The Law and Other Anomalies

How far can American hegemony extend when it comes to laying down the law of international transactions?

Buried in Section B of yesterday’s Wall Street Journal are two articles which suggest that the United States, the world’s most robust economy, is attempting to not only establish a capitalist world, but also to bring along American legal structures that will regulate it.

A Federal Court of Appeals is now determining whether Motorola can bring a treble damages anti-trust case for price fixing against a group of Asian companies which fixed the price on liquid crystal display panels. Motorola purchased about $5,000,000,000 worth of LCD panels for its Razr phones and other uses, but purchased them (fully manufactured) through foreign based affiliates, without United States contact, in 99% of the cases. Do our anti-trust laws reach sales by foreign companies, to foreign purchasers which may be owned ultimately by United States companies, and which occur offshore?

The SEC and the DOJ long have been vigorous in enforcing the United States’ Foreign Corrupt Practices Act, which prohibits bribery of government agencies and government owned companies around the world. The WSJ reports a reduced fine to Avon, an American company, for bribes paid through subsidiaries in Africa and Australia, and the SEC suggests that the fines were greatly reduced by Avon self-reporting its violations to the SEC. DOJ Criminal Fraud Section noted that voluntary disclosure is “a huge factor” in fixing sanctions. The article contrasts Avon ($5,000,000 fine) to Marubeni, a Japanese trading company which did not report and this year agreed to pay $88,000,000 in fines. A commentator, cited in this article, noted that foreign companies are particularly insensitive to the subtle DOJ message that self-reporting is the path to a better economic result.

The international nature of all business raises the need for an international matrix of appropriate, non-obtrusive regulation. Will the relatively strict American legal system end up as the international standard?

And, if you want to truly understand the international nature of things, note that Motorola, claiming anti-trust violations by its Asian vendors, recently was purchased by China’s Lenovo. We have a Chinese parent claiming violation of United States anti-trust laws by Asian vendors supplying LCD screens to non-US subsidiaries outside the United States.

Much has been written, but few useful cases decided, defining the role of corporate directors of a company which is insolvent or within the “zone of insolvency.” A deep dive into that debate is beyond the scope of this post, but counselors to corporations under financial stress might want to take a look at the October 1^st decision in Quadrant Structured Products decided by Delaware Chancery Court.

You don’t have to be a lawyer to understand the broad teaching here: directors do not owe any direct duty at any time to creditors; creditors can only make a claim against directors on a derivative basis which is to say, where they hold the position of the stakeholders in the corporation and the directors have breached their obligation to the corporation.

What is the standard for determining if a director is liable to a creditor for having managed an insolvent company in a manner which ultimately reduces the enterprise value to the creditors?

Directors should be comforted to know that, generally speaking, the “business judgment rule” applies. Even if a company is insolvent, if directors in good faith believe that by taking risk, spending money, etc. they can increase the value of the enterprise as a whole, then they are entitled to try and they are protected from liability if they have taken reasonable (and not self-interested) steps in that effort. (I do not here deal with issues created by director self-dealing, but there is even good news in the decision on that front.)

Globally, there is much discussion as to the duty of directors to creditors, but in the long run seldom resulting in any strategic adjustment. Typically: directors and management at all times want to build value, not waste it; strategic decisions in that context involve risk; many decisions will prove to have negative impact on value; good faith rational judgment by boards, even when a company is underwater, will be protected (at least in Delaware) from derivative claims asserted by creditors who have ended up short. Insolvency “does not mean that the directors cannot choose to continue the firm’s operations in the hope they can expand the inadequate pie such that the firm’s creditors get a greater recovery.”

As the elections approach, news reports have been full of legal battles surrounding efforts in various states to restrict access to the voting booth. These efforts may be traced back to the results of the 2008 election, which might otherwise be interpreted as reflecting an inter-racial detente in American society; however, it may not be working out that way.

Attorney Dale Ho, Director of the National Voting Rights Project of the American Civil Liberties Union, addressed a luncheon at the Boston offices of the Bingham McCutchen law firm on October 16^th. He noted that before 2008, only two states had restrictions on voter registration which required the presentation of one of a small number of government-issued IDs bearing a photograph. By August, 2012, twelve states had such a provision. In 2013, after the United States Supreme Court struck down Section 5 of the Voting Rights Act of 1965, thirteen more states adopted new restrictive laws, many of similar import.

