Thursday, October 21, 2021

GameStop Report Available Now

The SEC's report on what happened with GameStop and other meme stocks earlier this year is available here now.  It's a fantastic breakdown of what happened and a real resource for explaining market structure.

October 21, 2021 | Permalink | Comments (0)

Wednesday, October 20, 2021

Roe on Dodge v. Ford

Mark Roe has posted "Dodge v. Ford: What Happened and Why?" on SSRN (here). The first half of the abstract is excerpted below. My initial reaction to the abstract (I have not read the paper) is that lying in this context is similar to breaking the law when it comes to the business judgment rule.  IOW, just like a business decision to break the law is not protected by the BJR even if that decision otherwise maximizes shareholder value, so too should deceit be unprotected. This obviously has implications for our current stakeholder governance debate, given that this "noble lie" defense is one of the justifications given for greenwashing / woke-washing.

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three relevant industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly. Second, to stymie union organizers and to motivate his new assembly line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker acquiescence. And, third, if Ford pursued monopoly profit in an obvious and explicit way, the Ford brand would have been damaged with both his workforce and the company’s consumers. The transactions underlying Dodge v. Ford should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly-line produced, with Ford’s business plans requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting—namely that Ford let slip his charitable purpose when he could have won with a business judgment defense—should be reversed. Ford had a true business purpose—spending on labor and a vertically-integrated factory to solidify his monopoly profit and splitting that profit with labor—but he would have jeopardized the strategy’s effectiveness by articulating it.

October 20, 2021 in Stefan J. Padfield | Permalink | Comments (4)

Monday, October 18, 2021

Viewpoint Diversity Shareholder Proposals - A Commentary

Earlier this year, Transactions: The Tennessee Journal of Business Law, published papers presented at the 2020 Connecting the Threads IV symposium, held on Zoom just about a year ago.  Back in July, I wrote about my coauthored piece from the 2020 symposium.  That was my primary contribution to the event and the published output.

However, I also had the privilege of commenting on two papers at the symposium last year, and my comments were published in the Transactions symposium volume. I have been wanting to post about those published commentaries for a number of months, but other news just seemed more important.  Given the recent completion of this year's Connecting the Threads V symposium, it seems like a good time to make those posts.  I start with the first of the two here.

This post covers my commentary on Stefan Padfield's paper, An Introduction to Viewpoint Diversity Shareholder Proposals.  It was a fascinating read for me.  I was unaware of this genre of shareholder proposal before I picked up Stefan's draft.  If you also are in the dark about these shareholder proposals, his article offers a great introduction.  Essentially, viewpoint diversity shareholder proposals are shareholder-initiated matters proposed for a shareholder vote that (1) are included in a public company's proxy statement through the process set forth in Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and (2) serve "to restore some semblance of balance" in public companies that are characterized by viewpoint bias or discrimination.  Stefan's article offers examples and provides related observations.

My commentary is entitled A Few Quick Viewpoints on Viewpoint Diversity Shareholder Proposals.  It is posted on SSRN here. The SSRN abstract is as follows:

This commentary essay represents a brief response to Professor Stefan Padfield’s "An Introduction to Viewpoint Diversity Shareholder Proposals" (22 TRANSACTIONS: TENN. J. BUS. L. 271 (2021)). I am especially interested in two aspects of Professor Padfield’s article on which I comment briefly in turn. First and foremost, I focus in on relevant aspects of an academic and popular literature that Professor Padfield touches on in his article. This literature addresses an area that intersects with my own research: the diversity and independence of corporate management (in particular, as to boards of directors, but also as to high level executive officers--those constituting the so-called “C-suite”) and its effects on corporate decision-making. Second, I offer a few succinct thoughts on the suitability of the shareholder proposal process as a means of promoting viewpoint diversity in publicly held firms.

The essay is reasonably brief (so feel free to read it in its entirety).  But the essence of my conclusion offers the bottom line.  

Although viewpoint diversity may be a vague or malleable term, the business environment and exemplar shareholder proposals featured in Professor Padfield’s Article offer guidance as to the contextual meaning of that term. Based on his depiction and the literature on management diversity’s role in efficacious decision-making, viewpoint diversity has the capacity to add value to the business management enterprise and enhance the existence and sustainability of a healthy, happy workforce. Moreover, his Article indicates, and this commentary affirms, that the shareholder proposal process may be a successful tool in raising viewpoint diversity issues with firm management. Even if the inclusion of specific shareholder proposals in public company proxy statements may be questionable under Rule 14a-8, the existence of viewpoint diversity shareholder proposals may open the door to productive dialogues between shareholders and the subject companies. In sum, Professor Padfield’s Article represents a thought-provoking inquiry into an innovative way in which securities regulation may contribute to forwarding corporate social justice in the public company realm.

So, even if you don't read my commentary, you should read his article.

October 18, 2021 in Conferences, Corporate Governance, Corporations, Joan Heminway, Shareholders, Stefan J. Padfield | Permalink | Comments (2)

Saturday, October 16, 2021

Yet Another Controlling Shareholder Opinion

This week, I continue in my series of posts about controlling shareholders (prior posts here, here, here, here, here, here, here, here, here, and here) to call your attention to Patel v. Duncan, decided September 30.

Talos was a company backed by two private equity sponsors: Apollo and Riverstone. Apollo had 35% of the shares; Riverstone had 27%; and the rest were publicly traded.  Talos had a 10 member board, and Apollo and Riverstone had a shareholder agreement that guaranteed each would appoint 2 members, a fifth member would be jointly agreed upon, and the sixth member would be Talos’s CEO.  Of course, because their combined voting power exceeded 50%, there was no doubt their nominees would be included on the board.  As a result, the company’s SEC filings identified Talos as a “controlled company” for the purposes of NYSE rules; as the company put it, “We are controlled by Apollo Funds and Riverstone Funds. The interests of Apollo Funds and Riverstone Funds may differ from the interests of our other stockholders…. Through their ownership of a majority of our voting power and the provisions set forth in our charter, bylaws and the Stockholders’ Agreement, the Apollo Funds and the Riverstone Funds have the ability to designate and elect a majority of our directors.”

In 2018, Talos bought a troubled company that was heavily indebted to Apollo; as a result of this purchase, Apollo was nearly made whole on an investment that might otherwise have failed.  Then, in 2019, Talos bought certain assets from Riverstone, and it was this purchase that was alleged by a derivative plaintiff to have been unfair to the public stockholders.

When the Riverstone transaction was arranged, Riverstone’s 2 board nominees, both of whom were also Riverstone affiliates, were recused from the negotiation process. Additionally, one of Apollo’s nominees was recused, because of her associations with Riverstone.  So that left 7 directors to arrange the transaction, including the joint Riverstone-Apollo nominee, one Apollo nominee who was also an Apollo affiliate, and the CEO.  A representative of Riverstone and one of Apollo observed all Board meetings on the subject, without apparently speaking.  Under the original terms of the deal, Talos was supposed to pay for the Riverstone assets partially in common stock, but that issuance would have required approval of the common stockholders; as a result, the terms of the deal were changed so that Talos paid in a new form of preferred stock that would automatically convert to common.  The change was approved by Apollo and Riverstone in a written consent, the result of which was to avoid a shareholder vote and allow the deal to close more quickly. Per the court, “There was no Board meeting discussing, or resolution approving, the changing of these terms.”

The derivative plaintiff claimed that Talos overpaid for the Riverstone assets.  He argued that Apollo and Riverstone were controlling shareholders of Talos and had a kind of quid pro quo arrangement whereby each one would approve the other’s tainted deal.  Because Apollo and Riverstone together were controllers, the argument went, the two had fiduciary duties to Talos and the Riverstone deal was subject to entire fairness review. 

