This week, I want to call attention to two recent Delaware decisions involving disputes over the meaning of contractual language in merger agreements, because I find the purity of the interpretive questions posed to be aesthetically pleasing. 

First up, we have Schneider National Carriers v. Kuntz, where the court denied cross motions for summary judgment on the grounds that the contract was ambiguous.  Schneider acquired all of the stock of W&S in exchange for upfront cash payments and earnouts pegged to meeting certain annually-increasing EBITDA targets over the following three years.  As is common in earnout arrangements, Schneider agreed to certain operating covenants, the most critical of which was a covenant that Schneider would, during each Measurement Period, “cause one or more of the Acquired Companies to acquire, in the aggregate, not less than sixty (60) class 8 tractors.”

The question for the court was whether this language meant that Schneider should actually grow the total number of tractors by 60, or could those 60 include replacements for tractors that were retired?  If the latter, Schneider was in compliance; if the former, not so much, because Schneider retired more tractors than it acquired.  In the end – as one would expect if assets were shrinking – the acquired companies did not meet their EBITDA targets, leading to the lawsuit.

At this point I have to pause to admire the beauty of the problem.  It is sheer elegance in its simplicity.

The court had earlier determined the language to be ambiguous in cross-motions for judgment on the pleadings, so now, at the summary judgment stage, it looked to extrinsic evidence.  And what was this evidence?  Well, there was a lot of testimony regarding oral negotiations – and unsurprisingly, each side offered differing accounts – so the real action was in the documents.  And that showed that the EBITDA targets themselves were based on projections that assumed tractor growth.  And growth was actually written into Schneider’s early drafts of the stock purchase agreement, but somewhere along the way, Schneider deleted reference to growth while maintaining reference to acquiring 60 tractors, and the sellers never called Schneider on it.

The court’s takeaway from all of this was that factual questions remained, and I suppose that’s not unreasonable, but … come on.  If you’re a seller looking for an earnout, and all of your negotiations are focused on the post-merger conduct of the business, are you going to agree to a provision that theoretically gives the buyer complete freedom to discard all the tractors in the fleet – which consisted of several hundred tractors at the time of the acquisition – so long as 60 new ones are purchased?  Probably not.  I mean, even if you assume that Schneider could only retire tractors based on some concept of “good faith” or business continuity, why would anyone specify that precisely 60 tractors had to be added if they anticipated the possibility of a relatively unconstrained offsetting decrease?  Sixty additions are meaningless if you have no idea how many are being eliminated.

A more cynical interpretation would be that the buyer deleted critical language as drafts were exchanged and hoped—correctly—that sellers would not notice the significance until it was too late.  But, we’ll see what happens as the case goes forward.

Moving on, we have RoundPoint Mortgage Servicing Corp. v. Freedom Mortgage Corp.  RoundPoint was in the business of originating, refinancing, and servicing residential mortgage loans, and almost all of its stock was held by RPFG.  Freedom agreed to acquire RoundPoint at a valuation of 7.5% above RoundPoint’s book value just before closing, minus $4,150,000.  In practical effect, then, and excluding the $4 million deduction, every dollar by which RoundPoint’s book value increased meant an increase in payments to RPFG of that amount, plus 7.5%.

RoundPoint was concerned that it might have to pay certain margin calls before closing, and – because the merger agreement did not permit it to sell assets – would have insufficient liquidity to do so.  As a result, Freedom agreed in Section 7.02 of the Merger Agreement to allow RPFG to lend RoundPoint the necessary funds, but closing required that RoundPoint “shall have repaid, all amounts outstanding under the RPFG Facility.”

The problem was that after RPFG advanced those funds to RoundPoint, it simply forgave most of the debt.  By doing so, RPFG functionally added what appears to have been over a hundred million dollars to RoundPoint’s book value, which, of course, meant Freedom was obligated to pay RPFG 7.5% over that amount.

Freedom argued that unless RoundPoint repaid the full amounts loaned – regardless of any formal debt forgiveness – Freedom was relieved of its closing obligations.  Was it?

Here, we have a delightful dispute over emphasis: is the critical phrase “shall have repaid,” so that if RoundPoint did not actually repay the amounts loaned, the condition is not satisfied?  Or is the critical phrase “all amounts outstanding,” so that the condition is satisfied so long as there is no outstanding debt to RPFG?

