The business news this week was just lousy with reports on the Tesla trial currently ongoing in Delaware, and in particular, with reports on the testimony of Elon Musk (which, disappointingly, appears to have been less inflammatory than his depositions).  

The basic set up, of course – as I previously blogged – is that Musk championed Tesla’s acquisition of SolarCity, a company he founded with his cousins, chaired, and in which he held a substantial stake.  The unaffiliated Tesla shareholders voted in favor of the deal, which would be enough to cleanse it and restore business judgment review if Musk was not a controlling shareholder, but if he was, entire fairness review would follow.  So one of the burning questions at trial – and the one which most of the news reports focus on – is whether Musk, with something like a 22% stake in Tesla at the time, could be considered a controlling shareholder.  And that question, in turn, focuses not just on his voting power, but on his practical control over the company and the board. 

Y’all know that the question of who is a controller is one that has dominated a lot of my thinking recently (my most recent blog post on the subject is here; earlier posts are here, and here, and here, and here, and here, and here, and here), so I do have to observe that in In re Pattern Energy Group Stockholders Litigation, VC Zurn spent a lot of time explaining how one can be a controller – with fiduciary duties that follow – even without any stock ownership at all.  As she put it:

Fiduciary duties arise from the separation of ownership and control.  The essential quality of a fiduciary is that she controls something she does not own.  A trustee need not (and does not) own the assets held in trust; directors need not own stock. Even a third party lender that influences extraordinary influence over a company may be liable for acting negligently or in bad faith.  If a stockholder, as one co-owner, can owe fiduciary duties to fellow co-owners because the stockholder controls the thing collectively owned, surely an “outsider[]” that controls something it does not own owes duties to the owner.  “[I]t is a maxim of equity that ‘equity regards substance rather than form,’” and “the application of equitable principles depends on the substance of control rather than the form[;] it does not matter whether the control is exercised directly or indirectly.”  “[T]he level of stock ownership is not the predominant factor, and an inability to exert influence through voting power does not foreclose a finding of control.”  Thus, “Delaware corporate decisions consistently have looked to who wields control in substance and have imposed the risk of fiduciary liability on that person,” and “[l]iability for breach of fiduciary duty therefore extends to outsiders who effectively controlled the corporation.”

With this foundation, and considering evolving market realities and corporate structures affording effective control, Delaware law may countenance extending controller status and fiduciary duties to a nonstockholder that holds and exercises soft power that displaces the will of the board with respect to a particular decision or transaction.

That’s a point I made in my essay, After Corwin: Down the Controlling Shareholder Rabbit Hole; as I wrote there:

[O]ne of the first things a business law student learns is that even without a formal equity stake, contractual control can be exerted to the point where fiduciary obligations follow.  But all of this just raises the question whether the shareholder aspect of the controlling shareholder inquiry is necessarily doing any work.

Point being, the fact that Musk’s power does not come from his stock holdings alone is not dispositive of this question.  Musk is the kind of figure that boards, and shareholders, might be afraid to buck because he can’t be dislodged – Musk himself testified that Tesla would “die” without him – and he can send Tesla’s stock price tanking with a single tweet.  Imperial CEOs present a difficult case, but those factors are pretty much the basis for treating controlling shareholders differently from just ordinary conflicted boards. 

Or, with apologies to Guth v. Loft, 5 A.2d 503 (Del. 1939), “Musk was Tesla, and Musk was SolarCity.”  

That said, it must be observed that: (1) Plaintiffs can win this case even if Musk is deemed not to be a controlling shareholder, and (2) it’s possible VC Slights won’t have to decide whether Musk is or isn’t.

More under the cut…

Hey all.  For your reading enjoyment, I’ve posted my new paper, Capital Discrimination, forthcoming in the Houston Law Review, to SSRN.  Here is the abstract:

The law of business associations does not recognize gender.  The rights and responsibilities imposed by states on business owners, directors, and officers do not vary based on whether the actors are male or female, and there is no explicit recognition of the influence of gender in the doctrine. 

Sex and gender nonetheless may pervade business disputes.  One co-owner may harass another co-owner; women equity holders may be forced out of the company; men may refuse to pay dividends to women shareholders.