Vice Chancellor Zurn, however, rejected the argument that Apollo and Riverstone were bound together in a manner that would constitute a control group.   First, she looked at general ties between the two.  She disagreed that there was any significant historical relationship between the parties as had been found in other cases involving putative joint controllers, like In re Hansen Medical Shareholders Litigation, 2018 WL 3025525 (Del. Ch. June 18, 2018), and Garfield v. BlackRock Mortgage Ventures, 2019 WL 7168004 (Del. Ch. Dec. 20, 2019), such as a pattern of joint investments.  She also felt that the admission of controlled status under NYSE rules was “not as strong” as self-designations of controller status in Hansen and Garfield; for example in Hansen, the two funds had admitted to working as a group in a 13D filing pertaining to a different company.

Second, she looked to transaction-specific ties.  She found no evidence for the purported quid pro quo other than the mere fact that the two transactions had taken place.  The shareholders’ agreement was no evidence of such an arrangement, because it only referred to director voting and did not make any promises regarding votes on other matters.  And the presence of Riverstone and Apollo representatives as observers in board meetings did not suggest any specific involvement in negotiations.

Thus, she concluded that Apollo and Riverstone were not sufficiently associated that their separate minority positions should be linked.  Given that, in their role as individual minority shareholders, they had no fiduciary duties to Talos that they could violate. The transaction with Riverstone was not subject to entire fairness review because Riverstone was not a controlling shareholder – or even a fiduciary – of Talos.

The problem I have with all of this starts with the standard announced by the Delaware Supreme Court in Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245 (Del. 2019).  According to that case, a controller exists “where the stockholder (1) owns more than 50% of the voting power of a corporation or (2) owns less than 50% of the voting power of the corporation but exercises control over the business affairs of the corporation.… [M]ultiple stockholders together can constitute a control group exercising majority or effective control, with each member subject to the fiduciary duties of a controller. To demonstrate that a group of stockholders exercises control collectively, the [plaintiffs] must establish that they are connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement—to work together toward a shared goal.” 

Relying on cases like Garfield and Hansen, VC Zurn looked to the factors those courts had examined (transaction-specific ties, historical ties) to conclude that the Sheldon standard was not met.  But in Garfield and Hansen, the courts were trying to determine whether an agreement actually existed in the first place.  Here, it was not necessary to try to suss out whether there was an agreement, because Apollo and Riverstone admitted they had one.  All that was necessary was to determine whether the agreement they had gave them “more than 50% of the voting power of a corporation...exercising majority or effective control.”

Under the agreement they admitted to having, Apollo and Riverstone jointly had more than 50% of the vote, and they jointly agreed that they would use that voting power to select 6 members of a 10 member board.  Sure, they divvied it up – you vote for my nominee, I’ll vote for yours – but the fact remains, they had a “legally significant connection” – an actual, for real, disclosed contract – for dictating 60% of the directors.  Four of whom actually worked for Riverstone or Apollo; one of whom was the Talos CEO.  (Not that those ties matter, necessarily; imagine a single stockholder, with more than 50% of the vote, who nonetheless chose to select only nominally independent board members. That entity would absolutely be a controller.[1]  Therefore, it shouldn’t matter who Apollo and Riverstone chose to place on the board – the relevant point is that with more than 50% of the vote, they had an agreement to jointly select more than half the board members). 

True, their agreement did not give them transactional control over the particular purchase in question, but usually transactional control is treated as an alternative test for controller status; controller status also exists when someone controls the corporation in general.  See, e.g., In re Rouse Props., Inc., 2018 WL 1226015 (Del. Ch. Mar. 9, 2018).  And when it came to the corporation in general, Apollo and Riverstone straightforwardly, together, had “more than 50% of the voting power of a corporation,” and therefore “constitute[d] a control group exercising majority or effective control,” with all the legal consequences that follow.  The rest of it – their history, their involvement with the negotiations, the existence (or not) of a quid pro quo – is beside the point.

(Also, for what it’s worth, if you’re looking for evidence that they jointly executed the transaction, the fact that Apollo and Riverstone somehow changed the deal terms all on their own without involving the Board seems pretty significant.)

Anyway, all of this matters because, as scholars are now documenting, shareholder agreements in public companies are increasingly common, usually involving PE firms like Apollo and Riverstone.  They often provide for board seats, observation rights, and positions on key committees, among other things.  So it’s really, really important that courts come to a coherent, consistent position on how these agreements will be addressed, and as relevant here, when transactional control is going to be a necessary aspect of the controlling shareholder inquiry.


[1] For example, ViacomCBS has a majority independent board but – well, you know. 

October 16, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, October 15, 2021

Meme Stocks, Hypermateriality, and Insider Trading

Can "hypermaterial" public information about a stock render the company's (once material) nonpublic internal data immaterial? Consider the following scenario involving social-media-driven trading in a meme stock:

XYZ Corporation’s stock price had been falling over the last month (from a high of $12 down to $10), due to a short-sale attack by a small group of hedge funds. In the past week, a group of individuals in a social media chatroom have attempted a now well-publicized short squeeze, motivated by a desire to punish what they view as predatory behavior by the hedge funds. As a result, the stock price has been driven up to $300, significantly above where the stock was trading before the short-sale attack. The company's nonpublic data (earnings, etc.) that will be reported next week reflects the "true" price of the company's shares should be $8. With knowledge of the above public and nonpblic information, XYZ and some of its insiders issue/sell XYZ shares.

Has XYZ and its insiders committed insider trading in violation of the antifraud provisions of Section 10(b) of the Securities Exchange Act?

Insider trading liability arises under the classical theory when the issuer, its employee, or an affiliate seeks to benefit from trading (or tipping others who trade) that firm’s shares based on material nonpublic information. In such cases, the insider (or constructive insider) violates a fiduciary or other similar duty of trust and confidence by failing to disclose the information to the firm’s shareholder (or prospective shareholder) on the other side of the trade.

In Basic Inc. v. Levinson, 485 U.S. 224, 231-2 (1988), the Supreme Court has held that information is “material” for purposes of insider trading liability if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision, and there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

Prior to the onset of the social-media-driven trading, I think it's pretty clear that the insiders' nonpublic information that the company's stock (currently trading at $10) is actually worth $8 is material. In other words, there is a substantial likelihood that a reasonable shareholder would consider important information that a stock trading at $10 is actually worth $8. But is that same information still material after the social-media-driven trading has pushed the stock's price to $300? 

In our forthcoming article,Insider Trading in Response to Social-Media-Driven Expressive Trading, my coauthors Jeremy Kidd, George A. Mocsary, and I argue that once material nonpublic internal data can be drowned out (and be rendered immaterial) by subsequent hypermaterial public information like a dramatic price movement resulting from a well-publicized social-media-driven run on a stock.

If the issuer's and insiders' nonpublic information about the firm is immaterial, then they may trade while in possession of it without violating the anti-fraud provisions of the federal securities laws. We welcome your comments! Here's the abstract:

The phenomenon of social-media-driven trading (SMD trading) entered the public consciousness earlier this year when GameStop’s stock price was driven up two orders of magnitude by a “hivemind” of individual investors coordinating their actions via social media. Some believe that GameStop’s price is artificially high and is destined to fall. Yet the stock prices of GameStop and other prominent SMD trading targets like AMC Entertainment continue to remain well above historical levels.

Much recent SMD trading is driven by profit motives. But a meaningful part of the rise has been a result of expressive trading—a subset of SMD trading—in which investors buy or sell for non-profit-seeking reasons like social or political activism, or for aesthetic reasons like a nostalgia play. To date, expressive trading has only benefited issuers by raising their stock prices. There is nothing, however, to prevent these traders from employing similar methods for driving a target’s stock price down (e.g., to influence or extort certain behaviors from issuers).

