I’m interested in this district court opinion issued in May regarding Section 10(b) claims against Mylan.  Plaintiffs claim that Mylan’s Morgantown, West Virginia manufacturing facility was dramatically out of compliance with FDA manufacturing requirements – to the point where it was ultimately forced to halt production and recall certain products – and misled the public about it.  The court allowed the case to go forward based on a single statement by a Mylan spokesperson, but dismissed claims based on Mylan’s other statements.  See In re Mylan NV Sec. Litig., 2023 WL 3539371 (W.D. Pa. May 18, 2023).

Now, the first thing to note here is that the court found that plaintiffs properly alleged “clear circumvention of quality controls at Mylan to cut corners for time pressure and in a way that jeopardized the quality of the medications.”  The court accepted the allegations “of widespread compliance and product-quality issues at Morgantown that were driven by outsized production demands imposed by management. …[T]hese issues were directly communicated to management and high-level executives at Mylan but not meaningfully addressed until after repeated serious warnings from the FDA.”

Having said that, the court began by holding that Mylan’s statements on its general public-facing website were not made “in connection with” the purchase or sale of a security, and therefore could not form the basis of a claim.

Now, I’ve recently blogged a lot about the “in connection with” requirement, and how courts have had some trouble assessing it when someone speaks about one company in a way that’s expected to influence trading in a different company.

That’s not this case, though.  In this case, the statements were made about Mylan – just not, in the court’s view, purchases and sales of Mylan securities.  Here’s the court’s reasoning:

Rule 10b-5 states that to be actionable, an alleged misrepresentation must be made “in connection with the purchase or sale of any security[.]” 15 U.S.C. § 78j(b). This “in connection with” requirement is met “where material misrepresentations are disseminated to the public in a medium upon which a reasonable investor would rely” in deciding whether to buy or sell a security….

After careful consideration, the Court concludes that the statements from Mylan’s website are not the type of statements upon which a reasonable investor would rely.

To start, the alleged misstatements appeared on Mylan’s general website, not its investor-relations page. While certainly not dispositive, this fact suggests that investors visiting Mylan’s website would view the information contained on the separate investor-relations page to have more value to them, since it was specifically targeted to them. The information on the other pages within Mylan’s website drives this point.

These other pages included things like descriptions of products, general statements about safety and quality, and narratives regarding the company’s history. Essentially, these pages are all about promoting Mylan, its brand, and its products. “No reasonable investor would rely upon these promotional phrases in making investment decisions.” In re Medtronic Inc., Sec. Litig., 618 F. Supp. 2d 1016, 1030 (D. Minn. 2009) (holding that information published “about the Fidelis lead on its website to promote it to physicians” was not made in connection with the sale of securities), aff’d sub nom. Detroit Gen. Ret. Sys. v. Medtronic, Inc., 621 F.3d 800 (8th Cir. 2010).

The nature of the statements themselves further underscores this fact. They are best characterized as statements of “corporate optimism, “mere puffing,” or “generalized statements of optimism.”

Now, first, the court’s mixing two concepts here – puffery, and “in connection with.”  Puffery, I’ll address separately.

But “in connection with” … I mean, I looked at the Medtronic case that the court cites, and from my read, the court did not hold that website statements are not “in connection with” securities sales; rather, the court simply held they were either puffing or not false.

Moreover, in In re Carter-Wallace Sec. Litig., 150 F.3d 153 (2d Cir. 1998), the Second Circuit held that even product advertisements in medical journals might be relied upon by investors, and since then, courts have generally accepted that all public statements by a company, no matter where they appear, were fair game for fraud on the market cases.

The SEC has specifically warned companies that their general websites might be relied upon by investors as sources of information.  See Commission Guidance on the Use of Company Websites, 73 Fed. Reg. 45862 (Aug. 7, 2008) (“companies should be mindful that they ‘are responsible for the accuracy of their statements that reasonably can be expected to reach investors or the securities markets regardless of the medium through which the statements are made, including the Internet.’ Accordingly, a company should keep in mind the applicability of the antifraud provisions of the federal securities laws, including Exchange Act Section 10(b) and Rule 10b-5, to the content of its Web site.”).

