Not a whole lot going on this week in terms of legal developments, so I thought I’d reach back to an older post of mine, where I talked about a case pending before the Fifth Circuit regarding 14a-8.  The original petitioner, the National Center for Public Policy Research, argued that the SEC engages in viewpoint discrimination when it issues no-action letters; an intervenor challenged the entire basis for Rule 14a-8 as unauthorized by statute and unconstitutional to boot.  The SEC, for its part, addressed these substantive arguments but concentrated most of its energies on arguing that no-action letters are not final orders subject to challenge in the first place.

Normally, I’d assume a case like this wouldn’t have much chance of succeeding, but it’s the Fifth Circuit, which tends to take an entrepreneurial approach to issues like corporate rights, standing, and administrative authority.  Even then, I’d say the petitioners were likely out of luck, because the panel turned out to be Jones, Douglas, and Dennis – meaning, two Democrats and a Republican – and, indeed, only Judge Jones demonstrated any sympathies for the petitioners during oral argument.  But! The last time sec reg ended up before a 2-1 Democratic panel of the Fifth Circuit, the Democrats’ ruling in favor of the NASDAQ’s diversity rule was taken en banc where its prospects apparently are rather dim.

So what happens if Rule 14a-8, at least in the form we know it, dies?

Well, that brings me to the United Mine Workers’ tactic against Warrior Met.  As Mike Levin described in his Activist Investor blog here, United Mine Workers took advantage of the universal proxy rule to run a shareholder proposal proxy contest.  That is, because it can now list incumbent director candidates on its own proxy card, that’s just what it did – it offered several shareholder proposals (14a-8 would limit it to just one), ignored all of Rule 14a-8’s other strictures, filed its own proxy materials, sent out proxy cards, and hired a vendor to collect them.  Having done that, Warrior Met was backed into a corner and forced to include the proposals in its own proxy materials – because otherwise it risked losing control over, and insight into, how proxy cards collected by Mine Workers were being voted or if they were being returned at all.  The expenses for this entire effort by the Mine Workers totaled just $15,000, which sounds very feasible for at least some repeat-player proposal proponents.  It also may just scratch the surface of what the universal proxy enables in the future.

But that, of course, assumes the proposal is one that United Mine Workers can, in fact, bring to the floor – i.e., state corporate law has to allow shareholders to raise these proposals at a shareholder meeting and vote on them, before anything else can happen.  Mohsen Manesh lays out the argument for how corporations can – via bylaw or charter provisions – limit shareholders’ power to make proposals in the first place, which would not only prohibit United Mine Workers’ tactic, but also limit the use of 14a-8 (which is only supposed to enable shareholders to exercise their state-law created governance rights).  If he’s right, and if companies/management take advantage of that ability, we could lose a lot of shareholder proposals entirely (and a major source of entertainment for corporate academia).  Prof. Manesh explains that companies might not want to limit shareholders’ ability to bring proposals – maybe investors would be annoyed if their rights were curtailed that way – but, as I previously observed, there wasn’t much pushback when Exxon sued its own shareholders over a proposal, so maybe there’s space for companies to rid themselves of proposals entirely.

For decades, we’ve known that many arbitration awards in the FINRA arbitration forum go unpaid.  This happens because many brokerage firms collapse after liability for abusive sales practices comes home.  Last Friday, arbitrators rendered an award finding SW Financial liable for over $13 million in damages to a group of dozens of investors.  SW Financial was expelled by FINRA in 2023 for, among other things, making false statements to customers and failing to supervise its personnel.  

Congress has noticed the problem.  The Senate Committee on Appropriations recently found that “FINRA has failed to undertake steps to address unpaid arbitration awards by its members.”  It directed the SEC to “continue to engage with FIRNA to identify ways to reduce and eliminate the occurrence of unpaid awards.”  This comes after a 2018 bipartisan proposal to create a recovery pool failed to pass.

FINRA has tracked this issue for some time and keeps statistics on unpaid awards.  That an award goes unpaid, does not mean that every customer with an unpaid award recovers nothing.  FINRA explains it this way:

At times when an arbitration panel does award monetary damages to the claimant, the respondent may fail to pay the awarded damages. If a customer is not able to recover monetary damages awarded in the FINRA arbitration forum, that does not always mean that a customer did not receive any monetary payment in connection with the underlying dispute. In many cases that result in unpaid awards, a customer settles with one or more parties pre-award, but proceeds to obtain an award against other parties named in the case, who then fail to pay the award. 

