Business Law Prof Blog

Open Visiting Faculty Positions - Howard University School of Law

Dear BLPB Readers:

"HOWARD UNIVERSITY SCHOOL OF LAW invites applications for two visiting faculty
positions during the 2024-2025 academic year. Howard University, a culturally
diverse, comprehensive, research intensive and historically Black private university,
provides an educational experience of exceptional quality at the undergraduate,
graduate, and professional levels to students of high academic standing and
potential.

Position 1 – We are hiring a visiting law professor for a full-year podium visit. This
professor will teach one section of our first-year contracts course, which is a full
year course. In addition to the contracts course, we are open to a wide range of
other offerings in both semesters with a particular interest in business courses and
upper level writing seminars.

Position 2 – We are hiring a visiting law professor for a Fall 2024 podium visit. This
professor will teach one section of our fall first-year civil procedure course. In
addition to the civil procedure course, we are open to a wide range of other
offerings in the fall semester with a particular interest in business courses and
upper level writing seminars."

The complete announcement about these positions is here: Download HUSL Visiting Faculty Announcement - AALS 01.18.24[61]

David Rosenfeld on Insider Trading and Rule 10b5-1 Plans

The University of Chicago Business Law Review recently published an interesting and engaging article written by David Rosenfeld.  The article is entitled "Insider Abstention and Rule 10b5-1 Plans" and is available on SSRN.  The SSRN abstract for David's article follows.

Company insiders will typically be in possession of material non-public information (MNPI) about their companies. In order to allow insiders the opportunity to trade, the SEC adopted Rule 10b5-1, which provides an affirmative defense to insider trading liability if the trades are made pursuant to a written plan or trading instruction entered into when the trader was not aware of MNPI. Over the years, there has been considerable concern that insiders were abusing Rule 10b5-1 plans by adopting plans just prior to trading, adopting multiple plans, or even terminating plans when they turned out to be unprofitable. The SEC recently adopted new rules designed to curb some of the more abusive practices, but one significant problem remains: while Rule 10b5-1 plans are supposed to be irrevocable, insiders who back out of plans have so far escaped liability under the central anti-fraud provision of the federal securities laws, principally because a violation of that provision requires an actual trade.

The issue of “insider abstention”—insiders who decide not to trade based on MNPI—has long bedeviled insider trading law and policy. Insider abstention is typically undetectable and unknowable, raising insurmountable issues of proof, while the general requirement that fraud be “in connection with the purchase or sale of a security” imposes a rigid legal barrier. But Rule 10b5-1 plans stand on a different evidentiary footing: they are written plans, communicated to third parties, creating a clear record of intent. The only real question is whether legal liability can attach in the absence of an actual purchase or sale of a security.

Traditionally, the answer to this question has been no. The SEC staff has stated on a few occasions that cancellation of a Rule 10b5-1 plan would not in itself lead to liability under Rule 10b-5 because terminating a plan would not meet the “in connection with” requirement. However, Rule 10b-5 is not the only statutory provision that has been used to prosecute insider trading. The SEC has frequently prosecuted insider trading under Section 17(a) of the Securities Act, a provision that applies not only to the “sale” of securities but extends more broadly to “offers” to sell securities. And criminal authorities have increasingly been prosecuting in sider trading under mail and wire fraud statutes that do not have an “in connection with” requirement at all. These other statutory provisions could provide a basis for insider trading liability in the context of a cancelled or terminated Rule 10b5-1 plan.

I had the opportunity to review this paper in an earlier draft and found it illuminating and helpful.  I was interested in the piece in part because of recurrent concerns about insider trading abuses and reforms relating to Rule 10b5-1 plans.  As readers may recognize, the BLPB has featured posts in this regard, including this one by John Anderson. 

In this article, as in other aspects of David's work, David brings the keen eye of a former U.S. Securities and Exchange Commission enforcement professional to the question--an undoubtedly valuable lens.  Moreover, insider trading discussion groups in which I have participated at conferences in recent years have increasingly focused on the creative enforcement of insider trading under legal theories outside Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934, as amended.  David's article acknowledges and extends the reach of this trend.  Overall, the article is a fun and insightful read.

 

Are Lawyers, Lawmakers, and Law Professors Really Ready for AI in 2024?

We just finished our second week of the semester and I’m already exhausted, partly because I just submitted the first draft of a law review article that’s 123 pages with over 600 footnotes on a future-proof framework for AI regulation to the University of Tennessee Journal of Business Law. I should have stuck with my original topic of legal ethics and AI.

