Business Law Prof Blog

Remembering Roberta Karmel

I learned earlier this week of the death of Brooklyn Law Professor Roberta Karmel.  Roberta was extraordinary, and I miss her already.  Much has been written about her role in our profession--including her service as the first female commissioner at the Securities and Exchange Commission.  I will only add a few personal reflections here.

Roberta was both exacting and compassionate--traits that we sometimes think of as being mutually exclusive.  Small in stature, she somehow was still formidable.  When I first met her in a setting where she was commenting on academic work, I was impressed and intimidated.  Despite my extroversion, I was hesitant to introduce myself and reach out to her in friendship.  When I later admitted that to her, she laughed and (in that inimitable voice we all know and will remember) let me know how silly that was.

Roberta was the honored keynote speaker at our 2009 law graduation (hooding) ceremony at The University of Tennessee College of Law.  She was invited by a student committee that understood well her significance to the law and legal education communities.  She shared details of her life and career with us.  It was inspirational for me, even though I knew parts of the story.  Hearing that history in her own voice was priceless.

I was blessed to be part of a symposium held back in May 2021 to honor Roberta's career.  My paper from that symposium reflects on and extends an earlier published piece of her work.  I offered a post on that paper here.  As I note in that post, having the opportunity to review and dissect Roberta's work helped me in my own.

Thinking about all of this today does make me sad. Roberta's wisdom and voice will no longer add new ideas to the mix.  However, there also is cause for gratitude and hope.  She has left a strong legacy--one that we all can continue to reflect on and use in our work for many years to come.

What is the value of the corporate form?

The Tulane Corporate Law Institute this year was unusually contentious, and that’s because a lot of corporate practitioners – defense side – were unhappy with a number of recent Delaware decisions. 

Tornetta v. Musk made headlines because of the colorful personalities involved, but it actually rested on fairly commonplace, well-established Delaware standards of review.  More unsettling, I think, from the corporate bar’s perspective, were decisions like  Sjunde AP-Fonden v. Activision Blizzard (which I blogged about here), Crispo v. Musk (which I blogged about here), and West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (which I blogged about here), because those cases upset settled expectations of practitioners.  (VC Laster obliquely referred to some of the complaints in his decision denying interlocutory review in TripAdvisor: “Rule 42 does not invite a trial court to consider the level of media attention that a decision has received. That does not mean that the Delaware Supreme Court could not consider it. The justices might conclude that given the media attention and practitioner-driven stormlets over Delaware’s place in the corporate universe, Delaware’s highest court should weigh in. But that is not a consideration that Rule 42 instructs a trial court to take into account.”)

So it was in some sense unsurprising to see the Council of the Corporation Law Section of the Delaware State Bar Association immediately propose some legislative fixes.

Now, with the caveat that these proposals were just released, and I read them quickly, so I reserve the right to be totally wrong in my interpretation/analysis -

For Crispo, the proposal would make it possible for merger partners to specify that lost premium damages are available in the event of a broken deal, and further allow the target to create a shareholder’s representative who can seek lost premium damages on shareholders’ behalf (which, as I blogged, is something companies have sought to arrange through private ordering).

For Activision, the proposal allows boards to approve “substantially final” versions of merger agreements, especially if key terms are not included in the agreement but otherwise available to the board, and that disclosure schedules are not considered to be part of the merger agreement subject to board approval. 

I don’t find either of these particularly controversial (though I can imagine classroom hypos that have fun with how far a disclosure schedule can go; it doesn’t strike me as a particularly precise term).  As I previously blogged, in Activision, the violation seemed rather technical in nature, and Crispo just seemed like there was a divergence between the formal requirements of common law contract doctrine and the purposes a merger contract is meant to serve.

It’s the Moelis amendment that’s a bit more striking.  Proposed DGCL §122(18) would allow corporations to:

Make contracts with one or more current or prospective stockholders (or one or more beneficial owners of stock), in its or their capacity as such, in exchange for such minimum consideration as determined by the board of directors (which may include inducing stockholders or beneficial owners of stock to take, or refrain from taking, one or more actions). Without limiting the provisions that may be included in such contracts, the corporation may agree to: (a) restrict or prohibit itself from taking actions specified in the contract, whether or not the taking of such action would require approval of the board of directors under this title, (b) require the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation), and (c) covenant that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders or beneficial owners of stock of the corporation). With respect to all contracts made under this subsection, the corporation shall be subject to the remedies available under the law governing the contract, including for any failure to perform or comply with its agreements under such contract.

In conjunction with this amendment, there’s a new change to DGCL §122(5), as underlined:

Appoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation; provided that any contract or other appointment or delegation of authority that empowers an officer or agent to act on behalf of the corporation shall be subject to § 141(a) of this title, to the extent it is applicable.

According to the Richards, Layton & Finger memo on the proposed changes, Moelis only held that contractual restrictions on the board’s authority must be contained in preferred shares rather than a separate contract; therefore, these amendments to the DGCL would not substantively affect the extent to which the board can contract out its authority.  Rather, they only have the effect of allowing boards to use ordinary contracts, rather than preferred shares, to make those arrangements.

I am not sure that is an accurate interpretation of Moelis.  VC Laster seemed to leave open the question how far a preferred share issuance could restrict board authority; in footnote 19, he wrote:

Moelis may not be able to get everything he wanted. Even a charter provision cannot override a mandatory feature of the DGCL....This court has indicated that some restrictions on board action could be invalid even if they appear in the charter....Some transactions, like mergers, require a specific sequence of events in which the board initiates action, then the stockholders vote.  It is unclear whether a charter provision could require a stockholder’s pre-approval, before the board could act....Regardless, those issues are for another day....

So as I read it, Moelis actually touched upon a couple of different issues.  The first was, how much can corporate governance be privately ordered in a personal contract/stockholder agreement, rather than in a corporate charter (including preferred share classes)?  The second was, what are the fundamentally nondelegable functions of a corporate board, that cannot be restricted at all?

