Tuesday, December 7, 2021
Fair to say, corporate governance was very much a theme:
- Showcase Panel I: Social Activism and Corporate Leadership ( https://youtu.be/jOBTM2CBEhw )
- "Progressive" HR in 2021: The Solution or the Problem? ( https://youtu.be/xYJ2khao_e4 )
- Showcase Panel II: Private Control Over Public Discussion ( https://youtu.be/rRd1SOTzP1s )
- Cancel Culture Comes to Financial Services ( https://youtu.be/seU4zMRPRAg )
- Fireside Chat with Vivek Ramaswamy ( https://youtu.be/V00tPA7IIkg ) (Ramaswamy is the author of Woke, Inc.: Inside Corporate America's Social Justice Scam, which is currently the #1 best selling book in the "Theory of Economics" category on Amazon ( https://www.amazon.com/Woke-Inc-Corporate-Americas-Justice/dp/1546090789 )).
The full convention schedule can be found here: https://fedsoc.org/conferences/2021-national-lawyers-convention .
Monday, December 6, 2021
Hi, all. If you subscribe to emails from this blog, you may have noticed they've been erratic lately. Soon, if not immediately, we expect emails to halt altogether, because Google will no longer be supporting the email service. We appreciate you as devoted blog readers but sadly you will likely need to find another way to follow our posts. I personally follow blogs through the Feedly service.
Sorry for the inconvenience; it is unfortunately out of our hands, but we hope you will stick with us.
This in from friend-of-the-BLPB Jessica Erickson:
Dear AALS Business Association Section Members,
I hope the end of your semester is going well! I'm writing with programming details for the January 2022 AALS Annual Meeting and to invite you to nominate yourself or others for Executive Committee positions next year.
January 2022 Annual Meeting
1. Registration is still open, and you can register here https://aals.secure-platform.com/a/organizations/main/submissions/details/7094 . As you may know, most law schools have paid school-wide registration fees again this year, which makes registration simpler, but you still have to register to attend any of the sessions.
2. The Business Associations Section main program, "Race and Teaching Business Associations," will be held Friday, January 7th at 12:35 to 1:50 EST. Many thanks to James Park, the section's chair-elect, for organizing this panel!
Description: Business Associations classes taught in most law schools spend little if any time on issues relating to racial discrimination and inequity. But as important social institutions, businesses have long had a significant impact on racial equity. The increasing scrutiny of the lack of diversity on public company boards is one of several fronts where businesses are facing both legal and social pressure to address racial inequity. Students are increasingly interested in understanding how the law governing business organizations reflects or contributes to racial injustice. Many law professors want to do more to cover topics relating to race in their Business Associations course and are seeking guidance on how to do so. This panel will provide a forum where teachers of Business Associations can share ideas for incorporating the subject of racial discrimination and inequity into their classes.
* Invited Speakers
Thomas Joo, UC Davis School of Law
Steven Ramirez, Loyola University Chicago School of Law
Cheryl Wade, St. John's University School of Law
* Presenter from Call for Papers: Harwell Wells, Temple University School of Law, presenting Shareholder Meetings and Freedom Rides: The Story of Peck v. Greyhound
* Moderator: James Park, UCLA School of Law
3. The section's Works-in-Progress Program will be held Thursday, January 6th at 4:45 - 6:00 pm EST. Many thanks to Eric Chaffee for organizing a terrific panel of the following presenters and commentators!
* Paper #1: William J. Moon (University of Maryland Carey School of Law), Anonymous Companies
* Commentators: Frank Gevurtz, Joan Heminway, Eric Chaffee
* Paper #2: Trang (Mae) Nguyen (Temple University Beasley School of Law), Norm Assembly in Global Value Chains
* Commentators: Michael Malloy, Kish Parella, Veronica Root
* Paper #3: Alexander I. Platt (University of Kansas School of Law), Beyond "Market Transparency": Investor Disclosure and Corporate Governance
* Commentators: Afra Afsharipour, Michael Guttentag, and Donna Nagy
* Moderator: Eric Chaffee
Nominations for Next Year's Executive Committee
Finally, following past practice, we will hold an electronic business meeting later this month to determine the membership of next year's executive committee. If you would like to nominate yourself or another member, please email me at email@example.com by December 13, 2020.
We hope to see you (virtually) at the Annual Meeting!
On behalf of the Executive Committee:
Jessica Erickson, University of Richmond School of Law (Chair)
James J. Park, University of California, Los Angeles School of Law (Chair-Elect)
Dana Brakman Reiser, Brooklyn Law School
Eric Chaffee, University of Toledo College of Law
Carliss Chatman, Washington & Lee School of Law
Gina-Gail S. Fletcher, Duke University School of Law
Mira Ganor, University of Texas School of Law
Cathy Hwang, University of Virginia School of Law
Matt Jennejohn, BYU Law School
Michael Malloy, University of the Pacific McGeorge School of Law
James Nelson, University of Houston Law Center
Andrew Verstein, University of California, Los Angeles School of Law
Cheryl Wade, St. John's University School of Law
Manning G. Warren, III, University of Louisville, Louis D. Brandeis School of Law
Sunday, December 5, 2021
From our friend Art Wilmarth at GWU Law:
George Washington University Law School is seeking to hire a new Assistant Dean (and program director) for our Business and Finance Law Program.
Following is the link for the job posting:
If you know of well-qualified candidates who might be interested in this
position, please share this information and encourage them to apply.
Applications should be submitted ASAP, and preferably by December 15, 2021.
Many thanks, and best regards .................. Art Wilmarth
Arthur E. Wilmarth, Jr.
Professor Emeritus of Law
George Washington University Law School
2000 H Street, N.W.
Washington, DC 20052
Saturday, December 4, 2021
This case came out of the Second Circuit a couple of months ago, and it’s still bugging me, so it’s the subject of today’s blog post. I speak of Loreley Financing (Jersey) No. 3 Limited v. Wells Fargo Securities, LLC, 13 F.4th 247 (2d Cir. 2021).
The case itself is one of the last arising out of the financial crisis, featuring familiar names like Magnetar and Wing Chau. And the allegations were standard for cases of this type: Loreley, a German investment vehicle, invested in CDOs, and alleged that the structuring bank – Wachovia at the time, Wells Fargo as its successor – did not tell it the truth about how the assets were selected. Loreley claimed it was defrauded under New York common law (not Section 10(b), because if you’re not relying on the fraud-on-the-market theory and you’re not trying to bring claims as a class, state fraud law will almost always be more favorable). The district court granted summary judgment to Wells Fargo, and Loreley appealed.
