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Ann Lipton

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Ann M. Lipton is a Professor of Law and Laurence W. DeMuth Chair of Business Law at the University of Colorado Law School.  An experienced securities and corporate litigator who has handled class actions involving some of the world’s largest companies, she joined the Tulane Law faculty in 2015 after two years as a visiting assistant professor at Duke University School of Law.

As a scholar, Lipton explores corporate governance, the relationships between corporations and investors, and the role of corporations in society.  Read more.

I really enjoyed Matthew Wansley’s new paper, Moonshots, forthcoming in the Columbia Business Review.  He focuses on the complicated incentives involved in performing “moonshot” research, that is, highly risky projects that could dramatically advance a field, but that will take years to develop.  He argues that the venture carveout structure – whereby a startup has public company parents alongside other private investors, and employee incentive ownership, is designed to mitigate the various conflicts and agency costs that would exist among the players, and uses autonomous driving as the major case study.

I haven’t seen much about corporate investment in outside entities – though I gather there has been more written in the business literature, the only other legal paper I’m familiar with is Jennifer Fan’s Catching Disruptions: Regulating Corporate Venture Capital, 2018 Colum. Bus. L. Rev. 341, which offers a detailed descriptive account of how corporate venture capital functions and how it differs from traditional venture capital.  But the two papers together convince me that this is a phenomenon that needs more attention in the legal scholarship.

By now, I’m sure everyone is very much aware that Elon Musk took a giant stake in Twitter, was late filing his Schedule 13G (and failed to include a certification that he intended to hold passively), was added to Twitter’s board, and updated his Schedule 13G to a 13D, leaving a question whether he should have been filing on 13D all along.  Once Musk did reveal his stake, Twitter’s stock price shot up.

The SEC has not historically policed the Schedule 13G/Schedule 13D filing requirements with great vigor, though Gary Gensler has highlighted the potential harm to traders/markets when they trade in ignorance of the presence of a potential activist investor; see also United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991) (“Section 13(d)’s purpose is to alert investors to potential changes in corporate control so that they can properly evaluate the company in which they had invested or were investing.” (quotations and alterations omitted)).

Matt Levine asks whether this means Elon Musk engaged in insider trading, since he managed to save maybe $143 million by continuing to amass Twitter stock before finally revealing his holdings.

I’m going to ask something else: do the traders who sold between the time he was supposed to file the 13G, and the time he actually filed it, have a claim?  And it seems pretty much, yes they do.

And boy howdy this got long, so, under the cut it goes:

So the SEC dropped a couple of hundred pages of proposed new rules governing SPAC transactions. 

I’d say the rules fall into three categories: 

First, there are the ones meant to harmonize the regulatory framework for SPACs and for more traditional IPOs, both in terms of requiring disclosures akin to those in the IPO context, and in terms of imposing similar liability regimes, so that SPAC target companies will be vulnerable to Section 11 liability, financial advisors that shepherd the de-SPAC process will be treated as underwriters, and the PSLRA safe harbor will be unavailable for de-SPAC related projections.

(That last point is tricky: As the SEC acknowledged in its release, and as Professor Amanda Rose points out in a paper, because the de-SPAC is a merger, companies may essentially be required to include projections, like the ones that underlie financial advisors’ opinions, in their proxy statements.  Which would mean, unlike in a traditional IPO, there would be no minimizing liability exposure simply by failing to include projections in the SEC filings.  Couple that with Section 11 liability and it could be pretty intense.  That said, the SEC is proposing to require issuers to include climate-related forward-looking information…

The following post comes to us from George Georgiev at Emory Law.  It follows quite nicely on Ann’s post yesterday on Climate Change and Wahed Invest.  I know a bunch of us will be commenting over time on the SEC’s climate change release, and we are grateful that George has offered his ideas here.  Please note that more of the post is below the fold and can be accessed by clicking on the “continue reading” jump link.

