Saturday, May 21, 2022

Elon Musk and Twitter, Naturally

The world seems to be fascinated with Musk’s antics in connection with the Twitter acquisition (I have to pay attention; it’s my job), and in particular, a question that seems to be coming up a lot is, “Why isn’t the SEC doing anything?”  The answer, of course, is that none of this has anything to do with the SEC.  Yes, sure, Elon Musk didn’t file a form on time, and, now that we have the preliminary proxy, it seems the forms he did file were false in that they claimed he had no designs on a merger when in fact he absolutely did have designs on a merger, but delayed 13D/13G filings have never been a high priority for the SEC and in most cases have been met with a small fine.  The rest of it – Musk’s arguable violation of the merger agreement by tweeting confi info and disparaging everyone in sight, and his fairly transparent attempt to back out of his obligations with pretextual excuses about spambots – simply are not the SEC’s bailiwick.  That’s Delaware’s problem, which dictates the fiduciary duties of Twitter board members, and whose law governs the merger agreement.  And Delaware doesn’t act sua sponte, like a regulatory agency; it responds only when someone brings a lawsuit.  Which Twitter may or may not ultimately do.  (Its shareholders certainly will; one suit’s brewing, more will likely be forthcoming).

But there’s a deeper issue here, which is that the complete failure of anyone to rein Musk in really undermines the perception that there is a general rule of law that applies to everyone.  That’s why everyone’s asking why the SEC isn’t acting, even though this isn’t really the SEC’s responsibility to address.

I mean, sure, you kind of know in a cynical way that rich people play by their own rules, but there’s a difference between believing that intellectually and viscerally experiencing it, day by day, as it plays out in Twitter.

And maybe that perception is misguided in this case – as I just said, there really isn’t a basis for any regulatory authority to get involved here, though the SEC could create headaches by demanding more disclosures in the proxy – but Musk’s brazen disregard of his contractual obligations almost certainly flows from his history of ignoring rules and experiencing no meaningful consequences.  And of course, the more he does it, the more he develops an army of admirers who become less likely to hold him to account in the next iteration of the game.

Uninformed observers may be misunderstanding the specifics, but they’re right on the general principle.  Like, I don’t think it’s entirely coincidental that Musk is publicly defying obligations under Delaware law right after a Delaware court said – in practical effect – that he is a business genius who is largely entitled to skip all the niceties of Delaware procedure.

And that’s the danger of each individual player – a Delaware court, a particular regulatory agency, a merger partner – each deciding that Musk is too irascible, too smart, too wealthy, too talented, to rein in.  It collectively communicates a very specific lesson about who has to comply with the law, and who doesn’t.  That harms everyone, but no one actor has an incentive or even the jurisdiction to address it.

That said, on a long enough timeline, well....

May 21, 2022 in Ann Lipton | Permalink | Comments (0)

Friday, May 20, 2022

What Do FIFA, Nike, and PornHub Have In Common?

It's a lovely Friday night for grading papers for my Business and Human Rights course where we focused on ESG, the Sustainable Development Goals (SDGs), and the UN Guiding Principles on Business and Human Rights. My students met with in-house counsel, academics, and a consultant to institutional investors; held mock board meetings; heard directly from people who influenced the official drafts of EU's mandatory human rights and environmental due diligence directive  and the ABA's Model Contract Clauses for Human Rights; and conducted simulations (including acting as former Congolese rebels and staffers for Mitch McConnell during a conflict minerals exercise). Although I don't expect them all to specialize in this area of the law, I'm thrilled that they took the course so seriously, especially now with the Biden Administration rewriting its National Action Plan on Responsible Business Conduct with public comments due at the end of this month.

The papers at the top of my stack right now:

  1. Apple: The Latest Iphone's Camera Fails to Zoom Into the Company's Labor Exploitation
  2. TikTok Knows More About Your Child Than You Do: TikTok’s Violations of Children’s Human Right to Privacy in their Data and Personal Information
  3. Redraft of the Nestle v. Doe Supreme Court opinion
  4. Pornhub or Torthub? When “Commitment to Trust and Safety” Equals Safeguarding of Human Rights: A Case Study of Pornhub Through The Lens of Felites v. MindGeek 
  5. Principle Violations and Normative Breaches: the Dakota Access Pipeline - Human rights implications beyond the land and beyond the State
  6. FIFA’s Human Rights Commitments and Controversies: The Ugly Side of the Beautiful Game
  7. The Duty to Respect: An Analysis of Business, Climate Change, and Human Rights
  8. Just Wash It: How Nike uses woke-washing to cover up its workplace abuses
  9. Colombia’s armed conflict, business, and human rights
  10. Artificial Intelligence & Human Rights Implications: The Project Maven in the ‘Business of war.’
  11. A Human Rights Approach to “With Great Power Comes Great Responsibility”: Corporate Accountability and Regulation
  12. Don’t Talk to Strangers” and Other Antiquated Childhood Rules Because The Proverbial Stranger Now Lives in Your Phone
  13. Case studies on SnapChat, Nestle Bottling Company, Lush Cosmetics, YouTube Kidfluencers, and others 

Business and human rights touches more areas than most people expect including fast fashion, megasporting events, due diligence disclosures,  climate change and just transitions, AI and surveillance, infrastructure and project finance, the use of slave labor in supply chains, and socially responsible investing. If you're interested in learning more, check out the Business and Human Rights Resources Center, which tracks 10,000 companies around the world. 

May 20, 2022 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Business, International Law, Marcia Narine Weldon, Securities Regulation, Teaching | Permalink | Comments (0)

Thursday, May 19, 2022

Fifth Circuit Finds SEC ALJs Unconstitutional

The Fifth Circuit recently decided Jarkesy v. Sec. & Exch. Comm'n, No. 20-61007, 2022 WL 1563613, at *1 (5th Cir. May 18, 2022).  The case has significant implications for the SEC's use of administrative law judges (ALJs).  The majority opinion was written by Judge Elrod and joined by Judge Oldham. Judge Davis penned a dissent.  The majority issued three holdings:

We hold that: (1) the SEC's in-house adjudication of Petitioners' case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I's vesting of “all” legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II.

