Friday, May 5, 2023

Ten Questions Lawyers Should Ask Themselves about AI

A few months ago, I asked whether people in the tech industry were the most powerful people in the world. This is part II of that post.

I posed that question after speaking at a tech conference in Lisbon sponsored by Microsoft. They asked me to touch on business and human rights and I presented the day after the company announced a ten billion dollar investment in OpenAI, the creator of ChatGPT. Back then, we were amazed at what ChatGPT 3.5 could do. Members of the audience were excited and terrified- and these were tech people. 

And that was before the explosion of ChatGPT4. 

I've since made a similar presentation about AI, surveillance, social media companies to law students, engineering students, and business people. In the last few weeks, over 10,000 people including Elon Musk, have called for a 6-month pause in AI training systems. If you don't trust Musk's judgment (and the other scientists and futurists), trust the "Godfather of AI," who recently quit Google so he could speak out on the dangers, even though Google has put out its own whitepaper on AI development. Watch the 60 Minutes interview with the CEO of Google.

Just yesterday, the White House held a summit with key AI stakeholders to talk about AI governance

Between AI-generated photos winning competitions, musicians creating songs simulating real artists' voices, students using generative AI to turn in essays that fool professors, and generative AI's ability to hallucinate (come up with completely wrong answers that look correct), what can we as lawyers do? Are our jobs at risk? Barrons has put out a list.  IBM has paused hiring because it believes it can gain efficiencies though AI.  Goldman Sachs has said that 300 million jobs might be affected by this technology. I'm at a conference for entrepreneurs and the CEO of a 100-million dollar company said that he has reassigned and is re-skilling 90% of his marketing team because he can use AI for most of what they do. 

Should we be excited or terrified? I've been stressing to lawyers and my students that we need to understand this technology to help develop the regulations around it as well to wrestle with the thorny legal and ethical issues that arise. Here are ten questions, courtesy of ChatGPT4, that lawyers should ask themselves:

  1. Do I understand the basic principles and mechanics of AI, including machine learning, deep learning, and natural language processing, to make informed decisions about its use in my legal practice?
  2. How can AI tools be used effectively and ethically to enhance my practice, whether in legal research, document review, contract drafting, or litigation support, while maintaining high professional standards?
  3. Are the AI tools and technologies I use compliant with relevant data protection and privacy regulations, such as GDPR and CCPA, and do they adequately protect client confidentiality and sensitive information?
  4. How can I ensure that the AI-driven tools I utilize are unbiased, transparent, and fair, and what steps can I take to mitigate potential algorithmic biases that may compromise the objectivity and fairness of my legal work?
  5. How can I obtain and document informed consent from clients when using AI tools in my practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies?
  6. What are the intellectual property implications of using AI, particularly concerning AI-generated content, inventions, and potential copyright or trademark issues that may arise?
  7. How can I assess and manage potential liability and accountability issues stemming from the use of AI tools, including understanding the legal and ethical ramifications of AI-generated outputs in my practice?
  8. How can I effectively explain and defend the use of AI-generated evidence, analysis, or insights in court, demonstrating the validity and reliability of the methods and results to judges and opposing counsel?
  9. What measures should I implement to supervise and train my staff, including paralegals and support personnel, in the responsible use of AI tools, ensuring that ethical and professional standards are maintained throughout the practice?
  10. How can I stay up-to-date with the latest advancements in AI technology and best practices, ensuring that I continue to adapt and evolve as a legal professional in an increasingly technology-driven world?

Do you use ChatGPT or any other other generative AI in your work? Can you answer these questions? I'll be talking about many of these issues at the Connecting the Threads symposium and would love to get your insights as I develop my paper. 

May 5, 2023 in Compliance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, Jobs, Lawyering, Legislation, Management, Marcia Narine Weldon, Teaching, Technology, Web/Tech | Permalink | Comments (0)

Corwin Cleansing, Continued

In re Edgio, Inc. Stockholders Litigation, decided by VC Zurn this week, presented the unsettled question whether Corwin cleansing would apply to post-closing shareholder actions seeking injunctive relief for defensive/entrenchment measures.  Interestingly, she held it would not.

The set up: A company was in distress and its stock price was tumbling.  It became afraid that it might be targeted by activist investors.  It also had the opportunity for a very favorable deal: It could buy a business unit owned by Apollo for a large number of newly-issued shares.  The contract specified that Apollo would get one-third of the board seats, but would be required to vote its shares in favor of existing board members.  It would also be prohibited from selling for two years, and after that, it would not be able to sell to “any investor on the most recently published ‘SharkWatch 50’ list for twelve months.”

This was not a transaction that required shareholder approval under Delaware law, but the share issuance did require shareholder approval under NASDAQ rules, and the shareholders voted overwhelmingly in favor.

Post-closing, shareholders brought an action seeking to enjoin the entrenchment measures – not the deal itself – arguing that they violated Unocal.  Defendants, naturally, argued that the whole thing had been cleansed under Corwin by means of the shareholder vote.

VC Zurn began by noting that Corwin itself distinguished between injunctive relief and damages relief; in that case, the Delaware Supreme Court held that “Unocal and Revlon are primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M & A decisions in real time, before closing. They were not tools designed with post-closing money damages claims in mind.”

In light of that language, VC Zurn held:

Corwin explains that conduct supporting a post-closing claim for damages can be cleansed by stockholders who were satisfied with the economic value they received in a transaction. Inequities in a transaction’s price or process are compensable by monetary damages, and therefore able to be cleansed by stockholders satisfied with the consideration they already received.  But Unocal scrutiny is inspired by concerns that directors may act to “thwart the essence of corporate democracy by disenfranchising shareholders,” which prototypically causes irreparable injury.  Because a dollar value cannot be affixed to the harm caused by unjustifiably entrenching actions, it cannot be said that a stockholder can consider wrongfully entrenching actions as part of the “economic merits” of a transaction.

Similar language about Corwin’s scope, she noted, was used in Morrison v. Berry, 191 A.3d 268 (Del. 2018).

But then she had to reconcile three different pre-Corwin Delaware precedents.

The first, In re Santa Fe Pacific Corporation Shareholder Litigation, 669 A.2d 59 (Del. 1995), involved a pre-closing, post-vote challenge to a merger agreement that contained various lockups that had prevented the company from striking a deal with a competing bidder.  In that context, the court held that the shareholder vote had not restored business judgment review, reasoning:

Permitting the vote of a majority of stockholders on a merger to remove from judicial scrutiny unilateral Board action in a contest for corporate control would frustrate the purposes underlying Revlon and Unocal. Board action which coerces stockholders to accede to a transaction to which they otherwise would not agree is problematic. ...Thus, enhanced judicial scrutiny of Board action is designed to assure that stockholders vote or decide to tender in an atmosphere free from undue coercion...

In voting to approve the Santa Fe–Burlington merger, the Santa Fe stockholders were not asked to ratify the Board's unilateral decision to erect defensive measures against the Union Pacific offer. The stockholders were merely offered a choice between the Burlington Merger and doing nothing. The Santa Fe stockholders did not vote in favor of the precise measures under challenge in the complaint. Here, the defensive measures had allegedly already worked their effect before the stockholders had a chance to vote.  In voting on the merger, the Santa Fe stockholders did not specifically vote in favor of the Rights Plan, the Joint Tender or the Termination Fee.

Since the stockholders of Santa Fe merely voted in favor of the merger and not the defensive measures, we decline to find ratification in this instance.

But, in two other decisions, Stroud v. Grace, 606 A.2d 75 (Del. 1992) and Williams v. Geier, 671 A.2d 1368 (Del. 1996), corporations had adopted various changes to their articles of incorporation that had the effect of entrenching existing management.  When these changes were subsequently challenged by dissenting minority shareholders, the Delaware Supreme Court held that the shareholder votes in favor ratified the amendments.

