I'm rushing off to class, but I wanted to note quickly that I.B.M. has broken off negotiations with Sun over the weekend.  But lawyers take heart:  I.B.M.'s change in tone came after 100 lawyers engaged in extensive due diligence.  So, there is a second-year associate somewhere who can't believe the coolest deal she's gotten to work on so far just died over the weekend, but at least her hours for March were good.

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With so few fun deals to talk about these days, we have to enjoy the ones we have.  The IBM acquisition of Sun Microsystems seems to be coming to fruition at $9.55 a share ($7B), representing an almost 100% premium over the pre-announcement (or pre-rumor) price. (WSJ story here.) In fact, Sun recently lowered it's original asking price to make sure it kept I.B.M. in the game.  The new agreement has a lower price but a pretty strong termination penalty, according to reports. 

Remember that Sun shares were $250 in 2000, when Sun touted that it was the "dot in 'dot.com'" and this acquisition takes on a lot more narrative than it had before.  Here is the old guard,  I.B.M., snagging up Sun, one of the hottest hardware companies in the 1990s.  Everything old is new again.

For nostalgia's sake, here is a 10-year retrospective on Sun's share price, as compared to the NASDAQ composite index:

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Usha's post below, with its reference to Ronald Gilson's 1984 article on value creation by lawyers, prompts me to a short rant, not about Usha's post, but about the article, which Usha rightly calls a "classic" and  "the reigning academic account of what business lawyers actually do."  Honestly, with all due respect to Professor Gilson (who joined the Stanford faculty the year I left as a student), the article has bugged me since I read it a couple years ago; indeed, I have a comprehensive list from a Lexis search I did a while back of every article that had cited it, because I was trying to do a literature search to see if anybody else had said what I'm about to say here.  Since I haven't followed up on my list, I don't know, and I therefore apologize if I'm repeating a critique somebody has already written.  I also apologize for the stream of consciousness approach that follows.

What about the article bugs me?  Let me count the ways:

1.  If I were taken with law and economics in 1984, but had no way of showing empirically that the reams and reams of hours that lawyers spent doing deals actually produced anything with intrinsic value (which Professor Gilson forthrightly admitted, at pp. 247-48 of the article), but was inclined to hope that they did, with an interest in justifying their existence (as again Professor Gilson forthrightly admitted at footnote 149), this is, I suppose, exactly the article I would write.  What we have here is an attempt to make sense of the world, by way of scientific (or quasi-scientific) theory, but it is "over-determined" in the sense that the theory selected happens to be rational actor economics, rather than, say, the theoretical view Clifford Geertz applied to Balinese cock-fighting.

2.  The theory is capsuled as follows.  All transactions occur because buyers value an asset more than sellers.  The difference between the two values is surplus.  Haggling over the split of the surplus is of no interest generally to economists; that is mere strategic bargaining.  Each party, being rational, would know that hiring a lawyer to grab a bigger portion of the surplus won't work, because the other side will respond in kind, and the lawyers, not the parties, would get the benefit of the surplus.  So, in the long run, rational actors being what they are, it must be the case that "[t]he increase must be in the overall value of the transaction, not merely in the distributive share of one of the parties. That is, a business lawyer must show the potential to enlarge the entire pie, not just to increase the size of one piece at the expense."  That's a rational actor trope, and one that I have criticized in another context here.

3.  As I said in a comment to Usha's post, if I were to apply an economic model to lawyers in deals it would be the Prisoner's Dilemma. Both clients would be better off cooperating by throwing all the lawyers out of the room for most of the issues in the deal, hence eliminating the transaction cost of arguing over myriad reps and warranties and other contract niceties that don't make any difference anyway. So imagine a Prisoner's Dilemma matrix with Party A and Party B, and the choice for each is "Lawyer" or "No Lawyer." The payoff for each side choosing "No Lawyer" is a huge reduction in costs (say, 5, 5) compared to both sides choosing "Lawyer" (say, 10, 10)" But both sides keep their lawyers, for fear of the (1, 20) or (20, 1) outcomes in the Lawyer/No Lawyer boxes that are akin to one prisoner confessing but the other one not.

4.  There are places where lawyers reduce transaction costs, say, by mediating between two positions to reach a solution, but there's nothing particularly lawyerly about that. That's a negotiating skill.  Moreover, lawyers may well be necessary to getting the deal through the regulatory thicket, whether it is Hart-Scott-Rodino pre-merger notification or CFIUS review.  But that hardly seems fair, because lawyers created the regulatory thicket.