But alas, who knew so much would happen in 2023? I certainly didn’t even though I spent the entire year speaking on AI to lawyers, businesspeople, and government officials. So, I decided to change my topic in late November as it became clearer that the EU would finally take action on the EU AI Act and that the Brussels effect would likely take hold requiring other governments and all the big players in the tech space to take notice and sharpen their own agendas.

But I’m one of the lucky ones because although I’m not a techie, I’m a former chief privacy officer, and spend a lot of time thinking about things like data protection and cybersecurity, especially as it relates to AI. And I recently assumed the role of GC of an AI startup. So, because I’m tech-adjacent, I’ve spent hours every day immersed in the legal and tech issues related to large and small language models, generative AI (GAI), artificial general intelligence (AGI), APIs, singularity, the Turing test, and the minutiae of potential regulation around the world. I’ve become so immersed that I actually toggled between listening to the outstanding Institute for Well-Being In Law virtual conference and the FTC’s 4-hour tech summit yesterday with founders, journalists, economists, and academics. Adding more fuel to the fire, just before the summit kicked off, the FTC announced an inquiry into the partnerships and investments of  Alphabet, Inc., Amazon.com, Inc., Anthropic PBC, Microsoft Corp., and OpenAI, Inc. Between that and the NY Times lawsuit against OpenAI and Microsoft alleging billions in damages for purported IP violations, we are living in interesting times.

If you’ve paid attention to the speeches at Davos, you know that it was all AI all the time. I follow statements from the tech leaders like other people follow their fantasy football stats or NCAA brackets. Many professors, CEOs, and general consumers, on the other hand, have been caught by surprise by the very rapid acceleration of the developments, particularly related to generative AI.

However, now more members of the general public are paying attention to the concept of deepfakes and demanding legislation in part because the supernova that is Taylor Swift has been victimized by someone creating fake pornographic images of her. We should be even more worried about the real and significant threat to the integrity of the fifty global elections and occurring in 2024 where members of the public may be duped into believing that political candidates have said things that they did not, such as President Biden telling people not to vote in the New Hampshire primary and to save their votes for November.

For those of us who teach in law schools in the US and who were either grading or recovering from grading in December, we learned a few days before Christmas that Lexis was rolling out its AI solution for 2Ls and 3Ls. Although I had planned to allow and even teach my students the basics of prompt engineering and using AI as a tool (and not a substitute for lawyering) in my business associations, contract drafting, and business and human rights class, now I have to also learn Lexis’ solution too. I feel for those professors who still ban the use of generative AI or aren’t equipped to teach students how to use it ethically and effectively.

Even so, I’m excited and my students are too. The legal profession is going to change dramatically over the next two years, and it’s our job as professors to prepare our students. Thompson Reuters, the ABA, and state courts have made it clear that we can’t sit by on the sidelines hoping that this fad will pass.

Professionally, I have used AI to redraft an employee handbook in my client’s voice (using my employment law knowledge, of course), prepare FAQs for another client’s code of conduct in a very specialized industry, prepare interview questions for my podcast, and draft fact patterns for simulations for conferences and in class. I’ve also tested its ability to draft NDAs and other simple agreements using only ChatGPT. It didn’t do so well there, but that’s because I know what I was looking for. And when I gave additional instructions, for example, about drafting a mutual indemnification clause and then a separate supercap, it did surprisingly well. But I know what should be in these agreements. The average layperson does not, something that concerns Chief Justice Roberts and should concern us all.

How have you changed your teaching with the advent of generative AI? If you’re already writing or teaching about AI or just want more resources, join the 159 law professors in a group founded by Professors April Dawson and Dan Linna. As for my law review article, I’m sure a lot of it will be obsolete by the time it’s published, but it should still be an interesting, if not terrifying, read for some.

The Specter of Twitter v. Musk Keeps Reappearing

So, there was a lot going on in Twitter v. Musk, some of it in the actual case, but much of it in the speculation of we legal types as we gamed out various potential scenarios.

One scenario that kept recurring was whether Delaware would in fact have the ability to actually enforce a judgment against Elon Musk, should he choose to simply defy court orders.  That was never a likely scenario; Musk is a repeat player in Delaware and it was never feasible for him to remain the CEO of a public company organized in Delaware while running from the Delaware courts.

