Earlier this week, VC Laster issued his decision in United Food & Commercial Workers Union v. Zuckerberg.  Professor Stephen Bainbridge blogged about the decision here, with a lot more detailed discussion of the law than I’m going to provide, but I’m covering the same territory anyway because this case is an interesting example of the pathologies associated with the common law.

So, before stockholder plaintiffs are permitted to bring a derivative action on behalf of a corporation, they must first make a showing that the corporate board is too conflicted to be able to make the litigation decision themselves.  This may occur because board members are themselves at risk of liability regarding the underlying transaction being challenged, or because they are too close to someone who is.  The test was first articulated by the Delaware Supreme Court in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), but because this was a common law creation and the court was mostly focused on the dispute in front of it, the test it articulated conflated the general inquiry – is the board able to be objective about the litigation – with the specific application of that inquiry to the Aronson…

This week, I’m plugging a new piece I posted to SSRN, forthcoming as a chapter in Research Handbook on Corporate Purpose and Personhood (Elizabeth Pollman & Robert Thompson eds., Elgar). It actually includes a lot of the arguments/observations I’ve previously made in this space, but if you want them compiled in a handy chapter, here’s the abstract:

ESG Investing, or, If You Can’t Beat ‘Em, Join ‘Em

If corporate purpose debates concern whether corporations should operate solely to benefit their shareholders, or if instead they should operate to benefit the community as a whole, “ESG” – or, investing based on “environmental, social, and governance” factors – occupies a middle ground. Its adherents welcome shareholder power within the corporate form and accept that shareholders are the central objects of corporate concern, but argue that shareholders themselves should encourage corporations to operate with due regard for the protection of nonshareholder constituencies. This Chapter, prepared for the Research Handbook on Corporate Purpose and Personhood, will explore the theory behind ESG, as well as the barriers to its implementation.

Professor Jeremy McClane’s paper, Reconsidering Creditor Governance in a Time of Financial Alchemy, was just published by the Columbia Business Law Review and it’s a doozy.  His thesis is that lenders play an important role in corporate governance by imposing a degree of fiscal discipline on firms’ decisionmaking.  But when loans are securitized, lenders have fewer incentives to exercise control.  By analyzing SEC filings, he finds evidence to suggest that after firms violate financial covenants with lenders, the ones with nonsecuritized loans improve their performance and operate more conservatively, but the ones with securitized loans do not, implying that lenders intervened to force changes in the former category but not the latter.

The upshot: Lenders play an important role in corporate governance, with a view toward curbing the kind of short-term behavior that is often criticized from a stakeholder perspective (i.e., quick payouts that can make the firm more unstable and ultimately harm employees).  Securitization has therefore removed an important constraint on predatory behavior.

The Ninth Circuit just issued a loss causation opinion in In re BofI Securities Litigation, and it’s so beautiful, it gets so much right, it’s like staring at the sun, or the face of God. Birds sang, angels wept, my sinuses have been cleared, my freezer is defrosted, and all that’s left for me to do before I depart from this Earth is see Wonder Woman 1984 in theaters.

The background is a bit complex. BofI is the subject of two 10(b) securities class actions, covering different time periods.  The first alleges that the Bank lied about its lending practices, and the second alleges that the Bank lied about investigations into those lending practices.  Both cases were heard before the same district court judge, and the court dismissed both sets of claims on loss causation grounds, employing a particularly vigorous – nay, implausible – view of market efficiency. 

I blogged about second of those dismissals here, where I explained that the plaintiffs in that action had alleged that the fraud was revealed when a reporter for the New York Post filed a FOIA request and wrote an article about his findings.  The court rejected plaintiffs’ allegations of loss…

I usually leave the arcana of contract interpretation principles to the specialists, but every now and then I apparently dip my toe in, and this is another of those weeks.

VC Laster’s opinion in In re Anthem-Cigna Merger Litigation tells a truly wild tale.  In brief, Anthem and Cigna agreed to merge, but Cigna’s CEO, David Cordani, wanted to helm the combined entity. When it became clear he wouldn’t get the CEO spot, he began a campaign of sabotage, assisted by Cigna executives who supported his ambitions.  Thus, Cigna’s top leadership hired a PR firm to trash talk the merger while concealing the firm’s involvement from Cigna’s Board.  At one point, Cigna’s General Counsel personally leaked certain letters so they would be disclosed publicly, then tasked her head of litigation with conducting an internal investigation to discover the source of the leak.  Cigna’s foot-dragging with respect to integration planning and responding to regulators was so profoundly passive-aggressive that I felt my blood pressure rising – and this is despite the fact that Anthem was not exactly an angel: it lied in federal court proceedings, and the overall merger would certainly have reduced competition in an already-consolidated industry.

In any…

The SEC made its long-awaited revisions to Rule 14a-8, which dramatically increase the dollar investment requirements, add a new prohibition on allowing shareholders to aggregate their holdings to meet those requirements, prohibit shareholder representatives from advancing proposals on behalf of more than one shareholder per meeting, and raise the resubmission thresholds, among other things.  In practical effect, these rules make it much more difficult for retail shareholders – who are unlikely to hold $15K or $25K of a single company’s stock in their portfolio – to advance proposals.  And, as Yaron Nili and Kobi Kastiel have documented, retail shareholders (and specific retail shareholders at that) have been the driving force behind a large number of proposals.  They find that – despite critics’ claims that these “gadflies” are advancing a personal agenda – their proposals frequently win majority support.  Thus, important corporate governance innovations have been driven, in part, by proposals advanced by retail investors.

Retail investors are not the only ones who advance proposals, though; pension funds do, as well.  That’s where the Department of Labor comes in.  As I previously blogged, the DoL has proposed new rules that would sharply limit ERISA plans’ ability to participate…

Sherlock Holmes aficionados distinguish between literary criticism that is “Watsonian” in perspective, and criticism that is “Doylist.”  As any fan knows, the stories were written by Arthur Conan Doyle as a first-person narrative; they purport to be the work of John Watson, who is recounting the exploits of his brilliant friend and sometime-roommate, Sherlock Holmes.  Fans who analyze the stories, then, have a choice: They can take an “outsider” perspective and discuss them as works of fiction authored by the real-life person Arthur Conan Doyle, or they can take an “in-universe” perspective and discuss them as the actual literary product of John Watson, unreliable narrator.  Depending on which viewpoint you adopt, you may end up in strikingly different conversations.  For example, a Doylist might look at inconsistencies in how Watson’s wife is described throughout the series, and attribute them to the multi-year period over which the stories were published; a Watsonian might argue that Watson was covering for a gay relationship with Holmes and couldn’t keep his lies straight.  Neither viewpoint is incorrect, but the two fans are talking past each other; in order to communicate, they have to define the relevant playing field.

That’s how I feel…