Business Law Prof Blog

Fiduciary Duties Trump Contracts?!

Many in the business law world have been following the saga involving the adoption of  S.B. 313 by Delaware's General Assembly last week.  S.B. 313 adds a new § 122(18) to the General Corporation Law of the State of Delaware (DGCL) that broadly authorizes corporations to enter into free-standing stockholder agreements (not embodied in the corporation's charter) that restrict or eliminate the management authority of the corporation's board of directors.  See my blog posts here and here and others cited in them, as well as Ann's post here.

In the floor debate on S.B. 313 last Thursday in the Delaware State House of Representatives, a proponent of the legislation stated that fiduciary duties always trump contracts.  That statement deserves some inspection in a number of respects.  I offer a few simple reflections here from one, limited perspective.

The historical centrality of corporate director fiduciary duties (which were the fiduciary duties referenced on the House floor) is undeniable.  Those who have taken business associations or an advanced business course with me over the years know well that I emphasize in board decision making that the directors’ actions must be both lawful and consistent with their fiduciary duties in order to be legally valid and enforceable.  I doubt my teaching is exceptional in that regard.

But the floor debate involved a different kind of tangle between legal obligations and fiduciary duties than exists in the board decision-making context in which corporate action is written on a tabula rasa.  The comment made in last Thursday’s legislative session responded to the suggestion that a board of directors may later decide to breach a contract that is lawful and was approved by the board in a manner that is consistent with director fiduciary duty compliance.  That scenario involves board action to disregard the terms of an agreement—by authorizing and directing the corporation to breach a legal obligation of the corporation because the directors have, in good faith and with due care, determined that the breach of contract is in the best interest of the corporation.

This type of board action is certainly not unprecedented.  An example from my practice immediately springs to mind: no-shop, non-solicitation, and related clauses in business combination (M&A) agreements.  These provisions may be (or at least appear to be) lawful and compliant with director fiduciary duties when made but may interfere with a target board’s fiduciary duties if the board later determines it has a fiduciary obligation to engage in interactions with a potential transactional partner in violation of that type of deal protection provision. 

The resolution of this issue in the M&A context has largely been contractual.  Fiduciary outs of various kinds have been common in M&A agreements for decades.  (I gave my first CLE talk on them back in the 1980s.)  Through these provisions, directors consider and prepare in advance for the potentiality of a later conflict between the deal protection obligations of the corporation and their fiduciary duties to the corporation.  Properly drafted, fiduciary outs help  protect the legal validity and enforceability of the original contract from future challenge and preserve the board’s legal right to respond to new circumstances without breaching the contract.

As those who work in this space well know, a watershed case involving deal protection provisions is Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003). In its Omnicare opinion, the Delaware Supreme Court assesses the validity of a merger agreement that effectively locked up a majority of the votes needed to approve the merger.  The merger agreement did not include a fiduciary out provision. The directors had no ability to terminate the merger agreement or nullify its terms to comply with their fiduciary duties without breaching the contract.  The court found the deal protections invalid and unenforceable.

Proponents of S.B. 313 clearly state that a corporation's exercise of its authority to enter into stockholder agreements under § 122(18) will be subject to challenge if the directors breach their fiduciary duties to the corporation in approving a stockholder agreement or in later authorizing the corporation's performance under that agreement.  If the corporation's directors are found to be in breach, the stockholder agreement then may be found invalid or unenforceable.  The prospect of that occurring in the stockholder agreement context is as real as it is in the M&A deal protection context.

Perhaps, then, fiduciary outs are a best practice that should grow out of the new DGCL § 122(18).  If the parties truly intend for fiduciary duties to trump the contract (as the bill proponents have claimed) and we can anticipate challenges in that regard based on the nature of the agreement, stockholder agreements should provide in advance for the eventuality of a conflict.  Otherwise, a stockholder agreement authorized under DGCL § 122(18) may be found either invalid ex post because the board’s original approval of the agreement may later be determined to have been a breach of the directors’ fiduciary duties (for failure to include a fiduciary out, as in Omnicare) or unenforceable in litigation over a board decision to breach or refrain from breaching the agreement in the face of a perceived fiduciary duty conundrum related to the corporation’s performance under the terms of the agreement.  A well-crafted fiduciary out (which would undoubtedly be somewhat bespoke, as it should be in the M&A context, based on the nature of the corporation’s obligations in the contract) should help avoid litigation, or at least enable its early dismissal, in the event of either type of legal claim.

