Wednesday, March 6, 2024

Law School Better than a Meme

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

IMG_4694

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

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

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

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

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

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

 

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

 

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

 

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

 

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

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

 

 

 

 

March 6, 2024 in Current Affairs, Joshua P. Fershee, Law School, Lawyering, Teaching | Permalink | Comments (0)

Tuesday, March 5, 2024

Global Conversations in International Business Transactions

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

DC Roundtable FINAL CFP

March 5, 2024 in Call for Papers, Conferences, International Business, Joan Heminway | Permalink | Comments (0)

Monday, March 4, 2024

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.

March 4, 2024 in Constitutional Law, Corporations, Current Affairs, Joan Heminway, LLCs | Permalink | Comments (3)

Friday, March 1, 2024

*spins roulette wheel* Moelis and OpenAI!

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

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

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

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

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

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

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

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

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

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

EXCEPT.

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

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

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

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

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

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

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

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

March 1, 2024 in Ann Lipton | Permalink | Comments (0)

Thursday, February 29, 2024

A Recent Snapshot on American Retirement Readiness

Senator Sanders recently released the Majority Report for the Senate's Health, Labor, Education, and Pensions Committee.  That report has some grim findings about American retirements.  About half of people 55 and older have no retirement savings.  As we all know, defined-benefit pensions have become increasingly rare.  Unfortunately, defined-contribution pensions are often unavailable for a huge chunk of the workforce.  About 50 million workers don't have a way to save for retirement through their payroll.

The report and its figures has to be part of any conversation now about how to think about efforts to improve the quality of financial advice and retirement savings.

There is much more in the report than this quick summary, and if you write or think about retirement issues, you should check it out.

February 29, 2024 | Permalink | Comments (0)

Monday, February 26, 2024

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.

February 26, 2024 in Corporate Governance, Joan Heminway | Permalink | Comments (0)

Saturday, February 24, 2024

Counseling Creators: Influencers, Artists and Trendsetters Negotiation Competition and Conference

If you happen to be in Miami or think it's worth it to fly there next week, this is for you. I'll be moderating the panel on regulatory considerations for promoters and influencers and we have student teams competing from all over the country. 

February 29 - March 1
University of Miami

Content is king. We live in the golden age where content creators, artists, and influencers wield power and can shift culture. Brands want to collaborate. Creators need to be sophisticated, understand deal points and protect their brand and intellectual property. Miami Law will be the first law school in the country to pull together law students with leading lawyers, influencers, artists, creatives and trendsetters for a negotiation competition and conference.  

Negotiation Competition - Thursday, February 29 

Where

Shalala Student Center, 1330 Miller Drive, Coral Gables, FL 33146

Who Should Participate

This competition is ideal for law and business students. THE. TEAMS ARE FINALIZED ALREADY.

What to Expect

Participants will have the chance to represent influencers, brands, artists, fashion companies and other creators in the first ever Counseling Creators: Influencers, Artists and Trendsetters Negotiation Competition

  • Register a team of law students (can include business school students)
    1. Team of up to 4
    2. Individual registrants will be placed on a team
  • In advance of the competition, you will be assigned two negotiations where you may be representing your favorite influencer, brand, artist, or fashion company negotiating the compensation, deliverables, and key deal points
  • Industry judges will grade your negotiation and provide feedback
  • Top teams will advance to the final negotiation to be held live during the conference 

Conference - Friday, March 1 

Where

Lakeside Village Auditorium, 1280 Stanford Dr, Coral Gables, FL 33146

Who Should Attend

This conference appeals to all lawyers, law students, brands, influencers, artists and creators for the first ever law school conference on Counseling Creators: Influencers, Artists and Trendsetters.  

What to Expect

  • Panel conversations + Keynotes
  • Topics such as: The Business of Content Creation, Fair Use for Content Creators, Clearances for Creators, The Brand Deal, Compliance and Regulatory Considerations for Creators, Promoter Liability
  • Opportunity to network and learn from industry leading creators, brands, and lawyers and more

PROGRAM (Subject to change)

9:00am - 9:15am         Opening Remarks

9:15am - 10:15am       The Brand Deal

Moderator: TBA

Speakers:

Jennifer Karlik, Director of Business Development, CAA Brand Management
Michael Calvin Jones, SVP, Creators, Wasserman
Mark Middlebrook, VP, Legal Affairs, Fanatics Collectibles
Michael Isselin, Partner, Entertainment & Media Group, Reed Smith
Jonathan Seiden, Senior Vice President, Associate General Counsel, Endeavor


