Wednesday, April 17, 2024

American Business Law Journal Accepting Editorial Board Applications

Dear BLPB Readers:

"The American Business Law Journal invites ALSB members who are interested in serving on the Editorial Board of the ABLJ to apply for the position of Articles Editor.

The ABLJ is widely regarded, nationally and internationally, as a premier peer-reviewed journal. Serving as an Articles Editor provides an opportunity to serve the Academy of Legal Studies in Business and broader academic discipline at the highest levels of service. 

The incoming Articles Editor will begin to serve on the Board in August 2024. Board members commit to serve for three years: two years as Articles Editor and one year as Senior Articles Editor. After that, Articles Editors have the option of continuing to serve two more years—one as Managing Editor and another as Editor-in-Chief. 

Articles Editors supervise the review of articles that have been submitted to the ABLJ to determine which manuscripts to recommend for publication. If a manuscript is accepted, the Articles Editor is responsible for working with the author to oversee changes in both style and substance. If a manuscript is believed to be publishable but in need of further work, the Articles Editor outlines specific revisions and further lines of research that the author should pursue. The Articles Editor’s recommendations for works-in-process are perhaps the most important and creative aspect of the job because they provide the guidance necessary for works to blossom into publishable manuscripts.  

An applicant for the position of Articles Editor should have an established track record of publications. We prefer applicants who have previously published with the ABLJ and have familiarity with our peer review process. However, we also welcome applicants, including international applicants, who have published with high quality law journals and/or peer reviewed law journals that adhere to the Harvard Bluebook style.  Experience serving as a Reviewer for the ABLJ or as a Staff Editor is helpful. 

The ABLJ is committed to ensuring that financial resources, including the support of a research assistant, are not an obstacle to service on the Board. 

Applicants are encouraged to contact us to learn more about the position and financial assistance that may be available.

Please send a resume and letter of interest to Inara Scott, ABLJ Editor-in-Chief, at [email protected] by May 31, 2024, for full consideration."

April 17, 2024 in Colleen Baker | Permalink | Comments (0)

Monday, April 15, 2024

I Still Think My Disclosure Advice to Clients is the Same After Macquarie

I appreciate Ann's super helpful post on omissions liability after the U.S. Supreme Court's decision in Macquarie Infrastructure Corp. et al. v. Moab Partners, L. P., et al.  The hair splitting in that opinion is, in my view, dubious at best.  The Court's creation of a legally significant concept of "pure omissions" in a public company disclosure context is doctrinally counterfactual.  The omission to state a fact required to be disclosed under a mandatory disclosure rule like Item 303 of Regulation S-K necessarily occurs in a veritable river of disclosures in SEC filings and more generally and has the potential of making those disclosures misleading.  If material, such an omission should be actionable as deceptive or manipulative conduct under Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934, as amended.  Period.

Of course. civil liability would require proof of all elements of the claim, including (even for public enforcement officials) the requisite state of mind or scienter.  Private class action plaintiffs also would have heightened pleading burdens.  And a criminal prosecution can only be sustained if the predicate conduct is willful, as provided in Section 32(a) of the Exchange Act.

The point is that there is no such thing as a "pure omission."  Investors logically rely on the interplay between and among public statements made in filings and elsewhere.  If X exists for Public Company A, and Public Company A is required to disclose X in a public filing but does not do so, investors will view and assess all of the relevant public information about Public Company A assuming X does not exist for Public Company A.  If the omission makes existing disclosures misleading, is material, is made withe the action-appropriate state of mind, and deceives or manipulates, the basis for a Rule 10b-5 cause of action against Public Company A plainly exists based on the language of Section 10(b) and Rule 10b-5.  Back in January, wben I first wrote about Macquarie and an amicus brief I coauthored for the case (which you can fined here), I stated as much.  It seems Ann agrees when she says that "whatever the language of 10b-5(b), it seems entirely unobjectionable that it should be considered a “manipulative or deceptive device or contrivance” within the broader meaning of Section 10(b) to intentionally withhold information you have a duty to disclose – from some other source – in order to mislead someone else."  (Her further analysis follows.)

As Ann's post notes, much remains to be seen and said about the impact of Macquarie, and the Court has signaled that the true wisdom we can gain from its opinion in Macquarie may be constrained to actions brought under Rule 10b-5(b) and to certain factual contexts.  As a result, I have determined it is still appropriate--and wise--to caution public company clients that their failure to comply with mandatory disclosure requirements may make them subject to, among other things, Section 10(b)/Rule 10b-5 litigation.  One should, of course, note (among other things) that the omission would have to be material, make other disclosed facts misleading, and be made recklessly or willfully in order for liability to attach. 

Do you disagree?  Do you believe there are "pure omissions" in a public company disclosure context? Let me know.

 

April 15, 2024 in Ann Lipton, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Friday, April 12, 2024

Macquarie Infrastructure Corp. v. Moab Partners, L. P.

I’ve frequently posted about omissions liability under the federal securities laws; you can read many of those posts, in reverse chronological order, here, here, and here.  But, here’s the CliffsNotes version of where we are now, after the Supreme Court’s decision today in Macquarie Infrastructure Corp. v. Moab Partners, L. P..

 

Once upon a time, there was a statute, Section 10(b) of the Exchange Act. That statute made it unlawful:

 

To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

The Commission did, in fact, adopt those rules and regulations, in the form of Rule 10b-5, which made it unlawful:

 

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

These subparts, collectively, were intended to prohibit the full extent of conduct prohibited by Section 10(b) itself.  See SEC v. Zandford, 535 U.S. 813 (2002).   That is, if it could fall into the category of a “manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security, then it must be prohibited by at least one of Rule 10b-5’s subparts.

 

Back in kinder, simpler times, U.S. courts throughout the land interpreted Section 10(b) and Rule 10b-5 to prohibit not only “manipulative or deceptive device[s] or contrivance[s]”, but also conduct that aids and abets the “manipulative or deceptive device or contrivance” of someone else.  But, alas, in Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164 (1994), the Supreme Court said – nay!  Section 10(b) prohibits “only the making of a material misstatement (or omission) or the commission of a manipulative act”; mere “aiding” someone else’s “manipulative or deceptive device or contrivance” is not prohibited.

 

That, of course, kicked off years of litigation over the distinction between aiding a “manipulative or deceptive device or contrivance” and actually participating in one.

