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The Honorable Aida M. Delgado-Colón made me smile today.  As BLPB readers know, An LLC By Any Other Name, Is Still Not a Corporation. Finally, I received a notice of a court acknowledging this fact and requiring a party to refer to their legal entity correctly. Judge Delgado-Colón writes: 

Pursuant to this Court’s sua sponte obligation to inquire into its own subject matter jurisdiction and noticing the unprecedented increase in foreclosure litigation in this District, the Court ordered plaintiff to clarify whether it is a corporation or a limited liability company (“LLC”).

REVERSE MORTGAGE FUNDING, LLC, Pl., v. THE ESTATE OF ANGEL RAFAEL ANTONINI-NAZARIO, et al, Defendants., CV 16-3092 (ADC), 2020 WL 881019, at *1 (D.P.R. Feb. 20, 2020).  
 
The opinion continues:
Here, the Court cannot ascertain that diversity exists among the parties. Rule 11(b) of the Federal Rules of Civil Procedure holds attorneys responsible for “assur[ing] that all pleadings, motions and papers filed with the court are factually well-grounded, legally tenable and not interposed for any improper purpose.” Mariani v. Doctors Associates, Inc., 983 F.2d 5, 7 (1st Cir. 1993) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990). Despite Rule 11’s mandate, the Court finds significant inconsistencies among plaintiff’s representations, which to this date remain unclear. As noted at ECF No. 53, plaintiff has repeatedly failed to explain why its alleged principal place of business is in New Jersey instead of Michigan. To make matters worse, plaintiff now claims to be a “limited liability corporation”1 under Delaware law.
Id. at *2.
 
Because the court was “unable to determine that complete diversity exists between the parties,” the Court dismissed “without prejudice the amended complaint for lack of subject matter jurisdiction.” Id.  
 
I might quibble with some parts of the opinion (mostly that I think it could make what the plaintiff should have done even more clear), but that’s just quibbling.  I am thrilled to see an opinion that held the responsible party accountable for their entity descriptions.  
 
Thank you, Judge Delgado-Colón. 

National Business Law Scholars Conference (NBLSC)

June 18-19, 2020

Call for Papers

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 18-19, 2020, at The University of Tennessee College of Law.

This is the eleventh meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission.

Please use the conference website to submit an abstract or paper by March 31, 2020.  If you have any questions, concerns, or special requests regarding the schedule, please email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu. We will respond to submissions with notifications of acceptance shortly after the deadline. We anticipate the conference schedule will be circulated in May.

Conference Organizers:

Afra Afsharipour (University of California, Davis, School of Law)
Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Tulane University Law School)
Elizabeth Pollman (University of Pennsylvania Carey Law School)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)
Megan Wischmeier Shaner (University of Oklahoma College of Law)

At the University of Michigan’s Center on Finance, Law & Policy, an important project is underway on The Central Bank of the Future.  It’s a great, timely topic.  The project’s website explains that: “In partnership with the Bill and Melinda Gates Foundation, this project explores the mandate and design of central banks to consider whether they might play an even stronger role in promoting financial inclusion, financial health, and a more inclusive economy. More broadly, it creates a vision for what the “central bank of the future” might look like and focuses in particular on how emerging technology could support central banks in their efforts to promote financial inclusion, growth, and development.”

The March 20, 2020, deadline is fast approaching to submit academic papers, policy proposals, and pitches for technology products or services to the Central Bank of the Future Conference (w/ co-host Federal Reserve Bank of San Francisco), November 16-17, 2020.  A link to all of the details of the call for papers is here.

Sean Griffith recently wrote a book chapter explaining how plaintiffs’ merger-related challenges developed over time.  Plaintiffs began by seeking disclosure-only settlements, but after Trulia stamped out the practice in Delaware, plaintiffs began bringing claims in federal court challenging corporate proxies under Rule 14a-9.  And once they got there, they realized they did not have to limit themselves to merger litigation, and began bringing other kinds of proxy-related claims, and eventually these morphed into individual, rather than class, actions.

