Back to a subject near and dear to my heart: The increased pressure on the definition of “controlling stockholder” occasioned by Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) and Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).  I’ve posted about this on several prior occasions, and written an essay on the subject, so I would be remiss if I didn’t discuss VC Laster’s new ruling in Voigt v. Metcalf.  The facts, as taken from the opinion, are these:

CD&R was a 34.7% blockholder of a publicly-traded corporation called NCI.  In earlier years, CD&R had held as much as 68%.  CD&R had a stockholder agreement that, among other things, guaranteed it a certain number of board seats – but also guaranteed a certain number of seats for the unaffiliated stockholders – guaranteed that its nominees would have seats on key committees, and gave it blocking/consent rights for various board actions, though none were triggered in this case.

In early 2018, three things happened nearly simultaneously: Metcalf, one of the independent/unaffiliated directors of NCI, was elevated to Chair; CD&R acquired a majority stake in a company called New Ply Gem; and Metcalf proposed that NCI acquire New Ply Gem.  To negotiate the deal, Metcalf met with certain NCI directors who were also CD&R representatives/designees.

Eventually, NCI created a Special Committee to evaluate the transaction, and hired Evercore.  Well, actually Metcalf hired Evercore before the committee was even formed, and the Committee was told that Evercore had no conflicts – which was untrue, because Evercore was currently working for another CD&R portfolio company.  The Committee decided to keep NCI’s counsel, Wachtell.

Evercore recommended that New Ply Gem be acquired with NCI stock valued, post-deal, at roughly 1/3 of NCI’s total equity.  This valuation was based on CD&R’s own valuation when it acquired New Ply Gem.  CD&R – via the NCI board members – insisted on closer to a 50/50 split.  The Committee agreed.  The Committee asked for a majority-of-minority voting condition; CD&R refused.  When the deal was announced, NCI’s stock price fell, and of the unaffiliated stockholders, only 55% voted in favor.

After the transaction closed, an NCI stockholder brought a derivative lawsuit and, for our purposes, the critical question was whether CD&R was a controlling shareholder.  If not, the deal was likely cleansed by the shareholder vote – and even if there were disclosure deficiencies (spoiler: there were), plaintiff would have to establish that the Special Committee was interested/dependent on CD&R to succeed on his claim.  But if CD&R was a controlling shareholder, the deal was subject to entire fairness review.

VC Laster concluded that CD&R was a controlling shareholder, and refused to dismiss.

So, what’s notable here?

[More under the jump]

Continue Reading Who’s a Controlling Stockholder: Delaware Strikes Again

Arizona State University’s Sandra Day O’Connor College of Law now has a new business law journal, the Corporate and Business Law Journal.  It’s stated mission is:

The Corporate and Business Journal is a forum for the publication and exchange of ideas and information about trends and developments within business and corporate law. The Journal publishes articles and comments on various topics, including corporate governance, securities regulation, capital market regulation, employment law, and the law of mergers and acquisitions. Historically, corporate and business law has been heavily influenced by east coast institutions and practitioners. Accordingly, CABLJ offers a unique opportunity for students, scholars, and the Arizona community as a whole to readily engage in the discourse surrounding these practice areas.

Congratulations to ASU on the launch of the new journal!

Interestingly, the Corporate and Business Law Journal also has a companion forum for short pieces running over 500 words in length:  http://cablj.org/blog/  It might be a great place for things that are too short to develop into a full essay or article.

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

The United States Bankruptcy Court for the Western District of Kentucky has opened my eyes to some bankruptcy law issues I hadn’t previously seen. The court also committed what I consider to be a cardinal sin: the court refers to an LLC as a “limited liability corporation.”  An LLC is a “limited liability company,” which is a statutorily different entity than a corporation. 

