The Supreme Court, per Justice Sotomayor, issued a unanimous opinion this week in Hughes v. Northwestern University.  That somewhat unusual moment of agreement among the Justices was likely due to the fact that the opinion clocked in at a mere 6 pages, and left the hard stuff unaddressed.

Hughes was about the duties of an ERISA plan administration when constructing a defined contribution plan menu.  In this case, Northwestern University maintained a defined contribution plan with 240 fund choices, some of which were very very good, and some of which were very very bad.  For example, the menu included low-cost index funds, but it also included retail share classes of certain funds even though the plan could have qualified for lower-cost institutional share classes.  The menu also, according to plaintiffs, included various underperforming and high fee funds that should have been eliminated.

The Seventh Circuit held that none of that mattered because the menu was sufficiently large to satisfy all preferences.  Calling the plaintiffs’ arguments “paternalistic,” the court explained that “[p]laintiffs failed to allege, though, that Northwestern did not make their preferred offerings available to them. In fact, Northwestern did. Plaintiffs simply object that numerous additional funds were offered…

This week, it was announced that Microsoft is acquiring Activision.

It was also announced that Microsoft swooped in with a bid because Activision was wounded due to the sexual harassment scandals, which are already the subject of a securities fraud lawsuit and a couple of derivative lawsuits.

And, it is possible that Activision’s CEO – who, it was reported, was aware of/involved in many of Activision’s problems and concealed them from the board – will, as a result of merger, walk away with a change of control golden parachute worth as much as $293 million.

So, this is entertaining for me because it’s like a real life issue spotter.

Issue One: What happens to the ongoing securities fraud lawsuit?

Answer: Presumably it continues; liability will travel with the new entity, and of course will remain with any individual defendants.

Issue Two: What happens to the ongoing derivative lawsuits?

Answer:  Normally, if the plaintiffs lose their shares in the merger, they lose the ability to prosecute a derivative action.  But!  They might be able to maintain the action if they can show the sole purpose of the deal was to deprive them of standing.  See Lewis v. Anderson…

Okay, here I go, diving into Seafarers Pension Plan v. Bradway, recently out of the Seventh Circuit.  The appeal was argued in November 2020, which means this opinion took about 100 years to come down in Seventh Circuit time, and, well, to be honest, I’m not sure they worked out all the kinks.

I blogged extensively about the district court decision in this case here (although in the interests of full disclosure I should probably mention I spoke with the plaintiffs’ attorneys about the appeal, after the blog post went up).  The too-short version is that Boeing had a bylaw purporting to require that all derivative actions be filed in Delaware Chancery.  Plaintiffs filed a derivative action in federal court alleging Exchange Act claims under Section 14(a).  According to the plaintiffs, the Boeing defendants solicited shareholder votes in favor of their own reelection and compensation with false statements in the corporate proxy about the development of the 737 Max.  Boeing moved to dismiss in favor of Chancery due to the bylaw.   This was awkward because state courts, like Delaware Chancery, do not have jurisdiction to hear Exchange Act claims, and so enforcement of the bylaw in this case would be tantamount to a waiver of the claim.  But the Exchange Act prohibits predispute waiver of claims, and so the plaintiffs argued that the bylaw was invalid as applied here.

The district court ruled in Boeing’s favor and dismissed.  The plaintiffs appealed to the Seventh Circuit and, simultaneously, filed an action in Delaware Chancery alleging that the bylaw, as applied here, violated Delaware law.  The Delaware case (Docket No. 2020-0556-MTZ) was stayed in favor of the Seventh Circuit, and last week, the Seventh Circuit reversed and remanded, by a 2-1 vote, with Judge Easterbrook dissenting.

[Warning: Very long discussion under the cut, which will get unfortunately into the legal weeds at times, can’t be helped]

Edit: After I drafted this post, the Seventh Circuit finally decided Seafarers Pension Plan v. Bradway.  I blogged about the district court decision in that case here, and maybe I will eventually find the strength to draft a full blog post on CA7’s new decision reversing the district court, but in case I don’t because I’m screaming on the inside and nothing matters anymore, here’s my tweet thread on the subject. 

