Saturday, September 14, 2019
Emily Strauss at Duke has posted a fascinating new paper, Crisis Construction in Contract Boilerplate (Law & Contemp. Probs., forthcoming). She examines how judges interpreted the boilerplate in RMBS contracts during the financial crisis, and finds that they relaxed their reading of certain provisions in order to enable injured investors to recover their losses, and then reverted to more strict readings when the crisis had passed.
Specifically, the RMBS contracts provided that the “sole remedy” available for loans that did not conform with quality specifications was for trust sponsors to repurchase the noncompliant loan. Of course, during the crisis, investors alleged that huge percentages of loans backing the trusts were noncompliant, and a loan-by-loan repurchase requirement would have been, as a practical matter, impossible to pursue. Strauss finds that judges interpreted the clause to permit investors to use sampling to identify noncompliant loans and claim damages, but only in the years following the crisis. By 2015, they reverted to a stricter reading of the contracts. She cites this an example of “crisis construction,” namely, the way that courts alter their readings of contracts during times of calamity in order to further some economic policy. (Strauss discusses that phenomenon in her paper, and Mitu Galati also describes it in this blog post spotlighting Strauss’s work ).
The part that really fascinates me, though, is how this trend strikes me as the opposite of what I experienced when I litigated these cases not as a matter of contract construction, but as a matter of securities law violations. As I posted a few years ago (with additional discussion here and here), I believe that courts adopted a narrow – and nonsensical – approach to class action standing when investors started suing en masse after the crisis, and they did so as a way of managing what would otherwise be incomprehensibly large liabilities for Wall Street’s major players. So I’m intrigued that when it came to securities liability, courts shut the door to plaintiffs, but when it came to contract liability, they opened it.
Saturday, September 7, 2019
A few weeks ago, we had an interesting opinion out of the 10th Circuit interpreting the scope of primary liability under Section 10(b) in the wake of the Supreme Court’s Lorenzo v. SEC decision. The short version is that in Malouf v. SEC, the Tenth Circuit found that scheme liability under Section 10(b) (and parallel provisions of Section 17(a) and the Investment Advisers Act) may be incurred when a defendant knowingly fails to correct someone else’s false statement. But matters are actually a bit more complicated.
More under the jump; warning, this post assumes basic familiarity with Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) and Lorenzo. If you want that backstory, see this post on Janus and the Lorenzo cert grant and my discussion of the actual Lorenzo decision.
Saturday, August 31, 2019
Delaware Chancery court is apparently being dragged into the presidential race, via a new attack ad against Joe Biden. As reported by Shane Goldmacher, well:
NEW: Joe Biden about to get whacked on the Iowa and New Hampshire airwaves with an ad that also features Elizabeth Warren.— Shane Goldmacher (@ShaneGoldmacher) August 28, 2019
Spot paid for by an individual, Shirley Shawe, and is about the obscure Delaware Chancery Court.
There is so much to talk about here.
First, there’s the fact that the advertisement is misleading; Biden and Warren were apparently sparring about bankruptcy courts, not Chancery.
Second, there’s the fact that Biden – as a federal legislator – has no authority over Delaware Chancery.
Third, there’s the fact that while I won’t dispute that Delaware courts are too white, Delaware Chancery, at least, now has 3 women and 4 men. I’d be delighted to see more women on Chancery – and certainly the Delaware Supreme Court – but criticizing Chancery as too male is so last year.
Fourth, there’s the shifting numbers about the size of the ad buy; original reports said $500K, then the number was upped to $1 million, with print as well, and to be honest, I suspect that by blogging it I’m probably giving it the free attention that was the real aim.
But really the salient point is the identity of the buyer: Shirley Shawe, one of the litigants involved in the long-running TransPerfect dispute, tried before Chancellor Bouchard (which is why he is singled out for criticism in the advertisement).
TransPerfect was formed by Shirley Shawe’s son, Philip Shawe, and his one time-fiancee, Elizabeth Elting. They ended their romantic relationship but continued with the business. Elting had a 50% interest, and Philip Shawe a 49% interest, with 1% going to his mother so that the business as a whole could qualify as women-owned. Since Shirley always voted with her son, this meant that authority was split 50/50.
The business was successful but the working relationship was not, leading to prolonged and acrimonious litigation. Frankly, the Delaware opinions describing the fights between Shawe and Elting read more like a stalking complaint or domestic abuse than a business falling-out; among other things, Shawe was found to have hacked into Elting’s personal email, and – on two! occasions – hidden under her bed.
Ultimately, Chancellor Bouchard ordered that the company be sold, and Philip Shawe purchased it. The matter was not settled, though, because after that, the Shawes claimed that the Skadden partner who ran the auction “looted” the company.
Even today, the Shawes can’t let the matter go. From what I can glean, Shirley Shawe is involved with this nonprofit, formed in the wake of the TransPerfect dispute and devoted to criticizing the Delaware Chancery court (the group is not officially connected to Shawe, but this article describes her as a “driving force” behind it, and reports that she funded and starred in its advertisements). And now, of course, there’s this bizarrely irrelevant advertisement in the presidential race.
What the whole thing highlights, I think, is how business disputes that are tangled with family disputes don’t unfold like ordinary business matters, because the issues are far more personal. And business courts don’t really know how to address the family dynamics. That’s very much on display in TransPerfect, and it’s also the point of Allison Tait’s article, Corporate Family Law, 112 Nw. U. L. Rev. 1 (2017). Though she doesn’t talk about TransPerfect specifically, the situation really illustrates her point.
Saturday, August 24, 2019
Just after I posted my paper, Not Everything is About Investors: The Case for Mandatory Stakeholder Disclosure, arguing for a stakeholder-focused corporate disclosure system, the conversation about corporate obligations to noninvestor interests exploded. That’s because the Business Roundtable released a new “statement on the purpose of a corporation” which Marie Kondo-ed the traditional focus on shareholder interests, in favor of, well:
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
- Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
- Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
- Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. - Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
- Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
The reception has been … mixed.
There are two basic schools of thought. The first is that the BR’s statement represents a real change going forward, either because it will drive business decisionmaking or, more subtly, because the fact that the BR felt it necessary to issue the statement at all illustrates a societal shift that has already occurred.
The second is that this is a public relations ploy to stave off more onerous business regulation.
I posted about “stakeholder capitalism” a few weeks ago and how it often translates into a fairly naked attempt to avoid accountability to shareholders or anyone else. Which is why the Council of Institutional Investors (CII) immediately issued its own statement decrying the BR’s attempt to disclaim any responsibility to shareholders as a unique constituency.
Right on cue, Martin Lipton* – who, as I discussed in my prior post on the subject, has a very long history of using appeals to stakeholders as a mechanism for shielding management decisions from scrutiny – posted a statement in support of the BR, in which he warned that failure to embrace its vision would bring about calamity:
The failure of the Council of Institutional Investors to join the Business Roundtable in rejecting shareholder primacy and embracing stakeholder corporate governance is misguided. The argument that protection of stakeholders other than shareholders should be left to government regulation is an even more serious mistake. It would lead to state corporatism or socialism.