It seems statistically irrefutable that the effect of these various laws work against young people, and racial minorities, getting to the voting booth. These laws come in several flavors, and while many laws require photo IDs which may be difficult to obtain (elderly without drivers licenses in Texas may need to travel 250 miles to reach the Texas equivalent of the Department of Motor Vehicles in order to obtain a license), other provisions include: shrinking the period of time prior to an election that early voting can occur; preventing early voting on the day before election day (cutting into the practice of poorer churches that on Sunday they organize voters and on the following Monday, the day before election day, they drive them to the polls); requiring registration of individuals who assist people in obtaining voter status, and requiring their filing of monthly state reports (struck down by the courts); elimination of pre-registration qualification for younger teens; elimination of a civics course in high school.

Prior to 2008, most voter litigation involved improper districting (gerrymandering). Since 2008, almost all the litigation involves voter ID and related new state regulations. The Civil Liberties Union and other groups are sometimes, but not always, successful in barring the operation of these voter limitations either in Federal Court or in State Courts.

Finally, there was discussion of laws limiting rights of felons, once released from incarceration, to vote. Felony convictions fall disproportionally on minority groups. Four states permanently bar felons from voting, and other states have varying disqualification provisions. The United States has the highest incarceration rate of any Western democracy. If all the people presently in prison for felonies were to be organized into a state, that state would have six votes in our Electoral College.

Conclusion: There is going to be voter access litigation for a long time to come.

What is happening in the M & A markets during 2014? The short answer is: so far, 2014 is the most active year for United States M & A since 2008 (we all know what happened after 2008).

The current and future state of the market was discussed at the Practicing Law Institute panel held in New York on October 2, 2014, led by senior investment bankers from Lazard and Goldman Sachs.

United States target M & A volume was up 79% from 2013, through mid-August, driven in part by increased frequency of “mega deals”. Nearly 30% of the announced M & A volume arose from transactions in excess of $10 Billion.

There also was a significant upswing in strategic purchases. Part of this trend was driven by private equity firms partially divesting to corporate buyers. Meanwhile, leveraged buyouts by management remained depressed.

Were buyers paying cash? Almost 40% of M & A involved payment in some stock, and 15% of acquisitions were all-stock deals. Of course, when you are talking mega-transactions, it is difficult to come up with all that cash and, hence, the resurgence of paper.

Possible drivers which helped increased M & A: growth in hostile takeover attempts; pressure by shareholder activists seeking, in many instances, to break up larger companies; low interest rates; lots of dry powder on corporate balance sheets; positive performance of the equity markets which made payment in stock more palatable than in the recent past.

Where will M & A trend for the balance of the year and into 2015? While the prognosis expressed was generally positive, with sustained M&A activity assisted by projected modest but continued increase in the S&P, several warnings were noted: the world has become a more dangerous place which, in turn, increases business risk; some current deals may prove over-leveraged, and their weaknesses may trickle back into the marketplace and depress valuations, discouraging sellers; conversely, continued increased price multiples perhaps will dampen the enthusiasm of private equity buyers.

Suffolk Construction CEO John Fish leads the committee exploring bringing the 2024 Summer Olympic Games to Boston. His reasons, however, are likely not what you expected.

Delivering remarks at the National Association of Corporate Directors/New England September 18^th breakfast meeting, Fish emphasized that attempting to attract the Olympics was not just about the Olympics. Although I am sure that he would consider Olympics Games in Greater Boston to be a lot of fun (he never actually said as much), his foci were directed elsewhere.

First, he noted that the development of a robust infrastructure to support the movement, housing, feeding and care of an expanding workforce, regardless of whether the Olympics come to Boston, was a necessary component of robust economic growth. The Olympics could feed into the build-out of that infrastructure, by creating sustainable space which could be utilized as part of that future infrastructure. He sees the Olympics as getting a head start on future development.

Second, in developing Boston’s Olympics proposal, the committee convened many experts in data analysis. What events would be held in which venues and at what time? Where should the housing and support functions be located? What will be the impact on participants and the general population in different locations for pedestrians, drivers, workers, people seeking food or other services? The committee has developed a computerized model to analyze data for all locations relevant to the Olympic Games, and to do so hour by hour. For example [which I am suggesting, this was not made express at the meeting], let us assume there is a hockey game at the Harvard Hockey Arena on a Thursday. Should that be held at 10:00 in the morning, 2:00 in the afternoon or 8:00 at night? What will be most crowded, least crowded, most supported, least intrusive on the different constituencies and how do you address those issues by planning?

Fish cannot say whether Boston will receive the United States recommendation, and thereafter the International Olympic Committee approval, but he hopes that the information-based tools they have developed can be utilized in the future for planning infrastructure build-out.

A week or two ago, the Globe printed a map of Greater Boston with an indication of how the Olympics might fit into existing facilities, and into newly built facilities which could be repurposed after the Games concluded. I recall, at the time, not understanding the logic of how locations were being assigned; having heard Fish speak with respect to the data-driven methodology behind the plan, the logic of the proposal now becomes clear.