The court states: “Sunnyview and TR are limited liability corporations. They are not individuals and do not meet the definition of insiders under 11U.S.C.§ 101(31)(B)[sic].” In re: Bullitt Utilities, Inc., No. 15-34000(1)(7), 2020 WL 547278, at *6 (Bankr. W.D. Ky. Jan. 24, 2020) (emphasis added). Other than being LLCs, and not corporations, this appears to be correct. The statute, 11 U.S.C.§ 101(31), provides: 

(31)The term “insider” includes—

. . . . 
(B)if the debtor is a corporation—

(i)

director of the debtor;
(ii)

officer of the debtor;
(iii)

person in control of the debtor;
(iv)

partnership in which the debtor is a general partner;
(v)

general partner of the debtor; or
(vi)

relative of a general partner, director, officer, or person in control of the debtor;
The court continues, “If considered to be corporations, none of the entities meet the definition of a [sic] ‘insider’”. Id. The LLCs at issue are creditors, without any express control, so it is correct that they could not be insiders on their own. The court also determined there was “no evidence” that the individual in control of the two LLCs had used his power in a manner that resulted in “inequitable conduct,” so the LLCs under his control could not be held liable under any theory of vicariously liability (e.g., entity veil piercing). 
 
Based on the court’s factual determinations, this all appears to come out correctly, notwithstanding the mischaracterization of the LLC. 
 
More frustrating, for me, is my discovery that bankruptcy law does, in fact, characterize a “corporation” as follows: 
(9) The term “corporation”— (A) includes— (i) association having a power or privilege that a private corporation, but not an individual or a partnership, possesses; (ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association; (iii) joint-stock company; (iv) unincorporated company or association; or (v) business trust; but (B) does not include limited partnership.
11 USC § 101(9). 
 
So, while I acknowledge the statute, I strenuously object. (We all know how effective that is.) Corporations are just not partnerships and they are really, really not unincorporated companies or associations. That would be like saying Coca-Cola or Pepsi are an “Uncola. (Yes, I am dating myself with that reference.) 
 
Couldn’t we just use something like “Covered Entity” for the definition?  
 
Anyway, in closing, I will once again note that cases like this run the risk of creating bad law where an LLC is in control of a corporation. The court here states that the LLC is not and individual, but an LLC (I think) is a “person” under the definitions. The statute provides that “[t]he term ‘person’ includes individual, partnership, and corporation ….” 11 USC § 101(41). And as per 11 USC § 101(9), “corporation” includes unincorporated companies. Thus, I hope that the fact that LLCs in this case were not individuals, does not lead a potential future court to miss that they also need to consider whether an LLC might be a “person in control of the debtor.”

My short essay, “Me, Too and #MeToo: Women in Congress and the Boardroom,” was recently published in the George Washington Law Review.  The abstract follows.

The “Year of the Woman” (1992) and the year of #MeToo (2018) were landmark years for women in federal congressional elections. Both years also represent significant milestones for women’s roles as U.S. public company directors. In each of these two years, social context was interconnected with these political and corporate gender changes. The relevant social context in 2018 is most clearly defined by public revelations of sexual misconduct involving a significant number of men in positions of political and business power. The relevant social context in 1992 similarly involved specific, highly public disclosures and allegations of sexual misconduct.

These parallels beg many questions. In particular, one may ponder whether the correlation between social context and congressional or public company board elections is coincidence or something more. Apropos of the current era, those of us who focus on corporate board diversity may wonder whether looking at the election of women to Congress and corporate boards in the #MeToo era provides any insights or lessons about female corporate board representation.

This brief Essay examines and comments on possible gender effects of the #MeToo movement on public company board composition in relation to the possible gender effects of the #MeToo movement on the composition of legislative bodies. Although #MeToo has clarified, and perhaps expanded, the salient connections between business issues and women’s issues, those who have the power to elect corporate directors may not fully recognize this connection or other factors as unique values of female corporate board participation. Until additional female membership on corporate boards is substantively valued, swift sustainable changes in the gender makeup of corporate boards may not be realizable without specific, enforceable legal mandates. Although California’s state legislature has taken a bold step in this direction in the #MeToo era, it seems unlikely that additional state legislatures will follow its lead. As a result, the pace of change in corporate board gender composition is likely to continue to be more evolutionary than revolutionary.

