24. Professors Paul Gompers, Joy Ishii, and Andrew Metrick also examined Professor Daines’ results as part of their study of 1,500 large firms to assess how firm governance affects stock returns. Consistent with the unique nature and heterogeneity of each company, they found that the premium observed in Professor Daines’ study was attributed to various governance characteristics, such as a classified board, limited ability to call special shareholders’ meetings, and state law and charter takeover protections. After controlling for these factors, they discovered that the Delaware premium was no longer statistically significant. In other words, Professors Gompers, Ishii, and
An anti-activist bylaw is upheld at Eaton Vance’s closed end fund
I previously posted about an anti-activist bylaw at a closed end fund, meant to head off Saba Capital. The bylaw provided that an activist who obtained more than 10% of the fund’s voting power would not be able to vote the excess, unless the remaining fund shareholders voted to permit it. The Second Circuit found that bylaw ran afoul of the Investment Company Act.
Eaton Vance came up with a new tactic. Funds, unlike operating companies, have a large retail shareholder base. And retail shareholders often don’t cast ballots at all.
For ordinary director elections, retail lack of participation isn’t a huge problem. The directors are elected by a plurality standard, so you don’t need a majority of shares to vote in favor. And that means when an activist like Saba comes along, Saba can defeat the sitting directors under a plurality standard.
So! Eaton Vance funds passed a bylaw that provided for majority – not plurality – voting, but only if a director election is contested. And further, the bylaw provided that if no candidate receives a majority, then the sitting directors get to maintain their seats as holdover directors.
Which functionally means that, in a contested election, the
Wireless Investors: A Jot
The article’s insights (and embedded take-aways from Gramitto Ricci and Sautter’s earlier work) are relevant to several large-scale business law topics. Two are most salient for me: shareholder primacy and the reasonable investor standard. Each area of inquiry and debate connects with the composition or behaviors of corporate shareholders.
Whether addressing shareholder primacy as a matter of the locus of corporate governance power as among the corporation’s internal constituents (through, e.g., voting or derivative litigation) or in terms of the objective of board decision making, shareholder apathy and coordination may be important to analyses and judgments. In shareholder primacy debates, assumptions often are made about the nature and interests of corporate shareholders. Changes in the identity and engagement of shareholders may alter those assumptions.
Similarly, the reasonable investor standard (which is incorporated in materiality definitions used in, among other things, federal securities regulation) is rooted
Write That Short Piece
A few years ago and before I had tenure, one of my more senior UNLV colleagues asked me to write a short piece for the ABA’s Human Rights Magazine on corporate political spending. As this isn’t my primary focus, I benefited enormously from reading work from Dorothy Shapiro Lund and Leo Strine as well as Tom Lin. The format didn’t allow for citations so I try to just use their names whenever I talk about it so it’s clear their ideas influenced me.
I made the time to write it and the essay has resulted in a decent amount of outreach to talk about the topic. Last week, a portion of an interview I gave to Marketplace ran. They reached out because of that short piece in the ABA magazine. Since then, I’ve heard from classmates I haven’t talked to for some time calling and texting to tell me they heard the interview. Apparently, I’m friends with an NPR-listening crowd.
If you want your work to reach larger audiences, you really have to write short pieces in addition to law review articles. On a few occasions, I’ve had op-eds follow law review articles. It’s a challenge to distill
OpenAI Stuff
Hi, everyone – welcome to BLPB at the new place! As you can see, we’ve imported our old posts over here but in the process, the authors got scrambled for a lot of the older ones … we’ll work that out eventually. So! Moving on –
OpenAI’s been in the news, again, and there are some interesting things to talk about.
First, apparently both OpenAI, and Anthropic before it, have been raising funds through SPVs. The SPV formally invests in the company; the SPV raises the funds from the real investors.
The purpose of that is the securities laws. If OpenAI/Anthropic have too many investors, they’ll have to make public filings. But each SPV counts as a single investor. So, by taking investment through SPVs, OpenAI and Anthropic can keep their formal investor count below the threshold of becoming a public company, while in fact raising capital from a dispersed group.
That said, it only works if OpenAI/Anthropic are not the ones organizing the SPVs. If they are, they’re evading the statutory limit on the number of investors a private company can take on. The SEC’s view is that this trick only works if the SPVs are organized independently
Small Firm Reincorporations and Shareholder Value
I’ve covered the The Trade Desk proxy here before and how controlled companies might benefit from redomesticating away from Delaware. In his memorandum accompanying the proxy statement, Steven Davidoff Solomon points out that his own analysis does not show any negative premium associated with incorporating away from Delaware. This is how he put it:
As I noted above in Section IV, recent academic studies have found no premium associated with Delaware incorporation, and in some cases, such a premium may even be negative for controlled companies. To provide further information on this issue to the Board, I conducted case studies of the five reincorporations out of Delaware involving companies with a market capitalization of at least $200 million. These companies are Tesla, Inc., Fidelity National Financial, Inc., TripAdvisor, Inc., Cannae Holdings, Inc., and Rezolute, Inc.
