Last month, the SEC released a report on Mandatory Arbitration Among SEC-Registered Advisers.  The report tackles a basic dispute resolution problem.  For context, investors with a problem with a financial adviser will likely have to go to arbitration.  If their financial adviser is an associated person for a FINRA-registered brokerage firm, the dispute will likely go through FINRA arbitration.  While the FINRA system isn’t perfect, it’s often much better than any other alternative out there.  FINRA has made improvements to its arbitration process over the years resulting in a forum that has become fairer for investors.

But many financial advisers are not brokers.  They are registered investment advisers.  They usually charge fees on an assets under management basis.  Where do disputes against these RIA firms go?  It depends on what kind of pre-dispute arbitration agreement exists between the adviser and the investor.  The SEC report details the current options available to investors.

Here’s the short version, far too many RIAs have put in place arbitration agreements that effectively frustrate an investor’s ability to resolve a complaint.  Most of these agreements force investors to resolve their disputes through AAA–the American Arbitration Association.  Within that forum, Advisers generally elect to apply…

Two quick hits this week.

First, I posted over at FT Alphaville on the Kirschner v. JP Morgan case, pending before the Second Circuit.  The court is being asked to decide whether syndicated loans are securities, and my post addresses what’s at stake for the parties.  Help yourself.

Second, VC Zurn rejected the first attempt at a settlement of the AMC class action over the creation of the APE preferred shares.  As I’m sure any reader of this blog knows, after AMC became a meme stock, it sought to sell more shares, but it needed a charter amendment to authorize an increase.  Retail holders of AMC stock refused to vote in favor – likely because retail simply doesn’t vote at all.  AMC thought it had a clever way around that, through the issuance of a new form of preferred shares, called APEs, that could vote alongside the common and would convert into common once additional common shares were authorized.  Many APEs were publicly traded, but some were placed with a hedge fund, Antara Capital, that was contractually obligated to vote in favor of the charter amendment.  As a practical matter, then, the issuance of the APE shares assured there would…

John Malone and Gregory Maffei are repeat players before the Delaware courts.  They often occupy complementary positions within Delaware companies, and are frequently accused of abusing their combined positions to muscle through interested transactions.  Here’s a footnote from the complaint in Atallah v. Malone, which is the subject of today’s blog post:

Malone and Maffei have been sued numerous other times for engaging in self-dealing to the detriment of public stockholders. See, e.g., New Orleans Empls. Ret. Sys. v. The DIRECTV Group, Inc., C.A. No. 4606-VCP (Del. Ch. 2009) (Malone accused of orchestrating transaction, with Maffei’s approval, to obtain supervoting shares dilutive to the minority stockholders and receiving disproportionate tax benefits); Blackthorn Partners LP vs John C Malone, et al., C.A. No. 5260-CS (Del. Ch. 2010) (Malone accused of receiving premium for high-vote shares, with Maffei’s approval, that public shareholders did not receive, with class ultimately receiving $10 million settlement); In re Sirius XM S’holder Litig., Consol. C.A. No. 7800-CS (Del. Ch. 2012) (Maffei and rest of Board accused of failing to employ anti-takeover measures thus allowing Malone affiliate to improperly obtain majority control); In re Starz S’holder Litig., C.A. No. 12584-VCG (Del. Ch. 2016) (Malone accused of structuring transaction, with Maffei’s approval, such that he received different and more valuable consideration than public stockholders regardless of stockholder vote); Tornetta vs. Gregory B. Maffei, et al., C.A. No. 2019-0649-KSJM (Del. Ch.) (Board of directors including Maffei accused of ignoring standstill agreements and relying on Malone-affiliated banker to steer sale of company to Malone affiliate rather than sell at higher value to third party); Vladimir Fishel v. Liberty Media Corp., et al., Docket No. 2021-0820-KSJM (Del. Ch.) (Board of directors including Maffei accused of using company coffers to help Malone affiliate squeeze out minority stockholders).

Not included on this list, I don’t think, is Sciabacucchi v. Liberty Broadband, 2023 WL 4157103 (Del. Ch. June 22, 2023), in which Malone and Maffei settled claims involving related party transactions at Charter Communications,

Maffei has been the subject of so many shareholder lawsuits that he’s now seeking to reincorporate two of his companies from Delaware to Nevada, apparently for the explicit purpose of engaging in interested transactions with less oversight – which reincorporation is itself the subject of another shareholder lawsuit.

So that’s the background for Atallah v. Malone, where VC Glasscock found that derivative claims were properly pled against Malone and Maffei for a conflicted transaction, and refused to dismiss the complaint.

The set up: Qurate is a publicly traded company, of which Malone held high vote shares.  These were not by themselves enough to confer hard control at the 50% level, but were controlling enough that he had – and was compensated for – a call right held by Qurate.  If a third party were to offer for his high vote shares, and he was willing to accept, Qurate could call the shares for the lower of the third party offer, or a price equal to a 10% premium over the common, publicly traded shares.

Maffei was Executive Chair at Qurate, and also had an employment agreement to the effect that if Qurate changed control, he’d be entitled to resign from Qurate and win change in control benefits.

