I try to explain to people that the motion to dismiss in a securities case is a unique animal; the complaints, and the briefing, are not like motions to dismiss in any other area of law.  When it comes to securities cases – especially class actions – the motion to dismiss is really a mini motion for summary judgment.  This week, in a case called Khoja v. Orexigen Therapeutics, No. 16-56069, the Ninth Circuit tried to draw a line in the sand, but as far as I’m concerned, did not go nearly far enough.

It all begins with the Private Securities Litigation Reform Act, which heightens the pleading requirements in securities cases.  Among other things, the Act requires that plaintiffs “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” Additionally, plaintiffs must “state with particularity facts giving rise to a strong inference that the defendant acted” intentionally or recklessly. 15 U.S.C. §78u-4.

As Hillary Sale has documented in the context of scienter pleading, and as I myself experienced over the course of my 1o-ish year-long career as a plaintiff-side securities litigator, over time, courts have incrementally raised the bar for what kinds of evidence they will accept as meeting these standards.  To some extent, there’s a kind of one-way ratchet effect: plaintiffs hit upon the idea of using confidential witnesses to bolster the complaint’s allegations, and pretty soon they became de rigueur, to the point where the lack of such sources is viewed as a weakness, and so forth.  Moreover, as Nancy Gertner pointed out in another context, the judicial habit of writing long opinions explaining the reasoning for dismissing a case – and often (though not always) writing shorter, brief orders when refusing to dismiss – creates a body of caselaw stacked against plaintiffs.  Point being, securities complaints are subject to an extraordinary degree of scrutiny not present for many other kinds of actions.

One aspect of securities pleading that has grown worse over time is courts’ willingness to consider materials beyond the four corners of the complaint.  Though the general rule is that on a motion to dismiss, courts can only consider the complaint itself, there are two significant exceptions.  First, courts may consider “matters of which a court may take judicial notice,” and second, courts may consider “documents incorporated into the complaint by reference.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).  The principles behind these rules are relatively uncontroversial.  Judicial notice is supposed to be a relatively narrow category: Rule 201 permits notice of facts “not subject to reasonable dispute” because they “can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.”  Meanwhile, the “incorporated by reference” doctrine was intended to prevent plaintiffs from cherry-picking from documents – like, selecting part of a quote and leaving out the qualifier so as to create a false impression of what the defendant said.

But these narrow exceptions to the general rule against looking beyond the complaint have been stretched to the breaking point in securities litigation.  Today, it is common for defendants to submit hundreds of pages of supplemental material on a motion to dismiss.  Using one or both of these exceptions, courts consider SEC filings, court filings, press releases, federal agency reports, news articles, analyst reports, stock prices, accounting standards, patent applications, complaints and briefs in other cases, to name a few examples (See, e.g., Wolfe v. Aspenbio Pharma, 2012 WL 4040344 (D. Colo. Sept. 13, 2012); Carlucci v. Han, 2012 WL 3242618 (E.D. Va. Aug. 7, 2012); In re XenoPort, Inc. Sec. Litig., 2011 WL 6153134 (N.D. Cal. Dec. 12, 2011); In re MBIA, Inc. Sec. Litig., 700 F. Supp. 2d 566 (S.D.N.Y. 2010); Wilamowsky v. Take-Two Interactive Software, Inc., 818 F. Supp. 2d 744 (S.D.N.Y. 2011); In re American Apparel, Inc. S’holder Litig., 2012 WL 1131684 (C.D. Cal. Jan. 13, 2012); In re Seracare Life Sciences, Inc., 2007 WL 935583 (S.D. Cal. Mar. 19, 2007); In re White Elec. Designs Corp. Sec. Litig., 416 F. Supp. 2d 754 (D. Ariz. 2006)).  Honestly, the supply of extraneous material is endless. 

Partly, this is because plaintiffs cite and identify many sources to satisfy the particularity standards (thus opening the door for defendants to introduce documents “referenced”), and partly, this is because the fraud on the market context – with its vague articulation of what counts as publicly available information – invites introduction of any document that might, in any sense, be deemed publicly available.  And partly, this is because so much of these disputes play out in SEC filings – which are at least noticeable as publicly-filed regulatory documents – it’s easy for defendants to drop a Tolstoy novel’s worth of them into an appendix.