 

Which brought us to Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).  There, investment adviser Janus Capital Management caused its affiliated mutual funds to file false prospectuses about those funds’ policies. The Supreme Court held that the investment adviser had not violated Rule 10b-5(b), because it had not actually “made” a false statement.  The funds made false statements.  Though the funds’ statements had been drafted by its investment adviser, the statements had been filed under the funds’ name, making the funds – and only the funds – responsible for their contents.  This highly technical definition of the word “make,” the Court further explained, was necessary to preserve the line between primary liability and aiding and abetting liability.

 

Oh no.

 

Because, aiding and abetting, we learned from Central Bank, is outside the scope of the Section 10(b) statute.  But the Janus holding was based on a technical definition of the word “make,” which appears only in one subpart of Rule 10b-5.  Was the Court seriously proposing that intentionally causing a captured entity to issue false statements is not a “manipulative or deceptive device or contrivance” within the meaning of Section 10(b)?  Or was the Court merely holding that such conduct does not run afoul of Rule 10b-5(b), but still could run afoul of Rule 10b-5(a) or (c)?

 

In Lorenzo v. SEC, 587 U.S. 71 (2019), we got an answer.  Janus was about Rule 10b-5(b); there may well be conduct – including distributing false statements that someone else made, with an intent to deceive – that falls within Section 10(b), but not Rule 10b-5(b) (i.e., that falls within Rule 10b-5(a) or 10b-5(c)).

 

Which brings us to Moab v. Macquarie, wherein the Supreme Court decided that the Central Bank to Janus to Lorenzo journey was so much fun, it was worthwhile to do it again.

 

In Moab, shareholders of Macquarie Infrastructure Corp. brought a fraud on the market class action, alleging that Macquarie filed its 10-K without including certain information required to be disclosed under Item 303.  The shareholders contended that omitting required information was prohibited by Rule 10b-5(b).

 

The Supreme Court rejected the claim.  According to the Court, Rule 10b-5(b)’s language is limited solely to affirmatively false or misleading statements – not “pure” omissions.  The Court contrasted the language of Rule 10b-5(b) with the language of Section 11 of the Securities Act of 1933.  The latter prohibits not only false statements and misleading omissions, but also failure to disclose required information; Rule 10b-5(b), however, says nothing about failure to disclose required information.  Therefore, concluded the Court, absent an affirmative false or misleading statement, Rule 10b-5(b) does not create liability.

 

Except, we know that Section 10(b) prohibits “pure” omissions.  We know that because the Supreme Court has said so.  See Chiarella v. U.S., 445 U.S. 222 (1980) (“the Commission recognized a relationship of trust and confidence between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation. This relationship gives rise to a duty to disclose because of the ‘necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of the uninformed minority stockholders.’”); SEC v. Zandford, 535 U.S. 813 (2002) (“each [sale] was deceptive because it was neither authorized by, nor disclosed to, the Woods”); Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 152-53 (1972) (“The individual defendants, in a distinct sense, were market makers, not only for their personal purchases constituting 8 1/3% of the sales, but for the other sales their activities produced. This being so, they possessed the affirmative duty under the Rule to disclose this fact to the mixed-blood sellers.”).  

 

Which makes perfect sense!  Because whatever the language of 10b-5(b), it seems entirely unobjectionable that it should be considered a “manipulative or deceptive device or contrivance” within the broader meaning of Section 10(b) to intentionally withhold information you have a duty to disclose – from some other source – in order to mislead someone else.

 

The inescapable conclusion, then, is that if pure omissions are not prohibited under 10b-5(b), they must be prohibited under either 10b-5(a) or 10b-5(c).

 

Except Moab included this curious footnote:

 

The Court granted certiorari to address the Second Circuit’s pure omission analysis, not its half-truth analysis. See Pet. for Cert. i (“Whether . . . a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), even in the absence of an otherwise-misleading statement” (emphasis added)) …The Court does not opine on issues that are either tangential to the question presented or were not passed upon below, including what constitutes “statements made,” when a statement is misleading as a half-truth, or whether Rules 10b–5(a) and 10b–5(c) support liability for pure omissions.

It also included such language as:

 

Neither Congress in §10(b) nor the SEC in Rule 10b–5(b) mirrored §11(a) to create liability for pure omissions…

 So … either pure omissions – even if the omissions were part of an intentional effort to deceive someone to whom there was a duty of disclosure – do not count as “manipulative or deceptive device[s] or contrivance[s]”, which will come as a pleasant surprise to various insider traders and faithless brokers, or Rules 10b-5(a) and (c) prohibit conduct outside the scope of Section 10(b).

 

Or … we’ll be walking all this back in a couple of years.

 

Okay, fine, here’s the actual way out: The Court didn’t exactly say omissions aren’t prohibited; it said “A pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.”  Only these “pure omissions” are not prohibited.

 

Presumably, circumstances that give meaning to the silence are when one acts as a broker, or a market maker, or trades on the information provided in the context of a trusting relationship.  Or, it is not a “pure” omission – it is an omission coupled with conduct – when one misuses a brokerage account, or acts as a market maker, or trades in stock.

 

Without explanation – or even an acknowledgment of the inferential leap – the Supreme Court apparently concluded that no conduct is involved, or no “circumstances … giv[ing] any particular meaning to that silence” exist, when a defendant engages in the action of filing an official document with the SEC that omits required information. 

 

So I assume that the next smartass who tries to cite Moab as a defense to insider trading will be told “but that’s a circumstance that gives particular meaning to the silence!”

 

In other words, the rule, such as it is, appears to be that it’s not fraud if it’s in connection with a fraud on the market class action, and it is fraud anywhere else.  Which means, we must ask – is it a circumstance that gives particular meaning if someone doesn’t merely leave required information out of a form but fails to file a form at all? 

 

I guess we’ll soon find out. 

 

Finally, as I previously mentioned, the SEC can fix this – or most of this – by adding a line item to every filed form declaring that it is not only accurate, but also complete.  That would be the explicit statement rendered false by a failure to include required information.  Still, such a certification is not a complete panacea – there would still be uncertainty around entire failures to file a form, and over whose scienter would be attributed to the company for a false certification, but it would solve some of the problem.

 

Also, icymi, earlier today I posted a plug about stuff I've done recently.

