Business Law Prof Blog

The Delaware contretemps continues

Previously, I posted about the grumbles of discontent from the corporate bar regarding several recent Delaware Court of Chancery rulings, resulting in proposals for statutory amendments that seemed somewhat hasty and poorly thought-out.  Sujeet Indap had a piece in the Financial Times about it; before that, there was coverage in a local Delaware outlet.

Now, Law360 reports on a new memo issued by Wilson Sonsini, reminiscent of Martin Lipton's famous Interco memo, warning that Delaware may no longer be as friendly to business.  From the memo:

In recent months, a conversation has emerged as to whether Delaware should remain the favored state of incorporation for business entities. Indeed, many of our clients have asked us whether they should remain in Delaware or choose Delaware as the state of incorporation for their new ventures. In this discussion, we provide our reflections on that question and various factors that entrepreneurs, investors, and companies should consider when weighing incorporation in Delaware against incorporation in another state. ...

In the conversations that we have had with clients, businesspeople, and others in the corporate bar, we have heard the following reasons given for reconsidering incorporation in Delaware:

• A growing number of cases that have addressed technical issues, in the M&A context and elsewhere, and reached unexpected results in a manner that has impacted corporate structuring and transaction planning
• A perception that Delaware judges have in several opinions adopted an increasingly suspicious or negative tone toward corporate boards and management, and toward the corporate bar
• The challenges that the case law can pose for companies with influential founders or significant stockholders, the process mechanisms that such companies are expected to use, and the remedies that have been reached in those cases
• A sense that Delaware judges can be skeptical of the governance of venture-backed private companies and many Silicon Valley-based companies
• The increasingly active, and successful, plaintiffs’ bar in both technical and fiduciary claims, which can leave boards and management with the sense that they are planning around “gotcha” litigation driven by plaintiffs’ lawyers more than those lawyers’ individual clients

Obviously, the third point here regarding influential founders/significant stockholders is a reference to the MFW process, which the Delaware Supreme Court just reaffirmed.  But the Delaware Supreme Court also just granted interlocutory review in TripAdvisor, which raises the possibility that some of the tension will be ratcheted down through a narrowed definition of what counts as a conflicted transaction that triggers the need for entire fairness review/MFW cleansing in the first place.

What's more interesting to me are points 2 and 4.  I assume that some of those objections are about Moelis, which struck down the type of shareholder agreement that seems to have become common in VC-backed firms and was carried over to the public space, and maybe even go as far back as decisions like Trados, which held that in a VC backed firm, the directors' fiduciary obligations run to the common over the preferred (even though Trados itself did not grant any damages to the common shareholders).

But I also suspect that some of the sturm und drang has its antecedents in In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003), when then-Vice Chancellor Strine held that the independence of a special committee was compromised by close professional and networking ties.  The case was a break from prior Delaware jurisprudence, which treated directors as independent in almost all situations that didn't involve either blood or money, and the Delaware Supreme Court rejected his approach in Beam v. Stewart, 845 A.2d 1040 (Del. 2004).  Once Strine ascended to the Delaware Supreme Court, though, the caselaw started inching back his way, starting with Sanchez, continuing on with Sandys v. Pincus, and culminating in Marchand v. Barnhill.  The thing about these more nuanced tests for dependence/independence is that they may, in fact, hit Silicon Valley companies particularly hard, because of the chumminess of the tech world, and it's not surprising that once independence is questioned, the tone of the opinions is going to come off as skeptical, in a manner that defendants do not like.  

Anyway, I'll just conclude by echoing the comments in the Law360 article, namely, that whatever the correct direction of Delaware law, this kind of open warfare (and, frankly, attempted deployment of political muscle) challenges the reputation Delaware has built for comity and a technocratic approach to lawmaking. That's the kind of thing that undermines Delaware's legitimacy as, in a sense, a de facto federal agency.  It's the kind of thing that invites more intrusion from federal regulators, and less respect from other jurisdictions - not just other states, but around the world.

 

 

Another paper from me

In September, I was honored to deliver the Boden Lecture at Marquette Law School; a video of that lecture is available here.  (I also gave a vaguely similar, but not identical, talk at College of the Holy Cross earlier this month, which is available here).

Anyway, the Boden Lecture, in a more formalized form, will be published in the Marquette Law Review.  Here is the abstract:

Of Chameleons and ESG

Ever since the rise of the great corporations in the late nineteenth and early twentieth centuries, commenters have debated whether firms should be run solely to benefit investors, or whether instead they should be run to benefit society as a whole. Both sides have claimed their preferred policies are necessary to maintain a capitalist system of private enterprise distinct from state institutions. What we can learn from the current iteration of the debate—now rebranded as “environmental, social, governance” or “ESG” investing—is that efforts to disentangle corporate governance from the regulatory state are futile; governmental regulation has an inevitable role in structuring the corporate form.