The case involved two hedge funds founded by Jaresky, an investor, businessman, and conservative radio host.  The SEC alleged that Jaresky: (i) misrepresented the identity of the prime broker and auditor; (ii) misrepresented the funds' investment parameters and safeguards; and (iii) overvalued the funds' assets to increase the fees collected.  After an evidentiary hearing, an SEC ALJ found that the funds had committed securities fraud.  Jaresky's defended by raising constitutional challenges to administrative adjudication, among other things.
Although his arguments were rejected by the Commission, the Fifth Circuit embraced them.  I'll overview them briefly in turn before turning to broader context and the long term perspective.  
7th Amendment Right to a Jury Trial
 The Fifth Circuit concluded administrative adjudication was unconstitutional "because the SEC's enforcement action is akin to traditional actions at law to which the jury-trial right attaches. And Congress, or an agency acting pursuant to congressional authorization, cannot assign the adjudication of such claims to an agency because such claims do not concern public rights alone."  As I read the opinion, the Fifth Circuit's  seems to find that a right to a jury trial attaches to statutory and administrative claims which significantly overlap with common law claims. This may not be the only reading and I welcome any thoughts in the comments about the scope of this reasoning.
There are some immediate implications from this.  If applied more broadly, this reasoning might gut much administrative adjudication outside the SEC as well. This holding does not turn on anything unique to the SEC.  This would also likely significantly shift enforcement actions to federal court.
Unconstitutional Delegation
The SEC has long enjoyed the discretion to decide whether to proceed administratively or in an Article III court. The Fifth Circuit concluded that Congress unconstitutionally delegated this discretion because Congress did not specify a specific intelligible principle for this decision.  
The SEC had argued that the decision about where to bring its enforcement action was an executive one akin to prosecutorial discretion--not a legislative decision.  The Fifth Circuit disagreed finding that the decision about whether to consign matters to administrative adjudication or Article III courts was a legislative one.  It reasoned that different procedures apply in administrative adjudication and the ability to elect between administrative adjudication and Article III courts allows the SEC to pick the rules under which it would play on a case-by-case basis.
The opinion marks another advance for nondelegation doctrine within the federal courts.  As the doctrine expands, the risk to administrative agencies grows significantly.
Unconstitutional Removal Restrictions
As a final holding, the Fifth Circuit invalidated the ALJ structure as improperly insulated from presidential control because ALJs enjoy two layers of for-cause removal protections.   It found that: 
SEC ALJs perform substantial executive functions. The President therefore must have sufficient control over the performance of their functions, and, by implication, he must be able to choose who holds the positions. Two layers of for-cause protection impede that control; Supreme Court precedent forbids such impediment.
 Whether two layers of for-cause removal protection actually exists remains uncertain.  The Fifth Circuit repeats an error made by the Supreme Court in describing SEC Commissioners as protected by for-cause removal protections.  The SEC's statute does not address it. See Gary Lawson, Stipulating the Law, 109 Mich. L. Rev. 1191, 1194 (2011) (explaining that despite the widespread assumption that for-cause removal protections protect SEC Commissioners, “is certainly not obvious that the SEC Commissioners enjoy ‘for cause’ protection”); Peter L. Strauss, On the Difficulties of Generalization -Pcaobi N the Footsteps of Myers, Humphrey's Executor, Morrison, and Freytag, 32 Cardozo L. Rev. 2255, 2276–77 (2011) (explaining that the ability of the President to remove SEC Commissioners remains unclear because there is no statutory provision granting SEC Commissioners for-cause removal protection).
The Broader Picture
Many social media reactions to the decision mischaracterize it.  The decision does not declare the SEC unconstitutional or say that administrative agencies are unconstitutional.  Here are two examples:
As Bloomberg's Matt Levine has explained, this particular holding only addressed a small part of what the SEC does.  He explained that we should pay attention, but that it's not as though the SEC is suddenly shutting its doors:
This may not be a particularly big deal. Two judges on one panel of one appeals court found that one small part of what the SEC does is an unconstitutional delegation of power. It is possible that this decision is fairly narrow: Congress did delegate this decision — about whether to bring cases in federal courts or its own forums — to the SEC, fairly recently, without any guidance at all, which is unusual. Perhaps the “intelligible principle” standard allows the SEC to do all of its other rulemaking (because Congress has mostly given it some broad guidance about protecting investors in the public interest, and because SEC rules do help to fill in a fairly detailed statutory system), but not to make this particular decision. Still. I think the Fifth Circuit went out of its way to find a nondelegation problem because the Supreme Court has changed and now there will be a lot more courts finding a lot more nondelegation problems. I think this might be a sign of where things are going.
Others have had similar takes.  Professor Wurman thought the Fifth Circuit didn't need to reach many issues, but did not see a need to panic. 

Professor Verret welcomed the decision.

Mark Cuban celebrated the result.

Professor Jackson disagreed with the Fifth Circuit's reasoning with a thread.

A Worrying Trendline
I've written about the risks that the lines of judicial thought here pose.  Although this decision creates new risks for administrative agencies, financial regulators should pay particularly close attention.  That the Fifth Circuit would declare SEC ALJs unconstitutional wasn't on my immediate radar, but it didn't surprise me.  The bigger risk I'm worried about is that a court will suddenly take out some systemically important financial regulator leading to a market collapse and a financial crisis.  One way to think about this risk is that the courts have begun to play a game of Jenga™.   The Fifth Circuit just pulled away a bit of the SEC's enforcement discretion and use of ALJs within the Fifth Circuit.  Nothing has come tumbling down yet.  What happens when some brief before it raises constitutional challenges to FINRA, the Exchanges, or other SROs?  It's all fun and games until you pull the wrong block and crash the bond markets.

May 19, 2022 | Permalink | Comments (0)

Wednesday, May 18, 2022

Kress on Banking's Climate Conundrum

I was excited to see that Professor Jeremy Kress' excellent new article, Banking's Climate Conundrum, is forthcoming in the American Business Law Journal!  Kress presented this article during The Changing Faces of Business Law and Sustainability Symposium at the end of February (post here).  As with all his pieces, it's highly-readable, understandable, and enjoyable.  I'm a bit less sanguine than he is regarding relying on external credit rating agencies in calculations of bank capital requirements.  I encourage BLPB to read and decide what they think!  Here's the abstract:

"Over the past decade, a consensus has emerged among academics and policymakers that climate change could threaten the stability of banks, insurers, and the broader financial system. In response, regulators from around the world have begun implementing policies to mitigate emerging climate risks in the financial sector. The United States, however, lags significantly behind other countries in addressing such risks. This Article argues that the United States’ sluggishness in responding to climate-related financial risk is problematic because the U.S. banking system is uniquely susceptible to climate change. The United States’ vulnerability stems, in part, from a little-known statutory provision that prohibits U.S. regulators from relying on external credit ratings in bank capital requirements. Because of this deviation from internationally-accepted capital standards, when a credit rating agency downgrades a “brown” company, U.S. banks that lend to that company need not compensate by maintaining a bigger capital cushion. Over time, this dynamic will likely incentivize “brown” companies to borrow more from U.S. banks, intensifying the U.S. banking system’s exposure to climate risks. This Article contends that the United States must act quickly to overcome this unusual weakness by taking bold steps to safeguard the domestic financial system from the climate crisis."

May 18, 2022 | Permalink | Comments (0)

Tuesday, May 17, 2022

Sharfman on Twitter and “Portfolio Primacy”

Over at the University of Chicago's ProMarket site, Bernard Sharfman has posted: Will “Portfolio Primacy” Throw a Monkey Wrench in Elon Musk’s Plans to Acquire Twitter? In the piece, Sharfman argues that even if one assumes Musk's offer for Twitter maximizes the value of that firm, "investment advisers to index funds, such as BlackRock, Vanguard, and State Street (the Big Three)" may vote against the deal on the basis of portfolio primacy because:

[A]n investment adviser who manages a stock fund should be managing the fund based on an approach that attempts to maximize the financial value of the entire stock portfolio at any point in time, not just the value of any individual stock investment. This approach is referred to as “portfolio primacy.”… [L]et’s say that the investment adviser to the S&P 500 fund comes to the conclusion that a Musk takeover of Twitter will so distract Musk from his duties at Tesla that it will lead to a significant reduction in the market value of Telsa’s stock. Because the S&P 500 fund has so much more in terms of dollar holdings of Tesla than Twitter, this expected reduction in the market value of Tesla stock could easily outweigh whatever positive value the fund derives from Musk purchasing Twitter.


May 17, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Monday, May 16, 2022

AALS Section on Business Associations - Call for Papers for 2023 Annual Meeting

Dear Section Members --

On behalf of the Executive Committee for the AALS section on Business Associations, I'm writing with details of our two sessions at the 2023 AALS Annual Meeting, which will be held in San Diego, CA from January 4-7, 2023.

