Business Law Prof Blog

Mostly Dead

I posted earlier this week with a plug for my new paper on the internal affairs doctrine and an update on the Lee v. Fisher forum selection bylaw litigation in the Ninth Circuit, so I've just got a quick hit for today.

Unless you've been living in a cave, you know that Musk closed his purchase of Twitter on Thursday night; as of Friday, the stock had been delisted.  The litigation over whether Twitter lied about its business has come to a halt....

....or has it?

You may recall that in August, a Twitter whistleblower - Peiter Zatko - came forward as a whistleblower about Twitter's internal business operations.  Elon Musk amended his complaint in Chancery to incorporate Zatko's claims, alleging that the problems Zatko identified - such as a failure to comply with an FTC settlement - represented additional fraudulent actions on Twitter's part that allowed Musk to terminate the deal.

What you may have missed, though, is that shortly after Zatko went public, the Rosen Law Firm filed a securities class action, Baker v. Twitter, C.D. Cal. 22-cv-06525, based on Zatko's allegations.  The complaint names several Twitter executives - including Jack Dorsey - and Twitter itself as a defendant.  (It also, amusingly, appears to have accidentally cut-and-pasted allegations from an Activision complaint.)   

And as far as I can tell, there is no reason why that suit should not continue.  There has to be a lead plaintiff, of course, and an amended complaint, but legally, it persists against the named executives and now the Musk-owned Twitter.  Better yet, though there may be problems with loss causation depending on how Twitter's stock moved on any given day, there's really no reason the amended complaint couldn't beef up allegations about spam and misleading mDAU figures, relying not only on the Zatko complaint, but also on the confidential Twitter data that Musk revealed when he filed his own complaints in Chancery.

Which means, Musk may be stuck arguing to a court that there were never any problems, let alone mDAU problems, at Twitter at all.

We all look forward to the CW allegations from any recently-fired Twitter personnel.

Should Antitrust Regulators Come for the ESG Cartel?

Two recent posts that might be related:

On Tuesday, Vivek Ramaswamy posted The ESG Fiduciary Gap on The Harvard Law School Forum on Corporate Governance.  In that post, he noted that:

BlackRock is currently under investigation for antitrust violations precisely because of its coordinated ESG activism through groups like Climate Action 100+, Net Zero Asset Managers, and Glasgow Financial Alliance for Net Zero. Vanguard and State Street are members of many of the same groups. In fact, until recently, as Arizona’s Attorney General has observed, “Wall Street banks and money managers [were] bragging about their coordinated efforts to choke off investment in energy.” U.S. antitrust statutes are broad by design. They forbid competitors from entering into any agreement with the purpose or likely effect of reducing supply in a relevant market. Here, through these groups, BlackRock is cooperating with its competitors to make concerted efforts to decrease marketwide output in fossil fuels. That is no secret; it is the very purpose of these organizations. Net Zero Asset Managers, for example, makes clear that it has an “expectation of signatories” like BlackRock to force a “rapid phase out of fossil fuel[s],” including by, for example, refusing to finance new coal projects. If the CEOs of Exxon, Chevron, and Shell decided to cut gas production and prices then spiked, the DOJ Antitrust Division would be making arrests. But when the Big Three pressure them to do the same thing, it is praised as “ESG.”

Today, DealLawyers.com linked to a Freshfields blog, which noted that:

Led by antitrust officials in the US appointed by President Biden, authorities around the world have turned a critical eye towards private equity (PE), making PE the latest target in the global trend toward increased antitrust scrutiny.... The focus on PE in the US may inspire other regulators, in particular across the Atlantic. In Germany, a draft law is being discussed which would grant the Federal Cartel Office broad powers to address perceived “disruptions” of competition. Those powers are likely to include oversight of cross-ownerships and interlocking directorates. In 2020, the European Commission requested a study on the effects of common shareholdings by institutional investors and asset managers on European markets. While no major enforcement action has been taken since the report, the headlines generated by the DOJ may inspire the European Commission to have a renewed look at these issues in Europe. And in the UK, while the Competition and Markets Authority has recognized that highly leveraged private equity acquisitions are unlikely in themselves to impact competition, it has demonstrated a willingness to follow the European Commission in pursuing private equity owners for potential antitrust violations by their portfolio companies, as demonstrated most recently in relation to its case against excessive pricing for thyroid drugs.

And one might want to add the following from Amanda Rose (which I previously quoted here):

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

Specific Due Diligence Proposal for RIAs

The SEC recently released a highly specific proposal for registered investment advisers with comments open until at least December 27th.  The proposal "would require advisers to conduct due diligence prior to engaging a service provider to perform certain services or functions. It would further require advisers to periodically monitor the performance and reassess the retention of the service provider in accordance with due diligence requirements to reasonably determine that it is appropriate to continue to outsource those services or functions to that service provider."

My immediate reaction is that I'm generally in favor of RIAs performing appropriate due diligence, but that I'm a bit skeptical about the need for specific rules in a principles-based framework.  It's certainly true that Advisers outsource a significant amount of work today.  And it is also true that, as the proposal details, problems at third party service providers have led to broader problems. 

It's easy to see how concentration risk can grow in such an environment.  If a huge swath of the market outsources to a particular third-party firm, a failure at the third party could paralyze the market. 

It'll be interesting to watch to see how RIAs react to this.