At least for now, stock prices raised by SMD trading have been sticky and appear at least moderately sustainable. The expressive aspect, which unites the traders under a common banner, is likely a reason that dramatic price increases resulting from profit-seeking SMD trading have persisted. Without a nonfinancial motivation to hold the group together, its members would be expected to defect and take profits.

Given that SMD trading appears to be more than a passing fad, issuers and their compliance departments ought to be prepared to respond when targeted by SMD trading. A question that might arise is whether and when SMD-trading-targeted issuers, and their insiders, may trade in their firms’ shares without running afoul of insider trading laws.

This Article proceeds as follows: Part I summarizes the current state of insider trading law, with special focus on the elements of materiality and publicity. Part II opens with a brief summary of the filing, disclosure, and other (non-insider-trading-related) requirements issuers and their insiders may face when trading in their own company’s shares under any circumstance. The remainder of this Part analyzes the insider trading-related legal implications of three different scenarios in which issuers and their insiders trade in their own company’s shares in response to SMD trading. The analysis reveals that although the issuer’s and insiders’ nonpublic internal information may be material (and therefore preclude their legal trading) prior to and just after the onset of third-party SMD trading in the company’s stock, subsequent SMD price changes (if sufficiently dramatic) may diminish the importance of the company’s nonpublic information, rendering it immaterial. If the issuer’s and insiders’ nonpublic information about the firm is immaterial, then they may trade while in possession of it without violating the anti-fraud provisions of the federal securities laws.

October 15, 2021 in John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Wednesday, October 13, 2021

New CPMI-IOSCO Consultative Report Focused on Stablecoins

For BLPB readers interested in financial market infrastructures (FMIs), there’s something new and exciting to put on your fall reading list!  Don’t wait too long.  Comments on the new CPMI-IOSCO Consultative report: Application of the Principles for Financial Market Infrastructures to stablecoin arrangements are due by December 1, 2021.

At the request of the G7, G20, and FSB, the standard setting bodies have produced a “report [that] provides guidance on the application of the Principles for financial market infrastructures (PFMI) to systematically important stablecoin arrangements (SAs), including the entities integral to such arrangements.” 

The Executive Summary notes that: “Notwithstanding the fact that the transfer function of SAs is considered an FMI function for the purpose of applying the PFMI, SAs may present some notable and novel features as compared with existing FMIs. These notable features relate to: (i) the potential use of settlement assets that are neither central bank money nor commercial bank money and carry additional financial risk; (ii) the interdependencies between multiple SA functions; (iii) the degree of decentralisation of operations and/or governance; and (iv) a potentially large-scale deployment of emerging technologies such as distributed ledger technology (DLT).”

The report’s guidance is summarized in Table 1 (p. 5-6) and there are nine questions for consultation (p.7). 

Once I’ve thought more about the report, I might return to it in a future post.  Policymakers are increasingly focused on the regulation of stablecoins and other cryptocurrencies. The topic’s importance is sure only to increase.  

October 13, 2021 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Monday, October 11, 2021

Tenure-Track Position at the University of Miami Herbert Business School, Business Law Department

The University of Miami is accepting applications for a tenure-track faculty position within the Business Law Department at the Patti and Allan Herbert School of Business (MHBS) commencing August 15, 2022.

MHBS’s Business Law Department seeks applicants with experience and accomplishment in law scholarship, specifically in areas related to technology, data science, corporate governance, or sustainability. The position is open to those candidates with a law degree who have a strong research stream, or a well-developed relevant research agenda. A record of outstanding teaching or clear potential therefor is required.

The successful candidate will join a thriving Business Law department of 19 full-time regular faculty and instructors with varied scholarly interests, who teach a wide range of bachelors, masters, and executive level courses.

The University of Miami is a Carnegie comprehensive degree-granting research university with approximately 17,800 students and 16,400 faculty and staff. MHBS has approximately 4,000 total graduate and undergraduate students and is located on the University’s main campus in suburban Coral Gables, Florida.

Salary, benefits, and research support are competitive. Interested candidates should submit a letter of interest describing relevant qualifications and experience, detailed CV, as well as contact information for at least three academic and/or professional references who may be contacted.

Completed applications and any questions should be addressed to Professor Patricia Sanchez Abril, Chair, Business Law Department, Miami Herbert Business School, via email to Deadline is December 1, 2021.

University of Miami is an equal employment and affirmative action employer and a provider of ADA services. All qualified applicants will receive consideration for employment without regard to age, ethnicity, color, race, religion, sex, sexual orientation or identity, national origin, disability status, or protected veteran status.

October 11, 2021 in Business School, Joan Heminway, Jobs | Permalink | Comments (0)

Sunday, October 10, 2021

Open Assistant Professor Position in the Department of Business Law at California State University, Northridge

Dear BLPB Readers:

The Department of Business Law at California State University, Northridge, has an open faculty position: 

"The Department of Business Law invites applications for a tenure-track position at the Assistant Professor level. J.D. or J.S.D. from an ABA-accredited law school and admission to the bar at time of appointment required. In addition, previous experience and proven excellence in teaching law, business ethics, or related courses at the university level, a history of scholarly research and publications, experience practicing law, and business experience are preferred. An LL.M., M.B.A. or other graduate degree in business or economics from an accredited college or university, law review membership, and experience as a law clerk at the appellate level are desirable. At time of appointment, the candidate must meet and must continue to maintain current AACSB International “Scholarly Academic” standards of qualification throughout their tenure."

The complete job posting is here.

October 10, 2021 in Colleen Baker, Jobs | Permalink | Comments (0)

Saturday, October 9, 2021

Guest Post by Itai Fiegenbaum: How Overturning Gentile Widens the Controlling Shareholder Enforcement Gap

The following is a guest post by Itai Fiegenbaum, Visiting Assistant Professor of Law at Willamette University College of Law:

Minority expropriation by a controlling shareholder manifests in a variety of forms. Controllers can cause the corporation to sell them an asset at a steep discount. Or purchase from them an asset for an inflated price. These self-dealing transactions share a common thread: Unfair pricing transfers value away from the corporation, and, by extension, from its minority shareholders, to the controller. An additional complication arises when the corporation’s stock is issued to the controller. In this case, a sweetheart deal dilutes the value of their relative voting and dividend rights.  

Shareholder litigation is designed to keep transaction planners honest. Not all manner of minority expropriation, however, is subject to the same enforcement procedure. Long-standing corporate law principles distinguish between transactions that harm shareholders directly and transactions that harm them derivatively, through a reduction in their share price. Challenges against the former can proceed directly; challenges against the latter, by contrast, must overcome several procedural hurdles before a court will adjudicate a claim on its merits.

An unmodified application of the bifurcation framework would filter most self-dealing transactions between the corporation and its controller to the derivative enforcement procedure. Until two weeks ago, the rule had one noticeable exception. Under Gentile v. Rossette, equity issuances to a controlling shareholder were deemed to engender both a direct and a derivative cause of action, thus allowing shareholder challenges to circumvent the cumbersome derivative mechanism. This exception was emphatically wiped out in Brookfield Asset Management v. Rosson.

The Delaware Supreme Court provided two justifications for this shift. First, a single streamlined approach through which to evaluate shareholder claims restores doctrinal certainty. Second, even without the Gentile carve-out, other legal theories provide shareholders with a direct claim in change of control scenarios. A closer look finds both explanations unpersuasive.

An outsized emphasis on doctrinal certainty gives short thrift to the underlying concerns that likely prompted the Gentile exception in the first place. Self-dealing transactions are not required to undergo internal approval procedures as a condition to their validity. While corporate fiduciaries are expected to faithfully bargain on behalf of the shareholders, external factors influence their willingness to steadfastly confront the controller. The benefits of continued incumbency and the allure of additional posts are weighed against the harm of potential personal liability and the embarrassment of a public airing of their shortcomings. The result of this assessment hinges on the prospect of a shareholder lawsuit.

