The traditional line is that shareholders have three powers with respect to the corporations in which they invest: to vote, to sell, and to sue, and through these mechanisms, they can protect their investment and discipline management. 

Voting can oust unfaithful or incompetent managers; the prospect of a lawsuit can deter misconduct and compensate shareholders for losses; sales both allow investors to exit if they view an investment unfavorably, and can drive down stock prices, which will then pummel the stock options of recalcitrant managers and encourage activist interventions.

So what happens when shareholders have none of these?

I speak, of course, of the upcoming SpaceX IPO (I was going to wait to talk about it until the S-1 was public, but at this point so much has leaked – here’s me and Mike Levin talking about the implications of those leaks on our podcast – that waiting seemed unnecessarily coy).  So with the caveat that maybe the S-1 will have information contrary to what’s been publicly reported, what we know is:

(1)  SpaceX will have dual or multiple classes of stock that will give Elon Musk voting control and require his votes to remove him from the Board and from his position as CEO. 

(2) SpaceX will be incorporated in Texas, where it will take advantage of a Texas law permitting it to bar votes on shareholder proposals unless the proponent has at least $1 million worth, or 3% of, the outstanding stock.

(3) With its Texas incorporation, SpaceX will be insulated from any lawsuit unless the shareholder shows “fraud, intentional misconduct, an ultra vires act, or a knowing violation of law” (these provisions have not been interpreted, but if they’re anything like Nevada’s similar law, a conflict of interest – even an uncleansed conflict of interest – will not be enough to state a claim).  Additionally, SpaceX will take advantage of a Texas law permitting it to limit derivative lawsuits to shareholders who hold 3% of the stock (what, $52 billion at reported valuations?).  SpaceX will also, apparently, accept the SEC’s invitation to require individualized arbitration of securities lawsuits (as I keep saying, the point of an arbitration provision is not to arbitrate, but to bar class actions – so that only a handful of investors have sufficient stakes to make a lawsuit worthwhile).

(3) The NASDAQ 100 and, potentially, the S&P 500, will change their rules to permit SpaceX to be added early, which means countless investors will functionally be forced to buy at the market price, long before there’s been any serious price discovery, and on terms that may give the stock price an artificial boost. They will not be able to sell.

And SpaceX may be an extreme example but it’s hardly the only one – OpenAI and Anthropic are reportedly prepping their own IPOs and will benefit from the same index rules; they will unquestionably both go public as controlled companies; and even if they don’t adopt the extreme protections against shareholder lawsuits that SpaceX is contemplating, they’ll be going public at least in Delaware, where shareholders’ abilities to sue have been, shall we say, weakened. 

Meanwhile, there’s the SEC’s new proposal for semi-annual reporting, and I don’t know whether or to what extent any of these companies will take advantage of that option, but if they do, it would mean (1) shareholders have even less information on which to make a decision to sell, and (2) increased volatility may make securities lawsuits harder to bring because of the difficulties of establishing loss causation and/or price impact.

Now, I just wrote a whole paper arguing that at least some of the “disciplining” mechanisms available to shareholders are more performative than functional, but that doesn’t mean I’m comfortable with losing all of them simultaneously, especially since I think mandatory disclosure and transparent, liquid markets do a lot of the work.

In other words, we’re about to see a great test of corporate theory: What happens when the residual claimants have no rights at all?

There is no other thing.  No new Shareholder Primacy podcast this week, but back soon!

So, the SEC is out with its proposal to allow companies to choose whether to provide interim reports quarterly or semi-annually.  The Commission currently consists of three Republican members, two of whom seem pretty committed to the idea, so I suspect the “request for comments” is pro forma and the rule will be finalized soon.  

Previously, I posted about how this new rule might affect securities fraud litigation; now that the rule is out, I’ll point out it allows registrants to shift to between quarterly reporting and semi-annual reporting – back and forth – every year, by checking a box on the 10K.  Since the 10K is usually filed around 3 months into the following fiscal year, registrants will already know what the first quarter of the new fiscal year looks like when they make the election to report semi-annually or quarterly.  Which … I mean, Rule 10b5-1 was just changed to add a cooling-off period after amending the plan, you’d think reporting frequency could be at least as rigorous.  I’m sure market norms will develop around sudden changes, but, well, it seems to me to be a recipe for abuse.

