October 2022

I posted earlier this week with a plug for my new paper on the internal affairs doctrine and an update on the Lee v. Fisher forum selection bylaw litigation in the Ninth Circuit, so I’ve just got a quick hit for today.

Unless you’ve been living in a cave, you know that Musk closed his purchase of Twitter on Thursday night; as of Friday, the stock had been delisted.  The litigation over whether Twitter lied about its business has come to a halt….

….or has it?

You may recall that in August, a Twitter whistleblower – Peiter Zatko – came forward as a whistleblower about Twitter’s internal business operations.  Elon Musk amended his complaint in Chancery to incorporate Zatko’s claims, alleging that the problems Zatko identified – such as a failure to comply with an FTC settlement – represented additional fraudulent actions on Twitter’s part that allowed Musk to terminate the deal.

What you may have missed, though, is that shortly after Zatko went public, the Rosen Law Firm filed a securities class action, Baker v. Twitter, C.D. Cal. 22-cv-06525, based on Zatko’s allegations.  The complaint names several Twitter executives – including Jack Dorsey – and …

Two recent posts that might be related:

On Tuesday, Vivek Ramaswamy posted The ESG Fiduciary Gap on The Harvard Law School Forum on Corporate Governance.  In that post, he noted that:

BlackRock is currently under investigation for antitrust violations precisely because of its coordinated ESG activism through groups like Climate Action 100+, Net Zero Asset Managers, and Glasgow Financial Alliance for Net Zero. Vanguard and State Street are members of many of the same groups. In fact, until recently, as Arizona’s Attorney General has observed, “Wall Street banks and money managers [were] bragging about their coordinated efforts to choke off investment in energy.” U.S. antitrust statutes are broad by design. They forbid competitors from entering into any agreement with the purpose or likely effect of reducing supply in a relevant market. Here, through these groups, BlackRock is cooperating with its competitors to make concerted efforts to decrease marketwide output in fossil fuels. That is no secret; it is the very purpose of these organizations. Net Zero Asset Managers, for example, makes clear that it has an “expectation of signatories” like BlackRock to force a “rapid phase out of fossil fuel[s],” including by, for example, refusing to finance new coal projects. If the

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The SEC recently released a highly specific proposal for registered investment advisers with comments open until at least December 27th.  The proposal “would require advisers to conduct due diligence prior to engaging a service provider to perform certain services or functions. It would further require advisers to periodically monitor the performance and reassess the retention of the service provider in accordance with due diligence requirements to reasonably determine that it is appropriate to continue to outsource those services or functions to that service provider.”

My immediate reaction is that I’m generally in favor of RIAs performing appropriate due diligence, but that I’m a bit skeptical about the need for specific rules in a principles-based framework.  It’s certainly true that Advisers outsource a significant amount of work today.  And it is also true that, as the proposal details, problems at third party service providers have led to broader problems. 

It’s easy to see how concentration risk can grow in such an environment.  If a huge swath of the market outsources to a particular third-party firm, a failure at the third party could paralyze the market. 

It’ll be interesting to watch to see how RIAs react to this.

Dear BLPB Readers:

This Friday, October 28th, at 10am ET, the Wharton Initiative on Financial Policy and Regulation is hosting an hour-long online seminar with Professor Joshua C. Macey on Market Power and Financial Risk in U.S. Payment Systems.  It should be a great event!  Registration information and a link to the whitepaper is here: Download Market Power_Financial Risk

“Human beings are far more complicated and enigmatic and ambiguous than languages or mathematical concepts.” – Iris Murdoch, The Sovereignty of Good Over Other Concepts (88)

During lunch yesterday, I attended a panel on “Measuring the S in ESG” at Belmont University’s Hope Summit. The presenters made plenty of thoughtful comments, but I did not leave with much hope that we will be able to accurately measure “S” (social good). (The panel also seemed to confirm that most institutional investors view ESG data primarily as a tool to assist in achieving excellent financial performance, and most are not very interested in sacrificing profits, at least not for more than a few years.)

