Business Law Prof Blog

Honoring Peter J. Henning

I have been remiss in writing to honor the life and legacy of one of our colleagues (and one of my friends), Peter J. Henning.  Peter, a Professor at Wayne State University Law School until his untimely passing, died earlier this month after wrestling with a long-term, debilitating illness.  Our mutual friend, Stetson Law Professor Ellen Podgor, published a post in his memory back on the 18th on the White Collar Crime Prof Blog.  In the post, she reflected on their long-term friendship and initial co-editorship on the White Collar Crime Prof Blog.  She began by saying: "Peter Henning was an incredible writer, scholar, and teacher. Most of all to me - he was a good friend."  I could have started this post the same way . . . .  Ellen also linked to the announcement posted by Wayne State Law.

Peter was one among a number of colleagues whom I believe understood me and my work well.  He valued my practice experience and encouraged my use of it in research and writing.  While our work intersected most in the insider trading realm, he motivated and supported my scholarship and teaching more broadly.  He enjoyed our discussion groups at the Association of American Law Schools and Southeastern Association of Law Schools conferences (although my recollection is that he had to skip out on a bunch of the latter because of conflicting wedding anniversary celebrations . . .).

I was invited to speak at Wayne State Law (and write for the Wayne Law Review) twice at his suggestion.  Each time, he was the consummate host.   I remember hm taking me to a local eatery on one of those trips--a burger and beer place, as I recall.  I was too late for the normal lunch hour, but he wanted to make sure I had a bite to eat.  He was concerned that it was not upscale enough for me.  I assured him that it was just my style (which it was!).

His pieces for The New York Times were spot on.  You can find his columns for the paper's White Collar Watch here.  His work will continue to bless and inform us all for many years to come. 

I miss Peter for all this and more.  He was a great colleague and leader.  I know he is now free of his earthly burdens, which does give me some solace.  May he rest in eternal peace.

ERISA participants and bounded rationality

The Supreme Court, per Justice Sotomayor, issued a unanimous opinion this week in Hughes v. Northwestern University.  That somewhat unusual moment of agreement among the Justices was likely due to the fact that the opinion clocked in at a mere 6 pages, and left the hard stuff unaddressed.

Hughes was about the duties of an ERISA plan administration when constructing a defined contribution plan menu.  In this case, Northwestern University maintained a defined contribution plan with 240 fund choices, some of which were very very good, and some of which were very very bad.  For example, the menu included low-cost index funds, but it also included retail share classes of certain funds even though the plan could have qualified for lower-cost institutional share classes.  The menu also, according to plaintiffs, included various underperforming and high fee funds that should have been eliminated.

The Seventh Circuit held that none of that mattered because the menu was sufficiently large to satisfy all preferences.  Calling the plaintiffs’ arguments “paternalistic,” the court explained that “[p]laintiffs failed to allege, though, that Northwestern did not make their preferred offerings available to them. In fact, Northwestern did. Plaintiffs simply object that numerous additional funds were offered as well. But the types of funds plaintiffs wanted (low-cost index funds) were and are available to them.” (quotations omitted).

The Supreme Court reversed.   The Court held that regardless of whether the plaintiffs’ preferred options were available, an ERISA fiduciary must conduct “their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.  If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”  Because the Seventh Circuit had not conducted that analysis, the Court remanded for a do-over.

So, first, it’s notable that the Court did not hold that plaintiffs had actually stated a claim.  The Court only held that an ERISA fiduciary has an independent duty to determine whether particular investments can be “prudently included,” and allowed the Seventh Circuit to decide in the first instance whether any of the funds identified by plaintiffs did not meet that standard.

Second, though, the opinion leaves open a lot of questions about what it means to say that funds should not be prudently included, and, in particular, just how “paternalistic” an ERISA fiduciary should be.  Retail vs institutional share classes are in some ways the easiest possible case; if retail classes are offered when institutional ones are available, the fiduciary is simply charging the beneficiary unnecessary fees.  Indeed, this is precisely why the SEC announced its “share class disclosure initiative,” to deal with investment advisers who recommend higher cost share classes to clients when lower cost ones are available.

But the more interesting question is whether options should be removed from the menu not because they are, standing alone, completely unsuitable for any beneficiary, but because the menu as a whole is too challenging for the beneficiary to be able to make good choices. 

We know that ERISA menus need to be considered as a whole; after all, as the Supreme Court said in this case, a fiduciary has an “obligation to assemble a diverse menu of options.”  It might be perfectly appropriate for a menu to include a low-cost diversified bond fund, but the menu would be imprudent if it included nothing but low-cost diversified bond funds.