10:20am - 11:20am    Fair Use and Clearances for Creators

Moderator: Vivek Jayaram, Founder, Jayaram Law and Co-Director, Arts Track, Entertainment, Arts and Sports Law Program at Miami Law

Speakers:
John Belcaster, General Counsel, MSCHF and Miami Law Entertainment, Arts and Sports Law Program Advisory Board Member
Katie Fittinghoff, Creative, MSCHF
Matt Rayfield, Creative, MSCHF


11:30am - 12:30pm    Athletes as Content Creators
 

Moderator: Greg Levy, JD ’10, Associate Dean & Director Entertainment, Arts & Sports Law Graduate Program, Miami Law

Speakers:
Kirby Porter, Founder, New Game Labs
Michael Raymond, Founder, Raymond Representation
Bob Philp, Sr. Executive, Sports Partnerships & Talent Management, Roc Nation Sports
Darren Heitner, Founder, Heitner Legal


12:30pm -1:30pm      LUNCH
 

1:30pm – 2:20pm      Creator Fireside Chat


2:25pm - 3:25pm       Regulatory Considerations and Promoter Liability for Creators

Moderator: Marcia Narine Weldon, Director of Transactional Skills Program, Miami Law

Speakers:
Toam Rubinstein, JD ’13, Senior Associate, Entertainment & Media Group, Reed Smith
Mr Eats 305, (@MrEats305), Food, Travel, & Lifestyle Creator & Law School Graduate
Tyler Chou, Founder and CEO, Tyler Chou Law for Creators


3:30pm - 4:30pm       The Fashion Collaboration

Moderator – Carolina Jayaram, CEO, The Elevate Prize and Co-Director, Arts Track, Entertainment, Arts and Sports Law Program at Miami Law

Speakers:
Demeka Fields, Counsel for Global Sports Marketing, New Balance
Danielle Garno, Partner and Co-Chair of Entertainment Practice, Holland & Knight and Miami Law Entertainment, Arts and Sports Law Program Advisory Board Member
Matthew Growney, Founder, Thermal Brands; Sr. Advisor (Fashion/Creative), PUMA & Stella Artois

 
4:40pm - 5:30pm       Competition Final

 

For More Information

Contact [email protected] or 305-284-1689.

 
 
 

February 24, 2024 in Compliance, Conferences, Current Affairs, Law School, Lawyering, Legislation, Licensing, Marcia Narine Weldon, Music, Sports | Permalink | Comments (0)

Friday, February 23, 2024

The Materiality of Audit Opinions

A while back, I posted about an eyebrow-raising opinion out of the Second Circuit holding that clean audit opinions may not be material to investors because they use generic language.  Happily, the Second Circuit has agreed to take a second look at the issue, and invited the SEC to file an amicus brief, which it did.  (Alison Frankel has a column on the case here; the brief is linked here)

The brief is simple and makes the obvious point that the language of a clean audit opinion may be standardized, but its use reflects an industry understanding regarding the procedures used in the audit and the auditor’s conclusions.

One thing worth highlighting: As I explained in my original post, the way we seem to have gotten here is that the defendant auditor conducted a shoddy audit, but then argued that there was no link between its own audit deficiencies and the actual flaws in the underlying financial statements – i.e., even a proper audit would not have caught the problems.

The SEC argues that, even if true, that would not make the audit opinion immaterial; it might, however, affect the analysis of loss causation.  The distinction matters a lot to the SEC, because loss causation is only an element for private litigants; materiality, however, is an element that the SEC must prove in its own enforcement actions.

I agree with the SEC: a claim that the auditor would have issued a clean opinion – and missed the problems in the underlying financials – even if it had used proper procedures, is more properly characterized as a claim about loss causation, i.e, whether the false statement resulted in losses to the shareholders.

I like to use a little rule of thumb on the distinction between transaction causation (materiality) and loss causation.  Transaction causation asks, what would have happened if investors knew the truth?  Loss causation asks, what would have happened if the lie had been true? 

If investors would have done nothing differently, even had the truth been disclosed, the lie is immaterial. (This is, by the way, precisely what the Second Circuit has previously said about materiality). 

If the same losses would have occurred even if the allegedly false statements had been truthful – i.e., if there was some intervening cause that tanked the stock price – there is no loss causation.

In this case, it is impossible to believe that investors would have had no reaction had they been told the company was incapable of presenting a clean audit opinion.  Therefore, the Second Circuit should hold that the opinion was material.

And okay fine since I can’t resist…

As Ben Edwards blogged on Thursday, VC Laster came down with his long-awaited opinion in TripAdvisor.  The case was fascinating enough as it was – could it be a violation of fiduciary duty for a Delaware corporation to leave Delaware? – but in light of Elon Musk’s latest threats, it took on a heightened significance.

