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When the news came out that Volkswagen had used defeat devices in order to fool regulators into thinking that its cars complied with environmental standards, massive amounts of litigation followed, eventually consolidated into an MDL so sprawling that it literally took me over an hour – plus two calls to Bloomberg – just to get the docket sheet loaded on my computer.

One set of claimants are the bondholders who purchased in an unregistered 144A offering just before the scandal broke.  These bondholders contend that the offering memoranda failed to disclose critical information about the regulatory risks Volkswagen faced, in violation of Rule 10b-5.  They’ve just got one problem: They’d like to bring their claims as a class, but because the bonds did not trade in anything like an efficient market, they cannot make use of the fraud-on-the-market presumption of reliance.  Instead, they’ve turned to Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972), which holds that when a fraud consists of omissions rather than misstatements, reliance may be presumed.

Now, the first issue is, what counts as an omissions-based fraud?  The fraud here included affirmative misstatements, and usually that would be enough prevent the use of Affiliated…

Wrapping up the Mass Tort Deals series, we have suggestions for possible reforms.  (If you want links to the prior reviews, the Mass Torts Litigation Blog has a consolidated list here.)

Burch recognizes that getting real reforms here will be a challenge and that we are not likely to simply scrap the existing structure and start with something new for these cases.  In light of that, she focuses on empowering current and potential stakeholders who will have appropriate incentives to improve how the system functions.

Let’s start with financiers.  Burch’s scholarship has suggested empowering financiers to serve as monitors in this kind of litigation.  She continues that thread here and proposes a system where “plaintiffs could assign a financier a stake in their lawsuit as the contingent fee does now.  In exchange the financier funds the suit on a nonrecourse basis and pays attorneys a billable-hour rate plus some small percentage of the recovery as a bonus.”  In my view, this seems likely to generate much more effective and sophisticated oversight of attorney conduct.  A financier without in-house expertise in the area could simply hire sophisticated counsel to oversee the litigation.  Corporate defendants do this all the time and…

On Friday, I attended and spoke at my first BLPB Symposium: Connecting the Threads III.  I learned a ton from listening to the presentations of my co-bloggers, the faculty and student responses to each presentation that followed, and questions from the engaged audience.  It was a great event made possible by the hard work of the U. of Tennessee College of Law student editors and staff of Transactions: The Tennessee Journal of Business Law.  In particular, Colleen Conboy and Tanner Hamilton did an excellent job of organizing the event, and co-blogger Joan Heminway and her faculty colleague George Kuney, the Director of the Clayton Center for Entrepreneurial Law and Lindsay Young Distinguished Professor of Law, also deserve thanks and kudos for their involvement!  I can’t wait for next year!

My presentation, Banking on the Cloud, shared its title with my Symposium paper (w/David Fratto and Lee Reiners).  Professor Gary Pulsinelli and law student Savannah Darnall commented – big thank you to both!  My remarks began by noting that this title referred to two important realities: 1) the amount of financial industry outsourcing to cloud service providers (the big three: Amazon Web Services, Microsoft Azure…

There is a lot going on in VC Slights’s new opinion in Tornetta v. Musk,  refusing to dismiss a shareholder suit challenging Elon Musk’s eye-popping compensation package.

In Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), the Delaware Supreme Court held that, in the context of a squeeze-out merger, controlling shareholders can obtain business judgment review – rather than entire fairness – if they employ the dual protections of requiring the affirmative vote of a majority of the disinterested shares, and requiring that the deal be negotiated at the outset by a fully-empowered independent board committee.

Since then, there have been a lot of questions about MFW’s application, including whether MFW can/should be employed beyond the context of squeeze outs, which brings us to Tornetta.

Last year, Tesla granted Elon Musk a new compensation package that would award him as much as $55 billion in Tesla stock options, conditioned on achieving certain milestones.  The package was approved by a vote of the unaffiliated Tesla stockholders, but did not satisfy the full set of MFW preconditions (i.e., it was not negotiated by an independent committee, etc).  Thus, Tornetta filed a lawsuit challenging the award on the ground that (1) Musk is a Tesla controlling shareholder (2) the award is therefore an interested transaction subject to review for fairness and (3) the award was unfair.  The claims were brought both directly and derivatively.

Now, the first interesting thing about this case is the number of issues that could have been raised on the motion to dismiss, but were not (though defendants may still raise them later).

Defendants could have, but did not, dispute that Musk was a controlling shareholder (likely because VC Slights previously concluded he was in a case challenging the Tesla/SolarCity merger – I’ll come back to that).

Defendants could have, but did not, dispute that the directors who approved the package were dependent on Musk.

Directors could have, but did not, move to dismiss for failure to make a demand on the board (more on that below).

Directors could have, but did not, move to dismiss on the ground that the claim could not be maintained as a direct action (again, more below).

As a result, the narrow question before Slights was simply whether stockholder approval alone can cleanse a compensation award to a controller, or whether instead MFW procedures are required.  And he held that MFW procedures are always required when a controller’s interests conflict with those of the minority.

[More under the jump]

Chapter 5 in Elizabeth Chamblee Burch’s Mass Tort Deals brings together so many things.  It’s got arbitration, securities filings, banks, conflicts of interest, and so much more. (You can see some of the prior posts on this here.)

