If you have trouble viewing the embedded Tweets, please try a different browser (I recommend Internet Explorer).

Friend of the BLPB and fellow crowdfunding researcher Andrew Schwartz recently posted this article on SSRN: Mandatory Disclosure in Primary Markets, 2019 Utah L. Rev. 1069.  I was provoked by the abstract, which reads as follows:

Mandatory disclosure—the idea that companies must be legally required to disclose certain, specified information to public investors—is the first principle of modern securities law. Despite the high costs it imposes, mandatory disclosure has been well defended by legal scholars on two theoretical grounds: ‘Agency costs’ and ‘information underproduction.’ While these two concepts are a good fit for secondary markets (where investors trade securities with one another), this Article shows that they are largely irrelevant in the context of primary markets (where companies offer securities directly to investors). The surprising result is that primary offerings—such as an IPO—may not require mandatory disclosure at all. This profound insight calls into question the fundamental premises of the Securities Act of 1933 and similar laws governing primary offerings around the world. Reform of these rules could lead to a new age of simplified, low-cost primary offerings to the public, something that is already happening in New Zealand through its equity crowdfunding market.

As someone who believes that federal law should provide an exemption for small crowdfunded offerings (although current rule-making proposals instead look to ratchet up the aggregate offering prices for the federal crowdfunding exemption) with lighter mandatory disclosure obligations than those provided for under Title III of the Jumpstart Our Business Startups Act and Regulation Crowdfunding, I found myself very curious about Andrew’s paper.  So, I skimmed it (since I do not have time to read it in full at the moment).  I am glad to see that the article raises a distinction worth more exploration in the mandatory disclosure space–that between primary and secondary offerings.  But I admit to some skepticism about the overall thesis as to the lack of value of mandatory disclosure in primary offerings.  I hope a thorough review of the paper will provide important information and analyses.  

As the abstract and a recent post on the article on The CLS Blue Sky Blog indicate, the paper highlights for attention two of the theoretical values of mandatory disclosure for examination: its positive effects on agency costs and on information underproduction.  Given those ostensible focuses, here are a few things I will be looking for as I read:

  • An articulation of the different types of agency costs associated with initial public offerings (IPOs) and other primary offerings (as evidenced in the literature) and their relationship to mandatory disclosure obligations, as well as observations on the effects of mandatory and voluntary disclosure on those agency costs;
  • A rationale for why other theories supporting mandatory disclosure regulation are seemingly marginalized or omitted in the paper, including (1) standardization to facilitate investor comparisons and contrasts (which it seems is mentioned in a few footnotes) and (2) efficient capital market theory applications in the IPO disclosure context (including, perhaps, those impacting observed underpricing/overpricing market effects); and
  • An explanation of the role, if any, of investor sophistication and information access (which, together with mandatory disclosure, have framed analyses of the value of mandatory disclosure since the Court’s Ralston Purina decision more than 65 years ago) in the article’s analyses and overall thesis.

By quick inspection, it appears that the agency costs addressed are restricted to those borne of a manager-shareholder relationship that relies on a somewhat legalistic, rather than economic, concept of agency that would arise only after investors in the market purchase shares of corporate stock in an offering and become shareholders.  I wonder about the role of managers and others as promoters of the offering . . . .  Standardization is at least mentioned in a few places.  And as to the third bullet point, it looks like the answer the paper proffers is that institutional investors will drive significant voluntary disclosure to be made to all in a manner that gets information to the market efficiently.  If that is the argument, I look forward to seeing the evidence.  

So, I am curious, but I remain skeptical.  I am reserving judgment until I read the article in its entirety!  Regardless, this work has my attention, for sure.  Let me know if you have read it and, if so, what your reactions are.  Andrew also may want to comment.

Independent of the mandatory disclosure arguments, I know that I will enjoy reading about New Zealand’s crowdfunding experience.  I do find comparative regulatory work like this very enlightening.  I appreciate Andrew adding that to the mix, too.