The failure to recognize the existential threats of inequality and climate change, not only to business corporations but also to asset managers, institutional investors and all shareholders, will invariably lead to legislation that will regulate not only corporations but also investors and take from them the ability to use their voting power to influence the corporations in which they invest.
In other words, corporations have to appear to be good citizens to avoid being forced to be good citizens. At least he’s honest.
Meanwhile, the Wall Street Journal published its own view in which it agreed this is all fine for PR purposes but if anyone really means to pursue profits with anything less than religious devotion, that would be bad.
Let’s just say it’s an odd day when Martin Lipton is fighting both the CII and the WSJ editorial page. Usually, the alignment would be more CII versus Lipton and the WSJ, because the reality is, CII members are all about protecting corporate stakeholders – after all, the CII is an organization of employee pension plans – they just, you know, want shareholders to be the ones making those decisions, not corporate managers. And the WSJ and Lipton are very much in the opposite camp. Indeed, the BR is currently fighting to make it harder for shareholders to introduce proposals that would force corporations to focus on – you guessed it – stakeholder interests, so this looks a lot less like an issue of what is best for society than about who should be the decisionmaker.
But there’s more. First, not everyone’s on board with the BR’s statement; there are some notable absences from BR’s list of signatories. Second, the BR’s statement puts it at odds with the Trump Administration, which seems to have formally declared shareholder wealth maximization as the only appropriate corporate purpose. It also puts the BR at odds with SEC Commissioner Hester Peirce, who has done the same.
So, what do we make of all of this?
Well, first and most obviously, abstract notions of corporate purpose – and the near-unenforceable fiduciary duties that follow – are likely to have very little direct influence on corporate behavior. But that doesn’t mean they’re entirely irrelevant, because they can impact the legal regime in which corporations operate. As I discuss in What We Talk About When We Talk About Shareholder Primacy, it matters if the Trump Administration and the SEC think corporate purpose = shareholder wealth maximization, because that means they’ll develop legal rules to make it so, including defining “materiality” for securities law purposes to mean only matters relevant only to financial return, and prohibiting shareholders from pushing for greater accommodation of stakeholders. And so far, the BR is fully on board with that agenda.
That said, the true drivers of corporate decisionmaking are real-world incentives that corporate managers have to favor one constituency or the other. And because shareholders are the only constituency who get a vote, managers are particularly likely to attend to their concerns. Which brings me to this op-ed by Chief Justice Strine and Antonio Weiss, published in Friday’s New York Times. In it, they make an argument that Strine has often advanced, namely, that large mutual fund investors should vote for policies that protect the worker-beneficiaries of those funds, and thus force managers to accommodate their interests as employees and consumers. (For recent academic commentary in that vein, see Nathan Atkinson here and Michal Barzuza, Quinn Curtis, & David Webber here.)
Now, Strine has made this argument before – I posted about one iteration here – and as I pointed out at the time, Strine has also long argued that managers have fiduciary duties to shareholders alone. So there’s some tension in his argument that mutual funds should advocate for corporate policies that, at least according to formal (if not practical) Delaware law, cannot be advanced to the extent they favor employee interests over those of investors. The op-ed, though, squares that circle by equating protections for workers and the environment with the long-term best interests of the corporation itself (and thus, by extension, its investors).
(The op-ed also makes the odd argument that there are too many meaningless items on the corporate ballot. Which is unexpected because most of the non-critical items are, like, proposals that deal with corporate social responsibility, which is what the op-ed just said funds should advocate for, so, I’m confused.)
Now, the claim that long-term corporate interests are identical to those of society as a whole is an ancient way of papering over the very real conflicting interests of different stakeholders. As an example, Larry Fink’s famed letter about corporate purpose gets a lot of attention as advancing a stakeholder-primacy view, but the letter actually said that accommodating stakeholders was in the long-term interest of business, and therefore is better for investors.
That’s the (purported) thinking behind the new Long-Term Stock Exchange (LTSE), which just received SEC approval of its listing standards. Among other things, the standards require that listed companies have policies that are “consistent with” the notion that they should “consider a broader group of stakeholders and the critical role they play in one another’s success,” and requires listed companies to “adopt and publish a Long-Term Stakeholder policy explaining how the issuer operates its business to consider all of the stakeholders critical to its long-term success.”
Now, I say “purported” here because – going back to where all this began – arguments about managers accommodating corporate stakeholders are frequently code for “activist shareholders leave us alone,” which has little to do with corporate well-being and everything to do with management entrenchment. Still, we’ll see how the LTSE works out – whether it attracts listings, investors, and (most critically) whether LTSE-listed companies insist their long-term policies were merely puffery as soon as they find themselves in the crosshairs of a securities fraud lawsuit.
Where does that leave us?
In my view, the hypothesized alignment between shareholder and stakeholder interests is ... complicated. This is my argument in Not Everything is About Investors: corporate profit-seeking is only aligned with the interests of society writ large if corporations pay a price for inflicting harms on non-shareholder constituencies. Which is why I think disclosure for non-shareholder audiences, while not a cure-all, is important: it helps society extract that price so that corporate managers are incentivized to act in society’s best interest as an inherent aspect of profit-seeking.
That was a lot.
In closing, I’ll just describe one particular colloquy that occurred at Tulane’s Corporate Law Institute earlier this year. One panel was devoted to corporate social responsibility, and the panelists included Strine and Myron Steele, former chief justice of the Delaware Supreme Court.
The moderator of the panel turned to Steele and asked him directly, is it ever permissible for a board of directors to decide that they will prioritize the needs of employees over earning a higher profit? And Steele said, well, if the board sits down, and carefully studies the issue, and decides that prioritizing employees is in the best interests of the company’s long-term profitability, then yes, the board can make that decision.
And the moderator asked again, okay, but what if there’s a tradeoff between prioritizing employees and earning profits? Can the board choose to favor employees?
And Steele said, if the board studies the issue, documents its process, and comes to a reasoned determination that it’s better for the corporation’s long-term prosperity if benefits are conferred on employees, then yes, that’s permissible.
So. There you have it.
*yeah, I have to keep saying – no relation
Wednesday, August 14, 2019
In a previous post, I plugged a short piece that was published in the Georgetown Online Journal, and at that time, I explained it was a preview of a longer, in-progress article about the need for a corporate disclosure system intended for non-investor audiences. I have now posted a draft of that longer paper to SSRN. Here is the abstract:
Corporations are constantly required to disclose information, but only the federal securities laws impose generalized public disclosure obligations that offer a holistic overview of corporate operations. Though these disclosures are intended to benefit investors, they are accessible by anyone, and thus have long been relied upon by regulators, competitors, employees, and local communities to provide a working portrait of the country’s economic life.
Today, that system is breaking down. Congress and the SEC have made it easier for companies to raise capital without becoming subject to the securities disclosure system, allowing modern businesses to grow to enormous proportions while leaving the public in the dark about their operations. Meanwhile, the governmentally-conferred informational advantage of large investors allows them to tilt managers’ behavior in their favor, at the expense of consumers, employees, and other corporate stakeholders. As a result, securities disclosures do not provide the comprehensive picture necessary to maintain social control over corporate behavior.