But if that happened, it seemed one solution would be for Delaware to seize his Tesla shares, and his SpaceX shares, and then either sell them or more likely simply hold them until he complied with the judgment.  The logic was that, according to DGCL §169, shares of a Delaware corporation exist, in the abstract, within the state of Delaware, and Court of Chancery Rule 70 says:

If a judgment directs a party to execute a conveyance of land or to deliver deeds or other documents or to perform any other specific act and the party fails to comply within the time specified… On application of the party entitled to performance, the Register shall issue a writ of attachment or sequestration against the property of the disobedient party to compel obedience to the judgment. The Court may also in proper cases adjudge the party in contempt. If real or personal property is within the jurisdiction of the Court, the Court in lieu of directing a conveyance thereof may enter a judgment divesting the title of any party and vesting it in others and such judgment has the effect of a conveyance executed in due form of law. When any order or judgment is for the delivery of possession, the party in whose favor it is entered is entitled to a writ of execution or assistance upon application to the Register in Chancery. The provisions of this paragraph shall not be construed to replace any statutory authority granted this Court to compel performance by a substitute.

…For failure to obey a restraining or injunctive order, or to obey or to perform any order, an attachment may be ordered by the Court upon the filing in the cause of an affidavit showing service on the defendant, or that the defendant has knowledge of the order and setting forth the facts constituting the disobedience. …

Which, as I read it, grants Chancery pretty wide latitude to force compliance with court orders by seizing property within its jurisdiction.

And, in fact, on October 3, 2022 – right before Twitter v. Musk settled – VC Laster issued an opinion in In re Stream TV Networks Omnibus Agreement Litigation doing just that.

Now a big difference between that case and Twitter was, in that case, the shares themselves were the subject of the dispute.  SeeCubic had been ordered to transfer its assets to Stream, and instead of doing so, it arranged matters to ensure that certain shares of a Delaware company were seized by another company, Hawk.  Stream filed an emergency motion to get the shares back, and VC Laster relied on Section 169 and Chancery Court Rule 70 to order that Hawk be divested of the shares, and that they be vested in Stream.  So yes, it seemed a Delaware Chancery court could in fact simply order that shares of a Delaware company be transferred to someone else or sequestered to ensure compliance with a court order, and there did not seem to be a reason why the same principle wouldn’t apply to assets unrelated to a particular dispute.

But then!  In May 2023, then-Superior Court Judge LeGrow (now on the Delaware Supreme Court) decided Deng v. HK XU Ding.  There, Plaintiff Deng sold shares of iFresh, a Delaware corporation, to Defendant HK.  HK never paid the full purchase price, however, and Deng sued in New York for the remainder of the purchase price.  He won a default judgment of around $2.5 million, and then went to Delaware to execute.  The assets available to satisfy the monetary judgment were, of course, the iFresh shares, so Deng sought to attach them.

The problem was that these shares actually had been certificated, and the physical certificates had been seized by Chinese authorities.  Deng argued that didn’t matter; Judge LeGrow held that it did.

Relying on DGCL §324(a) and 6 Del. C. §8-112, Judge LeGrow held that when certificates of the stock exist, they may be attached to satisfy a debt only if the physical shares are seized.  The Delaware Supreme Court heard oral argument on that question earlier this month.

So, I’ll openly admit I don’t know how far the two situations interact; maybe not at all.  Sections 324 and 8-112 are about creditors satisfying debts, not about seizing for the purpose of forcing compliance with a court order/as a sanction for contempt, and possibly those are different scenarios.  (If you are a Delaware law maven who has a definitive answer, please drop a comment.)  But if LeGrow’s interpretation holds up across all scenarios, that would mean future Musks could, if they wanted to, evade sanction in Delaware by I guess going to DTC and getting physical certificates of their shares, and then sticking them in a vault in another state.  Or Bermuda or the Cayman Islands.  Of course, that would make them hard for anyone to seize, and I have no idea whether that would interfere with attempts to use them as security for personal loans, as Musk and many other executives do.

Edit:  I should add that another complexifying factor here is that the Chinese government obviously thinks it has possession of the shares. If Delaware holds that you do not need the physical certificates, is it challenging the claim of the Chinese government?  That presumably is a fight Delaware does not want to have; the problem is, there is a difference between the owner refusing to turn over the certificates to avoid a judgment, and another creditor/claimant refusing to turn them over.  The plaintiff in Deng admits there is a bona fide purchaser exception, but not every certificate seizure will involve those.

SEC | Investor Advocacy Clinic Summit - Mar. 1, 2024

On March 1, 2024, the SEC will host an Investor Advocacy Clinic Summit both virtually and in Washington D.C.  The event will run from 11:00 a.m. to 4:00 p.m. EST.  It's an opportunity for faculty and law students to:

LEARN about the work of the ten-law school investor advocacy clinics, and the benefits of these clinical programs for law students, law schools, and their communities.

HEAR perspectives from the SEC Chair, SEC Commissioners, and guest speakers.

