Very quick post this week as I comment on DoorDash’s recently-publicized S-1, and the forum selection clause contained in its current certificate of incorporation:

Unless this corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of this corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of this corporation to this corporation or this corporation’s stockholders, (iii) any action arising pursuant to any provision of the General Corporation Law or this Restated Certificate of Incorporation or the Bylaws of this corporation (as either may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten (10) days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of this corporation shall be deemed to have notice of and consented to the provisions of this Article XIV. Unless this corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.

As I understand it, upon the completion of the offering, DoorDash will move this clause from the charter into the bylaws.  Though (as I’ve previously said) I have questions about the charter vs. bylaw issue, the substance of the clause will remain the same.

What’s notable here is how DoorDash could have – but did not – choose to go much further than it did.

As I previously blogged, Boeing has a forum selection bylaw that requires all “derivative” claims to be filed in Delaware Chancery.  I strongly suspect that Boeing only intended the clause to apply to traditional fiduciary claims, but after the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi – permitting corporate constitutive documents to limit claims brought under the federal Securities Act – Boeing sought to have its bylaw applied to a derivative claim alleging violations of Section 14 of the Exchange Act.  Because state courts do not have jurisdiction over Exchange Act claims, in practical effect, Boeing’s argument meant that the derivative Section 14 claim against it needed to be dismissed.  A district court bought that argument, and the case is now on appeal to the Seventh Circuit.  Separately, the plaintiffs have filed a declaratory judgment action in Delaware challenging the bylaw as contrary to Delaware law.

Facebook is currently making a similar argument.  Facebook, like several companies, was hit with a derivative lawsuit in California federal court challenging its lack of diversity (which Marcia blogged about here).  Among other claims, the plaintiff is alleging false proxy statements in violation of Section 14 that induced shareholders to vote in favor of Facebook’s directors and approve its executive pay packages.  But because Facebook has a charter provision requiring that “derivative” actions be filed in Chancery, Facebook is moving to have the case dismissed, using Boeing as precedent.

Thus, it is striking to me that DoorDash chose not to push the envelope here, and is explicitly permitting claims to be filed in federal court if Delaware Chancery does not have jurisdiction.  This is, by current standards, a remarkable show of restraint.

One thing that does occur to me, though: In general, plaintiffs cannot bring federal claims for damages from a false proxy statement if they cannot show that the proxy statement was an “essential link” in accomplishing the challenged transaction.  In practical effect, the proxy statement must have solicited necessary shareholder votes.  But DoorDash – and, for that matter, Facebook – have dual-class share structures that give one person a controlling stake. Under those circumstances, the votes of the minority shareholders will rarely be necessary to legally effect a transaction.  Thus, DoorDash may feel that allowing Section 14 claims (derivative or direct) to be filed in federal court presents a fairly minimal risk of liability, when weighed against the headaches associated with trying to bar them.

Some time ago, one of my students reached out to me about strategies for improving race relations at our law school. After some discussion, we arrived at the idea of starting an informal brown-bag lunch group that would discourse on race. The student invited 10 students, taking care that the group would be diverse as to race. He explained that the goals of the group would be to:

(1) Gain some new appreciation of racial diversity;

(2) Gain some new understanding of people with a different racial identity;

(3) Learn about ways of using diversity to the advantage of your legal practice/business/personal life/community;

(4) Change negative assumptions about race to positive assumptions; and

(5) Motivate every participant to leave his/her comfort zone and take some positive step towards change and reconciliation.

We developed a simple exercise for the first meeting. We put together a questionnaire (in Microsoft Word) and emailed it to all the participants in advance of the meeting. We asked them to complete the questionnaire in the word document (so no identifying handwriting), print it out, and bring it to the lunch. We explained that the questionnaires were to be anonymous, and we asked students to take care not to leave any names or other identifying information on their printed answers. When the students arrived for lunch, we asked them to drop them in a box at the entrance. Once everyone had arrived, we (a) shuffled up the papers in the box, (b) pulled them out, (c) picked one question, (d) read ALL the answers back to back, and then (e) discussed.

We thought we would get through all or most of the questions at the first lunch. We ended up only getting through two! The discussion was so rich, honest, and enlightening. I left feeling like I had just experienced something very special—like the scales had fallen from my eyes. The anonymity offered an opportunity for every participant to really let loose! They had no fear of offending others, or of being judged. It was a free space—and there was real, authentic discourse—not debate or argument. We ended up meeting every other week for the rest of the year. We never did finished all the questions on the questionnaire, but we sure grew closer and gained a better understanding of one another.