 

This Friday - Professor Macey on Market Power and Financial Risk in U.S. Payment Systems

Dear BLPB Readers:

This Friday, October 28th, at 10am ET, the Wharton Initiative on Financial Policy and Regulation is hosting an hour-long online seminar with Professor Joshua C. Macey on Market Power and Financial Risk in U.S. Payment Systems.  It should be a great event!  Registration information and a link to the whitepaper is here: Download Market Power_Financial Risk

 

ESG and Mrs. Thompson

“Human beings are far more complicated and enigmatic and ambiguous than languages or mathematical concepts.” – Iris Murdoch, The Sovereignty of Good Over Other Concepts (88)

During lunch yesterday, I attended a panel on “Measuring the S in ESG” at Belmont University's Hope Summit. The presenters made plenty of thoughtful comments, but I did not leave with much hope that we will be able to accurately measure "S" (social good). (The panel also seemed to confirm that most institutional investors view ESG data primarily as a tool to assist in achieving excellent financial performance, and most are not very interested in sacrificing profits, at least not for more than a few years.)

Later that afternoon, at a celebration for our neighborhood bus driver, I began to realize why I had so little hope for numerical scores of social good. Glendra Chapman Thompson has been driving the same bus route in our neighborhood for 32 years; she is only retiring now due to serious health issues. To say she is beloved is an understatement. Her joy emanates. She is patient, kind, and always smiling. She knows the name of every child, and you can sense that she cares deeply for each one. As Iris Murdoch writes in the opening quote, languages or mathematical concepts cannot capture Mrs. Thompson's essence.

Organizations are made up of human beings like Mrs. Thompson. While I think we could agree that Mrs. Thompson has created a massive amount of social good, we can’t capture her goodness in a number. Her love is irreducible.  

Attempting to measure social good is not only practically impossible, but the attempted measurement may also do harm. By attempting to reduce the impact of someone like Mrs. Thompson to a number, you would miss nuance and beauty. Further, by measuring and marketing social good you can cut against humility, which is often considered a cornerstone virtue.  

In the corporate context, there may be some ESG data that is helpful. (Wage data, for example, can be telling). But I think we should be honest about the many things we cannot measure. Stories and interviews may be needed, and the most significant social good may be the least flashy.  

Watch the video our school system did for Mrs. Thompson here. We often walk our children to school, but we would let them ride the bus the 800m to school on occasion simply to be in her caring presence. We will miss you Mrs. Thompson.

Ninth Circuit to rehear Lee v. Fisher, Just When I Finally Write About It

On Sunday, I posted a new paper to SSRN, forthcoming in the Wake Forest Law Review.  It's called Inside Out (or, One State to Rule them All): New Challenges to the Internal Affairs Doctrine, and it covers a lot of territory I've touched on in blog posts, namely, litigation-limiting bylaws, the Salzberg decision, California's board diversity law, and issues regarding the internal affairs doctrine and LLCs.  Here is the abstract:

The internal affairs doctrine provides that the law of the organizing state will apply to matters pertaining to a business entity’s internal governance, regardless of whether the entity has substantive ties to that jurisdiction. The internal affairs doctrine stands apart from other choice of law rules, which usually favor the jurisdiction with the greatest relationship to the dispute and limit parties’ ability to select another jurisdiction’s law. The doctrine is purportedly justified by business entities’ unique need for a single set of rules to apply to governance matters, and by the efficiency gains that flow from allowing investors and managers to select the law that will govern their relationship.

The contours of the internal affairs doctrine have never been defined with precision, but several recent developments have placed new pressures on the doctrine’s boundaries. These include: (1) states’ attempts to regulate the governance structures of businesses that operate within their borders in order to benefit non-investor constituencies, such as diversity requirements for corporate boards; (2) the growing prevalence of LLCs, which – because of their flexible, contractual structure – blur the lines between investment relationships and employment relationships; (3) the increasing use of shareholder agreements, which are governed by contractual rules, and not infrequently the rules of a jurisdiction other than the one in which the business entity is organized; and (4) jurisprudence permitting the charters and bylaws of Delaware corporations to include provisions that govern litigation based on non-Delaware law.

This Essay explores modern challenges to the coherence of the internal affairs doctrine, and recommends alternatives.

Of course, one of the cases I tackle in the paper is Lee v. Fisher, which I blogged about when the district court and appellate decisions issued.  Briefly, the district court enforced Gap's forum selection bylaw that purported to move a Section 14(a) derivative claim to Delaware Chancery, which had no jurisdiction to hear it; on appeal, the Ninth Circuit affirmed.

Well, obviously reacting to the persuasive case I made in my paper, twenty-four hours after I posted, the Ninth Circuit vacated its Lee v. Fisher decision, and agreed to rehear the matter en banc.  I've updated my paper with a footnote to reflect the new development, which is probably all I'll do for now, since a new decision is unlikely to issue before publication.

Fordham JCFL Volume XXVIII: Call for Submissions

The Fordham Journal of Corporate & Financial Law is now accepting submissions for the Spring 2023 Issue of Volume XXVIII.  As one of the premier student-edited business law journals in the country, the Journal ranks among the top-five specialty journals in banking and financial law, and among the top-ten specialty journals in corporate and securities law.

The Journal welcomes articles and essays addressing important issues in banking, bankruptcy, corporate governance, capital markets, finance, mergers and acquisitions, securities, and tax law and practice.

Please send all submissions to either our Scholastica page or our email at [email protected]. For consideration in our Spring 2023 Issue, kindly send in your submissions by Friday, December 14^th, 2022.

For more information regarding submissions, please visit our website. If you have any questions, please contact Brendan Finnerty, Senior Articles Editor, at [email protected].