ENGAGE with SEC staff about the work of the different Divisions within the Commission.

FIND out about job opportunities at the SEC and the federal government post-law school graduation.

This is the link to RSVP.

You can access the flyer for the event here:  Download 2024 IAC Summit Evite -RSVP

Teaching and Supporting Small Business and Innovation

As you may know or recall, I am teaching an advanced business law course that leverages the characters and transactions featured in HBO Max's Succession.  I reported on the course here back in November. The inspiration for the course came in part from the work some of us did to produce a series of educational sessions as the Waystar Royco School of Law last year.  I posted on that lecture series here on the BLPB, too, including here.

From that series of Zoomcasts, a publication opportunity, some press inquiries, and a few new friendships followed, as well as the idea for my Succession course.  We are only a few classes in so far, but we had the pleasure of hosting friend-of-the-BLPB Ben Means in class today.  As you may know, Ben directs South Carolina's innovative Family and Small Business Program.  He also participated int he Waystar Royco School of Law (ad)venture and was a super guest.  We covered a lot of ground on family businesses, big and small, in our 75 minutes together this morning.  Thank you, Ben.

This class meeting and my Securities Regulation teaching today had me thinking about small businesses and innovation.  That reminded me that I keep forgetting to blog about a nifty small business that I was introduced to last year.  The business is The Grain Free Baker.  I learned about the business from one of my fellow BLPB editors, Colleen Baker.  It is her sister's business.  As a cook, a foodie, and a business lawyer supportive of entrepreneurship, it was fun to learn about the business--founded by a Baker who is a baker!  You can read about it here. 

It is the need to bring money into businesses like this that helps drive me to teach a new generation of law students to be corporate finance lawyers.  It is essential that lawyers understand, I argued earlier today, what a security is and what the legal implications of offering and selling securities are if they are to use their law degrees to support start-ups and small businesses.  Although many entrepreneurs will seek out commercial loans to finance their businesses, corporate finance transactions are desired or needed by others.

I hope those of you who are instructors also can find passion projects that inspire your teaching.  They can be so helpful in motivating instruction at downtimes during the semester.  That has been true for me.  And what's not to like about financing businesses that produce amazing products like the mix that made these cookies?!

JetBlue and Spirit

This is a really interesting classroom case study.

As I originally blogged about here, it all begins with Spirit and Frontier agreeing to a stock deal – non-Revlon – and JetBlue swooping in with a topping cash bid.

Spirit’s management resisted, arguing that there was far more regulatory/antitrust risk with the JetBlue deal than with the Frontier deal.  But JetBlue kept insisting that regulatory risks could be managed, and offered an extremely generous set of reverse termination provisions if the deal was blocked (more on those in a minute).

Ultimately, Spirit’s management caved to the demands of its shareholders; it was clear they would reject Frontier in favor of JetBlue.  And the deal was, in fact, blocked on antitrust grounds.

The parties had agreed to use best efforts to complete the deal, including to appeal any court orders enjoining the merger.  As the agreement states:

both Parent and Company (and their respective Subsidiaries and Affiliates) shall contest, defend and appeal any Proceedings brought by a Governmental Entity, whether judicial or administrative, challenging or seeking to restrain or prohibit the consummation of the Merger or seeking to compel any divestiture by Parent or the Company or any of their respective Subsidiaries of shares of capital stock or of any business, assets or property, or to impose any limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties or stock to avoid or eliminate any impediment under the HSR Act or similar applicable Law,

Termination cannot formally occur until all appeals have been exhausted.

JetBlue agreed to the following reverse termination fees to mitigate the risk of deal failure due to antitrust enforcement.  First, it agreed to pay $70 million to Spirit.  Second – and more unusually – it agreed to pay $400 million to Spirit shareholders.  And third, it agreed to a “prepayment” scheme, of sorts.  An initial payment of $2.50 per share was made to Spirit shareholders right after they voted in favor of the merger; after that, Spirit shareholders have been receiving a $0.10 per share “ticking fee” for every month of delay.  If the deal goes through, these payments are deducted from the merger consideration.  If the deal does not go through, shareholders get to keep them, plus whatever else is necessary to reach the $400 million mark.  If the deal is delayed to the point where the prepayments exceed $400 million, as I understand it – and someone please correct me if I’m getting this wrong – JetBlue keeps paying them, as long as the deal has not been formally terminated.  In other words, the longer the appeal process takes, the more likely it is JetBlue will have to pay reverse termination fees to Spirit shareholders in excess of $400 million.

I have no idea where the numbers are right now, but obviously, that makes fruitless appeals a lot less attractive.