Meanwhile, there are already a bunch of comments posted, most of which are from retail traders or individual investment advisers (my guess is institutions will take a little longer to get their thoughts out).  And most of those are opposed, with the most frequently cited objection being, retail traders are already at an informational disadvantage relative to large institutional traders, and a switch to semi-annual reporting will further uneven the playing field. Which is kind of a funny thing to say, since most securities theorists, I suspect, would argue something like, retail traders are always at a disadvantage relative to institutional traders, there can never be a level playing field, so retail traders should not rely on public information to beat the market and instead should accept the market return, which reflects the judgments of informed professionals.

And that makes me think of – prediction markets!  Lately there have been a lot of stories about evidence, implicit or explicit, that insiders are cleaning up, despite attempts by the platforms to police that sort of thing.  And yet, these platforms remain extremely popular, even among naïve gamblers bettors commodities traders.  Which, if you think about it, pretty much gives the lie to the Supreme Court’s pronouncement that it is necessary to police insider trading because “[a]lthough informational disparity is inevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law.” Or, more simply, it seems plenty of people would knowingly roll the dice in a crooked crap game.

And another thing. New Shareholder Primacy podcast is up!  Me and Mike Levin talk about the latest decision from the Delaware Supreme Court regarding advance notice bylaws, and about a new “zero contest” proxy contest.  Here at Apple; here at Spotify; and here at YouTube.

Now that we’re in proxy season, here is an update about the current shifts with some updates as things have changed a bit from a few weeks ago. We have another six companies announcing moves or attempts to move as well as a few vote results. This is the current list.

As usual, this is the full chart my RAs have worked up. We also have some infographics from the data that help make the picture easier to take in at a glance.

Research Assistant Infographics

Origin & Destination States

Market Cap By Destination

Claude Infographics

As it’s finals season and I want the RAs focused on their finals instead of making charts for me, I’ve asked Claude to lend a hand for some additional infographics.

Market Cap With and Without Exxon

When Exxon is removed, the market cap picture shifts significantly.

Migration Patterns

Here, I asked Claude to give me an infographic showing migration patterns.

When presented this way, some differences appear. Both Texas and Delaware draw companies from many other jurisdictions. So far, Nevada has been picking up companies leaving Delaware. This seems consistent with a read that much of the Texas migration appears to show Texas headquartered companies consolidating corporate governance in the same jurisdiction as their operations.

Vote Results

These were all recent. Texas Capital Bancshares (TCBI) did not pass this time and sets up an interesting comparison point. Why did ArcBest pass while TCBI did not? This is pure speculation, but the companies may have different stockholder bases. ArcBest is a transportation company and TCBI is a bank. I don’t know what positions proxy advisory firms took on these proposals or why, but that could have also had a significant impact if there were differences.

The proposal content may also matter. TCBI included a request for an advisory approval “to raise the ownership threshold to submit shareholder proposals from the current level provided under SEC Rules to three percent (3%) of the outstanding shares.” In contrast, ArcBest kept things a bit more stable and affirmatively opted out of some things it could do under Texas law. This is how it described it:

In furtherance of the Board’s intent to preserve stockholders’ existing rights, the Texas Charter includes provisions that expressly opt out of Section 21.373 (regarding ownership and solicitation thresholds to submit shareholder proposals) and Section 21.552(3) (regarding ownership thresholds to bring derivative lawsuits) of the TBOC.  As a result, the Company will not be subject to, and cannot elect to be subject to, these provisions without an amendment to the Texas Charter, which would require separate shareholder approval.  The Board believes that Sections 21.373 and 21.552(3) not only significantly depart from shareholder rights under Delaware law, but also are inconsistent with shareholder value and preferences.

To the extent that some voters were comfortable with centralizing governance and operations in Texas but skittish about thresholds, that could explain the difference. It would not surprise me if TCBI came back to its stockholders with the ArcBest playbook later. Fidelity National Financial did something similar last year.

Upcoming Votes

We should have some more results in soon. These are the upcoming votes I have.

• eXp World Holdings — May 8
• Liberty Media — May 11
• LGL Group — May 12
• NL Industries — May 14
• TTEC Holdings — May 21
• ExxonMobil — May 27
• Voyager Technologies — May 29

This post highlights a collection of new developments revolving around recent attacks on shareholder rights, in the name of “wealth maximization,” naturally.