From my perspective, the problem, really, is less that these documents are introduced at all than the matters for which they are introduced, namely, what they purport to establish.  And that’s where the Khoja case comes in.

First –and perhaps most usefully – in Khoja, the Ninth Circuit simply made clear that it is important for district courts to think carefully about why they are considering a document and what its relevance is.  In my experience, when faced with hundreds of exhibits produced by defendants (and often little pushback from plaintiffs, because of page limitations and because fighting too hard about authentic documents appears too defensive), district courts often simply say they are generally noticing the documents, without explaining what, precisely, they are considering and why.  The Khoja decision demonstrates that this is insufficient: If the district court is relying on a document submitted by the defendants to dismiss a complaint, it should explain its reasoning.

Next, Khoja makes clear that when it comes to judicial notice, courts should articulate what, exactly, they are noticing.  Identifying the document is not sufficient: That a document was filed with a public agency may be noticeable; that the document demonstrated the agency had knowledge of a particular fact by a particular date may also be noticeable.  But the truth of facts asserted within those documents, or the implications of those documents, are not judicially noticeable facts.  Courts need to make the appropriate distinctions.

Here’s where I think the Ninth Circuit did not go far enough.  Usually for these kinds of documents – even ones never cited by plaintiffs – courts notice them for the purpose of making assumptions about what “the market” knew and when it was known, or how the stock price reacted.  This is the nub of the problem.  Some nominally “public” documents – like obscure court filings – may or may not have had an impact on the market, depending on whether they came to traders’ attention: courts cannot make assumptions without further evidence.  Further, a document purporting to “reveal the truth” to the market may seem straightforward, but it’s difficult to say how the market interpreted the document without resort to even further evidence of analyst reports, news articles, and so forth, all of which may not be before the court.  And price impact?  Without expert analysis, what counts as impact (or what may have been confounded by other news) is impossible to tell.  The motion to dismiss is not the appropriate stage at which to resolve these disputes.

There is also often a danger that courts will accept the facts in these documents as truthful.  SEC reports of insider stock sales, for example; yes, they were filed, but they cannot be assumed (on a motion to dismiss) to represent a complete and accurate portrait of the defendants’ trading history.  (The story is different if the plaintiffs themselves cite the document for that purpose – discussed below). 

Okay, that’s judicial notice.  A separate and distinct basis for a court to consider an extraneous document is when the plaintiffs themselves incorporated the document by reference.  In this scenario, the Ninth Circuit set different ground rules.  First, the complaint must “refer[]extensively to the document or the document forms the basis of the plaintiff’s claim” to be considered at all.  Second, according to the Ninth Circuit, unlike in judicial notice, the contents of an incorporated document may be assumed to be truthful, but “it is improper to assume the truth of an incorporated document if such assumptions only serve to dispute facts stated in a well-pleaded complaint.” 

I don’t think the court is wrong here, exactly, but the standard should be articulated more precisely.  Certainly, not every document relied on by plaintiffs can be assumed to be truthful (what if the plaintiffs alleged the document was a false press release?)  What the court is grappling with is the scenario where plaintiffs use a document as the basis for an allegation, so that the plaintiffs themselves implicitly accept it as truthful.   For example, the plaintiffs may rely on a news article, or a government report, that purports to describe the “true facts” at the company at the time the defendants made the allegedly fraudulent statements.  A tempting rule of thumb is that the plaintiffs should accept the bitter with the sweet: if they themselves are alleging the document has accurately described the facts, then defendants should also be able to rely on it for that purpose.

But some of these documents may be long, or complex, or contain different anecdotes and explanations for different time periods.  It is overinclusive to say that if plaintiffs rely on one specific description in one part of a document, then all other parts of the document should also be treated as truthful for 12(b)(6) purposes, including for the purpose of injecting entirely new facts into the motion to dismiss. 