Most interestingly, VC Laster found, first, yes, a controller’s choice to relocate to a state that scrutinizes conflict transactions less closely than Delaware may itself be a conflict transaction.  And, second, damages rather than an injunction would almost certainly be the correct remedy.  Damages, he claimed, could be assessed by watching stock price movements; and not even necessarily at the moment of a shareholder vote, but even upon announcement of an intention to hold one.  (Which works for a public company, I guess; I assume we won’t see these disputes in private companies but that context would make a damages remedy much harder to fashion).

But here’s the thing.  To get there, he had to distinguish some prior cases that concluded that the elimination of litigation rights did not state a claim for breach of fiduciary duty.  This issue had come up, for example, in the context of charter amendments adding an exculpation clause under Section 102(b)(7), and in a reincorporation to California.  VC Laster was pretty clear that he simply thought some of them were wrongly decided, but his main point was that in those cases, the amendments were immaterial – i.e., it was not clear that the change conferred a non-ratable benefit on existing directors.  By contrast, he held, in this case, the differences between Nevada law and Delaware law are sufficiently plain – and the controller’s reasons for wanting the move sufficiently blatant – that the stockholder plaintiffs had at least, for pleading purposes, established they were losing a valuable right.

So … Texas?  As I previously wondered, Texas’s law might be different than Delaware’s but it is not obvious that it is so different – especially with respect to conflict transactions – that plaintiffs would be able to plead the same case.  And Musk may believe the Texas judges will less receptive to stockholder claims than Delaware judges, but, in TripAdvisor, VC Laster held that stockholders’ loss of access to any particular forum does not confer a material benefit on fiduciaries.

But!  If plaintiffs were able to plead that the move to Texas conferred a material benefit on Elon Musk, and then they had to prove damages via stock price movements – well, Musk gave them quite a boon by tweeting on January 30, in the middle of a dramatic slide in Tesla’s stock price due to the Tornetta verdict, that he hoped to reincorporate out of state.  That will sufficiently muddy the waters about price impact so as to give plaintiffs plenty of runway. 

Once again, foiled by bad tweets.

But finally, I think it will take quite a while to get that far, because if Tesla ever files a proxy statement for a shareholder vote, we will see some truly popcorn-worthy litigation over the completeness of the disclosures.  Will the proxy admit – or deny – the move was based on a Twitter poll?  How will the purposes of the move be characterized?  What was the board’s process for recommending the move, and how independent were the directors?  According to the WSJ, the directors intentionally keep concerns about Musk’s drug use out of the board minutes – can shareholder plaintiffs use §220 to get emails, then?  Etc, etc.

February 23, 2024 in Ann Lipton | Permalink | Comments (0)

Thursday, February 22, 2024

Delaware's TripAdvisor Decision

Vice Chancellor Laster has issued his opinion in the TripAdvisor case.  I'm still digesting it, but the overall framework does not surprise me.  As I can't improve on the opinion's recitation of the basic factual situation, here it is:

A Delaware corporation has two classes of stock. The CEO/Chair owns highvote shares carrying a majority of the outstanding voting power, giving him hard majority control. The board decides to convert the Delaware corporation into a Nevada corporation, and the CEO/Chair delivers the necessary stockholder vote. The board does not establish any protections to simulate arm’s length bargaining. The conversion is not conditioned on either special committee approval or a majority-ofthe-minority vote.

A stockholder plaintiff challenges the conversion.1 The plaintiff argues that Nevada law offers fewer litigation rights to stockholders and provides greater litigation protections to fiduciaries like the directors and the CEO/Chair. The plaintiff alleges that the directors and the CEO/Chair approved the conversion to secure the litigation protections for themselves. In support of those assertions, the plaintiff cites the materials the board considered, disclosures in the company’s proxy statement, the work of distinguished legal scholars about the content of Nevada law, and public statements by Nevada policy makers about the direction Nevada law has taken.

I appreciate that the opinion gives a neutral framework under Delaware law for how to assess liability for changes in governance and litigation rights.  Although it's Nevada today, Tesla might be jumping to Texas tomorrow.  This decision provides guidance for how to think about that problem.  This passage does a good job presenting the issue:

Holding that the plaintiffs have stated a claim on which relief can be granted does not discriminate against Nevada entities. The same reasoning would apply if a Delaware corporation converted into another Delaware entity in a transaction with comparable implications. Using the contractual freedom conferred by the Delaware Limited Liability Company Act, entity planners can implement a wide array of governance schemes that provide fewer rights to investors than what stockholders in a Delaware corporation enjoy. If a Delaware corporation converted into a Delaware LLC where the governing agreement had eliminated all fiduciary duties, then the same reasoning would hold. Entity planners could even design a Delaware LLC that mirrors the internal governance structure of a Nevada corporation. If a Delaware corporation converted into that LLC, the outcome would be the same.