What if, however, the menu included 50 diversified bond funds, and 50 diversified stock funds, and 50 target date funds, and so forth?  The plaintiffs, and their scholar amici, argued this too would be imprudent because it would simply be too difficult for a normal, unsophisticated plan participant to parse.  The plaintiffs, for example, mentioned the problem of “decision paralysis,” while the scholars highlighted investors’ “bounded rationality” and explained how long menus could tax investors’ attention spans and lead them to either make poor choices, or opt out of the plan entirely.  In the scholars’ view, 240 options was just way too many; a good plan should only include 20-30.

Significantly, though, the United States as amicus in support of the plaintiffs did not sign on to that argument; instead, it only agreed that plaintiffs had stated a claim with respect to the retail share classes (it also agreed with some arguments about recordkeeping fees).

Which is in some ways what I’d expect.  In my essay, A Most Ingenious Paradox, I argue that there’s a kind of a political interest in making sure that a broad array of mutual funds remain on the market – even if that’s not necessarily the best choice for retail investors.

Anyhoo, point being, all of these questions are still left unanswered, though it strikes me that the Seventh Circuit is unlikely to be a receptive audience for arguments about bounded rationality.

How To Contract

I was thrilled to be one of the invited speakers (one of only 2 law professors) to speak at the How to Contract Conference two weeks ago. Laura Frederick, ex-Tesla, ex-BigLaw lawyer organized the best two days of CLE I've had in my thirty years as a lawyer (and not just because I was a speaker). Replays are are available and if you're a law student, practicing lawyer, professor, or person who deals with contracts regularly, signing up should be a no-brainer.  If you need more convincing, here's the line up. Sign up today. You won't regret it. 

 

New Book | The Capitalist and the Activist by Tom C. W. Lin

I've started reading Tom Lin's new book, The Capitalist and the Activist: Corporate Social Activism and The New Business of Change.  Although I'm only through the first chapter so far, I've found it to be an extraordinarily accessible and even-handed account of the current state of play.  Using story after story he knocks down perceived walls between social activists and capitalists.  He takes a nuanced, thoughtful approach and encourages readers to reject simplified portraits of capitalist and activists.  These words jumped out at me:

Recognizing the significant good that capitalists can bring about for society does not blind us to the serious harms that they can sometimes create or perpetuate in society.  Recognizing the transformative power wielded by activists does not deny the obstacles they can sometimes present for policymaking.  Just as humans are neither all good nor all bad, their institutional and collectively efforts at capitalism and activism are neither all good nor all bad.

His first chapter tackles the debate over corporate purpose and sketches the different sides of the debate.  He rightly recognizes that corporate social activism and expectations of corporate engagement are likely here to stay even as debates about corporate purpose will inevitably continue.  I'm looking forward to reading the rest of the book.

Call for Papers - Wharton Financial Regulation Conference 2022

Dear BLPB Readers:

"The Wharton School of the University of Pennsylvania will host its annual Wharton Financial Regulation Conference on Friday April 1, 2022, in-person.

We are issuing a call for papers to any scholars from any discipline—law, economics, political science, history, business, and beyond—to submit papers concerning the following topics (along with related topics):

    - Governance of Monetary & Fiscal Policy
    - Market Infrastructure & Bank Regulation
    - The Community Reinvestment Act at 45
    - Agency Structures & Personnel

To submit a paper for consideration, please provide an abstract not to exceed one page and CV to Brian Feinstein and Christina Parajon Skinner by February 15. Selected presenters will be notified by February 21. Presenters will receive an honorarium to defray travel costs."

The complete call for papers is here: Download 2022 Wharton Fin Reg Conference - CFP

Open Faculty Position - Assistant Clinical Professor of Legal Studies at Drexel University

Dear BLPB Readers:

"The Legal Studies Department in Drexel University’s LeBow College of Business invites applications for an Assistant Clinical Professor of Legal Studies to begin September 1, 2022. This is a full-time, non-tenure track position. The successful candidate will teach undergraduate and graduate level Legal Studies courses in person at the Drexel University LeBow Main Campus, the Malvern Campus and online. A successful candidate will be expected to teach courses in various areas of business law, such as Entrepreneurial Law, Corporate Governance, Contract Law and International Business. The standard teaching load for an Assistant Clinical Professor is 3 courses each for 4 quarters per year.

Candidates should possess a J.D. or LLM from an ABA-Accredited law school and demonstrate a high level of teaching competence.  Candidates must provide evidence of successful experience in teaching. Experience with and commitment to working with diverse student populations and commitment to equity in education at all levels is required. Experience and/or commitment to the use of technology as an instructional tool is desirable, as are strong collegial and collaborative skills.

