Business Law Prof Blog

Teaching Question of the Day

I teach business law courses that involve planning and drafting in connection with business transactions. I know many of you do, too.  My question is, how do you teach your students to find drafting precedents (if that is part of your teaching) for transactional business law projects/tasks?  Do you advise students to use forms or to walk back provisions in fully negotiated agreements?

In our capstone 3L planning and drafting course at UT Law, Representing Enterprises, I let students take their own path in finding drafting precedents and ask them to report out their process to the class.   We talk through the pros and cons of their individual approaches, which I capture on the whiteboard.  My board notes from a recent class (during which we talked through how students located precedent bylaws for a closely held--preferably Tennessee--corporation) are included below.

 

Although Bloomberg Law was a popular resource for students who shared their process in this particular class meeting, the Securities and Exchange Commission's website and Google also got some love.  In the ensuing discussions, a student also mentioned Westlaw's Practical Law as a resource, although that's not reflected in this picture.

In other advanced business law planning/drafting courses, I invite representatives from Bloomberg Law, Lexis, and Westlaw into my classroom to train my students in how to find precedent documents (and other transactional resources) using their database's search tools.  One student involved in the discussion reflected in the photo above was enrolled in one of those advanced courses with me in the fall (and also had been a student in our transactional business law clinic).  He was among the folks who started his search process with Bloomberg Law.  His classmates told me he had been teaching them some of what he had learned in my course and the law clinic!  #peerteaching--loved it!

How do you help students find drafting precedents (and in what business law and legal education contexts)?  I am always willing to learn new methods and tricks.

Baylor Law: Transactional Drafting & Other Legal Writing/Drafting Openings

The following came to me from Patricia Wilson, Associate Dean and Professor of Law, Chair of the Faculty Appointments Committee at Baylor Law:

Baylor Law is accepting applications for two lecturer positions in our Legal Analysis, Research and Communication (LARC) program, as described below, to begin no later than August 1, 2023.  Please share with anyone you believe may be interested.

Lecturer (Transactional Drafting)

Candidates must possess a juris doctor. You will be asked to provide a letter of interest; curriculum vitae; transcripts, a list of three references in the application process, and two writing samples demonstrating the candidate's writing style.  Salary is commensurate with experience and qualifications.

The selected individual will have responsibility for teaching in the Legal Analysis, Research & Communications (LARC) program. Responsibilities include working collaboratively with other faculty members of the Baylor Law Writing Program to create, teach and grade assignments for the LARC 4 course (Transactional Drafting) and coordinating all of the writing efforts across all three years of the curriculum to ensure consistency and best management of resources. The ideal candidate will have at least three years of transactional legal writing experience, including drafting and analyzing a variety of different contracts and business entity governing documents. For more information about the Baylor Law Legal Writing Program, please visit www.baylor.edu/law/index.php?id=933907.

Lecturer (Persuasive Writing; Litigation Drafting)

Candidates must possess a juris doctor. You will be asked to provide a letter of interest; curriculum vitae; transcripts, a list of three references in the application process, and two writing samples demonstrating the candidate's writing style.  Salary is commensurate with experience and qualifications.

The candidate should have substantial experience in persuasive writing and litigation drafting, including drafting appellate briefs and a variety of different pleadings, trial motions, and similar work product.  The selected individual will have responsibility for teaching in the Legal Analysis, Research & Communications (LARC) program, specifically LARC 3, our required persuasive writing course, and LARC 5, our litigation drafting course. He or she will teach several sections of both courses each year.  He or she will be one of several LARC 3 instructors. With respect to the LARC 5 course, the candidate will be expected to collaborate and coordinate project planning with instructors for the LARC 4 (transactional drafting). Thus, the ideal candidate will also have experience in analyzing and drafting a variety of contracts. The candidate will share additional responsibilities as well, such as periodically serving as a judge in the Practice Court program and collaborating with other legal writing faculty members to create problems for writing competitions. For more information about the Baylor Law Legal Writing Program, please visit www.baylor.edu/law/index.php?id=933907.

General Information

Both positions entail renewable one-year contracts, with the possibility of promotion to senior lecturer status after seven years.

We are especially interested in candidates who will enhance the diversity of our faculty.  Our search includes both entry-level and junior lateral candidates.  

Additional information for these two positions and other open positions at Baylor Law is available at: www.baylor.edu/law/facultystaff/index.php?id=980341

I did a podcast!

Quick post today to mention that I did a podcast!  Evan Epstein of UC Law San Francisco hosts a regular podcast called "Boardroom Governance" for which he's interviewed everyone who has anything to do with corporate issues - academics, practitioners, board members, you name it.  Recently, he was kind enough to invite me for an interview.  It was a great discussion, covering everything from Twitter v. Musk (of course), to the McDonald's decision, to Sam Bankman-Fried, to public benefit corporations, to Domino's pizza.

You can give it a listen here (and at that link there's a handy index, if you want to jump to particular points).

Catholic Law Seeks Business (and Other) Faculty!

Catholic Law seeks to fill several faculty positions to begin in Fall 2023. We are seeking candidates for entry-level and lateral positions, tenure-track or contract, in a wide variety of subjects, including Clinical Education, Lawyering Skills, Civil Procedure, Family Law, Trusts and Estates, Criminal Law and Procedure, Evidence, Corporate and Securities Law, International Law, and Contracts and Commercial Law.

Candidates in Clinical Education may have opportunities to teach in our existing clinics but also may propose new clinical areas. We are particularly interested in clinical offerings compatible with participation by our evening students.

We are also seeking candidates whose teaching and research interests may be in any of the above subject matter areas (or others) who are also interested in participating in our University’s Institute for Latin American and Iberian Studies.

Catholic Law is a national leader in preparing students of all faiths for the practice of law and is an integral part of The Catholic University of America, the national university of the Catholic Church, located on a beautiful residential campus in the heart of the nation’s capital.