After deciding that the entire fairness standard will apply, the decision also clearly charts a path to leave Delaware without any liability:

Nor does this decision mean that a corporation can never leave Delaware without litigation risk. If a board proposed a similar conversion for a corporation without a stockholder controller, and if the fiduciaries fully disclosed the consequences of the change in legal regimes, including the effect on stockholder litigation rights, then the stockholders’ approval of the conversion would be dispositive, triggering an irrebuttable version of the business judgment rule. If directors proposed a similar conversion for a corporation with a stockholder controller, and if they properly conditioned the transaction on the twin MFW protections, then the dual approvals would be dispositive, again triggering an irrebuttable version of the business judgment rule.

For some public companies, Nevada may be a better fit than Delaware simply because of the cost issue.  Controlled corporations can exit with a two-step process and corporations without a controlling stockholder can make the move with a simple shareholder vote.

Going forward, a real challenge will be deciding how to value the change in litigation rights.  The opinion sketches out a possible market method:

The standard legal remedy is money damages. It seems quite likely that the court can craft a monetary remedy in this case that would be adequate. The remedial challenge will be to quantify the extent of the harm, if any, that moving from Delaware to Nevada imposes on the unaffiliated stockholders.

One way to determine the quantum of harm would be to value the Company pre-conversion as a Delaware corporation, then value the Company post-conversion as Nevada corporation, subtract the Nevada value from the Delaware value, and calculate a per share amount. That would be hard.

But there is another way to get at the delta. The Company’s stock has a trading price. In the conversion, nothing will change except the Company’s corporate domicile. Maffei’s control will remain constant. The Company’s business will remain constant. The only independent variable is the law governing its internal affairs.

Given that set-up, the change in the Company’s trading price should help quantify the harm, if any, caused by the conversion. As long as the market for the Company’s common stock is semi-strong-form efficient, then the price reaction should be indicative. Note that the stock price need not fairly approximate a pro rata share of the Company’s intrinsic value for the price reaction to matter. As long as any pricing disconnects remains consistent across variables other than the governing law, the price impact should provide insight.

From a Nevada perspective, the state will hope that companies trade up after these moves.  I previously proposed using markets to evaluate governance changes.  Although this method might shed some light on the valuation question, it's going to be a challenge.  Of course, this may also open the door to some disclosure gamesmanship.  It seems possible that a corporation announcing or completing this kind of move to Nevada might also selectively reveal some positive information at the same time.  That would increase the likelihood the stock would trade up and perhaps cloud or mask any impact from investors selling on the loss of their governance rights. 

It's probably worth also taking a look at other corporations that have made this move and what happens with their stock price.  If Delaware law and Nevada law are somewhat constant, you could likely get a better sense of the effect these moves have on valuation by getting a bigger dataset together.

If we're looking at changes in litigation rights and using this framework here when a company shifts from Delaware to Nevada or from a Delaware Corp. to a Delaware LLC, would we also use it for other governance changes?  What about a move to amend the bylaws in some way that affects litigation rights or a move to add a 102(b)(7) provision to a corporate charter?  My first thought is that the same framework should apply.  

In any event, this is going to be fun to watch.

February 22, 2024 | Permalink | Comments (0)

Northwestern Law School Workshops on Research Design for Causal Inference

Dear BLPB Readers:

For those of you who might be interested in strengthening your knowledge of empirical methods, Northwestern Law School is offering two summer workshops on Research Design for Causal Inference.  An overview of the main workshop and its target audience is below.  The complete details of the main and advanced workshops are here.

"Main Workshop Overview

We will cover the design of true randomized experiments and contrast them to natural or quasi experiments and to pure observational studies, where part of the sample is treated, the remainder is a control group, but the researcher controls neither which units are treated vs. control, nor administration of the treatment. We will assess the causal inferences one can draw from specific "causal" research designs, threats to valid causal inference, and research designs that can mitigate those threats.

Most empirical methods courses survey a variety of methods. We will begin instead with the goal of causal inference, and how to design a research plan to come closer to that goal, using messy, real-world datasets with limited sample sizes. The methods are often adapted to a particular study.

Target Audience

Quantitative empirical researchers (faculty and graduate students) in social science, including law, political science, economics, many business-school areas (finance, accounting, management, marketing, etc.), medicine, sociology, education, psychology, etc. –  anywhere that causal inference is important.

