Business Law Prof Blog

AmerisourceBergen, and Who Decides?

Delaware’s Caremark cases continue to be catnip for me.

The latest is the Delaware Supreme Court’s Lebanon County Employees’ Retirement Fund v. Collis, reversing VC Laster’s decision from last year.

Plaintiffs alleged that AmerisourceBergen’s board of directors violated opioid drug laws by failing to monitor suspicious prescriptions, to the point where they altered their internal reporting systems so that fewer prescriptions would be flagged.  Ultimately, this conduct caused severe damage to the company, through a $6 billion global settlement, as well as other settlements and litigation costs.

VC Laster explored the allegations in detail, ultimately determining that, standing alone, the complaint stated a claim against the AmerisourceBergen board for a violation of Caremark duties. 

But!  Plot twist.  Because in mid 2022, after the plaintiffs’ complaint was filed, a federal West Virginia court cleared AmerisourceBergen of misconduct.  The case was filed by a city and county in West Virginia – areas that were ground zero for the opioid crisis – and among thousands of similar cases consolidated for pretrial proceedings in a larger multidistrict litigation.  After a bench trial, the judge found that the plaintiffs had failed to prove that AmerisourceBergen did not maintain an effective control system.  According to Laster, that decision was enough to undermine the plaintiffs’ claims that AmerisourceBergen’s directors had caused the company to break the law.  As he held:

In light of the West Virginia Court’s thorough analysis, it is not possible to infer that the Company failed to comply with its anti-diversion obligations, nor is it possible to infer that a majority of the directors who were in office when the complaint was filed face a substantial likelihood of liability on the plaintiffs’ claims.

Case dismissed.

On appeal, the Delaware Supreme Court held that Laster had improperly deferred to the factfinding of another court as to contested matters, namely, whether the AmerisourceBergen Board had complied with the Controlled Substances Act.  As the Court put it:

the question whether the defendants in the West Virginia litigation engaged in wrongful conduct and failed to comply with the CSA was, it seems clear to us, a question of fact… This Court has not addressed whether a court can take adjudicative notice of the factual findings of another court. The weight of authority in the federal courts applying Federal Rule of Evidence 201, which is nearly identical to D.R.E. 201, indicates that a court may not do so when the underlying fact is reasonably disputed.

So, Laster was reversed, and the complaint sustained.

I’ve posted a lot about how common Caremark claims are becoming, and how they’re becoming more successful.  I think this trend is likely to create a lot of headaches for the Delaware courts and among those headaches – as this case demonstrates – is how Delaware’s decisions are going to interact with the findings of other courts.  After all, Caremark is predicated on the existence of illegal conduct.  Other regulators are the ones who are primarily responsible for determining whether any illegal conduct occurred in the first place; Delaware’s role is secondary to those primary findings of legality/illegality.

In other words, it would be kind of odd if a Delaware court held that a board violated its fiduciary duties by causing the company to break the law, if the company’s primary regulator determined that the company had not broken the law.

Laster’s original decision, then, has the air of trying to work out how Delaware courts will operate in tandem with these other legal systems in the context of Caremark.  Laster treated the West Virginia decision as a legal declaration under Delaware Rule of Evidence 202, which thereby absolved AmerisourceBergen – and thus its board – of any wrongdoing. 

The Delaware Supreme Court, however, rejected that attempt.  In its view, the West Virginia decision was not, for evidentiary purposes, a legal declaration of the propriety of the board’s conduct, but a factual determination of what had historically occurred – contested facts that Delaware is free to revisit (“To be sure, the findings of the West Virginia Court are recorded in the ‘case law . . . of the United States[,]’ but they do not establish or recognize a rule or principle of law of the kind that is subject to judicial notice under D.R.E. 202”).  And though the Delaware Supreme Court’s decision, taken in isolation, certainly makes sense, I wonder if it will create more problems for Delaware going forward, if Caremark claims appear to be proceeding even where underlying regulatory actions fail.  Or, as I put it previously, “Delaware really can’t be in the business of functioning as a backup regulator for the entire United States.”

DOL | Fiduciary Rulemaking Comment Letter

As I've mentioned before, the Department of Labor is now taking another go at improving advice standards for retirement accounts.  I put a quick letter together to give some reasons why I think it's important to have high standards for advice in this context.

Although written to the Department of Labor, I tried to put the letter together in a way that would help journalists and others understand some of the critical issues facing Labor and the need to put some real protections in place.

One of the talking points often deployed by the industry here is that people should understand that they are in a sales environment and not rely overmuch on the insurance producer deploying every known psychological trick to generate trust.  In reality, many people--particularly older Americans do not understand that the advice is not free.  

My sense is that the rulemaking will probable go through and then we'll find out how much room the courts will give to protect people here.

Crispo, Third Party Beneficiaries, and the Twitter Fallout

After Twitter v. Musk concluded, there remained a bit of satellite litigation in the form of a claim brought by Twitter shareholder Luigi Crispo, who alleged that his lawsuit against Musk – filed in the midst of the dispute with Twitter – had in fact materially contributed to the Twitter v. Musk settlement, and therefore he should be entitled to attorneys’ fees. 

(Pause for laughter.)

Anyway, the legal merit of that claim turned on whether Crispo’s claims against Musk – as a stockholder, for breaching the merger agreement with Twitter – themselves ever had any merit to begin with.  In October of this year, Chancellor McCormick held that they did not, but the way she got there put merger planners in something of a bind.

One issue that came up during the whole … thing … was what kind of damages Twitter could get if it prevailed in its claim that Musk breached the merger agreement, but if specific performance was for some reason unavailable.  (And yes, sorry, I can’t help but mention, this is an issue I discuss in more detail in my paper, Every Billionaire is a Policy Failure).  The merger agreement had a damages cap of $1 billion, but leaving that aside, the obvious damages would be for the lost premium.  I.e., Twitter was trading around $40 or so when the whole thing started, Musk offered $54.20, he should at least be required to pay that difference.

Conceptually, though, that’s a problem because Twitter, the entity, and the party to the merger contract, never expected to receive that money – the money was going straight to its stockholders.  Contract damages are supposed to give you the benefit of your bargain, and Twitter’s benefit was not to receive the difference between $40 per share and $54.20 per share, but to transfer that value to its stockholders, while itself receiving the inestimable benefit of submitting to Elon Musk’s leadership.