Let’s start with arbitration.  Burch gets the reality that arbitration contracts today are essentially imposed on the public by more powerful businesses.  She’s also correct that these agreements essentially cause the law to slowly, wither and lose its influence.  I’ve written about this and compared it to a dark shadow.  As arbitration supplants judicial resolution, industries insulate themselves from the threat of negative court rulings.  This procedural structure may allow bad practices to go on for far longer than they would have if courts actually decided cases.  It may also perpetuate injustices within arbitration forums.  Defendants may even argue that a claim should be denied because no precedent supports it.  Yet the precedent cannot come into existence if an industry has entrenched itself with arbitration provisions.  The lack of any precedent for relief should not doom claims in instances where courts can only rarely rule.

Mass tort settlement deals essentially shunt victims into a private dispute resolution world full of…

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This past week, Dr. Robert Engle, the 2003 Nobel Laureate in Economics and Michael Armellino Professor of Management and Financial Services at the NYU Stern School of Business, spoke at the University of Oklahoma in the Deane and Ginger Kanaly Lecture Series at the Michael F. Price College of Business and in our Energy and Commodities Finance Research Conference. 

Engle’s Kanaly Lecture focused on the work of Stern’s Volatility Institute (V-Lab), which he directs.  Specifically, he spoke at length about a measurement of systemic risk termed “SRISK.”  Systemic risk is generally understood to be the risk that the collapse of a financial institution or market will trigger domino-like collapses throughout financial markets and the broader economy.  SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk.  SRISK can be used not only to measure capital shortfalls in firms, but also undercapitalization of a country or global financial system.  It forecasts how much capital a firm (country or global system) would need to raise were a crisis to occur and, naturally, leads to questioning savings sufficiency.  It asks: how prepared is a…

By now, regular readers of this blog are aware that I’ve been especially forceful in arguing that litigation limits in corporate charters and bylaws can only address matters of corporate internal affairs, and that federal securities claims are beyond their scope.  Vice Chancellor Laster adopted a similar view in his Sciabacucchi v. Salzberg decision, where he invalidated charter provisions that purport to require that all Section 11 claims against the company be brought in federal court.  Now that the matter is on appeal to the Delaware Supreme Court (Docket No. 346,2019) – and the opening brief is due today –  a lot of articles about the scope of the internal affairs doctrine are dropping. 

First up, we have Daniel B. Listwa & Bradley Polivka’s First Principles for Forum Provisions (Cardozo Law Review, forthcoming), in which the authors argue that Laster’s opinion erroneously focused on “territoriality” rather than “comity,” and that the suit should have been dismissed for lack of ripeness.

Next, there’s Mohsen Manesh with The Contested Edges of Internal Affairs (Tennessee Law Review, forthcoming), which explores the uncertainties surrounding the scope of the internal affairs doctrine, spotlighted both by the Sciabacucchi v. Salzberg decision and by California’s…

The fourth chapter in Mass Torts Deals tackles the role judges play in coercing facilitating mass torts settlements.  (You can find more chapter writeups here.)

In many instances, it seems as though lawyers manage to rope judges into using procedural mechanisms and their trusted status as authority figures to push plaintiffs into settlements.  The big danger seems to be that because we do not have clean, well-established procedural rules specifically for multi-district litigation proceedings, judges simply do whatever they want, often using coercive powers without any real safeguards.

In one case, Judge Susan Wigenton seemed to take a very heavy hand with objectors to a medical device settlement.  She ordered plaintiffs to “enter into a private settlement program that entailed at least 18 months of mediation unless they settled sooner.”  At the same time, she stayed the multi-district proceeding, shutting off access to discovery.  Plaintiffs were forced to participate in the program or face dismissal.

In response, many plaintiffs objected.  Lawyers advocating for the settlement contended that Judge Wigenton had “inherent authority” to manage her docket and that the authority allowed her “to send an elderly plaintiff population into a private settlement program without their consent.”  In response to…

This past Friday, I had the privilege of attending the First Annual ISG/Corporate Issuers Conference, hosted by the Investor Stewardship Group (ISG) and the John L. Weinberg Center for Corporate Governance at the University of Delaware. The Investor Stewardship Group is “an investor-led effort that includes … more than 60 U.S. and international institutional investors with combined assets in excess of US$31 trillion in the U.S. equity markets,” which was formed “to establish a framework of basic investment stewardship and corporate governance standards for U.S. institutional investor and boardroom conduct.”[1] The John L. Weinberg Center for Corporate Governance “is one of the longest-standing corporate governance centers in academia, and the first and only corporate governance center in the State of Delaware, the legal home for a majority of the nation’s public corporations.”[2] Charles M. Elson is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the Weinberg Center.[3]

The primary work product of the ISG is the “framework for U.S. Stewardship and Governance comprising of a set of stewardship principles for institutional investors and corporate governance principles for U.S. listed companies. The corporate governance framework articulates six principles that the ISG believes are fundamental to good corporate governance at U.S. listed companies.” Meanwhile, the “stewardship framework seeks to articulate a set of fundamental stewardship responsibilities for institutional investors.” The Framework “became effective on January 1, 2018.”[4]

The agenda for the conference included a “deep-dive” into both the ISG Stewardship Principles and ISG Corporate Governance Principles, as well as “Fireside Chat” consisting of Charles Elson interviewing Marty Lipton. What follows, in no particular order, are three of my reflections on the conference. The Chatham House Rule applied, so I will not attribute any statements to any particular speakers.