Thursday, June 13, 2024

Moelis, § 122(18), and DGCL Subchapter XIV - Knowing Legislative Policy Shift?!

Like so many others, I have wanted to say a word about West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024).  My angle is a bit different from that of many others.  It derives from my 15-year practice background, my 24-year law teaching background, and my 39-year bar service background.  It focuses on a doctrinal analysis undertaken through a policy lens.  But I want to note here the value of Ann Lipton’s existing posts on Moelis and the related proposed addition of a new § 122(18) to the General Corporation Law of the State of Delaware (DGCL).  Her posts can be found here, here, here, and here.  (Sorry if I missed one, Ann!)  Ben Edwards also published a related post here.  They (and others offering commentary that I have read) raise and touch on some of the matters I address here, but not with the same legislative policy focus.

I apologize at the outset for the length of this post.  As habitual readers know, long posts are “not my style” as a blogger.  This matter is one of relatively urgent legislative importance, however, and I am eager to get my thoughts out to folks here.

I begin by referencing the DGCL provision in the eye of the storm.  DGCL § 141(a) provides for management of the business and affairs of a Delaware corporation by or under the direction of the corporation’s board of directors, except as otherwise provided in the corporation’s certificate of incorporation or the DGCL.  In Moelis, Vice Chancellor Travis Laster found various provisions in a stockholder agreement unlawful under DGCL § 141(a).  Specifically, a series of governance-oriented contractual arrangements at issue in Moelis were not authorized under the corporation’s certificate of incorporation or another provision of the DGCL.

The tension in this space involving DGCL § 141(a) is not new.  For many years, the legal validity of so-called stockholder agreements—technically, agreements (as opposed to charter provisions) that shift governance power from the directors of a corporation to one or more of its stockholders—has been questionable for most Delaware corporations, including public companies.  (I say “many years” because the legal validity of these agreements was an issue I routinely wrestled with before I left the full-time private practice of law in 2000.) 

The DGCL is different from the Model Business Corporation Act (MBCA) in this regard.  The MBCA has long had a broad-based statutory provision, MBCA § 7.32, authorizing shareholder agreements under specified conditions.  States adopting the MBCA have made a (presumably) conscious choice to embrace shareholder governance under the circumstances provided in the MBCA, including through § 7.32.  The MBCA’s provision expressing the management authority of the corporation’s board of directors, MBCA § 8.01(b), expressly references MBCA § 7.32, providing that:

[e]xcept as may be provided in an agreement authorized under section 7.32, and subject to any limitation in the articles of incorporation permitted by section 2.02(b), all corporate powers shall be exercised by or under the authority of the board of directors, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of the board of directors.

There is no analogous provision in the DGCL.  The only way to be sure that one could accomplish a shift in governance power from directors to stockholders under the DGCL has been for a corporation either to include the governance provisions in its certificate of incorporation or to organize as a close corporation under Subchapter XIV.  Close corporation status requires charter-based notification and conformity to a number of statutory requirements set forth in DGCL §§ 341 & 342, including that the certificate of incorporation provide that the stock be represented by certificated shares “held of record by not more than a specified number of persons, not exceeding 30,” that the stock be subject to transfer restrictions, and that there not be a “public offering” of the stock. DGCL § 342(a)(1)-(3).  Thus, by legislative design, statutory close corporation status is not available to publicly held corporations organized under Delaware law (which makes total sense for those who understand what a closely held corporation is, in a general sense).

Members of the Delaware State Bar Association (DSBA) Corporation Law Section know all of this well.  As leaders in reviewing and proposing changes to the DGCL over the years, this group of folks has thoughtfully weighed policy considerations relating to the DGCL’s application to the myriad situations that Delaware corporations may face.  Without having researched or inquired about the matter, I find it hard to believe that the section has not previously discussed the desirability of an express statutory provision allowing for the approval and execution of stockholder agreements outside a corporation’s certificate of incorporation.  The matter has been addressed by the Executive Council of the Tennessee Bar Association’s Business Law Section, which engages in similar legislative initiatives in Tennessee, more than once during the time I have been serving on it.  I therefore assume that the choice to refrain from proposing a specific statute authorizing stockholder agreements outside a corporation’s certificate of incorporation over the years has been both informed and intentional.

Yet, earlier today, Senate Bill 313 passed in the Senate Chamber of the Delaware General Assembly.  In that bill, vetted and approved by the DSBA Corporation Law Section and blessed by the DSBA Executive Committee, the longstanding policy decision to refrain from allowing stockholder agreements outside of the certificate of incorporation or Subchapter XIV is being summarily reversed through the proposal to adopt a new DGCL § 122(18)—an alteration of the corporate powers provision of the DGCL.  That new proposed DGCL section provides a corporation with the power to enter into stockholder agreements within certain bounds, but those bounds are relatively broad.

As others have noted (at least in part), the drafting of the proposed DGCL § 122(18) (and the related additional changes to DGCL § 122) reflects a belt-and-suspenders approach and is otherwise awkward.  Multiple sentences are crammed into this one new subpart of DGCL §122 to effectuate the drafters’ aims.  The DGCL has been criticized for its complex drafting in the past (resulting in, among other things, a project creating a simplified DGCL), and the approach taken by the drafters of the proposed DGCL § 122 changes adds to the complexity of the statute in unnecessary ways.  A provision this significant should be addressed in a separate statutory section, the approach taken in MBCA §7.32.  That new section then can be cross-referenced in DGCL § 141(b)—and, if deemed necessary, DGCL § 122.  Breaking out the provision in its own section also should allow legislators to more easily and coherently identify strengths and weaknesses in the drafting and build in or remove any constraints on stockholder governance that they may deem necessary as the proposed provision gets continued attention in the Delaware State House of Representatives.  I offer that as a drafting suggestion.

Apart from the inelegance of the drafting, however, I have one large and important question as Senate Bill 313 continues to move through the Delaware legislative process: do members of the Delaware General Assembly voting on this bill fully understand the large shift in public policy represented by the introduction of DGCL § 122(18)?  If so, then they act on an informed basis and live with the consequences, as they do with any legislation they pass that is signed into law.  If not, we all must work harder to enable that understanding. 

It is all fine and good for us to point out how hasty the drafting process has been, how traditional debate and procedures may have been short-changed or subverted, how waiting for the Delaware Supreme Court to act on the appeal of the Chancery Court decision before proceeding is prudent, etc.  But the fact of the matter has been that potential and actual stockholders of Delaware corporations have been able to rely exclusively on charter-based exceptions to the management authority of the board of directors—whether those exception are authorized in Subchapter XIV of the DGCL or otherwise.  This has meant that prospective equity investors in a Delaware corporation knew to carefully consider a corporation’s certificate of incorporation to identify any pre-existing constraints on the management authority of the board of directors before investing.  This also has meant that any new constraints on the board of directors’ authority to manage the corporation’s business and affairs required a charter amendment of some kind—either a board-approved and stockholder-approved amendment of the certificate of incorporation or the board’s approval of a certificate of designations under charter-based authority of which existing stockholders should be aware.

Ann noted this issue in a previous post.  The enactment of proposed DGCL § 122(18) will make it more challenging for potential equity investors to identify the locus/loci of management power in the corporation.  Although both the certificate of incorporation and any stockholder agreement would be required to be filed with the U.S. Securities and Exchange Commission for reporting companies (the latter as an instrument defining the right of security holders under paragraph (b)(4) or as a material contract (b)(10) of Regulation S-K Item 601), the current draft of proposed DGCL § 122(18) does not provide that a copy of any contract authorized under its provisions be filed with the Delaware Secretary of State or that its existence be noted on stock certificates (a requirement included in MBCA §7.32(c)).  In addition, stockholders will lose their franchise if the stockholder agreement would otherwise have required a stockholder vote.

Finally, it seems important to note that the judicial doctrine or independent legal significance—or equal dignity—has been strong in Delaware over the years as a factor in the interpretation of Delaware corporate law.  This has helped practitioners and the judiciary to navigate difficult issues in advising clients about the outcomes of Delaware corporate law debates.  The rule typically has been that, if one takes a path afforded by the statute, they get what the statute provides.  And if one does not take a provided statutory path, they cannot later be heard to argue for what the statute provides for users of that untaken statutory path. 

Classically, in dicta in Nixon v. Blackwell, 626 A.2d 1366 (1993), Chief Justice Veasey wrote (on pp. 1380-81) about the importance of DGCL Subchapter XIV in construing corporate governance arrangements in light of the doctrine of independent legal significance:

 . . . the provisions of Subchapter XIV relating to close corporations and other statutory schemes preempt the field in their respective areas. It would run counter to the spirit of the doctrine of independent legal significance and would be inappropriate judicial legislation for this Court to fashion a special judicially-created rule for minority investors when the entity does not fall within those statutes, or when there are no negotiated special provisions in the certificate of incorporation, by-laws, or stockholder agreements.

