Bloomberg Law recently covered the volume of records litigation going on in Delaware’s Chancery Court. These paragraphs frame the rise:

Records suits, which require only preliminary suspicions, are designed to resolve narrow disagreements over how to enforce a core shareholder right. But Delaware’s judges are spending significant chunks of time policing the process, as in recent fights over Amazon.com Inc’s antitrust woes, Boeing Co.’s safety scandals, and the $8 billion Paramount Global-Skydance Media merger.

“Nobody’s happy with the state of affairs,” said Widener University law professor Lawrence Hamermesh. “It’s a mess.”

Everyone involved would rather be doing something more substantive, but they’re responding rationally to structural incentives, Chancellor Kathaleen St. J. McCormick, the court’s chief judge, said at George Washington University. Although getting inside information offers clear advantages, “complaints just get longer and longer,” she said Oct. 25. “I’m not sure I need all that at the pleading stage, but it’s not hard to see why they’re doing it, and I can’t advise against it.”

Shareholder attorneys blame the logjam on board stonewalling, while companies say the ballooning cost is affecting settlement leverage. “Shareholders aren’t in the engine room every day, so there was wisdom in making sure they get this information,” said GWU law professor Omari Scott Simmons. “But there were unintended consequences.”

When I think about this issue, I suspect that the litigation volume may be a bit like the tip of an iceberg for companies responding to these requests. We can easily see and observe the litigation, but we don’t see the total time and expense associated with record requests.

Consider the issue from the perspective of a harried in-house lawyer with a full workload already. A records request shows up. The letter probably cites case law that the in-house attorney may not be closely familiar with. The next call will probably be to hire outside counsel for advice. That’s not cheap.

What I don’t know or know how to observe is what percentage of the time the company will simply pull together and send over records. That process will involve some expense, but it’s probably not too bad to do it once. But what about companies that get more requests? The costs pile up.

Nevada takes a different approach and doesn’t allow random shareholders to bring these actions for public companies. By avoiding the need to comply with requests, Nevada corporations can entirely avoid the expense. This approach comes with a tradeoff. It makes it harder for shareholder plaintiffs to obtain information that might allow them to win claims.

What’s the right solution here? It could be somewhere in the middle. It might make sense for a state define a range of easily collectible documents that should be maintained and made available upon request. Allowing shareholders to get ahold of more documents might be gated or balanced with some fee-shifting provision. I don’t know the right answer here, but it’s worth thinking about and finding some ways to study.

Well, the Fifth Circuit reached its decision in National Center for Public Policy Research et al. v. SEC, which I previously blogged about here and here. As I predicted, the panel chose to leave the SEC’s 14a-8 review process in place, but also as I suspected, Judge Jones – the only GOP appointee on the panel – dissented.

So I presume we’ll see a petition for rehearing en banc, and it wouldn’t surprise me at all if the full court took up the case, meaning, this may not the final word.

Recall, the claim was that the SEC engages in viewpoint discrimination when it issues no-action letters regarding companies’ attempts to exclude shareholder proposals from their proxy statements.  NCPPR claimed the SEC favors liberal proposals and disfavors conservative ones.  Separately, the National Association of Manufacturers intervened to argue that the entire 14a-8 system is unauthorized by the Exchange Act and is unconstitutional.

The SEC’s main argument was that no-action letters are not final orders subject to challenge.  The Democratic appointees on the panel agreed, but assuming Judge Jones’s dissent is a template for how the full Fifth Circuit would view the matter, it threatens to scramble the 14a-8 process, but perhaps in a manner that the incoming Trump Administration would find amenable.

Judge Jones argued that no-action letters are final orders because they constrain agency – SEC – discretion in a particular way, namely, they limit the SEC’s ability to bring an enforcement action.  And, further, she claimed that the SEC conceded that if they are final orders, they are arbitrary and capricious as a matter of law, because they do not state their reasoning.

Now, assuming the entire Fifth Circuit agrees, the upshot, as I understand it, is that the SEC would be required to offer more detailed reasoning in each and every no-action letter it issues under 14a-8.  That would be incredibly burdensome for the staff.

Meanwhile, under the first Trump Administration, the SEC adopted a policy of not issuing letters at all – instead, it switched to oral rulings, and often declined to weigh in on no-action requests (a policy the Biden SEC reversed).