5.  We have a neighborhood association in northern Michigan.  A lot of people in the association are rich.  When something happens that they don't like, they say things like, "if you do that, I'll have 10 lawyers from the Humungous Law Firm, who I have on retainer, up here the next day."  Since I'm a lawyer, and I used to be a partner at the Humungous Law Firm, I laugh at that, but it's an effective club when wielded against non-lawyers.  I rarely hear non-rich people say this, which goes to my next point.

6.  Professor Gilson's "empirical" testing of this theory is to walk through the most heavily lawyered of all documents, the typical business acquisition agreement.  If lawyers really created value accordingly to the theory, we ought to be able to test it not in mega-million or mega-billion dollar deals, but in little deals that happen all the time.  But the reality there is that most transactions occur without lawyers.  Sometimes there is boilerplate that lawyers had a hand in.  But if a lawyer being involved in a transaction necessarily made the pie bigger, why don't lawyers appear in almost all transactions?

7.  Professor Gilson spends many pages on the information-exchanging value of representations and warranties, and puzzles over the lack of any indemnification mechanism in public company deals (the representations and warranties expire at closing largely because once the proceeds in stock or cash are distributed to widely dispersed shareholders, there's no putting Humpty-Dumpty back together again). He acknowledges that indemnification may be partial or limited in time (there's also the "basket" or deductible, but I don't think that gets mentioned), but the real question, it seems to me, is whether the actual instances of acting on the indemnification clauses warrant the investment in the reps and warranties.  My guess is they have some amount of in terrorem effect, but neither of us have a whole lot of data to go on.  (The one empirical study of which I'm aware on this subject is by Steve Schwarcz, and it is based on surveys of clients who hire transactional lawyers.  To quote Steve's abstract:  "Contrary to existing scholarship, which is based mostly on theory, this article shows that transactional lawyers add value primarily by reducing regulatory costs, thereby challenging the reigning models of transactional lawyers as 'transaction cost engineers' and 'reputational intermediaries.'")

8.  My equally non-testable theory is that lawyers sometimes add value to deals, sometimes subtract value, and appear most of the time during the deal for the same reason neckties do:  it's part of the ritual.  There is no intrinsic reason they have to be there.  Lawyers, like neckties, have value, not because they necessarily make the pie bigger, any more than neckties make the pies bigger, but because somebody values the lawyer enough to pay more for her to be there than it cost for her to get there (marginally speaking, of course).  That's the reason we buy $75 neckties and Rolex watches as well.  But we don't feel a need to justify the presence of the necktie or the watch as a "transaction cost mechanism."

9.  I am persuaded by years of observation that great lawyers (like Jim Freund, who Professor Gilson cites repeatedly) help make deals, but that there is nothing particularly lawyerly about it.  It is, as Vic Fleischer suggests, quarterbacking, or as David Zaring suggests, closing.  That strikes me as an aspect of leadership, something business schools teach, but with which law schools and law (qua law) struggle immensely. 

10.  Mostly, though, I step back and see the process as something akin to a Balinese cockfight, a ritual or ceremony that gives us some limited assurance of certainty in a highly uncertain and contingent world.  I find it equally plausible that the presence of all those lawyers doesn't do a damned thing to make the pie bigger - but they are necessary, and they do have value, just as the accoutrements to the cock-fight have value to the participants.  Their value is in what they do to give us the courage to overcome fear, panic, seller's remorse, buyer's remorse, and risk averseness. Again, as I said over in the comments, lawyers provide an alternative model for resolving disputes about the deal that is better than pistols at twenty paces, but the idea that the contract language provides certainty in anything other than trivial cases is a self-justifying illusion for lawyers.  I suppose what really bugs me comes from my intuition that the Gilson thesis is theory-laden in the sense that Ian Shapiro criticized in The Flight from Reality in the Human Sciences.  What comes first is the economic model and its assumptions about value and rationality, which is then imposed on a linguistic exercise, which is itself an imperfect model of a complex world.

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I have decided to take a break from my two current obsessive-compulsive tics:  minute-by-minute visits to fivethirtyeight.com and to the Dow ticker.