We will assume knowledge, at the level of an upper-level undergraduate econometrics or similar course, of multivariate regression, including OLS, logit, and probit; basic probability and statistics including confidence intervals, t-statistics, and standard errors; and some understanding of instrumental variables. This course should be suitable both for researchers with recent PhD-level training in econometrics and for empirical scholars with reasonable but more limited training."

February 22, 2024 in Colleen Baker, Conferences | Permalink | Comments (0)

Wednesday, February 21, 2024

Call for Papers - Global Conversations in International Business Transactions

Tuesday, February 20, 2024

Richmond Law Seeking Spring 2025 Business Law Visitor

From friend-of-the-BLPB Jessica Erickson:

The University of Richmond School of Law is looking for a visitor next spring (2025) in the business law area.  Specifically, we are looking for coverage for our Mergers & Acquisitions course, as well as either Securities Regulation or Business Associations. If you might be interested, please reach out to Kristen Osenga, our Associate Dean for Academic Affairs, at [email protected].  I am also happy to answer any questions about the school and our fabulous students and faculty.

February 20, 2024 in Joan Heminway, Jobs | Permalink | Comments (0)

Monday, February 19, 2024

Baiardi Endowed Law Speaker Series - Wayne State Law

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I have the privilege and honor to be in Detroit today to present the second annual Baiardi lecture at Wayne State University Law School.  Wayne Law is a bit of a second home for me (a status it enjoys with several other law schools).  I have presented at two symposia here (publishing twice, as a result, with the Wayne Law Review).  Also, Wayne Law was the academic pied à terre of Peter Henning, who was a trusted and dear mentor (and an accomplice in reasoning through insider trading and applied corporate governance questions) until his untimely death.

My lecture addresses aspects of a joint project I previewed at the National Business Law Scholars Conference at Tennessee Law last June.  The project is the brainchild of my Tennessee Law colleague Tomer Stein and involves taking a new approach to the ongoing debate about federalizing corporate law.  The talk offers some practical applied thoughts on the project and is entitled "Visioning (Not Advocating or Discounting) Federal Corporate Law." I undoubtedly will have more to say on this topic as our work on the project progresses.  But if you think of or come across anything you deem relevant to the cause and have time to contact me or Tomer, I know we would be grateful for your insights and suggestions.

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[Please note that, although the notice above says the day of the week is a Thursday, I am speaking today--Monday.]

February 19, 2024 in Conferences, Corporations, Joan Heminway | Permalink | Comments (0)

Sunday, February 18, 2024

Seeking Applicants for the Executive Director of the Lowell Milken Institute for Business Law and Policy

POSITION OVERVIEW

Position title: Executive Director of the Lowell Milken Institute for Business Law and Policy

Salary range: A reasonable estimate for this position is $200,000 to $250,000

APPLICATION WINDOW

Open date: October 30, 2023

Most recent review date: Sunday, Jan 7, 2024 at 11:59pm (Pacific Time)
Applications received after this date will be reviewed by the search committee if the position has not yet been filled.

Final date: Sunday, Mar 31, 2024 at 11:59pm (Pacific Time)
Applications will continue to be accepted until this date, but those received after the review date will only be considered if the position has not yet been filled.

POSITION DESCRIPTION

The Lowell Milken Institute for Business Law and Policy (“Institute”) is seeking an Executive Director with substantial practical experience in business law and policy to plan, oversee and execute the work of the Institute. The Institute is, by design, a dynamic one and the Executive Director will have significant opportunity to creatively shape the Institute’s mission and initiatives together with key faculty and leaders at UCLA School of Law. The Institute supports and expands educational opportunities, job-search support, academic scholarship, and policy analysis in business law and tax law. The goals of the Institute are to train the next generation of leaders in business law and to be an important resource for both scholars and practitioners in analyzing current issues in business law and tax law and developing policy solutions in response to those issues. The Executive Director will lead a talented team, and will oversee the Institute’s core programs, fundraising, and operation.

The full position description can be found here. Hat tip to friend-0f-the-BLPB Andrew Verstein.

February 18, 2024 in Joan Heminway, Jobs | Permalink | Comments (0)

Cincinnati Law - Corporate Law Center Director Search

The University of Cincinnati College of Law is currently undertaking a search for a new director of our Corporate Law Center. A description is below.  Hat tip to Kate Jackson.