The paper is available on SSRN at this link.

DOL | Fiduciary Rule Out

The Department of Labor recently released its new fiduciary rule.  I covered the initial announcement here.  These are direct links to the parts of the rulemaking package:

FINAL RULE: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/final-rule.pdf

PTE 2020-02: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/prohibited-transaction-exemption-2020-02.pdf

PTE 84-24: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/prohibited-transaction-exemption-84-24.pdf

Other PTE Amendments: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/prohibited-transaction-exemptions-75-1-77-4-80-83-83-1-and-86-128.pdf

The New York Times has also covered the release.  I contributed my view to the piece.  As I see it, if printing a financial adviser's disclosers will run your printer out of toner, you should just find a different financial adviser.  

The simplest way to buy advice is to hire a “fee-only” independent certified financial planner who is a registered investment adviser, which means they are required to act as fiduciaries when providing investment advice about securities (stocks, mutual funds and the like). As part of that fiduciary duty, they must eliminate conflicts or disclose them.

“Your odds of conflicts go up, the longer their disclosures are,” said Benjamin Edwards, a professor at the William S. Boyd School of Law at the University of Las Vegas.

There will be much more on this to come.  The rule is great for ordinary people because it uniformly raises standards for advice about their retirement account money.  One of the major problems in this space is that lots of different people offer "financial advice" to retirement savers under different standards.  Insurance producers are probably the most loosely regulated and also the most likely to oversell complex financial products for a quick payday.  The rule applies whether someone is a broker, registered adviser, or an insurance producer.  It's the same standard for people doing the same basic thing.

Some of the industry opposition and litigation defense strategies often revolve around "personal responsibility."  And there is something to that.  People should understand what's going on when they invest significant sums.  But the reality is that people hire or work with financial advisers because they need advice.  If they knew what they were doing, they wouldn't need any help.  We need to make it safer for people to trust their financial advisers.  This rule goes a long way to help get us there.

Open Full-Time Lecturer Position - Texas State University

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"The Department of Finance and Economics at Texas State University is seeking a full-time lecturer to start in the Fall semester 2024. A JD from an ABA-accredited law school is required. Job duties include teaching onsite sections of Legal Environment of Business (and perhaps other classes as needed) as well as engaging in department, college, and university service. The contracts are annual but renewable. Because the position is non-tenure-track, there is no search committee; accordingly, if you are interested in the position or want to know more, you can contact Jeff Todd ([email protected]) directly."

Fiduciary Duties: A Tale of Two Families

Check out the third issue of volume 73 of the DePaul Law Review!  It includes a series of papers emanating from the HBO series Succession.  As you may recall, I posted a call for papers for this issue about a year ago.  Most of the papers in the issue came from a venture originated and organized by Susan Bandes and Diane Kemker called the Waystar Royco School of Law.  I wrote about that enterprise here.  

I participated in the Waystar Royco School of Law Zoom meetings as the “Roy/Demoulas Distinguished Professor of Law and Business.”  I presented on fiduciary duty issues comparing the principals of two family businesses--The Demoulas family from Northern Massachusetts and Succession's Roy family from New York.  You can find my Zoom session here (Passcode: #hN+7J5N).  That presentation resulted in an essay that I wrote for the DePaul Law Review issue as well as an advanced business associations course based on the Succession series. I finish teaching that course this week.  I also presented on the topic of my Succession essay at the Popular Culture Association conference back in March.  I include a screenshot of my cover slide below.

I just posted the essay to SSRN.  The piece is entitled What the Roys Should Learn from the Demoulas Family (But Probably Won’t).  The SSRN abstract is set forth below.

This essay offers a comparison of the actions taken by members of two families: the Demoulas family, best known as owner-operators of northeastern regional supermarkets, and the Roy family featured in HBO's series "Succession." The comparative appraisal focuses principally on the selfish pursuit of individualized financial, social, and familial status by key members of both the Demoulas and Roy families as they relate to the law of business associations (principally corporate law). At the heart of the matter is the legal concept of fiduciary duty. A comparison of the two families’ exploits reveals that lessons earlier learned by the Demoulas family (and observers of the multifaceted, multi-year litigation involving them and their business undertakings) fail to positively impact the destiny and legacy of Succession’s Roy family—at least as far as the Roy family story has been told to date. Although hope may be limited, there is still time for the remaining Roy family members to take heed and make changes.

To execute and comment on the comparison of these two families, the essay starts by outlining relevant information concerning legally recognized fiduciary duties in the corporate (and, to a lesser degree, partnership) contexts. Next, the essay offers background information about the Demoulas and Roy families and their respective businesses (both organized as corporations) and selected business dealings and governance, noting actual and potential breaches of fiduciary duty in each case. A brief conclusion offers comparative observations about the actions taken by members of the Demoulas and Roy families that contravene or challenge applicable fiduciary duties and the opportunity for general reflection. Of particular note is the observation that the ability of corporate directors and officers to comply with their fiduciary duties may become more difficult and complicated when integrating family dynamics and business succession issues into business decisions in a family business context.