With the passage of proposed DGCL § 122(18), parts of Subchapter XIV of the DGCL will seemingly be rendered vestigial (i.e., they will no longer have independent legal significance).  Consideration of this and any other potential collateral damage to the interpretation of Delaware corporate law that may be created by the enactment of proposed DGCL § 122(18) should be carefully undertaken and, as desired, additional changes to the DGCL should be debated before voting on Senate Bill 313 is undertaken in the Delaware State House of Representatives.

I do not argue for a specific result in this post.  Rather, I mean to illuminate further the significance of the decision facing the Delaware General Assembly (and, potentially, the decision of the Governor of the State of Delaware) in the review of proposed DGCL § 122(18).  In doing so, I admit to some sympathy for those who may have clients with stockholder agreements they now know or suspect to be unlawful under the Moelis opinion.  In all candor, any legislation on this topic should more directly address those existing agreements given that the provisions of proposed DGCL § 122(18) are not a mere clarification of existing law.  Agreements not re-adopted under any new legislative authority may be found unlawful in the absence of clarity on this point.  As a reference point, I note that, in amending MBCA § 7.32 to remove a previous 10-year duration limit, the drafters specified the effect on pre-existing agreements in MBCA § 7.32(h).  Take that as another drafting suggestion . . . .

I welcome comments on any or all of what I offer here.  If I have anything incorrect, please correct me.  Regardless, I hope this post provides some additional information to those in the Delaware General Assembly and elsewhere who have an interest in proposed DGCL § 122(18).

June 13, 2024 in Ann Lipton, Compliance, Corporate Governance, Corporations, Current Affairs, Delaware, Joan Heminway, Legislation, Management, Shareholders | Permalink | Comments (0)

Corporate Redomestications

Corporate redomestication has been in the news.  Earlier this week, the Wall Street Journal ran an op-ed I penned with Nevada's Secretary of state, Francisco Aguilar, explaining why some corporations seek to redomesticate from Delaware to Nevada or elsewhere.  Ann also covered the issue today in the context of Tesla's redomestication to Texas.  

Although the Tesla redomestication proposal apparently passed at the shareholder meeting, not all redomestication proposals will pass.  Notably, Glass Lewis recommended against the Texas reincorporation.  I have some faith that states like Nevada will react and legislatively change their laws if they prove a barrier to securing additional incorporations.  After all, Delaware has been changing its laws to ensure it remains attractive for decades.  Indeed, much of the movement in Delaware around proposed amendments to Delaware's corporate law seems aimed at maintaining Delaware's dominance and securing continued incorporations.

The key will be striking the right balance between investor protection and shielding managers from possibly unwarranted and value-destroying litigation costs. Ultimately, striking the right balance is hard.  Under a too lenient standard for litigation, corporations and shareholders will suffer from costs driven by excess litigation.  Under too demanding a regime, shareholders may suffer losses from uncompensated fiduciary breaches with courts refusing to intervene despite some misconduct.

One of the best things about being a corporate law professor is that it continues to actively develop.  In her post today, Ann gave the example of a controller possibly seeking to monetize her control premium personally instead of splitting it with all shareholders when selling. The WSJ story frames it as the controller losing trust in a CEO "after extensive back and forth with him that resulted in her family getting less cash from the deal than in earlier proposals" Exactly how Nevada law would treat this issue warrants development, but I doubt it would allow a majority shareholder to wantonly expropriate value from minority shareholders.  While Nevada does have a broad business judgment statute, it only applies to officers and directors--not to shareholders that may owe fiduciary duties.  Yet the statute does not currently clearly address the obligations controlling shareholders owe to minority shareholders. 

It's an area of Nevada law that needs more development.  As Keith Bishop pointed out in an email to me on this, there are some Nevada cases.  One is Foster v. Arata.  It found that stockholders in a dominant position owe fiduciary duties.  Another is Shivers v. AMERCO.  It's a Ninth Circuit decision that also recognized that majority shareholders owe duties.  It'll be an area to continue watch.

June 13, 2024 | Permalink | Comments (0)

Tesla takes, get ‘em while they’re hot!

Whenever I talk about Elon Musk and corporate governance, an objection is raised to the effect of, “Isn’t Musk sui generis?  Can we really take any lessons from him?”

It’s a fair question, but if Musk is sui generis, there is no meaning in any of this, and that’s no fun at all.  So, for the purposes of this post, I’m putting it aside.

Take One:  What a supreme failure of the SEC

I’m sorry, I have to start here.  Sometime in the middle of the night (I was asleep), Elon Musk tweeted an extremely informal spreadsheet screencapture of the purported shareholder vote, and for the next several hours – including during actual trading – no one knew if he was telling the truth.  I spoke to reporters, which is a thing I do now whenever Musk is in the news (i.e., on days that end in “y”), and they were simply not sure whether to take the tweet seriously.  Initial headlines read “Elon Musk says” rather than “The vote is.”

It is unacceptable that the CEO of an S&P 500 company could publicly release extremely material information and have the entire world spend multiple hours wondering if he was just kidding.

I can only assume the tweet was not, in fact, reviewed by the Twitter Sitter, even though Musk lost on all his attempts to challenge his settlement.

If the SEC cannot ensure the basic accuracy of something as simple as a report of the results of a shareholder vote on one of the most widely traded, publicly watched companies in history, what are we even doing here?  The phrase “You had one job” takes on new meaning.

Take Two: What is the value of fiduciary litigation?

The debate has long raged over whether fiduciary litigation brings any actual benefit to shareholders.  You can ask about that in specific cases – are these all nuisance suits that only benefit the attorneys? – and you can also ask more broadly, i.e., maybe having the system of fiduciary litigation in general keeps directors on the straight and narrow, and ultimately contributes to shareholder wealth systemically.

Notwithstanding Tesla’s assertions to the contrary, I think it’s fair to say most spectators associated a move to Texas with a reduction in fiduciary litigation, or at least, successful litigation.  Partly, this is just a mood, i.e., the expectation that Texas judges presiding over cases involving Texas employer Elon Musk, under the watchful eye of Musk’s good friend Greg Abbott, are more likely to rule in Tesla’s favor.  But it’s also potentially built into Texas law, which may be interpreted as requiring plaintiffs to clear a higher bar for showing a lack of board independence.

So what does it mean, that shareholders – especially institutional shareholders – voted to reincorporate?

Well, one story is, they agree that fiduciary litigation is rent-seeking, contrary to shareholder interests, and does nothing more than distract boards from doing their actual jobs.  In this story, Tesla’s shareholders voted to limit the nuisances that threatened the ability of Elon Musk to run the company as he sees fit – in a manner that would ultimately maximize the benefits to Tesla shareholders.  In other words, fiduciary litigation is too powerful, in that it inhibits too much managerial flexibility by imposing inappropriate one-size-fits-all standards.

But another story is that shareholders were, in fact, coerced, in the sense that they believed defying Musk’s wishes would cause him to violate his fiduciary duties to Tesla by redirecting its resources to his private companies.  But if that’s the story, you have to also believe that shareholders thought there was no remedy for that kind of breach.  After all, even though there are new complaints against Musk alleging that he misappropriated Tesla resources and opportunities, at the end of the day, no court can literally stand over him 24/7 and make him develop AI.  So under that view, fiduciary litigation is too weak to protect shareholder interests.

Either way, though, the conclusion might be that fiduciary litigation – be it too strong or too weak – doesn’t add value to shareholders.

(A third story, incidentally, is that shareholders are okay with Musk not maximizing Tesla’s value, if he’s saving humanity or taking us to Mars or whatever, and so they’ll willingly hand over Tesla assets for that project.  Which is actually really interesting and not entirely without evidentiary support, but would seem to come more from retail than institutions.)

Take Three: What does this mean for the proposed DGCL amendments?

I’ve previously blogged about proposed amendments to the DGCL (prior posts here, here, herehere, and here). None of those amendments are directly relevant to Musk (except in the very abstract way that they would authorize a shareholder agreement to substitute for the kind of dual-class recapitalization currently prohibited by listing rules).  But there is a theme here, and it’s that Delaware has become too strict in terms of limiting the flexibility of insiders, managers, and large investors.  And the Texas move, especially if it heralds additional flight, could be read as confirming that perception.  If so, that might weigh in favor of the proposed amendments – or at least, tempering at the Delaware Supreme Court level.

But a corollary to that is – and now we’re really veering off Musk and into the DGCL proposals – what is the larger political picture?  Delaware may claim that its law is shaped by balancing the interests of shareholders and managers, but it’s possible that shareholders in fact have very little interest or influence (here’s a paper discussing the lack of institutional investor bargaining power re: private equity; and in general, the fact that investors were so willing to invest in Chinese VIEs despite increasing warnings by the SEC regarding the lack of shareholder protections tells me something, anyway, about how much attention investors actually pay to governance rights ex ante).   