This Article recommends that we explicitly acknowledge the importance of disclosure for noninvestor audiences, and discuss the feasibility of designing a disclosure system geared to their interests. In so doing, this Article excavates the historical pedigree of proposals for stakeholder-oriented disclosure. Both in the Progressive Era, and again during the 1970s, efforts to create generalized corporate disclosure obligations were commonplace. In each era, however, they were redirected towards investor audiences, in the expectation that investors would serve as a proxy for the broader society. As this Article establishes, that compromise is no longer tenable.
As you can see, this one is a work in progress, so I’m very much interested in hearing everyone’s thoughts.
Saturday, August 10, 2019
Milton Friedman, shareholder primacy’s true north, wrote:
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.
Much judicial, political, and academic ink has been spilled over the first part of this pronouncement, but the second part has always baffled. What ethics? Whose ethics? How do we identify ethical customs that are not instrumental in generating higher profits (because if they were, there would be no need for the qualification; we would simply recognize that pursuit of profits may include pursuit of community goodwill because in its absence it may be hard to sell one’s product).
The recent tragedies in El Paso and Dayton have raised these questions anew. Cloudflare, which provides various website and internet security services, dropped 8chan (a breeding ground for violent white supremacist content and the site where the El Paso shooter posted a racist screed) as a client, thus knocking 8chan offline. In so doing, its CEO, Matthew Prince, explained:
We continue to feel incredibly uncomfortable about playing the role of content arbiter and do not plan to exercise it often. Some have wrongly speculated this is due to some conception of the United States' First Amendment. That is incorrect. First, we are a private company and not bound by the First Amendment. Second, the vast majority of our customers, and more than 50% of our revenue, comes from outside the United States where the First Amendment and similarly libertarian freedom of speech protections do not apply. The only relevance of the First Amendment in this case and others is that it allows us to choose who we do and do not do business with; it does not obligate us to do business with everyone.
Instead our concern has centered around another much more universal idea: the Rule of Law. The Rule of Law requires policies be transparent and consistent. While it has been articulated as a framework for how governments ensure their legitimacy, we have used it as a touchstone when we think about our own policies….
Cloudflare is not a government. While we've been successful as a company, that does not give us the political legitimacy to make determinations on what content is good and bad.
Two years ago, Cloudflare discontinued service to the Nazi site Daily Stormer. At that time, Prince said:
Now, having made that decision, let me explain why it's so dangerous…. Without a clear framework as a guide for content regulation, a small number of companies will largely determine what can and cannot be online. … Law enforcement, legislators, and courts have the political legitimacy and predictability to make decisions on what content should be restricted. Companies should not…
In an internal email to Cloudflare employees at that time, he was more blunt:
[T]his was an arbitrary decision. It was different than what I’d talked talked with our senior team about yesterday. I woke up this morning in a bad mood and decided to kick them off the Internet. … It was a decision I could make because I’m the CEO of a major Internet infrastructure company…. Literally, I woke up in a bad mood and decided someone shouldn’t be allowed on the Internet. No one should have that power.
Prince depicts himself as a man caught between conflicting ethical principles. Which apply?
After El Paso and Dayton, Andrew Ross Sorkin penned an open letter to Walmart’s CEO, the country’s largest seller of guns:
It is clear that this country is suffering from an epidemic that law enforcement and politicians are unable or unwilling to manage.
In the depths of this crisis lies an opportunity: for you to help end this violence….
You could threaten gun makers that you will stop selling any of their weapons unless they begin incorporating fingerprint technology to unlock guns, for example. You could develop enhanced background checks and sales processes and pressure gun makers to sell only to retailers that follow those measures.
You have leverage over the financial institutions that offer banking and financing services to gun makers and gun retailers as well as those that lend money to gun buyers….
It would be easy for you, and other chief executives, to argue that controlling the gun violence epidemic is Washington’s responsibility, not yours. But in an era of epic political dysfunction, corporate executives have a chance to fill that leadership vacuum.
All of this just begs the question of how much we should expect public-style regulation from the private companies that dominate our lives. Here’s Kara Swisher on Cloudflare’s decision:
It’s long past time for the digital giants to build safety into the DNA of products from their conception. The next crop of tech companies should think about safety from the get-go….
[W]hat we have today, as I have written before, are giant digital cities that were built without adequate police, fire, medical or safety personnel, decent street signs or any kind of rules that would make them work smoothly.
Amazon’s dominant position in commerce had led it to create its own private court system for adjudicating disputes, which has given rise to an industry of Amazon-court “lawyers” to help merchants navigate it. Facebook, as well, has proposed creating something like an internal court system for handling content disputes.
All of these examples strike me as peak “publicness,” in Hillary Sale’s terminology. When companies take on public responsibilities, the public demands that they act with the transparency and concern for public values that we ordinarily expect of governments. Or, to put it another way, Matthew Prince is right: His company does not have legitimacy to make these decisions, but made they must be - which is why greater public demands will be placed on Cloudflare to anticipate them, prepare for them, and avert the next El Paso rather than simply react to it. (Check out Matt Levine’s description of the terms of Facebook’s privacy settlement.)
How successful is that effort likely to be? Well, with both apologies and nods to Friedman, if corporations are like governments, an appeal to ethics alone isn’t going to cut it. As FDR reportedly once told a group of labor activists, “I agree with you; I want to do it; now, make me do it.” In the context of government, that means constituent anger and threatened disruption; companies may not be so different. So the real question is whether public outrage can become sufficiently expensive to force change. And that has yet to be seen.
Saturday, August 3, 2019
I often think about this Wall Street Journal article from 2015 about Mylan and its reincorporation to the Netherlands:
At a heated meeting with Mylan NV’s executive team in a Manhattan conference room in May, several investors complained about the drug maker’s resistance to a $40 billion takeover proposal from Teva Pharmaceutical Industries Ltd.
Executive Chairman Robert Coury leaned across the table and retorted, in language laced with expletives, “This is a stakeholder company, not a shareholder company,” according to multiple attendees, meaning his constituents went beyond investors and he wasn’t obligated to agree to a tie-up. Mr. Coury got his way….
Mylan’s resistance to Teva’s proposal was aided by an acquisition that moved the company’s legal home in February from Pennsylvania to the Netherlands—part of the wave of tax-trimming “inversion” transactions that swept American business last year. Mylan, whose senior management remain based in Pennsylvania, gained not just tax savings, but a Dutch corporate rule book that gives companies more levers to resist takeovers….
Dutch policy makers have spent the past decade touting the benefits of Dutch law to global corporations as part of an effort to turn the Netherlands into a management-friendly bastion.