April 12, 2024 in Ann Lipton | Permalink | Comments (0)

New Stuff From Me

Just posting the obligatory plug of a couple of new things.  First up, I reviewed Stephen Bainbridge's book, The Profit Motive: Defending Shareholder Value Maximization for the Harvard Law Review.  Here is the abstract:

Professor Stephen Bainbridge’s new book, The Profit Motive: Defending Shareholder Value Maximization, uses the Business Roundtable’s 2019 statement of corporate purpose as a jumping off point to offer a spirited defense of shareholder wealth maximization as the ultimate end of corporate governance. Beginning with an analysis of classroom standards like Dodge v. Ford Motor Co., and continuing through the modern era, Bainbridge argues both that shareholder value maximization is the legal obligation of corporate boards, and that it should in fact be so, partly because of wealth maximization’s prosocial tendencies, but also because of the lack of a viable alternative. Drawing on his decades of work as one of America’s most influential corporate governance theorists, Bainbridge offers up sharp critiques of the kind of enlightened managerialism reflected in the Business Roundtable’s statement, and advocated by academics like Professor Lynn Stout and practitioners like Martin Lipton. Along the way, he also has harsh words for trendy alternatives such as “environmental, social, and governance” (ESG) investing and proposals to reform the structure of the corporation itself.

In many ways, The Profit Motive is an essential resource for any theorist, or student, in this field. Deftly intertwining economic theory with sharp anecdotes and historical retrospectives, Bainbridge offers an entertaining account of the realpolitik of corporate functioning and the major legal developments that brought us to where we are today. However, as I argue in this book review, there are many facets to stakeholderism and the ESG movement, and the very features Bainbridge identifies as flaws could, in fact, turn out to be hidden virtues.

Second, last week, I spoke to students at College of the Holy Cross in Worcester, Massachusetts about ESG and the social responsibility of business.  The talk was somewhat similar to one I gave at Marquette Law School a few months ago, but this was the first time I had the opportunity to present to undergraduate students rather than law-type people.  Anyway, there's video:

 

 

April 12, 2024 in Ann Lipton | Permalink | Comments (0)

Thursday, April 11, 2024

Nicole Iannarone on Securities Arbitration

Andrew Jennings recently featured Nicole Iannarone and her work on the Business Scholarship Podcast.  You can access the episode here.  It focuses on a paper on securities arbitration and some of her recent work.  I'd like to direct your attention to the last five minutes or so.  It discusses being appointed as an arbitrator.  

If you're a business law professor, you're probably pretty well qualified to serve as arbitrator.  It might also give you insight into what happens in these kinds of disputes.  Because I'm involved with a securities arbitration bar association, I'm deemed to be a non-public arbitrator so I don't get selected often.

But if you're fair-minded and not in a major city, there is a real need for more competent arbitrators.  The paperwork and training doesn't take all that long, and it's pretty interesting if you get selected.

April 11, 2024 | Permalink | Comments (0)

Widener Law Seeks Visiting Professors for 2024-25

Widener University Commonwealth Law School is seeking to hire two visiting professors for the 2024-25 academic year.  We have strong needs in Property, Legal Methods and Contracts.  Additional courses are flexible but we have additional needs in the areas of environmental law, intellectual property, wills & trusts, administrative law and other upper level courses.  Interested persons should submit a cover letter and resume to Professor Robyn Meadows, Chair, Faculty Appointments Committee, at [email protected].  

April 11, 2024 in Joan Heminway, Jobs | Permalink | Comments (0)

Wednesday, April 10, 2024

Open Visiting Professor Position(s) at the University of Oklahoma College of Law for Spring 2025

Dear BLPB Readers:

"University of Oklahoma College of Law is pleased to announce that it is currently seeking
applicants for visiting professor position(s) for Spring 2025 of the upcoming academic year. The
law school has a number of curricular needs, but is especially interested in candidates
specializing in bankruptcy, secured transactions, consumer law and finance, and payment
systems."

The complete announcement is here: Download Spring 2025 Visiting Position University of Oklahoma College of Law

April 10, 2024 in Colleen Baker, Jobs | Permalink | Comments (0)

Monday, April 8, 2024

Trial Court Blesses Shadow Insider Trading

A federal jury found Matthew Panuwat liable for insider trading late last week.  As you may recall, the U.S. Securities and Exchange Commission (SEC) brought an enforcement action against Mr. Panuwat in the U.S. District Court for the Northern District of California back in August 2021.  In that legal action, the SEC alleged that Mr Panuwat violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, seeking a permanent injunction, a civil penalty, and an officer and director bar. The theory of the case, as described by the SEC in a litigation release, was founded on Mr. Panuwat's deception of his employer, Medivation, Inc., by using information obtained through his employment to trade in the securities of another firm in the same industry.

Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the August 22, 2016 announcement that Pfizer would acquire Medivation at a significant premium. Panuwat allegedly purchased the options within minutes of learning highly confidential information concerning the merger. According to the complaint, Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte's stock price. The complaint alleges that Medivation's insider trading policy expressly forbade Panuwat from using confidential information he acquired at Medivation to trade in the securities of any other publicly-traded company. Following the announcement of Medivation's acquisition, Incyte's stock price increased by approximately 8%. The complaint alleges that, by trading ahead of the announcement, Panuwat generated illicit profits of $107,066.

The SEC's theory of liability, an application of insider trading's misappropriation doctrine as endorsed by the U.S. Supreme Court in U.S. v. O'Hagan, has been labeled "shadow trading."

The Director of the SEC's Division of Enforcement, Gurbir S. Grewal, put it plainly in responding to the jury verdict in the Panuwat case on Friday:

As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.

Yet, many assert that the SEC's theory in Panuwat broadens the potential for SEC insider trading violations and enforcement.  See, e.g., here, here, and here. They include:

  • a wide class of nonpublic information that may be determined to be material and give rise to an insider trading claim;
  • the expansive scope of insider trading's requisite duty of trust and confidence (and the potential importance of language in an insider trading compliance policy or confidentiality agreement in defining that duty); and
  • the potentially large number of circumstances in which employees may be exposed to confidential information about their employer that represents a value proposition in another firm's securities.

Three of us on the BLPB have held some fascination regarding the Panuwat case over the past three years.  Ann put the case on the blog's radar screen; John later offered perspectives based on the language of Medivation's insider trading compliance policy; and I offered comments on John's post (and now offer this post of my own).  I am thinking we all may have more to say on shadow trading as additional cases are brought or as this case further develops on appeal (should there be one).  But in the interim, we at least know that one jury has agreed with the SEC's shadow trading theory of liability.