First, our main program is entitled, "Corporate Governance in a Time of Global Uncertainty.” We anticipate selecting up to two papers from this call for papers. To submit, please submit an abstract or a draft of an unpublished paper to Professor Mira Ganor,, on or before Friday, August 19, 2022. Authors should include their name and contact information in their submission email but remove all identifying information from their submission. Please include the words “AALS - BA- Paper Submission” in the subject line of your submission email.

Second, we are excited to announce that we will again hold a "New Voices in Business Law" program, which will bring together junior and senior scholars in the field of business law for the purpose of providing junior scholars with feedback and guidance on their draft articles. Junior scholars who are interested in participating in the program should send a draft or summary of at least five pages to Professor Summer Kim at on or before Friday, August 19, 2022. The cover email should state the junior scholar’s institution, tenure status, number of years in his or her current position, whether the paper has been accepted for publication, and, if not, when the scholar anticipates submitting the article to law reviews. The subject line of the email should read: “Submission—Business Associations WIP Program.”

For further details on both sessions, please see the attached calls for papers. [Ed. Note: the calls for papers are included below.]

Thank you,

James Park
Chair, AALS Business Associations Section


Call for Papers for the
Section on Business Associations Program on
Corporate Governance in a Time of Global Uncertainty
January 4-7, 2023, AALS Annual Meeting

The AALS Section on Business Associations is pleased to announce a Call for Papers for its program at the 2023 AALS Annual Meeting in San Diego, CA. The topic is Corporate Governance in a Time of Global Uncertainty. Up to two presenters will be selected for the section’s program.

Businesses are operating at an exceptional level of global uncertainty.  Mounting pressures from myriad fronts leave boards of directors to navigate new frontiers while maneuvering lingering challenges.  In addition to adjusting to uncertain economic and financial implications of geopolitical events and the global pandemic, businesses are asked to assume a distinct social role.  Proliferation of calls for corporate disengagement from certain states comes amidst continued disruption in supply chains and mounting diversity, inequality, climate, and cybersecurity challenges, as well as increased disclosure requirements.  This panel will explore the implications of global uncertainty on corporate governance and the role of corporations and their boards in these changing times.

Submission Information:

Please submit an abstract or a draft of an unpublished paper to Mira Ganor,, on or before Friday, August 19, 2022.  Authors should include their name and contact information in their submission email but remove all identifying information from their submission.  Please include the words “AALS - BA- Paper Submission” in the subject line of your submission email.  Papers will be selected after review by members of the Executive Committee of the Section.  Presenters will be responsible for paying their registration fee, hotel, and travel expenses.

We recognize that the past couple of years have been incredibly challenging and that these challenges have not fallen equally across the academy.  We encourage scholars to err on the side of submission, including by submitting early stage or incomplete drafts.  Scholars whose papers are selected will have until December to finalize their papers.   

Please direct any questions to Mira Ganor, the University of Texas School of Law, at


Call for Papers
AALS Section on Business Association
New Voices in Business Law
January 4-7, 2023, AALS Annual Meeting

The AALS Section on Business Associations is pleased to announce a “New Voices in Business Law” program during the 2023 AALS Annual Meeting in San Diego, CA. This works-in-progress program will bring together junior and senior scholars in the field of business law for the purpose of providing junior scholars with feedback and guidance on their draft articles.  To complement its other session at the Meeting, this Section is especially interested in papers relating to corporate governance in a time of global uncertainty, but it welcomes submissions on all business-related topics.

PROGRAM FORMAT:  Scholars whose papers are selected will provide a brief overview of their paper, and participants will then break into simultaneous roundtables dedicated to the individual papers.  Two senior scholars will provide commentary and lead the discussion about each paper.

SUBMISSION PROCEDURE:  Junior scholars who are interested in participating in the program should send a draft or summary of at least five pages to Professor Summer Kim at on or before Friday, August 19, 2022.  The cover email should state the junior scholar’s institution, tenure status, number of years in his or her current position, whether the paper has been accepted for publication, and, if not, when the scholar anticipates submitting the article to law reviews.  The subject line of the email should read: “Submission—Business Associations WIP Program.”

Junior scholars whose papers are selected for the program will need to submit a draft to the senior scholar commentators by Friday, December 9, 2022.

ELIGIBILITY:  Junior scholars at AALS member law schools are eligible to submit papers.  “Junior scholars” includes untenured faculty who have been teaching full-time at a law school for ten or fewer years.  The Committee will give priority to papers that have not yet been accepted for publication or submitted to law reviews. 

Pursuant to AALS rules, faculty at fee-paid non-member law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit.  Please note that all presenters at the program are responsible for paying their own annual meeting registration fees and travel expenses.

May 16, 2022 in Business Associations, Call for Papers, Conferences, Corporate Governance, Family Business, Research/Scholarhip | Permalink | Comments (0)

Saturday, May 14, 2022

Surviving Blasius, and Oh Hey Last Minute Update on Forum Selection Bylaws

So of course, after I drafted this post about Chancellor McCormick’s decision in Coster v. UIP Companies, the Ninth Circuit came down with a decision affirming the district court opinion in Lee v. Fisher.  I blogged about that case here; the short version is, the district court enforced a forum selection bylaw that required derivative 14(a) claims to be litigated in Delaware Chancery, despite the fact that Delaware Chancery has no jurisdiction to hear 14(a) claims.  Based on Ninth Circuit precedent, the district court held that the Exchange Act’s antiwaiver provision was not a clear enough statement of a federal public policy against forum selection to prohibit enforcement of the bylaw.   The Ninth Circuit, on appeal, agreed (you know the drill by now; no one engaged the question whether the bylaw is the equivalent of a contractual agreement, naturally).  By affirming the district court’s decision, the Ninth Circuit sort of - but not exactly - created a split with the Seventh Circuit’s decision in Seafarer's Pension Plan v. Bradway; I say “sort of” because – as I explained in my post about the Bradway decision, here – most of the Seventh Circuit’s logic refusing to enforce such a bylaw was rooted in its interpretation of Delaware law, rather than federal law. The Ninth Circuit largely refused to engage with the Delaware law analysis, and instead focused on federal law, because it concluded that the Lee v. Fisher plaintiff had waived arguments about Delaware law.

Upshot: In the Ninth Circuit, it is now possible for a company to completely opt out of Exchange Act liability by unilaterally adopting a bylaw saying so, as long as the bylaw doesn’t use the word “waiver” and instead uses the words “forum selection” and “Delaware Chancery.”

That’s probably all I have to say about that for now, despite my general creeping horror, unless I change my mind (saving it for a ranting article that one day will go up on SSRN), so back to what I originally intended to post about....

Recently, Chancellor McCormick issued her opinion in on remand in Coster v. UIP CompaniesCoster is a somewhat unusual case for Delaware, in that it involves a closely-held corporation governed via longstanding personal ties, rather than a public entity, or at least one sponsored by arm’s length VC/PE capital.  Two founding members of UIP each held 50% of its stock; when one died, his widow, Marion Coster, received his share.  The remaining founder and UIP employees tried to negotiate with Coster to buy her out, but they could not reach a deal; the parties deadlocked and could not agree on board members; and finally, Coster sought the appointment of a custodian.  In response, the remaining founder caused UIP to sell a chunk of stock to a longtime employee/holdover director.  Once the sale was complete, the founder and the employee together had majority voting control, breaking the deadlock and diluting Coster’s stake.