I have enjoyed the research and teaching I have done in this area over the past year.  It always is nice to take a fresh approach to familiar concepts.  I daresay my students have felt the same way in covering business associations topics through the lens of the happenings in the series.  They certainly have been attentive and communicative, which is what I had been shooting for in teaching corporate and other business associations law through the course.  I am happy to answer questions about the course and provide my syllabi to anyone who wants to see what I assigned and did for the course.  Just ask.

Clawbacks and 401(k) Vesting Schedules

Samantha Prince, Timothy G. Azizkhan, Cassidy R. Prince, and Luke Gorman recently released an interesting paper on the effects of 401(k) vesting schedules. With defined-contribution plans, employees always get to keep the contributions withheld from their paychecks.  Whether the employee will always keep the employer contributions depends on the vesting schedule in play, if any.

And vesting schedules really matter.  The authors found that in the 909 2022 filings they reviewed at least 1.8 million employees lost out on at least a portion of their employer contributions.  After the employees forfeit employer contributions on termination, the employers get to recycle the funds within the plan, avoiding the need for additional contributions. The filings indicated that employer contributions that were recycled were over $1.5 billion. This large sum represents money failing to follow the employee out the door because employment terminated before employees "vested" under the plans.

The analysis shows a partial picture of the broader American landscape because they analyzed 909 different single employer plans.  Still, the plans analyzed covered some major employers such as Amazon and Home Depot.

There are two main types of vesting schedules--graded vesting and cliff vesting.  In graded plans, the employee gradually gets to keep more and more of the employer contribution over time on their departure. In cliff vesting, employees who don't make it a set number of years (often three) lose all of the employer contributions to their retirement. The employers with employees losing the most money on departure generally use cliff schedules.

What happens to the money that gets left behind?  The employer gets to put it to work.  Usually, this means that it won't make more contributions for other employees.  Instead it'll just allocate some of the forfeited funds to cover its obligation to make an employer contribution.  Sometimes, they'll also use the money to offset other expenses.  In any event, employers with these vesting schedules benefit significantly when someone's employment ends before the vesting deadline.

Marketwatch recently covered the draft article and made some follow up calls to employers.  The responses were 

Almost as absurdly, several teams of flacks tried to deny that the companies themselves benefited from this clawback in 401(k) contributions. No, no, they insisted. We don’t benefit. It goes to the other employees in the 401(k) plan.

No, it doesn’t. If this money really went to the other employees, it would appear as a separate bonus. Instead, as Prince and her team’s investigation has shown, most of the money clawed back is used to cut the company’s contributions.

In other words, it’s a shell game. The employers don’t get that $1.5 billion. It just cuts the amount they have to spend on 401(k) contributions next year. By how much? Oh … er … $1.5 billion.

Amazon and Home Depot led the pack with the most employees affected by these plans.  In 2022, Amazon employees forfeited $102 million in employer contributions. Home Depot had the second most affected employees, but the total forfeiture amount came to around $7 million.

Interestingly, immediate competitors now often use different vesting schedules.  Prospective employees considering whether to work at firm A or firm B probably do not have the sophistication or access to information to understand vesting schedule differences and what it will mean for them in practical terms.

Although vesting schedules result in lower overall American retirement savings, employers may face some market pressure to adopt them.  If they face no real negative repercussions in the labor market for a three-year cliff vesting schedule, shifting their retirement vesting could allow them to delay or avoid millions in annual expenses over time. 

Absent some government intervention, I expect more employers will probably move to vesting schedules.  It's not hard to imagine how a management consultant could take the paper's data and then use it to go from company to company selling retirement plan adjustments that will more than pay for millions in consulting fees.

Tesla and Waste

Yup, we have another opportunity for Elon Musk to make new law.

This time, it comes in the form of an extraordinary proxy statement recommending that shareholders vote to ratify the compensation package that Chancellor McCormick invalidated in Tornetta v. Musk, and that they vote to reincorporate the company in Texas.

There are many many questions raised and I’m sure I’ll be revisiting a bunch of them over the next couple of months, but I’m zeroing in on one in particular: the pay package ratification vote.  Can they really do that?

And hoo boy did this get long, so behind a cut it goes; however, I personally find the most interesting part to be the realpolitik of it all if it ends up in a courtroom, so knowledgeable readers may want to skip to that part at the end.

More under the jump

Continue reading

American Business Law Journal Accepting Editorial Board Applications

Dear BLPB Readers:

"The American Business Law Journal invites ALSB members who are interested in serving on the Editorial Board of the ABLJ to apply for the position of Articles Editor.