My experience with this comes from the mortgage-crisis era cases that dominated the latter part of my career.  We would sometimes rely on something like the FCIC Report – which is 662 pages long – or even Michael Lewis’s The Big Short, which is only a few hundred pages long.  We might cite a total of 10 pages, but we were occasionally met with an argument that the entire document should be considered by the court, and assumed to be truthful in all respects – even though we, as plaintiffs, were only basing our allegations on limited excerpts.

In my view, this is difficult balancing act for courts: Cherry picking may be unfair – if plaintiffs rely on a story, necessary parts of the story should not be ignored.  But at the same time, unrelated sections of the document should not be assumed to be true for 12(b)(6) purposes merely because the plaintiffs relied on a few, separate portions.

What it comes down to is, the complaint is a highly selective set of allegations – no doubt.  But so are documents submitted by defendants in rebuttal.  When the defendants’ documents add necessary context to the specific facts being alleged by plaintiffs, so that those facts are rebutted or recontextualized, it is appropriate to consider them on a motion to dismiss.  Past that – that’s why we have summary judgment and, eventually, trial.

 

Gary Shteyngart has a new book out, titled Lake Success Capital.  It’s about a narcissistic hedge fund manager on the run from the SEC.  Although I’m still waiting on my copy to arrive, the marketing for the book is impressive.  Ben Stiller joined Gary for a promotional video:

The video tweaks the hedge fund industry for its insularity and tendency to draw its talent from a narrow pool of sources.  Lake Success seems to be recruiting new employees from the lacrosse teams at fourteen elite schools.  With these schools absorbing a significant chunk off the nation’s wealthy scions, it’s particularly funny when they describe accredited investors as “your moms.”  

I wanted to flag for this audience because others might also enjoy reading it. 

On Tuesday, Elizabeth Warren penned an article in The Wall Street Journal entitled Companies Shouldn’t Be Accountable Only to Shareholders: My new bill would require corporations to answer to employees and other stakeholders as well.

The article announced and promoted her Accountable Capitalism Act. With Republicans in control of Congress and the White House, Warren’s bill almost certainly doesn’t stand a chance of passing in the short-term.

Yet, because the bill draws on benefit corporation governance, a main scholarly interest of mine, and because it may foreshadow moves by a Democrat-controlled Congress in the future, I decided to read the 28-page bill and report here briefly.

Portions of the bill summarized:

  • As has been widely reported, the bill only applies to companies with more than $1 billion in revenue.
  • The bill seeks to establish an “Office of United States Corporations” within the Department of Commerce, which will review, grant, and rescind charters for the large companies covered by the bill.
  • The bill takes language from benefit corporation law and requires that U.S. Corporations must have a purpose to serve a “general public benefit” – “a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” This purpose is in addition to any purpose in the company’s state filing.
  • The governance requirements are a mix of the Model Benefit Corporation Legislation and Delaware version of benefit corporation law – requiring both that directors balance the “pecuniary interests of shareholders” with the “best interests of persons that are materially affected by the conduct of the United States corporation” (drawn from Delaware) and that directors consider a litany of stakeholders in their decisions (including shareholders, employees, customers, community, local and global environment – drawn from the Model). Only shareholders with 2%+ of the shares can sue derivatively.
  • Employees must elect 40%+ of the board of directors.
  • 75%+ of shareholders and 75%+ of directors must approve political spending of over $10,000 on a single candidate.

My brief thoughts:

  • This is a lot of press for benefit corporations.
  • The press may not be good for benefit corporation proponents who have been largely able to pitch to both sides of the political aisle in their state bills. B Lab co-founder Jay Coen Gilbert has already written an article trying to promote what he sees as the bipartisan nature of benefit corporations: Elizabeth Warren, Republicans, CEOs & BlackRock’s Fink Unite Around ‘Accountable Capitalism’
  • I have noted in my scholarly work how the state benefit corporation laws fail to align the purported “general public benefit” corporate purpose with effective accountability mechanisms. This bill, however, takes one step toward aligning company purpose and accountability by requiring that employees elect 40%+ of the board. Of course, that still leaves out many other stakeholders that directors are supposed to consider, and shareholders are still the only stakeholders with the ability to sue derivatively. A better solution is to have stakeholder representatives who elect the entire board and also possess, collectively, the right to sue derivatively. This stakeholder representative framework, articulated in my 2017 American Business Law Journal article, has the benefit of keeping the board united on a common goal – instead of fighting on behalf of the single stakeholder group who elected them – while also being held to account by representatives of all major stakeholder groups, collectively.
  • Suggesting that benefit corporation law become mandatory will likely not be popular among many conservatives. See, e.g., this early response in the National Review: Elizabeth Warren’s Batty Plan to Nationalize . . . Everything. Currently, a fair response to conservative critics of state benefit corporation laws is “if businesses do not like the benefit corporation framework, they can just choose to be a traditional corporation.” This bill attempts to remove that choice for large companies. 

(My co-blogger Joshua Fershee may be horrified to learn that the bill purports to apply not only to corporations, but also to LLCs, even though they use the term “U.S. Corporations” throughout).   

According to its website,

The U. S. Securities and Exchange Commission (SEC) has a three-part mission:

  • Protect investors

  • Maintain fair, orderly, and efficient markets

  • Facilitate capital formation

I think it needs to add: “Ensure proper entity identification.” 

Examples abound. Take this recent 10-Q:

On June 27, 2018, the Company formed a joint venture with Downtown Television, Inc., for the purpose of developing, producing and marketing entertainment content relating to deep-sea exploration, historical shipwreck search, artifact recovery, and expounding upon the history of these shipwrecks.  The joint venture is being formed as a new limited liability corporation that will be 50% owned each by EXPL and Downtown, and has been named Megalodon Entertainment, LLC. (“Megalodon”), as is further described in Note B. 

Endurance Exploration Group, Inc., SEC 10-Q, for the quarterly period ended: June 30, 2018 (emphasis added). 

Side note: That 10-Q, I will note, raised some other questionable decisionmaking, as it goes on to report: 

NOTE B – JOINT VENTURE

EXPL Swordfish, LLC

Effective January 9, 2017, the Company, through a newly formed, wholly owned subsidiary, EXPL Swordfish, LLC (“EXPL Swordfish”), entered into a joint-venture agreement (“Agreement”) with Deep Blue Exploration, LLC, d/b/a Marex (“Marex”).  The joint venture between EXPL Swordfish and Marex is referred to as Swordfish Partners.

As near as I can tell, Swordfish Partners is what it says it is, a partnership formed as a joint venture for a unique purpose.  This is fascinating to me.  Why would a company filing quarterly reports with the SEC not choose to take the time to create an LLC for the joint venture? I’m not a maritime expert, though I did participate in Tulane Law School’s program with the Aegean Institute of the Law of the Sea and Maritime Law many years ago. I simply cannot come up with a good reason not to create a limited liability entity for the joint venture.  I know there are times when it makes sense (or is not a concern), but this doesn’t seem like one of those times. 

I did a quick look for some other entity issues in SEC filings. There are many more, but this is what the Google machine provided in a quick search:

  • From Core Moldings Technologies, Inc. Schedule 13D (Aug. 8, S018): “GGCP Holdings is a Delaware limited liability corporation having its principal business office at 140 Greenwich Avenue, Greenwich, CT 06830.”   
  • From Financial Engines, Inc. Form 8-K, Jan. 28, 2016: “On February 1, 2016, Financial Engines, Inc. (“Financial Engines”) completed the previously announced acquisition of Kansas City 727 Acquisition LLC, a Delaware limited liability corporation ….”
  • Limited Liability Company Agreement of Artist Arena International, LLC, Exhibit 3.206: “This Limited Liability Company Agreement (this “Agreement”) of Artist Arena International, LLC, a New York limited liability company (the “Company”), dated as of January 4, 2011, is adopted and entered into by Artist Arena LLC., a New York limited liability corporation (the “Member” or “AA”), pursuant to and in accordance with the Limited Liability Company Law of the State of New York, Article 2, §§ 201-214, et seq., as amended from time to time (the “Act”).”
  • CloudCommerce, Inc., Form 8-K, October 1, 2015: “Certificate of Merger of Domestic Corporation and Foreign Limited Liability Corporation between Warp 9, Inc., a Delaware corporation, and Indaba Group, LLC, a Colorado limited liability company.”

