Tuesday, October 26, 2021

LLC Magically Appears, Incorrectly Called a Corporation

As I have noted previously, LLCs (also known as limited liability companies) are generally required to be represented by counsel in court proceedings.  This is unremarkable, as entities, like corporations and LLCs are deemed, by law, to be separate from their owners. They are often known as “fictional people.” Because they are not natural persons, they cannot (usually) represent themselves pro se and shareholder/member/owners cannot do so for them.

A recent case from the Eastern District of Wisconsin agrees with the well-established principal. Unfortunately, it also follows suit with a less productive prior practice, calling an LLC a limited liability corporation. An LLC, again, is a limited liability company, and it is a separate and distinct entity from a corporation, with its own statute and everything.  Here’s an excerpt:

Leszczynski is representing himself in the case, which he has a statutory right to do. 28 U.S.C. § 1654 (“In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein.”). But even though he is president of Rustic Retreats Log Homes, Inc., Leszczynski cannot represent that corporate defendant. “Corporations unlike human beings are not permitted to litigate pro se.” In re IFC Credit Corp., 663 F.3d 315, 318 (7th Cir. 2011) (citations omitted). “A corporation is not permitted to litigate in federal court unless it is represented by a lawyer licensed to practice in that court.” United States v. Hagerman, 545 F.3d 579, 581 (7th Cir. 2008) (citations omitted). That is true even if the corporation is a limited liability corporation. Id. at 582. “[T]he right to conduct business in [the form of a limited liability corporation] carries with it obligations one of which is to hire a lawyer if you want to sue or defend on behalf of the entity.” Id. at 581-82.

Leszczynski may represent himself, but he may not represent Rustic Retreat Log Homes, LLC. The corporate entity must be represented by a lawyer admitted to practice in the federal court for the Eastern District of Wisconsin. The corporation cannot file any documents in federal court—including any answer or response to the complaint—unless it does so through an attorney licensed to practice in this court.

PIONEER LOG HOMES OF BRITISH COLUMBIA, LTD., Plaintiff, v. RUSTIC RETREATS LOG HOMES, INC., & JOHN LESZCZYNSKI, Defendants., No. 21-CV-1029-PP, 2021 WL 4902169, at *3–4 (E.D. Wis. Oct. 21, 2021).

So, this is generally pretty standard fare. Wrong, but standard, though this one has a rather interesting wrinkle. The court here notes that “corporate” defendants must be represented by a lawyer.  It repeats other authority to support this, then attempts to draw a distinction between a corporation and an LLC, but incorrectly calling the LLC a limited liability corporation.  Twice.  But that, unfortunately, is not weird. It happens far to often. 

What’s weird here is that the case caption refers to Rustic Retreat Log Homes, Inc., as does the earlier part of the opinion.  Yet, down near the end, we have the vague LLC references, and an explicit reference to Rustic Retreat Log Homes, LLC.  But where does it come from? 

The “That is true even if the corporation is a limited liability corporation” language does suggest that perhaps there is another entity involved (an LLC in addition to the corporation), but this seems to be the only clue.  Clearly, this mystery needed to be solved, so I pulled the complaint.  In the complaint, it asserts, in paragraph 62, that “Leszczynski set up a successor company, Rustic Retreats WI, LLC, on June 25, 2021.”  That’s the only LLC reference in the complaint.  It seems likely, then that the court meant to say that both Rustic Retreat Log Homes, Inc. and Rustic Retreats WI, LLC needed to be represented by a lawyer in court.  But the opinion still seems kind of weird, and kind of wrong, in explaining what seems to be a rather simple (and correct) proposition.  Sigh.    

October 26, 2021 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Monday, October 25, 2021

Heminway on Murray on Reforming the Benefit Corporation

Last week, I posted about the first of my two published commentaries from the 2020 Business Law Prof Blog Symposium, Connecting the Threads IV.  That earlier post related to my comments on an article written by BLPB co-blogger Stefan Padfield.  The subject?  Public company shareholder proposals--specifically, viewpoint diversity shareholder proposals.

