Saturday, December 3, 2022
When it comes to FTX, I’ll let the crypto people talk about the implications for that space generally, and I’m sure we all have our opinions on Samuel Bankman-Fried’s conduct – both before the collapse, and his endless apology tour afterwards – but what will live on for me is not any of that, but the 14,000 word hagiography that Sequoia had published on its website until very recently; they took it down after the bankruptcy declaration, though of course you can’t erase anything from the internet.
Sequoia has gotten a lot of flak for it not only for the fawning coverage, but because it revealed that Bankman-Fried actually was playing a video game during his pitch meeting. More than that, after FTX raised $1 billion in its B round, it apparently held a “meme round” of financing, and raised $420.69 million from 69 investors.
But what really stood out to me not just was the evidence of due diligence failure, but the fact that Sequoia intentionally, by their own volition, put this article on its own website. It wanted you to know that this was who they were funding, and this was the process they used. They believed this would give them credibility, perhaps with founders, perhaps with their own investors – and they may very well have been right.
I’ve previously blogged (twice!), and written an essay about, about how the changes to the securities laws create these situations (though, of course, macroeconomic changes are responsible as well, as this Financial Times article explains).
In particular, my point is that the securities laws cultivate investors with particular preferences, and that leads to particular corporate outcomes. As relevant here, in 1996, Congress gave the green light for private funds to raise unlimited amounts of capital, without becoming subject to registration under either the Securities Act or the Investment Company Act, so long as their own investors consist solely of persons with $5 million in assets. At the same time, Congress and the SEC also made it easier for operating companies to raise capital while remaining private, so long as they mostly limit their investor base to these newly supercharged private funds. The illiquid nature of the funding vehicles (necessitated by their private, non-tradeable status) encourages a short-termist orientation in search of a quick payout. Due to the high-risk nature of these investments, private funds invest in multiple firms in the expectation that most will fail but a few will become outsized hits. The result has been that one category of investor – wealthy, institutional, private, illiquid, risk-seeking, and with limited ability to express negative sentiment – has come to dominate the private markets. And that’s how you end up with Sequoia bragging about funding being based on obscene numbers rather than DCF models.
The securities laws are ultimately supposed to facilitate the efficient allocation of capital, but unfortunately, too much weight is being put on “let sophisticated investors make their own choices” and not enough on how these rules shape these sophisticated investors themselves and their preferences, which may not up end up aligning with society's preferences.
Thursday, December 1, 2022
Press Release: "the Florida Treasury will begin divesting $2 billion worth of assets currently under management by BlackRock"
In a press release issued today (here), "Florida Chief Financial Officer (CFO) Jimmy Patronis announced that the Florida Treasury will begin divesting $2 billion worth of assets currently under management by BlackRock." Stated Patronis:
Using our cash ... to fund BlackRock’s social-engineering project isn’t something Florida ever signed up for. It’s got nothing to do with maximizing returns and is the opposite of what an asset manager is paid to do. Florida’s Treasury Division is divesting from BlackRock because they have openly stated they’ve got other goals than producing returns. As Larry Fink stated to CEOs "[A]ccess to capital is not a right. It is a privilege." As Florida’s CFO I agree wholeheartedly, so we’ll be taking Larry up on his offer. There’s no lack of companies who will invest on our behalf, so the Florida Treasury will be taking its business elsewhere.
At some point, these millions/billions being divested from Blackrock are going to add up to real money.
Wednesday, November 30, 2022
Dear BLPB Readers:
"The World Federation of Exchanges is organising its 40th Annual Clearing and Derivatives Conference, WFEClear, hosted by the Johannesburg Stock Exchange (JSE) and its CCP, JSE Clear.
We invite the submission of theoretical, empirical, and policy research papers on issues related to the conference topics. Accepted papers will be presented at the conference and posted as part of the Conference Proceedings on the Financial Economic Network (SSRN)."
Note that the submission deadline of December 13, 2022, is fast approaching! The complete call for papers is here.