A trial was held solely on Section 7.02, with additional proceedings regarding the rest of the Agreement to be held later.  And, based solely on that Section, without reference to other provisions, the court held for RoundPoint.  In the court’s view, “If the intent was to ensure that debt be repaid and not forgiven, that intent is expressed poorly … [B]ecause Section 7.02(f), as most naturally read, does not impose a restriction on debt forgiveness, and because the Merger Agreement shows that where the parties sought to impose such restrictions they knew how to do so, I find that the parties did not intend Section 7.02(f) to prohibit forgiveness of debt under the RPFG Facility.”  The court allowed that – after examination of the remainder of the merger agreement – it might come out differently.

Now, again, color me skeptical.  At first, the contract capped the total amount of RPFG’s loan at $40 million, but as RoundPoint’s assets deteriorated and the margin calls increased, Freedom repeatedly authorized RPFG to raise the limit.  Yet under RoundPoint’s reading, RPFG had the unfettered option to require total repayment, or none, or anywhere in between, always with the knowledge that Freedom would pay 7.5% on top of every dollar of debt forgiveness. Which means that as a practical matter, to accept RoundPoint’s argument, you have to believe that the more the company’s value declined, the more that Freedom agreed to pay.  If that’s the correct interpretation, I don’t see why you’d even bother calling these loans to RoundPoint at all; they’re more like exceptionally seller-friendly purchase price adjustments.

And the court understood all of that, but nevertheless found RoundPoint’s reading more “intuitive.”*

In any event, I go through this exercise because I am charmed by the classroom-ready pristineness of the dispute in each case.  I’m also amused by the tolerance of Delaware courts for contract interpretations that would hand limitless discretion to one party to decide how much to screw over the other.  But, well, that’s contracts for you; I’ll just go back to my corporate law corner where we talk about equity and fairness and duty.

 

*There is a smidge more to it; apparently, in the course of litigation, RPFG offered to forego the 7.5% premiums on the forgiven debt, but Freedom still sought to avoid closing. And presumably that’s because even without the premiums in the mix, Freedom would still be stuck paying a book value increased by RPFG’s capital infusions for a business that had significantly declined.  The court figured that viewed through a good-faith-and-fair-dealing lens, it wasn’t clear whether the missing covenant would have required full repayment by RoundPoint, or whether it would have required something more along RPFG’s foregone-premiums compromise. And without that clarity, there was no term the court could imply into the deal.

Kevin Haeberle has a new paper entitled Marginal Benefits of the Core Securities Laws.  He argues that for long-term, diversified investors, additional disclosure-oriented, insider-trading-related, or anti-fraud protections are not likely to provide substantial benefits to these investors.  The paper is worth reading simply for its clear explanations of nuanced market dynamics, as animated by principles from market microstructure economics.  It lucidly explains how bid-ask spreads and trade “footprint” costs arise, and the role information asymmetry plays in each. He argues that these measures of information asymmetry costs for long-term, diversified investors are now extremely limited. He also argues that a number of market mechanisms allow these investors to avoid these costs more generally. With, for example, bid-ask spreads for most large public corporations now literally at their legal minimum size, we will most likely not generate any real investor protection benefits by trying to protect investors by further reducing information asymmetry in secondary market trades. Interestingly, as he explains, this dictates that there is little to gain from using the core securities laws to reduce information asymmetry even if the law and economics thinking on how price discounts protect these same investors is wrong. Investor protection efforts should therefore be the focus on other areas of securities regulation, such as market structure and broker-dealer regulation.

The draft makes me think about Ann Lipton’s paper pointing out that many of the purportedly investor-related reforms pushed in recent years haven’t really been about investors. There may be good reasons to want additional disclosures from corporations–but we should not pretend that we need the information for investors to be able to efficiently trade stocks.

As I shared last week (here), many of us who study banking law and regulation are watching the path of Lacewell v. Office of the Comptroller of the Currency (OCC), a case about the OCC’s power to grant federal fintech charters to nondepository institutions, that is in the Second Circuit Court of Appeals.  We’ve been treated to dueling banking law prof amicus curiae briefs (additional amicus briefs were also filed). In this week’s post, I’ll highlight the brief written by Professor David Zaring at the Wharton School. Download Zaring_Brief

Zaring has previously written about OCC chartering practices (here). He argues that “the OCC has the authority to issue special purpose national bank charters for financial technology (fintech) companies pursuant to the National Bank Act and 12 C.F.R. §5.20(e)(1).” Hence, the District Court’s judgement should be reversed.