The Assistant Clinical Professor of Legal Studies will also engage in appropriate research/scholarly activities to maintain AQ status in discipline. Scholarly work may include conference presentations, law review publications, pedagogical scholarship and other scholarly works. The Assistant Clinical Professor in Legal Studies will also participate in service activities on campus and in the community."

The complete job posting is here.

#BusinessLawProfPride

I cannot resist sharing with you today a proud moment that I had last week.  One of the 3L students that I mentor wrote a blog post that our Leading as Lawyers blog published. I could not be more proud.

I had been encouraging this student--a young woman I deeply admire--to write a post for us for a number of months.  She wasn't sure.  But I kept telling her that she had such compelling stories to tell.  Nevertheless, she remained unsure until recently that anything she would write could speak in a powerful enough way about leadership.

More recently, the pieces of her professional development puzzle have started to fall into place.  As a result she could see it--she found her voice; she knew what she had to say.  The result of her labors can be found here.  The title alone is enough to make a business law prof proud: The Unlikely Avenue from Hopeful Environmental Litigator to Inspired Transactional Lawyer.  You can click on the link and read the post in its entirety.  But here is the bottom line:

When I came to law school, I was so scared of “selling out.” I thought that transactional law was the route straight there. It turns out that choosing a path that utilizes my strengths and foregoes my weaknesses was never going to be “selling out.” Choosing transactional law is going to equip me to help animals and people in ways that I had never imagined prior to law school.

Amen.  Thanks, Ashley, for giving me this proud moment that I can share.  I will miss you after you graduate in a few months . . . .

Christina Parajon Skinner Reviews “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”

This morning, my inbox included a link to: Christina Parajon Skinner, Cancelling Capitalism? Grow the Pie: How Great Companies Deliver Both Purpose and Profit …, 97 Notre Dame L. Rev. 417 (2021) [SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4000768 ]. What follows is an excerpt from the introduction.

In February 2019, Amazon announced a plan to build its new national headquarters in Queens, New York. The plan would create between 25,000 and 40,000 well-paid jobs and fill New York City's tax coffers with at least $27.5 billion. But Amazon cancelled its decision in the face of intense political opposition. Perhaps the most vocal opponent was New York congressional Representative Alexandria Ocasio-Cortez. She roundly celebrated Amazon's retreat, tweeting, “today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon's corporate greed.”

But the congresswoman's maligning of Amazon's relocation was a sleight of hand. She told her followers that the “tax breaks” that would have gone to Amazon would instead now be available for public works, like subway repairs and teacher salaries. But this was wrong. The tax breaks would not be a “donation” of dollars that would have taken funds away from other public uses; rather, Amazon would have had some reductions from future tax bills if and only if--the company had improved the community in financially concrete ways. Yet Amazon was bullied out of town on these false pretenses, and Queens lost out on jobs, urban development, and hefty corporate tax payments. Here, both Amazon and Queens residents lost out--the citizens perhaps the most.

The tale of Amazon in retreat is one of many hard-hitting examples Alex Edmans gives in his book, Grow the Pie, all of which illustrate the growing popular antipathy against corporate profit. In the most charitable interpretation of Edmans's examples, people and politicians increasingly reject capitalism--the private harnessing of free-economic markets--because they appear to misunderstand the role that profits play in society. In other cases, however, it seems that politicians feint ignorance of the social benefits of capitalism in seeking to hum the most popular tune. Grow the Pie disabuses misperceptions by providing novel evidence and examples that bust the myriad myths now perpetuating the growing movement to “cancel capitalism,” as I'll call it here.

Continue reading

Activision!

This week, it was announced that Microsoft is acquiring Activision.

It was also announced that Microsoft swooped in with a bid because Activision was wounded due to the sexual harassment scandals, which are already the subject of a securities fraud lawsuit and a couple of derivative lawsuits.

And, it is possible that Activision’s CEO – who, it was reported, was aware of/involved in many of Activision’s problems and concealed them from the board – will, as a result of merger, walk away with a change of control golden parachute worth as much as $293 million.

So, this is entertaining for me because it’s like a real life issue spotter.

Issue One: What happens to the ongoing securities fraud lawsuit?

Answer: Presumably it continues; liability will travel with the new entity, and of course will remain with any individual defendants.

Issue Two: What happens to the ongoing derivative lawsuits?

Answer:  Normally, if the plaintiffs lose their shares in the merger, they lose the ability to prosecute a derivative action.  But!  They might be able to maintain the action if they can show the sole purpose of the deal was to deprive them of standing.  See Lewis v. Anderson, 477 A.2d 1040 (Del. 1984).  I don’t know if the Activision deal meets that high standard, but the reporting is certainly fraught.