Monday, November 28, 2022
Earlier today, friend-of-the-BLPB Andrew Jennings released a podcast in his Business Scholarship Podcast series featuring me talking about my forthcoming piece in the Stetson Business Law Review, "Criminal Insider Trading in Personal Networks." You may recall me blogging about this piece as part of my report on the 2022 Law and Society Association's 7th Global Meeting on Law and Society this past summer. The SSRN abstract is as follows:
This Article describes and comments on criminal insider trading prosecutions brought over an eleven-year period. The core common element among these cases is that they all involve alleged tipper/tippee insider trading or misappropriation insider trading implicating information transfers between or among friends or family members (rather than merely business connections). The ultimate objectives of the Article are to explain and comment on the nature of these criminal friends-and-family insider trading cases and to posit reasons why friends and family become involved in criminal tipping and misappropriation--conduct that puts both the individual friends and family members and the relationships between and among them at risk.
I am grateful to be in the position of publishing this work in the near future (after a number of years of work on the larger project that includes the featured criminal cases). I enjoyed talking to Andrew about it. His podcast series has been a welcomed and valuable contribution to our field. You can find out a lot about current business law research by listening to even a few of his podcasts.
The podcast featuring me is available through any of the following links:
Apple Podcasts and other podcast apps: https://podcasts.apple.com/us/podcast/joan-macleod-heminway-on-friends-and-family-insider/id1470002641?i=1000587717188
Check it out. Consider subscribing!
Friday, November 25, 2022
Zhaoyi Li, Visiting Assistant Profoessor of Law at the Univeristy of Pittsburgh School of Law, has published a new article, Judicial Review of DIrectors' Duty of Care: A Comparison Between U.S. & China. Here's the abstract:
Articles 147 and 148 of the Company Law of the People’s Republic of China (“Chinese Company Law”) establish that directors owe a duty of care to their companies. However, both of these provisions fail to explain the role of judicial review in enforcing directors’ duty of care. The duty of care is a well-trodden territory in the United States, where directors’ liability is predicated on specific standards. The current American standard, adopted by many states, requires directors to “discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.” However, both the business judgment rule and Delaware General Corporate Law (“DGCL”) Section 102(b)(7) shield directors from responsibility for their actions, which may weaken the impact of the duty of care requirement on directors’ behavior.
To better allocate the responsibility for directors’ violations of the duty of care and promote the corporations’ development, it is essential that Chinese company law establish a unified standard of review governing the duty of care owed by directors to companies. The majority of Chinese legal scholars agreed that a combination of subjective and objective standards would function best. Questions remain regarding how to combine such standards and implement them. In order to promote the development of China’s duty of care, these controversial issues need to be solved. This article argues that China’s Company Law should hold a first-time violator of the duty of care liable only in cases of gross negligence but hold directors liable in the cases of ordinary negligence if they have violated the duty of care in the past.
Tuesday, November 22, 2022
Yesterday, I taught my Corporate Finance students about public offerings (focusing on initial public offerings--IPOs) and exempt offerings of securities. The front end of this course focuses on the instruments of corporate finance and the back end focuses on a number of different corporate finance transactional contexts. Although Business Associations is a prerequisite for the course, Securities Regulation is not. As a result, the 75 minutes I spend on public and exempt offerings is less doctrinally focused and more practically driven (unsurprising, perhaps, given the fact that my Corporate Finance course is a practical applied experiential offering).
Students prepare for the class session by reading parts of the SEC's website on going public and exempt offerings and reviewing an IPO checklist created and modified by me from a timetable/checklist I generated while I was in full-time law practice. Each student also must bring to class and be prepared to discuss a news article or blog post on public securities offerings. I share general knowledge and we dialogue about insights gained from the discussion items they bring to class. It usually turns out to be a fun and engaged class day, and yesterday's class meeting proved to be no exception.
I captured the board work on my phone and have pasted the photos in below. (I should note that I use a much more detailed public offering timeline in Securities Regulation, which I have memorialized in a series of PowerPoint slides. But the whiteboard version depicted below seems to be at about the right level of detail for the students in this course.) I am curious about how my coverage of public and exempt securities offerings might compare to what others give to this material in similar courses. Feel free to share in the comments.
I highly recommend these podcasts from the ABA Business Law Section:
VC Law: Episode 8: Capital Raising Considerations for Emerging Companies with Jose Ancer, author of Silicon Hills Lawyer and partner at Optimal Counsel (here)
Host Gary J. Ross talks with Jose Ancer, partner (and CTO) at Optimal Counsel and the author of Silicon Hills Lawyer, an internationally-recognized legal blog on emerging companies and VC fundamentals. Gary and Jose discuss the advantages and disadvantages of different securities instruments for emerging companies, including convertible notes and pre-money and post-money SAFEs; friends & family vs. angel rounds; the Series Seed and NVCA documents; valuation caps; and the significance of relationship building in the VC world.