These are both unsettled questions because, usually, if you want that much tailoring, you either form a close corporation or – more likely these days – an LLC. 

But proposed Section 122(18) blows past all that – not only does it allow for stockholder agreements to contain the kinds of governance rights previously associated with preferred shares, but it also does not seem to place any limits on the kinds of rights that can be given to stockholders directly in the first place.

We could ask why it matters whether a restriction appears in a stockholder agreement rather than a preferred share issuance.  The most obvious is, if it’s a private company, the stockholder agreement may not be known to the public or even other investors.  And even in a public company, stockholder agreements may be more easily amended than preferred share terms (though I imagine at least some of that difference could be mitigated with careful drafting regarding procedures for amendment of the preferreds).

But I think the broader question is the more interesting one: how much authority must a Delaware corporate board retain?  Or, where is the actual line between a corporation and an LLC?  Or, more generally, whether Delaware is going to be so firmly committed to private ordering in the corporate context that it functionally eliminates the distinction between the two.

And that just begs the question whether we really do need the two forms, or whether instead we should just have “the firm” which is a set of defaults that can be altered by the parties. 

(Yes, yes, I know LLCs are taxed differently than corporations, but that’s an IRS choice. It can decide separately which governance arrangements stray so far into the LLC territory that the firm should be taxed like an LLC.  Certainly, I don’t see any reason the label – and not the actual governance arrangements – should drive the taxation determination.)

One major argument in favor of keeping the corporate form “pure” is network benefits.  It’s easier for investors when there’s a basic governance arrangement that’s stable across firms, and that way they can focus on analyzing the substantive nature of the business when making investment decisions.  Writing in 2013, Michael Klausner pointed out that IPO charters demonstrate very little customization, which he took as evidence of the value of these network effects.

I genuinely wonder if that same result would be found today.  Increasingly, companies are going public with shareholder agreements, byzantine multiple-class share structures, forum selection clauses, corporate opportunity waivers – and that doesn’t even count all the private companies with impenetrably complex governance and cash flow rights. 

Does that suggest the network effects of the corporate form are overstated?  That’s the challenge that the proposed Section 122(18) poses.

And of course it goes further.  I have written about (and written about) the unsettled definition of what it means to be a controlling stockholder; allowing shareholders complete freedom to take on these kinds of governance powers demands a determination of when the powers are so overweening that the shareholder becomes a fiduciary.  Unless we want to make fiduciary obligations in this context waivable as well – which again brings the corporate form closer to the LLC.

One of the odder things about the proposed legislation is that the amendments to DGCL §122(5) recognize there must be some inherent powers in the board, that cannot be delegated to someone acting on the company’s behalf – like an officer.  This, presumably, is how you reconcile proposed §122(5) with proposed §122(18) – a stockholder, exercising rights under an agreement, is not acting on the corporation’s behalf, and therefore the §141(a) limits do not apply.

But think about the situation in Moelis itself.  There, the stockholder was Ken Moelis, who was also CEO, and also Chair of the Board.  He certainly, by virtue of the stockholder agreement, was a controlling shareholder.  If he exercised his rights under the agreement, would he be acting in his private capacity, or on behalf of the company?  And if on behalf of the company, does that mean §122(5) would kick in, preventing the board from delegating away its §141(a) power?  I’m very confused.

Also, by the way, there’s the bit about remedies.  The Richards, Layton & Finger memo on the proposed changes has this curious comment:

While the plain language of the new subsection would appear to give the board the power to bind the corporation to take fundamental action, such as approving a merger, at the direction of a stockholder, the real-world operation of any provision included in a stockholders’ agreement will be much more limited.  Although an agreement adopted pursuant to new Section 122(18) may require a corporation to cause fundamental action to be taken, nothing in the statute expressly provides that individual directors may be parties to the agreement and expressly bound thereto in their directorial capacities.  For example, fashioning a remedy for a corporation’s failure to cause a merger to occur as required by a stockholders’ agreement due to the failure of stockholders to adopt the merger agreement likely would involve consideration of the principles of preclusion and coercion applicable to termination fees.  While new Section 122(18) recognizes that a stockholder may receive damages if the corporation fails to cause a contractually specified event to occur, the amount of any such damages will be constrained, in most cases involving fundamental corporate actions, by equitable principles.  For example, fashioning a remedy for a corporation’s failure to cause a merger to occur as required by a stockholders’ agreement due to the failure of stockholders to adopt the merger agreement likely would involve consideration of the principles of preclusion and coercion applicable to termination fees.   

Actually, the amendment says that any remedies may be available under the law governing the contract.  Nothing in that language would prohibit equitable remedies where available, like specific performance, and courts enforce specific performance obligations against corporations all the time, including where board action (like completing a merger) is required.  I agree that matters requiring a stockholder vote will still require one, but the drafting of 122(18) does not on its face prohibit an order requiring the board perform its own obligations under the agreement.

Instead, the synopsis to proposed 122(18) says:

New § 122(18) does not authorize a corporation to enter into contracts with stockholders or beneficial owners of stock that impose remedies or other consequences against directors if they take, or fail to take, specified actions as required by the contract or that purport to bind the board of directors or individual directors as parties to the contract. Contracts that would impose such remedies or consequences on directors or that would bind directors as parties are subject to existing law. Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956); Chapin v. Benwood Foundation, Inc., 402 A.2d 1205 (Del. Ch. 1979). Instead, new §122(18) authorizes contracts that impose remedies only against the corporation, including as a result of any failure by the corporation, its board of directors, or its current or future directors, stockholders or beneficial owners of stock, to take, or refrain from taking, actions specified in the contract. If an action addressed in a covenant by the corporation requires director or stockholder approval under title 8, that approval must still be obtained in order to effect the action pursuant to title 8. For example, the lack of stockholder approval of an action under title 8 requiring such approval would render specific performance of the covenant unavailable. Moreover, as noted below, even the enforceability of a claim for money damages for breach of the covenant may be subject to equitable review if the making or performance of the contract constitutes a breach of fiduciary duty.