Candidates must possess a J.D. or equivalent, superior academic credentials, and relevant professional experience, such as teaching, legal practice, or judicial clerkships. The application should include a letter of interest, CV, references, sample publications, and a personal statement addressing how your research, teaching, and service would make a distinctive contribution to the mission of our University and law school and the vision of Catholic education outlined in the Apostolic Constitution on Catholic Universities, Ex Corde Ecclesiae.

Interested applicants should email their materials to the attention of Dean Stephen Payne at [email protected].

As a Catholic institution, our mission commits us to respecting the “dignity of each human person,” and to welcoming scholars who will bring a “diversity of backgrounds, religious affiliations, viewpoints, and contributions” to the law school’s vibrant intellectual community. We recognize the importance of diversity in our faculty and encourage applications from those with diverse backgrounds.

The Catholic University of America is an Equal Opportunity Employer.

Professor Wilmarth's We Must Protect Investors and Our Banking System from the Crypto Industry

Professor Emeritus Arthur E. Wilmarth recently posted a new article, We Must Protect Investors and Our Banking System from the Crypto Industry.  I always learn a ton in reading his work, so I'm looking forward to the opportunity to review this paper.  Here's the abstract:

"The crypto boom and crash of 2020-22 demonstrated that (i) cryptocurrencies with fluctuating values are extremely risky and highly volatile assets, and (ii) cryptocurrencies known as “stablecoins” are vulnerable to systemic runs whenever there are serious doubts about the adequacy of reserves backing those stablecoins. Crypto firms amplified the crypto boom with aggressive and deceptive marketing campaigns that targeted unsophisticated retail investors. Scandalous failures of prominent crypto firms accelerated the crypto crash by inflicting devastating losses on investors and undermining public confidence in crypto-assets.

Federal and state regulators have allowed banks to become significantly involved in crypto-related activities. Several FDIC-insured banks that provided financial services to crypto firms suffered substantial losses and incurred extensive legal, operational, and reputational risks during the crypto crash. Meanwhile, stablecoins issued by nonbanks and uninsured depository institutions threaten to become a new form of “shadow deposits” that could undermine the integrity of our banking system and require costly future bailouts.

This article presents a three-part plan for responding to the risks posed by fluctuating- value cryptocurrencies and stablecoins. First, policymakers must protect investors by recognizing the Securities and Exchange Commission (SEC) as the primary federal regulator of most fluctuating-value cryptocurrencies. Federal securities laws provide a superior regime for regulating such cryptocurrencies. In particular, the SEC has broader powers (including a more robust investor protection mandate) and a stronger enforcement record than the Commodity Futures Trading Commission (CFTC).

Second, federal bank regulators must protect the banking system by prohibiting all FDIC- insured banks and their affiliates from investing and trading in fluctuating-value cryptocurrencies, either on their own behalf or on behalf of others. In addition, federal bank regulators should bar FDIC-insured banks and their affiliates from providing financial services to crypto firms unless those firms are registered with and regulated by the SEC and/or the CFTC.

Third, Congress should mandate that all issuers and distributors of stablecoins must be FDIC-insured banks. That mandate would ensure that all providers of stablecoins must comply with the regulatory safeguards governing FDIC-insured banks and their parent companies and affiliates. Those safeguards provide crucial protections for our banking system, our economy, and our society."

 

 

Belmont University - Nashville, TN - Assistant Professor and Program Director of Legal Studies

Belmont University (my employer) is seeking an Assistant Professor and Program Director of Legal Studies.

This professor will sit across campus from me, in our College of Liberal Arts and Social Sciences ("CLASS"), but I will likely interact with them because my Business Law 1 and 2 classes feature in the legal studies major, in addition to the business majors on campus. Happy to discuss Belmont University with anyone who may be interested. 

You can apply for the position (by March 15) here.  

2023 Emory Law Transactional Law and Skills Conference & Tennessee's Business Law Journal

For those of you who may have been wondering about Emory Law's biennial Conference on the Teaching of Transactional Law and Skills, I have posted current information below.  I am pleased to see that our business law journal, Transactions: The Tennessee Journal of Business Law, is again publishing the proceedings.  This has been a great partnership between Emory Law and Tennessee Law over the years.  The proceedings of the 2021 Emory Law conference can be found here.

Just as I was ready to post this, I heard from the 2023-24 Editor-in-Chief of the journal, Bethany Wilson, that we are currently accepting articles for the Fall 2023 edition of Transactions. The articles published by Transactions typically focus on transitional business law issues and topics, including agency, antitrust, arbitration, bankruptcy, business associations, contracts, insurance, intellectual property, labor and employment, property, real estate, secured transactions, securities regulation, shareholder litigation, and tax. If you have any articles that you would be interested in having published by Transactions, please send them our way. Articles can be submitted via Scholastica or by emailing an abstract and copy of the article to [email protected].

 

Corporate Speech and the Omnipresent Specter of Political Bias

This post was originally intended to be submitted as a comment to Ann Lipton’s recent “Don’t Say Anything” post – so please read that post first before continuing. I ultimately decided to publish this as a free-standing post because it got a bit long for a comment and I’ll be better able to follow any subsequent comments here. As always, I remain open to changing my mind in the light of convincing feedback.

Ann’s post starts by referencing “Florida’s ‘Don’t Say Gay’ law, HB 1557.” For context, the following from Heritage Action's Executive Director Jessica Anderson (here) may be helpful:

While the Left and the corporate media continue to lie about Florida’s Parental Rights in Education bill, HB 1557, Florida Republicans haven’t stopped working to protect parents and children. Nothing in the bill bans the word ‘gay’ or censors schools — it simply protects grades K-3 from sexualized instruction and bolsters parents’ rights to know what’s going on in their children’s lives at school.