First, as Zaring notes, the core issue here really is: “what is banking?” He argues that the “the business of banking” is “susceptible to more than one meaning,” and that receipt of deposits is not an essential aspect of what it is to be a bank. The plain text of 12 C.F.R. §5.20(e)(1) “allow[s] national banks to obtain an SPNB [special purpose national bank] charter so long as they conduct at least one of three enumerated functions-(1) receive deposits, (2) pay checks, or (3) lend money.” Second, the OCC has a history of taking a cautious, “reasoned approach to charters,” and it “is not trying to hide an elephant in a mousehole or expand the definition of the ‘business of banking’ out of all recognition…” Indeed, Zaring asserts, “the agency’s past practice with special charters illustrates its caution.” Third, it’s costly and unwise to require online fintech firms “to tailor their businesses by state borders,” because of the U.S.’s dual banking system. “Few industries benefit more from regulation at the national level than industries that exist on the internet.” Fourth, the lack of a federal fintech charter is costly to the U.S. in terms of “investment in financial technology,” and international competitiveness in this arena. Finally, the OCC’s “chartering decisions are reviewable,” and, “if appropriate,” the “Court should clarify” this.

Zaring does an excellent job of explaining why the OCC has the authority to grant federal fintech charters to nondepository institutions, and I encourage BLPB readers to review his brief. As I previously noted, the answer to what might seem to be a technical banking law question of interest to few (and perhaps uninteresting to most) will have tremendous practical ramifications.

Stay tuned for Part III! I’ll plan to update BLPB readers when the Second Circuit Court of Appeals issues its decision.

On Saturday, I taught Business Planning to the Class of 2020 Professional MBA (ProMBA) Students in the Haslam College of Business at The University of Tennessee, Knoxville.  I have taught business law topics in this program for a number of years now and thoroughly enjoy it as a change-up to teaching law students.  This class is no exception.  And two of the students from this cohort plan to go to law school at some point in the next few years.

The class sessions on Saturday–four hours worth–were taught in a hybrid format, with some of the students in the classroom and some participating in the class remotely through Zoom.  Starting Wednesday, I will be teaching my Business Associations class sessions in a synchronous hybrid flex format with half of the students rotating in and out of the classroom in accordance with a predefined schedule.  The ProMBA program uses classrooms with technology different from that available at the College of Law, did not afford me Zoom hosting privileges that I have at the College of Law, and allows eating and drinking in the classroom.  Nevertheless, parts of the teaching I did on Saturday are analogous to what I will be doing at the College of Law in my Business Associations course.  Given that some of you also may be teaching in a similar format, I offer a few observations on Saturday’s hybrid teaching experience here.

  • Sanitizing:  An abundant supply of sanitizing wipes were made available.  The course administrator noted that she had sanitized my work station (podium, keyboard, mouse, mic) before I had arrived, but she was not offended when I also sanitized everything.  A ziplock bag with a travel-sized bottle of hand sanitizer was given to me for my use during class (although I had brought my own).  That was a nice touch.
  • Hosting:  I wish I had asked for hosting or co-hosting status for the class Zoom meeting room.  I wanted to offer a short poll to the remote students, but there was a miscommunication between me and the program administrators.  As a result, my poll had not been added to the meeting in advance.  Also, when the course administrator put the remote students into breakout rooms for a class exercise, I was put into one room as opposed to being able to easily move between rooms.  I worked around these issues, but I would have been able to smooth over these bumps in the class plan execution if I had been the Zoom meeting host or co-host.
  • Producer: The course administrator served as a “producer” for the class session–a term that is being used to describe the person who is monitoring remote students for participant hand raises, questions, comments, technology issues, and course and college compliance.  She sat in the back of the room and raised her hand when a remote student had a question or comment.  At my request, she also conveyed information to the remote students through the chat.  This worked well, although the chat comments and questions sometimes were predictably a bit out-of-sync with the instruction.
  • Acoustics:  The voices of the physically present students did not carry well in the room or through the room mics to the remote students.  I tried to summarize or repeat the questions being asked or comments being made in the physical classroom since I was mic’ed.
  • Masks:  Mask-wearing was a somewhat sloppy/noncompliant.  The masks of some students appeared to be too small to cover their mouth and nose.  Students sometimes (inadvertently, it appeared) pulled their masks down off their noses or even down below their chins.  They seemed to be unaware they were moving/removing their masks.  When students wanted eat a snack or have a drink, of course, they had to at least move–if not remove–their masks to do so. For the most part, however, the students were not close enough to present a marked danger to me or each other.  And there was no belligerent or other refusal to “mask up.”
  • Gathering:  Humans are natural attractive magnets.  During the in-class exercise, while most students in the classroom did as I asked and stayed in their seats or in other “eligible” seats in the classroom, I did caution one group to adjust their masks and distance themselves from each other because they stood up and moved to within six feet of each other.  They seemed unaware that their masks may not have been fully covering their mouths and noses and that they had closed in on each other’s space.  (This incident occurred near the end of our third 75-minute session.)  But I admit that the students did not look overly concerned that I was offering them cautionary instructions . . . .