Here are some sample questions we included on the questionnaire:

  • Use one word to describe the current state of race relations in the U.S. today.
  • Use one word to describe the current state of race relations here at the law school/at this firm/at this company.
  • What is most likely to frustrate/anger you when conversation turns to race?
  • How do you explain race?
  • What does “diversity” mean to you?
  • What does “inclusion” mean to you?
  • List one positive impact someone of another race has had in your life.
  • List one misconception you think people of other races have about members of your race.
  • When are you most uncomfortable talking about race? (With family? With friends? Among members of another race? With strangers?)
  • How could those around you make it easier to talk about race?
  • What generalizations/stereotypes about your race upset you most?
  • Are there any generalizations/stereotypes about your own race that you think have validity?
  • What is a question you have always wanted to ask someone of another race, but would be afraid or embarrassed to ask?
  • What is your most optimistic vision for race relations in the future?

The exercise developed out of a lunch group, but it can be employed in the classroom as well. It can also be an effective instrument for improving race relations in law firms and businesses.

Pfizers’s CEO sold about 60% of his stake in the company on the same day that Pfizer announced vaccine trial results.  These sales reportedly occurred pursuant to a pre-arranged 10b5-1 plan, which Pfizer adopted on August 19, 2020.  Pfizers’s stock rallied over 14% on the release of vaccine trial information on the day the CEO liquidated nearly two-thirds of his holding.

Of course, Pfizer is not the only company to release curiously positive results in periods coinciding with their pre-arranged 10b5-1 plans.  Moderna also released positive information on a similar schedule.  Wharton’s Daniel Taylor provided context:  

Taylor, of the Wharton business school, said the stock sales by Pfizer’s CEO brought to mind similar concerns with another coronavirus vaccine-maker, Moderna. As NPR reported in September, multiple executives at Moderna adopted or modified their stock-trading plans just before key announcements about the company’s vaccine. Those executives have sold tens of millions of dollars in Moderna stock, even though the company has not completed its vaccine trials.

“It’s troubling to me that the general counsel or the internal controls of these companies would consider it legitimate to adopt a 10b5-1 plan one day before a major vaccine announcement,” said Taylor. “If this isn’t a wake-up call for the SEC and a wake-up call that we need to reform these 10b5-1 plans, I don’t know what it is.”

The SEC may need to take a close look at 10b5-1 plans if the research indicates that companies are manipulating information flow to the markets in order to maximize their personal returns around pre-determined trading dates.  I’m not certain whether these plans must now be publicly disclosed in advance or not, but that could be a simple place to look first.

Update:

Thanks to Haskell Murray, Kurt Wolfe and others for contributing and pointing out that these plans are not currently mandatory disclosure items:

There are also doubts out there about whether or not we should require these plans to be disclosed and whether the SEC or Congress should make that decision. My tentative opinion is that SEC may want to mandate disclosure and continue to study the issue. Others, including Max Schatzow, think it’s probably best for Congress to make that determination.

UPDATE #2:  John Anderson has written about the challenges with these trading plans.  Much more informed thinking available here.

Over at Law & Liberty (here), David Osborne argues that Uzuegbunam v. Preczewski could impact “attack and retreat” strategies employed by labor unions.  Here is a brief excerpt:

Attack, retreat. Attack, retreat. Unfortunately, this is the tactical offensive increasingly used by the country’s biggest public-sector unions to keep dues money flowing. They “attack” by imposing unconstitutional, restrictive policies on public employees but “retreat” whenever they are challenged in court. Historically, it has allowed union officials to avoid important court rulings that would otherwise allow public employees to choose whether to become or remain union members.

But the Supreme Court may put an end to it this term….

The Court will hear a free speech case, Uzuegbunam v. Preczewski, that could have profound implications for public-sector union members who want to resign their union membership but keep their jobs. On its face, the case [involving two college students who distributed religious literature outside their college campus’s “free speech zones”] has nothing to do with public-sector unions. But Uzuegbunam has turned into a case about an important justiciability issue called “mootness”—and about the courts’ willingness to protect constitutional rights.