As for the substance of the case, I predict that Chancery will not dismiss the request. Why? Because it does not have to dismiss it in order to discourage “bullying” because this is not properly dismissed as bullying (i.e., an improper purpose). Simeone is certainly not the only shareholder to be concerned about Disney’s decision possibly being tainted by political bias – and this request is a proper way to try to get at the truth on that issue. What’s the most likely form of circumstantial evidence of political bias in a case like this? I believe it is failures of information-gathering that conveniently tilt in only one partisan direction. For example, if the decision-makers utterly failed to even consider simply firing the disruptive employees as a way to restore order at the company, or if they utterly failed to account for the completely foreseeable costs of backlash – in the form of state action or an even bigger PR nightmare – for trying to undermine the decisions of a democratically elected governor arguably doing precisely what he was democratically elected to do (cf. "Nikki Haley Says Florida’s Parental-Rights Law Doesn’t Go ‘Far Enough'"), then we start to get smoke suggesting a fire of politically biased willful blindness. Phrased more conventionally, if the corporate decision-makers failed to properly inform themselves in the course of reaching their decision, then they breached their duty of care, and if their information-processing failures rose to the level of consciously disregarding their known duty to become fully informed, then they engaged in non-exculpable bad faith. Given the highly politicized nature of this dispute, and the specter of political bias it raises, granting the request here seems perfectly in line with Section 220’s purpose and precedents. FWIW, I have previously written about the need for enhanced scrutiny in cases like this here, here, and here; Senator Marco Rubio has linked to some of that work here.

As for the concern that granting this request will somehow sanction improper or illegal “bullying” of corporations by political actors, I don’t think corporate decision-makers can ignore likely material impacts of political actions simply because they believe those actions may ultimately be deemed illegal. For example, should corporate decision-makers ignore the potential costs/benefits of President Biden’s loan forgiveness program because it may ultimately be ruled illegal? I think not.

Lawyers, Law Students, and Mental Health

Warning: this post addresses suicide.

I was supposed to post yesterday about a different topic but I'm posting today and not next week because someone needs to read this today.

Maybe it's you. Maybe it's your "strong" friend or colleague.

I found out yesterday that I lost a former student to suicide. She lit up every room she walked into and inspired me, her classmates, and everyone she met. I had no idea she was living in such darkness. Lawyers, law students, compliance professionals, and others in high stress roles are conditioned to be on top of everything. We are the strong ones that clients and colleagues rely on. We worry so much about the stigma of not being completely in control at all times, that we don't get help. We worry that clients won't trust us with sensitive or important matters. We worry that we won't pass the character and fitness assessments to get admitted to the bar. 

The CDC released a report this week showing an alarming rise in depression, suicidal thoughts, and anxiety among our youth. The report noted that:

• Female students and LGBQ+ students are experiencing alarming rates of violence, poor mental health, and suicidal thoughts and behaviors.
• The rates of experiencing bullying, sexual violence, poor mental health, and suicidal thoughts and behaviors indicate a need for urgent intervention.

According to nami.org, one of the most respected organizations on the mental health:

1 in 5 U.S. adults experience mental illness each year
1 in 20 U.S. adults experience serious mental illness each year
1 in 6 U.S. youth aged 6-17 experience a mental health disorder each year
50% of all lifetime mental illness begins by age 14, and 75% by age 24
Suicide is the 2nd leading cause of death among people aged 10-14 

Those statistics don't surprise me. I have a family member who lost his first friend to suicide at age 12 and has lost almost ten others in the past ten years to suicide or overdoses. I have other family members who have been hospitalized repeatedly for mental health crises and others who refused to get help and were homeless. When people ask my why I care so much about my students and coaching clients, this is why. It's personal for me.

It's why I got mental health first aid certified when the University of Miami offered the training to staff and professors and why I'm often the only lawyer in the room at conferences and trainings with social workers, neuroscientists, and therapists who are getting their certifications. I stay in my lane, of course. But I want to understand more and I want to do my part to help change the profession because lawyers are in the top 10 for rates of suicide. We have disproportionately higher rates of depression, anxiety, and substance use disorders. Although I've been a happy lawyer for over thirty years, I know I'm a unicorn.

So here are some resources. This list could be pages long so I've compiled links that also refer to other resources:

988 Suicide & Crisis Lifeline

American Bar Association Mental Health Resources

Mental Health First Aid Training (I highly recommend this training and have completed it myself through my law school)

National Alliance on Mental Illness Resource Directory

Institute for Well Being in Law

Lawyer Assistance Programs by State

ABA Substance Use and Mental Health Toolkit for Law School Students and Those Who Care About Them

If you are a parent, especially of young children, get educated as soon as you can so that you can spot the signs early and support your children so they don't end up in these statistics. Ask your school administrators if they are familiar with the CDC's What Works in Schools Program.  Tell your school board and elected officials that mental health is a priority and vote for candidates who understand this as the public health crisis that it is. Sit down with your kids and watch The Social Dilemma. It may not change their addiction to social media, but it will help you understand why this generation is suffering so much that school districts have filed suit about the mental health impacts.

If you're a law student, check out the resources above. Don't get your health advice from TikTok or Instagram unless it's from a trained professional  (although I did do a TikTok video telling people to get help).

If you're a law professor, do you know where to send your students if they come to you seeking help? I have the cell phone number of our Dean of Students and I know I can reach out to her at any time if I'm worried about a student. I also share my family's story with my students so they feel safe asking for my guidance. I don't act as their therapist, but it's my job to prepare the students for the difficulties of the profession, and not just how to redline a document or argue a motion. 

If you're a law firm partner, consider investing in real training for your lawyers and your staff.  Don't just bring in someone to talk about mindfulness or diversity, equity, and inclusion once a year so you can check that box off. Invest in long-term, consistent, evidence-based training and coaching for your staff and lawyers at all levels (yes, managing partners too). Look at and reconfigure your billable hours requirements and layoff plans. Are they realistic? Are they really necessary? If you're comfortable, share your personal story of dealing with mental health challenges with your associates so they know you're human and have some empathy even as you have them billing over 2000 hours to get a bonus. 

If you're a general counsel, ask your firms about what they do to protect and preserve mental health, just like you ask about DEI initiatives. 

