With the SEC considering how to raise the standards for investment advice, it’s important to realize that more is at stake than just money.  If a retirement investor takes a large loss because of bad financial advice, the aftermath can be deadly.  A study recently published in the Journal of the American Medical association examined the impact of wealth shock on mortality.   Compared to persons that didn’t experience wealth shock, the persons that experienced wealth shock faced significantly higher mortality rates:

In a nationally representative sample of US adults aged 51 years or older, more than 25% of individuals experienced a negative wealth shock of 75% or more during a 20-year follow-up period, from 1994 through 2014. A negative wealth shock was associated with an HR of 1.50, a risk that was only slightly smaller than the risk associated with asset poverty, an established social determinant of mortality. Furthermore, the association between negative wealth shocks and mortality did not differ by initial levels of net worth; thus, wealth shock may represent a potential risk factor for mortality across the socioeconomic spectrum.

The wealth shock research is consistent with the FINRA Foundation‘s finding that financial fraud can lead to depression and other negative health effects.  Wealth shocks might lead to increased mortality because the stress and anxiety associated with the loss drive negative health consequences.  It may also change the decisions people make.  Many people might put off or avoid medical care after losing wealth because of the high prices. 

Getting quality investor protection rules matters.  If better financial advice can reduce the likelihood of wealth shock, it’ll save lives. 

To be sure, investment fraud and bad financial advice isn’t the only possible cause for wealth shock.  The authors recognized that our costly medical system that often sticks patients with surprising and stunning bills may also be to blame:

Furthermore, because medical expenses from major illness can be a primary trigger of negative wealth shock in middle-aged and older adults,it can be difficult to disentangle the effect of negative wealth shocks on subsequent health outcomes from the effect of the medical illness itself.

Special thanks to Dr. Robert Roush and Debra Speyer for helping bring this study more attention.  We served on a panel together at the Public Investors Arbitration Bar Association’s Annual Meeting. 

 

Last week Dr. Denis Mukwege won the Nobel Peace Prize for his work on gender-based violence in the Democratic Republic of Congo (DRC). This short video interview describes what I saw when I went to DRC in 2011 to research the newly-enacted Dodd-Frank disclosure rule and to do the legwork for a non-profit that teaches midwives ways to deliver babies safely. For those unfamiliar with the legislation, U.S. issuers must disclose the efforts they have made to track and trace tin, tungsten, tantalum, and gold from the DRC and nine surrounding countries. Rebels and warlords control many of the mines by controlling the villages. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world’s cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. 

The stated purpose of the Dodd-Frank rule was to help end the violence in DRC and to name and shame companies that do not disclose or that cannot certify that their goods are DRC-conflict free (although that labeling portion of the law was struck down on First Amendment grounds). I  wrote a law review article in 2013 and co-filed an amicus brief during the litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rule, here about the EU’s version of the rule, here about the differences between the EU and US rule, and half a dozen times since 2013.

I had the honor of meeting Dr. Mukwege in 2011, who at the time did not support the conflict minerals legislation. He has since endorsed such legislation for the EU. During our trip, we met dozens of women who had been raped, often by gangs. On our way to meet midwives and survivors of a massacre, I saw five corpses of villagers lying in the street. They were slain by rebels the night before. I saw children mining gold from a river with armed soldiers only a few feet away.  That trip is the reason that I study, write, and teach about business and human rights. I had only been in academia for three weeks when I went to DRC, and I decided that my understanding of supply chains and corporate governance from my past in-house life could help others develop more practical solutions to intractable problems. I believed then and I believe now that using a corporate governance disclosure to solve a human rights crisis is a flawed and incomplete solution. It depends on the belief that large numbers of consumers will boycott companies that do not do enough for human rights. 

