X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Kicking Silicon Valley lawyers when they’re down seems cruel. But fair or not, there’s new cause for snickering from the East Coast: a study that’s sure to be trumpeted as long-sought proof that tech industry lawyers weren’t just annoying, they were amateur players in the deal mania that characterized the decade. Harvard Law School Professor John Coates IV supplies the ammo in an October article in the University of California, Berkeley’s Boalt Hall School of Law’s California Law Review, where he claims that scores of public companies represented by top Silicon Valley firms received shoddy legal advice in their adolescence — and could end up paying the price in this weak economy. Even though the alleged gaffes occurred long ago, they still matter, suggests Coates. Why? Because the failure in the early 1990s to install routine provisions to thwart hostile takeovers has left some public companies vulnerable to takeover today. If Coates is right, then, listen up, Carl Icahn: Peoplesoft Inc., Foundation Health Corporation, and Silicon Valley Bancshares just might make for easy pickings. Coates has one word to describe the overall quality of corporate lawyering in the San Francisco Bay Area a decade ago: inferior. Tough talk indeed, and it’s provoking predictable outrage. The sharpest riposte: that Coates is hardly an unbiased observer, having once been a partner in New York’s Wachtell, Lipton, Rosen & Katz, the M&A colossus. “He has such an East Coast, Gothno-centric view of the world,” gripes a partner in Palo Alto, Calif.’s Wilson Sonsini Goodrich & Rosati, which bears the brunt of Coates’ criticism. “If Marty Lipton and Joe Flom are doing it, it’s the right way.” Cross-country caterwauling is nothing new. Like rival hip-hop artists, East and West spent the Internet boom years dissing the opposition: Wall Streeters would bury deals in endless nitpicking; Silicon Valleyites needed more adult supervision. For a while, the sniping was mostly anecdotal. Then came Quickturn. In 1998 San Jose, Calif.-based Quickturn Design Systems, Inc. — a Wilson Sonsini client — couldn’t fend off a takeover battle ignited by Mentor Graphics Corp. The fight wound up in Delaware Chancery Court, the corporate law holy land. In its decision, the court struck down Quickturn’s defenses and criticized Wilson Sonsini for improperly advising the company’s board. In the end, Quickturn was rescued by a white knight, but the eastern school of thought holds that the company was forced to sell because Wilson Sonsini left it vulnerable. Coates is a dean of that school. After Quickturn, he set out to quantify the quality of corporate lawyering, using anti-takeover provisions as a measuring stick. He sifted through charters, bylaws, and other starter documents filed by 162 companies that went public between 1991 and 1992, or roughly 14 percent of total IPOs during that period. The governance terms in place at the IPO stage, according to Coates, affect whether target companies can later stay independent during a hostile bid. Coates looked for devices such as staggered or classified boards, which ensure that a majority of directors are not up for election at the same time, and dual class structures, which control the amount of power available to certain shareholders. What Coates found was a dearth of such basic safeguards among clients of several top Silicon Valley-based firms (the notable exception being Palo Alto’s Cooley Godward). What’s more, Coates says he found a “large number” of mistakes where conflicting measures effectively canceled each other out. For example, according to the study, only one of nine Wilson Sonsini clients, on the eve of their stock debuts, had a staggered board, and all gave shareholders blanket power to remove directors. By comparison, New York’s Skadden, Arps, Slate, Meagher & Flom installed classified boards in six out of seven clients and limited shareholder power to oust directors at all seven. There’s a clear lesson that Coates finds in the work done by Wilson Sonsini and its brethren: A decade ago, these firms were small, complacent, and inexperienced in M&A. They were also more interested in cementing ties to venture capitalists than in looking out for the long-term interests of their corporate clients, Coates suggests. To prove his point — and to cut Wilson Sonsini & Co. some slack — Coates says Silicon Valley shops had cleaned up their act by the late 1990s, the apex of the dot-com boom. He randomly chose 195 companies that went public between 1998 and 1999 and found that San Francisco Bay Area firms were just as likely to put in place anti-takeover clauses as were their New York counterparts (here again he singles out Cooley Godward for its consistency). “Learning,” writes Coates, “seems to have occurred.” For all this, Coates earns a double-barreled epithet from his critics: insolent and myopic. Coates and his eastern accomplices, the westerners say, don’t understand the early 1990s Silicon Valley culture or its clients. The region’s clientele, mostly entrepreneurs and venture capitalists, are less pliable than elsewhere and are fiercely independent. Hostile takeovers, both in the early 1990s and today, have been far from the minds of fledgling companies whose real value resides in their workforces, not in tangible products. “To lay this at the feet of quality lawyering is just wrong,” says Gordon Davidson, chairman of Palo Alto’s Fenwick & West and a corporate lawyer in Silicon Valley since the late 1970s. “I’ve known about staggered boards since I graduated from law school 26 years ago,” he adds. “I’ve argued until I’m blue in the face, and the board still made a conscious decision not to adopt them.” One reason: Boards were and are still populated with venture capitalists and investment bankers who are focused on making a quick buck and, as such, probably would welcome a bidding war — especially in this market. Companies began to embrace takeover shields by the end of the decade. It wasn’t because Silicon Valley lawyers finally attended the right CLE classes. Rather, clients had, over time, begun to realize the value of installing provisions that would allow them to control the sales process, says Diane Holt Frankle, an M&A partner in Palo Alto’s Gray Cary Ware & Friedenrich. And if that’s not good enough for East Coast second-guessers, try this: Davidson says he can think of “1,000 counterexamples where our firm and other firms have outlawyered New York firms.” The Manhattan crews understand deal mechanics, continues Davidson, but they often overlook the intellectual property and human capital components of a deal: “We’ve seen them over and over miss issues because they have blinders on.” Sounds like an invitation to a Stanford law professor to dissect some Wachtell deals.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.