Your reactions to these musings are, as always, welcomed.  We will be operating in new territory here assuming the Governor of Delaware signs S.B. 313 into law (as he has signaled).  If I am missing an element of statutory or decisional law or strategic litigation practice that impacts my arguments, I would appreciate hearing about it.  Regardless, it is now time that we all think about how to address anticipated issues arising from the Pandora’s box that the Delaware General Assembly has opened.  That may include practice-oriented solutions to perceived legal questions or tensions as well as potential further adjustments to the DGCL.  As to the latter, I note that I raised in one of my earlier posts the desirability of looking at DGCL subchapter XIV in light of the provisions of DGCL § 122(18).  Perhaps that issue merits a subsequent post . . . .

Thoughtful CTA Guidance

The Corporate Transparency Act is among the most talked about business law topics in the bar communities I frequent. Basic information and guidance can be found in many places, but nuanced treatments are more rare. I offer one of those rare ones up for your review and consideration today.

Entitled The Corporate Transparency Act Is Happening To You and Your Clients: Dealing with the Tsunami, the analysis and guidance comes from Stoll Keenon Ogden PLLC.  More specifically, one of the two co-authors is friend-of-the-BLPB Tom Rutledge.  His work never disappoints.  I urge you to check it out--all 58 pages of it!  There is even a short resource list at the end with links to some of the key public guidance.  I am grateful for Tom and his colleague, Allison, for putting this together.

I Also Write Letters!

Further to Ann's post on Sunday sharing the text of her comment letter on Delaware's S.B. 313 (and more particularly the proposal to add a new § 122(18) to the General Corporation Law) and my post on § 122(18) last week, I share below the text of my comment letter to the Delaware State House of Representatives Judiciary Committee.  Although Ann and I each got one minute to deliver oral remarks at the hearing held by the Judiciary Committee on Tuesday, 60 seconds was insufficient to convey my overarching concerns--which represent a synthesis and characterization of selected points from my post last week.  The comment letter shared below includes the prepared remarks I would have conveyed had I been afforded additional time.

Madame Chair and Committee Members:

I appreciated the opportunity to speak briefly at today’s hearing. As I explained earlier today, although I am a professor in the business law program at The University of Tennessee College of Law, my appearance before the committee relates more to my nearly 39 years as a corporate finance practitioner, which has included bar work (most recently and extensively in the State of Tennessee) proposing and evaluating corporate and other business entity legislation. This letter expands on the virtual oral comments I offered at the hearing on the proposed addition of § 122(18) to the General Corporation Law of the State of Delaware (DGCL). My goal is simply to best ensure that the committee and the General Assembly are well informed about the significance of this proposed new section of the DGCL.

Both proponents and critics of proposed § 122(18) concur that the stockholder agreements that would be authorized by that provision can currently be accomplished in a corporation’s certificate of incorporation—the corporate charter. Indeed, as was alluded to in the testimony earlier today, current Delaware law expressly authorizes transferring governance authority from a corporation’s board of directors to its stockholders through charter amendments and through certificates of designation (instruments providing for new classes or series of stock) as well as for statutory close corporations, a status designated in the certificate of incorporation. As a result, questions raised at today’s hearing about why the new authority embodied in proposed DGCL § 122(18) is needed—or why it would be objectionable—are well taken. As I indicated in my oral testimony earlier today, the answer to those questions lies in public policy.

Current Delaware law on stockholder agreements promotes notice, transparency, and assent. Provisions in a Delaware corporation’s certificate of incorporation are matters of public record in the State of Delaware on which stockholders and prospective stockholders rely. They must be filed with the Delaware Secretary of State. Thus, Delaware’s corporate law currently requires that stockholders and potential future stockholders have public notice of any fundamental alteration in the statutory power of the board of directors to manage the corporation. Stockholder agreements like those authorized under proposed DGCL § 122(18) are not required to be filed with the state (although they would have to be filed with the U.S. Securities and Exchange Commission under the federal securities laws at some point after they are signed, for public companies). Moreover, under current Delaware law, if an amendment to the certificate of incorporation is required to achieve a shift in governance authority from the board of directors, then a stockholder vote is required. These requirements, which evidence Delaware’s public policies of notice, transparency, and assent, are what ultimately divide the supporters and detractors of proposed DGCL § 122(18). Your ultimate views on these policies—your determination as to whether they are important to the integrity of Delaware corporate law—should be strong factors in your determination of how to vote on proposed DGCL § 122(18). I submit that these policies should not be abandoned or reduced without careful consideration.

