The Supreme Court, per Justice Sotomayor, issued a unanimous opinion this week in Hughes v. Northwestern University.  That somewhat unusual moment of agreement among the Justices was likely due to the fact that the opinion clocked in at a mere 6 pages, and left the hard stuff unaddressed.

Hughes was about the duties of an ERISA plan administration when constructing a defined contribution plan menu.  In this case, Northwestern University maintained a defined contribution plan with 240 fund choices, some of which were very very good, and some of which were very very bad.  For example, the menu included low-cost index funds, but it also included retail share classes of certain funds even though the plan could have qualified for lower-cost institutional share classes.  The menu also, according to plaintiffs, included various underperforming and high fee funds that should have been eliminated.

The Seventh Circuit held that none of that mattered because the menu was sufficiently large to satisfy all preferences.  Calling the plaintiffs’ arguments “paternalistic,” the court explained that “[p]laintiffs failed to allege, though, that Northwestern did not make their preferred offerings available to them. In fact, Northwestern did. Plaintiffs simply object that numerous additional funds were offered as well. But the types of funds plaintiffs wanted (low-cost index funds) were and are available to them.” (quotations omitted).

The Supreme Court reversed.   The Court held that regardless of whether the plaintiffs’ preferred options were available, an ERISA fiduciary must conduct “their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.  If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”  Because the Seventh Circuit had not conducted that analysis, the Court remanded for a do-over.

So, first, it’s notable that the Court did not hold that plaintiffs had actually stated a claim.  The Court only held that an ERISA fiduciary has an independent duty to determine whether particular investments can be “prudently included,” and allowed the Seventh Circuit to decide in the first instance whether any of the funds identified by plaintiffs did not meet that standard.

Second, though, the opinion leaves open a lot of questions about what it means to say that funds should not be prudently included, and, in particular, just how “paternalistic” an ERISA fiduciary should be.  Retail vs institutional share classes are in some ways the easiest possible case; if retail classes are offered when institutional ones are available, the fiduciary is simply charging the beneficiary unnecessary fees.  Indeed, this is precisely why the SEC announced its “share class disclosure initiative,” to deal with investment advisers who recommend higher cost share classes to clients when lower cost ones are available.

But the more interesting question is whether options should be removed from the menu not because they are, standing alone, completely unsuitable for any beneficiary, but because the menu as a whole is too challenging for the beneficiary to be able to make good choices. 

We know that ERISA menus need to be considered as a whole; after all, as the Supreme Court said in this case, a fiduciary has an “obligation to assemble a diverse menu of options.”  It might be perfectly appropriate for a menu to include a low-cost diversified bond fund, but the menu would be imprudent if it included nothing but low-cost diversified bond funds.

What if, however, the menu included 50 diversified bond funds, and 50 diversified stock funds, and 50 target date funds, and so forth?  The plaintiffs, and their scholar amici, argued this too would be imprudent because it would simply be too difficult for a normal, unsophisticated plan participant to parse.  The plaintiffs, for example, mentioned the problem of “decision paralysis,” while the scholars highlighted investors’ “bounded rationality” and explained how long menus could tax investors’ attention spans and lead them to either make poor choices, or opt out of the plan entirely.  In the scholars’ view, 240 options was just way too many; a good plan should only include 20-30.

Significantly, though, the United States as amicus in support of the plaintiffs did not sign on to that argument; instead, it only agreed that plaintiffs had stated a claim with respect to the retail share classes (it also agreed with some arguments about recordkeeping fees).

Which is in some ways what I’d expect.  In my essay, A Most Ingenious Paradox, I argue that there’s a kind of a political interest in making sure that a broad array of mutual funds remain on the market – even if that’s not necessarily the best choice for retail investors.

Anyhoo, point being, all of these questions are still left unanswered, though it strikes me that the Seventh Circuit is unlikely to be a receptive audience for arguments about bounded rationality.

I was thrilled to be one of the invited speakers (one of only 2 law professors) to speak at the How to Contract Conference two weeks ago. Laura Frederick, ex-Tesla, ex-BigLaw lawyer organized the best two days of CLE I’ve had in my thirty years as a lawyer (and not just because I was a speaker). Replays are are available and if you’re a law student, practicing lawyer, professor, or person who deals with contracts regularly, signing up should be a no-brainer.  If you need more convincing, here’s the line up. Sign up today. You won’t regret it. 