And at least one study has found that after companies air product advertisements on television, retail investors seek out financial information about the company and trade in that company’s stock.

That said, one of the ironies of the legal “reasonable investor” concept is that it is relatively impervious to evidence of how actual investors behave, which is why this Mylan opinion worries me as a bit of a camel’s nose.  Companies often issue investor-relevant information in places that are not designated specifically for investors.  As I blogged about FTX, the SEC’s complaint against Sam Bankman-Fried rested on statements made on FTX’s general website, to the media, and even in testimony before Congress, and while that says something about the (lack of) due diligence by FTX investors, I can’t say that the SEC is wrong, because investors’ lack of diligence almost certainly was due to exactly the air of legitimacy created by these statements in non-investor-specific locations. So it’s concerning that a court would just decide, as a matter of law, on a motion to dismiss, that general company websites are the equivalent of an investor no man’s land.

But now let’s talk about puffery.  Here’s what the website actually said:

“[T]here’s nothing generic about our standards. Our internal teams conduct reviews of all products, start to finish.” ECF 39, ¶ 254.

“[O]ur priorities are to meet or exceed industry standards. Our own teams conduct ongoing reviews to ensure quality and integrity of products, start to finish, and to continually improve for optimal quality and consistency.” Id. at ¶ 256.

“Mylan uses advanced testing and monitoring systems to assure product adheres to testing acceptance criteria that are in alignment with requirements established by standard-setting organizations around the world.” Id. at ¶ 258.

“Mylan utilizes state-of-the-art monitoring systems that can automatically evaluate and reject a product that does not meet specifications.” Id. at ¶ 260.

“Mylan assures product potency, purity, and drug release through expiration date by testing the stability of our products at specific intervals.” Id. at ¶ 262.

Let us all pause to laugh that Mylan explicitly saying it was not generic was deemed to be puffery, a legal term that is often defined in terms of whether a statement is too generic to convey useful information to investors. See, e.g. ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (“No investor would take such statements seriously in assessing a potential investment, for the simple fact that almost every investment bank makes these statements.”)).

Moving on. The court found that these statements were puffery, and also rejected claims based on statements in SEC filings.  In SEC filings, Mylan offered various warnings that it might fall out of compliance with regulatory requirements, including, for example:

[D]espite our efforts at compliance, from time to time we receive notices of manufacturing and quality-related observations following inspections by regulatory authorities around the world, as well as official agency correspondence regarding compliance. We may receive similar observations and correspondence in the future….

Although we have established internal quality and regulatory compliance programs and policies, there is no guarantee that these programs and policies, as currently designed, will meet regulatory agency standards in the future or will prevent instances of non-compliance with applicable laws and regulations.

Which, the court said, meant Mylan warned of the “very thing” that plaintiffs claimed was undisclosed:

Mylan’s compliance disclosures did not misleadingly “suggest that adverse consequences were only a possibility” and that the company was currently compliant despite allegedly “widespread” and “serious compliance issues.” ECF 39, ¶¶ 269, 275, 289, 296. Rather, they told investors the truth: Mylan faced serious business risk because of the heavily regulated industry in which it operated, and that maintaining adequate compliance would be a significant undertaking—an undertaking at which it would sometimes come up short…

Mylan also advised investors of the potentially severe consequences of any non-compliance,…

These added disclosures made it clear that, even under the best circumstances, there was uncertainty as to the very possibility of adequate compliance … in light of complex and shifting government regulations. That uncertainty was even more pronounced here since Mylan was telling investors that it, in fact, had already received (and would continue to receive) notices of non-compliance (quotations omitted)….

Considering what securities law refers to as the “total mix” of information available to investors, Mylan’s compliance disclosures did not misleadingly “suggest that adverse consequences were only a possibility” and that the company was currently compliant despite allegedly “widespread” and “serious compliance issues.”  Rather, they told investors the truth: Mylan faced serious business risk because of the heavily regulated industry in which it operated, and that maintaining adequate compliance would be a significant undertaking—an undertaking at which it would sometimes come up short.