Coster challenged the sale and, after a trial, McCormick concluded that though the defendants were interested in the sale, and had effectuated it to break the deadlock and thwart Coster’s move for a custodian, the transaction had nonetheless been “entirely fair” to Coster and the company because the board ran a reasonable process and the employee had paid a fair price.

On appeal, the Delaware Supreme Court seemed to leave undisturbed McCormick’s conclusion that the transaction had been “entirely fair,” but nonetheless held that, given the board’s entrenching motives, McCormick should additionally have evaluated whether the defendants had engineered the sale in order to entrench themselves and thwart Coster’s voting rights, in violation of Blasius Industries, Inc. v. Atlas Corp, 564 A.2d 651 (Del. Ch. 1988) – adding an interesting footnote acknowledging that while some have questioned the relationship of Blasius to Unocal, none of the parties had made that argument and so the court would not engage it, see Op. at n.66.

That in and of itself highlights a very odd aspect of the doctrine: the Delaware Supreme Court’s decision may be read to mean that a transaction can both be “entirely fair” and represent an inequitable interference with voting rights.  If that’s right, and since “entire fairness” is usually described as the most rigorous standard of review, the Supreme Court decision may mean that Blasius exists on something like a different scale, independent of the financial aspects of corporate action.  Or maybe the Delaware Supreme Court, recognizing that conceptual oddity, left the relationship of Blasius to “entire fairness” somewhat vague.  In the Court’s words:

the Court of Chancery fully supported its factual findings and legal conclusion that the board sold UIP stock to Bonnell at a price and through a process that was entirely fair. Thus, we will not disturb this aspect of the court’s decision. But the court also held that its entire fairness analysis was the end of the road for judicial review. …In our view, the court bypassed a different and necessary judicial review where, as here, an interested board issues stock to interfere with corporate democracy and that stock issuance entrenches the existing board. As explained below, the court should have considered Coster’s alternative arguments that the board approved the Stock Sale for inequitable reasons, or in good faith but for the primary purpose of interfering with Coster’s voting rights and leverage as an equal stockholder without a compelling reason to do so….

And later in the opinion

under Blasius, even if the court finds that the board acted in good faith when it approved the Stock Sale, if it approved the sale for the primary purpose of interfering with Coster’s statutory or voting rights, the Stock Sale will survive judicial scrutiny only if the board can demonstrate a compelling justification for the sale.  That the court found the Stock Sale was at an entirely fair price did not substitute for further equitable review when Coster alleged that an interested board approved the Stock Sale to interfere with her voting rights and leverage as an equal stockholder.

So I suppose this could be read to mean that Blasius is, in fact, part of the entire fairness analysis, and McCormick erred by stopping with process/price.  I’m not really sure, and I’m not sure the Supreme Court wanted me to be sure.

In any event, on remand, Chancellor McCormick elaborated on her factual findings.  In particular, she highlighted that the board’s actions were defensive moves intended to thwart the damaging actions of Coster, who was the aggressor.  Specifically, after insisting on a buyout at an unreasonable price, Coster sought to have unqualified nominees seated on UIP’s board.  When the board refused, she sought a custodian who would have had significant powers to upend UIP’s entire business model and damage its revenue streams.  Along the way, she refused meaningful negotiation with board members who tried in good faith to accommodate her.  At the same time, the stock sale to the employee had been in the works for a while, so by going ahead with it, the board managed to both address the Coster problem and reward someone who had long been a critical asset to the company.  Under these circumstances, McCormick felt that the board had shown it had a compelling justification for its actions under Blasius.

So, this is interesting because it speaks to a hypothesized but – as far as I can tell – never before seen set of circumstances in Delaware law.  Namely, when is it okay to issue stock to dilute someone’s existing voting power because they threaten to use that power in a damaging way?  Note that this is not the same as a poison pill; the pill gives advance warning to investors that if they acquire more shares, they may be diluted.  Here, by contrast, the dilution was to an existing interest, with no warning, based solely on the inequitable actions they sought to take.

The possibility that a board might be justified in taking such action has been raised before.  Specifically – as I blogged when discussing CBS’s proposal to take similar action with respect to Shari Redstone – in Mendel v. Carroll, 651 A.2d 297 (Del. Ch. 1994), the court held that maybe a board might under some circumstances be justified in taking such an action against a threatening controller.  The Mendel dicta has been repeated over the years, but this is, to my knowledge, the first time that a Delaware court has actually approved a board in fact taking such action.  Though, as I highlighted in that earlier blog post, a New York court interpreting Delaware law approved a dilutive issuance intended to force the sale of Bear Stearns to JP Morgan at the height of the financial crisis – which, among other things, demonstrated that Delaware was happy to pass that hot potato to New York in order to avoid taking responsibility for throwing America’s markets into chaos by blocking the action.

But until now, no Delaware court (I think) has actually given the go-ahead in a particular set of facts; the court in CBS itself held that it was not necessary for the board to dilute Shari Redstone’s interest because any fiduciary breaches on her part could be remedied on a case-by-case basis.

Which means the lesson here is not simply that there are some corporate actions that survive Blasius review, but also that there is at least one set of facts that permits the issuance of new shares for the explicit purpose of diluting an existing holder who represents a threat to the company’s future.

May 14, 2022 in Ann Lipton | Permalink | Comments (0)

Friday, May 13, 2022

What Are the Top 10 All-Time Novels About Business?

Earlier this month, I came across a fun Wall Street Journal article, "Great Novels About Business: How Much Do You Know?" The article got me thinking about business-themed novels more generally. What are the greatest all-time novels about business? I came across another, related article from that offers the following list of the 10 best classic novels about business:

  1. The Financier by Theodore Dreiser
  2. The Rise of David Levinsky by Abraham Cahan
  3. The Magnificent Ambersons by Both Tarkington
  4. The Old Wives' Tale by Arnold Bennett
  5. The Buddenbrooks by Thomas Mann
  6. North and South by Elizabeth Gaskell
  7. Atlas Shrugged by Ayn Rand
  8. JR by William Gaddis
  9. American Pastoral by Philip Roth
  10. Nice Work by David Lodge

I have to admit that I've yet to read a few of these books, and I plan to add them to my summer reading list. But I'm also surprised to find at least one book missing, A Christmas Carol by Charles Dickens.  How could we leave Scrooge, Marley, and old Fezziwig off the list..... 

"But you were always a good man of business, Jacob," faultered Scrooge, who now began to apply this to himself.

"Business!" cried the Ghost, wringing its hands again. "Mankind was my business. The common welfare was my business; charity, mercy, forebearance, and benevolence, were, all, my business. The dealings of my trade were but a drop of water in the comprehensive ocean of my business!"

Can you think of other novels that should be added--or some that should be removed from the list above? Please share your thoughts in the comments--and share some lines from your favorite business-themed novels!

May 13, 2022 in Books, John Anderson | Permalink | Comments (4)

Thursday, May 12, 2022

Driverless Finance | Fintech & Capital Intermediation

After the end-of-semester crunch and a bout with Covid, I'm back to reading Hilary Allen's Driverless Finance.  Chapter three, focused on Fintech and Capital intermediation seems prophetic today.  In it, she explains how stablecoins could lead to fiat currency runs and fluctuations.  She also explains how concerns about a particular cryptoasset could trigger panics affecting other cryptoassets.