Faced with this somewhat conflicting set of cases, VC Zurn held:

Stroud and Williams are inconsistent with my reading of Corwin, and, unlike Santa Fe, neither was acknowledged in relevant part by the Corwin Court. Corwin cites Stroud as an example of a vote required by statute or charter that affected the standard of review, indicating the Supreme Court thought the Stroud vote properly had that effect.  Corwin also cites Williams, albeit for the pedestrian principle that a vote will not have a cleansing effect if it is coerced and for the general principle that an informed statutory vote is “the highest and best form of corporate democracy.” Corwin did not explicitly resolve the apparent tension between Santa Fe on one hand, and Stroud and Williams on the other.

I believe I am duty-bound to follow the most recent and specific Delaware Supreme Court authority. Notwithstanding Stroud and Williams, I read Corwin’s plain text as reiterated in Morrison v. Berry, together with Santa Fe’s instructions that Corwin implicitly preserved, to take a claim to enjoin defensive measures under Unocal enhanced scrutiny out of Corwin’s reach. I read that to compel the conclusion that a claim for injunctive relief under Unocal enhanced scrutiny is not susceptible to restoration of the business judgment rule under Corwin.

After that, it was just a question of actually applying Unocal to this particular deal.  And since there was evidence that these moves were intended as a takeover defense – and since the defendants did not even argue that they would pass the Unocal test (only that Unocal did not apply) – she sustained the complaint and ordered the parties to confer further.


It’s actually fairly difficult to imagine that shareholder votes can’t cleanse entrenchment measures.  For example, proxy advisors like ISS generally oppose poison pills that last for over a year unless they are put to a shareholder vote; see also The Williams Cos. Stockholder Litigation, 2021 WL 754593 (Del. Ch. Feb. 26, 2021) (explaining that both ISS and Fidelity had recommended the board put a pill up for a shareholder vote).  Which makes perfect sense: Poison pills, as originally conceived, operated to solve a shareholder collective action problem – two-tier tender offers, for example, put shareholders in a prisoners’ dilemma that requires a cooperative response. 

Further, Corwin did distinguish between injunctive and damages relief in the Unocal context, ‘tis true, but it also distinguished between pre-closing and post-closing.

Moreover, VC Zurn’s pronouncement that “a dollar value cannot be affixed to the harm caused by unjustifiably entrenching actions” is curious; I mean, leave out the “unjustifiably” piece and it seems clear that control rights can be priced.  After all, in Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251 (Del. 2021), the Delaware Supreme Court, quoting Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994), held:

“the acquisition of majority status and the consequent privilege of exerting the powers of majority ownership come at a price,” and that price “is usually a control premium which recognizes not only the value of a control block of shares, but also compensates the minority stockholders for their resulting loss of voting power.”

That said, there is a very real distinction between Stroud and Geier on the one hand, and Santa Fe on the other, and it comes from the language of Santa Fe itself.  In that case, shareholders were presented with a deal – a full package of items, including a buyout at a premium; there was no opportunity to vote separately on the deal protections.  By contrast, in Stroud and Geier, shareholders were presented with an opportunity for a clean up-or-down vote on the entrenchment measures alone.

What immediately springs to mind, then, is the possibility – again, suggested in Santa Fe – that the shareholder vote in that case was not in fact free and fair, but was coerced.  Shareholders had to accept the deal protections if they wanted the premium, and there was certainly no way to know whether another deal would come through if they rejected the package outright.

That is what’s known as a “bundling” problem, i.e., when shareholders are not permitted to vote separately on particular items, and it’s actually something the SEC (theoretically) regulates, although of course the SEC hasn’t changed the requirements of Delaware law.

Not long ago, in Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152 (Del. Ch. May 31, 2017), VC Glasscock held that a shareholder vote in favor of a share issuance to an existing blockholder was coerced – and thus not subject to Corwin – because it was “bundled” with certain transactions that would be beneficial to shareholders.  As VC Glasscock put it, the issuance was plausibly “extrinsic, and tacked to the Acquisitions to strong-arm a favorable vote.”

One could say something similar about the facts of Edgio: a favorable transaction was conditioned on acceptance of the entrenching measures, and therefore the shareholder vote was not free and fair, as Corwin requires.

But that argument perhaps proves too much.  Is it “bundling” if there is a premium-generating deal that comes with the loss of control rights, or is that merely a bargained-for exchange?  Commenters have repeatedly attacked Corwin itself for creating a “bundling” problem, in that shareholders voting on a deal are deemed to also be voting to absolve fiduciaries of any liability, but the Delaware Supreme Court obviously didn’t have a problem with that.

In other words, what is needed is some kind of theory as to what counts as an “extrinsic” condition versus what counts as intrinsic to the deal.  (Obligatory plug: I previously likened this issue to the unconstitutional conditions doctrine in my essay, The Three Faces of Control.)

One other point I’ll make on this, though.  Corwin itself, as well as Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014), are implicitly predicated on the recognition that today’s shareholder base is concentrated and institutionalized, and therefore presumably capable of protecting its own interests; indeed, many of the Chancery court decisions that paved the way said so explicitly.  See, e.g., In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013); In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604 (Del. Ch. 2005); In re Netsmart Techs. S’holder Litig., 924 A.2d 171 (Del. Ch. 2007).  Which is why it is striking that Delaware is proposing to amend its law to make it easier to pass certain charter amendments (pertaining to increasing or decreasing shares outstanding), in recognition of the meme stock era and the re-retailization of the shareholder base.   It remains to be seen whether Delaware takes any steps to soften its standards of review as well.

May 5, 2023 in Ann Lipton | Permalink | Comments (0)

Monday, May 1, 2023

The Fiscal Sponsorship Alternative

A great joy in my law practice over the years has been to work on a pro bono basis with creative and social enterprises.  For the 2021 Business Law Prof Blog symposium, Connecting the Threads, I offered some wisdom from my work with creatives in legally organizing and funding their projects.  I wrote briefly about that presentation here.

I recently posted the article that I presented back then, Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation, 23 Transactions: Tenn. J. Bus. L. 526 (2022), on SSRN.  The associated abstract follows.

For many small business ventures that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, managing, and maintaining a tax-exempt nonprofit corporation under state law may be daunting (or even prohibitive). Moreover, the formal legal structures imposed by business entity law may not be needed or wanted by the founders or promoters of the venture. Yet, there may be distinct advantages to entity formation and federal tax qualification that are not available (or not as easily available) to unincorporated not-for-profit business projects. These advantages may include, for example, exculpation for breaches of performative fiduciary duties by nonprofit corporate directors and other personal liability limitations applicable to various participants in nonprofit corporations under state statutory law.

The described conundrum—the prospect that founders or promoters of a charitable or other federal income tax-exempt nonprofit business or undertaking (often simply denominated as a “nonprofit project”) may not have the time or financial capital to fully form and maintain a business entity that may offer substantial identifiable advantages—is real. Awareness of this challenge can be disheartening to lawyer and client alike. Fortunately, at least for some of these nonprofit projects, there is a third option—fiscal sponsorship—that may have contextual benefits. Fiscal sponsorships allow for projects to receive tax advantaged funding and operating support without the need for time-consuming, costly legal entity formation.

This brief article offers food for thought on the uses for and benefits of fiscal sponsorship, especially (but not exclusively) for creative endeavors. First, fiscal sponsorships are defined and described in more detail. Then, the attributes of fiscal sponsorships are compared with the attributes of nonprofit § 501(c)(3) corporations to identify important bases for advice and decision making. Finally, before briefly concluding, the article synthesizes this information for use in applied legal advising and offers an example of a nonprofit project that found fiscal sponsorship both desirable and efficacious.