Edit:  A reader pointed out that there is an outside date of July 2024, which is likely far too soon for any appeals to conclude, and JetBlue can terminate then.  But the ticking fees, I believe, still tick until then, and JetBlue cannot end this earlier, which means, Spirit does still have that leverage.

Which is why it’s understandable that, according to reports, JetBlue is not sure it wants to appeal.  And why it’s understandable that Spirit is insisting on adherence to the contract.  But there is a twist: Spirit’s financial condition is so poor that there are reports denying an imminent bankruptcy.  According to Reuters:

JetBlue… is also mindful that Spirit's business has deteriorated significantly since the two agreed the tie-up in July 2022, …

Spirit, which like other airlines took a financial hit during the COVID-19 pandemic, has struggled more than its peers to recover, because its low-budget price model has left it little room to raise air fares after fuel prices rose. Its net debt rose from $3.3 billion to $5.5 billion over the past two years as its losses widened.

Which makes me think that JetBlue is considering pulling the MAE card.  Spirit experiencing an MAE is a separate and independent grounds for JetBlue to terminate, and the merger agreement definition of an MAE has a carve-back for disproportionate impact:

“Company Material Adverse Effect” means any change, event, circumstance, development, condition, occurrence or effect that (a) has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, financial condition, assets, liabilities or results of operations of the Company Group, taken as a whole, or (b) prevents, or materially delays, the ability of the Company to consummate the transactions contemplated by this Agreement; provided, however, that none of the following will be deemed in themselves, either alone or in combination, to constitute, and that none of the following will be taken into account in determining whether there has been or will be, a Company Material Adverse Effect: …  (iv) acts of war, outbreak or escalation of hostilities, terrorism or sabotage, or other changes in geopolitical conditions, earthquakes, hurricanes, tsunamis, tornados, floods, mudslides, wild fires or other natural disasters, any epidemic, pandemic, outbreak of illness or other public health event (including, for the avoidance of doubt, COVID-19 and impact of COVID-19 on the Company) and other similar events in the United States or any other country or region in the world in which the Company conducts business; (v) any failure by the Company to meet any internal or published (including analyst) projections, expectations, forecasts or predictions in respect of the Company’s revenue, earnings or other financial performance or results of operations (it being understood that the underlying facts and circumstances giving rise to such event may be deemed to constitute, and may be taken into consideration in determining whether there has been, a Company Material Adverse Effect); … or (vii) any change in the market price or trading volume, or the downgrade in rating, of the Company’s securities (it being understood that the underlying facts and circumstances giving rise to such event may be deemed to constitute, and may be taken into consideration into determining whether there has been, a Company Material Adverse Effect); provided, further, that the effects or changes set forth in the foregoing clauses … (iv) shall be taken into account in determining whether there has occurred a Company Material Adverse Effect only to the extent such developments have, individually or in the aggregate, a disproportionate impact on the Company relative to other companies in the airline industry, in which case only the incremental disproportionate impact may be taken into account.

From my 30,000 foot view analysis, I’d say JetBlue has a stronger MAE argument than, you know, Musk did when trying to avoid the Twitter deal, and it makes me think that the whole situation could resolve – as is typical – in a settlement, say, where JetBlue pays an additional fee to avoid the appeals.

If that happens, I suppose there may remain messy questions like, will Spirit shareholders sue claiming they missed out on those additional ticking fees they were supposed to receive while appeals were pending?  Will they have a chance, given the merger agreement’s (typical) disclaimer of any third-party beneficiaries? 

Anyhoo, Matt Levine said it first (naturally) but it’s worth reiterating: This was a classic case where Spirit shareholders wanted something, its management wanted something else, and management was right.  I mean, the company not only lost the JetBlue and Frontier deals, but it’s obviously in pretty dire circumstances without either.  This is why management ultimately has such power under Delaware law.

On the other hand, I’ll need someone else to do the math, but maybe this was in fact the best outcome for diversified shareholders (who presumably are perfectly happy to simply own a JetBlue and a Frontier with one less competitor), and in some ways, that’s also what the law is designed to do.

Update: Looks like they went with the appeal after all.

MLK Jr. - On Doing What We Do Well

"Whatever your life’s work is, do it well. "
-Martin Luther King Jr., “Facing the Challenge of a New Age,” Dec. 3 1956, Montgomery, Alabama

 

These words from Dr. King have meaning for me today and every day.  Many lawyers and law professors are strivers, and I count myself among them.  We understand the burdens and joys of our roles and pursue them with vigor.  Having recently stepped back from an interim administrative role at UT Law, I feel more free to refocus on my instructional mission.

