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In Which the Second Circuit Overrules Blue Chip Stamps v. Manor Drug Stores, and also Basic v. Levinson
Back when the Supreme Court decided Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys., 141 S. Ct. 1951 (2021), I blogged that the confused ruling would eventually be interpreted by lower courts to restore the Fifth Circuit’s decision in Archdiocese of Milwaulkee Supporting Fund v. Halliburton, 597 F.3d 330 (2010), which rejected Basic v. Levinson’s presumption of price impact in fraud on the market cases, and instead replaced it with its own burden on plaintiffs to show price impact.
Thursday’s ruling in the same case – now before the Second Circuit – pretty much bore that out. Despite the occasional lip service to the defendants’ burden to disprove the existence of price impact, in fact, most of the opinion is concerned with the kind of showing plaintiffs must make to – in the Second Circuit’s words – “do the work of proving front-end price impact.” Op. at 56. See also op. at 54 n.11 (framing the question presented as “whether there is a basis to infer that the back-end price equals front-end inflation”).
But before we get there, the Second Circuit seems to have sub rosa rejected Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), in this throwaway paragraph on page 57:
Consider, for example, an investor who reads certain statements in a company’s Form 10-K, and then thinks “Things seem to be going well; I think I’ll hold onto my shares.” Although the statements did not cause that investor to buy more stock, they informed or influenced her decision. And if the company’s statements are later revealed as false, liability might follow not because the statement caused new or more inflation—that is, caused investors to purchase more stock (thereby increasing demand and, ultimately, raising the share price)—but instead because the statement maintained inflation, or influenced the investor’s decision to hold tight.
Let that serve as a preview for what follows.
[More under the cut]
BlackRock and Voting Choice
Last year, I blogged about BlackRock’s proposal to permit pass through voting for institutional investors in its funds. Well, it began that program and now – undoubtedly due to the anti-ESG backlash – BlackRock and other large asset managers, like Vanguard, are experimenting with extending the program to retail investors. The way BlackRock’s program works – and it seems like it’s not that different from Vanguard’s – is that investors in certain funds can choose from among several types of general voting policies, and ballots will be cast in accordance with that policy, in proportion to the investor’s pro rata share of the fund. The policies include BlackRock’s own stewardship policy, and several that are offered by ISS and Glass-Lewis, that they already offer their own clients. I.e., clients of ISS and Glass-Lewis can choose a “tilt” to their voting and ISS/Glass-Lewis will then make voting recommendations in accordance with that preferred tilt; BlackRock investors in its iShares S&P 500 ETF can now choose to follow those policies, as well.
You can see the list of available voting policies at BlackRock’s website. And you can click through to ISS and Glass-Lewis for more detail on the
Syndicated Loans and Also AMC
Two quick hits this week.
First, I posted over at FT Alphaville on the Kirschner v. JP Morgan case, pending before the Second Circuit. The court is being asked to decide whether syndicated loans are securities, and my post addresses what’s at stake for the parties. Help yourself.
Second, VC Zurn rejected the first attempt at a settlement of the AMC class action over the creation of the APE preferred shares. As I’m sure any reader of this blog knows, after AMC became a meme stock, it sought to sell more shares, but it needed a charter amendment to authorize an increase. Retail holders of AMC stock refused to vote in favor – likely because retail simply doesn’t vote at all. AMC thought it had a clever way around that, through the issuance of a new form of preferred shares, called APEs, that could vote alongside the common and would convert into common once additional common shares were authorized. Many APEs were publicly traded, but some were placed with a hedge fund, Antara Capital, that was contractually obligated to vote in favor of the charter amendment. As a practical matter, then, the issuance of the APE shares assured there would
The One Where They Castrated Calves Together
John Malone and Gregory Maffei are repeat players before the Delaware courts. They often occupy complementary positions within Delaware companies, and are frequently accused of abusing their combined positions to muscle through interested transactions. Here’s a footnote from the complaint in Atallah v. Malone, which is the subject of today’s blog post:
Malone and Maffei have been sued numerous other times for engaging in self-dealing to the detriment of public stockholders. See, e.g., New Orleans Empls. Ret. Sys. v. The DIRECTV Group, Inc., C.A. No. 4606-VCP (Del. Ch. 2009) (Malone accused of orchestrating transaction, with Maffei’s approval, to obtain supervoting shares dilutive to the minority stockholders and receiving disproportionate tax benefits); Blackthorn Partners LP vs John C Malone, et al., C.A. No. 5260-CS (Del. Ch. 2010) (Malone accused of receiving premium for high-vote shares, with Maffei’s approval, that public shareholders did not receive, with class ultimately receiving $10 million settlement); In re Sirius XM S’holder Litig., Consol. C.A. No. 7800-CS (Del. Ch. 2012) (Maffei and rest of Board accused of failing to employ anti-takeover measures thus allowing Malone affiliate to improperly obtain majority control); In re Starz S’holder Litig., C.A. No. 12584-VCG (Del. Ch. 2016) (Malone accused of structuring transaction, with Maffei’s approval, such that he received different and more valuable consideration than public stockholders regardless of stockholder vote); Tornetta vs. Gregory B. Maffei, et al., C.A. No. 2019-0649-KSJM (Del. Ch.) (Board of directors including Maffei accused of ignoring standstill agreements and relying on Malone-affiliated banker to steer sale of company to Malone affiliate rather than sell at higher value to third party); Vladimir Fishel v. Liberty Media Corp., et al., Docket No. 2021-0820-KSJM (Del. Ch.) (Board of directors including Maffei accused of using company coffers to help Malone affiliate squeeze out minority stockholders).