Last week, I wrote about my policy concerns relating to proposed DGCL § 122(18) in a blog post published on the Business Law Prof Blog. That post can be found here. Although my blog post was written for a different and broader legal audience (and therefore includes some technical legal references), it may be useful to you as additional statutory and judicial support for the positions I have taken in this letter and in my oral testimony. The post also includes several drafting observations relevant to the productive introduction of statutory authority for stockholder agreements that you may appreciate having.

I am grateful to have had the opportunity to share these insights with you today in writing and orally during the hearing this afternoon. I wish you well in your deliberations.

Very truly yours,

Joan M Heminway
Rick Rose Distinguished Professor of Law, The University of Tennessee College of Law
Member and Former Chair, Tennessee Bar Association Business Law Section
Former Chair and Member, Boston Bar Association Corporate Law Committee

The Delaware State House of Representatives may vote on the bill tomorrow (Thursday) afternoon.  It is the last item listed in the Main House Agenda for tomorrow's session.  I can only hope that the members of the House feel better informed after the House Judiciary Committee hearing on Tuesday.  I know many of us tried to ensure that they are well informed.

Moelis, § 122(18), and DGCL Subchapter XIV - Knowing Legislative Policy Shift?!

Like so many others, I have wanted to say a word about West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024).  My angle is a bit different from that of many others.  It derives from my 15-year practice background, my 24-year law teaching background, and my 39-year bar service background.  It focuses on a doctrinal analysis undertaken through a policy lens.  But I want to note here the value of Ann Lipton’s existing posts on Moelis and the related proposed addition of a new § 122(18) to the General Corporation Law of the State of Delaware (DGCL).  Her posts can be found here, here, here, and here.  (Sorry if I missed one, Ann!)  Ben Edwards also published a related post here.  They (and others offering commentary that I have read) raise and touch on some of the matters I address here, but not with the same legislative policy focus.

I apologize at the outset for the length of this post.  As habitual readers know, long posts are “not my style” as a blogger.  This matter is one of relatively urgent legislative importance, however, and I am eager to get my thoughts out to folks here.

I begin by referencing the DGCL provision in the eye of the storm.  DGCL § 141(a) provides for management of the business and affairs of a Delaware corporation by or under the direction of the corporation’s board of directors, except as otherwise provided in the corporation’s certificate of incorporation or the DGCL.  In Moelis, Vice Chancellor Travis Laster found various provisions in a stockholder agreement unlawful under DGCL § 141(a).  Specifically, a series of governance-oriented contractual arrangements at issue in Moelis were not authorized under the corporation’s certificate of incorporation or another provision of the DGCL.

The tension in this space involving DGCL § 141(a) is not new.  For many years, the legal validity of so-called stockholder agreements—technically, agreements (as opposed to charter provisions) that shift governance power from the directors of a corporation to one or more of its stockholders—has been questionable for most Delaware corporations, including public companies.  (I say “many years” because the legal validity of these agreements was an issue I routinely wrestled with before I left the full-time private practice of law in 2000.) 

The DGCL is different from the Model Business Corporation Act (MBCA) in this regard.  The MBCA has long had a broad-based statutory provision, MBCA § 7.32, authorizing shareholder agreements under specified conditions.  States adopting the MBCA have made a (presumably) conscious choice to embrace shareholder governance under the circumstances provided in the MBCA, including through § 7.32.  The MBCA’s provision expressing the management authority of the corporation’s board of directors, MBCA § 8.01(b), expressly references MBCA § 7.32, providing that:

[e]xcept as may be provided in an agreement authorized under section 7.32, and subject to any limitation in the articles of incorporation permitted by section 2.02(b), all corporate powers shall be exercised by or under the authority of the board of directors, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of the board of directors.

There is no analogous provision in the DGCL.  The only way to be sure that one could accomplish a shift in governance power from directors to stockholders under the DGCL has been for a corporation either to include the governance provisions in its certificate of incorporation or to organize as a close corporation under Subchapter XIV.  Close corporation status requires charter-based notification and conformity to a number of statutory requirements set forth in DGCL §§ 341 & 342, including that the certificate of incorporation provide that the stock be represented by certificated shares “held of record by not more than a specified number of persons, not exceeding 30,” that the stock be subject to transfer restrictions, and that there not be a “public offering” of the stock. DGCL § 342(a)(1)-(3).  Thus, by legislative design, statutory close corporation status is not available to publicly held corporations organized under Delaware law (which makes total sense for those who understand what a closely held corporation is, in a general sense).

