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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’m intrigued by this unusual Section 11 decision out of the Third Circuit, Obasi Investment LTD v. Tibet Pharmaceuticals, Inc, 2019 WL 3294888 (3d Cir. 2019).   A company called Tibet held an IPO, but the registration statement failed to identify financial troubles at its operating subsidiary.  Eventually the subsidiary’s assets were seized, Tibet’s stock price plunged, and trading was halted.

A class of plaintiffs brought a Section 11 claim against, you know, everyone they could get their hands on, including two individual defendants: Hayden Zou and L. McCarthy Downs.  Zou was a Tibet shareholder who had come up with the idea for an IPO in the first place, and approached Downs, who was a managing director for an investment bank called Anderson & Strudwick (“A&S”).  A&S ended up underwriting the offering, and for reasons that are not explained, A&S agreed with Tibet that after the IPO, two A&S designees would serve as nonvoting Board observers for the foreseeable future.  Those designees were Zou and Downs, and the registration statement explained that even without votes “they may nevertheless significantly influence the outcome of matters submitted to the Board of Directors for approval.”

When the plaintiffs sued, they argued that Zou and Downs were proper Section 11 defendants, because that statute imposes liability on “every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner.” 15 U.S.C. §77k(a)(3). 

The Third Circuit, in a 2-1 split, held that Zou and Downs were not named in the registration statement as performing functions similar to those of directors.

And honestly this is sort of a stream of consciousness about the decision, which got very very long, so behind a cut it goes:

[More under the jump]

I’ve previously blogged in this space about Shari Redstone and her conflicts with the CBS board.  Last week, New York Magazine published this fascinating article about Shari Redstone’s corporate battles and her relationship with her father, Sumner Redstone.  Shari Redstone refused to participate and thus much of it appears to have been drawn from other sources, but it was all new to me, and the anecdotes make for a fascinating – and eyebrow raising – read.  Here’s a taste:

In retrospect, it took some chutzpah for Moonves to take Redstone to court, when as reporting would later show, he was busily covering up the sexual-assault allegations against him. Less than six months later, he was gone. So were Gifford and most of the other elder men on the board who’d backed Moonves. …. CBS and Viacom are once again talking about merging, though Redstone cannot be officially involved until negotiations are further along. If the merger goes through, as it well may this summer, she will have cemented her control of a $30 billion media kingdom.

And Moonves’s stunning downfall has given Redstone, for all her wealth, something she’s never had before: a narrative that justifies her own rise.

…

I just recently came across the Ninth Circuit’s decision in In re Atossa Genetics Inc Securities Litigation, 868 F.3d 78 (9th Cir. 2017), and it struck me because it highlights an ongoing tension between the reliance/materiality distinction in fraud-on-the-market cases in general, and in the Supreme Court’s jurisprudence in particular.

And I’ll say up front that a lot of what I’m about to discuss in this post is stuff I’ve laid out in more detail in my essay, Halliburton and the Dog that Didn’t Bark.  The Atossa case is just a nice demonstration of the issue.

And hey, this got long, so – more after the jump.

When I was in practice, I worked on a number of cases alleging violations of Section 11 of the Securities Act, but none that had been filed in state court.  (For which I was profoundly grateful; I was always bemused by the fact that I needed to get pro hac’d into federal courts around the country but I was vastly more familiar with their rules and practices than with those of the New York State courts, notwithstanding my admission to the New York State bar).

So, to be honest, I never had any strong feelings about whether plaintiffs should have the right to pursue Section 11 class actions in state court, or whether the Securities Litigation Uniform Standards Act should be interpreted to permit defendants to remove such cases.  And I didn’t spare much attention when the Supreme Court recently held in Cyan, Inc. v. Beaver County Employees Retirement Fund that defendants cannot remove them.

But Michael Klausner, Jason Hegland, Carin LeVine, and Sarah Leonard just posted a short empirical analysis of state Section 11 class actions, and the results have captured my interest.  First, they find – unsurprisingly – there has been an increase in state Section 11…

Last week, the Delaware Supreme Court issued an opinion, Marchand v. Barnhill, which is notable for two reasons.  First, it furthers the Court’s project of reinvigorating director independence standards, and second, it is one of the very few decisions to find that the plaintiffs properly pled a claim for Caremark violations.

The facts are these.  Blue Bell Creameries suffered a listeria outbreak in 2015 that killed three people and nearly bankrupted the company, and shareholders brought a derivative lawsuit alleging that the directors failed to oversee corporate compliance with FDA and other requirements.  First, they alleged that the CEO Paul Kruse, and the VP of Operations Greg Bridges, actually received notification from various agencies of the company’s lack of compliance and took no remedial action.  In so doing, Kruse and Bridges violated their fiduciary duties to the company, and a litigation demand on the board would be futile because of their close ties to the board members.

Second, plaintiffs alleged that the Board violated its Caremark duties by failing to institute a system for monitoring the company’s compliance.

Chancery dismissed both claims, and the Delaware Supreme Court reversed.

