Uncategorized

Subscribe to Uncategorized via RSS

Recent news reports indicate that Senator Rand Paul failed to timely disclose his family’s securities transactions.  The Washington Post reported that Senator Paul’s wife purchased stock in Gilead Sciences in February 2020, before the World Health Organization classified Covid-19 as a global pandemic.  The disclosure “came 16 months after the 45-day reporting deadline set forth in the Stock Act, which is designed to combat insider trading.”  Given the reporting at the time about other Senators’ trades, it’s remarkable that Senator Paul’s office did not identify the omission before now.

Functionally, the current system for managing congressional securities trading does not seem to function particularly well.  As I wrote in Salon, “active trading by senators undermines confidence in government and markets.”  I continue to believe that the best approach is one suggested by Greg Shill, simply requiring members of Congress to submit trading plans much like the system for managing securities trading by corporate executives.

Given the apparent disregard some Senators appear to have for the Stock Act, it might be worth, at the very least, amending it to require Congressional Staff to forfeit any gains from purchases or sales which are not timely disclosed.  As it stands…

Very quick post this week just to call to your attention the recent complaint filed in Delaware Chancery by Grant & Eisenhofer, Delman v. GigAcquisitions3 LLC , No. 2021-0679.  (Bloomberg article on the case here, with links to the docket and complaint).

The complaint challenges the Lightning eMotors de-SPAC transaction on behalf of a class of investors in the SPAC shell company.  Rather than bring federal fraud claims, though – as many prior SPAC plaintiffs have – this plaintiff is alleging that the acquisition was a poor deal for the SPAC, initiated to benefit the SPAC sponsor, who had a limited time to complete a deal before liquidating.  Therefore, the directors and the SPAC’s sponsor breached their fiduciary duties to the SPAC.

Two things of note:

First, G&E seems to be self-consciously pitching the case as a bellwether challenge to the SPAC trend generally.  In the complaint, it alleges:

Gig3’s history is part of a disturbing trend of SPAC transactions in which financial conflicts of interest of sponsors and insiders override good corporate governance and the interests of SPAC stockholders….

This Court should take this opportunity to affirm that the boards and controllers of SPACs incorporated in Delaware owe

…

In the 1990s, newspapers had a problem.  They wanted their articles to be included in electronic databases like LexisNexis, but such databases being a relatively new technology, the newspapers had not bothered to include database republication rights in their agreements with freelance reporters.  Some publishers argued that their existing contracts covered database inclusion, but the Second Circuit wasn’t having it.  See Tasini v. New York Times Co., 206 F.3d 161 (2d Cir. 2000).  After the Supreme Court held that the articles could not be included in databases without the reporters’ permission, news organizations updated their contracts to cover electronic database republication.

Scarlett Johansson and Disney are now embroiled in their own dispute over a contract impacted by new technology.  Johansson’s contract for the Black Widow movie included a fairly standard provision (at least for big name actors) that she be entitled to a cut of the box office, and to ensure that the box office receipts would be worth her while, she extracted a promise that the movie would receive a “wide theatrical release of the Picture i.e., no less than 1,500 screens.”  In the wake of Covid-19, however, Disney chose to simultaneously release the film…

The University of Kansas School of Law invites applications from entry level and junior lateral candidates for two tenure-track, associate professor positions to begin fall 2022.  We will consider candidates in all subject areas, but are particularly interested in the areas of (1) property and (2) business, corporate finance, and transactional law, as well as candidates whose work engages these subjects in dialogue with other areas of law. Qualified candidates who will contribute to the diversity of our law school community, including a diversity of scholarly approaches, are especially encouraged to apply.

 
Applicants must possess a J.D. from an accredited U.S. law school or equivalent degree, and must demonstrate strong scholarly potential and a commitment to excellence in teaching.  The School actively seeks applications from members of groups that are underrepresented in higher education.

Review of applications begins in August and will continue until the positions are filled. Initial interviews will be conducted via Zoom. We will review candidate materials posted in the AALS Faculty Appointments Register (FAR), and also invite applications from candidates not participating in the FAR. Applications must be submitted online:  

and should include a cover letter, a CV/resume, a…

Anthony Rickey and I wrote about hidden conflicts in securities class action litigation and used the State Street case as a key example.  When the special master investigated in that action, discovery revealed an email from Damon Chargois to Labaton, stating:

“We got you ATRS as a client after considerable efforts, political activity, money spent and time dedicated in Arkansas, and Labaton would use ATRS to seek legal counsel appointments in institutional investor fraud and misrepresentation cases. Where Labaton is successful in getting appointed lead counsel and obtains a settlement or judgment award, we split Labaton’s attorney fee award 80/20 period.”