This brings me to our world today.  TerraUSD, a stablecoin, has become unstable.  It aimed to hold its value at $1 per coin to allow crypto enthusiasts to park cryptoassets in TerraUSD, avoiding market fluctuations.  For most of the past year, TerraUSD largely achieved this goal.  But then it didn't.  As of Wednesday, TerraUSD traded at $0.23.  To help readers see the carnage, check out these charts, first the year and then the last seven days.

TerraUSD 1Y

TerraUSD 7d

Allen predicted that these sorts of things could happen.  The Wall Street Journal described the panic briefly spreading to another stablecoin, explaining that the "collapse saddled investors with billions of dollars in losses. It ricocheted back into other cryptocurrencies, helping drive down the price of bitcoin. Another stablecoin, tether, edged down to as low as 96 cents on Thursday before regaining its peg to the dollar."

Allen also warned about the dangers to the financial system if cryptoassets served as collateral for institutional borrowing.  We can see some of the risks today with cryptoasset declines potentially causing retail investors to sell out of traditional equity securities.  Some retail traders already access margin loans with cryptocollateral. We're also seeing significant declines in crytocurrencies now.   This may drive significant selling activity.  

Ultimately, the events strengthen Allen's argument that we must manage financial stability risks arising from these new financial assets.

May 12, 2022 | Permalink | Comments (0)

Wednesday, May 11, 2022

Strengthening or Destroying

As I have heard many other educators state, this was the toughest semester in my dozen years as a teacher. In my case, it was a mix of difficulties – teaching an overload, representing my colleagues in a heated faculty senate term, and balancing family responsibilities.

Among the most difficult parts was working with students who were struggling more than I have ever seen. To be clear, I was quite proud of my students this semester. Even with a Zoom option, most students showed up in person, engaged with the material, and worked hard. But several students communicated true hardships, and all students seemed to drag more than usual. Typically, I am a stickler for deadlines, but I pushed deadlines back in every class this semester, and I graded with more grace.

It has been a while since Colleen or I had a running post, but today’s track workout felt a bit like this semester. My plan for this morning was 1 mile at tempo pace followed by 8x400m at goal mile race pace. I haven’t been getting great sleep this week so the run started sluggishly. The warm-up and the tempo mile went fine, but I could tell they required more effort than normal. Starting the 400s, I refocused mentally, dug deeper, and came through faster than expected on the first one. On the second 400, however, my legs felt like logs, and I stepped off the track halfway through that rep. I knew 8x400 simply was not going to happen at the planned pace, and I reconfigured the workout on the fly to 800@3K pace, 2x200@800m race pace, 800@3K pace, 2x200@800m race pace. This maintained roughly the same amount of hard running, but in a format that I could actually complete.

Younger versions of myself would have seen this “busted workout” as weakness. And the line between strength building and destruction is a fine one. At times, you want to “go to the well” and “see God” in a workout. Training yourself to be mentally tough and push through pain can be a valuable part of the process. You do have to tear down somewhat in order to build. But an effort that is “too difficult” will hamper progress either through injury or through extreme fatigue that ruins other planned runs. Disgraced Nike Coach Alberto Salazar seemed to miscalculate in his training of Mary Cain and squandered her immense talent with too much intensity.

Obviously, both as a teacher and as an athlete, finding the right balance is difficult. Frankly, I may have been a bit too easy on my students and myself this past semester, but it did seem like we were moving into territory where holding strictly to plan would have been more destructive than stengthening.     

May 11, 2022 in Haskell Murray, Psychology, Sports, Teaching | Permalink | Comments (1)

Monday, May 9, 2022

Pandemic Fallout: Legal Questions About Relational Contracts

In a recent article, I offer a description and critique of the utility of "formal relational contracts" when the going gets rough for businesses.  That article, The Potential Legal Value of Relational Contracts in a Time of Crisis or Uncertainty, 85 Law & Contemporary Probs. 131 (2022), was published as part of a symposium volume focusing on "Contract in Crisis" (co-edited by Temple Law's Jonathan C. Lipson & Rachel Rebouché).  The table of contents for the entire volume can be found here.  The abstract for my article follows.

A co-authored October 2020 Harvard Business Review (“HBR”) article promotes the use of “formal relational contracts” as a means of obviating or limiting opportunistic behaviors by contracting parties, including parties contending with cataclysmic events or factors in or outside the business that place significant financial stress on the business and its relations with others. The HBR co-authors note that the uncertainties exposed by and emanating from the ongoing COVID-19 pandemic are formative to their proposition. They specifically focus their attention on supply contracts, although their ideas may have broader application. This article preliminarily inspects the claims made in that HBR article from the standpoint of U.S. legal doctrine and lawyering and suggests avenues for future research, with the limited goal of offering legal commentary on a broad-based contract design idea that responds to the need for business operations flexibility in a pandemic or in other times of systemic or individualized crisis.

Many of us in business law watched as the pandemic raised significant questions about supply agreements, distribution agreements, merger/acquisition agreements, insurance contracts, and more.  I found it interesting to inquire, investigate, and contemplate whether any type of contract design fares more or less well in circumstances of crisis impacting businesses.  Over a period of months, in sessions with many of the authors of work in this symposium book, I had the opportunity to do that and to write up some of my thoughts.  As many readers may realize, I do not publish pure contract pieces often.  But I was inspired and encouraged to research and write this one.

May 9, 2022 in Contracts, Joan Heminway | Permalink | Comments (2)

Saturday, May 7, 2022

Tesla and Delaware

As everyone knows by now, in In re Tesla Motors Stockholder Litigation, VC Slights refrained from engaging all the meaty doctrinal issues.  He did not decide whether Elon Musk is a controlling shareholder of Tesla; he refused even to decide whether a “controller” is a different thing than a “controlling shareholder,” see Op. at 81 n.377.  He didn’t decide whether the Board was majority independent, going so far as to raise the possibility that even a board that operates under serious conflicts may nonetheless “prove” their independence at trial, see Op. at 81 n.378.   He did not decide whether passive investors’ stakes on both sides of a merger may render them not disinterested for cleansing purposes, see Op. at 63 n.311.  Instead, he found it easier to conclude that Tesla’s acquisition of SolarCity was entirely fair, rather than engage with all the thorny legal questions the case raised.

That was sort of a surprise (though you can’t help but wonder how much of that was hindsight, see Op. at 126-27).  Yet in many respects, it was ultimately a very Delaware sort of decision. 

It has long been observed that while liability is rarely imposed on Delaware fiduciaries, the Delaware judicial system has its own method of discipline, namely, through reputational sanctions.  Ed Rock described this phenomenon in Saints and Sinners: How Does Delaware Corporate Law Work?; as he tells it, Delaware decisions are parables of good managers and bad managers, and operate as a kind of “public shaming” for those who violate these norms.  See also Omari S. Simmons, Branding the Small Wonder: Delaware’s Dominance and the Market for Corporate Law (discussing the Disney case; “even where a decision does not result in liability for board members, embarrassing details of corporate dysfunction may tarnish a company's reputation.  Reputational risk is another salient reason for boardrooms to pay attention to Delaware court pronouncements.”).

That’s not a bad description of the Tesla decision.  Though VC Slights had apparently a great deal of admiration for Elon Musk’s strategic vision and business expertise, he also offered harsh criticism over Tesla’s refusal to adopt an independent process for negotiating the deal.  See Op. at 86-87.  He even explicitly acknowledged Delaware law as functioning through parable, see id., and, as punishment for the board’s laxity, he refused to award Musk costs.  See Op. at 131.  These criticisms should strike fear into the hearts of corporate managers (or their insurers) everywhere: all of these litigation expenses, from the motion to dismiss through discovery through summary judgment to trial, could have been avoided had the Tesla board simply adopted cleansing measures from the outset.  And that’s supposed to be the takeaway for future boards.