This is resource list is clearly just a start. What resources or tips do you have for those who are struggling in the profession? What will you today? If you do nothing else, share this message with others. It could be a matter of life or death for someone you know. 

Don't Say Anything

As you may be aware, a Disney shareholder, Kenneth Simeone, has filed a Section 220 action in Delaware Chancery seeking books and records pertaining to Disney’s announcement in early 2022 that it opposed Florida’s “Don’t Say Gay” law, HB 1557. 

Before the law was passed, Disney’s CEO, Robert Chapek, told employees that the company would not take a public position on the law.  That decision infuriated Disney employees, who, among other things, began staging walkouts in protest.  Ultimately, Chapek reversed course and publicly stated that Disney opposed the law.

In the wake of that announcement, Governor Ron DeSantis and the Florida legislature voted to dissolve Disney’s self-governed Reedy Creek Improvement District, although they later walked back their actions by maintaining the district but transferring control to Florida political appointees.  Chapek was fired by the board (likely for a host of reasons), and former CEO Robert Iger was restored to his old role.

Anyway, Simeone claims that he has a credible basis to suspect that Disney’s public opposition to the law was the result of mismanagement and breach of fiduciary duty.  In particular, he claims that Disney’s officers and directors may have put their personal political preferences ahead of shareholder interests, and that therefore he is entitled to further information to investigate.  Among other things, he seeks information about whether any of the directors are beholden to LGBTQ+ rights organizations, or whether they are beholden to directors who are.  The case is set for trial in Delaware, Simeone v. The Walt Disney Co., No. 2022-1120-LWW.

So, first, let’s just state the obvious: Disney facially had a legitimate business reason for its opposition to the law.  The company had become ungovernable, and silence was becoming a public relations nightmare.  That doesn’t mean Chapek handled things well or even competently, nor is it a statement about anyone’s true motivation; it’s simply that there was a patently legitimate reason for the about-face. 

What’s also obvious is that this 220 action was undertaken to punish Disney for expressing a (liberal) political opinion, and to deter other corporations from doing the same.   The difficulty from Delaware’s perspective is that, especially after AmerisourceBergen v. Lebanon County Employees’ Retirement Fund, the bar for obtaining books and records is very low.  The shareholder does not have to establish a viable claim for breach of fiduciary duty; investigating mismanagement is enough, if only because evidence of mismanagement might be used to run a proxy contest or otherwise communicate with other shareholders about further courses of action.  The shareholder does not have to articulate any particular plan of action after obtaining such evidence; in a mismanagement investigation, Section 220 does not require that shareholders identify the “ends” to which they might apply the materials.  And though courts have rejected demands in the past when there was reason to suspect the shareholders’ motivations were pretextual or based on personal political beliefs, the fact that a petitioner might harbor such beliefs does not itself undermine an otherwise-legitimate request for materials.  Therefore, it seems that Delaware Chancery will be in the difficult position of having to do three things simultaneously: Dismiss the action, without setting new standards that make legitimate claims difficult to bring, while also making clear that Delaware is not a forum for bullying companies that make political statements with which some segment of the public disagrees.

But there’s another insidious aspect to this dispute.  Simeone’s brief lays out a truly convincing case that DeSantis’s actions against Disney were explicit retaliation for its speech, in violation of the First Amendment.  And yet the legal argument Simeone makes is, to comply with their fiduciary duties and otherwise properly manage the company, Disney’s officers and directors should have anticipated unconstitutional action by the governor of Florida and modified their behavior accordingly.

And it gets worse.  Simeone is not, as far as I know, in any way affiliated with the State of Florida, but other investors are.  DeSantis has already implied he would manipulate Florida’s public pension funds into initiating litigation against any portfolio companies that anger him; imagine if he retaliated against a company for expressing opposition to him and then caused Florida’s own fund (or even funds sponsored by sympathetic states) to bring lawsuits claiming the company was at fault for bringing about the very harm his own administration inflicted.

That said, from a pure shareholder primacy/wealth maximization point of view, I’m not sure Simeone is wrong; Disney has no right even to stand up for its own freedom of speech, unless there is a business purpose for doing so.  Unless, of course, there’s a general public policy principle that corporate directors are not obligated to manage the company in anticipation of overtly unconstitutional action by U.S. government officials.

Heminway on Fiduciary Duties and Succession - Tonight!!

As I noted in a post a few weeks ago, I am presenting on corporate fiduciary duties tonight as the Roy/Demoulas Distinguished Professor of Law and Business at the Waystar/ROYCO School of Law.  The title of my presentation is: What the Roys Should Learn from the Demoulas Family (But Probably Won't).  The presentation will run from 9:00 pm to 10:00 pm Eastern on Zoom at the following link:  https://us02web.zoom.us/j/86783560319?pwd=cTJza2N6elFyVGhBUFVjdk1Gb2oxQT09.

If you do not know about the Demoulas family and their fiduciary duty tangles up in Massachusetts, my presentation will inform you (and may even get you interested).  Members of the family were locked in litigation with each other for over 20 years.  Much of that litigation relates to alleged breaches of corporate and trust fiduciary duties.  And for those who have not watched the HBO Max series Succession, I will offer a window on some of the characters and plot lines, tying them in to observations about the Demoulas family.  

I welcome your attendance and participation!