If that’s true, why does Delaware provide any protections for shareholders at all?  Well, one answer is – Delaware operates in competition with the SEC, which provides mandatory investor protection.  And so, Delaware strategically protects investors just enough to keep the SEC and Congress off its turf.  And corporate managers understand that dynamic, and even tolerate it, in tacit collusion with Delaware, to ward off federal intervention.

But what does the world look like when federal intervention is off the table, perhaps because we have a court that will strike down any move the SEC makes?   Maybe it looks very much like this world, where Delaware leaps at the chance to eliminate investor voice.

Take Four: How easy is it to escape Delaware’s protections via reincorporation?

This is obviously the main issue in TripAdvisor, but I can’t help considering the issue in light of the woes of – yes, Paramount.  Because according to news reports, a big stumbling block in Shari Redstone’s attempt to sell her stake is that (1) she wants to receive more consideration than the public shareholders but (2) she fears the liability would follow.  That liability comes from Delaware law.  Take Nevada, for instance.  It seems Nevada would give a free pass to controller transactions, absent evidence of intentional misconduct, fraud, or knowing violation of law, and it does not seem as though a simple conflict of interest rises to that level.

So, can we imagine a world where Shari Redstone uses her controlling stake to force a reincorporation to Nevada, and then sells the company on her terms?  I can imagine it, sure, and the lesson here is how difficult it is for states to maintain different standards so long as managers can choose the law to govern their affairs.

Of course, if you truly believe that the market will police all of this, then, maybe you think that, in the future, shareholders of Delaware companies will demand charter protections against reincorporation without disinterested shareholder approval.

Or, maybe, contra what I said in Take Three, you believe investors will pay less for their stakes if they do not have governance rights.  Which is exactly what this paper demonstrates regarding firms backed by PE that go public with shareholder agreements in place.  Except the dollar figures still appear to be so high that PE firms are willing to make that sacrifice in order to retain the private benefits of control.  I’d argue – as I said previously – that since the financial power associated with control translates into political power, we have an explanation for why PE firms would make that trade.  And that really is about much more than the market reaching an appropriate discount for appropriation risk; that is a problem for the Rest of Us.

Take Five: Superstar CEOs

There’s been a lot of talk about them but, in Tesla’s case, there’s a really specific issue on the table.  What if, Tesla is just a car company?  What if, Tesla’s current market valuation is entirely untethered from its actual potential – under the direction of Musk or anyone else?  What if the only reason for its stratospheric valuation is because Musk has a PT Barnum like ability to convince people of a mythical future that will never come to pass?

I am a lawyer, I’m not a financial analyst, and I’m not going to weigh in on whether that’s correct. I am safe in saying, however, that there’s certainly a contingent of relatively informed people who feel that way (though certainly not everyone).

Indulge me, for a moment, in a thought experiment.  If the critics are right, that puts Tesla’s investors in a bind.  Elon Musk may be mismanaging the company, in the sense of diverting resources to his private firms and stocking the board with his bestest buddies and doing whatever he’s doing while high, but there is no solution via traditional channels.  Any activist move to oust him and install better governance will still result in a drop in stock price to reflect Tesla’s true potential.  Current shareholders are benefitting, in other words, from misplaced confidence.  (Cf James Spindler on why existing shareholders prefer securities fraud).  That means, they cannot risk instilling any kind of discipline at all.

If that’s true, then we are back to where we started.  Because if there’s one other thing the securities laws are intended to do, beyond ensure the basic accuracy of public material information, it’s to keep stock prices at least relatively tethered to corporate fundamental value, so as to ensure efficient capital allocation.  And for whatever reason (Elon Musk personally, the difficulty with policing projections of future performance, the irrationality of retail, take your pick), that process has entirely failed in the case of Tesla.  And we are now witnessing the downstream effects.

June 13, 2024 in Ann Lipton | Permalink | Comments (4)

Tuesday, June 11, 2024

What is Equity, Anyway?

I just came back on Sunday from the 2024 Law and Society Association Annual Meeting in Denver.  It was, as always, a stimulating few days.  A number of us business law profs were in attendance.  The corporate and securities law collaborative research network (CRN46) habitually organizes several programs.  This year was no exception.  I was privileged to be featured in two.  But I will say more on my participation in the conference later.

Today, I want to highlight an interesting piece that was presented at the conference during one of the CRN46 paper panels: "The Original Meaning of Equity " by Asaf Raz (forthcoming in the Washington University Law Review).  The SSRN abstract follows:

Equity is seeing a new wave of attention in scholarship and practice. Yet, as this Article argues, our current understanding of equity is divided between two distinct meanings: on one side, the federal courts, guided by the Supreme Court, tend to discuss equity as the precise set of remedies known at a fixed point in the past (static equity). On the other, state courts—most prominently, in Delaware—administer equity to preserve the correct operation of law in unforeseeable situations (substantive equity). Only the latter interpretation complies with the historical and functional idea of equity.

This Article makes the first detailed argument for resolving the problem of static equity, and reinvigorating substantive equity in the federal judiciary and the broader legal community. To do so, this Article takes a highly innovative step, by connecting the federal discussion with an in-depth analysis of the legal scene where equity is employed most systematically (and most faithfully to its historical roots): Delaware law, including its corporate law. As this Article demonstrates, substantive equity is fully compatible with originalism and textualism; the "equity" mentioned in the Constitution and later federal texts is substantive, not static, equity. Federal law has always operated within the sphere of the common law, and this Article offers a new bridge between the two, exposing the members of each community to insights from the other, in a manner that promotes both the original understanding of the legal text, justice, and the rule of law.

Asaf's presentation of the piece at the conference generated several questions and an interesting extended discussion.  The term "equity" has many meanings in law that we must be conversant with in our work.  We also need to help students define "equity" in context and sort out its varied meanings as they learn about law in its multifarious manifestations.  These factors alone make the article a valuable read.  However, more centrally, I applaud Asaf for taking on the task of adding some clarity to the term and on connecting his research to both federal (including constitutional) and Delaware law in novel ways.  I look forward to spending more time with this piece.  And I know Asaf welcomes your comments!

June 11, 2024 in Conferences, Delaware, Joan Heminway, Research/Scholarhip | Permalink | Comments (0)

Monday, June 10, 2024

The Value of Relationships in Business Lawyering

Transactions: The Tennessee Journal of Business Law recently published the proceedings of the 2023 Business Law Prof Blog symposium, held at UT Law in Knoxville back in October.  The proceedings can be found here.  As is customary, the issue includes articles written by the principal presenters—bloggers from here at the BLPB—and related commentary from UT Law faculty and students.

My contribution to the symposium was a piece called Business Lawyer Leadership: Valuing Relationships.  The abstract is set forth below.

Business lawyers are surrounded by relationships because of the nature of their work. Businesses are relational; business associations law is relational; business lawyering is relational. Business lawyering, in all its manifestations, is a practice steeped in the lawyer’s awareness and management of, as well as their participation in, the layered sets of relationships found in businesses and business associations law.

This article recognizes these important connections between business law practice and relationships. It approaches each of them in turn. The substantial take-away is that a business lawyer can best lead by understanding the inherent value of relationships to business lawyering and leveraging that understanding through focused effort that includes the employment of, among other things, relationship management skills. Relationship management—together with the other components of emotional intelligence and other relational traits, skills, and practices—affords business lawyers important tools for building and sustaining healthy relationships.

Those who know me well will recognize a lot of "me" in this piece.  Relationship building and relationship management are high priorities for me.  Through this article, I attempt to unravel some of the reasons why all business lawyers may want to place a premium on relationship building and management.  Relationships truly are deeply connected to business, business law, and business law practice in ways that make relational leadership skills valuable.

June 10, 2024 in Business Associations, Conferences, Lawyering, Management | Permalink | Comments (0)

Friday, June 7, 2024

In Which Elon Musk (Again) Illustrates Basic Corporate Law Concepts

I swear I wasn’t going to blog about Elon Musk this week; I had several other ideas planned, but then someone went ahead and filed a new complaint in Delaware and I just can’t help myself.

In Ball v. Tesla, the plaintiff challenges both the upcoming pay ratification vote, and the Texas redomestication.  The arguments against pay ratification are pretty much the ones you’ve already heard in this space (as well as ones advanced by Prof. Elson in his proposed amicus brief), and we’ve pretty much exhausted those so I’ll skip it.

As for the Texas redomestication vote, the plaintiff claims that the required threshold to leave Delaware is 2/3 rather than a simple majority of outstanding shares due to certain provisions in Tesla’s charter.

I’ve previously blogged about this issue at Tesla; it has a staggered board and keeps trying reduce the stagger, but it can’t get the required 2/3 outstanding vote, because so many shareholders do not cast ballots at all. 

