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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.

When the news came out that Volkswagen had used defeat devices in order to fool regulators into thinking that its cars complied with environmental standards, massive amounts of litigation followed, eventually consolidated into an MDL so sprawling that it literally took me over an hour – plus two calls to Bloomberg – just to get the docket sheet loaded on my computer.

One set of claimants are the bondholders who purchased in an unregistered 144A offering just before the scandal broke.  These bondholders contend that the offering memoranda failed to disclose critical information about the regulatory risks Volkswagen faced, in violation of Rule 10b-5.  They’ve just got one problem: They’d like to bring their claims as a class, but because the bonds did not trade in anything like an efficient market, they cannot make use of the fraud-on-the-market presumption of reliance.  Instead, they’ve turned to Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972), which holds that when a fraud consists of omissions rather than misstatements, reliance may be presumed.

Now, the first issue is, what counts as an omissions-based fraud?  The fraud here included affirmative misstatements, and usually that would be enough prevent the use of Affiliated…

There is a lot going on in VC Slights’s new opinion in Tornetta v. Musk,  refusing to dismiss a shareholder suit challenging Elon Musk’s eye-popping compensation package.

In Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), the Delaware Supreme Court held that, in the context of a squeeze-out merger, controlling shareholders can obtain business judgment review – rather than entire fairness – if they employ the dual protections of requiring the affirmative vote of a majority of the disinterested shares, and requiring that the deal be negotiated at the outset by a fully-empowered independent board committee.

Since then, there have been a lot of questions about MFW’s application, including whether MFW can/should be employed beyond the context of squeeze outs, which brings us to Tornetta.

Last year, Tesla granted Elon Musk a new compensation package that would award him as much as $55 billion in Tesla stock options, conditioned on achieving certain milestones.  The package was approved by a vote of the unaffiliated Tesla stockholders, but did not satisfy the full set of MFW preconditions (i.e., it was not negotiated by an independent committee, etc).  Thus, Tornetta filed a lawsuit challenging the award on the ground that (1) Musk is a Tesla controlling shareholder (2) the award is therefore an interested transaction subject to review for fairness and (3) the award was unfair.  The claims were brought both directly and derivatively.

Now, the first interesting thing about this case is the number of issues that could have been raised on the motion to dismiss, but were not (though defendants may still raise them later).

Defendants could have, but did not, dispute that Musk was a controlling shareholder (likely because VC Slights previously concluded he was in a case challenging the Tesla/SolarCity merger – I’ll come back to that).

Defendants could have, but did not, dispute that the directors who approved the package were dependent on Musk.

Directors could have, but did not, move to dismiss for failure to make a demand on the board (more on that below).

Directors could have, but did not, move to dismiss on the ground that the claim could not be maintained as a direct action (again, more below).

As a result, the narrow question before Slights was simply whether stockholder approval alone can cleanse a compensation award to a controller, or whether instead MFW procedures are required.  And he held that MFW procedures are always required when a controller’s interests conflict with those of the minority.

[More under the jump]

By now, regular readers of this blog are aware that I’ve been especially forceful in arguing that litigation limits in corporate charters and bylaws can only address matters of corporate internal affairs, and that federal securities claims are beyond their scope.  Vice Chancellor Laster adopted a similar view in his Sciabacucchi v. Salzberg decision, where he invalidated charter provisions that purport to require that all Section 11 claims against the company be brought in federal court.  Now that the matter is on appeal to the Delaware Supreme Court (Docket No. 346,2019) – and the opening brief is due today –  a lot of articles about the scope of the internal affairs doctrine are dropping. 

First up, we have Daniel B. Listwa & Bradley Polivka’s First Principles for Forum Provisions (Cardozo Law Review, forthcoming), in which the authors argue that Laster’s opinion erroneously focused on “territoriality” rather than “comity,” and that the suit should have been dismissed for lack of ripeness.

Next, there’s Mohsen Manesh with The Contested Edges of Internal Affairs (Tennessee Law Review, forthcoming), which explores the uncertainties surrounding the scope of the internal affairs doctrine, spotlighted both by the Sciabacucchi v. Salzberg decision and by California’s…

Emily Strauss at Duke has posted a fascinating new paper, Crisis Construction in Contract Boilerplate (Law & Contemp. Probs., forthcoming).  She examines how judges interpreted the boilerplate in RMBS contracts during the financial crisis, and finds that they relaxed their reading of certain provisions in order to enable injured investors to recover their losses, and then reverted to more strict readings when the crisis had passed.