But will that work?

In his article, Ed Rock acknowledged that celebrity managers might not care about Delaware’s opprobrium, not when they stand to earn riches by ignoring it.  Instead, he pointed out that most public corporations have a bureaucratic set of directors, who will be responsive to Delaware’s censure even when particular managers are not.  As he put it:

MBOs, overnight, provided the opportunity for the senior managers to become very rich, to go from being bureaucrats to entrepreneurs . Under such circumstances , one can expect that some managers might rather quickly become indifferent to the criticism of the judges. The possibility of becoming seriously rich sometimes has that effect.

How did the courts respond? In the MBO cases, one sees a subtle shift of attention from the managers to the special committee. Although the potential gains to managers in MBOs might lead them to develop resistance to the deterrent effect of public shaming, the members of the special committee had no such prospects. They were not getting rich. They were simply trying to do their best as outside directors. One would predict that such actors are likely to be far more susceptible to the kind of influence that Delaware opinions exert than the managers. The Delaware courts, perhaps sensing this, focused much of their attention-both in the opinions and in extrajudicial utterances-on influencing the conduct of the special committees.

Note, now, a surprising implication of this analysis. If the success of Delaware's method for constraining or encouraging managers to act on  behalf of shareholders depends critically on a separation of ownership and control , with the greater susceptibility to reputational effects that agents have in comparison to principals, then the system is likely to be less suitable for corporations not characterized by this separation, such as closely held corporations.

If that’s right, Tesla – and Elon Musk – are particularly poorly suited for the “Delaware way.”  Not only is Musk himself indifferent to Delaware’s criticism, but his public board – stacked with allies and close associates – is structured very much like his private ones, making it more akin to the structure of a closely-held company.  See, for example, this New York Times article about how Musk retains tight control over his companies, including by populating boards and managerial positions with his allies.

One could obviously argue that in the end, it hardly matters so long as Musk is benefitting his shareholders.  But leaving aside the problem of counterfactuals (what if a more independent board would have improved shareholder returns even more?) another possibility is that other CEOs take Musk as a role model – especially in a time when companies are staying private for longer, as founders are feted as auteurs, as most IPOs feature dual-class stock, as even ostensibly “independent” directors are compensated with millions of dollars’ worth of stock – and not all of these stories will end happily for shareholders.  There is a real question whether Musk is simply an outlier, or whether the model public company on which the Delaware ethos is built is transforming into a different kind of institution that requires different policing.

May 7, 2022 in Ann Lipton | Permalink | Comments (2)

Thursday, May 5, 2022

SEALS 2022, Elon Musk, and Cinco de Mayo

The Southeastern Association of Law Schools is holding its annual conference in Sandestin, Florida from July 27 through August 3.  The current draft program is available here.  I hope a number of you are planning to come.

In addition to my usual co-moderation (with the inimitable John Anderson) of an insider trading discussion group at the conference, I am looking to moderate the following discussion group:

Elon Musk and the Law

Moderator: Joan Heminway, The University of Tennessee College of Law

Enigmatic entrepreneur Elon Musk has found himself—and his businesses and his family—in the crosshairs of law and regulation. The legal and regulatory issues span a wide range, including First Amendment questions, securities disclosure challenges, legal contests involving the name of his son born in 2020 (with the musician Grimes), and more. This discussion group aims to identify, classify, and analyze these legal and regulatory interactions and interpret their effects on law reform, regulatory entrepreneurship, legal and administrative process, business venturing, and other areas of inquiry. Comparisons to and contrasting views of other public figures and their legal and regulatory tangles may be explored in the process.

Email me if you are interested in participating.

Also, I wish all a feliz Cinco de Mayo.  Wikipedia reminds me that Cinco de Mayo is both a celebration of Mexican-American food and culture in the United States and a commemoration of "Mexico's victory over the Second French Empire at the Battle of Puebla in 1862." The Wikipedia article notes that "[t]he victory of a smaller, poorly equipped Mexican force against the larger and better-armed French army was a morale boost for the Mexicans."  Ukraine immediately comes to mind.  And I guess (feebly tying all this back to Elon Musk) one could take the view that a smaller, poorly equipped Twitter lost out to a larger and better armed acquiror in it recent kerfuffle-turned-takeover-battle with Elon Musk . . . .  I know many of us will continue to have commentary on the Twitter acquisition as the transaction proceeds.

May 5, 2022 in Conferences, Joan Heminway, John Anderson | Permalink | Comments (2)

Wednesday, May 4, 2022

American Business Law Journal Call for Submissions

Dear BLPB Readers:

"The American Business Law Journal invites article submissions on a year-round basis. We encourage submissions outside of the traditional July/August and February submission cycles.

The ABLJ is ranked in the top 6% by Impact Factor of all publications listed in the 2016 Washington & Lee Submissions and Rankings.

The ABLJ is a highly selective faculty-edited, internationally peer-reviewed journal that welcomes manuscripts that comprehensively explore and analyze legal and ethical issues that affect businesses, not only within the United States but also across the globe. We seek to publish only top-quality law review articles that make a significant scholarly contribution to the field of business law.

Manuscripts that enter our review process are sent to at least two faculty reviewers who are experts in the subject matter of the manuscript. The review is triple-blind. The reviewers are not told the identity of the author, the assigned Articles Editor is not told the identity of the author until a review decision has been reached, and the author is not told the identity of the reviewers. This is a time-intensive but worthwhile process. Reviewers read the manuscript, review the relevant literature, and provide commentary and critique to our Articles Editors for a publication recommendation decision. Articles Editors then communicate that useful feedback to the author. We strive to inform authors of a publication decision within four weeks.

Manuscripts may be submitted to the ABLJ through Scholastica or directly by emailing"

May 4, 2022 | Permalink | Comments (0)

Tuesday, May 3, 2022

Well Being in Law Week 2022 Began Yesterday

image from

It is again Well Being in Law Week!

Ways for individuals to engage with the week can be found here.  On that page, the organizers note that "[e]ach of the 5 days in Well-Being Week is focused on one dimension of overall well-being." Today's objective is alignment (spiritual wellbeing)--"Cultivating a sense of meaning and purpose in work and life. Aligning our work and lives with our values, goals, and interests."  As we head into the spring semester exam season, try focusing in on yourself a bit more this week.  There is no time like the present!  Namaste, y'all.

May 3, 2022 in Joan Heminway, Wellness | Permalink | Comments (0)

Korsmo & Myers on "The Rise of the Trading Price Paradigm in Corporate Law"

Below is an interesting and perhaps Twitter-relevant excerpt from Charles Korsmo & Minor Myers, What Do Stockholders Own? The Rise of the Trading Price Paradigm in Corporate Law, 47 J. Corp. L. 389, 394 (2022).

Expressed in the conventional analytical framework, Delaware now protects the stockholder's entitlement in a public corporation with a liability rule, where the stockholder's entitlement may be taken in a non-consensual exchange like a merger at any price exceeding the prevailing trading price.

