This past Friday and Saturday, The Tobias Leadership Center at Indiana University, the Center for Legal Studies and Business Ethics at the Spears School of Business at Oklahoma State University, and the American Business Law Journal hosted the online symposium “Ethical Leadership and Legal Strategies for Post-2020 Organizations.”  I wanted to share with readers the program slides Download 2021-Symposium-Slides for “details of the interesting topics and diverse approaches that were taken to the symposium’s theme.” 

The American Business Law Journal anticipates publishing a special issue on the symposium’s theme.  I’ll be sure to keep readers posted!

This week, I offer brief comments on a couple of different things:

1.  I’ve previously blogged about courts that stretch the definition of “forward-looking statement” in order to preclude defendants from claiming the protections of the PSLRA safe harbor.  But probably the more common scenario runs in the other direction.  Behold Police and Fire Retirement System of Detroit v. Axogen, 2021 WL 1060182 (M.D. Fla. Mar. 19, 2021), where the plaintiffs alleged that Axogen claimed that the potential demand for its medical products was very large because of the sheer number of nerve repair surgeries performed every year in the U.S.  As it turned out, far fewer surgeries were performed annually; in effect, the plaintiffs argued that Axogen overstated the size of its market.  Here’s what the court said in its dismissal order:

Plaintiff … [focuses] in particular on statements made in Axogen’s offering materials and elsewhere that a certain number of people in the United States “each year…suffer”  traumatic PNI [peripheral nerve injuries], which “result in over 700,000 extremity nerve repair procedures,” and that “[t]here are more than 900,000 nerve repair surgeries annually in the U.S.”  Plaintiff argues these statements refer to “present existing conditions.” But the number of injuries occurring “each year” reflects an ongoing state of affairs extending from the present into the future, rather than an observable state of affairs in existence at the specific point in time when the statement is made. Such a statement cannot be determined to be true or false by reference to “present existing conditions,” and is therefore analogous to other present tense statements the Eleventh Circuit has held to be forward-looking.

Thus is a representation about ongoing conditions – the number of nerve repair surgeries performed annually – transformed into a projection about future nerve repair surgeries.  The court did not even appear to consider whether a reader would interpret Axogen’s statements as implying recent past annual figures in this range (a range that, according to the plaintiffs, was wildly inflated).

The problem here is that, in the Seventh Circuit’s words, “Investors value securities because of beliefs about how firms will do tomorrow, not because of how they did yesterday.”  Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989); see also Glassman v. Computervision Corp., 90 F.3d 617 (1st Cir. 1996).  Any representation of current conditions is relevant to investors because they will extrapolate from that to predict future conditions, but if that were enough to make the statement “forward-looking,” well, everything would be protected by the safe harbor.  

2.  Tesla is being sued again, this time by a stockholder who claims that Elon Musk’s … colorful … behavior on Twitter violates his settlement with the SEC, is a threat to corporate value, and that the Board’s failure to rein him in represents a violation of its duty of good faith (and hey, as I was drafting this very post Musk did it again).  While I’m sure there are many things one could say about the lawsuit, the part that struck me was where the plaintiff alleged that the Board is dependent on Musk, in part, because Musk is indemnifying its members for any legal liability.  As the plaintiff puts it:

the Board is insured, and thus indemnified, by Musk personally for a majority of the harm caused by Musk alleged herein. The Board cannot be considered independent in any way from Musk in these circumstances. Musk could refuse to pay out the ‘insurance policy’ if the Board elected to proceed with an investigation of him, and the Board would have every incentive to abandon that investigation.

It is my understanding from Tesla’s SEC filings that the personal indemnification arrangement ended in 2020 and the Board now has an ordinary insurance policy, but the plaintiff is, as I read it, claiming that Musk still provides the coverage for certain acts that occurred in 2020.  The insurance arrangement raised a lot of eyebrows when it was first disclosed, and at the time I wondered what its legal significance would be for Board dependence.  I now look forward to finding out. 

(I should note that when the indemnification agreement was first disclosed, Tesla claimed that Musk’s performance was nondiscretionary, but that still raises questions about what Musk can and can’t dispute – and how interested the Board is in ensuring his solvency).

