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The Delaware Legislature is set to consider new legislation concerning litigation-limiting bylaws and charter provisions.

As discussed here, the new legislation would, among other things:

(1) Explicitly authorize corporations to include in their charter or bylaws forum selection clauses that designate Delaware courts as the exclusive forum for shareholder litigation;

(2) Explicitly forbid corporations from including in their charters or bylaws forum selection or arbitration clauses that prohibit bringing claims in Delaware courts; and

(3) Prohibit fee-shifting bylaws and charter provisions.

[More under the cut]

Sergei Magnitsky. Remember that name any time you’re considering doing business in Russia or any other country in which the “rule of law” is a meaningless masquerade for the uncontrolled whims of the powerful.

Magnitsky was a young Russian accountant working for the Hermitage Capital Management firm created by Bill Browder to invest in Russia. When Browder stepped on the toes of some of the Russian business oligarchs, Magnitsky was thrown into prison, beaten, refused essential medical care, and basically murdered.

I learned Magnitsky’s story in a new book by Bill Browder, Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice. Browder created Hermitage Capital shortly after the breakup of the Soviet Union. The book details Hermitage’s dramatic rise and, when Browder publicly fought the attempts by the Russian oligarchs to dilute his minority investments, Hermitage’s eventual fall. Browder and almost everyone else associated with Hermitage managed to flee Russia, some after being detained, but Magnitsky, the firm’s young accountant, refused to leave. When he was imprisoned and questioned, he refused to tell his captors the lies they wanted to hear, and his refusal eventually resulted in his death.

The story is…

There’s been a lot of controversy recently over the SEC’s use – or perhaps I should say, non-use – of the automatic “bad actor” disqualifications for firms that commit securities violations.  The disqualification provisions place certain limits on the activities of firms that are found to have committed securities violations.  Dodd Frank added a big stick to the list of penalties:  It added an automatic disqualification from participating in private placements under Rule 506 of Regulation D.  It’s a severe penalty; private placements are extremely lucrative.

But the SEC can waive the automatic disqualification – and frequently does, even for “recidivist” firms that repeatedly rack up securities violations.  It imposes fines, perhaps outside monitoring, but it waives disqualifications – especially the Rule 506 disqualification.

The issue has recently hit the public eye because Democratic Commissioners Luis Aguilar and Kara Stein have been objecting to the grant of waivers to recidivist firms.  In their view, waivers are an important tool for deterring securities violations, and the SEC has improperly adopted a policy of granting them “reflexively.”

In light of all of this, the SEC has promised to issue guidelines as to how Rule 506 waiver decisions are made; Commissioner Daniel Gallagher thinks the matter may ultimately have to be resolved by Congress.

Until recently, hasn’t been clear just how often these waivers have been granted, and who has received them.  But Urska Velikonja just posted a new paper that gathered data on 201 waivers issued between 2003 and 2014.  These waivers involved Regulation D disqualification, Regulation A disqualification, and also disqualification from the use of automatic shelf registration statements to raise capital.  Velikonja finds that: (1) large financial firms received over 80% of the waivers; smaller firms and nonfinancial firms rarely receive them even though they are much more likely to be the target of an enforcement action; (2) the SEC typically does not offer any real justifications for its decision to grant or withhold a waiver, but the pattern appears to be that the Commission does not grant waivers for firms accused of offering fraud or issuer disclosure violations; usually, they’re granted for firms accused of unrelated misconduct, such as violations of the broker-dealer and investment adviser rules – presumably because the Commission views the latter firms as presenting a lower recidivism risk; and (3) the number of waivers has declined over time, and the SEC has recently begun utilizing partial waivers.

(More under the jump)

I finally got it together and opened an account on SSRN (I know, I know), and posted two of my forthcoming pieces there.

The first, Searching for Market Efficiency, is a very short comment that will be published in the Arizona Law Review, discussing Donald Langevoort’s Judgment Day for Fraud-on-the-Market and Geoffrey Miller’s The Problem of Reliance in Securities Fraud Class Actions, both of which will be published in the same issue.  The comment discusses the Supreme Court’s recent decision in Halliburton, and the reasons behind courts’ difficulties in defining market efficiency for the purpose of Section 10(b) class actions.

