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.

I was quoted earlier this week (Monday) in a Business Insider article, “Elon Musk has a lot to gain if Trump wins. A Harris presidency is more uncertain.” The article is behind a paywall (sorry!), but at the time this is being posted, an aol.com version is available. In any event, this post offers my two quotes with some context.

On the potential for bias against Elon Musk in a Harris administration:

“One would hope that governmental units would be immune to political pressures,” Joan MacLeod Heminway, a law professor at the University of Tennessee, told BI. “But people in those units are humans and may inadvertently scrutinize proposals coming from entities owned or controlled by Elon Musk.”

In response to a question about the inclusion of Elon Musk in a Trump administration:

“There are ethical rules mandating compliance with various types of obligations, including conflict-of-interest reporting, for certain types of government positions,” Heminway said. “Elon Musk may not want to take on these obligations.”

Now, we will wait and see what actually transpires. The article notes that “Trump has already incorporated some of Musk’s policy proposals into his campaign, with plans to establish a government efficiency commission led by Musk. Trump has said the commission would conduct a ‘complete financial and performance audit of the entire federal government’ and make suggestions for ‘drastic reforms.'”

Certainly, the deregulatory business environment that characterized the initial Trump administration (which I wrote about some here and here) was and likely would be a boon for business innovators like Elon Musk. The article observes that “[m]any of Musk’s companies depend largely on federal approvals, regulations, subsidies, or contracts — and Trump has promised a lighter regulatory environment with plans to lower corporate and personal taxes.” No doubt we will have more to say on all this here on the BLPB as time moves forward.

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.

One issue that I keep coming back to concerns the conflicts inherent in asset management.  Namely, mutual fund companies control lots of funds; each fund is its own entity, and presumably has its own interests; and yet historically, they’ve tended to be managed as a group, with – for example – all funds voting relatively in tandem, even if different funds might have different sets of interests (not always; sometimes there are legal reasons to separate them).

Anyway, it’s a subject I’ve written about in the past, and I’m always fascinated when a new empirical paper pops up illustrating the coordinated management of funds. Recently there have been a couple of interesting ones on the subject of ESG.  Previously, I blogged about this paper by Roni Michaely, Guillem Ordonez-Calafi, and Silvina Rubio, which finds that mutual fund families let their ESG funds vote separately in support of ESG issues only when those votes are unlikely to be the pivotal ones, because the proposal is widely supported or widely opposed.  When it’s a close vote, their ESG funds are reined in to the house view.

And now there’s ESG Favoritism in Mutual Fund Families, by Anna Zsofia Csiky, Rainer Jankowitsch, Alexander Pasler, & Marti G. Subrahmanyam, which finds that mutual fund families functionally “subsidize” their ESG funds – by allocating better performing assets to them at the expense of other, non-ESG funds within the same family – in order to prevent them from underperforming.  The authors speculate that families may be motivated to support their ESG funds in order to cater to a new ESG market, or simply to burnish their own reputations.

And finally, the latest Shareholder Primacy podcast is up.  This week, me and Mike Levin talk about the McRitchie v. Zuckerberg case, and Exxon’s lawsuit against Arjuna Capital.  Available at Apple, Spotify, and YouTube.

I know this is late notice, but I have a small role in an online symposium on benefit corporations being held today at 3:30 pm Eastern (12:30 pm Pacific). The symposium features essays on Professor Michael Dorff’s recent book on benefit corporations, Becoming a Benefit Corporation. The essays will be published in a forthcoming issue of the Southwestern University Law Review. I am writing a foreword for the issue. If you have time and want to register to attend, the flyer is included above. You also can just register here.

Happy Halloween!

The Delaware Supreme Court just heard oral argument in the TripAdvisor case. Both sides had talented lawyers representing them. Keith Bishop has also covered this here. You can watch the oral argument here:

I’d like to offer three quick thoughts.

The Reincorporation Premium/Discount

At around the 28th minute, counsel for the stockholder made claims about there being a Nevada discount. This doesn’t seem to be supported by the weight of the evidence–or recent evidence. Steven Davidoff Solomon summarized the evidence in a recent memorandum that was attached to The Trade Desk Proxy. This is what he found:

24. Professors Paul Gompers, Joy Ishii, and Andrew Metrick also examined Professor Daines’ results as part of their study of 1,500 large firms to assess how firm governance affects stock returns. Consistent with the unique nature and heterogeneity of each company, they found that the premium observed in Professor Daines’ study was attributed to various governance characteristics, such as a classified board, limited ability to call special shareholders’ meetings, and state law and charter takeover protections. After controlling for these factors, they discovered that the Delaware premium was no longer statistically significant. In other words, Professors Gompers, Ishii, and Metrick concluded that any valuation increase in Delaware firms identified by Professor Daines was not due to incorporation in Delaware, but rather to the individual governance choices of those firms.

