Thing One:  SEC Commissioner Mark Uyeda recently posted this dissent regarding an SEC enforcement action against Cantor Fitzgerald. The action accused Cantor Fitzgerald of taking SPACs public while already having begun to have substantive negotiations with potential merger targets.  Commissioner Uyeda argues that in the context of SPACs – which are designed to merge with someone eventually – preliminary negotiations with targets should not be considered material until they are close to reaching binding contract.

John Jenkins at Deal Lawyers Blog points out Uyeda’s views may be more representative of what we can expect from the incoming administration.  And I particularly note as much because (as Uyeda mentions) the SEC settled an enforcement action against Digital World Acquisition Corp. for failing to disclose discussions with Trump Media before the DWAC IPO. 

Notably, the case against Patrick Orlando, the former DWAC CEO, was filed last year and continues to be litigated. 

Thing Two: I was fascinated by this Bloomberg story about ATIC, the main insurance company for taxis/rideshares in New York, which recently was declared insolvent. (Anyone who teaches Walkovsky v. Carlton can’t help but be interested in NYC taxi insurance regulation.)

Anyway, the main takeaway is that ATIC was, functionally, a Ponzi scheme – its reserves were always insufficient, so claims were paid out of premiums paid by other drivers – which meant, among other things, that ATIC’s low rates drove others out of the market, and also that ATIC (like all Ponzi schemes) depended on a growing customer base.  So, it benefitted when Uber and Lyft entered the market, and then stalled out when NY capped the number of new vehicle licenses.  But most astonishingly, politicians and regulators have known about ATIC’s finances for literally decades, and failed to act – even to the point where the state insurance department simply failed to publish required examinations.

Thing Three:  Not a corporate case, but a heartbreaking Delaware case. Chancellor McCormick regretfully denies a request for a TRO to allow a plaintiff access to the remains of his beloved horse: “There is no doubt that Mr. Marckese would dig up that entire acre himself, given access and a shovel.”

Hat tip to friend-of-the-BLPB Tom Rutledge for this.

On December 31, 1600, Queen Elizabeth granted a charter to the East India Company, accurately described by Tom as “the granddaddy of business associations.” You can find the brief HISTORY.com accounting here. A longer article on the HISTORY.com site, authored by Dave Roos, can be found here. The first paragraph follows.

One of the biggest, most dominant corporations in history operated long before the emergence of tech giants like Apple or Google or Amazon. The English East India Company was incorporated by royal charter on December 31, 1600 and went on to act as a part-trade organization, part-nation-state and reap vast profits from overseas trade with India, China, Persia and Indonesia for more than two centuries. Its business flooded England with affordable tea, cotton textiles and spices, and richly rewarded its London investors with returns as high as 30 percent.

As I prepare to teach Business Associations again in the spring semester, it is sobering to be reminded that, even as the law of business associations continually evolves, the form and function are not new. Also, the concept that the private firm and government can serve–and has served–the same and overlapping roles in society over the years is something we should keep in mind as both business ventures and the public sector expand and contract.

Happy new year to all. I hope to see many of you in 2025, here or there.

Litigation limiting bylaw and charter provisions are something of a running interest of mine – I have four different papers discussing them, more or less, and here is the latest of many blog posts on the subject – so I was tickled when I discovered In re Cerence Stockholder Derivative Action, 2024 WL 5187699 (D. Mass. Dec. 20, 2024), where the company had two different forum selection provisions, one in the charter and one in the bylaws, and they were not the same.

Conflicting provisions in the charter and bylaws?  That’s how we know these things have really gone mainstream.

So.  Cerence is incorporated in Delaware, and has a charter provision, adopted when it went public as a spinoff in 2019, requiring:

Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer or other employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders … shall be the Court of Chancery of the State of Delaware, in all cases to the fullest extent permitted by law, or, if the Court of Chancery or the State of Delaware does not have jurisdiction, any other state or federal court located within the State of Delaware.

Then, in 2022, the Seventh and Ninth Circuits issued decisions addressing bylaws that required all derivative claims be heard in Delaware’s Court of Chancery.  By their terms, these bylaws applied to both state and federal derivative claims, but because Chancery has no jurisdiction to hear Exchange Act claims, they functionally acted as a waiver for derivative federal claims.  As I blogged (and blogged and blogged) at the time, the Seventh Circuit refused to enforce one bylaw, while the Ninth Circuit upheld another.

Also in 2022, the plaintiffs filed their derivative Section 14(a) claims against Cerence in the District of Massachusetts.  The case was stayed in favor of a related securities class action.