Notice how this says specific performance is not available if stockholder approval is required but lacking?  It conspicuously does not say specific performance is unavailable if only board action is required.  So I am not at all certain how the remedies section of the proposed law squares with the claim that it would not change existing cases like Abercrombie, which holds that stockholder agreements may not significantly limit the ability of directors to exercise their judgment on matters of corporate policy.

I’ll go further – I keep beating this drum about choice of law (wrote a whole paper about it).  Stockholder agreements are subject to ordinary choice of law principles, and proposed §122(18)’s reference to “the law governing the contract” apparently plans to keep it that way.  Which means, we get the possibility of a California law, or Texas law, or whatever other state law, determination of whether specific performance is required.  That sounds … very coherent.

Anyway, the Delaware Supreme Court has increasingly insisted that corporations are just contracts so now we’re really reaching put up or shut up time.  Is there anything left for the corporate form to do?  Or should we all just be teaching the law of the firm?

Search for the Executive Director Lowell Milken Institute for Business Law and Policy--UCLA, School of Law

The Lowell Milken Institute for Business Law and Policy at the University of California, Los Angeles School of Law seeks an experienced, innovative, and collaborative leader to serve as its next Executive Director. The full posting can be found here.

Thursday April 4 - ABA Banking Law Committee's New Members Subcommittee Program on the Business of Banking and Banking Law Careers

Dear BLPB Readers:

On April 4, 2024, at 11:30am EST, the American Bar Association's Banking Law Committee's New Members Subcommittee will host "A 30-minute in-person and zoom meeting of the Banking Law Committee’s New Members Subcommittee" to discuss the business of banking and careers in banking law.  It's a free program for ABA members and ABA membership is free for law students!  Here is a flyer with complete details: Download Promo for April 4 ABA session on banking law and careers 

Texas Judge Finds Pump & Dump Not Wire Fraud

A recent decision from Judge Andrew S. Hanen of the Southern District of Texas found that a pump and dump scheme could not be prosecuted as wire fraud.

I'm trying to wrap my head around it and struggling.  It seems to find that the government could not prosecute a pump and dump scheme because the defendants only wanted to make money and did not want to deprive any specific people of money or property.  The mere fact that the pump and dump scheme occurred through a market and not in direct personal transactions seems to have driven the decision.

Bloomberg's Matt Levine has covered it.  It also made CNN.  

Notably, the indictment even includes statements that the Defendants said things like "we’re robbing … idiots of their money."

Disney

I have literally no idea if this is correct, I’m putting it forward as a set of facts that I think demonstrates the very complicated era we’re in from a corpgov perspective.

Ike Perlmutter was fired from Disney.  It’s very well known that he generally opposed attempts to diversify the MCU.

Nelson Peltz has teamed with Ike Perlmutter in his Disney proxy contest.  Nelson Peltz is a Trump supporter.  He’s also friends with Elon Musk, who has increasingly become a right wing culture warrior.

Disney has long been in the crosshairs of the right.  We all know about the fight with DeSantis and Don’t Say Gay; we also know that a Disney shareholder accused the company of abandoning shareholder value in order to promote a political agenda.

Elon Musk is furious about Disney pulling ads from ex-Twitter, and has openly criticized Disney’s diversity priorities.  He’s even bankrolling a suit by Gina Carano, alleging that Disney discriminated against her due to her conservative politics.

Bill Ackman has also criticized Disney for pulling ads from Twitter, specifically connecting that decision to the proxy fight with Peltz, and arguing that Peltz can right the ship.  

ISS is also a right wing target, on accusations that it recommends in favor of “woke” corporate governance instead of sticking to shareholder value.

ISS – I have to assume responding to this complaint – is creating a new “ESG skeptic” voting template, to go along with its other templates like Climate, Catholic, and SRI.

Glass Lewis recommended that shareholders vote for the Disney slate, against Nelson Peltz.  The Wall Street Journal recently published a fairly searing indictment of Peltz’s Trian fund.  And Jeffrey Sonnenfeld of the Yale School of Management, along with Steven Tian of the Yale Chief Executive Leadership Institute, argue that Trian has destroyed value at the companies where Peltz has won board seats.  

ISS just recommended in favor of Peltz in his bid for a Disney board seat.

I have no idea if ISS’s recommendation had anything to do with politics.  Certainly, it offered very plausible reasons for backing Trian, and the proxy fight itself does not involve (explicit) political accusations either way, notwithstanding Ackman’s hints.

But everything surrounding corpgov is so politicized these days that it’s impossible not to ask whether ISS thought that endorsing Peltz would help mitigate some of the right wing criticism.

I guess my point is, whether it’s a sign of the times or not, it is very hard to evaluate shareholder value in a manner that’s divorced from the political environment.  In the end, companies make money by appealing to popular tastes.  Politicians have every incentive to insist that their side is the “popular” one, and therefore that any appeals to other audiences must be unpopular, and therefore unprofitable.  Profitability is now a proxy for political popularity.  And when politicians threaten to legislate those preferences – functionally a legal dictate as to what is and is not profitable – we can’t tell if corporate actors are responding to the regulatory threats or their own independent judgment.

Edit 3/23: Remember how I said the fight does not involve (explicit) political accusations? Turns out, not so much: 'Why do I need an all-Black cast?' Disney criticizes Peltz remarks

2024 National Business Law Scholars Conference - Extension of Submission Deadline

Please note that the deadline for submission of proposals for the National Business Law Scholars Conference has been extended to April 1!  The revised Call for Papers follows.  I hope to see many of you there.

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 National Business Law Scholars Conference (NBLSC) 
June 24-25, 2024 
Call for Papers 

The National Business Law Scholars Conference (NBLSC) will be held on Monday and Tuesday, June 24-25, 2024, at The University of California, Davis School of Law. 