I am sure there is more that I could think of if I put my mind to it.  But this is the core of what I noticed.  I did not sense that I was exposing myself to an uncomfortable level of risk.  Teaching in a hybrid format with these ProMBA students (who by now know me reasonably well) was challenging.  In the end, it was neither a bad teaching experience nor the best teaching I have ever done.  But teaching and learning were happening during the class sessions.  I hope that when I am teaching in my home space–with familiar technology, as the host of my class Zoom meetings, with no eating or drinking permitted in the classrooms–things will go a bit more smoothly.  Fingers crossed!

Attention BLPB readers:

The Ohio State Business Law Journal (OSBLJ) is a student-run and student-edited journal that provides a forum for quality, cutting edge articles related to business and corporate law. We publish bi-annually: one edition on scholarly articles and the other edition on student note written by our journal members. We are currently accepting submissions from legal scholars for our scholarly edition, which will deal with the question of whether the business legal structure hamper coping with crises.

We believe that in addition to the relevancy of this topic to the current times, this edition will tie in nicely with the theme of our upcoming symposium in March 2021, “Confronting Crises: Preparing for the Unexpected.”  In this symposium, we will have various panels, including: whether the government should take ownership of failing companies; contracting for the worst case scenario; effects of government response to crises; and tax law—the impact of government intervention and the effects it will have on businesses.

We are currently accepting submissions via Scholastica, as well as submissions via email. Any questions, as well as submissions, may be emailed to Mayu Nakano at nakano.17@osu.edu. We look forward to hearing from you!

 

Since 1892, the Uniform Law Commission has deeply affected the practice of law – especially business law.  Uniform Acts like the Revised Uniform Partnership Act (RUPA) and the Uniform LLC Act are typical examples of the types of frameworks that the ULC typically develops. They are laws that serve as a guide to private transactions and civil liability.  Perhaps the most famous example of this has been the Uniform Commercial Code.

More recently however, the ULC has begun to study, draft, and approve laws that, if adopted, would expand its traditional scope – providing more regulatory and criminal oversight of various issues rather than more commercial transactions.

More after the jump…

Continue Reading Guest Blog: ULC’s work on Coercive Labor Practices in Supply Chains, Part 1

In Juul Labs v. Grove, Vice Chancellor Laster held that inspection rights are a matter of internal affairs, and therefore California’s Section 1601, which grants inspection rights to shareholders of California corporations and foreign corporations with headquarters in California, is invalid as applied to Delaware corporations.

There are a lot of policy implications here, because Juul arose in the context of a private company that required shareholders to waive their inspection rights under Delaware law.  Assuming Delaware treats that waiver as valid – and Laster did not reach that question – critical sources of information could be denied to private company investors.  And, as I previously blogged about the Juul dispute, if Delaware finds such contractual waivers valid, the next step is for companies to insert them into their charters and bylaws.  If that’s valid – and after Salzberg v. Sciabacucci, it could be – it would mean that 220 inspection rights could be left a functional dead letter for both private and public companies.