What does the data say about compliance with the rule? The General Accounting Office puts out a mandatory report annually on the legislation and the state of disclosures. According to the 2018 report:

Similar to the prior 2 years, almost all companies required to conduct due diligence, as a result of their country-of-origin inquiries, reported doing so. After conducting due diligence to determine the source and chain of custody of any conflict minerals used, an estimated 37 percent of these companies reported in 2017 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 39 and 23 percent in 2016 and 2015, respectively. Four companies in GAO’s sample declared their products “DRC conflict-free,” and of those, three included the required Independent Private Sector Audit report (IPSA), and one did not. In 2017, 16 companies filed an IPSA; 19 did so in 2016. (emphasis added).

But what about the effect on forced labor and rape? The 2017 GAO Report indicated that in 2016, a study in DRC estimated that 32 percent of women and 33 percent of men in these areas had been exposed to some form of sexual and gender-based violence in their lifetime. Notably, just last month, a coalition of Congolese civil society organizations wrote the following to the United Nations seeking a country-wide monitoring system:

… Armed groups and security forces have attacked civilians in many parts of the country…Today, some 4.5 million Congolese are displaced from their homes. More than 100,000 Congolese have fled abroad since January 2018, raising the risk of increased regional instability… Since early this year, violence intensified in various parts of northeastern Congo’s Ituri province, with terrifying incidents of massacres, rapes, and decapitation. Armed groups launched deadly attacks on villages, killing scores of civilians, torching hundreds of homes, and displacing an estimated 350,000 people. Armed groups and security forces in the Kivu provinces also continue to attack civilians. According to the Kivu Security Tracker, assailants, including state security forces, killed more than 580 civilians and abducted at least 940 others in North and South Kivu since January 2018. (emphasis added)

The U.S. government provides $500 million in aid to the DRC and runs an app called Sweat and Toil for people who are interested in avoiding goods produced by exploited labor. As of today, DRC has seven goods produced with exploitative labor: cobalt (used in electric cars and cell phones), copper, diamonds, and, not surprisingly, tin, tungsten, tantalum, and gold- the four minerals regulated by Dodd-Frank. The app notes that “for the second year in a row, labor inspectors have failed to conduct any worksite inspections… and [the] government also separated as many as 2,360 children from armed groups…[t]here were numerous reports of ongoing collaboration between members of the [DRC] Armed Forces and non-state armed groups known for recruiting children… The Armed Forces carried out extrajudicial killings of civilians including children, due to their perceived support or affiliation with non-state armed groups. ..”

For these reasons, I continue to ask whether the conflict minerals legislation has made a difference in the lives of the people on the ground. The EU, learning from Dodd-Frank’s flaws, has passed its own legislation, which goes into effect in 2021.  The EU law applies beyond the Democratic Republic of Congo and defines conflict areas as those in a state of armed conflict, or fragile post-conflict area, areas with weak or nonexistent governance and security such as failed states, and any state with a widespread or systematic violation of international law including human rights abuses. Certain European Union importers will have to identify and address the actual potential risks linked to conflict-affected areas or high-risk areas during the due diligence of their supply chains. 

Notwithstanding the statistics above, many investors, NGOs, and other advocates believe the Dodd-Frank rule makes sense. A coalition of investors with 50 trillion worth of assets under management has pushed to keep the law in place. It’s no surprise then that many issuers have said that they would continue the due diligence even if the law were repealed. I doubt that will help people in these countries, but the due diligence does help drive out inefficiencies and optimize supply chains.

Stay tuned for my upcoming article in UT’s business law journal, Transactions, where I will discuss how companies and state actors are using blockchain technology for due diligence related to human rights. Blockchain will minimize expenses and time for these disclosure requirements, but it probably won’t stop the forced labor, exploitation, rapes, and massacres that continue in the Democratic Republic of Congo. (See here for a Fortune magazine article with a great video discussing how and why companies are exploring blockchain’s uses in DRC). The blockchain technology won’t be the problem– it’s already being used for tracing conflict diamonds. The problem is using the technology in a state with such lawlessness. This means that blockchain will probably help companies, but not the people the laws are meant to protect. 