Aggarwal, Choi & Lee on Meme Corporate Governance

I'm an avid reader of Matt Levine's Money Stuff newsletter.  Yesterday, he discussed a recently posted article by Dhruv Aggarwal, Albert H. Choi, and Yoon-Ho Alex Lee, Meme Corporate Governance.  Although I've not yet had time to review the paper, it's now on my reading list, and I thought other BLPB readers might want to add it to theirs too!  Here's the abstract:

"In 2021, several publicly traded companies, such as GameStop and AMC, experienced a dramatic influx of retail investors in their shareholder base. This Article analyzes the impact of the “meme stock surge” phenomenon on the companies, particularly with respect to their governance outcomes and structures. The paper presents three principal findings. First, as a preliminary matter, we show how the “meme stock” frenzy was affected by the introduction of the commission-free trading platform, such as Robinhood, in 2019. We show empirically that the meme stock companies experienced a larger trading volume when commission-free trading was widely introduced. Second, we examine how the influx of retail shareholders has directly affected the governance outcomes at the meme stock companies. The main finding is that, notwithstanding the promise of more active shareholder base, meme stock companies have experienced a significant decrease in participation by their shareholders, including voting and making shareholder proposals. Third, we examine other popular governance metrics—such as ESG and board diversity indices—and show that while the diversity index has not improved, the ESG measure has gotten worse for the meme stock companies. While there is an issue of generalizability, our findings show that the influx of retail shareholders at meme stock companies have not translated into more “democratic” governance regimes."

 

ICYMI: "House Republicans Launch Anti-ESG Working Group Targeting SEC Climate Rules"

Thomson Reuters recently published an accounting & compliance alert (here) noting the following.

• Representative Bill Huizenga of Michigan signaled a new working group "will lean heavily into the Supreme Court's 2022 ruling in West Virginia v. EPA to argue that the SEC has gone beyond its statutory authority with the proposed [climate] rules, set to be finalized this spring.... The working group will examine how to 'rein in the SEC's regulatory overreach' and reinforce the materiality standard in the disclosure regime, as well as 'hold to account market participants who misuse the proxy process or their outsized influence to impose ideological preferences in ways that circumvent democratic lawmaking,' according to a news release." 

 

• "Senator Marco Rubio on Feb. 2 announced his 'anti-woke agenda' for the 118th Congress, including the Mind Your Own Business Act that would enable shareholders to more easily sue public companies over socially-driven actions, such as refusing to do business in states that crack down on abortion or restrict voting rights." [FWIW, I suspect that Sen. Rubio might replace "refusing to do business in states that crack down on abortion or restrict voting rights" with "refusing to do business in states that protect the lives of the unborn or defend the integrity of our voting system."]

 

• "Senator Mike Braun of Indiana on Feb. 1 announced plans to launch a Congressional Review Act (CRA) resolution seeking to nullify the Department of Labor's recent rules clearing barriers to ESG investing and proxy voting for retirement plan fiduciaries, alongside 49 other senators, with Representative Andy Barr of Kentucky introducing the resolution in the House."

Another LLC/Employment case

As I've mentioned repeatedly in this space, I recently posted a new paper to SSRN: Inside Out (or, One State to Rule them All): New Challenges to the Internal Affairs Doctrine, forthcoming in the Wake Forest Law Review.  The paper is about the uncertain boundary between matters subject to the internal affairs doctrine, and matters subject to ordinary choice of law analysis, and one of the issues I tackle concerns LLC agreements.  Specifically, LLCs have increasingly included employment provisions in their operating agreements, leaving Delaware courts in somewhat of a quandary as to whether the operating agreement is subject to the internal affairs doctrine - and thus Delaware law - or whether instead it should be treated as an employment contract, subject to ordinary choice of law analysis. (I also blogged about one such case here; as longtime readers are aware, stuff I muse on in blog posts often ends up in papers).

Anyhoo, this is why VC Will's new opinion in Hightower Holding LLC v. Gibson is so striking.  There, partners in a financial advisory firm sold their interests to Hightower, and were made LLC members and principals in Hightower.  The LLC agreement contained a noncompete clause and selected Delaware law; so did a separate "protective agreement" signed by the partners.  You can guess what happened next.  One partner quit and started a competing firm, and Hightower sued to stop him.  VC Will's opinion refusing to enjoin the partner is striking for what it does not do, namely, even so much as mention the internal affairs doctrine.  Instead, the opinion treats the entire dispute as an ordinary contractual matter, concludes that Alabama has the greater interest in the dispute notwithstanding the selection of Delaware law, and ultimately holds that the noncompetes are likely invalid. 

I don't disagree with that decision, of course, but the failure even to consider the role of the internal affairs doctrine sits uneasily alongside some of Delaware's other caselaw - and the meta issue is just how far we can go in treating LLCs like ordinary contracts for choice of law purposes.  If LLCs are not subject to the internal affairs doctrine and still manage to sail along just fine, how necessary is the internal affairs doctrine itself (often justified on the grounds that absolute chaos would result if it were abandoned)?

Texas Governor Abbott's Chief of Staff: "Rebranding ... employment discrimination as ‘DEI’ doesn’t make the practice any less illegal."

As reported by America First Legal (here), Texas Governor Greg Abbott’s office recently issued a memo reminding state agencies and universities that “federal and state law forbid discrimination against a current or prospective employee because of that person’s race, color, religion, sex, national origin, age, disability or military service.” As stated in the letter (here): “Rebranding this employment discrimination as ‘DEI’ doesn’t make the practice any less illegal.” Of course, the extent to which diversity may be deemed a compelling interest justifying at least some forms of racial discrimination is an issue currently before the Supreme Court (see here).

Amended Complaint and Intervention in FINRA Constitutional Challenge

Continuing ongoing coverage of the case challenging FINRA's constitutional status, we have some new developments.  The plaintiffs have filed an Amended Complaint.  The United States has also intervened in the case to defend the constitutionality of the securities laws.

Lamentably, the Amended Complaint does not cite to Supreme Risk.   I can understand why they would not want to cite me.  Although the article discusses the possibility of their types of claims at length and characterizes them as a colorable risk with the current Supreme Court, it also points out that they might trigger a financial crisis if they win.  That being said, they cite many of the same people I cited in my article.  

Although I haven't spent much time sitting with the Amended Complaint, I saw a few things that struck me as just plain wrong immediately. 

Let's take one of their jurisdictional allegations.  To deal with the earlier motion to dismiss, the amended complaint tries to detail much more of FINRA's connection to Florida.  It alleges that "FINRA also funds, operates, and conducts business in Florida through its Investors Rights Clinic that is located in this state."  This struck me as completely untrue.  The Clinic is run by Miami's Law School.  One of the major challenges for securities clinics has been the total absence of any FINRA funding.  It's why Senator Cortez Masto introduced legislation last year to create a federal funding mechanism.