Anderson on Corporate Law and Admiralty

In prior posts, I've plugged a couple of legal history articles, essentially offering different accounts of how the corporation, with its distinctive features, came to be.  In particular, I highlighted Margaret Blair's piece on how corporate law is inextricably tied to state recognition, and Taisu Zhang's and John Morley's paper on how modern corporate features are tied to a developed state capable of adjudicating the rights of far flung investors with consistency.

Into this mix I'll introduce Robert Anderson's new paper, The Sea Corporation, forthcoming in the Cornell Law Review, demonstrating that the features we think of as defining the corporate form - limited liability, tradeable shares, entity shielding, separate personality, and centralized management selected by the equity owners - were all associated with admiralty law for centuries before the development of the modern corporation, embodied in the form of the ship's personality.  Anderson points out that, to some extent, these were necessary given the realities of maritime commerce: when a ship docked in a foreign port, identifying and litigating against its distant owners was nearly impossible.  Therefore, creditors necessarily could only bring an in rem action against the ship itself; if the claims were less than the ship's value, the owners could be relied upon to appear in court to collect the residual.  Otherwise, creditors would be left only to collect against the ship's assets.  Anderson also highlights that maritime law addresses a problem that has vexed corporate scholars, namely, how to deal with limited liability and involuntary creditors (like tort victims).  Some have suggested these creditors should receive priority of payment over voluntary ones; he points out that maritime law operates in just this manner and may provide guidance in the corporate sphere.

Anyway, here's the abstract:

Over the two centuries the corporation has become the dominant form of business organization, accounting for more productive assets than all other business forms combined. Yet the corporation is relatively young for a legal institution of such economic importance. As late as the middle of the nineteenth century, most business was still conducted through partnerships, with corporations active only in a few industries. Only in the ensuing decades did restrictions ease allowing the corporation to secure its economic dominance.

Commentators widely attribute the corporation’s success to a set of features thought to be unique to the corporation, including limited liability, transferable shares, centralized management, and entity shielding. Indeed, the consensus among economic and legal historians is that these essential corporate features created a unique economic entity that rapidly displaced the obsolete partnership.

This Article argues that these economic features were not unique to the corporation, nor did they first develop in the business corporation. Over many centuries, the maritime law developed a sophisticated system of business organization around the entity of the merchant ship, creating a framework of legal principles that operated as a proto-corporate law. Like modern corporate law, this maritime organizational law gave legal personality to the ship, limited liability, transferable shares, centralized management, and entity shielding. The resulting “sea corporations” were the closest to a modern corporation that was available continuously throughout the 17th through early 19th centuries in Europe and the United States.

The fact that maritime law developed all the most important features of corporate law offers important lessons for business organizational law itself. The parallel development of the same characteristics, with different and independent mechanisms, is strong evidence of the economic importance of the features of the modern corporation. The maritime law employed a unique device—the maritime lien—to achieve the same economic results as the nascent corporation. The key turn was the use of a property mechanism, rather than the contract mechanisms of partnership law, to implement in rem attributes. The vessel is property come to life in the eyes of the law, developing a form of legal personhood. Viewed in this broader context, the corporation is not a unique institutional solution to recurrent economic problems; it was a convenient vehicle for expanding and generalizing a set of economic solutions.

This new organizational theory of maritime law provides potentially important lessons for both maritime law and business organizations law. First, the theory provides a guiding principle for otherwise disorganized features of maritime law. It suggests that courts should explicitly interpret maritime law as a form of business entity law, keeping maritime law’s distinctive purposes, but drawing from the rich theoretical insights of law of other business associations to inform its unique institutions. At the same time, the long history of maritime law as business organization law provides hints for enduring challenges in corporate law, such as externalities of limited liability on involuntary creditors, such as tort creditors. Here, maritime law provides time-tested solutions, providing a system that provides priority for such creditors over contract creditors, solving one of corporate law’s most vexing problems.

 

Limits, Running, and Teaching

More and more of my posts are focusing on running.

I promise to tie the post to teaching at the end, but I will put the text under the break to spare the uninterested. 

 

Continue reading

Lawsuit Challenging FINRA's Constitutional Status Filed

Eight days ago, Scottsdale Capital Advisors and Alpine Securities Corp. filed a Complaint in the Middle District of Florida arguing that FINRA's structure and operation violate the U.S. Constitution.  The firms argue that FINRA is unconstitutional under the Appointments Clause, separation of powers principles, and the nondelegation doctrine.  The case has attracted some coverage already.

The suit makes many of the arguments I previewed in Supreme Risk, which was recently published by the Florida Law Review.  When I foresaw this risk, I highlighted four doctrinal areas where the Supreme Court might invalidate or significantly limit SROs, including: (i) nondelegation doctrine; (ii) separation of powers doctrine; (iii) state action; and (iv) appointments clause issues.

While it's still very early, this type of challenge now presents a colorable risk to self-regulatory organizations.  If these arguments succeed against FINRA, it's likely to cause significant market disruption.  It also lowers the barrier to press the same arguments against any SRO with a similar structure.

I would expect a case like this to make its way through the courts and toward the Supreme Court eventually.  It would not surprise me if groups like the Pacific Legal Foundation seek to get involved as well.  As FINRA has not yet filed its answer, it'll be interesting to watch this matter develop.

Recording of Sept. 28th Meeting of CFTC's Market Risk Advisory Committee Available

Dear BLPB Readers,

Today, I had an opportunity to review a recording of the September 28th meeting of the CFTC's Market Risk Advisory Committee (MRAC).  For those of you who might have also missed the opportunity to view it in real time and are interested in learning more about the Committee's work, a recording is here and I list the various sections of the meeting, with approximate start times, below.