Before the Second Circuit, there were two issues. The first concerned whether there were any misrepresentations at all; the court agreed that there were arguably at least some misrepresentations alleged with respect to one of the CDOs. The second concerned the element of reliance, because Loreley itself did not actually communicate with Wachovia and did not receive any false information. Instead, its investment advisor did.
Loreley was actually formed by the investment advisor, IKB. And IKB was in charge of vetting assets for the fund. IKB presented its recommendations, and Loreley made the actual purchase without doing any independent research. Thus, it was IKB – not Loreley – that received the false information, and Wells Fargo argued that for that reason, Loreley itself did not “rely” on any misrepresentations under New York law.
Shockingly, to me, the Second Circuit held in favor of Wells Fargo. The court, summarizing its understanding of New York law, held that “Loreley—which did not communicate directly with the defendants—bases its fraud claims on IKB’s reliance. Yet New York law does not support such a theory of third-party reliance....The reliance element of fraud cannot be based on indirect communications through a third party unless the third party acted as a mere conduit in passing on the misrepresentations to a plaintiff.”
That is … nutty. No fund ever reviews information directly; they always rely on investment advisors who act on their behalf. That’s the whole point; funds themselves are shells, with the real work being done by an investment advisor.
But instead of recognizing that fact, the Second Circuit made a big deal out of the orthogonal point that IKB conducted significant independent analysis before passing its recommendation on to Loreley. That’s not entirely irrelevant, for sure. If IKB’s recommendation was based on its own analysis and not the fraud, then IKB didn’t rely, and IKB’s nonreliance is imputed to the funds.
But that’s not what the Second Circuit held. The Second Circuit’s point was that Loreley itself never received the false information because it only received IKB’s analysis, and from that concluded that even if IKB’s analysis on Loreley’s behalf was in fact influenced by the fraud, Loreley did not rely on that fraud itself. If that is the rule, no fund would ever be able to bring a fraud claim.
For example, off the top of my head, consider the Volkswagen case, which I blogged about here. Since that post, the Ninth Circuit on appeal rejected the district court’s conclusion the case involved omissions, and therefore held that Affiliated Ute’s presumption of reliance would not apply, but as relevant here, in that case, it was investment advisor, not the institutional investor itself, who reviewed the materials.
After all, that’s part of the reason why qualified institutional buyers and accredited investors are permitted to invest in unregistered offerings; we assume wealthy investors are capable of hiring professional advisors who will vet things for them.
The Second Circuit claimed that its decision was dictated by Pasternack v. Lab. Corp. of Am. Holdings, 27 N.Y.3d 817 (2015). In that case, the plaintiff had to get a drug test to maintain flight certification and he alleged the lab misrepresented the results to the FAA. When he couldn’t get his certification, he sued the lab for fraud. In that context, the New York Court of Appeals held there was no reliance.
The Second Circuit also cited Securities Investor Protection Corp. v. BDO Seidman, 95 N.Y.2d 702 (2001), which presented a similar kind of scenario. BDO Seidman audited a broker-dealer and communicated its financial condition to the NASD. The NASD was charged with, among other things, notifying SIPC of any problems with a regulated broker-dealer. As it turns out, BDO Seidman gave the firm a clean audit even though the firm was engaged in shenanigans, and the firm ultimately went bankrupt. SIPC was then forced to cover the claims of the broker-dealer’s customers, and it sued BDO Seidman for fraud and negligent misrepresentation. The court held that because the audits were not performed for SIPC, and were never communicated to SIPC, SIPC had not relied on the audits.
Both Pasternak and SIPC present common problems in fraud claims: the plaintiff didn’t rely on the false information, but someone else did, and that third party reliance ended up harming the plaintiff. It comes up a lot for short-sellers, for example: The defendant lies publicly about its financial condition, and the short-seller knows it’s lying, but because the market is fooled, the short-seller is still forced to cover its position at inflated prices. Can the short-seller satisfy the element of reliance in a Section 10(b) claim? That’s something of an unsettled question, see discussion in Christine Hurt & Paul Stancil, Short Sellers, Short Squeezes, and Securities Fraud.
In fact, in a way, all of fraud-on-the-market is a kind of third party reliance. The plaintiff did not necessarily hear the lie, but the market did, and that affected the plaintiff.
But in these scenarios, the “market” is not acting on the investor’s behalf. Just like NASD was not acting on SIPC’s behalf, and the FAA was certainly not acting on Pasternak’s behalf. It is therefore a very different kind of problem than the one presented in Loreley Financing, where Loreley employed a financial advisor, the advisor relied on a misrepresentation, and then made a recommendations based on that misrepresentation. The financial advisor should not even count as a third party in this context – the financial advisor is acting on Loreley’s behalf and therefore is an extension of Loreley itself. It’s the “on Loreley’s behalf” that’s the key here and it’s a distinction that the Second Circuit completely elided.
Now, to be sure, IKB did not have discretion to actually make the investment decision for Loreley; Loreley ultimately made the investment decision. (There does not appear to be any information about how often Loreley rejected IKB’s recommendations). And in the briefing, there was some skirmishing among the parties about whether IKB was technically acting as Loreley’s agent – Loreley said it was, Wells Fargo said it was not – but what’s notable about the Second Circuit’s opinion was that it did not care. The court’s holding was not based on some kind of hypothesized distance between IKB’s recommendation and Loreley’s investment; the court accepted that IKB was hired by the funds to vet investments (and in fact was Loreley’s sponsor), and that still was not enough for the Second Circuit to impute IKB’s reliance to Loreley.
Friday, December 3, 2021
View the debate here: https://youtu.be/uhg7P1DHxVk .
From the video description: The MIT Sloan Adam Smith Society chapter hosted a virtual debate between Roivant founder and chairman Vivek Ramaswamy and Chicago Booth Professor Luigi Zingales on the topic: “Is ‘Woke Capitalism’ a Threat to Democracy?”