It includes questionable allegations about the power of the President to remove SEC Commissioners, stating "the SEC commissioners cannot be removed by the President except for in limited circumstances. . . Thus, because the President cannot remove SEC commissioners without
cause, and because the SEC cannot remove FINRA Board members without cause, the Board and its appointed executives and officers are unconstitutionally insulated from Presidential control and oversight."  This remains uncertain and unsupported by the statute, despite the Supreme Court's prior comments to this effect.  

Ultimately, I think FINRA and the United States are right to take this challenge seriously and show up.  The current Supreme Court has put the ball in play for these sorts of challenges and they have to be addressed.

 

Bainbridge on “The Profit Motive”

Many BLPB readers are likely aware that Stephen Bainbridge recently published a new book, The Profit Motive: Defending Shareholder Value Maximization. I must admit that I’m a fan of the Introduction:

There are a lot of books on the market praising stakeholder capitalism. They proclaim a new age in which big corporations should embrace—and, in fact, are embracing—environmental, social, and governance (ESG) goals. Whether putatively objective academic tomes filled with statistics or mass market books filled with bullet points, the bottom line is the same; namely, that stakeholder capitalism is the right thing to do both morally and financially. This is not one of those books.

For those of you on the fence, there is an hour-long overview on YouTube (here), but if that’s too long you might consider a recent guest post by Prof. Bainbridge on the Corporate Finance Lab discussing the book (here). Below is a brief excerpt from that post.

Three major themes animate the project. First, any conception of corporate purpose that embraces goals other than creating value for shareholders is inconsistent with the mainstream of U.S. corporate law. Second, directors do—and should—have wide and substantially unfettered discretion as to how they go about generating shareholder value. Although many commentators claim that those statements are inconsistent, in fact they both reflect fundamental normative principles deeply embedded in U.S. corporate law. Third, a shareholder-centric conception of corporate purpose is preferable to stakeholder capitalism….

 

Pursuit of shareholder value maximization leads to more efficient resource allocation, creates new social wealth, and promotes economic and political liberty. To be sure, there will always be externalities. Just as pursuing profit is baked into the corporation’s DNA, so is externalizing costs. There is no such thing as a free lunch. The theory and evidence recounted in The Profit Motive, however, suggests that the balance comes down strongly in favor of shareholder value maximization.

Carney & Sharfman: Whither Judicial Valuation?

I teach a unit on the legal aspects of valuation in my Corporate Finance planning and drafting seminar every year.   I have often been able to secure as a guest speaker on one day during that unit a friend of mine who is a seasoned valuation expert (and was the expert whose opinion carried the day in the most recent Tennessee Supreme Court case on valuation in an M&A context).  

There is a relatively large body of academic literature on appraisal (a/k/a dissenters') rights and, more generally, the history of valuation law and practices in the M&A context.  In the Business Associations textbook of which I am a coauthor, I excerpt from Mary Siegel's 1995 article, Back to the Future: Appraisal Rights in the Twenty-First Century (32 Harv. J. on Legis. 79).  Her 2011 follow-on article, An Appraisal of the Model Business Corporation Act's Appraisal Rights Provisions (74 Law & Contemp. Probs 231 (2011)), also is a good read on appraisal rights history.  Other legal academics who have dipped their toes into these waters include George Geis, Bayless Manning, Brian JM Quinn, Randall Thomas, and Barry Wertheimer (who is no longer a law professor), and many more. 

I am excited to report that there is a new kid (really, two coauthor new kids) on the block.  Bill Carney has coauthored a new article on appraisal rights with Keith Sharfman entitled: The Exit Theory of Judicial Appraisal (28 Fordham J. Corp. & Fin. L 1 (2023)).  The SSRN abstract follows.

For many years, we and other commentators have observed the problem with allowing judges wide discretion to fashion appraisal awards to dissenting shareholders on the basis of widely divergent, expert valuation evidence submitted by the litigating parties. The results of this discretionary approach to valuation have been to make appraisal litigation less predictable and therefore more costly and likely. While this has been beneficial to professionals who profit from corporate valuation litigation, it has been harmful to shareholders, making deals costlier and less likely to complete.

In this Article, we propose to end the problem of discretionary judicial valuation by tracing the origins of the appraisal remedy and demonstrating that its true purpose has always been to protect the exit rights of minority shareholders when a cash exit is otherwise unavailable, and not to judge the value of the deal. So understood, judicial appraisal should not be a remedy for dissenting shareholders when a market exit or equivalent protection is otherwise available.

While such reform would be costly to valuation litigation professionals, their loss would be more than offset by the benefit of such reforms to shareholders involved in future corporate transactions. Shareholders presently have adequate protections, both from private arrangements and legal doctrines involving fiduciary duties.

I am grateful that Bill passed a copy of the article along to me yesterday.  This is a topic that generates significant interest in a variety of business law courses that I teach/have taught (including, in addition to Corporate Finance, Advanced Business Associations, Business Associations, and Mergers & Acquisitions).  Students love puzzling through the issues, asking, e.g.:

• Why do appraisal rights exist? 
• Why do we not see many reported appraisal rights opinions?
• How do planners and drafter address the existence of appraisal rights in practice?

Based on a quick peek at the table of contents of Bill's and Keith's article, I sense their work will offer the reader some answers to these and other related questions.

Emilie Kao on 303 Creative v. Elenis: "Can Stand-Alone Dignitary Harm Create A Right to Endorsement and Duty to Endorse?"

The following excerpt is from the introduction to a recent publication that may be of interest to BLPB readers. The publication is: Emilie Kao, 303 Creative v. Elenis: Can Stand-Alone Dignitary Harm Create A Right to Endorsement and Duty to Endorse?, 2023 Harv. J.L. & Pub. Pol'y Per Curiam 5, 2–5 (2023). Emilie Kao is Senior Counsel and Vice-President for Advocacy Strategy at Alliance Defending Freedom (ADF), which represents Lorie Smith.