That’s what I thought of when I read the new books and records complaint filed against Facebook in Employees’ Ret. Sys. Of Rhode Island v. Facebook, No. 2020-0085-JRS.

In it, Rhode Island’s pension fund is seeking privileged documents related to Facebook’s $5 billion settlement with the FTC over allegations that it violated a previous FTC settlement regarding its data practices.  Much of the complaint is redacted – the plaintiff received some documents already, just not the privileged ones it is seeking now – but the basic allegation is that, according to news reports, the FTC wanted to charge Mark Zuckerberg personally, but the company refused, and accepted a larger fine to protect him.  The plaintiff now claims that this was the equivalent of giving a “non-ratable” benefit to a controlling shareholder.  I.e., the company could, theoretically, rationally conclude that keeping its CEO out of legal crosshairs was the best course of action for the company as a whole, but when that CEO is also a controlling shareholder, those decisions must either be made using the procedural protections of Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) (negotiation by independent directors and conditioned on independent stockholder approval), or reviewed for entire fairness by a court ex post.  Therefore, argues the Rhode Island fund, it is entitled to books and records to evaluate potential claims, and under Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), even attorney-client privileged documents should be made available.

This case is just getting started – all that’s happened is that the complaint was filed – but it reminded me of the 14a-9 situation because we’re seeing a similar kind of evolution with respect to controlling shareholder arguments.

(I am not – let’s be clear! – suggesting that the Facebook complaint is frivolous in the way that a lot of 14a-9 litigation has been accused of being.  This is just about how claims shift over time.)

It began, as I’ve frequently argued (in this essay, plus numerous blog posts, most recently last week), when Delaware tightened the screws on merger-related challenges with Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015), MFW, and also C&J Energy Services v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014).  Those cases made it very difficult for plaintiffs to challenge a merger unless they were able to demonstrate that the merger involved a controlling stockholder.  Suddenly, everything turned on demonstrating that even minority blockholders had effective control of the company, which put enormous pressure on courts to find the presence of a controller when transactions appeared to be conflicted or suspicious in some way.

But there was more.  This sharp divide between transactions that could be cleansed with a shareholder vote, and those that could not, led courts to question whether the MFW/Corwin divide should be extended to nonmerger transactions – which they decided to do, in cases like IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964 (Del. Ch. Dec. 11, 2017), In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245 (Del. Ch. Jan. 25, 2016), and Tornetta v. Musk, 2019 WL 4566943 (Del. Ch. Sept. 20, 2019) (the latter of which I blogged about here).

Now, suddenly, new rule: Any transaction with a controller gets entire fairness review absent MFW protection.

And that rule was even extended into the books-and-records space, where the failure to use MFW protections in a given transaction was deemed suspicious enough to weigh in favor of granting plaintiffs access to internal documents.  We saw that happen in CBS, which I blogged about here.  At the time, I said:

Slights determined that the mere fact that CBS made no attempt to adhere to MFW cleansing was itself evidence of wrongdoing for Section 220 purposes.  That interests me [because] it extends MFW into a novel space: previously, its purpose was to trigger business judgment review for controlling shareholder transactions, but now it will also be used to “cleanse” for the purpose of avoiding a 220 demand. 

Leading us to where we are now: An argument that even a legal settlement is subject to the MFW/Corwin divide, and therefore can be bootstrapped to justify plaintiffs’ access to internal (privileged) documents.

I wouldn’t begin to guess how this case will play out – to be honest, I am sympathetic to the argument but I worry about implications (i.e., starting with Tesla’s and Musk’s settlement with the SEC, which may have become worse for the company because of Musk’s initial recalcitrance) – but it strikes me that this is a rulification problem.