The two enforcement procedures are hardly equivalent in that regard. A direct claim affords plaintiffs an unobstructed path to the courthouse. Plaintiffs that wish to vindicate a derivative harm, by contrast, are required to first navigate a procedural gauntlet. These differences impact the likelihood that a plaintiff steps forward and, consequently, the bargaining agents’ cost-benefits analysis in their negotiations with the controller. Effective independent director committees and attendant best practices were forged in the crucible of near-ubiquitous litigation based on a direct shareholder claim. An unaltered application of their teachings in the derivative context ignores the factors that encourage directors’ unflinching loyalty. Gentile provided a pathway around the cumbersome derivative procedure and made it more likely that a plaintiff step forward. Its elimination widens the enforcement gap for a large segment of self-dealing transactions.

The context-specific direct claims alluded to in Brookfield are incapable of satisfactorily covering this gap. Revlon grants plaintiffs a direct claim for equity issuances that transfer control. Ann Lipton has astutely observed the malleability of the control threshold and its impact on the parties’ incentives. My contribution is in highlighting Revlon’s gradual diminishment in the corporate governance ecosystem. Moreover, current doctrine allows a positive shareholder vote to extinguish Revlon claims. Shareholders’ near-certain approval of these transaction call into question the vote’s effectiveness at promoting accountability. In sum, eliminating the Gentile exception reduces the likelihood of a shareholder lawsuit, without ensuring that an alternative accountability mechanism picks up the slack.     

October 9, 2021 | Permalink | Comments (0)

Thursday, October 7, 2021

Belmont University - Nashville, TN - Assistant Professor of Creative & Entertainment Industries (Law)

Apply to be my (across-campus) colleague.

Belmont University is hiring for a tenure track professor position in our Mike Curb College of Entertainment & Music Business. One of the main courses taught would be Entertainment Law and Licensing. I've lived in a half-dozen different cities and Nashville is my favorite by far. And Belmont has been a fabulous place to work. I am on the hiring committee, so feel free to reach out to me with questions.  

Details here

October 7, 2021 in Haskell Murray, Intellectual Property, Jobs | Permalink | Comments (0)

Tuesday, October 5, 2021

AULR's "My Favorite Law Review Article"

The following comes to us from one of our devoted readers (and fellow business law blogger), Walter Effross. He writes to inform us about a new initiative that he suggested to the American University Law Review, in which faculty, practitioners, judges, regulators, and others discuss "My Favorite Law Review Article." The inaugural video (in which Walter recommends an Elizabeth Warren article) is here.

The guidelines for submissions are as follows:

1. Select the law review article that you wish to discuss. (Please choose an article that you did not write or co-author.)
2. All forms of video recording (Zoom, Photo Booth, phone camera, etc.) are acceptable; our team will edit appropriately.
3. Please try to keep your review between five and seven minutes long.
4. At the beginning of the video, please introduce (1) yourself and (2) the title and author of the Article. [including the citation, or at least the year of publication?]
5. Please provide a brief synopsis of the piece, read one or more pertinent passages, and/or discuss a particularly moving/interesting segment.
6. Most importantly, explain why this article is your favorite. You might consider discussing: when and how you first read it; what makes it special to you—the topic itself, the writing style, and/or something else; why others should read it; and/or how it contributed to your understanding of, or passion for, specific areas of the law.
7. Email your recording to Emily Thomas, at

I am intrigued by this initiative.  I admitted to Walter that it is making me think about what my favorite might be . . . .  The website notes that the law review hopes "that this collaborative project brings legal thinkers together and initiates productive conversation about the legal community and how we can better understand each other’s points of view." I will be interested to see where this goes.  Let me know if you contribute!

[Editor's Note: Most of this post comes directly from an email I received from Walter.  So, I tip my hat to him and thank him for the text of this post!]

October 5, 2021 in Joan Heminway, Law Reviews, Research/Scholarhip | Permalink | Comments (0)

Monday, October 4, 2021

Connecting the Threads 2021 - My Thread in the Tapestry . . . .

Screen Shot 2021-10-04 at 7.36.06 PM

With my bum shoulder and a lot of work on our dean search cramping my style over the past few weeks, I have been remiss in posting about the 2021 Business Law Prof Blog Symposium, Connecting the Threads V.  The idea behind the name (and Doug Moll likes to riff on it--so have at it, Doug!) is that our bloggers here at the BLPB connect the many threads of business law in what we do--here on the blog and elsewhere.

Anyhoo (as Ann would say), as always, my BLPB co-bloggers did not disappoint in their presentations.  I know our students look forward to publishing many of the articles and the related commentaries in the spring book of our business law journal, Transactions: The Tennessee Journal of Business Law.  I also am always so proud of, and interested to hear, the commentary of my colleagues and students.  This year was no exception.

In the future, I will post more about the article that I presented.  But I will offer a teaser here, accompanied by the above screen shot from the symposium.  (It was "Big Orange Friday" on our campus.  The orange had to be worn.  Go Vols!)

The title of my presentation and article is Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.  A brief excerpt from the continuing legal education handout for the symposium presentation is set forth below (footnotes omitted).

[T]his presentation urges that competent, complete legal counsel on choice-of-entity for nonprofit business undertakings should extend beyond advising clients on which form of business entity best fits their needs and wants, if any. For many small business ventures that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended (“IRC”), as religious, charitable, scientific, literary, educational, or other eligible organizations under Section 501(c)(3) of the IRC . . . , the time and expense of organizing, qualifying, managing, and maintaining a tax-exempt nonprofit corporation under state law may be daunting (or even prohibitive). Moreover, the structures imposed by business entity law may not be needed or wanted by the founders or promoters of the venture. Yet, there may be distinct advantages to entity formation and federal tax qualification that are not available (or not as easily available) to unincorporated not-for-profit business projects. These may include, for example, exculpation for breaches of performative fiduciary duties and limitations on personal liability for business obligations available to participants in nonprofit corporations under state statutory law and easier clearance of or compliance with initial and ongoing requirements for tax-exempt status under federal income tax law.

The described conundrum—the prospect that founders or promoters of a nonprofit project or business may not have the time or financial capital to fully form and maintain a business entity that may offer substantial identifiable advantages—is real. Awareness of this challenge can be disheartening to lawyer and client alike. Fortunately, at least for some of these nonprofit ventures, there is a third option—fiscal sponsorship—that may have contextual benefits. This presentation offers food for thought on the benefits of fiscal sponsorship, especially for arts and humanities endeavors.

Again, I will have more to say about this later, once the article is fully crafted.  But your thoughts on fiscal sponsorship--and examples, stories, and the like--are welcomed in the interim as I continue to work through the article.

October 4, 2021 in Ann Lipton, Conferences, Joan Heminway, Lawyering, Nonprofits, Research/Scholarhip | Permalink | Comments (0)

Northwestern is Seeking Business Law Applicants

Northwestern Pritzker School of Law invites applications for tenured or tenure-track faculty positions with an expected start date of September 1, 2022. This is part of a multi-year strategic hiring plan, and we will consider entry-level, junior, and senior lateral candidates.

Northwestern seeks applicants with distinguished academic credentials and a record of or potential for high scholarly achievement and excellence in teaching. Specialties of particular interest include: tax, anti-discrimination law, international law (joint search with the Buffett Institute for Global Affairs), health law (joint search with the Feinberg School of Medicine), and business law. Northwestern welcomes applications from candidates who would contribute to the diversity of our faculty and community. Positions are full-time appointments with tenure or on a tenure-track.

