This week, the Delaware Supreme Court reversed and remanded Chancery’s appraisal determination in Dell et al. v. Magentar Global Event Driven Master Fund et al..  The decision amplified the Supreme Court’s earlier opinion in DFC Global Corp. v. Muirfield Value Partners, LP, et al..

In DFC, the Delaware Supreme Court held that courts entertaining appraisal claims should place heavy emphasis on the deal price, at least for arm’s length negotiations with no apparent flaws.

Dell, however, was a slightly different animal.  Unlike DFC, it involved a management buy-out, which is a scenario rife with potential conflicts of interest.  It was precisely because of these conflicts that the Chancery court refused to accept the deal price, and instead used its own discounted cash flow analysis to determine that the stock was worth more.

On appeal, the Delaware Supreme Court reversed.  Though the Court acknowledged that there may be cause for concern in the MBO context, the Court concluded – based on Chancery’s own findings – that those concerns had been allayed in this particular case due to, among other things, an efficient market for the company’s stock, a robust sales process with full disclosure, and…

The SEC’s Investor as Owner Subcommittee of the Investor Advisor Committee has just posted a discussion draft regarding dual class share structures in advance of the December 7 meeting at which such structures were under consideration.  (As of this posting, details of what transpired at the meeting are not online).

Dual class structures are increasingly common these days; presumably, that’s in large part due to the fact that institutional investor power has become a serious threat to management control, and dual class shares are a mechanism for pushing back.  (Staying private is another mechanism, and the more that companies choose that route, the more bargaining power they have when they eventually go public, etc etc).

Suffice to say that despite various defenses of dual class shares that have been offered, the Investor as Owner Subcommittee is not impressed.  It highlights a number of risks, which basically come down to that public investors may have different views about corporate strategy than the control group – precisely the feature that endears the structure to some commenters – and that controllers may use their control to further cement their own control (i.e., Google and the nonvoting shares).  And then of course…

To draft end of semester exams.  So while I frantically try to develop fact-patterns that are simple and coherent and yet simultaneously engage a semester’s worth of material, I offer three links that interested me recently.

First, Vice Chancellor Laster’s ruling in Wilkinson v. Schulman (pdf).  In this opinion, VC Laster denied a books and records request on the grounds that the purposes of inspection belonged to Wilkinson’s counsel, and not Wilkinson himself.  Wilkinson had complaints about the company, but the purposes of inspection raised in the demand letter were different, and developed by the attorneys without Wilkinson’s involvement.  As Laster concluded, “Wilkinson simply lent his name to a lawyer-driven effort by entrepreneurial plaintiffs’ counsel.”  This strikes me as the kind of ruling that could have broader implications – we’ll see if future cases pick up these threads.

Second, Bloomberg recently reported on an organization called “Protect Our Pensions,” which purports to be a grassroots effort to fight against fossil fuel divestment, but is in fact industry-backed astroturf.   The reason I find this fascinating is that the standard argument against divestment is that it conveys no new information to the market and therefore will not affect prices.  But the fact…

The PSLRA requires that complaints alleging Section 10(b) violations plead facts that raise a “strong inference” that the defendant acted with intent or recklessness.  15 U.S.C. § 78u-4.  A “strong inference” is one that, taking into account “plausible opposing inferences,” is “at least as compelling as any opposing inference one could draw from the facts alleged.”  Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).

It has long been an axiom of PSLRA pleading that a strong inference may be raised by alleging that the defendant knew his or her statements were false, or knew facts that contradicted his or her public statements.  See, e.g., Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000); Miss. Pub. Emples. Ret. Sys. v. Boston Sci. Corp., 523 F.3d 75 (1st Cir.2008); Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 665 (8th Cir.2001); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009); Pugh v. Tribune Co., 521 F.3d 686 (7th Cir. 2008).  Indeed, allegations of actual knowledge of falsity are sufficient to plead scienter even in the context of forward-looking statements, which are subject to…

Today’s post is by Shu-Yi Oei (Boston College) & Diane M. Ring (Boston College), and originally appeared at TaxProf Blog:

Senate Republicans released their version of tax reform legislation on Thursday, November 9. The legislative language is not available yet, but the Description of the Chairman’s Mark (prepared by the Joint Committee on Taxation) suggests that one of the key provisions in the bill will clarify the treatment of workers as independent contractors by providing a safe harbor that guarantees such treatment. The JCT-prepared description tracks the contents of the so-called “NEW GIG Act” proposed legislations introduced by Congressman Tom Rice (R-S.C.) in the House and Senator John Thune (R-S.D.) in the Senate in October and July 2017, respectively. “NEW GIG” is short for the “New Economy Works to Guarantee Independence and Growth (NEW GIG) Act.” But notably, and as we further discuss below, the legislation is not limited in its application to gig or sharing economy workers.