Section 1: The Future of Finance (32:25)

Section 2: Climate Related Market Risk (1:09)

Section 3: Interest Rate Benchmark Reform - Transition Away From LIBOR (1:43:50)

Section 4: CCP Risk and Governance and the Transition of CCP Services to the Cloud (1:55)

Section 5: Market Structure (2:12:50)   

Diversified Standing

A lot of people are talking about this complaint against Meta, filed by James McRitchie, alleging that the Board violates its fiduciary duties to diversified shareholders because it seeks to maximize profits at Meta individually while externalizing costs that impact shareholders’ other investments.   The complaint further argues that the Board, whose personal holdings in Meta are undiversified, labors under a conflict with respect to diversified investors (seeking, apparently, to avoid the business judgment rule and obtain higher scrutiny of the Board’s actions).

The “universal ownership” theory of corporate shareholding has got a lot of traction recently; as I previously blogged, it’s appealing because it suggests that corporations can be forces for social good without actually changing anything about the structure of corporate law.

That said, academic champions of the theory do not necessarily argue in terms of fiduciary duty – that is, they aren’t claiming that either as a normative or descriptive matter, corporate boards are legally obligated to maximize wealth for shareholders at the portfolio level – instead, they tend to elide those kinds of claims and simply argue that as a matter of power, diversified investors have sufficient stakes and influence to control board behavior in this regard.

The problem with making the argument from the legal perspective, as Marcel Kahan and Ed Rock point out, is that it is not terribly compatible with corporate law as it is currently structured.

That comes through very clearly in the McRitchie complaint, which is brought both directly and, in the alternative, derivatively.

As a direct claim, the plaintiffs are only arguing that they are injured in their nonshareholder capacities – that is, with respect to the aspects of their existence other than their investment in Meta, namely, their existence as shareholders in other companies.  The Board of Meta obviously has no duty to maximize the wealth of these shareholders in their nonshareholder capacities, any more than it has a duty to maximize the wealth of corporate employees by paying them larger salaries, simply because the employees might also be shareholders.

As a derivative claim, it fails because derivative claims by definition allege harm to the corporate entity, and the complaint is very explicit that the Board’s actions do not harm Meta, but instead maximize its value (at the expense of others).

That said, the complaint highlights the underlying tension in corporate law, namely, the question whether directors’ fiduciary duty is to advance the interests of a kind of abstract notion of a shareholder (in which case, directors’ duties are a matter of government policy rather than private ordering), or instead, whether the duty is – or should be – to advance the interests of the actual shareholders who actually make investment and voting decisions.

It is worth noting, by the way, that these tensions are also playing out in the context of federal disclosure requirements.  The SEC’s proposed climate change disclosure rule does, to some extent, take into account the preferences of diversified investors who want a portfolio-eye view:

Investors have noted that climate-related inputs have many uses in the capital allocation decision-making process including, but not limited to, insight into governance and risks management practices, integration into various valuation models, and credit research and assessments.  Further, we understand investors often employ diversified strategies, and therefore do not necessarily consider risk and return of a particular security in isolation but also in terms of the security’s effect on the portfolio as a whole, which requires comparable data across registrants.

Commissioner Peirce, however, objects:

The Commission justifies its disclosure mandates in part as a response to the needs of investors with diversified portfolios, who “do not necessarily consider risk and return of a particular security in isolation but also in terms of the security’s effect on the portfolio as a whole, which requires comparable data across registrants.”  Not only does this justification depart from the Commission’s traditional company-specific approach to disclosure, but it suggests that it is appropriate for shareholders of the disclosing company to subsidize other investors’ portfolio analysis.  How could a company’s management possibly be expected to prepare disclosure to satisfy the informational demands of all the company’s investors, each with her own idiosyncratic portfolio?  The limiting principle of such an approach is unclear. 

Edit: After this post was published, the plaintiffs suing the Meta board amended their complaint to eliminate the derivative claims.

Contracting Out of Partnership

I attended the BLPB "Connecting the Threads" symposium last week at the University of Tennessee and, as per usual, had an excellent time with the students, staff, and faculty associated with the Transactions journal.  Upon asking the regular bloggers in this space, I was assured that it was acceptable to "toot my own horn" about publications.  To that end, please allow me to mention that my article on Contracting Out of Partnership has (finally) come out in the most recent issue of the Journal of Corporation Law.  If interested, the abstract is as follows:

Can parties contract out of the general partnership form of business organization, even if their conduct would otherwise establish a partnership? Although a recent judicial decision suggests that they can, treating contractual disclaimers of partnership as dispositive is inconsistent with modern statutes. More importantly, permitting parties to contract out of partnership imposes substantial costs by undermining the protections of fiduciary duty, creating uncertainty about the operating rules for the business, and threatening to deny the rights of third parties. These costs outweigh the benefits of promoting freedom of contract and providing certainty on the partnership formation question, particularly because such benefits can largely be captured within existing partnership and LLC law.

M&A Teaching/Learning Resources for the Academy and the Bar - A Reprise

It's been a minute since I mentioned and promoted my coauthored series of annotated model business combination agreements published with UT Law's business law journal, Transactions: The Tennessee Journal of Business Law.  I offer a list below, with a hypertext link to the SSRN posting of each.  These forms of agreement can be used as teaching or training resources.