One way around this would be to make stockholders third party beneficiaries of the contract, but to do that might give them enforcement rights – exactly as Crispo was claiming – which would interfere with the directors’ ability to control any subsequent litigation.

Anyway, merger planners have been aware of this problem for a little while and so they generally write in first, that there are no third party beneficiaries, and second, some kind of liquidated damages provision that counts lost premium as among the damages that acquirers are responsible for.  Twitter’s merger contract did the same (although, apparently, still qualified by the cap).

Which brings us to Crispo.  He argued that notwithstanding all of this, he still had the ability to bring his claims for lost premium damages, which meant his claims when filed were meritorious, which meant his lawsuit could be viewed as having contributed to the final settlement.

In October, McCormick rejected the argument, and along the way she held that if stockholders are not third party beneficiaries, target companies cannot seek lost premium damages, even through a liquidated damages clause, because liquidated damages clauses can only encompass benefits that a contracting party actually expected to receive if the deal went through:

Contractual provisions that define the type of damages for which a party might be liable are enforceable only to the extent they are consistent with principles of contract law.  A contracting party cannot receive more than expectation damages.  “[E]xpectation damages [are] measured by the amount of money that would put the promisee in the same position as if the promisor had performed the contract.”  A party cannot recover damages for consideration that it would not expect to receive had the contract been performed…. A target company has no right or expectation to receive merger consideration, including the premium… Where a target company has no entitlement to a premium in the event the deal is consummated, it has no entitlement to lost-premium damages in the event of a busted deal. Accordingly, a provision purporting to define a target company’s damages to include lost-premium damages cannot be enforced by the target company.

She also held that merger targets like Twitter cannot claim to be seeking lost premium damages on shareholders’ behalf, because “there is no legal basis for allowing one contracting party to unilaterally and irrevocably appoint itself as an agent for a non-party for the purpose of controlling that party’s rights.”

Now, I personally find that technically correct as a matter of contract doctrine, and wholly unsatisfying as a practical matter.  After all, as McCormick herself noted in the same opinion:

[M]erger agreements involve the payment of consideration directly to stockholders. In a Delaware corporation, that benefit to stockholders marks the satisfaction of the board’s fiduciary obligations to them and is a material part of the parties’ purpose in entering into the contract. Indeed, delivering this benefit to stockholders is typically the target corporation’s purpose for entering into a merger agreement.

It seems very … artificial … to ignore that obvious fact for the purpose of remaining faithful to, well, common law forms of action.  But she held what she held, and now merger planners who want to allow for lost premium damages, while not giving shareholders the ability to enforce deals directly, are stuck.

One possibility that’s being floated is to amend the DGCL.  After all, Crispo is simply a common law contract holding; no reason the law can’t be changed by statute.

In the meantime, though, a little birdie alerted me to this private ordering solution by PGT Innovations.  PGTI entered a merger agreement, and when shareholders vote on it, well:

At the PGTI Stockholders Meeting, PGTI expects to submit for the approval or adoption by PGTI’s stockholders an amendment to the Amended and Restated Certificate of Incorporation of PGTI (as amended from time to time) designating PGTI as the agent of stockholders of PGTI to pursue damages in the event that specific performance is not sought or granted as a remedy for Masonite’s fraud or material and willful breach of the Merger Agreement (the “PGTI Organizational Document Amendment”). The PGTI Organizational Document Amendment is intended to address recent caselaw from the Delaware Chancery Court that, could be construed to, in effect, limit the remedies available to PGTI under the Merger Agreement absent the PGTI Organizational Document Amendment.

See?  The merger agreement itself – to which shareholders are not a party – can’t unilaterally make PGTI into shareholders’ agents, but, the theory goes, the charter, which increasingly is treated as a contract between shareholders and managers under Delaware law, can. 

It’s a neat solution (though I don’t think the problem should, umm, exist), though I do wonder what happens when shareholders accuse PGTI of violating its duties as an agent by not seeking exactly the right damages (settling too easily, whatever); the same kind of deference we usually give to board members should not apply if PGTI is acting in a different capacity, though I suppose PGTI might address that with careful drafting (the exact language does not (?) seem to be available yet).

Guest Post: Politics as a New Differentiator Between American Business Courts: A View on the Debate Between Former Attorney General Barr and Vice Chancellor Laster

Today's guest post comes to us from Anthony Rickey of Margrave Law:

The Thanksgiving weekend witnessed a debate between former Attorney General William Barr and attorney Jonathan Berry and Vice Chancellor Travis Laster over whether Delaware risks “driving away” corporations through “flirtation with environmental, social and governance [“ESG”] investment principles.”  Reuters reports that Chancellor McCormick further criticized Barr’s article at a Practicing Law Institute event, and Vice Chancellor Will  commented in a Bloomberg Law interview.  Professor Stephen Bainbridge has published two posts on the controversy.

When giants wrestle, wise men stay out from underfoot.  Nonetheless, I think the debate merits a close look because, however much I agree with Vice Chancellor Laster on matters of doctrine, I suspect that similar articles will become more common in the future.  Three factors influence my prediction:  a) Delaware has weakened its reputational bulwark against accusations of partisanship, b) the influence of politics in corporate law has increased (largely via ESG) and c) other states are now seeking to differentiate themselves from, rather than imitate, the Delaware Court of Chancery.

Delaware Dissolves One of Its Fundamental Corporate Law Pillars

The heart of Barr’s argument is that Delaware risks following “many blue states [that] are using ESG to inject the progressive political agenda on climate, race, and other issues into corporate governance,” and that “red states are developing potentially attractive alternatives.”  I think Vice Chancellor Laster has by far the best of the doctrinal debate on this point.  Formally, nothing in Delaware law preferences “progressive” governance over “conservative” governance, however one defines those terms.

 But Delaware recently eliminated one of its longstanding bulwarks against this accusation:  the requirement that the Court of Chancery and the Delaware Supreme Court be split between Republicans and Democrats.  On January 30, a federal court approved a consent judgment between (Democrat) Governor John Carney and a former Democrat (now independent) plaintiff declaring that the “major political party” requirement of the Delaware Constitution violates the First Amendment.  In theory, each political party is still limited to a bare majority of the seats on both courts.  But these protections are porous:  for instance, the Washington, D.C. City Council has similar restrictions, and its seats tend to be occupied by Democrats and “Independents” who are former Democrats.