Assuming the Senate Bill adopts the basic parameters of the NEW GIG proposed legislation — which looks to be the case based on the JCT-prepared description — we have some concerns. In brief, this legislation purports to simply “clarify” the treatment of workers as independent contractors and to make life easier for workers by introducing a new 1099 reporting threshold and a new withholding obligation. But the legislation carries potentially important ramifications for broader fights over worker classification that are raging in the labor and employment law area. Despite possibly alleviating tax-related confusion and reducing the likelihood of under-withholding, we worry that there are quite a few underappreciated non-tax hazards for workers if these provisions go through.

Summary of the Legislation

The legislation (assuming the Senate Bill more or less tracks the NEW GIG Act language) purports to achieve such “clarification” of worker classification status by doing the following:

First, the legislation introduces a safe harbor “which, if satisfied, would ensure that the worker (service provider) would be treated as an independent contractor, not an employee, and the service recipient (customer) would not be treated as the employer.” The legislation creates three objective tests, which, if met, ensure that the worker would be treated as an independent contractor rather than an employee. Very generally, those tests focus on (1) the relationship between the parties (including specificity of the task, exclusivity of the relationship, and whether the service provider incurs their own expenses), (2) the location of services or means by which they are provided, and (3) the existence of a written contract stating the independent-contractor relationship and acknowledging responsibility for taxes and a reporting/withholding obligation. (See JCT-prepared Description pp. 155-57.)

The first two tests are pretty easy for any sharing economy business to meet. In fact, many non-sharing businesses, such as those contracting with a broad swath of freelancers, could satisfy the safe harbor requirements, thereby extending the true reach of the legislation well beyond the gig economy. The “written contract” test is also not onerous. That requirement is essentially met if there is a written contract that makes the right noises in which the parties agree to independent contractor treatment. (Unsurprisingly, a contractual limitation is often not really a limitation at all.)

Second, the legislation clarifies the information reporting rules: It establishes a $1,000 threshold for Form 1099-K reporting and raises the 1099-MISC threshold from $600 to $1,000. (Under current law, there is some question of whether a Form 1099-K needs to be provided if the transactions do not exceed $20,000 and more than 200 transactions. We detail this issue in our article, “Can Sharing Be Taxed?”.)

Third, the legislation also requires the service recipient/payor to withhold limited amounts on payments made to independent contractor workers covered by the safe harbor. From the JCT-prepared description: “The proposal imposes an income tax withholding requirement with respect to compensation paid pursuant to a contract between a service provider and a service recipient (or payer) that meets the [safe harbor] requirements. For this purpose, a payment of such compensation is treated as a payment of wages by an employer to an employee. However, the amount required to be withheld is five percent of the compensation and only on compensation up to $20,000 paid pursuant to the contract.”

Fourth, the legislation limits the IRS’s ability to reclassify service providers as employees (and service recipients/payors as employers) in cases where the parties try in good faith to comply with the safe harbor but fail. The legislation only allows the IRS to recharacterize the relationship as an employment relationship on a prospective basis.

Finally, the legislation amends Tax Court jurisdiction: Under the current IRC § 7436 mechanism for challenging worker classification, only the person for whom the services are performed may petition the Tax Court regarding misclassification of workers. The bill would expand current law to allow the worker/service provider to bring such a case as well. 

[More under the cut]

SEC Commissioner Jay Clayton recently gave a speech where he remarked:

I have become increasingly concerned that the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance. For instance, the SEC staff estimates that over 66% of the Russell 1000 companies are owned by Main Street investors, either directly or indirectly through mutual funds, pension or other employer-sponsored funds, or accounts with investment advisers… And, if foreign ownership is excluded, that percentage approaches approximately 79%.

… A question I have is: are voting decisions maximizing the funds’ value for those shareholders?

In situations where the voting power is held by or passed through to Main Street investors, it is noteworthy that non-participation rates in the proxy process are high. … This may be a signal that our proxy process is too cumbersome for retail investors and needs updating.

What’s interesting is that there are two different ideas here.  One concerns the voting power of mutual funds and pension funds; the other concerns the votes of retail shareholders themselves.

As for retail votes, Jill Fisch has an article on this very subject forthcoming in the Minnesota Law Review.  She recommends that retail shareholders be given…

The GOP unveiled its tax bill this week.  Below are a collection of links to commentary that I found interesting (taking a page from Stefan’s book, some are in the form of embedded tweets):

A lot to like and a lot to dislike in the Republican tax bill: “The tax bill aggressively takes on deductions in the individual income tax code, and channels the proceeds towards across-the-board cuts in income tax.  Unfortunately, that good work is undone by expensive giveaways to the owners of firms, and unnecessary windfalls to the heirs of the rich.”

Tax Bill May Deal a Body Blow to LBOs: “The legislation includes a provision that would cap interest deductibility at 30 percent of adjusted taxable income, a dramatic shift from the 100 percent allowed now.”

Sports Stadiums Would Lose Access to Tax-Exempt Bonds Under House Tax Plan: “Lawmakers of both parties have long sought to limit the use of municipal bonds to benefit sports teams.”

Apple Among Giants Due for Foreign Tax Bill Under House Plan: “Earnings held in cash would be taxed at 12 percent while profits invested in less liquid assets like factories and equipment face a 5 percent rate.”…