 

I’ve started reading Tom Lin‘s new book, The Capitalist and the Activist: Corporate Social Activism and The New Business of Change.  Although I’m only through the first chapter so far, I’ve found it to be an extraordinarily accessible and even-handed account of the current state of play.  Using story after story he knocks down perceived walls between social activists and capitalists.  He takes a nuanced, thoughtful approach and encourages readers to reject simplified portraits of capitalist and activists.  These words jumped out at me:

Recognizing the significant good that capitalists can bring about for society does not blind us to the serious harms that they can sometimes create or perpetuate in society.  Recognizing the transformative power wielded by activists does not deny the obstacles they can sometimes present for policymaking.  Just as humans are neither all good nor all bad, their institutional and collectively efforts at capitalism and activism are neither all good nor all bad.

His first chapter tackles the debate over corporate purpose and sketches the different sides of the debate.  He rightly recognizes that corporate social activism and expectations of corporate engagement are likely here to stay even as debates about corporate purpose will inevitably continue.  I’m looking forward to reading the rest of the book.

Dear BLPB Readers:

“The Wharton School of the University of Pennsylvania will host its annual Wharton Financial Regulation Conference on Friday April 1, 2022, in-person.

We are issuing a call for papers to any scholars from any discipline—law, economics, political science, history, business, and beyond—to submit papers concerning the following topics (along with related topics):

    – Governance of Monetary & Fiscal Policy
    – Market Infrastructure & Bank Regulation
    – The Community Reinvestment Act at 45
    – Agency Structures & Personnel

To submit a paper for consideration, please provide an abstract not to exceed one page and CV to Brian Feinstein and Christina Parajon Skinner by February 15. Selected presenters will be notified by February 21. Presenters will receive an honorarium to defray travel costs.”

The complete call for papers is here: Download 2022 Wharton Fin Reg Conference – CFP

Dear BLPB Readers:

“The Legal Studies Department in Drexel University’s LeBow College of Business invites applications for an Assistant Clinical Professor of Legal Studies to begin September 1, 2022. This is a full-time, non-tenure track position. The successful candidate will teach undergraduate and graduate level Legal Studies courses in person at the Drexel University LeBow Main Campus, the Malvern Campus and online. A successful candidate will be expected to teach courses in various areas of business law, such as Entrepreneurial Law, Corporate Governance, Contract Law and International Business. The standard teaching load for an Assistant Clinical Professor is 3 courses each for 4 quarters per year.

Candidates should possess a J.D. or LLM from an ABA-Accredited law school and demonstrate a high level of teaching competence.  Candidates must provide evidence of successful experience in teaching. Experience with and commitment to working with diverse student populations and commitment to equity in education at all levels is required. Experience and/or commitment to the use of technology as an instructional tool is desirable, as are strong collegial and collaborative skills.

The Assistant Clinical Professor of Legal Studies will also engage in appropriate research/scholarly activities to maintain AQ status in discipline. Scholarly work may include conference presentations, law review publications, pedagogical scholarship and other scholarly works. The Assistant Clinical Professor in Legal Studies will also participate in service activities on campus and in the community.”

The complete job posting is here.

I cannot resist sharing with you today a proud moment that I had last week.  One of the 3L students that I mentor wrote a blog post that our Leading as Lawyers blog published. I could not be more proud.

I had been encouraging this student–a young woman I deeply admire–to write a post for us for a number of months.  She wasn’t sure.  But I kept telling her that she had such compelling stories to tell.  Nevertheless, she remained unsure until recently that anything she would write could speak in a powerful enough way about leadership.

More recently, the pieces of her professional development puzzle have started to fall into place.  As a result she could see it–she found her voice; she knew what she had to say.  The result of her labors can be found here.  The title alone is enough to make a business law prof proud: The Unlikely Avenue from Hopeful Environmental Litigator to Inspired Transactional Lawyer.  You can click on the link and read the post in its entirety.  But here is the bottom line:

When I came to law school, I was so scared of “selling out.” I thought that transactional law was the route straight there. It turns out that choosing a path that utilizes my strengths and foregoes my weaknesses was never going to be “selling out.” Choosing transactional law is going to equip me to help animals and people in ways that I had never imagined prior to law school.

