This week, I offer miscellaneous collection of things that caught my attention recently….

In Connection With.  I’ve been keeping track of cases involving a pattern where, roughly, company A and company B are somehow related; company B makes fraudulent statements that affect company A’s price; and shareholders of company A sue company B.  Blog posts here and here and here and here and here and here – also, Mike Levin and I discussed the issue in a Shareholder Primacy podcast (here at Apple, here at Spotify, here at YouTube).

Anyhoo, the latest entry in this series is In re General Motors Co. Securities Litigation, 2025 WL 952479 (E.D. Mich. Mar. 28, 2025), where shareholders of GM brought Section 10(b) claims against both GM and its majority-owned subsidiary, Cruise, alleging that both companies made false statements about the state of Cruise’s autonomous vehicle technology, and that the truth was disclosed when a Cruise car struck and dragged a pedestrian in San Francisco.  Though the court concluded that plaintiffs failed to identify any false statements made by GM or its officers, Cruise officers – and the Cruise company, on its blog – had falsely described the state of the technology and the circumstances surrounding the accident, including disseminating a misleadingly-edited video of the crash.  Without much trouble, the court went on to hold that Cruise’s statements had been made in connection with the sale of GM securities, and allowed the claims against Cruise and its officers to proceed.

Which seems obviously correct!  But I do point out that, without much coherence, the court in In re Volkswagen AG, 661 F. Supp. 3d 494 (E.D. Va. 2023), dismissed claims against Volkswagen’s wholly owned American subsidiary, VWGoA, after VWGoA made that stupid joke about Volkswagen changing its name to Voltswagen.  The court agreed the statements were false, made with scienter, in connection with trading in Volkswagen securities, but seemed to believe that if there was no claim against the parent, there could not be against the subsidiary either.

Meanwhile, of course, in Klein v Altria Group, 2021 WL 955992 (E.D. Va. Mar. 12, 2021), shareholders of the publicly-traded Altria were able to bring claims against JUUL, in which Altria had a minority stake, for making false representations about its business – but the Klein court had to distinguish Ontario Public Service Employees Union Pension Trust Fund v. Nortel Networks Inc., 369 F.3d 27 (2d Cir. 2004), where shareholders of JDS Uniphase, which held a minority stake in Nortel, were not permitted to sue Nortel when JDS Uniphase’s stock price dropped in the wake of revelations about Nortel’s fraud.

So. You know.

Nano, Nano.

Chancellor McCormick’s decision in Desktop Metal v. Nano Dimension has attracted some attention; Nano agreed to acquire Desktop Metal; a disgruntled Nano shareholder then obtained control of the board and sought to avoid the merger, largely by regulatory foot-dragging with CFIUS.

It’s a colorful set of facts but two things stood out for me.  First, several weeks ago, I blogged about another broken deal, between Kroger and Albertsons, and how Albertsons also accused Kroger of regulatory foot-dragging.  In that blog post, I pointed out that, even though – by its text – the merger agreement appeared to contemplate different levels of “effort” that the parties would apply to complete the merger, with a higher level imposed for obtaining regulatory approval, Delaware caselaw has traditionally refused to recognize “effort” distinctions in merger contracts.

Well, not anymore.  I don’t think it’s relevant to the outcome, really – in Nano, the acquiring company was actively trying to avoid the merger, not merely applying imperfect effort – but in her decision, Chancellor McCormick casually acknowledged and accepted that the merger contract expected especially high efforts to satisfy CFIUS with lower levels of effort for other aspects of deal completion.  See Op. at 15, 111. Albertsons will be happy.

The other thing that jumped out in Nano was, well, the chutzpah.  In order to avoid Desktop’s claims for specific performance, Nano argued that Desktop itself was in breach of the “Company Transaction Expenses” covenant, which prohibited Desktop from incurring expenses in excess of $15 million in connection with the agreement itself.  What expenses did Desktop incur, do you suppose?  If you guessed, litigation expenses to sue Nano to enforce the agreement, you are correct!