This is the fifteenth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission. 

Submission Guidelines: 

Please fill out this form to register and submit an abstract by Monday, April 1, 2024. Please be prepared to include in your submission the following information about you and your work: 

• Name 
• E-mail address 
• Institutional Affiliation & Title 
• Paper title 
• Paper description/abstract 
• Keywords (3-5 words) 
• Dietary restrictions 
• Mobility restrictions 

If you have any questions, concerns, or special requests regarding the schedule, please email Professor Eric C. Chaffee at [email protected]. We will respond to submissions with notifications of acceptance a few weeks after the submission deadline. We anticipate the conference schedule will be circulated in late April. 

Conference Organizers: 

Afra Afsharipour (University of California, Davis, School of Law) 
Tony Casey (The University of Chicago Law School) 
Eric C. Chaffee (Case Western Reserve University School of Law) 
Steven Davidoff Solomon (University of California, Berkeley School of Law) 
Benjamin Edwards (University of Nevada, Las Vegas Boyd School of Law) 
Joan MacLeod Heminway (The University of Tennessee College of Law) 
Nicole Iannarone (Drexel University Thomas R. Kline School of Law) 
Kristin N. Johnson (Emory University School of Law) 
Elizabeth Pollman (University of Pennsylvania Carey Law School) 
Jeff Schwartz (University of Utah S.J. Quinney College of Law) 
Megan Wischmeier Shaner (University of Oklahoma College of Law) 

Representing Elon Musk

Sometimes, the scholarly enterprise offers one the opportunity to deeply learn while sharing embedded knowledge.  I never thought that my 2022 Southeastern Association of Law Schools discussion group on Elon Musk and the Law would turn into such a rich learning experience.  But it did.  

In organizing the group, I knew folks would focus on all things Twitter (especially as the year proceeded).  But because of the kind offer of the Stetson Law Review to host a symposium featuring the work of the group and publish the proceedings, I was able to dig in a bit deeper in my work, which focused on visioning what it would be like to represent Elon Musk.  The resulting article, "Representing Eline Musk," can be found here.  The SSRN abstract follows.

What would it be like to represent Elon Musk on business law matters or work with him in representing a business he manages or controls? This article approaches that issue as a function of professional responsibility and practice norms applied in the context of publicly available information about Elon Musk and his business-related escapades. Specifically, the article provides a sketch of Elon Musk and considers that depiction through a professional conduct lens, commenting on the challenges of representing or working with someone with attributes and behaviors substantially like those recognized in Elon Musk.

Ultimately (and perhaps unsurprisingly, for those who have followed Elon Musk’s interactions with the law in a business setting), the article concludes that representing Elon Musk or one of his controlled businesses would be a tough professional assignment, raising both typical and atypical professional responsibility issues. Taking on an engagement in which Elon Musk is the client or a control person would require deliberate lawyer leadership, including (among other things) patience, mental toughness, and empathy. As a result, the lawyer would be required not only to have the required legal expertise, sensitivity to professional conduct regulation, and practical experience to carry out the representation, but also to understand and know how to employ their talent, personality, character strengths, and leadership style in a demanding and mutable lawyering context.

The well-considered comments of so many folks helped to move this work along.  While my author footnote mentions some, it could not mention all.  As I thought through issues of client wealth, power, mental health, and neurobiological status, those who know more than I--personally and professionally--were essential to my assessments. 

I know that there is a lot more that can (and should) be written on representing clients in the varied lot of personal circumstances that life presents.  I hope that I presented my thoughts in this piece in a way that is sensitive to the myriad issues involved in describing and considering client attributes and conditions.  I also hope this work will encourage more reflection and writing on related issues.

Chancellor McCormick is Annoyed

On March 12, Chancellor McCormick issued a revised appraisal opinion in HBK Master Fund v. Pivotal Software, amending her calculations to award the petitioners 44 cents above deal price, rather than 17 cents below, as she had originally.  

But I somehow missed the original opinion, so my first read was the amended one.  Forgive me if this is old hat by now, but it was new to me, so.

The case involved a buyout of Pivotal by its sister company, VMWare, both controlled by Dell Technologies.  That raised the question whether the use of MFW procedures required deference to the deal price, in the same way it does in other kinds of appraisal actions.  Chancellor McCormick held no, because, critically, with a controlling shareholder, there can be no real market test – there are no other potential bidders, and even the shares themselves may trade at a discount to reflect the controller’s ability to extract rents.  Thus, the underpinning of cases like Dell v. Magnetar, 177 A.3d 1 (2017), is absent.

But that’s actually not what stood out to me. 

As is the usual course with these things, Chancellor McCormick began with a standard discussion of the process by which the deal was negotiated.  Along the way, she singled out the conduct of Marcy Klevorn, who was one member of a two-person Pivotal special committee, and who also held positions at Ford.  Here is what McCormick said:

Around this time, the Pivotal Special Committee decided not to canvas the market for other potential bidders….

One of the two Pivotal Special Committee members, Klevorn, was missing in action through much of this process.

• She missed the October 8, 2018 Board meeting. She later testified that her absence was likely due to separate duties at Ford.
• She missed the January 28, 2019 Board meeting.112 Klevorn testified that she was “probably traveling[.]”
• She arrived late to the March 15, 2019 Board meeting. She could not recall why.
• She missed the March 22, 2019 Board meeting. She could not recall why.
• She left early from the April 9, 2019 Board meeting due to a “prior engagement[.]” At this meeting, Lankton provided an update to the rest of the Board on the merger.

So, through April 2019, Klevorn missed, was late for, or left early from each Pivotal Board and Special Committee meetings. Klevorn testified that being on the Pivotal Special Committee was “a lot of work and I don’t know, to be honest, how I felt about it at the time.”

…

The Pivotal Special Committee met on July 31, 2019. Klevorn joined the meeting late because she was busy with a meeting at Ford.