Members of the Delaware State Bar Association (DSBA) Corporation Law Section know all of this well.  As leaders in reviewing and proposing changes to the DGCL over the years, this group of folks has thoughtfully weighed policy considerations relating to the DGCL’s application to the myriad situations that Delaware corporations may face.  Without having researched or inquired about the matter, I find it hard to believe that the section has not previously discussed the desirability of an express statutory provision allowing for the approval and execution of stockholder agreements outside a corporation’s certificate of incorporation.  The matter has been addressed by the Executive Council of the Tennessee Bar Association’s Business Law Section, which engages in similar legislative initiatives in Tennessee, more than once during the time I have been serving on it.  I therefore assume that the choice to refrain from proposing a specific statute authorizing stockholder agreements outside a corporation’s certificate of incorporation over the years has been both informed and intentional.

Yet, earlier today, Senate Bill 313 passed in the Senate Chamber of the Delaware General Assembly.  In that bill, vetted and approved by the DSBA Corporation Law Section and blessed by the DSBA Executive Committee, the longstanding policy decision to refrain from allowing stockholder agreements outside of the certificate of incorporation or Subchapter XIV is being summarily reversed through the proposal to adopt a new DGCL § 122(18)—an alteration of the corporate powers provision of the DGCL.  That new proposed DGCL section provides a corporation with the power to enter into stockholder agreements within certain bounds, but those bounds are relatively broad.

As others have noted (at least in part), the drafting of the proposed DGCL § 122(18) (and the related additional changes to DGCL § 122) reflects a belt-and-suspenders approach and is otherwise awkward.  Multiple sentences are crammed into this one new subpart of DGCL §122 to effectuate the drafters’ aims.  The DGCL has been criticized for its complex drafting in the past (resulting in, among other things, a project creating a simplified DGCL), and the approach taken by the drafters of the proposed DGCL § 122 changes adds to the complexity of the statute in unnecessary ways.  A provision this significant should be addressed in a separate statutory section, the approach taken in MBCA §7.32.  That new section then can be cross-referenced in DGCL § 141(b)—and, if deemed necessary, DGCL § 122.  Breaking out the provision in its own section also should allow legislators to more easily and coherently identify strengths and weaknesses in the drafting and build in or remove any constraints on stockholder governance that they may deem necessary as the proposed provision gets continued attention in the Delaware State House of Representatives.  I offer that as a drafting suggestion.

Apart from the inelegance of the drafting, however, I have one large and important question as Senate Bill 313 continues to move through the Delaware legislative process: do members of the Delaware General Assembly voting on this bill fully understand the large shift in public policy represented by the introduction of DGCL § 122(18)?  If so, then they act on an informed basis and live with the consequences, as they do with any legislation they pass that is signed into law.  If not, we all must work harder to enable that understanding. 

It is all fine and good for us to point out how hasty the drafting process has been, how traditional debate and procedures may have been short-changed or subverted, how waiting for the Delaware Supreme Court to act on the appeal of the Chancery Court decision before proceeding is prudent, etc.  But the fact of the matter has been that potential and actual stockholders of Delaware corporations have been able to rely exclusively on charter-based exceptions to the management authority of the board of directors—whether those exception are authorized in Subchapter XIV of the DGCL or otherwise.  This has meant that prospective equity investors in a Delaware corporation knew to carefully consider a corporation’s certificate of incorporation to identify any pre-existing constraints on the management authority of the board of directors before investing.  This also has meant that any new constraints on the board of directors’ authority to manage the corporation’s business and affairs required a charter amendment of some kind—either a board-approved and stockholder-approved amendment of the certificate of incorporation or the board’s approval of a certificate of designations under charter-based authority of which existing stockholders should be aware.

Ann noted this issue in a previous post.  The enactment of proposed DGCL § 122(18) will make it more challenging for potential equity investors to identify the locus/loci of management power in the corporation.  Although both the certificate of incorporation and any stockholder agreement would be required to be filed with the U.S. Securities and Exchange Commission for reporting companies (the latter as an instrument defining the right of security holders under paragraph (b)(4) or as a material contract (b)(10) of Regulation S-K Item 601), the current draft of proposed DGCL § 122(18) does not provide that a copy of any contract authorized under its provisions be filed with the Delaware Secretary of State or that its existence be noted on stock certificates (a requirement included in MBCA §7.32(c)).  In addition, stockholders will lose their franchise if the stockholder agreement would otherwise have required a stockholder vote.