Meanwhile, back to today’s intended post: 

I’ve blogged here a couple of times about courts’ struggles to evaluate allegations of scienter against a corporate defendant in a securities fraud case, and in particular, the problem of conflating pleading standards with the substantive definition of scienter.

Which is why I was so happy to see the court get it right in Acerra v. Trulieve Cannabis Corp., 2021 WL 6197088 (N.D. Fla. Dec. 30, 2021); all the more impressively done because, as far as I can tell from the briefing, the plaintiff didn’t make much of a corporate scienter argument and instead focused on the scienter of individual defendants.

The essence of the plaintiffs’ claim was that a medical marijuana company misled investors about the…

Honestly, the most interesting business news I’ve seen during this liminal time between Christmas and New Year’s is this story from my local New Orleans paper.  Four academics – from Tulane, LSU, and the University of New Orleans – joined together to form a … well, a gourmet toothpaste company.  Which apparently became quite popular, recommended by Gwyneth Paltrow and sold in Harrod’s and luxury stores in Dubai. Three of the four founders are now suing the CEO for fraud and misuse of company funds:

the lawsuit says worrying signs were accumulating, including Sadeghpour’s persistent refusal to move operations from his parents’ home on 8th Street in Metairie, a few blocks from the Lakeway business complex, to offices rented in the BioInnovation Center on Canal Street.

When the board members would meet at Sadeghpour’s house on Wednesdays, they started to get uneasy about the fact the company’s sales stagnated after 2018 at the $1 million mark….The lawsuit says the other board members noticed an accumulation in Sadeghpour’s home of Japanese pottery and other high-end art.

The lesson, apparently, is that if you’re the CEO of a small business and you’re spending company funds on personal luxuries, it’s probably best…

In recent years, there’s been a lot of talk about the macro effects of consolidation in the asset management industry, whereby a handful of managers own stock in just about everything.  In particular, several scholars have argued that these massive investors “own the economy,” and therefore internalize any externalities generated by the antisocial behavior of an individual portfolio company.  Therefore, the theory goes, these firms have an interest in reducing sources of systemic risk, like climate change, or potentially racial inequality.  See, e.g., Madison Condon, Externalities and the Common Owner, 95 Wash. L. Rev. 1 (2020); John C. Coffee, The Future of Disclosure: ESG, Common Ownership, and Systematic Risk; Jim Hawley & Jon Lukomnik, The Long and Short of It: Are We Asking the Right Questions? Modern Portfolio Theory and Time Horizons, 41 Seattle U. L. Rev. 449 (2018).

There were always some kinks in the theory.  Most obviously, concerns have been raised that asset managers encourage less competition among portfolio firms, to the detriment of customers and labor.  See, e.g., Miguel Anton, Florian Elder, Mireia Gine, & Martin C. Schmalz, Common Ownership, Competition, and Top Management Incentives; Zohar Goshen & Doron Levit…

Today I’m posting to call everyone’s attention to In re Kraft-Heinz Co. Derivative Litigation, decided by Vice Chancellor Will earlier this week.

This is a demand excusal case and there may be a lot that’s interesting about it but I’m focusing on one specific aspect.

Kraft-Heinz was 27% owned by Berkshire Hathaway, 24% owned by 3G (which had operational control), and 49% owned by public shareholders.  Berkshire and 3G each got to nominate 3 members of the 11 member board, and they had a shareholder agreement whereby they promised to vote for each other’s designees, and not take action to “to effect, encourage, or facilitate” the removal of the other’s designees.

Kraft-Heinz started to perform poorly and 3G sold 7% of its stake just before a disappointing earnings announcement.  Shareholders filed a derivative lawsuit alleging that 3G traded on nonpublic information, naming 3G and its board designees as defendants, and the critical question was whether the 11-person board was majority disinterested for demand purposes. That question, in turn, turned on whether Berkshire’s nominees – one of whom was a Berkshire director, one of whom was a director of several Berkshire subsidiaries and the CEO of one  – could objectively…