The article is available here.  Even though I do not teach a course on nonprofit organization, governance, or finance, I do occasionally raise the idea of fiscal sponsorship and other nontraditional organizational possibilities with students outside the classroom.  Had it not been for my pro bono work at Skadden, Arps, Slate, Meagher & Flom LLP in Boston in the 1980s and 1990s, I would not have known about fiscal sponsorships and could not have had those teaching moments with my students.  By publishing this piece, I hope to offer that same "aha moment" to others who may find themselves working with artists or musicians or others in the nonprofit space. 


May 1, 2023 in Entrepreneurship, Joan Heminway, Lawyering, Nonprofits | Permalink | Comments (0)

Friday, April 28, 2023

VC Laster Goes to War

In Amalgamated Bank v. Yahoo!, 132 A.3d 752 (Del. Ch. 2016), VC Laster allowed a corporation to condition production of documents sought under Section 220 on the stipulation that if the plaintiff filed a lawsuit that relied on any of the documents, the entire production set would be deemed incorporated by reference into the complaint.  VC Laster considered this to be a reasonable stipulation to protect the defendant against the plaintiffs’ strategic cherry picking of documents in order to create a misleading impression of the facts.

Since then, such stipulations have become common, and the practice has evolved for defendants to certify that they have produced all responsive documents to the plaintiffs in order to get the benefit of incorporation-by-reference.  See, e.g., In re Vaxart S’holder Litig., 2022 WL 1837452 (Del. Ch. June 3, 2022).  The predictable result is that motions to dismiss are accompanied by ever-more-lengthy lists of exhibits.  Delaware Chancery has repeatedly warned that these “incorporation by reference” stipulations do not change the standard of review, and that it has the option either to disregard excess submissions or use them as a basis for transforming the dismissal motion into a motion for summary judgment.  See, e.g., In re Match Group Deriv. Litig., 2022 WL 3970159 (Del. Ch. Sept. 1, 2022).

In Oklahoma Firefighters Pension & Ret. Sys. v., Inc., 2022 WL 1760618 (Del. Ch. June 1, 2022), VC Will permitted a defendant to redact documents produced in response to Section 220 demands to remove material that was nonresponsive to the plaintiffs’ request.  As VC Will put it, “In my view, redactions to material unrelated to the subject matter of a demand are proper because Section 220 only entitles a stockholder to information essential to accomplishing its stated purposes for inspection. The redactions appropriately cabin Section 220 inspections to their intended scope.”

From VC Laster’s opinion this week in Ontario Provincial Council of Carpenters’ Pension Trust Fund et al. v. Walton, 2023 WL 3093500 (Del. Ch. Apr. 26, 2023), one gets the distinct impression that he believes these two developments – singly and in combination – have been abused by defendants, and he’s fighting back. 

In Walton, the plaintiffs sued the Walmart board for violations of its Caremark duties with respect to opioid prescriptions, and relied on the heavily-redacted documents that Walmart produced in a prior 220 action.  Walmart, of course, submitted its own documents in support of its motion to dismiss.  Given the procedural posture (reasonable inferences drawn in the plaintiffs’ favor), VC Laster held that the certification of completeness, coupled with an incorporation-by-reference provision, allowed for the inference that “if the record lacks documentation relating to a particular event, and if it is reasonable to expect that documentation would exist if the event took place, … [then] the event did not occur.” Id. at *2.  With respect to redactions, which he often found “dubious” because “a partial-sentence redaction … depends on the premise that the author incoherently injected an unrelated topic into an otherwise responsive sentence,” id. at 3 – he either gave them a plaintiff-friendly inference or also treated them as evidence of the absence of discussion.  The net effect was a near weaponization of the lack of record evidence on various topics in order to conclude that the Walmart board failed to conduct proper oversight of the company. 

Prior cases have drawn inferences from the lack of 220 documents on a subject, e.g., In re Boeing Co. Deriv. Litig., 2021 WL 4059934 (Del. Ch. Sept. 7, 2021); Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065 (Del. Ch. Aug. 24, 2020), but I’ve never seen anything quite like this.  To wit:

Walmart did not produce a final budget for the Health and Wellness Division as part of its Section 220 document production, entitling the plaintiffs to an inference that a budget sufficient to fund the projects necessary to comply with the DEA Settlement did not exist.


The memo identified two significant challenges. The first challenge, identified in a single sentence, was redacted. The redaction was marked “NR/ACP/AWP,” for non-responsive, attorney-client privilege, attorney work product. Because the single sentence redaction appears in an otherwise responsive paragraph, the redaction is dubious, and with three possibilities provided, the basis for it is unclear. At the pleading stage, the plaintiffs are entitled to an inference that the redacted text referenced a compliance failure that Walmart was not addressing.


An appendix to the slide deck identified a list of items that Walmart had completed during fiscal years 2011 and 2012. …Significant portions of the appendix are redacted. … The list of completed activities conspicuously omits significant items identified in the DEA Settlement, such as testing for doctor shopping, flagging requests for early refills, or checking for altered or forged prescriptions.

Read together, the 2012 Memo and accompanying materials support a pleading-stage inference that the Health and Wellness Division had created a summary of what a nice compliance program would look like, then never did the work to implement one.

He goes further.  He recognizes that he cannot draw negative inferences from redactions specifically for attorney-client privilege, but he also holds that a conscientious board, appropriately overseeing the company, would be expected to have at least some discussions of legal compliance that did not involve privileged conversations, and thus the absence of evidence of nonprivileged discussions would also be treated as evidence of absence.  As he put it:

Although this decision does not draw inferences from any of the passages or documents for which Walmart has asserted privilege, it does draw inferences from an absence of non-privileged documents containing discussions or decisions about the business issues necessarily involved in (i) taking the steps necessary to comply with the DEA Settlement and the Controlled Substances Act, (ii) responding to red flags of noncompliance, and (iii) assessing the effectiveness of the compliance efforts. Legal advice undoubtedly is an input into those discussions and decisions, but if directors and officers are doing their jobs, then there will be non-privileged discussions and decisions about what are inherently and ultimately business decisions (which the business judgment rule generally will protect). Walmart represented that its Section 220 production was complete, so when there are no indications of non-privileged discussions, the plaintiffs are entitled to an inference that the discussions and decisions did not occur.

The result was:

Walmart produced a copy of the meeting minutes, which comprise seven pages. All of the substantive portions of the minutes were redacted for non-responsiveness and attorney-client privilege with the exception of the following sentence: “Ms. Harris then provided an update to the Committee on the overall status of Health and Wellness Compliance projects.” … There are no non-privileged documents reflecting the Employee Compliance Committee making any business decisions or taking any action. At the pleading stage, the absence of evidence about action by the Employee Compliance Committee supports a plaintiff-friendly inference that the Employee Compliance Committee failed to take action to promote compliance with the DEA Settlement.


Walmart's privilege log contains entries suggesting that the Employee Compliance Committee met on twenty other occasions from 2016 through 2020. Walmart withheld all of the relevant meeting minutes, noting on its privilege log only that the discussions involved “controlled substances,” “opioids,” or Walmart's “Health & Wellness compliance program.” There are no indications that the committee had any business discussions, made any business decisions, or took any type of action. If Walmart's assertions of privilege are to be believed, then as the opioid epidemic raged, Walmart's senior compliance employees did nothing except receive and consider legal advice. They knew about the problem and took no action whatsoever. Although that seems highly unlikely, that is the record that Walmart created through its highly redacted Section 220 production.