The ABLJ is widely regarded, nationally and internationally, as a premier peer-reviewed journal. Serving as an Articles Editor provides an opportunity to serve the Academy of Legal Studies in Business and broader academic discipline at the highest levels of service. 

The incoming Articles Editor will begin to serve on the Board in August 2024. Board members commit to serve for three years: two years as Articles Editor and one year as Senior Articles Editor. After that, Articles Editors have the option of continuing to serve two more years—one as Managing Editor and another as Editor-in-Chief. 

Articles Editors supervise the review of articles that have been submitted to the ABLJ to determine which manuscripts to recommend for publication. If a manuscript is accepted, the Articles Editor is responsible for working with the author to oversee changes in both style and substance. If a manuscript is believed to be publishable but in need of further work, the Articles Editor outlines specific revisions and further lines of research that the author should pursue. The Articles Editor’s recommendations for works-in-process are perhaps the most important and creative aspect of the job because they provide the guidance necessary for works to blossom into publishable manuscripts.  

An applicant for the position of Articles Editor should have an established track record of publications. We prefer applicants who have previously published with the ABLJ and have familiarity with our peer review process. However, we also welcome applicants, including international applicants, who have published with high quality law journals and/or peer reviewed law journals that adhere to the Harvard Bluebook style.  Experience serving as a Reviewer for the ABLJ or as a Staff Editor is helpful. 

The ABLJ is committed to ensuring that financial resources, including the support of a research assistant, are not an obstacle to service on the Board. 

Applicants are encouraged to contact us to learn more about the position and financial assistance that may be available.

Please send a resume and letter of interest to Inara Scott, ABLJ Editor-in-Chief, at [email protected] by May 31, 2024, for full consideration."

I Still Think My Disclosure Advice to Clients is the Same After Macquarie

I appreciate Ann's super helpful post on omissions liability after the U.S. Supreme Court's decision in Macquarie Infrastructure Corp. et al. v. Moab Partners, L. P., et al.  The hair splitting in that opinion is, in my view, dubious at best.  The Court's creation of a legally significant concept of "pure omissions" in a public company disclosure context is doctrinally counterfactual.  The omission to state a fact required to be disclosed under a mandatory disclosure rule like Item 303 of Regulation S-K necessarily occurs in a veritable river of disclosures in SEC filings and more generally and has the potential of making those disclosures misleading.  If material, such an omission should be actionable as deceptive or manipulative conduct under Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934, as amended.  Period.

Of course. civil liability would require proof of all elements of the claim, including (even for public enforcement officials) the requisite state of mind or scienter.  Private class action plaintiffs also would have heightened pleading burdens.  And a criminal prosecution can only be sustained if the predicate conduct is willful, as provided in Section 32(a) of the Exchange Act.

The point is that there is no such thing as a "pure omission."  Investors logically rely on the interplay between and among public statements made in filings and elsewhere.  If X exists for Public Company A, and Public Company A is required to disclose X in a public filing but does not do so, investors will view and assess all of the relevant public information about Public Company A assuming X does not exist for Public Company A.  If the omission makes existing disclosures misleading, is material, is made withe the action-appropriate state of mind, and deceives or manipulates, the basis for a Rule 10b-5 cause of action against Public Company A plainly exists based on the language of Section 10(b) and Rule 10b-5.  Back in January, wben I first wrote about Macquarie and an amicus brief I coauthored for the case (which you can fined here), I stated as much.  It seems Ann agrees when she says that "whatever the language of 10b-5(b), it seems entirely unobjectionable that it should be considered a “manipulative or deceptive device or contrivance” within the broader meaning of Section 10(b) to intentionally withhold information you have a duty to disclose – from some other source – in order to mislead someone else."  (Her further analysis follows.)

As Ann's post notes, much remains to be seen and said about the impact of Macquarie, and the Court has signaled that the true wisdom we can gain from its opinion in Macquarie may be constrained to actions brought under Rule 10b-5(b) and to certain factual contexts.  As a result, I have determined it is still appropriate--and wise--to caution public company clients that their failure to comply with mandatory disclosure requirements may make them subject to, among other things, Section 10(b)/Rule 10b-5 litigation.  One should, of course, note (among other things) that the omission would have to be material, make other disclosed facts misleading, and be made recklessly or willfully in order for liability to attach. 

Do you disagree?  Do you believe there are "pure omissions" in a public company disclosure context? Let me know.

 

Macquarie Infrastructure Corp. v. Moab Partners, L. P.

I’ve frequently posted about omissions liability under the federal securities laws; you can read many of those posts, in reverse chronological order, here, here, and here.  But, here’s the CliffsNotes version of where we are now, after the Supreme Court’s decision today in Macquarie Infrastructure Corp. v. Moab Partners, L. P..