25. Finally, in a 2020 article, Professor Ed Fox investigated whether there is a premium for controlled companies incorporated in Delaware.35 Replicating the Daines study with a smaller sample of firms, Professor Fox found a potential effect for middle-market diffusely held Delaware firms, but it was not significant. He also examined controlled firms, like The Trade Desk, and discovered that “controlled Delaware firms have a lower Tobin’s Q compared to controlled firms incorporated elsewhere, after factoring in firm characteristics.”36 In other words, Professor Fox identified a Delaware effect, but it was negative for controlled firms. He found that controlled Delaware firms are, on average, worth 4.9% less than similarly situated firms incorporated elsewhere.

26. Regarding Nevada firms and the value of Nevada incorporation, the primary study by Professors Clark and Barzuza found that, as of 2011, Nevada is the place of incorporation for 8.0% of all public firms incorporating outside their headquarters state, making it second only to Delaware in attracting out-of-state incorporations.37 Professors Clark and Barzuza also replicated the Daines study and found “no discernible valuation effect for firms that incorporate in Nevada,” in contrast to Delaware firms, which are “valued higher than firms incorporated in Nevada and other states outside Delaware.”38 This discrepancy may be attributed to the fact that the Nevada firms in their sample are significantly smaller than Delaware firms, potentially leading to a lower overall value. Additionally, the value differential could reflect differences in the quality of firms incorporating in Delaware versus Nevada.39

27. Professor Eldar has more recently analyzed studies of whether Nevada firms have a premium or discount. He states that “there seems to be no convincing evidence that incorporation in Nevada adversely affects share prices.”40 Professor Eldar also conducted his own study and concluded that “the evidence supports the hypothesis that Nevada’s protectionist laws do not harm shareholder value…. ”41

28. Ultimately, these and other studies suggest that while incorporating in Delaware may have had some value in the past, the premium has diminished as capital markets have matured. Additionally, these findings are subject to limitations, such as the inability to fully control for selection effects and omitted variable bias. More specifically, it is possible that these studies observed higher or lower-quality companies choosing Delaware, Nevada, or elsewhere, and that these unobserved characteristics influenced the results. Furthermore, the findings of Professors Gompers, Ishii, and Metrick, along with subsequent research, support the idea that any observed valuation effects of incorporation may also be attributed to the unique governance characteristics of the companies.42

In short, there doesn’t seem to be any meaningful change in stock price when firms pick Nevada over Delaware. To the extent that controlled firms really do trade at a discount in Delaware, reincorporation might offer a minority stockholder benefit by helping reduce that discount.

What Companies Give Up When They Decamp to Delaware

If Delaware does start imposing liability for reincorporations, other states might respond. Nevada made this point in its brief by pointing out that stockholders might sue under the law of other states because a reincorporation to Delaware would deprive them of their rights to a jury trial.

But there are other differences between the states. Take constituency statutes for instance. Over thirty states have them. They generally provide that the corporation’s board may consider constituencies other than shareholders when making decisions. Nevada’s constituency statute allows a corporate board to take into account the interests of “the corporation’s employees, suppliers, creditors or customers” among an array of other constituencies when considering the interests of the corporation. Reincorporation to Delaware trims away a corporate board’s ability to consider these other interests directly and makes it so that they must be considered through the lens of what best advances shareholder interests.

The states that charter corporations surely have an interest in them. As there isn’t a good mechanism for these constituencies to sue for the loss of their ability to be considered as part of the interests of the corporation, states might authorize their attorney generals to seek damages for reincorporations to jurisdictions that apply different standards.

Damages Remain Speculative

Either for the loss of the constituency statutes or for other changes in rights between states, figuring out damages appears to be a really nasty thicket. I don’t know any great way to do it. I don’t think anyone does. How do you value a different set of statutes, different cases, and a different court system? I don’t know. I don’t think the Delaware Supreme Court has a great answer either. It might be better to just treat damages here as too speculative.

Tulane Law School invites applications for its Forrester Fellowship and Visiting Assistant Professorship, both of which are designed for promising scholars who plan to apply for tenure-track law school positions. Both positions are full-time faculty in the law school and are encouraged to participate in all aspects of the intellectual life of the school. The law school provides significant support and mentorship, a professional travel budget, and opportunities to present works-in-progress in faculty workshops. 

