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PIABA and the PIABA Foundation recently released a new study on stockbroker expungements within the FINRA forum. Their review of arbitration awards finds that FINRA’s arbitrators continue to recommend expungement around 90% of the time.  This doesn’t surprise me.  The entire system seems fundamentally broken and these expungement requests almost never receive any real scrutiny because there are no adversaries for most expungement requests.

FINRA has a pending proposal with the SEC which will make some changes to the process.  It’ll increase the number of arbitrators hearing these cases, eliminate the ability of parties to rank and strike arbitrators (which may reduce selection effects toward arbitrators who simply grant expungements), and create more procedural rights for non-party customers to participate in the hearings.  I’ve commented on the proposal twice and FINRA has amended it twice. 

There are different ways to look at this.  One way is that the process is gradually getting better.  There is some truth to this.  The changes will make the panels a bit more balanced and may make it easier for non-party customers to participate in these hearings.  That being said, many of the FINRA rules specify that “parties” have particular rights in these proceedings.  What…

Vice Chancellor Zurn just issued a monster, 213-page opinion sustaining a complaint alleging that the Board of Pattern Energy breached its fiduciary duties when selling the company.  At 213 pages, there’s a lot to talk about, but I actually am going to focus on a couple of specific points that happen to intersect with a lot of what I blog about here.

The set up:  Pattern Energy was created by a private equity firm, Riverstone, to operate energy projects owned by other Riverstone entities.  At one time, Riverstone indirectly owned a controlling stake in Pattern, but by the time of the events of the complaint, it had shed its interest.  It did continue to exert influence, though.  First, Pattern had been formed to operate other Riverstone projects, and continued to do so, mainly though its relationship with another company called Developer 2, which was majority-owned by Riverstone.  Second, Pattern owned a stake in Developer 2, but was prohibited from selling that stake – including through a merger – without Riverstone’s consent, which functionally gave Riverstone approval power over Pattern mergers.  Third, most of Pattern’s officers, including its CEO, were Riverstone affiliates and partners in various ways, including by occupying present or past managerial roles with Developer 2.  Fourth, two of Pattern’s directors were Riverstone people – its CEO, and a Riverstone manager who had been appointed to Pattern’s board back when Riverstone had hard control.

According to the complaint, Pattern began contemplating a merger, and because of its close ties to Riverstone and especially Developer 2, Riverstone wanted to make sure that any merger would preserve Riverstone’s influence and Pattern’s relationship with Developer 2.   Therefore, Riverstone preferred a financial buyer who would maintain Riverstone’s role with the companies, and was opposed to a strategic acquirer, Brookfield, who would pay more for Pattern but would either also absorb Developer 2 or disentangle it from Pattern.  The plaintiff alleged, and Zurn accepted, that Pattern’s Board favored the financial buyer over Brookfield, largely to protect Riverstone, in violation of its duties to maximize wealth for Pattern’s stockholders.  Zurn also sustained certain claims against Pattern’s officers, and aiding-and-abetting claims against Riverstone.

So here’s what I find most interesting….

(More under the jump)

We are looking to hire for a position as Instructor of Legal Analysis and Communication at Mississippi College School of Law. Please don’t hesitate to reach out to me directly if you are interested. Here’s the announcement:

Mississippi College School of Law (MC Law) invites applications from candidates for a position as Instructor of Legal Analysis and Communication. Responsibilities will include teaching in MC Law’s summer entry program, its Legal Analysis and Communication program (which focuses on writing and analytical skills), and in courses and workshops targeting success in law school and on the bar exam. We seek candidates with exceptional writing skills, a distinguished academic background (having earned a J.D.), and a commitment to excellence in teaching. We particularly encourage applications from candidates who will enrich the diversity of our faculty. Applications should include a cover letter, curriculum vitae, the names and contact information of three references, and teaching evaluations (if available). Applications should be sent in a single PDF to Professor John P. Anderson, Chair, Faculty Appointments Committee, via email at jpanders@mc.edu.

Nevada’s Supreme Court recently released a new business law decision.  It arose out of AMC’s acquisition of RLJ Entertainment (RLJE), a Nevada corporation.  Back in 2016, AMC  loaned RLJE $65 million in exchange for the option to become a controlling stockholder by acquiring 50.01 percent of RLJE’s stock.  That deal prohibited RLJE from shopping any acquisition proposal and also let AMC designate two directors on RLJE’s board.  Later, in 2018, AMC offered to purchase RLJ’s outstanding shares at a price of $4.25 a share.  RLJE formed a special committee to negotiate.  The special committee negotiated over about 50 days and eventually secured an offer at a a price of $6.25 a share.  The merger was approved at a stockholder meeting held on Halloween.  

Shareholder plaintiffs sued, pointing out that certain directors were interested parties in the transaction.  Notably, they also conceded that “the two members of the Special Committee, Laszlo and Royster, ‘had no commercial, financial or business affiliations or relationships with any of AMC, [ ] Johnson or any of their respective affiliates.'”  

