Marcel Kahan

Do Bondholders Lose from Junk Bond Covenant Changes

This paper documents that firms can and do change the convenants of their public debt indentures through consent solicitations. A game theoretic model of these solicitations shows that they can coercive, i.e. bondholders who cannot coordinate their actions may consent to convenant changes even when it is not in their collective interest to do so. Despite this theoretical finding, abnomral bondholder returns around the announcements of consent solicitations are significantly positive. Further analysis of the data indicates that bondholders can, in fact, coordinate their actions to modify or defeat disadvantageous proposals. As a result, bondholders obtain a portion of the gains resulting from convenant modifications. The public policy implication of these findings is that bondholders do not need additional regulatory or judicial protection in the solicitation process.

Director Elections and the Role of Proxy Advisors

Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at S&P 1500 companies, we examine how advisors make their recommendations. Of the four firms we study, Institutional Shareholder Services (ISS), Proxy Governance (PGI), Glass Lewis (GL), and Egan Jones (EJ), ISS has the largest market share and is widely regarded as the most influential. We find that the four proxy advisory firms differ substantially from each other both in their willingness to issue a withhold recommendation and in the factors that affect their recommendation. It is not clear that these differences, or the bases for the recommendations, are transparent to the institutions that purchase proxy advisory services. If the differences are not apparent, investors may not accurately perceive the information content associated with a withhold recommendation, and investors may rely on those recommendations based on an erroneous understanding of the basis for that recommendation. To the extent that proxy advisors aggregate information for the purpose of facilitating an informed shareholder vote, these limitations may impair the effectiveness of the shareholder franchise. If the differences are apparent, our results show that investors, though selecting a proxy advisor, can indirectly choose the bases for their vote on directors. To that extent, it is likely that proxy advisory firms will retain more investor clients if their recommendations are based on factors that their clients consider relevant.

A New Governance Structure for Corporate Bonds

This paper proposes a new governance structure for publicly registered corporate bonds that combines the benefits of those bonds -- including liquidity and ease of diversification -- with the benefits of private debt contracts, e.g., tight covenants and ease of recontracting. We propose that a company appoint a supertrustee for its public debt whose authority goes far beyond that of a conventional indenture trustee. The supertrustee will actively monitor the company, enforce and, where appropriate, renegotiate a bonds covenants on behalf of public bondholders, thus resolving the collective action problem presently associated with dispersed ownership of public debt. With the supertrustee emulating the functions carried out by, for example, banks in private debt contracts, public bonds will have more and tighter covenants, their holders will be less apprehensive of unchecked actions by issuers, and there will be lower costs to relaxing a covenant when such relaxation is value-increasing. The supertrustee will thus reduce the cost of the conflict of interests between creditors and stockholders and will enable companies to issue bonds at higher prices (or lower yields) that will more than compensate for the costs of the supertrustee.

Lockups and the Market for Corporate Control

This paper analyzes the effect of lockups on the market for corporate control. We demonstrate that lockups can affect the outcome of bidding contests and that judicial leniency toward lockups would have detrimental effects on the disciplinary influence of the takeover threat and on the number of value-enhancing acquisitions that occur. Scholarship to date on lockups has argued that lockups are generally ineffective in allowing target managers to influence who acquires a target firm. Accordingly, scholars who have taken this position have advocated leniency in judicial review of lockups. We explain that this prior analysis has failed to take full account of the impact that the legal treatment of lockups has on the ex ante willingness of potential bidders to enter an auction, and thus fails to take full account of the ultimate influence a lockup can have on who acquires a target. We then examine the proper legal treatment of lockups from the perspectives of shareholder wealth maximization and social wealth maximization, and we propose an alternative to the current legal standard.

The Myth of State Competition in Corporate Law

This Article challenges the conventional wisdom that states compete for incorporations. Delaware aside, no state stands to gain meaningful tax revenues or legal business from chartering firms, and no state takes significant steps to attract incorporations. The explanation for this apathy lies in a combination of economic entry barriers and political factors. This analysis of the market for incorporations has implications for the present structure of corporate law, for the desirability of federal intervention, and for theories of regulatory competition in general.

Special levies on punitive damages: Decoupling, agency problems, and litigation expenditures

Abstract This article extends the economic model of “decoupling” the damage award payable by a defendant and the award received by a plaintiff in the context of recently enacted “special levy” statutes. These statutes require plaintiffs to hand over portions of their punitive damage awards to the state. The basic model of decoupling is expanded by incorporating the effect of levies on litigation expenditures and settlement and by examining the effect of agency problems between plaintiff and his attorney. Consistent with the basic model, we find that, in the absence of agency problems, if a case goes to trial, levies reduce the expected award payable by the defendant and the plaintiffs litigation expenses. However, the effect of levies on settlement is indeterminate. In the presence of agency problems, certain forms of levies will have no effect on the defendants expected payments, on litigation expenses, or on settlement; and other forms will either be equally ineffective as the former forms or less effective than they are in the absence of agency problems.