On Thursday and Friday, Tulane hosted its 32nd Annual Corporate Law Institute.  The CLI is a major conference focused on the latest developments in M&A and related topics, and features a variety of speakers drawn from the bench, the bar, and the SEC.

Now, obviously, it’s a tough time to host a large conference – the big question was whether we’d see cancelations – and I’m not in charge of administration so I can’t say what the final numbers were, but from what I could see, attendance looked just fine.

That said, I personally was not able to attend the whole event, but I did go to a few of the panels, and below are my notes from Hot Topics in M&A Practice and Chancellor William T. Allen and His Impact on Delaware Jurisprudence.

 

Continue Reading A Few Notes from Tulane’s 32nd Annual Corporate Law Institute

Judge Wolf recently issued his opinion in the State Street case.  It’s a long read at over 159 pages. Judge Wolf scorches class counsel and ultimately refers the matter to the state bar for possible discipline, if appropriate.  This is a case I’ve written about before and explored in an article with Anthony Rickey, arguing that we need more disclosures about the relationships between institutional plaintiffs and class counsel in securities litigation.

For those not following the case as closely, here is a quick refresher.  After a $300 million settlement, class counsel sought a significant fee award and presented the court with information about the time and money spent on the case.  The Court allocated $75 million to the attorneys.  Then the Boston Globe’s Spotlight team started digging.  The Globe revealed that contract attorneys billed at $400 an hour had only been paid about $40 an hour for their work.  The Globe also revealed that the brother of the managing partner at one of the firms had been billed out at $500 an hour when he otherwise took $50 an hour court appointment cases.  The disclosures troubled the Court and caused it to appoint a special master to dig into the matter.  The special master discovered that after Labaton (one of the leading firms) obtained its millions in fees, it then directed $4 million to a lawyer who did little or no work on the case pursuant to a referral fee agreement which had not been disclosed to all members of the class or all lawyers working on the matter.  The special master also uncovered some troubling emails, including this one hinting that the institutional plaintiff may have faced pressure to work with the law firm:

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

After the revelations, the Court had to reconsider how to allocate the fees.  This brings us to the new opinion.  On the whole, the lawyers still collected a significant amount. The court trimmed the fee award back from $75 million to $60 million.  This is a reasonable result.  Despite the mess, the lawyers till did a good bit of work and obtained a significant settlement for the class.  The award adjusts the fee amounts to account for the issues and to compensate other firms which had to do additional work because of the imbroglio.

The Court still found significant cause for concern with the original “submissions “in support of the request for an award of $75,000,000 were replete with material false and misleading statements.”  It found that Labaton and Thornton “violated Federal Rule of Civil Procedure 11(b) and related Massachusetts Rules of Professional Conduct.” In particular, the court found that lawyers had not even read the documents they signed under oath and certified to be complete and accurate.  The Court also took issue with how the firms described their hourly rates because they were not generally paid by the hour–their compensation all came from contingency cases. The Court also took issue with a calculation error which led to the double counting of approximately $4 million worth of hours.  The list goes on. 

Class action settlements present a special circumstance where ordinary adversarial processes break down.  Once the defense settles its case, it lacks any incentive to oppose the settlement or thoroughly check everything class counsel claims in its papers.  Class counsel also has little incentive to bring up problems and slow down a significant payday. Because of this, Massachusetts ethics rules treat class action settlement hearings as ex parte proceedings where the attorneys have an expanded duty of candor to inform the court about all material facts, even those adverse to their position.  In light of the issues here, expansive ethical duties for class action settlements might be appropriate in all states.

The Court also called for other judges to more closely vet class action settlements:

The United States has a proud history of honorable, trustworthy lawyers. However, this case demonstrates that not all lawyers can be trusted when they are seeking millions of dollars in attorneys’ fees and face no real risk that the usual adversary process will expose misrepresentations that they make. Therefore, in making fee awards in class actions, it is important that judges be skeptical, and do the hard work necessary to protect the interests of the class and the integrity of the administration of justice.