I swear we can do better.  Really.  

image from sealslawschools.org

On Saturday evening, I returned from the 2018 Southeastern Association of Law Schools (SEALS) annual conference (program here).  My week-long tour of duty as a conference registrant spanned three different areas of engagement: (1) volunteerism in the portion of the conference dedicated to helping prepare prospective law faculty for the law school appointments process; (2) attendance at programs of interest on substantive law, law schools, and law teaching; and (3) participation (through presentation and commentary) in business law discussion groups.  Although I was exhausted by the time I left (especially because I also attended portions of two meetings of the SEALS Board of Trustees), I also was rewarded by each of the three types of involvement in the conference.

The prospective law teachers component of the conference offers the opportunity for a select group of future teacher-scholars to present a sample job talk, receive comments on their draft CVs, and engage in mock interviews.  This year, I participated as a mentor in all three components.  Some folks needed more support with pieces of the process than others, as you might imagine.  But all were amply qualified and deserving of appointments.  Several sent me nice “thank you” messages.  I hope that we will stay in touch.

I was able to attend a few sessions (or parts of sessions) of various kinds that did not focus on business law directly.  Some featured my UT Law colleagues; others represented areas of interest wholly outside or only indirectly related to business law.  For example, I attended an international panel on “Fake News” in a Digital Era, a discussion session on Strategies for Bar Preparation and Success, a New Scholars Workshop panel focusing on works-in-process relating to regulatory questions in various areas of law, a program entitled Workshop on Teaching to Engage, and a healthcare and bioethics discussion session.  All had something relevant to offer to my scholarship, teaching, or service.  As a result of the teaching session, I plan to move one day of office hours a week to our law school commons c=area, so that students can just drop in individually or in groups.  I will try to remember to report out on that experiment.

Finally, I did participate in three discussion groups and attend a fourth as part of the Business Law Workshop at the conference.  Specifically: I co-chaired–with John Anderson–an insider trading discussion session (U.S. v. Martoma and the Future of Insider Trading Law); chaired a second discussion forum on Alternative ways of Going Public; commented on forthcoming works in a Corporate Governance discussion group; and participated in a final discussion forum on The Role of Corporate Personhood in Masterpiece Bakeshop organized and chaired by our own BLPB co-editor Stefan Padfield. Fellow co-editor Marcia Narine Weldon also attended and participated in this and other programming at the conference.  The discussions in these sessions were rich and varied.  Perhaps Stefan will have more to say about the discussion group he organized . . . .  I think he was pleased with the result of his call for participation.  I found the conversation stimulating and fascinating

The 2019 conference is scheduled to start at the end of July (July 29-August 4) in Boca Raton, Florida.  Look for news on it here, or sign up for the SEALS blog, through which SEALS makes major announcements of interest to subscribing faculty.  If you would like to organize a business law program for next year’s conference, please feel free to contact me for advice. I helped originate the SEALS Business Law Workshop years ago and can provide assistance with the proposal submission process.

The Washington and Lee University School of Law seeks to hire a faculty member with research and teaching interests in the fields of corporate law, securities regulation, and/or commercial law.  Our school has a long history of outstanding scholarship and teaching in these areas, and we are excited to advance our trajectory with a new hire.  In addition to this subject-matter focus, we look for an individual who will embrace and meaningfully contribute to our close-knit, collegial, and intellectually vibrant community. 

We warmly invite applications for a position as Assistant or Associate Professor of Law beginning July 1, 2019, and we are particularly focused on lateral candidates with between 2-4 years of experience.  In all cases, candidates for the position must demonstrate a record of excellence in both teaching and scholarship.