Candidates must have a J.D., Ph.D., or equivalent degree, a distinguished academic record, and demonstrated potential to produce outstanding scholarship. Northwestern Pritzker School of Law will consider the entry level candidates in the AALS Faculty Appointments Register, as well as through application directly to our law school. Candidates applying directly should submit a cover letter, C.V., and draft work-in-progress through our online application system: Specific inquiries should be addressed to the chair of the Appointments Committee, Zach Clopton,

Northwestern University is an Equal Opportunity, Affirmative Action Employer of all protected classes, including veterans and individuals with disabilities. Women, racial and ethnic minorities, individuals with disabilities, and veterans are encouraged to apply. Click for information on EEO is the Law.

October 4, 2021 in Jobs | Permalink | Comments (0)

Sunday, October 3, 2021

Western State College of Law at Westcliff University Faculty Hiring Announcement

Western State College of Law (WSCL) at Westcliff University invites applications from entry-level and lateral candidates for up to two tenure-track faculty positions beginning August 1, 2022. We have particular interest in persons interested in teaching Business Organizations, Contracts, Sales, Evidence, Professional Responsibility, and Remedies. Candidates should have strong academic backgrounds, commitment to teaching excellence, and demonstrated potential for productive scholarship. 

WSCL is located in the city of Irvine, California – close to miles of famous beaches, parks, recreation facilities and outdoor activities as well as the many museums, music venues, and diverse cultural and social experiences of greater Los Angeles.

Founded in 1966, WSCL is the oldest law school in Orange County, California, and is a fully ABA approved for-profit, private law school. Noted for small classes and personal attention from an accessible faculty focused on student success, WSCL is proud that our student body is among the most diverse in the nation. Our 11,000+ alumni are well represented across public and private sector legal practice areas, including 150 California judges and about 15% of Orange County’s Deputy Public Defenders and District Attorneys.

WSCL is committed to providing workplaces and learning environments free from discrimination on the basis of any protected classification including, but not limited to race, sex, gender, color, religion, sexual orientation, gender identity or expression, age, national origin, disability, medical condition, marital status, veteran status, genetic marker or on any other basis protected by law.

Confidential review of applications will begin immediately. Applications (including a cover letter, complete CV, teaching evaluations (if available), a diversity statement addressing your contributions to our goal of creating a diverse faculty, and names/email addresses of three references) should be emailed to Professor Elizabeth Jones, Chair, Faculty Appointments Committee: For more information about WSCL, visit

October 3, 2021 in Joan Heminway | Permalink | Comments (0)

Saturday, October 2, 2021

Private Really is the New Public

A while back, I posted about how there’s been some institutional investor support for the proposal that the SEC require not only public companies, but private companies, disclose climate change information.

Usually, of course, private companies aren’t required to disclose things – especially to institutional investors – on the theory that institutional investors can themselves bargain for the information that they need.  (Yes, yes, there are kind of exceptions, like Securities Act Section 4(a)(7), etc).  But the SEC and Congress have been gradually expanding which companies count as private, raising concerns that not only that they have assumed too much sophistication on the part of institutions (for example, institutional investors themselves have complained about opacity among the PE funds in which they invest), but also that the SEC and Congress have ignored the benefits of creating a body of public information across a wide swath of companies.

Which is why this article grabbed me

The California Public Employees’ Retirement System and Carlyle Group Inc. helped rally a group of more than a dozen investors to share and privately aggregate information related to emissions, diversity and the treatment of employees across closely held companies. More firms and institutions are expected to join.

“We need to start a common language across all these participants so we can actually, in a sustained way, make some progress,” Carlyle Chief Executive Officer Kewsong Lee said in an interview. “By honing in on a set of common standards and common metrics, we start to standardize the conversations so we can really track progress. It’s really hard to do that right now.”

Blackstone Group Inc. and the Canada Pension Plan Investment Board, the country’s largest pension fund, are also part of the effort. Boston Consulting Group was tapped to aggregate the data.

Private-equity firms will be seeking to standardize and share data on greenhouse-gas emissions, renewable energy, board diversity, work-related injuries, net new hires and employee engagement. Calpers CEO Marcie Frost said she would like to see these metrics expand to include data such as C-suite diversity and employee satisfaction.

The article is framed as further evidence of a trend toward ESG investing, but for me the more relevant point is that investors are trying to band together to create a common pool of information about private companies that have been excepted from the public disclosure regime.  You could, I suppose, call that a triumph of private ordering; I take it as evidence of a fundamental failure of the securities disclosure system.  I suppose you could also tell a story about the privatization of what was once public infrastructure more generally, or the unholy marriage of privatization and environmentalism.

October 2, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, October 1, 2021

Douglas on "Creepy" Concepts and Insider Trading Reform

Insider trading reform has been a consistent theme in my last few posts (see, e.g., here, here, here, and here). In keeping with this theme, I’d like to highlight a new article, How Creepy Concepts Undermine Effective Insider Trading Reform, which was posted just yesterday by Professor Kevin R. Douglas (Michigan State College of Law). Professor Douglas is an important new voice in the areas of securities regulation, corporate finance, and business law more generally. Here’s the abstract:

Lawmakers are building momentum towards codifying our insider trading laws to clarify which kind of trading is illegal. In May 2021, the US House of Representatives passed the Insider Trading Prohibition Act for the second time in two years. In January 2020, a Securities and Exchange Commission sponsored task force on insider trading released a report containing proposed legislation. Both the House Bill and the task force proposal would prohibit trading while in possession of “wrongfully obtained” information and prohibit trades that involve a “wrongful use” of information. This article explains why the concept of “wrongful” trading is too ambiguous to improve insider trading law and explores the requirements of effective legislative reform.

For decades, scholars have described insider trading doctrine as mystifying and called for reform. Many explain the confusion by pointing to the stark difference in how enforcement officials and federal courts apply insider trading law. Others argue that the confusion is caused by policymakers failing to choose between fostering efficient markets and fostering fair or equitable markets. This article argues that the conflict between courts and enforcement officials is a symptom of two deeper conceptual problems—one at the doctrinal level and one at the policy level. The doctrinal confusion is more precisely caused by the attempt to simultaneously invoke two conflicting concepts of “fairness.” Fairness meaning consensual transactions, versus fairness meaning transactions in which all parties enjoy equal access to all material information and other economic values. Attempting to simultaneously apply these mutually exclusive notions of fairness has caused a slow and inconsistent conceptual creep, resulting in an incoherent doctrine.

The policy confusion is caused by officials relying on economic models that use misidentified theories of “economic efficiency.” Officials describe the policy goal of our insider trading regime as encouraging capital formation in US securities markets and economic growth in general. These goals imply an exclusive commitment to promoting “allocational efficiency”—or maximizing wealth. However, scholars usually rely on the concept of “market efficiency” when evaluating the law and practice of insider trading. The definition of market efficiency relies on assumptions that embody an unacknowledged focus on economic distribution—equalizing wealth. This includes the assumptions that all investors (1) trade at the same price (the correct price) and (2) have equal access to all available information. Conflating these forms of efficiency causes officials to unintentionally oscillate between promoting opaque distribution goals and promoting economic growth.

This article recommends clarifying insider trading law by prioritizing one of the two conflicting fairness doctrines and a compatible policy goal. Clarity requires specifying whether consent is a defense against insider trading liability. Enforcing only one fairness doctrine gives everyone the option of attempting to privately adhere to both principles while successfully applying one of the principles through law.

October 1, 2021 in John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Thursday, September 30, 2021

2021 Corporate Governance Summit

Through today and tomorrow, UNLV Law is cohosting a Corporate Governance Summit with Greenberg Traurig.  Many thanks to Robert Jackson for giving our keynote talk over lunch today.  His talk covered the waterfront, touching on ESG, corporate governance, broker misconduct, and SPACs.

