Control Transaction Governance: Collective Action and Asymmetric Information Problems and Ex Post Policing Kenju Watanabe
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Northwestern Journal of International Law & Business Volume 36 Issue 1 Winter 2016 Winter 2016 Control Transaction Governance: Collective Action and Asymmetric Information Problems and Ex post Policing Kenju Watanabe Follow this and additional works at: http://scholarlycommons.law.northwestern.edu/njilb Recommended Citation Kenju Watanabe, Control Transaction Governance: Collective Action and Asymmetric Information Problems and Ex post Policing, 36 Nw. J. Int'l L. & Bus. 45 (2016). http://scholarlycommons.law.northwestern.edu/njilb/vol36/iss1/2 This Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons. DOCUMENT1 (DO NOT DELETE) X 2/10/2016 10:35 PM Copyright 2016 by Northwestern University School of Law Printed in U.S.A. Northwestern Journal of International Law & Business Vol. 36, No. 1 Control Transaction Governance: Collective Action and Asymmetric Information Problems and Ex post Policing Kenju Watanabe* Abstract: Why, when and how should control transactions be policed ex post and by a judiciary? This article is the first to 1) articulate the doctrinal prereq- uisites for effective ex post judicial policing of fiduciaries in control transac- tions, and 2) theoretically unify two seemingly distinct approaches to police con- trol transactions: the ex post judicial policing in the United States and the ex ante policing by the Takeover Panel in the United Kingdom. Shareholder collec- tive action and asymmetric information problems, and the extent of gatekeeping by fiduciaries together determine the mode of third-party interventions, such as those by judiciaries and the Takeover Panel, in control transactions. The Arti- cle’s analysis yields normative conclusions about how judiciaries in the United States, including Delaware’s, should fine-tune gatekeeping by corporate fiduci- aries in control transactions. It predicts that multijurisdictional shareholder liti- gation that seeks anticipatory adjudication will produce negative consequences. Further, it gives policy makers outside of the United States the theoretical foun- dation for crafting third-party interventions in both types of control transac- tions, i.e., third-party acquisitions of control and controller freeze-outs, that are optimal for their own jurisdictions. * Kenju Watanabe is a member of the New York State Bar Association. He was a partner at Skadden, Arps, Slate, Meagher & Flom LLP and Paul Hastings LLP focusing on M&As and a visiting scholar at Columbia Law School (2012–14). I wish to first thank Professor Curtis J. Milhaupt for his generosity and invaluable advice throughout the process of writing this paper and Professor Hideki Kanda who, among others, kindly introduced me to Professor Milhaupt. I also thank Professors Harry First and Charles Whitehead, who took interests in this project in its early stages and Professor Peter Mülbert, who, among others, very generously shared his European perspectives. I had conversations with Profes- sor Michael Halberstam, who stresses the importance of civil procedure for corporate governance and has continued interests in this project. For helpful comments on prior drafts and discussion, I am equally grateful to other academics and practitioners, including William Allen, Thomas Allingham, John Ar- mour, Steve Banker, Ed Duffy, Peter Halasz, Koichi Hamada, Takeo Inaba, Hajime Kanagawa, Shin Kikuchi, Etsuro Kuronuma, Hatsuru Morita, Hisashi Ohgaki, Kenichi Osugi, Maria Isabel Saez, Katsu- hisa Shimbo, Toshihiko Shimizu, Masakazu Shirai, Wataru Tanaka, Akira Tokutsu, Hiroyuki Watanabe, Noriyuki Yanagawa, and Mitsuhiro Yasuda. Errors in this paper are all mine. The law firms of which the author was a member played roles in some of the cases cited in this paper. 45 46 DOCUMENT1 (DO NOT DELETE) X 2/10/2016 10:35 PM Northwestern Journal of International Law & Business 36:45 (2016) TABLE OF CONTENTS I. Introduction ............................................................................................. 49 II. Twin Problems, Dilemmas, Ex Post Judicial Intervention, and Attendant Complications .................................................................. 51 A. Governance Dilemmas ................................................................ 52 1. Acquisition of Companies with Wholly Dispersed Shareholders ........................................................................ 52 2. Acquisition of Minority Shares by Controllers ..................... 54 B. Governance Dilemmas Intensified .............................................. 