Washington and Lee University School of Law is an Equal Opportunity employer that does not discriminate on the basis of race, color, religion, national or ethnic origin, sex, gender identity, gender expression, sexual orientation, age, disability, veteran’s status, or genetic information with regard to employment.  We have a commitment to enhancing the diversity of our faculty and, in that regard, we welcome candidates who are members of communities that are traditionally under-represented in the legal profession and academia.

Applicants should submit the following materials through the W&L portal (https://apply.interfolio.com/53173):  a cover letter describing their interest in the position, a current curriculum vitae, a research agenda, and a list of references.  Please address these materials to Prof. Christopher B. Seaman, Chair of the Faculty Appointments Committee.  Any questions may be addressed to Prof. Seaman at seamanc@wlu.edu.  All inquiries will be treated as confidential.

We’re a month away from our second annual Business Law Professor Blog CLE, hosted at the University of Tennessee on Friday, September 14, 2018. We’ll discuss our latest research and receive comments from UT faculty and students. I’ve entitled my talk Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management, and will blog more about that after I finish the article. This is a really long post, but it’s chock full of helpful links for novices and experts alike and highlights some really interesting work from our colleagues at other law schools.

Two weeks ago, I posted some resources to help familiarize you with blockchain. Here’s a relatively simple definition from John Giordani at Forbes:

Blockchain is a public register in which transactions between two users belonging to the same network are stored in a secure, verifiable and permanent way. The data relating to the exchanges are saved inside cryptographic blocks, connected in a hierarchical manner to each other. This creates an endless chain of data blocks — hence the name blockchain — that allows you to trace and verify all the transactions you have ever made. The primary function of a blockchain is, therefore, to certify transactions between people. In the case of Bitcoin, the blockchain serves to verify the exchange of cryptocurrency between two users, but it is only one of the many possible uses of this technological structure. In other sectors, the blockchain can certify the exchange of shares and stocks, operate as if it were a notary and “validate” a contract or make the votes cast in online voting secure and impossible to alter. One of the greatest advantages of the blockchain is the high degree of security it guarantees. In fact, once a transaction is certified and saved within one of the chain blocks, it can no longer be modified or tampered with. Each block consists of a pointer that connects it to the previous block, a timestamp that certifies the time at which the event actually took place and the transaction data.

These three elements ensure that each element of the blockchain is unique and immutable — any request to modify the timestamp or the content of the block would change all subsequent blocks. This is because the pointer is created based on the data in the previous block, triggering a real chain reaction. In order for any alterations to happen, it would be necessary for the 50%-plus-one of the network to approve the change: a possible but hardly feasible operation since the blockchain is distributed worldwide between millions of users.

In case that wasn’t clear enough, here are links to a few of my favorite videos for novices. These will help you understand the rest of this blog post.

To help prepare for my own talk in Tennessee, I attended a fascinating discussion at SEALS on Thursday moderated by Dean Jon Garon of Nova Southeastern University Shepard Broad College of Law called Blockchain Technology and the Law.

For those of you who don’t know how blockchain technology can relate to your practice or teaching, I thought I would provide a few questions raised by some of the speakers. I’ve inserted some (oversimplified)links for definitions. The speakers did not include these links, so if I have used one that you believe is incomplete or inaccurate, do not attribute it to them.

Professor Del Wright, University of Missouri-Kansas City School of Law;

Del started the session by talking about the legal issues in blockchain consensus models. He described consensus models as the backbones for users because they: 1) allow users to interact with each other in a trustless manner; 2) ensure the integrity of the ledger in both normal and adversarial situations; and 3) create a “novel variety of networks with extraordinary potential” if implemented correctly. He discussed both permissioned (e.g. Ripple) and permissionless (Bitcoin) systems and how they differ. He then explained Proof of Work blockchains supported by miners (who solve problems to add blocks to the blockchain) and masternodes (who provide the backbone support to the blockchain). He pointed out how blockchains can reduce agency costs and problems of asymmetrical information and then focused on their utility in financial markets, securities regulation, and corporate governance. Del compared the issues related to off-chain governance, where decisionmaking first takes place on a social level and is then actively encoded into the protocol by the developers (used by Bitcoin and Ethereum) to on-chain governance, where developers broadcast their improvement protocols on-chain and then, once approved, those improvements are implemented into the code. He closed by listing a number of “big unanswered issues” related to regulatory guidance, liability for the performance of the technology and choice of consensus, global issues, and GDPR and other data privacy issues.