Recall: The court would concluded that plaintiffs had in fact alleged “clear circumvention of quality controls at Mylan to cut corners for time pressure and in a way that jeopardized the quality of the medications” and that there were “widespread compliance and product-quality issues at Morgantown that were driven by outsized production demands imposed by management” communicated to management but unaddressed.

Despite that, the court concluded that Mylan’s usual warnings it operated in a heavily regulated industry and might fall short of compliance standards were not even misleading, and accurately characterized the risks of investing in Mylan.

I am reminded of the Seventh Circuit’s statement in Pommer v. Medtest, 961 F.2d 620 (7th Cir. 1992), “It is not enough that the other party must have recognized a risk. Risks are ubiquitous. Disclosures assist investors in determining the magnitude of risks.”

All I can say is, it seems there’s a disconnect between the standards courts apply when determining whether a statement is so banal as to be immaterial, and the standards they apply when determining whether general warnings of risk are misleading for failure to convey the magnitude of a specific existing risk.

Regular readers know that I’ve spent a lot of time thinking about the problem of controlling shareholders.  I’ve written a bunch of blog posts on the subject (prior posts here, here, here, here, here, here, here, here, here, here, here , and here), and two essays: After Corwin: Down the Controlling Shareholder Rabbit Hole, and The Three Faces of Control. 

To summarize my previous writing on the subject: The label “control” in Delaware carries an enormous amount of legal weight. Controlling shareholders are subject to fiduciary duties; control itself is valuable and subject to special pricing, and interested transactions by controlling shareholders are subject to the MFW cleansing regime rather than ordinary cleansing (“ordinary” meaning by either disinterested shareholders or disinterested/independent directors).  In recent years, the definition of control has become muddled, in part – I’ve argued – because Corwin allows many suspect deals to escape review entirely, encouraging an expansive view.  And once Chancery courts concluded that all conflict transactions by controllers could only be cleansed via MFW review, enterprising plaintiffs became especially creative about identifying interested transactions, including regulatory settlements and reincorporation out of state.

The Delaware Supreme Court may have taken the first tiny steps for dealing with the first problem – how “control” is defined – in its opinion in In re Tesla Motors Stockholder Litigation.  There, both Chancery and the Supreme Court left undecided the question whether Elon Musk – with a 22% stake – could be considered a controlling shareholder of Tesla. In that context, the Delaware Supreme Court said:

The fact that such a stockholder lacks the voting power to elect directors, approve transactions, or perhaps use her voting power to block transactions makes the question [of who counts as a controller] an important one  

Which perhaps provides guidance to Chancery courts in the future, that they should concentrate their inquiry on these factors – the power to elect directors, the power to approve transactions, and the power to block transactions – when determining whether someone qualifies as controlling.  (I note, though, that in Ruprecht v. Third Point, 2014 WL 1922029 (Del. Ch. May 2, 2014), the court believed that a 20% stake might be enough to achieve blocking control. So, you know.  If control is defined narrowly, does that mean poison pills have to be narrow as well?).

But.

Putting aside the question of how control is defined, we still have the issue of how conflict transactions are cleansed.  As I said, Chancery has settled on the proposition that all conflicted controller transactions are cleansed exclusively through MFW.  But in their article, Optimizing the World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead, Lawrence Hamermesh, Jack Jacobs, and Leo Strine argued that in the modern world of institutional shareholders, independent directors, and robust SEC disclosure requirements, MFW procedures are no longer necessary; in fact, ordinary cleansing is sufficient to protect minority shareholders from a controller’s influence, and should trigger business judgment review for all controller transactions except freezeouts (or, possibly, transactions that require an organic shareholder vote for approval).

And that’s why it’s a very big deal that at the end of May, the Delaware Supreme Court ordered the parties in In re Match Group Derivative Litigation, No. 368, 2022, to brief the issue whether MFW cleansing is required for all interested controller transactions, or whether ordinary cleansing is permissible outside the freezeout context.  The case involved a series of transactions by which the old Match Group reorganized its assets, in a manner that public shareholders claimed benefitted the controller at the expense of the minority.  VC Zurn held that MFW cleansing was satisfied and the public shareholders appealed, arguing that the stringent MFW requirements were not met – leading to the question whether MFW was even necessary to trigger business judgment review.

