It’s not quite as dramatic as LeBron James taking his talents to South Beach, but I’m nevertheless excited to announce my upcoming move to the Free Enterprise Project (FEP), a DC-based think tank that “focuses on shareholder activism and the confluence of big government and big business.” The FEP is part of the National Center for Public Policy Research, which is “a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems.” The NCPPR was founded in 1982, and readers of this blog may be interested to know that among its many activities it is the plaintiff in a recently filed lawsuit accusing the SEC of viewpoint discrimination in connection with its oversight of shareholder proposals (co-blogger Ann Lipton recently discussed an aspect of that lawsuit here).

In addition to the FEP, the National Center includes: (1) the Environment and Enterprise Institute, (2) Project 21, (3) Able Americans, and (4) The Political Forum Institute. For those interested, I’ve included a brief summary of each of these projects below.

• The Environment and Enterprise Institute seeks to “counter misinformation being spread to the public and policymakers by the environmental left.”
• Project 21 seeks to “promote the views of African-Americans whose entrepreneurial spirit, dedication to family and commitment to individual responsibility have not traditionally been echoed by the nation’s civil rights establishment.”
• Able Americans seeks to “support Americans living with intellectual, developmental and physical disabilities.”
• The Political Forum Institute seeks “to build a powerful and enduring community dedicated to the values and beliefs of the American founding: free peoples, free minds, and free markets.”

While I am looking forward to this new opportunity to advance the principles of “a free market, individual liberty and personal responsibility” – I must also express my gratitude for the opportunities I’ve been given by Akron Law to be of service to that institution and its students. If you aren’t familiar with all the great things going on at Akron Law, please visit their web page (here). There is much I could brag about when it comes to Akron Law, but perhaps the best thing I can say about the school is that everyone I ever worked with there – from the Dean’s suite to the administrative offices and throughout the school – was and is passionately committed to the success of our students. Unsurprisingly, we have not always agreed on the best path forward for the school, but I never once questioned the commitment of my colleagues to the institution and our students.

Finally, I want to express my gratitude to my past and present co-bloggers at the BLPB. I believe I can rightfully claim to be the founding member of this 2013 re-boot of the BLPB, but at this point I merely bask in the brilliance of my co-bloggers. When I was younger, I typically preferred to be a big fish in a small pond – but now the advice I almost always give is to dive into the pond with the biggest/best fish you can surround yourself with, and my experience here confirms that this is the better road travelled.

I’ve also decided to jump back on Twitter and LinkedIn, so feel free to connect with me there (at least until I’m cancelled).

Onwards and upwards!

Each year on and around Memorial Day, in addition to all the promotional sales that hit my email in box and text messaging apps, I read many grateful testimonials to those whose lives were lost in national military service.  The personal reflections are touching and inspire in me both sorrow for the loss and pride in the United States of America.  As many before me have said, there is no greater sacrifice for one’s country.

Although family members alive during my lifetime have served in the armed services, none of those family members died in the line of service.  I have been lucky to not suffer that kind of loss.  It would be heartbreaking.

Today, my brother (who researches our family history) asked his Facebook friends–me included–to honor “all of those who have lost their lives in the struggle for freedom.”  That request followed a brief recitation of the story of one of our family members who lost his life as a civilian working in what became enemy territory in World War II.  Here is what my brother wrote:

1st cousin 1 generation removed Donald MacLeod Williams (14 May 1921, San Francisco, California – 9 Mar 1943, Sasebo, Nagasaki, Japan) was a civilian POW who died while imprisoned during WWII at Sasebo POW Camp # 18. He was my grandfather’s sister’s son.

He was working for the Morrison-Knudsen Company on Wake Island when it was overtaken. Along with 250 other men, he was captured and transported by an oil tanker to Yokohoma. The men were marched through the streets and then put on a train to Sasebo Camp #18. While in the camp he became ill, developed pneumonia and died of both the pneumonia and malnutrition.

He was originally buried in Unoki near Sasebo in a mass grave. The American military recovered the bodies after the war and the family was given the ability to bury him properly. He had spent some of his childhood with his family in Hawaii and the decision was made to bury him there. He is buried in the National Memorial Cemetery of the Pacific in Honolulu, Hawaii.

I had never heard this story.  It made me think.  Specifically, it forced me to consider the risks of working abroad–something diplomats, journalists, and multinational businessmen must be keenly aware of when they are stationed or accept a position located overseas.  I offer the story to you so that you may be similarly enlightened.