 

 

 

 

 

 

 

 

 

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This week, the Delaware Supreme Court decided Flood v. Synutra, and began to clear up some of the questions left open after its earlier decision in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).  Flood itself is relatively straightforward but, for me, it inevitably calls to mind some larger issues regarding the relationship between independent directors and controlling shareholders under Delaware law.

For many years, the regime in Delaware was that a controlling shareholder squeeze-out transaction would be reviewed for entire fairness, but the burden to prove lack of fairness would be placed on plaintiffs if the deal was approved by either a majority of the minority shareholders, or by a committee of independent directors who acted freely, without coercion, had the power to say no, etc. See Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del. 1994).

In MFW, the Delaware Supreme Court held that if a controlling shareholder employs both protections, and makes clear from the outset that any deal will be conditioned on their satisfaction, and there is no reason to think the protections were circumvented (i.e., the committee acted with care, was fully empowered, and so forth), the resulting deal will get business judgment review.  But a lot was still left open.

For one thing, MFW had this odd footnote that suggested that an independent committee’s lack of care/bargaining power might be demonstrated, for pleading purposes, by a showing that the deal price was insufficient.  The footnote was odd because normally a lack of care is not pled by challenging a substantive outcome; allowing it in this instance suggested the Court was not entirely confident that MFW’s dual protections truly substituted for an arm’s-length deal.  And for another thing, MFW did not specify how early in the process the controller would have to disable itself to be entitled to business judgment protection.

So in Flood, per Chief Justice Strine, the Court began to close the holes.

First, it basically did away with MFW’s baffling footnote, which to be honest is more housekeeping than anything else.

And second, the Court held that “so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process, when it is selecting its advisors, establishing its method of proceeding, beginning its due diligence, and has not commenced substantive economic negotiations with the controller, the purpose of the pre-condition requirement of MFW is satisfied.”

In other words, a controlling shareholder may still take advantage of the MFW framework if it proposes the deal without the protections, and adds them later, so long as no “substantive economic negotiations” (and possibly other steps) have taken place in between.

Justice Valihura, in dissent, argued that the majority’s rule would inevitably draw courts into factual disputes as to what constitutes “substantive economic negotiations.” (And I admit, even I’m unclear what happens if the deal is proposed, and the special committee hires advisors and conducts due diligence without any negotiations, but before the conditions are added).  Valihura would have preferred that the MFW rule kick in only if the conditions appear in the first formal written proposal (with, it must be said, exceptions if plaintiffs can show there was intentional evasion via oral negotiations before that point – so factual disputes are always possible).

Which brings me to the issue of independent directors.

In Flood, the controlling shareholder submitted a letter proposing a deal without either of MFW’s protections.  Over the next two weeks, a new independent director – one previously proposed by the controller – was added to the Board, a special committee was formed to consider the proposal, and the newly-added director was placed on that committee.  Also (and this was the focus of the Valihura dissent) there were other arrangements involving each side hiring counsel, and the directors being briefed on their fiduciary duties.  After that, the controller submitted a revised letter conditioning the deal on the MFW protections.  Despite the intervening events between the first proposal and the revised letter, the majority held that the MFW framework would apply.  The majority was untroubled by the new addition to the Board, or his presence on the special committee.  In other words, the Court was confident that, even under these circumstances, he could perform his duties fairly.

So here’s why this all strikes me as odd.

It has never been entirely clear whether the Delaware Supreme Court believes that independent directors can be trusted to stand up to controlling shareholders.

In Kahn v. Lynch, the Court held that squeeze out mergers would get entire fairness review even if approved by independent directors who acted diligently, fairly, etc.  But it did not justify its holding on the ground that independent directors are likely to be coerced by a controller; rather, it only explicitly said that minority shareholders might feel coerced.  Standing alone, then, Kahn might be interpreted to mean that since mergers ordinarily have dual protections (disinterested director plus disinterested shareholder approval), then if only one is present (disinterested director approval), there must be heightened scrutiny, with no suggestion that independent directors are likely to bow to a controller’s wishes.

