PR OFILE
California. State laws do not vary much, he has found, so the individual contracts are more relevant. Some jurisdictions are, however, "more hospitable to corporate defendants", and Schiffman recalls Arizona as one where plaintiffs were well received. Equally, Schiffman has had successes "even in unfriendly jurisdictions with unsympathetic courts".
PBs can be vulnerable to opportunistic litigation simply because "the PB is often the only solvent party left in cases of frauds or blow-ups, where the money manager may have nothing left", Schiffman explains. He says he has generally been "very successful at avoiding PB liability, and has been involved in many Madoff- and Petters-related cases". But he observes that PBs have sometimes incurred losses and cautions that "changes in state law on fraudulent conveyance have lowered the bar for PB liability". Essentially, there is no longer any need to prove intent, knowledge or co-conspiracy. An entirely innocent PB, who knows nothing of a fraud, "could be trapped just because it received money from the wrongdoer". Though Schiffman might not agree with this, naturally he respects the law.
APPRAISAL STATUTES ("MINORITY SQUEEZE OUTS") In general, it seems that regulation is hampering funds, but in a few areas it can help them. Swartz identifi es appraisal statutes as potentially offering very attractive risk/reward for hedge funds that do not vote in favour of a takeover bid and seek an appraisal rather than the agreed upon merger consideration. In appraisal actions, courts seek to determine the fair value of the target's shares exclusive of any value arising from the merger itself, such as deal-specifi c synergies. And, under Delaware law, funds receive 5 per cent interest from
the effective date of the merger through the date of payment or judgment.
The determination of fair value can be higher or lower than the merger consideration but, in Delaware, judges have found fair value to equal or exceed merger consideration in 85 percent of the cases litigated to a decision. So, "while appraisal actions need to be carefully selected, typically the worst case is you get the share price plus interest because it's very unlikely that a court concludes that the deal price exceeded fair value," Swartz says. The best case is that holdouts may get a premium over the original offer plus interest.
Like most cases, these tend to get settled, as there is risk involved and it is expensive to hire expert witnesses for the process but, "as appraisal litigation increases, and the stakes become greater and greater, expectations of favourable settlements could fade as both sides dig in," adds Gussman. (In the United States, expert witnesses can command six or seven fi gure fees.) When market valuations are drifting upwards, the passage of time plays into funds' hands as the reference point for appraisals is at the closing of the transaction, not when the deal was signed. "If market or industry conditions have improved in the interim, then valuations will tend to be higher. In any event, 5 per cent is not too shabby after six years of near-zero interest rates," notes Swartz.
Conclusion Schiffman reckons regulation follows a pendulum- like movement, noting, "we are past the high point of regulatory fever post-2008, and the pendulum is starting to drift back a bit, but it moves slowly and is still at a high pitch". Law fi rms, regulators and fi nancial fi rms will be busy for many years to come. THFJ
“We are past the high point of regulatory fever post—2008, and the pendulum is starting to drift back a bit, but it moves slowly and is still at a high pitch.”
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