Featured panel discussions include:

  • All about the green: Developments of environmental, social, and governance (ESG) issues in the boardroom
  • Buy, sell, or hold: What’s a board to do in today’s M&A environment?
  • Diversity, inclusion, and refreshment: The hidden ingredients of successful boardroom governance 
  • Carrots and sticks: Unlocking the power of effective incentive structures in executive and board compensation
  • If you don’t know, now you know: A guide to a board’s role in managing (unexpected) risk in the aftermath of the COVID-19 pandemic
  • Let’s talk!: Maximizing the shareholder relationship and the benefits of shareholder engagement

It’s been great to get together and talk about these issues in person.  Hopefully we’ll be in an even better position next year.

September 30, 2021 | Permalink | Comments (0)

Wednesday, September 29, 2021

Clearinghouse Chapter in Report By Task Force on Financial Stability

I had a chance to read Chapter 7 on Clearinghouses [CCPs] in a recent report by the Task Force on Financial Stability and look forward to reading more of the report soon.  It’s a short chapter with a lot of excellent information.  I particularly appreciated its focus on the issue of clearinghouse ownership (too often left out of clearinghouse discussions), incentive misalignments, and tensions between shareholders and clearing members when CCPs are for-profit, public companies.  There is an especially helpful discussion on externalities in the current clearing ecosystem and a summary table of them accompanied by related recommendations (p.99).  I agreed with several of the chapter's recommendations (starting on p.96) and with the statement that “Pervasive reforms of derivatives markets following 2008 are, in effect, unfinished business; the systemic risk of CCPs has been exacerbated and left unaddressed” (p.96). 

On p.94, the report mentions that clearing members “complained when, in December 2017, the CBOE and CME listed bitcoin contracts (which have extremely high volatility and which many members were not authorized to transact) and then commingled the contracts with the default fund for other instruments.”  I think the complaints are understandable and pointed out this issue in a previous post (here).

I did have feedback about a few items in the chapter and will share two points:  

First, on p.93, the report states “Were a CCP to fail, something that has not yet occurred, the disruption to the financial system could be enormous.”  It’s certainly true that a failed, significant CCP would likely cause enormous disruptions in financial markets.  However, as I note in my 2016 report for the Volcker Alliance (p.52), CCPs have failed in other countries and some have argued that certain CCPs in the U.S. risked failure in the October 1987 crash. 

Second, I’d like to see a lot more discussion of recommendation #3 (p.97):

“Make sure that systemically important CCPs outside the United States have access to a lender of last resort who can provide dollar funding. This might be provided through a foreign central bank that is willing and able to lend and has access to a Fed swap line. If such funding is not available, and conditioned on a Fed finding that a non-U.S. CCP is adequately supervised, the Fed should consider extending access to the discount window to systemic non-U.S. CCPs. (Currently access is restricted to FSOC-designated systemically important financial market utilities.) It is in the United States’ interest to prevent the failure of systemic CCPs around the world. If a properly supervised entity needs access to dollar funding, and satisfactory information sharing is in place to limit risk, discount window access would strengthen the system.”

In The Federal Reserve's Use of International Swap Lines, I noted that from my perspective, certain provisions in Dodd-Frank appeared to anticipate the possibility of Fed swap lines with CCPs outside the U.S. (p.648).  The risk of potentially having to provide emergency euro funding to clearinghouses outside the Eurozone has been an important aspect of the longstanding tensions between the U.K. and the E.U. surrounding clearing (a few stories on this are here, here, and here).  The E.U. has argued that because of this financial stability risk, such clearing should be relocated to the Eurozone.  Hence, the issue of a major central bank having to provide emergency funding to a foreign clearinghouse is a highly significant concern and merits extensive discussion.   

September 29, 2021 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Saturday, September 25, 2021

An Embarrassment of Riches: Slack, Brookfield, Activision, and the Death of Aronson

Sometimes, there’s not a whole lot new to blog about – and other times you get the Slack decision, the Brookfield decision, an SEC investigation of Activision, and Aronson’s demise all in a single week.  So in this post, I am going to tackle the first three and save United Food and Commercial Workers Union v. Zuckerberg for maybe another time, but if you really want to know my immediate reaction to the Zuckerberg case, I tweeted a thread here.  Professor Bainbridge also has a long blog post on the Zuckerberg decision here.


I previously blogged about this case here, and the short version is that Slack went public via direct listing, and filed a Securities Act registration statement for slightly fewer than half of the shares that became available to trade on the opening day, because the rest of the shares did not need to be registered in order to trade under Rule 144.  Stock purchasers claimed that the registration statement contained false statements in violation of Section 11 of the Securities Act; the question was whether they’d need to establish that theirs were the registered shares before they’d be able to bring a claim – an impossible task, which would functionally prevent any shareholders from bringing any Section 11 claims at all.  The district court said no, they did not have to do that, and earlier this week, the Ninth Circuit affirmed by a 2-1 vote

The Ninth Circuit’s logic was unexpected, to say the least.  The Court interpreted NYSE Listed Company Manual, Section 102.01B Footnote E, to mean that NYSE direct listings are legally not possible unless a Securities Act registration statement is filed.  According to the court:

Per the NYSE rule, a company must file a registration statement in order to engage in a direct listing.  See NYSE, Section 102.01B, Footnote E (allowing a company to “list their common equity securities on the Exchange at the time of effectiveness of a registration statement filed solely for the purpose of allowing existing shareholders to sell their shares”) (emphasis added).... As indicated, in contrast to an IPO, in a direct listing there is no bank-imposed lock-up period during which unregistered shares are kept out of the market. Instead, at the time of the effectiveness of the registration statement, both registered and unregistered shares are immediately sold to the public on the exchange. See NYSE, Section 102.01B, Footnote E.  Thus, in a direct listing, the same registration statement makes it possible to sell both registered and unregistered shares to the public.

Slack’s unregistered shares sold in a direct listing are “such securities” within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence. Any person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement….

Slack’s shares offered in its direct listing, whether registered or unregistered, were sold to the public when “the registration statement . . . became effective,” thereby making any purchaser of Slack’s shares in this direct listing a “person acquiring such security” under Section 11.

Now, the reason this is surprising is that the argument almost seems to have come out of nowhere.  It was not the basis for the district court’s decision, and though it was alluded to by the plaintiffs in their Ninth Circuit briefing, neither the defendants, nor their amici, seems to have addressed it, and the issue was only barely mentioned at oral argument.  And no one cited Section 102.01B Footnote E of the NYSE Listed Company Manual at all.

Plus, I gotta say, this is not the most convincing reading of the NYSE rules.  Here’s what the NYSE Listed Company Manual, Section 102.01B Footnote E, actually says:

Generally, the Exchange expects to list companies in connection with a firm commitment underwritten IPO, upon transfer from another market, or pursuant to a spinoff. However, the Exchange recognizes that some companies that have not previously had their common equity securities registered under the Exchange Act, but which have sold common equity securities in one or more private placements, may wish to list their common equity securities on the Exchange at the time of effectiveness of a registration statement filed solely for the purpose of allowing existing shareholders to sell their shares, where such company is listing without a related underwritten offering upon effectiveness of a registration statement registering only the resale of shares sold by the company in earlier private placements. …Consequently, the Exchange will, on a case by case basis, exercise discretion to list [such] companies …

That doesn’t sound like the NYSE is prohibiting direct listings in the absence of a Securities Act registration; it sounds more like the NYSE has not contemplated that an issuer might want to list without one.

Now, to be fair, maybe that doesn’t matter.  The NYSE, in creating its rules (which had to be approved by the SEC), only contemplated direct listings accompanied by a Securities Act registration statement, so that’s all that’s currently authorized.  Still, the legal effect of the registration statement was not, despite the Ninth Circuit’s holding, that it allowed the unregistered securities to trade publicly.  Rule 144 allowed them to trade publicly without any registration statement at all.  What the registration statement arguably allowed was for them to trade publicly on the Exchange, which is not the same thing.