Finally, it seems important to note that the judicial doctrine or independent legal significance—or equal dignity—has been strong in Delaware over the years as a factor in the interpretation of Delaware corporate law.  This has helped practitioners and the judiciary to navigate difficult issues in advising clients about the outcomes of Delaware corporate law debates.  The rule typically has been that, if one takes a path afforded by the statute, they get what the statute provides.  And if one does not take a provided statutory path, they cannot later be heard to argue for what the statute provides for users of that untaken statutory path. 

Classically, in dicta in Nixon v. Blackwell, 626 A.2d 1366 (1993), Chief Justice Veasey wrote (on pp. 1380-81) about the importance of DGCL Subchapter XIV in construing corporate governance arrangements in light of the doctrine of independent legal significance:

 . . . the provisions of Subchapter XIV relating to close corporations and other statutory schemes preempt the field in their respective areas. It would run counter to the spirit of the doctrine of independent legal significance and would be inappropriate judicial legislation for this Court to fashion a special judicially-created rule for minority investors when the entity does not fall within those statutes, or when there are no negotiated special provisions in the certificate of incorporation, by-laws, or stockholder agreements.

With the passage of proposed DGCL § 122(18), parts of Subchapter XIV of the DGCL will seemingly be rendered vestigial (i.e., they will no longer have independent legal significance).  Consideration of this and any other potential collateral damage to the interpretation of Delaware corporate law that may be created by the enactment of proposed DGCL § 122(18) should be carefully undertaken and, as desired, additional changes to the DGCL should be debated before voting on Senate Bill 313 is undertaken in the Delaware State House of Representatives.

I do not argue for a specific result in this post.  Rather, I mean to illuminate further the significance of the decision facing the Delaware General Assembly (and, potentially, the decision of the Governor of the State of Delaware) in the review of proposed DGCL § 122(18).  In doing so, I admit to some sympathy for those who may have clients with stockholder agreements they now know or suspect to be unlawful under the Moelis opinion.  In all candor, any legislation on this topic should more directly address those existing agreements given that the provisions of proposed DGCL § 122(18) are not a mere clarification of existing law.  Agreements not re-adopted under any new legislative authority may be found unlawful in the absence of clarity on this point.  As a reference point, I note that, in amending MBCA § 7.32 to remove a previous 10-year duration limit, the drafters specified the effect on pre-existing agreements in MBCA § 7.32(h).  Take that as another drafting suggestion . . . .

I welcome comments on any or all of what I offer here.  If I have anything incorrect, please correct me.  Regardless, I hope this post provides some additional information to those in the Delaware General Assembly and elsewhere who have an interest in proposed DGCL § 122(18).

What is Equity, Anyway?

I just came back on Sunday from the 2024 Law and Society Association Annual Meeting in Denver.  It was, as always, a stimulating few days.  A number of us business law profs were in attendance.  The corporate and securities law collaborative research network (CRN46) habitually organizes several programs.  This year was no exception.  I was privileged to be featured in two.  But I will say more on my participation in the conference later.

Today, I want to highlight an interesting piece that was presented at the conference during one of the CRN46 paper panels: "The Original Meaning of Equity " by Asaf Raz (forthcoming in the Washington University Law Review).  The SSRN abstract follows:

Equity is seeing a new wave of attention in scholarship and practice. Yet, as this Article argues, our current understanding of equity is divided between two distinct meanings: on one side, the federal courts, guided by the Supreme Court, tend to discuss equity as the precise set of remedies known at a fixed point in the past (static equity). On the other, state courts—most prominently, in Delaware—administer equity to preserve the correct operation of law in unforeseeable situations (substantive equity). Only the latter interpretation complies with the historical and functional idea of equity.

This Article makes the first detailed argument for resolving the problem of static equity, and reinvigorating substantive equity in the federal judiciary and the broader legal community. To do so, this Article takes a highly innovative step, by connecting the federal discussion with an in-depth analysis of the legal scene where equity is employed most systematically (and most faithfully to its historical roots): Delaware law, including its corporate law. As this Article demonstrates, substantive equity is fully compatible with originalism and textualism; the "equity" mentioned in the Constitution and later federal texts is substantive, not static, equity. Federal law has always operated within the sphere of the common law, and this Article offers a new bridge between the two, exposing the members of each community to insights from the other, in a manner that promotes both the original understanding of the legal text, justice, and the rule of law.