Others have commented on the dispute between Huntsman and Apollo over the "material adverse change" clause (or "MAC").  In a nutshell, Apollo, a private equity group, had purchased four chemical companies, merging them into a group called Hexion.  After a extended bidding contest involving Basell, Hexion (controlled by Apollo) executed an agreement to purchase Huntsman at $28 per share.  During the post-signing due diligence, however, Apollo's financial advisers came to the conclusion that the addition of Huntsman debt to Hexion would render the latter insolvent, triggering what I think is referred to as a "non-payment default" in Hexion's banking agreements.  Apollo invoked the MAC, and sued in Delaware asking the court for a declaration that it was entitled to walk away.  As Steve Davidoff reported, Vice-Chancellor Lamb ruled in an 89-page opinion that there had been no MAC and ordered Hexion to show up at the closing.

I've had sitting on my desk for over a month now the front page Wall Street Journal story on the dispute.  It preceded Vice-Chancellor Lamb's ruling, but it wasn't the technical contract dispute that got me interested.  It was this from Jon Huntsman in reaction to a "down-bid" from $25 to $24 per share in the pre-contract negotiations. "We deal throughout the world with people whose word means something. . . But with these firms, it's hard to know today what tomorrow's price will be."  Even after the deal was signed, Huntsman had Apollo's two senior executives to his Deer Valley mansion, along with the Huntsman board, a number of Huntsman's friend, and Utah's two senators, Orrin Hatch and Robert Bennett.  According to the Journal:  "Mr. Huntsman says he was suspicious of Apollo's willingness to close the deal at that point. 'It was important to me that I have Black and Harris [the Apollo execs] shake hands with them at our Deer Valley home. . .I wanted them to look [the senators] in the eye and tell them it was a done deal.'"  (Disclaimer:  it is public knowledge that, in his role as ecclesiastical leader, Jon Huntsman interviewed Gordon Smith in 1985 in connection with Gordon's impending marriage.  It's not clear from the record whether Mr. Huntsman had the power to put the kibosh on the proposed union, but we do have that bit of data on his good judgment or lack thereof.)

For contract theorists, this is a tough piece of data to assimilate, particularly if one is trying to come up with a universal justification for the involvement of the state in enforcing private agreements, presumably with close questions of doctrine hanging in the balance between the two views:  is the policy based on a moral imperative about promise-keeping, or is it based on economic efficiency and welfare enhancement?  As Ethan Leib observed, the theoreticians seem to be ships passing in the night, but for reasons that I find ironic.  Over in the Yale Law Journal, Daniel Markovits' Kantian "respect for persons" justification expressly disclaimed application to business entities, and the Schwartz & Scott economic justification of contract formalism expressly only applied to business entities of a certain size.  Over at the Harvard Law Review, in her critique of the immorality (or amorality) of aspects of contract doctrine like efficient breach, Seana Shiffrin admits she doesn't know how corporate officers deal with efficient breach, and, anyway, she may be affected by her "overly blunt anticorporatism."

Indeed, part of the Schwartz & Scott logic supporting contract formalism is that corporate executives go to business school and learn how to make optimizing rather than cognitively erroneous decisions, and to perform complex game-theoretic reasoning (if you don't believe me, see 113 Yale L.J. at 551, n. 17; my complete critique of this article is here at the text accompanying footnotes 101-122). So where does that leave Jon Huntsman in all of this, regardless of his lawyers' success in persuading Vice-Chancellor Lamb that the contract's formal provisions were congruent with the immanent morality of the situation as evidenced not by contract but by given word, handshake, and look-in-the-eye? 

Well, that's merely money.  More importantly, where does it leave the contract theorists?  Forever flummoxed, I think, if they try to create models that fail to recognize we are all moral agents, and all economic opportunists, and all at the same time.  My attempt at the final, unimpeachable, most universal, satisfy everybody but satisfy nobody reconciliation of it all is here.

Now back to the financial crisis.

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We've had good stuff on the state of play here, and Glom veteran Elizabeth Nowicki is blogging up a storm here and, more generally, here.

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Steven Davidoff has the analysis here, but it seems he hadn't seen the Wachovia-Citigroup exclusivity agreement, which is here.  The agreement doesn't contain a fiduciary out (a provision that lets the board do with a different bidder if it feels that its fiduciary duties require it to do so).  Is Wells Fargo banking on North Carolina corporate law giving it a way out of the contract?

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Hank Greenberg took AIG to some impressive heights, Elliot Spitzer then went after him, and what has happened to the company after he was forced to resign must be a little bittersweet - mostly bitter, given that a lot of his net worth is tied up in the company.  Anyway, as others have noted, he's thinking about trying to save the company at the last minute.

