I have previously blogged about the SPV phenomenon, whereby investors can get access to private company shares by investing through a vehicle dedicated to that purpose. As I previously explained, the trend has recently exploded, with numerous LLCs selling interests to retail investors through platforms like EquityZen, often with high fees and opaque pricing.  Among other things, the SPV phenomenon allows capital-hungry startups to raise money while (nominally) staying below the 2,000 investor threshold that would trigger mandatory reporting – and startups are increasingly pushing the limits of the law by coordinating with SPV sponsors.

Which is why I was fascinated by recent reports that some startups – particularly Anthropic and OpenAI – have gotten concerned about the number of uncontrolled SPVs selling interests in their shares.

I agree it’s a wild west, and for sure some retail investors are being taken advantage of.  The more interesting question is why companies like Anthropic would care.  Investors in SPVs – and SPVs of SPVs – don’t have a direct relationship with the company and don’t have rights against it, so what are they concerned about? I have a couple of thoughts. 

First, as the Financial Times article explains, OpenAI…

A reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion—or, otherwise put, about the speaker’s basis for holding that view. And if the real facts are otherwise, but not provided, the opinion statement will mislead its audience.  Consider an unadorned statement of opinion about legal compliance: “We believe our conduct is lawful.” If the issuer makes that statement without having consulted a lawyer, it could be misleadingly incomplete. In the context of the securities market,

Contractual disputes are an ongoing source of amusement to me, especially when the words of the deal are used to defeat the actual meaning of what the parties bargained for. To wit: VC Will’s recent opinion in Kim, et al. v. FemtoMetrix, Inc.

Avaco was a stockholder in FemoMetrix, and had signed a voting agreement with other stockholders.  That agreement gave Avaco the right to designate one director, and it chose Kim, who was then an Avaco employee.

The voting agreement had the following relevant terms:

1) Section 1.2(a) granted Avaco a designation right, subject to sections 1.6 and 1.4(a).

2)  Section 1.6 provided that Avaco could not designate a “bad actor” as defined by SEC rules.

3)  Section 1.4(a) provided that Avaco’s designee could be removed without Avaco’s approval, but only for “cause.”

4) Section 7.8 provided that amendments to the voting agreement required a stockholder vote, but an amendment specific to a particular investor – that did not “appl[y]” to all equally – would require that investor’s consent.  It also provided that Section 1.2(a) could not be amended without Avaco’s consent.

(At this point, “Jaws” music should be playing in your head.)

Avaco got into a…

After the Supreme Court decided Citizens United v. Federal Election Commission, 558 U.S. 310 (2010), there were a flurry of articles pointing out its flaws as a matter of corporate theory (and those are only a very limited sample). 

The problem is, the Supreme Court accepted a kind of simplistic view of the corporation as an association of citizen-shareholders, imbued with free speech rights by the transitive properties of the First Amendment.  But corporations are not spontaneously-formed groups of private citizens; corporations themselves are creatures of law, and law in the first instance sets the ground rules for their structure and powers, including who has authority to speak, the purposes for which they may speak (i.e., wealth maximization), and the procedures for deciding what speech will be made. 

In other words, the First Amendment can rationally be said to confer rights on natural persons, who exist outside of law; they are not constituted by law.  Corporations, however, must be created by law before they exist as entities for the First Amendment to act upon, and it’s not clear how much that law – the law that creates them – has to be informed by constitutional principles.

For example, there…

…in a nonprecedential opinion so don’t get too excited.

San Diego County Employees Retirement Association v. Johnson & Johnson represents the latest iteration of courts trying to figure out what the heck to do about fraud on the market class certification in the wake of the Supreme Court’s desperately confused Goldman Sachs Grp., Inc. v. Ark. Teacher Ret. Sys., 594 U.S. 113 (2021).

Plaintiffs alleged that J&J concealed asbestos in its talc products, resulting in multiple stock price drops as the truth dribbled out.  At class certification, J&J claimed it had rebutted the presumption of reliance by demonstrating that each allegedly corrective disclosure revealed no new information the market, and therefore could not have been responsible for the dissipation of artificial inflation.

I pause here to note that this is, I guess, the framework mandated by Goldman, but – as I have frequently screamed – it is both illogical and inconsistent with Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (Halliburton I). Specifically, even if J&J proves beyond a reasonable doubt that its fraudulent statements were never publicly corrected, that does not in any way shed light upon the question…

I speak of Epicentrx, Inc. v. Superior Court, a case that I previously blogged about here.

Delaware entity, doing business in California.  A minority investor sues in California, alleging fraud, breach of fiduciary duty, and breach of contract.  Defendant corporation and controlling stockholder move to dismiss, on the grounds of a Delaware Chancery forum selection clause in both the charter and the bylaws.  Investor argues that California’s constitution confers a jury right that – per California precedent – cannot be contractually waived pre-dispute.  Therefore, investor claims, a forum selection clause that functionally results in a jury waiver (because the Court of Chancery sits without a jury) must also be invalid.  Investor also argues that the charter and bylaws are not binding because the internal affairs doctrine has no application here (fraud claims, for example, are not governed by the internal affairs doctrine), and the forum selection clauses were not freely adopted.

Since this is a topic I’ve written about (and written about and written about), the case had my attention.  In my previous post, I wrote, “one factor that makes constitutive documents noncontractual is that, as Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d…