Ultimately, this is a problem that has lingered for far too long.  Although FINRA has made some moves on the issue, including requiring certain “restricted firms” to keep more money on deposit, too many investors get stuck with the short end of the stick. Part of the problem is that a small firm can cause big damages for a large number of people.   For investors with claims against smaller brokerage firms, I’d encourage them not to dawdle on seeking justice.  Whether they get paid at all may depend on when they get in line.

Thing One: 

I jotted!  Which is to say, I wrote a Jotwell review of Hilary Allen’s Interest Rates, Venture Capital, and Financial Stability, forthcoming in the University of Illinois Law Review.  Her paper is here, and you can find my review here.

Thing Two:  I have a new paper-ish thing.  As y’all know, I’ve been keeping an eye on litigation-limiting bylaw and charter provisions, including – as I previously posted – the Ninth Circuit’s en banc decision in Lee v. Fisher, which permitted The Gap to enforce a forum selection bylaw directing derivative Section 14(a) claims to Delaware’s Court of Chancery – even though that court has no jurisdiction to hear Section 14(a) claims.  In practical effect, then, the bylaw operated as a waiver of the federal claim.

That decision cited a draft version of an article by Professors Mohsen Manesh and Joseph Grundfest, Abandoned and Split But Never Reversed: Borak and Federal Derivative Litigation, in which they defended such bylaws.  The article was published in the Business Lawyer late last year, and is available here.

Anyhoo, I now have a (very short) reply to Professors Manesh and Grundfest, also forthcoming in the Business Lawyer, called Not Dead Yet.  The Reply is available here, and this is the abstract:

In their article, Abandoned and Split, But Never Reversed: Borak and Federal Derivative Litigation, Professors Mohsen Manesh and Joseph Grundfest argue that corporations should be permitted to waive derivative Section 14(a) claims in their constitutive documents, partly because such claims are duplicative of other causes of action, and partly because of the weakness of the original Supreme Court case to recognize them. In this Reply, I defend the continuing vitality of the derivative Section 14(a) cause of action, and its necessity as a source of investor protection

But! Mine is not the last word; Mohsen and Joe will have a reply to my reply in the same issue.  When that’s public, I’ll edit this post with a link.

Edit: As promised, here is a link to Manesh & Grundfest’s response to my response.

Thing Three:  The Lee v. Fisher case was one of a series of cases arguing that companies were lying about their efforts to diversify their boards.  Another such case was brought against Qualcomm, and it was dismissed by a federal district court in 2021.

The plaintiff in that case then sought books and records in Delaware, and relied on those to file a state law complaint, which once again alleged that the company lied about its efforts to diversify when seeking director candidates.  This time, however, the complaint was brought for breach of state law fiduciary obligations rather than federal proxy fraud, and the claim was direct rather than derivative.  Not long ago, Vice Chancellor Laster dismissed that claim in a bench ruling.

The transcript is worth a read.  Among other things, VC Laster explicitly (though not unsurprisingly) held that directors only have a duty to maximize firm value.  Demographic diversity may further that goal by fostering innovation; demographic diversity may also further that goal by inspiring the confidence of stakeholders, who would otherwise lose faith if they “only see very few people who look like them.”  But boards have discretion to make their own judgment as to the financial value that diversity provides.

What they can’t do, of course, is explicitly lie to shareholders in their proxy statement, or omit material information, which is what the plaintiff was alleging.  And here was the second interesting point: VC Laster noted that a voting rights claim based on a misleading or incomplete proxy statement is not, per se, subject to the business judgment rule.  As he put it, “Directors have a duty to disclose material information, but there is no separate standard of review that overlays that obligation, such as the business judgment rule…. [I]n a case involving stockholder action, a plaintiff need only plead two elements: First, that there was a request for stockholder action, and certainly there was here.  These were elections of directors. And second, that there was a material misrepresentation or omission.”

With that set up, however, he found that Kiger had not in fact stated facts that made it reasonably conceivable that Qualcomm misled shareholders about its diversity efforts, and that was the end of that.