In 2023, the company – acting, I can only assume, in response to the Seventh and Ninth Circuit rulings and not to the derivative lawsuit, I think? – amended its bylaws to add a new forum provision that said:

Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, the Exchange Act, or the respective rules and regulations promulgated thereunder.

This was funny because the original charter provision was just fine as it was; you get the sense that the bylaw was drafted by someone who was unaware of what the charter actually said. So, the charter would require all derivative actions to be filed in the state of Delaware – state or federal court – while the bylaws would require that all federal claims be filed in some federal court somewhere.

Well, Massachusetts is, indeed, somewhere, so when the stay was lifted and litigation got going again, and Cerence moved to dismiss the derivative action in favor of Delaware on the basis of the charter provision, the plaintiffs said, but no!  The bylaws – which you just passed – permit our claims to advance right here.  Cerence responded, naturally, that when the charter and bylaws conflict, the charter controls.

The court held that, read correctly, the provisions did not conflict at all.  The charter required claims to be filed in a Delaware court unless the company consented in writing; the bylaw was the equivalent of just such a consent; therefore, the plaintiffs were permitted to advance their claims in any federal court, including a federal court in the Bay State.

Q.E.D.

The National Center for Public Policy Research has sponsored a series of conservative shareholder proposals asking companies to reconsider their diversity programs. The one recently offered at Costco is typical:

It’s clear that DEI holds litigation, reputational and financial risks to the Company, and therefore financial risks to shareholders.

And yet Costco still has such a program, though it was apprehensive enough to recognize this as it recently and quietly rebranded its DEI program to “People and Communities.”  But sticking a new label on discriminatory practices does not protect Costco and its shareholders from these risks….

With 310,000 employees, Costco likely has at least 200,000 employees who are potentially victims of this type of illegal discrimination because they are white, Asian, male or straight.  Accordingly, even if only a fraction of those employees were to file suit, and only some of those prove successful, the cost to Costco could be tens of billions of dollars.

Resolved: Shareholders request that the Board conduct an evaluation and publish a report, omitting proprietary and privileged information, on the risks of the Company maintaining its current DEI (including “People & Communities”) roles, policies and goals.

Costco’s response was not:

The proponent professes concern about legal and financial risks to the Company and its shareholders associated with the diversity initiatives. The supporting statement demonstrates that it is the proponent and others that are responsible for inflicting burdens on companies with their challenges to longstanding diversity programs. The proponent’s broader agenda is not reducing risk for the Company but abolition of diversity initiatives. A 2023 federal district court decision, in a case brought by the proponent, noted that the proponent had “published a document called ‘Balancing the Boardroom 2022,’ which describes its shareholder activism as ‘fighting back’ against ‘the evils of woke politicized capital and companies.’ [The proponent went] on to describe ‘CEOs and other corporate executives who are most woke and most hard-left political in their management of their corporations’ as ‘inimical to the Republic and its blessings of liberty’ and ‘committed to critical race theory and the socialist foundations of woke’ or ‘shameless monsters who are willing to sacrifice our future for their comforts.'” National Center for Public Policy Research v. Schultz, E.D. WA. (Sept. 11, 2023)….

We believe that the proponent’s request for a study reflects a policy bias with which we disagree and that further study and reporting would not be an efficient use of Company resources.

Tl;dr version:

Hennion and Walsh, a FINRA member firm, has taken an unusually aggressive position, claiming that because it has procured expungements through the FINRA forum, members of the public cannot discuss the underlying conduct. A cease and desist letter sent to a law firm claims that the firm “posts information relating to Hennion and Walsh, Inc. and its’ [sic] employees which has been found to be false and has been ordered to be expunged.” The letter goes on to claim, without authority, that it’s “illegal to provide a false statement . . .of an individual’s character and/or reputation” and that unspecified “relevant records reflect the information you have posted for public consumption has been deemed to be false, was ordered to be expunged and that order has been confirmed in a court of competent jurisdiction.”

The letter doesn’t specify exactly what statements it wants removed, but I presume it’s blog posts or other things featuring news of past Hennion and Walsh settlements or complaints against Hennion and Walsh employees. These are all fairly typical things for a plaintiff-side firm to post. If one investor has filed or settled a claim against a particular broker, there may be other aggrieved investors out there looking for counsel. Having a blog post up informs the public that the attorney watches the space and would probably welcome a call for help.

