Direct/derivative. I’ve previously blogged about how the direct/derivative distinction comes out when blockholders increase their position into hard control via nontraditional means, such as stock buybacks, open market purchases, and stock giveaways.
The latest in the genre is the complaint filed in ZipRecruiter. The company went public with a dual class share structure, but no single insider had hard control; control was distributed among several officers and VC backers (which meant, I take it, the company was not “controlled” for NYSE purposes). Over time, most of the insiders sold down their positions, which left one VC backer with hard control, and the founder with a substantial voting block. After that, the Board caused the company to institute a share buyback program, run by the founder/CEO, and that buyback program included a lot of negotiated purchases from the VC backer, as well as on the open market. Which meant, ultimately, the founder was left with hard control.
The plaintiff alleges that the board violated its fiduciary duties by enabling this transfer of control to the founder, without requiring a control premium. And, the plaintiff is bringing the claims directly rather than derivatively.
As you can see from my prior posts on this (as well as my article, The Three Faces of Control) I am very sympathetic to the idea that this complaint is properly brought directly. Substantively, well, we only have the complaint but you can already see the headache it creates. Sure shareholders who bought in understood the risk of Class B holders selling and creating a hard control situation; on the other hand, the buybacks were the Board’s decision, and seem to have facilitated the transfer of control to the founder specifically. But one might argue over whether control was transferred from the public to the founder, or from the VC backer to the founder.
Bylaws vs Contracts. Last week, Mike Levin and I talked about the Supreme Court’s FS Credit Opportunities v. Saba Capital Master Fund case on our podcast, and in particular how I objected to everyone’s easy assumption that bylaws are contracts. (This, of course, is a longstanding concern of mine.) Anyhoo, a podcast listener helpfully alerted me to the recent Second Circuit decision in Petersen Energía Inversora S.A.U. v. Argentine Republic, where the court rejected claims by shareholders of an Argentinian oil and gas company, in part on the ground that bylaws – though they may be interpreted like contracts – are not, in fact, actual contracts. Though the court was addressing Argentinian law, it made several references to U.S. law at the same time.
Reiterating my modest proposal about proposals. Way back in 2018, I argued that the SEC should require that when companies report the results of a shareholder vote, they break out the votes of high vote shares/insiders and report them separately from the votes of public shareholders, so that investors can get a clear sense of the extent which a particular proposal was essentially imposed or rejected by insiders. Sure, you might be able to do the math and get a general sense of the likely breakdown, but it’s not easy to do and the headline totals may therefore be somewhat misleading. At the time, I was inspired in part because I’d just seen news reports of a vote at Google requesting a collapse of the dual class share structure. The news gave the headline vote totals but did not make clear that the proposal only failed because of the votes of Larry Page and Sergey Brin.
Since then, I learned that the Council of Institutional Investors has made this kind of reporting part of its good governance priorities, and such a proposal was recently offered at Facebook/Meta. The board recommended shareholders vote against it, because, they argued, shareholders can always do their own math, and the shareholders voted it down. However, as Andrew Droste pointed out on his blog, if you in fact do the math, it appears that 64% of the non-insiders favored the proposal, so the outside shareholders themselves, at least, don’t seem think that the math is all that easy.
Anyhoo, I mention all of this because here’s an article by Bloomberg reporting the shareholder vote at Dell to reincorporate out of Delaware and into Texas. As you can see, the article announces that the vote was 97% in favor, but leaves out the part where public shareholders only have 9% of the votes at Dell.
So, I once again renew my proposal: Companies should be required to break out the high vote/insider shares from everyone else’s.
An additional benefit, apart from the transparency, is that it might actually cause minority shareholders to take the vote more seriously. Right now, it’s possible they either don’t vote, or vote with management, because they know it doesn’t matter (at least when the vote doesn’t have a cleansing effect on something). But if they know that their votes are separately reported, they may wish to make their voices heard.
Update: Andrew Droste does the math and concludes that the Dell redomestication was rejected by the unaffiliated shareholders; it was the insider votes that forced it through.