Starting with the issue of director independence, as Delaware-watchers are well-aware…

SEC Commissioner Peirce recently delivered a speech to the American Enterprise Institute and there’s a lot going on here.

First, though this wasn’t the nominal topic of the speech, Commissioner Peirce took the opportunity to take some shots at proxy advisors, complaining that:

Proxy advisor Glass Lewis, for example, has only 360 employees, only about half of whom perform research, who cover more than 20,000 meetings per year in more than 100 countries.  Companies may not get an opportunity to correct underlying errors. According to one recent survey, companies’ requests for a meeting with a proxy advisory firm were denied 57 percent of the time.  Companies submitted over 130 supplemental proxy filings between 2016 and 2018 claiming that proxy advisors had made substantive mistakes, including dozens of factual errors.  Proxy advisors ISS and Glass Lewis provide companies some opportunity to contest such errors, but access is not uniform for all issuers, and the process may not provide adequate opportunity for issuers to respond before proxies are voted.  The ramifications for the affected companies can be dramatic, as investment advisers, unaware of the error, vote their proxies in accord with the recommendation.

I’ve previously posted about the SEC’s new interest in …

It’s no secret that Tesla has weathered some … ahem … criticism of its governance structure, and in particular, the (lack of) board supervision over Elon Musk.  After Musk’s antics landed him in trouble with the SEC, the company proposed two charter amendments that would make the board more responsive to shareholders: first, to amend the charter so that future charter amendments will require only majority rather than 2/3 vote of the outstanding stock, and second, to amend the charter to reduce director terms from 3 years to 2. 

Management sponsored proposals – especially those that hand more power to shareholders – are usually kind of a done deal.  But this week, Tesla announced that even though the vast majority of voting shareholders favored the proposals, the proposals had failed to pass.  Now, to be sure, the proposals needed a 2/3 vote of the outstanding stock – that was, after all, one of the things sought to be amended! – but it was still a bit of a surprise to see that the threshold hadn’t been met, given the amendments’ popularity.

I know that I wasn’t the only one who suspected some kind of Musk-related shenanigans, like perhaps Musk…

Several months ago, I posted about a symposium I attended at Case Western Reserve Law School titled Fiduciary Duty, Corporate Goals, and Shareholder Activism.   The Case Western Reserve Law Review will be publishing a volume of papers from the symposium, and my contribution, What We Talk About When We Talk About Shareholder Primacy, is now available on SSRN.  The essay (well, they’re calling it an article but I think of it more as an essay) is about how shareholder primacy can be defined either as a wealth maximization norm or as obedience to shareholders, and what that means for corporate organization and theory.

In April, I attended the Corporate Accountability symposium sponsored by the Institute for Law & Economic Policy and the Vanderbilt Law Review.  The Vanderbilt Law Review will be publishing those papers, and my contribution, After Corwin: Down the Controlling Shareholder Rabbit Hole, is now available on SSRN.  The essay addresses the inconsistencies in how Delaware treats controlling shareholder transactions, and the new pressure that Corwin, as well as changes to corporate financing, have placed on the definition of what a controlling shareholder is.

(Regular readers of this blog will note that…

Jeremy McClane at Illinois recently posted to SSRN a truly fascinating study of boilerplate in IPO prospectuses (okay, I gather it may have been out for a while but it was only posted to SSRN recently and that’s how I learn anything these days).  In Boilerplate and the Impact of Disclosure in Securities Dealmaking, he concludes that while the inclusion of “boilerplate” – namely, generic disclosures that copy from similar deals – contributes to lower legal fees (though not lower underwriter and audit fees), it ultimately costs firms in terms of greater IPO underpricing and greater litigation risk. (It should be noted that he does not analyze litigation outcomes – compare to the risk factor paper, described below).  Boilerplate is also associated with greater divergence in analyst opinion, and greater (upward) price revision in the pre-IPO period.  All of this, he concludes, demonstrates that boilerplate contributes to greater information asymmetry.

In a previous post, I described a working paper, Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language, that examines boilerplate in SEC risk factors.  The authors of that study concluded that – perversely – boilerplate is…

A couple of weeks ago, I was lucky to participate in a panel on securities litigation at George Mason University Antonin Scalia Law School, along with Professor J.W. Verret, Jonathan Richman of Proskauer Rose, Steven Toll of Cohen Milstein, moderated by Judge Michelle Childs of the District of South Carolina.  We had a lively discussion about current issues concerning these actions, including what I guess is now being branded as “event-driven” litigation, definitions of materiality, and arbitration clauses in charters and bylaws.

In my opening remarks, I discussed merger litigation and the shift from state to federal courts, covering much of the territory I previously described on this blog (of course, since that post, the Supreme Court dismissed the Emulex case as improvidently granted).  I also drew from research by Matthew Cain, Steven Davidoff Solomon, Jill Fisch, and Randall Thomas, presented in April at the ILEP symposium on corporate accountability.  (Their research is not yet public but I will link here as soon as it becomes available).

In the meantime, if you’re interested, you can watch a video of the panel here:

The other panels from the symposium are also available for viewing at this link