When Tesla drafted its charter way back when, it set about minimizing shareholder rights as much as it could under Delaware law.  It instituted a staggered board, it prohibited shareholders from acting by written consent – they can only act at a duly called meeting – and prohibited them from calling a meeting themselves.  And then, to ensure shareholders couldn’t amend the charter and remove the protections, it insulated those provisions with a two-thirds voting requirement to amend them (and a two-thirds vote requirement to amend the voting standard to amend them):

Notwithstanding any other provision of this Certificate of Incorporation … the affirmative vote of the holders of at least 66 2/3% of the voting power of all then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision as part of this Certificate of Incorporation inconsistent with the purpose and intent of, Article V, Article VI, Article VII or this Article IX …

Now Tesla wants to move to Texas.  But Texas guarantees more shareholder rights than Delaware.  Specifically, in Texas, corporations cannot eliminate either the right of shareholders to act by written consent, nor the right of shareholders to call special meetings.  So when Tesla drafted a new Texas charter, it tried to minimize those rights as much as possible.  Specifically, the Texas charter permits action only by unanimous written consent, and permits shareholders to call a special meeting only if 50% of shareholders demand it (the highest threshold Texas permits).  Additionally, as Tesla notes in its proxy, under Texas law, even if shareholders call a special meeting, the Board may still postpone or reschedule it.

So, in Ball v. Tesla, the shareholder claims that these new charter provisions expand the rights granted in the original charter, and therefore, can only be amended – and the redomestication can only be approved – with the approval of two-thirds of the outstanding shares.

What happens next?

Well, I’m assuming Ball will be in some way consolidated with Tornetta.  I also assume the good attorneys at BLBG will be not at all happy about the challenge to the pay package, because they want to maintain control over the litigation.  If nothing else, their fee depends on the “benefit” they provided to Tesla shareholders, and Tesla has already telegraphed that if shareholders vote to ratify, the company plans to argue that the attorneys did not provide any benefit to Tesla shareholders, and therefore the fee should be reduced or eliminated.  So the Tornetta team already has a very strong incentive to argue that the ratification has no effect, and they will not be pleased that an interloper is trying to seize control of the issue.

With respect to the Texas redomestication, the vote’s in a week.  Chancellor McCormick cannot risk the company redomesticates and then she somehow has to reel it all back, which means she either has to decide this issue very quickly, or she has to make sure Tesla won’t move while there are (plausible) arguments outstanding.  That said, the Texas move is not self-executing once the vote occurs; even if shareholders vote in favor, Tesla will still have to file the appropriate forms with the Texas Secretary of State.  So, if Chancellor McCormick believes the complaint has merit, she does not have to block the vote (which is not something Ball has asked for anyway); she can enjoin Tesla (or seek a promise, which she seems to prefer), from filing the forms until the matter is sorted out.

Which brings us to – does the complaint have merit?

Imma stop you right there on the written consent thing.  The two-thirds requirement only applies to actions that are “inconsistent with the purpose and intent of” the original charter provisions, and there is no possibility of getting unanimous written consent in a public company (plus, Elon Musk owns shares; if he’s consenting, the point is moot anyway since he can call a special meeting).  Ball’s not going to succeed on that one.

What about the 50% threshold for calling a special meeting?

I’m going to start by saying I have not actually researched any caselaw on this, which might very well exist, and that obviously supersedes anything I’m about to say, but – I’d still rather be Tesla than Ball.  Fifty percent is still almost impossible to achieve in a public company outside the context of a shareholder meeting; moreso now that Tesla’s shareholder base is in the ballpark of 45% retail, and especially taking into account that Musk himself owns 13% (20% if you count the unexercised options, which number includes the ones in dispute).

So I think the real action here is over the pay ratification.

But I promised a lesson about corporate law, and here it is.

What if this challenge presented more of a threat to redomestication?  What if, for example, Texas set the maximum threshold for shareholders to call a special meeting at 25% – which is the MBCA standard – rather than 50%?

In that event, we can imagine a scenario.  Suppose Elon Musk called up his good buddy Governor Greg Abbott, and told him, “Greg, Tesla would love to reincorporate to Texas, but your law is blocking us!  Can you do something about that?”

How much do you think Texas cares about that maximum vote threshold for shareholders to demand a meeting – especially if, in my hypothetical, Texas just adopted the MBCA as written?

Probably not much.

So we can imagine that, at the next legislative session, a bill sails through the legislature to amend Texas’s corporate code to eliminate the right of shareholders to call special meetings, and voila!  Tesla freely reincorporates.

All of this is a thought experiment for Tesla but it’s a real-world thing that happens with companies all the time.  For example, this paper tells the story of the time that Massachusetts actually changed its corporate law in the middle of an active proxy fight in order to protect the management of a local firm.  And that’s not even unusual.

But, corporations and shareholders assume, it doesn’t happen in Delaware.  Why?  Partly because Delaware cares a lot more about its corporate code, but also because Delaware doesn’t have local firms.  I mean, you know, not really.  So it’s pretty much neutral ground.

At least, that’s what everyone’s always thought.

But right now, there’s a proposal to amend Delaware’s corporate code rather dramatically (prior posts here, here, herehere, and here), and as far as I can tell, that’s largely to protect a group of specific companies that got a bit over their skis with aggressive shareholder agreements when they went public, and now some faction of the Delaware bar is seeking to change the law in order to retroactively validate those arrangements.

So, you know.  We’ll see what happens.

Edit: In the comments, it's proposed that the complaint fails for a simpler reason regarding the terms of Delaware's redomestication statute, which overrides specific supermajority charter provisions.  That may be right.  Interestingly, Tesla recommends against shareholder proposals seeking declassification on the ground that they are impossible to implement without a two-thirds majority, but it cagily does not say that it could not implement them in conjunction with redomestication.  ISS reports that when it raised the possibility of declassification in conjunction with the Texas move, Tesla simply stated it preferred to keep the new Texas charter as close in form to the old one as possible and committed to revisiting the issue of declassification when it achieved sufficient shareholder participation at a meeting.

June 7, 2024 in Ann Lipton | Permalink | Comments (1)

Thursday, June 6, 2024

Nevada Files Amicus Brief in TripAdvisor

We've covered the TripAdvisor litigation here for some time.  With the case before the Delaware Supreme Court, Nevada has weighed in with an amicus brief.  Nevada, on behalf of Francisco Aguilar, Nevada's Secretary of State, was represented by its Office of the Attorney General,  friend of the BLPB, Anthony Rickey, and DLA Piper's John Reed.  Ann's Tweet even makes an appearance.

Nevada argues that Delaware's Chancery Court should not accept allegations in a complaint about Nevada law instead of analyzing Nevada law itself.  It also argues that the decision risks creating an exit tax on any corporation that seeks to leave Delaware for Nevada--or some other state.  To the extent that any other state arguably offers benefits that wouldn't be available to a controlling shareholder in Delaware, the same standards would apply.  Thus, a reincorporation to Texas, Florida, or California might even be covered.  Depending on how far you take it, any corporation seeking to redomesticate to any of the many states with constituency statutes might face the same kind of challenge.

The amicus also points out that claims that Nevada has "raced to the bottom" should sound familiar to Delaware because Delaware itself has faced this accusation for many years. And while the TripAdvisor complaint included some comments made in Nevada's internal legislative debate, the same could happen with Delaware with Delaware Representative Madinah Wilson-Anton's statement that any "lover of democracy, transparency, and the rule of law should be grossed out" over process leading to recent proposed amendments in Delaware.

It's in Nevada's interest to push back on the notion that Nevada law creates a "liability free" jurisdiction.  One common criticism of Nevada law is that its business judgment statute appears to exculpate for violations of the duty of loyalty.  What often gets missed though is the nuance.  Nevada does not separate loyalty and care for exculpation.  It does not exculpate for fiduciary breaches that include "intentional misconduct, fraud or a knowing violation of law."  Any knowing betrayal or intentional violation of a duty of loyalty would not be exculpated.  While Delaware may allow liability for unintentional and unknowing violations of law, Nevada does not impose liability for those mistakes.

One thing that often gets glossed over, is that Nevada, like Delaware, has a strong economic incentive to balance investor and management rights in ways that maximize shareholder value.  If investors did not think that Nevada law's benefits were worth the bargain, they could sell or discount what they pay for Nevada shares.  Indeed, the TripAdvisor decision considered looking at market reactions for potential damages.  If the market ever gave a negative judgment about a state's corporate law, you could expect firms to flee the jurisdiction or the state to quickly move to correct the problem.

June 6, 2024 | Permalink | Comments (0)

Wednesday, June 5, 2024

Call for Papers - Journal of Financial Markets Infrastructures

Dear BLPB Readers:

I'm excited to share a Call for Papers from the Journal of Financial Markets Infrastructures, where I am an Associate Editor.  Here is a brief description of the Journal from its website:

"The economic and technological landscape of financial market infrastructures (FMIs) is rapidly evolving and changing how we conduct transactions globally. Efforts to renew and strengthen payment, clearing and settlement systems have been undertaken internationally and the role of new technologies, including digital money, CBDCs, blockchains and smart contracts, is being continuously reassessed.

The Journal of Financial Market Infrastructures was the first journal to specialize in publishing peer-reviewed research in FMIs. Today, over a decade after its first publication, the journal continues to offer its readers a selection of the best ideas, developments and analysis in this dynamic and exciting sector of the economy."