I appreciate the opportunity to publish these thoughts generated in connection with a conference held at GWU Law back in 2018.  The conference, “Women and Corporate Governance: A Conference Exploring the Role and Impact of Women in the Governance of Public Corporations,” featured a number of super panels.  I had the opportunity to moderate one (“Women as Counsel and Gatekeepers”) and publish this piece.

At this point, we’re a bit past the New Year, but you might still be thinking about the conferences you’ll attend in 2020, right?  Here are some great ideas:   

The Academy of Legal Studies in Business has a great annual conference in early August.  This year it’s in Providence, Rhode Island, August 4-8, 2020.  I’ve never been to Providence, but I hear it’s lovely.  I can’t wait! 

The Academy also has a number of regional conferences.  Check out all the options (if I missed one, send me an email)!

Canadian ALSB Annual Conference April 30-May 2, 2020 (Toronto, Canada)

Great Lakes ALSB, Fall 2020 (Grand Rapids area, Michigan – check back for more info)

Mid-Atlantic Academy of Legal Studies in Business, April 23-25, 2020 (Atlantic City, NJ)

Mid-West Academy of Legal Studies in Business, March 26-27, 2020 (Chicago, Illinois)

North Atlantic Regional Business Law Association Annual Conference, April 4, 2020 (Easton, Massachusetts)

North East Academy of Legal Studies in Business, May 1-3, 2020 (Lakeville, Connecticut)

Pacific Northwest Academy of Legal Studies in Business, April 23-25, 2020 (Vancouver, Canada)

Pacific Southwest Academy of Legal Studies in Business, February 13-16, 2020 (Palm Springs, California)

Rocky Mountain Academy of Legal Studies in Business, September 25-26, 2020 (Vail, Colorado)

Southern Academy of Legal Studies in Business, March 5-7, 2020 (San Antonio, Texas)

Southeastern Academy of Legal Studies in Business [check back for 2020 updates]

Western Academy of Legal Studies in Business, March 27-29, 2020 (Lake Tahoe)

The following post comes to us from Prof. Ilya Beylin of Seton Hall:

On Monday, I read Ann Lipton’s thoughtful and informative post, on “The Eroding Public/Private Distinction”.  One of the luxuries being a business law professor offers is the space, and perhaps even community encouragement, to feel strongly about and delve deeply into esoteric albeit perhaps consequential matters such as the boundary between public and private securities markets.  Well, the feeling came, and I wrote Ann to see if I could riff on her piece in a response.  So here we are, although the more I mull over the strands in the original piece, the more I recognize the completeness of Prof. Lipton’s work and the keenness of the insights there. 

A definitional question is predicate to evaluating the growth of exceptions to the traditional public/private divide.  Public and private under the ’33 and ’34 Acts have two drastically different implications.  Under the ’33 Act, private typically refers to being able to conduct a securities offering outside of the SEC mediated registration process under Section 5.  Under the ’34 Act, however, private means not having to provide ongoing public disclosure on the state of the company (e.g., quarterly and annual filings, current reports).  While the ’33 Act principally governs the manner in which a primary market transaction may be conducted, the ’34 Act principally governs how secondary trading may be conducted.  Expansions of Regulation D to permit public offers to accredited investors under 506(c), relaxation of Rule 701 to enable greater distribution to employees and other service providers, Crowdfunding under Reg CF, expansion of Reg A into Reg A+, and some of the other incursions we’ve seen since 2005 into the protective sphere of Section 5 do not generally implicate the continued significance of the private/public distinction in secondary markets. 