Professor Catherine Christopher, Texas Tech University School of Law;

Catherine wants to help judges think about smart contracts. She asked, among other things, how judges should address remedies, what counts as substantial performance, and how smart contract audits would work. She questioned whether judges should use a consumer protection approach or instead follow a draconian approach by embracing automation and enforcing smart contracts as drafted to discourage their adoption by those who are not sophisticated enough to understand how they work.

Professor Tonya Evans, University of New Hampshire School of Law (follow her on Twitter; see her blog on blockchain here);

Tonya focuses on blockchain and intellectual property. Her talked raised the issues of non-fungible tokens generated through smart contracts and the internet of value. She used the example of cryptokitties, where players have the chance to collect and breed digital cats. She also raised the question of what kind of technology can avoid infringement. For more on how blockchain can disrupt copyright law, read her post here.

Professor Rebecca Bratspies, CUNY School of Law;

In case you didn’t have enough trust issues with blockchain and cryptocurrency, Rebecca’s presentation focused on the “halo of immutability” and asked a few central questions: 1) why should we trust the miners not to collude for a 51% attack 2) why should we trust wallets, which aren’t as secure as people think; and 3) why should we trust the consensus mechanism? In response, some members of the audience noted that blockchain appeals to a libertarian element because of the removal of the government from the conversation.

Professor Carla Reyes, Michigan State University College of Law– follow her on Twitter at Carla Reyes (@Prof_CarlaReyes);

Carla talked about crypto corporate governance and the potential fiduciary duties that come out of thinking of blockchains as public trusts or corporations. She explained that governance happens on and off of the blockchain mechanisms through social media outlets such as Redditt. She further noted that many of those who call themselves “passive economic participants” are actually involved in governance because they comment on improvement processes. She also noted the paradox that off chain governance doesn’t always work very well because participants don’t always agree, but when they do agree, it often leads to controversial results like hard forks. Her upcoming article will outline potential fiduciaries (miner and masternode operators for example), their duties, and when they apply. She also asked the provocative question of whether a hard fork is like a Revlon event.

Professor Charlotte Tschider, William Mitchell College of Law (follow her on Twitter);

As a former chief privacy officer, I have to confess a bias toward Charlotte’s presentation. She talked about blockchain in healthcare focusing on these questions: will gains in cybersecurity protection outweigh specific issues for privacy or other legal issues (data ownership); what are the practical implications of implementing a private blockchain (consortium, patient-initiated, regulatory-approved); can this apply to other needed uses, including medical device applications; how might this technology work over geographically diverse regulatory structures; and are there better applications for this technology (e.g. connected health devices)? She posited that blockchain could work in healthcare because it is decentralized, has increased security, improves access controls, is more impervious to unauthorized change, could support availability goals for ransomware attacks and other issues, is potentially interoperable, could be less expensive, and could be controlled by regulatory branch, consortium, and the patient. She closed by raising potential legal issues related to broad data sharing, unanswered questions about private implementations, privacy requirements relating to the obligation of data deletion and correction (GDPR in the EU, China’s cybersecurity law, etc); and questions of data ownership in a contract.

Professor Eric Chason, William & Mary Marshall-Wythe School of Law;

Eric closed by discussing the potential tax issue for hard forks. He explained that after a hard fork, a new coin is created, and asked whether that creates income because the owner had one entitlement and now has two pieces of ownership. He then asked whether hard forks are more like corporate reorganizations or spinoffs (which already have statutory taxation provisions) or rather analogous to a change of wealth. Finally, he asked whether we should think about these transactions like a contingent right to do something in the future and how that should be valued.