VC Law: Episode 9: Discussing down round financings with Troy Foster, partner at Perkins Coie (here)
Host Gary J. Ross discusses down round financings with Troy Foster, partner and firmwide co-chair of emerging companies and venture capital practice at Perkins Coie. Topics covered include common provisions in down round term sheets, such as pay-to-play and pull-up mechanisms; anti-dilution adjustment mechanisms; obtaining the consent of previous investors; Section 228 notices; and Business Judgment Rule vs. Entire Fairness Review.
Monday, November 21, 2022
The Federalist Society has posted a review of the oral argument in Mallory v. Norfolk Southern (here):
Under Pennsylvania law, a foreign corporation “may not do business in this Commonwealth until it registers” with the Department of State of the Commonwealth. State law further establishes that registration constitutes a sufficient basis for Pennsylvania courts to exercise general personal jurisdiction over that foreign corporation. Norfolk Southern Railway objected to the exercise of personal jurisdiction, arguing that the exercise violated the Due Process Clause of the Fourteenth Amendment. The trial court agreed and held Pennsylvania’s statutory scheme unconstitutional. The Pennsylvania Supreme Court affirmed. The Supreme Court is to decide if a state registration statute for out-of-state corporations that purports to confer general personal jurisdiction over the registrant violates the Due Process Clause of the Fourteenth Amendment.
Saturday, November 19, 2022
Look there are two massive business stories right now - FTX and Twitter - and I have worked very, very hard to avoid learning anything about crypto, so Twitter it is.
Eventually there will be writing - so much writing - about all of this (me and everyone else), but as I type, it's being reported that there has been a massive exodus of Twitter employees who largely do not want to work for Elon Musk; Musk, in a paranoid fear of sabotage, locked all employees out of the offices until Monday before demanding they all fly to San Francisco for a meeting on Friday, and engineers responsible for critical Twitter systems left. Most of us who are actually on Twitter are waiting for one big bug to take the system down (I've set up an account, by the way, at Mastodon). And maybe that won't happen - maybe Musk will eventually turn things around - but he's certainly made things a lot more difficult for himself in the interim.
I'll save my bigger lesson musings for other formats, but for now, I'll make a minor point: the Delaware Court of Chancery did not, of course, order Musk to complete the deal, but he settled in the shadow of other broken deal cases and clearly saw the writing on the wall. Though there are only a few cases on point, Chancery has not hesitated to order reluctant buyers to complete mergers - in fact, I'm unaware of any case where an acquirer was found to be in breach and specific performance was not awarded - but in the first of these, IBP v. Tyson, Chancellor Strine agonized over the social dislocation that might be caused by forcing an unwilling buyer to complete a sale. Part of the reason he ultimately ordered specific performance was because the business case for the deal remained unchanged; as he put it:
A compulsory order will require a merger of two public companies with thousands of employees working at facilities that are important to the communities in which they operate. The impact of a forced merger on constituencies beyond the stockholders and top managers of IBP and Tyson weighs heavily on my mind. The prosperity of IBP and Tyson means a great deal to these constituencies. I therefore approach this remedial issue quite cautiously and mindful of the interests of those who will be affected by my decision….
[T]here is no doubt that a remedy of specific performance is practicable. Tyson itself admits that the combination still makes strategic sense. At trial, John Tyson was asked by his own counsel to testify about whether it was fair that Tyson should enter any later auction for IBP hampered by its payment of the Rawhide Termination Fee. This testimony indicates that Tyson Foods is still interested in purchasing IBP, but wants to get its original purchase price back and then buy IBP off the day-old goods table. I consider John Tyson's testimony an admission of the feasibility of specific performance…
Probably the concern that weighs heaviest on my mind is whether specific performance is the right remedy in view of the harsh words that have been said in the course of this litigation. Can these management teams work together? The answer is that I do not know. Peterson and Bond say they can. I am not convinced, although Tyson's top executives continue to respect the managerial acumen of Peterson and Bond, if not that of their financial subordinates.
What persuades me that specific performance is a workable remedy is that Tyson will have the power to decide all the key management questions itself. It can therefore hand-pick its own management team. While this may be unpleasant for the top level IBP managers who might be replaced, it was a possible risk of the Merger from the get-go and a reality of today's M A market.