To all of those who honored the lives of family, friends, or others today, “a day of prayer for permanent peace,” I send sympathy and hopes for peace.

But the First Amendment challenges to the securities laws seem to be piling up – in the Fifth Circuit Court of Appeals, specifically.

The Chamber of Commerce recently petitioned that court to overturn the SEC’s new rules requiring disclosure of stock buybacks.  Though the briefing hasn’t been filed yet, the press release on the subject announces that the Chamber plans to argue that the new rules unconstitutionally compel corporate speech.

Next up, the National Center for Public Policy Research – a conservative organization that has been filing a lot of anti-ESG shareholder proposals under 14a-8 – just petitioned the Fifth Circuit regarding the SEC’s no-action letter permitting Kroger to exclude an NCPPR proposal requesting a report on the “risks associated with omitting ‘viewpoint’ and ‘ideology’ from [Kroger’s] written equal employment opportunity (EEO) policy.”  The NCPPR argues, among other things, that the SEC has denied exclusion of similar proposals with a liberal bent, and is therefore engaging in viewpoint discrimination by allowing Kroger to exclude the NCPPR proposal.  (The SEC’s response, so far, mainly focuses on whether a no-action letter counts as a final order).

Finally, the National Association of Manufacturers (NAM) just intervened in NCPPR’s case to argue that 14a-8 itself is a violation of corporate First Amendment rights, as well as a violation of the major questions doctrine and unauthorized by the text of Section 78n. 

With respect to the statutory interpretation piece, awkwardly for NAM, Rule 14a-8, in one form or another, has been around since 1942.  NAM elides that point by focusing on the modern version of the rule and the current SEC’s interpretations of it (particularly with respect to social proposals), but NAM’s textual argument rests on the proposition that Section 78n “does not grant the SEC power to compel corporations to publicize or discuss shareholder-submitted proposals,” Mot. at 19, and therefore we’ve all been misinterpreting the statute since World War II.

For the First Amendment piece, NAM’s motion to intervene states:

[NAM]… moves to intervene to raise a fundamental threshold issue addressed by neither party but affecting every publicly traded company in the United States: Whether the First Amendment and federal securities laws allow the SEC, through its Rule 14a-8, to compel a corporation to use its proxy statement to speak about abortion, climate change, diversity, gun control, immigration, or other contentious issues unrelated to its core business or the creation of shareholder value.

The answer is “No.” It is “firmly established” that the States have the authority “to regulate domestic corporations.” CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (1987). And state corporate law typically empowers corporate management, subject to oversight by the board of directors, to determine whether and how the corporation will speak or act. See, e.g., In re Franchise Servs. of N. Am., Inc., 891 F.3d 198, 210 (5th Cir. 2018).

But the SEC’s Rule 14a-8 asserts federal governmental power to override management and compel a corporation to publicize dissenting shareholders’ proposals on divisive issues in its own proxy solicitation. The SEC’s claimed power to dictate the contents of corporate proxy statements has no basis in federal securities law, and it violates the First Amendment’s prohibition against government-compelled speech.

Now, to be honest, First Amendment doctrine is way outside my lane, but I can’t help but make a couple of observations.

First, CTS was not about federal power to regulate; it was about conflicts among the powers of different states.  In fact, CTS was very explicit that federal law could preempt state law in this area, if there was federal law on point.  See 481 U.S. at 79.

More generally, state governments are … you know, governments.  If it is, in fact, a violation of the First Amendment for the federal government to require that shareholder proposals be included on corporate proxies, it would also be a violation of the First Amendment for states to do the same thing.  After all, in Citizens United v. FEC, 558 U.S. 310 (2010) – which involved federal campaign finance regulation – the Supreme Court held that states “cannot exact as the price” for the privilege of incorporation the forfeiture of First Amendment rights.  Id. at 351.

But that leads to the more interesting First Amendment question here.  Shareholder proposals don’t come from government regulators; they come from, well, shareholders.  Regulators may impose conditions for their inclusion on corporate proxies, but regulators are not the source – shareholders are.  And shareholders are, in the Supreme Court’s view, the company owners.  See Burwell v. Hobby Lobby, 573 U.S. 682 (2014).  (I include the cite to avoid debates about whether shareholders are in fact owners or simply residual claimants).  So when NAM argues that it violates the First Amendment to force companies to include shareholder proposals on proxies, what it’s really saying is that there is a constitutional principle requiring that corporate speech decisions be made exclusively by directors and officers, free from the influence of the corporation’s owners.