April 8, 2024 in Ann Lipton, Current Affairs, Financial Markets, Joan Heminway, John Anderson, Securities Regulation | Permalink | Comments (0)

Friday, April 5, 2024

The Business Lawyer – Call for Papers, 2024

Call for Submissions

The Business Lawyer (TBL) is currently accepting submissions for Volume 79, Summer and Fall issues to be published in 2024. TBL is the peer-reviewed scholarly law review and premier publication of the ABA Business Law Section with over 19,000 readers. The Section welcomes article submissions to TBL on topics that advance the development, understanding, and analysis of business law. The Section also welcomes submissions of scholarly articles from legal academics who are looking for a large audience for their scholarship or who wish to adapt their prior research for use by the judiciary and the practicing bar. Pioneering articles originally published in The Business Lawyer have led to significant practice developments, notably in connection with standard practices for legal opinions and audit response letters.

In addition, the Section’s Diversity, Equity and Inclusion Plan encourages a diverse set of viewpoints and backgrounds for TBL authors. The plan includes the widest range of business law practitioners including but not limited to young lawyers, law students, senior lawyers, international lawyers, lawyers of diverse or underrepresented ethnic and racial backgrounds, lawyers with disabilities, LGBTQ2+ lawyers, and women lawyers.

All submissions should be in Word format, double-spaced (including footnotes), accompanied by author contact information, resumes, and an abstract. Manuscripts, including footnotes, ordinarily should not exceed one hundred pages in length (or about 25,000 words). In general, text and footnotes should follow the style and citation format prescribed in The Bluebook: A Uniform System of Citation (21st Edition). In addition, a manuscript will not be considered, and should not be submitted, if it is under consideration for publication elsewhere.

We look forward to reviewing your manuscripts. Please submit them to The Business Lawyer’s Production Manager, Diane Babal, at [email protected]. Direct any questions to [email protected] or 312/988-5507.

April 5, 2024 in Call for Papers | Permalink | Comments (0)

Thursday, April 4, 2024

Match is out!

It's the moment we've all been waiting for and - the Delaware Supreme Court holds that all conflicted controller transactions require MFW protections to win business judgment review.

It also appears that the special committee must be composed completely of independent directors - none of this, oh, well, one turned out to be conflicted but it didn't matter much business, which to me actually tightens the standard that I kind of assumed was being employed, and was employed in the Chancery decision in Match itself.

Also, I have previously remarked on the disjunction between requiring MFW for conflicted transactions, but only board independence for considering litigation demands against controlling shareholders.  In my paper, After Corwin: Down the Controlling Shareholder Rabbit Hole, I said:

litigation demands are, in a real sense, different from ordinary conflict transactions. If directors are too conflicted to consider the merits of a transaction, the court evaluates its fairness. By contrast, if directors are too conflicted to consider the merits of bringing litigation, shareholders themselves are permitted to assume control of corporate machinery to bring the action in their stead. For that reason, demand excusal may legitimately be viewed as its own category of problem.

Reading quickly, it appears the Delaware Supreme Court adopted similar reasoning:

Admittedly, there is a tension in our law in these contexts. But Aronson and our demand review precedent stand apart from the substantive standard of review in controlling stockholder transactions. The distinction is grounded in the board’s statutory authority to control the business and affairs of the corporation, which encompasses the decision whether to pursue litigation. 

(They didn't cite me but that's okay, they cited me for something else, I can live with it.)

I may or may not have more to say as I read again; it's a very short opinion and doesn't seem to address what I believe have become the real issues: who is a controlling shareholder, and what counts as a conflicted transaction?  That's really what's created much of the difficulty, but resolution must await another day.

I guess I'll conclude with: the Council of the Corporation Law Section of the Delaware State Bar Association may be cowed by threats of migration out of Delaware, but the Delaware Supreme Court is holding firm.

 

April 4, 2024 in Ann Lipton | Permalink | Comments (0)

Monday, April 1, 2024

Finfluencers and the Reasonable Retail Investor

Calling attention today to Sue Guan's paper, Finfluencers and the Reasonable Retail Investor, posted on SSRN and forthcoming to the University of Pennsylvania Law Review Online.  The abstract is copied in below.

Much recent commentary has focused on the dangers of finfluencers. Finfluencers are persons or entities that have outsize impact on investor decisions through social media influence. These finfluencers increasingly drive investing and trading trends in a wide range of asset markets, from stocks to cryptocurrency. They do so because they can provide powerful coordination mechanisms across otherwise diffuse investor and trader populations. Of course, the more influence wielded over their followers, the easier it is for finfluencers to perpetrate fraud and manipulation.

The increase in finfluencing has highlighted a gray area in the securities laws: a finfluencer's statements may not be factually untrue or clearly deceptive, but they can be interpreted as misleading depending on the context and the particular beliefs held by the finfluencer’s social media followers. Moreover, such statements can harm investors who buy or sell based on their interpretation of the finfluencer's activity. In other words, finfluencers can easily profit off of their followers' trading activity while steering clear of the securities laws.

A recent case has narrowed finfluencers' ability to do so. This Piece argues that In re Bed Bath and Beyond provides a path to holding finfluencers accountable even when they have not made clearly untrue statements. In considering materiality, In re Bed Bath and Beyond focuses on the reasonable retail investor. This places primacy on retail investors’ interpretation of social media activity and narrows a gap in securities oversight, demonstrating that existing securities laws can be flexible enough to deter and punish a significant portion of problematic finfluencer behavior. In doing so, it opens a path forward for harmed retail investors to seek redress from careless finfluencers.

Sue offers a video summary here

In this work, Sue takes on one of my favorite topics: materiality.  She sees the potential for courts to use the reasonable retail investor--as opposed to the reasonable investor--as the reference point for materiality analysis in securities fraud actions.  Truly interesting.

Social media does move markets.  Investors, retail investors, act on what they read in social media.  They may even act based on interpretations of emojis, as  Sue suggests.  I appreciate her taking on the legal aspects of market behavior in this context.  I am confident more will be said about this as additional cases are brought.

April 1, 2024 in Joan Heminway, Research/Scholarhip, Securities Regulation | Permalink | Comments (0)

Saturday, March 30, 2024

Remembering Roberta Karmel

I learned earlier this week of the death of Brooklyn Law Professor Roberta Karmel.  Roberta was extraordinary, and I miss her already.  Much has been written about her role in our profession--including her service as the first female commissioner at the Securities and Exchange Commission.  I will only add a few personal reflections here.