The impact on other constituencies of this ruling also seems tolerable. Tyson's own investment banker thinks the transaction makes sense for Tyson, and is still fairly priced at $30 per share. One would think the Tyson constituencies would be better served on the whole by a specific performance remedy, rather than a large damages award that did nothing but cost Tyson a large amount of money.
Well, Elon Musk is an ... unusual ... buyer of companies, and I doubt we'll see his like again soon, but he's definitely illustrating a worst case scenario for forcing a merger over a buyer's objections. He famously performed no diligence on the company before signing the deal, and tried to back out immediately thereafter, so there was no point where he engaged in any serious analysis of Twitter's systems or planning for what he'd do with ownership. His whiplash changes to policies, his mistaken firings, and his basic misunderstanding of Twitter's business all demonstrate the dangers of selling a company to a buyer who is not prepared to run it.
Which begs the question whether Chancery will be more hesitant in future cases to order specific performance.
In Twitter's case, the parties had agreed to an unusually strong specific performance provision - which barred Musk from even contesting the propriety of specific performance were he found to be in breach - but whatever parties' contractual agreements, specific performance ultimately lies in the court's discretion, and the court has to decide whether it is an appropriate remedy. Though Delaware places great weight on parties' agreements that specific performance is appropriate and breach would cause irreparable harm, the court must also determine that the order "not cause even greater harm than it would prevent." What made the Twitter deal so uniquely high stakes was that the parties had also agreed that, in the absence of specific performance, the most Musk could be ordered to pay in damages was $1 billion, which was far less than the damage he had inflicted on Twitter in the interim and certainly less than what shareholders were owed. Had the court been unwilling to award specific performance, his bad behavior would, essentially, have been rewarded with a slap on the wrist.
Deal planners, I assume, know all of this, which makes me wonder if, going forward, there will be more uncertainty about enforcement, and whether merger agreements will be more likely to provide that knowing and intentional breaches can result in uncapped damages. At least that way, parties will be protected if they are concerned that Delaware courts - looking at the Twitter wreckage - might be less willing to order specific performance in the future.
Friday, November 18, 2022
As much as I love being a professor, it can be hard. I’m not talking about the grading, keeping the attention of the TikTok generation, or helping students with the rising mental health challenges.
I mean that it’s hard to know what to say in a classroom. On the one hand, you want to make sure that students learn and understand the importance of critical thinking and disagreeing without being disagreeable.
On the other hand, you worry about whether a factual statement taken out of context or your interpretation of an issue could land you in the cross hairs of cancel culture without the benefit of any debate or discussion.
I’m not an obvious person who should be worried about this. Although I learned from some of the original proponents of critical race theory in law school, that’s not my area of expertise. I teach about ESG, corporate law, and compliance issues.
But I think about this dilemma when I talk about corporate responsibility and corporate speech on hot button issues. I especially think about it when I teach business and human rights, where there are topics that may be too controversial to teach because some issues are too close to home and for many students and faculty members, it’s difficult to see the other side. So I sometimes self censor.
My colleagues who teach in public universities in Florida had even more reason to self censor because of the Stop WOKE act, which had eight topics related to race, gender, critical race theory and other matters that the State deemed “noxious” or problematic.
Yesterday, a federal court issued a 139-page opinion calling the law “dystopian.” The court noted that Justice Sotomayor could violate the law by guest lecturing in a law school and reading from her biography where she talks about how she benefitted from affirmative action. That’s absurd.
I had the chance to give my views to the Washington Post yesterday. This law never personally affected me but as the court noted, the university is the original marketplace of ideas. I told the reporter that one of my areas of expertise, ESG, is full of the kinds of issues that the government of the State of Florida has issues with. I told him that I was glad that I worked at a private university because academic freedom makes me more comfortable to raise issues. I noted that students need the ability to play devil's advocate and speak freely because there's no way to mold the next generation of thinkers and lawmakers without free speech. I explained that you can't write the laws if you're not willing to hear more than one point of view.
I hope that we get back to the days when professors don’t self censor, whether there’s a law in place or not. Of course there are some statements that are unacceptable and should never be taught in a classroom.
But I worry that some in this generation don’t know the difference between controversial and contemptible. That goes for my friends of all ideologies.
I worry that some students are missing out on so much because our society doesn’t know how to engage in civil discourse about weighty topics. So people either rant or stay silent.
In any event, my rant is over.