And that really gets to the heart of the problem with corporations and First Amendment rights; because the corporation is itself a creature of law, the law also determines who has authority to act on its behalf, and there is no obvious constitutional principle for excluding shareholders from that decision – indeed, Citizens United explicitly held that corporations are associations of citizens in corporate form, 558 U.S. at 349, and that shareholders could have a say in corporate speech via the “procedures of corporate democracy.” Id. at 370.  Those procedures are not preexisting natural forms to be found in the shape of a flower or the beat of a hummingbird’s wing; they are themselves created by law.  State or federal.

I’m hardly the first person to make that observation; academics have been arguing that point for years.

So I have to admit, I am very curious to find out if the Constitution mandates a particular theory of shareholder involvement in corporate governance, especially considering that we didn’t even have business corporations at the Founding and they only barely existed when the 14^th Amendment was adopted.  After Citizens United, we know that the Constitution distinguishes between corporations and their associated political action committees, so obviously there is some constitutional … minimum … regarding the corporate form, but apparently there is more to be unearthed.

But mainly, does all this mean that the Fifth Circuit is now the new “mother court” of securities law?

If you regularly read speeches given by SEC Commissioners and staff, you may have noticed a change in the standard opening.  For most of my career, the remarks always began with something to this effect:

Before I begin, I must give the customary disclaimer that the views I express today are my own and do not necessarily reflect the views of my fellow commissioners or the staff.

That standard disclaimer came from Commissioner Crenshaw on March 30, 2023 in the opening to her remarks to the Fixed Income Forum.  And about a month ago, Chair Gensler’s standard disclaimer on April 24, 2023 to the Annual Small Business Forum came out as:

As is customary, I would like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

But something has changed.  Chair Gensler gave the disclaimer this way on May 10, 2023 in remarks to the Municipal Securities Disclosure Conference:

My views are my own as Chair of the SEC, and I am not speaking on behalf of my fellow Commissioners or the staff (emphasis added)

This change continues forward to Chair Gensler’s remarks today to to the Investment Company Institute:

As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff (emphasis added)

It appears that the custom has changed and the introductory disclaimer now includes a note that remarks are in an official’s capacity.  You can also see this in Commissioner Udeya’s remarks at the MFA Global Summit on May 16.  He put it this way:

I would like to share remarks that reflect my views as an individual Commissioner of the SEC and do not necessarily reflect the views of the full Commission or my fellow Commissioners. (emphasis added)

The changed language likely results from discovery disputes in SEC vs. Ripple Labs.  Some news reports have covered the SEC being forced to turn over documents related to a 2018 Speech by William Hinman, then the SEC’s Director for the Division of Corporation Finance.  

I poked around the docket in that case and found an order finding that internal discussions about the Hinman speech were discoverable and not protected by the Deliberative Process Privilege (DPP) because Hinman was communicating his own opinions and they did not “relate to some form of agency position, decision, or policy”.  This is some relevant language from the opinion:

The DPP “is a form of executive privilege” that “shields from disclosure documents reflecting advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated.” U.S. Fish & Wildlife Serv. v. Sierra Club, Inc., 141 S. Ct. 777, 785 (2021) (quotation marks and citation omitted).

The DPP applies to documents that are “predecisional” and “deliberative.” Id. at 785–86. Documents are “predecisional if they were generated before the agency’s final decision on the matter, and they are deliberative if they were prepared to help the agency formulate its position.” Id. at 786 (quotation marks omitted). Judge Netburn determined that the DPP does not apply to the Internal Speech Documents because those documents were intended to facilitate the communication of Hinman’s own opinions regarding the application of the securities laws to digital asset offerings and not the opinions of the SEC. Order I at 14; Order II at 5–7. The SEC argues that Judge Netburn’s conclusion constitutes an error of law because Second Circuit precedent states that “subjective documents which reflect the personal opinions of the writer rather than the policy of the agency” are protected by the DPP. See SEC Objs. at 13 (quoting Tigue v. U.S. Dep’t of Just., 312 F.3d 70, 80 (2d Cir. 2002)) (emphasis omitted). But this argument fails to recognize that documents reflecting such personal opinions are protected only when they relate to some form of agency position, decision, or policy. Cf. Sierra Club, Inc., 141 S. Ct. at 785. Because Judge Netburn determined that the Internal Speech Documents did not relate to an agency position, decision, or policy, Order I at 14; Order II at 5–6, her conclusion is not contrary to law.