Buying Assets in Tennessee: An Annotated Model Tennessee Asset Purchase Agreement

Buying Stock in Tennessee: An Annotated Model Tennessee Stock Purchase Agreement

Bank Mergers in Tennessee: An Annotated Model Tennessee Bank Merger Agreement

Acquisition Escrows in Tennessee: An Annotated Model Tennessee Acquisition Escrow Agreement

Acquisition Licenses in Tennessee: An Annotated Model Tennessee Acquisition License Agreement

Bills of Sale in Tennessee: An Annotated Model Tennessee Bill of Sale

This video is offered as a bonus: What is a Merger Anyway? from the 2019 Business Law Prof Blog Symposium (Connecting the Threads III).  The edited transcript is published in our Transactions journal and published here.

Enjoy!  Holler at me with any questions.

ICYMI: Louisiana divests nearly $800 million from BlackRock over ESG policies

At our wonderful BLPB conference a week ago (details here), I presented "An Introduction to Anti-ESG Legislation." Thus, news that Louisiana Treasurer John Schroder plans to liquidate all BlackRock investments within three months over Blackrock's ESG policies caught my eye. Here are some notable excerpts from the FOXBusiness article (here) on the news:

Louisiana Treasurer John Schroder penned a letter to BlackRock CEO Larry Fink, explaining the state would liquidate all BlackRock investments within three months and, over a period of time, divest nearly $800 million from the bank's money market funds, mutual funds or exchange-traded funds. The state treasurer blasted Fink's pursuit of so-called environmental, social and governance (ESG) standards that promote green energy over traditional fossil fuels. "Your blatantly anti-fossil fuel policies would destroy Louisiana’s economy," Schroder wrote to Fink in the letter .... "Consumers' Research applauds Treasurer Schroder's commendable decision to withdraw the state's assets from BlackRock's misuse," Will Hild, the executive director of Consumer's Research, told FOX Business in a statement. "As noted in his letter, BlackRock is using the people of Louisiana's money to advance a destructive agenda that raises costs for consumers in the state and across the country. The seeds of today's energy crisis were planted by BlackRock and others in their reckless abandonment of their fiduciary duty [in order] to cozy up to radical, woke politicians," he continued. "We are glad to see the Treasurer working to put an end to their economic vandalism."

You can find the full letter to BlackRock here. Here is a notable excerpt:

[A]ccording to my legal counsel, Environmental, Social and Governance (ESG) investing is contrary to Louisiana law on fiduciary duties, which requires a sole focus on financial returns for the beneficiaries of state funds. Focusing on ESG’s political and social goals or placing those goals above the duty to enhance investors’ returns is unacceptable under Louisiana law. A letter signed by 19 state attorneys general sent to you recently emphasized this same point…. You have admitted that your ESG agenda of forcing behaviors will not increase investor returns. Your 2022 letter to CEOs stated plainly that “We need to be honest about the fact that green products often come at a higher cost.” High cost/low return environmental policies will reduce a company’s profits ... and investors’ returns…. Recently Blackrock set a record for “the largest amount of money lost by a single firm over a six-month period” having “lost $1.7 trillion of clients’ money,” associated with ESG accounts, according to a July 20, 2022 Bloomberg article titled “BlackRock Is Breaking the Wrong Kind of Records.” Such huge losses would seem to indicate that BlackRock is either not focused on investor returns or that its ESG investment strategy is flawed. Neither bodes well for investors…. I’m convinced that ESG investing is more than bad business; it’s a threat to our founding principles: democracy, economic freedom, and individual liberty. It threatens our democracy, bypasses the ballot box and allows large investment firms to push political agendas. It threatens our economic freedom because these firms use their massive shareholdings to compel CEOs to put political motivations above a company’s profits and investors’ returns. Finally, it threatens our personal liberty because these firms are using our money to push their agendas contrary to the best interests of the people whose money they are using!

In Connection With

Last week, the Second Circuit issued an interesting decision on the scope of Section 10(b) standing in Menora Mivtachem Insurance v. Furtarom, 2022 WL 4587488 (2d Cir. Sept. 30, 2022).  IFF is a U.S. publicly traded company that purchased Frutarom, which also traded publicly but outside the U.S..  Frutarom lied about its business, and these lies were incorporated into IFF’s S-4 issued in connection with the merger.  The truth came out, and IFF’s stock price fell.  Stockholders of IFF tried to sue Frutarom, now a wholly-owned IFF subsidiary, for making false statements in connection with IFF’s stock.  The Second Circuit held that under Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the plaintiffs had no standing because they did not buy stock in the precise company being lied about.  As the Second Circuit put it:

Under Plaintiffs’ “direct relationship” test, standing would be a “shifting and highly fact-oriented” inquiry, requiring courts to determine whether there was a sufficiently direct link…Section 10(b) standing does not depend on the significance or directness of the relationship between two companies.

Rather, the question is whether the plaintiff bought or sold shares of the company about which the misstatements were made…The fact that this case involved a merger instead of the sale of a business unit and that IFF incorporated some of Frutarom’s misstatements in its SEC filings and investor presentations does not change the analysis here.  Plaintiffs did not purchase securities of the issuer about which misstatements were made….