Roberta was both exacting and compassionate--traits that we sometimes think of as being mutually exclusive.  Small in stature, she somehow was still formidable.  When I first met her in a setting where she was commenting on academic work, I was impressed and intimidated.  Despite my extroversion, I was hesitant to introduce myself and reach out to her in friendship.  When I later admitted that to her, she laughed and (in that inimitable voice we all know and will remember) let me know how silly that was.

Roberta was the honored keynote speaker at our 2009 law graduation (hooding) ceremony at The University of Tennessee College of Law.  She was invited by a student committee that understood well her significance to the law and legal education communities.  She shared details of her life and career with us.  It was inspirational for me, even though I knew parts of the story.  Hearing that history in her own voice was priceless.

I was blessed to be part of a symposium held back in May 2021 to honor Roberta's career.  My paper from that symposium reflects on and extends an earlier published piece of her work.  I offered a post on that paper here.  As I note in that post, having the opportunity to review and dissect Roberta's work helped me in my own.

Thinking about all of this today does make me sad. Roberta's wisdom and voice will no longer add new ideas to the mix.  However, there also is cause for gratitude and hope.  She has left a strong legacy--one that we all can continue to reflect on and use in our work for many years to come.

March 30, 2024 in Joan Heminway, Research/Scholarhip, Securities Regulation, Service | Permalink | Comments (0)

Friday, March 29, 2024

What is the value of the corporate form?

The Tulane Corporate Law Institute this year was unusually contentious, and that’s because a lot of corporate practitioners – defense side – were unhappy with a number of recent Delaware decisions

Tornetta v. Musk made headlines because of the colorful personalities involved, but it actually rested on fairly commonplace, well-established Delaware standards of review.  More unsettling, I think, from the corporate bar’s perspective, were decisions like  Sjunde AP-Fonden v. Activision Blizzard (which I blogged about here), Crispo v. Musk (which I blogged about here), and West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (which I blogged about here), because those cases upset settled expectations of practitioners.  (VC Laster obliquely referred to some of the complaints in his decision denying interlocutory review in TripAdvisor: “Rule 42 does not invite a trial court to consider the level of media attention that a decision has received. That does not mean that the Delaware Supreme Court could not consider it. The justices might conclude that given the media attention and practitioner-driven stormlets over Delaware’s place in the corporate universe, Delaware’s highest court should weigh in. But that is not a consideration that Rule 42 instructs a trial court to take into account.”)

So it was in some sense unsurprising to see the Council of the Corporation Law Section of the Delaware State Bar Association immediately propose some legislative fixes.

Now, with the caveat that these proposals were just released, and I read them quickly, so I reserve the right to be totally wrong in my interpretation/analysis -

For Crispo, the proposal would make it possible for merger partners to specify that lost premium damages are available in the event of a broken deal, and further allow the target to create a shareholder’s representative who can seek lost premium damages on shareholders’ behalf (which, as I blogged, is something companies have sought to arrange through private ordering).

For Activision, the proposal allows boards to approve “substantially final” versions of merger agreements, especially if key terms are not included in the agreement but otherwise available to the board, and that disclosure schedules are not considered to be part of the merger agreement subject to board approval. 

I don’t find either of these particularly controversial (though I can imagine classroom hypos that have fun with how far a disclosure schedule can go; it doesn’t strike me as a particularly precise term).  As I previously blogged, in Activision, the violation seemed rather technical in nature, and Crispo just seemed like there was a divergence between the formal requirements of common law contract doctrine and the purposes a merger contract is meant to serve.

It’s the Moelis amendment that’s a bit more striking.  Proposed DGCL §122(18) would allow corporations to:

Make contracts with one or more current or prospective stockholders (or one or more beneficial owners of stock), in its or their capacity as such, in exchange for such minimum consideration as determined by the board of directors (which may include inducing stockholders or beneficial owners of stock to take, or refrain from taking, one or more actions). Without limiting the provisions that may be included in such contracts, the corporation may agree to: (a) restrict or prohibit itself from taking actions specified in the contract, whether or not the taking of such action would require approval of the board of directors under this title, (b) require the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation), and (c) covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation). With respect to all contracts made under this subsection, the corporation shall be subject to the remedies available under the law governing the contract, including for any failure to perform or comply with its agreements under such contract.

In conjunction with this amendment, there’s a new change to DGCL §122(5), as underlined:

Appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation; provided that any contract or other appointment or delegation of authority that empowers an officer or agent to act on behalf of the corporation shall be subject to § 141(a) of this title, to the extent it is applicable.

According to the Richards, Layton & Finger memo on the proposed changesMoelionly held that contractual restrictions on the board’s authority must be contained in preferred shares rather than a separate contract; therefore, these amendments to the DGCL would not substantively affect the extent to which the board can contract out its authority.  Rather, they only have the effect of allowing boards to use ordinary contracts, rather than preferred shares, to make those arrangements.

I am not sure that is an accurate interpretation of Moelis.  VC Laster seemed to leave open the question how far a preferred share issuance could restrict board authority; in footnote 19, he wrote:

Moelis may not be able to get everything he wanted. Even a charter provision cannot override a mandatory feature of the DGCL....This court has indicated that some restrictions on board action could be invalid even if they appear in the charter....Some transactions, like mergers, require a specific sequence of events in which the board initiates action, then the stockholders vote.  It is unclear whether a charter provision could require a stockholder’s pre-approval, before the board could act....Regardless, those issues are for another day....

So as I read it, Moelis actually touched upon a couple of different issues.  The first was, how much can corporate governance be privately ordered in a personal contract/stockholder agreement, rather than in a corporate charter (including preferred share classes)?  The second was, what are the fundamentally nondelegable functions of a corporate board, that cannot be restricted at all?

These are both unsettled questions because, usually, if you want that much tailoring, you either form a close corporation or – more likely these days – an LLC. 

But proposed Section 122(18) blows past all that – not only does it allow for stockholder agreements to contain the kinds of governance rights previously associated with preferred shares, but it also does not seem to place any limits on the kinds of rights that can be given to stockholders directly in the first place.

We could ask why it matters whether a restriction appears in a stockholder agreement rather than a preferred share issuance.  The most obvious is, if it’s a private company, the stockholder agreement may not be known to the public or even other investors.  And even in a public company, stockholder agreements may be more easily amended than preferred share terms (though I imagine at least some of that difference could be mitigated with careful drafting regarding procedures for amendment of the preferreds).