Today is a day for celebration.
Congratulations to my colleagues in public universities.
Reason has won out.
Thursday, November 17, 2022
About a month ago, I covered a lawsuit challenging FINRA's constitutional status. A review of the docket since that time reveals motions for two Gibson Dunn lawyers to appear on behalf of FINRA, Amir C. Tayrani and Alex Gesch. FINRA's Answer in the matter is set to be filed on December 12th.
What conclusions can be drawn from FINRA's decision to bring the Gibson Dunn team out for the matter? At the very least, a review of Tayrani's resume shows that FINRA takes the challenge seriously. Tayrani's biography states that he has briefed 21 cases on the merits at the Supreme Court and lists some standout wins, including:
- Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011): Decision decertifying the largest employment-discrimination class action in history.
- Citizens United v. FEC, 558 U.S. 310 (2010): Landmark campaign-finance ruling recognizing the First Amendment right of corporations to make expenditures in support of political candidates.
Given the current composition of the Supreme Court, FINRA is likely making the right decision to invest heavily in its defense early on in this matter. When I wrote about the risk posed by these kinds of challenges in Supreme Risk, I highlighted the need for a robust response in the courts. I argued that all SROs should be monitoring any case bringing these challenges:
Awareness of existing constitutional challenges creates an opportunity to attempt to persuade courts to render favorable decisions. When SROs and federal administrative agencies recognize that a pending action may create adverse or favorable precedent, they may devote more resources to the matter. For SROs that are not parties to the action, this may mean that they should hire sophisticated outside counsel to prepare persuasive amicus briefs to inform and influence the court. For SROs that are parties to a case presenting a constitutional challenge, they may allocate additional personnel and resources to the matter to increase the likelihood of a favorable decision. Additionally, they may coordinate with other SROs with interests at stake in the matter to bring in additional support.
Given the critical role self-regulatory organizations play in our financial system, FINRA should probably alert the exchanges, and other stakeholders about the need to ensure that the courts render a fully-informed decision.
FINRA might also consider passing the hat around to other SROs as it defends this case. Gibson Dunn isn't cheap. The precedent established here or in another similar challenge will matter to those SROs.
Wednesday, November 16, 2022
Dear BLPB Readers:
"The University of Michigan Law School invites junior scholars to attend the 9th Annual Junior Scholars Conference, which will take place in person on April 21-22, 2023 in Ann Arbor, Michigan. The conference provides junior scholars with a platform to present and discuss their work with peers, and to receive detailed feedback from senior members of the Michigan Law faculty. The Conference aims to promote fruitful collaboration between participants and to encourage their integration into a community of legal scholars. The Junior Scholars Conference is intended for academics in both law and related disciplines. Applications from graduate students, SJD/PhD candidates, postdoctoral researchers, lecturers, teaching fellows, and assistant professors (pre-tenure) who have not held an academic position for more than four years, are welcome.
Tuesday, November 15, 2022
Co-blogger John Anderson and I are considering submitting a late proposal for the inclusion of a discussion group in the Business Law Workshop for the 2023 annual meeting of the Southeastern Association of Law Schools (SEALS). The 2023 conference is scheduled to be held from July 23 - July 29 at the Boca Raton Resort and Club. A draft title and description for the possible discussion group follow.
Stock Ownership and Trading by Government Officials - Time for Reform?
Allegations of unlawful insider trading by government officials have again been making headlines. Multiple Senators were investigated for suspiciously timed trades in advance of the COVID-19 market collapse. A February 2022 Business Insider article identified members of both houses of Congress hailing from both major political parties who have failed to comply with applicable federal legislation. And a recent poll found that more than three-quarters of American voters think members of Congress have an “unfair advantage” in trading stocks. This discussion group focuses on insider trading by government officials and the need for and nature of possible responses.
Please contact me as soon as possible if you are interested in participating. We need to assemble a group of at least ten folks in total, at least half of whom are from SEALS member schools. And the program is filling up fast!
Monday, November 14, 2022
Earlier today, I received a communication from the American Bar Association's Governmental Affairs Office. It was a request for action (as would often come from a government affairs office) relating to the ENABLERS Act amendment to the National Defense Authorization Act (NDAA). The contents admittedly somewhat stunned me. I include them in pertinent part below.
This . . . Senate amendment, like the similar amendment contained in the House-passed version of the NDAA, would regulate many business lawyers and law firms under the Bank Secrecy Act (BSA) and could require them to report a substantial amount of attorney-client privileged and other protected client information to the government.