Tulane’s Forrester Fellows teach legal writing in the first-year curriculum to first-year law students in a program coordinated by the Director of Legal Writing. Fellows are appointed to a one-year term with the possibility of a single one-year renewal. Applicants must have a JD from an ABA-accredited law school, outstanding academic credentials, and significant law-related practice and/or clerkship experience. If you have any questions about this position, please contact Erin Donelon at edonelon@tulane.edu.

Tulane’s visiting assistant professor position is supported by the Murphy Institute at Tulane (http://murphy.tulane.edu/home/), an interdisciplinary unit specializing in political economy that draws faculty from the university’s departments of economics, philosophy, history, and political science. The position is designed for scholars focusing on regulation of economic activity very broadly construed (including, for example, research with a methodological or analytical focus relevant to scholars of regulation).  If you have any questions about this position, please contact Adam Feibelman at afeibelm@tulane.edu.  

Tulane is an equal opportunity employer and candidates who will enhance the diversity of the law faculty are especially invited to apply. Please apply through interfolio: http://apply.interfolio.com/156399

I previously posted about an anti-activist bylaw at a closed end fund, meant to head off Saba Capital. The bylaw provided that an activist who obtained more than 10% of the fund’s voting power would not be able to vote the excess, unless the remaining fund shareholders voted to permit it. The Second Circuit found that bylaw ran afoul of the Investment Company Act.

Eaton Vance came up with a new tactic. Funds, unlike operating companies, have a large retail shareholder base. And retail shareholders often don’t cast ballots at all.

For ordinary director elections, retail lack of participation isn’t a huge problem. The directors are elected by a plurality standard, so you don’t need a majority of shares to vote in favor. And that means when an activist like Saba comes along, Saba can defeat the sitting directors under a plurality standard.

So! Eaton Vance funds passed a bylaw that provided for majority – not plurality – voting, but only if a director election is contested. And further, the bylaw provided that if no candidate receives a majority, then the sitting directors get to maintain their seats as holdover directors.

Which functionally means that, in a contested election, the activist is subject to a higher voting threshold than the incumbent nominees. A threshold that, due to lack of retail participation, is unlikely to be met.

Saba challenged the bylaw in court, and after a bench trial, the Massachusetts Superior Court upheld the bylaw. The court agreed that if the bylaw made it impossible for a challenge to succeed, it would violate both the terms of the Trust – which was functionally a contract – and the Investment Company Act. But, the court found as a factual matter that the bylaw did not make it “impossible or impracticable” to elect challenger nominees.

I know very little about closed end funds; the Investment Company Institute, unsurprisingly, defends them and accuses activists of taking advantage of market dislocations that cause the funds to trade below their NAV. Meanwhile, the Working Group on Market Efficiency and Investor Protection in Closed-End Funds concludes that these “market dislocations” are ubiquitous and activism in closed end funds is important to protect investors.

But what interests me here is that nothing in the Massachusetts opinion discusses fiduciary obligations. The only questions the court addresses are whether the bylaw is a violation of statute or contract. Apparently, at some point earlier in the case, Saba did argue that the bylaw breached the Trustees’ fiduciary obligations, citing Delaware law; for whatever reason, the court did not address that argument in its final ruling.

I don’t know Massachusetts trust law, but in Delaware, we’d of course say that inequitable action does not become permissible simply because it is legally possible; the actions of Delaware corporate directors are “twice tested”: first for legal validity, and second for compliance with fiduciary obligation. But I find it very difficult to believe that Delaware, anyway, would conclude that a bylaw that imposes different voting thresholds for challengers and sitting directors (with shifting thresholds depending on the existence of a contest) comports with fiduciary obligations. If nothing else, the incumbents would have to identify a “threat” justifying a defensive measure, and “shareholders might vote for a policy I think is bad” is not a cognizable threat.

And finally, the latest Shareholder Primacy podcast is up.  This week, Mike Levin talks with Harvard Law’s Ben Bates about his paper on advance notice bylaws, forthcoming in the NYU Law Review.  Available at Apple, Spotify, and YouTube.

A law firm recently reached out to me to conduct a CLE on Mental Health Challenges in the Age of AI. It was an interesting request. I’ve spoken about AI issues on panels, as a keynote speaker, and in the classroom, and I wrote about it for Tennessee Journal of Business Law. I also conduct workshops and CLEs on mental health in the profession. But I’ve never been asked to combine the topics. 

Before I discussed issues related to anxiety about job disruption and how cognitive overload affects the brain, I spent time talking about the various tools that are out there and how much our profession will transform in the very near future.

If you’re like many lawyers I know, you think that AI is more hype than substance. So I’ll share the information I shared with the law firm.