A tweet from a law prof colleague over the weekend asks a question that resonates.

I just love this observation and the related question! I am not on social media as much as I used to be, but when I am, I often am rewarded by tidbits like this.  Thank you, David, for commenting and asking.

I did reply.  FWIW, my reply was "For me, it’s about setting limits and persevering. There’s always more one can do. But we need sleep and time away to be most effective. And so we must sleep and save things for another day!"  Other replies offered similar and other personal wisdom.

Our roles as law professors--if we want to do the job well--involve focused attention and extensive effort.  Teaching (with all that entails from course design to assessment), researching,  writing, editing, and performing service to benefit the school, the university, the community, the academy, and the profession can be a heavy load to bear.  Managing it with self care can be a struggle.  That struggle is real, and we should, as David does, acknowledge and address it.  After all, Dr. King also is quoted as having said the words set forth below in a sermon, “The Three Dimensions of a Complete Life,” in April 1967 at the New Covenant Baptist Church in Chicago, Illinois.

You know, a lot of people don’t love themselves. And they go through life with deep and haunting emotional conflicts. So the length of life means that you must love yourself. And you know what loving yourself also means? It means that you’ve got to accept yourself.

Words of wisdom.  And so we plod on, endeavoring to do our life's work well while also accepting and loving ourselves.  The latter should not be a burden, but rather a commitment to self leadership through self love that enables us to do our best work. 

Thank you, Dr. King, for helping lead us through, even years after your untimely death.  And again thank you, David, for your resonant post.

Supreme Court to Hear Important Securities Fraud Case - Tomorrow!

Tomorrow morning, the U.S. Supreme Court will be hearing oral arguments on a securities fraud case for which I am an amicus brief coauthor.  The case is: Macquarie Infrastructure Corporation, et al. v. Moab Partners, L.P., et al. (No. 22–1165, Certiorari to the C. A. 2nd Circuit).  The Court convenes at 10 am and has allotted one hour for oral argument: 30 minutes for the petitioners, 20 minutes for the respondent, Moab Partners, and 10 minutes for the U.S. Securities and Exchange Commission (“SEC”), as amicus supporting the respondents.  An audio feed of the argument is live-streamed on the Court's website, and the Court posts the audio later in the day.

The question presented to the Court is: "May a failure to make a disclosure required under Item 303 of SEC Regulation S-K support a private claim under Section 10(b) of the Securities Exchange Act of 1934, even in the absence of an otherwise misleading statement?"  The issue in the case, in essence, is whether a mandatory disclosure rule properly adopted by the SEC gives rise to a duty to disclose that can be the basis of a securities fraud claim under Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934, as amended.  There is a circuit split on this issue.  As most of you know, in 1988, in Basic v. Levinson, the Supreme Court offered that “[s]ilence, absent a duty to disclose, is not misleading under Rule 10b-5.”  A duty to disclose is therefore a foundational element in a Section 10(b)/Rule 10b-5 claim.  Of course, the elements of proof extend beyond this essential disclosure duty element—including by incorporating the requirement that there be a misstatement or misleading omission of a material fact).

The Macquarie case involves a corporation’s alleged failure to comply with an SEC mandatory disclosure rule.  The corporation and other original defendants are the petitioners.  Our brief argues in favor of the respondents.  In sum, we argue that the SEC disclosure requirement creates a judicially cognizable duty to disclose for purposes of a claim under Section 10(b)/Rule 10b-5.  Accordingly, we contend that the omission of the required disclosure provides a basis for a Section 10(b)/Rule 10b-5 claim.  An omission to state material fact required to be disclosed under an SEC mandatory disclosure rule may mislead investors who expect that any required disclosure is made or inapplicable.

Many of us teach in this space.  If you have time to listen in, the argument may illuminate some new things.  And it is bound to be interesting, regardless.

Vote buying

In two of his columns this week, Matt Levine highlighted this new company that purports to facilitate vote buying.  It invites passive retail holders to sell their votes to interested buyers.  Though the site itself mentions that buyers might be interested in influencing board selection, advancing ESG initiatives, or affecting takeover/merger decisions, in communications with Matt Levine, the company apparently emphasized the potential to use bought votes to obtain a quorum.  (As we all know, retail-heavy companies – especially SPACs – have had trouble with that recently). 

What no one seems to be talking about is whether any of this is actually legal, and the answer is – maybe?  Maybe not?

Delaware does not prohibit vote buying outright.  First, it draws a distinction between (1) where the company uses company resources to buy a vote; (2) where a third party uses its own resources to buy a vote.

