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So Michael Piwowar inspired a bit of heartburn in the plaintiffs’ bar this week when, during a speech to the Heritage Foundation, he encouraged corporations to add mandatory arbitration provisions in their charters prior to an IPO. This is a subject on which I’ve frequently posted, but since it’s in the news again I can’t let it go by without comment.

Mandatory arbitration is an idea that terrifies plaintiffs’ attorneys because arbitration clauses typically come with a class action waiver, and that could sound the death-knell for federal securities litigation.  Moreover, because the Supreme Court has interpreted the Federal Arbitration Act to bar most attempts at regulating contracts to arbitrate, see, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the fear is that once an arbitration clause makes it into the corporate governance documents, it’s pretty much game over.  The plaintiffs’ bar has long taken comfort in the fact that (at least until now) the SEC has taken the position that such provisions are impermissible, which is exactly why Piwowar’s remarks raised concern.  Delaware, of course, recently amended its corporation law to prohibit the use of mandatory arbitration clauses in corporate charters and bylaws, see Del.

Could this be the beginning of the end for the event study in Section 10(b) class certification?

Yes, I’m probably overstating, but still, the Second Circuit’s opinion in In re Petrobras Securities, 2017 WL 2883874 (2d Cir. July 7, 2017), definitely takes a step in that direction.

As a recap, a private plaintiff alleging fraud claims under Section 10(b) of the Exchange Act must demonstrate that he or she “relied” on the defendant’s false statements.  In Basic Inc. v. Levinson, 485 U. S. 224 (1988), the Supreme Court held that reliance could be demonstrated via the fraud on the market doctrine – namely, the presumption that in an open and developed market, any material, public misstatement is likely to have impacted the market price of the security.  The fraud on the market doctrine is what allows Section 10(b) claims to be brought as class actions, since it eliminates the need for plaintiffs to demonstrate reliance on an individual basis.  Since Basic, then, battle has been joined between plaintiffs and defendants regarding what counts as an “open and developed” market for class certification purposes.

In recent years, it has become de rigueur for plaintiffs to use an event…

     Most LLC statutes provide an exclusive charging order remedy that creditors can use against a member’s interest.  A charging order is effectively a lien on the member’s transferable interest (i.e., the member’s financial rights) in the LLC.  If a court imposes a charging order, the judgment creditor is entitled to any distributions made by the LLC that would otherwise have gone to the debtor-member.  The entitlement to distributions continues until the judgment creditor has received enough proceeds to pay off the judgment.  The creditor is not permitted, however, to execute on a member’s interest in the same way that a creditor could normally execute on the debtor-member’s non-exempt personal property.  If the LLC does not make sufficient distributions, some statutes allow a court to order foreclosure of the charging lien, which effectively results in a sale of the debtor-member’s transferable interest.  Significantly, even with foreclosure, the purchaser at the foreclosure sale will only become a transferee and will not have the status of a member (nor the rights of a member).  This charging order scheme protects the rights of the non-debtor members to control the admission of new members to the LLC.

     In Olmstead v. Federal…

As most readers of this blog are likely aware, Hobby Lobby is in the news again.

Hobby Lobby is a privately-held corporation that runs a chain of arts and crafts stores.  Its shareholders consist of members of the Green family, who also manage the corporation on a day to day basis.  The Greens are religious Christians, and Hobby Lobby’s statement of purpose declares that the company will be run in accordance with biblical principles.

When Hobby Lobby last made the news, it had just won its case in the Supreme Court, Burwell v. Hobby Lobby Stores.  The Greens argued, successfully, that the Affordable Care Act impermissibly burdened their religious beliefs by requiring that Hobby Lobby provide birth control coverage to its employees.  The difficulty with this argument, from a corporate law perspective, is that it draws no distinction between burdens placed on Greens in their personal capacities, and burdens placed on the Hobby Lobby corporation itself.  (The Supreme Court opinion did little to clarify the matter, which is why I use it in my class as part of my introduction to business law).

Now the company making headlines again, for smuggling ancient artifacts out of Iraq.

Cuneiform

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