Issue Three: What merger related claims are plaintiffs likely to advance directly?

Answer: 

(1) They could allege that Kotick ran a flawed sales process so that he could cash out rather than suffer the indignity of being fired, and the board was only too happy to acquiesce and shed themselves of the bother.  As a result, the merger price was too low.

(2) They could also allege that the board failed to secure value for the lost derivative claims, and therefore the merger price was too low.

Issue Four:  Isn’t it funny how the class plaintiffs and the derivative plaintiffs are at cross purposes, because if the derivative plaintiffs can maintain standing (a longshot, but still), it kind of interferes with the class plaintiffs’ allegations that the merger consideration failed to account for the value of the lost derivative claims (which are not, by hypothesis, lost at all)?

Answer: Yes.

Issue Five: Are there any other potential derivative claims here? 

Answer: Someone might consider the option of a double derivative lawsuit, i.e., suing Microsoft to get it to sue the old Activision board on behalf of Activision.  See Lambrecht v. O'Neal, 3 A.3d 277 (Del.2010).

Issue Six:  Could Activision just go ahead and quickly settle the derivative claims, to spare some of the headache?

Answer: I suppose but –

Issue Seven: Wouldn’t the objections to that settlement be convoluted, because if you tried to say the derivative plaintiffs were settling on the cheap, the answer would be that they were about to lose their claims anyway, so any number above zero was fair – and the real injury would be to the class plaintiffs in the merger, who may or may not have standing to object depending on whether the cheap derivative settlement was deemed some kind of improper diversion of merger consideration, permitting a direct claim, in facts that were distinguishable from Kramer v. Western Pacific Industries, Inc, 546 A.2d 348 (Del.1988) because the transactions were more closely related?

Answer:  Yes.

Issue Eight: Will the merger close, and defendants secure a dismissal of merger-related claims on Corwin grounds?

Answer:

¯\_(ツ)_/¯

Okay, internet: What did I miss?

Sharing About Some Teaching Materials

We just finished our first week of class for the spring semester!  It was a busy several days (as I would imagine the first week of the semester tends to be for all!).  As I returned to teaching mode, I thought of some teaching materials I’d like to share (and somewhat reshare) with BLPB readers.

First, several years ago, I blogged about Professor Richard Shell’s Springboard: Launching Your Personal Search for Success (here and here).  I mentioned his Six Lives Exercise, but I didn’t explain much about it.  Not only do I think it’s a great personal reflection exercise, but it generally generates a significant amount of classroom discussion and interest.   As I’ve used it several times now and it tends to generate a lot of student discussion, I thought I’d reshare about it!  Although I recommend buying the book, it’s not necessary to do the exercise, which is available here.  Shell provides vignettes of six lives: a teacher, wealthy investor, tennis pro, stone mason, and non-profit executive.  After reading their stories, students (or the reader) is invited to rank the lives in the order of “most successful” to “least successful” from their perspective.  Shell argues that success has an inner (internal happiness and satisfaction) and an outer dimension (social achievement, fame etc.).  The class (or reader) can then reflect upon how success is being defined in each of these lives, how they personally define success, the extent to which their ranking reflects their definition, and small steps to minimize any misalignment.

Second, if you teach contracts and you don’t know about Leonard v Pepsico (I didn’t until Professor Kimberly Houser told me about it.  Thanks, Kim!), you should!  It’s a really fun and students love it!  Professor Jeremy Telman has blogged about it (here) with links to videos of the Pepsi commercial at issue.  In a nutshell, Pepsi made a commercial about various items that could be purchased with different amounts of Pepsi Points.  At the end of the commercial, a Harrier Fighter Jet appeared with the words “7,000,000 Pepsi Points.”  Needless to say, Pepsi wasn’t offering fighter jets to customers in exchange for their Pepsi Points.  However, one customer did amass all of these points and then sought to claim a jet!

M&A Disciplining Misconduct in Investment Advisory Firms

There is an interesting new paper, Misconduct Synergies, by  Heather Tookes and Emmanuel Yimfor, which was recently the subject of a Business Scholarship Podcast.  The paper looks at misconduct at registered investment advisory firms after M&A activity.  It finds that "that disclosures of new disciplinary events in the combined firm drops by between 25 and 34 percent following mergers. This reduction is driven mainly by separations of high misconduct employees at the target firm."  In short, after M&A, employees with disciplinary records are much more likely to depart the firm.  