So far, Delaware’s courts remain politically balanced.  But tradition is a weak restraint on politicians once they set their sights on other goals.  For instance, traditionally at least one vice chancellor and justice resided in each of Delaware’s three counties.  Today, Kent County has no resident justice and no resident judicial officer listed on the Court of Chancery’s website.  Tradition seems no more likely to sustain political diversity than geographic diversity.

Delaware’s Blue State Disadvantage

Questions of political balance will, I suspect, become a larger topic as politics intrudes more deeply into corporate law—and especially as conservatives begin to use litigation in a way once dominated by the political left.   (For instance, Professor Ann Lipton recently described a derivative lawsuit filed by several communities of Catholic nuns against Smith & Wesson in Nevada, mentioning another derivative suit against Starbucks filed by a conservative plaintiff challenging Starbuck’s DEI policies.)  Corporate law is a matter of doctrine, but politics is as much a matter of appearance as precedent.  And here, respectfully, I think Delaware is vulnerable:  however neutral the doctrine, its critics will not need to look far for examples if they seek to portray Delaware to outsiders as “blue”-leaning.

Take the recent decision involving a books-and-records action by a Disney stockholder, discussed both by AG Barr and Vice Chancellor Laster.  As the Vice Chancellor stated, the Disney decision found that “the demand was pretextual because the plaintiff was rather acting as a front for a politically motivated group.”  But looking closer at Disney, one criticism of the (conservative) plaintiff stands out:  he “reviewed but made no edits to the Complaint.”   The decision cites no precedent holding a previous litigant to that standard.  I went back and looked at Disney’s briefs:  they offered no examples either.  Indeed, I can’t find any case criticizing a books-and-records plaintiff for not editing (as opposed to simply reviewing) a draft complaint.  Disney appears to find fault in the plaintiff’s law firm going out and finding a plaintiff—an accusation that can be leveled at every plaintiff’s shop that makes “fraud monitoring agreements” with multiple pension funds.

Compare Disney to New York State Common Retirement Fund v. Oracle Corp., C.A. No. 11642-VCL, where a pension fund sought books-and-records relating to Oracle’s political donations following the United States Supreme Court’s decision in Citizens United v. F.E.C., 558 U.S. 310 (2010).  One would think that, as in Disney, decisions on political spending are quintessential matters of business judgment.  Yet the plaintiff relied upon an article by then-Chief Justice Strine to contend otherwise.  The trustee of the pension fund seeking records concerning political donations was the New York State Comptroller—himself a politician with interests in political giving.  Rather than take things to trial, Oracle settled quickly.  I can’t find anything in the record suggesting that the Court of Chancery ever considered whether the pension fund’s interests were a “pretext” for the politician’s. 

Doctrinally, it is easy to reconcile Oracle and Disney:  the former settled, creating no law.  But even if the doctrine is clear, it is easy for Delaware’s critics to ask:  would Oracle have settled without a supportive law review article from a sitting justice critiquing Citizens United?  Would Disney have gone to trial if the plaintiff could have cited a similar law review article by a sitting judge supporting Florida’s legislation?

When it comes to politics and optics, the Court of Chancery faces another disadvantage in comparison to other states’ business courts:  it is a court of equity and hears non-business cases.  Take, for instance, this passage from State of Delaware v. City of Seaford, C.A. No. 2022-0030-JTL, involving not corporate governance, but the invalidation of a “fetal remains” ordinance:

In a society divided over the issue of abortion, any decision that touches on that topic carries heightened significance, and particularly so after Dobbs v. Jackson Women’s Health Organization, 597 U.S. — (2022). The Dobbs decision overruled Roe v. Wade, 410 U.S. 113 (1973), and Planned Parenthood of Southeastern Pennsylvania v. Casey, 505 U.S. 833 (1992), which recognized that women have rights to bodily integrity, personal liberty, and self-determination under the United States Constitution, that respecting those rights is necessary to achieve the equality of women and men under the law, and that a woman’s right to make decisions about bodily integrity, parenthood, and family therefore must be balanced against any interests that a government might seek to address when regulating abortion. Particularly after Casey, challenges to laws regulating abortion frequently turned on whether the challenged regulation imposed an undue burden on or a substantial obstacle to the ability of women to exercise their federal constitutional rights.

The passage is dicta.  The very next sentence is: “This case does not involve federal constitutional rights.”  Nevertheless, it is hard not to divine an opinion concerning the propriety of the Dobbs decision from City of Seaford.

As Professor Bainbridge points out, the intersection of politics and corporate law raises a concern because of the “chicken heart” problem created by the recent Marchand decision.  Much of Delaware corporate litigation involves exercises of discretion by a court of equity, and those decisions may be fact-intensive.  This is an advantage when addressing non-political matters, such as whether a particular subspecies of deal protection is or isn’t acceptable.  Political issues raise thornier issues of perception.

Consider a hypothetical:  the board of a chain of general goods stores, mostly concentrated in red states, wants to differentiate itself from companies like Target or Bud Light by supporting a Florida bill like the one Disney criticized.  That board has a good faith belief that the policy will increase sales (and thus stockholder value) in the medium- to long-term.  In the short term, however, it causes a large staff walkout.  A public sector pension fund like New York’s, led by a politician, files a Delaware books-and-records action, and the politician publicly proclaims his antagonism to the Florida law.  Just as the Oracle complaint cited a Delaware Chief Justice’s law review article, the new complaint highlights the Delaware court’s recent report commending (among many other things) the establishment of gender-neutral bathrooms to benefit transgender and nonbinary people.  Doctrinally, the facts still seem to fall within Vice Chancellor Laster’s scope of a good faith business judgment.  Reading Disney and City of Seaford, how confident could one be in advising about the likelihood dismissal of a well-crafted Section 220 action brought by a blue-state politician concerning a matter where Delaware’s political culture is far closer to the plaintiff than the defendants?  About a Caremark claim?  What are the odds that the board settles, as in Oracle, rather than roll the dice that some fact distinguishes a “pretextual” individual from a pension fund led by a respected (but blue state) politician?