If you have trouble viewing the embedded Tweets, please try a different browser (I recommend Internet Explorer).

Image result for olympic trials in the marathon

Last year, in a post about personal finance, I mentioned my friend Joey Elaskr, who is completing a PHD/MD program at Vanderbilt University. In late 2019, Joey qualified for the Olympic Trials at the Monumental Marathon in an impressive 2:18:57 (5:18 per mile for 26.2 miles). On February 29th this year, just a couple weeks after successfully defending his dissertation, he competed in the Olympic Trials in Atlanta. You can read a bit about Joey’s running on Lets Run and on Money & Megabytes. While the tie to “business law” is admittedly stretched, I do think our readers can learn a good bit about juggling demanding responsibilities from Joey, and I am glad he agreed to answer a few questions below the break.

Continue Reading Joey Elaskr and the Olympic Trials in the Marathon

Plain Bay alleges that it is a citizen of Florida for diversity purposes as it is a Florida limited liability company incorporated in Florida with its principal place of business in Florida and that Yates is a citizen of California for diversity purposes as he “is a citizen of the United States and a resident of the State of California[.]” . . . In order for this Court to properly exercise jurisdiction over a case, “the action must be between ‘citizens of different States.’ ” 28 U.S.C. § 1332(a)(1).

Plain Bay Sales, LLC v. Gallaher, 9:18-CV-80581-WM, 2020 WL 961847, at *2 (S.D. Fla. Feb. 28, 2020) (emphasis added). 
 
Yates, though, was a UK citizen, who lived in Florida, and thus, “the Court concludes that, for diversity purposes, Yates should be considered a citizen of Florida.” Id. The court eventually determines that Yates would destroy diversity, but Plain Bay removed him as a defendant, and as a dispensable party, diversity was restored. 
 
Okay, but there is a problem here. Two really. First, Plain Bay was not “incorporated” anywhere. It was formed. It is an LLC, not a corporation.  But more important, Plain Bay’s citizenship has not been determined.  The state of formation and principal place of business is irrelevant to LLC citizenship. “[A] limited liability company is a citizen of any state of which a member of the company is a citizen.” Rolling Greens MHP, L.P. v. Comcast SCH Holdings, L.L.C., 374 F.3d 1020, 1022 (11th Cir. 2004). Here, the court determined that the plaintiff LLC is an citizen of Florida without ever looking at the citizenship of any members. They may all be Florida residents, but WE DON’T KNOW. 
 
Anyway, not even stating the law for determining citizenship of an LLC is not cool. Not cool at all. 

I recently had occasion to offer background to, and be interviewed by, a local television reporter about a publicly traded firm that owns several health care facilities in East Tennessee and has been financed significantly through loans from and corporate payments made by a member of its board of directors.  The resulting article and news clip can be found here.  Since the story was published, a Form 8-K was filed reporting that the director has resigned from the board and the firm is negotiating with him to cancel its indebtedness in exchange for preferred stock.

In reviewing published reports on the firm, Rennova Health, Inc., I learned that it had been delisted from NASDAQ back in 2018.  The reason?  The firm engaged in too many stock splits.

I also came across an article reporting that another health care firm, a middle Tennessee skilled nursing provider, Diversicare Healthcare Services, Inc., had been delisted in late 2019.  The same article noted two additional middle Tennessee health care firms also were in danger of being delisted from stock exchanges.  One was subsequently delisted. 

Health care mergers and acquisitions also have been in the news here in Tennessee.  A Tennessee/Virginia health care business combination finalized in 2018 is one of two under study by the Federal Trade Commission.  The combining firms, Mountain States Health Alliance and Wellmont Health System, avoided federal and state antitrust merger approvals and challenges through the receipt of a certificate of public advantage (COPA) under Tennessee law and a coordinated process in Virginia.  The resulting firm, Ballad Health, is an effective health care monopoly in the region and has had well publicized challenges in meeting its commitment to provide cost-effective, quality patient care.

