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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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…

A lot of people are talking about this complaint against Meta, filed by James McRitchie, alleging that the Board violates its fiduciary duties to diversified shareholders because it seeks to maximize profits at Meta individually while externalizing costs that impact shareholders’ other investments.   The complaint further argues that the Board, whose personal holdings in Meta are undiversified, labors under a conflict with respect to diversified investors (seeking, apparently, to avoid the business judgment rule and obtain higher scrutiny of the Board’s actions).

The “universal ownership” theory of corporate shareholding has got a lot of traction recently; as I previously blogged, it’s appealing because it suggests that corporations can be forces for social good without actually changing anything about the structure of corporate law.

That said, academic champions of the theory do not necessarily argue in terms of fiduciary duty – that is, they aren’t claiming that either as a normative or descriptive matter, corporate boards are legally obligated to maximize wealth for shareholders at the portfolio level – instead, they tend to elide those kinds of claims and simply argue that as a matter of power, diversified investors have sufficient stakes and influence to control board…

Last week, the Second Circuit issued an interesting decision on the scope of Section 10(b) standing in Menora Mivtachem Insurance v. Furtarom, 2022 WL 4587488 (2d Cir. Sept. 30, 2022).  IFF is a U.S. publicly traded company that purchased Frutarom, which also traded publicly but outside the U.S..  Frutarom lied about its business, and these lies were incorporated into IFF’s S-4 issued in connection with the merger.  The truth came out, and IFF’s stock price fell.  Stockholders of IFF tried to sue Frutarom, now a wholly-owned IFF subsidiary, for making false statements in connection with IFF’s stock.  The Second Circuit held that under Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the plaintiffs had no standing because they did not buy stock in the precise company being lied about.  As the Second Circuit put it:

Under Plaintiffs’ “direct relationship” test, standing would be a “shifting and highly fact-oriented” inquiry, requiring courts to determine whether there was a sufficiently direct link…Section 10(b) standing does not depend on the significance or directness of the relationship between two companies.

Rather, the question is whether the plaintiff bought or sold shares of the company about which the misstatements were made…The

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Since there’s absolutely nothing of interest happening in the business world these days, I figure it’s a good time to tell the story of how I tried to reject an arbitration clause when buying a car.

It was 2013, and I’d just moved to Durham, North Carolina to become a Visiting Assistant Professor at Duke.  It was quite the move; other than for schooling and clerkships, I’d spent my entire life – including my legal career – in New York City.  I’d never owned a car or really even driven one before; I had to take driving lessons in advance.  And when I arrived in Durham, I spent the first week frantically researching cars – there’s a difference between make and model, who knew? – before forming my preferences (namely, inexpensive, good gas mileage, and very very safe, to give myself a fighting chance in the all-but-inevitable crash. And small, so I’d also have a fighting chance at staying in a single lane).

I looked at a mix of new cars and used cars before settling on a bright red Kia Rio, gently used from a previous life as a rental.  (Me on test drives is a whole ‘nother story…

Senators Reed, Warren, and Cortez Masto recently introduced a bill to expand Section 12(g) of the Exchange Act.  The bill, as I understand it, would require that private companies with WKSI-level private valuation, or $5 bill in revenue plus 5,000 employees, would become reporting companies.

I couldn’t find announcements from the sponsoring senators about the purpose of the bill, but there is this floor statement from Sen. Reed:

[T]hese companies have incredible influence over our society and way of life.  … It should be alarming when private companies can become extremely large and influential in our economy and raise unlimited amounts of capital from an unlimited number of investors, while circumventing the basic disclosure and governance requirements that Congress sought to apply…

I wrote a whole article on how securities disclosures are nominally intended for investors, but they are used by other audiences, and the distortive effects of attempting to hijack the securities disclosure system for the benefit of stakeholders.  My point is not that stakeholders don’t deserve disclosure – far from it! – but instead that we should openly create a stakeholder disclosure system rather than continue to filter stakeholder-oriented disclosures through the SEC.

This bill … illustrates the…

A while back, I blogged about a securities fraud case where the only lead plaintiff applicant was rejected on the grounds that he had sent harassing letters to the defendants.  Ultimately, in that case, no alternative lead plaintiff ever completed a new application, and the case did not proceed as a class.  Instead, several investors proceeded on an individualized basis, and their claims were eventually dismissed.

Well, it happened again: in Bosch v. Credit Suisse Group, 22-cv-2477 (ENV), Magistrate Judge Roanne Mann held that the only proposed lead plaintiff – with a $621 stake – simply did not have enough interest in the case to justify appointment as lead. 

This is a bit more unusual than the earlier case I blogged about, though, because the denial wasn’t based on misconduct, but simply dollar value of losses.  The judge reasoned that, according to the PSLRA, the lead plaintiff must make a “prima facie showing that its claims satisfy the typicality and adequacy requirements of Rule 23,” and then held that a $621 loss rendered the plaintiff inadequate: “This Court is not satisfied that Jimenez has a sufficient interest in the litigation to vigorously pursue the claims of the…