Author: Lawrence Cunningham

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Facebook Playing Spoiler in Apple – Comcast Tie Up

 a comcastWithin hours after Apple Inc. and Comcast Corporation announced their long-anticipated merger agreement late last night, Facebook, Inc. said it would make a hostile bid for Comcast.  The Apple-Comcast deal, a stock-for-stock transaction valuing Comcast at $150 billion, is nominally billed as a “merger of equals” but few doubt that Apple, with a market cap nearing $500 billion, is the true acquirer.

Comcast has two classes of stock, all of the Class A being publicly held while all of the Class B, which has super-voting rights, held by the Roberts family, giving them thirty percent of the company’s total voting power.  A Comcast executive, who said the deal had been in the works for years as part of its strategic plan, called the transaction “a marriage made in heaven that could not be torn asunder.”

a facebookFacebook believes otherwise. The upstart social media business, with a market cap of $170 billion, says the late-night announcement merely put Comcast “up for sale.” Facebook officials said that Comcast’s board must entertain its bid.  Offering a combination of cash and stock that it says values Comcast at $190 billion, Facebook portrays its bid as “clearly superior.”

Comcast officials immediately dismissed Facebook’s overture.  “We are a staid Philadelphia-based, family-oriented company with prime assets such as NBC network television and the Golf Channel,” one Comcast executive explained.  “Facebook is a motley crew of youthful Menlo Park hoodies. We cannot see the two companies coming together under any circumstances. Apple, in contrast, gets our ‘TV culture’.”

For its part, Apple says its valuation of Comcast is generous and that it is not prepared to engage in competitive bidding.  “Facebook cannot be serious in thinking it can win a takeover battle for Comcast against Apple.  We are a far superior company and can assure Comcast and its stockholders of closing the transaction unconditionally.”

a appleAnalysts also noted that the Apple-Comcast merger agreement includes a termination fee requiring Comcast to pay Apple $1 billion if the transaction fails to close for any reason.  In addition, should the transaction note close because the Comcast board determines that its fiduciary duties prevent it from closing, Apple has the option to acquire 19.9 percent of Comcast’s Class A stock at yesterday’s closing market price. The option purchase price may be paid with an Apple promissory note and settled, at Apple’s option, for cash in lieu of shares. There is no cap on its value.

Facebook’s bid is conditional on those two contract terms being withdrawn or declared invalid.  Apple and Comcast have scheduled all-day emergency board meetings for April  1.   

 

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Job Opportunity: Associate Dean, GW Law’s Econ/Finance Program

The George Washington University Law School seeks an Associate Dean and Program Director for its Center for Law, Economics & Finance (C-LEAF). C-LEAF is a think tank within the Law School, designed as a focal point in Washington, DC, for the study and debate of major issues in economic and financial law confronting the United States and the global community.

Minimum Qualifications: Master’s degree in an appropriate area of specialization and a minimum of 5-7 years of professional or administrative experience. An advanced degree  and experience in legal education is highly preferred.  Extensive knowledge and understanding of business and finance law policy. Previous experience in program administration and fund raising is essential.

To apply, please visit The George Washington University employment site, posting number 003171.

Deadline for applications is March 30, 2014.

The George Washington University is an Equal Employment Opportunity/Affirmative Action Employer.

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Liquidity and Control at Buffett’s Berkshire Hathaway

Warren Buffett’s ownership of Berkshire Hathaway is skewed heavily towards commanding greater voting power rather than a larger slice of the economic interest. He values control more than liquidity and is delighted to have shareholders who prefer liquidity to control to stake their money accordingly.   It is interesting to see the corporate governance tools used to create this structure and precisely how the voting power and economic interests are determined. 

Berkshire Hathaway, like many other corporations, has multiple classes of stock with different economic and voting rights. Berkshire’s Class A has 10,000 times the voting power as its Class B and 1,500 times the economic interest.  All shares are eligible to vote on most shareholder voting matters and there are no further distinctions as to economic rights, such as dividends or liquidation payments. Market prices generally reflect the economic rather than the voting ratio: the Class A shares recently traded at $170,000 per share while the Class B trade at $113 (very close to 1500-to-1).

Many stockholders, including Buffett, own some Class A and some Class B, in part because they exercised the right to convert A to B to give gifts and otherwise manage estate planning.   It is easy to see what portion Buffett or another shareholder has of each Class, simply his number of shares of a Class divided by all shares of that Class. Buffett, for example, owns about forty percent of Berkshire’s Class A shares and a small number of the Class B.