This paradigm shift augurs dramatic change not simply in appraisal, but in all of merger law. Most obviously, the shift will necessarily affect the basic measure of damages in other contexts. Indeed, the Court of Chancery has already confronted this scenario: a breach of fiduciary duty that gave rise to no damages because the transaction was at a premium to the market price. But perhaps the most notable doctrinal reckoning involves Unocal and its progeny, which afford directors the power to defend against the threat of acquisitions where the price is “too low.” That power reached is fullest expression in the 2011 Air Products v. Airgas decision, a ruling that remains controversial. The board of Airgas blocked a $70 acquisition offer from Air Products, even though Airgas stock had previously been trading between $40 and $50 per share. The Court of Chancery held that the “inadequate price” justified the continuing defenses by Airgas, bringing the control fight to an end.

The continuing force of the reasoning behind Airgas is now in serious doubt. If the best evidence of the value of the corporation is the market price, as the supreme court held in Aruba, and the absence of higher bidders is sufficient demonstration of the attractiveness of the bid, as the supreme court held in DFC Global, and the opinion of informed insiders is insufficient to call into question the fairness of a market-tested bid, as the supreme court held in Dell, on what ground can Airgas still stand?

May 3, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Monday, May 2, 2022

To say they are shareholders only begins analysis.

I recently posted (here) a link to, and brief overview of, a letter from twenty-two of the nation’s leading professors of law and finance urging the SEC to withdraw its climate disclosure proposal. Brett McDonnell submitted an interesting comment to that post, highlighting a potential tension between espousing views that prioritize shareholder wealth maximization while at the same time rejecting the calls of some of the world’s largest shareholders for greater climate-related disclosures. (Please be sure to read his full comment.) In response, Lawrence Cunningham suggested I post an additional excerpt from the letter, which addresses this issue in more detail. You’ll find that excerpt below. However, this all reminded me of a recent article by Amanda Rose, and so I’ll start my excerpts with a quote from that article.

Traditional asset managers claim their commitment to ESG is motivated by a desire to improve long-term fund performance for the benefit of investors. But agency costs offer an alternative potential explanation: embracing the ESG movement may help asset managers curry political favor, enabling them to fend off greater regulation of the industry; it may advance the personal sociopolitical commitments of those who ran them; or it may offer a way to attract investors to fund offerings without imposing any meaningful limitations on how a fund is managed.

Amanda M. Rose, A Response to Calls for SEC-Mandated ESG Disclosure, 98 Wash. U.L. Rev. 1821, 1824–25 (2021).

Now, on to the letter (the full version is here):

Continue reading

May 2, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, April 30, 2022

I'm talking about proxy solicitations

Look, I know the Tesla/SolarCity decision just came down, and I’m, like, contractually obligated to blog about it, but to tell you the truth, this was the last week of classes, exams are next week, and I just got back from a conference thing, so comments on the Tesla decision will have to wait (though, yes, I did appreciate the wink in footnote 377).

So, proxy solicitations.  Specifically, the Eighth Circuit’s decision in Carpenters’ Pension Fund of Illinois v. Neidorff, 30 F.4th 777 (8th Cir. 2022), which I was alerted to by the Deal Lawyers’ blog.

In Neidorff, the plaintiffs brought a derivative Section 14(a)/Rule 14a-9 claim alleging that Centene Corporation solicited a vote in favor of a merger by way of a misleading proxy statement that failed to disclose known problems with the target company. Rule 14a-9 prohibits proxy statements from:

containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

In this case, the preliminary proxy statement was filed on August 19, 2015, the final proxy statement was filed on September 21, 2015, and the vote was taken on October 23, 2015.  The Eighth Circuit decision is very light on the specific allegations (and the briefs, as far as I can tell, are under seal), but apparently among them was the claim that even if the proxy statement was true as of September 21, the defendants violated Rule 14a-9 by failing to update it with newly discovered facts before the shareholder vote.  In response to that argument, the Eighth Circuit held:

As to Appellants’ argument that the failure to update the Proxy Statement rendered it materially misleading, Appellants have not cited, and we have not found, any authority supporting the proposition that § 14(a) requires a company to update its proxy statement. Moreover, this argument is inconsistent with the text of Rule 14a-9(a), which provides that a proxy statement may not contain “any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact,” 17 C.F.R. § 240.14a-9(a) (emphasis added), and the language of the Proxy Statement itself, which provides in all capital letters that neither Centene nor Health Net intends to update the Proxy Statement and that both companies disclaim any responsibility to do so, R. Doc. 79-3, at 118.

For the reasons set forth above, Appellants have failed to plead facts showing that the Proxy Statement contained a material misrepresentation or omission and, consequently, have failed to plead particularized facts demonstrating that at least half of the Board faces a substantial likelihood of liability on their § 14(a) claim.

The reason I find this incredible is that there is ample precedent for the notion that proxy statements must be updated to avoid being false.  This is because, unlike, say, a 10-K, which represents a snapshot in time - and thus will rarely be rendered “false” due to a failure to update with subsequent information - a proxy statement is supposed to provide the basis of action on a particular date, namely, the shareholder meeting.  If proxy statements do not have to be up to date as of the meeting, they will not serve their primary purpose of providing shareholders with sufficient information to cast their ballots.  Thus, in Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973), the Second Circuit held, “we cannot suppose that management can lawfully sit by and allow shareholders to approve corporate action on the basis of a proxy statement without disclosing facts arising since its dissemination if these are so significant as to make it materially misleading, and we have no doubt that Rule 14a-9 is broad enough to impose liability for non-disclosure in this situation.”  See also SEC v. Parklane Hosiery, 558 F.2d 1083 (2d Cir. 1977) (quoting Gerstle).

The SEC has also made clear that companies must update their proxy statements to ensure they are accurate as of the date of the shareholder vote.  See SEC Release No. 34-23789, 1986 WL 722059 (“When there have been material changes in the proxy soliciting material or material subsequent events (in contrast to routine updating), an additional proxy card, along with revised or additional proxy soliciting material, should be furnished to security holders … to permit security holders to assess the information and to change their voting decisions if desired.”); SEC Release No. 34-16343, 1979 WL 173161 (“Even in a situation wherein a statement when made was true and correct, and is rendered incorrect due to a change in circumstances or other subsequent event, appropriate action should be taken to correct the misstatement prior to the meeting….Rule 14a-9 has been construed by courts to require either that proxy solicitation materials which have become false and misleading should be corrected or that other steps be taken to ensure that shareholders not vote on matters on the basis of incomplete or inaccurate information.”).

Further to this, Stephen Quinlivan at Stinson compiled this list of typical SEC comments on merger proxy statements.  I’ve excerpted out a relevant one:

We note the disclosure on page X that ABC does not intend to revise its projections. Please revise this disclosure, as publicly available financial projections that no longer reflect management’s view of future performance should either be updated or an explanation should be provided as to why the projections are no longer valid.

(emphasis added).

I realize a lot of this precedent is kind of old, but I have no reason to think it’s no longer good law, which makes the Eighth Circuit’s decision here bit of an eyebrow-raiser (assuming it meant what I think it meant, because, again, the opinion is light on details).

April 30, 2022 in Ann Lipton | Permalink | Comments (0)

Friday, April 29, 2022

"We Know Wrongful Trading When We See It" - Some Observations Concerning the Recent Senate Hearing on the Insider Trading Prohibition Act

Earlier this month, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the Insider Trading Prohibition Act (ITPA), which passed the house with bipartisan support in May of last year. Some prominent scholars, like Professor Stephen Bainbridge, have criticized the ITPA as ambiguous in its text and overbroad in its application, while others, like Professor John Coffee, have expressed concern that it does not go far enough (mostly because the bill retains the “personal benefit” requirement for tipper-tippee liability).