The ENABLERS Act amendment, sponsored by Sen. Sheldon Whitehouse (D-RI), would change the BSA’s definition of “financial institution” to include lawyers and law firms that provide legal services to clients involving company formation, trust services, acquiring or disposing of interests in those entities, and many other specified financial activities. It would also require the Treasury Department to issue new regulations that could subject these lawyers and law firms to some or all of the BSA’s requirements for financial institutions. This could force you to submit Suspicious Activity Reports (SARs) on your clients’ financial transactions (without notifying the clients); identify and verify your clients’ accounts to the government; establish due diligence policies that could conflict with state supreme court rules; create costly and burdensome new anti-money laundering programs within your law firm; and undergo periodic or random audits to assess compliance.
I have not been following this at all. I wonder if any of you have been . . . . Of course, the ostensible purpose is to combat money laundering--certainly a worthy goal. But the incursion on the lawyer-client relationship, assuming the description above is accurate (and I am still wading into this, in all candor), does seem rather vast. Please leave comments if you have thoughts to offer. I am intrigued.
Sunday, November 13, 2022
My Akron Law colleague Camilla Hrdy recently published The Value in Secrecy in the Fordham Law Review. You can find the SSRN version here. Below is the abstract.
Trade secret law is seen as the most inclusive of intellectual property regimes. So long as information can be kept secret, the wisdom goes, it can be protected under trade secret law, even if patent and copyright protections are unavailable. But keeping it a secret does not magically transform information into a trade secret. The information must also derive economic value from being kept secret from others. This elusive statutory requirement--called “independent economic value”--might at first glance seem redundant, especially in the context of litigation. After all, if information had no value, why would the plaintiff have bothered to keep it secret, and why would the parties be arguing over the right to use or disclose it? Surely, well-kept secrets that end up in court must be valuable.
That assumption is pervasive. But it is wrong. Secrecy does not demonstrate value. Even a company's best-kept secrets might be commercially worthless if vetted against what is known in the rest of the industry. Nor does the decision to pursue litigation indicate value. Trade secret litigants have plenty of exogenous reasons for pursuing lawsuits that have little to do with information's inherent value. Most importantly, “value” is not the statutory standard; the standard is economic value that comes specifically from secrecy.
Some federal courts have begun to call out weak assertions of independent economic value and, in the process, are redefining the role of this neglected statutory requirement. By analyzing this case law and drawing on insights from the larger field of intellectual property law, this Article generates a typology of “value failures” that can arise in any given trade secret dispute--amount failures, causation failures, type failures, and timing failures. Courts in trade secret cases should screen for value failures far more consistently than they currently do. Otherwise, courts risk giving trade secret status to mere confidential information. This leads to wasted court resources and has detrimental consequences for competition, innovation, speech, and employee mobility.
Saturday, November 12, 2022
I previously posted about the increasing use by shareholders of proxy-exempt solicitations under Rule 14a-6(g). That rule allows shareholders who are not seeking proxy authority to solicit other shareholders without filing a proxy statement, but under some circumstances, any holder of more than $5 million of stock must file their written solicitation materials with the SEC. These days, however, even shareholders who do not need to file with the SEC choose to do so voluntarily, because EDGAR serves as a convenient and cheap mechanism by which materials can be distributed to other shareholders.
Well, Dipesh Bhattarai, Brian Blank, Tingting Liu, Kathryn Schumann-Foster, and Tracie Woidtke have just done a study of these solicitations: Proxy Exempt Solicitation Campaigns. They find that a variety of institutional investors make these filings, including public pension funds (38%), union funds (26%), and other institutions, including hedge funds (22%). The filings may be used to support shareholder proposals that are already on the ballot - and thus to exceed the 500-word limit for such proposals - and to oppose management proposals, such as director nominations and say-on-pay. And these filings are taken seriously: 74% of them are accessed by a major investment bank, and they appear to have an effect on voting outcomes and forced CEO turnover.