About the Center

The Corporate Law Center at the University of Cincinnati College of Law was founded in 1987.  Its mission is to carry out  programs related to the education and training of students and others in the field of corporate law.  The Center has historically fulfilled its mission in a variety of ways, including the following: Awarding CLC fellowships to incoming law students, hosting an annual symposium devoted to trending topics in business law, supporting research, coursework, and other academic activities related to corporate law, sponsoring the student-led Business Law Society at the College of Law, supporting the Entrepreneurship and Community Development Clinic, which provides transactional legal services to start-ups, small businesses, and non-profit organizations; supporting the Patent & Trademark Clinic, which provides intellectual property legal services to individuals and businesses throughout the Cincinnati entrepreneurial ecosystem, and administering the Business Law Concentration for current law students.

Many of these activities continue to be enormously valuable. As part of the creation of a vision and strategic plan, the new Director will undertake a full programmatic review of the CLC and determine what kind of restructuring and reimagining is necessary to bring the CLC to the next level, as the leading national center of its kind.  Additional activities in this regard may include the creation of additional educational opportunities for students, a mentoring program, the establishment of an advisory board, and roundtables and seminars for members of the bar.

Job Overview

The College of Law seeks an innovative and dynamic leader to reinvigorate and reimagine its storied Corporate Law Center ("CLC").  Reporting directly to the Dean and working closely with its Academic Director, the new Director of the CLC will be responsible for defining a vision for the CLC, developing the resources to carry the vision out, and raising the profile of the CLC so that it is properly recognized as one of the premier centers of the College of Law. 

The ideal candidate will be collaborative and visionary, with experience in transactional law and a passion for the educational mission of the College of Law.  The candidate's background will reflect the potential to build strong and lasting partnerships with various constituencies both within and outside the institution to advance the mission of the Corporate Law Center.  The ideal candidate will also demonstrate the capacity to tailor academic and nonacademic programming to meet the unique needs of law students interested in transactional law.  Finally, the candidate will have a demonstrated track record of bringing a vision from its original conception through to full implementation.  

The position is structured as a two-year term, with the potential for extensions if the CLC is successful in obtaining funding to support the position for a longer period. 

Standard Days Worked: M-F
Type of Appointment: Full-Time (12 Months)
Work Location:  In-person.  The office location is University of Cincinnati College of Law, 2925 Campus Green Drive, Cincinnati, Ohio 45221.

Essential Functions

  • Undertake a full programmatic review of the CLC's current activities.
  • Create a vision and a long-term strategic plan for the CLC.
  • Develop the resources necessary to carry out the plan. 
  • Build partnerships across campus and to the Cincinnati business community.
  • Research, design, and implement high quality programming in the area of corporate law.
  • Provide educational outreach to the transactional legal community through events, workshops, and collaboration with applicable partners.
  • Collaborate with College of Law leadership, faculty, and staff, as well as campus and community members.
  • Maintain data and provide reports on Center activities, as well as assessment of outreach and other efforts.
  • May provide direct and/or indirect supervision to exempt and non-exempt staff (i.e., hiring/firing, performance evaluations, disciplinary action, approve time off, etc.).
  • Perform related duties based on the needs of the Corporate Law Center.

Minimum Requirements

  • Demonstrated capacity for developing a vision and creating and carrying out a strategic plan.
  • Substantial capacity for fundraising.
  • Commitment to working collaboratively and building partnerships to advance the mission of the CLC and the College.
  • Strong communication skills.
  • Deep commitment to creating a culture of inclusive excellence and belonging.
  • Five years post-J.D. work experience in corporate legal practice or a related field.
  • Juris Doctor.

Additional Qualifications Considered

  • Experience with law teaching.
  • A record of published scholarship in corporate law and related fields.

Application Information

  • Interested and qualified applicants must apply online and include (i) a cover letter of interest, and (ii) a resume.  
  • Applications without a cover letter and resume will not be considered for the position. Please use the additional documents feature as needed for these items.

February 18, 2024 in Joan Heminway, Jobs | Permalink | Comments (0)

Friday, February 16, 2024

More thoughts about advance notice bylaws

Fights over advance notice bylaws are becoming more common; I previously posted about Paragon Technologies v. Cryan, and right after that, VC Will decided Kellner v. AIM Immunotech.  In both situations, boards were found to have been overly aggressive in drafting and enforcing their bylaws, and VC Will went case by case to determine which actions were permissible and which were not.  And since the dissidents had not fully complied with even the permissible bylaws, VC Will would not order that their nominees be permitted to stand for election.

This strikes me as such a difficult problem.  On the one hand, there are good reasons for these bylaws, as both the Paragon and AIM disputes make clear.  In Paragon, the dissident really was playing games about providing information regarding its plans; in AIM, the contest was a continuation of one spearheaded a year earlier by a convicted felon who tried to conceal his involvement.  So yeah, boards have really legitimate interests in ensuring that shareholders have full information.