The New York Times reported on the revelations and indicated that the court, client, and class had not been informed of the relationship:

The payment to the lawyer, Damon Chargois, had not been previously disclosed. Mr. Rosen’s investigation unearthed documents showing that Mr. Chargois did no work on the litigation other than help introduce the Arkansas Teacher Retirement System to Labaton roughly a decade ago. In 2011, Labaton filed a lawsuit for the retirement fund that was later consolidated with similar lawsuits filed by a few other law firms.

None of those other law firms, nor Judge Wolf, were

…

 

Presented by the John F. Scarpa Center for Entrepreneurship and Law

 

Friday, September 10, 2021

9:00 a.m.–3:00 p.m.

Virtual Event

 

Click to Register

 

The John F. Scarpa Center for Entrepreneurship and Law will host the second Future Business Law Professors Conference on Friday, September 10. All visiting assistant professors, fellows, researchers, law clerks, practitioners and others who are considering entering the higher education academic teaching market in business law—including business associations, securities regulation, corporate finance and business ethics—are invited to attend. This year’s conference will be virtual.

Participants will learn more about the business law teaching market, receive advice on how to be a successful candidate and meet future colleagues. Attendees will have the opportunity to participate in mock interviews and get a sneak-peak into the hiring process from current business law faculty. Some will be able to present their job talk paper to leaders in the field and receive feedback.

Faculty from University of Colorado Law School, Georgetown University Law Center, George Washington University Law School, University of Michigan Law School, University of Nebraska College of Law, University of Pennsylvania Carey Law School, University of Pittsburgh School of Law, Rutgers Law School, Temple University Beasley School

…

Dear BLPB Readers:

Surrey Law School is recruiting a tenure-track or tenure-equivalent position in Financial Law (Lecturer or Senior Lecturer). They have an energetic and highly international faculty, and the University of Surrey campus is ideally situated in the leafy English countryside a mere 25 miles from central London (30 min by train). The School comprises three main research clusters: The Surrey Centre for Law and Philosophy, the Surrey Centre for International and Environmental Law and the Law and Technology Hub. This new position in Financial Law is part of an investment in strengthening our Law & Technology Pathway LLB degree, and our FinTech & Policy MSc programme run with Surrey Business School, among other strategic initiatives. The School is in a period of growth and the hiring committee is interested in considering applications also from US-trained lawyers and legal academics. For more information about the position and to apply, please see link below. (Note the application deadline of September 6th.)

Robinhood is gearing up for its IPO, and one of its gimmicks is to allot 20-35% of its newly issued shares to its own customers, who trade on its platform.  This unusual allocation is being billed, in part, as evidence of its commitment to “democratize finance,” and it’s not the first time a company has used its IPO allocations as, essentially, a branding mechanism.

But this New York Times piece also points out that Robinhood is allowing its own employees to trade up to 15% of their shares right away, which is pitched as being of a piece with Robinhood’s nontraditional stock allocations.  And, in fact, Robinhood’s S-1 says:

up to 15% of the shares of our outstanding Class A common stock and securities directly or indirectly convertible into or exchangeable or exercisable for our Class A common stock held, as of the date of this prospectus, by our directors, officers and current and former employees and consultants (other than our founders and our Chief Financial Officer, who are discussed above) …, with such 15% calculated after excluding any shares withheld for taxes associated with IPO-Vesting Time-Based RSUs, may be sold beginning at the commencement of trading

…

Last year, Anthony Rickey and I published a paper highlighting potential conflicts of interest that can arise between securities class action plaintiffs, their counsel, and the class.  Our article suggested that courts could discourage troublesome practices by requiring law firms to disclose past findings of misconduct when they apply for lead counsel appointments.  The idea is to make sure that future judges know what happened in past cases so they can protect the class.

Recently, Judge Alsup of the Northern District of California issued this type of order after two of the country’s largest plaintiff-side securities litigation firms hurled allegations of misconduct back and forth.  The fallout from this decision demonstrates a potential shortcoming of mandatory disclosure orders:  they are not self-enforcing.