 

Once upon a time, there was a statute, Section 10(b) of the Exchange Act. That statute made it unlawful:

 

To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

The Commission did, in fact, adopt those rules and regulations, in the form of Rule 10b-5, which made it unlawful:

 

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

These subparts, collectively, were intended to prohibit the full extent of conduct prohibited by Section 10(b) itself.  See SEC v. Zandford, 535 U.S. 813 (2002).   That is, if it could fall into the category of a “manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security, then it must be prohibited by at least one of Rule 10b-5’s subparts.

 

Back in kinder, simpler times, U.S. courts throughout the land interpreted Section 10(b) and Rule 10b-5 to prohibit not only “manipulative or deceptive device[s] or contrivance[s]”, but also conduct that aids and abets the “manipulative or deceptive device or contrivance” of someone else.  But, alas, in Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164 (1994), the Supreme Court said – nay!  Section 10(b) prohibits “only the making of a material misstatement (or omission) or the commission of a manipulative act”; mere “aiding” someone else’s “manipulative or deceptive device or contrivance” is not prohibited.

 

That, of course, kicked off years of litigation over the distinction between aiding a “manipulative or deceptive device or contrivance” and actually participating in one.

 

Which brought us to Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).  There, investment adviser Janus Capital Management caused its affiliated mutual funds to file false prospectuses about those funds’ policies. The Supreme Court held that the investment adviser had not violated Rule 10b-5(b), because it had not actually “made” a false statement.  The funds made false statements.  Though the funds’ statements had been drafted by its investment adviser, the statements had been filed under the funds’ name, making the funds – and only the funds – responsible for their contents.  This highly technical definition of the word “make,” the Court further explained, was necessary to preserve the line between primary liability and aiding and abetting liability.

 

Oh no.

 

Because, aiding and abetting, we learned from Central Bank, is outside the scope of the Section 10(b) statute.  But the Janus holding was based on a technical definition of the word “make,” which appears only in one subpart of Rule 10b-5.  Was the Court seriously proposing that intentionally causing a captured entity to issue false statements is not a “manipulative or deceptive device or contrivance” within the meaning of Section 10(b)?  Or was the Court merely holding that such conduct does not run afoul of Rule 10b-5(b), but still could run afoul of Rule 10b-5(a) or (c)?

 

In Lorenzo v. SEC, 587 U.S. 71 (2019), we got an answer.  Janus was about Rule 10b-5(b); there may well be conduct – including distributing false statements that someone else made, with an intent to deceive – that falls within Section 10(b), but not Rule 10b-5(b) (i.e., that falls within Rule 10b-5(a) or 10b-5(c)).

 

Which brings us to Moab v. Macquarie, wherein the Supreme Court decided that the Central Bank to Janus to Lorenzo journey was so much fun, it was worthwhile to do it again.

 

In Moab, shareholders of Macquarie Infrastructure Corp. brought a fraud on the market class action, alleging that Macquarie filed its 10-K without including certain information required to be disclosed under Item 303.  The shareholders contended that omitting required information was prohibited by Rule 10b-5(b).

 

The Supreme Court rejected the claim.  According to the Court, Rule 10b-5(b)’s language is limited solely to affirmatively false or misleading statements – not “pure” omissions.  The Court contrasted the language of Rule 10b-5(b) with the language of Section 11 of the Securities Act of 1933.  The latter prohibits not only false statements and misleading omissions, but also failure to disclose required information; Rule 10b-5(b), however, says nothing about failure to disclose required information.  Therefore, concluded the Court, absent an affirmative false or misleading statement, Rule 10b-5(b) does not create liability.

 

Except, we know that Section 10(b) prohibits “pure” omissions.  We know that because the Supreme Court has said so.  See Chiarella v. U.S., 445 U.S. 222 (1980) (“the Commission recognized a relationship of trust and confidence between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation. This relationship gives rise to a duty to disclose because of the ‘necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of the uninformed minority stockholders.’”); SEC v. Zandford, 535 U.S. 813 (2002) (“each [sale] was deceptive because it was neither authorized by, nor disclosed to, the Woods”); Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 152-53 (1972) (“The individual defendants, in a distinct sense, were market makers, not only for their personal purchases constituting 8 1/3% of the sales, but for the other sales their activities produced. This being so, they possessed the affirmative duty under the Rule to disclose this fact to the mixed-blood sellers.”).  

 

Which makes perfect sense!  Because whatever the language of 10b-5(b), it seems entirely unobjectionable that it should be considered a “manipulative or deceptive device or contrivance” within the broader meaning of Section 10(b) to intentionally withhold information you have a duty to disclose – from some other source – in order to mislead someone else.

 

The inescapable conclusion, then, is that if pure omissions are not prohibited under 10b-5(b), they must be prohibited under either 10b-5(a) or 10b-5(c).