But actually, the interesting part here for me is the procedural aspect.  Now, the exact contours of the internal affairs doctrine have always been unclear – see, e.g., Mohsen Manesh, The Contested Edges of Internal Affairs – but Delaware’s decision on this was … overdetermined.  Delaware has always had a much broader view of the scope of the internal affairs doctrine than other states – particularly California – and this is not the first time Delaware has held that California’s corporate code is invalid as applied to Delaware entities.  See VantagePoint Venture P’rs 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005).  But California never seems to get its own chance to weigh in, because as soon as a Delaware company gets a hint that a shareholder plans to invoke its rights under California law, the company runs to file a declaratory action in Delaware.  That’s what happened in VantagePoint, and when the shareholder filed its own action in a California court, California stayed its own proceedings in favor of the first-filed Delaware action.

Here, a similar scuffle occurred.  The Juul shareholder first had to make a demand for inspection under California law, which put the company on notice that a dispute was in the offing.  The company immediately filed a declaratory judgment action in Delaware – arguing, among other things, that because the company had a forum selection clause in its charter requiring that internal affairs disputes be heard in Delaware, and because inspection rights are governed by the internal affairs doctrine, any California court would be powerless to weigh in.  The shareholder subsequently filed an action in California, but California stayed its ruling in favor of Delaware case.  See Grove v. Adam Bowen, Superior Court of Californa, CGC20582059.  That left the field free for Laster to hold that inspection rights are part of internal affairs, California’s law did not apply, and no suit could be filed in California.  And that holding is now presumably immune from attack in California courts, even though there is California precedent for the idea that Section 1601 does not deal with internal affairs.  See Valtz v. Penta Investment Corp., 139 Cal. App. 3d 803 (Ct. App. 1983).

I suppose if California courts really want to get in the middle of this, they could refuse to stay their own actions and rush to reach a judgment before Delaware does, but for now it seems like only Delaware is going to get a say.  And that’s going to be especially true if forum selection provisions in corporate governance documents extend beyond internal affairs – as the Delaware Supreme Court held they can in Salzberg – so that the forum choice in future cases does not depend on that initial “internal affairs” determination, while simultaneously functioning as a waiver of any challenge to personal jurisdiction over the shareholder in a Delaware court.*

And I, for one, would really like to hear what another state thinks.

 

*Which, by the way, just highlights the importance of the question whether other states accept Salzberg and agree that forum choices in corporate constitutive documents are binding even for noninternal affairs questions.  Because if a company has a charter provision that says all information disputes must be heard in Delaware, and other states accept that as binding contractually, then even if a California court wants to decide whether Section 1601 governs internal affairs or not, and is theoretically able to reach the question before it becomes res judicata in Delaware, it still won’t be able to hear the case.  So, all eyes on Dropbox.

As an academic and consultant on environmental, social, and governance (ESG) matters, I’ve used a lot of loaded terms — greenwashing, where companies tout an environmentally friendly record but act otherwise; pinkwashing, where companies commoditize breast cancer awareness or LGBTQ issues; and bluewashing, where companies rally around UN corporate social responsibility initiatives such as the UN Global Compact.

In light of recent events, I’ve added a new term to my arsenal—wokewashing. Wokewashing occurs when a company attempts to show solidarity with certain causes in order to gain public favor. Wokewashing isn’t a new term. It’s been around for years, but it gained more mainstream traction last year when Unilever’s CEO warned that companies were eroding public trust and industry credibility, stating:

 Woke-washing is beginning to infect our industry. It’s polluting purpose. It’s putting in peril the very thing which offers us the opportunity to help tackle many of the world’s issues. What’s more, it threatens to further destroy trust in our industry, when it’s already in short supply… There are too many examples of brands undermining purposeful marketing by launching campaigns which aren’t backing up what their brand says with what their brand does. Purpose-led brand communications is not just a matter of ‘make them cry, make them buy’. It’s about action in the world.

The Black Lives Matter and anti-racism movements have brought wokewashing front and center again. My colleague Stefan Padfield has written about the need for heightened scrutiny of politicized decisions and corporate responses to the BLM movement here, here, and here, and Ann Lipton has added to the discussion here. How does a board decide what to do when faced with pressure from stakeholders? How much is too much and how little is too little?