The Case:  SEB Investment Management AB v. Symantec Corp., et al., No. 3:18-cv-02902-WHA (N.D. Cal.)

Judge Alsup’s April 20, 2021 order briefly summarizes the troublesome facts of a securities class action involving Symantec Corporation.  When SEB Investment Management AB (“SEB”) became lead plaintiff in 2018, the court ordered SEB to interview law firms to serve as class counsel.  SEB selected Bernstein, Litowitz, Berger & Grossman, LLP (“BLBG”), its original counsel, to lead the litigation “even though BLBG…

The business news this week was just lousy with reports on the Tesla trial currently ongoing in Delaware, and in particular, with reports on the testimony of Elon Musk (which, disappointingly, appears to have been less inflammatory than his depositions).  

The basic set up, of course – as I previously blogged – is that Musk championed Tesla’s acquisition of SolarCity, a company he founded with his cousins, chaired, and in which he held a substantial stake.  The unaffiliated Tesla shareholders voted in favor of the deal, which would be enough to cleanse it and restore business judgment review if Musk was not a controlling shareholder, but if he was, entire fairness review would follow.  So one of the burning questions at trial – and the one which most of the news reports focus on – is whether Musk, with something like a 22% stake in Tesla at the time, could be considered a controlling shareholder.  And that question, in turn, focuses not just on his voting power, but on his practical control over the company and the board. 

Y’all know that the question of who is a controller is one that has dominated a lot of my thinking recently (my most recent blog post on the subject is here; earlier posts are here, and here, and here, and here, and here, and here, and here), so I do have to observe that in In re Pattern Energy Group Stockholders Litigation, VC Zurn spent a lot of time explaining how one can be a controller – with fiduciary duties that follow – even without any stock ownership at all.  As she put it:

Fiduciary duties arise from the separation of ownership and control.  The essential quality of a fiduciary is that she controls something she does not own.  A trustee need not (and does not) own the assets held in trust; directors need not own stock. Even a third party lender that influences extraordinary influence over a company may be liable for acting negligently or in bad faith.  If a stockholder, as one co-owner, can owe fiduciary duties to fellow co-owners because the stockholder controls the thing collectively owned, surely an “outsider[]” that controls something it does not own owes duties to the owner.  “[I]t is a maxim of equity that ‘equity regards substance rather than form,’” and “the application of equitable principles depends on the substance of control rather than the form[;] it does not matter whether the control is exercised directly or indirectly.”  “[T]he level of stock ownership is not the predominant factor, and an inability to exert influence through voting power does not foreclose a finding of control.”  Thus, “Delaware corporate decisions consistently have looked to who wields control in substance and have imposed the risk of fiduciary liability on that person,” and “[l]iability for breach of fiduciary duty therefore extends to outsiders who effectively controlled the corporation.”

With this foundation, and considering evolving market realities and corporate structures affording effective control, Delaware law may countenance extending controller status and fiduciary duties to a nonstockholder that holds and exercises soft power that displaces the will of the board with respect to a particular decision or transaction.

That’s a point I made in my essay, After Corwin: Down the Controlling Shareholder Rabbit Hole; as I wrote there:

[O]ne of the first things a business law student learns is that even without a formal equity stake, contractual control can be exerted to the point where fiduciary obligations follow.  But all of this just raises the question whether the shareholder aspect of the controlling shareholder inquiry is necessarily doing any work.

Point being, the fact that Musk’s power does not come from his stock holdings alone is not dispositive of this question.  Musk is the kind of figure that boards, and shareholders, might be afraid to buck because he can’t be dislodged – Musk himself testified that Tesla would “die” without him – and he can send Tesla’s stock price tanking with a single tweet.  Imperial CEOs present a difficult case, but those factors are pretty much the basis for treating controlling shareholders differently from just ordinary conflicted boards. 

Or, with apologies to Guth v. Loft, 5 A.2d 503 (Del. 1939), “Musk was Tesla, and Musk was SolarCity.”  

That said, it must be observed that: (1) Plaintiffs can win this case even if Musk is deemed not to be a controlling shareholder, and (2) it’s possible VC Slights won’t have to decide whether Musk is or isn’t.

More under the cut…