3.  WeWork!  In addition to the news that the plans to go public are back on – this time via SPAC – it’s the subject of another lawsuit, this time by the former shareholders of a private company that WeWork acquired, using its own stock as currency.  Unsurprisingly, the former shareholders argue that various WeWork officers, including Adam Neumann, overstated the value of WeWork shares when negotiating the deal.  What is surprising, to me anyway, is that the claims are solely brought under Section 10(b) of the Exchange Act.  Section 10(b) claims are very difficult to bring – apart from the higher pleading standards of the PSLRA, they are also relatively narrow in terms of the type of conduct that is deemed prohibited.  Their only real advantage over state claims – whether common law or even blue sky – is their availability for secondary market purchases, and the fraud-on-the-market presumption of reliance.  So I’m wondering why the plaintiffs elected to bring claims solely under Section 10(b), in a case where neither of these advantages are relevant.

4.  Insider trading!  A guy named Jason Peltz was recently indicted for insider trading and related offenses, arising out of trades in companies rumored to be the subject of takeover interest.  What makes this indictment unusual, however, is that it claims that an unnamed Reporter for a “financial news organization” was one of Peltz’s sources, providing Peltz with information about upcoming news stories.  (The indictment tactfully declines to name the Reporter or the news organization, but the stories are identified with sufficient particularity that deducing his identity is a relatively simple task).  So here’s the thing: Though Peltz is charged under 10b-5 for “misappropriating” confidential information, the indictment makes no reference to fiduciary obligations or the duty of trust and confidence.  Meaning, it’s unclear whether the claim is that Peltz misappropriated information from the Reporter, or whether the claim is that the Reporter misappropriated from his publication and intentionally tipped Peltz (echoing the dispute at the heart of United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986)).  On this point, I note that nothing in the indictment suggests any kind of longstanding close friendship between the Reporter and Peltz, but the indictment does mention that the scheme began when Peltz obtained inside information about a takeover bid, purchased the target’s stock, and then tipped the Reporter, who was able to publish a scoop (causing the target’s stock price to rise, and allowing Peltz to cash out).

And … that’s all!

Earlier today, a number of law school securities clinics met online with the SEC thanks to its Office of the Investor Advocate to talk about what they have been seeing in their cases.  By the most recent count, we’re down to only about 12 securities clinics nationwide.  Jill Gross has written about these disappearing clinics.  In my role, I teach business organizations, securities regulation, professional responsibility, and also offer a clinic from time to time.  At UNLV, clinics are not always offered every semester because our faculty also teach other courses.  With the need to turn a clinic on and off, I can’t run the kind of investor protection clinic I ran when I was at Michigan State because the cases just don’t wrap up in a semester.  Although we’ve done it in the past at UNLV with good results for clients and students, it’s not something that works well without attorney support to carry the cases and provide broader assistance when we’re not in session.  With that in mind, we’ve offered a “Public Policy”clinic here this semester with a focus on helping non-profits in preparing comment letters and advocating for their own goals.  This new offering focuses mostly on the advocacy work that other investor clinics do in their comment letters, only with a broader portfolio.  We’ll tackle a few things outside the securities realm as well.  It’s also been challenging because the federal rulemaking environment has been in flux with the Presidential transition.

Still, we’ve also been able to get students some real speaking experience.  A few weeks ago, we had a student team represent a non-party customer in an expungement hearing within the FINRA forum.  They were able to do openings, closings, and cross examinations–even cross examining the CEO of a brokerage firm.  These matters are intense because they happen on an expedited basis.  But they also don’t require the kind of long-term commitment that an ordinary customer arbitration does.  Today, that same student team was able to turn around and present to the SEC about the experience and interact with sitting SEC Commissioners.  Although outside the securities realm, we also had another student team prepare a white paper and present at the Consumer Product Safety Commission, sharing views on how the CPSC might regulate consumer products with AI and machine learning technology embedded in the devices.  This work gets us into some fascinating areas and gets the students writing, presenting, and having client experiences. 

But there are still too few of these clinics and we need more of them.  They play a vital role because the economics don’t make sense for most ordinary securities attorneys to take cases with relatively smaller damages or take on matters where there isn’t any money to recover.  If you get swindled out of a million dollars, attorneys will fight for you.  If you get taken for forty grand, many lawyers will pass because they have to put food on their own tables.  Of course, this leaves bad actors free to continue to take people for significant amounts without much fear that they’ll be held accountable for swindling investors.

A short time ago, the SEC’s Investor Advisory Committee recommended financial support for law school clinics.  I know that if we had funding, I could hire counsel, help more people, help a broader class of people, and provide more opportunities for our students.  We might eventually get something similar for securities law to what already exists for tax clinics, but it’s still uncertain whether we’ll get there.  Absent that, it seems likely that these kinds of clinics are going to continue to vanish.  