To bring this full circle, this is probably the reason why the language in the disclaimer has changed to include some statement that the remarks are in their official capacity.  I don’t know if other litigants will have the same success as Ripple did in getting access to internal documents, but I would expect defendants to try if they can find some hook to argue that the documents should be provided in discovery.

There’s been a lot of thinking recently about retail shareholder power.  The meme stock phenomenon, and the popularity of platforms like Robinhood, showed that retail shareholders can in sufficient numbers have a real influence over corporate behavior.   This had led authors like Sergio Alberto Gramitto Ricci and Christina Sautter to argue that we may be witnessing a revolution as retail shareholders assert themselves, bringing perhaps concerns about ESG and sustainability the fore.

A while back, Jill Fisch proposed that retail shareholders be given access to the type of electronic tools available to institutional shareholders so that they could create standing voting instructions, allowing them to cast ballots in corporate elections automatically according to predefined preferences.  That vision appears to close to realization; today, there are new programs that make it easier for retail shareholders to cast ballots, including in accordance with preset preferences.  As I understand the Iconik service, for a monthly fee, you can set your preferences and have the app automatically vote them – or you elect to follow the instructions provided by a third party provider like As You Sow or Third Act.  If you do that, it’s free.

And of course, we know that mutual fund companies are proposing to give more voice to retail shareholders through various kinds of pass-through voting experiments.  There are now voting platforms being developed that allow automatic voting in this context, as well.

Which is why it’s really interesting to watch what happening right now in In re AMC Entertainment Holdings Stockholder Litigation pending in Delaware.  As you probably know, AMC became a meme stock; AMC wanted to take advantage of the enthusiasm by selling more stock; its charter did not authorize any new stock issuances; retail shareholders either did not want to vote to amend the charter or simply did not pay attention to the vote; AMC found a workaround by using the blank check provision in its charter to issue new voting preferred stock; AMC held another shareholder vote, and – with the preferreds voting – the charter was amended to authorize the issuance of more common, which the preferred could then convert into.

A class of AMC common stockholders sued, arguing that this violated their rights, and now the parties have agreed to a settlement that VC Zurn will consider.

Now, because AMC stock is held by a particularly online set of investors, retail holders began writing to the court with their views of the settlement (usually negative).   (I also wonder whether Chancery’s moment in the spotlight during Twitter v. Musk contributed to retail shareholders’ participation.)  In response, VC Zurn formally set up a procedure for them to submit their comments, and boy, have they.  You can read the letters on the docket; some have taken further action, like moving to intervene, seeking access to discovery, and objecting to the special master.  Interestingly, last night the special master recommended that discovery access be granted, and there may be a telephonic hearing on any objections to be held later this morning.

But here’s the thing.  While some of the letters inspire a lot of sympathy – many investors appear to have endured significant losses – a lot of the comments are, well, uninformed, to put it mildly.  There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting.  Many of the objecting shareholders buy into those theories.  For example, in a report filed on May 17, the special master recommended against one shareholder’s attempt to intervene, which was predicated on the “synthetic share” theory.

So this is the elephant in the room:  What does this tell us about the wisdom of encouraging greater retail involvement in corporate governance?  While no doubt some retail shareholders are highly informed, many are not, and if AMC demonstrates anything, it’s that in some cases, the technological tools that enable retail shareholders to coordinate and share information may also cause the rapid spread of misinformation.

You can actually see that in the Netflix documentary Eat the Rich: The GameStop Saga.  The retail shareholders profiled had a sense of mission in attacking short sellers, but they also seemed to be very unclear as to what short sellers actually do. For example, they were under the misimpression that short sellers – rather than private equity firms – had bankrupted Toys R Us.

To be fair, Ricci and Sautter anticipate this, and in other work they propose various forms of investor education.  And Jill Fisch, in her paper on GameStop, argued that while misinformation was possible, in general, concerns might be exaggerated and investors generally tended to place greater weight on more reliable sources.

The investors who have filed letters in the AMC case may therefore be outliers; after all these are the ones who object to the settlement, and may not be representative of the ones who do not object.

Then again, Dhruv Aggarwal, Albert Choi, and Yoon-Ho Alex Lee have found that meme stock traders are, well, traders – not voters, which suggests their rise does not herald a corporate governance revolution.  Of course, these authors also recognize that meme stock traders may not be representative of retail investors generally, but if meme stock investors are not representative of retail investors as a whole, then the meme stock phenomenon itself may not tell us much about potential retail participation in corporate governance in the first place, and we’re back where we started.