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I’ve started reading Tom Lin‘s new book, The Capitalist and the Activist: Corporate Social Activism and The New Business of Change.  Although I’m only through the first chapter so far, I’ve found it to be an extraordinarily accessible and even-handed account of the current state of play.  Using story after story he knocks down perceived walls between social activists and capitalists.  He takes a nuanced, thoughtful approach and encourages readers to reject simplified portraits of capitalist and activists.  These words jumped out at me:

Recognizing the significant good that capitalists can bring about for society does not blind us to the serious harms that they can sometimes create or perpetuate in society.  Recognizing the transformative power wielded by activists does not deny the obstacles they can sometimes present for policymaking.  Just as humans are neither all good nor all bad, their institutional and collectively efforts at capitalism and activism are neither all good nor all bad.

His first chapter tackles the debate over corporate purpose and sketches the different sides of the debate.  He rightly recognizes that corporate social activism and expectations of corporate engagement are likely here to stay even as debates about corporate purpose will inevitably continue. …

This morning, my inbox included a link to: Christina Parajon Skinner, Cancelling Capitalism? Grow the Pie: How Great Companies Deliver Both Purpose and Profit …, 97 Notre Dame L. Rev. 417 (2021) [SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4000768 ]. What follows is an excerpt from the introduction.

In February 2019, Amazon announced a plan to build its new national headquarters in Queens, New York. The plan would create between 25,000 and 40,000 well-paid jobs and fill New York City’s tax coffers with at least $27.5 billion. But Amazon cancelled its decision in the face of intense political opposition. Perhaps the most vocal opponent was New York congressional Representative Alexandria Ocasio-Cortez. She roundly celebrated Amazon’s retreat, tweeting, “today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon’s corporate greed.”

But the congresswoman’s maligning of Amazon’s relocation was a sleight of hand. She told her followers that the “tax breaks” that would have gone to Amazon would instead now be available for public works, like subway repairs and teacher salaries. But this was wrong. The tax breaks would not be a “donation” of dollars that would have taken funds away from other public uses; rather, Amazon would have had some reductions from future tax bills if and only if–the company had improved the community in financially concrete ways. Yet Amazon was bullied out of town on these false pretenses, and Queens lost out on jobs, urban development, and hefty corporate tax payments. Here, both Amazon and Queens residents lost out–the citizens perhaps the most.

The tale of Amazon in retreat is one of many hard-hitting examples Alex Edmans gives in his book, Grow the Pie, all of which illustrate the growing popular antipathy against corporate profit. In the most charitable interpretation of Edmans’s examples, people and politicians increasingly reject capitalism–the private harnessing of free-economic markets–because they appear to misunderstand the role that profits play in society. In other cases, however, it seems that politicians feint ignorance of the social benefits of capitalism in seeking to hum the most popular tune. Grow the Pie disabuses misperceptions by providing novel evidence and examples that bust the myriad myths now perpetuating the growing movement to “cancel capitalism,” as I’ll call it here.

This week, it was announced that Microsoft is acquiring Activision.

It was also announced that Microsoft swooped in with a bid because Activision was wounded due to the sexual harassment scandals, which are already the subject of a securities fraud lawsuit and a couple of derivative lawsuits.

And, it is possible that Activision’s CEO – who, it was reported, was aware of/involved in many of Activision’s problems and concealed them from the board – will, as a result of merger, walk away with a change of control golden parachute worth as much as $293 million.

So, this is entertaining for me because it’s like a real life issue spotter.

Issue One: What happens to the ongoing securities fraud lawsuit?

Answer: Presumably it continues; liability will travel with the new entity, and of course will remain with any individual defendants.

Issue Two: What happens to the ongoing derivative lawsuits?

Answer:  Normally, if the plaintiffs lose their shares in the merger, they lose the ability to prosecute a derivative action.  But!  They might be able to maintain the action if they can show the sole purpose of the deal was to deprive them of standing.  See Lewis v. Anderson…

There is an interesting new paper, Misconduct Synergies, by  Heather Tookes and Emmanuel Yimfor, which was recently the subject of a Business Scholarship Podcast.  The paper looks at misconduct at registered investment advisory firms after M&A activity.  It finds that “that disclosures of new disciplinary events in the combined firm drops by between 25 and 34 percent following mergers. This reduction is driven mainly by separations of high misconduct employees at the target firm.”  In short, after M&A, employees with disciplinary records are much more likely to depart the firm.  

The RIA space is an interesting place to study employee misconduct and M&A activity.  Unlike most other industries, RIA firms have to disclose disciplinary and regulatory information in a way where it becomes publicly accessible.  It’s also an interesting area to study because M&A activity has been booming for RIA firms.  Trimming away potential future regulatory issues may be a way to set up the combined firm for another deal.  It also finds that more of the target firm’s employees separate than the acquiror, finding that “the sensitivity of separations to employee misconduct increases for target firm employees following mergers, suggesting stricter disciplinary mechanisms for target employees…

The Drexel University Thomas R. Kline School of Law invites applications for a two Visiting Assistant Professor positions.   One position is dedicated to a faculty member who will teach and research in the area of tax.  The other position is open, with a preference for someone who does research that touches on legal implications of new technology and/or someone open to teaching Torts.  Each position will last two years and VAP’s are expected to fully participate in the intellectual life of the law school.

We seek candidates who hold (at minimum) a JD or appropriate equivalent degree.  We are particularly interested in candidates embarking on an academic career.  The Kline School of Law is committed to recruiting, developing, retaining, and rewarding faculty members who bring scholarly interests and life experiences that contribute to the diversity and success of our students, our University, and our communities.