And nothing in the contract specifically … contradicted? … that interpretation, but McCormick was not having it:

Desktop’s argument is consistent with the parties’ contractual scheme.  The parties stipulate to specific performance in the event of breach. Nano’s reading of Company Transaction Expenses would effectively preclude Desktop from seeking specific enforcement of the agreement by limiting its litigation budget.  Nano has spent more than $17 million on this litigation.  Nano’s reading effectively means that only Nano has a right to zealously enforce the Merger Agreement due to the asserted cap on litigation fees. This is the sort of non-sensical result that would defy any party’s reasonable expectations.

If Nano correctly interpreted the definition of Company Transaction Expenses, the prevention doctrine precludes Nano from terminating the Merger Agreement based on a failure of the Transaction-Expenses Covenant. That is because Desktop never would have incurred “legal fees and expenses spent on this litigation” but for Nano’s breaches of the Merger Agreement.  Allowing Nano to benefit from its own breach by counting enforcement costs against the transaction expense cap would improperly reward contractual violations.

Empirical researchers: Lemme know if future merger agreements define capped “company transaction expenses” to exclude litigation expenses associated with enforcement, would you?

Investment Company Act vs. Takeover Defenses. I’ve blogged a couple of times about When Takeover Defenses Meet the Investment Company Act, in connection with Saba’s activism at various closed end funds. Well, we have a third instance.  Section 18(d) of the Investment Company Act says:

It shall be unlawful for any registered management company to issue any warrant or right to subscribe to or purchase a security of which such company is the issuer, except in the form of warrants or rights to subscribe expiring not later than one hundred and twenty days after their issuance and issued exclusively and ratably to a class or classes of such company’s security holders…

Which was given a workout when ASA tried to fend off Saba’s activist attack by creating a flip in poison pill – all the usual features, rights to all shareholders, but if Saba increased its stake, Saba’s rights would become void and everyone else’s would be triggered.  And, to get around the 120 day statutory limit, ASA’s pill expired after 120 days, but the board just adopted a new one.  And then another new one.

In Saba Capital Master Fund, LTD. et al v. ASA Gold and Precious Metals, 2025 WL 951049 (S.D.N.Y. Mar. 28, 2025), Saba argued that the successive pills violated the statute, and further that because Saba’s rights exclusively were nullified after a triggering event, the rights were not distributed “ratably” among share classes.

Now, Section 18(d) of the Investment Company Act was part of the original statute in 1940, long before the poison pill was a twinkle in anyone’s eye.  The concern at the time, as far as I can tell, was substantive: closed-end investment companies had developed a reputation for adopting complex and manipulative capital structures, frequently for the benefit of insiders and affiliates.

Nonetheless, whatever its origin, the provision is there now and Saba argued it prohibited ASA’s pill. 

And it got a partial win!  The court agreed that ASA’s tacking scheme violated the Act; to interpret the Act to permit successive pills would render the expiration provisions meaningless.  In so doing, the court relied on SEC v. Sloan, 436 U.S. 103 (1978), where the Supreme Court rejected a similar tactic by the SEC to get around a ten-day limit on trading suspensions. The court distinguished (unconvincingly) a 2007 decision out of Maryland, but mostly just seemed to think the Maryland court had got it wrong.

But the court rejected Saba’s claim that the fundamental design of the pill, which nullified Saba’s own rights, violated the ratable requirement, because Saba did, in fact, receive rights ratably with everyone else:

Section 18(d) requires only that rights be issued proportionally, and in the context of this case, required only that Plan Rights be allocated on a pro rata basis to all shareholders.  The Rights Plans issued a Plan Right, per share, to Saba just as it issued them to other shareholders, and accordingly, there is no violation.

I mean, especially given the original concerns of the ICA – special rights to insiders – I have my doubts about a statutory interpretation that allows the issuance of rights to everyone, but that are only exercisable by some.  That said, any other interpretation would mean that closed-end funds can’t issue pills at all, even for a limited duration, and I can see why the court might have been uncomfortable with that interpretation.

Still, the story’s not over.  Not only is ASA appealing, but it also just adopted another pill!  Saba is now moving to enforce the original order.