 

Except Moab included this curious footnote:

 

The Court granted certiorari to address the Second Circuit’s pure omission analysis, not its half-truth analysis. See Pet. for Cert. i (“Whether . . . a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), even in the absence of an otherwise-misleading statement” (emphasis added)) …The Court does not opine on issues that are either tangential to the question presented or were not passed upon below, including what constitutes “statements made,” when a statement is misleading as a half-truth, or whether Rules 10b–5(a) and 10b–5(c) support liability for pure omissions.

It also included such language as:

 

Neither Congress in §10(b) nor the SEC in Rule 10b–5(b) mirrored §11(a) to create liability for pure omissions…

 So … either pure omissions – even if the omissions were part of an intentional effort to deceive someone to whom there was a duty of disclosure – do not count as “manipulative or deceptive device[s] or contrivance[s]”, which will come as a pleasant surprise to various insider traders and faithless brokers, or Rules 10b-5(a) and (c) prohibit conduct outside the scope of Section 10(b).

 

Or … we’ll be walking all this back in a couple of years.

 

Okay, fine, here’s the actual way out: The Court didn’t exactly say omissions aren’t prohibited; it said “A pure omission occurs when a speaker says nothing, in circumstances that do not give any particular meaning to that silence.”  Only these “pure omissions” are not prohibited.

 

Presumably, circumstances that give meaning to the silence are when one acts as a broker, or a market maker, or trades on the information provided in the context of a trusting relationship.  Or, it is not a “pure” omission – it is an omission coupled with conduct – when one misuses a brokerage account, or acts as a market maker, or trades in stock.

 

Without explanation – or even an acknowledgment of the inferential leap – the Supreme Court apparently concluded that no conduct is involved, or no “circumstances … giv[ing] any particular meaning to that silence” exist, when a defendant engages in the action of filing an official document with the SEC that omits required information. 

 

So I assume that the next smartass who tries to cite Moab as a defense to insider trading will be told “but that’s a circumstance that gives particular meaning to the silence!”

 

In other words, the rule, such as it is, appears to be that it’s not fraud if it’s in connection with a fraud on the market class action, and it is fraud anywhere else.  Which means, we must ask – is it a circumstance that gives particular meaning if someone doesn’t merely leave required information out of a form but fails to file a form at all? 

 

I guess we’ll soon find out. 

 

Finally, as I previously mentioned, the SEC can fix this – or most of this – by adding a line item to every filed form declaring that it is not only accurate, but also complete.  That would be the explicit statement rendered false by a failure to include required information.  Still, such a certification is not a complete panacea – there would still be uncertainty around entire failures to file a form, and over whose scienter would be attributed to the company for a false certification, but it would solve some of the problem.

 

Also, icymi, earlier today I posted a plug about stuff I've done recently.

New Stuff From Me

Just posting the obligatory plug of a couple of new things.  First up, I reviewed Stephen Bainbridge's book, The Profit Motive: Defending Shareholder Value Maximization for the Harvard Law Review.  Here is the abstract:

Professor Stephen Bainbridge’s new book, The Profit Motive: Defending Shareholder Value Maximization, uses the Business Roundtable’s 2019 statement of corporate purpose as a jumping off point to offer a spirited defense of shareholder wealth maximization as the ultimate end of corporate governance. Beginning with an analysis of classroom standards like Dodge v. Ford Motor Co., and continuing through the modern era, Bainbridge argues both that shareholder value maximization is the legal obligation of corporate boards, and that it should in fact be so, partly because of wealth maximization’s prosocial tendencies, but also because of the lack of a viable alternative. Drawing on his decades of work as one of America’s most influential corporate governance theorists, Bainbridge offers up sharp critiques of the kind of enlightened managerialism reflected in the Business Roundtable’s statement, and advocated by academics like Professor Lynn Stout and practitioners like Martin Lipton. Along the way, he also has harsh words for trendy alternatives such as “environmental, social, and governance” (ESG) investing and proposals to reform the structure of the corporation itself.

In many ways, The Profit Motive is an essential resource for any theorist, or student, in this field. Deftly intertwining economic theory with sharp anecdotes and historical retrospectives, Bainbridge offers an entertaining account of the realpolitik of corporate functioning and the major legal developments that brought us to where we are today. However, as I argue in this book review, there are many facets to stakeholderism and the ESG movement, and the very features Bainbridge identifies as flaws could, in fact, turn out to be hidden virtues.

Second, last week, I spoke to students at College of the Holy Cross in Worcester, Massachusetts about ESG and the social responsibility of business.  The talk was somewhat similar to one I gave at Marquette Law School a few months ago, but this was the first time I had the opportunity to present to undergraduate students rather than law-type people.  Anyway, there's video:

 

 

Nicole Iannarone on Securities Arbitration

Andrew Jennings recently featured Nicole Iannarone and her work on the Business Scholarship Podcast.  You can access the episode here.  It focuses on a paper on securities arbitration and some of her recent work.  I'd like to direct your attention to the last five minutes or so.  It discusses being appointed as an arbitrator.  

