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These days, it often seems like technology is eradicating the difference between our public and private selves, and apparently, the SEC is going down the same path with respect to companies.

Matt Levine at Bloomberg is fond of saying that private markets are the new public markets, by which he means that companies no longer seek to raise capital by tapping the public markets; instead, they do that in private offerings, and turn to public markets when early investors want to cash out.  This is made possible by the fact that Congress and the SEC have, over the years, loosened many of the rules that required companies seeking large capital infusions to register their shares publicly.  Today, due to Rule 506 and other exemptions, companies can grow to enormous sizes solely based on the investment of accredited investors.  These investors are usually institutions, like venture capital funds, but also the stray mutual fund or sovereign wealth fund.  Other rule amendments have made it easier for private companies to pay their employees in stock and stock options, which allows them to free up capital.

But now the SEC is working to make it easier for new classes of individuals to…

California Western’s Catherine Hardee, recently posted her paper Schrodinger’s Corporation: The Paradox of Religious Sincerity in Heterogeneous Corporations to SSRN.  It’s a fascinating piece and has already been featured on Ipse Dixit if you’re curious about a podcast version.

Her abstract sets the key problem out well:

Consider a corporation where one group of shareholders holds sincere religious beliefs and another group of shareholders does not share those beliefs but, for a price, will allow the religious shareholders to request a religious exemption to a neutrally applicable law on behalf of the corporation.  The corporation is potentially both religiously sincere and insincere at the same time. A claim by the corporation for a religious accommodation requires the court to solve the paradox created by this duality and declare the corporation, as a whole, either sincere or insincere in its beliefs. While the Supreme Court and scholars have noted some of the particular issues raised when determining the religious sincerity of shareholders’ claims, to date no one has engaged systematically with the question of whose religious sincerity should be attributed to the corporation when shareholders hold heterogeneous, or diverse, religious beliefs.

One possible solution to the problem might be to…

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One of the things I’ve talked about before is how courts adjudicating securities claims must perennially police the line between “fraud” and “mismanagement.”  The issue goes back to the Supreme Court’s decision in Santa Fe Indus. v. Green, 430 U.S. 462 (1977), which held that “the language of § 10(b) gives no indication that Congress meant to prohibit any conduct not involving manipulation or deception.”  Thus, Section 10(b) claims cannot be based on mismanagement or breach of fiduciary duty alone.

That said, as federal securities regulation increasingly enters into the governance space, the distinction between fraud and mismanagement is harder and harder to identify.  In general, courts hold that if there’s been a false statement, then the claim is properly stated as securities fraud; if not, not.  The problem is, as the SEC imposes more and more disclosure requirements, many of which concern core aspects of governance (ethics codes, risk taking, and whatnot), the “deception” test does not seem to emotionally do the work of distinguishing a claim based on poor governance from a claim based on fraud.

As I’ve repeatedly blogged about – and written articles about, most extensively in Reviving Reliance– given this problem, courts have…

For some time, FINRA has allowed stockbrokers to suppress complaints from their record through an expungement process.  I’ve written about this here before and about how recent research shows that brokers who have procured expungements may be more likely to attract more complaints than other brokers.  Another relatively recent report revealed that the pace at which brokers now procure expungements has accelerated, moving from brokers seeking to expunge just 102 complaints in 2015 to attempting to suppress 1,036 complaints in 2018.  Remarkably, brokers succeed over 80% in their attempts to suppress and expunge complaints from the public record.

Yet we do not have a robust understanding about why brokers tend to win at such high rates in the FINRA forum.  One reason might be problems with how customers receive notice about an attempt to expunge their complaint.  Consider one recent news report.  Ron Carson, a former stockbroker currently affiliated with Cetera Advisor Networks secured the expungement of a customer dispute in an arbitration award released last week.  Carson filed an arbitration proceeding against his former firm on February 28, 2019.  Over nine months later, on or about  December 11, 2019, Carson “submitted a copy of the letter sent to…

You might detect a theme.

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As part of what is apparently my continuing series on developments concerning the use of corporate bylaws and charter provisions to limit federal securities claims….

Earlier this month, the Delaware Supreme Court heard oral argument on whether corporations may include provisions in their charters and bylaws requiring that federal Section 11 claims be heard only in federal court (video of oral argument here; prior posts on this issue here and here and here and here… you get the idea)

Running parallel with that, Professor Hal Scott of Harvard Law School submitted a proposal under 14a-8 requesting that Johnson & Johnson adopt a bylaw requiring that all federal securities claims against the company be arbitrated on an individualized basis. As I blogged at the time, the SEC granted J&J’s request to exclude the proposal on the ground that it appeared that NJ, the state of incorporation – following what it believed to be Delaware law – did not permit federal claims to be governed by corporate charter/bylaw provisions.  Scott filed a federal lawsuit over that, and the action was voluntarily stayed pending the Delaware Supreme Court’s ruling.

But Scott has not let the crusade rest.  As I…

Wharton Assistant Professor Peter Conti-Brown recently posted another important work about the Federal Reserve System: Restoring the Promise of Federal Reserve Governance (here).  I highly recommend it to all BLPB readers, especially those wanting to quickly learn a lot about the U.S. central bank, one of the most important of U.S. institutions.  Here’s the abstract:  

The US Federal Reserve System (Fed) is famous for its organizational complexity. Overlooked in debates about the costs and benefits of this complexity for the Fed’s legitimacy, independence, and accountability is the congressional vision of what the Fed should be. The central bank is governed by a highly accountable seven-person Board of Governors to manage the rest of the system. Time and experience have eroded this authority as a matter of practice but not as a matter of law. The Fed governors are supposed to supervise the system, a legal aspiration that has increasingly been enervated by institutional drift. Using empirical and historical tools, this paper discusses the erosion of the Board of Governors over the Fed’s century-long history, including the substantial reduction in real compensation for the governors, their diminished participation in Federal Open Market Committee (FOMC) meetings, and the increased…

A belated Happy New Year to everyone! 

I’ve been meaning to blog for quite some time on a partnership puzzle that Elizabeth Pollman brought to my attention.  Assume that Jack, Jill, and Jen have an at-will general partnership.  Jack gives notice to the partnership that he is withdrawing, and he demands the liquidation of the partnership business.  (Assume that there is no partnership agreement governing this dispute.)

Is Jack correct?  Does he have the ability under the default rules to compel dissolution of the partnership if Jill and Jen wish to continue the business?

Under RUPA (1997), the answer is “yes.” Jack dissociated by express will under RUPA § 601(1).  It is an at-will partnership, so the dissociation is not wrongful.  RUPA § 602.  Under RUPA § 801(1), the partnership “is” dissolved and “its business must be wound up.”

Under RUPA § 802(b), however, the winding up of the partnership can be avoided if the partners agree.  Who must agree?  Section 802(b) says clearly that it is “all of the partners, including any dissociating partner other than a wrongfully dissociating partner.”  So Jack’s consent is necessary to avoid winding up.  Let’s assume he is not going to consent; thus, …