So, this brings me to the key question, does the fact that expungements have been procured through the FINRA arbitration forum mean that law firms must send all those old posts down the memory hole? The reality here is that the best available research here from Colleen Honigsburg and Matthew Jacob shows that brokers who have obtained expungements are actually more likely to attract future customer complaints than similarly situated brokers who do not obtain expungements. Brokers with expungements are “3.3 times as likely to engage in new misconduct as the average broker.”

For many years, the process for expunging information about stockbrokers has been fundamentally broken. I’ve written about the enormous problems with the expungement system and called for a shift to a more regulatory framework. FINRA has also moved and significantly reformed its expungement process with new rules going into effect in 2023. Yet the prior system’s problems don’t go away immediately. One broker recently secured a record number of expungements under the old rules in an award that came out in September this year.

Some Hennion and Walsh expungements seem to exemplify the problems under the old system. Consider four different expungements secured by Hennion and Walsh brokers. In each of these matters, the broker seeking expungement filed a claim against Hennion and Walsh. Both the broker and Hennion and Walsh were simultaneously represented by Hennion and Walsh’s in-house counsel, Jennifer Woods Burke. All of these cases employed the ethically dubious dollar-trick strategy.

These cases raise two red flags for me. The dollar-trick strategy in this circumstance seems particularly hard to defend. It also strikes me as a violation of the concurrent conflict of interest rules.

Did The Damages Claims Have Any Basis?

Let’s start with the dollar-trick issue. I call the strategy ethically dubious because under ABA Model Rule 3.1 lawyers are only supposed to assert claims if they have a “basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law.” Asserting a $1 damages claim for the purpose of securing a single arbitrator allowed claimants to avoid the three arbitrators the FINRA Rules called for claims for non-monetary relief. Wanting non-monetary relief without wanting to pay fees for non-monetary relief doesn’t strike me as a claim that has some basis in law and fact. In an expungement hearing, I once asked a broker who had filed one of these claims why he thought his firm owed him a dollar. He was baffled and had no idea.

Here, the lawyer represented the broker and the firm in the same matter. Surely the lawyer would be well-positioned here to know whether there was any basis for seeking monetary damages. That the claim was dismissed at the hearing–as all other dollar-trick claims were–makes it appear as though there was no basis for the damages claim than a desire to avoid paying fees.

Simultaneous Claimant and Respondent Representation

The other major ethical issue with these expungements is the concurrent client conflict of interest. Burke represented both the claimant and the brokerage in each of these four matters. That raises an issue under Model Rule 1.7. The ethics rule states that you have a concurrent conflict if “the representation of one client will be directly adverse to another client.” It goes on to provide that you can only waive the conflict if “the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal.” Here, Burke simultaneously represented both the claimant and the respondent in the same proceeding before an arbitration tribunal.

Comment 17 to the Rule explains:

[17] Paragraph (b)(3) describes conflicts that are nonconsentable because of the institutional interest in vigorous development of each client’s position when the clients are aligned directly against each other in the same litigation or other proceeding before a tribunal. Whether clients are aligned directly against each other within the meaning of this paragraph requires examination of the context of the proceeding. Although this paragraph does not preclude a lawyer’s multiple representation of adverse parties to a mediation (because mediation is not a proceeding before a “tribunal” under Rule 1.0(m)), such representation may be precluded by paragraph (b)(1).

With Burke representing both the brokers and the firm in the same proceeding, you cannot pretend that the “institutional interest in vigorous development of each client’s position” was achieved. You also cannot pretend that the public’s interest in preserving public information about past complaints against brokers was vigorously represented.

For a long time, FINRA expungements were often sham proceedings. In most expungement cases, no person with any interest in surfacing information militating against expungement ever spoke to the arbitrator. FINRA has put in place rule changes to deal with the problem and now allows state regulators to appear in these proceedings on the theory that they may serve as better defenders of the public’s interest in information.

Ultimately, Hennion and Walsh secured its expungements through this dubious process, for whatever that’s worth. But they should not be able to use expungements secured through this dubious process to force everyone else to pretend that no complaints were ever raised about their personnel in the past. They had past complaints. They got them expunged. The process they used seems ethically dubious. They won four expungements when the same lawyer represented the claimant and the firm before an arbitration tribunal. Take the facts for what they’re worth.

In law school, students take a professional responsibility exam and then take the MPRE exam. After graduation, they sit through (often boring) continuing legal education courses and try to get that precious ethics credit.

I don’t teach professional responsibility anymore, although I do speak about ethics in my Compliance, Corporate Governance, and Sustainability and my Business and Human Rights courses.