Asaf's presentation of the piece at the conference generated several questions and an interesting extended discussion.  The term "equity" has many meanings in law that we must be conversant with in our work.  We also need to help students define "equity" in context and sort out its varied meanings as they learn about law in its multifarious manifestations.  These factors alone make the article a valuable read.  However, more centrally, I applaud Asaf for taking on the task of adding some clarity to the term and on connecting his research to both federal (including constitutional) and Delaware law in novel ways.  I look forward to spending more time with this piece.  And I know Asaf welcomes your comments!

Artificial Intelligence and Memorial Day

Over the years, I have written a number of blog posts here on Memorial Day that honor those who sacrificed their lives for us through national military service.  You can find the last few here, here, and here.  When practicable, I work in something about business law in those posts.

This year, as I contemplated what to write, I also was mired in grading and other teaching-related work.  On my mind throughout was generative artificial intelligence, a hot topic in law school circles and throughout education (and, of course, elsewhere, too).  The full range of benefits and burdens of generative artificial intelligence still remain to be discovered.

I wondered what a generative artificial intelligence tool would draft up as a blog post for Memorial Day.  Then, I thought, why wonder?  Why not give it a whirl?  So, I asked Google Gemini to "[w]rite a short blog post that combines business law with Memorial Day."  Set forth below is what I got back.

Honoring Heroes, Respecting Rights: Business Law and Memorial Day

Memorial Day is a time to remember the brave men and women who died serving our country. But for businesses, it also presents some legal considerations. Here's a quick look at how business law intersects with this solemn holiday.

• • Employee Rights: Federal law doesn't mandate paid time off for Memorial Day. However, some states have their own laws, and many companies offer paid holidays as part of employee contracts. Businesses must ensure they're following all applicable laws and agreements regarding employee pay and scheduling for the holiday.

  • Business Closings: If your business plans to close for Memorial Day, it's crucial to communicate this clearly to employees and customers well in advance. This helps avoid confusion and ensures smooth operations upon reopening.

  • Sales and Promotions: While Memorial Day weekend often unofficially kicks off the summer shopping season, it's important to be mindful of the true meaning of the holiday. Avoid promotions or marketing that appears disrespectful to the somber occasion.

  • Community Engagement: Businesses can choose to honor veterans and fallen soldiers by participating in local Memorial Day events or supporting veterans' charities. This demonstrates respect for the holiday's purpose while fostering positive community relations.

By understanding these legal aspects, businesses can ensure a respectful and compliant approach to Memorial Day, allowing them to honor our heroes while adhering to the law.

Honestly, it's not too far off from some of what I have posted in the past.  I am not sure whether to be sad or happy about that.  But now I no longer have to wonder . . . .

Regardless, I do want to continue to pay respect to those who have died in military service to our country.  May they rest in eternal peace knowing that their lives and work are remembered and appreciated on this Memorial Day and every Memorial Day.

Celebrating Law Leadership!

I have written in the past about the intersections of leadership and law, including business law.  See, for example,  here, here, here, here, and here.  And I was privileged to be the Interim Director, for over three years, of the institute for Professional Leadership at The University of Tennessee College of Law.  I find there is such a strong connection between leadership and business law teaching and practice . . . .

We are celebrating the tenth anniversary of the Institute for Professional Leadership this fall.  The celebration, which will take place on Thursday, October 24 and Friday, October 25, will include a gala dinner and a symposium featuring workshops, a call-for-papers panel, and a series of expert panels.  The "save the date" notice is included above.  I hope you will consider responding to the forthcoming call for proposals and papers.  But regardless, I hope you will consider attending. Feel free to reach out to me with any questions.

ESG Greenwashing

ESG greenwashing has been getting attention among legal academics.  In Rainbow-Washing, 15 Ne. U. L. Rev. 285 (2023), LMU Law's John Rice explores the

increasingly common, but destructive, practice in which corporations make public-facing statements espousing their support of the LGBTQIA+ community . . . to draw in and retain consumers, investors, employees, and public support, but then either fail to fulfill the promises implicit in those statements or act in contravention to them. 