In the earliest days, Delaware didn’t sharply distinguish between controlling shareholder transactions and other kinds of interested transactions.  And the development of the law was messy, in its common-law way.  Sometimes Delaware suggested independent-director cleansing was enough, sometimes not, the types of transactions that received extra scrutiny were sometimes limited to “transformative” transactions, sometimes not; it was as much an issue of how the court felt about a given scenario than anything else.  It was only recently that courts began to set down a bright-line rule that all controlling shareholder transactions would receive entire fairness scrutiny absent MFW protections, and to some extent, that rule was hastened by MFW itself, as courts struggled to identify the cases to which it applied.  And we’re now seeing the implications of that, because it turns out, when a controlling shareholder is involved in corporate governance, lots of otherwise-mundane business decisions could implicate their interests.   Throw back in the issue of whether someone’s a controlling shareholder in the first place, and you’ve just invited bedlam.  One rule (MFW) begets another (all controlling shareholder transactions, except the demand requirement) which presumably will beget another (except for some set of cases) and possibly more (except these factors do/do not contribute to the inquiry whether someone is a controller in the first place).

Not sure I have any great conclusions to draw here, but if Delaware doesn’t watch out, it’s going to become the MBCA.

FINRA Expungement Fee Change

FINRA has begun to move to address some of the concerns about abuse of its expungement process, which allows stockbrokers to wipe customer complaints and dispute information off their public records.  FINRA’s stated process calls for these requests for non-monetary relief to be heard by a panel of three arbitrators, requiring at least two of them to vote in favor of expungement.  

Yet some creative lawyers found a way to put expungement claims before a single arbitrator.  The “dollar-trick” arbitrations proceed by requesting $1 dollar of relief and expungement.  Because the case had a low monetary value, FINRA’s forum had had shunted these dollar trick claims to single-arbitrator panels.  As the PIABA Foundation reported, stockbrokers using this alternative process paid much less in fees, causing FINRA to miss out on $8,000 or more in revenue per case.  Brokers seeking expungement under this process also benefitted by only needing to convince one arbitrator to grant extraordinary relief rather than two.  If you’re wondering what happens to the claims for $1.00 in damages, the stockbroker usually drops the $1.00 claim at the hearing and simply focuses on his expungement request.

To address this, FINRA recently announced a new rule proposal to stop the “dollar-trick” expungement exploit. Essentially, it aims to close this alternative process down.  When comments will be due remains unclear. Although it has been posted to the FINRA website for a few days now, it has not yet shown up on the SEC website. 

This rule change is a small step in the right direction.  Still, the entire idea may be fundamentally flawed.  Private arbitrations should probably not resolve whether the public gets access to information.

Stanford Fellowship

Unrelated, Stanford’s Rock Center for Corporate Governance is now taking applications for fellows. It’s a solid program and has helped connect some really wonderful scholars to the business law community.  

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These job postings were forwarded to me by a reader of the blog. 

(1) Kickstarter – General Counsel – Brooklyn, NY

(2) Hills Stern & Morley LLP – Lateral Partners & Associates – Washington D.C. 

Hills Stern & Morley LLP, a successful boutique firm focused on global transactions and based in Washington, seeks lateral partners to expand and complement its current practice areas in (i) project finance and development, (ii) energy and infrastructure finance, (iii) private equity fund formation and investment, (iv) private acquisitions, and (v) general corporate and finance.  Must have strong academic credentials, a stable work history, and relevant deal experience; portable business and a track record of business development are strongly preferred.  The firm offers an attractive alternative to the Big Law business model, a collegial work environment, and an impressive client list (including multiple development finance institutions).  Interested in a better platform to expand your practice?  Please send your CV, deal list and contact info to Michael Abbey at mabbey@hillsstern.com.

HSM is also looking for seasoned associates to support our practice areas.  Why not enhance your skills working with experienced partners on exciting global transactions and enjoy life outside the office as well?  Please send your CV, deal list and contact info to Michael Abbey.

(3) Social Finance – Assistant General Counsel – Boston, MA

See extensive information about the position under the page break. 

Continue Reading Three Job Postings

In an email exchange with Stanford business law clinician Jay Mitchell, I learned of this intriguing post on legal document design.  Jay takes the design thinking context way beyond my “legal design” idea of using IRAC in corporate finance drafting as a means of ensuring that students are engaging with applicable law and norms in their drafting, and in doing so, he makes a number of interesting observations and points that relate to both document planning and drafting, on the one hand, and teaching planning, drafting, and overall business law practice, on the other.  Here are a few.