My own view is that there are some good, bad, and ugly aspects of the bill. Starting with what’s good about the bill:

  • If made law, the ITPA would end what Professor Jeanne L. Schroeder calls the “jurisprudential scandal that insider trading is largely a common law federal offense” by codifying its elements.
  • The ITPA would bring trading on stolen information that is not acquired by deception (e.g., information acquired by breaking into a file cabinet or hacking a computer) within its scope. Such conduct would not incur Section 10b insider trading liability under the current enforcement regime.
  • The ITPA at least purports (more on this below) to only proscribe “wrongful” trading, or trading on information that is “obtained wrongfully.” Since violations of our insider trading laws incur criminal liability and stiff penalties, I have argued for some time that liability should be limited to conduct that is morally wrongful.
  • The ITPA preserves the “personal benefit” test as a limiting principal on what otherwise would be an ambiguous and potentially overbroad test for when tipping would breach a fiduciary or similar duty of trust and confidence. Traders need (and justice demands) bright lines that will allow them to determine ex ante whether their trading is legal or will incur 20 years of prison time (but more on this below).

Now, turning to what is bad about the bill, I share some concerns raised by Professor Todd Henderson in his testimony before the Senate Committee:

  • Though the ITPA codifies the personal benefit test as a limit on liability, it includes “indirect personal benefit[s]” within its scope. As Henderson points out, “[i]t is possible to describe virtually any human interaction as providing an ‘indirect benefit’ to the participants. Instead, the law should reflect the common sense notion that the source of information either received something tangible and valuable in return or what amounts to a monetary gift to a relative or friend.” The personal benefit test only fulfills its intended function as a limiting principle if it imposes real limits on liability. The test should therefore only be satisfied by objective evidence of self-dealing. If indirect psychological or other benefits that can be found in any voluntary human action can satisfy the test, then it cannot function as a limit on liability.
  • At least some versions of the ITPA include a catchall provision to the definition of wrongfully obtained or used information that would include “a breach of a confidentiality agreement, [or] a breach of contract.” Not only does this challenge the time-honored concept of efficient breach in the law of contracts, but as Professor Andrew Verstein has argued, this provision can open the door to the weaponization of insider trading law through the practice of “strategic tipping.” Professor Henderson raised this concern before the Senate committee, noting that so broad an understanding of wrongful trading is “ripe for abuse, with companies potentially able to prevent individual investors from trading merely by providing them with information whether they want it or not.” The recent examples of Mark Cuban and David Einhorn come to mind.
  • The ITPA would impose criminal liability for “reckless” conduct. As Henderson explained to the Committee, under the ITPA, “anyone who ‘was aware, consciously avoided being aware, or recklessly disregarded’ that the information was wrongfully obtained or communicated can have a case brought against them. The ITPA is silent on the meaning of ‘recklessly disregarded,’ which would appear to rope in innocent traders along with actual wrongdoers.” Moreover, permitting mere recklessness to satisfy the mens rea element of insider trading liability will no doubt have a chilling effect on good-faith transactions based on market rumors that would otherwise be value enhancing for traders, their clients, and the markets. The loss of such trades will diminish market liquidity and reduce price accuracy.
  • Finally, Henderson raised the concern that the ITPA lacks an “exclusivity clause stating that it will be the sole basis for bringing federal insider trading claims.” Henderson explained that “allowing prosecutors to cherry pick their preferred law is no way to provide clear rules for the market.” Professor Karen Woody has written about how prosecutors may be starting to bring insider trading cases under 18 U.S.C. § 1348 to avoid the court-imposed personal benefit test under Exchange Act §10b. Without an exclusivity clause, prosecutors will be free to make the same end run around the personal benefit test imposed by the ITPA.

Finally, the ITPA is straight-up ugly because, while it promises that it will limit insider trading liability (which can be punished by up to 20 years imprisonment) to only “wrongful” conduct, the bill defines the term “wrongful” in a way that suggests the drafters have no intention of delivering on that promise. For example, as noted above, some versions of the bill define any breach of contract as “wrongful,” but this is in clear tension with common sense, common law, and the doctrine of efficient breach.

In addition, though there is ambiguity in the text, current versions of the ITPA appear to embrace SEC Rule 10b5-1’s “awareness” test for when trading on material nonpublic information incurs insider trading liability. Under the awareness test, a corporate insider incurs insider trading liability if she is aware of material nonpublic information while trading for totally unrelated reasons. In other words, liability may be imposed even if the material nonpublic information played no motivational role in the decision to trade. But if the material nonpublic information played no motivational role, then the trading cannot be judged “wrongful” under any common-sense understanding of that term.

For these (and other reasons there is no space to address here), the ITPA leaves too much room for play in its definition of what constitutes “wrongful” trading and tipping to cohere with our common-sense understanding of that term. Former SEC Commission Robert J. Jackson assured the Committee that “we know wrongful trading when we see it.” Presumably Professor Jackson’s implication was that the SEC and DOJ can be trusted to exercise sound discretion in interpreting the play in the statutory language. In response, I offer the following question for Professor Jackson or any reader of the ITPA to consider: Would issuer-licensed insider trading violate the statute? I have defined “issuer licensed insider trading” as occurring where:

(1) the insider submits a written plan to the firm that details the proposed trade(s);

(2) the firm authorizes that plan;

(3) the firm has previously disclosed to the investing public that it will permit its employees to trade on the firm’s material nonpublic information when it is in the interest of the firm to grant such permission; and

(4) the firm discloses ex post all trading profits resulting from the execution of these plans.

I have argued that trading under these conditions is neither morally wrongful nor harmful to markets. If it violates ITPA, what provisions? I hope some readers will share their thoughts on this in the comments below!

April 29, 2022 in Current Affairs, Ethics, Financial Markets, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (1)

ICYMI: "Twenty-Two National Professors Urge SEC to Withdraw Climate Disclosure Proposal"

As per the relevant press release (via Lawrence Cunningham): "Twenty-two of the nation’s leading professors of law and finance this week wrote the Securities and Exchange Commission (SEC) to dispute the agency’s authority to adopt a new far-reaching climate disclosure regime and to urge an immediate withdrawal of the proposal." You can find the full letter here. Here is a hopefully useful excerpt:

The following analysis raises concerns that the Proposal is neither necessary nor appropriate for either investor protection or the public interest and will not promote other statutory goals. The SEC would do better to withdraw the Proposal and revisit the subject with a fresh approach focused on America’s ordinary investors rather than an elite global subset. The three parts of this letter address each statutory issue in turn, as follows:

I. “Investor Demand” versus “Investor Protection”
    A. Investor Varieties: Diverse Institutions and Individuals
    B. Climate Shareholder Proposals: Few Are Made, Most Lose, Many Are Political
    C. The Ample Supply of Climate Disclosure
    D. Correlation of Climate Practices with Economic Performance Is Not Causation
II. Authority of Others and the “Public Interest”
    A. The Environmental Protection Agency’s Statutory Jurisdiction
    B. State Corporate Law Prerogatives on Purposes, Powers and Business Judgments
    C. Risk of Unconstitutional Compelled Political Speech
III. Other Statutory Considerations
    A. Certain High Costs versus Highly Speculative Benefits
    B. Impairs Investment Industry Competition
    C. Compliance Burdens Discourage Public Company Registrations

April 29, 2022 in Stefan J. Padfield | Permalink | Comments (2)