The article’s a bit circumspect about it, but I have always imagined Coury saying something like, “It’s stakeholder, b---,” as he refused to consider Teva’s offer. This, of course, it a lot like Martin Lipton’s longstanding advocacy for a “stakeholder” orientation, from the days of Unocal – when, at his urging, the Delaware Supreme Court held that employee welfare was an appropriate consideration in a takeover battle (before it retconned its own holding the next year in Revlon) – extending to today’s exhortations that corporate managers should protect stakeholder interests. All the right buzzwords of corporate social responsibility and ESG are there, but the fairly transparent endgame is to make boards less accountable to shareholders, not more accountable to other constituencies.
Anyhoo, I mention all of this because it’s the first thing that occurred to me when the news broke about Pfizer’s new combination with Mylan. Pfizer will spinoff its Upjohn unit to combine it with Mylan, and shareholders of both Mylan and Pfizer will receive stock in the new company. Significantly, the combined entity will incorporate in Delaware, thus removing some of the insulation that Coury has enjoyed over the past few years (despite his intention, described in the above-linked article, to maintain his role as Executive Chair).
Given Mylan’s poor performance recently – and associated shareholder restiveness – perhaps this move was inevitable. As I previously noted in the case of Netflix, it seems like public companies can only wall off their shareholders for so long, especially as performance declines – which is exactly when shareholders are going to want to flex their muscles.
Saturday, July 27, 2019
I’m intrigued by this unusual Section 11 decision out of the Third Circuit, Obasi Investment LTD v. Tibet Pharmaceuticals, Inc, 2019 WL 3294888 (3d Cir. 2019). A company called Tibet held an IPO, but the registration statement failed to identify financial troubles at its operating subsidiary. Eventually the subsidiary’s assets were seized, Tibet’s stock price plunged, and trading was halted.
A class of plaintiffs brought a Section 11 claim against, you know, everyone they could get their hands on, including two individual defendants: Hayden Zou and L. McCarthy Downs. Zou was a Tibet shareholder who had come up with the idea for an IPO in the first place, and approached Downs, who was a managing director for an investment bank called Anderson & Strudwick (“A&S”). A&S ended up underwriting the offering, and for reasons that are not explained, A&S agreed with Tibet that after the IPO, two A&S designees would serve as nonvoting Board observers for the foreseeable future. Those designees were Zou and Downs, and the registration statement explained that even without votes “they may nevertheless significantly influence the outcome of matters submitted to the Board of Directors for approval.”
When the plaintiffs sued, they argued that Zou and Downs were proper Section 11 defendants, because that statute imposes liability on “every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner.” 15 U.S.C. §77k(a)(3).
The Third Circuit, in a 2-1 split, held that Zou and Downs were not named in the registration statement as performing functions similar to those of directors.
And honestly this is sort of a stream of consciousness about the decision, which got very very long, so behind a cut it goes:
[More under the jump]
Saturday, July 20, 2019
I’ve previously blogged in this space about Shari Redstone and her conflicts with the CBS board. Last week, New York Magazine published this fascinating article about Shari Redstone’s corporate battles and her relationship with her father, Sumner Redstone. Shari Redstone refused to participate and thus much of it appears to have been drawn from other sources, but it was all new to me, and the anecdotes make for a fascinating – and eyebrow raising – read. Here’s a taste:
In retrospect, it took some chutzpah for Moonves to take Redstone to court, when as reporting would later show, he was busily covering up the sexual-assault allegations against him. Less than six months later, he was gone. So were Gifford and most of the other elder men on the board who’d backed Moonves. .... CBS and Viacom are once again talking about merging, though Redstone cannot be officially involved until negotiations are further along. If the merger goes through, as it well may this summer, she will have cemented her control of a $30 billion media kingdom.
And Moonves’s stunning downfall has given Redstone, for all her wealth, something she’s never had before: a narrative that justifies her own rise. The #MeToo movement has hardly had a richer target than CBS, with its board of mostly old white men who protected Moonves and shrugged off the company’s treatment of women. ...The new board of CBS is, like Viacom’s, majority female for the first time — and increasingly stacked with her allies. Women are being put in charge and on the air at CBS. And the face of the family controlling these companies was once the patriarch whose embarrasing sexual exploits were aired in court; now it’s his daughter.
As the excerpt indicates, the main theme of the article is that Shari Redstone - though an unlikely candidate for feminist hero - has battled a cadre of older men, many of whom disparaged or dismissed her apparently on the basis of gender, and has come out on top. She’s now firmly in control of both CBS and Viacom, and likely will fulfill her ambition to combine the two companies. A great piece to mull over.
Saturday, July 13, 2019
I just recently came across the Ninth Circuit’s decision in In re Atossa Genetics Inc Securities Litigation, 868 F.3d 78 (9th Cir. 2017), and it struck me because it highlights an ongoing tension between the reliance/materiality distinction in fraud-on-the-market cases in general, and in the Supreme Court’s jurisprudence in particular.
And I’ll say up front that a lot of what I’m about to discuss in this post is stuff I’ve laid out in more detail in my essay, Halliburton and the Dog that Didn’t Bark. The Atossa case is just a nice demonstration of the issue.
And hey, this got long, so – more after the jump.
Saturday, July 6, 2019
When I was in practice, I worked on a number of cases alleging violations of Section 11 of the Securities Act, but none that had been filed in state court. (For which I was profoundly grateful; I was always bemused by the fact that I needed to get pro hac’d into federal courts around the country but I was vastly more familiar with their rules and practices than with those of the New York State courts, notwithstanding my admission to the New York State bar).
So, to be honest, I never had any strong feelings about whether plaintiffs should have the right to pursue Section 11 class actions in state court, or whether the Securities Litigation Uniform Standards Act should be interpreted to permit defendants to remove such cases. And I didn’t spare much attention when the Supreme Court recently held in Cyan, Inc. v. Beaver County Employees Retirement Fund that defendants cannot remove them.
But Michael Klausner, Jason Hegland, Carin LeVine, and Sarah Leonard just posted a short empirical analysis of state Section 11 class actions, and the results have captured my interest. First, they find – unsurprisingly – there has been an increase in state Section 11 filings since Cyan was decided, and very often, state litigation is accompanied by a parallel federal case filed by a competing set of plaintiffs. Second, they conclude that the state cases are dismissed on the pleadings at far lower rates than federal cases (though the data is a bit muddy; they exclude from analysis any federal cases with a simultaneous Section 10(b) component, which means they may be excluding cases that appear more fraudulent and thus are - perhaps - stronger). They also analyze settlement sizes and find little difference between federal and state cases, with the caveat that Cyan may have effects further down the road (they also exclude cases filed prior to 2014 to avoid the effects of the financial crisis, which may also distort results).
So this is definitely a fruitful area to keep an eye on – especially with the looming battle over whether the PSLRA discovery stay applies in state court proceedings. See Wendy Gerwick Couture, Cyan, Reverse-Erie, and the PSLRA Discovery Stay in State Court, 47 Sec. Reg. L.J. 21 (2019); see also Post-Cyan Ruling on Discovery Stay.
Saturday, June 29, 2019
Greetings from sunny Portugal. I am enjoying some vacation time here after attending and presenting at the European Academy of Management conference in Lisbon this past week. I will have more to say about that conference in a later post. But for today, I offer some light thoughts and an Internet "treasure hunt" relating to mergers and acquisitions.