Which gets to what I think was really the driving force behind the Ninth Circuit’s decision: policy.  As the Ninth Circuit explained:

interpreting Section 11 to apply only to registered shares in a direct listing context would essentially eliminate Section 11 liability for misleading or false statements made in a registration statement in a direct listing for both registered and unregistered shares. While there may be business-related reasons for why a company would choose to list using a traditional IPO (including having the IPO-related services of an investment bank), from a liability standpoint it is unclear why any company, even one acting in good faith, would choose to go public through a traditional IPO if it could avoid any risk of Section 11 liability by choosing a direct listing.  Moreover, companies would be incentivized to file overly optimistic registration statements accompanying their direct listings in order to increase their share price, knowing that they would face no shareholder liability under Section 11 for any arguably false or misleading statements.  This interpretation of Section 11 would create a loophole large enough to undermine the purpose of Section 11 as it has been understood since its inception.

And this is why the dissent is dissenting; in Judge Miller’s view, these policy considerations should not override the plain text of Section 11, which only permits claims by “any person acquiring such security,” meaning, “such security” as was registered on the faulty registration statement. 

Now, I suspect we’re not done here, because defendants will likely seek rehearing and/or certiorari, but if this is the final word, I note that the Ninth Circuit’s decision may have implications for ordinary IPOs, when issuers forego the traditional 180-day lockup and instead allow insiders to trade unregistered shares right away.  I previously blogged about this problem in connection with Robinhood’s IPO; per Law360, a lot of companies are now eliminating the traditional lockup.  Under prior law, one would expect the immediate trading of unregistered shares to bar, or at least inhibit, Section 11 claims, but by the Ninth Circuit’s logic, as I understand it, for these companies, the Securities Act registration statement is a necessary step to allow the unregistered shares to trade on the Exchange, and that might be enough to eliminate the tracing requirement.  The Ninth Circuit distinguished situations where shares were issued pursuant to more than one registration statement, see op. at 12, 14, but it also suggested – as other courts have held – that tracing is not an issue when the two registration statements contain identical misstatements, see op. at n.5; see also In re IPO Sec. Litig., 227 F.R.D. 65 (S.D.N.Y. 2004).  Point being, this decision, if it stands, could become the basis for eliminating the tracing requirement for exchange-traded shares so long as there has only been either one registration statement, or all registration statements contain identical misstatements.

What the Ninth Circuit decision does not resolve, though, is how losses/damages would be calculated in these kinds of situations, which – as I blogged in connection with Slack and Robinhood – remains an issue. 

My final observation is that the SEC could make most of this go away by refusing to accelerate the effectiveness of a registration statement for any issuer that does not agree to waive tracing defenses for shares purchased in the first 180 days.


Short version: Ordinarily, if a corporation issues new shares in exchange for inadequate consideration, this is a derivative harm to existing shareholders, but Gentile v. Rossette created an exception to that rule by holding that if the shares are issued to a controlling shareholder, who thereby increases his/her/its level of control, the harm is both direct and derivative.  Gentile sat uneasily amongst Delaware precedent for a long time, as Delaware courts increasingly narrowed its application, until finally, in Brookfield Asset Management v. Rosson, the Delaware Supreme Court eliminated it.  As the court put it:

Gentile is premised on the presence of a controlling stockholder that allegedly used its control to “expropriate” and extract value and voting power from the minority stockholders.  Controlling stockholders owe fiduciary duties to the minority stockholders, but they also owe fiduciary duties to the corporation.  The focus on the alleged wrongdoer deviates from Tooley’s determination, which turns solely on two central inquiries of who suffered the harm and who would receive the benefit of any recovery. That shift has led to doctrinal confusion in our law. The presence of a controller, absent more, should not alter the fact that such equity overpayment/dilution claims are normally exclusively derivative because the Tooley test does not turn on the identity of the alleged wrongdoer.

Still, this direct/derivative problem is not entirely settled because – as the Delaware Supreme Court pointed out – “To the extent the corporation’s issuance of equity does not result in a shift in control from a diversified group of public equity holders to a controlling interest, (a circumstance where our law, e.g., Revlon, already provides for a direct claim), holding Plaintiffs’ claims to be exclusively derivative under Tooley is logical and re-establishes a consistent rule that equity overpayment/dilution claims, absent more, are exclusively derivative …. we see no practical need for the ‘Gentile carve-out.’ Other legal theories, e.g., Revlon, provide a basis for a direct claim for stockholders to address fiduciary duty violations in a change of control context.”

In other words, if you’re a shareholder in a company without a controller, and directors sell enough of an interest to create a controller, then, even if there was no change in the character of the shares you personally hold, you can still bring a direct, Revlon-standard review challenge to that action.  Which to be honest I was not, until now, sure was a clear thing, though there have been some decisions that suggested as much.  See In re Coty Stockholder Litigation, 2020 WL 4743515 (Del. Ch. Aug. 17, 2020).  But I will say, given the malleability of the standard for what counts as control – see my numerous blog posts on the subject – any cases that arise will be hilarious to watch.  On the one hand, plaintiffs will want to argue that the party receiving the new stock was a controller already, so that the MFW standards for cleansing apply; on the other, plaintiffs will want to argue that the party receiving the new stock was not a controller already, in order to be able to bring claims directly.  And defendants will have the opposite incentives. 

I’ll also note that in Brookfield itself, plaintiffs offered the alternative argument that they had a direct claim because the company undersold shares to a 51% controller, in a manner that brought the controller’s holdings to 65%.  This was significant, claimed the plaintiffs, because certain charter provisions could only be amended upon a 2/3 vote, so increasing the controller’s power to that level gave the controller even more substantive control. 

And the Delaware Supreme Court did not reject the argument as a theoretical matter!  Meaning, it’s not only a direct claim if the company goes from no control to control; it’s a direct claim if the company goes from control to next-level control.  But, the Supreme Court said, the plaintiffs had not made their factual case here because 65% < 2/3. 

Which I have to say is pretty unconvincing; I mean, Delaware will accept that someone with 49% of the vote in a public company is a controller, because that additional 1% it needs will come from somewhere; I don’t see why the same argument couldn’t be used to say that 65% is functionally the same as 66% when it comes to public companies.  But that only highlights the problem here: once legal significance is attached to going from no control to control, or from control to next-level control, defining what we mean by control becomes very hard to do.

A final note on this: I previously blogged that in the Tesla trial, VC Slights could theoretically resolve the entire matter without ever deciding whether Elon Musk is, or is not, legally a controlling shareholder; as I said at the time, the only wrinkle that might force such a decision on him were the plaintiffs’ direct claims brought under a Gentile theory.  Now that that theory is kaput, it will be even easier for Slights to avoid the is-he-or-isn’t-he question, if the facts allow it and that’s something he wants to.


Activision Blizzard, according to reports, has a very serious sexual harassment/sex discrimination problem.  So serious that the California Department of Fair Employment and Housing filed a lawsuit after a 2-year investigation.  The EEOC has also been investigating the company since 2020.

Given all this, it’s no surprise that when the news broke, a shareholder lawsuit was filed against Activision, generally alleging that the company misrepresented its employment policies to investors.

What was more surprising, though, was the news that the SEC was investigating Activision, because usually that’s not the kind of fraud that the SEC gets involved with.  It’s hard to exactly articulate the difference, but the SEC tends to stay its hand when the allegation is that the company was doing non-financially bad things and did not disclose those bad things to investors.

What gives?

I have no special insight, of course, but if I had to guess, this is about the fact that the SEC only recently made the following addition to Item 101 of Regulation S-K:

(c) Description of business….

(2) Discuss the information specified in paragraphs …[(c)(2)(ii)] of this section with respect to, and to the extent material to an understanding of, the registrant's business taken as a whole, except that, if the information is material to a particular segment, you should additionally identify that segment….