As Caremark claims become easier (if still not easy) to win, directors may legitimately wonder whether future lawsuits will extend to their consideration of ESG issues.  And directors may look differently at the risks than judges do.  After all, even if a Caremark claim is unlikely to succeed, or even survive a motion to dismiss, it is unpleasant to be named in complaint and have one’s personal assets placed in jeopardy.  Litigation paradigms that offer routes to avoid lawsuits in the first place, rather than simply winning on a motion to dismiss, may become more attractive.

In considering the decisions above, however, two points are critical.  First, I agree entirely with Vice Chancellor Laster as to the relevant doctrine and make no suggestion that Disney or City of Seaford are wrongly decided.  Second, I’m hardly suggesting that Delaware is a poor forum for conservatives.  I’m a conservative myself (albeit of the pro-choice varietal) and have litigated here for most of my career.  But I doubt that City of Seaford’s description of Casey raised many eyebrows, even among most conservative members of the Delaware bar.  Delaware is a deep blue state.  The implications of Disney and City of Seaford may be perceived differently by directors in a purple, let alone red, state.

The Trend for Differentiation Among Non-Delaware Business Courts

Given that difference in perspectives, I’m somewhat surprised that it took so long for an article like Barr’s to appear.  As he mentions, several “red” states have recently set up their own business courts.  This isn’t new:  a majority of states now have specialized fora for corporate disputes.  But when I started writing about Delaware’s competition over a decade ago, most states were trying to imitate Chancery.  Now, they’re seeking to differentiate themselves.

Take Nevada, which recently changed its corporate code to preclude the application of an “inherent fairness” standard, similar to Delaware’s “entire fairness” standard of review.  Certainly the Delaware plaintiff’s bar considers this a challenge:  a plaintiff is currently suing to prevent TripAdvisor from leaving Delaware for Nevada.  Keith Bishop thinks the plaintiff’s concerns about Nevada being a “no liability” regime are overstated.  Still, the fallout suggests that Nevada is consciously seeking to compete by creating a different litigation environment.

Texas provides another example.  The new business court imitates the Court of Chancery in certain respects.  For instance, the new court’s judges, unlike their counterparts in the Texas judiciary, will be appointed rather than elected.   But Texas did not adopt a political balance requirement.  And the Texas political and litigation environment is markedly different.  Tort reform groups like Texans for Lawsuit Reform advocated for the new court; several Texan legal associations (plaintiff- and defense-side) unsuccessfully opposed it.  Earlier tort reforms will influence the new court’s decisions, including rules that limit fees in class actions to four times lodestar.  (Notably, Texas’ accompanying rules on non-monetary fees eliminated “merger tax” lawsuits in the Lone Star State before Delaware did.)  Corporations may well perceive that the Texas legislature and the Delaware General Assembly view the cost/benefit balance of representative shareholder litigation differently.

Here, I part ways with Professor Bainbridge, who thinks it unlikely that Caremark, or most anything else, can pose a competitive challenge to Delaware because the First State can simply adopt any successful reform.  That has long been the conventional wisdom, but competition is dynamic.  To the extent that states like Utah and Georgia intend to challenge Delaware, I expect that they will follow Texas and Nevada in adopting reforms that Delaware will find hard to replicate due to its own entrenched constituencies.  (Professor Bainbridge has himself commented on this.)  Statutorily eliminating entire fairness review or adopting fixed limits on attorneys’ fees would be revolutionary in Delaware and inspire spirited opposition from the bar.

Does this mean an end to Delaware’ dominance of corporate law?  Given Delaware’s successful century, it would take a brave person to bet against the First State.  But I agree with Professor Jay Verret:  Barr’s article was a “wake up call.”  Barr’s doctrinal analysis deserves skepticism for the reasons expressed by Vice Chancellor Laster.  But I doubt Barr will be the last to highlight Delaware’s blue-state political status.  As other jurisdictions seek to entice corporations away from the First State, politics is an obvious and easily understandable point of differentiation.

Open Tenure-Track Assistant Professor of Law Position - Cal Poly, San Luis Obispo

Dear BLPB Readers:

"The Accounting Area in the Orfalea College of Business at California Polytechnic State University, San Luis Obispo, is seeking to fill a full-time/academic year tenure-track position in business law as part of the university’s year-round operations initiative with a contemplated appointment in summer of 2024.

Applicants must have the ability to work with diverse students. Demonstrated experience and commitment to student-centered learning and teaching, as well as the ability to collaboratively work in multidisciplinary settings is required. Demonstrated proficiency in written and oral use of the English language is required.

Primary duties and responsibilities are to: (A) teach undergraduate and graduate business law courses; (B) maintain an active portfolio of research in business law accompanied with publication in high quality law journals and other approved peer reviewed publications; and (C) perform extensive area, college, and university service duties (e.g., curriculum committee, academic senate, etc.)."

The complete job posting is here.

Privileged to Be a Lawyer

I was honored to be invited recently to write a column for our local bar magazine, DICTA, entitled "Privileged to Be a Lawyer."   My contribution, Joy in Lawyering, can be found here.  It took no time at all to write this short piece.  The words came straight from my heart through my fingers to the keyboard.  The punchline (for those who don't care to read the entire column): "Truly, I know of few career choices that could have given me so much."  I can only hope that many of you feel the same way.

Call it an Early Twitter Christmas Gift

You may already have seen the news that Judge Charles Breyer refused to dismiss claims against Elon Musk arising out of l’affaire Twitter.  Specifically, a class of shareholders alleged that Musk’s desperate efforts to get out of the deal – including his accusation of spam and his insistence that Twitter violated its contractual obligations by refusing to provide him with information – depressed the price of Twitter stock by creating uncertainty regarding closing.  As a result, some investors were harmed by selling stock too soon.  In Pampena v. Musk, 2023 WL 8588853 (N.D. Cal. Dec. 11, 2023), Judge Breyer dismissed claims based on several of Musk’s statements, but sustained others.  He reasoned:

The May 13 tweet reads as follows: “Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users.” … Defendant represented to a reasonable investor that the Twitter deal was on hold—and would not close—until Twitter provided information supporting its bot calculations. Or, put another way, a reasonable investor could have plausibly understood that Twitter was obligated to provide Defendant with the requested information for the deal to close…. The Court finds that Defendant's statement did give an impression materially different from the state of affairs that existed. Plaintiffs have plausibly alleged that Defendant waived due diligence as a condition to the Merger Agreement, and thus that Twitter had no obligation under the Merger Agreement to provide information supporting its bot calculations. Because Twitter did not have an obligation to provide this data to Defendant under the terms of the Merger Agreement, Defendant's representation that Twitter did have this obligation in order for the deal to close was false.