According to a  2024 Bloomberg survey on AI and the legal profession, 69% of Bloomberg survey respondents believe generative AI can be used ethically in legal practice. But they harbor “extreme” or “moderate” concerns about deep fakes (e.g., human impersonations, hallucinations and accuracy of AI-generated text,  privacy, algorithmic bias, IP, and of course, job displacement.

Those are all legitimate concerns. But you’ve heard the saying by now that AI won’t replace lawyers — it will replace lawyers who don’t use AI. I think that’s true and there’s some evidence to back me up. 

During the CLE, I highlighted statistics from the 2024 Clio Legal Trends Report, which compiled findings from a comprehensive survey of 1,028 legal professionals, including lawyers, paralegals, and administrative staff; 1,437 Clio customers; and a random sample of 500 law firms across the United States. Clio employed a large language model (LLM) to evaluate the work activities outlined in the Occupational Information Network (O*NET) database, assigning automation scores to various legal tasks. This analysis involved over 7 million time entries from anonymized billing data, categorizing work activities according to their revenue contributions. Here are some key findings from Clio’s report:

  • In 2023, 19% of lawyers used AI for work. In 2024 that number jumped to 79%.
  • 25% have adopted AI “widely or universally.”
  • 84% of legal respondents believed law firm AI use will increase over the next 12 months, including 68% of those who aren’t currently using the technology.
  • 74% of hourly work in the legal industry could be automated by AI including 57% of lawyer work, 69% of paralegal work, and 81% of legal assistant work.

But what would clients think if we used AI for their work? 70% of clients are either agnostic or would prefer to work with firms that use AI, including 59% of baby boomers, 68% of Gen X, 75% of Millenials and 81% of Gen Z. One in six Americans has consulted with ChatGPT for legal advice.

For business lawyers, life is becoming exponentially easier (unless you bill by the hour, which will be the subject of another post). Why? You can use Spellbook AI, which claims to be “the only GPT-4 powered tool that has been tuned for contracting & integrated with Word…In the same manner that a junior associate would be expected to accomplish work without constant supervision, Spellbook Associate can use a single prompt to effectively work through legal matters such as producing complete financing documents from a term sheet, reviewing hundreds of documents for risks and inconsistencies and revising employment packages.” 

Fortune 500 companies and law law firms use Harvey, which is trained on extensive U.S. and EU legal databases, covering over 50 languages and various legal systems.  Paxton maintains a legal library with over 200 million documents, does real-time clause comparison, redlining, and contract creation suggesting language for contracts based on regulatory guidelines. CoCounsel, backed by Thompson Reuters, extracts data from contracts and ensures that contracts comply with a company’s policies. And there are so many more.

This isn’t hype and it’s not going away. 

Although I require my students to  use AI for brainstorming in my business associations and transactional skills classes, many law schools, ban or discourage AI. But that’s changing. 55% of law schools surveyed by the ABA  reported that they offer classes dedicated to teaching students about AI. 83% reported the availability of opportunities, including clinics, where students can learn how to use AI tools effectively. 93% of respondents expect to change their curricula to address the prevalence of AI tools. Although only 29 deans responded to the survey, we should still pay attention to these statistics. My institution, the University of Miami has just appointed a Chief Artificial Intelligence Officer and has rolled out a program on AI in teaching. My law school hired an AI fellow to help faculty members and students integrate the technology and has established an AI Lab. 272  law professors have joined the AI & Law-Related Course Professor List, the brainchild of Daniel Linna from Northwestern and April Dawson of NCCU.

I spend hours a day thinking and learning about AI with all of the good, the bad, and the ugly. But with all of the new tools, I also have to think deeply about how I train the next generation of lawyers. Having access to a precedent to draft from is one thing, but these AI platforms are pretty good and will only get much much better very very soon. 

As you think about your own experiences, whether you’re part of a law firm, an academic institution, an in-house legal team, or a client of legal services, consider these questions:

  1. How do you currently incorporate technology in your legal practice or teaching?
  2. What are your biggest concerns about using AI in your legal work?
  3. In what ways do you think AI can enhance the negotiation and drafting process?
  4. How do you ensure ethical compliance while integrating AI tools?
  5. What skills do you believe are essential for the next generation of legal professionals in an AI-driven environment?
  6. How can collaboration among legal professionals improve the implementation of AI tools?
  7. What training or resources would be most helpful for you or your team in adopting AI technologies?
  8. How do you communicate the value of AI tools to your clients or colleagues?
  9. What strategies can you use to maintain client trust when implementing AI solutions?
  10. How can law schools better prepare students for a future where AI plays a significant role in legal practice?