Courts really don’t like it when you intentionally issue false projections in order to make a merger look better, again.  Hey, remember that time Vista Equity Partners kind of induced the CEO of Mindbody to breach his fiduciary duties when selling the company, and then got dismissed out of the Delaware case because of some odd procedural choices by the plaintiffs?  (Mike Levin and I discussed that case in a podcast, too: here at Apple, here at Spotify, here at Youtube).  Anyway, there was also a securities fraud
case, in which the target shareholders alleged that Mindbody intentionally lowballed its future prospects in order to persuade shareholders to vote for the deal (that case settled).

Well, the Ninth Circuit just reversed a district court’s dismissal of another case involving a Vista acquisition, where shareholders alleged, you’ll never believe this, that the target lowballed its future prospects in order to persuade shareholders to vote for the deal. 

As with the Mindbody case, the court almost seemed to go out of its way to redefine “forward looking” to avoid application of the PSLRA safe harbor. It held that representations as to how projections are prepared – in good faith, management’s best judgment, etc – are not forward looking statements, and therefore, if false, are actionable.  Here, they were, because the target had a business model of acquiring other companies, but inexplicably omitted acquisition growth in its latest (and only its latest) set of projections, without disclosing that fact to investors. 

Also interestingly, the plaintiffs were permitted to proceed on a claim that the target misrepresented the contents of an ISS report.  ISS had recommended that shareholders vote in favor of the merger, but only qualifiedly, with a scathing analysis; the target touted the headline but not the details.  The reason this stands out is because ISS reports are, like, semi public.  They’re sold to institutional clients, and that means lots of people see them and have access to them – especially the kind of investors who are most likely to make an impact – even if they aren’t made generally available.

Ordinarily, that’s the kind of scenario that’s ripe for a truth on the market argument, but this wasn’t a fraud on the market case – it was a proxy fraud case!  And in a proxy fraud case, the issue is whether shareholders were actually adequately informed, not whether information was incorporated into stock prices via informed trading. (Once, in the context of 10(b), the Ninth Circuit nicely drew the distinction).

That said, if the case goes much further, I do wonder if defendants will argue that, because the ISS report was made available to most of the largest shareholders, their votes were informed, and their votes were enough to win majority approval of the deal.

And another thing. On this week’s Shareholder Primacy podcast, Mike Levin and I talk (again) about the amendments to Delaware law: what the final versions do, and What It All Means.  Here at Apple, here at Spotify, and here at YouTube.

Private company share trading seems to be the theme of the week.  The WSJ reported on it Tuesday, and on Wednesday, Mike Levin and I posted a new episode of Shareholder Primacy – where we talk about “withhold the vote” and “vote no” campaigns for corporate directors – but we also talk about the phenomenon of private company share trading.  (Here on Apple, here on Spotify, here on YouTube). 

The WSJ focuses on how accredited investors – which is a relatively low bar, for individuals, it just means someone who earns $200K per year, or has $1 million net worth (minus the primary residence) – are increasingly able to trade shares of pre-IPO companies on sites like EquityZen and Forge Global.

But the WSJ only glancingly references the point that Mike and I focused on in the podcast: The investors aren’t trading shares of the operating company; they’re trading shares of SPVs, which themselves own shares of the operating company.  This is something I posted about before, here – it’s a way to avoid the securities law requirement that companies begin public reporting if they have 2,000 investors holding a single class of equity.

Except, under the securities laws, the operating company is not supposed to be involved in creating the SPV – a detail that companies seem to be ignoring.

The phenomenon allows companies to stay private longer – they can raise all the capital they need, and get liquidity to boot, through the use of SPVs – but also herds a lot of only moderately wealthy investors into opaque funding vehicles, that may charge hefty fees, that give them no insight into the operating company and no rights associated with it (like, fiduciary claims, inspection rights, etc).

For example, here are the offering documents that StartEngine posted for investment in a StartEngine SPV that will invest in Kraken. As I understand it, in addition to a 20% carry, the SPV will purchase the Kraken securities from one of its affiliates at a price that is approximately 45% higher than the price the affiliate paid.