…

The next day, the Pivotal Special Committee held a meeting to decide whether to counteroffer, accompanied by Morgan Stanley, Mee, and other members of Pivotal leadership.  Klevorn attended, reluctantly. A few days prior, Klevorn’s assistant asked her if she could attend that meeting from 5:30 p.m. to 7:00 p.m. Klevorn responded, “[u]gh. Was planning to do a bunch of returns at [S]omerset. I thought it was at 2???” After her assistant responded about the timing, Klevorn replied, “[l]ife ruiner. Ok.”

On August 14, 2019, the VMware Special Committee made what it termed a “best and final offer” of $15.00 per share.  The Pivotal Special Committee held a meeting to consider it; Klevorn was absent.

Oof.

Did Klevorn’s neglect have a bearing on the outcome?  Reader, it did not.  After McCormick explained why MFW procedures could not cleanse the transaction, she pretty much moved on from any discussion of this particular process, except to briefly note that Klevorn’s absence called into doubt certain base projections – which McCormick ended up accepting anyway.  (Op. at 88-89).  Sure, I suppose Klevorn’s conduct could have had some kind of influence on McCormick’s thought process, but if so, it’s not explicit in the opinion.

Why am I mentioning this? 

Because a while ago, Edward Rock argued that Delaware’s courts operate more through parables of “good” and “bad” boards, reputational sanctions, and public shaming, than through actual interference with business decisions.  And though I can think of a certain billionaire, now 25% poorer, who might disagree with that assessment, McCormick’s somewhat gratuitous swipes at Klevorn (“life ruiner”) would seem to bear out the thesis.

If you don’t want to serve on a special committee, don’t do it.  At the very least, don’t put it in an email/text.

The SEC Should Allow FINRA To Regulate Non-Attorney Arbitration Representation

For a long time, compensated non-attorney representatives (NARs) have been a blight on FINRA's securities arbitration forum.  PIABA released a report highlighting problems with these groups in 2017.  After considering the issue, FINRA moved to largely ban non-attorneys from representing investors in securities arbitration.  The proposed rule change expressly permits law school clinics or their equivalent to continue to appear on behalf of investors.  The proposal was even approved by the SEC's Division of Trading and Markets on January 18, 2024 pursuant to its delegated authority. 

Despite the lack of any opposition in the comment file, an unknown SEC Commissioner blocked the rule from going into effect under "Rule 431 of the Commission’s Rules of Practice" on January 19, 2024.  That rule provides that:

An action made pursuant to delegated authority shall have immediate effect and be deemed the action of the Commission. Upon filing with the Commission of a notice of intention to petition for review, or upon notice to the Secretary of the vote of a Commissioner that a matter be reviewed, an action made pursuant to delegated authority shall be stayed until the Commission orders otherwise. . . .

As it stands, the change has been indefinitely delayed.  Compensated NARs cause problems for investors because they operate in lieu of attorneys without being bound by the ethical constraints governing attorneys.  As one comment letter explained, this ethics gap leads to major problems.  The NARs charge non-refundable up-front fees and settle cases without client approval.  St. John's Securities Arbitration Clinic has filed multiple letters in support of addressing this problem.  As a 2017 letter from St. John's explained:

NARs are not governed by the same constraints governing attorneys. Most notably, there are no ethical rules limiting the conduct of the NARs. Individuals who fail to receive competent representation from an NAR may have no recourse.

If an incompetent attorney botches a case, the client has a claim for malpractice.  When an incompetent NAR does the same, the client cannot bring a professional malpractice claim because the NAR owes no professional ethical duties.

Hopefully, the SEC will allow the rule change to go into effect.

March 19 - Seminar on The Evolution of Financial Markets: Digital Money and Atomic Settlement

Dear BLPB Readers,

I wanted to share that the Journal of Financial Market Infrastructures (where I'm an Associate Editor), in addition to the Bank for International Settlements Innovation Hub, and Quinan & Associates will host a seminar, The Evolution of Financial Markets: Digital Money and Atomic Settlement, on March 19th.  It will be on the early side for those in the U.S., but it looks really interesting!  A pdf flyer of the event is below.  

Download Joint-Seminar-Agenda-Flyer

Activision and Delaware

Last week, Chancellor McCormick decided Sjunde AP-Fonden v. Activision Blizzard, which held that former shareholders of Activision had stated a claim that Activision’s board failed to comply with DGCL 251(b) when it approved the merger agreement with Microsoft.  The draft agreement that the board reviewed was missing key details, such as consideration, the disclosure letter, and a plan to handle dividend payments between signing and closing.  Those details were obviously filled in later, but the full board never formally approved the revised merger agreement – dividends, for example, were handled by committee.  McCormick held that while a board need not review a formal, final version of the agreement, Section 251(b) requires that they at least review a version that includes essential terms, and plaintiffs had for pleading purposes alleged that the Activision board failed to do so.  Due to the statutory violations, McCormick ultimately concluded, the plaintiffs had stated a claim for unlawful conversion of their shares.

So, here’s the thing.  Of course boards should formally review the essential terms of a merger agreement before declaring the deal’s advisability for statutory purposes.  How could it be otherwise?  But at the same time, it seems, you know, likely, that the individual Activision board members eventually came to learn the full essential terms and approved them, at least in practice if not through formal action.  Or, to put it another way, I think it’s unlikely there will be evidence that if the board had called a formal meeting to formally approve the final final merger, signed with a quill pen on a vellum scroll, the deal terms would have been any different. 

So the shareholders would have gotten the same deal regardless.  Meanwhile, the deal’s done; no way McCormick is going to unwind it.  (One case even held there can be no conversion claims post-merger because of the impossibility of unwinding, see Arnold v. Soc’y for Sav. Bancorp, Inc., 1995 WL 376919 (Del. Ch. June 19, 1995), though I am not sure that makes sense; conversion claims can be maintained when property is destroyed or transformed.). 