I arrived at my hotel in Sintra earlier today to find a notice in the room stating that "[o]n the 30th June 2019, the Hotel Tivoli Sintra will be changing the legal business entity which will be reflected in future invoices." The notice went on to ask that, "to avoid possible delays relating to the billing" each guest pay up his or her bill to date on June 30th "in a partial invoice," noting that "[t]he remaining services will be invoiced at the departure time with the new entity." Apologies were made for "the inconvenience" and thanks were offered for "the understanding."
Of course, as an M&A practitioner and instructor, I wanted to know what led to this change in "legal business entity." I suspected a merger or acquisition transaction. Was it an asset transaction in which the hotel brand was being changed? That's what I suspected. Since I ask my advanced business law students to try to identify the nature of business combination transactions from news reports and public filings, I thought I would see what I could find out by doing a bot of Internet research. Here's what I learned.
Minor Hotels "completed the acquisition of the entire Tivoli portfolio in early 2016." I read this in the Minor International Public Company Limited 2016 Annual Report. See also here. The Tivoli Hotel Sintra was part of this final stage in acquiring the Tivoli hotels. See here. Minor International (known as MINT) is registered under the laws of the Kingdom of Thailand.
In the fall of 2018, MINT launched a compulsory tender offer for shares of NH Hotel Group SA. The tender offer was commenced as a result of MINT's acquisition of a >30% equity stake in NH Hotel Group in a series of transactions earlier in the year. A news report reveals that MINT's significant stock acquisitions were part of an initial unsolicited bid for NH Hotel Group, which Hyatt Hotels & Resorts also desired to acquire. (Spain has a compulsory tender offer law that kicks in when control of a public company--which includes the direct or indirect acquisition of 30% or more of the public company's voting rights--changes. See here.) By the end of October, MINT had acquired sufficient additional shares of NH Hotel Group's common stock to bring its equity stake in NH Hotel Group to over 94%. See here and here and here. A subsequent news report indicates that "NH Hotels and Minor Hotels are seeking to further integrate their brands." The same posting noted that "[p]lans are already underway in Brazil and Portugal to rebrand some Minor Hotels as NH Hotels, with 15 hotels in the two countries undergoing the transformation."
Accordingly, it seems that I may be among the last hotel guests to stay at the Tivoli Hotel Sintra as a Tivoli branded hotel. At least that's my guess based on what I have read. Although I was not correct in my original guess as to the nature of the transaction that led to the change in "legal business entity" of my Sintra hotel, if my assessment is correct, I wasn't far off. An asset acquisition was involved at the outset, but the posited rebranding happened later and was more the result of a series of stock acquisitions in a hostile, competitive takeover environment. Not a bad day's work in M&A sleuthing. Just call me Nancy Drew, right, Ann?
Friday, June 28, 2019
Last week, the Delaware Supreme Court issued an opinion, Marchand v. Barnhill, which is notable for two reasons. First, it furthers the Court’s project of reinvigorating director independence standards, and second, it is one of the very few decisions to find that the plaintiffs properly pled a claim for Caremark violations.
The facts are these. Blue Bell Creameries suffered a listeria outbreak in 2015 that killed three people and nearly bankrupted the company, and shareholders brought a derivative lawsuit alleging that the directors failed to oversee corporate compliance with FDA and other requirements. First, they alleged that the CEO Paul Kruse, and the VP of Operations Greg Bridges, actually received notification from various agencies of the company’s lack of compliance and took no remedial action. In so doing, Kruse and Bridges violated their fiduciary duties to the company, and a litigation demand on the board would be futile because of their close ties to the board members.
Second, plaintiffs alleged that the Board violated its Caremark duties by failing to institute a system for monitoring the company’s compliance.
Chancery dismissed both claims, and the Delaware Supreme Court reversed.
Starting with the issue of director independence, as Delaware-watchers are well-aware, in the past few years, the law has undergone something of a revolution. Once upon a time, only clear financial ties or the equivalent of blood relations would be sufficient to show that one director lacked independence from another, but more recently, Delaware has begun to recognize how less concrete social and business ties, traveling in similar circles, ongoing professional and personal contacts, and so forth, can collectively create feelings of obligation that prevent one director from making an objective decision about whether to sue another.
Thus, in Marchand, the Court held that a particular director was likely biased in favor of Kruse because the Kruse family – not Paul Kruse personally – had mentored him throughout his business career, going so far as to make a sizeable donation to a local college that somehow ended up with the director in question getting a facility named after him. Significantly, the Court emphasized that “independence” may vary depending on the type of decision at issue – directors may be willing to vote against close friends on some matters, but that’s a far cry from being willing to sue the friend for breach of duty, and judges need to be sensitive to the difference.
This entire line of caselaw might be described as Strine’s revenge: it’s a direction he recommended with In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) when he was on the Chancery court, and that the Delaware Supreme Court rejected in Beam v. Stewart, 845 A.2d 1040 (Del. 2004). Now in the Chief Justice spot, Strine has apparently persuaded his colleagues as to the correctness of his views and is moving full steam ahead, going so far in Marchand as to cite his Oracle decision, thus retroactively making it authoritative.
As to the Caremark issue, what’s striking here is not only the rarity with which Caremark claims make it past a motion to dismiss, but the fact that the Court accepted the plaintiffs’ claim that no monitoring system at all had been put into place. The Court highlighted that despite various compliance problems that arose over the years, the Board had no committee in place to address these matters and Board minutes did not indicate any discussion of them.
By contrast, in the few cases where Caremark claims have had some success – think something like In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011), where the claim was properly pled but lost in a merger – plaintiffs demonstrated that the Board didn’t simply fail to monitor, but was actually complicit in the legal violations. They knew of the red flags and either ignored them or directly encouraged the misbehavior. They were, in Elizabeth Pollman’s framework, actually disobedient regarding their legal obligations. (And to give credit where credit is due, I’ll say that Elizabeth Pollman is the one who has observed that successful Caremark complaints tend to plead willful violations of the law, and the paper she eventually releases on the subject is something to stay tuned for). But notwithstanding that general tendency, in Marchand, the Delaware Supreme Court did not hold that the Board was complicit, or that it had actual knowledge of potential legal violations; instead, it held that the Board simply had no monitoring system in place at all – a much harder claim since just about any monitoring system will do, and its design is within the directors’ business judgment. The Marchand Court went so far as to point out that monitoring systems in place at the management level were insufficient to absolve the Board, because there was no indication that the Board was monitoring at all – even to make sure that management did its job.
The thing to note about this aspect of Marchand is that the Court did not have to go that way, because Paul Kruse and Greg Bridges – who actually knew about the various problems – were both directors themselves, and Kruse later became Chair of the Board. That is, the Court could have said that the Board, via Kruse and Bridges, did have a monitoring system, and that, via Kruse and Bridges, the Board was aware of problems but refused to take action to remedy them. Yet the Court chose not to go this route – it didn’t even mention that Kruse was a director throughout the period and Bridges was a director for most of it (you have to look at the Chancery decision for those tidbits), and only grudgingly indicated that Kruse eventually became Chair of the Board – a fact to which the Court attaches no significance (and indeed, he only became Chair just before the problem reached crisis point). Instead, ignoring the fact that at least two members of the Board were part of management and directly received notice of compliance issues, the Court simply declared that no monitoring system was in place.