The fact that so many meetings took place supports an inference that the officers and employees on the Employee Compliance Committee closely monitored Walmart's compliance with its obligations under the Controlled Substances Act. At the same time, the allegations in the complaint, together with other documents in the record, support an inference that Walmart was failing to comply with its obligations as a dispenser of prescription opioids and, in particular, was undermining its pharmacists’ ability to fulfill the Refusal-To-Fill Obligation. The court therefore must infer that the Employee Compliance Committee knew about Walmart's failure to fulfill its obligations as a dispenser of prescription opioids. The absence of any indication that the Employee Compliance Committee did anything except gather to receive and discuss legal advice, supports a pleading-stage inference that the members of the committee consciously ignored Walmart's compliance failures.


The Board also met in November 2017, and the minutes of that meeting span sixty-eight pages. Ex. 61. Only three sentences of substantive text survived the redaction tool. The first reads: “Timothy P. Flynn, Chair of the Audit Committee, then provided the Audit Committee report.” The following partially redacted text appears on the next page: “He concluded his report by stating that the Audit Committee had received updates from management regarding various other matters including ... [REDACTED] ... enhanced processes and training for pharmacists regarding filling prescriptions of controlled substances.” The redactions were marked for non-responsiveness, attorney-client privilege, and attorney work product. The unredacted text provides no basis to infer that the Board or Audit Committee had any business-oriented discussion about compliance issues or made any business decisions about compliance issues.

And my personal favorite:

Walmart redacted the entire director education presentation on the basis of the attorney-client privilege and work product doctrine. Because of those redactions, the only possible inference is that during a meeting specifically called to address the opioid crisis, Walmart's directors and senior executives and unidentified members of the Walton family did not discuss any business issues, consider any business initiatives, or make any business decisions. All they did was receive and consider legal advice. Although that is hard to believe, Walmart's redactions necessarily lead to that inference.

In more sorrow than anger, he writes:

Reinemund served on the Board during the full term of the DEA Settlement. …He therefore also faces a substantial risk of liability, and there is reason to doubt whether Reinemund could consider a demand.

The court reaches this conclusion reluctantly, because Reinemund is a person of stature who has had an impressive career. He graduated from the United States Naval Academy and served in the Marine Corps, rising to the rank of Captain. After leaving the military, Reinemund enjoyed success in the business world, culminating in the position of Chairman and CEO of PepsiCo from 2001 to 2003. From 2008 to 2014, he served as Dean of the Wake Forest University Business School. In addition to serving as a director at Walmart, he has served on the boards of other major public companies.

Why would an outside director like Reinemund ignore red flags about noncompliance with the DEA Settlement, much less make a conscious decision not to achieve compliance with the DEA Settlement? The answers likely lie in the redacted portions of the documents in Walmart's Section 220 production. 

See also id. at *41 (“As with Reinemund, it is hard to believe that an outside director like Flynn would ignore red flags about noncompliance with the DEA Settlement, much less make a decision not to comply with it. Once again, the answers likely lie in the redacted portions of the documents in Walmart's Section 220 production. Unfortunately, because of Walmart's compulsive redacting of documents, the pleading-stage record supports an inference that Flynn knew that Walmart was not in compliance with the DEA Settlement, knew that Walmart could not achieve compliance by the time the DEA Settlement terminated, and did nothing to bring the company into compliance.”).

That’s the headline, but it’s not all that’s of interest here.

I earlier blogged about Caremark and the distinction between taking legal risks and business risks.  In Walton, VC Laster articulates the distinction between legal risk and business risk thusly:

  • In one hypothetical scenario, the lawyers say: “Although there is some room for doubt and hence some risk that our regulator may disagree, we believe the company is complying with its legal obligations and will remain in compliance if you make the business decision to pursue this project.”
  • In the other hypothetical scenario, the lawyers say: “The company is not currently in compliance with its legal obligations and faces the risk of enforcement action, and if you make the business decision to pursue this project, the company is likely to remain out of compliance and to continue to face the risk of an enforcement action. But the regulators are so understaffed and overworked that the likelihood of an enforcement action is quite low, and we can probably settle anything that comes at minimal cost and with no admission of wrongdoing.”

In the former case, the directors can make a business judgment to pursue the project. In the latter case, the decision to pursue the project would constitute a conscious decision to violate the law, the business judgment rule would not apply, and the directors would be acting in bad faith.

Critically, I note that his assessment of good faith in these scenarios permits reliance on legal advice.  See also id. at *40.  That’s interesting, because – as I blogged when discussing the case of The Williams Companies v. Energy Transfer Equity LP, 159 A.3d 264 (Del. 2017) – there’s been some disagreement at the Delaware Supreme Court over approaches to legal advice.  In Williams, then-Chief Justice Strine in dissent recognized that even “good faith” legal advice is malleable, and may be adjusted depending on the desire of the client.  The majority, by contrast, treated “good faith” legal advice as something akin to an unwavering North Star, unresponsive to the client’s needs.  As recently as Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, 2021 WL 5267734 (Del. Ch. Dec. 19, 2022), Laster seemed to take more of Strine’s view of the matter, but his opinion was reversed on appeal in Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP, 288 A.3d 1083 (Del. 2022), with a concurrence specifically warning that a great deal of deference ought to be given to good faith legal opinions.

The upshot of which is, going forward, I worry about how easy it will be for boards to satisfy Caremark obligations, despite red flags of illegal conduct, by relying good-faith-but-under-duress legal opinions.  And it is particularly ironic to see such a sentiment expressed in an opinion that does not, in the main, evince much confidence in counsel’s good faith advocacy.

April 28, 2023 in Ann Lipton | Permalink | Comments (0)

Thursday, April 27, 2023

Nevada Reincorporations

As Joan already flagged, Delaware litigation has broken out over whether TripAdviser can reincorporate to Nevada.  The Complaint in that action argues that Delaware courts should enjoin the move and prevent the corporation from moving to Nevada.  The New York Post has also picked up on the reincorporation trend.  In my view, the conditions under which a corporation may exit a jurisdiction and reincorporate elsewhere is a valid question of its current state's corporate law.  While Delaware may want to impose appropriate conditions on some departures, I doubt it wants to become the Hotel California of corporate law--where you can check in any time you want, but you can never leave.

There are undoubtedly material differences between Delaware and Nevada law.  As I covered here at the time, Nevada's statutory business judgment rule imposes more limits on liability that Delaware law.  Nevada's Supreme Court has explained that establishing liability under Nevada law "plainly requires the plaintiff to both rebut the business judgment rule’s presumption of good faith and show a breach of fiduciary duty involving intentional misconduct, fraud, or a knowing violation of the law."  

Nevada's law may be better for some corporations than Delaware's law.  Duke's Ofer Eldar found that "Nevada corporate law does not harm shareholder value for firms that self-select into Nevada, particularly small firms with low levels of institutional shareholding and high levels of insider ownership, and it may in fact enhance the value of these firms."

Ultimately, as a stakeholder in Nevada corporate law, the last thing I want is for our state to become a cesspool for fraud and misconduct.  Nevada's protective business judgment rule strikes a different balance than Delaware, but it's not going to let people get away with rank misconduct.

April 27, 2023 | Permalink | Comments (0)

Last Call for the 2023 National Business Law Scholars Conference!

As I recently announced, tomorrow is the last day that we will be accepting submissions for the National Business Law Scholars Conference, June 15-16 at The University of Tennessee College of Law.  We need to start scheduling the sessions for the conference next week.  The substantive requirements for submission include a paper title, a brief abstract, and a few key words.

Information about the conference, including related notes on transportation and accommodations and more information about submissions, can be found here.  We look forward to seeing many of you in Knoxville in June!  Please contact me or Eric Chaffee with questions.