But I think the broader question is the more interesting one: how much authority must a Delaware corporate board retain?  Or, where is the actual line between a corporation and an LLC?  Or, more generally, whether Delaware is going to be so firmly committed to private ordering in the corporate context that it functionally eliminates the distinction between the two.

And that just begs the question whether we really do need the two forms, or whether instead we should just have “the firm” which is a set of defaults that can be altered by the parties. 

(Yes, yes, I know LLCs are taxed differently than corporations, but that’s an IRS choice. It can decide separately which governance arrangements stray so far into the LLC territory that the firm should be taxed like an LLC.  Certainly, I don’t see any reason the label – and not the actual governance arrangements – should drive the taxation determination.)

One major argument in favor of keeping the corporate form “pure” is network benefits.  It’s easier for investors when there’s a basic governance arrangement that’s stable across firms, and that way they can focus on analyzing the substantive nature of the business when making investment decisions.  Writing in 2013, Michael Klausner pointed out that IPO charters demonstrate very little customization, which he took as evidence of the value of these network effects.

I genuinely wonder if that same result would be found today.  Increasingly, companies are going public with shareholder agreements, byzantine multiple-class share structures, forum selection clauses, corporate opportunity waivers – and that doesn’t even count all the private companies with impenetrably complex governance and cash flow rights

Does that suggest the network effects of the corporate form are overstated?  That’s the challenge that the proposed Section 122(18) poses.

And of course it goes further.  I have written about (and written about) the unsettled definition of what it means to be a controlling stockholder; allowing shareholders complete freedom to take on these kinds of governance powers demands a determination of when the powers are so overweening that the shareholder becomes a fiduciary.  Unless we want to make fiduciary obligations in this context waivable as well – which again brings the corporate form closer to the LLC.

One of the odder things about the proposed legislation is that the amendments to DGCL §122(5) recognize there must be some inherent powers in the board, that cannot be delegated to someone acting on the company’s behalf – like an officer.  This, presumably, is how you reconcile proposed §122(5) with proposed §122(18) – a stockholder, exercising rights under an agreement, is not acting on the corporation’s behalf, and therefore the §141(a) limits do not apply.

But think about the situation in Moelis itself.  There, the stockholder was Ken Moelis, who was also CEO, and also Chair of the Board.  He certainly, by virtue of the stockholder agreement, was a controlling shareholder.  If he exercised his rights under the agreement, would he be acting in his private capacity, or on behalf of the company?  And if on behalf of the company, does that mean §122(5) would kick in, preventing the board from delegating away its §141(a) power?  I’m very confused.

Also, by the way, there’s the bit about remedies.  The Richards, Layton & Finger memo on the proposed changes has this curious comment:

While the plain language of the new subsection would appear to give the board the power to bind the corporation to take fundamental action, such as approving a merger, at the direction of a stockholder, the real-world operation of any provision included in a stockholders’ agreement will be much more limited.  Although an agreement adopted pursuant to new Section 122(18) may require a corporation to cause fundamental action to be taken, nothing in the statute expressly provides that individual directors may be parties to the agreement and expressly bound thereto in their directorial capacities.  For example, fashioning a remedy for a corporation’s failure to cause a merger to occur as required by a stockholders’ agreement due to the failure of stockholders to adopt the merger agreement likely would involve consideration of the principles of preclusion and coercion applicable to termination fees.  While new Section 122(18) recognizes that a stockholder may receive damages if the corporation fails to cause a contractually specified event to occur, the amount of any such damages will be constrained, in most cases involving fundamental corporate actions, by equitable principles.  For example, fashioning a remedy for a corporation’s failure to cause a merger to occur as required by a stockholders’ agreement due to the failure of stockholders to adopt the merger agreement likely would involve consideration of the principles of preclusion and coercion applicable to termination fees.   

Actually, the amendment says that any remedies may be available under the law governing the contract.  Nothing in that language would prohibit equitable remedies where available, like specific performance, and courts enforce specific performance obligations against corporations all the time, including where board action (like completing a merger) is required.  I agree that matters requiring a stockholder vote will still require one, but the drafting of 122(18) does not on its face prohibit an order requiring the board perform its own obligations under the agreement.

Instead, the synopsis to proposed 122(18) says:

New § 122(18) does not authorize a corporation to enter into contracts with stockholders or beneficial owners of stock that impose remedies or other consequences against directors if they take, or fail to take, specified actions as required by the contract or that purport to bind the board of directors or individual directors as parties to the contract. Contracts that would impose such remedies or consequences on directors or that would bind directors as parties are subject to existing law. Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956); Chapin v. Benwood Foundation, Inc., 402 A.2d 1205 (Del. Ch. 1979). Instead, new §122(18) authorizes contracts that impose remedies only against the corporation, including as a result of any failure by the corporation, its board of directors, or its current or future directors, stockholders or beneficial owners of stock, to take, or refrain from taking, actions specified in the contract. If an action addressed in a covenant by the corporation requires director or stockholder approval under title 8, that approval must still be obtained in order to effect the action pursuant to title 8. For example, the lack of stockholder approval of an action under title 8 requiring such approval would render specific performance of the covenant unavailable. Moreover, as noted below, even the enforceability of a claim for money damages for breach of the covenant may be subject to equitable review if the making or performance of the contract constitutes a breach of fiduciary duty.

Notice how this says specific performance is not available if stockholder approval is required but lacking?  It conspicuously does not say specific performance is unavailable if only board action is required.  So I am not at all certain how the remedies section of the proposed law squares with the claim that it would not change existing cases like Abercrombie, which holds that stockholder agreements may not significantly limit the ability of directors to exercise their judgment on matters of corporate policy.

I’ll go further – I keep beating this drum about choice of law (wrote a whole paper about it).  Stockholder agreements are subject to ordinary choice of law principles, and proposed §122(18)’s reference to “the law governing the contract” apparently plans to keep it that way.  Which means, we get the possibility of a California law, or Texas law, or whatever other state law, determination of whether specific performance is required.  That sounds … very coherent.

Anyway, the Delaware Supreme Court has increasingly insisted that corporations are just contracts so now we’re really reaching put up or shut up time.  Is there anything left for the corporate form to do?  Or should we all just be teaching the law of the firm?

March 29, 2024 in Ann Lipton | Permalink | Comments (0)

Thursday, March 28, 2024

Search for the Executive Director Lowell Milken Institute for Business Law and Policy--UCLA, School of Law

The Lowell Milken Institute for Business Law and Policy at the University of California, Los Angeles School of Law seeks an experienced, innovative, and collaborative leader to serve as its next Executive Director. The full posting can be found here.

