Martin Lipton: for the defense.

• Author: Kaback, Hoffer
• Position: Interview with corporate takeover specialist of the law firm Wachtell, Lipton, Rosen and Katz - Interview

Whether defending against hostile takeovers or criticizing putative boardroom 'best practices,' Martin Lipton and his law firm operate at the highest levels of craftsmanship.

ONE OF THE BEST BARGAINS AROUND is getting yourself a spot on the Wachtell, Lipton, Rosen & Katz mailing list. The cost is nil; the value, high. Wachtell Lipton -- a charter member (along with long-time rival Skadden, Arps, Slate, Meagher & Flom) of the two-firm top tier of takeover law firms -- distributes high-quality memoranda on a wide range of topics. Subjects include corporate governance, corporate taxation, securities regulation, accountants' liability -- and, of course, takeovers. One memo may be a one-pager analyzing a recent Delaware Chancery Court opinion; another may be a three-quarter-inch thick tome on bank takeovers; a third may be a sophisticated dissection of a "blue ribbon" governance report; a fourth may provide a set of model bylaws for a potential target company.

Some memos are signed by Martin Lipton, one of the two individual legal giants of the takeover world of the last quarter-century. (The other is Joseph Flom of Skadden Arps -- see "The Lion in Winter: Joe Flom at 75," DIRECTORS & BOARDS, Fall 1998.) Lipton produces incisive analyses of corporate governance issues. For example, he opposes the "box-checking" approach to board "best practices" and major aspects of current proposals for audit committee change (see sidebar "Audit committee reform: A misguided focus").

Consonant with Wachtell Lipton's core business, he also offers continuing comments on the atmospherics, business strategy, and tactics of takeovers. These are not law review articles from some academic. Lipton's memos embody the thinking of the quintessential "man in the arena."

Lipton repeatedly updates his comprehensive "Takeover Response Checklist" memo. That memo begins with a discussion of factors (ordered alphabetically from "Accounting" to "Technology") affecting current M&A activity. It then segues into his detailed checklist of takeover responses. For Marty Lipton's "Takeover Response Checklist" alone, it is worth being on the Wachtell mailing list.

AT CERTAIN POINTS IN THEIR CAREERS, several world chess champions competed in, a class by themselves. This was true of the invincible J. R. Capablanca in the early 1920s; of Alexander Alekhine from the late 1920s to the early 1930s (particularly at the San Remo and Bled tournaments); and, many believe, of current champion Gary Kasparov. Similarly, Wachtell Lipton and Skadden Arps, which have squared off against each other many times, stand apart in a class by themselves from other law firms operating in the takeover area.

Yet Wachtell is very different not only from Skadden but from most other major American firms:

* In 1972, when the salary for first-year associates at large New York law firms was $15,000-$16,000, Wachtell Lipton (at that time fewer than 30 lawyers and only seven years old) paid $20,000.

* Today, when many law firms apportion compensation by pointedly weighing how much business each partner brings in and the level of his own billings (the "you eat what you kill" approach to slicing the partnership money pie), Wachtell Lipton pays its partners strictly on the basis of seniority. The most recent American Lawyer "profitability per partner" rankings put Wachtell Lipton No. 2 in the country for 1998 at a hefty $3.1 million per partner (with the No. 1 firm a Midwestern one that won a huge judgment last year).

* Although many American law firms vigorously market their services, Wachtell Lipton does not.

* While, through mergers or expansion, the reach of several U.S. lave firms is now multinational, Wachtell has only one office.

* Although the maneuvering and backstabbing of some law firm partners resemble those of White House aides jockeying for Presidential "face time," Wachtell Lipton prides itself on being like a family (see sidebar page 23).

A senior partner of old-line law firm Davis, Polk & Wardwell was recently quoted in New York magazine as saying that "The day of the firm as family has passed.... As is the case with sports teams and Fortune 500 corporations, lawyers are now free agents." That is not the Wachtell Lipton way.

MUHAMMAD ALI and Joe Frazier. Sugar Ray Leonard and Roberto Duran. Sugar Ray Robinson and Jake LaMotta. These names are forever paired. So too are Martin Lipton and Joseph Flom.

Sometimes the battles between Wachtell and Skadden have been plain vanilla. On other occasions, creativity, novelty, and legal skill of the highest order have been apparent. For example, in the fight over Conrail between CSX (represented by Wachtell) and Norfolk Southern (represented by Skadden), Wachtell Lipton's artistry was so impressive that some seasoned takeover players concluded they would have even paid money just to read the proxy statement Wachtell Lipton crafted.

And, of course, it was Wachtell Lipton that developed the poison pill. When the pill's legality was upheld in the Household International case, it was a seminal event in the history of modern American takeovers.

In that history, Wachtell Lipton as a firm, and Marty Lipton as an individual, have played an immense role.

The board's role in defense

What is the single most important factor for success in a hostile bid? Same question for the defense.

Price [laughing]. For a bidder. Every now and then, maybe once every five years, somebody will reject a stupendous price. Very few 100% premiums get turned down. Occasionally one does, but infrequently.

How about for the defense?

Oh, just the board's willingness to stand firm.

That's the single most important factor?

If a company wants to remain independent, yes.

Have there been situations in your extensive career where, but for the idiocy of the board, a hostile deal that should have succeeded -- or a defense that should have prevailed -- failed?

There have been a fair number of hostile situations that did not result in the raider's acquiring the target. Whether that was the idiocy of the board or the good sense of the board I'll leave to somebody else to judge. But there have been a number of situations where boards determined that a bid was inadequate, wasn't in the best interest of the company, and the board was successful in defeating the bid. And the company subsequently did very well.

I wrote an article back in 1979 pointing that out. Frank Easterbrook and Dan Fischel wrote articles refuting it. Eventually, I dropped out of the race, but various economists picked up the cudgels and I think it's fair to say that there is a body of information that sustains the view that companies that have successfully resisted takeover bids did better for their shareholders than if they had accepted the bid.

That ties into research along those same lines regarding the poison pill. However, my question was: Since basically you're always in the boardroom, have you been witness to idiotic behavior by a board that impeded the takeover dynamic?

I have never seen that. Contrary to the impression that most people have that boards act in self-interest or are the puppets of management or something else, my experience is that, overwhelmingly, in 98% of the situations, the board acts very responsibly and believes that what it's doing is in the best interest of the company and shareholders. It's not selfishness; it's not ignorance; it's a very well-determined decision by the board based on information provided by management, investment bankers, management consultants, lawyers, and so on.

I think we can concede that not all investment bankers are immune from being influenced by the existence of their success fee. Suppose an investment banker makes a presentation to the board that is in his own subjective interest and the board does not include sophisticated people knowledgeable about the takeover business who might be sensitive to that aspect.

Truly, I've never seen that. Bankers don't make up their projections or recommendations. Bankers' presentations are predicated on management projections. Boards test management projections all the time. Management knows that if they come in with wild projections, the board is going to lose confidence in management. Now, clearly, management projections do not always pan out. That's universal -- not just in takeover situations. It's very rare that a company meets its projections for the following year, and it's almost never that a company meets its projections for three, four, five years out. But those projections aren't illegitimate or ill-founded. Sometimes the projections are far exceeded.

It's really a question of no one's being able to predict the future. None of this is made up for the purpose of serving management or fooling the board of directors. The major investment banks have too much at stake to jeopardize their reputation in these situations.

What I...