April 27, 2023 in Conferences, Joan Heminway | Permalink | Comments (0)

Tennessee Law Clinical Teaching Fellowship - May 1 Application Deadline

Set forth below are key portions of the posting for The University of Tennessee College of Law's new Clinical Teaching Fellowship.  Applications are solicited for either our advocacy or transactional law clinic. The full announcement, including instructions on how to apply, can be found here. Applications will be considered on a rolling basis.  However, preference will be given to applications received before May 1, 2023. For questions, please contact Director of Clinical Programs Joy Radice at [email protected]

*          *          *

The University of Tennessee College of Law is accepting applications for our new Clinical Teaching Fellowship to begin in the summer of 2023.  This two-year fellowship will prepare talented lawyers and aspiring clinicians with at least 2 years of practice experience to become full-time clinical faculty at U.S law schools.  The Clinical Teaching Fellow will work alongside and learn from current full-time clinical faculty who teach in the College of Law’s Legal Clinic.  The Clinical Teaching Fellow will be immersed in all aspects of clinical teaching from learning clinical pedagogy to supervising law students on their casework.  The UT Law Clinical Teaching Fellow will also develop a research agenda and begin working on a scholarly article in preparation for entering the law school teaching market.  The fellow will receive training in clinical teaching methods, supervision when working with students on cases, and guidance in developing legal scholarship with faculty mentors.

We seek a Clinical Teaching Fellow to begin in the summer of 2023, and to work with one of the following Clinics:

  1. The Advocacy Clinic, which provides direct legal services to clients in a range of litigation including civil, juvenile, and criminal cases. A more detailed description can be viewed at
  2. The Transactional Law Clinic, which provides direct legal services to small businesses, nonprofit organizations, community-based associations, entrepreneurs, and artists. A more detailed description can be viewed at

 . . .


Required Qualifications and Experience:

  • J.D. or equivalent degree.
  • At least two (2) years of practice experience in relevant areas of law.
  • Excellent written and oral communication skills.
  • Strong interest in clinical teaching, with a commitment to inclusive teaching methods designed to effectively engage a diverse student population.
  • Membership in a U.S. state bar and willingness to petition for admission to the Tennessee Bar prior to the start date of the fellowship.  Tennessee allows lawyers teaching in a law school clinical program to waive into the bar.

Preferred Qualifications and Experience:

  • Teaching, training or supervision of law students or early-career lawyers.
  • Experience with relevant civil, criminal or juvenile matters as preparation for teaching in the Advocacy Clinic or experience with relevant transactional matters as preparation for teaching in the Transactional Law Clinic.
  • A commitment to public interest work.

April 27, 2023 in Clinical Education, Joan Heminway, Jobs | Permalink | Comments (0)

Wednesday, April 26, 2023

More on Central Bank Digital Currencies (CBDCs)

My last post (here) addressed central bank digital currencies (CBDC).  I wanted to address this topic again today (and will do so again in the future!).  Michelle W. Bowman, a Member of the Board of Governors of the Federal Reserve System, recently gave a speech entitled, Considerations for a Central Bank Digital Currency.  She states “There are two threshold questions that a policymaker needs to ask before any decision to move forward with a CBDC. First, what problem is the policymaker trying to solve, and is a CBDC a potential solution? Second, what features and considerations--including unintended consequences--may a policymaker want to consider in deciding to design and adopt a CBDC?” 

Governor Bowman notes that “a CBDC is simply a new form of digital liability of a central bank…Beyond this baseline definition though, “what is a CBDC" defies a simple definition.”  There is “an array of CBDC design choices” and “policy tradeoffs that this multitude of choices presents.”

One of the policy tradeoffs related to design features that Governor Bowman addresses is privacy considerations. She states that “In thinking about the implications of CBDC and privacy, we must also consider the central role that money plays in our daily lives, and the risk that a CBDC would provide not only a window into, but potentially an impediment to, the freedom Americans enjoy in choosing how money and resources are used and invested. So, a central consideration must be how a potential U.S. CBDC could incorporate privacy considerations into its design, and what technology and policy options could support a robust privacy framework.”

In a prior post (here), I linked to an excellent article by Professors Morgan Ricks, Lev Menand, and John Crawford, FedAccounts: Digital Dollars.  In their article, focused on a potential FedAccount CBDC, the authors address “privacy and civil liberties,” stating that “Although these concerns are legitimate, some perspective is in order for four reasons.” (p. 164) I hope interested BLPB readers read the article for the authors’ explanation of these reasons. 

I also hope interested BLPB readers read Governor Bowman’s speech.  I recently stated (here) and will continue to reiterate that I think widespread education about CBDCs and extensive public debate about the potential adoption of a U.S.-dollar CBDC is tremendously important.      

April 26, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Monday, April 24, 2023

Quotables: Lipton & Edwards on TripAdvisor

Friend-of-the-BLPB Tom Rutledge alerted me earlier today to a Thomson Reuters piece on the TripAdvisor reincorporation litigation that quotes not one but two of our blogger colleagues: Ann Lipton and Ben Edwards (in that order).  Ann is quoted (after a mention and quotation of one of her recent, more entertaining tweets) on the Delaware judicial aspects of the case.  Ben is quoted on the Nevada corporate law piece.  So great to see these two offering their legal wisdom on this interesting claim.

Ann's tweet (perhaps predictably) offers a different "take" on Nevada law than Ben's press statements.

Ann: “I tell my students, Nevada is where you incorporate if you want to do frauds . . . .” 

Ben: “The folks here are people acting in good faith, trying to do what’s right – not cynically racing to the bottom . . . .”

And then Ben gets the last word: “Nevada . . . has become a home for billionaires leaving Delaware in a huff.”


April 24, 2023 in Ann Lipton, Business Associations, Corporate Governance, Current Affairs, Delaware, Joan Heminway, Litigation | Permalink | Comments (0)

Friday, April 21, 2023

Section 12's Photo Bomb

There is so very much to say about the Slack Technologies v. Pirani case pending before the Supreme Court.  Oral argument was held Monday; here is a link to the transcript.

Slack went public via direct listing, which as a practical matter meant: Slack itself did not sell new shares to the public; it merely enabled existing shareholders to sell by listing its shares on the NYSE.  Existing shareholders were largely early investors – who had purchased under Rule 506 exemptions – or employees – who had purchased under Rule 701 exemptions.

At the time of the listing, a little more than half of these early investors were legally free to sell their shares to the public, and did.  A little fewer than half were still bogged down by SEC rules for holding periods in private sales.  For these shares – and these shares only – Slack filed an S-1 registration statement, allowing everyone to trade at once.

Subsequently, purchasers of Slack stock on the open market alleged the S-1 was false, and sought to bring Securities Act claims.  Problem was, Section 11 of the Securities Act – providing a remedy for false statements in registration statements – requires the plaintiff to “trace” the shares they bought to a particular false registration statement.  Slack’s pool of shares was an undifferentiated mix of registered shares and unregistered shares.  The Ninth Circuit held, eh, let everyone sue; Slack wants to let no one sue.  Thus the Supreme Court case.

I blogged about the Slack case at the district level and the Ninth Circuit level here and here; I also blogged about a similar problem that arises in IPOs, when companies permit early investors to trade their unregistered shares right away, so that the pool of stock available to trade contains both unregistered and registered shares. 

Anyway, when Slack came up for oral argument, all attention was on this issue of Section 11 tracing.  But oral argument took kind of an unexpected turn when the Supreme Court wandered down the path of Section 12 of the Securities Act, which allows investors to sue for false statements in prospectuses.  Section 12 claims were alleged in the Slack case but they didn’t seem to be the main event, until they did.

What’s going on there?

And this is going to get long – behind the cut it goes.

Continue reading

April 21, 2023 in Ann Lipton | Permalink | Comments (4)

Tuesday, April 18, 2023

Sharfman on "Market Share Opportunism"

Friend of the blog Bernard Sharfman has published "How the ‘Market Share Opportunism’ of Investment Advisers is Harming Investors and Public Companies" over at ProMarket. I'm providing an excerpt below but you should go read the whole thing.

