Like Steve Bainbridge and Matt Levine, I’m very entertained by this complaint Albertsons filed against Kroger over the breakup of their merger due to antitrust concerns.

The crux of it is that Kroger promised to make some kind of effort – more on that in a moment – to meet FTC demands in order to clear the deal, Kroger got cold feet and refused to meet those demands, and as a result, the FTC got the deal blocked in court, and now Kroger owes Albertsons damages for its breach.

As Matt Levine points out, one weakness in these kinds of disputes is establishing that Kroger’s recalcitrance was, in fact, the reason for the FTC rejection.  For example, not long ago, Anthem sued Cigna with a similar set of allegations, and though the court agreed that Cigna breached the contract, the court also concluded that the deal would have been blocked anyway.

But the part that I’m enjoying is the argument about what, exactly, kind of effort Kroger agreed to make.  This is from the complaint:

First, Kroger generally agreed to use “reasonable best efforts” to satisfy all closing conditions “as promptly as reasonably practicable.”

Second, Kroger assumed a more stringent obligation to use its “best efforts”—not limited by any standard of reasonableness—“to avoid, eliminate, and resolve any and all impediments under any Antitrust Law . . . so as to enable the Closing to occur as promptly as practicable.” That “best efforts” provision explicitly required Kroger to divest any assets and make any changes to its operations that were necessary to obtain antitrust approval.

Third, if a regulator threatened or instituted an antitrust challenge, Kroger committed to take “any and all actions” necessary to “eliminate each and every impediment under any Antitrust Law” to closing the Merger….

There was only one caveat to Kroger’s “best efforts” and “any and all actions” obligations: those commitments did not require Kroger to divest more than 650 physical stores.

So the claim here is that Kroger’s “best efforts” to avoid antitrust impediments should be interpreted to include conduct that goes a step beyond its ordinary “reasonable best efforts” to satisfy closing conditions.

Is that plausible?  Presumably, Kroger argues something like, are you seriously asking a court to hold that “best efforts” is not implicitly modified by some degree of reasonableness?  What, you think the default presumption should be that we agreed to unreasonable efforts?  Doesn’t it make more sense to presume parties agree to reasonableness, and then, if you want to hold someone to a standard of unreasonableness, it has to be written right there in the contract?  Cf. Alliance Data Sys. v. Blackstone Capital Partners V LP, 963 A.2d 746 (Del. Ch. 2009) (“‘Best efforts’ is implicitly qualified by a reasonableness test—it cannot mean everything possible under the sun.”).

For that reason, Steve Bainbridge argues that Albertsons has the weaker argument, because Delaware historically has treated all “best efforts” clauses as generally similar.  Which is no doubt true.  For example, here is VC Laster’s opinion in Akorn v. Fresenius Kabi AG:

Deal practitioners have a general sense of a hierarchy of efforts clauses.  The ABA Committee on Mergers and Acquisitions has ascribed the following meanings to commonly used standards:

• Best efforts: the highest standard, requiring a party to do essentially everything in its power to fulfill its obligation (for example, by expending significant amounts or management time to obtain consents).

• Reasonable best efforts: somewhat lesser standard, but still may require substantial efforts from a party.

• Reasonable efforts: still weaker standard, not requiring any action beyond what is typical under the circumstances.

• Commercially reasonable efforts: not requiring a party to take any action that would be commercially detrimental, including the expenditure of material unanticipated amounts or management time.

• Good faith efforts: the lowest standard, which requires honesty in fact and the observance of reasonable commercial standards of fair dealing. Good faith efforts are implied as a matter of law.

…

Commentators who have surveyed the case law find little support for the distinctions that transactional lawyers draw.  Consistent with this view, in Williams Companies v. Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction agreement that used both “commercially reasonable efforts” and “reasonable best efforts.” Referring to both provisions, the high court stated that “covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.”