So, first thing to note is why this matters.  Normally, if plaintiffs bought stock in the parent, they’d sue the parent.  But here, at least some of the false statements issued before the merger, when the parent is not responsible for the subsidiary’s misconduct.  Post-merger, through a combination of agency and scienter theories, it’s tough to show that the parent company is liable for the false statements of a subsidiary.  See my blog post about Plumbers & Steamfitters Local v. Danske Bank; see also Pugh v. Tribune Co., 521 F.3d 686 (7th Cir. 2008), and in fact, those kinds of allegations were dismissed in this very case.  And despite the Second Circuit’s reservation that state law may permit claims here, the only likely remedy under state law would be a derivative action by parent company stockholders – which of course wouldn’t benefit anyone who had sold their shares since the truth was revealed, and, again, would not work without a showing of scienter at the parent level, to excuse demand.

Which leaves the subsidiary as the only viable defendant.  But, as above, the Second Circuit narrowly construed the subsidiary’s statements to be about the subsidiary, and not about the parent – even when the subsidiary’s statements (presumably with the subsidiary’s permission) were included in merger documents associated with the parent.

So, first, let’s just point out the incongruence of treating statements in a prospectus for the sale of the acquirer’s stock as not being about the acquirer.

Leaving that aside, though, this issue comes up repeatedly.  In Ontario Public Service Employees Union Pension Trust Fund v. Nortel Networks Inc., 369 F.3d 27 (2d Cir. 2004), for example, Nortel was JDS Uniphase’s largest customer, and issued stock to JDS in exchange for a business unit.  When Nortel collapsed in fraud, JDS shareholders tried to sue Nortel on the grounds that the false statements had affected JDS Uniphase’s price.  They were rebuffed because Nortel’s statements were about Nortel, not JDS Uniphase.  Not long ago, though, a district court held that Juul might be liable to Altria’s shareholders for misstatements about its own business, seeing as how Altria was a 35% shareholder of Juul at the time. See Klein v Altria Group, 2021 WL 955992 (E.D. Va. Mar. 12, 2021).  And in Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000), the Third Circuit held that shareholders of a target company in a proposed, but unconsummated, stock-for-stock merger might be able to sue the acquirer and its auditor for a fraud discovered before the deal closed, on the ground that the acquiring company’s inflated performance affected the stock price of the target.

The Second Circuit’s decision here may – or may not – be at odds with Semerenko.  Formally, the Third Circuit’s decision was not based on “standing” but on construction of Section 10(b)’s language prohibiting fraud “in connection with” the purchase or sale of a security, which the Second Circuit here took as permission to disregard its holding: “Nortel rejected Cendant as persuasive authority, so Plaintiffs’ attempt to invoke Cendant to argue that other courts have allowed plaintiffs in their circumstances to sue is unavailing. In any event, as we noted in Nortel, Cendant did not discuss standing.”  That’s a little weird, because the standing requirement of Blue Chip is rooted in 10(b)’s “in connection with” language.  More generally, Semerenko has often been understood as representing the general principle that if two companies are closely related, a false statement about one is actionable by shareholders of the other.

I’ve previously written about the artificiality of how the fraud on the market doctrine is applied in modern cases, because there are so many judicially-created rules that limit what is supposed to be a court’s empirical inquiry into how frauds affect securities trading, and this is (sort of) another addition to the pile.  Leaving aside the fear that this allows, say, public companies to wink-wink-nudge-nudge induce related private companies to make false statements about their businesses, knowing that shareholders of the public company will be blocked from suing anyone at all, it’s fairly obvious that false statements by a target company about its business will affect the trading price of its acquirer.  That’s why the statements go in the acquiring company’s SEC filings in the first place.  Of course, when it comes to securities trading, everything affects everything else and certainly it’s reasonable to place limits on the connections one draws from one company to another – a point I made when discussing this issue in connection with “shadow” insider trading – but there’s a difference between requiring a close nexus, and creating a bright line rule that bars lawsuits of this kind.  Let alone a bright line rule that somehow excludes statements made in a prospectus for the sale of stock purchased by the plaintiff.  

That said, even a “nexus” rule may be applied strangely; in this case, Judge Pérez in concurrence would have applied a nexus rule, but she still found a nexus was lacking because the plaintiffs had not shown a direct relationship between the false statements of Furtarom and IFF’s stock price.  If required disclosures in an SEC registration statement are not enough to show that kind of relationship on a motion to dismiss, I’m really confused about what we’re all doing here. 

It's also worth pointing out some sparring between the majority opinion and the concurrence that does not bear on the direct holding.  The majority justified its refusal to permit standing here on the grounds that judicially created private rights of action, such as the right under Section 10(b), should be narrowly construed.  The concurrence, however, appeared to be concerned that the majority’s broad language could be taken to apply outside the 10(b) context, and warned that the opinion should not be taken to mean that all implied private rights of action should be read narrowly.

How to Contract Conference- February 16-17 in Miami

I had originally planned to post Pt. 2 of the blog post I did a couple of weeks ago, but this announcement is time sensitive.

I'm thrilled to announce that the Transactional Skills Program at the University of Miami School of Law is partnering with Laura Frederick for the second How to Contract conference. It's time sensitive because we are considering holding a side event with a contract drafting and negotiation competition for law students if there's enough interest. If you think you would be interested, please email me at [email protected].

For lawyers, there are virtual and live options for the contract conference. I've cut and pasted from the website so you can see why you should come to sunny Miami (and it won't be hurricane season):

It is not about the mega deals.

ContractsCon is about the contracts you work on EVERY DAY. We want to help you learn how to draft and negotiate the deals you see all the time.

Because for every 100-page specialized contract sent to outside counsel, there are thousands of smaller but important ones that in-house counsel and professionals do day in and day out.

ContractsCon focuses on how we manage risk and make the tough decisions with less time and information than we need.

It is not a summary of recent case law.