I have not yet watched the video, but I have heard both speakers before and expect the debate to be of interest to our readers. Here's a bit more from the description:
In 1970, Milton Friedman urged business leaders to prioritize shareholder value when making business decisions. Businesses have turned away from this model of late, and are instead actively pursuing social and political goals. Is it good for society when businesses promote political causes and take social stances? Is it good for business? What are the costs when corporate managers focus exclusively on maximizing profit?
Monday, November 29, 2021
In my Corporate Finance class this morning, as a capstone experience, I asked my students to read and be prepared to comment on an article I wrote a bit over a decade ago. The article, Federal Interventions in Private Enterprise in the United States: Their Genesis in and Effects on Corporate Finance Instruments and Transactions, 40 Seton Hall L. Rev 1487 (2010), offers information and observations about the U.S. government's engagements as an investor, bankruptcy transformer, and M&A gadfly/matchmaker in responding to the global financial crisis. A discussion of the article typically leads to a nice review of several things we have covered over the course of the semester. I have a number of topics I want to ensure we engage with, but I allow some free rein.
Today, one of our interesting bits of discussion centered around the possibility that the U.S. government became a controlling shareholder for a time due to the nature of its high percentage ownership interest in, for example, AIG. This was not directly addressed in my article. Nevertheless, we set into a discussion of the substance, citing to Sinclair Oil Corp. v. Levien, one of Josh Fershee's favorite cases. We also reflected on possible associated lawyering and professional responsibility issues.
I wondered after the in-class discussion whether anyone of us who had written articles on the government as an investor in private enterprise in the wake of the financial crisis had, in fact, commented on this aspect of the government's majority or other controlling preferred stock investments. A little digging revealed the following passage from a student article:
Delaware corporate law protects minority shareholders from controlling shareholders who use the corporation to advance their own interests at the expense of other shareholders. It does so both by imposing fiduciary duties on the directors and officers of a corporation, including duties of care, loyalty, and good faith, and extending those duties to any shareholder who exercises control over a corporation.
Matthew R. Shahabian, The Government as Shareholder and Political Risk: Procedural Protections in the Bailout, 86 N.Y. L. Rev. 351, 369 (2011) (citing to Sinclair) (footnote omitted). The article engages both Sinclair's substantive fiduciary duty rule and the applicable judicial review standard, citing to the case a total of six times. J.W. Verret also cites to Sinclair for the same principles in his article Treasury Inc.: How the Bailout Reshapes
Corporate Theory and Practice, 27 Yale J. Reg. 283, 335 (2010), and Steven Davidoff Solomon and David Zaring give Sinclair three nods in their article, After the Deal: Fannie, Freddie, and the Financial Crises Aftermath, 95 B.U.L. Rev. 371 (2015). Good to know.
I admit that I was pleased that, after 13-14 weeks of hard work on the part of me and my students, we could have a conversation about this type of practical, applied legal issue. I was still guiding the way a bit, but the students really carried the discussion. And they had useful ideas and observations--ones I know they could not have shared at the beginning of the semester. I applaud them; I am proud of them!
Sunday, November 28, 2021
Eric Chaffee has published Index Funds and ESG Hypocrisy in 71 Case W. Res. L. Rev. 1295. Here is an excerpt from Part I of that essay:
[S]tatements from BlackRock, State Street, and Vanguard can be boiled down into a contradictory phrase that sounds like it belongs in George Orwell's novel, 1984: “Diversity is conformity.” To unpack this idea a bit more, BlackRock, State Street, and Vanguard are selling index fund shares with the promise of diversification of the portfolios that underlie those funds to stabilize returns while mitigating risk, yet at the same time, they are fueling conformity through their voting power related to those funds.
This Essay takes the position that the importation of ESG voting into index funds by the dominate players in the index fund industry is unacceptable because it creates an unresolvable conflict of interests, is misleading to those purchasing shares in mutual funds, and is undemocratic. This Essay argues that these issues could be resolved by the SEC promulgating rules creating a fund name taxonomy to make it clear to investors the nature of the funds in which they are investing.
This Essay contributes to the existing literature in three main ways. First, this Essay contains an extensive analysis of the problems of pursuing ESG objectives through index funds, which include that it creates an unresolvable conflict of interest, is misleading, and is undemocratic. Second, this Essay proposes a fund name taxonomy for investment funds to resolve the problems with pursuing ESG objectives through index funds, which includes the requirement that the title “index fund” be reserved only for passively managed funds that are designed to track the components of financial markets. Such an approach would fit the underlying purposes of federal securities regulation to mandate disclosure and allow investors to make informed decisions regarding their investments. Third, the analysis and proposal in this Essay is especially important because at the time of this Essay, the United States Securities and Exchange Commission (SEC) is considering whether additional rulemaking is needed relating to section 35(d) of the Investment Company Act of 1940, which mandates honesty in the naming of investment funds.
Saturday, November 27, 2021
- but happily there's no shortage of news about holiday-themed shortages.
For starters, Christmas tree supplies are tight, and this is both a covid problem and a climate change problem:
The American Christmas Tree Association has said this year’s supply of real Christmas trees will be squeezed by the summer’s heat dome in the Pacific Northwest, while supplies of artificial trees, largely coming from China, will be affected by the same shipping and labor problems plaguing many industries.
And apparently some of the problems can be blamed on ... *squints* ... Lehman Brothers?
Hundley of the National Christmas Tree Association said there is one reason for the tighter stocks this year that has nothing to do with the pandemic or the world’s supply chain headaches: During the financial crisis of 2008, many growers didn’t have the capital to plant a lot of trees, and national plantings dipped. “The previous financial crisis caused fewer to be planted, so we don’t have an oversupply right now. It’s a supply that matches demand,” he said.
It also seems that covid has come for Santa:
The pandemic hit the Santa Claus community hard, for obvious reasons: Many of the men who play the role are at high risk in the covid-19 pandemic, because of their age. The Santa physique (see: "bowl full of jelly") tends to check off a not-so-nice list of potential co-morbidities, starting with a high BMI.
“Several hundred Santas and Mrs. Clauses, over the last 18 months, have passed away, and it’s just a tragedy,” says Allen, though he cautions that not all of those deaths may have been attributable to covid-19. Other Santas, wary of the risks of being around germy, potentially unvaccinated children, have decided to sit yet another pandemic holiday out, or retire.