This week, I am posting on the second commentary, History, Hope, and Healthy Skepticism, 22 TRANSACTIONS: TENN. J. BUS. L. 223 (2021).  This commentary offers my observations on co-blogger J. Haskell Murray’s, The History and Hope of Social Enterprise Forms, 22 TRANSACTIONS: TENN. J. BUS. L. 207 (2021).  The main body of the abstract follows.

In this comment, I play the role of the two-year-old in the room. Two-year-old children are well known to ask “why,” and that is what I do here. Specifically, this comment asks “why” in two aspects. First, I ask why we do (or should) care about making modifications to existing social enterprise practices and laws, the subject of Professor Murray’s essay. Second, assuming we do (or should) care, I ask why the changes Professor Murray suggests make sense. My commentary is largely restricted to the benefit corporation form because corporate forms loom large in the debates relevant to Professor Murray’s essay and because the benefit corporation is acknowledged to be the most widely adopted corporate form as among the social enterprise forms of entity.

And so, Haskell and I are "at it again" over whether the benefit corporation is worth reforming/saving.  More precisely, I am (again) picking a bit of an academic fight with Haskell.  His good nature and patience in response to my continued questions and push-backs have been and are deeply appreciated.

Do/should we care about modifying benefit corporation practices and laws and, if so, do Professor Murray's proposed reforms make sense?  [SPOILER ALERT!]  My bottom line:

I am satisfied—even if not wholly persuaded—that there is a reason to care. Benefit corporations may alter mindsets in a positive way, even if they do not positively or meaningfully alter applicable legal principles. And . . . I am convinced that Professor Murray generally has the right idea in calling for more accountability to a broader base of stakeholders—beyond just shareholders.

So, in the end, I was ready to call a limited truce--or really more of a detente. 

But I do maintain, as Haskell knows, a healthy doubt that the benefit corporation form has any broad-based value (making it hard to agree that amending the standard statutory framework or related practices has any merit).  And it looks like I have a new convert to this cause.  In his recent, provocative thought piece, Capitalism, heal thyself, Alan Palmiter avers as follows:

[W]e don’t really need benefit corporations, those corporations that have a hybrid profit and social/environmental purpose. All the companies that are doing big ESG -- world-changing ESG -- are your garden-variety for-profit (for-shareholder profit) companies. Maybe there are some benefit corporations, like my friend Patagonia, that like the label. But Patagonia didn’t have to be a benefit corporation to do what it’s doing.

That said, there’s a problem with fake benefit corporations, the ones pretending to do ESG. . . .

Alan, as you know, you are beating my drum--a drum I earlier have beaten here, here, and here, among other places, in various ways.  We shall see where it all goes.  But I remain a believer in the ability of the traditional for-profit corporation's ability tio engage in effective, efficient social enterprise and (more broadly) ESG initiatives.


October 25, 2021 in Conferences, Haskell Murray, Joan Heminway, Social Enterprise | Permalink | Comments (0)

Sunday, October 24, 2021

Sharfman: "The 'sustainable' investing fad is based on a Wall Street-created myth"

Bernard Sharfman has posted an interesting op-ed on Insider (here).  Excerpt:

The idea behind ESG's impact on climate change is that by moving money away from companies that spew fossil fuels, the funds can effectively make it cheaper for "clean" companies to raise money either through debt or equity offerings and more expensive for "dirty" companies. This sounds good in theory, but does not hold up in reality because the major effects of ESG funds are on the secondary market, where securities are traded but no new money is being raised. As explained by Fancy, investing in ESG funds does not provide new funding for those companies that would help mitigate climate change. "Instead, the money goes to the seller of the shares in the public market." Basically, ESG products are buying stock in companies from other asset managers, not the underlying businesses, so they aren't directly funding these firms at all....