It is more important to know what percentage of the aggregate voting power and economic interest any given shareholder’s stake represents.  So: what percentage of the aggregate voting power and economic interest does Buffett command?  For Berkshire, the answer can be computed using the following formula that reflects the relative weight of the A compared to the B in votes and payouts:

 

Voting Power    =

Number of A Shares Owned + Number of B Shares Owned / 10,000

Total A Shares Outstanding + Total B Shares Outstanding / 10,000

Economic Interest =

Number of A Shares Owned + Number of B Shares Owned / 1,500

Total A Shares Outstanding + Total B Shares Outstanding / 1,500

 

Applied to Buffett (using the most recent proxy statement figures for share information):

 

          Buffett’s Voting Power =

    350,000 + 3,525,623 / 10,000      

892,657 + 1,126,012,136 / 10,000

= 34.9%

 

Buffett’s Economic Interest =

      350,000 + 3,525,623 / 1,500

892,657 + 1,126,012,136 / 1,500

= 21.4%

 

Conversion charts can be created to show the voting power and economic interest of given levels of A and B share ownership.  The following assume the same figures stated above, which can change from time to time as Class A shares are converted into Class B shares or other capital shuffles occur.

 

Class A Power

Shares % ofClass VotingPower EconomicInterest
  250  – 0.04 0.02
  500 .056 0.05 0.03
1000 .112 0.1 0.06
2000 .224 0.2 0.12
3000 .336 0.3 0.18
4000 .448 0.4 0.24
5000 .550 0.5 0.30
6000 .662 0.6 0.36
7000 .784 0.7 0.42
8000 .892 0.8 0.48
9000 1.00 0.9 0.54
10,000 1.12 1.0 0.60
15,000 1.68 1.5 0.91
30,000 3.36 3.0 1.82

                                                                                                 Class B Power

(shares in millions)

Shares % ofClass VotingPower EconomicInterest
  1 0.1 0.04 0.01
  5 0.4 0.20 0.05
10 0.9 0.42 0.1
20 1.8 0.82 0.2
30 2.7 1.22 0.3
40 3.6 1.62 0.4
50 4.4 2.02 0.5
60 5.3 2.42 0.6
70 6.2 2.84 0.7
80 7.1 3.24 0.8

 

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The 80/20 Principle

ParetoPareto originated the so-called 80/20 principle in the early 1900s after observing that 80% of the wealth in Italy was owned by 20% of the population.  For a century, innumerable observers have found that the 80/20 pattern, also dubbed the “vital few/trivial many rule,” recurs across many distributions.

Businesses tend to generate 80% of sales from 20% of their products and 80% of their profits from 20% of their customers.  Managers can use the tool to think about operations and allocating resources.  In book publishing, eighty percent of promotional resources are dedicated to twenty percent of the list.

The principle applies among law firms, where twenty percent of clients contribute eighty percent of billings. Firms can use the insight to improve in many ways. For example, it can help partners decide which clients to nurture or fire  or how paralegals should allocate their time.

The concept can be refined for any number of time management tasks, as popularized by Richard Koch’s 1998 book, and in The Four Hour Work Week by Tim Ferris (some notable tips from which Jeff Yates collected a few years ago at The Faculty Lounge).

The concept is not a precise measure nor a universal constant. For example, in America today, 20 percent of the population owns something more like 95% of the wealth. And the insight does not yield to prescriptive policy manuals. It is instead a way of thinking about resource allocation that can improve one’s effectiveness.

I wonder, among law professors, in what ways does the 80/20 rule manifest?  Here are some alluring candidates:

Eighty percent of law professors were trained at twenty percent of the nation’s law schools.

Do eighty percent of a prawf’s citations come from twenty percent of their articles?

Are eighty percent of your downloads on SSRN from twenty percent of your posted pieces?

Are twenty percent of law professors responsible for eighty percent of legal academic blogging, as Eric Goldman once forecast?

Do eighty percent of valuable classroom contributions come from only twenty percent of your students?

What other questions might this apply to for law professors? And what are the implications?

For one, being aware of the phenomenon can help define the activities that matter the most and allocate scarce productive resources on those.  Reflect upon what is special about the twenty percent of your scholarship yielding the vast majority of its influence.   Is it subject matter, methodology, orientation, clarity?  If twenty students in your 100-person classroom pull most of the weight, what should you do about that? Is it necessary to draw the rest in or capitalize on the phenomenon in some other way?

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Contracts Casebook Survey Results

The frightful stress gripping legal education is one reason why all law professors may be interested in the newly-released results of the Washington Law Review survey of law teachers of Contracts conducted in mid-2013.