Now, that strikes me as possibly simplifying matters for a judge, but also kinda out of step with Delaware’s recent (repeated) insistence that it is an exceptionally contractual jurisdiction.  See, e.g. New Enterprise Associates 14 LP v. Rich, 295 A.3d 520 (Del. Ch. 2023).   If deal planners claim that they understand these terms to have different meanings to the point where ABA Guidance to lawyers says the terms have different meanings, why would the Delaware judiciary reform the contract to strip those nuances away?

Yet again, if deal planners contract in the shadow of cases like Akorn, can’t we assume they do know that Delaware courts flatten the distinctions among terms, and therefore we should assume that’s the intent?

Maybe that’s even what’s most efficient; after all, we also know that contractual terms are not drafted from scratch; attorneys may cut and paste from different models, and god knows even sophisticated players can make rookie mistakes after things go back and forth a few times in blackline, so maybe Delaware courts are doing everyone a favor by presuming all best efforts clauses are roughly the same, unless someone actually goes out and writes “no this time we really really mean the standard is unreasonableness.”

Except maybe that actually did happen here?  Take a look at the language of the merger agreement.  As Albertsons pleads in the complaint, there are two different provisions: “reasonable best efforts” to close, and “best efforts” with respect to antitrust.  This is what they look like:

Section 6.3      Regulatory Matters

Subject to the terms and conditions of this Agreement (including any differing standard set forth herein with respect to any covenant or obligation, including, with respect to Antitrust Law, as provided below), the Company, on the one hand, and each of Parent and Merger Sub, on the other hand, will cooperate with the Other Party and use (and will cause their respective Subsidiaries to use) its reasonable best efforts to (i) take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable to cause the conditions to the Closing to be satisfied as promptly as reasonably practicable and to consummate and make effective, as promptly as reasonably practicable, the Merger, including taking actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions, including without limitation preparing and filing promptly and fully all documentation to effect all necessary filings, notifications, notices, petitions, statements, registrations, submissions of information, applications and other documents (including filing any Notification and Report Form required pursuant to the HSR Act within fifteen (15) Business Days following the execution of this Agreement), (ii) obtain promptly all Consents, clearances, expirations or terminations of waiting periods, registrations, authorizations and other confirmations from any Governmental Entity or third party necessary, proper or advisable to consummate the Merger and (iii) defend, contest and resist any Proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the Merger. ….

Without limiting the generality of the obligations of Parent and Merger Sub pursuant to this Section 6.3, Parent agrees to, and will cause its Affiliates to, use best efforts, to take, or to cause to be taken, any and all actions necessary to avoid, eliminate, and resolve any and all impediments under any Antitrust Law with respect to the Transactions…

In addition if any Proceeding is instituted (or threatened) challenging the Merger as violating any Antitrust Law or if any decree, order, judgment, or injunction (whether temporary, preliminary, or permanent) is entered, enforced, or attempted to be entered or enforced by any Governmental Entity that would make the Merger illegal or otherwise delay or prohibit the consummation of the Merger, Parent and its Affiliates and Subsidiaries shall take any and all actions (i) to contest and defend any such Proceeding to avoid entry of, or to have vacated, lifted, reversed, repealed, rescinded, or terminated, any decree, order, judgment, or injunction (whether temporary, preliminary, or permanent) that prohibits, prevents, or restricts consummation of the Transactions and (ii) to eliminate each and every impediment under any Antitrust Law to close the Transactions prior to the Outside Date.

(emphasis added)

I mean, I’ll let the parties do their own briefing but my preliminary read of the contract seems to explicitly contemplate different standards for closing in general, versus antitrust in particular. That’s what it says right there in the beginning.

And another thing: Final Shareholder Primacy podcast of 2024 is up!  Mike Levin and I talk about what happened in 2024, and what’s coming in 2025.  Here at Apple; here at Spotify; and here at Youtube.

Earlier this week, I spoke on a panel for the SEC’s Investor Advisory Committee. The was the agenda. Although the video is not yet up and available publicly, I put the draft of my remarks up on SSRN.

Other panelists included:

• Neal Newman from Texas A&M. A copy of his presentation is up on the SEC’s website.
• Rajib Chanda from Simpson Thatcher. His presentation is also available.
• Craig McCann from the Securities Litigation and Consulting Group.
• Melody Wang from Blackrock.
• Phil Bak from Armada ETFs.

