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Sean Griffith recently wrote a book chapter explaining how plaintiffs’ merger-related challenges developed over time.  Plaintiffs began by seeking disclosure-only settlements, but after Trulia stamped out the practice in Delaware, plaintiffs began bringing claims in federal court challenging corporate proxies under Rule 14a-9.  And once they got there, they realized they did not have to limit themselves to merger litigation, and began bringing other kinds of proxy-related claims, and eventually these morphed into individual, rather than class, actions.

That’s what I thought of when I read the new books and records complaint filed against Facebook in Employees’ Ret. Sys. Of Rhode Island v. Facebook, No. 2020-0085-JRS.

In it, Rhode Island’s pension fund is seeking privileged documents related to Facebook’s $5 billion settlement with the FTC over allegations that it violated a previous FTC settlement regarding its data practices.  Much of the complaint is redacted – the plaintiff received some documents already, just not the privileged ones it is seeking now – but the basic allegation is that, according to news reports, the FTC wanted to charge Mark Zuckerberg personally, but the company refused, and accepted a larger fine to protect him.  The plaintiff now claims that this was the…

FINRA Expungement Fee Change

FINRA has begun to move to address some of the concerns about abuse of its expungement process, which allows stockbrokers to wipe customer complaints and dispute information off their public records.  FINRA’s stated process calls for these requests for non-monetary relief to be heard by a panel of three arbitrators, requiring at least two of them to vote in favor of expungement.  

Yet some creative lawyers found a way to put expungement claims before a single arbitrator.  The “dollar-trick” arbitrations proceed by requesting $1 dollar of relief and expungement.  Because the case had a low monetary value, FINRA’s forum had had shunted these dollar trick claims to single-arbitrator panels.  As the PIABA Foundation reported, stockbrokers using this alternative process paid much less in fees, causing FINRA to miss out on $8,000 or more in revenue per case.  Brokers seeking expungement under this process also benefitted by only needing to convince one arbitrator to grant extraordinary relief rather than two.  If you’re wondering what happens to the claims for $1.00 in damages, the stockbroker usually drops the $1.00 claim at the hearing and simply focuses on his expungement request.

To address this, FINRA recently announced a…

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Back to a subject near and dear to my heart: The increased pressure on the definition of “controlling stockholder” occasioned by Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) and Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).  I’ve posted about this on several prior occasions, and written an essay on the subject, so I would be remiss if I didn’t discuss VC Laster’s new ruling in Voigt v. Metcalf.  The facts, as taken from the opinion, are these:

CD&R was a 34.7% blockholder of a publicly-traded corporation called NCI.  In earlier years, CD&R had held as much as 68%.  CD&R had a stockholder agreement that, among other things, guaranteed it a certain number of board seats – but also guaranteed a certain number of seats for the unaffiliated stockholders – guaranteed that its nominees would have seats on key committees, and gave it blocking/consent rights for various board actions, though none were triggered in this case.

In early 2018, three things happened nearly simultaneously: Metcalf, one of the independent/unaffiliated directors of NCI, was elevated to Chair; CD&R acquired a majority stake in a company called New Ply Gem; and Metcalf proposed that NCI acquire New Ply Gem.  To negotiate the deal, Metcalf met with certain NCI directors who were also CD&R representatives/designees.

Eventually, NCI created a Special Committee to evaluate the transaction, and hired Evercore.  Well, actually Metcalf hired Evercore before the committee was even formed, and the Committee was told that Evercore had no conflicts – which was untrue, because Evercore was currently working for another CD&R portfolio company.  The Committee decided to keep NCI’s counsel, Wachtell.

Evercore recommended that New Ply Gem be acquired with NCI stock valued, post-deal, at roughly 1/3 of NCI’s total equity.  This valuation was based on CD&R’s own valuation when it acquired New Ply Gem.  CD&R – via the NCI board members – insisted on closer to a 50/50 split.  The Committee agreed.  The Committee asked for a majority-of-minority voting condition; CD&R refused.  When the deal was announced, NCI’s stock price fell, and of the unaffiliated stockholders, only 55% voted in favor.

After the transaction closed, an NCI stockholder brought a derivative lawsuit and, for our purposes, the critical question was whether CD&R was a controlling shareholder.  If not, the deal was likely cleansed by the shareholder vote – and even if there were disclosure deficiencies (spoiler: there were), plaintiff would have to establish that the Special Committee was interested/dependent on CD&R to succeed on his claim.  But if CD&R was a controlling shareholder, the deal was subject to entire fairness review.

VC Laster concluded that CD&R was a controlling shareholder, and refused to dismiss.

So, what’s notable here?