So this is fascinating. The rule, adopted in 1992, at least as I always understood it, was intended to ensure that all shareholders receive the same information, and to allow that information to be publicly vetted, so that large shareholders can't lobby others in secret (and away from management prying eyes). But with modern computerized filings, the rule has been, functionally, hacked, to serve as a low-cost mechanism by which shareholders can communicate with other shareholders - and shareholders find it useful. That's a good thing, and it tells us that maybe the SEC should in fact be more proactive in sponsoring platforms for shareholder communication. Obviously, there are plenty of electronic forums today where shareholders congregate, but these are generally thought to appeal to retail shareholders and may have a high noise to signal ratio. Now that the SEC knows it can provide an easy distribution mechanism for more formalized communications, I wonder if it's worth building out that possibility even more.
Wednesday, November 9, 2022
Dear BLPB Readers:
"The Wharton School of the University of Pennsylvania will host its annual Wharton Financial
Regulation Conference on April 14, 2023.
We issue a call for papers to any scholars from any discipline—law, economics, political science,
history, business, and beyond—to submit papers on any topic related to financial regulation,
broadly construed. Special attention will be paid to junior scholars and those new to the financial
regulation community, but we welcome all submissions, including from those who have presented
To submit a paper, please include an unpublished manuscript not exceeding 25,000 words and a CV
to conference organizer David Zaring, by February 1, 2023. Selected presenters will be notified by
email by February 15, 2023."
The call for papers is also Download 2023 Wharton Fin Reg Call for Papers.
Tuesday, November 8, 2022
Dear BLPB Readers:
The ABA's Derivatives and Futures Law Committee's virtual mid-year event on October 6, 2022, included fireside chats with CFTC Commissioners Johnson, Goldsmith-Romero, Mersinger, and Pham. I wasn't able to watch these interesting and highly-informative discussions in real-time, so I'm happy that recordings are now available and wanted to share a link to each with BLPB readers!
Monday, November 7, 2022
How many of you who are or were engaged in the practice of law were asked to help a senior lawyer in your office prepare for or present at a continuing legal education (CLE) program? How many of you felt well prepared for that experience when it presented itself? I remember being asked to help script and help present at a number of CLE programs during the era in my practice in which I was still working on figuring things out. The associated imposter syndrome was real. I hope to make my students better prepared for that kind of engagement in their law practice.
As many readers know, I teach Corporate Finance as an experiential offering--a limited enrollment three-credit-hour planning and drafting course. I teach the course in two 75-minute segments each week. Along the way, I engage students with related practice experiences. One of them is a CLE-like teaching activity. Specifically, as the syllabus describes, it is a course requirement (part of each student's class participation grade) that they participate in a "class expert experience."
Class expert experience: Together with a partner, you are required to serve as a class expert as part of a peer-to-peer teaching experience once during the course of the semester. You will have the opportunity to choose a topic from a list of open assignments and a partner for your expert teaching experience. You may sign up on the class website starting the second week of the semester. Do not wait too long to do this.
On your day as a class expert, you and your partner will lead a class discussion on the topic of the reading assignment (plan for 45-60 minutes, since there will be questions and interruptions). I will supply you with substantive guidance on coverage and make myself available to you as you prepare for your in-class expert presentation. The format for your presentation can be anything you want–PowerPoint slides, real-time document analysis (using the document camera or otherwise), poetry readings, a skit, songs, a game–anything you want. If you decide to use PowerPoint slides or other projections, please let me know so that we can coordinate your use of the classroom technology.
Apart from accurate and complete substantive coverage of the assigned material, the only requirements for your expert experience are that you (a) involve the rest of the class in your in-class presentation, (b) illustrate or suggest ways in which transaction participants could use the material you are presenting to draft the operative documents differently to better achieve their objectives, and (c) finish within the allotted time. These four requirements—accurate and complete coverage, audience engagement, drafting suggestions, and time efficiency—can be met in many ways. As an audience-participation component, for example, you may want to ask questions of your classmates or involve them in an exercise, or you could take a poll on an issue relating to the topic. FYI, our TWEN site has polling functions and several other teaching tools. Zoom also has a polling capability, and there are other software applications to which we have access that also may be of interest. Just let me know in advance what you want or envision, and I will try to ensure that you have the resources you need. You may make drafting suggestions orally or in writing or through interaction with the rest of the class. Again, use whatever teaching method or methods you want–just make sure you meet the four requirements.
We try to have some fun along the way, too. Donuts and Halloween candy/notions become participation incentives, Kahoot! competitions test class learning, and songs (Pink Floyd's Money has made at least one appearance) reinforce points made in memorable ways. This part of the course has evolved over the years as I have learned from what students do and as the course learning objectives become more refined. Interestingly, in past course evaluations, students have described this course component as both the most challenging and the most rewarding component of the course. Sometimes, the same student will describe the experience both ways, citing to the distinctive reward that comes from confronting and responding to a significant challenge.
