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!