March 28, 2024 | Permalink | Comments (0)

Wednesday, March 27, 2024

Thursday April 4 - ABA Banking Law Committee's New Members Subcommittee Program on the Business of Banking and Banking Law Careers

Dear BLPB Readers:

On April 4, 2024, at 11:30am EST, the American Bar Association's Banking Law Committee's New Members Subcommittee will host "A 30-minute in-person and zoom meeting of the Banking Law Committee’s New Members Subcommittee" to discuss the business of banking and careers in banking law.  It's a free program for ABA members and ABA membership is free for law students!  Here is a flyer with complete details: Download Promo for April 4 ABA session on banking law and careers 

March 27, 2024 in Colleen Baker | Permalink | Comments (0)

Thursday, March 21, 2024

Texas Judge Finds Pump & Dump Not Wire Fraud

A recent decision from Judge Andrew S. Hanen of the Southern District of Texas found that a pump and dump scheme could not be prosecuted as wire fraud.

I'm trying to wrap my head around it and struggling.  It seems to find that the government could not prosecute a pump and dump scheme because the defendants only wanted to make money and did not want to deprive any specific people of money or property.  The mere fact that the pump and dump scheme occurred through a market and not in direct personal transactions seems to have driven the decision.

Bloomberg's Matt Levine has covered it.  It also made CNN.  

Notably, the indictment even includes statements that the Defendants said things like "we’re robbing … idiots of their money."

March 21, 2024 | Permalink | Comments (1)

Disney

I have literally no idea if this is correct, I’m putting it forward as a set of facts that I think demonstrates the very complicated era we’re in from a corpgov perspective.

Ike Perlmutter was fired from Disney.  It’s very well known that he generally opposed attempts to diversify the MCU.

Nelson Peltz has teamed with Ike Perlmutter in his Disney proxy contest.  Nelson Peltz is a Trump supporter.  He’s also friends with Elon Musk, who has increasingly become a right wing culture warrior.

Disney has long been in the crosshairs of the right.  We all know about the fight with DeSantis and Don’t Say Gay; we also know that a Disney shareholder accused the company of abandoning shareholder value in order to promote a political agenda.

Elon Musk is furious about Disney pulling ads from ex-Twitter, and has openly criticized Disney’s diversity priorities.  He’s even bankrolling a suit by Gina Carano, alleging that Disney discriminated against her due to her conservative politics.

Bill Ackman has also criticized Disney for pulling ads from Twitter, specifically connecting that decision to the proxy fight with Peltz, and arguing that Peltz can right the ship.  

ISS is also a right wing target, on accusations that it recommends in favor of “woke” corporate governance instead of sticking to shareholder value.

ISS – I have to assume responding to this complaint – is creating a new “ESG skeptic” voting template, to go along with its other templates like Climate, Catholic, and SRI.

Glass Lewis recommended that shareholders vote for the Disney slate, against Nelson Peltz.  The Wall Street Journal recently published a fairly searing indictment of Peltz’s Trian fund.  And Jeffrey Sonnenfeld of the Yale School of Management, along with Steven Tian of the Yale Chief Executive Leadership Institute, argue that Trian has destroyed value at the companies where Peltz has won board seats.  

ISS just recommended in favor of Peltz in his bid for a Disney board seat.

I have no idea if ISS’s recommendation had anything to do with politics.  Certainly, it offered very plausible reasons for backing Trian, and the proxy fight itself does not involve (explicit) political accusations either way, notwithstanding Ackman’s hints.

But everything surrounding corpgov is so politicized these days that it’s impossible not to ask whether ISS thought that endorsing Peltz would help mitigate some of the right wing criticism.

I guess my point is, whether it’s a sign of the times or not, it is very hard to evaluate shareholder value in a manner that’s divorced from the political environment.  In the end, companies make money by appealing to popular tastes.  Politicians have every incentive to insist that their side is the “popular” one, and therefore that any appeals to other audiences must be unpopular, and therefore unprofitable.  Profitability is now a proxy for political popularity.  And when politicians threaten to legislate those preferences – functionally a legal dictate as to what is and is not profitable – we can’t tell if corporate actors are responding to the regulatory threats or their own independent judgment.

Edit 3/23: Remember how I said the fight does not involve (explicit) political accusations? Turns out, not so much: 'Why do I need an all-Black cast?' Disney criticizes Peltz remarks

March 21, 2024 in Ann Lipton | Permalink | Comments (1)

Wednesday, March 20, 2024

2024 National Business Law Scholars Conference - Extension of Submission Deadline

Please note that the deadline for submission of proposals for the National Business Law Scholars Conference has been extended to April 1!  The revised Call for Papers follows.  I hope to see many of you there.

+++++

 National Business Law Scholars Conference (NBLSC) 
June 24-25, 2024 
Call for Papers 

The National Business Law Scholars Conference (NBLSC) will be held on Monday and Tuesday, June 24-25, 2024, at The University of California, Davis School of Law. 

This is the fifteenth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission. 

Submission Guidelines: 

Please fill out this form to register and submit an abstract by Monday, April 1, 2024. Please be prepared to include in your submission the following information about you and your work: 

Name 
E-mail address 
Institutional Affiliation & Title 
Paper title 
Paper description/abstract 
Keywords (3-5 words) 
Dietary restrictions 
Mobility restrictions 

If you have any questions, concerns, or special requests regarding the schedule, please email Professor Eric C. Chaffee at [email protected]. We will respond to submissions with notifications of acceptance a few weeks after the submission deadline. We anticipate the conference schedule will be circulated in late April. 

Conference Organizers: 

Afra Afsharipour (University of California, Davis, School of Law) 
Tony Casey (The University of Chicago Law School) 
Eric C. Chaffee (Case Western Reserve University School of Law) 
Steven Davidoff Solomon (University of California, Berkeley School of Law) 
Benjamin Edwards (University of Nevada, Las Vegas Boyd School of Law) 
Joan MacLeod Heminway (The University of Tennessee College of Law) 
Nicole Iannarone (Drexel University Thomas R. Kline School of Law) 
Kristin N. Johnson (Emory University School of Law) 
Elizabeth Pollman (University of Pennsylvania Carey Law School) 
Jeff Schwartz (University of Utah S.J. Quinney College of Law) 
Megan Wischmeier Shaner (University of Oklahoma College of Law) 

March 20, 2024 in Call for Papers, Conferences, Joan Heminway | Permalink | Comments (0)

Monday, March 18, 2024

Representing Elon Musk

Sometimes, the scholarly enterprise offers one the opportunity to deeply learn while sharing embedded knowledge.  I never thought that my 2022 Southeastern Association of Law Schools discussion group on Elon Musk and the Law would turn into such a rich learning experience.  But it did.  

