Pondering the Impact of the Corporate Governance Law on M&A

Dealmakers are less concerned about the last-minute about-face of the Bush administration when it chose to support the corporate governance law signed at the end of July than on how the new law will affect m&a. To answer that question, Mergers & Acquisitions spoke with a number of experts and came up with a mixed review on a question dear to dealmakers’ hearts: Is the new legislation going to make it easier or harder to structure and close deals? “The increased transparency will increase people’s comfort levels because the improved oversight of financial reporting will make the final product more accurate,” says Eugene Goldman, a partner at the law firm of McDermott, Will & Emery. In addition to Goldman’s glass-half-full take on the new measures, some experts caution that the changes the law will introduce will not necessarily have a huge impact on m&a. Depressed stock valuations and a slumping economy, these advisers warn, will have more impact on m&a than changes in accounting methods or an increased degree of oversight on the part of auditors. Professor Jay Lorch of Harvard Business School notes that the corporate oversight law will have more effect on companies’ ongoing operations than in change-of-control situations. “The law will have some effect on the structure of deals and it may discourage some marginal deals but, overall, increased transparency has to be a positive in getting deals done,” he says. The law hikes criminal penalties for CEOs and CFOs and increases oversight of the accounting profession. Lorch says that the more effective auditors become at rooting out irregularities in the numbers, the more confident buyers and sellers of businesses should become. One of many factors that could hamper m&a But another expert, Charles Elson, director of the University of Delaware’s Center for Corporate Governance, says that he could imagine scenarios in which the new law might make m&a harder. “It may have a negative impact because it could make transactions more difficult,” he states. He points to potential situations where it may be more difficult for a CEO to get his acquisition plan approved by the newly empowered and more skeptical boards. While the law may not be the only contributor to the increasing difficulty in getting deals done, it is part of the climate that might turn out to be detrimental to doing transactions, notes Elson. He also wonders about the impact of the law and the current atmosphere on poison laws. “Will an independent board tolerate a poison pill?” These antitakeover devices are designed to ward off hostile offers, but Elson says it is an open question as to whether they would be retained by boards. Also in question is the impact of one of the law’s major structures, the Public Company Oversight Board. Professor Douglas Carmichael of Baruch College in New York thinks that the new board doesn’t necessarily rule out the problem with the previous accounting review board, namely, that the non-accountant members tended to defer to the CPAs. “To the extent that the new board is able to improve audit effectiveness and make it harder to do creative accounting, it could have a depressing effect on m&a,” he asserts. If the board imposes a rigorous review, Carmichael adds, it will be hard to do another Tyco. But the tone and the resources of the board aren’t clear at this point, he says. “The new board will have to hire a huge staff or outsource most of its reviews, and the legislation isn’t very specific about how this will be done,” he notes. If the board turns out to be toothless, it might be better for some m&a transactions under Carmichael’s formulation, but whether or not that occurs, it seems clear that there are nuances to the new law that require close attention from dealmakers.