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The SEC’s Climate Disclosure Proposal: Critiquing the Critics
George S. Georgiev

The SEC released its long-awaited Climate Disclosure Proposal a few days ago, on March 21, 2022. The Proposal is expansive, the stakes are high, and, predictably, the critical arguments that started appearing soon after the SEC kicked off this project a year ago are being raised ever more forcefully in preparation for a potential court challenge. A close review of the Proposal, however, suggests that it is firmly grounded within the traditional SEC disclosure framework that has been in place for close to nine decades. The Proposal is certainly ambitious (and overdue), but it is by no means extraordinary. This, in turn, suggests that challenges to the Proposal’s legitimacy ought to fail, even if certain aspects of the Proposal could stand to be improved as part of the ongoing rulemaking process.

This view is not universally held. In voting against the Proposal, SEC Commissioner Hester Peirce admonished that it “turns the disclosure regime on its head” and erects “a hulking green structure” that will “trumpet” a “revised mission” for the SEC: “‘protection of stakeholders, facilitating the growth of the climate-industrial complex, and fostering unfair, disorderly, and inefficient markets.’” This certainly sounds problematic—and, indeed, quite dramatic. But once we set aside the entertaining rhetorical flourishes, we see that many of the arguments against the Proposal misstate the applicable legal constraints and mischaracterize important aspects of the Proposal. Moreover, even though Commissioner Peirce goes out of her way to praise “the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures,” her lengthy dissenting statement reveals that she actually opposes many important and established elements of the very framework she says she wants to conserve.

I will make the case that the SEC’s Climate Disclosure Proposal is in keeping with longstanding regulatory practice by examining several features of the traditional disclosure regime and the new Proposal. I will focus my analysis on arguments I’ve developed in prior research, certain other less-known arguments, and the particular aspects of the new Proposal. This piece is not intended to be comprehensive, and I want to note that the broader issue of ESG disclosure has generated extensive debate and much insightful analysis. As always, I welcome comments and amendments via email.

Shareholders, Stakeholders, and Expert Groups

The SEC’s Climate Disclosure Proposal immediately prompts the well-worn question: Is this disclosure intended for shareholders or for stakeholders? But posing this as a binary choice automatically shifts the terms of the debate in favor of opponents of climate-related disclosure, regardless of the actual content of the Proposal. Since climate change has society-wide implications, information about it will inevitably resonate beyond the boundaries of the disclosing firm and the capital markets, even when the focus is on financially-material disclosure relying on investor- and issuer-generated disclosure frameworks (as is the case here). The social resonance of climate-related disclosure can drown out its clear-cut financial relevance, render any proposed disclosure rule suspect, and lead to a situation that, when we stop and think about it, is quite illogical: A subject matter’s relevance to one audience (stakeholders) is used as an argument to cancel out the well-established relevance of that same subject matter to another audience (investors). This is a general vulnerability that applies not just to climate-related disclosure, but to other ESG disclosure as well. It is important to understand it and de-bias policymaking accordingly.

Commissioner Peirce’s dissenting statement deftly zeroes in on this vulnerability by asserting that the Proposal “tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies” and “forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.” Reading this, one would think that the Proposal was written by the Sierra Club and the National Resources Defense Council—or by a D.C. bureaucrat, who, in Peirce’s telling, is both clueless and corruptible. Yet, nothing could be further from the truth. 

The SEC’s Proposal draws on technical frameworks for financially-material disclosure developed by expert groups such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol. Take the TCFD, for example: Its members include representatives of mainstream investors (including BlackRock and UBS Asset Management), banks (JP Morgan, Citibanamex), insurance companies (Aviva, Swiss Re, Axa), giant industrial firms (BHP, Eni, Tata Steel, Unilever), rating agencies (Moody’s, S&P), accounting firms (Deloitte, E&Y), and others. Its secretariat is headed by a leader in the financial industry and capital markets, Mary Schapiro, who holds the unique distinction of having served as Chair of the SEC, Chair of the CFTC, and CEO of FINRA. And, for better or worse, no environmental NGOs or stakeholder organizations are represented on the TCFD. As its name suggests, the TCFD’s focus is on financial disclosures of the kind that investors require and use. The TCFD has generated an impressive roster of supporters and official adopters in just over six years, and, importantly, each of the “big three” (BlackRock, State Street, and Vanguard) has endorsed the TCFD framework.

