Previously, I posted about the grumbles of discontent from the corporate bar regarding several recent Delaware Court of Chancery rulings, resulting in proposals for statutory amendments that seemed somewhat hasty and poorly thought-out.  Sujeet Indap had a piece in the Financial Times about it; before that, there was coverage in a local Delaware outlet.

Now, Law360 reports on a new memo issued by Wilson Sonsini, reminiscent of Martin Lipton’s famous Interco memo, warning that Delaware may no longer be as friendly to business.  From the memo:

In recent months, a conversation has emerged as to whether Delaware should remain the favored state of incorporation for business entities. Indeed, many of our clients have asked us whether they should remain in Delaware or choose Delaware as the state of incorporation for their new ventures. In this discussion, we provide our reflections on that question and various factors that entrepreneurs, investors, and companies should consider when weighing incorporation in Delaware against incorporation in another state. …

In the conversations that we have had with clients, businesspeople, and others in the corporate bar, we have heard the following reasons given for reconsidering incorporation in Delaware:

• A growing number of cases that have addressed technical issues, in the M&A context and elsewhere, and reached unexpected results in a manner that has impacted corporate structuring and transaction planning
• A perception that Delaware judges have in several opinions adopted an increasingly suspicious or negative tone toward corporate boards and management, and toward the corporate bar
• The challenges that the case law can pose for companies with influential founders or significant stockholders, the process mechanisms that such companies are expected to use, and the remedies that have been reached in those cases
• A sense that Delaware judges can be skeptical of the governance of venture-backed private companies and many Silicon Valley-based companies
• The increasingly active, and successful, plaintiffs’ bar in both technical and fiduciary claims, which can leave boards and management with the sense that they are planning around “gotcha” litigation driven by plaintiffs’ lawyers more than those lawyers’ individual clients

Obviously, the third point here regarding influential founders/significant stockholders is a reference to the MFW process, which the Delaware Supreme Court just reaffirmed.  But the Delaware Supreme Court also just granted interlocutory review in TripAdvisor, which raises the possibility that some of the tension will be ratcheted down through a narrowed definition of what counts as a conflicted transaction that triggers the need for entire fairness review/MFW cleansing in the first place.

What’s more interesting to me are points 2 and 4.  I assume that some of those objections are about Moelis, which struck down the type of shareholder agreement that seems to have become common in VC-backed firms and was carried over to the public space, and maybe even go as far back as decisions like Trados, which held that in a VC backed firm, the directors’ fiduciary obligations run to the common over the preferred (even though Trados itself did not grant any damages to the common shareholders).

But I also suspect that some of the sturm und drang has its antecedents in In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003), when then-Vice Chancellor Strine held that the independence of a special committee was compromised by close professional and networking ties.  The case was a break from prior Delaware jurisprudence, which treated directors as independent in almost all situations that didn’t involve either blood or money, and the Delaware Supreme Court rejected his approach in Beam v. Stewart, 845 A.2d 1040 (Del. 2004).  Once Strine ascended to the Delaware Supreme Court, though, the caselaw started inching back his way, starting with Sanchez, continuing on with Sandys v. Pincus, and culminating in Marchand v. Barnhill.  The thing about these more nuanced tests for dependence/independence is that they may, in fact, hit Silicon Valley companies particularly hard, because of the chumminess of the tech world, and it’s not surprising that once independence is questioned, the tone of the opinions is going to come off as skeptical, in a manner that defendants do not like.  

Anyway, I’ll just conclude by echoing the comments in the Law360 article, namely, that whatever the correct direction of Delaware law, this kind of open warfare (and, frankly, attempted deployment of political muscle) challenges the reputation Delaware has built for comity and a technocratic approach to lawmaking. That’s the kind of thing that undermines Delaware’s legitimacy as, in a sense, a de facto federal agency.  It’s the kind of thing that invites more intrusion from federal regulators, and less respect from other jurisdictions – not just other states, but around the world.

In September, I was honored to deliver the Boden Lecture at Marquette Law School; a video of that lecture is available here.  (I also gave a vaguely similar, but not identical, talk at College of the Holy Cross earlier this month, which is available here).

Anyway, the Boden Lecture, in a more formalized form, will be published in the Marquette Law Review.  Here is the abstract:

Of Chameleons and ESG

Ever since the rise of the great corporations in the late nineteenth and early twentieth centuries, commenters have debated whether firms should be run solely to benefit investors, or whether instead they should be run to benefit society as a whole. Both sides have claimed their preferred policies are necessary to maintain a capitalist system of private enterprise distinct from state institutions. What we can learn from the current iteration of the debate—now rebranded as “environmental, social, governance” or “ESG” investing—is that efforts to disentangle corporate governance from the regulatory state are futile; governmental regulation has an inevitable role in structuring the corporate form.

The paper is available on SSRN at this link.

The Department of Labor recently released its new fiduciary rule.  I covered the initial announcement here.  These are direct links to the parts of the rulemaking package:

FINAL RULE: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/final-rule.pdf

PTE 2020-02: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/prohibited-transaction-exemption-2020-02.pdf

PTE 84-24: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/prohibited-transaction-exemption-84-24.pdf

Other PTE Amendments: https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/laws/erisa/retirement-security/prohibited-transaction-exemptions-75-1-77-4-80-83-83-1-and-86-128.pdf

The New York Times has also covered the release.  I contributed my view to the piece.  As I see it, if printing a financial adviser’s disclosers will run your printer out of toner, you should just find a different financial adviser.  