Not included on this list, I don’t think, is Sciabacucchi v. Liberty Broadband, 2023 WL 4157103 (Del. Ch. June 22, 2023), in which Malone and Maffei settled claims involving related party transactions at Charter Communications,
Maffei has been the subject of so many shareholder lawsuits that he’s now seeking to reincorporate two of his companies from Delaware to Nevada, apparently for the explicit purpose of engaging in interested transactions with less oversight – which reincorporation is itself the subject of another shareholder lawsuit.
So that’s the background for Atallah v. Malone, where VC Glasscock found that derivative claims were properly pled against Malone and Maffei for a conflicted transaction, and refused to dismiss the complaint.
The set up: Qurate is a publicly traded company, of which Malone held high vote shares. These were not by themselves enough to confer hard control at the 50% level, but were controlling enough that he had – and was compensated for – a call right held by Qurate. If a third party were to offer for his high vote shares, and he was willing to accept, Qurate could call the shares for the lower of the third party offer, or a price equal to a 10% premium over the common, publicly traded shares.
Maffei was Executive Chair at Qurate, and also had an employment agreement to the effect that if Qurate changed control, he’d be entitled to resign from Qurate and win change in control benefits.
Given the close relationship between Malone and Maffei, then, as Matt Levine might put it, there was an opportunity for a Good Trade.
Maffei could “offer” to buy Malone’s shares; that would trigger the call right by Qurate, which would buy Malone’s shares at a premium above market. Once Malone no longer held high vote shares, that would trigger a change in control at Qurate, which would entitle Maffei to severance.
And so that’s exactly what they did. Except, of course, neither wanted to really leave Qurate, so Malone accepted for his high vote shares payment in common stock instead of cash, at a 10% premium to market price.
Meanwhile, Maffei said, “Yes, I could resign and take my severance, but I would be willing to stay on for a renegotiated compensation package” – which Qurate did, which included granting him high vote shares.
I haven’t done the math regarding the exact number of shares involved, but in many ways, the transaction appears to be designed to transfer Malone’s high vote shares to Maffei, while simultaneously giving Malone a premium and possibly Maffei a bit of a premium in stock awards, all out of Qurate’s pocket.
So of course, shareholders sued, claiming this entire series of transactions was undertaken by a controlling shareholder group – Malone and Maffei coordinating – to benefit them both.
What’s interesting here?
[More under the cut]
So, Ripple
This week, I was going to blog about the decision in Sobel v. Thompson, 2023 WL 4356066 (W.D. Tex. July 5, 2023), where a Texas district court relied on a forum selection bylaw to dismiss a derivative Section 10(b) claim in favor of Delaware Chancery, which – you guessed it – has no jurisdiction to hear Section 10(b) claims. The court could have dismissed on the merits, especially given the dismissals of related cases in other jurisdictions, but instead, it purported to follow Lee v. Fisher, which I blogged about most recently here, but of course, Lee v. Fisher involved Section 14, and the court relied heavily on the purportedly-suspect pedigree of derivative Section 14 claims. The SolarWinds court did not bother with that kind of analysis before extending Lee v. Fisher to derivative 10(b) claims and yeah, pretty much that’s it, you can read Alison Frankel’s Reuters piece here, and in the meantime just call me Cassandra.
Anyway, I was going to blog about all of that, but now I’m not, obviously, because the summary judgment opinion in the SEC’s enforcement action against Ripple finally came down, and I think I’ve made it clear by
The one where the word “noobs” appears in an opinion of the Court of Chancery
Today, I’m blogging about Vice Chancellor Laster’s post-trial decision in In re Columbia Pipeline Group Merger Litigation. This is a fascinating case for many reasons, starting with its procedural history.
The sum is, TransCanada bought Columbia Pipeline in 2016, and shareholders have been suing about it ever since.
