1934.  The investors sued Charter’s SUPPLIERS AND CUSTOMERS, including Scientific-Atlanta and Motorola, who had entered into essentially “wash” contracts with Charter for purposes of allowing Charter to inflate its earnings and mislead investors.  The contracts involving Scientific-Atlanta and Motorola obligated Charter to buy set top boxes from Scientific-Atlanta and Motorola, and, in return, both parties would buy advertising from Charter.  The effect of these agreements was technically a wash for Charter, but Charter was using these agreements – specifically the advertising agreements – to inflate its revenues and bolster its financial statements.  Both Scientific-Atlanta and Motorola knew, it is alleged, why Charter wanted to enter into these wash transactions with them.

The trial court, with the 8th Circuit affirming, dismissed this lawsuit in favor of the defendants.  The Supreme Court today affirmed, finding that the complaining Charter investors failed to adequately plead the “reliance” element of a Section 10(b) claim.  (In order to sue in a private action under Section 10(b), a complaining party (other than the SEC) must establish that the defendant (a) made a material misstatement or omission, (b) in connection with the purchase or sale of securities, (c) with the intent to deceive, manipulate or defraud, (d) and the investor relied on this misstatement or omission, and (e)  the investor suffered losses from the misstatement or omission.)

Unfortunately, today is a double teaching day for me (M&A and Business Enterprises II), so I cannot spend a whole lot of time blogging on this case.  But I have several points to make quickly:

1.  Some of the media blurbs I have seen today warn that the Supreme Court’s holding in Stoneridge bodes ill for private securities fraud suits against secondary actors (such as lawyers, bankers, auditors, underwriters).  That is NOT true.  The media folks writing those inflammatory headlines either (a) have not read the Stoneridge opinion, (b) are not familiar with the Stoneridge facts, or (c) are only discussing the case with the corporate defense bar who, I am sure, will likely try to sell the Stoneridge holding as ringing the death knell for any securities fraud cases against anyone other than an issuer.  As a fan of the broad interpretation of Section 10(b), allow me to say that the facts of this case (the facts pertaining to the involvement of Scientific-Atlanta and Motorola in Charter’s securities fraud) troubled even me.  This case – Stoneridge – involved suppliers and customers of an issuer.  Those parties are even further removed from investors and the actual securities market than traditional “secondary actors” such as an issuer’s lawyers, auditors, etc.  Even with my propensity to broadly interpret and apply the elements of a 10(b) cause of action, I might have had a hard time holding S-A and Motorola liable thereunder.  So the Supreme Court opinion in Stoneridge, if anything, should stand for the notion that, the further down the fraud actor chain we go, the harder it is to pull in defendants.

2.  In a related vein, I am stunned that the Supreme Court treated this case as a “reliance” case.  Basically the Court said that the investors could not have relied on Scientific-Atlanta and Motorola b/c those parties had no “duty” to make disclosure to the investors.  Huh?  As I understand the reliance argument that could be made by the investors in this case, it is that the investors relied on the fact that the contracts with Scientific-Atlanta and Motorola were legitimate, business-justified, economically defensible contracts.  Which wasn’t true –they were wash contracts, designed to be wash contracts.  If an investor walked into court and could prove that she bought stock in Charter because she saw on Charter’s books the contracts with S-A and Motorola, and she relied on the economic value of those contracts (that they were positive contracts benefiting Charter), why *couldn’t* the investor establish reliance as it pertains to S-A and Motorola?  The fact that S-A and Motorola had no “duty” to the Charter investors is irrelevant.  “Duty” is not an element to a Section 10(b) violation.  Reliance is, and if an investor could prove that she “relied” on the true economic value of those contracts (to wit, that they weren’t sham “wash” contracts), why couldn’t she prove reliance?

3.  To that end, this opinion re-affirms that the Supreme Court is often totally confused when it tries to discuss securities fraud.  First Dura, now Stoneridge.  With due respect to the Justices who signed on to the majority opinion in this case, the law isn’t particularly challenging in this area– either a plaintiff establishes the five/six elements necessary to prove securities fraud or she does not.  Were I writing the Stoneridge opinion, and I wanted, for policy reasons, to affirm dismissal of the suit, I would have done it on the “in connection with” element.  One could argue with a straight face that S-A’s and Motorola’s “lies” (to wit, the fraudulent wash contracts) were not lies told “in connection with the purchase or sale of securities.”  Reliance, not so much.

4.  Justice Kennedy, in his majority opinion, made clear that he really *wanted* to cut off investors at the knees in terms of their ability to sue “secondary actors.”  His opinion gave us a stream of dicta regarding aiding and abetting and federalism and the problem with expansive interpretations of 10(b).  At the end of the day, he didn’t *need* to give us that monologue in order to decide the case, but he clearly wanted us to know that he’s not a big fan of broadly interpreting Section 10(b).  Duly noted.

5.  To that end, Kennedy includes some ramblings about common law fraud in his majority opinion, but he gets the story wrong.  (See point “3,” above.)  Section 10(b) was adopted on the heels of the stock market collapse in the 1920’s, and Section 10(b) was therefore specifically designed to address fraud in the securities markets that the common law was insufficient to reach.  Common law fraud doctrine was viewed as not broad enough – that’s why we needed an expansive federal scheme.  So, if anything, as we look at the elements of a 10(b) claim, we need to interpret these elements more BROADLY than they have been interpreted at common law.  With due respect to Justice Kennedy, when he says “Section 10(b) does not incorporate common-law fraud into federal law,” he should have been using that as his launching point to justify interpreting “reliance” in the 10(b) context more broadly than reliance in the plain vanilla common law context.  Instead, he used that as his launching point to have a discussion about the need to limit who we can reach under a Section 10(b) private action.  (How could Kennedy’s law clerk have missed this point about common law fraud and the history of 10(b)’s adoption?)

6.  The majority opinion makes clear that the SEC can go after S-A and Motorola for aiding and abetting securities fraud.  I have no idea if the SEC has already undertaken to so do.  If they have not, I would urge the SEC to get on that task now.  The last thing the investing public needs is an invitation like that from the Supreme Court to be ignored.

7.  One more thing:  Justice Kennedy writes in his opinion that, if the Court is too broad with its interpretation of Section 10(b), “[o]verseas firms with no other exposure to our securities laws could be deterred from doing business here.”  In the margin of the opinion next to that language, I wrote “huh?”  For the love of all things good and holy, why would Kennedy include that kind of needless hyperbolic dicta in an opinion that is already anti-investor?  I will bet you $12 that that line becomes one of the most-quoted Stoneridge lines within the next two years.  The reality is that overseas firms aren’t going to be deterred from doing business here, because they KNOW that the sort of facts we see in Stoneridge usually don’t make it to court due to problems with the “in connection with” element of Section 10(b).  Kennedy’s “overseas firms” comment strikes me as a bizarre attempt to get on the “capital is going overseas” band wagon some anti-regulation wonks have recently been driving around blindly.  The “capital is going overseas” cry, even if we assume its truth, is not a reason to stop enforcing Section 10(b).  Reading Justice Kennedy’s nod to the overseas market hysteria made me feel so… cheap and dirty.  Trendy doomsday rhetoric from the Supreme Court is, in my mind, equivalent to the Justices ending an opinion with “woot” or something.