The simplest way to buy advice is to hire a “fee-only” independent certified financial planner who is a registered investment adviser, which means they are required to act as fiduciaries when providing investment advice about securities (stocks, mutual funds and the like). As part of that fiduciary duty, they must eliminate conflicts or disclose them.

“Your odds of conflicts go up, the longer their disclosures are,” said Benjamin Edwards, a professor at the William S. Boyd School of Law at the University of Las Vegas.

There will be much more on this to come.  The rule is great for ordinary people because it uniformly raises standards for advice about their retirement account money.  One of the major problems in this space is that lots of different people offer “financial advice” to retirement savers under different standards.  Insurance producers are probably the most loosely regulated and also the most likely to oversell complex financial products for a quick payday.  The rule applies whether someone is a broker, registered adviser, or an insurance producer.  It’s the same standard for people doing the same basic thing.

Some of the industry opposition and litigation defense strategies often revolve around “personal responsibility.”  And there is something to that.  People should understand what’s going on when they invest significant sums.  But the reality is that people hire or work with financial advisers because they need advice.  If they knew what they were doing, they wouldn’t need any help.  We need to make it safer for people to trust their financial advisers.  This rule goes a long way to help get us there.

Samantha Prince, Timothy G. Azizkhan, Cassidy R. Prince, and Luke Gorman recently released an interesting paper on the effects of 401(k) vesting schedules. With defined-contribution plans, employees always get to keep the contributions withheld from their paychecks.  Whether the employee will always keep the employer contributions depends on the vesting schedule in play, if any.

And vesting schedules really matter.  The authors found that in the 909 2022 filings they reviewed at least 1.8 million employees lost out on at least a portion of their employer contributions.  After the employees forfeit employer contributions on termination, the employers get to recycle the funds within the plan, avoiding the need for additional contributions. The filings indicated that employer contributions that were recycled were over $1.5 billion. This large sum represents money failing to follow the employee out the door because employment terminated before employees “vested” under the plans.

The analysis shows a partial picture of the broader American landscape because they analyzed 909 different single employer plans.  Still, the plans analyzed covered some major employers such as Amazon and Home Depot.

There are two main types of vesting schedules–graded vesting and cliff vesting.  In graded plans, the employee gradually gets to keep more and more of the employer contribution over time on their departure. In cliff vesting, employees who don’t make it a set number of years (often three) lose all of the employer contributions to their retirement. The employers with employees losing the most money on departure generally use cliff schedules.

What happens to the money that gets left behind?  The employer gets to put it to work.  Usually, this means that it won’t make more contributions for other employees.  Instead it’ll just allocate some of the forfeited funds to cover its obligation to make an employer contribution.  Sometimes, they’ll also use the money to offset other expenses.  In any event, employers with these vesting schedules benefit significantly when someone’s employment ends before the vesting deadline.

Marketwatch recently covered the draft article and made some follow up calls to employers.  The responses were 

Almost as absurdly, several teams of flacks tried to deny that the companies themselves benefited from this clawback in 401(k) contributions. No, no, they insisted. We don’t benefit. It goes to the other employees in the 401(k) plan.

No, it doesn’t. If this money really went to the other employees, it would appear as a separate bonus. Instead, as Prince and her team’s investigation has shown, most of the money clawed back is used to cut the company’s contributions.

In other words, it’s a shell game. The employers don’t get that $1.5 billion. It just cuts the amount they have to spend on 401(k) contributions next year. By how much? Oh … er … $1.5 billion.

Amazon and Home Depot led the pack with the most employees affected by these plans.  In 2022, Amazon employees forfeited $102 million in employer contributions. Home Depot had the second most affected employees, but the total forfeiture amount came to around $7 million.

Interestingly, immediate competitors now often use different vesting schedules.  Prospective employees considering whether to work at firm A or firm B probably do not have the sophistication or access to information to understand vesting schedule differences and what it will mean for them in practical terms.

Although vesting schedules result in lower overall American retirement savings, employers may face some market pressure to adopt them.  If they face no real negative repercussions in the labor market for a three-year cliff vesting schedule, shifting their retirement vesting could allow them to delay or avoid millions in annual expenses over time. 

Absent some government intervention, I expect more employers will probably move to vesting schedules.  It’s not hard to imagine how a management consultant could take the paper’s data and then use it to go from company to company selling retirement plan adjustments that will more than pay for millions in consulting fees.

Yup, we have another opportunity for Elon Musk to make new law.

This time, it comes in the form of an extraordinary proxy statement recommending that shareholders vote to ratify the compensation package that Chancellor McCormick invalidated in Tornetta v. Musk, and that they vote to reincorporate the company in Texas.

There are many many questions raised and I’m sure I’ll be revisiting a bunch of them over the next couple of months, but I’m zeroing in on one in particular: the pay package ratification vote.  Can they really do that?

And hoo boy did this get long, so behind a cut it goes; however, I personally find the most interesting part to be the realpolitik of it all if it ends up in a courtroom, so knowledgeable readers may want to skip to that part at the end.

More under the jump

Continue Reading Tesla and Waste

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