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I’ve previously posted about Delaware’s vulnerability – namely, to the extent it tries to police shareholder litigation through procedural rather than substantive legal standards, it is vulnerable to losing disputes to other jurisdictions that have rules deemed more favorable by litigants.  Plaintiffs and defendants can reach sweetheart merger settlements in jurisdictions that examine the terms less searchingly; defendants can win a dismissal of all claims filed by weak plaintiffs in one jurisdiction and estop stronger plaintiffs who bring suit in Delaware.

So, for example, Delaware encourages derivative plaintiffs to seek books and records under Section 220 before bringing a lawsuit, but that takes time.  A plaintiff in another jurisdiction might simply file a lawsuit right away, and if that suit is dismissed, the dismissal can preclude the Delaware plaintiff– which only gives the Delaware plaintiff less incentive to seek books and records in the first place.

Well, until now.  In Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017), that exact scenario occurred in the long-running action against Wal-Mart for violations of the foreign corrupt practices act in Mexico.  While the Delaware plaintiffs sought books and records to bolster a derivative claim, federal plaintiffs…

I’ve been waiting for The Founder to open for months.  Starring Michael Keaton as Ray Kroc, it tells the story of the founding of McDonald’s restaurants.  As business junkies and professors know, McDonald’s was an innovation: it created the modern franchise, identical restaurants run by individual entrepreneurs in locations across the country and, eventually, the world.  It also represented a critical development in the history of fast food, transferring the assembly line from the factory floor to the kitchen.  Most basic business classes talk a lot about McDonald’s, because the franchise system – and the degree of control that McDonald’s corporate exercises – raise interesting questions about agency law and the definition of employment.

[Spoilers under the cut, not very if you already know the story]

A couple of months ago, investors in Theranos filed a class action complaint seeking damages for fraud and negligent misrepresentation under California law.  Theranos is based in California; presumably, the plaintiffs intend to argue that any false statements emanated from California and therefore California law covers even out of state purchases.  See Diamond Multimedia Systems, Inc. v. Superior Court, 19 Cal. 4th 1036 (Cal. 1999). 

The reason this interests me is because it’s rare – not unheard of, of course, but rare – to see fraud-based securities class actions concerning securities that are not publicly traded.  SLUSA eliminated the possibility for most companies, but SLUSA alone isn’t the problem; the other hurdle is the difficulty of establishing reliance on a classwide basis, as even before SLUSA, fraud-on-the-market doctrine was largely limited to Section 10(b) claims. 

California law, however, is different from most states’, because California’s blue sky law explicitly permits claims for deceit based on price distortion.  See Mirkin v. Wasserman, 5 Cal. 4th 1082 (Cal. 1993); Cal. Corp. Code, §§ 25400, 25500. 

It will be interesting to see if that’s how the Theranos class plans to approach matters; the difficulty will be establishing that, for example, Investor A’s willingness…

    If you haven’t yet heard, the 2016 revision of the Model Business Corporation Act has been released.  A memorandum from the Corporate Laws Committee describes the evolution of the recent revision:

    Sixty-six years ago the Committee on Corporate Laws of the ABA’s Business Law Section (the Committee) published the Model Business Corporation Act (the Act or the Model Act). Now substantially adopted by a majority of the States, the Act has strongly influenced the law governing U.S. corporations. Like corporate law, however, the Act has not been static: the Committee approved a substantial revision of the Act in 1969, less than 20 years after its initial publication; and just 15 years later, in 1984, the Committee adopted what was then called the Revised Model Business Corporation Act, a top to bottom revision of the original Act.

    Through periodic amendments, the Act has continued to evolve in significant ways since 1984, as further described below. Until recently, however, the Committee has not undertaken a comprehensive revision of the Act in a form that could be adopted by state legislatures as a means to capture all of the changes to the Act since 1984. Nor has there been any systematic attempt to…

A couple of months ago, Snapchat’s parent announced that the company would hold an IPO in 2017 – the largest and most high-profile IPO since Alibaba in 2014.  Given the sluggish IPO market, as well as Snapchat’s general name recognition and tech cachet, the announcement was a big deal.

But it’s possible there’s going to be a monkey in the wrench.  On January 4, a former Snapchat employee (fired after 3 weeks) filed a lawsuit alleging two of Snapchat’s metrics – and which ones are redacted from the complaint – were fraudulently manipulated in order to inflate Snapchat’s valuations to private investors and in anticipation of the IPO.  (The redactions are due to concerns that the allegations are covered by the plaintiff’s confidentiality agreement).  The unredacted portions of the complaint allege that the company never built an appropriate team to analyze its metrics, and that the employee was illegally fired in retaliation for blowing the whistle.

Snapchat has given a statement to the media denying the allegations as the fictional creations of a “disgruntled former employee.”

Though the redactions are extensive, the complaint does offer at least a hint of what’s at stake.  In Paragraph 24, the complaint…

Happy (Almost) New Year!  As 2016 draws to a close, I offer three quick hits of interesting recent business law developments:

First:  The endlessly-running case of Erica P. John Fund v. Halliburton has finally settled!  Halliburton has been a particular obsession of mine lo these past 6 years or so, and I even attended the Fifth Circuit oral argument held in September.  (My report of that argument is here, where I link to my prior blog posts on the subject).  I’m sort of sad to see it go, even though I found many of the opinions frustrating.  In any event, Alison Frankel has a nice retrospective of the case, including how David Boies ended up as lead attorney for the plaintiffs after the death of his daughter, the previous lead.  

Second: I previously posted about Facebook’s move to create a nonvoting class of stock, essentially as a mechanism to allow Mark Zuckerberg to have his cake and eat it too (i.e., divest his stock while still maintaining voting control).  The move was duly approved by an independent special committee, but – as was recently revealed in a shareholder lawsuit – one of the committee members appears…