The second, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, is a longer article forthcoming in the Georgetown Law Journal, and it deals with the claim that, because corporate governance documents are “contractual,” clauses that require arbitration of shareholder disputes must be enforced according to their terms, as required by the Federal Arbitration Act.  I’ve discussed this topic before; the Article spins things out in more depth.  I will eventually put up a longer post here summarizing the piece, but if there’s anyone who just can’t wait for the cliffs notes…

The following comes to us fromJ. Scott Colesanti and Mandy Li Weiner:

    To a degree large or moderate, New York shall soon be at the vanguard of Bitcoin regulation. Since last July, observers have been asked to witness the shotgun marriage of the coin of no realm and a daunting state licensing measure; to date, no vows have been taken.

    The initial proposal from the Department of Financial Services was truly bold and far-reaching. Eschewing a classification of Bitcoin itself, the Department took aim at parties doing business with State residents by issuing, buying/selling, converting or storing the notorious cryptocurrency (and other, similar virtual currencies). Such entities and operators would have been required to register for the popularly dubbed “Bitlicense” at an indeterminate cost.

The requirements attending the proposed Bitlicense were rich and varied. Traditional State consumer protection provisions focused on customer complaints and record keeping. More novel provisions seemingly borrowed from securities law authorities on business continuity planning and anti-money laundering programs, and from sister State warnings regarding cryptocurrencies as investments. Consequentially, New York’s broad, multi-layered protocol would have closed the door of entry to an appreciable number of businesses and startups, as well as related enterprises.

Not surprisingly, …

This seems to have been a great week for business stories with a touch of the absurd.

First up, we have Footnoted.org’s fantastic catch in Goldman’s 10-K.  Apparently, Goldman now has a new risk factor:

[O]ur businesses ultimately rely on human beings as our greatest resource, and from time-to-time, they make mistakes that are not always caught immediately by our technological processes or by our other procedures which are intended to prevent and detect such errors. These can include calculation errors, mistakes in addressing emails, errors in software development or implementation, or simple errors in judgment. We strive to eliminate such human errors through training, supervision, technology and by redundant processes and controls. Human errors, even if promptly discovered and remediated, can result in material losses and liabilities for the firm.

We can only speculate as to what specific, as-yet-undisclosed, human error prompted this disclosure, but if I had to make a bet, my money would be on an email address auto-fill mistake that is now the subject of some behind-the-scenes settlement discussions, the details of which will only come to light if negotiations fail and a public lawsuit is filed.

Next up, we have a Hunger-Games inspired video created…

This just in from Steven Davidoff Solomon:

Berkeley is looking to fill a one-year (possibly w/renewal) research fellowship position at the Berkeley Center for Law, Business, and the Economy.  Looks like  great opportunity for some of our readers.  Early applications are encouraged, so get right on it!

One of the enduring debates in corporate law concerns whether shareholder empowerment promotes short-termism – i.e., temporary boosts in stock prices that can only be achieved at the expense of longer-term value-building projects, like research and development.  Related to this debate is the argument – championed by, among others, Margaret Blair and Lynn Stout – that directors cannot/should not be solely concerned with shareholder wealth maximization; instead, their role is to mediate among various firm stakeholders.  This is because a firm cannot thrive unless it offers a credible commitment to its employees and other corporate constituents  that they will not be ousted the moment it appears profitable to do so.  In other words, in order to induce employees and other stakeholders to invest valuable human capital in the firm, these actors must believe that the firm is committed to them – that shareholders are barred from, for example, insisting on downsizings or outsourcings or what-have-you the moment it appears that doing so will create a share price bump. 

Martijn Cremers and Simone Sepe weigh in on this debate in a new paper, Whither Delaware? Limited Commitment and the Financial Value of Corporate Law(summarized here), where they conclude that…