The competitiveness of our public companies is being weakened by the market share opportunism of those who manage (investment advisers like State Street and BlackRock) our mutual funds and exchanged traded funds (ETFs). Instead of maximizing shareholder wealth through voting and engagement, what is maximized is an investment adviser’s market share of the investment fund market. The result is economic harm to companies and the lowering of financial returns for the tens of millions of U.S. citizens who own shares in stock mutual funds and ETFs, those who hold common stocks directly in brokerage accounts, and beneficiaries of public pension funds. The only way to mitigate this investment adviser opportunism is for the SEC to establish and enforce new fiduciary duties for investment advisers that keep them focused on maximizing the financial value of their funds when exercising their shareholder voting authority and engaging with portfolio companies. Shareholder voting and engagement with portfolio companies has become increasingly based on political values, not wealth maximization. Such voting, no matter what part of the political spectrum it represents, pressures corporate boards into making decisions that are not expected to maximize shareholder value. Without such maximization, companies are less likely to enter into the most profitable supply chain arrangements, human capital decisions, and investment opportunities. This makes them less competitive compared with those companies who do not face such pressures.

April 18, 2023 in Stefan J. Padfield | Permalink | Comments (0)

Roberto Tallarita: "portfolio primacy creates a fiduciary deadlock"

Roberto Tallarita has posted "Fiduciary Deadlock" on SSRN (here). Below is the abstract.

In May 2022, the shareholders of BlackRock, the world’s largest asset manager, voted on a proposal to push portfolio companies to reduce their social and environmental externalities, even if doing so would reduce the companies’ stock value. The proposal was based on the theory that BlackRock should maximize the value of its whole portfolio (portfolio primacy), rather than the value of individual companies (shareholder primacy), and it is driven by the expectation that portfolio primacy can harness the power of large asset managers to fight climate change and other pressing social problems. Although the proposal was rejected, portfolio primacy is gaining increasing support and will likely inspire similar proposals in the next proxy seasons. In this Essay, using the BlackRock proposal as a paradigmatic case, I examine how portfolio primacy interacts with the fiduciary duties of large asset managers. I argue that portfolio primacy creates a fiduciary deadlock: a situation in which multiple fiduciary relationships—between investment adviser and fund investors, between corporate managers and shareholders, between controlling and minority shareholders—come into conflict with each other. I show that, within the existing structure of fiduciary law, portfolio primacy will remain trapped in a tight knot of conflicts and, as a result, will prove ineffective in promoting ambitious social and environmental goals. Only legislators and regulators can cut this Gordian knot.

April 18, 2023 in Stefan J. Padfield | Permalink | Comments (0)

Monday, April 17, 2023

National Business Law Scholars 2023 - Extension of Submission Deadline to April 28th

I am looking forward to welcoming many of you to Knoxville for the National Business Law Scholars Conference on June 15th and 16th!  We have a great group already registered for the conference.  The papers being presented span a wide range of interesting business law topics, as has been the custom.

Several folks indicated they were a bit jammed for time to make the April 7 deadline for submissions.  After consulting with our master scheduler, Eric Chaffee, we have determined to leave submissions open until April 28th.  We are in the process of changing the conference website to update the submission deadline, but the submission link (which generates an email to Eric) is still open.

In the coming weeks, the conference website will be updated to include information on lodging (we have arrangements with several local hotels) and transportation.  In addition to Knoxville's local airport, McGee-Tyson (TYS), flights are available to a number of local airports (Nashville, Chattanooga, and Tri-Cities) at which one can rent a car and from which one can drive to Knoxville.  The State of Tennessee is beautiful and fun.  I would be delighted to offer touring advice to anyone who would like to take some vacation time around the conference.

With the extended submission date, we hope that a few more of you will be in a position to submit work to present at the conference.  Please do not hesitate to reach out to me or Eric for any desired guidance in that regard, especially if you have never submitted to the conference before.  We are happy to help.

April 17, 2023 in Call for Papers, Conferences, Joan Heminway | Permalink | Comments (0)

Padfield on Crony Stakeholder Capitalism (Final)

My paper, Crony Stakeholder Capitalism, 111 Ky. L.J. 441, 442 (2023), is now available on Westlaw, and I have posted the final version on SSRN here. Below is the abstract.

Capitalism in the context of corporate governance may be understood as an economic system that equates efficiency with corporate managers only pursuing projects that they reasonably expect will have a positive impact on the value of the corporation's shares (accounting for opportunity costs). Such projects may be referred to as positive net-present-value (NPV) projects. Stakeholder capitalism, on the other hand, may be understood a number of different ways, including: (1) an improved form of calculating NPV; (2) a conscious choice to sacrifice some NPV in order to advance broader social objectives; (3) a form of rent-seeking; (4) a form of green-washing; (5) a manifestation of the agency problem whereby managers prioritize their personal political preferences over NPV; (6) a manifestation of the agency problem whereby managers prioritize their personal financial wealth over NPV; (7) a form of crony capitalism. Of these, an argument can be made that only the first is both legal and efficient, at least in the case of Delaware corporations operating under the relevant default rules. Given the high risk of stakeholder capitalism thus constituting illegal or inefficient conduct, this Essay argues that decisions justified on the basis of stakeholder capitalism (as opposed to NPV calculations) should not be presumed to be fully informed and free of material conflicts, as is the case when the business judgment rule otherwise applies. Rather, such conduct should be subject to enhanced scrutiny to account for the omnipresent specter of illegal/inefficient motives. Such a rule would be similar to what is already often the case in Delaware when corporations defend against hostile takeovers, due to the omnipresent specter of managerial entrenchment motives.

Following an Introduction, this Essay proceeds as follows. First, because the argument that stakeholder capitalism can constitute a form of crony capitalism is at least somewhat novel, the connection between the two is fleshed out. Second, Senator Marco Rubio's Mind Your Own Business Act (MYOBA) is analyzed as a potential solution to the problem of crony stakeholder capitalism. Finally, recommendations are made for improving MYOBA.

April 17, 2023 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, April 15, 2023

Caremark and "Violation of Law"

I’m intrigued by the Caremark claims that were just filed against Fox Corp.

If you’re online enough to be reading this blog post, you probably already know that Fox Corporation and its subsidiary, Fox News, have been sued by Dominion Voting Systems for promoting lies about how its equipment was used to steal the presidency from Donald Trump.  The trial is set to begin and what evidence we have suggests that Dominion has a strong case.  Namely, it appears that Fox News internally was very aware that it was airing unsubstantiated (and lunatic) conspiracy theories, but intentionally stifled criticism out of a concern that its viewership would abandon the channel if it reported truthfully

Anyway, somewhat predictably, this week a stockholder filed a Caremark claim against Fox Corp, and there’s every reason to believe more plaintiffs will file similar actions.  The allegations in the current complaint are that Fox Corporation’s board knowingly allowed the Fox News subsidiary to air false claims of election fraud.

Now, it’s too soon to know exactly how the defamation case will play out – though the judge decided that Fox’s statements were false on summary judgment, and further held that Fox was not protected by privileges for opinion and neutral reporting, outstanding for a jury are issues like actual malice, whether Fox Corp parent was sufficiently involved to be held liable alongside its subsidiary, and what damages Dominion has suffered.

But let’s assume, for the moment, that the stockholder plaintiff is right, and that the Fox Corp parent (and, in particular, its board of directors) did knowingly acquiesce in defaming Dominion.  It’s an interesting theoretical question, to me, whether that can/should be the basis of a Caremark claim, which kind of gets to the heart of the line between Caremark claims and other kinds of breach of duty claims.