But as business professors, I’m not sure that we spend enough time talking about business ethics. Yes, it’s important to know about conflicts of interests but do we know how to advise our business clients on the issues that affect them?

I get to flex my “ethics” muscles in an interdisciplinary Innovation, Technology, and Design program housed in our School of Engineering, where I teach a course on Ethics, Equity, and Responsibility- basically Ethics and Technology.

They say grading is the worst part of being a professor.

But not this week.

My students in the ITD class brought me to tears reading their final exams.

I was impressed by their projects on regulating technologies like social media, cloning, AI, and robotics, and by their business plans and pitches for new innovations.

I would invest in some of them today if I could.

But their final reflections on the semester hit me hardest.

This class explored traditional philosophical principles (Kant, Descartes, Bentham, Hume, Locke, virtue theory, Socrates, Plato) and nontraditional theories (Ubuntu, care ethics, indigenous perspectives), applying them to topics like:
– Ethical supply chains
– Geoengineering
– Autonomous vehicles
– China’s social credit system
– AI and education, healthcare, and the environment
– Drone warfare
– Killer robots
– Social media

Some students did mock podcast interviews for their final exams. Others wrote long-form blog posts or letters to their future selves.

What struck me most:
– They debated these issues with family and friends, even when they weren’t asked to do so.
– They now approach debates and discourse with a critical eye for rhetoric, fallacies, and red herrings.
– Some deleted their social media apps or significantly cut down on their use and noted how their self esteem went up and their anxiety went down.
– They reflected on how they’ll use these lessons in their future careers.
– Some even changed career paths or dream employers.

Of course, they’re college students; their perspectives may evolve again.

But…

I believe that just one person can change the world.

These are our future business leaders, regulators, and government officials. They are our students’ future clients.

If I convinced even one student to consider ethics, privacy, and human rights be design in their careers or future government roles, then mission accomplished.

No one teaches – whether kindergarteners or law students – for the money.

We do it to shape the future, one person at a time.

We do it for moments like this.

I can’t wait to see how these sophomores and juniors change the world.

Whether you teach or not, I hope you’re in a role where you can inspire even one person to create a better future.

Who’s the one person you’re inspiring today?

Now, back to grading my law school exams… and hoping these don’t bring tears for other reasons!

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.

If you’re a law professor, please consider sending a team to Miami on January 16th for the University of Miami’s inaugural contract drafting and negotiation competition.

We have slots for 4 more teams and there is no registration fee due to the generosity of our sponsors, Law Insider and SimpleDocs. We are excited to welcome students from the University of Miami, William & Mary, SMU Dedman, St. Thomas (Miami), and North Carolina Central University.

We will award $5000 in cash prizes and students will be in beautiful Miami, Florida in January. What more could you want? We will hold registration open until December 20 or until we fill the slots.

Key dates are below:

Saturday December 21, 2024:

8:00am: Written Round prompt release

Monday January 13, 2025:

5:00pm: Deadline for Written Round contract submission.

8:00pm: Release of Negotiation Round 1 prompt.

All required in-person events will be held at the Newman Alumni Center

6200 San Amaro Dr, Coral Gables, FL 33146

Thursday January 16, 2025

3:00-4:00pm: Registration and Check In

4:00-5:20pm: Negotiation Round 1

5:30-7:00pm: Networking Reception

7:30-10:00pm: Dine Around Dinners

10:00pm: Negotiation Round 2 prompts released.

Friday January 17, 2025

8:30am-10:00am: Continental breakfast available

9:00am-10:00am: Registration and Check In

10:00-11:20am: Negotiation Round 2

12:00pm-1:00pm: Lunch

1:00-2:15pm: Finalist receive their last prompt and prepare for the final
round

2:15-2:30pm: Closing Remarks

2:30-3:50pm: Championship Negotiation

3:50-4:00pm: Award Presentation and Toast to the Participants

If students want to register, they can use this link here. More information is in the official Welcome Packet here. Feel free to email me at mweldon@law.miami.edu if you have more questions.

I hope to see you in Miami next month!

In my previous post on a November 7th Society of Corporate Compliance and Ethics (SCCE) panel on ESG through the life cycle of a business, I outlined the shifting landscape of ESG in the wake of recent regulatory and social developments in the U.S. This follow-up provides more detail on the insights shared by my fellow panelists, Eugenia Maria Di Marco and Ahpaly Coradin, who explored ESG in the contexts of startups, international markets, private equity, and M&A. As President-elect Trump continues to name cabinet members and advisors, I and others expect that ESG issues will continue to be a hot button issue here in the US.