I can only assume that these health care corporate finance issues in Tennessee are a microcosm of what exists nationally.

All of this has made me interested in the U.S. healthcare industry as an engaging and useful lens through which one could teach and write about the legal aspects of corporate finance . . . .  Many of the current business law issues in U.S. health care firms stem from well-known financial challenges in the industry and the related governmental responses (or lack thereof).  With public debates–including in connection with this year’s presidential caucuses, primaries, and election–over the extent to which the federal government should provide financial support to the health care industry under existing conditions and whether the health care industry has become too big to fail, health care examples and hypotheticals seem very salient now, in the same way that banking or telecomm examples and hypotheticals may have had pedagogical and scholarly traction in corporate finance in the past.  

Some of the business law issues facing U.S. health care firms may be quite the same as they are for firms in any other industry.  Yet, some also may be unique to the health care industry and worth further, individualized exploration in the classroom or in the research realm.  For example, innovation and entrepreneurship–intricately tied to corporate finance–may be different in the health care space, as currently configured in the United States.  This article makes arguments in that regard.

In all, it seems there is a synergy worth examining in the connections between the U.S. health care crisis and business law teaching and research.  Unless and until something fundamental changes in the U.S. health care delivery system, corporate finance lawyers and professionals are likely to have important (if somewhat hidden) roles in ensuring that health care firms survive while providing cost-effective care to those who need it.  Business law analyses and innovations are sure to play strong roles in this environment, making business law professors key potential contributors. Time for us to step up and take the challenge!

Professor Saule T. Omarova at Cornell Law School recently posted (here) a new article to SSRN, Technology v. Technocracy: Fintech as a Regulatory Challenge (forthcoming, Journal of Financial Regulation).  I’m excited to read it.  Omarova’s articles are always excellent and it’s on an important, timely topic.  Here’s the abstract:

Technology is a tool. How to use it, for what purposes and to what effects, is a choice. What does this choice involve in the context of fintech? And how can it be translated into a coherent strategy of fintech regulation? These questions are at the heart of this article. Taking a broad view of fintech as a systemic force disrupting the very enterprise of financial regulation, as opposed to any particular regulatory scheme, the article offers a conceptual framework for the development of a more cohesive and effective public policy response to fintech disruption.

The article argues that the currently dominant technocratic model of financial regulation is inherently limited in its ability to respond to systemic challenges posed by fintech. The existing regulatory model operates primarily through the mechanisms of structural compartmentalization, bureaucratic specialization, and narrow targeting of isolated and well-controlled micro-level phenomena. Fintech, however, is transforming financial markets in ways that directly undermine the basic premises underlying this technocratic paradigm. Exploring these dynamics, the article develops a five-part taxonomy of the key tech-driven changes in the structure and operation of the financial system, and the corresponding challenges these systemic shifts pose to the continuing efficacy of the regulatory enterprise.

This exercise reveals the fundamental tension at the core of the fintech problem. In the fintech era, the financial system is growing ever bigger, moving ever faster, and getting ever more complex and difficult to manage. The emerging regulatory responses to these macro-level changes, however, continue to operate primarily on the micro-level. The article surveys current efforts to regulate fintech—including regulatory “sandboxes,” special charters, and RegTech—and highlights the limiting effects of the technocratic bias built into their design. Against that background, it outlines several alternative reform options that would explicitly target the core macro-structural, as opposed to micro-transactional, aspects of the fintech challenge—and do so in a more assertive, comprehensive, and normatively unified manner. 

I often skim through recent opinions issued in private securities class actions, just to see what the latest issues are and how courts are addressing them.  So this week, I’ll talk about a few that caught my eye.  As the subject line indicates, most of this discussion concerns materiality, but there are some extra issues tossed in.

And yes, this is a very long one, so behind a cut it goes:

Continue Reading Three Times Federal Courts Got Materiality Wrong, and One Time They Didn’t