Archive for the ‘Uncategorized’ Category

Update on Corporate Political Activity

Posted by John Coates, Harvard Law School, on Tuesday July 3, 2012 at 9:27 am
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Editor’s Note: John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post relates to research by Professor Coates discussed on the Forum here, as well as a recent post on a Manhattan Institute Legal Policy Report, discussed here. Work from the Program on Corporate Governance about corporate political spending includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert Jackson, discussed on the Forum here. A committee of law professors co-chaired by Bebchuk and Jackson submitted a rulemaking petition to the SEC concerning corporate political spending; that petition is discussed here.

Corporate politics continue to generate controversy. Recent items of note include (1) the US Supreme Court’s decision to expand the reach of Citizens United in Western Tradition Partnership; (2) the continued increase in the number of and support for shareholder proposals calling for disclosure of corporate political activity; and (3) a recent “study” sponsored by the conservative Manhattan Institute (and described on the Forum here) purporting to find that – as the Wall Street Journal put it – “politics spending pays” – contrary to my own research, which finds that large public companies that were politically active before Citizens United experience a decline in their industry-adjusted market value after the decision. Each of these developments is discussed briefly below.

…continue reading: Update on Corporate Political Activity

Delaware Supreme Court Orders Entire Fairness Review

Posted by Andrew Tuch, co-editor, HLS Forum on Corporate Governance and Financial Regulation on Saturday February 28, 2009 at 4:23 pm
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Editor’s Note: This post comes to us from Robert S. Reder, Alan J. Stone, Peter Heller and Dean Sattler of Milbank, Tweed, Hadley & McCloy LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a previous Client Alert, [1] we discussed a decision of the Delaware Court of Chancery dismissing a stockholder suit that alleged breach of fiduciary duty by directors who initiated, but later abandoned, a sale process that had generated three attractive offers. In Gantler v. Stephens [2], the Court of Chancery applied the business judgment rule to the board’s conduct, rather than the Unocal [3] standard of enhanced review, because the directors’ actions were not “defensive” in nature. In affording the directors the benefit of the business judgment presumption, the Court of Chancery found that the directors breached neither their duty of loyalty nor their duty of care, and therefore declined to undertake an “entire fairness” review of the board’s conduct.

On January 27, 2009, the Delaware Supreme Court reversed the Court of Chancery’s decision. In the Supreme Court’s view, the complaint pled “sufficient facts to overcome the business judgment presumption,” thereby requiring an examination of plaintiffs’ allegations under the entire fairness standard of review.[4] The Supreme Court’s analysis provides helpful insight into the nature of the pleading required to overcome the presumption of the business judgment rule in the M&A context. The Gantler decision also clarifies the nature of the fiduciary duties owed by corporate officers to a Delaware corporation, as well as the scope and application of the shareholder ratification doctrine under Delaware law.


In August 2004, the board of directors of First Niles Financial, Inc. authorized a process to sell the company, and retained financial and legal advisors to assist. At the next board meeting, with the sale process underway, management advocated abandoning the process in favor of a so-called “going private” transaction. The board did not act on management’s proposal, but instead allowed the sale process to continue.

…continue reading: Delaware Supreme Court Orders Entire Fairness Review

Do Shareholder Rights Affect the Cost of Bank Loans?

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday January 12, 2009 at 12:50 pm
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In our paper Do Shareholder Rights Affect the Cost of Bank Loans? which was recently accepted for publication in the Review of Financial Studies, we analyze the relationship between firm-level corporate governance measured by the governance index of Gompers, Ishii, and Metrick (2003, henceforth GIM) and the cost of bank loans issued to publicly traded firms.

We use a panel data set of over 6000 loans issued to a wide cross-section of US firms between 1990 and 2004 as the basis for our analysis. Our basic result shows that firms that are more vulnerable to takeovers (i.e., firms with higher shareholder rights) are charged significantly higher loan spreads. To quantify this result, we follow GIM and construct corner portfolios of firms with the highest (democracy) and the lowest levels (dictatorship) of shareholder rights. We show that for a typical firm in our sample a switch from the democracy to the dictatorship portfolio decreases the expected loan spread by almost 25% (30 basis points) after controlling for the default risk as well as various firm-level factors and specific features of loan contracts.

In interaction regressions, we find that democracies with low leverage are charged significantly higher loan spreads. This provides evidence that the possibility of an increase in financial risk is an important consideration through which takeover vulnerability gets priced in bank loans. Additionally we find that conditional on high takeover vulnerability, long maturity loans have higher spreads than loans with short maturities. Loans with longer maturity expose banks to takeover risk for a longer time-period and our results indicate that banks charge a premium for taking such risks.

Though our focus remains on debt pricing, bank loan covenants and collateral can also mitigate a bank’s concern about potential losses in takeover. Consistent with this argument, we find that banks charge higher loan spread to those high takeover vulnerability borrowers that have fewer covenants or those who obtain unsecured loans. To investigate whether banks can also protect their interests by having bargaining power over their borrowers, we analyze the effect of syndicate size on the pricing effect of takeover vulnerability. We find that the effect of takeover vulnerability is significantly higher for loans with smaller syndicate size i.e., when the bargaining power is likely to be high. Thus, the bargaining power channel is less likely to explain away our results.

Our results have important implications for understanding the link between a firm’s governance structure and its cost of capital. Our study suggests that firms that rely too much on corporate control market as a governance device are punished by costlier bank loans. The full paper is available for download here.


Posted by Robert Jackson, Managing Editor, Harvard Law School Corporate Governance Blog, on Friday December 1, 2006 at 12:15 pm
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Welcome to our weblog! The Harvard Law School Corporate Governance Blog is sponsored by the Harvard Law School Program on Corporate Governance. The Program seeks to facilitate research and public discourse about corporate governance.

Our weblog will provide updates on working papers, seminars, speakers, and other activities sponsored by the Program. The blog will also provide a forum for communications about corporate governance by individuals associated with the Program–faculty, fellows, and members of the Program’s advisory board–as well as by guest contributors and others.

All views expressed on this blog should be attributed only to the individuals expressing them; the Program on Corporate Governance seeks to provide a forum for the expression of different views and does not take positions on any corporate governance issues. 

The blog editor, Robert Jackson, can be reached by email at rojackso [at] Readers of the blog may also write comments by clicking the “Comments” link below each post. Readers may also receive regular updates on new posts by clicking the RSS link on the right-hand side of the blog. We look forward to communicating with and hearing from you!

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