Santa Tim Connaghan, who goes by the honorific “National Santa” for his role in major parades and as the Santa for Toys for Tots, surveys his brethren annually and reports that 18 percent of the surviving Santas are taking the year off. He is taking fewer bookings this year to spend more time with family....
Connaghan has deployed Santa’s wife in areas where no Santa can be found…. But, she, too, is in short supply.
Apparently, this means people have to accept stripped-down Santas without luxury add-ons:
Bryant signed a contract for $320 for two hours of a fake-bearded Santa — “If we wanted one with a real beard, it would have been like, a hundred dollars more.”
And then there's the most troubling situation of all:
A dire shortage in glass bottles is forcing some winemakers to let wine age in wooden barrels for too long, which can lead to the drink tasting "like a sawmill," Phil Long, the owner of Longevity Wines in Livermore, California, told Insider.
Long has cobbled together a supply of bottles by purchasing extra glass from wineries with some to spare, and has even resorted to buying bottles bearing another vineyard's name....
Chris Wachira, owner of Wachira Wines, said her business hasn't been able to send wine to members of their wine club because they don't have enough glass bottles to pour the wine into.
Happily, this is one crisis I know how to solve.
Friday, November 26, 2021
I was recently honored to be invited to join a panel at the 16th Annual Meeting of the American College of Business Court Judges (ABCBJ), which was held in Jackson, Mississippi, on October 27-29. The meeting was hosted by Chancellor Denise Owens (the current president of the ACBCJ) in association with the Law & Economics Center (LEC) at George Mason University Antonin Scalia School of Law.
Chancellor Owens kicked off the event and introduced the keynote speaker, Haley Barbour (former Governor of Mississippi). Governor Barbour gave an excellent talk about the ways in which Mississippi's musical traditions have helped to improve race relations over the past century.
The meeting panels covered a broad array of topics, including:
- Ownership, Transfer and Trading of Intellecual Property Rights.
- The Cost of Truth, Can You Afford It?
- Artificial Intelligence, Machine Learning, and Algorithms: Studies in Law, Economics, and Racial Bias
- Thriving Post Pandemic - Private Practice and Expanding Regulatory Authority After COVID-19.
I joined Professors Todd Zywicki and Donald Kochan on a panel moderated by Judge Elihu Berle (Los Angeles Superior Court). The panel was entitled, Shareholder Wealth Maximization versus ESG and the Business Roundtable: The Growing Debate Over Corporate Purpose. I presented on the Securities and Exchange Commission's plans for a new mandatory climate-change-related disclosure regime. The prsentation drew from portions of a recent essay I coauthored with Professor George Mocsary, An Economic Climate Change?
The conference concluded with the tour of our new Civil Rights Museum in Jackson. It was a wonderful meeting, and I look forward to participating in future ABCBJ events!
Wednesday, November 24, 2021
Dear BLPB Readers:
"The University of Surrey School of Law seeks to appoint a Financial Law expert with a specific focus on FinTech and financial regulation. The appointment may be made at Lecturer, Senior Lecturer or Reader Level.
Interested candidates should apply here: https://jobs.surrey.ac.uk/vacancy.aspx?ref=070521
Applicants are expected to have an excellent record of scholarship with published work of international significance and rigour. Candidates should have experience in applying for, and obtaining research income, or they should demonstrate the potential to do so. Those applying at Reader level should have an established record of generating research income, leading research projects, supervising research students, and providing administrative leadership. Applicants should be able to deliver outstanding teaching in law at undergraduate and postgraduate levels and must be able to teach on our FinTech & Policy MSc programme run with Surrey Business School. A qualifying law degree (LLB, JD or similar) is essential and a doctorate in law or a related field is strongly preferred. We are keen on candidates who combine theoretical understanding of the area with demonstrated practical experience or expertise."
The complete job posting is here.
Tuesday, November 23, 2021
Penn State Law Minority Business Development: Special Open Session (November 30, 2021, 4:00 PM - 6:45 PM EST)
This just in from friend-of-the-BLPB Sam Thompson at Penn State Law. Sam hopes we will bring this program to the attention of those "who might be interested in learning more about this very important topic," including law school administrators, faculty, and students. I know I plan to make others aware.
Dear Colleagues: This semester I am teaching a course dealing with issues in Minority Business Development, a subject I took as a student literally 50 years ago in my third year at the University of Pennsylvania Law School. Because of the importance of this topic, Penn State Law has permitted me to make the course open to anyone who is interested in this very important topic, and recordings of all of the sessions of the course are available on the Penn State Law website here.
The course is divided into the following three segments:
Part I, Introduction and in-Depth Analysis of the Minority-White Gap in Business Ownership,
Part II, The Lawyer’s Essential Tools in Representing a Minority-Owned Small Business, and
Part III, The Big Ideas for Addressing the Minority-White Gap in Business Ownership
Part I was covered over five sessions and ended with a discussion with Professor Berdejo of the Loyola Law School in LA about his recently published article in the University of Wisconsin Law Review entitled: Financing Minority Entrepreneurship. Part II of the course focused on the Essential Tools that any lawyer needs in advising owners of a business. Each of these sessions was led by an outstanding practitioner, including a lawyer from the following firms: McGuire Woods; Richards, Layton & Finger; Nelson Mullins; Schiff Hardin; Wachtell Lipton; and Starfield & Smith. For this part, we principally used the Maynard et. al. Business Planning casebook.
This brings me to Part III, The Big Ideas for Addressing the Gap, which will be held in one session on Tuesday, November 30, 2021. This special session will be live over the Internet from 4 PM to 6:45 PM Eastern Time. A recording of this session will also be available on the website for the course. This Special Session is entitled Perspectives on Minority Business Development, and in this session, experts from across the country will engage in a live discussion of Minority Business Development issues. The event, which is divided into three sessions, includes perspectives of lawyers, an economist, a business school dean, tax policy experts, entrepreneurs, and Penn State Law students who are enrolled in the course. Reactions to the presentations in the three sessions will be provided by Dana Peterson, Chief Economist at The Conference Board. While Ms. Peterson was a banker at Citigroup, she was the co-author of a 2020 report by Citigroup entitled: Closing the Racial Inequality Gaps. A flyer for the program is attached, and the event page for the program can be reached here.
. . .