If you’re interested in these issues, the panel may be worth listening to when the SEC makes it available.

One of the challenges with the discussion is how to zero in on what we mean by alternative investments. As conceived for the panel, the category includes the wide world of things beyond ordinary stocks, bonds, and public stock/bond mutual funds that may show up in a brokerage account.

This is an issue we’re going to have to navigate in the coming years. It’s not an easy one. There is a huge difference between the sorts of products issued by leading private equity firms and major institutional issuers and some of the other predatory alternative investments that have been sold to retail investors.

As I see it, the SEC faces a few challenges here. First, how do you inform retail investors about the kinds of uncertainty they may face with valuing alternative assets? Brokerage statements usually just give people a number. If they rely on that number with many alternatives, they may end up disappointed when they actually liquidate the product. In my view, it would be better to have account statements communicate a value range instead of a set figure so that investors see the uncertainty. Of course, this will probably be unpopular with financial advisers that sell the products. They’ll sell it at a fixed price and then have to discuss a range in their client meetings.

Second, the other major issue is how to protect retail investors from adverse selection in private markets? I understand why some retail investors will want to “get in” on private market investments on the theory that lots of hot firms like, say, Space-X, just won’t be available on public markets. Yet why would a promising startup or private company have any interest in courting a dispersed base of retail investors? My big fear here is that retail will get to take bets that institutional investors walk past.

There may be ways to mitigate these concerns by making more alternative investment access indirect through funds with sophisticated fiduciary management. One idea might be to only open some funds up to retail so long as there is some ratio between retail and sophisticated institutional capital. Now, CalPERS will see different opportunities than retail. But we might use CalPERS or other sophisticated defined-benefit pension plan participation in an offering as a way to minimize adverse selection risks.

Another major challenge in this space is that retail investors have needs that differ form institutional capital. Lots of alternative investments are illiquid and have a longer time horizon. Retail is much more likely to need sudden liquidity when life happens. Some fund structures may be better than others at balancing these objectives.

The one thing I think the Committee should avoid is focusing on voluminous issuer-disclosures. Retail investors don’t read them. If the goal is to protect retail, we’ll need to do something else.

I don’t know what the Committee will ultimately recommend here, but it’s focused on an important issue.

Yup, two posts in one day – and early in the week for me – but this seems to be a day for an outpouring of corporate governance news. I reserve the right to take the week off at some future date.

Anyhoo, NASDAQ adopted a comply-or-explain rule for board diversity, which was approved by the SEC, and it was immediately challenged.  Unconstitutional, beyond SEC authority, major questions, etc etc. 

A rare Democratic Fifth Circuit panel upheld the rule, but then the case went en banc, and today, the full Court struck the rule in a 9-8 ruling.

The striking thing about the Fifth Circuit’s opinion is how narrowly it construes the purpose of the securities laws.  Sure, it unsurprisingly cast doubt on the evidence that NASDAQ offered regarding the benefits of diversified boards, but most of the opinion is devoted to a reinterpretation of the Exchange Act to focus nearly exclusively on the prevention of fraud and manipulation.

For example, some excerpts:

We (B) explain that an exchange rule is not related to the purposes of the Exchange Act simply because it is a disclosure rule. The Act exists primarily to protect investors and the macroeconomy from speculative, manipulative, and fraudulent practices, and to promote competition in the market for securities transactions. A disclosure rule is related to the purposes of the Act if it has some connection with those purposes, but not otherwise….

Congress enacted these disclosure provisions to protect investors and prevent speculation. … Second, it thought disclosure would facilitate “the evaluation of prices of securities” and therefore promote the efficient “direction of the flow of savings into industry.” .. Or put differently, disclosure would stabilize markets by curbing speculation.