The RIA space is an interesting place to study employee misconduct and M&A activity.  Unlike most other industries, RIA firms have to disclose disciplinary and regulatory information in a way where it becomes publicly accessible.  It's also an interesting area to study because M&A activity has been booming for RIA firms.  Trimming away potential future regulatory issues may be a way to set up the combined firm for another deal.  It also finds that more of the target firm's employees separate than the acquiror, finding that "the sensitivity of separations to employee misconduct increases for target firm employees following mergers, suggesting stricter disciplinary mechanisms for target employees within the merged firm."  It's probably easier to clean house when it's a house you just bought.

Drexel Seeks Two VAPs

The Drexel University Thomas R. Kline School of Law invites applications for a two Visiting Assistant Professor positions.   One position is dedicated to a faculty member who will teach and research in the area of tax.  The other position is open, with a preference for someone who does research that touches on legal implications of new technology and/or someone open to teaching Torts.  Each position will last two years and VAP’s are expected to fully participate in the intellectual life of the law school.

We seek candidates who hold (at minimum) a JD or appropriate equivalent degree.  We are particularly interested in candidates embarking on an academic career.  The Kline School of Law is committed to recruiting, developing, retaining, and rewarding faculty members who bring scholarly interests and life experiences that contribute to the diversity and success of our students, our University, and our communities.

Drexel University, founded in 1891, is an R1 comprehensive research institution.  Drexel established its law school in 2006, and it has rapidly developed a reputation for innovative scholarship across disciplines, a diverse portfolio of academic programs, and a focus on civic engagement.  The Kline School of Law is home to the Center for Law and Transformational Technology and the Center for Law, Policy and Social Action.   The law school has a vibrant scholarly culture, including an active workshop series.  Kline Law has moved up steadily in the rankings and is now ranked #81 by U.S. News.

Applications for this position should include a CV and cover letter.

Review of applications will begin immediately, and prompt application is encouraged.  Questions should be directed to Professor Bret Asbury. 

Apply online via Drexel’s HR portal: https://careers.drexel.edu/en-us/job/497570/visiting-assistant-professor-kline-school-of-law.

Martin Luther King Jr. and the Beginning of a New Semester

I begin teaching again on Wednesday.  The past few weeks have been occupied with course preparation as well as catching up on editing, writing, and other tasks abandoned during a month+ focused on the grading period, attentiveness to  a downturn in my dad's health, Christmas, a nasty cold, and intensive physical therapy.  As I have focused on the spring semester, I continue to be concerned about helping to teach my students critical and intensive thinking, in and outside legal reasoning.  On this day honoring the life and many legacies of Dr. Martin Luther King Jr., I am inspired in my work by this passage from his writing--specifically, Chapter 1 of Strength to Love (1963; Pocket Book ed. 1964):

 . . . The tough mind is sharp and penetrating, breaking through the crust of legends and myths and sifting the true from the false. The tough-minded individual is astute and discerning. He has a strong austere quality that makes for firmness of purpose and solidness of commitment.

Who doubts that this toughness is one of man's greatest needs? Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half-baked solutions. Nothing pains some people more than having to think.

The last three sentences of this quote are especially meaningful to me.  The world is full of "easy answers and half-baked solutions."  I laugh when a state or  federal legislator sends me survey asking me, e.g., whether I support the taxation of X (as one once did).  How can I answer that question (except in a knee jerk or heuristic-driven process) if I do not know other things first (including whether something else may be taxed instead or whether services may be cut)?  And I am pained when students rely on commercial case briefs and caselaw summaries rather than personally digesting and dissecting the text of even a case excerpt in a casebook.  Suffice it to say, it is difficult to have an in-depth or fully engaged conversation with a student who has not read and thought through the key elements of a particular judicial opinion.

Dr. King may be right that there are relatively few folks "who willingly engage in hard, solid thinking."  But my hope is that many of those who do are and will continue to be lawyers (who lead in our society both in and outside the profession) and that at least a few of those lawyers will have been my students.  I know other law faculty that feel the same way.

Encouraging law students to engage with the legal education process in a way that is productive to willing engagement with "hard, solid thinking" is certainly not easy when easy-to-read summary resources are widely available.  But an investment in that encouragement is worth the time and energy, in my view.  Lawyers can best fulfill their professional promise and responsibility by thinking in a way that is "sharp and penetrating, breaking through the crust of legends and myths and sifting the true from the false."

So, here's to the new semester.  I start with renewed energy to work with my students to get them what they need to succeed in and beyond law school, including by motivating each of them to develop a "sharp and penetrating" mind--a "tough mind."  Sustaining that type of energy in a pandemic-infused, understaffed world will surely be a challenge. But I am up for it!  I wish all law professors well in their pursuit of effective teaching.