Inter-Collegiate Seminar on Teaching Inclusive Capitalism in Key Undergraduate Courses Throughout the Curriculum
Friday - Saturday, Dec. 3-4, 2021 | 1 - 4 p.m. ET
Purpose and Background
This seminar will share progress made and explore next steps in the continuing effort to teach widely in colleges and universities the following principle of fuller employment and its many important implications:
A broader distribution of capital acquisition with the future earnings of capital creates the rational expectation of a broader distribution of discretionary capital income in future years (to people with a higher propensity to consume) and therefore greater incentive to employ more labor and capital in earlier years.
A growing number of professors of economics have characterized this principle of fuller employment as “the most important contribution to economic theory in many decades: an idea with many practical, beneficial policy implications for both current and future generations” [Letter from Professors of Economics in Support of Inclusive Capitalism.]
A key motivation for this new form of Inclusive Capitalism is the need to fundamentally address the current and growing trends in income inequality and environmental destruction.
This two-day virtual event will bring together professors of economics and other disciplines from Assumption University, Eckerd College, Rutgers University, University of South Florida, Syracuse University, and Virginia Tech to discuss the creation of a teaching and research agenda centered around Inclusive Capitalism.
Monday, November 22, 2021
JP Morgan Sued Elon Musk’s Tesla For Breach Of Contract: How Did I Predict It? - Lécia Vicente (Guest Post)
Friend-of-the-BLPB Lécia Vicente sent along the following post, which I thought our readers might find interesting, especially in light of the blog's prior posts on Elon Musk and his conduct (including those from Ann and me, like this one--citing to many others--and that one). Enjoy! Comment, as desired. I have my own comments, which I will share in due course.
And (in this week of giving thanks) I offer gratitude to Lécia for bringing this post to us! (You may remember that she guest blogged with us last December--almost a year ago. Where did the time go?)
On November 6th 2021, Elon Musk polled his Twitter followers to determine if he should sell 10% of his stake in his company, Tesla. He wrote, “[m]uch is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this?”
On November 8th 2021, two days after Musk’s tweet, I tweeted the following question, "[c]an Musk actually be sued if he doesn’t follow through on his pledge to sell?” Initially, I was more concerned about securities law. Based on Musk’s tweets, shareholders might be misled to sell, meaning that Musk could be sued for misrepresentation. Similar scenarios of securities fraud involving Tesla and Elon Musk have happened before. In addition, Musk’s tweets could trigger claims of breach of contractual duties. A week after my tweet, on November 15th 2021, JP Morgan filed a complaint against Tesla for breach of contractual duties. I guess I predicted it.
Specifically, in JP Morgan Chase Bank, National Association, London Branch v. Tesla, Inc, JP Morgan is suing for the Tesla CEO’s tweet on August 7th 2018 when he stated “Am considering taking Tesla private at $420. Funding secured.” This statement came from the chair of Tesla’s board of directors and controlling shareholder. While the tone and seriousness of the announcement is debatable, JP Morgan took it seriously. Seriously enough to sue.
On February 27th 2014 and March 28th 2014, JP Morgan entered a series of agreements with Tesla in which JP Morgan would buy Tesla stock warrants at a specified “strike price.” Additionally, the warrants maintained an adjustment clause in case of an announcement of a significant corporate transaction involving Tesla, such as an acquisition. The purpose of the adjustment clause was to protect the parties from adverse economic effects. The 2021 Warrants expired between June and July 2021.
As explained in the complaint, in a Form 8-K filed on November 5th 2013, Tesla identified Elon Musk’s personal Twitter account “as a source of material public information about the company” and encouraged investors to review that account. The complaint also stated that:
Because the tweet violated NASDAQ rules requiring at least 10 minutes’ advance notice before a listed corporation publicly disclosed a going-private transaction, NASDAQ temporarily halted trading in Tesla’s stock following Mr. Musk’s tweet, evidencing that the exchange considered the tweet to constitute an announcement by the company itself.
After Mr. Musk’s tweet, Tesla’s Chief Financial Officer, its head of communications, and its General Counsel drafted an email—attributed to Mr. Musk—detailing the going-private plan. The email was sent to Tesla employees and published the same day on both Mr. Musk’s Twitter account and Tesla’s blog (which Tesla had also designated as a source of material public information about the company). In the email, and in a series of tweets responding to his Twitter followers, Mr. Musk elaborated on his plans to take Tesla private. He concluded in a tweet that “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.”
That same day, in response to various inquiries from research analysts, Tesla’s head of investor relations confirmed that Mr. Musk’s tweet signified a “firm offer” to take Tesla private that was “as firm as it gets.” Specifically, she wrote in response to press inquiries about the tweet:
- “I can only say that the first Tweet clearly stated that ‘financing is secured.’ Yes, there is a firm offer.”
- “[A]part from what has been tweeted and what was written in a blog post, we can’t add anything else. I only wanted to stress that Elon’s first tweet, which mentioned ‘financing secured’ is correct.”
- “The very first tweet simply mentioned ‘Funding secured’ which means there is a firm offer. Elon did not disclose details of who the buyer is . . . . I actually don’t know [whether there is a commitment letter or a verbal agreement], but I would assume that given we went full-on public with this, the offer is as firm as it gets.”
It turns out that Elon Musk’s announcement of an acquisition was false. However, JP Morgan and all the banks that had entered similar contracts with Tesla, namely Goldman Sachs, did not know that at the time of the announcement. Still, JP Morgan adjusted the terms of the 2021 Warrants as a result of Tesla’s announcement of acquisition and, later, its abandonment of the transaction on August 24th 2018. JP Morgan considered that such adjustments were contractually required. Tesla refused to settle and pay in full what JP Morgan claimed Tesla owed as a result of the adjustments. JP Morgan ended up suing Tesla for $162,216,628.81, to be precise, for breach of contractual duties.
So, did Elon Musk’s tweet on August 7th 2018 constitute an announcement of an acquisition? Was it a “firm offer” to enter into a contract?”
Interestingly, JP Morgan’s complaint resonates with Johnson v. Capital City Ford, a case decided by the Louisiana Court of Appeal, in 1955. In Johnson v. Capital City Ford Co., the Court had to determine whether a unilateral declaration of will like an advertisement constituted a firm offer. Capital City Ford found itself with a surplus of 1954 Fords. To get rid of them, the company placed an advertisement in the local newspaper, the gist of which was “[c]ome in, buy a 1954 Ford and, when the new models come in, we will let you trade in the 1954 model for a 1955 model at no extra charge.”