54 1. Acquisition of Companies with Wholly Dispersed Shareholders ........................................................................ 55 2. Acquisition of Minority Shares by Controllers ..................... 55 C. U.S. Model to Solve Governance Dilemmas ............................... 57 D. Ex Post Judicial Policing: Amplified Needs and Difficulties...... 63 1. Preexisting Problems Amplified and Ex post Judicial Policing Becoming Both More Crucial and More Challenging ......................................................................... 63 2. Gatekeeping Activities Make Policing More Challenging ... 64 3. Acquisition of Companies with Dispersed Shareholders: Directors Acting as Gatekeepers ......................................... 64 4. Acquisition of Minority Shares by Controllers: Controllers Acting as Gatekeepers ...................................... 66 III. Ex Post Judicial Policing of Gatekeepers: Twin Problems and Possible Solutions ............................................................................ 66 A. Twin Problems re Initiation and Prosecution of Lawsuits .......... 67 1. Twin Problems ...................................................................... 67 (a) Collective Action Problems ........................................... 67 (b) Asymmetric Information Problems ............................... 68 2. Solutions ............................................................................... 69 (a) Solutions to Collective Action Problems ....................... 69 (b) Solutions to Asymmetric Information Problems ........... 71 B. Twin Problems re Ex Post Restorative Relief to Undo a Shareholder Collective Decision or Transaction ...................... 71 1. Twin Problems ...................................................................... 71 2. Solutions ............................................................................... 73 C. Inadequacy and Inefficiency of Ex Post Damage Relief ............. 73 1. Inadequacy and Inefficiency ................................................. 73 (a) Adequacy of Ex Post Damage Relief ............................ 73 (i) Directors as Gatekeepers ......................................... 73 46 Document1 (DO NOT DELETE X 47 Control Transaction Governance 36:45 (2016) (ii) Controllers as Gatekeepers ..................................... 75 (b) Efficiency of Ex Post Damage Relief ............................ 75 (i) Directors as Gatekeepers ......................................... 75 (ii) Controllers as Gatekeepers ..................................... 78 2. Solutions ............................................................................... 79 D. Summary ..................................................................................... 81 IV. United States ......................................................................................... 82 A. Delaware...................................................................................... 82 1. Strategies to Reduce the Twin Problems of Initiation and Prosecution of Lawsuits ...................................................... 82 (a) Collective Action Problems re Initiation and Prosecution of Lawsuits ................................................ 82 (i) Class Actions ........................................................... 82 (ii) Costs of Lawsuits .................................................... 85 (iii) Anticipatory Relief ................................................ 87 (b) Asymmetric Information Problems re Initiation and Prosecution of Lawsuits ................................................ 88 (i) Fact-finding .............................................................. 88 (ii) Burden of Proof ...................................................... 90 2. Strategies to Avoid Ex Post Restorative Relief to Undo a Shareholder Collective Decision or Transaction ................. 91 (a) Anticipatory Relief ........................................................ 92 (i) Interlocutory Injunctions .......................................... 93 (ii) Permanent Injunctions ............................................ 97 (b) Speed ............................................................................. 97 (c) Expertise and Flexibility .............................................. 100 (i) Chancery Court ...................................................... 100 (ii) Supreme Court ...................................................... 102 B. Other States ............................................................................... 103 1. Strategies to Reduce the Twin Problems of Initiation and Prosecution of Lawsuits .................................................... 103 (a) Collective Action Problems re Initiation and Prosecution of Lawsuits .............................................. 103 (b)