As background, the Exchange Act’s ongoing public disclosure requirements apply to three prototypical issuers: those that engaged in a public offering under the ’33 Act, those that have enough equity holders (raised, significantly, to up to 2,000 accredited investors from a prior cap of 500 as Prof. Lipton and others have keenly pointed out), and those listed on an exchange.  The realities, however, of secondary market trading mean that substantial liquidity remains largely conditional on becoming exchange listed and thus public for purposes of ongoing disclosure under the ’34 Act. 

[More under the cut]

Continue Reading Guest Post: Prof. Ilya Beylin responds to “The Eroding Public/Private Distinction”

As most readers of this blog are likely aware, the SEC recently proposed some rather dramatic changes to the rules governing shareholder proposals under Rule 14a-8.  Among other things, the revisions would raise ownership and holding period requirements, raise the thresholds for resubmission, and bar representatives from submitting proposals on behalf of more than one shareholder per meeting.

The changes have at least the potential to fundamentally reshape the corporate governance ecosystem, and part of the reason for that is highlighted in a new paper by Yaron Nili and Kobi Kastiel, The Giant Shadow of Corporate Gadflies.  As they document, forty percent of all shareholder proposals are submitted by just five individuals, who have made the practice something of a combined life’s mission and personal hobby.  The proposals submitted by these individuals tend to focus on corporate governance, and they also tend follow the stated governance preferences of large institutional investors.  As a result, these proposals frequently win substantial, if not majority, support, and have a real impact on target companies – which means, over time, they dramatically alter the norms of what is considered good corporate governance. 

Now, there’s no legal reason why we have to depend on a handful of quirky individuals to reshape corporate governance – institutional investors have far greater holdings and could submit proposals far more widely – but, for whatever reason, institutions mainly prefer instead to wait for someone else to propose something and then vote in favor of it.  Some pension funds may be active in submitting proposals, but large mutual funds never submit any, even though they have far greater resources to do so.  As a result, if the revisions to 14a-8 take effect, they could dramatically inhibit the activity of these “gadflies” and thus shareholder proposal activity across the board (of course, some of these gadflies have been at it for decades – Evelyn Davis, one prominent gadfly, died in 2018 – so the reality is, the passage of time might limit their activity anyway).

Nili and Kastiel offer a few policy proposals to relieve the system’s reliance on gadflies.  They suggest we create a nonprofit organization whose job it is to submit proposals, or create a rotating system whereby popular governance reforms are automatically included on corporate ballots.

All of that, of course, assumes that institutional investors want these reforms.  That may not be an unreasonable conclusion – they vote for them, after all – but that just begs the question why the largest institutions aren’t submitting proposals in the first place.

Nili and Kastiel have a couple of theories.  One possibility is that large mutual funds believe that taking the lead on a proposal would anger managers at their portfolio companies.  Funds may depend on these companies for other business, or simply depend on cordial relationships with managers in order to engage with them about various governance-related issues.  Being the face of a proposal – rather than quietly voting in favor of one – could create frictions in these relationships.  Alternatively, the big mutual fund companies may feel that obtrusive activism will make them political targets.  There are already rumblings about the need for greater fund regulation, which is why BlackRock is now busy trying to pretend that it doesn’t have the influence it obviously has.  Open agitation for governance changes might spur a more aggressive regulatory response.

But if that’s right, we might expect large asset managers to at least oppose any changes to Rule 14a-8, because the managers rely on their retail shareholder-avatars to advance the mutual funds’ own agendas.  Yet that’s not what seems to be happening.

There are some asset managers – especially, though not exclusively, ones who focus on corporate social responsibility issues – who have objected to the SEC’s proposed revisions.  But the largest have not.  BlackRock submitted a letter that says – well, honestly, nothing at all; it takes no position.  Meanwhile, Reuters reports that Vanguard submitted a letter that supports restricting the use of 14a-8, though the details are not clear, and nothing’s up at the SEC website as of this posting.*

So, what gives?