…

Plaintiffs state the Defendant “baselessly” announced that fake and spam accounts make up at least 20% of Twitter's users during the “All in Summit,” a tech conference in Miami. Plaintiffs argue that each of Defendant's statements misled investors in “represent[ing] that [Defendant] had some right to data or to cancel the Merger agreement thereto, which he did not.”… Even if Defendant's statement was literally true based on his “random sample” calculation or some other means of data analysis, the complaint plausibly alleges that the statement misled the investing public to believe that Defendant received—and was basing his statement on—bot user data from Twitter, which was not the case…. In light of Defendant's May 13, 2022 tweet that the deal was on hold pending details that spam/fake accounts represent less than 5% of users, a reasonable investor would likely find Defendant's access to and findings about Twitter's data to be material to their investment decision-making. Moreover, Defendant's statement suggested that Twitter had significantly more bot users than reported in its most recent SEC filings, a fact which would certainly be material to an investor given the nature of Twitter's business.

….

Plaintiffs argue that Defendant's May 17, 2022 tweet that the number of fake accounts on Twitter could be “much higher” than 20% and that the deal “cannot move forward” was false because it created the impression that Defendant was entitled to due diligence and that he had the right to terminate the merger. The tweet is composed of two parts: (1) Twitter is made up of 20% fake/spam accounts, which Defendant thinks could be higher than 20%, and (2) the deal cannot move forward until the Twitter CEO shows proof that the spam accounts are less than 5%... it is reasonable that investors would infer that Defendant, the next day, tweeted about user data because he actually received evidence from Twitter “demonstrating that Twitter's SEC filings were false and that the number of fake accounts exceeded 5%.” For the same reason, Plaintiffs have adequately alleged that this tweet would alter the “total mix” of information available to investors, and is therefore material.

The second statement is materially false or misleading for the same reasons that the May 13, 2022 tweet is materially false or misleading. Plaintiffs plausibly allege that Defendant waived due diligence as a condition to the Merger Agreement, and thus that Twitter did not have an obligation to provide him with “proof” that spam accounts make up less than 5% of users.  In contrast, the statement that the deal “cannot move forward” until he receives “proof of <5%” fake/spam account implies that Twitter did have an obligation to provide this data to Defendant and that Defendant was able to terminate the deal absent Twitter doing so. Accordingly, the Court concludes that Plaintiffs have adequately pleaded a material misrepresentation with respect to this tweet.

Among other things, Musk alleged that the plaintiffs could not demonstrate loss causation, because the “truth” was never revealed.  Now, I mean, that doesn’t make … sense … in a depressed stock case.  The truth doesn’t have to be revealed for a depressed price case in order to show losses; the losses occur when you sell your stock too cheaply even if the truth is never revealed to the market and remains a secret.  This is not like an inflated price case, where you buy at the inflated price but so long as the price remains high, you can sell and recoup the overpayment.  But, nonetheless, Judge Breyer held that the plaintiffs sufficiently alleged a connection between the statements and their losses because:

With respect to the statements that the deal was “temporarily on hold” (the May 13, 2022 tweet) as well as the statement that the deal “cannot move forward” until Twitter showed proof of its bot-user claims (within the May 17, 2022 tweet), Plaintiffs adequately plead loss causation through corrective disclosure…. Plaintiffs have plausibly alleged that when Defendant announced that he would move forward with the deal—after a public battle with Twitter about the Merger Agreement and absent any apparent resolution around his due diligence requests—the market reasonably reacted to the “truth” that Twitter never had the obligation to provide the bot-account information to Defendant.

Now, the interesting thing here is that the claims sustained were based on Musk’s statements on May 13, 2022, May 16, 2022, and early May 17, 2022.  But the merger agreement was filed on an 8-K on April 26.  And at that point, everyone on the planet was aware of what Twitter’s obligations were and were not.  There was, you may recall, something of a public conversation about that very issue.  So it was a bit … surprising … to see Judge Breyer conclude that the truth about Twitter’s obligations was only revealed when Musk caved in Delaware. 

That said, I’ve read Musk’s briefing and he seems more devoted to claiming that Twitter did, in fact, owe additional information under the merger agreement than to claiming that any mischaracterizations were immaterial because the public could evaluate Twitter’s obligations themselves.  So.  There you go.

But here’s the fun part.

There is another putative securities class action currently pending in the Central District of California, Baker v. Twitter, that also arises out of Musk’s efforts to get out of the Twitter deal.  This case, however, alleges that Twitter committed fraud with respect to its spam counts, and that Musk’s accusations revealed the truth.  The entire predicate of the action is that Musk himself admitted Twitter’s statements were false, and Musk’s accusations were sufficiently credible to sustain a complaint, given his access to internal information.  And the court agreed!  In August, the court held that one of Musk’s accusations – that Twitter lied about removing identified spam from the mDAU – had a sufficient basis to allege fraud on the part of Twitter.  See Baker v. Twitter, 2023 WL 6932568 (C.D. Cal. Aug. 25, 2023).  The court dismissed the complaint for failure to allege loss causation, but plaintiffs are repleading.  And, of course, since Musk now owns Twitter, he’s going to be the one who has to defend against the fraud accusations if the case goes much further.

Which means, we could have parallel securities class actions, both based on Musk’s accusations that Twitter committed fraud, one claiming the accusations were false, the other claiming they were true – and Musk is (directly or indirectly) liable for damages in both.

Anyhoo, I’ll just conclude by (once again) plugging my paper on Twitter v. Musk, Every Billionaire is a Policy Failure, now forthcoming in the Virginia Law & Business Review.

Widener Law Seeks Tenure-Track Contracts Professor

Widener Law Commonwealth seeks an entry-level or pre-tenure lateral faculty member to fill one tenure track position starting in the 2024-2025 academic year. We have a specific need in our year-long Contracts course. The remainder of the teaching package is flexible. This position reports to the dean of the law school.