The call for papers is here: Download JFMI Call for Papers

June 5, 2024 in Call for Papers, Colleen Baker | Permalink | Comments (0)

Monday, June 3, 2024

Teaching Transactional Business Law through Campus and Community Partnerships

At Emory Law's Eighth Biennial Conference on the Teaching of Transactional Skills back in the fall of 2023, I had the privilege of presenting with my UT Law clinical teaching colleague, Brian Krumm.  (Congratulations are due to Brian, who was recently appointed the Interim Director of our Clayton Center for Entrepreneurial Law!)  The title of this post is also the title of our presentation.  An edited transcript of the presentation was recently published by Transactions: The Tennessee Journal of Business Law and can be found here. The abstract is as follows:

In this edited transcript, we explain how each of us--a doctrinal law professor and a clinician--use members of our campus and local communities to help instruct transactional business law students. We each have independently realized that there is a value to sharing these outside business and legal experts with our students. Among other things, we have found that we can bring unique areas of legal and business expertise into our teaching and, at the same time, introduce our students to real-life practice experiences and related simulations. All of this is foundational to law practice. In addition, experiences of this kind are, in our view, increasingly useful and important as we look toward preparing students for the concepts, principles, and skills that will be tested on the NextGen Bar.

Please contact me or Brian if you have questions about the teaching we describe in this transcript.  We are happy to provide more information and relevant teaching materials.  Jyst ask.

A collection of the presentations from the Emory Law conference is available here.

June 3, 2024 in Business Associations, Clinical Education, Conferences, Teaching | Permalink | Comments (0)

Saturday, June 1, 2024

I Can't Help It, if You Start Talking About Caremark, it's Like a Honey Pot

Which is why you get an extra blog post this week.

So I’m reading this entire fairness conflicted controller opinion and right there at the end, VC Laster preemptively wanders into a Caremark discussion - and the reason this is important is it hits on some of the issues I’ve blogged about previously with respect to the (over) extension of Caremark.

The case is Firefighters' Pension System v. Foundation Building Materials, and I’ve got threads up at other social media spaces of the horror show of fiduciary breaches (help yourself), but here I’ll talk about the Caremark piece, which is tangential to the actual claims but important for theory. 

The traditional rule is that “Delaware law does not charter law breakers,” articulated in In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011), and part of a general family of cases that fall under the Caremark rubric that requires Delaware managers to take reasonable steps to ensure legal compliance.

Here’s what VC Laster writes in Foundation Building Materials:

timing principles govern Massey and Caremark claims. Before a plaintiff can invoke those theories, the plaintiff must point to some sufficiently concrete corporate injury. Typically, that will require a prior adjudication that the statute or regulation was violated, the payment of a fine or penalty, or a settlement.

The existence of a predicate injury serves an important policy function by limiting the ability of plaintiffs to use Massey and Caremark claims as vehicles to litigate alleged violations of far-flung statutory and regulatory regimes. Without that type of gating requirement, a stockholder plaintiff could assert that directors had knowingly violated a statutory or regulatory scheme in another state or country, plead facts supporting a statutory violation, and then litigate that claim in the Court of Chancery

In prior blog posts, I’ve expressed concern about how Caremark claims have been used as political weapons to attack corporate conduct even before a prior adjudication of wrongdoing or obvious injury to the corporation.

VC Laster’s new opinion therefore takes some first steps toward cabining that kind of use. 

The problem that remains theoretically, of course, is that to the extent the claim involves intentional lawbreaking, it isn’t intended to protect shareholders at all.  A claim for intentional lawbreaking can proceed even if, ex ante, the corporation calculates - correctly! - that the net present value of the wrongdoing, taking into account the risks involved, financially benefits shareholders.  In that sense, Massey claims are for society, not shareholders; they represent the outer limits of shareholder primacy.

For that reason, one could argue that the requirement of a prior corporate trauma raises questions about “fit.”  If the claim isn't really about shareholders at all, why must there be a corporate trauma first before the claim can be brought? 

The argument would be, I suppose, something like, for the purposes of practicality of enforcement, it's a risk shifting framework.  Directors can take that risk of lawbreaking to benefit shareholders, but they’re the ones who will financially suffer (or their insurance) if the risk doesn’t pan out and ultimately the corporation is injured as a result, because they’ll functionally indemnify the corporation for any damages suffered as a result of the lawbreaking.

The problem is, that kind of calculus fits poorly with Massey-like rhetoric about Delaware not chartering lawbreakers; it ends up right back with a permission structure for lawbreaking.  

June 1, 2024 in Ann Lipton | Permalink | Comments (1)

Friday, May 31, 2024

You'll never guess what today's blog post is about

Maybe this is a time when other news has overtaken corporate governance disputes, but governance disputes are we do here, so.

Also, what obviously has my attention right now are two issues: the upcoming Tesla vote on Musk’s pay and redomestication to Texas, and the proposed amendments to the DGCL.  This blog post is a couple of quick notes about both.

On the Tesla vote.

I previously blogged that a good argument could be made that restoring Musk’s pay package now offers no economic benefit to Tesla, and therefore would fall into the legal category of waste – which, under current doctrine (even if subject to challenge in the modern era) would require unanimous shareholder approval.  At the time, I offered the reservation that, from a practical perspective, waste would be difficult to litigate (and yes, if shareholders vote in favor, the effect of the vote will absolutely be litigated, by Tornetta, the current plaintiff, if no one else).  That’s because a court might be hesitant to hold that major institutional shareholders – with a fiduciary duty to maximize value for their beneficiaries – would cast an economically irrational vote.  From there, the court might reason backward and conclude that it couldn’t possibly be economic waste.

I also offered a rejoinder – namely, institutions might vote to approve the package because they were “coerced,” perhaps due to Musk’s threats to develop AI in his private businesses rather than Tesla (which he is using Tesla data to do).  But in my post, I treated that as a difficult argument to make, given that there was no suggestion of a threat in the proxy; the plaintiff would have to reach back to those earlier comments by Musk and ask a court to draw the inference that they were still influencing shareholders in June.

And then, of course, Musk couldn’t quite stay off ex-Twitter and he reaffirmed the threat, which Tesla was then forced to file as proxy solicitation material.  He also hinted at it during an earnings call before stopping himself, which was also filed as solicitation material, and Musk boosters are making the point pretty explicitly on social media:


And all the reporting mentions the threat to develop AI outside of Tesla, so, now, it’s much easier for the plaintiff to argue that any shareholder vote in favor of Musk’s pay is coerced, and therefore without ratifying effect.  It works in tandem with the waste argument, even though they’re also alternatives – why did shareholders vote for waste? Coercion.  How do we know it was coercive?  Because of the lack of (legitimate) economic value for Tesla.  Etc.

And then there’s Texas. I think it would be difficult, legally, for shareholders to challenge reincorporation to Texas as somehow damaging to their rights; leaving aside the uncertain status of TripAdvisor, Texas’s law is similar to Delaware’s, and so formally, reincorporation doesn’t present the same specter of self-dealing.  (I’m not saying no one’s gonna try, who knows what those wacky shareholders might do).  And Tornetta’s legal team probably is going to stay focused on the pay package rather than the Texas issue (except to the extent they’re worried a reincorporation in Texas means a new lawsuit will be filed there that’s res judicata in Delaware).

Nonetheless, the attempt at reincorporation now adds color to the pay dispute.  Because yes, of course, Tesla’s proxy statement makes clear, the states have a lot of formal similarities in their laws.  And academics debate whether there’s any real benefit to incorporating in Delaware, and it might be reasonable for a startup entrepreneur setting up a new company headquartered in Texas to choose Texas as its chartering state.  But Tesla is not a new company – it’s an established public company that has already been operating according to (well, not according to) Delaware law for a while, now contemplating an expensive switch – involving special committee payments, advisors, hours, and expert analysis, not to mention vote whipping – for benefits that even the company itself claims largely are about branding. 

Even then, if Tesla were doing this on a clear day, then, you know, shrug. 

But it’s not a clear day, it’s in the wake of two high profile losses for Tesla – the Tornetta decision, and the earlier settlement over director pay – and one personal one for Musk, namely the Twitter case (which he dropped, because he knew he would lose), and comes only after Musk tweeted his declaration that Tesla would reincorporate in Texas, reincorporated his other companies out of Delaware, and tweeted that he would not acquire Delaware companies.  In the midst of several tweets about Delaware’s perfidy, he even urged other companies to leave.  Given that context – not to mention Chancellor McCormick’s previous findings regarding the Board’s deference to Musk – there is certainly cause to doubt that the Board, or the special committee, was entirely forthcoming about its reasons, and acting entirely in good faith, when insisting that Tesla should move to Texas right now because Tesla is “all-in on Texas,” and not at all acting on Musk’s personal ire.  Which is apparently what ISS said in its proxy recommendation – I don’t have access to the report itself, but it noted that, while the move itself was unobjectionable, “the process undertaken by the board to reach a decision . . . does leave something to be desired.”  And certainly outside observers read the move as an attempt to free the board to give Musk as much compensation as he wants.