Greenberg doesn't think he is getting the help from current management he deserves.  Astute friend-of-the-Glom Miriam Baer pointed us to this anguished cry: "We have been discussing for serveral weeks my offer to assist the company," but "[t]he only concern you have expressed to me is the fear that were I to become an advisor to the company I would 'overshadow' you."  Greenberg says he isn't trying to "point fingers," even though the current management has "nothing under control."  Good stuff.

If he can't help them, it appears that other private entities will not either.  Dealbreaker suggests that the government is toying with putting the insurance firm under a federal conservatorship, and if that happens, Henry Paulson really will be the most powerful man in America, because I can't think of a legal basis he would have for that, other than perhaps a troubling declaration by the president that the emergency powers offered by TWEA and IEEPA might warrant serious peacetime economic involvement.

It is, after all, something we have heard from this administration before.

But I'd bet on that last line of defense, the Fed's discount window, being the statutory basis for government action if government action there is to be.

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Check out Steven Davidoff's fall deals preview over at DealBook ... if that's the sort of thing you like, I think you'll like it.

DealBook, by the way, is figured by Felix Salmon to be the most valuable finance blog out there, largely because it is kind of an email listserv too.  Hope Steven negotiated for a piece of the upside when he went on board....

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Carl Icahn and Yahoo have settled their proxy fight. Icahn will join Yahoo's board of directors, and he will get two accomplices on Yahoo's newly expanded 11-person board. After a modest rise at the end of last week, Yahoo's shares are again trading down below $22. Everyone is wondering what this does to the Microsoft deal, and the answer is that the deal seems very much alive. Icahn is no shrinking violet, and allowing him into the boardroom is not going to give Yang and the other incumbent yahoos a respite from his pressure to do a deal. Yang knows full well that Icahn is not in the business of managing companies. He is in the business of making deals.

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That's the picture painted by Andrew Ross Sorkin, who attended Allen & Company’s annual conference in Sun Valley, Idaho with a large collection of "moguls." (Who says "moguls" anymore, unless you are talking about skiing?) Lots of soundbites from sympathetic CEOs, who wouldn't want to be in Yang's shoes. Here is a sample:

“Steve is playing Carl to the hilt.... If Carl gets the board, Steve will buy Yahoo for a song — or watch Yahoo die on Carl’s watch.”

Not everyone at the conference believes that Steve Ballmer is the master of the universe: "'At this point, it’s embarrassing,' one technology C.E.O. whispered just out of earshot of Bill Gates. 'Ballmer should either buy the company or forget it.'"

For his part, Yang was "calm" -- "mingling effortlessly when he knew Mr. Ballmer and Mr. Icahn were off somewhere plotting his demise." Oh, brother. Does Sorkin work for Yahoo's PR department? Here is Yang being all noble:

“This isn’t about me.... It's about what’s going to happen to Yahoo.... Sure, it was on my mind, but I’ve gotten pretty good at compartmentalizing. If you let this sort of situation take over your life, it will. I have a business to run and stockholders to think about."

Compartmentalizing? That is a word that will forever be linked to Bill Clinton in my mind. Anyway, Owen Thomas offers another perspective:

That ignores Yang's responsibility for Yahoo's plight, of course. Could he not be the reason why Yahoo has been unable to attract a competent CEO a year after Terry Semel quit? A founder who holds a large, but not controlling stake, but is unable to let go of his company; who dithers on major decisions, stalling any action for fear of being wrong; who cannot articulate a vision for his company: Why would anyone want to work for such a man? Jerry Yang thinks he is irreplaceable in his willingness to be replaced. But the truth is, for Yahoo, he's not a martyr. He's a menace.

So which story do you believe? Yang as martyr or menace? Ballmer as master of the universe or embarrassment? From my desk, they both look like bumblers at this point, though coming events may provide redemption for one of them.

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What a weekend ... Anheuser-Busch agreed to be acquired by InBev for about $52 billion (just when we were about to get some interesting litigation) and Yahoo rejected another Microsoft offer, this one with Icahn (Rupert Murdoch says a deal between Microsoft and Yahoo is unlikely because "there's bad personal feelings"). But the big news is that Treasury is proposing to bail out Fannie and Freddie. According to Paul Kedrosky, whom I met last week for the first time, "These are tough times, folks, and we're headed to a whole new place that has never been explored." Amen to that.