In response to the announcement, Johnson went to Capital City’s lot, picked out a 1954 model, and bought it. When the new models arrived a short time later, Johnson returned to the Capital City lot and demanded a trade. Capital City refused, claiming that the advertisements “were not intended as offers, but merely as invitations to come in and bargain.”
The Court advanced the following major premises: (1) A newspaper advertisement may constitute an offer, acceptance of which will consummate a contract and create an obligation in the offeror to perform according to the terms of the published offer. (2) An offer to be effective, need not be addressed to determinate offerees; it can, instead, be addressed to the public at large. (3) Whether a particular advertisement is an offer, rather than an invitation to make an offer or enter negotiations, depends on “the legal intention of the parties and the surrounding circumstances.” (4) If the meaning of a declaration of will is doubtful or uncertain due to “want of explanation” that the declarer should have given or from “any other negligence of fault of his,” then “the construction most favorable to the other party shall be adopted.”
The Court held the advertisement was an offer. To a reader, the wording of the advertisement denoted a bona fide offer, and it was certain and definite enough to constitute a legal offer. If Capital City Ford really intended the advertisement not as an offer but as an invitation to make an offer, it should have said something to that effect. The advertisement created a risk of uncertainty through its ambiguous statements. Therefore, the onus was on Capital City Ford to clear up the ambiguity. Since the company did not do so, the Court construed the advertisement against Capital City.
In Johnson v. Capital City Ford, the Court applied another case R. E. Crummer & Co v. Nuveen et al. (1945). In Crummer & Co v. Nuveen, the US Court of Appeals for the Seventh Circuit had to decide if a notice published in a regular paper circulated among municipal bond dealers was a mere solicitation for offers to sell the bonds or an offer to purchase them. The notice reads as follows:
For the convenience of bondholders who may wish to surrender their bonds, the Board […] has arranged to provide funds for the purchase of the above described bonds at par and interest to December 1, 1941. Holders may send their bonds to the Manufacturers Trust Company for surrender pursuant to such terms.
The plaintiff was the owner and holder of $458,829 principal amount of the bonds, dated June 1st 1940 and due June 1st 1970. The defendants arranged with the Manufacturers Bank of New York (“Bank”) to deposit funds necessary to cover all such bonds presented for payment pursuant to the terms of the notice. The plaintiff, in reliance on the notice, delivered its bonds to the Bank on December 11th 1941. However, the Bank refused to pay the principal amount as provided by the notice. The plaintiff attempted to sell the bonds to other parties at par, but the bid for them was substantially less than par resulting in damages of $35,000. The defendants moved to dismiss the complaint on the grounds that the notice was merely a solicitation for offers to sell the bonds and not an offer to purchase them.
The US Court of Appeals maintained:
We cannot believe that the ordinary business man could be expected to read the advertisement as an invitation to send bonds from wherever he might be to New York on the chance that when they got there the advertiser would accept his offer to enter into negotiations for the purchase of the bonds. Rather, we think the wording of the advertisement is such as to show "an intent to assume legal liability thereby." [emphasis added].
In other words, the US Court of Appeals considered the notice as an offer to purchase bonds and not a mere solicitation for offers to negotiate the sale of bonds.
The agreements JP Morgan entered with Tesla included an announcement event protection clause. An “announcement event” is contractually defined in the agreements as follows:
(i) The public announcement of any Merger Event or Tender Offer or the announcement by the Issuer of any intention to enter into a Merger Event or Tender Offer,
(ii) the public announcement by Issuer of an intention to solicit or enter into, or to explore strategic alternatives or other similar undertaking that may include, a Merger Event or Tender Offer or
(iii) any subsequent public announcement of a change to a transaction or intention that is the subject of an announcement of the type described in clause (i) or (ii) of this sentence (including, without limitation, a new announcement relating to such a transaction or intention or the announcement of a withdrawal from, or the abandonment or discontinuation of, such a transaction or intention) (in each case, whether such announcement is made by Issuer or a third party);
provided that, for the avoidance of doubt, the occurrence of an Announcement Event with respect to any transaction or intention shall not preclude the occurrence of a later Announcement Event with respect to such transaction or intention.
Did Tesla’s CEO manifest a plain and clear intention to make a firm offer to sell his stock? Were his tweets mere invitations to negotiate rather than firm offers? Was there consideration or any sort of reward if the potential offerees satisfied specified requirements? Was his August 7th 2018 tweet a promise to enter contracts to sell stock?
Potentially, Musk's tweet could be seen as an offer to sell his stock to his Twitter followers if it gave the public the right to acquire Tesla’s stock when Tesla sold them. In this scenario, if those who accepted the offer paid for the stock when it was sold, then a contract would have been formed. In addition, Musk’s tweet could be seen as a promise to sell stock. In this case, offerees have a right to demand that Musk sell the stock. If this is a promise Musk did not intend to keep, then the SEC can understandably view it as a false statement.
More important than Elon Musk’s behavior is the actions as a result from his tweet on August 7th 2018. Why did he do it? It is doubtful that the tweet was originally intended as an offer to sell stock. It is not clear if Tesla’s CEO’s intention was to have his Twitter followers contact him with an acceptance and form a contract. That investors feel strongly about Elon Musk’s tweets is not surprising. As Jeremy Grantham said in a 2019 interview to CNBC news channel, Tesla “is an extreme demonstration of growth.”
The bottom line is that there is space to explore what substantiates an offer-via-tweet in the context of corporate transactions such as initial public offerings, takeovers, mergers and acquisitions. Even if one concludes Musk did not provide a firm offer, the contractual terms of JP Morgan and Tesla’s 2021 Warrants help expand this interesting area of contract law.
* * *
Thank you to Nathan B. Oman, Rollins Professor of Law and Co-Director of the Center for the Study of Law and Markets at William and Mary Law for comments and fruitful interaction on this issue via Twitter.
Saturday, November 20, 2021
I’ve blogged a couple of times on the eroding distinction between private and public companies – “private is the new public,” as Matt Levine likes to say (though Prof. Ilya Beylin does not agree that the erosion is so drastic). Which is why I was struck by the package of financial reforms endorsed this week by the House Financial Services Committee.