And if that’s right – that no matter how thorough the proxy statement is about describing the Board’s reasoning and the special committee’s diligence, it’s impossible to escape the doubts raised by the context in which this is occurring – then even if the Texas proposal is not directly challenged by Tornetta, the fact of its existence supports the argument that all of the Board – including the special committee – is beholden to Musk.  Therefore, none of the Board’s actions – including the recommendation that the pay package be restored – can be trusted.

Point being, it adds heft to any legal challenges to the pay vote.

BUT!!  Given that it is, frankly, politically awkward for one state – Delaware – to claim there’s anything wrong with incorporating in another state, I wouldn’t be surprised if Chancellor McCormick didn’t want to engage with the Texas issue directly.  But it could still affect her thinking (and the thinking of the Delaware Supreme Court on appeal).

On Proposed Amendments to Delaware Law


Prior posts in reverse chronological order here, herehere, and here.

VC Laster has been active on LinkedIn, highlighting various ambiguities in the proposed DGCL 122(18).  But he’s doing more than poasting; in Columbia Pipeline Merger Group Litigation and in Wagner v. BRP Group, Inc., his legal reasoning reads as a direct challenge to the synopsis to those amendments, by demonstrating the fiduciary “outs” they propose are ephemeral.

For example, the DGCL 122(18) synopsis says:

even the enforceability of a claim for money damages for breach of the covenant may be subject to equitable review, and related equitable limitations, if the making or performance of the contract constitutes a breach of fiduciary duty…

New § 122(18) does not relieve any directors, officers or stockholders of any fiduciary duties they owe to the corporation or its stockholders, including … with respect to deciding whether to perform, or cause the corporation to perform, or to breach, the contract, whether in connection with their management of the corporation’s business and affairs in the ordinary course or their approval of extraordinary transactions, such as a sale of the corporation

However, in both Columbia Pipeline and BRP, Laster extensively discusses how fiduciary obligations cannot require corporations to break contracts, or free them of consequences (including damages or equitable remedies) when they do so.  The synopsis suggests contracts might be set aside when directors’ actions are reviewed under “enhanced scrutiny”; Laster takes that one on as well in both cases, concluding that it’s a misreading of Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994).

Additionally, the synopsis says:

New § 122(18) does not relieve any directors, officers or stockholders of any fiduciary duties they owe to the corporation or its stockholders, including with respect to deciding to cause the corporation to enter into a contract with a stockholder or beneficial owner of stock….

In BRP, Laster highlights that fiduciary duties are only owed to current – not future – shareholders.  Which means, if fiduciary obligations are the only thing that protects shareholders when boards adopt these contracts, anyone who was not a shareholder at the time of contracting will have no claim.  In practical effect, a contract adopted pre-IPO could not be challenged by public stockholders.

Additionally, in Moelis, Laster held that the improper provisions of a stockholder agreement might be replicated via a preferred share issuance, though reserving the question just how far preferred shares might go.  In BRP, he elaborated on that point, arguing that some restrictions on board authority must be contained in the charter “proper,” and cannot even be included in preferred shares.  As he put it:

A counterparty also would not be able to secure covenants that bind the board through a preferred stock issuance. A certificate of designations can set forth “the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions” of the class or series of stock that the board authorizes using blank check authority. 8 Del. C. § 102(a)(4). That list of features does not include imposing covenants on the board. To constrain or mandate action by the board under Section 141(a) requires a charter provision directed to the board, not a charter provision limited to the “the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions” of a class or series of shares.  That type of provision could appear in the original charter. It also could be implemented through charter amendment duly approved under Section 242, or through a merger or comparable transaction where the DGCL authorizes amendments to the charter of the surviving corporation. A covenant binding the board could not be imposed through a certificate of designations. Under current law, it also cannot be imposed through a governance agreement.

Proposed DGCL 122(18) would authorize contracts that:

covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract

The implication being, DGCL 122(18) would authorize contracts that go further than what could be accomplished in a preferred share issuance.  Assuming that’s right, it just further demonstrates how DGCL 122(18) would more than authorize governance contracts, but actually encourage a shift of governance from the corporate form and into personal contracts. 


May 31, 2024 in Ann Lipton | Permalink | Comments (0)

Monday, May 27, 2024

Artificial Intelligence and Memorial Day

Over the years, I have written a number of blog posts here on Memorial Day that honor those who sacrificed their lives for us through national military service.  You can find the last few here, here, and here.  When practicable, I work in something about business law in those posts.

This year, as I contemplated what to write, I also was mired in grading and other teaching-related work.  On my mind throughout was generative artificial intelligence, a hot topic in law school circles and throughout education (and, of course, elsewhere, too).  The full range of benefits and burdens of generative artificial intelligence still remain to be discovered.

I wondered what a generative artificial intelligence tool would draft up as a blog post for Memorial Day.  Then, I thought, why wonder?  Why not give it a whirl?  So, I asked Google Gemini to "[w]rite a short blog post that combines business law with Memorial Day."  Set forth below is what I got back.

Honoring Heroes, Respecting Rights: Business Law and Memorial Day

Memorial Day is a time to remember the brave men and women who died serving our country. But for businesses, it also presents some legal considerations. Here's a quick look at how business law intersects with this solemn holiday.

    • Employee Rights: Federal law doesn't mandate paid time off for Memorial Day. However, some states have their own laws, and many companies offer paid holidays as part of employee contracts. Businesses must ensure they're following all applicable laws and agreements regarding employee pay and scheduling for the holiday.

    • Business Closings: If your business plans to close for Memorial Day, it's crucial to communicate this clearly to employees and customers well in advance. This helps avoid confusion and ensures smooth operations upon reopening.

    • Sales and Promotions: While Memorial Day weekend often unofficially kicks off the summer shopping season, it's important to be mindful of the true meaning of the holiday. Avoid promotions or marketing that appears disrespectful to the somber occasion.

    • Community Engagement: Businesses can choose to honor veterans and fallen soldiers by participating in local Memorial Day events or supporting veterans' charities. This demonstrates respect for the holiday's purpose while fostering positive community relations.

By understanding these legal aspects, businesses can ensure a respectful and compliant approach to Memorial Day, allowing them to honor our heroes while adhering to the law.

Honestly, it's not too far off from some of what I have posted in the past.  I am not sure whether to be sad or happy about that.  But now I no longer have to wonder . . . .

Regardless, I do want to continue to pay respect to those who have died in military service to our country.  May they rest in eternal peace knowing that their lives and work are remembered and appreciated on this Memorial Day and every Memorial Day.

May 27, 2024 in Current Affairs, Joan Heminway | Permalink | Comments (0)

Friday, May 24, 2024

What is the value of the corporate charter, a reprise

I previously posted about the proposed changes to Delaware law, the latest version of which would allow shareholder agreements insofar as they don’t go further than what a charter – including a preferred share issuance – could allow (except for the exemption from DGCL 115)

One thing I should have mentioned, though, highlighted by Marcel Kahan and Edward Rock here, is that the difference between a share issuance/charter provision, and a contract, is highly salient for purposes of an exchange listing.  Exchanges define control in terms of voting power, not contractual power; moreover, they prohibit corporate actions that would limit shareholder voting power after listing; dual class shares are fine, they just need to be established prior to listing rather than taking away shareholder voting power mid-stream.  What they don’t address, though, is power through shareholder agreements.  Which means, if the DGCL is amended as proposed, a public company could hand over additional governance powers to particular shareholders through contract, without affecting the formal voting power of existing shareholders, and very possibly remain compliant with Exchange rules.

To put it concretely: Elon Musk has vocally demanded 25% voting power of Tesla so that he can control the development of AI. He’s also admitted he can’t get that through a switch to dual-class shares, because of the listing rules.  If the DGCL changes go through, though, there is no reason the board couldn’t “contract” with him to give him outsized influence over Tesla’s governance, regardless of how existing shareholders vote. 

And that leads to the elephant in the room.  Delaware law is all about shareholder wealth – full stop.  My paper on Twitter v. Musk (which is now published and the final version is on SSRN, by the way /plug) is all about the fallacy of relying on Delaware law to advance any value other than shareholder wealth maximization.  But corporate governance does, in fact, matter to the rest of us; it matters whether single individuals wield nearly unchecked power over how corporations behave. 

Back in the 1930s, Congress actually legislated to discourage the use of holding companies, precisely in order to limit the power that individuals could wield over large corporate structures with only a small slice of equity interest.

More recently, as I talk about in my paper Beyond Internal and External, the FTC settled with Mark Zuckerberg to prevent him from exercising his rights as a shareholder to interfere with Facebook’s compliance with a privacy settlement.  Zuckerberg’s unchecked power in his shareholder capacity threatened Facebook’s ability to comply with the law.