WLC is a dynamic community of teachers and scholars. We pride ourselves on our dedication to our students, our engagement with teaching, and our scholarly impact. Many of our scholars are actively engaged in law reform efforts at both the state and federal level.

The law school is committed to fostering an environment in which faculty, staff, and students from a variety of backgrounds, cultures, and personal experiences are welcomed and can thrive. Faculty and staff are active participants in our work to enhance diversity, equity, inclusion, and belonging. We welcome applications from members of historically underrepresented groups.

Established in 1989, Widener Law Commonwealth is an independently accredited law school within Widener University. Located in Harrisburg, PA, the law school’s location in the capital of Pennsylvania provides impactful experiences for both our faculty and students. . . .

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The full position announcement is here.

Call for Papers - 2024 Wharton Financial Regulation Conference

Dear BLPB Readers:

"The Wharton School of the University of Pennsylvania will host its annual Wharton Financial
Regulation Conference on April 5, 2024. A conference dinner will be held the night before, on
April 4, 2024.

We issue a call for papers to scholars from any discipline—law, economics, political science,
history, business, and beyond—to submit papers on the following topics related to financial
regulation:

• Digital assets and the payments system
• Regional and community banking (including banking market structure)
• Central banking, monetary and fiscal policy
• Bank regulators & constitutional governance

To submit a paper, please include an unpublished manuscript not exceeding 25,000 words and a
CV to conference organizer Christina Skinner ([email protected]) by February 1,
2024. Selected presenters will be notified by email by February 15, 2024."

A pdf of this call for papers is Download 2024 Wharton FinReg Call for Papers.

Touro Law Seeking Small Business Assistance Clinic Director

Touro Law is hiring in its Clinical Program for a director of the new Small Business Legal Assistance Clinic. Please pass along this opportunity if you know someone who may be interested in the pursuit of social justice through transactional work and teaching. Please see job description and application at this link. The position, starting in the summer of 2024, is for a full time faculty member with voting privileges and annual renewal up to a 3-year term. Applications will be considered on a rolling basis, with priority for those submitted by December 31, 2023.

It's another internal affairs doctrine post

Two interesting matters related to the internal affairs doctrine came up recently, and since I just wrote a whole paper on this subject, I can’t resist mentioning them here.

First, VC Laster issued an opinion in Sunder Energy v. Jackson et al,.  The question was whether certain LLC members and employees violated noncompetes included in the LLC agreement, but Laster began by railing against the trend of companies attempting to avoid the employment law of states where they do business by writing employment-related terms into entity organizational documents, and then issuing equity compensation to employees.  The companies do so apparently in hopes that the employment-related terms will then be treated as entity internal affairs matters governed by the state of organization (Delaware), rather than employment terms governed by the employee’s home state.  Sunder Energy was not the first time Laster objected to the practice; earlier, he gave a long speech on the matter in his transcript ruling in Strategic Funding Source Holdings LLC v. Kirincic, which I quoted extensively in my paper. 

Anyway, that’s not the only thing of interest in the case; it also presents an interesting cautionary tale that will work well in the classroom.  Several people formed an LLC.  They did not, however, draft an LLC agreement.  At the moment of founding, they referred to themselves as “partners,” though they agreed that two members in particular would manage the business and receive a majority of the equity, with the remainder split among the other founders, who would be employees. 

Later, the two managing members sought legal counsel for themselves and drafted a formal LLC agreement that dramatically changed the arrangement in a manner that favored themselves and limited the rights of the other members.  The other members signed the new agreement as presented to them, but the changed terms were never explained, and the managing members implied this was just a formality recommended by entity lawyers.

Laster held that when the original LLC was formed – before the agreement was drafted – the default rules for LLC organization kicked in, which meant the managing members had fiduciary duties to the minority.  By rewriting the agreement in such a self-interested fashion – and presenting it to the minority members without disclosing what it meant – they violated those duties, rendering the new agreement unenforceable.  As Laster put it:

At the very least, Nielsen and Britton had an obligation to state plainly to the Minority Members that it was time to switch out of a mindset of fiduciary reliance and into a mindset of arm’s-length bargaining. They were obligated to put the Minority Members on notice that this was a really big deal. They needed to say, in substance, that the 2019 LLC Agreement materially and adversely altered the Minority Members’ rights, that Snell & Wilmer represented Sunder and its controlling members (viz., Nielsen and Britton) and not the Minority Members, and that the Minority Members should retain their own counsel and obtain independent advice because there were major changes in the draft agreement.

Anyway, the whole situation reminded me a little of Christine Hurt’s Startup Partnerships, about the inadvertent partnerships that form before companies formally organize.  Also, for contract and restrictive covenant mavens, there’s some great stuff on how choice of law affects the restrictive covenant analysis, and very amusing language about the overbreadth of the restrictions.

Which brings us to our next internal affairs issue, regarding the complaint filed in Adrian Dominican Sisters et al. v. Mark P. Smith, in the District of Nevada.  There, several communities of Catholic nuns filed a derivative lawsuit against Smith & Wesson, arguing that the company acted in bad faith by failing to oversee Smith & Wesson’s compliance with laws regarding the marketing of its AR-15 – functionally, a Caremark/Massey claim.  And yes, I realize this is particularly well-timed given the recent shooting at UNLV, which Ben posted about earlier this week.

The lawsuit in and of itself is interesting, but what struck me is that Smith & Wesson is organized in Nevada, but, until recently, its headquarters were in Massachusetts (they just moved to Tennessee).  The plaintiffs aver that they obtained books and records before filing their lawsuit, but as I understand Nevada law, inspection rights are only available for investors with at least a 15% stake.  So, the plaintiffs sought books and records under Massachusetts law.  And the reason that’s striking is, nothing in the complaint suggests Smith & Wesson objected – in fact, it provided records – but not long ago, in Juul Labs, Inc. v. Grove, 238 A.3d 904 (Del. Ch. 2020), VC Laster held that inspection rights are an internal affairs matter.  (Which is something I also discuss in my paper).  The choice of law for inspection rights has always been a bit fuzzy; I don’t know if Smith & Wesson acceded in in this case because of prior unfavorable precedent, or for some other reason.