The students in my summer Regulatory Compliance, Corporate Governance, and Sustainability course were torn when they acted as board members deciding whether to make a public statement on Black Lives Matter and the murder of George Floyd. As fiduciaries of a consumer goods company, the “board members” felt that they had to say “something,” but in the days before class they had seen the explosion of current and former employees exposing  companies with strong social justice messaging by pointing to hypocrisy in their treatment of employees and stakeholders. They had witnessed the controversy over changing the name of the Redskins based on pressure from FedEx and other sponsors (and not the Native Americans and others who had asked for the change for years). They had heard about the name change of popular syrup, Aunt Jemima. I intentionally didn’t force my students to draft a statement. They merely had to decide whether to speak at all, and this was difficult when looking at the external realities. Most of the students voted to make some sort of statement even as every day on social media, another “woke” company had to defend itself in the court of public opinion. Others, like Nike, have received praise for taking a strong stand in the face of public pressure long before it was cool and profitable to be “woke.”

Now it’s time for companies to defend themselves in actual court (assuming plaintiffs can get past various procedural hurdles). Notwithstanding Facebook and Oracle’s Delaware forum selection bylaws, the same lawyers who filed the shareholder derivative action against Google after its extraordinary sexual harassment settlement have filed shareholder derivative suits in California against Facebook, Oracle, and Qualcomm. Among other things, these suits generally  allege breach of the Caremark duty, false statements in proxy materials purporting to have a commitment to diversity, breach of fiduciary duty relating to a diverse slate of candidates for board positions, and unjust enrichment. Plaintiffs have labeled these cases civil rights suits, targeting Facebook for allowing hate speech and discriminatory advertising, Qualcomm for underpaying women and minorities by $400 million, and Oracle for having no Black board members or executives. Oracle also faces a separate class action lawsuit based on unequal pay and gender.

Why these companies? According to the complaints, “[i]f Oracle simply disclosed that it does not want any Black individuals on its Board, it would be racist but honest…” and  “[a]t Facebook, apparently Zuckerberg wants Blacks to be seen but not heard.” Counsel Bottini explained, “when you actually go back and look at these proxy statements and what they’ve filed with the SEC, they’re actually lying to shareholders.”

I’m not going to discuss the merits of these cases. Instead, for great analysis, please see here written by attorneys at my old law firm Cleary Gottlieb. I’ll do some actual legal analysis during my CLE presentation at the University of Tennessee Transactions conference on October 16th.

Instead, I’m going to make this a little more personal. I’m used to being the only Black person and definitely the only Black woman in the room. It’s happened in school, at work, on academic panels, and in organizations. When I testified before Congress on a provision of Dodd-Frank, a Black Congressman who grilled me mercilessly during my testimony came up to me afterwards to tell me how rare it was to see a Black woman testify about anything, much less corporate issues. He expressed his pride. For these reasons, as a Black woman in the corporate world, I’m conflicted about these lawsuits. Do corporations need to do more? Absolutely. Is litigation the right mechanism? I don’t know.

What will actually change? Whether or not these cases ever get past motions to dismiss, the defendant companies are likely to take some action. They will add the obligatory Black board members and executives. They will donate to various “woke” causes. They will hire diversity consultants. Indeed, many of my colleagues who have done diversity, equity, and inclusion work for years are busier than they have ever been with speaking gigs and training engagements. But what will actually change in the long term for Black employees, consumers, suppliers, and communities?

When a person is hired or appointed as the “token,” especially after a lawsuit, colleagues often believe that the person is under or unqualified. The new hire or appointee starts under a cloud of suspicion and sometimes resentment. Many eventually resign or get pushed out. Ironically, I personally know several diversity officers who have left their positions with prestigious companies because they were hired as window dressing. Although I don’t know Morgan Stanley’s first Chief Diversity Officer, Marilyn Booker, her story is familiar to me, and she has now filed suit against her own company alleging racial bias.

So I’ll keep an eye on what these defendants and other companies do. Actions speak louder than words. I don’t think that shareholder derivative suits are necessarily the answer, but at least they may prompt more companies to have meaningful conversations that go beyond hashtag activism.

Those of us who study banking law and regulation know it’s an absolutely exciting area! That’s particularly true at the moment. Not only are we watching the path of Lacewell v. Office of the Comptroller of the Currency (OCC), a case about the OCC’s power to grant federal fintech charters to nondepository institutions, currently in the Second Circuit Court of Appeals, but we’ve also been treated to dueling banking law prof amicus curiae briefs (additional amicus briefs were also filed). In this week’s post, I’ll highlight the brief led by Lev Menand, Saule Omarova, Morgan Ricks, Joe Sommer, and Art Wilmarth, and signed by thirty-three banking law scholars (here).