First: To all the veterans — thank you for your service!  As an immigrant who became a U.S. citizen in college and served 6 years of active duty in the U.S. Army before attending law school, I am proud to have joined you in taking the oath to support and defend the Constitution of the United States against all enemies, foreign and domestic.

Second: Jody Greene and Sharif Youssef have published “Human Rights after Corporate Personhood: An Uneasy Merger” (you can order an examination copy here or pre-order via Amazon here).  I am grateful to have had the opportunity to contribute a chapter: “Killing Corporations to Save Humans: How Corporate Personhood, Human Rights, and the Corporate Death Penalty Intersect.”  Here’s the University of Toronto Press pitch:

Human Rights after Corporate Personhood offers a rich overview of current debates, and seeks to transcend the “outrage response” often found in public discourse and corporate legal theory. Through original and innovative analyses, the volume offers an alternative account of corporate juridical personality and its relation to the human, one that departs from accounts offered by public law. In addition, it explores opportunities for the application of legal personality to assist progressive projects, including, but not limited to, environmental justice, animal rights, and Indigenous land claims.

Presented accessibly for the benefit of non-specialist readers, the volume offers original arguments and draws on eclectic sources, from law and poetry to fiction and film. At the same time, it is firmly grounded in legal scholarship and, thus, serves as an essential reference for scholars, students, lawmakers, and anyone seeking a better understanding of the interface between corporations and the law in the twenty-first century.

BLPB Readers, below are hiring announcements of the Kelley School of Business at Indiana University:

Tenure Track Posting

The Kelley School of Business at Indiana University seeks applications for a tenured/tenure-track position in the Department of Business Law and Ethics, effective fall 2021. The candidate selected will join a well-established department of 26 full-time faculty members who teach a variety of courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. It is anticipated that the position will be at the assistant professor rank, though appointment at a higher rank could occur if a selected candidate’s record so warrants. Complete posting here: Download BLE tenure-track ad (to start fall 2021)

Lecture (non tenure track) Posting

The Kelley School of Business at Indiana University seeks applications for a full-time, non-tenure-track lecturer position in the Department of Business Law and Ethics, effective fall 2021. The candidate selected will join a well-established department of 26 full-time faculty members who teach a variety of residential and online courses on legal topics, business ethics, and critical thinking at the undergraduate and graduate levels. Lecturers have teaching and service responsibilities, but are not expected to engage in research activities. Complete posting here: Download BLE Lecturer ad (to start fall 2021)

 

In today’s post, I thought I’d share with BLPB readers a few tidbits of information that caught my eye this morning:

1) Today, the Financial Stability Board (FSB) released the “2020 list of global systemically important banks (G-SIBs).”  Topping the list of 30 are Citigroup, HSBC, and JP Morgan Chase.

2) The FSB also recently released a discussion paper for public consultation: Regulatory and Supervisory Issues Relating to Outsourcing and Third Party Relationships.  Reading it has now been added to my “do to list” as it addresses issues such as banks’ reliance on cloud computing, a topic I wrote about in Banking on the Cloud (w/David Fratto and Lee Reiners), an article for last year’s BLPB symposium.

3) Bill Ackman, CEO of the hedge fund Pershing Square, is “hedging the pandemic again.” 

4) Ok, so this one didn’t really catch my eye so much as I went looking for it!  I’m working on finishing this year’s BLPB symposium article… Huang and Takát’s The CCP-bank nexus in the time of Covid-19 shares the happy news that despite the intense market volatility of March 2020, clearinghouses performed well.  However, procyclical margin calls by clearinghouses did create liquidity squeezes during this time of market stress.  The authors state that  “Going forward, the interaction of CCPs [clearinghouses] with clearing member banks is critical (“CCP-bank nexus”). Importantly, actions that might seem prudent from an individual institution’s perspective, such as increasing margins in a turmoil, might destabilise the nexus overall.  Therefore, central banks need to assess banks and CCPs jointly rather than in isolation.”  Sounds incredibly wise to me!  

The University of Alabama School of Law seeks to fill as many as two tenure-track positions for the 2021-22 academic year. Candidates must have outstanding academic credentials, including a J.D. from an accredited law school or an equivalent degree (such as a Ph.D. in a related field). Entry-level candidates should demonstrate potential for strong teaching and scholarship. The primary focus of these positions is in Contracts and Torts; however, qualified applicants in other areas may be considered. Among our secondary interests are Family Law and Business Law. We welcome applications from candidates who approach scholarship from a variety of perspectives and methods. The University embraces diversity in its faculty, students, and staff, and we welcome applications from those who would add to the diversity of our academic community.