So the opinion seems, in a way, motivated.
That impression is reinforced by the types of compliance problems that the Court identifies to establish that that Blue Bell had longstanding sanitation issues. The Court lists regulatory citations that Blue Bell factories received dating back to 2009, but – to my untutored eye – they all read like, well, flyspecking. You know, periodically an agency inspects, and they always find a problem to write up, and it’s quickly resolved. Now, just to be clear, I am not an expert in the regulation of food safety and I may very well be misreading this, but a handful of problems like “equipment left on the floor and a ceiling in disrepair in the container forming room” just don’t strike me as the kind of thing to suggest systemic noncompliance. Matters only get serious when listeria is first detected in 2013, and after that, though listeria is identified several other times, nothing in the opinion indicates that the company was ignoring regulatory complaints or failing to attempt to remediate the problem before it issued a general recall in early 2015.
The point being, it almost seems as though the Court is going out of its way to justify a “failure to monitor” theory and seizes upon (again, to my untrained eye) fairly minor problems as evidence that the Board was not paying sufficient attention.
That said, I do have to highlight this aspect of the Court’s reasoning:
In answering the plaintiff’s argument, the Blue Bell directors also stress that management regularly reported to them on “operational issues.” This response is telling. In decisions dismissing Caremark claims, the plaintiffs usually lose because they must concede the existence of board-level systems of monitoring and oversight such as a relevant committee, a regular protocol requiring board-level reports about the relevant risks, or the board’s use of third-party monitors, auditors, or consultants…Here, the Blue Bell directors just argue that because Blue Bell management, in its discretion, discussed general operations with the board, a Caremark claim is not stated.
But if that were the case, then Caremark would be a chimera. At every board meeting of any company, it is likely that management will touch on some operational issue….
I admit, if defendants just argued that the Board discussed “operational issues,” that’s pretty damning.
Okay, so what do we make of all of this?
Well, I have to go back to an argument I’ve previously made in this space, namely, that with decisions like Corwin, Delaware has transformed itself into something like a mini-SEC. Suddenly, instead of emphasizing a Board’s substantive obligations, courts are scouring disclosures to determine if a shareholder vote was fully informed. Except, of course, we already have an SEC – we don’t need Delaware to do that job. (But see Reza Dibadj, Disclosure as Delaware’s New Frontier, 70 Hastings L.J. 689 (2019)). A contextual, nuanced take on independence carves out a space for Delaware that the SEC can’t replicate – and perhaps the same might be said of a more muscular approach to Caremark.
Saturday, June 22, 2019
If only there were an agency tasked with developing uniform standards for reporting material information
SEC Commissioner Peirce recently delivered a speech to the American Enterprise Institute and there's a lot going on here.
First, though this wasn't the nominal topic of the speech, Commissioner Peirce took the opportunity to take some shots at proxy advisors, complaining that:
Proxy advisor Glass Lewis, for example, has only 360 employees, only about half of whom perform research, who cover more than 20,000 meetings per year in more than 100 countries. Companies may not get an opportunity to correct underlying errors. According to one recent survey, companies’ requests for a meeting with a proxy advisory firm were denied 57 percent of the time. Companies submitted over 130 supplemental proxy filings between 2016 and 2018 claiming that proxy advisors had made substantive mistakes, including dozens of factual errors. Proxy advisors ISS and Glass Lewis provide companies some opportunity to contest such errors, but access is not uniform for all issuers, and the process may not provide adequate opportunity for issuers to respond before proxies are voted. The ramifications for the affected companies can be dramatic, as investment advisers, unaware of the error, vote their proxies in accord with the recommendation.
I've previously posted about the SEC's new interest in regulating proxy advisors; the writing on the wall appears to be that whatever else the SEC does, it's likely to create some kind of formal process by which companies can contest proxy advisor recommendations - potentially before the recommendations are distributed to investors, which, depending on how the regulations are drafted, could wind up impeding proxy advisors' ability to distribute recommendations at all. Glass Lewis recently began a pilot program to circulate companies' rebuttals to Glass Lewis's analyses; Glass Lewis says this is not about staving off regulation, which. Sure, let's go with that.
But the real topic of the speech was ESG investing, which she likened to a scarlet letter used to shame companies based on dubious metrics with little connection to financial value. As she put it:
It is true that ESG issues may well be relevant to a company’s long-term financial value. At a recent hearing before the Senate Banking Committee, John Streur of Calvert Research and Management testified that it is a “misconception” that using ESG investment strategies results in the investor sacrificing returns. In fact, he said, research has found that “firms in the top quintile of performance on financially material ESG issues significantly outperformed those in the bottom quintile.” Why, then, must the word “ESG” must be used at all? Of course, firms in the top quintile of performance on financially material issues outperform those on the bottom. If ESG disclosures mean disclosing what is financially material, there is little controversy, but the ESG tent seems to house a shifting set of trendy issues of the day...
There is, for example, a growing group of self-identified ESG experts that produce ESG ratings. ESG scorers come in many varieties, but it is a lucrative business for the successful ones. The business is a good one because the nature of ESG is so amorphous and the demand for metrics is so strong. ESG is broad enough to mean just about anything to anyone. The ambiguity and breadth of ESG allows ESG experts great latitude to impose their own judgments, which may be rooted in nothing at all other than their own preferences. Not surprisingly then, there are many different scorecards and standards out there, each of which embodies the maker’s judgments about any issues it chooses to classify as ESG. The analysis can appear arbitrary as it may treat similarly situated companies differently and may even treat the same company differently over time for no clear reason. Putting aside the analysis that produces the final score, some ESG scores are grounded in inaccurate information....
Even if the rating is not wrong on its own terms, the different ratings available can vary so widely, and provide such bizarre results that it is difficult to see how they can effectively guide investment decisions....
People are free to invest their money as they wish, but they can only do so if the peddlers of ESG products and philosophies are honest about the limitations of those products. The collection of issues that gets dropped into the ESG bucket is diverse, but many of them simply cannot be reduced to a single, standardizable score. ... We ought to be wary of shrill cries from a crowd of self-appointed, self-righteous authorities, even when all they are crying for is a label.
Now, I completely agree that often the call for ESG investing conflates the idea of investing based on moral/ethical considerations, and the idea of investing based on nonfinancial metrics which have a moral cast but are in fact part of financial analysis. And I agree that there is a proliferation of untested, vague standards, as well as a wide variety of funds that market themselves as "ESG" without being anything of the sort.
Which probably explains why Cynthia Williams and Jill Fisch petitioned the SEC for formal rulemaking on the disclosure of ESG information. It also explains why the SEC's Investor Advisory Committee asked the SEC to consider modernizing the framework for reporting on human capital management. So, maybe if there's a demonstrated investor demand for reliable, consistent, comparable information about public companies, there's something the SEC could do to help them out besides warning them to "be wary"?