Among other measures, the Committee backed a restriction on the marketing of public companies – namely, SPACs – to retail investors. Per the proposed legislation, no investment adviser or broker-dealer would be permitted to recommend, or even facilitate a trade in, a SPAC investment by an unaccredited investor unless either the “promote” is less than 5%, or the SPAC “makes such disclosures to the Commission as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors.”
Now, this is kind of a weird requirement – what disclosures is the SEC supposed to mandate? Isn’t it already, like, mandating disclosures of everything it thinks is necessary or appropriate? So, I don’t think this proposal – or, I suspect, a lot of the other proposals endorsed by the Committee – will actually become law. That said, it’s interesting to me that the proposal functions not by placing new restrictions on SPACs before they can go public – it doesn’t say, no SPAC can go public with a promote greater than 5%, or even mandate additional disclosure requirements in the S-1 – but instead, it distinguishes among public companies. Those that meet the requirements can be freely recommended and traded; those that do not will still be publicly traded, but, as a practical matter, will only be available to accredited investors.
This is not the first time such a move has been proposed; in 2019, the SEC wanted, in practical effect, to have retail investors take the equivalent of a financial literacy test before their brokers/investment advisers could sell them leveraged ETFs, though that proposal never went anywhere.
Over the years, Congress and the SEC have gradually expanded private companies’ ability to market and sell their securities to ever broader groups of investors; and now there also seem to be these impulses to simultaneously restrict the trading in public companies based on the same measures of sophistication that typically are used in private markets. It's almost ridiculous to call companies “private” today, when you can go to a website that offers shares in pre-IPO companies, and depending on what type of investor you are, you’ll be given different investment opportunities. And for the hot start-ups unavailable on those sites, well, in addition to the other secondary trading platforms out there for private company shares, Morgan Stanley is creating a new one that promises to be “friendlier” to corporate CEOs (what could possibly go wrong?).
In many ways, the system is gradually becoming what Stephen Choi recommended once upon a time, namely not so much treating companies as public or private, but instead treating investors as more or less qualified to transact.
That, of course, is a radical rethinking of the current system, which tends to assume that it’s not simply a set of required disclosures, but a robust regulated market that protects investors; by segmenting opportunities, that market is fractured and cannot fulfill its function. And, well, as is currently on display in a California courtroom, it does raise the question of how well we believe regulators can distinguish between sophistication and naivete among investors.
Wednesday, November 17, 2021
Dear BLPB Readers:
• Coordinates and supports conferences, symposia, and other scholarly, professional, and public-facing projects and events initiated by the Assistant Dean, individual Business and Finance Law Program faculty members, and related centers, initiatives, and programs as well as student groups focused on business and finance law.
• Supports faculty and student research and scholarship on relevant topics, including support for the student-edited Business and Finance Law Review and supervision of student research papers.
• Responsible for publicizing the work of Business and Finance Law faculty and students by developing programmatic communication materials in conjunction with the Law School and University administration, including the Dean and the Communications Office, as well as providing input to Law School publications on related program topics/issues.
• In conjunction with the Jacob Burns Law Library, develops and administers special educational and research programs in the field of business and finance law.
• Attends bar, organizational and public meetings to obtain exposure and recognition for the program and receive feedback on issues and matters that will help ensure success of the program.
• Consults with the Faculty Director(s) and other faculty members of the Business and Finance Law Program; collaborates with and supports C-LEAF, FAME, GWNY, and other faculty-led centers and initiatives affiliated with the BFL Program."
Tuesday, November 16, 2021
The College of Business Administration at Central Michigan University (“CMU”) invites applications for two separate entrepreneurship faculty positions to begin service on August 22, 2022. CMU encourages applicants from diverse academic backgrounds to apply.
The first open position is for a tenure-track assistant professor. Candidates must have a terminal degree: (i) a Ph.D. or D.B.A in entrepreneurship or a related business field (from an AACSB accredited institution); or, (ii) a J.D. (from an ABA accredited institution) with significant entrepreneurship-related experience; or, (iii) other relevant terminal degree with significant entrepreneurship-related experience. For those pursuing a Ph.D. or D.B.A., ABD applicants will be considered if it is clear that the applicant’s degree will be conferred at the time of appointment. Tenure-track faculty are generally expected to teach three courses per semester, maintain an active research agenda, and actively participate in service activities.
The second open position is for a fixed-term faculty member at the rank of Lecturer I. The candidate must have: (i) an earned a master’s degree in a business or other discipline related to entrepreneurship; or, (ii) a relevant terminal degree (such as a Ph.D. or D.B.A in entrepreneurship or related business field or a J.D.). The candidate must also be able to satisfy the requirements for IP, SP, PA, or SA status under CMU’s AACSB Faculty Qualification Guidelines (found here). The position is expected to teach four courses per semester but may receive a lighter teaching load in exchange for work as an Entrepreneur-in-Residence with our Isabella Bank Institute for Entrepreneurship.
Candidates for either position may also: advise students; engage in assessment of learning activities; help develop and promote CMU’s entrepreneurship offerings; support CMU’s New Venture Competition (NVC) and other extra-curricular initiatives; and strengthen partnerships on and off campus. All candidates must have the ability to perform the essential functions of the job with or without reasonable accommodations.
You must submit an online application to be considered an applicant for either position. To apply, please visit our website at https://www.jobs.cmich.edu/. Inquiries about these positions may be directed to the Entrepreneurship Chairperson David Nows at David.Nows@cmich.edu; however, the applicant must apply directly through the online Central Michigan University applicant portal. The positions are open until filled, although priority consideration will be given to applications completed by December 22, 2021. We will contact candidates to schedule a phone interview, or alternatively, an in-person interview if the candidate is attending this winter’s USASBE Annual Conference held January 5-9, 2022 in Raleigh, NC. Conference attendance is not required to be considered for this position.
Monday, November 15, 2021
College of Law
Northern Illinois University
NORTHERN ILLINOIS UNIVERSITY COLLEGE OF LAW invites applications for an anticipated opening for an entry-level tenure-track faculty position beginning August 2022. Duties include engaging in high quality research and teaching, as well as being an active participant in law school and university service. Applicants must hold a J.D. degree from an ABA accredited law school, or a foreign law school equivalent, and must provide evidence of the potential for engaging in high quality research and teaching.
NIU Law is a public law school. It resides at the heart of a diverse and active university campus of over 17,000 students in DeKalb, Illinois, located on the western edge of the Chicago metropolitan area.