See what they did in that latter paragraph? I deleted the citations but note how they acknowledged the price formation function of the securities laws but immediately reinterpreted it to be entirely about fraud prevention.  And then there’s:

That makes sense. If companies could hide their financial conditions, they could defraud investors or whip them into a speculative frenzy. Disclosure of basic corporate and financial information was a sound antidote. But it was not an end in itself; it served a purpose—essentially the same purpose served by restrictions on margin loans and short sales. That much is clear from the fact that Congress carefully limited SEC’s power to compel disclosure to the kinds of information that are most likely to eliminate fraudulent and speculative behavior.

By contrast, the original panel opinion (and the dissent here) read the purpose of the securities laws as to mandate disclosure.  Here are quotes from the original panel:

The “fundamental purpose” of the Securities Exchange Act of 1934 (Exchange Act), codified as amended at 15 U.S.C. § 78a et seq., is to enforce “a philosophy of full disclosure . . . in the securities industry.”…

The “fundamental purpose” of the Exchange Act is “implementing a philosophy of full disclosure,” …—not just the disclosure of information sufficient to state a securities fraud claim.  Indeed, the Exchange Act gives the SEC “very broad discretion to promulgate rules governing corporate disclosure.”  To give one example, for a security to be registered on an exchange, the SEC can require the issuer to disclose any information about “the organization, financial structure, and nature of the business” as is “necessary or appropriate in the public interest or for the protection of investors.”  15 U.S.C. § 78l(b)(1)(A).  Nothing in this provision or the provision governing exchange rules cabins disclosure rules to information that would meet the materiality element of a securities fraud claim.  And, as the SEC Approval Order explains, “[e]xchanges have historically adopted listing rules that require disclosures in addition to those required by [SEC] rules.”  …

That’s a crucial difference, because – while there surely are those who approach things differently – I’d argue the mainstream view today is that the meta purpose of the securities laws is to ensure that investors have sufficient information to accurately price securities (according to risk/return), with the broader goal of ensuring efficient capital allocation throughout the economy.  We want investors to give money to useful and productive businesses, and not to businesses that will set resources on fire, and the securities laws facilitate that.  (Here are two cites; there are countless more)

Fraud prevention suggests a much narrower scope for SEC disclosure regulation than does regulation for accuracy in pricing.

So, it’s not surprising that the Fifth Circuit went from there to hold that the diversity disclosure rule does not serve the narrow purpose of preventing fraud.  At one point, it went so far as to suggest the rule might be barred even if it provided financially useful information to investors:

Moreover, SEC may have asked the wrong question. SEC considered evidence respecting the effects of diversity on firm performance. See JA9. But it is not clear what firm performance has to do with the Exchange Act. Of course, investors generally like it when firms make more money, but Congress did not pass the Exchange Act for the purpose of maximizing shareholder wealth. It passed the Act to protect investors from fraud, manipulation, speculation, and anticompetitive exchange behavior. Firm performance has little to do with those objectives.

(As part of its logic, the Fifth Circuit also attacked the rule on MQD grounds by writing that “the SEC has never claimed the authority to impose diversity requirements, or anything resembling them, on corporate boards.” Item 407(c)(vi) would never)

So I am less concerned about the fate of this particular rule, than I am for the rhetoric here that suggests a dramatic curtailment of all securities disclosure requirements.

At which point I have to mention the climate change rules.

Those are currently being challenged in the Eighth Circuit.  With the election, who knows how that challenge will proceed; what’s certain is that the Trump Admin will end up unwinding the rules.

But in general, both the diversity rules, and the climate change disclosure rules, tend to be challenged with the same arguments.  Opponents accuse the SEC of stepping outside its lane to solve problems allocated to other agencies – to solve climate change, which is the EPA’s job, or to solve workplace discrimination, which is the EEOC’s.  When presented with evidence that major investors want these disclosure rules, there tend to be sideswipes to suggest these investors – BlackRock, for example – aren’t really seeking investment related information, but are instead trying to impose their own (Larry Fink’s) notion of the social good on corporate America.  The challengers also point out that the rules themselves are structured as disclosure rules, but function as governance rules – “disclose your process for evaluating climate risk,” for example, technically allows a company to say “we don’t evaluate that,” but no company wants to admit as much, so, in fact, the rule forces companies to start evaluating climate risk (or diversifying their board, or whatever), and that, opponents say, is bad. 

