But if he’s behind this campaign, he needs to file on Schedule 14A.
(and if it’s a Tesla shareholder with a $5 million stake, they need to file with the SEC as well)
Semi-Annual Reporting and Securities Fraud Risk
I spoke to Law.com about the potential switch to semi-annual reporting, and one of the questions I was asked concerned securities fraud risk – more? less?
Answer: it’s complicated.
On the one hand, fewer statements means fewer potentially false statements, and so fewer opportunities for someone to bring a lawsuit over what you say.
On the other hand, probably a lot of companies will continue to speak to the market – and even voluntarily disclose quarterly earnings. Except, they may not include all of the details that a 10-Q would include. Depending on what they choose to disclose, and whether they change their practices over time, there might be some vulnerability to a charge of misleading half-truths/omissions.
Additionally, semi-annual reporting means the market will be receiving less information on the company, and the information it does receive may come as a surprise, resulting in more volatility. Surprise information, coupled with a big price movement, is the stuff securities fraud actions are made of. Fewer disclosures means fewer opportunities to telegraph changed expectations and slow walk the stock in a particular direction.
But on the other hand! Securities fraud actions live or die by the event study – proof that
Moral: Check Your Cap Table
Out of Delaware’s Court of Chancery, we have another tale of messy startup contract drafting, with facts that are increasingly bizarre and horrifying.
Consultant was hired by a startup, and the startup fell into arrears paying its bills. The CEO and sole director offered a warrant for stock in lieu of payment, at a cheap (“practically free”) exercise price. The company’s counsel (Wilson Sonsini) drafted the warrant for 1% of outstanding shares at the time of the warrant’s issuance. The consultant’s attorney then amended the agreement to say 1% of shares at exercise. The consultant returned the signed amended agreement to the CEO, but not in blackline and with no warning of the change. The CEO, apparently without reading it, signed the revised agreement. The agreement was recorded on the company’s books as being for 100,000 shares, i.e., 1% at time of issuance.
Later, the company conducted a stock split, and the warrant was revised on the company’s books to reflect 1 million shares. At one point, KPMG audited the company for a counterparty considering a transaction, and flagged the discrepancy, but the company made no change.
Eventually – plot twist! – the consultant apparently got into some
Nine Years
This week, the Second Circuit issued an opinion reversing a district court’s dismissal of a securities fraud complaint filed against The Hain Celestial Group. The facts are these.
The plaintiffs alleged that Hain Celestial Group, and certain of its officers, engaged in a channel stuffing scheme by offering various concessions to distributors, so that it could book sales early and meet Wall Street expectations. Allegedly, Hain failed to properly account for the concessions that it offered, which were accomplished through “off book” arrangements. Distributors were granted an “absolute right to return,” with one employee reportedly processing hundreds of thousands of dollars in returns in one quarter – but the sales were included in Hain’s financial results regardless.
Eventually, as with all channel stuffing schemes, things fell apart, and the whole thing ended in the restatement of several years of financial results and a dramatic drop in sales.
The Second Circuit first held that the plaintiffs had properly alleged misstatements in violation of Section 10(b). Restatements are a per se admission of falsity, so that covered the financials. Further, Hain had engaged in misleading half-truths when it attributed its purportedly positive results to customer demand, rather than the distributor concessions.
Retail Therapy
A while back, I posted about what was then the new voting choice programs being adopted at large mutual fund complexes, giving retail shareholders the right to choose voting policies that would apply to their pro rata share of fund ownership.
Well, Alon Brav, Tao Li, Dorothy S. Lund, and Zikui Pan have a new paper out, The Proxy Voting Choice Revolution, that dissects the early results for Vanguard’s funds, and what is actually the thing that stands out to me is not what the choices reveal about retail shareholders, but what they reveal about proxy advisors.
The thing is, proxy advisors have a benchmark policy of standard voting recommendations, and they have custom policies that can be tailored to the needs of their individual clients, and they also have “themed” policies which are somewhere in between – “off the rack” so a client doesn’t have to pay for tailoring, but specialized beyond the basic policy. Except we don’t have a lot of insight into exactly how ballots are cast for these themed policies – until, apparently, now.
The authors are able to use the data from Vanguard to infer how Glass Lewis’s ESG themed voting policy
Texas’s Anti-Woke Corporate Governance
I keep explaining in various spaces so I may as well articulate it here too: It’s tough to make predictions, especially about the future, but I would be surprised if Texas wins the current chartering race, or at least, wins the race it’s currently running.
The issue for Texas is that it keeps demonstrating that it is not interested in crafting a well-designed – even manager-friendly – corporate law; instead, it is interested in using corporate governance as another cudgel in the culture war.