ContractsCon is about providing actionable advice to help you do the work that you have sitting in your inbox RIGHT NOW.

It's not about case names or citations and we don't get into academic explanations.

ContractsCon focuses on the real-world expertise from experienced practitioners that you need to improve your contract skills and expertise and become better at drafting and negotiating in the real world.

It is not going to put you to sleep.

ContractsCon is about the fun and awesomeness of contracts. We are organizing it to be a true lovefest for everything contracts.  

Why not combine learning about contracts with having fun?

You'll meet other lawyers and professionals passionate about contract drafting and negotiating. Our sessions and workshops feature contracting superstars who love what they do and will share their excitement with you. Plus we're planning a ton of activities on-site and online to keep you engaged. 

ContractsCon is designed for in-house lawyers and professionals who want to learn:

• the insights and techniques needed to handle the commercial contracts filling their inbox every day,
• how experienced lawyers manage risk, work efficiently, and make the hard decisions in challenging circumstances,
• WHAT to say, WHY to say it that way, and HOW to reach the best-negotiated deal you can with your contract counterparties.

Virtual ticket holders get access to 6 HOURS of no-fluff practical contract training by experienced practicing lawyers.

People who attend in person in Miami get 12 HOURS of training, including 6 hours of interactive skills workshops.

I hope to see you in Miami in a few months. Don't forget to follow Laura Frederick on LinkedIn for great contract drafting tips and to let me know whether you and your students might be interested in participating in a contract drafting competition. 

 

 

 

 

 

 

Nevada Business Court Makes Lawyer Who "happened to wander into the courtroom today" Co-CEO of Public Company

When I teach business law and corporations, I teach that a corporation's "board of directors has full control over the affairs of the corporation."  If a dispute breaks out between the CEO of a corporation and the board of directors, the board's view controls because the board is ultimately in charge of the corporation's affairs.  Of course, there may be room for questioning whether a valid board meeting occurred or the composition of the board for some reason, but the basic point that the board of directors gets to make these decisions struck me as largely settled law.

But you never know exactly what courts will do when a dispute ends up before them.  This brings me to the governance dispute that broke out at Vinco Ventures, Inc. (NASDAQ: BBIG).  According to its most recent 10-K, Vinco's business involved "digital media and content technologies."  As of April, "[f]ive directors comprise[d] [Vinco's] board of directors: Lisa King, Roderick Vanderbilt, Elliot Goldstein, Michael J. DiStasio and Philip A. McFillin."  King served as the CEO and Vanderbilt served as chair of the board.  An 8-K filed on July 8th, stated that Theodore Farnsworth was appointed as co-CEO and made a member of the board of directors.  The securities filing contain a good number of 8-Ks and announcements including other director changes and a notice of delisting from NASDAQ.  I'm not certain how reliable the 8-Ks are because the Nevada complaint in the governance dispute alleged that 8-Ks have been filed containing "materially incorrect and misleading information."

Nonetheless, according to an 8-K filed on September 30th, the company recently settled litigation resulting in, among other things, that "Ross Miller is the sole CEO and shall run the Company under the oversight of the Company’s Board of Directors, with Lisa King and Rod Vanderbilt remaining as directors." Mr. Miller is a Nevada politician, former Secretary of State, and the son of former Nevada Governor Bob Miller.  His Wikipedia page has yet to be updated to reflect his new role as the CEO of a public company.

How exactly did Mr. Miller become the CEO of Vinco?  I'm still trying to puzzle that out.  Many of the court records are available online.

In the interest of keeping this blog length, let's start with a business court order entered on August 19th.  By way of factual findings, the Court stated that "The Parties disagree regarding the propriety of certain Board Meetings wherein persons were either selected or removed as Chief Executive Officer (“CEO”). Plaintiff contends that John Colucci has been selected as CEO and Defendants contend that Lisa King, Ted Farnsworth or both are the duly-elected CEO." 

I would have approached this situation by sorting out the valid board of directors and allowing them to make the decision.  That isn't what happened here.

The Court recognized both John Colucci and Lisa King as "co-CEOs of Vinco Ventures pending further order of the court."  As Colucci and King apparently opposed each other, the Court stated that it believed that "it is in the best interest of Vinco Ventures to have an interim, neutral, and independent third co-CEO."  It then appointed "an interim, neutral, and independent party—former Secretary of State of Nevada, Ross Miller, Esq.—to serve as a third co-CEO of Vinco Ventures pending further order of the Court."  The Court then admonished all three co-CEOs "to make a good faith effort to work together in the best interests of Vinco Ventures."

How did Mr. Miller get picked for this role? A transcript of the relatively brief hearing reveals that the idea was pitched to the Court by one of Farnsworth's attorneys.  As the attorney explained it "my proposal is going to be that Mr. Colucci, Lisa King, and then, a third-party, who just happened to wander in the courtroom today, because he was a witness in the case next door, Mr. Ross Miller, be appointed as co-CEO."  The attorney then revealed that he had "vetted Mr. Miller.  He said he'll do it.  He used to be the Secretary of State of Nevada. If you remember, his father was the governor for 10 years not even 8, but 10 years. And he does do corporate law. And he says he's interested in it. So we're going to propose him as the co-CEO."  

From the transcript, I gather that the Court thought this structure preferable to appointing a receiver.  The Court stated that it knew "the receiver word, you know, it has a negative connotation."