If you're a business law professor, you're probably pretty well qualified to serve as arbitrator.  It might also give you insight into what happens in these kinds of disputes.  Because I'm involved with a securities arbitration bar association, I'm deemed to be a non-public arbitrator so I don't get selected often.

But if you're fair-minded and not in a major city, there is a real need for more competent arbitrators.  The paperwork and training doesn't take all that long, and it's pretty interesting if you get selected.

Widener Law Seeks Visiting Professors for 2024-25

Widener University Commonwealth Law School is seeking to hire two visiting professors for the 2024-25 academic year.  We have strong needs in Property, Legal Methods and Contracts.  Additional courses are flexible but we have additional needs in the areas of environmental law, intellectual property, wills & trusts, administrative law and other upper level courses.  Interested persons should submit a cover letter and resume to Professor Robyn Meadows, Chair, Faculty Appointments Committee, at [email protected].  

Open Visiting Professor Position(s) at the University of Oklahoma College of Law for Spring 2025

Dear BLPB Readers:

"University of Oklahoma College of Law is pleased to announce that it is currently seeking
applicants for visiting professor position(s) for Spring 2025 of the upcoming academic year. The
law school has a number of curricular needs, but is especially interested in candidates
specializing in bankruptcy, secured transactions, consumer law and finance, and payment
systems."

The complete announcement is here: Download Spring 2025 Visiting Position University of Oklahoma College of Law

Trial Court Blesses Shadow Insider Trading

A federal jury found Matthew Panuwat liable for insider trading late last week.  As you may recall, the U.S. Securities and Exchange Commission (SEC) brought an enforcement action against Mr. Panuwat in the U.S. District Court for the Northern District of California back in August 2021.  In that legal action, the SEC alleged that Mr Panuwat violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, seeking a permanent injunction, a civil penalty, and an officer and director bar. The theory of the case, as described by the SEC in a litigation release, was founded on Mr. Panuwat's deception of his employer, Medivation, Inc., by using information obtained through his employment to trade in the securities of another firm in the same industry.

Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the August 22, 2016 announcement that Pfizer would acquire Medivation at a significant premium. Panuwat allegedly purchased the options within minutes of learning highly confidential information concerning the merger. According to the complaint, Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte's stock price. The complaint alleges that Medivation's insider trading policy expressly forbade Panuwat from using confidential information he acquired at Medivation to trade in the securities of any other publicly-traded company. Following the announcement of Medivation's acquisition, Incyte's stock price increased by approximately 8%. The complaint alleges that, by trading ahead of the announcement, Panuwat generated illicit profits of $107,066.

The SEC's theory of liability, an application of insider trading's misappropriation doctrine as endorsed by the U.S. Supreme Court in U.S. v. O'Hagan, has been labeled "shadow trading."

The Director of the SEC's Division of Enforcement, Gurbir S. Grewal, put it plainly in responding to the jury verdict in the Panuwat case on Friday:

As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.

Yet, many assert that the SEC's theory in Panuwat broadens the potential for SEC insider trading violations and enforcement.  See, e.g., here, here, and here. They include:

• a wide class of nonpublic information that may be determined to be material and give rise to an insider trading claim;
• the expansive scope of insider trading's requisite duty of trust and confidence (and the potential importance of language in an insider trading compliance policy or confidentiality agreement in defining that duty); and
• the potentially large number of circumstances in which employees may be exposed to confidential information about their employer that represents a value proposition in another firm's securities.

Three of us on the BLPB have held some fascination regarding the Panuwat case over the past three years.  Ann put the case on the blog's radar screen; John later offered perspectives based on the language of Medivation's insider trading compliance policy; and I offered comments on John's post (and now offer this post of my own).  I am thinking we all may have more to say on shadow trading as additional cases are brought or as this case further develops on appeal (should there be one).  But in the interim, we at least know that one jury has agreed with the SEC's shadow trading theory of liability.

The Business Lawyer – Call for Papers, 2024

Call for Submissions

The Business Lawyer (TBL) is currently accepting submissions for Volume 79, Summer and Fall issues to be published in 2024. TBL is the peer-reviewed scholarly law review and premier publication of the ABA Business Law Section with over 19,000 readers. The Section welcomes article submissions to TBL on topics that advance the development, understanding, and analysis of business law. The Section also welcomes submissions of scholarly articles from legal academics who are looking for a large audience for their scholarship or who wish to adapt their prior research for use by the judiciary and the practicing bar. Pioneering articles originally published in The Business Lawyer have led to significant practice developments, notably in connection with standard practices for legal opinions and audit response letters.