As for the lawsuit itself, traditionally, religious orders have focused on shareholder proposals rather than derivative lawsuits, but it’s not surprising to me that they’re branching out because – as I previously posted – Delaware is in the process of establishing some mighty broad rules about derivative lawsuits on the grounds of intentional lawbreaking by corporate boards.  Unsurprisingly, plaintiffs are alleging even unadjudicated lawbreaking as a violation of fiduciary duty, and so, a conservative plaintiff recently latched on to that precedent to challenge Starbucks’s diversity policies, and now we’re seeing liberal-side plaintiffs claim that Smith & Wesson’s marketing of the AR-15 was illegal and rendered the company vulnerable to future liability.  (I mean, these are not Delaware companies or cases, but I think the litigants are inspired by Delaware precedent).  Also, the complaint alleges that this conduct violated the Board’s ESG Committee charter, so it turns out that Smith & Wesson has an ESG Committee.

Another University Shooting, This Time Mine

It's tough to know what to write here today.  I was fortunate enough to be working from home when I started getting emails from the University.  This is what the first ones said:

(11:51 a.m.) University Police responding to report of shots fire in BEH evacuate to a safe area, RUN-HIDE-FIGHT.

(11:57 a.m.). University Police responding to confirmed active shooter in BEH. This is not a test.  RUN-HIDE-FIGHT.

My first thought was to wonder why they were not texting me.  Then it was to realize that if I were not getting texts, many of my colleagues might not either.  The BEH building code meant the shooter was at the Business School--just a short, short walk from the law school.  I started texting my colleagues.  At least all of them that I had numbers for.  As people checked in, I learned that my colleagues were sheltering in place as the school locked down.  I reached out to some students who I'd worked with and had numbers for to make sure they were okay.  Fortunately, the two that I connected with were not on campus.  But they very easily could have been.  Our final exams have started and students not taking exams usually hole up at the law school to study.

Yesterday seemed to drag on with my phone buzzing every few minutes with someone trying to find out if I was okay as the news spread around the globe.  Early reports coming in where chaotic and confusing.  At one point, we thought there might be two shooters.  We also heard that over twenty people had been shot.  There have been so many of these events that people now know that the early information is often unreliable.  But it's also terrifying.

My two-year-old daughter attends a suburban pre-school here.  They locked down in response to the news about the shooting.  Other colleagues have their own children in the University daycare and preschool.  They locked down.  I can't imagine the horror and anxiety of being forced to shelter in place in your campus office knowing a shooter was firing off rounds near you and your child in the campus daycare.

This isn't the first time I've been relatively near to a mass shooting.  The 1 October shooting happened in Vegas right around when I moved to Vegas.  I lived in Orlando about a mile and a half from the Pulse nightclub shooting.  I was in downtown Charleston when the Mother Emanuel shooting happened.  I'm not unique.  There are way too many mass shootings.   

Something about this feels different though. I walk through the buildings where the shooting occurred all the time.  On any day, I could have been over there.  The faculty killed were people I might have worked with, had their lives not been ended.

Next semester, I will teach two classes.  We'll start with a review for how to escape the building.  It's how all my classes will start from now on. 

I'm freaked out.  My students will undoubtedly be freaked out.  

Assistant/Associate/Full Professor Positions in Business Law and Ethics, Indiana U. Kelley School of Business

Dear BLPB Readers:

"The Kelley School of Business at Indiana University in Bloomington seeks applications for a tenured/tenure-track position or positions in the Department of Business Law and Ethics, effective Fall 2024. The candidate(s)selected will join a well-established department of 27 full-time faculty members who teach a variety of courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. It is anticipated that the position(s) will be at the assistant professor rank, though appointment at a higher rank could occur if a selected candidate’s record so warrants.
Candidates with appropriate subject-matter expertise and interest would have the opportunity to be involved on the leading edge of a developing interdisciplinary collaboration between the Kelley School of Business and the Kinsey Institute, the premier research institute on human sexuality and relationships and a trusted source for evidence-based information on critical issues in sexuality, gender, and reproduction. Such expertise, however, is not required to be qualified and considered for the position or positions."

The complete job posting is here.

Rotten Eggs and Congressional Insider Trading

In June, at the National Business Law Scholars Conference in Knoxville, I sat in on a paper panel featuring Sarah Williams's work in process, Regulating Congressional Insider Trading: The Rotten Egg Approach.  A draft of the resulting paper, forthcoming in the Cardozo Law Review, has been made available on SSRN.  The abstract is copied in below.  

A 2004 study revealed that the stock portfolios of members of Congress were consistently outperforming those of the investing public. The financial success of federal lawmakers was statistically correlated to the use of nonpublic information obtained in connection with the performance of legislative responsibilities – reasonably characterizable as insider trading. Cries of dismay over such profiteering by lawmakers have been echoing in the public domain since Samuel Chase, Maryland’s representative in the Continental Congress, cornered the flour market in 1788 after learning that copious quantities of the product would be purchased by the government to support the Continental Army. Notwithstanding efforts to apply insider trading law to curb this behavior and the enactment of the Stop Trading on Congressional Knowledge (“STOCK”) Act, fortuitous securities transactions by members of Congress continue to occur in connection with headlining national events; it was recently observed with respect to news of the financial collapse of certain regional banks.

While there is scholarly and political support for laws that would effectively ban such rotten egg behavior, this Article proposes that the conduct be regulated under the statute created with rotten eggs in mind – the Securities Act of 1933. The Securities Act creates speedbumps for persons in a control relationship with issuers who want to sell the issuer’s securities in the secondary market. The speedbumps require both public disclosure and broker inquiry. This article asserts that senators and house representatives are in a control relationship with issuers such that they transcend the status of ordinary investor in the securities law regime and must navigate the obstacles established under the Securities Act for such persons before selling their securities in the secondary market. This approach eliminates the legal and evidentiary challenges of insider trading theory, provides a disclosure mechanism that is vastly more effective than that provided by the STOCK Act, and deploys broker-dealers as gatekeepers to ensure that such trades do not undermine the maintenance of fair markets.

As you can see, she takes a novel, creative approach to a tough, longstanding issue.  I look forward to reading the draft.

A Tale of Two Anti-Activist Bylaws

This week, we had two interesting, and very different, decisions on the validity of anti-activist bylaws.

