Friday, August 31, 2018

When in doubt, I can always post about litigation limits in corporate governance documents

It's not that there isn't other news, it's just that this is swimming in warm water.  A few days ago, SurveyMonkey filed an S-1 for its forthcoming IPO, and there are a few things that jumped out at me.

First, there's a survey!



(Okay, I'm feeling a little attacked right now.)

Second, there's a warning!  I previously warned about warnings; poorly drafted ones can warn the registrant right out of a truth on the market/materiality defense if there's a subsequent securities fraud claim.  SurveyMonkey seems to get it right, though:


So, unlike warnings that have gotten issuers into trouble in the past, this one doesn't explicitly tell anyone not to rely on external information.  It's just warning you that external information isn't attributable to SurveyMonkey.

(Which, incidentally, highlights the artificiality of the entire exercise; does anyone seriously believe that from an investor/market perspective, there's any real difference between "you should only rely on us" language and "we have not authorized anyone else" language?)

And finally, as I promised in my subject line, there's the litigation limit:


Okay, so much to talk about here.  First, if you've been following along, you know that I've repeatedly posted about - and written one article and one book chapter discussing - the question whether corporate governance documents can limit federal securities claims.  My view is, they can't.  But, as I previously mentioned, that issue is currently being tested in Delaware, with oral argument currently scheduled for September 27, so we may have a clear answer soon (umm, well, after the appeal that I assume will follow whatever the Chancery court decides).

And this matters a heckuva lot, because funneling Securities Act claims into federal courts may not seem like much of a deal, but that's just a stalking horse for the more explosive question, namely, whether corporations can use their governance documents to require that federal securities claims be arbitrated, and likely, arbitrated individually rather than on a class basis.  That issue has seen a resurgence of interest, with SEC Commissioners current and former seeming to encourage the idea, and the Consumer Federation of America recently issuing a white paper arguing against it.  If Delaware decides - as I think it should - that litigation limits in corporate governance documents can only be applied to state claims, then it's difficult to see what mechanism companies could use to dictate the arbitration of federal claims, no matter what the SEC says. (Though I suppose they'll come up with something, but there will then be the question whether that "something" is a contract subject to the Federal Arbitration Act, etc, etc.)

Finally, I note that SurveyMonkey put its forum selection clause in its bylaws.  That's a change from other companies that recently went public, like Snap, Roku, Blue Apron, and Stitch Fix, all of which included the provisions in their charters where they would be much more difficult for shareholders to change (umm, also, some of those shareholders can't vote).  In any event, SurveyMonkey is implicitly giving its shareholders the option of repealing the bylaw if they want to (assuming SurveyMonkey's directors don't, you know, change it right back).

So, that's the state of play, and as far as I'm concerned the ball's now in Delaware's - not the SEC's - court.

Ann Lipton | Permalink


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