So these proposed DGCL changes have very far reaching social consequences that simply have not been explored by Delaware lawmakers, let alone The Rest of Society.

Anyhoo, links to a recent news article here and a collection of Chancery Daily links here.



May 24, 2024 in Ann Lipton | Permalink | Comments (0)

Friday, May 17, 2024


Earlier this month, VC Glasscock issued an opinion in Kormos v. Playtika Holding UK II, where he dismissed breach of fiduciary duty claims against the Chair/CEO and CFO of a controlled company.  The opinion made reference to an earlier bench ruling where he sustained claims against the company’s controlling shareholder, Giant/Alpha, which is what alerted me to the bench ruling – which issued in January – in the first place.  And that bench ruling is actually what has my attention.

Playtika Holding Corp is a publicly traded company with a controlling shareholder, Playtika Holding UK II Limited (“Holding”).  Holding is a wholly-owned subsidiary of Giant/Alpha.  In 2021, Giant/Alpha faced a liquidity crisis and desperately needed to raise cash, which it sought to do by selling Holding’s Playtika stock, potentially in connection with a sale of the entire company.  But the process was rushed and messy, with Playtika itself and Giant/Alpha running separate inquiries; eventually, Giant/Alpha instructed Playtika’s board to stop talking to potential buyers, but to instead cause Playtika to institute a self-tender for its own stock.  SEC rules require that tender offers treat all shares of a class equally, which meant that the public shareholders – as well as Giant/Alpha – were able to tender in to the offer.  But, with Giant/Alpha tendering, it could receive cash back from Playtika which would then solve its liquidity problems.

Plaintiffs, the public holders of Playtika, alleged that this was a conflicted transaction that was not in Playtika’s best interests, and was therefore subject to entire fairness review (though they did not claim the price paid for the shares was unfair).

There’s just one problem with that argument, doctrinally: ever since Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971), we know that in order to be a conflicted transaction, implicating the duty of loyalty, the controller must receive a nonratable benefit, i.e., some benefit not available to the other stockholders – and arguably, it has to be a benefit that specifically comes at the minority’s expense.  In Sinclair itself, for example, the controlling shareholder caused the company to pay out massive dividends that allegedly robbed the company of the ability to take advantage of alternative opportunities, and it did so for its own private reasons.  Still, the dividend payments weren’t a conflict transaction – and were therefore subject only to business judgment review – because all shareholders got the same dividends, controller and noncontrollers alike.  The controlling shareholder did not receive a special benefit at the expense of the minority (As the Delaware Supreme Court put it, “a proportionate share of this money was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its minority stockholders. As such, these dividends were not self-dealing”).

Similarly, in Playtika, the self-tender may have been motivated by Giant/Alpha’s need for cash, but all shareholders could participate in the tender on equal terms, meaning, it wasn’t a conflict transaction, and was therefore subject only to business judgment review.


There was a twist.

Giant/Alpha did not want to risk tendering so many shares that it actually lost control of Playtika.  So, it negotiated a provision whereby Playtika would have to announce the number of shares tendered publicly, which would allow Giant/Alpha to keep close tabs on the status of the offer.  Giant/Alpha could also withdraw shares that it previously tendered – which I gather was a negotiated term of the agreement, but also, by the way, required under SEC rules for all tendering shareholders.  So, because Giant/Alpha was able to monitor the shares tendered, and withdraw its own shares, it could adjust its tender and maintain control of the company.

Those provisions, according to VC Glasscock – as he explained in his bench ruling in January, and again in his recent opinion earlier this month, were a nonratable benefit to Giant/Alpha, because they uniquely allowed Giant/Alpha to maintain control, which was not something the minority could share.  And that was enough to transform the Playtika self-tender into a conflict transaction, subject to entire fairness review.

So here’s the thing.

Treating the right to monitor the number of public shares tendered as a nonratable benefit to Giant/Alpha – let alone one that comes at the expense of minority shareholders – strikes me as a bit of a reach.  SEC rules require that tendering shareholders be able to withdraw before the tender offer closes; that wasn’t a benefit unique to Giant/Alpha.  And if Playtika publicly announced how many shares had been tendered, that meant everyone could see what the status was.   

That said, the whole scenario was obviously hinky from the get-go.  There was an awful initial search for alternative transactions; the self-tender itself was designed to benefit Giant/Alpha, and you can see why a judge might be looking for a reason to at least scrutinize the arrangement more closely.  Hence, a nonratable benefit was identified – Giant/Alpha’s ability to modulate the number of shares it tendered. 

And it matters because, as I’ve written two papers about, and also blogged repeatedly (here, here, here, here, here, here, here, here, here, here, here, here, here, and here), the more that Delaware makes it very easy to insulate deals from review unless they involve a controlling shareholder conflict, the more that courts are motivated to identify a controlling shareholder conflict in order to give themselves the opportunity to review problematic transactions.  As my papers discuss, that’s often exhibited in the definition of what it means to be a controlling shareholder in the first place – but, as we can also see here, it exhibits itself in the definition of conflict, as well.

Anyway, that kind of morass is exactly why the Delaware Supreme Court granted interlocutory review of TripAdvisor, i.e., to address the definition of a conflict transaction.  But TripAdvisor involves a reincorporation from Delaware to Nevada; I have no idea whether the court will address just that scenario – which obviously involves questions of comity not present for other kinds of potential conflicts – or whether it will take a broader view of the problem.

May 17, 2024 in Ann Lipton | Permalink | Comments (0)

Monday, May 13, 2024

Celebrating Law Leadership!


I have written in the past about the intersections of leadership and law, including business law.  See, for example,  here, here, here, here, and here.  And I was privileged to be the Interim Director, for over three years, of the institute for Professional Leadership at The University of Tennessee College of Law.  I find there is such a strong connection between leadership and business law teaching and practice . . . .

We are celebrating the tenth anniversary of the Institute for Professional Leadership this fall.  The celebration, which will take place on Thursday, October 24 and Friday, October 25, will include a gala dinner and a symposium featuring workshops, a call-for-papers panel, and a series of expert panels.  The "save the date" notice is included above.  I hope you will consider responding to the forthcoming call for proposals and papers.  But regardless, I hope you will consider attending. Feel free to reach out to me with any questions.

May 13, 2024 in Joan Heminway, Law School | Permalink | Comments (0)

Friday, May 10, 2024

What is the Value of the Corporate Charter?

A few weeks ago, I blogged about the proposed amendments to the DGCL, and the questions they raised.  Well, I wasn’t the only one who had concerns, and so, now, there are new amendments to the amendments (which The Chancery Daily has posted here).  And once again, I just got these last night and I read quickly (in the middle of end-of-semester grading) so I reserve the right to be completely wrong, but, here is my quick reaction.

As I explained in my prior post , many of the original amendments were intended as a response to VC Laster’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & CoMoelis struck down a shareholder agreement that functionally conveyed management power on a particular stockholder, by giving him veto power over most board decisions.  VC Laster held that a board’s authority can only be cabined to such a degree in the charter, including through a preferred share issuance – and he also suggested that there may be some outer limits on how far even a charter provision could go in restricting board authority.

The original proposed DGCL amendments would have overruled Moelis in both respects.  They would have authorized stockholder agreements that usurped board authority and would not have placed any limits on the degree of authority that could be usurped.  The latter point struck me as particularly important, because traditionally, the corporate form is defined by its board-centric model.  If that can be contractually avoided, does the corporate form have any value at all?

The new amendments are a little different, in that they do not permit contracts that would confer governance powers beyond what could be included in the charter, or would be contrary to Delaware law.  In other words, if there are certain core powers that must remain with the board and can’t be visited in someone else via the charter, then, these amendments to the amendments would not allow those powers to be transferred via stockholder contracts.  The new language provides:

no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State … if included in the certificate of incorporation.

But also, in determining what these “core” board powers are, courts can’t rely on the fact that the power is one that is statutorily conferred on the board.  As the amendments put it, “a restriction, prohibition or covenant in any such contract that relates to any specified action shall not be deemed contrary to the laws of this State or the certificate of incorporation by reason of a provision of this title or the certificate of incorporation that authorizes or empowers the board of directors (or any one or more directors) to take such action.”

Now, the first thing that leaps out at me is how these new amendments interact with VC Laster’s decision in McRitchie v. Zuckerberg.  There, Laster held that the directors of a Delaware corporation have a duty to maximize the value of the equity, and do not have a duty to maximize the value of a diversified portfolio. (I blogged about the case when the complaint was first filed).  But Laster went on to hold that corporations could adopt charter provisions that would change directors’ fiduciary duties, so that they are obligated to consider diversified shareholders.   That’s contestable; Steve Bainbridge, for example, has suggested that Delaware corporations cannot by private ordering depart from shareholder wealth maximization and I personally would ask what’s the difference between Laster’s proposal and a charter provision that waives the duty of loyalty – which has long been assumed to be unwaivable, except as otherwise statutorily provided (like, opportunity waivers). 