Mr. Miller became one of three co-CEOs on August 19th and then pursuant to a settlement agreement entered into on September 28th became the sole CEO of Vinco.  The day before on September 27, the SEC brought an enforcement action against Theodore Farnsworth alleging that he and others "intentionally and repeatedly made misstatements" in securities filings for a different public company.

One of the purported benefits of the Delaware Chancery Court is its predictable application of law and rich body of case law addressing questions. 

Nevada offers an alternative.  It's possible for a court here to appoint a lawyer who happens to wander into a courtroom as the co-CEO of a public company.  

Call for Papers - AALS Section of Financial Institutions & Consumer Financial Services

Dear BLPB Readers:

"The AALS Section of Financial Institutions & Consumer Financial Services will host the first AALS FinReg Conference on November 4, 2022, in-person, at the Antonin Scalia Law School, in Arlington, Virginia."

The deadline to submit a paper or abstract for consideration is October 16, 2022.  The complete call for papers is here: Download AALS_GMU_Call_for_paper

The Wit and Wisdom of Tom N.

It was so wonderful to be able to host an in-person version of our "Connecting the Threads" Business Law Prof Blog symposium on Friday.  Connecting the Threads VI was, for me, a major victory in the continuing battle against COVID-19--five healthy bloggers and a live audience!  Being in the same room with fellow bloggers John Anderson, Colleen Baker, Doug Moll (presenting with South Carolina Law friend-of-the-BLPB Ben Means), and Stefan Padfield was truly joyful.  And the topics on which they presented--shadow insider trading, exchange trading in the cloud, family business succession, and anti-ESG legislation--were all so salient.  (I offered the abstract for my own talk on fiduciary duties in unincorporated business associations in last week's post.)  For a number of us, the topic of our presentations arose from work we have done here on the BLPB.

This year, as I noted in my post last week, we had a special guest as our luncheon speaker.  That guest would be known to many of you who are regular readers as "Tom N."  Tom has commented on our blog posts here on the BLPB for at least eight years.  (I rooted around and found a comment from him as far back as 2014.)  And Tom lives right here in Tennessee--in middle Tennessee, to be exact (closer to Haskell Murray than to me).  You can check out his bio here.  I am delighted that we were able to coerce Tom to give up a day of law practice to come join us at the symposium.

The title/topic for Tom's talk was "A Country Boy Busines Lawyer's View from Down in the Weeds."  The talk was, by design, a series of reflections on Tom's wide-ranging business law practice here in the state of Tennessee.  He tries to stay out of the courtroom, but by his own recounting, he has been in court in every county in the state--and Tennessee has 95 counties!  

In the end, Tom ended up offering a bunch of tips for law students and lawyers (both of whom were in attendance at the symposium).  I took notes during Tom's talk.  I have assembled them into a list below.  The key points are almost in the order in which they were delivered.  The stories that led to a number of these snippets of practical advice were priceless.  You had to be there.  Anyway, here is my list, together with a few editorial comments of my own.  Tom can feel free to add, correct, or dispute my notes in the comments!

• Take tax courses; if you fear they may hurt your GPA, audit them.
• Use all available resources to get more knowledge.  (Tom indicated that he bought Westlaw/used Practical Law as a solo practitioner for many years but recently gave it up.  he also noted that he regularly reads a number of the law prof blogs.)
• Be a bar association member and access the resources bar associations provide.  (Tom noted the excellent written materials published by the American Bar Association and the superior continuing legal education programs produced by the Tennessee Bar Association.)
• “You are going to learn to write in law school.”  (Tom advised focusing on clear, efficient writing—something I just emphasized with my Business Associations students last week.)
• Publish in the law.  (Tom shared his view that writing in the law improves both knowledge and analysis.)
• Expect the unexpected, especially in court (e.g., confronting in court transactions in pot-bellied pigs involving a Tennessee nonprofit).  And as a Corollary: "You can't make this stuff up."  The truth often is stranger than anything you could make up . . . .)
• In business disputes, never assume that an attorney was there on the front end.  (And yes, there was mention of the use by many unknowledgeable consumers of online entity formation services.)
• As a lawyer, be careful not to insert your own business judgment.  The business decision is the client's to make.
• Relatedly, let the business people hand you the framework of the deal.
• Along the same lines: "I am not paying people to tell me I can’t do it; I am paying people to tell me how to do it.”  (As heard by Tom from his father, a business owner-manager.  I think many of us have heard this or learned this—sometimes the hard way . . . .  I do try to prevent my students from learning that lesson the hard way by telling them outright.)
• And further: “You want to screw up a deal, put the lawyers in the center of it.”
• As a courtroom lawyer, know the judges and—perhaps more importantly—court clerks!
• Introduce yourself to everyone; they may be in a position to help you now or later (referencing the time he introduced himself, unknowingly, to John Wilder, the former Lt. Governor of Tennessee, who proceeded to introduce him to the local judges).
• Preparation for the bar exam is a curriculum of its own.  (That's close to a quote.)
• “A lot of things go more smoothly of you can get people talking.”  (Tom is more of a fan of mediation than arbitration.)
• Local rules of court may not be even published; sometimes, you just need to pick up the phone and call the court clerk.  (Another reason to get to know local court clerks!)
• Developing rapport with a judge is incredibly important to successful courtroom lawyering.
• Saying "I don’t know" does not hurt anything; in fact, it may help judges/others develop confidence in you and your integrity.
• Your law school grades will not matter after your first or second job.  Employers will be looking at you and your professional record, not your grades.

I am sure I missed something along the way.  Maybe my fellow bloggers in attendance will have something to add.  But this list alone is, imv, pure gold for students and starting lawyers.