That’s definitely what the Fifth Circuit said in this case about the diversity rules (e.g., “If Congress had granted a diversity mandate to any agency … we would have expected Congress to give it to the Equal Employment Opportunity Commission or even the Department of Justice”; “corporations that do not meet those objectives must explain why they failed. That is not a disclosure requirement. That is a public-shaming penalty for a corporation’s failure to abide by the Government’s diversity requirements.”), and you see it in the briefing and general commentary on the climate change disclosure rules.

The challengers are half right.  Because, I tend to agree that diversity disclosure rule is not, in fact, intended to help investors price securities or even to adopt governance practices that contribute to wealth creation; it is more in the category of the kind of rule that serves a kind of signaling function, that the corporation is exercising its power responsibly and inclusively.  It’s a display of self-governance and discipline, in a manner that costs corporations very little but perhaps wins them legitimacy.  It benefits companies and investors, but not in the traditional manner by which the securities laws operate; it does so by contributing to their social license to operate. (Yeah, I talk about that in my paper, Of Chameleons and ESG).

But that’s not what the climate change rules do.  The climate change rules force companies to evaluate the actual financial impact of climate change on their business, and that is crucial information not to fight climate change (which the SEC is accused of trying to do), but to ensure that companies – and investors – accurately begin to weigh the financial costs of climate change.  And on a broader level, to encourage investors to seriously stop allocating capital to areas and industries that will simply not survive the transition.  Which is exactly what the function of the securities laws should be in our society.

That said, my fear with the challenges to the climate change rules was, the rules were so obviously financially-relevant that any decision by a court striking them down would necessarily have spillover effects to other, more traditional securities disclosure rules, which would damage the entire system.  How ironic that the Fifth Circuit did that anyway with the diversity rules – only it did so, as far as I can see, quite intentionally, in what looks like the first step in a project to pare back the securities laws across the board.

Anyhoo, in case you missed it, Mike Levin and I talked about the climate change disclosure rules on our podcast a few episodes ago – here on Apple, and here on Spotify.

First, the Supreme Court DIG’d the NVIDIA case. I previously blogged about that case here; it, along with the Facebook case (which was also DIG’d), was a spectacularly bad grant resulting from disgruntled defendants who successfully made it appear that their extraordinarily fact-specific pleading-stage losses presented grand overarching legal questions that necessitated Supreme Court guidance. Belatedly, the Supreme Court realized they did not. Would that it had done so for other securities cases.

Second, the 2024 DGCL proposed amendments are out. As far as I can tell, the big change concerns litigation limiting bylaws and forum selection provisions (a subject I have addressed … frequently). The backstory here is, after a pair of decisions – Boilermakers Local 154 Retirement Fund v. Chevron Corp, 73 A.3d 934 (Del. Ch. 2013) and ATP Tour Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) – Delaware amended its code to address charter or bylaw provisions that govern internal-affairs-like state law stockholder claims. Specifically, corporations may require all such claims be brought in a particular forum, as long as plaintiffs retain access to the Delaware Superior Court or the Delaware Court of Chancery, but they may not require fee-shifting for unsuccessful shareholder claims.

In Salzberg v. Sciabacucchi, the Delaware Supreme Court functionally held that corporations may also adopt bylaws and charter provisions to govern non internal affairs claims that may be brought by stockholders – like federal securities claims – but these preexisting code provisions would not govern those claims. In practical effect, then, corporations could adopt bylaws and charter provisions that required fee shifting for unsuccessful federal securities claims, and that selected any forum for federal securities claims, including arbitral forums.

Hal Scott tried to get an arbitration bylaw passed at J&J for federal securities claims; a lot of 14a-8 litigation followed until Scott’s dispute was mooted.