But if Laster is right, then, of course, that represents a very broad view of how far charters can go to alter the board’s authority, which would also mean that stockholder agreements, under the amended proposed amendments, could go very far in altering board authority. 

Which then raises the question: Is there value to requiring that restrictions on board authority be placed in the charter rather than a separate shareholder agreement?

One obvious value is transparency; at least if the company is not subject to SEC reporting, shareholder agreements may not be available to the public or even to other shareholders.  Another value may concern the ease with which an agreement versus a charter could be amended, though I still think that if you conferred special rights to preferred shareholders, you could also confer the right to vote on amendments to those rights to the same preferred shareholders, which would make ease of amendment roughly equivalent.

Another value, though, concerns choice of law.  As I previously blogged, shareholder agreements are subject to ordinary choice of law principles; charter provisions and preferred share terms are subject to the internal affairs doctrine.  (Read my paper addressing this!)

The comments to the amendments to the amendments now discuss choice of law, but I don’t think they change the landscape.  The comments say:

Notwithstanding any choice of law provision in the contract, the reference in the last sentence of § 122(18) to the law “governing” the contract shall be deemed to refer to the laws of this State if and to the extent choice of law principles (such as the internal affairs doctrine) so require.

In other words, it’ll be another state’s law if choice of law principles so require, which, for stockholder agreements, they often do.

But further muddying the waters is this:  The new amendments say that stockholder contracts can’t go beyond what a charter amendment would permit except with respect to DGCL §115, which can be waived in a stockholder contract.

DGCL §115 requires that a Delaware forum be available for claims that “(i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

So, as I understand it, let’s say a stockholder agreement conferred extraordinary governance powers on a single stockholder.  Let’s say those powers arguably made the stockholder a “controller” subject to fiduciary obligations.  The contract could also provide that claims against the stockholder for breach of fiduciary duty must be brought in an arbitral or non-Delaware forum.  Presumably, this would include derivative claims – a shareholder would sue derivatively claiming self-dealing by a controller, the corporation would be bound by the forum selection clause, and so, the claim would be heard outside of Delaware.

I also assume that disputes regarding compliance with, or even the interpretation of, a stockholder agreement could be heard in a non-Delaware forum.  So, if someone wanted to claim that a particular stockholder agreement was unenforceable because it conferred power on a stockholder that went beyond what Delaware law permits, and it turned out that the agreement selected another state’s courts as the forum for disputes, that argument – that Delaware law does not permit delegation of such-and-such power – would not be heard in a Delaware court.

As far as I can tell, this provides an incentive for stockholders to enter into these agreements – even if they have hard control over the board and don’t really need them – because it allows them to opt out of DGCL 115, and possibly even the statutory limits on the agreements themselves, which will no longer be policed in Delaware.

Well, I have no idea how this ends but, I gotta tell you, all this drama fascinated my corpgov seminar students, so I suppose I will have much to discuss with my classes next year.

May 10, 2024 in Ann Lipton | Permalink | Comments (0)

Tuesday, May 7, 2024

ESG Greenwashing

ESG greenwashing has been getting attention among legal academics.  In Rainbow-Washing, 15 Ne. U. L. Rev. 285 (2023), LMU Law's John Rice explores the

increasingly common, but destructive, practice in which corporations make public-facing statements espousing their support of the LGBTQIA+ community . . . to draw in and retain consumers, investors, employees, and public support, but then either fail to fulfill the promises implicit in those statements or act in contravention to them. 

My own forthcoming article in the University of Pennsylvania Journal of Business Law, presented at the November 2023 ILEP-Penn Carey Law symposium honoring Jill Fisch, mentions the increasing notoriety of ESG greenwashing and cites to John's article.

Last week, UVA Law Professor Naomi Cahn called out ESG greenwashing in Forbes, citing to a study to be published in the Journal of Accounting Research that finds "firms’ ESG rhetoric may not match their reality."  She suggests that "a meaningful analysis of a firm’s ESG commitment requires much further digging, and ultimately it requires meaningful oversight from outside the ESG community on what should be disclosed and the accuracy of the reports."  The article references a forthcoming book coauthored by Cahn, June Carbone (Minnesota Law) ,and Nancy Levit (UMKC Law) and quotes Minnesota Law Professor Claire Hill.  (Hat tip to Claire for leading me to this Forbes piece.)  It's a solidly good read.  I added a citation to it in my forthcoming article.

I suspect more will be done in this space academically and practically as ESG continues to occupy the minds of legal academics, lawyers, and business principals.  I will be continuing to work in this area, focusing next on corporate compliance issues.  Stay tuned for news on that project (and for a notification about the publication of my forthcoming University of Pennsylvania Journal of Business Law article referenced above).

May 7, 2024 in Compliance, Corporations, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Monday, May 6, 2024

2024 Corporate & Securities Litigation Workshop

Corporate & Securities Litigation Workshop: 

Call for Papers 

UCLA School of Law, in partnership with the University of Illinois College of Law, University of Richmond School of Law, and Vanderbilt Law School invites submissions for the Eleventh Annual Workshop for Corporate & Securities Litigation. This workshop will be held on September 20-21, 2024 in Los Angeles, California. 


This annual workshop brings together scholars focused on corporate and securities litigation to present their scholarly works. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible, including securities class actions, fiduciary duty litigation, and SEC enforcement actions. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress at any stage. Authors whose papers are selected will be invited to present their work at a workshop hosted by UCLA School of Law. Participants will pay for their own travel, lodging, and other expenses. 


If you are interested in participating, please send the paper you would like to present, or an abstract of the paper, to [email protected] by Friday, June 7, 2024 Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified in early July. 


Any questions concerning the workshop should be directed to the organizers: Jim Park ([email protected]), Jessica Erickson ([email protected]), Amanda Rose ([email protected]), and Verity Winship ([email protected]). 

May 6, 2024 in Call for Papers, Corporations, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Friday, May 3, 2024

Hu, Malenko, and Zytnick on Proxy Advice

I very much enjoyed Edwin Hu, Nadya Malenko, and Jonathon Zytnick’s new paper, Custom Proxy Voting Advice.   They find that most institutional investors who buy proxy voting advice from ISS and Glass Lewis don’t use their benchmark recommendations, but instead create a tailored set of preferences and get recommendations that are based on those preferences.  Then, in particular cases, they may depart from those recs and vote another way – which in fact appears to happen quite a bit for shareholders who use customized recommendations, because, the authors speculate, the customized recommendations free up attention from less contentious votes, and permit shareholders to focus on the more contentious ones.

The point is important because, first, it may mean that headlines like “ISS recommends XXX” may be less meaningful than we think, because the benchmark recommendation may not be what many clients receive.  And second, these findings continue to demonstrate the folly of the perennial corporate complaints that proxy advisors have too much power and/or shareholders “robovote” in response to proxy advisor recommendations.   The real complaint is that shareholders have too much power and too many preferences, and if that’s the problem – well, management should take it up with them.

The final thing to note is that much of the differential comes, unsurprisingly, environmental/social proposals.  Which makes me want to draw attention to this paper by Roni Michaely, Guillem Ordonez-Calafi, and Silvina Rubio, Mutual Funds’ Strategic Voting on Environmental and Social Issues.  They find that ESG-themed mutual funds within larger mainstream families engage in a subtle form of greenwashing, whereby funds within larger families tend to vote for the E/S proposals when the proposals are very likely to pass, or very likely not to pass – and they deviate and vote with the family for the closer votes.  So they vote E/S more than regular-themed funds, but only when those votes won’t make a difference in outcome.  Which is consistent, I think, with Hu, Malenko, and Zytnick’s findings regarding how institutions use custom proxy voting advice, and deviate from it.

May 3, 2024 in Ann Lipton | Permalink | Comments (0)

Wednesday, May 1, 2024

This Friday - SMU Energy, Environment, and Natural Resources Colloquium

I'm delighted to share that I'll be presenting this Friday at the SMU Energy, Environment, and Natural Resources Colloquium.  Anyone interested in attending can register here.  A description of the event is below.  I'm excited to be working on my third (one and two) article with SMU energy law Professor James W. Coleman. It's at the intersection of energy and financial regulation, and I look forward to sharing more about it with readers soon!  I'm particularly grateful to co-blogger Joan Heminway and the University of Tennessee Law School for hosting the Connecting the Threads CLE series, the forum in which we first shared our initial papers! 


"The SMU Energy, Environment, and Natural Resources Colloquium is an annual program, in its second year, which focuses on the interdisciplinary connections between the fields of energy, environment, and natural resources (“EENR”). It promises to be a pivotal gathering for academics, students, practitioners, and other stakeholders in the fields of law, science, engineering, business, and the humanities. The conference will delve into crucial topics like environmental justice initiatives, natural resource management using law and markets, carbon management, and interdisciplinary solutions to environmental challenges, featuring a mix of talks, panel discussions, and followed by graduate student presentations."




May 1, 2024 in Colleen Baker, Conferences | Permalink | Comments (0)