Drexel University, founded in 1891, is an R1 comprehensive research institution.  Drexel established its law school in 2006, and it has rapidly developed a reputation for innovative scholarship across disciplines, a diverse portfolio of academic programs, and a focus on civic engagement.  The Kline School of Law is home to the Center for Law and…

Okay, here I go, diving into Seafarers Pension Plan v. Bradway, recently out of the Seventh Circuit.  The appeal was argued in November 2020, which means this opinion took about 100 years to come down in Seventh Circuit time, and, well, to be honest, I’m not sure they worked out all the kinks.

I blogged extensively about the district court decision in this case here (although in the interests of full disclosure I should probably mention I spoke with the plaintiffs’ attorneys about the appeal, after the blog post went up).  The too-short version is that Boeing had a bylaw purporting to require that all derivative actions be filed in Delaware Chancery.  Plaintiffs filed a derivative action in federal court alleging Exchange Act claims under Section 14(a).  According to the plaintiffs, the Boeing defendants solicited shareholder votes in favor of their own reelection and compensation with false statements in the corporate proxy about the development of the 737 Max.  Boeing moved to dismiss in favor of Chancery due to the bylaw.   This was awkward because state courts, like Delaware Chancery, do not have jurisdiction to hear Exchange Act claims, and so enforcement of the bylaw in this case would be tantamount to a waiver of the claim.  But the Exchange Act prohibits predispute waiver of claims, and so the plaintiffs argued that the bylaw was invalid as applied here.

The district court ruled in Boeing’s favor and dismissed.  The plaintiffs appealed to the Seventh Circuit and, simultaneously, filed an action in Delaware Chancery alleging that the bylaw, as applied here, violated Delaware law.  The Delaware case (Docket No. 2020-0556-MTZ) was stayed in favor of the Seventh Circuit, and last week, the Seventh Circuit reversed and remanded, by a 2-1 vote, with Judge Easterbrook dissenting.

[Warning: Very long discussion under the cut, which will get unfortunately into the legal weeds at times, can’t be helped]

Will Moon recently posted an article forthcoming in the Duke Law Journal to SSRN.  It’s a fascinating, accessible read and thoughtfully explores privacy as a functional feature of modern business entities.  Many states, Nevada included, allow the principal of a business entity to conduct business without ever disclosing the principal’s identity.  Most discussions about using business entities to cloak individual identity focus on how the wealthy and powerful use privacy to avoid accountability and evade responsibility.  Yet not enough attention has been paid to the other side of the coin, how privacy enables economic activity for persons with stigmatized identities or in areas where violent retaliation against a business’s disclosed principals may functionally force it to close.

A few years ago, Ann McGinley and I wrote about how some entrepreneurs will trot out persons with favored identities to access capital.  Because white men tend to raise more money, some entrepreneurs will strategically affiliate with white men to raise capital.  A proposal to create an agency for these purposes recently circulated online:

…

Roberto Tallarita has revised The Limits of Portfolio Primacy on SSRN (here). An excerpt of the abstract follows.

According to a theory that is gaining increasing support, we should expect large asset managers (and, in particular, index fund managers) to become “climate stewards” and force companies to reduce their impact on climate change. According to this theory, by maximizing the value of their entire portfolio (portfolio primacy) rather than the value of the individual company (shareholder primacy), index fund managers are incentivized to reduce climate externalities and therefore to steer companies toward decarbonization. This Article offers the first systematic critique of this theory and identifies four crucial limits that undermine its practical impact: mispricing of climate mitigation, portfolio biases, fiduciary conflicts, and insulation from index funds stewardship…. [C]limate stewardship would create unsolvable fiduciary conflicts on multiple levels: between fund managers and fund investors; between large asset managers and undiversified shareholders; and between corporate directors and the individual company….

Edit: After I drafted this post, the Seventh Circuit finally decided Seafarers Pension Plan v. Bradway.  I blogged about the district court decision in that case here, and maybe I will eventually find the strength to draft a full blog post on CA7’s new decision reversing the district court, but in case I don’t because I’m screaming on the inside and nothing matters anymore, here’s my tweet thread on the subject. 

Meanwhile, back to today’s intended post: 

I’ve blogged here a couple of times about courts’ struggles to evaluate allegations of scienter against a corporate defendant in a securities fraud case, and in particular, the problem of conflating pleading standards with the substantive definition of scienter.

Which is why I was so happy to see the court get it right in Acerra v. Trulieve Cannabis Corp., 2021 WL 6197088 (N.D. Fla. Dec. 30, 2021); all the more impressively done because, as far as I can tell from the briefing, the plaintiff didn’t make much of a corporate scienter argument and instead focused on the scienter of individual defendants.

The essence of the plaintiffs’ claim was that a medical marijuana company misled investors about the…

The New Jersey Bureau of Securities recently announced that it would let its state fiduciary rulemaking expire.  In its release, it indicated that it intended to shift focus to gamified digital brokerage practices:

Since the Bureau published its rule proposal in 2019, the securities industry has seen a dramatic rise in the use of digital platforms and digital engagement practices by broker-dealers and investment advisers. COVID-19 accelerated this trend, as millions of investors turned to trading applications and social media for investment advice. Meanwhile, the Bureau has been monitoring federal regulatory developments.

“Prior to finalizing a Fiduciary Rule, the Bureau intends to reassess the rapidly changing landscape of the financial industry and determine whether further modernization of the Bureau’s rules is necessary,” said Christopher W. Gerold, Chief of the New Jersey Bureau of Securities. 

The financial industry’s use of digital engagement practices, including digital marketing, has drawn new investors into the market, many of whom have little or no prior investment experience. These unsophisticated investors may be particularly susceptible to predatory tactics, including the use of gaming features (for example, point scoring and competition with other investors) to increase trading activity, a practice known as “gamification.”

Undoubtedly New Jersey has…