If ESG funds do not mitigate climate change, what is the motivation for marketing these funds to investors? The simple answer is that the investment industry, which includes large investment advisers, rating agencies, index providers, and consultants, makes a lot more money when investors purchase shares in ESG funds versus plain vanilla index funds where the management fees sometimes approach zero.

October 24, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, October 23, 2021

UNH Law - Tenure-Track Opening

Open Rank - Tenure-Track Professor of Law

The University of New Hampshire Franklin Pierce School of Law (UNH Franklin Pierce), a national leader in legal education with a commitment to inclusion, diversity, and quality engagement for all, is pleased to announce that it is currently seeking applicants for two tenure-track appointments to its full-time faculty starting in August 2022. The law school has a number of curricular needs but is particularly interested in candidates with subject-matter expertise and scholarship in Criminal Law, Criminal Procedure, Evidence, Torts, Business and Commercial Law, Technology Law, and/or Intellectual Property. Both first-time faculty and junior lateral faculty are welcome to apply.

Additional Job Information

Cover letter should be addressed to Professor Courtney Brooks, co-chair of the Faculty Appointments Committee. In your cover letter, please describe your scholarly agenda, why you are interested in this position, and what makes you a strong candidate in light of the required and preferred qualifications described above. In the required Diversity Statement, please address how you have contributed to Diversity, Equity, and Inclusion in your scholarship and work. This position is open until filled. Review of applications will begin immediately. Priority review date: November 19, 2021.

Link to the full posting: https://jobs.usnh.edu/postings/43511 

October 23, 2021 in Joan Heminway, Jobs | Permalink | Comments (0)

Still thinking about SPACs

No, not that SPAC.

Actually, I’m thinking about the SPAC I blogged about here, GigCapital3, which merged with Lightning Systems.  It’s the subject of a lawsuit in Delaware Chancery; the allegation is that the de-SPAC transaction was bad for the SPAC investors, and rushed through in order to benefit the sponsor, before the eighteen month deadline passed and the sponsor was forced to liquidate.

There are some claims that the proxy statement was misleading – I’ll get back to that – but one claim is that this was a bad deal, the SPAC shareholders would have been better off if the SPAC had simply liquidated, and it was approved and recommended by the board because they either benefitted personally or had ties to the sponsor. 

Ordinarily, if you claim that a conflicted board approved a bad deal, that claim is reviewed for entire fairness unless it’s cleansed.  And in this case, theoretically any board breaches were cleansed by the shareholder vote in favor of the merger.  To address that, the complaint claims that the SPAC sponsor was actually a controlling shareholder, suggesting that cleansing could only come via MFW protections.

The problem is, it’s really hard to transpose ordinary corporate concepts into the SPAC context.

Start with:  Every SPAC shareholder had the right to redeem their shares at the same price they’d get in liquidation.  So, if you put aside, for the moment, the piece about a misleading proxy statement, it’s not clear why it would matter whether the board chose a bad merger over liquidation; the SPAC shareholders are in the same position either way.  And absolutely, one could make an argument about shareholders relying on the board to make good judgments about this, the whole point of having a board is that shareholders believe they know better than the shareholders, and their recommendation in favor of a deal carries particular weight, etc etc, but Delaware’s Corwin decision allowing a particularly extreme degree of cleansing via shareholder vote has really undermined the idea that shareholders are dependent on board decisionmaking in that substantive way.  The message of Corwin is, once shareholders have full information, they don’t need the board at all.  Which means, in a SPAC, shareholders shouldn’t be affected by a board decision to go through with a bad merger because they can always choose to redeem instead.

So really, from the shareholder perspective, the issue is not bad deal versus liquidation.  It’s bad deal versus good deal, but the complaint doesn’t allege that a good deal was ever on the table; the bad deal was rushed through precisely because the board was out of time to find a better one.

Now consider whether the shareholder vote cleansed any fiduciary breaches on the part of the board.