In some contexts, courts do account for these dynamics, such as when married co-owners file for divorce.  But business law itself has no vocabulary to engage the influence of sex and gender, or to correct for unfairness traceable to discrimination.  Instead, these types of disputes are resolved using the generic language of fiduciary duty and business judgment, with the issue of discrimination left, at best, as subtext.  The failure of business law doctrine to confront how gender influences decisionmaking has broad implications for everything from the allocation of capital throughout the financing ecosystem

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In June, the Ninth Circuit handed down its opinion in Meland v. Weber, holding that an individual shareholder of OSI Systems had standing to challenge California’s board diversity law, which mandates that publicly-traded companies with headquarters in the state appoint a certain number of women directors.

The shareholder is claiming that the mandate violates the 14^th Amendment, and the Meland opinion naturally doesn’t engage that; the question before the Ninth Circuit was simply whether the shareholder can sue.

To find standing, the court had to make two necessary findings: first, that the law actually operated on the shareholder, i.e., it demanded some kind of action or behavior from the shareholder despite being targeted to corporate boards (what the Ninth Circuit called being the “object” of the law); and second, that there was a cognizable injury to the shareholder, i.e., some kind of threat to the shareholder personally if OSI Systems did not comply.

With respect to both findings, the connections that the court found between the law and the shareholder’s injury were, shall we say, attenuated.

As for the first finding, that the law operates on the shareholder, the essence of the plaintiff’s claim is…

Well, the Supreme Court’s decision in Goldman Sachs v. Arkansas Teacher Retirement System is out and I suppose that makes me legally obligated to blog about it.

The result itself was … overdetermined.  As I posted after oral argument:

[Goldman] argued that “genericness” is a relevant fact to be considered at class certification in service of the price impact inquiry, along with any other evidence on the subject.  Goldman’s claim was not that courts should revisit the question of materiality at class cert – which tests what a hypothetical reasonable investor would have thought about the statements – but that in weighing whether the statements actually had an effect on prices, it is legitimate for courts to consider the generic nature of the statements at issue.  …

[T]he plaintiffs agreed with Goldman that genericness is a relevant fact to be considered by courts as part of the price impact inquiry, subject to appropriate expert evaluation.  …Which meant, the disagreement between the parties boiled down to whether [] the Second Circuit had erred by rejecting the notion that genericness is relevant if not dispositive…

So the parties are functionally reduced to fighting over what the Second Circuit meant, and whether

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The SEC recently called for public comment on the issue of mandatory climate reporting, and the comments are in the process of being posted at the SEC’s site.  In the original request for information, Acting Chair Lee asked:

What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?

Not all of the commenters responded to this question, but here are some highlights:

The Institutional Limited Partners Association, which is a group of institutional investors in private equity, said:

If appropriate standards for minimum disclosures are established for SEC registrants, these standards will subsequently influence private markets. In anticipation of potentially listing private fund portfolio companies, GPs will seek to align to the SEC standard. LPs, particularly those looking to measure climate implications across their public and private investment portfolios, will benefit from this alignment. Furthermore, LPs that currently struggle to collect climate-related information will benefit from SEC requirements, which will serve as a framework to encourage GP reporting alignment

Private equity said:

From a regulatory perspective, the AIC believes that the

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Everyone remembers Emulex Corp. v. Varjabedian, right?  The Ninth Circuit held that plaintiffs could sue under Section 14(e) for negligent, as well as intentional, false statements in connection with a tender offer – breaking with circuits that had read 14(e) to require scienter – and the Supreme Court granted certiorari to resolve the split.  The problem was, the defendants were sort of arguing that 14(e) only prohibits intentional conduct, and sort of arguing that there’s no private right of action under 14(e) at all.  As a result, the whole thing ended with the Court dismissing the writ as improvidently granted. 

Fast forward to Brown v. Papa Murphy’s Holdings Incorporated, 3:19-cv-05514-BHS-JRC, pending in the Western District of Washington.  The plaintiffs there also alleged that defendants negligently made false statements in connection with a tender offer; the claims survived a motion to dismiss; but the magistrate handling the case just recommended that the district court certify for interlocutory appeal under Section 1292.  What issue is being certified?  Well, that depends on which page of the opinion you read.  Here are some quotes from the magistrate’s order, from June 9, 2021, Dkt. 62:

the Court finds that

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