A speculative frenzy appears to have taken hold of markets, extending to everything from GameStop shares to sports cards and anything blockchain (again).  Caught up in the mania are SPACs – specifically the blank-check firms trading before an acquisition target has been identified.

The difficulty, as the Financial Times recently reported, is that retail shareholders caught up in the SPAC craze aren’t necessarily interested in voting their shares when it comes time to consummate a merger.  Worse, a large number of them may have sold their shares after the record date, leaving no one to actually cast the ballot.

Which is why Switchback Energy Acquisition Corporation recently issued the most extraordinary press release:

• Stockholders as of the Close of Business on December 16, 2020 Should Vote Their Shares Even if They No Longer Own Them

…

Switchback Energy Acquisition Corporation (NYSE: SBE) (“Switchback”) today announced that it convened and then adjourned, without conducting any other business, its virtual Special Meeting of Stockholders to February 25, 2021 at 10:00 a.m., Eastern time (the “Special Meeting”), to allow for more time for stockholders to vote their shares to reach the required quorum and approve the required proposals….

Switchback has received overwhelming support for the Business Combination. At the time the Special Meeting was convened, approximately 99.9% of the proxies received had been voted in favor of the transaction. However, since holders of approximately 45% of the outstanding shares submitted proxies to vote, the necessary quorum of a majority of the outstanding shares was not present. Switchback requests that any investor who held shares of stock in Switchback as of the close of business on December 16, 2020 and has not yet voted do so as soon as possible in order to avoid additional delays….

Can I still vote if I no longer own my shares?

Yes, if you owned shares as of the close of business on December 16, 2020, the record date for the Special Meeting, you can still vote your shares even if you no longer own them.

This is, I must say, quite remarkable.  I mean, there have long been concerns about “empty voting,” i.e., casting ballots for shares in which you have no economic interest, including casting ballots for shares that have since been sold.  See, e.g., Henry T.C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. Cal. L. Rev. 811, 835 (2006).  Here, everyone’s assuming that the vote was a mere formality and the reason the shares were not voted was that retail shareholders are indifferent, but what if some shareholders disfavored the merger?  Pushing the deal through with the ballots of former shareholders would hardly be fair to them.

Which gets to the legal question of whether this is even okay.  Delaware has vaguely suggested, you know, maybe not.  For example, in In re Appraisal of Dell, 2015 WL 4313206 (Del. Ch. July 13, 2015), VC Laster held:

even the right to control how shares vote transfers with the shares, notwithstanding the legal expedient of the record date, because the subsequent holder can compel the seller to issue him a proxy (assuming the seller can be identified)

In support, he cited Commonwealth Assocs. v. Providence Health Care, Inc., 641 A.2d 155 (Del. Ch. 1993), where Chancellor Allen expressed “doubt” that a contract for the sale of shares that allowed the seller to retain the right to vote would be “be a legal, valid and enforceable provision, unless the seller maintained an interest sufficient to support the granting of an irrevocable proxy with respect to the shares.”  See also In re Canal Construction Co., 182 A. 545 (Del. Ch. 1936) (“As between a transferror who has parted with all beneficial interest in stock and his transferee, the broad equities are all in favor of the latter in the matter of its voting.  While the transferee may not himself be qualified to vote because he had not caused the stock to be registered in his name …, it does not necessarily follow that the transferror may exercise the voting right in defiance of the transferee’s wishes. So far have courts recognized the equity of the true owner of stock to control its voting power as against the registered holder, that the latter has been required to deliver a proxy to the former.”); In re Giant Portland Cement Co., 21 A.2d 697 (Del. Ch. 1941) (“A mere nominal owner naturally owes some duties to the real beneficial or equitable owner of the stock; and even if the right to demand a proxy is not exercised, if the vendor exercises his legal right to vote in such a manner as to materially and injuriously affect the rights of the vendee, he is, perhaps, answerable in damages in some cases.”)

Those cases were about disputes between the transferor and the transferee regarding the manner in which shares would be voted, but it should also be noted that in the context of “vote-buying” allegations, Delaware has suggested that it is illegitimate to divorce economic interest in shares from the voting rights attached to them.  See Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010).

Anyhoo, we can add this to the growing list of “concerns about SPACs,” which is why the SEC is reportedly taking a closer look.  Of course, if the world is finally opening up post-covid, speculative trading may also subside, and the problem may take care of itself.