[More under the jump]

Arizona State University’s Sandra Day O’Connor College of Law now has a new business law journal, the Corporate and Business Law Journal.  It’s stated mission is:

The Corporate and Business Journal is a forum for the publication and exchange of ideas and information about trends and developments within business and corporate law. The Journal publishes articles and comments on various topics, including corporate governance, securities regulation, capital market regulation, employment law, and the law of mergers and acquisitions. Historically, corporate and business law has been heavily influenced by east coast institutions and practitioners. Accordingly, CABLJ offers a unique opportunity for students, scholars, and the Arizona community as a whole to readily engage in the discourse surrounding these practice areas.

Congratulations to ASU on the launch of the new journal!

Interestingly, the Corporate and Business Law Journal also has a companion forum for short pieces running over 500 words in length:  http://cablj.org/blog/  It might be a great place for things that are too short to develop into a full essay or article.

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The following post comes to us from Prof. Ilya Beylin of Seton Hall:

On Monday, I read Ann Lipton’s thoughtful and informative post, on “The Eroding Public/Private Distinction”.  One of the luxuries being a business law professor offers is the space, and perhaps even community encouragement, to feel strongly about and delve deeply into esoteric albeit perhaps consequential matters such as the boundary between public and private securities markets.  Well, the feeling came, and I wrote Ann to see if I could riff on her piece in a response.  So here we are, although the more I mull over the strands in the original piece, the more I recognize the completeness of Prof. Lipton’s work and the keenness of the insights there. 

A definitional question is predicate to evaluating the growth of exceptions to the traditional public/private divide.  Public and private under the ’33 and ’34 Acts have two drastically different implications.  Under the ’33 Act, private typically refers to being able to conduct a securities offering outside of the SEC mediated registration process under Section 5.  Under the ’34 Act, however, private means not having to provide ongoing public disclosure on the state of the company (e.g., quarterly and annual filings, current reports).  While the ’33 Act principally governs the manner in which a primary market transaction may be conducted, the ’34 Act principally governs how secondary trading may be conducted.  Expansions of Regulation D to permit public offers to accredited investors under 506(c), relaxation of Rule 701 to enable greater distribution to employees and other service providers, Crowdfunding under Reg CF, expansion of Reg A into Reg A+, and some of the other incursions we’ve seen since 2005 into the protective sphere of Section 5 do not generally implicate the continued significance of the private/public distinction in secondary markets. 

As background, the Exchange Act’s ongoing public disclosure requirements apply to three prototypical issuers: those that engaged in a public offering under the ’33 Act, those that have enough equity holders (raised, significantly, to up to 2,000 accredited investors from a prior cap of 500 as Prof. Lipton and others have keenly pointed out), and those listed on an exchange.  The realities, however, of secondary market trading mean that substantial liquidity remains largely conditional on becoming exchange listed and thus public for purposes of ongoing disclosure under the ’34 Act. 

[More under the cut]

As most readers of this blog are likely aware, the SEC recently proposed some rather dramatic changes to the rules governing shareholder proposals under Rule 14a-8.  Among other things, the revisions would raise ownership and holding period requirements, raise the thresholds for resubmission, and bar representatives from submitting proposals on behalf of more than one shareholder per meeting.

The changes have at least the potential to fundamentally reshape the corporate governance ecosystem, and part of the reason for that is highlighted in a new paper by Yaron Nili and Kobi Kastiel, The Giant Shadow of Corporate Gadflies.  As they document, forty percent of all shareholder proposals are submitted by just five individuals, who have made the practice something of a combined life’s mission and personal hobby.  The proposals submitted by these individuals tend to focus on corporate governance, and they also tend follow the stated governance preferences of large institutional investors.  As a result, these proposals frequently win substantial, if not majority, support, and have a real impact on target companies – which means, over time, they dramatically alter the norms of what is considered good corporate governance. 

Now, there’s no legal reason why we have to depend…

Boston University’s Rory Van Loo has a new paper examining how private firms now serve as public enforcers and gatekeepers.  It tackles the new pressure for businesses to police conduct by other businesses.  Consider Facebook for example.  After the way Cambridge Analytica used data acquired from Facebook, Facebook faced oversight from the FTC, culminating in an enormous $5 billion fine. Notably, the fine and pressure came primarily to force Facebook to more intensively monitor and control other companies’s behavior.  Amazon, Google, and others have faced similar actions—all to force the platforms to better control third parties.

Van Loo shows that these pressures are not unique to technology firms.  Banks now face pressure from the CFPB to monitor debt collectors.  Oil companies like B.P. must oversee environmental compliance at offshore oil platform companies.  Pharmaceutical companies must oversee suppliers and third-party labs.  Government regulators now routinely conscript private firms and force them to enforce standards–making them “enforcer firms.”

These conscripted enforcer firms playing quasi-regulatory roles put pressure on the idea that they are purely private entities.  The draft defines and explores the new model without endorsing it as the right approach.  Enforcer firms will use their power as contracting parties to…