Well, an alternative explanation – championed by some commenters, including Sean Griffith and Dorothy Lund – is that large asset managers do not want to be stewards, and do not like voting on governance changes; they do it because the regulatory system requires or at least encourages them to do so.  If that’s the case, these asset managers would be delighted by the prospect of fewer 14a-8 proposals for them to worry about.

But there’s another possibility.  As it turns out, BlackRock may not have taken a position, but the Investment Company Institute, which is a trade association of mutual fund companies, did.  In its letter, the ICI generally supports the 14a-8 changes, and even recommends further limits on proposals that are submitted by investors in mutual funds.

And that, it seems, may part of the issue here.  Mutual fund companies are, well, companies.  Even if they do appreciate the power that Rule 14a-8 gives them over their portfolio investments, they don’t like receiving 14a-8 proposals themselves, either from shareholders in their mutual funds, or at the corporate level.  (BlackRock, for example, often receives proposals submitted under Rule 14a-8.)

So, BlackRock says nothing, and lets the ICI take a position on its behalf.  Pretty sweet way to make its views clear to the SEC while publicly declaring a commitment to “stewardship.”

*It’s hard to draw any conclusions without seeing Vanguard’s letter, but I do note that Wellington Management’s sustainability arm signed on to a letter submitted by Principles for Responsible Investment, which generally urged the SEC to keep the current framework and avoid changes that would disrupt the proposal process.  This is significant because Wellington is one of the managers Vanguard uses for its external/active funds, though Vanguard recently gave its external managers freedom to vote separately from Vanguard’s indexed funds.  So, that’s an interesting dynamic.

 

Emory2020

CALL FOR PROPOSALS AND REGISTRATION INFORMATION

Emory’s Center for Transactional Law and Practice is delighted to announce its seventh biennial conference on the teaching of transactional law and skills.  The conference, entitled “Hindsight, Insight, and Foresight: Transactional Law and Skills Education in the 2020s,” will be held at Emory Law, beginning at 1:00 p.m. on Friday, June 5, 2020, and ending at 3:45 p.m. on Saturday, June 6, 2020.

Come together with your colleagues and friends in Atlanta to reflect upon transactional law and skills education and ponder the answers to three vital questions:

  • Where have we been?
  • What have we learned?
  • Where are we going?

Our keynote speaker – to be announced soon – will elaborate on our theme. In addition, conference attendees will participate in a workshop to create a vision for transactional law and skills education in the 2020s (the “Vision Workshop”).  Finally, we will bestow the second Tina L. Stark Award for Excellence in the Teaching of Transactional Law and Skills.  (For information about how to nominate yourself or someone else for this award, please click here.)

CALL FOR PROPOSALS

 

We are accepting proposals immediately, but in no event later than 5 p.m. on Friday, March 20, 2020. 

We welcome you to present on any aspect of transactional law and skills education as long as you view it through the lens of our theme.  For example, if you present about a course, curriculum, or program, tell us how it’s worked, what you’ve learned, and how you envision it evolving over time.  Alternatively, you may want to focus on just one of the three questions. For example, if you present a “Try-This” session, you may want to examine what you have learned from teaching the exercise a number of times – and even from preparing to teach it to your colleagues. 

We also welcome proposals that address the big picture.  Maybe you have a scheme to address the legal education system’s tendency to value litigation skills training above transactional skills training.  Perhaps you have experience moving a law school faculty and administration to give transactional law and skills education the attention it deserves.  Or maybe you believe that riding the wave of the future means teaching students particular topics or skills – such as how to be a leader or how to use technology.

Try-This Sessions.  Each Friday afternoon “Try-This Session” will be 45-minutes long and will feature one classroom activity and one individual presenter.

Panels.  Each Saturday session, except for one hour devoted to the Vision Workshop, will be approximately 90 minutes long and feature a panel presenting two or more topics grouped together for synergy. 