Subsequent Chancery cases – including one authored by Chief Justice Strine when he was Vice Chancellor – interpreted Kahn to mean that independent directors might be cowed by the presence of a controller, and therefore their decisions are suspect. See, e.g., In re Pure Res., Inc., S’holders Litig, 808 A.2d 421 (Del. Ch.2002) (where then-VC Strine characterized controllers as 800-pound gorillas).  As a result, a series of Chancery cases have subjected controlling shareholder transactions to entire fairness review, even if approved by the independent directors, and even if the transaction wouldn’t ordinarily require shareholder approval. See discussion in In re Ezcorp Inc. Consulting Agreement Derivative Litigation, 2016 WL 301245 (Del. Ch. Jan. 25, 2016).

Then came MFW.  In response, some Chancery cases clarified that controllers can get the benefit of business judgment review if they employ the MFW framework, including transactions that ordinarily wouldn’t require shareholder approval at all.  See In re Ezcorp Inc. Consulting Agreement Derivative Litigation, 2016 WL 301245 (Del. Ch. Jan. 25, 2016); IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964 (Del. Ch. Dec. 11, 2017) (endorsing Ezcorp).

In other words, Chancery courts seem (?) to have coalesced around the view that controlling shareholders are likely to overwhelm both stockholders and independent directors, and therefore we can only trust the fairness of an interested-controller transaction if both approve, without any additional evidence of coercion.

If I’m not mistaken, the Delaware Supreme Court did eventually explicitly endorse the idea that directors can never be truly independent of a controller, but only twice.  In Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997), the Court held:

Entire fairness remains applicable even when an independent committee is utilized because the underlying factors which raise the specter of impropriety can never be completely eradicated and still require careful judicial scrutiny….The risk is thus created that those who pass upon the propriety of the transaction might perceive that disapproval may result in retaliation by the controlling shareholder. Consequently, even when the transaction is negotiated by a special committee of independent directors, no court could be certain whether the transaction fully approximated what truly independent parties would have achieved in an arm’s length negotiation.

(quotations and alterations omitted).  Later, the Court said the same thing in Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del.2012), quoting Tremont.  But these cases are the only ones that I know of where the Delaware Supreme Court explicitly said that we cannot fully trust even independent directors when they stand opposite controlling shareholders.  And I note that earlier cases held in dicta that independent directors could cleanse transactions involving controlling shareholders.  See, e.g., Summa v. Trans World Airlines, Inc., 540 A.2d 403 (Del. 1988); Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993).

(Am I wrong? Is there another case where the Delaware Supreme Court was explicit about the fact that independent directors should be distrusted as a matter of law – even absent a showing of some specific dysfunction – when across the table from a controlling shareholder?)

But if that’s right, there’s an odd incongruity, which Vice Chancellor Laster explored in detail in In re Ezcorp Inc. Consulting Agreement Derivative Litigation, 2016 WL 301245 (Del. Ch. Jan. 25, 2016), and that then-Vice Chancellor Strine flagged in In re Pure Res., Inc., S’holders Litig, 808 A.2d 421 (Del. Ch.2002).  Namely, it is well-established that independent directors are presumed to be unbiased for the purposes of the demand requirement in a derivative lawsuit, even if the defendant is a controlling shareholder.  In other words, we always trust that independent directors can make a fair determination as to whether it is in the corporation’s interest to file a lawsuit against the controller.  That much goes back to Aronson v. Lewis, 473 A.2d 805 (Del. 1984).

The Aronson rule does not seem to have changed – mostly.  I’ve previously blogged about how in Delaware Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) and Sandys v. Pincus, 152 A.3d 124 (Del. 2016), the Delaware Supreme Court addressed demand futility in cases against controlling shareholders, and employed a much more nuanced inquiry than it had performed in the past.  Specifically, the Court was willing to hold that nebulous social and business ties could, collectively, compromise a director’s independence.  Neither case, however, limited its holding to the controlling shareholder context (and Chancery has not interpreted the cases to be so limited).  So Sanchez and Sandys, as far as we know, are not cases about controlling shareholders generally; they are cases about what constitutes independence.