Price Discrimination in the Market for Corporate Law

This Article shows how Delaware uses its power in the market for incorporations to increase its profits through price discrimination. Price discrimination entails charging different prices to different consumers according to their willingness to pay. Two features of Delaware law constitute price discrimination. First, Delawares uniquely structured franchise tax schedule assesses a higher tax to public than to nonpublic firms and, among public firms, to larger firms and firms more likely to be involved in future acquisitions. Second, Delawares litigation-intensive corporate law effectively price discriminates between firms according to the level of their involvement in corporate disputes. From the perspective of social welfare, price discrimination between public and nonpublic firms is likely to enhance efficiency (although the efficiency effect of franchise tax price discrimination among public firms is indeterminate). By contrast, price discrimination through litigation-intensive corporate law is likely to reduce efficiency.

An Institutional Innovation to Reduce the Agency Costs of Public Corporate Bonds

Photosensitive material which is a silver halide photosensitive material optimally used for copies of a color film original and the like is coated with developing solution from the nozzle holes of a spray tank. A chamber provided with an internal cavity is disposed on the opposite side of the transporting path to the spray tank with the transporting path sandwiched therebetween. The upper portion of the chamber is covered with a heating plate. The heating plate is pierced with a plurality of suction holes which penetrate from the inside of the chamber to the outside thereof. The unexposed surface of the photosensitive material is suctioned through the suction holes and the heating plate heats the photosensitive material as well as guides the photosensitive material. Downstream of the heating plate on the photosensitive material transporting path D, transporting rollers are disposed for transporting the photosensitive material and for squeezing out developing solution from the photosensitive material.

Some Problems with Stock Exchange-Based Securities Regulation

In The Exchange as Regulator, Prof. Mahoney suggests that regulatory authority over most aspects of securities trading should devolve to stock exchanges. There are, however, several potential drawbacks to stock-exchange based regulations. These drawbacks fall in two separate categories: the incentives of exchanges to adopt rules that maximize the value of the firm; and the enforcement of these rules. Incentives have incentives to adopt rules that attract listings and induce trading of listed securities. Since managers control where the stock of their company is listed, rules adopted by stock exchanges are likely to inhibit the operation of management disciplinary devices -- in particular, takeovers and proxy contests. Furthermore, exchange rules are likely to encourage speculative trading more than is optimal. Regarding enforcement, stock exchanges may lack the requisite authority to pass regulations that bind the public at large and to impose sanctions that sufficiently deter violations of its rules. Moreover, stock exchanges have insufficient incentives to police for, and detect, violations of its rules. In light of these drawbacks -- and in light of the fact, under the present U.S. system, the growth rate of securities markets, investor confidence, and liquidity has been high, and trading costs have been low -- I favor a more moderate approach to reforming the present system.

Symbiotic Federalism and the Structure of Corporate Law

In the public debate sparked by the corporate scandals of the last years, Delaware has been strikingly absent. In contrast to the high profile activity of Congress, the Securities and Exchange Commission, the stock exchanges, federal prosecutors, and even state law enforcement officials, Delaware has been largely mute: no legislation; no rule-making; no criminal investigations; few headlines. In this Article, we use Delaware’s relative passivity during this latest episode of corporate law-making as a starting point in the analysis of the shape of American corporate federalism and Delaware’s place within it. We argue that Delaware long ago opted for what we will call a “classical” or “19 century” common law model of corporate law-making. In Delaware, corporate law is largely judge-made; judicial opinions are filled with quasi-deterministic reasoning; statutory law is comparatively narrow and rarely subject of partisan disputes; the judiciary as well is relatively non-partisan and has claim to technical expertise; and the law is enforced through litigation brought by private parties. We view these traits through the lens of the institutional and political landscape in which Delaware must operate. This landscape is characterized by a federalist system in which Delaware’s regulatory powers co-exist with, and can be constrained by, the powers of the federal government. In this system, Delaware is faced with the threat that populist pressures will lead to a federal preemption of Delaware corporate law and thus eradicate the huge profits Delaware derives from being the domicile of choice for public-traded U.S. corporations. By creating and enhancing an apolitical gloss over Delaware’s corporate law, the various traits we identify help shield Delaware against this threat. At the same time, the scope of Delaware’s corporate law is designed to minimize conflicts by assuring that Delaware has the requisite personal jurisdiction over defendants to enforce its law effectively and that the prevailing conflict rules point to substantive Delaware law as applicable to a corporate law dispute. But this classical model of law making carries with it intrinsic limitations. Specifically, legal change is slow, standard-based and incremental. Faced with the recent corporate scandals, calls for action, and Sturm und Drang, Delaware reacted accordingly: Basically, it does nothing until cases are brought. Any more pro-active response by Delaware actors would have threatened to undermine the political legitimacy achieved by Delaware’s commitment to the classical common law model. But because the classical common law style, together with jurisdictional and conflict rules, constrain Delaware, federal law is needed to complement Delaware’s. In that respect, the relation between federal law and Delaware law is symbiotic, rather than antagonistic: Delaware is happy to have federal law pick up the slack and thereby reduce the likelihood that ineffective regulation produces a populist backlash.