Preferred qualifications include record of scholarly publication, teaching experience (particularly in a law school), legal practice experience, strong law school record, law journal membership, and clerkship experience.
We will consider candidates with a broad range of teaching and research interests. Our needs include, but are not limited to, Business Law, Civil Procedure, Commercial Law, Tax, Trusts and Estates, and skills courses. Applications are encouraged from women, members of minority groups, and others whose background and experience would contribute to the diversity of the law school community. Salary is commensurate with experience and education; position includes a robust benefits package to eligible applicants.
To apply, visit https://employment.niu.edu/postings/59887. For full consideration, please complete an application and upload a current curriculum vitae, cover letter, list of three professional references, and unofficial transcripts by December 5, 2021. Applications will be evaluated on a rolling basis. Candidates are also encouraged to submit a one-page statement, describing their past experiences and future plans for promoting diversity, equity and inclusion.
Please direct questions to the search committee chair, Professor and Interim Associate Dean Marc Falkoff, at firstname.lastname@example.org; or to Tita Kaus, Administrative Assistant to the Dean, at 815-753-1068 or email@example.com.
Equal Employment Opportunity Statement
Northern Illinois University (NIU) is committed to fostering a diverse and inclusive academic global community; as an AA/EEO employer, NIU considers qualified applicants for employment without regard to, and does not discriminate on the basis of gender, race, color, national origin, sexual orientation, religion, protected veteran status, disability, or any other legally protected status.
Saturday, November 13, 2021
Elizabeth Pollman has a new Comment, published in the Harvard Law Review, on what she calls “The Supreme Court’s Pro-Business Paradox.” She makes several very well-argued points. First, that by weakening corporate regulation, the Supreme Court has put greater pressure on corporate governance to constrain antisocial corporate behavior; second, the Court’s rulings are arguably at odds with the preferences of corporate shareholders, whose interests the Court clams to be furthering; and third, that in its zeal to insulate corporations from liability, the Supreme Court has turned corporate governance concepts upside-down – by, for example, holding that the Alien Tort Statute makes corporations less responsible for the “decisionmaking” that occurs in boardrooms than for the actions of employee-agents lower down in the hierarchy. There’s no abstract for me to quote, but here’s an excerpt from the Introduction:
This Comment makes two primary contributions. It first observes that cases from the recent Term reflect an important way in which the Roberts Court has earned its reputation: over the beginning of the twenty-first century, the Court has often expanded corporate rights while narrowing corporate liability or access to justice against corporate defendants. Part I of this Comment sets forth this argument, using Americans for Prosperity, Ford, and Nestlé as case studies to show how the Court uses ill-fitting conceptions or overbroad generalizations to empower corporations and limit their accountability.
This trend gives rise to a paradox that Part II subsequently explores: the “pro-business” Court is often at odds with internal activity in corporate law and governance. Quite remarkably, as the Roberts Court has expanded corporate rights and narrowed pathways to liability, many shareholders and stakeholders have become vocal participants, putting pressure on corporations to rein in the use of their rights, to mitigate risks generated by their externalities, and to take account of environmental, social, and governance (ESG) concerns. The Court’s expansion of corporate rights not only disserves many corporate participants and spurs them to action but also might fuel challenges to new disclosure rules about corporate political activity or other ESG-related concerns that investors and others seek for effective participation in corporate governance. Further, as the Court has downplayed or ignored corporate decisionmaking structures in its jurisprudence expanding rights and narrowing liability, by contrast, in the world of corporate law and governance, we see that board oversight, monitoring, and compliance functions have grown in importance.
Friday, November 12, 2021
According to SEC Chair, Gary Gensler, “[w]hen it comes to climate risk disclosures, investors are raising their hands and asking for more.” He has therefore asked his staff to prepare recommendations on new mandatory climate-change-related disclosure rules.
There appear to be two principal policy goals behind this proposed mandatory climate-related disclosure regime. First, to advise current and prospective investors of previously undisclosed physical and transitional climate-related risks through reliable, consistent, and comparable disclosures. Second, to structure the disclosure requirements to highlight “bad actors” and incentivize changes in the climate-related behavior of publicly traded companies.
Not everyone is, however, convinced that new, mandatory climate disclosures are necessary or even wise. For example, two of the five current SEC Commissioners have questioned the wisdom and/or need for new climate disclosure rules. In addition, Professor Stephen Bainbridge and Professors Paul and Julia Mahoney have expressed concern over the costs of a new climate-disclosure regime, as well as skepticism over the claim that climate disclosures are important to the average investor.
In our recent essay, An Economic Climate Change?, my coauthor George Mocsary and I weigh into the debate over the wisdom of new mandatory climate-change disclosure rules for issuers by asking: (1) Are the goals behind the proposed reforms worthy and appropriate for an SEC disclosure regime (the mission of which is to maintain efficient markets and facilitate capital formation)? (2) Can these goals be accomplished under the existing regime? (3) What would a new disclosure requirement cost, both directly and indirectly? (4) Would any benefits from increased disclosure outweigh those costs?
We conclude that, with respect to disclosure of transitional climate-related risks (risks to issuers from current or prospective regulatory demands and broader market trends toward a carbon-neutral world), new disclosure rules would be either redundant or outside the scope the SEC’s statutory authority.
Concerning mandatory disclosure of physical risk (a company’s risk to physical assets, markets, and supply chain due to climate-related extreme weather events), we express concern that the unreliability of the nascent discipline of “event attribution science” (which strives to identify causal links from human-influenced climate change to extreme weather events) would force issuers into rampant speculation that would be of little use to investors. It is not consistent with the SEC’s mission (and is likely outside its current statutory authority) to mandate disclosures that would be of little or no use to investors.
Finally, we conclude by highlighting the potential for some unintended consequences of mandatory disclosures in this area. For example, the burden of such disclosures may force some currently public companies to go private. This would have the result of further reducing the already decreasing number of investment opportunities for Main Street investors. Moreover, capital may shift abroad to markets that do not require climate-related disclosures, making U.S. markets less competitive. And perhaps most concerning, new climate disclosure rules may force larger, more eco-friendly companies to reduce their carbon footprint by selling off fossil-fuel-based assets and business lines. These assets may be purchased by private or foreign companies that are less concerned about the environment. This may actually result in a net increase in carbon emissions.