In organizing the group, I knew folks would focus on all things Twitter (especially as the year proceeded).  But because of the kind offer of the Stetson Law Review to host a symposium featuring the work of the group and publish the proceedings, I was able to dig in a bit deeper in my work, which focused on visioning what it would be like to represent Elon Musk.  The resulting article, "Representing Eline Musk," can be found here.  The SSRN abstract follows.

What would it be like to represent Elon Musk on business law matters or work with him in representing a business he manages or controls? This article approaches that issue as a function of professional responsibility and practice norms applied in the context of publicly available information about Elon Musk and his business-related escapades. Specifically, the article provides a sketch of Elon Musk and considers that depiction through a professional conduct lens, commenting on the challenges of representing or working with someone with attributes and behaviors substantially like those recognized in Elon Musk.

Ultimately (and perhaps unsurprisingly, for those who have followed Elon Musk’s interactions with the law in a business setting), the article concludes that representing Elon Musk or one of his controlled businesses would be a tough professional assignment, raising both typical and atypical professional responsibility issues. Taking on an engagement in which Elon Musk is the client or a control person would require deliberate lawyer leadership, including (among other things) patience, mental toughness, and empathy. As a result, the lawyer would be required not only to have the required legal expertise, sensitivity to professional conduct regulation, and practical experience to carry out the representation, but also to understand and know how to employ their talent, personality, character strengths, and leadership style in a demanding and mutable lawyering context.

The well-considered comments of so many folks helped to move this work along.  While my author footnote mentions some, it could not mention all.  As I thought through issues of client wealth, power, mental health, and neurobiological status, those who know more than I--personally and professionally--were essential to my assessments. 

I know that there is a lot more that can (and should) be written on representing clients in the varied lot of personal circumstances that life presents.  I hope that I presented my thoughts in this piece in a way that is sensitive to the myriad issues involved in describing and considering client attributes and conditions.  I also hope this work will encourage more reflection and writing on related issues.

March 18, 2024 in Conferences, Current Affairs, Ethics, Joan Heminway, Lawyering, Wellness | Permalink | Comments (0)

Friday, March 15, 2024

Chancellor McCormick is Annoyed

On March 12, Chancellor McCormick issued a revised appraisal opinion in HBK Master Fund v. Pivotal Software, amending her calculations to award the petitioners 44 cents above deal price, rather than 17 cents below, as she had originally.  

But I somehow missed the original opinion, so my first read was the amended one.  Forgive me if this is old hat by now, but it was new to me, so.

The case involved a buyout of Pivotal by its sister company, VMWare, both controlled by Dell Technologies.  That raised the question whether the use of MFW procedures required deference to the deal price, in the same way it does in other kinds of appraisal actions.  Chancellor McCormick held no, because, critically, with a controlling shareholder, there can be no real market test – there are no other potential bidders, and even the shares themselves may trade at a discount to reflect the controller’s ability to extract rents.  Thus, the underpinning of cases like Dell v. Magnetar, 177 A.3d 1 (2017), is absent.

But that’s actually not what stood out to me. 

As is the usual course with these things, Chancellor McCormick began with a standard discussion of the process by which the deal was negotiated.  Along the way, she singled out the conduct of Marcy Klevorn, who was one member of a two-person Pivotal special committee, and who also held positions at Ford.  Here is what McCormick said:

Around this time, the Pivotal Special Committee decided not to canvas the market for other potential bidders….

One of the two Pivotal Special Committee members, Klevorn, was missing in action through much of this process.

  • She missed the October 8, 2018 Board meeting. She later testified that her absence was likely due to separate duties at Ford.
  • She missed the January 28, 2019 Board meeting.112 Klevorn testified that she was “probably traveling[.]”
  • She arrived late to the March 15, 2019 Board meeting. She could not recall why.
  • She missed the March 22, 2019 Board meeting. She could not recall why.
  • She left early from the April 9, 2019 Board meeting due to a “prior engagement[.]” At this meeting, Lankton provided an update to the rest of the Board on the merger.

So, through April 2019, Klevorn missed, was late for, or left early from each Pivotal Board and Special Committee meetings. Klevorn testified that being on the Pivotal Special Committee was “a lot of work and I don’t know, to be honest, how I felt about it at the time.”

The Pivotal Special Committee met on July 31, 2019. Klevorn joined the meeting late because she was busy with a meeting at Ford.

The next day, the Pivotal Special Committee held a meeting to decide whether to counteroffer, accompanied by Morgan Stanley, Mee, and other members of Pivotal leadership.  Klevorn attended, reluctantly. A few days prior, Klevorn’s assistant asked her if she could attend that meeting from 5:30 p.m. to 7:00 p.m. Klevorn responded, “[u]gh. Was planning to do a bunch of returns at [S]omerset. I thought it was at 2???” After her assistant responded about the timing, Klevorn replied, “[l]ife ruiner. Ok.”

On August 14, 2019, the VMware Special Committee made what it termed a “best and final offer” of $15.00 per share.  The Pivotal Special Committee held a meeting to consider it; Klevorn was absent.

Oof.

Did Klevorn’s neglect have a bearing on the outcome?  Reader, it did not.  After McCormick explained why MFW procedures could not cleanse the transaction, she pretty much moved on from any discussion of this particular process, except to briefly note that Klevorn’s absence called into doubt certain base projections – which McCormick ended up accepting anyway.  (Op. at 88-89).  Sure, I suppose Klevorn’s conduct could have had some kind of influence on McCormick’s thought process, but if so, it’s not explicit in the opinion.

Why am I mentioning this? 

Because a while ago, Edward Rock argued that Delaware’s courts operate more through parables of “good” and “bad” boards, reputational sanctions, and public shaming, than through actual interference with business decisions.  And though I can think of a certain billionaire, now 25% poorer, who might disagree with that assessment, McCormick’s somewhat gratuitous swipes at Klevorn (“life ruiner”) would seem to bear out the thesis.

If you don’t want to serve on a special committee, don’t do it.  At the very least, don’t put it in an email/text.

March 15, 2024 in Ann Lipton | Permalink | Comments (0)