Ahpaly shared his perspective on ESG trends, particularly in private equity. Although he acknowledged that in the US, interest in ESG is waning, many PE firms still screen for ESG risks at the initial target selection stage and during due diligence. Larger firms see market positioning and risk mitigation as the main benefits of ESG. However, revenue growth and capital allocation are not primary motivators due to the lack of data. He noted that many limited partners are increasingly deploying capital away from sectors like tobacco, alcohol, and to a lesser extent, fossil fuels.

Ahpaly opined that given the current climate, we are likely to see divergent trends between the U.S. and the rest of the world, with the U.S. pulling back on ESG-related initiatives. Additionally, PE firms in the U.S. are asking fewer and less detailed ESG-related questions compared to their counterparts in other regions, underscoring the stark difference in ESG priorities between the U.S. and the rest of the world.

When it comes to climate-related due diligence, Ahpaly emphasized the importance of focusing on four key areas: physical risk, compliance risk, litigation risk, and shareholder activism. Physical risk includes disruptions due to climate-related events like storms, floods, and droughts, particularly affecting supply chains. Companies need contingency plans, adaptation, and resilience strategies. Even if the decision is to take no action, having a documented analysis of why adds value. Compliance risk varies by industry and location. While the U.S. may see deregulation of GHG emissions and anti-DEI measures, international businesses must still comply with foreign regulations like the UK Modern Slavery Act and the EU Corporate Sustainability Due Diligence Directive. Litigation risk around greenwashing claims may become more difficult to pursue under potential U.S. deregulation, but this risk hasn’t disappeared entirely. Shareholder activism is increasingly focused on stranded asset risk, particularly in the energy sector, where assets may become obsolete due to market changes, technology, or regulation.

Ahpaly also advised that less regulation and enforcement in the U.S. might increase ESG-related risks for buyers in M&A deals. These risks should be factored into pricing and negotiations by considering strategies like reps and warranty insurance and expanding MAE clauses to cover ESG scenarios.

Eugenia Di Marco, who is headquartered in Miami but works with Latin American and European startups shared valuable insights on the role of ESG for startups and international markets. She emphasized that startups can use ESG as a competitive advantage, particularly in Latin America and the EU, where ESG considerations are becoming more critical than in the U.S. Investors and consumers in these regions are placing a higher premium on sustainability, ethical governance, and social responsibility. By embedding ESG principles into their business models early, startups can differentiate themselves, attract investment, and build trust with partners and customers. According to Eugenia, in international markets, ESG is not just a “nice-to-have” but an essential component of market entry and growth strategy.

KPMG’s 2023 statistics are revealing, as highlighted in The Sustainable Advantage: Leveraging ESG Due Diligence report:

  • The top reasons U.S. investors are conducting ESG due diligence are to identify risks and upsides pre-signing, to meet increased investor focus, and to respond to regulatory requirements.
  • 53% of U.S. investors have had deals canceled, and 42% have opted for a purchase price adjustment due to ESG concerns.
  • 23% of U.S. investors are conducting ESG due diligence without an adequate understanding of ESG in their area of investment.
  • 43% of U.S. investors will perform ESG due diligence on the majority of their deals in the future, compared to only 33% in the past.
  • 90% of U.S. investors with a robust ESG due diligence approach use their findings to drive a clear post-close action plan.
  • 62% of U.S. investors are willing to pay a premium for companies that align with their ESG priorities.
  • 54% of U.S. respondents plan to work with external advisors for ESG due diligence in the future.
  • The top challenges U.S. investors face with ESG due diligence are a lack of robust data, inadequate understanding of ESG across stakeholders, and difficulty defining a meaningful scope.
  • 82% of investors in Europe, the Middle East, and Africa (EMEA) integrate ESG into their M&A agenda, compared to 74% of U.S. investors.

It will be interesting to see the results of KPMG’s survey two years from now.

This morning I spoke to an in-house lawyer in the EU, who is knee deep in ESG initiatives. Meanwhile, on this side of the pond, an HR executive for a major hospital system told me that they have been instructed to scrub all references to DEI from company policies and practices to avoid losing government funding.

Given this complex landscape and the incoming administration, businesses must stay agile. The only thing that’s clear is that there will be a lot of work for lawyers and a lot for me to talk about in my Compliance, Corporate Governance, and Sustainability course in the Spring.

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:

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.