All people have inherent dignity and should be treated with respect. However, whether and how courts should address legal claims surrounding dignity are notoriously complicated. Does the government have an interest in protecting citizens from “dignitary harm”--subjective feelings of emotional distress or stigma? If so, does the government's interest require it to compel or silence the expression of certain views? If so, does the dignity of the person compelled to speak or remain silent matter? Dignitary harm has played important roles in conflicts between religious freedom and anti-discrimination laws in Masterpiece Cakeshop v. Colorado Civil Rights Commission and Fulton v. Philadelphia. And they are at issue again in 303 Creative v. Elenis, a free-speech case that was recently argued at the U.S. Supreme Court.

 

In 303 Creative, Colorado's public accommodation law--the Colorado Anti-Discrimination Act (CADA)--requires graphic artist, Lorie Smith, to create websites celebrating same-sex marriage that violate her religious belief that marriage is between one man and one woman. Colorado stipulated that Ms. Smith serves all people, regardless of sexual orientation and that her websites are unique, custom, and expressive; in other words, that she is engaging in pure speech. Like many artists, Ms. Smith chooses each word, visual design, and artistic element to tell a unique story that is consistent with her beliefs, whether about animal rescue, homelessness, or marriage. She wants to design websites to “promote God's design for marriage.” Therefore, she cannot create websites that celebrate marriages contrary to God's design for any of her clients, regardless of sexual orientation. Her decisions are always based on the message, not the person.

 

Colorado claims that it has a compelling interest in ensuring that members of protected classes are shielded from “dignitary harm.” That dignitary harm, though, consists merely in a creative professional declining to endorse their desired message. The Tenth Circuit agreed with Colorado. But in his dissent, Chief Judge Tymkovich warned that, “[l]ike Nineteen Eighty-Four's Winston Smith, CADA wants Lorie Smith to not only accept government approved speech but also to endorse it.” The Supreme Court should refuse Colorado's attempt to create a right to endorsement and a corresponding duty to endorse that would compel Ms. Smith to speak messages that violate her conscience. A government interest in protecting citizens from the emotional and moral distress of disagreement is intrinsically distinct from the material and dignitary harms created by status-based denials. Therefore, courts should treat the claims arising from these distinct interests differently.

Statutory Sellers in the Age of Social Media

Section 12 of the Securities Act gives a right of rescission to purchasers of illegally unregistered securities, and purchasers of securities sold by means of a false prospectus. See 15 U.S.C. § 77l.  Although the right of action has existed since 1933, its exact contours have always been somewhat hazy.  But now, in the age of social media – with the potential for widespread promotion of unregistered and/or fraudulent investments (lately, cryptocurrencies) – interpretations of Section 12 are getting a work out, and the legal ground may be shifting.

So, the background.  Section 12 provides:

(a)In general

Any person who—

(1) offers or sells a security [without meeting registration requirements]

(2) offers or sells a security (… by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission,

shall be liable… to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.

In Pinter v. Dahl, 486 U.S. 622 (1988), the Supreme Court addressed what it means to be a “seller” under Section 12, such that one can be held liable.  First, one is a seller if one actually passes title to the subject security in a transaction with the plaintiff.  Remote sellers, i.e., persons who passed title back in a chain of sales that led to the sale to the plaintiff, are not liable.

Second, one is a seller if one “solicits” the sale to the plaintiff, even if the soliciting person did not actually pass title.  The Court explained that brokers, for example, or agents of the seller, can be held liable under Section 12, and the critical question is whether the soliciting person acted for his own financial gain, or the financial gain of the seller.  If the soliciting person was merely offering gratuitous advice to the buyer, however, he would not come within the scope of Section 12.  The Court rejected a test that would make liability turn on whether the defendant’s “participation in the buy-sell transaction is a substantial factor in causing the transaction to take place.”  As the Court put it, “§ 12's failure to impose express liability for mere participation in unlawful sales transactions suggests that Congress did not intend that the section impose liability on participants' collateral to the offer or sale.”  The Court further elaborated, “The ‘purchase from’ requirement of § 12 focuses on the defendant's relationship with the plaintiff-purchaser. The substantial-factor test, on the other hand, focuses on the defendant's degree of involvement in the securities transaction and its surrounding circumstances.”

This test for “seller” status under Section 12 is now known as the “statutory seller” requirement, and in the aftermath of Pinter, all courts agree that whether a plaintiff proceeds under Section 12(a)(1) – for unregistered securities – or 12(a)(2) – for false prospectuses, the seller requirement remains the same.

So, two routes to liability under Section 12.  Transfer of title – which is usually easy to spot – or solicitation.  But what is a solicitation?  In a bunch of cases interpreting Pinter, courts latched on to the “defendant's relationship with the plaintiff-purchaser” language to hold that statutory sellers must have direct contact with the plaintiff, or at least some kind of active relationship with the plaintiff, to become liable.  See, e.g., Holsworth v. BProtocol Foundation, 2021 WL 706549 (Feb. 22, 2021). This often came up in the context of registered offerings, where plaintiffs suing for false prospectuses were informed that participation in the preparation of offering materials is not “solicitation” for Section 12 purposes, unless there was some kind of direct relationship between the preparer and a particular purchaser.  Shaw v. Digital Equipment Corp., 82 F.3d 1194 (1st Cir. 1996); Mass. Mut. Life Ins. Co. v. Residential Funding Co., LLC, 843 F. Supp. 2d 191 (D. Mass. 2012); Braun v. Ontrak, 2022 WL 5265052 (Cal. Super. Oct. 4, 2022); Citiline Holdings v. iStar Fin., 701 F. Supp. 2d 506 (S.D.N.Y. 2010); Rosenzweig v. Azurix Corp., 332 F.3d 854, 871 (5th Cir. 2003); Baker v. SeaWorld Entertainment, 2016 WL 2993481 (S.D. Cal. Mar. 31, 2016); In re Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir. 1996); Freeland v. Iridium World Comms., 2006 WL 8427320 (D.D.C. Sept. 15, 2006); In re Deutsche Telekom AG Sec. Litig., 2002 WL 244597 (S.D.N.Y. Feb. 20, 2002).