Commissioner Peirce rightly points out that the SEC does not have the depth of expertise on climate-related matters that other, specialized regulators have. Such expertise, however, is not necessary here since the SEC is not setting GHG emission limits, calculating carbon trading prices, drawing up climate transition plans, or setting climate resilience standards for businesses. The SEC’s Proposal is limited to disclosure—and only disclosure—on a technical topic, and the SEC has decades-long experience handling disclosures on technical topics. For example, the SEC is not an energy regulator, but it drew up a specialized disclosure framework for oil and gas extraction activities in the 1970s (with help from expert groups, much like it has done here), and it has administered this framework successfully since then. As the composition of the economy has changed, the SEC has had to develop some expertise in cybersecurity disclosure, tech disclosure, and in other specialized areas. The Climate Disclosure Proposal does not veer away from this time-tested approach; the only difference is that it concerns a hot-button topic.

Statutory Authority and Regulatory Practice: Recalling Schedule A of the Securities Act

A central challenge to the Proposal is that it goes beyond the authority given to the SEC by Congress because the rules are too prescriptive, not rooted in “materiality” (more on which later), and because Congress has not directed the SEC to pursue rulemaking on this particular topic. A fair amount of debate has focused on what it means for the SEC to act as “necessary or appropriate in the public interest or for the protection of investors”—language that has been part of the securities laws since they were passed in the 1930s but that has not been tested in court.

Not long ago, the SEC filed an enforcement action against robo-advisor Wahed Invest.  Wahed Invest assured clients that it only selected investments that were compliant with a Shari’ah law.  In fact, according to the SEC, in addition to many other fraudulent practices (it claimed to have funds it didn’t have; it claimed to rebalance and didn’t), it also failed to adopt policies and procedures to assure Shari’ah compliance.  As the SEC put it:

While Wahed Invest advertised its adherence to Shari’ah compliant investing, Wahed Invest failed to adopt and implement written policies and procedures reasonably designed to address its Shari’ah advisory decision-making processes and compliance reviews and oversight.

On the Wahed Invest Website, in its marketing materials, and in interviews, Wahed Invest extensively discussed the importance of its income purification process. For example, the Wahed Invest Website stated that Wahed Invest “go[es] the extra mile to ensure your wealth is pure” by creating a “unique annual purification report” for each robo-advisory client, which were provided to clients.

Despite these representations to clients and prospective clients, Wahed Invest had no written policies and procedures addressing how it would assure Shari’ah compliance on an ongoing basis or how it would calculate

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I’ve previously posted about problems in how courts determine whether a complaint pleads scienter under the standards of the PSLRA; last summer, I talked about courts’ unduly narrow use of evidence of insider trading, namely, to consider it only as a pecuniary motive for fraud, rather than as evidence of knowledge of a problem.  Which is why I was very pleased to see the decision in Gelt Trading Ltd. v. Co-Diagnostics Inc., 2022 WL 716653 (D. Utah Mar. 9, 2022).

The claim is that Co-Diagnostics overstated the accuracy of its covid-19 tests, and its stock price fell when the truth was revealed.  The complaint only alleged two false statements; the court dismissed claims based on one, but permitted claims based on a false press release – which was mostly attributed to the company, but also quoted Dr. Satterfield, the company founder/chief science officer – to proceed.

