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Earlier today, Senator Cancela introduced Senate Bill 304 in Nevada.  Although the bill’s text is not yet available on the website, the digest reveals that the legislation will explicitly authorize fee-shifting provisions under Nevada corporate law.  (Update–the text of the draft legislation is now available.)

The digest indicates that it will also do a few other interesting things if it passes:

  • Preserve and transfer any internal corporate claims to a Nevada corporation acquiring some other entity;
  • Authorize the application of fee-shifting provisions to claims arising from a prior entity (so long as the transaction was approved by a majority of disinterested stockholders);
  • Prohibit any provision that would forbid a shareholder from suing in Nevada courts;
  • Authorize Nevada-specific forum-selection provisions;
  • Authorize the Nevada Secretary of State to issue rules allowing lawyers to indemnify stockholders for any possible fee-shifting;
  • Provide that Nevada will have personal jurisdiction over any shareholder that sues outside of Nevada; and
  • Require the Secretary of State to study fee-shifting’s impact on the business environment and report back to the legislature in three years.

Despite the problems with shareholder litigation, Delaware opted to ban fee-shifting right as a mass of public companies began to adopt it. This, of course…

Tulane just held its 31st Annual Corporate Law Institute, and though I was not able to attend the full event, I was there for part of it.  Though the panels were very interesting and I took copious notes, as a matter of personal satisfaction, the single most important thing I learned is that it is pronounced Shah-bah-cookie.  You’re welcome.

That said, below are some takeaways from the Hot Topics in M&A Practice panel, and to be clear, this isn’t even remotely a comprehensive account of everything interesting; it’s just stuff that I personally hadn’t heard before.  (And thus, the exact contours of my ignorance are revealed.)

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The University of Richmond School of Law will host the Third Annual Junior Faculty Forum on Tuesday, May 21 and Wednesday, May 22, 2019 in Richmond, Virginia.  More information is available here.  This is Richmond’s description of the event:

This annual workshop brings together junior law scholars to present their scholarship in an informal collegial atmosphere. The workshop is timed to allow participants to incorporate feedback on early ideas or projects before the summer, and papers and works-in-progress are welcome at any stage of completion. To maximize discussion and feedback, the author will provide a brief introduction to the paper, but the majority of the individual sessions will be devoted to collective discussion of the papers. We will also have plenty of opportunities for networking and more casual discussions.  

Richmond Law will provide all meals for those attending the workshop, but attendees will cover their own travel and lodging costs.

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Jeremy Kress at the University of Michigan’s Ross School of Business recently posted on SSRN his new article, Solving Banking’s “Too Big To Manage” Problem, forthcoming in the Minnesota Law Review.  Here’s the abstract:

The United States’ banking system has a problem: many financial conglomerates are so vast and complex that their executives, directors, and shareholders cannot oversee them effectively. Recognizing this “too big to manage” (TBTM) dilemma, both major political parties have endorsed breaking up the banks, and bipartisan coalitions in Congress have introduced bills to shrink the largest firms. Despite this apparent consensus, however, policymakers have not agreed on a solution to the TBTM problem. Thus, a decade after the financial crisis, the biggest U.S. banks are significantly larger today than they were in 2008. 

This Article contends that the most prominent proposals to break up the banks—by reinstating the Glass-Steagall Act, capping banks’ size, or imposing onerous capital rules—each suffer from critical policy and political shortcomings. This Article then proposes a better way to solve the TBTM problem: using the Federal Reserve’s existing authority to compel divestitures when a financial conglomerate falls out of compliance with minimum regulatory requirements. In contrast to existing break-up proposals, this…

I am fascinated by the eyebrow-raising speech SEC Commissioner Hester Peirce delivered to the Council of Institutional Investors (CII) earlier this week.  In it, she said:

I have concerns about CII’s position with respect to the Johnson & Johnson shareholder proposal. As you know, a Johnson & Johnson shareholder submitted a proposal that, if approved, would have started the process to shift shareholder disputes with the company to mandatory arbitration…. CII also submitted a letter stating that “shareholder arbitration clauses in public company governing documents reflect a potential threat to principles of sound governance.”…

CII argues that “shareowner arbitration clauses in public company governing documents represent a potential threat to principles of sound corporate governance that balance the rights of shareowners against the responsibility of corporate managers to run the business.” Among your worries is the non-public nature of arbitration and thus the absence of a “deterrent effect.”…

The problem is that these class actions are rarely decided on the merits. Instead, the cost of litigating is so great that companies often settle to be free of the cost and hassle of the lawsuit.  Settlements are rarely public and certainly involve no publication of broadly applicable legal findings. Additionally,

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Wenqian Huang at the Bank for International Settlements recently posted a new version of her working paper: Central counterparty capitalization and misaligned incentives.  Here’s its abstract:

Financial stability depends on the effective regulation of central counterparties (CCPs), which must take account of the incentives that drive CCP behavior. This paper studies the incentives of a for-profit CCP with limited liability. It faces a trade-off between fee income and counterparty credit risk. A better-capitalized CCP sets a higher collateral requirement to reduce potential default losses, even though it forgoes fee income by deterring potential traders. I show empirically that a 1% increase in CCP capital is associated with a 0.6% increase in required collateral. Limited liability, however, creates a wedge between its capital and collateral policy and the socially optimal solution to this trade-off. The optimal capital requirements should account for clearing fees.

For those who understand the different incentive structures associated with member versus investor owned clearinghouses, some of the model’s finding will be unsurprising: in the absence of capital requirements (such as in the U.S.), member-owned clearinghouses hold more capital than investor-owned institutions.  This has important public policy implications.  Nevertheless, as I noted in an earlier post…

I’ve previously posted that judges sometimes suggest that markets are efficient to a degree that borders on the mystical.*  But on the opposite end of the spectrum, it often seems as though Congress does not believe in efficient markets at all.  For example, the PSLRA’s “crash damages” provision contains the implicit assumption that when negative information comes to light, it will take 90 days for the stock to appropriately internalize it.  15 U.S.C. §78u-4(e)(1).  Dodd Frank requires all public companies to disclose information on their compliance with the Federal Mine Safety & Health Act (I amuse myself by highlighting for my class the “mine safety disclosure” in the Starbucks 10-K, for example), even though that information is public via other channels.  (Spoiler alert: the disclosures apparently make a difference, so Congress may be right!) 

And most recently, we have the Improving Corporate Governance Through Diversity Act of 2019, introduced by Representative Meeks in the House and Senator Menendez in the Senate.

These identical bills would require public companies to disclose “Data, based on voluntary self-identification, on the racial, ethnic, and gender composition of the board of directors of the issuer;  nominees for the board of directors of…

Da Lin recently posted Beyond Beholden, a paper tackling a new issue in director independence.  Although most corporate law focuses on whether there is a stick a controlling shareholder can use to punish directors if they fail to follow orders, Lin looked to see if she could see any carrots a controlling shareholder could use to lead a director around.  This bit from the article captures it nicely:

Corporate governance scholarship focuses extensively on the incentives generated by the controlling shareholder’s ability to retaliate against insubordinate directors. What the literature overlooks, however, is that directors may also be influenced by the prospect of reward. What happens when the controlling shareholder is not angered but instead pleased?

The result, it turns out, is often new opportunities or future benefits from the controlling shareholder to the favored directors. Controlling shareholders can direct their resources or those owned by the controlled company in ways that reward friends.

Lin’s article looks at how controlling shareholders may reward ostensibly independent directors by appointing them to other lucrative board positions under their control.  A director who approves a sale of the company may soon find herself out of a six-figure job when the company gets…