Saturday, June 15, 2019
It’s no secret that Tesla has weathered some … ahem … criticism of its governance structure, and in particular, the (lack of) board supervision over Elon Musk. After Musk’s antics landed him in trouble with the SEC, the company proposed two charter amendments that would make the board more responsive to shareholders: first, to amend the charter so that future charter amendments will require only majority rather than 2/3 vote of the outstanding stock, and second, to amend the charter to reduce director terms from 3 years to 2.
Management sponsored proposals – especially those that hand more power to shareholders – are usually kind of a done deal. But this week, Tesla announced that even though the vast majority of voting shareholders favored the proposals, the proposals had failed to pass. Now, to be sure, the proposals needed a 2/3 vote of the outstanding stock – that was, after all, one of the things sought to be amended! – but it was still a bit of a surprise to see that the threshold hadn’t been met, given the amendments’ popularity.
I know that I wasn’t the only one who suspected some kind of Musk-related shenanigans, like perhaps Musk got cold feet about relinquishing power at the last minute, and withheld votes on his approximately 21% stake. The Wall Street Journal article reporting on the vote pointedly highlighted Musk’s ability to block changes he disliked. Plus, when it was originally posted online, the article reported that a spokeswoman for Tesla did not answer a question about how Musk voted, though later the article was revised to say that the company claimed Musk did not withhold his votes.
But still, I was suspicious about how exactly the proposals managed to fail, so I tried to do some back of the envelope calculations once Tesla filed its 8-K disclosing the tally.
And here’s what I figure. First, based on proxy disclosures and the 8-K, about 80% of the total voting shares made some kind of appearance at the meeting (in many cases, via broker non-votes). That compares to about 83% last year, when there were about 4 million fewer shares eligible to vote.
Second, broker non-votes this year exceeded last year’s tally by 11 million – but even if all of those shares had voted in favor of the proposals, it wouldn’t have been enough to change the outcome given the 20% of shares that never made an appearance.
Why so many non-votes/nonappearances as compared to last year? Well, I’m not sure if this means anything, but it also seems there was a lot higher volume of trading after the record date this year as compared to last year. Now, Tesla sold 3 million new shares in early May, so I only looked at the first two weeks after the record date of 2018 as compared to 2019, but it seems there was double the amount of trading in 2019. So, if I’m thinking about this correctly – and someone please feel free to weigh in if I’m getting this wrong, and disclaimer: I did not actually do a statistical analysis so I might be overstating the differences, but – it seems (1) the disparity in trading is not surprising given Tesla’s scandals this year and (2) the increased volume could potentially mean that otherwise-eligible voters sold their shares after the record date; so they didn’t bother to vote, and the new buyers weren’t able to do so.
So it’s definitely possible that all of this is just what it looks like: Tesla’s charter requires a high threshold to amend and the vagaries of public company voting made that threshold difficult to meet, even if most voting shareholders would prefer the amendment. But what we we don’t have is rock solid certainty that there wasn’t some kind of last-minute management change-of-heart.
And that takes me back to my post last year about the need for disclosure of how insiders vote (holders of high vote shares, high ranking officers, directors). We don’t have that now; absent actual class voting, the votes are just disclosed as an undifferentiated block. Which is what sent me on my bout of amateur sleuthing.
Now, not every company is Tesla and most of the time you can probably look at the vote total and, using other disclosures, figure out how insiders voted relative to other shareholders. But my point is, I shouldn’t have to open my creaky copy of Excel and consult multiple SEC filings to suss this information out. A clear statement, and separate totals, matter. They matter in terms of how the public understands the vote – reporting like this is downright misleading – and I think they probably matter in terms of how (some) shareholders understand their votes. Voting isn’t like efficient markets; whether or not information is “priced in,” actual votes have to be cast with knowledge in mind. Voters either understand the dynamics, or they don’t, and not everyone is going to do the math. Shareholders should be able to clearly understand the impact of their votes before and after the ballots are cast. Plus, I believe for certain kinds of close votes, insiders will be sensitive to how their ballots will be reported publicly, and that will affect their behavior.
Bottom line: Insider votes (and votes cast by high vote shares) should be broken out and reported separately.
Tuesday, June 4, 2019
New papers: On shareholder primacy, controlling shareholders, and mootness fees (they're different papers)
Several months ago, I posted about a symposium I attended at Case Western Reserve Law School titled Fiduciary Duty, Corporate Goals, and Shareholder Activism. The Case Western Reserve Law Review will be publishing a volume of papers from the symposium, and my contribution, What We Talk About When We Talk About Shareholder Primacy, is now available on SSRN. The essay (well, they're calling it an article but I think of it more as an essay) is about how shareholder primacy can be defined either as a wealth maximization norm or as obedience to shareholders, and what that means for corporate organization and theory.
In April, I attended the Corporate Accountability symposium sponsored by the Institute for Law & Economic Policy and the Vanderbilt Law Review. The Vanderbilt Law Review will be publishing those papers, and my contribution, After Corwin: Down the Controlling Shareholder Rabbit Hole, is now available on SSRN. The essay addresses the inconsistencies in how Delaware treats controlling shareholder transactions, and the new pressure that Corwin, as well as changes to corporate financing, have placed on the definition of what a controlling shareholder is.
(Regular readers of this blog will note that both of these essays draw heavily from my posts here. Waste not, want not.)
Finally, I previously posted about a panel on securities litigation that I attended at George Mason. At that time, I mentioned that my remarks drew from research that Matthew Cain, Steven Davidoff Solomon, Jill Fisch, and Randall Thomas presented at the April ILEP conference, and I promised to link to their paper when it was finally made public. Well, that paper, Mootness Fees (also forthcoming in Vanderbilt's ILEP symposium volume), is now available on SSRN (so hot off the presses that as of this posting, it's still in SSRN jail). It's an empirical examination of mootness fees paid out in the wake of Delaware's crackdown on merger litigation.
Saturday, June 1, 2019
Jeremy McClane at Illinois recently posted to SSRN a truly fascinating study of boilerplate in IPO prospectuses (okay, I gather it may have been out for a while but it was only posted to SSRN recently and that’s how I learn anything these days). In Boilerplate and the Impact of Disclosure in Securities Dealmaking, he concludes that while the inclusion of “boilerplate” – namely, generic disclosures that copy from similar deals – contributes to lower legal fees (though not lower underwriter and audit fees), it ultimately costs firms in terms of greater IPO underpricing and greater litigation risk. (It should be noted that he does not analyze litigation outcomes - compare to the risk factor paper, described below). Boilerplate is also associated with greater divergence in analyst opinion, and greater (upward) price revision in the pre-IPO period. All of this, he concludes, demonstrates that boilerplate contributes to greater information asymmetry.
In a previous post, I described a working paper, Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language, that examines boilerplate in SEC risk factors. The authors of that study concluded that – perversely – boilerplate is rewarded by judges in litigation and, crucially, by the SEC, where it is associated with fewer comment letters.