On the other hand, the blue pencil approach – where the noncompliant bylaws are severed and the legitimate ones remain standing – strikes me as having the same problem that’s been identified in the context of noncompetition agreements.  In the employment context, Chancery does not blue pencil, because:

To blue-pencil the provision creates a no-lose situation for employers, because the business can draft the covenant as broadly as possible, confident that the scope of the restriction will chill some individuals from departing. If someone does challenge the provision, then the worst case is that the court will blue-pencil its scope so that it is acceptable. It also enables employers to extract benefits at the expense of employees by including unenforceable restrictions in their agreements. The logical result of such a system is sprawling restrictive covenants.  Accordingly, “[w]hile, in some circumstances, a court may use its discretion to blue pencil an overly broad non[1]compete to make its restrictions more reasonable, this court has also exercised its discretion in equity not to allow an employer to back away from an overly broad covenant by proposing to enforce it to a lesser extent than written.”

Obviously, the employment context is not the same as an advance notice bylaw – dissidents are not nearly as vulnerable as employees – but there is, I think, a similar set of concerns.  If Delaware courts blue pencil the bylaws back to what – ex post – is determined to be reasonable, then boards have no incentive not to draft the most lengthy and unreasonable bylaws they can.  The dissident then has to guess at which ones are and are not permissible, and comply with the right set of bylaws – reveal too much and make themselves vulnerable, too little and disqualify themselves – while mounting an expensive court challenge that won’t necessarily create useful precedent for the next set of creative bylaws.

One aspect of the AIM case highlights the problem.  In 2016, the board had adopted a bylaw requiring disclosure of “all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made.”  In 2023, after having dealt with the convicted felon’s earlier contest, the board amended the bylaw to broaden that provision and capture associates and family members in a manner that VC Will found was unreasonable.  When the dissidents challenged the amended bylaw, rather than strike it entirely, Will decided to restore it to the narrower, 2016 version, and measured the dissidents’ compliance against that bylaw – the one that did not exist anymore.  The dissidents had not complied with the bylaw that did not exist, and that was one of the reasons why VC Will affirmed the board’s decision not to permit them to advance their nominees. 

Now, given the peculiar facts of this case, I’m not troubled by that result, but notice the bind this would have placed on a good-faith dissident slate.  They would have found it nearly impossible to guess what information was actually required of them.

I wonder, then, if the solution is to set some kind of blanket rule that certain types of bylaws are almost always going to be permissible.  If the board adopts bylaws that go beyond that floor, it does so at its own risk – if any additions are deemed unreasonable, all are struck, but the floor (to the extent adopted by the board) remains intact.  That way, dissidents know what the floor is for compliance, and there is no risk that, say, a felon gets through without any disclosure just because the board was overzealous.  Meanwhile, if the board has genuine need for information beyond the floor, it has an incentive to be judicious in crafting its additional requirements.

February 16, 2024 in Ann Lipton | Permalink | Comments (2)

Monday, February 12, 2024

National Business Law Scholars 2024 - Call for Papers

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 Friday, March 15, 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) 

February 12, 2024 in Call for Papers, Conferences | Permalink | Comments (0)

Friday, February 9, 2024

This Post is Not (Just) About Elon Musk

Look, it’s not like I want to post about Elon Musk every week, it’s just that he keeps doing things that result in interesting corporate governance conundrums.  So this week’s post covers several things, only one of which is a Musk thing.

The Musk Thing

After Chancellor McCormick struck down his Musk’s 2018 pay package, one bit of speculation that floated about was whether Musk could sue Tesla to recover the package, on some kind of restitution/quantum meruit theory.  My suspicion is that such a claim would be unlikely to succeed because Musk’s own fiduciary breaches are what led to the original forfeiture, and he who comes into equity must do so with clean hands.  Or, as the famous jurist Leo Rosten put it, it would be like “a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.”

But despite the dubious merit such a claim would have, given the close ties McCormick identified between Tesla’s board and Elon Musk, there would be a risk that the board would take a dive and settle unnecessarily.

(More under the cut)

Continue reading

February 9, 2024 in Ann Lipton | Permalink | Comments (0)

Wednesday, February 7, 2024

Professors Baker and Coleman on Metals Derivatives Markets and the Energy Transition

My coauthor, SMU Law Professor James W. Coleman, recently posted a draft of our article, Metals Derivatives Markets and the Energy Transition, on SSRN.  It's forthcoming in Transactions: The Tennessee Journal of Business Law, and was written in connection with Business Transactions: Connecting the Threads VII, the BLPB-related conference at the University of Tennessee Law School.  I had a wonderful time at the event, which has become one of my yearly favorites, and am truly grateful for UT Law School's consistently outstanding hospitality! 