Interested candidates should apply online at https://facultyjobs.ua.edu/postings/47619. Salary, benefits, and research support will be nationally competitive. All applications are confidential to the extent permitted by state and federal law; the positions remain open until filled. Questions should be directed to Professor Fred Vars, Chair of the Faculty Appointments Committee (facappts@law.ua.edu).

The University of Alabama is an Equal Employment/Equal Educational Opportunity Institution. All qualified applicants will receive consideration for employment without regard to race, color, religion, national origin, sex, sexual orientation, gender identity, gender expression, pregnancy, age, genetic or family medical history information, disability, or protected veteran status, or any other legally protected basis, and will not be discriminated against because of their protected status. Applicants to and employees of this institution are protected under Federal law from discrimination on several bases. Follow the links below to find out more.

“EEO is the Law” http://www1.eeoc.gov/employers/upload/eeoc_self_print_poster.pdf 
“EEO is the Law” Poster Supplement http://www.dol.gov/ofccp/regs/compliance/posters/pdf/OFCCP_EEO_Supplement_Final_JRF_QA_508c.pdf

Perhaps of interest (full statement here):

Press Release: According To a New Siemens Stiftung Study, Social Enterprises Are Expected To Create Much Needed Jobs in Africa

The comprehensive analysis in 12 selected African countries estimates that, by 2030, 1 million new jobs can be created by local social enterprises (SEs). In addition, recommendations are outlined on how to support SEs in leveraging their job creation potential. The study, Social Enterprises as Job Creators in Africa – The Potential of Social Enterprise to Provide Employment Opportunities in 12 African Countries 2020-2030 is available as trilogy – Part I: Main Report; Part II: Country Profiles; Part III: Case Studies….

Overall, SEs focus on social effects through their products and services but also through the jobs and income opportunities they provide to marginalized groups.

This week I want to call everyone’s attention to a fascinating new paper by Edwin Hu, Joshua Mitts, and Haley Sylvester, Index Fund Governance: An Empirical Study of the Lending-Voting Tradeoff.

As the authors explain, for a long time, the SEC prohibited mutual funds from lending their shares to short-sellers if doing so would interfere with the funds’ stewardship obligations.  As a result, funds typically would recall any loaned shares in time to vote them at the annual shareholder meeting.  However, in 2019, the SEC changed its rules to allow funds to loan their shares even if doing so would sacrifice their ability to vote, so long as it would be in the funds’ best interest.  Hu, Mitts, and Sylvester study the effects of the rule change and find that the number of shares available to borrow around the time of shareholder meetings jumped by 58% in companies with a high level of index fund ownership, and there are increases even when important matters, like proxy fights, are on the ballot.  The extra shares don’t result in greater short interest, but they do apparently take them out of the voting pool – or potentially make them available for activists to vote.

The really interesting question this raises is whether these managers really are acting in the funds’ best interest – trading the value of the vote against the value of the lending fees – or whether instead, perhaps due to a fee split between the fund and the adviser, the managers are sacrificing the interests of the fund in order to benefit the adviser.  It’s complicated; not every share that becomes available to borrow actually does get lent out, which, as I understand it, means no fees are earned but the vote is still lost.  On the other hand, for some votes, the fund may reasonably calculate that there is unlikely to be an impact on value, or that the fund’s votes are unlikely to be pivotal (on this, I direct interested readers to Fatima Zahra Filali Adib’s paper, previously highlighted in this space, observing that funds can determine when their votes are likely to matter to outcomes, and they allocate attention accordingly).  That said, the authors also tell the tale of a company called GameStop, where activists won a proxy contest, arguably because index fund holders – who would otherwise have voted with management – loaned their shares instead of voting them.

Relatedly, Joshua Mitts has just posted another paper on share lending, where he argues that passive funds that are part of large mutual fund complexes can use negative information about a stock gleaned from the active side of the business to raise the prices they charge to short sellers who borrow their shares.  Doing so allows passive funds to, in a way, earn profits from “active” participation in the market.  Mitts also claims that this activity helps make prices more efficient, which is ultimately to the long term benefit of passive investors.