Under Delaware law, this sort of controlling shareholder acquisition would likely have been subject to entire fairness review without both approval by independent directors and…

Margaret Blair just posted a new paper to SSRN, How Trustees of Dartmouth College v. Woodward Clarified Corporate Law.  It’s a fun historical piece on how Trustees of Dartmouth College v. Woodward enshrined the concession theory of the corporation into law.  She argues that although the case is often cited for the contractual theory of the corporation, it also stands for the proposition that corporations result from state-conferred privileges.  She traces the history of business organizations in the United States in order to demonstrate that critical features of the corporate form – separate personhood, asset partitioning, limited liability – were not replicable absent official state recognition, leading up to Dartmouth College’s famous pronouncement that “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law. Being the mere creature of the law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.”  The notion of a corporation as the product of state privilege was also articulated by Justice Washington in his concurrence, where he wrote, “A corporation is defined by Mr. Justice Blackstone to be a franchise….It amounts to an…

FINRA has amended its proposal to reform the expungement process again. I’ve written about this before here and here.  The “straight-in” or “expungement-only” arbitration process can be summarized quickly.  A broker desiring to purge customer dispute information from public records can secure expungement by following an odd process.  The broker first files an arbitration against a current or former employer alleging that the customer who is not a party to the action filed a “false” claim or somehow mistakenly identified a broker who had nothing to do with the matter.  In essence, the arbitration alleges that the non-party customer told lies about the broker.  The broker will then wait until about 30 days before the hearing before sending a vague letter to the customer notifying them of their right to appear at a hearing. (If the amended proposal goes into effect, customers will get notice much earlier in the future.) In my experience, the letters often omit information you’d expect to be included, such as the name of the arbitrator for the case, the time zone for the hearing, or how the customer can dial in to participate.  The process has a lot of problems and statistical evidence indicates…

Last year, I blogged about the Boeing decision in the Northern District of Illinois.  In sum, a district court ruled that Boeing’s forum selection bylaw – requiring that all derivative actions be filed in Delaware Chancery – applied even to federal securities claims brought under Section 14(a) of the Exchange Act.  That matters because Delaware Chancery has no jurisdiction to hear Section 14(a) claims; dismissal in favor of the Delaware forum, as a practical matter, was a holding that the forum selection bylaw defeated plaintiffs’ ability to bring derivative Section 14(a) claims at all. Which would seem to be in tension with the anti-waiver provisions of the Exchange Act, which voids “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title.” 15 U.S.C. § 78cc(a).

The Boeing plaintiffs have appealed to the Seventh Circuit and while we all await the outcome of that case, another court has just reached a similar result – this time, a magistrate decision in Lee v. Fisher, N.D. Cal., No. 3:20-cv-06163.  Section 14(a) claims were brought derivatively against The Gap and, just as in Boeing, the court dismissed the claims due…

FINRA recently released a new regulatory notice seeking comments on how to support diversity and inclusion efforts in the brokerage industry.  The notice asks for commenters to identify any FINRA rules or regulations which might be having a disparate impact on certain groups within the industry.

My sense is that the diversity and inclusion struggles industry firms face may be driven more by firm and industry culture than particular FINRA rules.  Susan Antilla wrote about the challenges women face in the industry.  Brokers of color have also faced real challenges. As Forbes covered, the numbers in asset management are particularly stark:

But in one industry, diversity numbers seem like they’re straight out of the 19th century: Firms owned by white men manage a stunning 98.7% of the $69 trillion managed by the U.S. asset management industry. That’s according to a 2019 Knight Foundation analysis, and includes hedge funds, mutual funds, real estate funds, and private equity funds. 

The FINRA notice also seems consistent with the SEC initiative on ESG reporting.

I previously blogged about benefit corporations going public, with my main point being that the legal requirements in the benefit corporation statute are so weak that they do not, as a practical matter, bind companies to adhere to their social purpose.  As a result, publicly traded benefit corporations are vulnerable to market pressures to favor shareholders over other stakeholders.  The newly-public benefit corporations have therefore chosen to adopt more mundane devices to insulate them from the market for corporate control – high inside ownership, staggered boards, etc – to stay on mission.  The drawback, however, is the same as exists for all antitakeover devices: managers may use their power to advance social purposes, but they may also use it to seek personal rents.

Anyway, I mention all of this because I noticed that another company recently went public as a benefit corporation, namely, Coursera, a provider of online education.  Coursera is in some ways following the path charted by Laureate Education, which is a for-profit university system that is also organized as a benefit corporation.  Both are also certified B-Corps (which provides a bit more reassurance of staying on mission; B-Corp status does not impose legal obligations but…

Dear BLPB Readers:

Wharton Professors David Zaring and Peter Conti-Brown share that:

We’re delighted to host the annual Wharton Financial Regulation Conference this coming Friday, April 16, from 10 am to 5pm. All are welcome to come–we don’t expect record crowds, so we will use a Zoom room. Our keynote speaker will be Greg Ip from the Wall Street Journal. Attached is the program. Zoom link is here. Papers are here. 
 
We’re especially keen to see our junior colleagues–anyone pre-market or pre-tenure–and will ensure that their questions and participation receive priority, so please circulate to your own colleagues. 
 
I’m looking so forward to this event!!  Hope to “see” many of you there!  Here’s the agenda: Download Agenda-Wharton-Finreg-2021-April 13