Available here, the results from 138 respondents consist of numerical summaries of multiple choice questions and synthesis of their written comments that I culled.  A sampling from the latter appears below.

The results are of inherent interest to those teaching Contracts and speak to broader questions of legal pedagogy of value to others, including the allocation of time in the first year, the utility of the case method of instruction, and desire for change versus the tug of tradition.

(The survey was done in connection with a symposium inspired by my recent book, Contracts in the Real World, which has also just been published, here, featuring contributions from Aditi Bagchi, Brian Bix, Larry DiMatteo, Erik Gerding, Charles Knapp, Jake Linford, and Jennifer Taub.)

Read More

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Call for Papers: National Business Law Scholars Conference

The Fifth Annual National Business Law Scholars Conference (NBLSC) will be held on Thursday-Friday, June 19-20, 2014, Loyola Law School, Los Angeles.  I had the honor of giving the keynote address at last year’s event (held at Ohio State) and can attest to an impressive group of scholars, papers, and ideas, in both quantity and quality. They come from across the U.S. and around the world.

The organizers (named below), welcome all scholarly submissions relating to business law. Presentations should focus on research appropriate for publication in academic journals, especially law reviews, and should make a contribution to the existing scholarly literature.  They try to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by April 4, 2014. Please title the email “NBLSC Submission – {Name}”. If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a commentator or moderator. A conference schedule will be circulated in late May. More information is available here.

Conference Organizers
Barbara Black (The University of Cincinnati College of Law)
Eric C. Chaffee (The University of Toledo College of Law)
Steven M. Davidoff (The Ohio State University Moritz College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia Law)

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The Responsibility of Autonomy: More on Berkshire and Benjamin Moore

Autonomy does not mean carte blanche; its operational companion, hands-off management, does not mean abdication.  The concepts entail complex relations between power and responsibility. Autonomy is an act of trust whose disappointment  prompts its revocation.  The saga of Benjamin Moore, about which my recent blog drew two thoughtful comments,  illustrates.

Beginning in 1883, the company’s paint was sold solely through a network of small distributors operating with extraordinary autonomy, as owners of their own businesses.  In 2000, when Berkshire Hathaway acquired the company, its famously hands-off chairman, Warren Buffett, assured distributors of continuation of that tradition.

As the grip of the Great Recession in 2008 stunted sales growth, however, a new CEO at Benjamin Moore (Denis Abrams) began displacing the distributorship tradition through new arrangements with chain stores (including big-box retailers).  Abrams altered the distributor relationship to respond to competitive changes, including dictating tougher terms on financing inventory and charging for advertising. Distributors complained about this to Buffett, but Berkshire’s practice of vesting autonomy in its CEOs prevented direct or immediate intervention.

Ultimately, however, Abrams’s repudiation of distributor autonomy prompted Buffett to make an exception to the autonomy Berkshire usually gives Berkshire CEOs, and fired Abrams.  To replace him, Buffett delegated much of the task to a new Berkshire employee, Tracy Britt Cool, a recent business school graduate he had just named chairman of Benjamin Moore.  Her choice, Bob Merritt, began correcting the errors that Buffett believed Abrams had made, especially restoring distributorship autonomy.

Last month, however, Merritt was fired too.  Who fired him (Buffett or Britt) is unclear and the exact reasons have not been disclosed. It may be a replay, a business disagreement about distribution or involve (per press gossip) issues of gender bias and locker room humor among company management.  Merrit’s replacement, meanwhile, was chosen jointly by Britt and Buffett. 

So there are several marks on the long winding story of autonomy in the Benjamin Moore saga.  The distributors had autonomy, which Berkshire promised they would keep, yet Abrams impaired; distributor complaints to Berkshire first met resistance in the name of CEO autonomy until Berkshire lifted its usual deference to that practice; Buffett gave Britt considerable autonomy to choose Merritt, who ran with it until he didn’t have it anymore; and, most recently, she enjoyed far less autonomy in the case of selecting his successor.  

People claiming that Buffett is a hands-off manager or gives his CEOs extraordinary autonomy are right, so long as they appreciate how that entails a strangely awesome burden.  People who are trusted, and who are trustworthy, often excel and avoid problems precisely because autonomy is a huge responsibility.

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Benjamin Moore and Berkshire: Centuries of Repute

Sometimes the up-to-the-minute nature of contemporary life obscures ancient principles. A case in point is the news surrounding last week’s and last year’s firings by Berkshire Hathaway of the CEOs of its subsidiary, Benjamin Moore & Co. But the values that Benjamin Moore has embraced for more than a century and those Berkshire has embraced for nearly half a century speak louder than the gossipy whispers associated with these two sad episodes (hat drop to New York Post).