The first decision, out of Delaware, upheld certain advance notice bylaws in the context of a motion for a preliminary injunction, while the second, from the Second Circuit, rejected control share acquisition bylaws adopted by a closed-end mutual fund.

The first decision, Paragon Technologies v. Cryan, concerned Paragon’s activist attack on penny stock Ocean Powers Technology (OPT).  After Paragon expressed interest, OPT adopted an advance notice bylaw requiring director nominees offer a wealth of information, including any plans that would be required to be disclosed on a 13D, any business or personal interests that could create conflicts between the nominees and OPT, and any circumstances that could delay a nominee receiving security clearance, while simultaneously adopting a NOL pill (for more on those, read Christine Hurt).

Paragon submitted some documents in connection with the bylaw, but the “plans” only said it would “fix OPT.”  OPT identified numerous deficiencies in Paragon’s submission, Paragon submitted more information including that its plans were to reduce expenses and focus on industry growth.  Long story short: OPT kept finding deficiencies to complain about, and ultimately Paragon’s nominees were rejected.  Paragon had also requested an exemption from the pill, which was denied.

On Paragon’s motion for a preliminary injunction ordering that its nominees be permitted to stand for election, and for relief from the pill, VC Will concluded that neither side had covered itself in glory.  She agreed that OPT very possibly had nitpicked Paragon’s application, and some of its demands – like the security clearance thing – were vague and potentially unnecessary.  But she also found that Paragon had deleted certain text messages, which contributed to her finding that the record was inconclusive as to whether Paragon had complied with even reasonable bylaws.  Like, it might have had plans that were not disclosed; there were discussions among Paragon personnel about a stock-for-stock upside down merger with Paragon.  Like, there was the possibility that such a merger would also have had to have been disclosed as a potential conflict.  Like, even if the security clearance demand was vague, on this record, Will could not be sure that Paragon had been genuinely confused.  And though the timing of the NOL pill was certainly suspicious, the OPT Board’s tax advisor had pointed out that there was a real financial risk to OPT if it granted Paragon’s exemption request.

Given these factual disputes, she concluded that Paragon had not met its burden of proof that it was entitled to an injunction suspending operation of the bylaw and the pill.

I admit, I’m a bit uncomfortable with this holding, because it seems to me that with these kinds of bylaws, it will be very easy for boards to create factual “disputes” about whether all of an activist’s plans were disclosed, or whether there was some undisclosed conflict lurking somewhere, or whether a bylaw really was vague in application, and with those factual disputes in hand, stave off a proxy challenge for at least another year, which may render it uneconomical for an activist to even litigate the bylaw issues in the first place.  Perhaps the board’s actual conduct – evasiveness and foot-dragging when addressing requests for clarification – should carry more weight.  But I don’t want to overstate; deleted text messages were a real issue, Paragon’s first 13D disclosures were laughable, and Will suggested that she might have looked more favorably on a different request for relief, such as, delay of the annual meeting until trial on Paragon’s claims that OPT breached its duties with respect to the bylaw and the pill.  Still, I do think there needs to be more work on how advance bylaws function to undermine activists’ strategies and to what extent that’s good – or at least acceptable – or bad, and unacceptable.  (If that paper’s been written, point me to it!)

But then we come to the Second Circuit’s decision in Saba Cap. CEF Opportunities 1, Ltd., Saba Cap. Mgmt., L.P. v. Nuveen.  Saba launched an activist attack on a Nuveen closed-end fund, and Nuveen passed a control share acquisition bylaw – any shares Saba acquired in excess of 10% would lose their voting rights, unless the remaining shareholders voted to restore them.

The Second Circuit held that the bylaw violated the Investment Company Act’s requirement that all shares have equal votes.  Per the court:

Read together, these two provisions of the ICA control. The first provision requires that all shares of stock must be “voting stock” and have “equal voting rights.” Id. § 80a-18(i). The second defines an umbrella term, “voting security,” as one “presently entitling” the owner to vote. Id. § 80a-2(a)(42).  The language is plain and unambiguous. In addition to requiring that all investment company stock be voting stock, the statute defines it with reference to its function—that it “presently entitles” the owner to vote it. Id. § 80a-2(a)(42).

Nuveen’s Amendment violates this provision because under it, if an owner of Nuveen stock cannot “presently” vote their stock, the stock loses its function and is not “voting” stock. The Amendment also violates Section 80a-18(i) because it deprives some shares of voting power but not others—contrary to the provision’sguarantee of “equal voting rights.” Id. § 80a-18(i).

The court distinguished Delaware decisions as being about, you know, Delaware, and noted that poison pills – if permissible at all, which the court would not say definitively – at least are different in that they distinguish shareholders’ economic interests, not the voting rights of the shares.  The court repeatedly made somewhat derisive references to Nuveen’s claim that the bylaws were intended to “limit[] the risk that the [f]und will become subject to undue influence by opportunistic traders pursuing short-term agendas adverse to the best interests of the [f]und and its long term shareholders,” obviously believing such arguments to be irrelevant to the statutory provisions at issue.

What do I find interesting in all this?

First, it is more evidence for one of my recurring themes, namely, that corporate governance is not an exercise in private ordering, but that the hand of the state is now less visible in operating companies than it is in regulation of investors.  Corporate organization may carry the patina of private ordering, but the levers of governance are held by institutional investors who are subject to far more intrusive regulations than Delaware ever dreamed of imposing on companies themselves. 

Second, Delaware would almost certainly have accepted Nuveen’s claim to be protecting itself against Saba’s desire to “alter[] investment strategies away from long-term investments, all to turn a ‘quick profit,’” while the Second Circuit nearly laughed the argument out of court.  And that’s interesting because Delaware’s invocation of “long termism” has often been interpreted as a sub rosa grant of permission for corporate managers to consider stakeholder interests instead of shareholder ones.  I.e., Delaware would never say so explicitly, but every time it permitted directors to fend off a hostile takeover to protect company “long term” interests, it functionally was permitting directors to adopt a stakeholder model of governance. 

The Investment Company Act, according to the Second Circuit, grants no such permission.  Shareholder primacy reigns supreme.  Which means our tightly federally regulated investors are engineered for pure profit seeking without regard for other concerns.  Federal law doesn’t contain the “give” of Delaware law, and that’s an aspect of governmental choice, as well.