Stay tuned for more on these and other projects related to blockchain. I will be sure to post them when they are done. But, ignore blockchain at your peril. There’s a reason that IBM, Microsoft, and the State Department are spending money on this technology. If you come to UT on September 15th, I’ll explain how other companies, the UN, NASDAQ, and nation states are using blockchain beyond the cryptocurrency arena.

 

As many readers are likely aware, the proposed acquisition of Tribune Media Company by Sinclair Broadcast Group fell through when the FCC referred the matter to an administrative hearing, thus creating a nearly-insurmountable roadblock to closing.  On Thursday, Tribune filed a complaint against Sinclair in Delaware alleging that Sinclair breached the merger agreement by failing to use its best efforts to win regulatory approval.  The complaint is an entertaining read and regardless of the outcome, I’m quite certain it will prove to be a vivid classroom example of best efforts clauses in the merger context.

The basic gist of the complaint is that Sinclair agreed to use its best efforts to win regulatory approval, and it was entirely foreseen by the parties that the relevant regulators – the Justice Department and the FCC – would want divestments in 10 specific markets.  Nonetheless, Sinclair stonewalled the DOJ (at one point actually telling the Assistant Attorney General “sue me”), and submitted sham divestment plans to the FCC that involved, well:

selling WGN-TV in Chicago to Steven Fader, a close associate of [Sinclair Executive Chair David] Smith’s in a car dealership business who had no experience in broadcasting. Sinclair also proposed the sale of WPIX, a New York station, to Cunningham Broadcasting Corporation, a company that owns numerous television stations that are operated by Sinclair employees under joint sales and shared services agreements, has tens of millions of dollars in debt guaranteed by Sinclair, and had been controlled by the estate of Smith’s late mother until January 2018.

…When Sinclair’s applications were subject to public comment, opponents of the divestitures revealed facts that Sinclair had failed to disclose to the FCC …. For example, Sinclair had not told the FCC, in its applications, that Smith owned the controlling interest in Fader’s car dealership company, and that Cunningham’s controlling shares had been sold at a suspiciously low price only months earlier to a Sinclair associate with re-purchase options held by Smith’s family members.

All of which, predictably, submarined the merger and breached Sinclair’s obligations to Tribune.

Now, I have no idea what exactly happened, but I can imagine a cynical story.  The cynical story goes something like, Sinclair is a conservative media organization and the merger was favored by Trump.  The FCC’s Chair, Ajit Pai, up until now had bent over backwards to accommodate Sinclair, up to and including loosening regulations that allowed the merger to proceed.  (Currently, Pai is under investigation by the FCC’s inspector general to determine if these regulatory maneuvers were impermissibly timed to benefit Sinclair).  As a result – and knowing that the Trump administration is not renowned for its religious devotion to the minutiae of regulatory procedure – when Sinclair signed the merger agreement, it reasonably believed that its best efforts would not in fact, require it to divest anything (an expectation that may have gotten support from past practice), and was completely blindsided when matters went the other way (as was, apparently, Washington).  Certainly, there have been reasonable grounds to believe that this administration occasionally intrudes upon agency decisionmaking.

There’s also a story where the merger was denied because it strengthen a competitor to Fox News, Trump’s favorite network, though I don’t believe the historical evidence bears that out.

Either way, if Sinclair were to make an argument along these lines – not that I expect it to, this is a thought experiment – how should the contract itself be interpreted?

Essentially, this is the conundrum that Delaware Chief Justice Leo Strine anticipated when he spoke earlier this year at the Tulane Corporate Law Institute.  As I wrote at the time:

[R]eferencing the then-current dispute between Broadcom, Qualcomm, and CFIUS … he explained that judges often have to make difficult decisions about the interpretation of closing conditions that involve regulatory approvals.  In the past, judges could at least be confident that, whether you agree with the regulator or not, regulation was not being done “sideways.”  If, however, regulation is going to be used for other than its original purposes – such as for protectionist purposes – that will affect how courts address after-the-fact disputes about why deals fell through.

In other words, Delaware judges have to have faith in the legitimacy of the regulatory process in order to evaluate these kinds of disputes; without it, it becomes much harder to interpret “best efforts” clauses that involve entanglement with federal regulators.