Amen.  Thanks, Ashley, for giving me this proud moment that I can share.  I will miss you after you graduate in a few months . . . .

This morning, my inbox included a link to: Christina Parajon Skinner, Cancelling Capitalism? Grow the Pie: How Great Companies Deliver Both Purpose and Profit …, 97 Notre Dame L. Rev. 417 (2021) [SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4000768 ]. What follows is an excerpt from the introduction.

In February 2019, Amazon announced a plan to build its new national headquarters in Queens, New York. The plan would create between 25,000 and 40,000 well-paid jobs and fill New York City’s tax coffers with at least $27.5 billion. But Amazon cancelled its decision in the face of intense political opposition. Perhaps the most vocal opponent was New York congressional Representative Alexandria Ocasio-Cortez. She roundly celebrated Amazon’s retreat, tweeting, “today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon’s corporate greed.”

But the congresswoman’s maligning of Amazon’s relocation was a sleight of hand. She told her followers that the “tax breaks” that would have gone to Amazon would instead now be available for public works, like subway repairs and teacher salaries. But this was wrong. The tax breaks would not be a “donation” of dollars that would have taken funds away from other public uses; rather, Amazon would have had some reductions from future tax bills if and only if–the company had improved the community in financially concrete ways. Yet Amazon was bullied out of town on these false pretenses, and Queens lost out on jobs, urban development, and hefty corporate tax payments. Here, both Amazon and Queens residents lost out–the citizens perhaps the most.

The tale of Amazon in retreat is one of many hard-hitting examples Alex Edmans gives in his book, Grow the Pie, all of which illustrate the growing popular antipathy against corporate profit. In the most charitable interpretation of Edmans’s examples, people and politicians increasingly reject capitalism–the private harnessing of free-economic markets–because they appear to misunderstand the role that profits play in society. In other cases, however, it seems that politicians feint ignorance of the social benefits of capitalism in seeking to hum the most popular tune. Grow the Pie disabuses misperceptions by providing novel evidence and examples that bust the myriad myths now perpetuating the growing movement to “cancel capitalism,” as I’ll call it here.

Continue Reading Christina Parajon Skinner Reviews “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”

This week, it was announced that Microsoft is acquiring Activision.

It was also announced that Microsoft swooped in with a bid because Activision was wounded due to the sexual harassment scandals, which are already the subject of a securities fraud lawsuit and a couple of derivative lawsuits.

And, it is possible that Activision’s CEO – who, it was reported, was aware of/involved in many of Activision’s problems and concealed them from the board – will, as a result of merger, walk away with a change of control golden parachute worth as much as $293 million.

So, this is entertaining for me because it’s like a real life issue spotter.

Issue One: What happens to the ongoing securities fraud lawsuit?

Answer: Presumably it continues; liability will travel with the new entity, and of course will remain with any individual defendants.

Issue Two: What happens to the ongoing derivative lawsuits?

Answer:  Normally, if the plaintiffs lose their shares in the merger, they lose the ability to prosecute a derivative action.  But!  They might be able to maintain the action if they can show the sole purpose of the deal was to deprive them of standing.  See Lewis v. Anderson, 477 A.2d 1040 (Del. 1984).  I don’t know if the Activision deal meets that high standard, but the reporting is certainly fraught.

Issue Three: What merger related claims are plaintiffs likely to advance directly?

Answer: 

(1) They could allege that Kotick ran a flawed sales process so that he could cash out rather than suffer the indignity of being fired, and the board was only too happy to acquiesce and shed themselves of the bother.  As a result, the merger price was too low.

(2) They could also allege that the board failed to secure value for the lost derivative claims, and therefore the merger price was too low.

Issue Four:  Isn’t it funny how the class plaintiffs and the derivative plaintiffs are at cross purposes, because if the derivative plaintiffs can maintain standing (a longshot, but still), it kind of interferes with the class plaintiffs’ allegations that the merger consideration failed to account for the value of the lost derivative claims (which are not, by hypothesis, lost at all)?