In addition, the Section’s Diversity, Equity and Inclusion Plan encourages a diverse set of viewpoints and backgrounds for TBL authors. The plan includes the widest range of business law practitioners including but not limited to young lawyers, law students, senior lawyers, international lawyers, lawyers of diverse or underrepresented ethnic and racial backgrounds, lawyers with disabilities, LGBTQ2+ lawyers, and women lawyers.

All submissions should be in Word format, double-spaced (including footnotes), accompanied by author contact information, resumes, and an abstract. Manuscripts, including footnotes, ordinarily should not exceed one hundred pages in length (or about 25,000 words). In general, text and footnotes should follow the style and citation format prescribed in The Bluebook: A Uniform System of Citation (21st Edition). In addition, a manuscript will not be considered, and should not be submitted, if it is under consideration for publication elsewhere.

We look forward to reviewing your manuscripts. Please submit them to The Business Lawyer’s Production Manager, Diane Babal, at [email protected]. Direct any questions to [email protected] or 312/988-5507.

Match is out!

It's the moment we've all been waiting for and - the Delaware Supreme Court holds that all conflicted controller transactions require MFW protections to win business judgment review.

It also appears that the special committee must be composed completely of independent directors - none of this, oh, well, one turned out to be conflicted but it didn't matter much business, which to me actually tightens the standard that I kind of assumed was being employed, and was employed in the Chancery decision in Match itself.

Also, I have previously remarked on the disjunction between requiring MFW for conflicted transactions, but only board independence for considering litigation demands against controlling shareholders.  In my paper, After Corwin: Down the Controlling Shareholder Rabbit Hole, I said:

litigation demands are, in a real sense, different from ordinary conflict transactions. If directors are too conflicted to consider the merits of a transaction, the court evaluates its fairness. By contrast, if directors are too conflicted to consider the merits of bringing litigation, shareholders themselves are permitted to assume control of corporate machinery to bring the action in their stead. For that reason, demand excusal may legitimately be viewed as its own category of problem.

Reading quickly, it appears the Delaware Supreme Court adopted similar reasoning:

Admittedly, there is a tension in our law in these contexts. But Aronson and our demand review precedent stand apart from the substantive standard of review in controlling stockholder transactions. The distinction is grounded in the board’s statutory authority to control the business and affairs of the corporation, which encompasses the decision whether to pursue litigation. 

(They didn't cite me but that's okay, they cited me for something else, I can live with it.)

I may or may not have more to say as I read again; it's a very short opinion and doesn't seem to address what I believe have become the real issues: who is a controlling shareholder, and what counts as a conflicted transaction?  That's really what's created much of the difficulty, but resolution must await another day.

I guess I'll conclude with: the Council of the Corporation Law Section of the Delaware State Bar Association may be cowed by threats of migration out of Delaware, but the Delaware Supreme Court is holding firm.

 

Finfluencers and the Reasonable Retail Investor

Calling attention today to Sue Guan's paper, Finfluencers and the Reasonable Retail Investor, posted on SSRN and forthcoming to the University of Pennsylvania Law Review Online.  The abstract is copied in below.

Much recent commentary has focused on the dangers of finfluencers. Finfluencers are persons or entities that have outsize impact on investor decisions through social media influence. These finfluencers increasingly drive investing and trading trends in a wide range of asset markets, from stocks to cryptocurrency. They do so because they can provide powerful coordination mechanisms across otherwise diffuse investor and trader populations. Of course, the more influence wielded over their followers, the easier it is for finfluencers to perpetrate fraud and manipulation.

The increase in finfluencing has highlighted a gray area in the securities laws: a finfluencer's statements may not be factually untrue or clearly deceptive, but they can be interpreted as misleading depending on the context and the particular beliefs held by the finfluencer’s social media followers. Moreover, such statements can harm investors who buy or sell based on their interpretation of the finfluencer's activity. In other words, finfluencers can easily profit off of their followers' trading activity while steering clear of the securities laws.

A recent case has narrowed finfluencers' ability to do so. This Piece argues that In re Bed Bath and Beyond provides a path to holding finfluencers accountable even when they have not made clearly untrue statements. In considering materiality, In re Bed Bath and Beyond focuses on the reasonable retail investor. This places primacy on retail investors’ interpretation of social media activity and narrows a gap in securities oversight, demonstrating that existing securities laws can be flexible enough to deter and punish a significant portion of problematic finfluencer behavior. In doing so, it opens a path forward for harmed retail investors to seek redress from careless finfluencers.

Sue offers a video summary here. 

In this work, Sue takes on one of my favorite topics: materiality.  She sees the potential for courts to use the reasonable retail investor--as opposed to the reasonable investor--as the reference point for materiality analysis in securities fraud actions.  Truly interesting.

Social media does move markets.  Investors, retail investors, act on what they read in social media.  They may even act based on interpretations of emojis, as  Sue suggests.  I appreciate her taking on the legal aspects of market behavior in this context.  I am confident more will be said about this as additional cases are brought.