Want a trillion dollar client?

My law school classmate is the General Counsel of the Small Business Administration and is looking for a deputy. If I didn't love my work, I would apply myself.

Here's how she describes the role:

"I am searching for my next Deputy General Counsel. What's the job? The right person will be looking to be the managing partner of a mid-sized law practice (125+ persons) in which the sole client has a $1 trillion portfolio and a mission of serving the needs of small businesses throughout the nation."

If you want the actual official job description, see below. 

This Deputy General Counsel reports to the General Counsel. The incumbent provides legal counsel and services to the Administrator and other Agency officials and is responsible for dispensing legal advice on a myriad of issues involving, among other things, litigation, legislation, procurement, appropriations, employment law, labor relations, and financial law. The incumbent is responsible for the day-to-day operations of the Office of General Counsel.

Responsibilities

• Directs, plans, and executes oversight of the day-to-day operations of the Office of General Counsel.
• Provides legal interpretation and application of the Small Business Act and all related laws and regulations affecting the programs and operations of SBA.
• Resolves novel and complex legal problems which become precedent opinions to guide operating and legal staffs at headquarters and in the field.
• Serves as a liaison between SBA and top legal officers of other Government departments and agencies as well as with those on Congressional Committees, especially the House and Senate Small Business Committees.
• Confers with individual Senators and Congressmen concerning the legal aspects of problems with their small business constituents.
• Provides legal support to the Agency when responding to inquiries from Congress, other Federal agencies, state entities, and municipalities.

Benefits

In addition to an annual salary, a career with the U.S. Government provides employees with a comprehensive benefits package. As a federal employee, you and your family will have access to a range of benefits that are designed to make your federal career very rewarding. Please visit the posted announcement on USAJOBS for additional information.

How to Apply

If you are interested in the position, please visit the posted announcement on USAJOBS.gov (https://www.usajobs.gov/GetJob/ViewDetails/630142800) . Resumes will be accepted through February 7, 2022, so candidates are encouraged to apply immediately.

All applications must be submitted through the posting on USAJOBS. If you have questions, please submit your questions to the Agency contacts listed on the posted announcement.

 

See less

 

The battle’s done, and we kinda won

Okay, here I go, diving into Seafarers Pension Plan v. Bradway, recently out of the Seventh Circuit.  The appeal was argued in November 2020, which means this opinion took about 100 years to come down in Seventh Circuit time, and, well, to be honest, I’m not sure they worked out all the kinks.

I blogged extensively about the district court decision in this case here (although in the interests of full disclosure I should probably mention I spoke with the plaintiffs’ attorneys about the appeal, after the blog post went up).  The too-short version is that Boeing had a bylaw purporting to require that all derivative actions be filed in Delaware Chancery.  Plaintiffs filed a derivative action in federal court alleging Exchange Act claims under Section 14(a).  According to the plaintiffs, the Boeing defendants solicited shareholder votes in favor of their own reelection and compensation with false statements in the corporate proxy about the development of the 737 Max.  Boeing moved to dismiss in favor of Chancery due to the bylaw.   This was awkward because state courts, like Delaware Chancery, do not have jurisdiction to hear Exchange Act claims, and so enforcement of the bylaw in this case would be tantamount to a waiver of the claim.  But the Exchange Act prohibits predispute waiver of claims, and so the plaintiffs argued that the bylaw was invalid as applied here.

The district court ruled in Boeing’s favor and dismissed.  The plaintiffs appealed to the Seventh Circuit and, simultaneously, filed an action in Delaware Chancery alleging that the bylaw, as applied here, violated Delaware law.  The Delaware case (Docket No. 2020-0556-MTZ) was stayed in favor of the Seventh Circuit, and last week, the Seventh Circuit reversed and remanded, by a 2-1 vote, with Judge Easterbrook dissenting.

[Warning: Very long discussion under the cut, which will get unfortunately into the legal weeds at times, can’t be helped]

Continue reading

William Moon on Anonymous Companies

Will Moon recently posted an article forthcoming in the Duke Law Journal to SSRN.  It's a fascinating, accessible read and thoughtfully explores privacy as a functional feature of modern business entities.  Many states, Nevada included, allow the principal of a business entity to conduct business without ever disclosing the principal's identity.  Most discussions about using business entities to cloak individual identity focus on how the wealthy and powerful use privacy to avoid accountability and evade responsibility.  Yet not enough attention has been paid to the other side of the coin, how privacy enables economic activity for persons with stigmatized identities or in areas where violent retaliation against a business's disclosed principals may functionally force it to close.