Answer: Yes.

Issue Five: Are there any other potential derivative claims here? 

Answer: Someone might consider the option of a double derivative lawsuit, i.e., suing Microsoft to get it to sue the old Activision board on behalf of Activision.  See Lambrecht v. O’Neal, 3 A.3d 277 (Del.2010).

Issue Six:  Could Activision just go ahead and quickly settle the derivative claims, to spare some of the headache?

Answer: I suppose but –

Issue Seven: Wouldn’t the objections to that settlement be convoluted, because if you tried to say the derivative plaintiffs were settling on the cheap, the answer would be that they were about to lose their claims anyway, so any number above zero was fair – and the real injury would be to the class plaintiffs in the merger, who may or may not have standing to object depending on whether the cheap derivative settlement was deemed some kind of improper diversion of merger consideration, permitting a direct claim, in facts that were distinguishable from Kramer v. Western Pacific Industries, Inc, 546 A.2d 348 (Del.1988) because the transactions were more closely related?

Answer:  Yes.

Issue Eight: Will the merger close, and defendants secure a dismissal of merger-related claims on Corwin grounds?

Answer:

¯_(ツ)_/¯

Okay, internet: What did I miss?

We just finished our first week of class for the spring semester!  It was a busy several days (as I would imagine the first week of the semester tends to be for all!).  As I returned to teaching mode, I thought of some teaching materials I’d like to share (and somewhat reshare) with BLPB readers.

First, several years ago, I blogged about Professor Richard Shell’s Springboard: Launching Your Personal Search for Success (here and here).  I mentioned his Six Lives Exercise, but I didn’t explain much about it.  Not only do I think it’s a great personal reflection exercise, but it generally generates a significant amount of classroom discussion and interest.   As I’ve used it several times now and it tends to generate a lot of student discussion, I thought I’d reshare about it!  Although I recommend buying the book, it’s not necessary to do the exercise, which is available here.  Shell provides vignettes of six lives: a teacher, wealthy investor, tennis pro, stone mason, and non-profit executive.  After reading their stories, students (or the reader) is invited to rank the lives in the order of “most successful” to “least successful” from their perspective.  Shell argues that success has an inner (internal happiness and satisfaction) and an outer dimension (social achievement, fame etc.).  The class (or reader) can then reflect upon how success is being defined in each of these lives, how they personally define success, the extent to which their ranking reflects their definition, and small steps to minimize any misalignment.

Second, if you teach contracts and you don’t know about Leonard v Pepsico (I didn’t until Professor Kimberly Houser told me about it.  Thanks, Kim!), you should!  It’s a really fun and students love it!  Professor Jeremy Telman has blogged about it (here) with links to videos of the Pepsi commercial at issue.  In a nutshell, Pepsi made a commercial about various items that could be purchased with different amounts of Pepsi Points.  At the end of the commercial, a Harrier Fighter Jet appeared with the words “7,000,000 Pepsi Points.”  Needless to say, Pepsi wasn’t offering fighter jets to customers in exchange for their Pepsi Points.  However, one customer did amass all of these points and then sought to claim a jet!

There is an interesting new paper, Misconduct Synergies, by  Heather Tookes and Emmanuel Yimfor, which was recently the subject of a Business Scholarship Podcast.  The paper looks at misconduct at registered investment advisory firms after M&A activity.  It finds that “that disclosures of new disciplinary events in the combined firm drops by between 25 and 34 percent following mergers. This reduction is driven mainly by separations of high misconduct employees at the target firm.”  In short, after M&A, employees with disciplinary records are much more likely to depart the firm.  

The RIA space is an interesting place to study employee misconduct and M&A activity.  Unlike most other industries, RIA firms have to disclose disciplinary and regulatory information in a way where it becomes publicly accessible.  It’s also an interesting area to study because M&A activity has been booming for RIA firms.  Trimming away potential future regulatory issues may be a way to set up the combined firm for another deal.  It also finds that more of the target firm’s employees separate than the acquiror, finding that “the sensitivity of separations to employee misconduct increases for target firm employees following mergers, suggesting stricter disciplinary mechanisms for target employees within the merged firm.”  It’s probably easier to clean house when it’s a house you just bought.