I share all this with you today because my last Corporate Finance student class experts present on Wednesday (on the structure and key contents of M&A agreements). I look forward to it, but I also regret that this part of the course is coming to an end. As usual, and I have been impressed by what students have done and are doing to both learn and teach (all, in short order).
Saturday, November 5, 2022
Back in September, I posted about the Buzzfeed case that I was watching in Delaware Chancery. Well, now a decision has issued, and the whole situation remains intriguing.
In Buzzfeed v. Anderson, employees of privately-held Buzzfeed signed an arbitration agreement with the company concerning their employment, and also received equity compensation. Buzzfeed went public via a SPAC merger, whereby the old private company became the subsidiary of the publicly-traded SPAC. Employees’ equity comp was converted into stock of the new, publicly traded entity, but, through a series of unfortunate events, they were unable to trade for the first few days. That cost them a lot, because the stock price plummeted immediately thereafter. Relying on their employment agreements, the employees brought mass arbitration claims against the public company and several insiders. Those defendants then sued in Delaware for a declaration that they were not bound by the arbitration agreement, and that in fact the employees were bound to bring any claims in Delaware, because the new, publicly traded entity had a forum selection provision in its charter.
In her decision, Vice Chancellor Zurn held that the arbitration clause did not apply to the company defendants (now plaintiffs in the Delaware action; it gets confusing). The entity the employees had sued was the publicly traded parent of their former employer; the parent had not signed the arbitration agreement. The insiders, as well, had not signed the agreement, which was between the employees and private-Buzzfeed. VC Zurn observed that the insiders might have had rights, as nonsignatories, to force the employees into arbitration if they had sued in court, but it didn’t work the other way around. Op. at 23-24.
I’m not an arbitration expert, so this doctrine was new to me and just highlights the Kafka-esque nature of how arbitration contracts work these days.
But! What actually interested me was the effect of the forum-selection provision.
As I’ve previously mentioned, I recently posted a new paper to SSRN: Inside Out (or, One State to Rule them All): New Challenges to the Internal Affairs Doctrine, forthcoming in the Wake Forest Law Review. It’s about how the internal affairs doctrine is encroaching on other areas of law, including employment law, and the Buzzfeed case seemed like a perfect example. Here you had employees suing about a compensation dispute, and their employment claims were (according to the company defendants) converted into shareholder claims by virtue of a charter provision, over which the employees had no control, that operated to override their for-real contracts.
The problem with Buzzfeed though, from my perspective, was that the substantive claims of the employees – the ones they actually filed in their arbitrations – were pretty explicitly rooted in their status as stockholders. They brought claims under Section 11 of the Securities Act (which is a little strange because, as I understand it, the whole issue here was that the employees’ shares were not registered when they were supposed to be). They explicitly invoked the companies’ status as a Delaware corporation to argue that Delaware law applied. It was only later, when they got to court in Delaware, that they tried to recast their claims as related to their employment, and therefore not subject to the charter forum provision.
So. I didn’t mention the case in my Inside Out paper, but I was curious to see what VC Zurn would do with it. And she kind of split the baby.
There were two separate arguments: The employees claimed Delaware had no personal jurisdiction over them, and therefore this case was simply improperly filed; and the company defendants claimed that the employees were bound bring any disputes in Delaware.
On the former argument, VC Zurn found that the employees had consented to suit in Delaware via the forum provision and therefore she had jurisdiction to hear the dispute, Op. at 39-43, but on the latter, she held that until the employees’ lodged their claims in a court, she could not determine if they fell within the forum provision, Op. at 47-48.
Those holdings are … difficult to reconcile. If she has not determined whether the claims substantively fall within the forum provision, how can she know whether the employees “agreed” to be sued in Delaware via the forum provision? As best I can tell, the holding had to do with her interpretation of the employees’ arguments; the employees argued that their claims were not covered under the forum provision for the purposes of whether they had to bring their claims in Delaware, but not for jurisdictional purposes. Op. at 40-41.
Anyway. As it stands, I’m not sure there are any grand lessons (other than, as I previously posted, the hot mess that was the SPAC frenzy), but I will continue to keep an eye on things to see where they go from here.