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This week, VC Laster upheld Caremark claims against Facebook’s board in a telephonic ruling.  The nub of the allegations was that the board allowed Facebook to violate an FTC consent decree, resulting in a massive $5 billion fine.

The transcript is not yet available so I don’t have the details, but I believe this is the legal theory I blogged about long ago here and here.  Namely, in addition to traditional oversight claims, the plaintiffs alleged that this was actually a conflicted controller transaction, in that the company agreed to accept a larger penalty in order to spare Zuckerberg personally.  Because the company did not use MFW procedures to cleanse that arrangement, the argument goes, the settlement is subject to entire fairness review.  And VC Laster upheld those claims, as well as the more traditional oversight claims.

Edit: I’ve now seen the transcript, and VC Laster does treat the settlement as an uncleansed-conflict transaction, but he does not invoke Zuckerberg’s controlling shareholder status; he just says the approving directors were not disinterested/independent.

So, this is obviously a fascinating new extension of the definition of a conflict transaction – and, to be clear, I don’t think anyone is…

Regular readers may have noticed that I was, perhaps, intrigued by the Twitter v. Musk dispute.  Obviously, I could not allow all that time spent studying a single case to go to waste, so I finally managed to get a paper out of it (which, I will confess, borrows in major parts from earlier blog posts on the subject, so some of you will find it old hat).

The paper, Every Billionaire is a Policy Failure, is now available on SSRN.  Here is the abstract:

(No, for real, that’s the abstract; SSRN doesn’t currently allow me to insert images in the abstract field, but I’m committed to the bit.)

So. For anyone who’s not Twitter v. Musk‘ed out, here’s more.

In re Edgio, Inc. Stockholders Litigation, decided by VC Zurn this week, presented the unsettled question whether Corwin cleansing would apply to post-closing shareholder actions seeking injunctive relief for defensive/entrenchment measures.  Interestingly, she held it would not.

The set up: A company was in distress and its stock price was tumbling.  It became afraid that it might be targeted by activist investors.  It also had the opportunity for a very favorable deal: It could buy a business unit owned by Apollo for a large number of newly-issued shares.  The contract specified that Apollo would get one-third of the board seats, but would be required to vote its shares in favor of existing board members.  It would also be prohibited from selling for two years, and after that, it would not be able to sell to “any investor on the most recently published ‘SharkWatch 50’ list for twelve months.”

This was not a transaction that required shareholder approval under Delaware law, but the share issuance did require shareholder approval under NASDAQ rules, and the shareholders voted overwhelmingly in favor.

Post-closing, shareholders brought an action seeking to enjoin the entrenchment measures – not the deal itself – arguing that they…

In Amalgamated Bank v. Yahoo!, 132 A.3d 752 (Del. Ch. 2016), VC Laster allowed a corporation to condition production of documents sought under Section 220 on the stipulation that if the plaintiff filed a lawsuit that relied on any of the documents, the entire production set would be deemed incorporated by reference into the complaint.  VC Laster considered this to be a reasonable stipulation to protect the defendant against the plaintiffs’ strategic cherry picking of documents in order to create a misleading impression of the facts.

Since then, such stipulations have become common, and the practice has evolved for defendants to certify that they have produced all responsive documents to the plaintiffs in order to get the benefit of incorporation-by-reference.  See, e.g., In re Vaxart S’holder Litig., 2022 WL 1837452 (Del. Ch. June 3, 2022).  The predictable result is that motions to dismiss are accompanied by ever-more-lengthy lists of exhibits.  Delaware Chancery has repeatedly warned that these “incorporation by reference” stipulations do not change the standard of review, and that it has the option either to disregard excess submissions or use them as a basis for transforming the dismissal motion into a motion for summary judgment.  See…

As Joan already flagged, Delaware litigation has broken out over whether TripAdviser can reincorporate to Nevada.  The Complaint in that action argues that Delaware courts should enjoin the move and prevent the corporation from moving to Nevada.  The New York Post has also picked up on the reincorporation trend.  In my view, the conditions under which a corporation may exit a jurisdiction and reincorporate elsewhere is a valid question of its current state’s corporate law.  While Delaware may want to impose appropriate conditions on some departures, I doubt it wants to become the Hotel California of corporate law–where you can check in any time you want, but you can never leave.

There are undoubtedly material differences between Delaware and Nevada law.  As I covered here at the time, Nevada’s statutory business judgment rule imposes more limits on liability that Delaware law.  Nevada’s Supreme Court has explained that establishing liability under Nevada law “plainly requires the plaintiff to both rebut the business judgment rule’s presumption of good faith and show a breach of fiduciary duty involving intentional misconduct, fraud, or a knowing violation of the law.”  

Nevada’s law may be better for some corporations than Delaware’s law.  Duke’s Ofer Eldar…

There is so very much to say about the Slack Technologies v. Pirani case pending before the Supreme Court.  Oral argument was held Monday; here is a link to the transcript.

Slack went public via direct listing, which as a practical matter meant: Slack itself did not sell new shares to the public; it merely enabled existing shareholders to sell by listing its shares on the NYSE.  Existing shareholders were largely early investors – who had purchased under Rule 506 exemptions – or employees – who had purchased under Rule 701 exemptions.

At the time of the listing, a little more than half of these early investors were legally free to sell their shares to the public, and did.  A little fewer than half were still bogged down by SEC rules for holding periods in private sales.  For these shares – and these shares only – Slack filed an S-1 registration statement, allowing everyone to trade at once.

Subsequently, purchasers of Slack stock on the open market alleged the S-1 was false, and sought to bring Securities Act claims.  Problem was, Section 11 of the Securities Act – providing a remedy for false statements in registration statements – requires the plaintiff to “trace” the shares they bought to a particular false registration statement.  Slack’s pool of shares was an undifferentiated mix of registered shares and unregistered shares.  The Ninth Circuit held, eh, let everyone sue; Slack wants to let no one sue.  Thus the Supreme Court case.

I blogged about the Slack case at the district level and the Ninth Circuit level here and here; I also blogged about a similar problem that arises in IPOs, when companies permit early investors to trade their unregistered shares right away, so that the pool of stock available to trade contains both unregistered and registered shares. 

Anyway, when Slack came up for oral argument, all attention was on this issue of Section 11 tracing.  But oral argument took kind of an unexpected turn when the Supreme Court wandered down the path of Section 12 of the Securities Act, which allows investors to sue for false statements in prospectuses.  Section 12 claims were alleged in the Slack case but they didn’t seem to be the main event, until they did.

What’s going on there?

And this is going to get long – behind the cut it goes.