At the time, some commenters believed this tilted the playing field in favor of management, because, absent an SEC opinion, management would simply decline to include proposals in their proxy statements and dare proponents to sue.  Since proponents are as a group less resourced than corporations and less likely to file a lawsuit, management would be pretty safe.  Others worried that the whole situation just created uncertainty around litigation risk, and that corporations would prefer to have the guidance.

If the Fifth Circuit functionally mandates that the SEC either not act at all, or act with a full explication of its reasons, I assume that the Trump SEC would choose not to act at all in most cases.  Companies would still be required to first petition the SEC to exclude a proposal – that’s part of Rule 14a-8 itself – but they wouldn’t expect an answer.  Meaning, the entire system of SEC adjudication of 14a-8 proposals would end, and companies would be left to include proposals in their proxies, or not, at their discretion, depending on their tolerance for litigation risk.  For most proposals (maybe not by Starboard Value, but others), the tolerance would presumably be pretty high, if for no other reason than if a shareholder did have the wherewithal to file lawsuit, the company could easily just settle it by belatedly agreeing to include the proposal in its proxy materials.

And another thing. On this week’s Shareholder Primacy podcast, Mike Levin and I talk about the legal uncertainty surrounding controlling stockholders, and director say-on-pay. Available on Spotify, Apple, and Youtube.

Elon Musk is using his new quasi-official role with the federal government to threaten to preempt Delaware law with federal corporate governance standards, if the Delaware Supreme Court does not restore his Tesla pay package.

And another thing, on this week’s Shareholder Primacy podcast, Mike Levin talks with Matt Moscardi of Free Float Analytics about what shareholders should and do look for in director candidates, and how to use advanced data and modeling to identify good and bad directors. Available on Spotify, Apple, and Youtube.

Like many of you, I’m still digesting the election results and mulling what it will mean for financial regulation.  At the least, here are my early expectations:

• Administrative agencies may focus on repealing existing rules over crafting new ones to address problems.  We saw this with the last Trump Administration and I’d expect to see more of the same.
• The Trump Administration will likely move to exert more political control over civil servants.  At the end of the last Trump Administration, President Trump issued an Executive Order aiming to exclude many more federal employees as outside the ordinary civil service rules. President Biden revoked it on taking office.  If reinstated, Schedule F would cover “[p]ositions of a confidential, policy-determining, policy-making, or policy-advocating character not normally subject to change as a result of a Presidential transition[.]”   Essentially, the Trump Administration may seek to take political control over any federal employees involved in policy work.  This would cover a huge swath of federal employees.
• The independence of the SEC will be tested.  There are two ways I can see this happening.  First, Chair Gensler could decline to resign and simply serve out his term.  President-elect Trump has promised to fire him.  But it’s not entirely clear to me that he can be fired without cause.  By staying at his desk, Chair Gensler could bring clarity to whether the SEC does enjoy for-cause removal protection. Of course, if Gensler resigns, someone else will take the job.  That person also stands a good chance of getting fired because the prior Trump administration included regular firings and turnover.  If some new SEC Chair decided to resist termination, we’d also get an answer to this question.
• Climate-related rules are likely to be watered down or rolled back.
• Enforcement priorities may shift away from crypto-related frauds and scams.
• The Federal Reserve may lose independence.
• Self-regulatory organizations may face greater risks that courts will question their status.

Many readers know Bill Carney, Professor Emeritus at Emory Law. Bill’s scholarly and instructional work in business finance has enlightened so many of us. That, alone, is a great legacy of his many years of research, writing, and teaching.

But now we have another reason to celebrate Bill and the mark he is leaving on our world. Last week, Emory announce a major gift from Bill, creating the William and Jane Carney Center for Business and Transactional Law at Emory Law. Many know about Emory Law’s historical leadership in business law through its Center for Transactional Law and Practice (which is encompassed in the Carney Center). Bill has been a strong component and proponent of that leadership. This gift will undoubtedly ensure a continued academic and instructional focus on business law at Emory Law for the foreseeable future.

I am thrilled for Emory Law and my friends there. And we all can be grateful to Bill for so much–including this. Business law education needs more of this kind of support.