Later that afternoon, at a celebration for our neighborhood bus driver, I began to realize why I had so little hope for numerical scores of social good. Glendra Chapman Thompson has been driving the same bus route in our neighborhood for 32 years; she is only retiring now due to serious health issues. To say she is beloved is an understatement. Her joy emanates. She is patient, kind, and always smiling. She knows the name of every child, and you can sense that she cares deeply for…

On Sunday, I posted a new paper to SSRN, forthcoming in the Wake Forest Law Review.  It’s called Inside Out (or, One State to Rule them All): New Challenges to the Internal Affairs Doctrine, and it covers a lot of territory I’ve touched on in blog posts, namely, litigation-limiting bylaws, the Salzberg decision, California’s board diversity law, and issues regarding the internal affairs doctrine and LLCs.  Here is the abstract:

The internal affairs doctrine provides that the law of the organizing state will apply to matters pertaining to a business entity’s internal governance, regardless of whether the entity has substantive ties to that jurisdiction. The internal affairs doctrine stands apart from other choice of law rules, which usually favor the jurisdiction with the greatest relationship to the dispute and limit parties’ ability to select another jurisdiction’s law. The doctrine is purportedly justified by business entities’ unique need for a single set of rules to apply to governance matters, and by the efficiency gains that flow from allowing investors and managers to select the law that will govern their relationship.

The contours of the internal affairs doctrine have never been defined with precision, but several recent developments have placed

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The Fordham Journal of Corporate & Financial Law is now accepting submissions for the Spring 2023 Issue of Volume XXVIII.  As one of the premier student-edited business law journals in the country, the Journal ranks among the top-five specialty journals in banking and financial law, and among the top-ten specialty journals in corporate and securities law.

The Journal welcomes articles and essays addressing important issues in banking, bankruptcy, corporate governance, capital markets, finance, mergers and acquisitions, securities, and tax law and practice.

Please send all submissions to either our Scholastica page or our email at jcfl@fordham.edu. For consideration in our Spring 2023 Issue, kindly send in your submissions by Friday, December 14th, 2022.

For more information regarding submissions, please visit our website. If you have any questions, please contact Brendan Finnerty, Senior Articles Editor, at bfinnerty6@fordham.edu.

In prior posts, I’ve plugged a couple of legal history articles, essentially offering different accounts of how the corporation, with its distinctive features, came to be.  In particular, I highlighted Margaret Blair’s piece on how corporate law is inextricably tied to state recognition, and Taisu Zhang’s and John Morley’s paper on how modern corporate features are tied to a developed state capable of adjudicating the rights of far flung investors with consistency.

Into this mix I’ll introduce Robert Anderson’s new paper, The Sea Corporation, forthcoming in the Cornell Law Review, demonstrating that the features we think of as defining the corporate form – limited liability, tradeable shares, entity shielding, separate personality, and centralized management selected by the equity owners – were all associated with admiralty law for centuries before the development of the modern corporation, embodied in the form of the ship’s personality.  Anderson points out that, to some extent, these were necessary given the realities of maritime commerce: when a ship docked in a foreign port, identifying and litigating against its distant owners was nearly impossible.  Therefore, creditors necessarily could only bring an in rem action against the ship itself; if the claims were less than the…

Eight days ago, Scottsdale Capital Advisors and Alpine Securities Corp. filed a Complaint in the Middle District of Florida arguing that FINRA’s structure and operation violate the U.S. Constitution.  The firms argue that FINRA is unconstitutional under the Appointments Clause, separation of powers principles, and the nondelegation doctrine.  The case has attracted some coverage already.

The suit makes many of the arguments I previewed in Supreme Risk, which was recently published by the Florida Law Review.  When I foresaw this risk, I highlighted four doctrinal areas where the Supreme Court might invalidate or significantly limit SROs, including: (i) nondelegation doctrine; (ii) separation of powers doctrine; (iii) state action; and (iv) appointments clause issues.

While it’s still very early, this type of challenge now presents a colorable risk to self-regulatory organizations.  If these arguments succeed against FINRA, it’s likely to cause significant market disruption.  It also lowers the barrier to press the same arguments against any SRO with a similar structure.

I would expect a case like this to make its way through the courts and toward the Supreme Court eventually.  It would not surprise me if groups like the Pacific Legal Foundation seek to get involved as well.  As…