The original Caremark decision articulated directors’ duties to set up good faith systems for preventing legal violations, and, as Jennifer Arlen points out in her recent paper, was rooted largely in a traditional agency-cost view of Caremark obligations.  Namely, the concern was that directors might fail to comply with the law out of some kind of bad faith neglect of their duties, and the corporation would suffer penalties as a result.  The theory was that a director making a good faith ex ante calculation of costs versus benefits would set up an appropriate monitoring system, and directors who fail to do so should pay damages.

Since then, though, other cases have suggested a different principle, namely, that illegal conduct crosses the line between permissible and impermissible corporate behavior - even if, ex ante, the directors would rationally conclude that lawbreaking is profitable under a cost benefit analysis.  Stone v. Ritter, 911 A.2d 362 (Del. 2006), holds that a “intent to violate applicable positive law” violates directors’ fiduciary duties; In re Citigroup Shareholder Litigation, 964 A.2d 106 (Del. Ch. 2009) distinguishes the obligation to monitor for legal violations from the obligation to monitor against business risk, only the latter of which concerns directors’ business judgment; so does In re Goldman Sachs Group Inc. Shareholder Litigation, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011).  And of course, DGCL 102(b)(7) does not permit exculpation for intentionally illegal conduct (though – interestingly – the MBCA permits exculpation so long as the conduct was not intentionally criminally illegal). 

This view of Caremark was articulated clearly in In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011), where then-Vice Chancellor Strine held that “Delaware law does not charter law breakers. Delaware law allows corporations to pursue diverse means to make a profit, subject to a critical statutory floor, which is the requirement that Delaware corporations only pursue ‘lawful business’ by ‘lawful acts.’” 

Since then, Delaware judges have distinguished “Massey” claims involving intentional lawbreaking from other kinds of Caremark claims.  See In re McDonald’s Corp. S’holder Deriv. Litig., 289 A.3d 343 (Del. Ch. 2023); City of Detroit Police & Fire Ret. Sys. v. Hamrock, 2022 WL 2387653 (Del Ch. June 30, 2022).  Note that Massey claims, then, can involve directors who are in fact pursuing the best interests of the corporation; they simply are doing it in an impermissible way.  (Kent Greenfield describes this as a modern-day ultra vires).  That view of Caremark is not rooted in agency costs at all; it’s rooted in concern for the welfare of nonshareholder constituencies.  It represents the outer limit of shareholder primacy.

Caremark itself has also been divided into so-called “prong one” and “prong two” claims.   E.g., Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065 (Del. Ch. Aug. 24, 2020).  Prong one claims are that the company simply failed to adopt any kind of monitoring system, and though they may be the hardest to prove, they are also the claims that fit easily within the shareholder-primacy framework.  After all, you can’t make an informed judgment about what’s best for the firm if you blind yourself to the facts.  Prong two claims, though, are that directors ignored “red flags” of illegal conduct.  But when we aren’t talking about illegal conduct – but simply bad business decisions – “red flag” claims fall squarely within the business judgment rule, i.e., that the directors made a rational decision that the risks were worth the payoff. In re Citigroup S’holder Litig., 964 A.2d 106 (Del. Ch. 2009); In re Goldman Sachs Group Inc. S’holder Litig., 2011 WL 4826104 (Del. Ch. Oct. 12, 2011).  What distinguishes a “red flag” Caremark claim from a “red flag” business decision claim is that, presumably, corporate directors do not have permission to take calculated risks about the payoffs from lawbreaking.

Given this frame, the question becomes, where does “defamation” fit on this scale?  Does it count as illegal, ultra vires conduct?  Or can it be a legitimate business decision that becomes a breach of duty only in “prong one” situations, or, I could imagine, if defamation is permitted not because directors believe it to be wealth-maximizing for the firm, but because directors are advancing their own political commitments?  In the Fox case, the stockholder plaintiff alleges that the Fox Corp board intentionally permitted false claims to air because it was fearful of losing viewers.  In other words, the actual allegation is that the board was trying to maximize shareholder wealth – not that it neglected its duties, and not even that false political claims benefitted board members personally.

I mean, look, I realize it sounds absurd even to ask the question – “when is intentional defamation by a news organization permissible?” – I kind of laughed and cringed as I typed this – but I think there’s an important theoretical point here regarding where we draw the line on the hard limits of authorized corporate activity.  Stone v. Ritter, for example, only mentioned “intentional violation of positive law” as a breach of directors’ fiduciary duties; does that mean only statutory/regulatory law, or does it include common law civil torts like defamation?  I also note that Delaware permits directors to engage in “efficient breach” of contract, e.g., In re Essendent S’holder Litig., 2019 WL 7290944 (Del. Ch. Dec. 30, 2019); in other words, directors can, consistent with their fiduciary obligations to shareholders, choose to break a contract if they deem it profitable to do so, taking into account the penalties the corporation may be forced to pay to the counterparty.  So that’s at least one kind of “law” that corporations are permitted to violate.  Is tort law different from contract law, and if so, why?  What if the company engages in tortious interference with contract?

I suppose one way of drawing the line would be to note that tort claims – unlike contract claims – permit punitive damages, which is kind of like society’s way of saying that this is not simply priced behavior, but unauthorized behavior.  And maybe that’s simply the answer.  But cf. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L.Rev. 1089, 1126 n.71 (1972).

April 15, 2023 in Ann Lipton | Permalink | Comments (3)

Wednesday, April 12, 2023

Professor Skinner on Central Bank Digital Currency as New Public Money

Last week, I posted (here) about an important new article on the Fed and I’m doing that again this week.  Wharton Professor Christina Parajon Skinner’s Central Bank Digital Currency as New Public Money (forthcoming, University of Pennsylvania Law Review) is also a critical piece.  As the Introduction explains: “nearly every central bank around the world” is considering whether to create a central bank digital currency (CBDC).  Most payments are already digital.  Hence, it is important to realize that the impact of a central bank digital currency would be more than just payment digitization. 

Skinner states that “At least in the case of a U.S.-dollar CBDC, issued by the Federal Reserve, not only is a CBDC a fundamentally new monetary instrument, it also fundamentally alters – by weakening – the bundle of rights that State-issued money has heretofore conveyed to individuals holding public money.” (p. 9-10) And that “In many ways, as this Article will suggest, the nature of money implicates the very relationship between people and the State. In that sense, each nation’s decision about whether to pursue a CBDC will be highly dependent on its legal framework but also its political-economy values. Some States may well proceed with a CBDC while others might find it inconsistent with their political and legal mores and traditions. But in that case, the question of how to preserve a well-functioning monetary order will need to be addressed within the framework of international monetary law.” (p.11)  

Even more than with the question of who has access to a master account at the Fed (see here, here and here), widespread understanding of and debate about the potential adoption of a U.S.-dollar CBDC is tremendously important.  Such conversations are also incredibly timely. 

In fall 2022, the Federal Reserve Bank of New York (FRBNY) released its Phase One Report on “Project Cedar.”  As the FRBNY explains: “Project Cedar is the inaugural project of the New York Innovation Center (NYIC). It is a multiphase research effort to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC) in the Federal Reserve context.”  The Report “aims to contribute to a broad and transparent public dialogue about CBDC from a technical perspective. The report is not intended to advance any specific policy outcome, nor to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a retail or wholesale CBDC, nor to offer an indication of how one would necessarily be designed.” (p.3-4)

Here’s the abstract for Skinner's article:

Today, nearly every central bank around the world is considering whether to create a new form of digital public money, referred to as central bank digital currency, “CBDC.” Although CBDC is often discussed as a way to make payments more efficient, enhance financial inclusion, or reduce the risk of financial instability posed by stablecoins, the legal rights attached to CBDC remain poorly understood. This Article theorizes American public money as a bundle of distinct economic rights—namely, rights to popular monetary sovereignty; to property in value; and to qualified privacy. It then measures CBDC against the legal and conventional status quo to discern where CBDC adds to the monetary bundle-of-rights or takes a stick away. The Article argues that CBDC transfers significant monetary power to the State by weakening the individual right of issuance, conditioning the individual right to monetary property, and rendering monetary privacy rights scarce. It also, in so doing, empowers the central bank while weakening its independence.”    