(ii) A description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction and retention of personnel).

And indeed, in its 2020 10-K, filed in February 2021, Activision included these statements under the heading “Human Capital”:

Activision Blizzard takes an active role in the entirety of the employee lifecycle, from candidates to alumni. Recognizing that ours is a rapidly changing industry with constant technological innovation, we remain focused on attracting, recruiting, enabling, developing, and retaining a diverse and innovative employee population.

Diversity, Equity, and Inclusion (“DE&I”): We believe that a culture of inclusion and diversity enables us to create, develop, and fully leverage the strengths of our workforce to exceed players' and fans' expectations and meet our growth objectives. We remain committed to building and sustaining a culture of belonging, built on equitable processes and systems, where everyone thrives. By embedding DE&I practices and programs in the full employee lifecycle, we work to recruit, attract, retain, and grow world-class talent. Our employee resource groups play an active role in our DE&I efforts by building community and awareness. We also offer leadership and management development opportunities on the topics of unconscious bias and inclusive leadership and train our recruiting workforce in diverse sourcing strategies….

Compensation and Benefits: The main objective of our compensation program is to provide a compensation package that attracts, retains, motivates, and rewards top-performing employees that operate in a highly competitive and technologically challenging environment. We seek to do this by linking compensation (including annual changes in compensation) to overall Company and business unit performance, as well as each individual’s contribution to the results achieved. The emphasis on overall Company performance is intended to align our employee’s financial interests with the interests of our shareholders. We also seek fairness in total compensation by reference to external comparisons, internal comparisons, and the relationship between development and non-development, as well as management and non-management, remuneration. We believe in equal pay for equal work, and we continue to make efforts across our global organization to promote equal pay practices….

Employee Experience: We capture and act on the voice of our employees through regular company-wide pulse surveys. We emphasize to employees that this is their chance to “provide honest, candid feedback about their experience working for the company.” Our survey participation rates (regularly 75% or higher) demonstrate our collective commitment that Activision Blizzard remains a great place to work. The survey—and other forms of employee feedback—result in actionable steps that lead to positive improvements to the employee experience at the company-wide, business unit, and team levels. Our employee feedback is dynamic and relevant to our employees’ immediate needs. …

That … sounds rather at odds with a company that is alleged to have tolerated extreme levels of sexual harassment, discriminated against women in pay and promotion opportunities, and actively discouraged women from reporting their complaints to HR.  Notably, the California DFEH and EEOC investigations were well underway when this 10-K was filed, but I can’t find mention of either.

So if I had to guess, the SEC views this situation as potentially a way of communicating that no, it’s actually not kidding when it says that human capital disclosure is a required line item under Item 101 of Regulation S-K.

Assuming my speculations are correct, this is not about the SEC demanding that companies preemptively accuse themselves of uncharged wrongdoing; it’s not even about whether Activision’s practices ultimately turn out to be legal or illegal under California or federal law.  This is about the SEC, having recognized that in the knowledge economy, workforce management is an important contributor to corporate wealth, responded to investor demand by requiring a new level of transparency surrounding it.  And in the very first year after those requirements took effect, one digital company – exactly the type of knowledge/skills-based company that inspired the new requirements – may have blatantly misdescribed to investors the facts surrounding its internal policies.  And that possibility is what the SEC is looking into.

And - that’s as much as I can handle this week!

September 25, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, September 24, 2021

Ten Ethical Traps for Business Lawyers

I'm so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here's the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren't the only ethical traps, of course, but there's only so many things you can talk about in a 45-minute slot. 

All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.

Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing with an unrepresented person), 7.1 (communications about a lawyer’s services), 8.3 (reporting professional misconduct); and 8.4 (dishonesty, fraud, deceit).  

Discussion topics will include:

  1. Do lawyers have an ethical duty to take care of their wellbeing? Can a person with a substance use disorder or major mental health issue ethically represent their client? When can and should an impaired lawyer withdraw? When should a lawyer report a colleague?
  2. What ethical obligations arise when serving on a nonprofit board of directors? Can a board member draft organizational documents or advise the organization? What potential conflicts of interest can occur?
  3. What level of technology competence does an attorney need? What level of competence do attorneys need to advise on technology or emerging legal issues such as SPACs and cryptocurrencies? Is attending a CLE or law school course enough?
  4. What duties do lawyers have to educate themselves and advise clients on controversial issues such as business and human rights or ESG? Is every business lawyer now an ESG lawyer?
  5. What ethical rules apply when an in-house lawyer plays both a legal role and a business role in the same matter or organization? When can a lawyer representing a company provide legal advice to an employee?
  6. With remote investigations, due diligence, hearings, and mediations here to stay, how have professional duties changed in the virtual world? What guidance can we get from ABA Formal Opinion 498 issued in March 2021? How do you protect confidential information and also supervise others remotely?
  7. What social media practices run afoul of ethical rules and why? How have things changed with the explosion of lawyers on Instagram and TikTok?
  8. What can and should a lawyer do when dealing with a businessperson on the other side of the deal who is not represented by counsel or who is represented by unsophisticated counsel?
  9. When should lawyers barter with or take an equity stake in a client? How does a lawyer properly disclose potential conflicts?
  10. What are potential gaps in attorney-client privilege protection when dealing with cross-border issues? 

If you need some ethics CLE, please join in me and my co-bloggers, who will be discussing their scholarship. In case Joan Heminway's post from yesterday wasn't enough to entice you...

Professor Anderson’s topic is “Insider Trading in Response to Expressive Trading”, based upon his upcoming article for Transactions. He will also address the need for business lawyers to understand the rise in social-media-driven trading (SMD trading) and options available to issuers and their insiders when their stock is targeted by expressive traders.

Professor Baker’s topic is “Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis.” Professor Baker will provide an overview of the regulation of Texas’ electric power system and the severe outages in February 2021, explaining why Texas is on the forefront of challenges that will grow more prominent as the world transitions to cleaner energy. Next, it explains competing electric power business models and their regulation, including why many had long viewed Texas’ approach as commendable, and why the revealed problems will only grow more pressing. It concludes by suggesting benefits and challenges of these competing approaches and their accompanying regulation.

Professor Heminway’s topic is “Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.” Professor Heminway will discuss how for many small business projects that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, and maintaining a tax-exempt nonprofit corporation may be daunting (or even prohibitive). Yet there would be advantages to entity formation and federal tax qualification that are not available (or not easily available) to unincorporated business projects. Professor Heminway addresses this conundrum by positing a third option—fiscal sponsorship—and articulating its contextual advantages.

Professor Moll’s topic is “An Empirical Analysis of Shareholder Oppression Disputes.” This panel will discuss how the doctrine of shareholder oppression protects minority shareholders in closely held corporations from the improper exercise of majority control, what factors motivate a court to find oppression liability, and what factors motivate a court to reject an oppression claim. Professor Moll will also examine how “oppression” has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief.

Professor Murray’s topic is “Enforcing Benefit Corporation Reporting.” Professor Murray will begin his discussion by focusing on the increasing number of states that have included express punishments in their benefit corporation statutes for reporting failures. Part I summarizes and compares the statutory provisions adopted by various states regarding benefit reporting enforcement. Part II shares original compliance data for states with enforcement provisions and compares their rates to the states in the previous benefit reporting studies. Finally, Part III discusses the substance of the benefit reports and provides law and governance suggestions for improving social benefit.

All of this and more from the comfort of your own home. Hope to see you on Zoom today and next year in person at the beautiful UT campus.

September 24, 2021 in Colleen Baker, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Ethics, Financial Markets, Haskell Murray, Human Rights, International Business, Joan Heminway, John Anderson, Law Reviews, Law School, Lawyering, Legislation, Litigation, M&A, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Teaching, Unincorporated Entities, White Collar Crime | Permalink | Comments (0)