In evaluating the allegations of scienter, the court considered, among other things, that although Dr. Satterfield had not sold stock, others had.  As the court put it:

multiple board members sold significant amounts of stock just as news outlets began to question the accuracy of Co-Diagnostics’ test. This suggests that at least some

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I call your attention this week to Chief Judge Marbley’s opinion in in re FirstEnergy Securities Litigation, 2022 U.S. Dist. LEXIS 39308 (S.D. Ohio Mar. 7, 2022), sustaining the securities fraud complaint against FirstEnergy and various additional defendants.  To some extent, the decision was unsurprising; Chief Judge Marbley sustained similar allegations in a parallel derivative 14(a) claim last year, but there are still some things here I want to highlight.

The basic claim is that FirstEnergy bribed Ohio politicians to secure a public bailout of failing nuclear plants, and lied about it to investors.  When the scandal came to light, the fallout was dramatic, resulting in, among other things, a criminal case against FirstEnergy and a plunge in its stock price.

I’m going to talk about two aspects of the decision.

First, many of the public lies were relatively generic statements to the effect that FirstEnergy’s political donations and lobbying activities complied with all laws, and that the company had a system of internal controls to ensure that this was the case.  (Sidebar: Speaking of generic statements, I assume everyone saw the news that the Second Circuit granted Goldman Sachs’s third 23(f) petition in the Arkansas Teachers case? …

CNBC recently reported on BlackRock’s previously-announced plan to permit pass-through voting for institutional investors in its index funds.  According to the report, the plan will cover about 40% of those funds, which works out to about $1.92 trillion of assets.

It seems obvious to me that BlackRock is feeling the political/regulatory heat from its existing voting power – there’s been lots of GOP pushback on its climate policies, concerns about antitrust (including FTC proposals that would paralyze BlackRock with regulation), it gets protestors outside its offices due to its control over particular companies, all of which caused BlackRock to go on an – obviously failed – campaign to convince people that it does not hold the power it holds (as I described in my book chapter, ESG Investing, or if you can’t beat ’em, join ’em).  Pass through voting feels like BlackRock voluntarily giving up at least some of its tremendous influence in the face of that scrutiny.  Or, to put it another way, perhaps that power does not translate into financial benefits to BlackRock, at least, not enough to make it worth the regulatory costs.

I have no idea how this will play out…

Previously, I posted about Margaret Blair’s paper on concession theory, where she argued that the state played an integral role in the development of the corporate form, disputing those who argue that corporations could be somewhat replicated via private contracting. 

The latest entry in this genre is a new paper by Taisu Zhang and John Morley, The Modern State and the Rise of the Business Corporation.  They adopt a somewhat narrower definition of corporation to mean something like a large, publicly traded, limited liability entity, and argue that its rise is necessarily linked to the development of a state apparatus capable of recognizing and enforcing the rights of disparate investors, including the development of a uniform, professionalized court system.  They make their argument through a series of cross-cultural case studies, the most fascinating (and convincing) of which is 19th and early 20th century China.  According to the paper, at this time, China’s economy had grown to the point where it needed something like the corporate form, and corporations were in fact statutorily authorized, but China’s weak central state meant that there were few takers.  It wasn’t until the middle of the 20th century that China…

I am so amused by this brief opinion in Manti Holdings v. The Carlyle Group.

The case is a continuation of Manti Holdings, LLC v. Authentix Acquisition Co.  There, as many of you know, the Delaware Supreme Court held that a shareholder agreement among sophisticated investors in a private company could waive appraisal rights associated with a merger.

Well, the same shareholders who sought appraisal are now instead suing for breach of fiduciary duty in connection with the merger, and the defendants argued that the same shareholder agreement not only waived appraisal rights, but also waived the right to sue for breach of fiduciary duty.  We know, of course, that you cannot waive fiduciary duties in corporate constitutive documents; the question for VC Glasscock was whether you can waive them in personally-negotiated shareholder agreements.  Glasscock held that he did not need to reach that question, because even if such waiver was possible, the agreement here was not clear about it. 

But his reasoning is what fascinates me.

The agreement required that shareholders “consent to and raise no objections against such transaction,” i.e., the merger, thus raising the question whether an action for fiduciary breach is the equivalent of…