Specifically, the RMBS contracts provided that the “sole remedy” available for loans that did not conform with quality specifications was for trust sponsors to repurchase the noncompliant loan.  Of course, during the crisis, investors alleged that huge percentages of loans backing the trusts were noncompliant, and a loan-by-loan repurchase requirement would have been, as a practical matter, impossible to pursue.  Strauss finds that judges interpreted the clause to permit investors to use sampling to identify noncompliant loans and claim damages, but only in the years following the crisis.  By 2015, they reverted to a stricter reading of the contracts.  She cites this an example of “crisis construction,” namely, the way that courts alter their readings of contracts during times of calamity in order to further some economic policy.  (Strauss discusses that phenomenon in her…

A few weeks ago, we had an interesting opinion out of the 10th Circuit interpreting the scope of primary liability under Section 10(b) in the wake of the Supreme Court’s Lorenzo v. SEC decision.  The short version is that in Malouf v. SEC, the Tenth Circuit found that scheme liability under Section 10(b) (and parallel provisions of Section 17(a) and the Investment Advisers Act) may be incurred when a defendant knowingly fails to correct someone else’s false statement.  But matters are actually a bit more complicated.

More under the jump; warning, this post assumes basic familiarity with Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) and Lorenzo.  If you want that backstory, see this post on Janus and the Lorenzo cert grant and my discussion of the actual Lorenzo decision.

Delaware Chancery court is apparently being dragged into the presidential race, via a new attack ad against Joe Biden.  As reported by Shane Goldmacher, well:

There is so much to talk about here.

First, there’s the fact that the advertisement is misleading; Biden and Warren were apparently sparring about bankruptcy courts, not Chancery.

Second, there’s the fact that Biden – as a federal legislator – has no authority over Delaware Chancery. 

Third, there’s the fact that while I won’t dispute that Delaware courts are too white, Delaware Chancery, at least, now has 3 women and 4 men.  I’d be delighted to see more women on Chancery – and certainly the Delaware Supreme Court – but criticizing Chancery as too male is so last year.

Fourth, there’s the shifting numbers about the size of the ad buy; original reports said $500K, then the number was upped to $1 million, with print as…

Just after I posted my paper, Not Everything is About Investors: The Case for Mandatory Stakeholder Disclosure, arguing for a stakeholder-focused corporate disclosure system, the conversation about corporate obligations to noninvestor interests exploded.  That’s because the Business Roundtable released a new “statement on the purpose of a corporation” which Marie Kondo-ed the traditional focus on shareholder interests, in favor of, well:

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

– Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.  

– Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

– Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. – Supporting the communities in which we work. We respect the people in our communities and protect the

…

In a previous post, I plugged a short piece that was published in the Georgetown Online Journal, and at that time, I explained it was a preview of a longer, in-progress article about the need for a corporate disclosure system intended for non-investor audiences.  I have now posted a draft of that longer paper to SSRN.  Here is the abstract:

Not Everything is About Investors: The Case for Mandatory Stakeholder Disclosure

Corporations are constantly required to disclose information, but only the federal securities laws impose generalized public disclosure obligations that offer a holistic overview of corporate operations.  Though these disclosures are intended to benefit investors, they are accessible by anyone, and thus have long been relied upon by regulators, competitors, employees, and local communities to provide a working portrait of the country’s economic life.

Today, that system is breaking down.  Congress and the SEC have made it easier for companies to raise capital without becoming subject to the securities disclosure system, allowing modern businesses to grow to enormous proportions while leaving the public in the dark about their operations.  Meanwhile, the governmentally-conferred informational advantage of large investors allows them to tilt managers’ behavior in their favor, at the

…

Milton Friedman, shareholder primacy’s true north, wrote:

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.

Much judicial, political, and academic ink has been spilled over the first part of this pronouncement, but the second part has always baffled.  What ethics?  Whose ethics?  How do we identify ethical customs that are not instrumental in generating higher profits (because if they were, there would be no need for the qualification; we would simply recognize that pursuit of profits may include pursuit of community goodwill because in its absence it may be hard to sell one’s product).

The recent tragedies in El Paso and Dayton have raised these questions anew.  Cloudflare, which provides various website and internet security services, dropped 8chan (a breeding ground for violent white supremacist content and the site where the El Paso shooter posted a racist screed) as a…

I often think about this Wall Street Journal article from 2015 about Mylan and its reincorporation to the Netherlands:

At a heated meeting with Mylan NV’s executive team in a Manhattan conference room in May, several investors complained about the drug maker’s resistance to a $40 billion takeover proposal from Teva Pharmaceutical Industries Ltd.

Executive Chairman Robert Coury leaned across the table and retorted, in language laced with expletives, “This is a stakeholder company, not a shareholder company,” according to multiple attendees, meaning his constituents went beyond investors and he wasn’t obligated to agree to a tie-up.  Mr. Coury got his way….

Mylan’s resistance to Teva’s proposal was aided by an acquisition that moved the company’s legal home in February from Pennsylvania to the Netherlands—part of the wave of tax-trimming “inversion” transactions that swept American business last year. Mylan, whose senior management remain based in Pennsylvania, gained not just tax savings, but a Dutch corporate rule book that gives companies more levers to resist takeovers….

Dutch policy makers have spent the past decade touting the benefits of Dutch law to global corporations as part of an effort to turn the Netherlands into a management-friendly bastion.

The article’s a bit circumspect…