Meanwhile, two companies, Boeing and Gap, adopted bylaws that purported to require that all “derivative” claims be brought in the Delaware Court of Chancery. I would literally bet body parts that the bylaws were intended to apply to state law fiduciary derivative claims, which would make the provisions unremarkable. But then, both companies became the target of exceedingly rare derivative Section 14(a) claims under federal law (Boeing also became the target of a derivative 10(b) claim, though that was dropped), and both companies argued that their bylaws required (1) the cases be filed in the Delaware Court of Chancery, and (2) they then be dismissed, since the Delaware Court of Chancery has no jurisdiction to hear claims under 14(a) (or 10(b)).

The Seventh and the Ninth Circuit split (blog posts here and here), meaning, the Ninth Circuit allowed companies to unilaterally select Delaware state courts for at least some federal securities claims, which would then require the claims’ immediate dismissal, since federal law requires those claims be brought in federal court.

Professors Mohsen Manesh and Joseph Grundfest wrote a long paper on the correctness of CA9’s ruling with respect to derivative 14(a) claims (well, the paper was in draft form, CA9 cited it, then they finalized it), while I wrote a paper on the general horror show of permitting state constitutive documents to govern federal securities claims at all, and then I wrote a response to Manesh and Grundfest specifically on derivative 14(a) claims, to which they responded here.

And thank god those latter papers were published in the last week or so, because of course now the DSBA is proposing amendments to the DGCL that would render all of the arguments moot. Specifically, the proposals would amend Delaware law to prohibit corporations from adopting bylaw/charter provisions that would (1) require fee shifting for non internal affairs claims, and (2) deny access to any Delaware court with jurisdiction to hear those claims. In practical effect, corporations must at least grant shareholders access to the District of Delaware for any securities claims that must be brought in federal court.

So, yay, I win, sort of!

And wow, that’s an awfully plaintiff-friendly proposed amendment, so *eyebrow raise* again!

Except, you know, from what I’ve seen, notwithstanding CA9’s holding, this is exactly what’s become market standard. No one is seeking fee-shifting or exclusive arbitration anymore; companies are generally adopting bylaw and charter provisions that would permit access to federal courts for claims that cannot be brought in state court. This does not, in other words, practically change the landscape.

And that’s particularly true because CA9’s decision permitting forum-selection provisions forcing federal claims into a state court with no jurisdiction was limited to derivative 14(a) claims – which is a very rare beast to begin with.

Point being, I don’t think the DSBA made many concessions here, and if I may say, this looks like a kind of plaintiff-friendly cover to paper over the rifts from last year’s SB 113 battles and whatever is coming for 2025 (my bet – limiting controlling shareholder liability).

And another thing: New Shareholder Primacy podcast is up! Me and Mike Levin talk about Chancellor McCormick’s latest ruling in the Musk pay package case, and what’s next. Available at Apple, Spotify, and YouTube.

Ferdinand Bratek, April Klein, and Yanting (Crystal) Shi have recently posted to ssrn The Market Value of Pay Gaps: Evidence from EEO-1 Disclosures.

Most companies are required to file reports with the EEOC regarding the diversity of their workforce, however, these EEO-1 reports are confidential unless the companies choose to release them. In 2023, a FOIA lawsuit forced the public release of EEO-1 reports for government contractors. The authors use this newly-released granular workforce data to confirm that women and people of color are paid less than white men in a variety of positions, and also that firms financially benefit by having more women and people of color in their workforce. In general, analysts often tout the purported financial benefits that diversity brings to a firm, but these authors suggest the disturbing possibility that diversity benefits a firm by lowering its labor costs.

Most strikingly, the authors find that when this particular EEO-1 data became public, the firms with greater pay gaps experienced more positive shareholder returns. In other words, the market, as well, recognized the value of underpaying women and people of color.

From a ruthless shareholder wealth maximization perspective, that makes perfect sense. But I note that pay-equity shareholder proposals are a popular genre and proceed from the (apparently?) false premise that investors value equality rather than discrimination.

And another thing: New Shareholder Primacy podcast is up – this time, Mike Levin and I talk about Caremark claims in Delaware, and the information that Broadridge can supply to activists. Available at Spotify, Apple, and YouTube.