The professors begin by stating their interest: “ensuring that banking agencies stay within their statutory mandates and work in the public interest.” They term the OCC’s proposal to charter nondepository fintech firms “a dangerous power grab premised on the novel claim that banking is just another word for lending.” In a nutshell, the scholars argue that “the OCC does not have the power to charter entities that are not in the deposit – that is, money creation – business.” It’s actually illegal – as the brief notes – for “unregulated entities to receive deposits.” “Bank deposits constitute the bulk of our nation’s money supply, and it is for this reason that banks are subject to strict federal oversight…Creating deposit dollars is a delegated sovereign privilege – an extremely sensitive activity that justifies federal chartering, regulation, and supervision.” The OCC’s very name is linked to the nation’s currency system!

As the brief explains, if the OCC were to be able to grant federal fintech charters to nondepository institutions, this would result in a significant expansion of its regulatory authority. It would also impact the governance of the Federal Reserve, and expand access to Fed master accounts and discount window lending. Additionally, as banks are exempt from the coverage of the federal securities laws and investment company laws, it would impact the coverage of these laws, and it would even create “an alternative, OCC-controlled system of business organization available to a huge range of companies.”

Indeed, the answer to what might seem to be a technical banking law question of interest to few (and perhaps boring to most) will have tremendous ramifications. The professors do an excellent job of explaining the implications of the OCC having the authority to grant federal fintech charters, and I encourage BLPB readers to review their brief.

Stay tuned for Part II, next Wednesday!! I’ll be highlighting Professor David Zaring’s Amicus Curiae Brief supporting the OCC’s position.  

My recent article with Anthony Rickey, Uncovering Hidden Conflicts in Securities Class Action Litigation, discussed how a court-appointed special master investigating a securities class action settlement discovered a $4.1 million “referral fee” paid by Labaton Sucharow LLP (“Labaton”) to an attorney who did no work on the case but purportedly secured the Arkansas Teacher Retirement System (“ATRS”) as a client.  The bombshell revelation in Arkansas Teacher Retirement System v. State Street Bank and Trust Co. (“State Street”) undoubtedly stemmed from an email by Texas attorney Damon Chargois, who wrote:

We got you ATRS as a client after considerable favors, political activity, money spent and time dedicated in Arkansas, and Labaton would use ATRS to seek lead counsel appointments in institutional investor fraud and misrepresentation cases.  Where Labaton is successful in getting appointed lead counsel and obtains a settlement or judgment award, we split Labaton’s attorney fee award 80/20, period.

The State Street payment was not the first:  Labaton had paid a percentage of its total fee awards in at least seven other cases.  While scholars had discussed the role of “pay to play” in securities class actions for years, State Street revealed a referral agreement and raised questions about the extent of favors and political influence brought to bear.

Shortly after we published Uncovering Hidden Conflicts, Judge Wolf issued a blistering opinion in State Street, finding that “the submissions of Labaton and [the Thornton Law Firm] in support of the request for an award of $75,000,000 were replete with material false and misleading statements” and that the firms “in many respects violated Federal Rule of Civil Procedure 11(b) and related Massachusetts Rules of Professional Conduct.”  The opinion also described, in explicit detail, the origin of the relationship between Labaton, Chargois, and ATRS.  Ultimately, Judge Wolf cut the fee from approximately $75 million to $60 million (the lower end of the “presumptive reasonable range”) and referred his opinion to the Massachusetts Board of Bar Overseers.  An appeal is pending.

The State Street case prompted an exposé in the New York Law Journal, including extensive comments from Chargois’ former (now retired) law partner, Tim Herron, and a deep-dive into the history of the ATRS/Labaton relationship.  Some Arkansas lawmakers questioned ATRS’ decision to rehire Labaton during a public hearing in May.  As Professor Coffee put it, “The practices [the special master] uncovered is like turning over a rock in the field and finding some ugly things crawling around.” 

More, after the jump.

Continue Reading State Street, Public Sector Pension Funds, and In re Tesla: An Update on Uncovering Hidden Conflicts in Securities Class Action Litigation