Here's the abstract of our article:

Despite their escalating importance, thus far, there has been minimal legal scholarship on metals derivatives markets. Given the key role of these markets in the transition to a clean energy future, increased focus on them is imperative. Hence, it is not surprising that the agendas for the last four meetings of the Commodity Futures Trading Commission’s Energy and Environmental Markets Advisory Committee each dedicated a significant portion of the meeting to metals derivatives markets and their role in the transition to a clean energy future.

Fundamentally, the United States and the world are moving from their long-term dependence on the fossil fuels that built the modern world, to dependence on new commodities such as copper and lithium. Coal and then natural gas made the modern economy possible by providing heat, power, and electricity to growing industries and populations in the world’s growing urban centers. Then oil made globalization possible by powering international sea and air travel as well as overland vehicles. As electric vehicles increasingly displace fossil fuel vehicles and renewable energy sources increasingly replace fuels in heating and industry, the economic and geopolitical stakes of metals markets will grow higher and higher. The criticality of metals derivatives markets, such as the dysfunctional market for nickel, will also escalate as governments, businesses, and others seek to hedge risks related to the increasing global dependency on metals.

Our article makes at least two contributions. First, it expands the minimal analysis of metals derivatives markets in the legal scholarship. Indeed, to the best of the authors’ knowledge, this is the first law review article to focus primarily on these markets. Second, it explores the role of metals derivatives in preparing for the transition to a clean energy future. We provide a brief overview of metals derivatives, including new markets in development, and their regulation in Parts I and II, respectively. In Part III, we explore the central role of metals derivatives markets in securing a clean energy future.  

February 7, 2024 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Monday, February 5, 2024

Packin and Alon-Beck on Board Observers

I had the opportunity to attend one of the sessions in the Interdisciplinary Workshop on Corporations, Private Ordering, and Corporate Law last week.  The program was co-hosted by Foundations of Law and Finance (Goethe University Frankfurt, Center for Advanced Studies) and Columbia Law School.  Luckily for me, the piece of the program I attended featured Nizan Geslevich Packin presenting a work-in-progress she is co-authoring with Anat Alon-Beck entitled Board Observers: Shadow Governance in the Era of Big Tech.

Although a draft of the paper is not yet posted, here is the SSRN abstract:

This Article examines the rise in corporate governance practice of appointing board observers, especially in the context of private equity, venture capital (VC), and corporate venture capital (CVC). Board observers are non-voting members attending board meetings to gain knowledge and insight. They arguably also provide valuable feedback, an outside perspective, and can even help ensure corporate operations. In recent years, board observer seats – a notion also existing in the nonprofit sector – have become increasingly popular in the for-profit business world, where investors have various market and business justifications for using board observers, including corporate governance considerations, minimizing litigation exposure, navigating antitrust issues, CFIUS regulation, and ERISA concerns. It was not until November 2023 that mainstream media started paying more attention to the concept of board observers, after OpenAI, the corporate entity that brought the world ChatGPT, gave Microsoft a board observer seat following the drama in OpenAI’s boardroom. But what the mainstream media did not explore in its coverage of the board observer concept was its seemingly less interesting nature as a non-voting board membership, which was an important element in the complex relationship between OpenAI and Microsoft. This signaled deepening ties between the two companies that also eventually got the attention of the DOJ and FTC, as well as the influential role of CVC in funding and governing the research and development of OpenAI.

This Article makes several contributions. First, it provides an account of the board observer phenomenon, which has significantly developed and become a common practice in recent years given antitrust and national security considerations and scrutiny. Second, it presents fresh insights, groundbreaking empirical findings, and data on the scope of this corporate governance vehicle. Third, it considers the theoretical circumstances and implications of these developments. It argues for a shift in contractual innovation in deal-making and regulatory reviews, necessitating the development of corporate culture norms emphasizing disclosure and prioritizing company interests, communication, and trust-building as crucial elements in service of board observers. Finally, the Article considers the practical implications of these developments and explains why more empirical data collection and further research are necessary to determine whether current corporate governance mechanisms require modification in connection with liability, accountability, and fiduciary duties for board observers.

As someone who had to deal with board observer requests and provisions in an earlier corporate finance era, I was fascinated by the work.  So much of what their research is revealing felt familiar (even though much also has changed): what is old can be new again.  I look forward to reading the draft and learning more.

February 5, 2024 in Corporate Finance, Corporate Governance, Corporations, Joan Heminway, Management | Permalink | Comments (0)