April 12, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Tuesday, April 11, 2023

Succession: DePaul Law Review Call for Papers

The DePaul Law Review will devote the third issue of its 73rd volume (slated for publication in Spring 2024) to a symposium addressing the Emmy-winning scripted drama Succession from a legal and pedagogical point of view. The aim of this special issue is to collect in one place the insights of a variety of faculty members with different legal subject-matter expertise, as a resource for all who are interested in the use of this award-winning work for the teaching, practice, and study of law. The DePaul Law Review has already secured the participation of a number of distinguished scholars.

The DePaul Law Review invites proposals from others for two to four additional contributions to be included in this special issue. Proposals for a contribution of between 5,000 and 10,000 words are welcome from all who teach any area of law. (The print symposium will be accompanied by simultaneous online publication with live hyperlinks, allowing readers to access video links if the author desires.)

Potential contributions to the special issue might take a variety of forms. For example, these essays might:

• explore the legal implications of various plotlines through a variety of doctrinal lenses (e.g., mergers and acquisitions, wills and trusts, corporate law, employment law, criminal law);

• share classroom techniques for using Succession, and its scenarios or characters, in law teaching;

• consider how matters such as race, gender, sexual orientation, age, disability, and class are represented on Succession, or how the show depicts law, law enforcement, and lawyers; or

• draw on literary techniques to illuminate (or critique) Succession's approach to the myriad legal issues it presents.

Interested individuals should send an abstract outlining the topic and substance of their proposed contribution to the DePaul Law Review by email to Lizzie Carroll, Managing Editor of Lead Articles, at [email protected], or to Prof. Susan Bandes, [email protected], or Visiting Professor Diane Kemker, [email protected]. Abstracts (of 250 words at most) should be submitted by April 30, 2023. Proposals will be reviewed and invitations issued by June 1, 2023. Initial drafts will be due August 15, 2023, with final drafts due by October 1, 2023.

April 11, 2023 in Call for Papers, Family Business, Joan Heminway, Law Reviews, Television | Permalink | Comments (0)

Monday, April 10, 2023

Recording of the Inaugural Peter J. Henning Lecture

For those of you interested in watching or listening to the inaugural Peter J. Henning lecture (the subject of my blog post last Monday), you can find the recording here.  Friend-of-the-BLPB Chris Lund was kind enough to send the link along.  As you'll note, Judge Rakoff's remarks (which were introduced by Chris) begin with comments about Peter, his contributions to our field, and his service to the general public.  Judge Rakoff's thoughts in that regard are so well taken.  The whole presentation was such a fitting tribute.

I hope you all enjoy the lecture as much as I did!

April 10, 2023 in Joan Heminway, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Sunday, April 9, 2023

ICYMI: "Civil Rights Complaint Against McDonald’s for Unlawful and Racist Hiring Practices"

From America First Legal (here) on April 5, 2023:

Today, as part of its initiative under the Center for Legal Equality, America First Legal (AFL) asked the U.S. Equal Employment Opportunity Commission (EEOC) to open a civil rights investigation into McDonald’s Corporation for engaging in unlawful, discriminatory hiring practices. Federal law forbids discrimination based on race, color, religion, sex, or national origin by an employer against an employee or potential employee. Yet, McDonald’s publicly admits to intentionally violating this law. McDonald’s even created a “Diversity Snapshot” that breaks down its staffing goals by race .... As part of its “Allyship through Accountability” program, McDonald’s actively uses hiring practices focusing on immutable characteristics rather than skillsets.... The odious and illegal practice of hiring based on immutable characteristics like race is a flagrant attack on civil rights that harms all Americans. Under the guise of “equity,” companies like McDonald’s openly discriminate against individuals without facing any repercussions or pushback. America First Legal is determined to stop the destructive hiring practices of woke companies across the country and will continue to fight for equal opportunity for all Americans.

Gene Hamilton, America First Legal Vice President and General Counsel, added the following:

So many of America’s biggest and most celebrated corporations have abandoned the very systems, values, and laws that made this country great. Now, even McDonald’s, with its iconic golden arches and international recognition as a standard-bearer for American success, has caved to a woke mob of activists and has committed to violating the law to achieve their desired social outcomes–even aiming for racial quotas. Their actions are un-American, bad for business, and patently unlawful. As McDonald’s prepares for widely anticipated corporate layoffs–an unfortunate development that will hurt real American families–our hope is that it abides by federal law and refuses to use these anticipated layoffs with an eye towards achieving its racial diversity goals.

April 9, 2023 in Stefan J. Padfield | Permalink | Comments (1)

Saturday, April 8, 2023

Fourth time's definitely a pattern

I blogged a few times about 10(b) cases raising the question of when shareholders of a publicly traded parent company can sue its wholly-owned subsidiary for the subsidiary’s false statements.  The latest, In re CarLotz Inc. Securities Litigation, 2023 WL 2744064 (S.D.N.Y. Mar. 31, 2023), denied such claims by shareholders of a pre-merger SPAC seeking to hold the pre-merger target liable for misleading investor presentations about its business.  The case was the natural result of the Second Circuit’s decision in Menora Mivtachim Insurance Ltd. v. Frutarom Industries Ltd., 54 F.4th 82 (2d Cir. 2022), which I blogged about here.

CarLotz was in the business of facilitating used car sales from their original owners to retail customers.  Acamar, a SPAC, went public in February 2019, and struck a deal to merge with CarLotz in October 2020.  A prospectus and registration statement were filed in December 2020 to register the new Acamar shares that would be issued as merger consideration, and Acamar shareholders approved the deal in January 2021.

After the announcement of the deal but before the merger, CarLotz’s officers were alleged to have made a false statements about CarLotz’s business.  The truth was revealed after the merger, when CarLotz admitted, among other things, a backlog of inventory that it had to sell at unfavorable prices, and the loss of a critical corporate partner and source of vehicles.

Shareholders of both pre-merger Acamar and post-merger CarLotz sued CarLotz’s officers under Rule 10b-5, as well as Section 11 and Section 12, purporting to represent Acamar/post-merger traders in the period beginning October 2020 through May 2021.

The court held that Frutarom “forecloses Plaintiffs’ challenge to any statements made by Pre-Merger CarLotz about Pre-Merger CarLotz.  As in Frutarom, neither of the named Plaintiffs purchased shares of Pre-Merger CarLotz—a privately held entity. The only pre-merger shares purchased by a named plaintiff in this case were those of Acamar. All of the challenged pre-merger statements, however, were made by Pre-Merger CarLotz about itself, not Acamar.”  Though the court explicitly noted the “policy concerns” of permitting SPAC transactions to escape 10b-5 liability in this manner, the court considered itself bound by the Second Circuit’s holding, even noting that the Second Circuit had explicitly considered – and rejected – arguments about Frutarom’s application to SPACs when the Frutarom plaintiffs petitioned for rehearing.

As for the Section 11 and Section 12 claims, the court held that plaintiffs had not shown they’d purchased shares traceable to the false registration statement or – with respect to Section 12 – in the offering itself (which, in the latter case, would not seem to be possible by anyone except the former CarLotz shareholders).  The court rejected arguments that Section 11 and 12 requirements should be modified for the SPAC context.

Anyhoo, as I previously blogged, at least one court outside the Second Circuit has rejected Frutarom, so … stay tuned.

April 8, 2023 in Ann Lipton | Permalink | Comments (0)