First, a couple of weeks ago, I posted about how Indiana went and passed the model proxy advisor act proposed by “Consumer Defense,” which burdens any proxy advice to vote against management, prompting a lawsuit by ISS. (Mike Levin and I also talked about the act on our podcast.) Well, the update is that Glass Lewis has also filed a lawsuit to challenge Indiana’s law – and it turns out, Kansas passed its own version, so ISS is challenging that one, too.

Second, Texas Capital Bancshares, a Delaware corporation, recently held a vote on a proposal to reincorporate to Texas – which failed, rather convincingly. (Interestingly, an even bigger failure – one might say a resounding one, actually – was TCBI’s “advisory” proposal to adopt a 3% threshold for shareholder proposals if the Texas move were approved).

Now, what’s striking here is that TCBI is not a controlled company; its largest shareholders are BlackRock, Vanguard, T. Rowe Price, Dimensional Fund, and State Street – so presumably, these holders were largely opposed to the proposal.

But I’ve previously posted, Exxon is also proposing a reincorporation to Texas – and Exxon’s major shareholders are also BlackRock, Vanguard, and State Street.

My assumption has been that Exxon kind of got a gut check from them before proposing its move (in a manner consistent with proxy solicitation rules etc etc), and ascertained that they are on board, so if they are planning to support reincorporation, the question is – why Exxon and not TCBI?

I don’t know much about TCBI, but I can make up reasons – to the extent Delaware exercises more oversight than Texas, maybe Exxon’s prominence functions as its own disciplining mechanism, and maybe shareholders feel TCBI, being a smaller and less well known company, would benefit more from legal constraints.

But my suspicion is that – as long as voting by large asset managers is in the political crosshairs (including the Trump Administration’s latest effort to bring them within the ERISA framework) – large asset managers may feel political pressure to, well, support Texas, specifically, at least when votes are likely to gain a lot of media attention (like at Exxon).  And it occurs to me that, though I think Nevada has a lot going for it over Texas for companies looking for Delaware alternatives, the fact that asset managers may feel that political pressure to support a Texas reincorporation, when they may not feel the same for a Nevada move, may turn out to be the deciding factor.

Third, I call the reader’s attention to this model law by ALEC (hat tip Paul Rissman), proposing to prohibit state pension funds not only from considering ESG factors disconnected from financial value when making investment decisions, but also from considering “systemic, general, or not investment-specific” factors.  In other words, they do not want pension plans to consider the effects of war, or bad mortgages throughout the banking sector, or, specifically, climate change – regardless of their financial impact.  Similarly, a number of red state attorneys general have requested the SEC investigate credit rating agencies that have stated they will use ESG factors in downgrades, criticizing in particular their “flawed ‘energy transition’ and ‘increasing regulations’ ESG predictions.” 

Which, well – let’s just say this particular request is perhaps poorly timed, though I’d be surprised if SEC views it in those terms.

And another thing. New Shareholder Primacy podcast is up!  Me and Mike Levin talk about the leaks regarding the SpaceX IPO, and how boards search for independent directors.  Here at Apple; here at Spotify; and here at YouTube.

Last week, VC Will dismissed the plaintiffs’ claims in The Gregory M. Raiff 2000 Trust v. Jenzabar, Inc., et al.. The complaint alleged a number of fiduciary breaches, including unearned stock giveaways to insiders over a period of 11 years that increased their ownership from 18% to 91%. Critically, the plaintiffs argued that the dilution of their voting power via the stock issuances was a direct claim, rather than a derivative one. VC Will disagreed:

These are quintessential derivative claims. In Brookfield Asset Management, Inc. v. Rosson, the Delaware Supreme Court confirmed that “equity overpayment/dilution claims, absent more, are exclusively derivative.” The harm alleged here—the improper extraction of corporate assets and equity—was suffered in the first instance by Jenzabar.  Any resulting dilution of the minority
stockholders’ voting power or economic interest is a secondary harm shared proportionally among all stockholders.  The recovery for such claims flows to the corporation.

The plaintiffs attempt to evade Brookfield by shoehorning their allegations into two recognized exceptions. Both arguments are unavailing.

First, the plaintiffs argue that the dilution claims are direct because the cumulative transactions “resulted in a . . . change in control” under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. Brookfield acknowledged that a dilution based claim might be direct if it involves a transaction that shifts control from a diversified group of stockholders to a controlling interest, depriving the minority of a control premium.  But a creeping accumulation of stock over a decade is not a Revlon transaction.  There was no active bidding process, merger, or sale where Jenzabar’s stockholders were wrongfully deprived of a control premium.