McClaine’s findings are in a similar vein. Despite the SEC’s (purported) efforts to stamp out boilerplate, he discovers that excess levels of boilerplate are not associated with more pre-offering prospectus amendments or with more SEC commentary. (Caveat: His study period includes post-JOBS Act filings but I’m not entirely clear how he treats draft registration statements for the purposes of this analysis).
A final note: McClane speculates on how boilerplate could impact investor assessments, given the common expectation that few investors actually, you know, read SEC filings to begin with. He points out that professional investors and analysts do the reading, and their determinations may ultimately drive pricing. He also notes that lawyers and underwriters draft IPO disclosures and that process may prompt them to ask questions, which ultimately generates more information. I’d add to the mix that these days, computers do a lot of the reading (especially once trading begins), which raises the possibility that subtle variations are more detectable than they were in days’ past. I’d love to see more analysis along these lines that divide filings by time period.
Saturday, May 25, 2019
A couple of weeks ago, I was lucky to participate in a panel on securities litigation at George Mason University Antonin Scalia Law School, along with Professor J.W. Verret, Jonathan Richman of Proskauer Rose, Steven Toll of Cohen Milstein, moderated by Judge Michelle Childs of the District of South Carolina. We had a lively discussion about current issues concerning these actions, including what I guess is now being branded as “event-driven” litigation, definitions of materiality, and arbitration clauses in charters and bylaws.
In my opening remarks, I discussed merger litigation and the shift from state to federal courts, covering much of the territory I previously described on this blog (of course, since that post, the Supreme Court dismissed the Emulex case as improvidently granted). I also drew from research by Matthew Cain, Steven Davidoff Solomon, Jill Fisch, and Randall Thomas, presented in April at the ILEP symposium on corporate accountability. (Their research is not yet public but I will link here as soon as it becomes available).
In the meantime, if you’re interested, you can watch a video of the panel here:
The other panels from the symposium are also available for viewing at this link.
Saturday, May 18, 2019
In 2014, the Supreme Court decided Burwell v. Hobby Lobby Stores, where it held that it is possible for a for-profit corporation to have a religious identity, derived from the religious commitments of “the humans who own and control those companies.” In so holding, the Court relied in part on state laws that permit even for-profit corporations to pursue purposes beyond stockholder wealth maximization. As the Court put it:
Not all corporations that decline to organize as nonprofits do so in order to maximize profit. For example, organizations with religious and charitable aims might organize as for-profit corporations because of the potential advantages of that corporate form, such as the freedom to participate in lobbying for legislation or campaigning for political candidates who promote their religious or charitable goals. In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.
In any event, the objectives that may properly be pursued by the companies in these cases are governed by the laws of the States in which they were incorporated—Pennsylvania and Oklahoma—and the laws of those States permit for-profit corporations to pursue “any lawful purpose” or “act,” including the pursuit of profit in conformity with the owners’ religious principles.
So it was a bit of an eyebrow-raiser to read this April Executive Order in which Trump declares:
The majority of financing in the United States is conducted through its capital markets. The United States capital markets are the deepest and most liquid in the world. They benefit from decades of sound regulation grounded in disclosure of information that, under an objective standard, is material to investors and owners seeking to make sound investment decisions or to understand current and projected business. As the Supreme Court held in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), information is “material” if “there is a substantial likelihood that a reasonable shareholder would consider it important.” Furthermore, the United States capital markets have thrived under the principle that companies owe a fiduciary duty to their shareholders to strive to maximize shareholder return, consistent with the long-term growth of a company.
As readers of this blog are likely aware, academics love to argue over whether existing law requires that corporations be run solely to maximize stockholder wealth, and of course over whether such law – if it exists – is a good idea or a bad idea. See generally Joan MacLeod Heminway, Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents, 74 Wash. & Lee L. Rev. 939 (2017). Usually, however, these battles occur in the context of state law. And while federal law – securities regulation, and so forth – often implies a corporate purpose of wealth maximization, I have to admit, I don’t recall seeing so blatant a statement about it before.
In any event, this section of the Executive Order directs the Department of Labor to review its existing guidance re: ERISA plans’ involvement in ESG matters. It’s a follow-up to last year’s Labor Department release – which I blogged about here – warning that ERISA plans may violate their duties to plan beneficiaries if they engage on ESG matters, or vote for ESG-related proxy proposals, for reasons other than plan wealth maximization.
As I’ve previously discussed, the SEC is currently reviewing rules governing the proxy process – including the role of proxy advisory services – to determine if additional regulation is needed. Much of this fight is, of course, about shareholder involvement in ESG matters and corporate governance more generally. I assume from this latest Executive Order that we’re about to see something of a two-pronged effort to limit shareholder power, with new guidance and/or regulations issuing from the SEC on one side and the Labor Department on the other. Anyone’s guess how successful this effort is likely to be, but I will highlight Andrew Tuch’s recent article, Why Do Proxy Advisors Wield So Much Influence? Insights From U.S.-U.K. Comparative Analysis, B.U. L. Rev. (forthcoming), pointing out that proxy advisory services have far less influence in the UK than in the United States, which he attributes to the fact that US shareholders have less power, and have reached less consensus on best practices in corporate governance, than shareholders in the UK. He concludes that many of the attempts to limit shareholder power – and the power of proxy advisors – in the US will not only be ineffective, but will actually strengthen proxy advisors’ hand.
Saturday, May 11, 2019
Vanguard recently announced that it will no longer centralize proxy voting across all of its funds; instead, its externally managed funds will set their own proxy voting policies. Although these represent only around 9% of Vanguard’s assets under management, they include almost all of Vanguard’s actively managed funds and actively managed equity assets.
I haven’t really seen much explanation for the shift from Vanguard itself – its own statement on the matter is quite vague – but I suspect they may have made the change for the same reason that Fidelity separates active and passive voting authority, namely, to avoid having the active funds grouped with the passive for the purposes of Section 13(d) of the Securities Exchange Act. Fidelity’s policy is longstanding because historically, it specializes in active funds. Vanguard, by contrast, is nearly synonymous with index funds, so my guess is that it reached a point where the active assets under management were becoming a regulatory risk, especially if those funds wanted to take positions with a view toward influencing – or supporting those who influence – management. As John Morley points out, Section 13(d) limits the ability of large fund providers to take activist stances; Vanguard, I think, just opened that door a crack. (If anyone else has more info on this or a different theory, please drop a comment or otherwise let me know.)
That said, I think this is a good move. I’ve long argued that mutual funds’ practice of centralizing their voting behavior is problematic both from the perspective of fund governance and from the perspective of corporate governance. On the fund governance side, vote centralization may fail to reflect the distinct interests of individual funds. On the corporate governance side, a diversified portfolio of funds may influence managerial decisionmaking in ways that conflict with the interests of less diversified shareholders. Given the concerns these days that mutual fund companies exercise too much power over corporate behavior, decentralizing voting authority seems like the most obvious - and appropriate - solution.