  • “The physical design of clinic work-products and client communications is a constant concern. It’s humbling, idea-generating, and inspiring to look at graphic design and wayfinding books and see great solutions to complex information design challenges.”
  • “Our world is one of entities; structures; flows of information, money, and property rights; time periods; decision-making processes; legal, tax, and accounting principles; and dense and difficult documents — and then helping clients operationalize all this across multiple functions and geographies. Seems like we need good tools for capturing, assessing, and conveying information. Visual executions can provide those tools. They have great communicative capacity: shape, color, line, line weight, line effects, and white space are all at hand, and, as noted, people just get pictures.”
  • “Design outlooks and practices seem to distill and operationalize knowledge, from a variety of disciplines, in ways relevant to a lawyer, service provider, professional writer, and producer of tangible products. Our clients notice the attention to user, context, and functionality, as well as factual and legal accuracy, in our advice, client communications, contracts, and governance materials.”
  • “In a setting where students are drafting and doing other legal tasks for the first time, we need to give them room to try, receive feedback, and try again.”
  • After advocating sketching (using shapes, colors, etc. on a whiteboard) with students: “Sketching enables us to visibly and slowly break down a situation, and then to build it back up, step by step. It lets, or maybe forces, us to leave out detail; it helps reveal higher-order relationships that are otherwise difficult to discern. It helps us define the problem and possible solutions. Those qualities make it a good tool for identifying the most important features in an unstructured environment . . . .”
  • “What are seen as core elements of design thinking are now familiar: observation, empathy, ideation, and experimentation. Designers focus on the realities and needs of people for whom they’re designing a product or process. They frame problems and generate lots of ideas. They test those ideas through low-fidelity prototypes, over and over. They try to “keep people at the center” of their work. These are useful notions for the clinical teacher or senior lawyer working with new lawyers.” (footnote omitted)

Jay notes along the way in describing the impact of design thinking on his teaching and practice: “I’ve learned more about legal documents, about their features and footprints, about what they demand of user and thus producer. Which leads to thinking harder about what to make, what to include, and how to present information in effective ways. And to productive discussions with students not only about work-product but also client respect and client reality.”  Great stuff.  I know that our contract drafting curriculum at UT Law focuses on presentation as well as content (as do, I am sure, most similar law school programs of that kind).  Jay’s post is great food for thought in executing on that focus.

What’s the #1 new release in Banking Law on Amazon?  I’m glad you asked!  It’s Professor David Zaring’s first book, The Globalized Governance of Finance (Cambridge University Press).  In 2008, Zaring joined Wharton’s Legal Studies and Business Ethics Department as an assistant professor.  At the time, I was a PhD student in the Department and also focused on banking law.  So, it was really exciting for me to have a banking law scholar join us and I’m thrilled to now have a chance to highlight his new book.  My copy is on its way from Amazon, so for now, I’ll share Zaring’s description of his book and my own thoughts with BLPB readers soon!

The book pulls together work I’ve done on the regulatory networks – the Basel Committee, IOSCO, IAIS, e.g., – that have become the global taste for harmonizing financial regulation.  I think the regimes, and their relative bindingness (especially Basel), are interesting in their own right, and they are also an interesting way of doing global governance, where the sine qua non is often thought to be a treaty enforced by a tribunal, a la the World Trade Organization. 

But in finance, you see neither of those things, and still robust oversight that American regulators, regardless of administration, seem to embrace.  Even as the Trump administration has pushed for changes in trade law, Randal Quarles of the Fed has been installed as chair of the Financial Stability Board, the network of networks that keeps everything moving.  The Obama administration tried to get a Basel-like process into its trade deals, and issued an executive order encouraging agencies to harmonize regulations.

Moreover, since the financial crisis, regulators have doubled down on these networks, adding political oversight from the G-20, a middle manager in the FSB, and standardizing notice and comment rulemaking at the network level.  That, I think, makes the whole scheme look increasingly like a cross-border bureaucracy.  After all, American agencies make policy through notice and comment rulemaking overseen by career regulators overseen by political leaders.  So too Basel, IOSCO, IAIS, and the other networks.