So now here we are, back in the context of a controlling shareholder squeeze-out, and we have a prima facie reason to distrust the decisionmaking of the independent directors: A whole new one was added to the board, at the controller’s behest, and added to the special committee, after the controller had proposed the deal.

But does the Court suspect wrongdoing?  No!  To the contrary, it cites Aronson – the original case to hold that independent directors are unlikely to be cowed by controllers – to justify its faith in the directors’ fortitude.  See Flood, slip op. at 8 n.37.  The Court does not invoke Tremont, with its explicit doubts whether independent directors can resist controllers.

Point being, which is it?  Do we trust independent directors to protect minority shareholders when their interests diverge from the controller, or don’t we?  If we do, then MFW should only apply in the context of transactions that legally cannot be consummated without both director and shareholder approval; if the transaction does not require both, approval by independent directors should be sufficient.  And if we don’t trust independent directors to stand up to controllers, then MFW should apply to all situations where a controlling shareholder has interests that diverge from the minority, including determinations of whether demand is futile.  And if we don’t fully trust independent directors to defy controlling shareholders, we should be much more suspicious of squeeze-outs that are initiated without the MFW protections, even if the directors only engage in minimal preparations before those protections are added.  Or perhaps the demand requirement is its own separate world – which is what VC Laster seemed to think in Ezcorp – in which case, Aronson should not be used to support an inference of director independence in other contexts.

Anyhoo, these incongruities have persisted for many years; it’s quite possible they’ll continue for many years more, and I guess we’ll have to live with the uncertainty for now.

In the crypto-enforcement space, the SEC recently reached an administrative settlement with TokenLot, an unregistered broker-dealer firm, and its two twenty-something principals. TokenLot described itself as an “ICO Superstore” and offered access to all sorts of tokens.  Many of these tokens were, undoubtedly, securities.  

Interestingly, the SEC order here includes an undertaking to “destroy” TokenLot’s digital assets:  

Destroy the digital tokens in the Current Inventory within 30 days of the date of this Order and Pending Inventory within 30 days of receipt by TokenLot; 

This isn’t something I’ve seen before.  It’s also something that makes me scratch my head.  I know how to destroy ordinary things.  If I wanted to destroy a piece of paper I could just shred it or burn it.  Once that happens, I can confidently say that the object has been “destroyed.”  

A distributed asset is a bit different.  If it exists on many computer nodes across the world, I don’t have the power to go into all of those notes and change them to erase the existence of the asset.  At best, all I could do is “destroy” the key to access/move the asset.  This seems different to me.

I reached out to TokenLot’s counsel, Lisa Braganca, to ask how they were going to “destroy” these assets.  She told me that she and her clients are working closely with the SEC and an independent consultant to come up with a process to destroy these crypto assets. It’ll be interesting to see how this happens.

Special thanks to Carla Reyes for bringing some attention to this issue in her excellent talk on this issue at the PIABA Annual Meeting.

California drives me nuts with lazy references to LLCs — “limited liability companies” — as” limited liability corporations.” See, e.g., Dear California: LLCs are Not Corporations. Or Are They?

A 2010 case recently posted to Westlaw provides another example, this time from the local rules for the United States District Court for the Central District of California.  The case deals with an attorney withdrawing as counsel for an LLC, which requires the withdrawing attorney to provide notice to soon-to-be former client YPA, that as

a limited liability company that cannot proceed pro se, its failure to have new counsel file a timely notice of appearance will result in the dismissal of its complaint for failure to prosecute and of the entry of its default on the cross-complaint.