UPDATE: Henry Blodget on Yahoo-Microsoft: "In our opinion, this was not a serious offer. We think it was designed simply to give Microsoft and Icahn more to complain about in the weeks leading up to the shareholder meeting."

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Kara Swisher has the scoop twice over: Microsoft is sweetening the search deal ("The centerpiece of the offer ... would be a deal to buy about one-third of Yahoo from existing shareholders at a premium to where it is trading now"), and Yahoo's management is weighing options, including an AOL deal or a new CEO to replace Jerry Yang and a new President to replace Sue Decker.

The bottom line, according to Swisher: "Massive change is coming to Yahoo in the next 30 days, one way or another."

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Bernard Black and Henry Hu, colleagues at the University of Texas, and authors of an interesting article on empty shareholder voting, appear to get along.  But not, apparently, with regard to the CSX dispute, in which Black has filed letters and briefs in support of the hedge funds mounting the proxy fight and Hu has filed one on behalf of CSX's management.  We'd call it something cute like the Annihilation in Austin or the Civil War in Hivill Country if we didn't suspect that Black and Hu will probably make up over some expensive cigars or something once this litigation is said and done.  Anyway, I started writing this - been away awhile, and behind my research on the internet - only to find that Larry Ribstein has already said it all better.

The CSX takeover dispute, by the way, because it involves a British acquirer, has got the unions and management looking to Congress and CFIUS to block the transaction - it's like we keep we keep telling you: CFIUS is the hot new corporate defense device.

HT: Securities Mosaic

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When Yahoo shareholders filed a class action complaint against members of Yahoo's board of directors on February 21, 2008, they complained about the board's refusal to negotiate with Microsoft, inappropriately casting this as a "'just say no' defense." Earlier this week, the plaintiff's have filed a motion to amend the complaint, but that document doesn't appear to be public, yet. Nevertheless, the main thrust of the complaint seems to have remained the same: Yahoo did not negotiate in good faith with Microsoft. The question that interests me is this: Assuming that allegation is true, should the aggrieved shareholders of Yahoo pursue litigation or a proxy contest?

Of course, they are pursuing both, but the rules of the game reveal the underlying policy. The claims raised in the shareholder litigation are not viable. The Yahoo directors have not engaged in a conflict of interest transaction and they have not acted defensively in response to a hostile takeover bid (no bid to Yahoo's shareholders was ever made!). As a result, the actions of Yahoo's directors would be judged under the business judgment rule, and the plaintiffs would lose. Rightly so. "Not coming to terms with a potential acquiror" is not -- and should not be -- a breach of fiduciary duty.

If shareholders believe that their directors are mistaken or incompetent, the right course of action is to replace those directors. With Carl Icahn's actions over the past few days, it appears that Yahoo's shareholders will have the opportunity to choose in July.

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Just in case Yahoo's board of directors thought Carl Icahn was going to play nice, this is the first sentence of his letter to Yahoo Chairman Roy Bostock:

It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft.

Icahn has purchased 59 million shares of Yahoo in the mid-20s, and he would be thrilled to take Microsoft's $33/share offer. This is what I wrote about Microsoft's bid on March 4:

Here is the important thing to understand: lots of shares have changed hands since the Microsoft bid was announced, and those new buyers did not buy Yahoo because they have warm and fuzzy feelings about Jerry Yang. These new shareholders paid a premium for their shares, and they are counting on a big transaction. Yahoo's managers are facing tremendous pressure to deliver.

Carl Icahn now speaks for those shareholders when he writes:

It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo's closing price of $19.18 on the day before the initial Microsoft offer.

...

During the past week, a number of shareholders have asked me to lead a proxy fight to attempt to remove the current board and to establish a new board which would attempt to negotiate a successful merger with Microsoft, something that in my opinion the current board has completely botched.

So what sort of grade would Icahn receive in his business letter writing assignment? The person who taught my business writing class would have given this a B on a good day, but I think it's an A. Remember: audience, audience, audience. Icahn is only nominally writing to Yahoo's board of directors. This letter is aimed at Yahoo's shareholders. And Microsoft, to whom the message is unmistakable: Yahoo should love Microsoft. Microsoft was right, and Yahoo was wrong. Please, Steve Ballmer, come back to the party.

By the way, Icahn's nominees include Harvard professor Lucian Bebchuk, who has become increasingly active in policy and advocacy over the past few years.

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