But, absent unwinding, the only remedy available to shareholders will be the fair value of their pre-merger shares.  And there are some precedents about determining fair value of a tradeable asset – giving the victim the benefit of the higher price when there are fluctuations in value after conversion – but here, the asset itself disappeared from the market after conversion.  Even if you looked to the pre-conversion price, Activision traded consistently below the deal price.  And if nothing else, I imagine that McCormick might conclude the fair value in this context should be calculated the same way it would be in an appraisal action, which probably means deal price.  Any way you slice it, I’m not sure what damages the shareholders can obtain, beyond nominal plus attorneys’ fees.  So it seems like an awful lot of running around for something that doesn’t really provide much benefit. 

And that, I think, was kind of the spirit of the grumblings about Delaware law I heard at the Delaware Developments panel at the Tulane Corporate Law Institute on Thursday.  (I missed the Activision discussion that I gather occurred in the prior panel; anyone know if they talked about remedies?)  Anyway, at Delaware Developments, mostly, corporate attorneys were complaining about new cases like Activision or Moelis that upset settled expectations and subjected corporations to unpredictable liabilities, but I think the spirit of the objection, and there’s some truth to this, is that it feels like formalities being enforced without a corresponding shareholder benefit.  There may be a systemic benefit from adhering to the technicalities - governance restrictions in the charter, not a shareholder agreement, and of course boards should have the details of a merger agreement when approving it - but it’s hard to see the benefit to shareholders by enforcing them ex post in individual cases.

But that’s the weakness of relying entirely on a system of private litigation.  Activision, for example, very much smacks of the kind of thing that should be handled with a regulatory fine and a stern warning to others.  But that’s not on the table.

Shareholder Agreements and Corporate Charters

Vice Chancellor Laster recently requested information from litigants in Seavitt v. N-able, Inc. with this letter.  According to the complaint:

Plaintiff brings this action because N-able is presently flouting this foundational principle of Delaware law through a contractual arrangement designed to entrench and perpetuate certain favored stockholders’ control over N-able’s business and affairs. Specifically, in violation of DGCL Section 141(a), N-able has provided certain favored stockholders—affiliates of the private equity firms Silver Lake Group, LLC (“Silver Lake”) and Thoma Bravo, LLC (“Thoma Bravo,” and together with Silver Lake, the “PE Investors”)—with a contractual power to control the most important decisions and functions properly entrusted to the Company’s Board under our corporate system.  

. . . 

Third, in violation of DGCL Section 141(k) and in further derogation of the stockholder franchise, N-able has adopted an invalid provision in its operative Amended and Restated Certificate of Incorporation (the “Certificate”), purporting to provide that as long as the PE Investors own in the aggregate 30% of the voting power of the Company’s outstanding shares, “directors may be removed with or without cause upon the affirmative vote of the [PE Investors]. . .” This provision violates DGCL Section 141(k), which governs the removal of directors and provides that directors may be removed only by a majority stockholder vote (or, in some cases, a higher vote pursuant to DGCL Section 102(b)(4)). N-able’s Certificate, by contrast, allows a favored minority of stockholders to remove duly-elected directors who continue to maintain the support of a stockholder majority

This may seem familiar to readers because Prof. Lipton recently blogged about a similar issue in Moelis.  This case has some different wrinkles because the court has to consider both shareholder agreement and corporate charter provisions.  The Moelis decision found that many of the shareholder agreement provisions would have been permissible if they had been included in a corporate charter.

This brings me to the letter.  It asks about a few issues:  (i) whether Delaware corporations can incorporate stockholder agreements by reference into their charters in order to give them the same effect as charter provisions; (ii) whether bylaws can incorporate stockholder agreements by reference and give them the same effect as bylaw provisions; and (iii) whether the charter and bylaws at issue adequately did the job here. The letter asked the parties to brief the issues and gave some specific questions.

Of particular interest to me is number 7 an "extremes case." It asks whether a Delaware charter could include a provision saying that the corporation would be governed by Nevada law with the proviso that if there were "any conflict with a mandatory provision of the Delaware General Corporation Law, Delaware shall control."  In non-mandatory cases, the charter would swap Delaware defaults for Nevada defaults.

I don't expect corporations to actually do this.  It probably makes more sense to just reincorporate into Nevada if you want to be bound by Nevada law.  You'd probably save a lot of money that way.  Our local newspaper, the Review Journal, recently covered this issue.  It highlighted one recent mover's cost calculation:

Laird Superfood, a plant-based food producer physically headquartered in Boulder, Colorado, reincorporated in Nevada on Dec. 31. In a filing with the U.S. Securities and Exchange Commission before the shareholder vote, it told investors that it expected to pay about $200,000 in Delaware taxes for that fiscal year. By contrast, Laird’s Nevada annual fees are expected to be about $700, according to the filing. Nevada doesn’t have corporate taxes.

It'll be interesting to watch the briefs on this one as they come in.

 

Law School Better than a Meme

The meme below has been going around about the different framing for medical school and law school. I get why it is kind of amusing, but it is mostly rather upsetting because it resonates too readily with too many people.

Although that has never been the institutional approach anywhere I have been, I will concede that there are at least some faculty members (and plenty members of the bench and bar) who think this way about law school and the legal profession. 

When I became a dean, I decided to do it, in part, because of how much I believe in the legal profession and what we are charged to do.  I believed, and I continue to believe, that lawyers are there to help people in what is often their worst of times.  Even when it is not bad, it is still usually a very significant time.  At the risk of being cliché, that means our jobs come with great power and responsibility. 

Despite what you may hear, our law students today are capable, smart, and caring.  They may not view the world the way we did, but we didn’t view the world the same as our predecessors, either.  There are challenges and different expectations, but there is no lack of ability or commitment.  Our students and our profession will be in good hands.  But we will need to work to do the good things expected of us. That has always been true.  