Which brings me to CoreWeave.  It was generally viewed as a hot AI startup until it filed for its IPO – at which point, the public got a look at its financials and recoiled (very much like WeWork, in that respect). The IPO is supposed to happen today; I guess we’ll see how it trades, but it’s already been scaled back.

One argument is that CoreWeave is disappointing precisely because it needed the IPO – public companies are where you go when you aren’t good enough to be hoarded in private markets. But that situation is unsustainable because, as Elisabeth de Fontenay pointed out several years ago, private market investors rely on the information supplied in public markets in order to value their companies.  Without a robust public market, everyone’s flying blind.

These are the kind of dangers that we’re exposing moderately wealthy retail investors to, with a healthy dose of SPV fees to boot. 

And another thing. Belated plug for the Shareholder Primacy podcast released last week, where Mike Levin spoke to Sarah Haan at Washington & Lee about the connections between shareholder democracy and civic democracy.  Here at Apple, here at Spotify, and here at YouTube.

Is a question I get asked a lot, especially after Musk offered an enthusiastic gesture that absolutely, positively, in no way resembled a Nazi salute pleasedon’tsueme. 

And the answer is – no. 

Even under the law of Delaware-before-SB-21 (and before Texas’s “hold my beer” alternative, which would among other things, prevent not only shareholders, but the corporation’s own board, unprompted, from suing a director or officer in the right of the corporation for anything other than fraud, intentional misconduct, ultra vires acts, or knowing violations of law), this cannot be the basis for a claim by Tesla’s shareholders against Elon Musk.

As Tesla’s CEO and a member of the board, Elon Musk owes Tesla a duty of care, and a duty of loyalty.  That means he cannot run Tesla with gross negligence – which, under Delaware law (let’s assume Texas law is no more strict), would be defined as akin to recklessness – and he cannot be disloyal, which means acting under a conflict of interest, intentionally trying to harm the company, or intentionally failing to take action to benefit Tesla when he knows he has a duty to take such action.

Let’s start with loyalty.  Whatever his motives are, he is almost certainly not intentionally trying to harm Tesla.  He may be blinded to the effects his actions are having on the brand, but he hasn’t set out to wreck it, nor is he disregarding any specific action he knows needs to be taken on Tesla’s behalf.  There are no reports, for example, that he’s letting Tesla plants idle while they wait for him to make a decision, nothing like that.

And whatever else he’s doing – even his work for DOGE which he is totally not doing it’s all Amy Gleason shut up – there is no evidence that his governmental work is causing him to deal with Tesla as a counterparty.  He is not, for example, assuming a governmental role while bargaining with the government on Tesla’s behalf (that would be what’s he’s doing at SpaceX.) If anything, his proximity to government is giving Tesla certain advantages, like an infomercial on the White House lawn.

So that leaves the duty of care.  Which might appear to be in play, to the extent Musk is ignoring Tesla in favor of his other interests.  But under Delaware law, at least, inaction is gauged – again – by conscious disregard of one’s duties.

In other words, neglect only rises to the level of a fiduciary breach when the corporate manager intentionally refuses to take actions he knows must be taken.

A shareholder couldn’t even sue on the grounds that Tesla has made false representations about Musk’s role with the company, because here’s the company’s most recent 10-K:

We are highly dependent on the services of Elon Musk, Technoking of Tesla and our Chief Executive Officer. Although Mr. Musk spends significant time with Tesla and is highly active in our management, he does not devote his full time and attention to Tesla. For example: Mr. Musk also currently holds management positions at Space Exploration Technologies Corp., X Corp., X.AI Corp., Neuralink Corp. and The Boring Company, and is involved in other ventures and with the Department of Government Efficiency….

if our ESG practices do not meet investor or other industry stakeholder expectations, which continue to evolve, we may incur additional costs and our brand, ability to attract and retain qualified employees and business may be harmed. Compliance with any current or future legal requirements on these topics may result in additional costs or risks to us, including harm to our reputation, reduction in customer demand, and increased legal and operational risks.