As I previously posted, one problem in this context is that there’s so little shareholder voting in SPACs that some SPACs have resorted asking people who already sold their shares to vote in favor of the merger.  But the other more fundamental issue is that you can vote in favor of the merger and still redeem your shares.  And shareholders do this, because many shareholders also hold warrants to buy shares in the combined company; those warrants are worthless without a merger, but probably worth something even in a bad merger. 

This is one of the problems that Usha R. Rodrigues and Michael Stegemoller identify in the paper I highlighted a few weeks ago; they call it empty voting.

Given that, SPAC shareholders, on the whole, should actually prefer a bad deal over liquidation, if those are the only two choices.  Of course, as we know from Revlon and the note holders, the board could not and should not have worried about the warrant holders as warrant holders, even if some warrant holders were also shareholders, so saving the warrant holders could not legitimately be part of the board’s decisionmaking when it agreed to the deal.  But the SPAC shareholders may be thinking about their warrants, which means a vote in favor of the deal is meaningless; shareholders should either prefer a bad merger, or be rationally indifferent as between bad merger or liquidation.

And what that means is, it’s very hard to take the shareholder vote as some kind of Corwin ratification of the deal or the board’s conduct when it comes to SPACs; shareholders have an incentive to vote in favor if it’s a good deal, and they have an incentive to vote in favor if it’s a bad one.  Even if they think it’s bad, they have no incentive to vote no because they can redeem.  Corwin just doesn’t have the same role to play.

Take the SPAC at issue here.  Per the 8-K, they only barely had a quorum; out of 25,893,479 total shares, only 14,829,588 actually voted.  Those 14,829,588  voted overwhelmingly in favor of the deal, but – also per the 8-K – 29% of the outstanding shares chose to redeem, and some of those may also have voted in favor.  We don’t know.  But if they did, that’s as many as 7,509,108 shares redeemed out of 14,555,716 voted in favor.  If, say, all the redeemed shares also voted in favor (unlikely, but bear with me), more voted in favor and rejected the deal than not.  (For some reason, the complaint says only 5.8 million were redeemed; I don’t know why the discrepancy, it might be because I am not accounting for insider shares properly.  Whichever of us is right, it’s still a lot though.)

But if we can’t treat the shareholder vote as cleansing here, we certainly can’t apply MFW, which is (apparently) what the plaintiffs plan to argue when they claim the sponsor was a controlling shareholder.  Because the rationale for requiring MFW procedural protections when there’s a controller is that shareholders will be intimidated by the presence of a controller; they may fear the controller will retaliate against them if they vote the wrong way.  See, e.g., Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994).  But in a SPAC, what could the controller possibly do to them?  They can still redeem their shares, which is the same as a liquidation, which is what’s going to happen if the deal is rejected.

Which is why the main focus of the plaintiffs’ complaint in this case is not so much that the board breached its duties by approving a bad deal – though that’s alleged too – but the claim that the proxy statement was misleading, and shareholders were lulled into approving a bad deal and sticking with the company rather than liquidate or redeem.  Plus, shareholders are bringing this claim directly rather than derivatively, and the “we would have redeemed if we had only known” argument is kind of essential to make that work.

So, the complaint doesn’t really focus on the argument that Corwin can’t apply in a situation where you can both vote in favor and redeem your shares, and when they file their opposition to the motion to dismiss, plaintiffs may choose not to make that argument in their briefing, either, because it’s awkward to claim that shareholders were lulled into sticking with a bad deal while simultaneously pointing out how many, in fact, did not.

Which ultimately is unsatisfying because frankly I’d love to see the Delaware courts grapple with the question how ratification should work in this context.

October 23, 2021 in Ann Lipton | Permalink | Comments (0)

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, Expressive Trading, Hypermateriality, and Insider 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 BSLrecruiting@mbs.miami.edu. 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 thomasemilyjane@gmail.com

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: https://facultyrecruiting.northwestern.edu/apply/MTE3Mw. Specific inquiries should be addressed to the chair of the Appointments Committee, Zach Clopton, zclopton@law.northwestern.edu.

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: enjones@wsulaw.edu For more information about WSCL, visit wsulaw.edu

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)