YOUR PERSONAL ASSISTANT, LLC, a Nevada limited liability company, Plaintiff, v. T-MOBILE USA, INC., a Delaware Corp., & DOES 1-100, inclusive. Defendants., No. CV1000783MMMRCX, 2010 WL 11598037, at *3 (C.D. Cal. Apr. 23, 2010)

This is fairly typical, as entities are generally not allowed to appear pro se — that is reserved as an option for natural persons. However, because of poor drafting, the local rules keep open the possibility that an LLC could appear pro se.  As the court notes in footnote 9, the rules provide:

9. See CA CD L.R. 83-2.10.1 (“[a] corporation including a limited liability corporation, a partnership including a limited liability partnership, an unincorporated association, or a trust may not appear in any action or proceeding pro se.”)

Id. at *3 n.9 (C.D. Cal. Apr. 23, 2010).  The language here refers to an LLC a type of corporation, which, as a general matter, it is not.  A limited liability partnership is a type of partnership (with gaps often filled by partnership law), but corporations and LLCs are, most of the time, separate and distinct entities.
 
image from www.thefrugalhumanist.com
None of this is new, coming from me.  But I’m not giving up, even if I that tree I keep banging my head on is a Redwood. 

BLPB reader Tom N. sent me a link to this article last week by email.  The article covers Elon Musk’s taunting of the U.S Securities and Exchange Commission (SEC) in a post on Twitter.  The post followed on the SEC’s settlement with Musk and Tesla, Inc. of a legal action relating to a prior Twitter post. The title of Tom N.’s message?  “Musk Pokes the Bear in the Eye.”  Exactly what I was thinking (and I told him so) when I had read the same article earlier that day!  This post is dedicated to Tom N. (and the rest of you who have been following the Musk affair).

Last week, I wrote about scienter issues in the securities fraud allegations against Elon Musk, following on Ann Lipton’s earlier post on materiality in the same context.  This week, I want to focus on state corporate law–specifically, fiduciary duty law.  The idea for this post arises from a quotation in the article Tom N. and I read last week.  The quotation relates to an order from the judge in the SEC’s action against Musk and Tesla, Alison Nathan, that the parties jointly explain and justify the fairness and reasonableness of their settlement and why the settlement would not hurt the public interest.  Friend and Michigan Law colleague Adam Pritchard offered (as quoted in the article): “She may want to know why Tesla is paying a fine because the CEO doesn’t know when to shut up.”  Yes, Adam.  I agree.

What about that?  According to the article, the SEC settlement with Musk and Tesla “prevents Musk from denying wrongdoing or suggesting that the regulator’s allegations were untrue.”  The taunting tweet does not exactly deny wrongdoing or suggest that the SEC’s allegations against him were untrue.  Yet, it comes close by mocking the SEC’s enforcement activities against Musk and Tesla.  Musk’s action in tweeting negatively about the SEC is seemingly–in the eyes of a reasonable observer–an intentional action that may have the propensity to damage Tesla.  

At the very least, the tweet appears to be contrary to the best interests of the firm.  But is it a manifestation of bad faith that constitutes a breach of the duty of loyalty under Delaware law?  As most of us well know, 

[b]ad faith has been defined as authorizing a transaction “for some purpose other than a genuine attempt to advance corporate welfare or [when the transaction] is known to constitute a violation of applicable positive law.” In other words, an action taken with the intent to harm the corporation is a disloyal act in bad faith. . . . [B]ad faith (or lack of good faith) is when a director acts in a manner “unrelated to a pursuit of the corporation’s best interests.” It makes no difference the reason why the director intentionally fails to pursue the best interests of the corporation.

Bad faith can be the result of “any emotion [that] may cause a director to [intentionally] place his own interests, preferences or appetites before the welfare of the corporation,” including greed, “hatred, lust, envy, revenge, . . . shame or pride.”

In Re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 753-54 (Del. Ch. 2005).  Of course, Musk was not authorizing a transaction–or even clearly acting for or on behalf of Tesla–in making his taunting tweet.  But he is identified strongly with Tesla, and his tweet was intentional and inconsistent with the best interests of the firm.  Did he intend to harm Tesla in posting his tweet?  Perhaps not.  Did he act in a manner “unrelated to a pursuit of the corporation’s best interests?”  Perhaps.  The tweet is certainly an imprudent (and likely grossly negligent or reckless) action that appears to result from Musk intentionally placing his own hatred or revenge ahead of the interests of Tesla.  