Which brings us to the broader issue. Whether you consider Musk’s conduct in terms of care, or in terms of loyalty, ultimately, it’s up to the board of directors to oversee his behavior.  As a formal matter, they’re the ones who “hired” him as CEO and who retain him in that role; they’re the ones who, in the first instance, have a responsibility to rein him in if he is not performing adequately.  Which is why – even if Musk had violated his duties of care or loyalty – any shareholder bringing a lawsuit first would have to demonstrate that the board is incapable of performing its own functions.

And, I mean, yeah, it’s no secret what the board’s ties are to Musk, but I find it very difficult to believe any court would go so far as to hold they were incapable of overseeing him as CEO.  After all, their stock compensation is tied to his performance as well.  Even the Tornetta decision, holding that the board was captured by Musk, only applied to the pay award – not for all things forever and for all time.

If that sounds like shareholders have a lot of hurdles to overcome before bringing a lawsuit, correct!  Because the system is predicated on the idea that lawsuits are a last resort for disciplining recalcitrant corporate managers, not a first resort.  The first resort is supposed to be the market.  Corporate CEOs (and boards) are paid with stock, so that they will care if stock prices drop.  And even if they don’t care, public shareholders will – and they’ll respond to stock drops by voting in new directors who will do a better job. The system just isn’t built to handle a scenario where a CEO, board, and public shareholders all respond with a collective shrug when a stock loses nearly half its value within the space of a few months.

And that’s not really a problem.  After all, if the stock drop was due to, I dunno, Tesla philanthropy, I probably wouldn’t be having this conversation with people.  The reason the question comes up, usually, is because the person doing the asking believes Elon Musk is causing harm in the world, and so floats the possibility that he’s violating shareholder rights as a mechanism to get him to stop.

But if you were genuinely concerned for the plight of Tesla shareholders, you wouldn’t recommend a lawsuit.  What could that possibly get you?  There’s no realistic chance of Musk, like, paying financial damages to make up for the price drop, so the only remedy would be some kind of judicial order that he focus more on Tesla, or that he be fired from Tesla entirely.  But Tesla shareholders don’t want his firing, nor should they – Tesla’s stock price is still well above what it would be for an ordinary car company.  And if Musk were to focus more on Tesla, that might be great in theory, but it’s not a command that a court can realistically enforce.

So that’s my point.  I’m not saying corporate law is irrelevant to societal outcomes – I think it does have a role to play, actually, an important role – but not quite this directly.  The formal duties that a corporate officer owes to a company are not going to be what causes Elon Musk to step back from DOGE.

Meredith Ervine at Deallawyers highlights this blog by Milbank on Advance Notice Bylaws. Two things stand out to me.

First, apparently companies are now requiring nominating activists to vote only their long positions, not borrowed shares:

While lending shares of the corporation to cover short sales may provide income for large fund complexes, it is unlikely that these fund complexes (or other long-term holders) wish to promote empty voting in a contested corporate election.  Permitting the voting of borrowed shares by an activist – amplifying the activist’s voting power when there is no meaningful economic stake in the shares being voted – misaligns voting power with the economic consequences of the vote and does not promote good long-term decision making. The Alignment ANB accordingly requires the nominating stockholder and allied participants in the solicitation to waive their right to vote shares in excess of their collective net long position – in other words, to waive the right to vote shares that were borrowed or otherwise subject to an offsetting sale or delivery obligation.

I didn’t know you could do that by bylaw! Do similar requirements apply to incumbents (a la Kiani at Masimo?).

Second, Milbank recommends questionnaires delve into the nominee’s independence from the nominating activist:

In other situations, activists will nominate “independent” directors, …At times, however, the term “independent” is applied rather liberally, …The Alignment ANB seeks to make the connections between nominees and the activist clearer, requiring disclosure of whether the nominee and activist have had discussions to align on a shared agenda for the corporation (and if so, the result of such discussions), on financial, social and family ties, and finally, on whether the nominee is expected to share confidential board information with the activist going forward. The degree of independence of any given nominee will matter acutely to voting stockholders, particularly if they are not fully on board with the activist’s platform or if their financial interests do not clearly align with the activist’s.

In light of SB 21, the concern is … ironic.