Let’s look, for example, at two recent amendments to its corporate code: allowing corporations to limit shareholder proposals by those who hold either less than $1 million worth of stock or 3% of voting shares; and the proxy advisor law that puts a variety of restrictions on proxy advisor advice.
These laws explicitly take aim at liberal-coded measures; shareholder proposals, for example, have historically been oriented toward liberal causes (despite a recent upsurge in anti-ESG proposals), and the proxy advisor law is targeted at “ESG” advice.
The laws are also a model of poor drafting. The shareholder proposal law, for example, does not apply to corporations chartered in Texas, but does apply
Quick hit on the SEC’s action today
Last week, I posted about the SEC’s proposal to reconsider its stance on arbitration of federal securities claims – today, they went and did what was entirely obvious and greenlighted the inclusion of securities arbitration provisions in charters and bylaws.
As I posted last week, Delaware just banned these in September, more in anticipation of bylaws that select a forum without jurisdiction to hear a dispute than arbitration provisions. Commissioner Atkins’s statement all but called on Delaware to change its law and/or invited other states to compete by offering a more favorable law; I expect we’ll see movement along those lines soon.
(I also imagine there will be a resurgence of arguments that arbitration provisions in corporate constitutive documents are not, in fact, contracts, and their enforceability, especially with respect to federal claims, is not controlled by the chartering state. I of course find that argument persuasive, but a number of courts have already rejected it in the context of forum selection bylaws; let’s see if they start to walk that back).
The thing is, it feels like we’re seeing an attack on public information on a number of fronts. To the attacks on the BLS and
Mandatory arbitration in corporate constitutive documents – here we go again
Seems like I’ve been writing about litigation limits in corporate constitutive documents since 2014 (because I have). So many blog posts I can’t search them all, and multiple papers (here, here, here, and here)
The issue on the table specifically right now is arbitration.
The idea that corporations could use charter and bylaw provisions to require mandatory arbitration has been floating around for quite some time. And it’s not arbitration they’re after; the point would be to require individualized arbitration, so that stockholder claims could not be brought as class actions.
Back in 2016, I published a paper arguing, among other things, that any such provisions could only apply to state claims, not federal securities claims. But then the Delaware Supreme Court disagreed with me.
I have also argued that if such bylaw and charter provisions are considered potentially “contractual,” they are not governed by the internal affairs doctrine, and the law of the state of incorporation should not apply. The Delaware Supreme Court agrees on the former point and not the latter, leading to much confusion in courts outside of Delaware.
I have also argued that bylaws and charters
I wasn’t planning this week’s blog post to be about Tesla but
Mortals plan and the gods laugh.
With the caveat that it’s 5 in the morning here and I may be misreading, in which case I will correct this post or delete it entirely to hide my shame…
Tesla’s new proxy asks shareholder approval for Musk compensation, which we expected. But there are two elements.
The first is a go-forward plan which pays out massive amounts of shares if Musk meets dramatic new targets. I don’t have a whole lot to say about this one, except that the targets are meaningfully different from the package awarded in 2018 (and rescinded in 2024 by Delaware) in that they don’t just include share price increases; they also include sales targets. The 2018 grant only included share price increases and revenue/EBITDA targets that were pretty much matched to the share price increases, leaving the price increases as the only meaningful hurdles. I will let others weigh in on whether it’s a similar situation with the new proposal, but the sales/subscription requirements are a new feature that was not present previously – and, dare I say it – could in fact accomplish the task of forcing Musk to focus on Tesla rather than his
Frankenstein Loses Control of the Monster
I have previously blogged about the SPV phenomenon, whereby investors can get access to private company shares by investing through a vehicle dedicated to that purpose. As I previously explained, the trend has recently exploded, with numerous LLCs selling interests to retail investors through platforms like EquityZen, often with high fees and opaque pricing. Among other things, the SPV phenomenon allows capital-hungry startups to raise money while (nominally) staying below the 2,000 investor threshold that would trigger mandatory reporting – and startups are increasingly pushing the limits of the law by coordinating with SPV sponsors.
Which is why I was fascinated by recent reports that some startups – particularly Anthropic and OpenAI – have gotten concerned about the number of uncontrolled SPVs selling interests in their shares.
I agree it’s a wild west, and for sure some retail investors are being taken advantage of. The more interesting question is why companies like Anthropic would care. Investors in SPVs – and SPVs of SPVs – don’t have a direct relationship with the company and don’t have rights against it, so what are they concerned about? I have a couple of thoughts.
First, as the Financial Times article explains, OpenAI