Significantly, this issue was waived by the Match Group defendants before the Court of Chancery; the Delaware Supreme Court said that notwithstanding that waiver, “the Court finds that resolving the issue raised by the IAC Defendants is in the interests of justice to provide certainty to boards and their advisors who look to Delaware law to manage their business affairs.”

I admit to some trepidation in saying this, but what else is tenure for I can’t help noticing that this is kind of a fraught moment for the Delaware Supreme Court to actually reach out and grab the issue in a case where it was not properly presented.  Elon Musk just loudly moved Twitter from Delaware to Nevada, and the controller of TripAdvisor and Liberty TripAdvisor is now moving his companies out of Delaware and into Nevada, quite explicitly for the purpose of engaging in conflict transactions under a more permissive standard of review.  It’s hard not to recall how Martin Lipton* suggested reincorporation outside of Delaware in the wake of the City Capital Assocs. v. Interco, Inc., 551 A.2d 787 (Del. Ch. 1988) decision, and how the Delaware Supreme Court subsequently rejected Interco.  In so doing, the Delaware Supreme Court may not have been responding specifically to the Lipton memo, but it might have been swayed by a general … mood … that the memo reflected. 

So, to bring this all back to Match Group, I’m not saying that the Delaware Supreme Court ordered the MFW briefing out of concern over an exodus from Delaware, but I’m not not saying it, either.

That said, I tend to agree the current system is not sustainable, but – and I argued this all explicitly in Three Faces – I don’t think expanding ordinary cleansing to non-freezeout transactions is the solution.

First, derivative claims against controllers are already protected by the demand requirement.  Hamermesh, Jacobs, and Strine argued for a much more forgiving standard for demand excusal, but their view of demand excusal was rejected by the Delaware Supreme Court in United Food & Com. Workers Union v. Zuckerberg, 262 A.3d 1034 (Del. 2021).  The concepts are sides of a coin; it’s one thing to easily cleanse conflicted controller transactions when there’s a robust ability to bring derivative claims, and quite another to do so when derivative procedures already provide a strong layer of protection.  See Three Faces at n. 102.

Second, the business judgment standard of review is predicated on the idea that shareholders can simply oust directors who are unfaithful to their interests.  That’s not the case when it comes to controlling shareholders, and it’s particularly not the case when the controlling shareholder – through dual class structures or other means – has a level of control that is not correlated with its economic interest in the company.

Third, recent Delaware decisions have made it clear that entire fairness review is not insurmountable.  Musk prevailed after trial in Tesla, and so did the defendants in In re BGC Partners, Inc. Derivative Litigation (currently on appeal to the Delaware Supreme Court); additionally, in In re Baker Hughes Derivative Litigation, the court accepted a one-member SLC’s conclusion that a conflicted transaction was “entirely fair” to shareholders under Zapata, and dismissed a derivative action.  So it’s not like consigning controller transactions to entire fairness review necessarily means liability will be imposed.

Finally, I believe the current predicament is a direct result of the … distance … created by Corwin between an idealized vision of corporate governance and the reality of how transactions actually unfold.  To put it bluntly, Corwin has not prevented a number of transactions that appear to be exploitative on their face, which has sometimes left Chancery floundering for a path to achieve justice.  If the Delaware Supreme Court were to make it easier for controlling shareholders to cleanse conflicted transactions, I believe that distance would become intolerable.

In SMART Local Unions and Councils Pension Fund v. BridgeBio Pharma, Inc serves as a cautionary tale.  In that case, controlling shareholder BridgeBio Pharma squeezed out the minority shareholders of Eidos Therapeutics despite the fact that a third party had offered to buy the minority shares at a higher price (subject to various governance protections).  Vice Chancellor Fioravanti applied business judgment review because, notwithstanding the price differential, BridgeBio had employed MFW procedures.  All of which provides a rather vivid illustration that even MFW leaves plenty of room for exploitation of the minority; if Delaware weakens minority shareholder protections, what new horror stories will emerge that threaten the legitimacy of its law?