The first is more troubling, because it raises the possibility of conflicted transactions.  For example, in Hewlett v. Hewlett-Packard, 2002 WL 549137 (Del. Ch. 2002), the plaintiffs alleged that HP allocated business to Deutsche Bank in order to persuade Deutsche Bank to vote shares held in its asset management arm in favor of a merger.   The court held that “Management… may not use corporate assets to buy votes in a hotly contested proxy contest about an extraordinary transaction that would significantly transform the corporation, unless it can be demonstrated… that management's vote-buying activity does not have a deleterious effect on the corporate franchise.”  Historically, there have been scenarios where management sought to buy votes to entrench their positions.  See Macht v. Merchants Mortgage & Credit Co., 194 A. 19 (Del.Ch. 1937).

But not every scenario is like that.  In Schreiber v. Carney, 447 A.2d 19 (Del. Ch.1982), the company wanted to reorganize, and pretty much everyone agreed the reorganization would be beneficial, but the proposal would have debilitating adverse tax consequences for one large blockholder.  The blockholder agreed to vote in favor, but only if the company loaned it sufficient funds to exercise certain warrants that would eliminate the tax problem.  When the transaction was challenged by a company shareholder, the Delaware Court of Chancery agreed this was vote buying, but not impermissible vote buying – the facts were fully disclosed, the deal was conditioned on approval by the remaining stockholders, and the purpose of the arrangement was not to defraud or disenfranchise the other stockholders but to further their collective interest.

What about third party vote buying?  That doesn’t use corporate resources at all.

Nonetheless, Delaware has expressed concern about it because it decouples the vote from economic interests in the shares.  See Crown EMAK Partners v. Kurz, 992 A.2d 377 (Del. 2010).  What if, for example, someone were to short the shares and then use bought votes to vote for a value-decreasing transaction?  Now, I’m not exactly sure how this would be economical – especially for retail votes – because you’d have to pay the shareholders enough to compensate them for the lost value of their shares, but maybe retail shareholders aren’t savvy enough to make those calculations and will sell their votes cheap.  As a result, the Delaware Supreme Court, affirming the findings of VC Laster, suggested that arrangements which decouple the vote from the economic interest are illegitimate.  Id. at 390 (“We hold that the Court of Chancery correctly concluded that there was no improper vote buying, because the economic interests and the voting interests of the shares remained aligned….”) .

That said, the whole set of rules is kind of muddled because of the obvious fact that there are plenty of ways, short of outright vote buying, to obtain votes without being exposed to the economic risks of the shares.  Whole articles have been written on the subject, with various proposed reforms. 

What this tells me is that if companies buy votes in order to obtain a quorum, that might be permissible under Schreiber, but you’d kind of have to assume the lack of a quorum wasn’t somehow a deliberate choice by shareholders, and that the final vote in fact advanced their collective welfare.

As for third party vote buying, I mean … I’m honestly not sure, but it doesn’t look good, because the economic interest in the shares remains with the seller.  Even if the buyer also has an economic interest through their own share ownership, they’re by definition obtaining votes that exceed their economic interest.  And if the buyer has no economic interest – if it’s just buying votes because it has other reasons for wanting the corporation to behave a certain way – well, big flashing warning signs.

Anyway, I’ll conclude by pointing out that there’s a case for permitting vote buying, if the sellers are uninformed/retail, and the buyers are long term wealth-maximizing institutional holders.

 

Some American Bar Association Opportunities for Law Students

Dear BLPB Readers:

I wanted to help spread the word about various ways in which law students can begin connecting with the American Bar Association (ABA) and encourage interested readers – especially the professors! – to also assist in getting the word out! 

First, law students can join the ABA for FREE!  They can find out more here.  

Second, the annual Banking Law Committee meeting will be in Washington D.C. on January 18-20, 2024.  This year, it’s an in-person only event (other meetings this year will offer virtual options).  Law students can attend this and other meetings for FREE (to do so, a student must become a member of the ABA and the Business Law Section)! 

Of course, the ABA has many committees in addition to the one on banking, including consumer financial services, bankruptcy, corporate governance, antitrust etc. and resources and opportunities for students interested in a variety of professional legal paths (transactional, litigation, regulatory etc.).

Third, the Banking Law Committee will also have full day meetings at two ABA conferences later in 2024 (Orlando, April 4-6 and San Diego, September 12-14).  Both meetings will have in-person and online options.  Additionally, the April meeting (and perhaps the September one too!) will have a one-hour “New Members Subcommittee Session,” which could be a helpful way for law students to begin connecting with the ABA!    