During orientation, when we welcome our students, the first thing we tell that is that they belong here.  I also tell them that they are here because we believe in them and that we expect each one of them to succeed.  That is the truth. We don’t admit anyone we don’t expect to succeed, and while not every single student is successful (for a variety of reasons), we are correct far more often than not.

Encouragement doesn’t stop during orientation.  I also try to provide reminders throughout the year so that students don’t forget why they are here. This is my message from January:

As we prepare for grades to come in, I want to encourage you to keep some perspective. If things went well, that’s awesome, and keep at it.  If things did not go as you’d hoped, please talk to your professors, your friends, and your student support team. The new year is a time for us to reset and restart, and everyone starts fresh. 

 

As you already know, law school is a lot of work. It needs to be because the jobs we have as lawyers are important ones.  Try not to get discouraged when school or work is hard.  We help people through some of their most challenging and complex problems.  And the reality is, you wouldn’t be here if it were easy.  You have sought out a rewarding, but difficult, profession, and it’s because you are committed to helping people. Embrace the challenge, and know we believe in you.  We really do.

 

When I started here more than four years ago, I asked out community to commit to three things consistent with our Jesuit values: (1) Faith, (2) Trust, and (3) Hope.  I ask you to commit to faith, spiritually, if that’s important to you, as well as faith in your abilities, in our profession, and in one another.  I also ask you to choose trust.  Trust the process, trust that we want the best for you, and trust that you can do this.  Finally, I ask that you work to create hope: hope for a better tomorrow; hope for your clients and community, and hope for those who are suffering. 

 

Faith and trust are choices. No one can give them to you.  You must decide whether to have faith and whether to trust. I promise that we will work to give you reasons to have faith and to trust us, but in the end, the choice, the power, is yours.  Hope, on the other hand, is something we can try to give people.  We’ll try to do that for you, and I hope you will try to do it for others.  

 

I wish you have a great semester, whether it’s your first spring semester, your second, or your last, and I look forward to all you will accomplish in 2024.  Work hard, work together, and take care of yourselves and each other, and good things will follow.  

As lawyers, we should always remember the great power and privilege that comes with our role. It is our job to do well and do good.  I very much believe in our profession. And to all the lawyers and law students out there, for what it’s worth, I believe in you. 

 

 

 

 

Global Conversations in International Business Transactions

Hat tip to Kish Parella regarding the following call for papers and roundtable!

Corporate Transparency Act Held Unconstitutional

A U.S. District Court judge sitting in the Northeastern Division of the Northern District of Alabama found the Corporate Transparency Act (affectionately referred to in short form as the CTA) unconstitutional as detailed in a memorandum opinion issued on Friday.  The opinion granted the plaintiffs, the National Small Business United (NSBU) and Isaac Winkles, an NSBA member, their summary judgment motion on this basis.  The accompanying final judgment permanently enjoined the Secretary of the Treasury and other government defendants, as well as "any other agency or employee acting on behalf of the United States," from enforcing the Corporate Transparency Act against the plaintiffs in the litigation.

Many of us business law profs--and all of our business law practice brethren--have been following the CTA, endeavoring to gain a more comprehensive understanding of its provisions and fashioning advice on compliance.  The CTA, enacted in 2021 and effective as of January 1, 2024, requires nonexempt companies (domestic or foreign corporations, limited liability companies, and other entities formed or, in the case of foreign entities, registered to do business in any U.S. state or tribal jurisdiction) to disclose certain information, including about their beneficial owners, to the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Treasury Department.  Exempt firms include (among others) “large operating companies” with a presence in the U.S., entities with a class of securities registered under the Securities Exchange Act of 1934, as amended (or registered under the Investment Company Act of 1940, as amended, or the Investment Advisers Act of 1940, as amended), and controlled or wholly owned subsidiaries of certain exempt firms.

The March 1 memorandum opinion specifically holds that the U.S. Congress acted outside the scope of its constitutional power in enacting the CTA.  In holding the CTA unconstitutional, the court found that the congressional enactment of the CTA was not authorized under the Commerce Clause, Congress's taxing power, or the Necessary and Proper Clause and could not be justified as incidental to the exercise by Congress of its express legislative authority.  As to the Commerce Clause--which has been interpreted broadly in many contexts--the court noted that "the CTA does not regulate economic or commercial activity on its face."  The court also found that the CTA does not have a substantial effect on interstate commerce.  In essence, the court finds the CTA analogous to incorporation--a state entity structure and governance matter and not a matter of interstate commerce.

It will be interesting to see if there is any reaction at the federal level or any fallout in other federal trial courts.  The memorandum opinion is well written and easy to follow.  Having said that, although I am no constitutional law scholar, it seems that the court's reasoning is subject to attack on a number of points.  I will continue to keep my ear to the ground on this.

*spins roulette wheel* Moelis and OpenAI!

I had so many choices for what to blog about this week.  The dispute about Donald Trump’s Truth Social SPAC?   Chancellor McCormick’s conclusion that the Activision/Microsoft merger might have violated Delaware law?  VC Laster’s Moelis decision?  Musk’s lawsuit against OpenAI? 

I ultimately decided to go with Moelis and OpenAI because they actually are fundamentally kind of the same thing, and this way I kill two birds with one stone.

So, earlier this week, it seemed like the big business law news was VC Laster’s holding in West Palm Beach Firefighters’ Pension Fund v. Moelis, issued last Friday, invalidating the shareholder agreement that Ken Moelis reached with Moelis & Co. when he took it public, and that allowed him to functionally remain in control of the business even when his voting stake dropped below a majority.  VC Laster held that the contract violated DGCL 141(a), which requires that corporations be managed by their boards of directors.

