Legal Commentary

The JPMorgan - Bear Stearns deal is getting great coverage in the blogosphere.  Highlights thus far include: Larry Ribstein's insightful prediction (on Monday) that Bear shareholders might reject the deal; Gordon Smith's detailed discussion of the merger agreement's "restructuring efforts" provision; Steve Davidoff's consistently thorough and insightful analysis, including his most recent take on the deal protection provisions; and Jeff Lipshaw's expert thoughts on many different aspects of the deal.

One fascinating aspect to the deal is: will it hold?  The $2 (in JPMorgan shares) that each Bear share will get seems quite paltry compared to the share's historic price.  Many shareholders are unhappy with the deal, particularly Bear employees, who are purported to own up to a third of the stock.  The NY Times has reported of a battle in the markets between shareholders who want the merger to go through and those who do not.  The list includes:

• Bear shareholders (against the deal)
• Bear employees (strongly against the deal, as they may also lose their jobs)
• Bear bondholders (in favor of the deal, which includes Fed protection for creditors)
• Bear CDO holders (also in favor based on the improved protections against risk)
• Bear shareholders with significant short positions (in favor of the deal, if they shorted at more than the .054 shares of JPM)

All of these groups are battling to buy shares in order to serve their overall economic interests -- not the simplistic "maximized shareholder residual" of corporate law theory.  As Larry Ribstein notes, this raises the question of "what do shareholders want?"

The assumption is that [the shareholders] have a vote because they're interested in maximizing the value of the firm ? i.e, expected profits or cash flows. On this assumption hangs not only director fiduciary duties, but also proposals to clean up so-called "empty voting" ? that is, the separation of voting from ownership. But Bear shows that in our complex financial markets it's not so simple.

In our new paper, The False Promise of One Share, One Vote, Grant Hayden and I take on the notion of shareholder homogeneity as justification for the shareholder franchise.  The paper discusses how shareholders often have interests that differentiate them from other shareholders -- for example, majority shareholders, hedged shareholders, and employee shareholders.  The Bear Stearns deal is a particularly vivid example of the heterogeneity on display in the market. 

As Grant and I argue in the paper, shareholder homogeneity is a simplifying assumption that no longer works.  It is time to reconsider this fundamental principle behind the shareholder franchise.  Perhaps the Bear deal will be a catalyst for changes not only in the markets, but in corporate law theory as well.