Tulane seeks Fellows!

Tulane Law School invites applications for its Forrester Fellowship, which is designed for promising scholars who plan to apply for tenure-track law school positions. This is a full-time faculty position in the law school, and faculty are encouraged to participate in all aspects of the intellectual life of the school. The law school provides significant support and mentorship, a professional travel budget, and opportunities to present works-in-progress in faculty workshops. 

Tulane’s Forrester Fellows teach legal writing in the first-year curriculum to first-year law students in a program coordinated by the Director of Legal Writing. Fellows are appointed to a one-year term with the possibility of a single one-year renewal. Applicants must have a JD from an ABA-accredited law school, outstanding academic credentials, and significant law-related practice and/or clerkship experience. If you have any questions about this position, please contact Erin Donelon at [email protected]. Interested candidates may apply here: Apply - Interfolio

Qualifications

J.D. from ABA-accredited law school; practice and/or clerkship experience

 

Call for Conference Participation - MALSB Annual Conference in Chicago (April 2024)

Dear BLPB Readers:

"The Midwest Academy of Legal Studies in Business (MALSB) Annual Conference is held in
conjunction with the MBAA International Conference. MBAA International draws hundreds of
academics from business-related fields such as accounting, business/society/government, economics,
entrepreneurship, finance, health administration, information systems, international business,
management, and marketing. The MALSB has its own program track on Legal Studies and attendees
may take advantage of the multidisciplinary nature of this international conference and attend sessions
held by the other program tracks.

Presentations in 2024 will have the option of in person or live online delivery. Tentatively MALSB paper
and panel in person/live online presentations are scheduled to begin Thursday morning (April 11, 2024)
and conclude Friday afternoon (April 12, 2024). If registration numbers require additional sessions, they
will be held Wednesday afternoon (April 10, 2024)."

Note that the registration/submission deadline is January 15, 2024.  The complete call for conference participation is here. Download Malsb_call_for_participation_2024

Litigation-limiting constitutive documents – off to the California Supreme Court

Looking back, it’s funny how the issue of litigation limits in corporate constitutive documents has really been a throughline throughout my academic career; my first paper on the subject, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, was written when I was still a VAP.  So now it’s like a theme.

Anyhoo, as you all know, the latest set of developments occurred when the Delaware Supreme Court decided Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), and approved the use of litigation limiting bylaws and charter provisions even for non Delaware claims, specifically, federal securities and antitrust claims.

That was part of what inspired my latest paper on the subject, Inside Out (or, One State to Rule them All): New Challenges to the Internal Affairs Doctrine, arguing, among other things, that other states pay too much deference to Delaware by automatically treating these provisions as contracts governed by Delaware law, rather than asking which law to apply, and whether the elements of contract are met.

Well, a new case has come up, EpicentRx, Inc. v. Superior Court, 95 Cal.App.5th 890.

EpicentRx is private, organized in Delaware but headquartered in California.  Its charter and bylaws require that shareholder claims be filed in Delaware Chancery.  Well, one shareholder is suing, not only for breach of fiduciary duty under Delaware law, but also for fraud under California law.  In EpicentRx, Inc. v. Superior Court, the California appellate court held that the corporate constitutive documents are, in fact, a contract – governed by the internal affairs doctrine, which, by the way, is not what Salzberg held, there was a diagram and everything – but that in this case, a trial in Delaware Chancery would require the shareholder to forfeit its jury rights under California law, and therefore the contract is unenforceable.  (Yes, that’s an issue I mention briefly in my paper, by the way)

The California Supreme Court recently agreed to hear the case, Epicentrx, Inc. v. Superior Court, 2023 Cal. LEXIS 6991 (Cal., Dec. 13, 2023).

Now, I gather that a lot of the action will be about whether the particular claims advanced by the plaintiff are, in fact, jury claims under California law.  But I desperately hope the California Supreme Court will spend some time asking whether there’s even a contract here in the first place, including which state’s law applies (since, I say again, Delaware did not hold this question was governed by the internal affairs doctrine).  Now, since EpicentRx is private, these may be more difficult questions than in the context of publicly traded corporations.  The plaintiff presumably bought stock directly from the company, for all I know the investment contract incorporated the bylaw and charter provisions by reference, although – and I think this is key – one factor that makes constitutive documents noncontractual is that, as Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) recognized, Delaware managers are subject to fiduciary duties when they enforce them, and I don’t even know how you ask whether it’s a violation of fiduciary duty to enforce a bylaw that causes a shareholder to forfeit a jury right.  In any event, all I really want is for the California Supreme Court to take these questions seriously.