There are two separate ideas here that are worth teasing out. The first is VC Will’s implicit suggestion that direct claims for dilution of control can only be brought in the context of some kind of active bidding process, merger, or sale. On that point, I actually interpret Brookfield differently; in my paper, The Three Faces of Control, I argued that Brookfield implied that specific reallocation of control rights away from some stockholders to others could give rise to a direct claim, focusing on this particular Brookfield quote:

To the extent the corporation’s issuance of equity does not result in a shift in control from a diversified group of public equity holders to a controlling interest (a circumstance where our law, e.g., Revlon, already provides for a direct claim), holding Plaintiffs’ claims to be exclusively derivative . . . is logical and re-establishes a consistent rule that equity overpayment/dilution claims, absent more, are exclusively derivative.

And, as I discussed in the paper, prior to Brookfield, there were a limited number of Chancery decisions that also held that when a board permits an insider to gain enough shares to achieve hard control, resulting fiduciary claims may be brought directly. For example, in Louisiana Municipal
Police Employees’ Retirement System v. Fertitta, 2009 WL 2263406 (Del. Ch. July 28, 2009), plaintiffs were able to bring direct claims that a board improperly failed to deploy a poison pill, which allowed the company’s chair and 46% stockholder to increase his stockholdings above 50% via open market purchases.

Notably, as I previously blogged, a couple of years ago, Chancellor McCormick seemed to agree with my interpretation of Brookfield in Cascia v. Farmer. There, Hertz engaged in a share buyback that increased a blockholder’s stake from 39% to 56%. Chancellor McCormick held that fiduciary claims could be brought both directly and derivatively.

But there was a second aspect to VC Will’s ruling, and that’s the idea that there’s a difference between handing control to someone in a relatively small and temporally-confined series of transactions, and distributing it slowly over a period of many years. That‘s actually a bit more complex to tease out, and at bare minimum, it might suggest that the direct claims in Jenzabar ripened at the moment the insiders’ holdings crossed the 50% threshold.

Anyhoo, this is an important issue that I hope the Delaware Supreme Court will provide some guidance on; as I pointed out in my previous blog post, there is a real chance at some point a board is going to sign a stockholder agreement with someone that gets challenged in a direct action, and Delaware will have to lay down ground rules about whether/when that is permissible.

And another thing. New Shareholder Primacy podcast is up!  Me and Mike Levin talk about VC David’s decision dismissing what were the last of the real Delaware claims against Tesla, and what it really would mean if a corporate board were to think like an activist.  Here at Apple; here at Spotify; and here at YouTube.

Advisers, investors, and corporate leaders now consider the differences between different jurisdictions. To provide these audiences with a more complete picture of Nevada law, we prepared a Response to Professor Barzuza’s recently revised and recirculated work, “Nevada v. Delaware” (the “Draft”).

I am enormously grateful to Nevada Governor Joe Lombardo, Nevada Secretary of State Francisco V. Aguilar, Nevada Treasurer Zachary Conine, and Nevada Assemblyman Joe Dalia for also joining this Response alongside another twenty Nevada lawyers and faculty members at the William S. Boyd School of Law. The persons joining do not speak for their firms or employers or necessarily agree that every case cited or settlement reached came out the right way. I also note that I alone have prepared this blog post and it is not “joined” by the persons that joined the Response. But we all agree that Professor Barzuza’s Draft does not accurately present Nevada corporate law. We rise in defense of Nevada because the piece has been broadly circulated over a period of years and promoted on the Harvard Law School Corporate Governance Forum, the Columbia Blue Sky Blog, and on social media. We hope that this Response will also see substantial circulation to inform the same audiences about our concerns.

Given the widespread dissemination of the work and the misimpression it creates about Nevada, we prepared and made this Response public so that advisers, investors, and corporate leaders will have access to a more complete picture. I provided Professor Barzuza with an advance copy of this Response on Monday and we corresponded afterward. I will not speak for her here, and her work speaks for itself.

Our Response highlights a number of concerns. I briefly detail just a few of them here. I encourage you to read the Response as this brief summation does not cover all of our concerns. We hope that our Response will help to educate investors and advisors who might otherwise rely solely on Professor Barzuza’s Draft for information about Nevada law.