Evidence for a possible negative premium for controlled companies incorporated in Delaware comes from an article by Edward Fox, that “finds, surprisingly, that controlled Delaware firms are actually slightly less valuable than similar companies incorporated elsewhere.” (emphasis in original).
Given that recent redomestication announcements for companies with market capitalizations of over $200 million have already been examined, I thought it might be interesting to take
That’s one way to satisfy Howey
Yesterday, the Department of Justice unsealed indictments of several cryptocurrency exchange operators for various forms of market manipulation, in coordination with SEC complaints targeting the same conduct. It turns out there was an elaborate FBI sting operation involved, whereby the FBI actually created a token for the targeted individuals to manipulate. The FBI set up a website and everything – the website is actually hilarious, because it describes the token with every bit of crypto-futurish-gibberish you can imagine. To wit:
It almost reads like it was written by AI as a parody, but I hope a real human person got to draft this. They must be so proud.
Anyhoo, that’s not the only interesting thing. Here’s what’s also interesting.
Often, when DOJ comes for crypto, it just charges wire fraud. That way – unlike the SEC – it can avoid getting into a fight about whether a particular token was or was not a security. But market manipulation, specifically, is a security-related offense. And the DOJ wanted to get at market manipulation. By creating its own token, DOJ could be sure that the token satisfied the definition of a “security.” It designed it to be a security!
For example, one
Zymergen
The SEC recently settled an enforcement action against Zymergen for making false projections about its business. Prior to its IPO in April 2021, many of these projections were given directly to analysts. Zymergen did not include the projections in its registration statement, because companies are strictly liable to investors for false statements in a registration statement under Section 11 of the Securities Act, and so they generally try to avoid making projections that may turn out to be overly optimistic. Instead, Zymergen gave the false projections to analysts, so the analysts would take the projections, and use them in building their models, which they would pass on to investors with a recommendation of some sort.
One question then, is, if the SEC had not brought an enforcement action, could Zymergen have been liable to investors for passing on bad info to analysts?
The answer is, maybe not. Certainly not under Section 11, which only applies to information in a registration statement. And maybe not under Section 10(b), the general antifraud statute, because Stoneridge v. Scientific-Atlanta holds that public investors are not deemed to “rely” on behind-the-scenes conduct that’s filtered to the public through the false statements of another entity.
Reincorporation Returns: A Practitioner-Driven Stormlet or A Controller Cloudburst?
Reincorporations from Delaware to Nevada and elsewhere remain in the news with the Delaware Supreme Court awaiting oral argument in the TripAdvisor case. I’ve covered the issue here before and written about Nevada with our Secretary of State for the Wall Street Journal. Nevada offers an alternative to Delaware and a different litigation environment. In that op-ed, we framed the issue this way:
The likelihood of expensive, meritless or value-destroying litigation leads public companies in Delaware to avoid deals they would otherwise make. Another of the three public companies that recently decided to exit, Fidelity National Financial, explained in a shareholder letter that the state’s approach “may discourage pursuit of transactions the Board might otherwise believe to be in the best interests of the Company and its stockholders” because of litigation costs.
This issue looms particularly large for corporations with significant shareholders. Although Delaware law offers a process for companies to manage transactions with conflicts outside court, Delaware jurists themselves don’t always agree about how much information corporate boards must push out to shareholders to avoid litigation. When the process becomes too costly and cumbersome, deals don’t get done.
This brings me to the most recent reincorporation proxy
Climate Change and Wahed Invest, a Reprise
A while ago, I posted about an SEC enforcement action against Wahed Invest. Wahed Invest is a religious investment advisor that purported to select and monitor investments to ensure compliance with Shari’ah law. In fact, according to the SEC, it did not in fact have policies in place to assess ongoing Shari’ah law compliance,
At the time, I noted that I had not before seen an enforcement action based on false nonfinancial representations – that were nonetheless material to investors’ nonfinancial goals – and I compared it to the then-proposed climate change rule’s consideration for the nonfinancial goals of investors. Specifically, the proposed rule justified, in part, its requirement that companies disclose GHG emissions on the ground that some investors have made net-zero commitments, regardless of whether the emissions data would be financially material to the operating company.
Well, this morning, I learned about a new SEC enforcement action against Inspire Investing. Like Wahed, Inspire is a religious investment advisor, and like Wahed, it purported to engage in a “biblically responsible” investment strategy that required it to use sophisticated data analysis to ensure no companies in its ETFs engaged in certain prohibited activities. In fact, its methods were