A few years ago, Ann McGinley and I wrote about how some entrepreneurs will trot out persons with favored identities to access capital.  Because white men tend to raise more money, some entrepreneurs will strategically affiliate with white men to raise capital.  A proposal to create an agency for these purposes recently circulated online:

And This is why I'm seriously thinking about starting up "stand in founder". Agency of white males, willing to the be the face for the VCs 😂.

I mean they will just be hired to stand there and look pretty - but could be impactful for fund raising.

Who wants to invest?

— 🍊 Natalie Furness (@Natalie_Furn) December 12, 2021

 

While our article dealt with deploying identity as a facade to raise capital, Moon explores how obscuring identity facilitates business operations.  He showcases different examples of how privacy enables economic activity from incubating morally contestable enterprises such as operating clinical trials for abortion drugs to evading "racialized" market biases.  The article even details how survivors of intimate-partner abuse use business entities to protect their identities while working.  

The paper is a significant contribution to an often unexplored area of business law.  Most discussions of business entities focus on asset partitioning and limited liability.  These essential features matter.  Yet for many people, privacy may also be a significant concern.  Moon's paper provides a balanced exploration of the merits and risks of allowing people to shield their identities behind business entities.  

Open Legal Studies Position - Georgia State University, Robinson College of Business

Dear BLPB Readers:

"GEORGIA STATE UNIVERSITY invites applications for a non-tenure-track appointment in Legal Studies, effective fall 2022 in the Department of Risk Management and Insurance at the J. Mack Robinson College of Business.  Rank is open, but we expect to hire at the level of Clinical Assistant Professor (non-tenure track) or Clinical Associate Professor (non-tenure track). The salary level and course load are competitive.

 JOB QUALIFICATIONS: Candidates must have a J.D. degree from an ABA accredited law school, the capability to publish research in refereed pedagogical and/or professional journals, and demonstrated potential to be an outstanding teacher. Significant professional experience as a lawyer is also highly valued.  While we welcome applications from candidates in all areas of business law, we would be especially interested to hear from applicants who have a background in insurance, innovation, or entrepreneurship, and those who could help advance the Robinson College of Business’s equity and inclusion initiatives and programs."

The full job posting is here: Download GSU Legal Studies Clinical Faculty Position

Can Business Law Profs Be Change Leaders?

Yesterday evening, the 2022 Association of American Law Schools Annual Meeting concluded.  Hosted on a platform using Zoom, the conference spanned five days.  It was a meeting filled with super papers and discussion, many worthy honorees, and a little bot of networking and fellowship (not as satisfactory over Zoom, of course).

I was invited by BLPB co-blogger John Anderson and Martin Edwards to be part of an exciting discussion group: A Very Online Economy: Meme Trading, Bitcoin, and the Crisis of Trust and Value(s) – How Should the Law Respond?  [Editor's note: a hypertext link to John's earlier blog post was added post publication.]  Participants were asked to write short papers on the topic and share their theses during the session at the meeting. Initially, I planned to write on something involving substantive doctrinal law stemming from the meme stock phenomenon or my work in crowdfunding, blockchains, or insider trading.  But the more I thought about it (and the topic), and with the conference's programs honoring the life and legacy of Deborah Rhode in the foreground of my mind, the more I became convinced that I wanted to write/speak about lawyer leadership in this area at this time.

The short paper that resulted from that thinking, Leading as Lawyers in an Era of Rapid Technological Change, Limited Trust, and Individualism, can be found here.  It is not worth an SSRN post; it is just a thought piece.  But I am interested in your feedback, so I am sharing a link to it here.  The essential thesis is summarized in my conclusion paragraphs, pasted in below:

Lawyers and legal academics who desire to be change leaders have unique knowledge and experience relevant to the creation of a vision for legal or regulatory change that responds to ongoing business transformations. We know the existing legal and regulatory landscape and can observe its application in day-to-day business dealings. As businesses rapidly evolve in an increasingly digital world, the expertise of business lawyers and business law scholars is important to legal and regulatory change as well as legal and regulatory compliance.

Yet, successful, sustainable change in U.S. law and regulation has proven somewhat difficult. Among other things, we are living in an era of limited trust and increased individualism. These socio-political attributes of current life in the United States appear to be barriers to implementing even the most swell-reasoned legal arguments for change.

A possible way forward involves the use of proven patterns of efficacious change leadership that have been observed in private businesses and documented in a robust body of literature—especially academic literature authored by business management scholars. This literature deserves our attention and study, as does its application to effective processes of legal and regulatory change. There is no magic recipe for leading change, especially in the current environment. But merely having and sharing solid ideas for positive legal and regulatory change has never been enough to ensure the adoption and entrenchment of that change. If we want to be change leaders in the current, rapidly evolving business ecosystem, business lawyers and business law academics must consider and engage process. The ideas shared here are offered as a means of encouraging that consideration and engagement.