First, there was a fiduciary claim against the Columbia Pipeline directors, which was dismissed on the pleadings. Then, there was a securities action in federal court alleging disclosure failures in the merger proxy, which was also dismissed on the pleadings. Then, there was an appraisal action, which resulted in a judgment that the deal price was equal to the fair value. And then, finally, there was the second fiduciary action – this action, which made it to trial – and which Laster refused to dismiss on the pleadings in March 2021. The plaintiffs brought claims against Robert Skaggs, the CEO and Chair, and Stephen Smith, the CFO and Executive VP. They also sued TransCanada as an aider and abetter of Skaggs’s and Smith’s fiduciary breaches.
On the motion to dismiss back in 2021, no one claimed that the first fiduciary action – where the plaintiffs had not even sought books and records – was preclusive of the second one, but the defendants did argue that the earlier securities action and the appraisal action precluded – through estoppel, or as precedent, or as persuasive legal authority – the second fiduciary action.
Laster rejected both arguments. For the earlier securities action, he spent some time on the difference between federal and Delaware’s pleading standards, but his reasoning carries a whiff of disdain for federal courts’ understanding of materiality in the merger context.
As for the appraisal action, he held that it was asking a different legal question than the fiduciary action, namely, whether the deal price represented fair value, not whether Skaggs and Smith breached their fiduciary duties by failing to obtain the best value for the stockholders.
The upshot of all of this was that Laster permitted a fiduciary claim to proceed against Skaggs, Smith, and TransCanada. After the Skaggs and Smith settled, the claims against TransCanada proceeded to trial, and that was the decision issued earlier this week, where Laster found that TransCanada did, in fact, aid and abet breaches of fiduciary duty.
Several things to talk about here, so behind a cut it all goes.
So long, Blasius?
A while back, I blogged about the Chancery decision in Coster v. UIP Cos.
Here’s the recap: The case involved a closely-held corporation where voting power was split 50-50 between two shareholders, one being a founder of the company, the other being the widow of another founder. After the two deadlocked, and the widow sought to appoint a custodian that would throw the company into disarray, the founder caused the company to issue a slug of new stock to a longtime employee. That broke the deadlock; the founder and the employee sided against the widow. The widow then alleged that the sale had been effectuated to dilute her voting power in violation of the founder’s fiduciary duties. Chancellor McCormick concluded that the sale occurred at a price and on terms that were entirely fair; on appeal, the Delaware Supreme Court affirmed the entire fairness holding, but remanded for Chancellor McCormick to consider whether the dilution of voting control had violated Blasius Industries, Inc. v. Atlas Corp, 564 A.2d 651 (Del. Ch. 1988).
That alone, I said at the time, was sort of weird, because it suggested that a sale could be both entirely fair and represent an
Ernst and Ernst and Hochfelder and Powell
Last week, I had the pleasure of attending one of my favorite conferences: NBLSC, hosted this year in Knoxville by Joan Heminway and by Eric Chafee. While there, I took part in a panel discussion of Adam Pritchard and Robert Thompson’s new book, A History of Securities Law in the Supreme Court.
Much of the book is based on the recently-public papers of Justice Powell, and argues that his presence on the Court reshaped the direction of securities law from the deferential approach applied in the early years of the New Deal to the much more skeptical view we often see today. In particular, the book highlights how Justice Powell, with his experience as a corporate lawyer, exhibited particular sympathy and concern for businessmen who might be caught in an uncertain liability regime (twice, Justice Blackmun accused Justice Powell of continuing to represent his corporate clients from the bench, see pp. 85, 163).
In elucidating their argument, Pritchard and Thompson highlight a string of cases authored by Justice Powell where the Court adopted narrow constructions of the securities laws, after a run of broad constructions (both at the Supreme Court and in the lower courts). One of those
“In connection with” is everywhere now
I’m interested in this district court opinion issued in May regarding Section 10(b) claims against Mylan. Plaintiffs claim that Mylan’s Morgantown, West Virginia manufacturing facility was dramatically out of compliance with FDA manufacturing requirements – to the point where it was ultimately forced to halt production and recall certain products – and misled the public about it. The court allowed the case to go forward based on a single statement by a Mylan spokesperson, but dismissed claims based on Mylan’s other statements. See In re Mylan NV Sec. Litig., 2023 WL 3539371 (W.D. Pa. May 18, 2023).
Now, the first thing to note here is that the court found that plaintiffs properly alleged “clear circumvention of quality controls at Mylan to cut corners for time pressure and in a way that jeopardized the quality of the medications.” The court accepted the allegations “of widespread compliance and product-quality issues at Morgantown that were driven by outsized production demands imposed by management. …[T]hese issues were directly communicated to management and high-level executives at Mylan but not meaningfully addressed until after repeated serious warnings from the FDA.”
Having said that, the court began by holding that Mylan’s statements on its general public-facing