“To act in good faith, a director must act at all times with an honesty of purpose and in the best interests and welfare of the corporation.”  Id. at 755.  Yet, it is unclear how far that goes in a Twitter-happy world in which the personal blends into the professional.  Musk was (in all likelihood) not taking action as a director or officer of Tesla when he tweeted his taunt.  Yet, he was undoubtedly cognizant that he occupied those roles and that his actions likely had an effect on the firm.  Should his fiduciary duties extend to this type of conduct?

And what about the Tesla board’s duty to monitor? Does it extend to monitoring Musk’s personal tweeting?  E.g., the argument made in the Chancery Court’s opinion in Beam Ex Rel. Martha Stewart Living Omnimedia, Inc. v. Stewart.  Even of not mandated by fiduciary duty law, the SEC clearly wants the board to have that monitoring responsibility.  The settlement with the SEC reportedly provides for “Tesla’s board to implement procedures for reviewing Musk’s communications with investors, which include tweets.”  More for us all to think about when we think about Elon Musk and Tesla . . . .  It’s always best not to poke the bear.

All I’ve got this week is a drive-by of interesting things (which is necessary because of how the news was so. exceptionally. boring)

1)  You’ve probably at least heard about the New York Times’s massive expose on Donald Trump’s inherited wealth and the tax fraud that enabled it.  If you’re not a tax person, the length may be a little intimidating, but trust me it’s very accessible and worth the read.  Among other highlights are some specific descriptions of the use of a shell company called All County Building Supply & Maintenance that served a dastardly dual purpose: to spin cash gifts from Fred Trump to his children into ordinary income (thus avoiding gift tax liability), and to justify rent increases for rent-stabilized apartments.  Fred Trump accomplished this by making his children owners of All County, and then using All County as a purchasing agent for his buildings.  For every purchase, All County added a large markup – pure profit for All County (and thus the kids), paid by Fred Trump.  Then, Fred Trump used the inflated bills as proof of property improvements to justify his rent increases.  The scheme was sheer elegance in its simplicity.

For the securities aficionados, the article also has a soupcon of market manipulation: Fred Trump would buy stock in companies just before Donald Trump leaked an intention to take them over, causing a quick boost in the stock price.

2)  Another expose, this one from the Washington Post, on the fate of small investors in Trump hotels.  These investors bought individual units as condominiums, in the expectation that the Trump organization would rent them out and, after deducting maintenance fees, pay them the income.  Problem is, after 2016, business has plummeted in New York and Chicago, leaving these investors with large losses.  An interesting tale of corporate governance and, if you like, a timely hypothetical regarding application of the Howey test to condo sales.  (Also, for those interested in reporting process, here is a Tweet thread explaining how WaPo developed the story.)

3)  Finally, I previously posted about a pending oral argument in Delaware Chancery on the question whether corporate charters and bylaws can impose litigation limits (forum selection clauses, etc) on federal securities claims, in addition to placing limits on Delaware internal affairs claims.  That argument, in the case of Sciabacucchi v. Salzberg, 2017-0931, took place on September 27, and the transcript is available from the Chancery court reporters.  Attorneys did most of the talking, but towards the end of the hearing, VC Laster honed in on the critical question: if charters and bylaws can extend to cover claims not governed by Delaware law or the internal affairs doctrine, how much further can they go?  William Chandler – yes, that William Chandler, former Delaware Vice Chancellor, now with Wilson Sonsini – argued that they extend to any claim that deals with the stockholder’s rights as a stockholder; VC Laster expressed concern about defining the appropriate relationship between the claim and the plaintiff’s stockholder status.  At the same time, he acknowledged that ultimately the issue will probably be resolved not by him, but by the Delaware Supreme Court.

That’s all – here’s looking forward to another deadly dull week.