My own forthcoming article in the University of Pennsylvania Journal of Business Law, presented at the November 2023 ILEP-Penn Carey Law symposium honoring Jill Fisch, mentions the increasing notoriety of ESG greenwashing and cites to John's article.

Last week, UVA Law Professor Naomi Cahn called out ESG greenwashing in Forbes, citing to a study to be published in the Journal of Accounting Research that finds "firms’ ESG rhetoric may not match their reality."  She suggests that "a meaningful analysis of a firm’s ESG commitment requires much further digging, and ultimately it requires meaningful oversight from outside the ESG community on what should be disclosed and the accuracy of the reports."  The article references a forthcoming book coauthored by Cahn, June Carbone (Minnesota Law) ,and Nancy Levit (UMKC Law) and quotes Minnesota Law Professor Claire Hill.  (Hat tip to Claire for leading me to this Forbes piece.)  It's a solidly good read.  I added a citation to it in my forthcoming article.

I suspect more will be done in this space academically and practically as ESG continues to occupy the minds of legal academics, lawyers, and business principals.  I will be continuing to work in this area, focusing next on corporate compliance issues.  Stay tuned for news on that project (and for a notification about the publication of my forthcoming University of Pennsylvania Journal of Business Law article referenced above).

2024 Corporate & Securities Litigation Workshop

Corporate & Securities Litigation Workshop: 

Call for Papers 

UCLA School of Law, in partnership with the University of Illinois College of Law, University of Richmond School of Law, and Vanderbilt Law School invites submissions for the Eleventh Annual Workshop for Corporate & Securities Litigation. This workshop will be held on September 20-21, 2024 in Los Angeles, California. 

Overview 

This annual workshop brings together scholars focused on corporate and securities litigation to present their scholarly works. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible, including securities class actions, fiduciary duty litigation, and SEC enforcement actions. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress at any stage. Authors whose papers are selected will be invited to present their work at a workshop hosted by UCLA School of Law. Participants will pay for their own travel, lodging, and other expenses. 

Submissions 

If you are interested in participating, please send the paper you would like to present, or an abstract of the paper, to [email protected] by Friday, June 7, 2024 Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified in early July. 

Questions 

Any questions concerning the workshop should be directed to the organizers: Jim Park ([email protected]), Jessica Erickson ([email protected]), Amanda Rose ([email protected]), and Verity Winship ([email protected]). 

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.

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.

 

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].  

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.

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.

Remembering Roberta Karmel

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

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

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

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

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

2024 National Business Law Scholars Conference - Extension of Submission Deadline

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

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

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

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

Submission Guidelines: 

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

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

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

Conference Organizers: 

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

Representing Elon Musk

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

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

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

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

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

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

Global Conversations in International Business Transactions

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

Corporate Transparency Act Held Unconstitutional

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

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

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

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

Status and Corporate Stakeholders

Check out High-Status Versus Low-Status Stakeholders, an intriguing paper authored by one of our business school brethren, Justin Pace.  In this work, Justin approaches an important, yet difficult, topic at the intersection of corporate governance and the class divide.  The SSRN abstract follows.

The literature on stakeholder theory has largely ignored the difficult and central issue of how judges and firms should resolve disputes among stakeholders. When the issue is addressed, focus has largely been on the potential for management to use stakeholder theory as cover for rent seeking or on disputes between classes of stakeholders. Sharply underappreciated is the potential for disparate interests within a stakeholder class.

That potential is particularly acute due to a (largely education-driven) stark and growing class divide in the United States. There is a substantial difference between the interests of a highly educated professional and managerial elite and a pink-collar and blue-collar working class who mostly do not hold four-year degrees. Despite their smaller numbers, the professional and managerial elite will frequently win out in intra-stakeholder disputes with working class stakeholders due to their greater status, power, and influence.

Because this class divide is cultural, social, and political as well as economic, these disputes will go beyond financial pie splitting to culture war issues. This threatens to be destabilizing for both the republic and individual firms and undermines both the practical and ethical arguments for the stakeholder theory.

I also have been engaged by the idea that no class of stakeholders is homogeneous.  Business law scholars certainly could do a lot more work fleshing our salient differences of interest among stakeholders of a single type (including shareholders).  I (along with many others) have been known to note that not all shareholders have the same interests, for example. 

I look forward to digging into Justin's article in more depth.  Based on my review so far, there are insights in it for many different business law scholars.  (Co-blogger John Anderson might enjoy his references to virtue theory, for example . . . .)  Anyway, give it a look.