Please submit the proposal form electronically via the Emory Law website found here before 5 p.m. on March 20, 2020. 

PUBLICATION OF SELECTED MATERIALS

As in prior years, some of the conference proceedings as well as the materials distributed by the speakers will be published in Transactions:  The Tennessee Journal of Business Law, a publication of the Clayton Center for Entrepreneurial Law of The University of Tennessee, a co-sponsor of the conference.

CONFERENCE REGISTRATION

Both attendees and presenters must register for the Conference and pay the appropriate registration fee: $250 (general); $200 (adjunct professor and new professor).  Note: A new professor is someone in their first three years of teaching.

The registration fee includes a pre-conference lunch beginning at 11:30 a.m., snacks, and a reception on June 5, and breakfast, lunch, and snacks on June 6. We are planning an optional Thursday evening reception (June 4) and Friday evening dinner (June 5) at an additional cost of $60 per person for the dinner.

Registration is now open for the Conference and the optional events here.

TRAVEL ARRANGEMENTS AND HOTEL ACCOMMODATIONS

Attendees and presenters are responsible for their own travel arrangements and hotel accommodations. Special hotel rates for conference participants are available at the Emory Conference Center Hotel, less than one mile from the conference site at Emory Law. Subject to availability, rates are $159 per night. Free shuttle transportation will be provided between the Emory Conference Center Hotel and Emory Law.

To make a reservation at the special conference rate, call the Emory Conference Center Hotel at 800.933.6679 and mention “The Emory Law Transactional Conference.” Note: The hotel’s special conference rate expires at the end of the day on Thursday, May 14, 2020.  If you encounter any technical difficulties in submitting your proposal or in registering online, please contact Kelli Pittman, Program Coordinator, at kelli.pittman@emory.edu or 404.727.3382.

We look forward to seeing you in June!

Sue Payne                               Katherine Koops                      Kelli Pittman
Executive Director                 Assistant Director                    Program Coordinator

Boston University’s Rory Van Loo has a new paper examining how private firms now serve as public enforcers and gatekeepers.  It tackles the new pressure for businesses to police conduct by other businesses.  Consider Facebook for example.  After the way Cambridge Analytica used data acquired from Facebook, Facebook faced oversight from the FTC, culminating in an enormous $5 billion fine. Notably, the fine and pressure came primarily to force Facebook to more intensively monitor and control other companies’s behavior.  Amazon, Google, and others have faced similar actions—all to force the platforms to better control third parties.

Van Loo shows that these pressures are not unique to technology firms.  Banks now face pressure from the CFPB to monitor debt collectors.  Oil companies like B.P. must oversee environmental compliance at offshore oil platform companies.  Pharmaceutical companies must oversee suppliers and third-party labs.  Government regulators now routinely conscript private firms and force them to enforce standards–making them “enforcer firms.”

These conscripted enforcer firms playing quasi-regulatory roles put pressure on the idea that they are purely private entities.  The draft defines and explores the new model without endorsing it as the right approach.  Enforcer firms will use their power as contracting parties to create different rules than a more public process might generate.  Their enforcement processes will also differ. They may also be stable in ways that traditional regulators will not–they will not suspend operations if a Congressional appropriation process fails.  Enforcer firms’s size and resources may also ensure that Congress never appropriates resources to oversee them in any comprehensive way.  

Van Loo’s analysis shows that a new realm of private regulation has appeared.  Although we have had self-regulatory organizations operating in the financial sector for some time, the enforcer-firm model differs substantially.  These enforcer firms do not operate with power delegated by Congress and overseen by some other regulatory body.  Rather, the firms use their own contractual power to regulate third parties.  This approach offers real advantages–efficiency, expertise, and responsiveness.  But it’s also potentially dangerous and risks “creating a vast sphere of regulatory arbitrage out of public sight and judicial review.” Van Loo rightly calls for administrative agencies to keep a close eye on these new gatekeepers.