But actually what I suspect will actually happen – and again, I made this argument in Three Faces at 821 – is that Chancery courts will try to find an outlet; if they can’t find it through MFW, they’ll find it through definitions of materiality or coercion or independence, which will create a new explosion of malleable standards that will be difficult for transaction planners to anticipate.

Now, I admit the whole situation is a mess (a beautiful mess, it got me two whole papers), and cries out for some kind of order, but I think in the near term, anyway, a more feasible solution is to place some moderate limits on the types of transactions subject to MFW review, without going as far as to confine MFW solely to freezeouts or transactions that require an organic shareholder vote.  For example, Delaware might decide that transactions in the ordinary course of business – like compensation, and routine legal settlements, and the like – can be cleansed using a single protective device, while more extraordinary transactions with controlling shareholders require both methods.  Cf. Three Faces at 827.

Anyway, I’ll just end with: There’s a particular irony that the Delaware Supreme Court is considering alterations to Delaware common law in light of the number of institutional shareholders, while the Delaware legislature is considering alterations to Delaware statutory law in light of the number of retail shareholders.  

*no relation

In today’s post, I wanted to highlight two more works (previous posts here and here) of University of Michigan Professor Emeritus George Siedel.

First, Siedel recently wrote an informative piece in the ABAJournal entitled, Consider teaching law in a business school as an alternative career.  This helpful article should be especially useful to BLPB readers who might be interested in teaching law in a business school or simply curious to understand ways in which teaching law in a business school might be different from teaching law in a law school.  

Second, in a previous post (here) I mentioned Siedel’s book Seven Essentials for Business Success: Lessons from Legendary Professors.  I just finished reading it.  Definitely well-worth my time and effort!!  There are so many great ideas here that I can’t wait to put into practice when the fall semester begins!  It seems that great teachers combine stellar “teaching processes” with what Siedel terms “authenticity.”  From his study of and interviews with the legendary professors, he identifies “[s]ix themes relating to the teaching process” (p.186): 1) “Prepare, Prepare, Prepare,” 2) “Build a Learning Community,” 3) “Emphasize the Big Picture,” 4) “Simplify, Simplify,” 5) “Make the Learning as Interactive as Possible,” and 6) “Emphasize Why the Course Is Important.” (pp. 186-203)

While a professor’s “authenticity” is perhaps a more challenging concept to define, it is nevertheless highly important.  Siedel shares that at the beginning of a U. of Michigan course, he sends the following question to his students “What qualities do you value most in a professor?” (p.185)  While “comments on course content and delivery” seem predictable responses, he shares the following insight:

“What you might not expect – and what surprised me when I first used the questionnaire several years ago – are the large number of comments that mention qualities that are more elusive.  Almost 60% of the students used these words when describing what they value most in a professor: authentic, empathetic, passionate, love of teaching, humility, interest in and respect for the students, fair, transparent, enthusiastic, friendly, approachable, kind, lack of ego, curious, understanding, candid, energetic, patient, committed, available, and honest.”  (p.185) 

Siedel distills examples of these qualities into three clusters based on the seven professors the book profiles: “passion for the material and concern for students, dedication to continuous learning, and a higher purpose that has a positive impact beyond the classroom.” (p. 204)

Several quotes throughout the book really struck me.  I’ll highlight just three of my favorites:

“Every moment students are engaged by participation is good.” (p. 68, quoting Richard Shell, one of the profiled profs)

“[M]ost students want to know how much you care before they care how much you know” (p. 204, quoting Chris Christensen in Education for Judgement)

“[G]ood teaching cannot be reduced to technique: good teaching comes from the identity and integrity of the teacher” (p. 203, quoting Parker Palmer)

Finally, one of the seven legendary professors that Siedel profiles is Wharton Professor Richard Shell, who was also my dissertation advisor.  In the conclusion of the book and in wrapping up his discussion on authenticity, Siedel remarks “Professor Shell, says another student, is one of ‘those rare people you meet who appears to walk the talk.’ ” (p. 210)  While attending the Wharton Fin Reg Conference this past April, I had an opportunity to catch up with Richard and to seek his wisdom and advice about many things.  I can assure the student quoted that Richard is a truly rare person and a legendary professor who indeed “walks the talk.”