The paper admittedly results in part from the feeling that many worthy ideas for legal or regulatory change never get implemented because the right process was not employed.  Perhaps you also have felt this frustration at some point . . . .  As a result, in the paper, I end up encouraging the implementation of specific, staged, sequenced steps to make sustainable legal or regulatory change.

Among other things, I share a few pieces of the referenced academic literature on change leadership--a literature that I have used in other work.  It is a growing body of work.  And it keeps drawing me back.

The paper is five pages.  If any of what I have said in this post piques your interest and you deign to read the paper, let me know if you have any thoughts.  My idea is a simple idea; perhaps too simple . . . .

Tallarita on The Limits of Portfolio Primacy (Revised)

Roberto Tallarita has revised The Limits of Portfolio Primacy on SSRN (here). An excerpt of the abstract follows.

According to a theory that is gaining increasing support, we should expect large asset managers (and, in particular, index fund managers) to become “climate stewards” and force companies to reduce their impact on climate change. According to this theory, by maximizing the value of their entire portfolio (portfolio primacy) rather than the value of the individual company (shareholder primacy), index fund managers are incentivized to reduce climate externalities and therefore to steer companies toward decarbonization. This Article offers the first systematic critique of this theory and identifies four crucial limits that undermine its practical impact: mispricing of climate mitigation, portfolio biases, fiduciary conflicts, and insulation from index funds stewardship.... [C]limate stewardship would create unsolvable fiduciary conflicts on multiple levels: between fund managers and fund investors; between large asset managers and undiversified shareholders; and between corporate directors and the individual company....

Corporate scienter: was that so hard?

Edit: After I drafted this post, the Seventh Circuit finally decided Seafarers Pension Plan v. Bradway.  I blogged about the district court decision in that case here, and maybe I will eventually find the strength to draft a full blog post on CA7’s new decision reversing the district court, but in case I don’t because I’m screaming on the inside and nothing matters anymore, here’s my tweet thread on the subject. 

Meanwhile, back to today's intended post: 

 

I’ve blogged here a couple of times about courts’ struggles to evaluate allegations of scienter against a corporate defendant in a securities fraud case, and in particular, the problem of conflating pleading standards with the substantive definition of scienter.

Which is why I was so happy to see the court get it right in Acerra v. Trulieve Cannabis Corp., 2021 WL 6197088 (N.D. Fla. Dec. 30, 2021); all the more impressively done because, as far as I can tell from the briefing, the plaintiff didn’t make much of a corporate scienter argument and instead focused on the scienter of individual defendants.

The essence of the plaintiffs’ claim was that a medical marijuana company misled investors about the quality of its grow facilities.  The court dismissed allegations based on certain statements for failure to allege falsity; when that was done, a single actionable statement remained, namely, that Trulieve’s website falsely represented that its products were “hand-grown and specially cultivated in a state-approved, climate-controlled environment to ensure purity and safety. We leave nothing to chance while letting nature do her work.”

At that point, the court turned to the question of scienter, and concluded that plaintiffs failed to show that the individual defendants – the company’s CEO and CFO – drafted or even knew about the website text; thus, the corporate defendant could not be held liable vicariously based on the officers’ misconduct.  But the court did not stop there; it added:

Trulieve could of course be held liable based on acts or omissions not just of the named individual defendants but also based on acts or omissions of another officer or employee, so long as the officer or employee acted with the requisite state of mind. But here, as in Mizzaro [v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008)], the plaintiffs have not alleged scienter of the corporate defendant based on the knowledge or intent of any other officer or employee. The second amended complaint does not allege the existence of any individual, whether known or unknown, who both drafted or approved the website’s “climate-controlled” statement and acted recklessly or with intent to defraud. And it is by no means obvious—there is no “strong inference”—that any such person exists. The second amended complaint gives no reason to believe any single person must both have been aware of the website’s precise language, on the one hand, and aware of precisely what kind of facilities were out in the field.

I don’t have an opinion on whether the court reached the right outcome on these facts, but the analysis is exactly what I’d hoped courts would undertake.  The court asked whether the complaint created a strong inference that any agent of Trulieve, acting with scienter, drafted the false statement; the court entertained the possibility that such an agent might not be a defendant, and might exist even if their identity was unknown to the plaintiffs at pleading; recognized that corporate liability might attach if such an agent did exist; but concluded that the complaint did not raise a strong inference of that possibility.

I’m so pleased.