In 1883 Brooklyn, twenty-seven-year-old Benjamin Moore, along with his forty-three-year-old brother Robert, created the paint company that remains in business today. He articulated several business principles to guide his company:

  1. A fair deal for everyone.
  2. The giving of value received without any graft or chicanery.
  3. Recognition of the value of truth in the representation of our products and an effort at all times to keep the standard of our goods up to the highest mark.
  4. The practice of strict economy without the spirit of parsimony, and the exercise of intelligent industry in the spirit of integrity.

Moore’s motto was “quality, start to finish.” It charged a premium price for it, even when that sacrificed market share. To reinforce its investment in quality, the Moore brothers began the practice of selling paint through independent distributors. Other paint makers might sell in hardware stores, or as private-label products of customer retailers, or in their own retail stores. Benjamin Moore & Co. always strictly adhered to the model of distributing exclusively through certified dealers. Those distributors, in turn, have invested considerable effort in building their businesses to keep their end of the bargain. Read More

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A Priest’s Mission He Never Talked About

The following commentary recently appeared in the Catholic Star Herald, a publication of the Catholic diocese in Camden, New Jersey. It was written by Monseigneur Ciaran P. O’Mearain.

One year ago Father James Barry, retired pastor of Salem, died in the Lord. Priests are easily forgotten and their good deeds “oft interred with their bones.” But, for me, there was a defining event in Father Jim’s life rendering him forever memorable. . . .

During the troubles in Northern Ireland, 1968-98, there was a period of internment, 1971-75, during which 1,981 young people, mostly from the Catholic minority, were arrested and imprisoned without trial. Unfortunately, internment only led to outrage in the minority community.

It was during the internment period Father Barry spent his vacation at my sister’s home in Belfast. He went out every day, trailed by an army helicopter, to visit those distraught young people who languished in jail. It was a dangerous undertaking, and a secret mission he shared with no one.

It was only after his return to America my sister began to receive calls from parents of the interned thanking her for Father Barry and the consolation he brought to their sons and daughters.
In death he was embraced by the One who was also arrested, who stood with people of little significance; pushed off the road of life and relegated to the margins. Perhaps He whispered gently into Jim’s surprised ear: “I was in prison and you came to visit me” (Mt 25:36).

* * * * *

I was grateful to read this piece, because Father Barry was my Uncle Jim.  I remember discussing many aspects of the Irish situation with him during the period Msgr. O’Mearain refers to. Uncle Jim shared his prodigious knowledge of the religious, political and historical aspects of the Troubles. Although I knew that Uncle Jim traveled to Ireland many times during and after this period, I cannot recall him ever mentioning these secret missions.

A high school classmate of mine who knew Uncle Jim, Bill Tillinghast, sent this clipping on to me with this note: “A seemingly simple mission to minister to the imprisoned, but in context as dangerous as any Ranger or Recon mission.”  Thanks Bill. I’ve forwarded it to all my siblings and cousins and wanted to post it here as a tribute to my late Uncle and perhaps an inspiration for others.

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Good Riddance Spitzer

The virulent narcissist Eliot Spitzer should now slink quietly back into political obscurity.  Having been decisively defeated in yesterday’s Democratic primary race for comptroller of New York City, Americans can breathe a sigh of relief that New Yorkers had the sense to repel the preening scion.

The hypocrite, who made his name by falsely accusing others of wrongdoing that turned out to be the kind of misbehavior he had engaged in, threatened to use the same bullying tactics running New York City’s finances. This would have meant flexing muscles to attack corporate America indiscriminately in the interest of Spitzer’s self-promotion.

The sideshows he promised involved waging battles against corporations in which NYC invests to effect corporate governance makeovers on terms Spitzer would approve. Such distractions would not only have ruined reputations of corporate managers, but would have impaired corporate productivity, cost American economic output and diminished employment prospects and retirement funds of people across the country.

A majority of NYC Democratic voters saw through Spitzer’s arrogant duplicity. He is the man, after all, who proclaimed to the utmost integrity yet humiliated his wife by elaborate infidelity, scarred his three daughters for life by screwing (literally) girls their age for years and furtively broke federal banking laws repeatedly while publicly punishing others for similar transgressions.

One hopes that Spitzer, myopic and thick-headed, will finally take the hint that people do not think liars and cheats like him should be in public office.  Good riddance.