VC Laster recognized that every time a corporation enters into any kind of contract at all, the board’s choice set becomes more limited, but – using a word that I personally had never heard before and don’t know how to pronounce – concluded that there is a spectrum, starting with ordinary commercial contracts and ending with arrangements that ultimately intrude so far into corporate governance that they leave the realm of the commercial and raise a Section 141(a) issue.  Relying on Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956), he explained that the validity of a contract therefore depends on two inquiries: first, is it a governance arrangement at all?  If not, we’re done.  A number of factors go into determining whether the contract implicates corporate governance, including whether the contract involves some kind of commercial exchange, and whether it restricts the actions of internal corporate actors, namely, boards and shareholders.  

If the contract does implicate corporate governance, it will be invalid if it substantially restricts the board’s ability to manage the company.   In this case, the Moelis contract fit both bills: there was no commercial exchange, and the contract limited the board’s choices at every turn.  (My personal fave: The board was not permitted to discard the “Moelis” name without Moelis’s approval, even though name changes aren’t usually subject to a shareholder vote at all).

Among other interesting questions raised by the opinion are – what are the nondelegable functions of a corporate board?  DGCL 141(a) requires that corporations be “managed by or under the direction of a board of directors,” but in practice boards take advantage of the “under the direction of” piece and delegate most of those responsibilities to others.  What are the definitional board responsibilities that must remain with the board itself?  Certainly, merger negotiations fall into this category.  And in the Caremark context, Marchand v. Barnhill’s concept of “mission critical” risks is, functionally, a delineation of compliance responsibilities that are definitionally part of the board’s job and cannot be delegated to others.  The Moelis case also circles around the idea of core board functions that cannot be outsourced without violating Section 141(a).

Laster explains, however, that – though there are still outer limits imposed by the DGCL – many restrictions that would be prohibited in a stockholder agreement may still be permissible if they are contained in the corporate charter, or even in a new preferred stock issuance whose terms become part of the charter by operation of law.  And that’s the thing that grabs me.

Why does it matter whether something is in a shareholder agreement, versus a preferred share issuance?

Well, we can talk about transparency, and procedures for amendment – topics covered by Jill Fisch in her paper, Stealth Governance: Shareholder Agreements and Private Ordering.  I can also point out that now, after Moelis is already listed on the New York Stock Exchange, issuing new preferred stock that undermines the governance rights of existing shareholders may not be possible (does it count as a disparate reduction or restriction on shareholder rights if a shareholder agreement that existed at the IPO stage was invalidated and reconstituted in the form of a preferred share issuance?  I dunno).  But also, as I explain in my paper, Inside Out, preferred share terms are treated as internal affairs matters, subject to the law of the state of incorporation.  But shareholder agreements are ordinary contracts, and subject to ordinary choice of law.  Indeed, it’s not uncommon for shareholder agreements to contain a choice of law provision that is different from the state of incorporation.  (Yeah, that’s right, I answer to “Cassandra” now).

So the difference between putting it in a shareholder agreement and a preferred share issuance may be choice of law.

EXCEPT.

VC Laster, when explaining how to test for whether a shareholder agreement addresses governance matters (again, remember the mere fact that it addresses such matters does not invalidate it; you need to go to the second step of degree of constraint), he repeatedly referred to “internal affairs” and “internal governance.”  He didn’t mention choice of law, but the implication? was kind of? that a contract containing such restrictions might not, in fact, be subject to ordinary choice of law after all?  And might be deemed to be subject to the law of the state of organization? 

Which brings us, hilariously, to Elon Musk’s suit against OpenAI.  The gravamen of which, as I understand it, is that Sam Altman had an idea for developing AI for the benefit of “humanity,” pitched this to Musk, and Musk donated a bunch of resources while Altman organized multiple (Delaware) entities to effectuate the vision.  Generally speaking, those entities consist of a Delaware nonprofit corporation, OpenAI, Inc., which has a number of Delaware for-profit LLC subsidiaries.  Musk now advances various California breach of contract and analogous claims because, in his view, OpenAI, Inc. and its subsidiaries have failed to operate in accordance with the original humanity-focused set of promises. “This case is filed to compel OpenAI to adhere to the Founding Agreement and return to its mission to develop AGI for the benefit of humanity,” is an actual allegation at ¶33.

I will leave it to the nonprofit folks to talk about the standing of a donor to sue when a nonprofit fails to operate in accordance with expectations, though the fact that the complaint cites the relevant statute as “E.g. Cal. Bus. & Prof. Code § 17510.8” does not inspire confidence (the “eg” means “for example,” which I interpret as, there is no direct statute on point).  I will leave it to the contract folks to talk about whether promises of benefitting humanity are enforceable, or whether you can even cobble together a contract from the multiple conversations, emails, and organizational documents Musk cites.

Instead, I’ll talk about the fact that, in addition to disgorgement and damages, Musk seeks specific performance in the form of:

1. An order requiring that Defendants continue to follow OpenAI’s longstanding practice of making AI research and technology developed at OpenAI available to the public, and
2. An order prohibiting Defendants from utilizing OpenAI, Inc. or its assets for the financial benefit of the individual Defendants, Microsoft, or any other particular person or entity;

In other words, Musk claims that he has a contract, formed under California law, that allows Musk to dictate the governance choices of a Delaware organized (nonstock) corporation, and further, that a California court should order that this Delaware corporation conduct itself in accordance with his contract. 

Now, as a nonprofit, OpenAI is subject to jurisdiction not only of the Attorney General of its state of organization, but also the Attorney General of the states where it operates.  And I have no idea whether it has violated the legal rules governing nonprofits in those states – that’s up to the AGs.

But Musk is not invoking AG authority; he’s claiming a contractual right to dictate the governance of a Delaware-organized (nonstock) corporation.  So, especially in light of Moelis, if OpenAI wanted to take this as a serious threat, it could file a declaratory judgment action in Delaware to the effect that these “contracts” – if they even exist – are in fact contracts concerning internal affairs matters governed by Delaware law.  And, under Delaware law, at least at the corporate (OpenAI, Inc.) level, they are illegal intrusions into the board’s authority. (Though, I suppose, it might have difficulty getting personal jurisdiction over Musk in Delaware these days)