Significant Omissions

The Draft omits significant, relevant material. For example, the Draft only cites to four decisions from Nevada’s courts. One of those citations attributes language to the Nevada Supreme Court that I cannot find anywhere in the opinion. It omits relevant Nevada Supreme Court decisions that sit in tension with core claims that Nevada is a liability free jurisdiction.

The Draft also omits information about substantial settlements that have occurred, including recent multimillion dollar settlements, other settlements for hundreds of thousands in fees, a plaintiff-side victory in a jury trial, and a pending settlement for approximately $17 million. These are not all of the settlements that have occurred under Nevada law, but many are easily discoverable via the SEC’s EDGAR portal and documented in the Response.

False or Mistaken Quotations

In reading Professor Barzuza’s Draft, I did not recognize her depiction of Nevada. When I attempted to understand the basis for her views, I could not find a significant amount of quoted material in the sources identified. Although I have not attempted to identify every false or mistaken quotation from the disseminated draft, the Response details a number of instances where quoted material does not appear in the sources cited.

Mischaracterization of Nevada Legislative History

Nevada’s statutory business judgment rule applies as a default, in contrast to Delaware’s opt-in structure for its liability limits in Section 102(b)(7). In discussing Nevada’s legislative history Professor Barzuza contends that Nevada’s shift to an opt-out structure “was not justified by policy considerations” and that “no one explained why Nevada should deprive shareholders of the opt-in authority they retain in every other state.”

But the same legislative minutes cited by Professor Barzuza show the opposite. The testimony provided that “the proposal actually benefits the small ‘mom‑and‑pop’ operation” and that the testifying lawyer had “probably seen thousands of corporations since 1987, and [that] he can think of only one instance in which a corporation charter did not have that provision because it was, essentially, a small business that apparently did not have the funds to seek legal counsel.” The testimony went on to explain that the corporation had used “some office supply form, and missed the director and officer protection.” Notably, Professor Couture had specifically identified this policy rationale in a paper published before Professor Barzuza re-released the Draft.

Ultimate Issue

Nevada and Delaware do differ on certain issues, and these differences do not mean that either state’s approach is right or wrong. 

Delaware’s law creates tradeoffs and imposes costs on companies operating under Delaware law by subjecting them to a greater degree of oversight through litigation.  Some view this litigation as offering benefits and preventing misconduct. The Draft expresses concern that Nevada unduly limits these litigation rights.  But not all scholars, jurists, or practitioners agree that Delaware’s level of stockholder litigation is optimal or even good. 

It is widely understood that Nevada corporate law offers more certain and durable protection for directors and officers than does Delaware corporate law. As Professor Couture has recognized, Nevada has made different policy choices, and Nevada’s corporate law “prioritizes limiting the negative impacts of monetary liability, such as disincentivizing qualified officers from serving, over deterring officer breaches of fiduciary duty.”

Nonetheless Nevada is not offering up a liability-free legal regime, and Nevada, as a jurisdiction, remains far from indifferent to misconduct.  Nevada law plainly prohibits directors from engaging in “intentional misconduct, fraud, or a knowing violation of law.” If Nevada errs, it errs on the side of preventing low-value litigation, creating clear rules to guide transaction planners, and allowing boards of directors efficiently to operate corporate entities.

That some litigation might be possible in Delaware while dead on arrival in Nevada does not mean that Nevada’s approach is wrong—it is just different from Delaware law, and time will tell which is better for which types of corporations. 

As investors, advisers, and corporate leaders continue to consider differences between jurisdictions, I hope that this Response will help provide information to combat widespread misperceptions and allow decisions to be made on the merits instead of on misinformation.

*I have edited this post to additional signatories to the Response.

Each summer, the Business Scholarship Podcast features scholars entering the upcoming law-teaching market. Episodes are recorded from May through July, with the goal of publication before the FAR distribution (this year, August 13). We welcome guests entering the market who work in business law, broadly defined, including corporate and securities, tax, antitrust, bankruptcy, commercial law, contracts, and related areas. Anyone interested in being featured is invited to contact Andrew Jennings at andrew.jennings@emory.edu.

Separately, I remain deeply grateful to senior colleagues who gave comments on early work and helped me develop. If there is new work that’s relevant to this blog’s readers, please feel free to send it to me or our other fantastic editors.