But now we have social media!  And more and more investment opportunities are being advertised through mass communications (sometimes, in Regulation A offerings, which are subject to Section 12 liability for false communications).  A bunch of these are, of course, cryptocurrencies, where the issue isn’t just false prospectus communications, but unregistered sales.  All of which makes a flat rule of personal communication somewhat unsatisfying.

Recently, the Ninth and Eleventh Circuit reversed district court rulings that direct communication was necessary.  Both Circuits held that mass social media communications that urge particular investments can trigger Section 12 liability to all affected purchasers.  See Wildes v. Bitconnect, 25 F.4th 1341 (11th Cir. 2022); Pino v. Cardone Capital, 55 F.4th 1253 (9th Cir. 2022); see also Owen v. Elastos Foundation, 2021 WL 5868171 (S.D.N.Y. Dec. 9, 2021); Balestra v. ATBCoin LLC, 380 F. Supp. 3d 340 (S.D.N.Y. 2019).

Notice the shift, then.  For some courts, preparing a prospectus for a registered offering was not deemed to involve sufficient solicitation to trigger Section 12 liability - but now other courts are saying that urging purchases on social media is sufficient.  Someone’s got to give.

And even on the internet, what kind of communications qualify?  That part’s still not entirely clear.  In the social media cases, the defendants created and sold particular investments and hawked them relentlessly, and that was found to be a solicitation.  Which brings us to Underwood v. Coinbase Global, Inc., 2023 U.S. Dist. LEXIS 17201 (S.D.N.Y. Feb. 1, 2023).

There, a class of plaintiffs alleged that many of the cryptotokens available for sale on the Coinbase exchange were, in fact, unregistered securities, and brought a battery of claims against Coinbase, including claims under Section 12 for unregistered sales.  The plaintiffs actually tried to establish liability under both of Pinter’s definitions of seller – they sued Coinbase for transferring title, and for soliciting sales.

So, let’s start with the title transfer allegations.  As we all know, in securities class actions, the original complaints are filed, consolidated, and then a notice is issued alerting other potential plaintiffs of the case.  Any plaintiffs (the original ones, or new ones) may then petition the court for “lead plaintiff” status.  The court appoints a lead, and (usually) appoints that lead’s chosen counsel as lead counsel, and a new, consolidated complaint is filed.  That consolidated complaint becomes the operative complaint for the case.  And, because the original plaintiffs may not be appointed lead, the early pleadings tend to be very sparse placeholders, in anticipation of a more detailed pleading to come after the leads are selected.

In Coinbase, however, there was no battle for lead status – after the original complaint was filed, one other plaintiff and one other law firm joined with the original plaintiffs/counsel, and they were all appointed lead together, after which they filed the amended complaint.

As is typical in these situations, the amended complaint was much longer and more detailed than the original complaint.  But, crucially, the original complaint had alleged that traders on the Coinbase exchange trade with each other, and Coinbase facilitates the exchange.  The amended complaint alleged that Coinbase acts as a market maker, buying directly from one user to sell to another, and vice versa – which would make it a statutory seller for Section 12 purposes under Pinter’s first prong.

Judge Engelmayer refused to accept the amended complaint’s allegations.  Citing circuit authority, he held that when an amended complaint contains factual allegations that contradict the facts alleged in earlier complaints, the new allegations may be rejected.  And he buttressed that holding by pointing out that the user agreement cited in the original complaint – but not the amended version – described Coinbase as merely facilitating transactions between users without trading itself.

I mean … I have no idea how Coinbase arranges its transactions, but, considering how securities class actions are organized, Judge Engelmayer’s holding is a little concerning, because the whole point is that early complaints are not drafted with the same kind of care as the consolidated complaint.  That’s not ideal, but it’s an inevitable byproduct of the lead plaintiff process, and the lead plaintiff process is – for its flaws – one of the best things to come out of the PSLRA.  And, in this case, a new plaintiff and new firm joined the action.  I don’t know the history there but it’s certainly possible neither had anything to do with the original complaint, and became part of the action because of the notice – precisely as the PSLRA intended.  It’s troubling that these new parties might be bound by mistakes – perhaps flat out errors – made by the original filers.

But let’s move on to the second prong of Pinter, concerning solicitation liability.  Plaintiffs alleged that Coinbase made money on trades – satisfying Pinter’s requirement that the solicitation be motivated by the defendant’s financial gain – and that Coinbase participated in “airdrops” of particular new token offerings, wrote news stories on price movements of particular tokens, and linked to news stories about them.

This, according to Judge Engelmayer, was not sufficient to qualify as solicitation under Pinter:

To hold a defendant liable under Section 12 as a seller, a purchaser such as plaintiffs must, therefore, demonstrate its direct and active participation in the solicitation of the immediate sale…. the AC's allegations regarding Coinbase's "solicitation" of the transactions involving the Tokens fail, because they do not describe conduct beyond the "collateral" participation that Pinter and its progeny exclude from Section 12 liability.  … These activities of an exchange are of a piece with the marketing efforts, "materials," and "services" that courts, applying Pinter’s second prong, have held insufficient to establish active solicitation by a defendant.

I’m not even saying this decision is wrong, exactly, but the line between participating in promotional “airdrops” and linking to articles about price movements, and urging purchases through YouTube and Instagram (as occurred in some of the social media cases where plaintiffs were allowed to proceed), is a fuzzy one – and that’s exactly what the Supreme Court was trying to avoid in Pinter.  See 486 U.S. at 652 (“the substantial-factor test introduces an element of uncertainty into an area that demands certainty and predictability”).

Anyway, it’s an area where the law is rapidly developing so … stay tuned.