Given the close relationship between Malone and Maffei, then, as Matt Levine might put it, there was an opportunity for a Good Trade.

Maffei could “offer” to buy Malone’s shares; that would trigger the call right by Qurate, which would buy Malone’s shares at a premium above market.  Once Malone no longer held high vote shares, that would trigger a change in control at Qurate, which would entitle Maffei to severance.

And so that’s exactly what they did.  Except, of course, neither wanted to really leave Qurate, so Malone accepted for his high vote shares payment in common stock instead of cash, at a 10% premium to market price.

Meanwhile, Maffei said, “Yes, I could resign and take my severance, but I would be willing to stay on for a renegotiated compensation package” – which Qurate did, which included granting him high vote shares.

I haven’t done the math regarding the exact number of shares involved, but in many ways, the transaction appears to be designed to transfer Malone’s high vote shares to Maffei, while simultaneously giving Malone a premium and possibly Maffei a bit of a premium in stock awards, all out of Qurate’s pocket.

So of course, shareholders sued, claiming this entire series of transactions was undertaken by a controlling shareholder group – Malone and Maffei coordinating – to benefit them both.

What’s interesting here?

[More under the cut]

The Nevada Supreme Court recently delivered an opinion on Series LLCs.  These entities are relatively new and not much caselaw on them currently exists so it’s good to get some more guidance about how to deal with them.

The case, Federal Housing Finance Agency v. Saticoy Bay LLC, reached the Nevada Supreme Court on a certified question from the Ninth Circuit about how to obtain jurisdiction over series LLC entities.  In short, the question the Ninth Circuit wanted answered was whether a court obtained jurisdiction over series entities by naming the master LLC itself or whether the individual series must be sued in its own name to establish jurisdiction over it?  Nevada’s Supreme Court answered that naming the individual series LLC at issue was not an “optional” matter.  To establish jurisdiction over a series entity, the entity itself must be sued.  It found that the “plain language of NRS 86.296(2) does not allow a party to sue a master LLC in lieu of a series LLC at the party’s discretion.”

This week, I was going to blog about the decision in Sobel v. Thompson, 2023 WL 4356066 (W.D. Tex. July 5, 2023), where a Texas district court relied on a forum selection bylaw to dismiss a derivative Section 10(b) claim in favor of Delaware Chancery, which – you guessed it – has no jurisdiction to hear Section 10(b) claims.  The court could have dismissed on the merits, especially given the dismissals of related cases in other jurisdictions, but instead, it purported to follow Lee v. Fisher, which I blogged about most recently here, but of course, Lee v. Fisher involved Section 14, and the court relied heavily on the purportedly-suspect pedigree of derivative Section 14 claims.  The SolarWinds court did not bother with that kind of analysis before extending Lee v. Fisher to derivative 10(b) claims and yeah, pretty much that’s it, you can read Alison Frankel’s Reuters piece here, and in the meantime just call me Cassandra.

Anyway, I was going to blog about all of that, but now I’m not, obviously, because the summary judgment opinion in the SEC’s enforcement action against Ripple finally came down, and I think I’ve made it clear by…

…

Today, I’m blogging about Vice Chancellor Laster’s post-trial decision in In re Columbia Pipeline Group Merger Litigation.  This is a fascinating case for many reasons, starting with its procedural history.

The sum is, TransCanada bought Columbia Pipeline in 2016, and shareholders have been suing about it ever since.

First, there was a fiduciary claim against the Columbia Pipeline directors, which was dismissed on the pleadings.  Then, there was a securities action in federal court alleging disclosure failures in the merger proxy, which was also dismissed on the pleadings.  Then, there was an appraisal action, which resulted in a judgment that the deal price was equal to the fair value.  And then, finally, there was the second fiduciary action – this action, which made it to trial – and which Laster refused to dismiss on the pleadings in March 2021.  The plaintiffs brought claims against Robert Skaggs, the CEO and Chair, and Stephen Smith, the CFO and Executive VP.  They also sued TransCanada as an aider and abetter of Skaggs’s and Smith’s fiduciary breaches.

On the motion to dismiss back in 2021, no one claimed that the first fiduciary action – where the plaintiffs had not even sought books and records – was preclusive of the second one, but the defendants did argue that the earlier securities action and the appraisal action precluded – through estoppel, or as precedent, or as persuasive legal authority – the second fiduciary action.

Laster rejected both arguments.  For the earlier securities action, he spent some time on the difference between federal and Delaware’s pleading standards, but his reasoning carries a whiff of disdain for federal courts’ understanding of materiality in the merger context. 

As for the appraisal action, he held that it was asking a different legal question than the fiduciary action, namely, whether the deal price represented fair value, not whether Skaggs and Smith breached their fiduciary duties by failing to obtain the best value for the stockholders.

The upshot of all of this was that Laster permitted a fiduciary claim to proceed against Skaggs, Smith, and TransCanada.  After the Skaggs and Smith settled, the claims against TransCanada proceeded to trial, and that was the decision issued earlier this week, where Laster found that TransCanada did, in fact, aid and abet breaches of fiduciary duty.

Several things to talk about here, so behind a cut it all goes.