A former shareholder of Anaplan recently filed a lawsuit against several of its former officers and directors, alleging a variety of fiduciary breaches in connection with the company sale to Thoma Bravo (“TB”).

As you may recall from news reports at the time – or Matt Levine’s column – Anaplan signed a deal to sell itself to TB at $66 per share.  Then, the bottom fell out of the market, and suddenly that looked like a very generous price.  TB was stuck, though, until Anaplan screwed up by approving a bunch of new bonus payments to executives that violated the merger agreement’s ordinary course covenant.  That gave TB an excuse to threaten to walk away unless Anaplan agreed to a lower deal price, and the merger ultimately closed at $63.75 – a reduction of $400 million.

Pentwater Capital, a hedge fund with a substantial stake in Anaplan, is now suing, alleging that compensation committee directors, and the officers involved with the awards, breached their duties of loyalty and committed waste, and that the officers – including the company CEO, who was also Chair – acted with gross negligence. 

(Side note: to distinguish the CEO’s behavior in his capacity as officer, where he was not exculpated for negligence, from his behavior in his capacity as Chair, where he was, the complaint points out that he participated in Compensation Committee meetings, though he could not legally have been a member of that committee since NYSE requires that Compensation Committee members be independent).

And what leaps out to me from this suit is how Delaware law has taken some wrong turns.

First and most obviously, as I previously blogged, Delaware now permits officers, as well as directors, to be exculpated for negligence in connection with direct claims.  Though the Anaplan complaint tries to make out a claim for conscious wrongdoing, which would violate the duty of loyalty via bad faith action, that seems like a tall ask; there’s no argument that the excess compensation awards were self-dealing, only that they were obviously barred by the merger agreement, and that the defendants forged ahead heedlessly nonetheless.  Pentwater doesn’t even claim that the excess awards were actually material to TB or the merger agreement.  Instead, it admits that their significance was that they handed TB the excuse it needed to escape the deal, and claims that the defendants should have anticipated that TB would make use of any leverage it could.

So this, to me, is a scenario where negligence liability would help remedy a tangible harm inflicted on the shareholders.  But in future years, it’s likely that any officers who behave similarly will be entirely in the clear.  I’ll note that Pentwater makes much of the CEO’s golden parachute and other payments he received in connection with the merger – to the tune of over $250 million – but this is not like those cases where the CEO negotiates a bad deal to get his severance; here, the CEO already had a great deal on the table and no reason to blow it, especially since a lot of his payments were equity.  Still, the payments do suggest that there would be some justice in forcing him personally to make up a lot of what shareholders lost.

Second, this case highlights the fallacy of Corwin.  Because the biggest stumbling block for Pentwater is that shareholders approved the merger.  Of course they did!  The bottom fell out of the market; they weren’t going to get a better deal, even at the revised price.  That hardly means they wanted to cleanse the fiduciary breaches that cost them $400 million.  But Corwin requires that these two actions – approval of the substance of the deal, and ratification of the managers’ conduct – be bundled into a single vote.  Which is precisely the objection several commenters have raised with respect to Corwin, see, e.g., James D. Cox, Tomas J. Mondino, & Randall S. Thomas, Understanding the (Ir)relevance of Shareholder Votes on M&A Deals, 69 Duke L.J. 503 (2019).  In fact, as I previously blogged, VC Glasscock recently had the exact same intuition outside the Corwin context.  In Manti Holdings v. The Carlyle Group, 2022 WL 444272 (Del. Ch. Feb. 14, 2022), he held that shareholders did not waive their rights to bring fiduciary duty claims in connection with a merger merely because they signed a contract agreeing not to challenge the merger itself.  Because challenging a merger, and alleging fiduciary breaches in connection with a merger, are different things, as the Anaplan case highlights, but as Corwin conflates.

That said, Pentwater knows all this and has seeded its complaint with potential end-runs around Corwin.  Starting with, it argues that the vote was coerced: “stockholders had a metaphorical gun to their head,” Pentwater alleges.  And, that’s not wrong, but defendants presumably will argue, not without force, that the “coercion” was simply that the shareholders liked the deal on the table and didn’t expect a better one would be forthcoming.  The facts may be extreme, but they’re the same as every other merger that Corwin deems cleansed; what this situation really highlights is just how unsatisfying Corwin is for that reason.

Pentwater also argues that the proxy materials were misleading because they didn’t make clear exactly how egregious the defendants’ conduct was, and how aware they were that they were in breach.  Which may be true – I have no idea – but the whole point of the coercion argument is that shareholders were forced to vote in favor anyway, which kind of suggests that those details were immaterial. 

Finally, Pentwater argues waste.  Pentwater makes the not unreasonable point that when a company is on the verge of being sold for cash, new retention awards add zero value to current shareholders.  Waste, of course, can only be approved with a unanimous shareholder vote, see Harbor Fin. Partners v. Huizenga, 751 A.2d 879 (Del. Ch. 1999), and while the vote in favor of the deal was nearly 99%, it wasn’t actually unanimous.

I actually can see this one having legs, especially if Pentwater can make the case that the defendants knew they violated the agreement or acted without heed of it.  Not only is the waste argument persuasive, but waste is useful from Delaware’s perspective because it would allow justice to be done in this particular case without forcing a confrontation with the paradoxes created by Corwin.  But that doesn’t mean the problems have gone away.

Back in October, I posted a blog asking “Should Antitrust Regulators Come for the ESG Cartel?” Yesterday, The Federalist reported (here) that Republicans are launching an investigation into the “Climate-Obsessed Corporate ‘Cartel.’” Some key points from the article:

• In a June op-ed published in the Wall Street Journal and cited by lawmakers, Sean Fieler, the president of Equinox Partners, a Manhattan-based investment firm, outlined how “The ESG Movement Is a Ripe Target for Antitrust Action.”
• Republican Arizona Attorney General Mark Brnovich launched a separate antitrust investigation into the Climate Action 100+ network in November last year.
• House Republicans launched an investigation Tuesday probing whether major climate groups that spearhead the “environmental, social, and governance” (ESG) movement are violating antitrust laws.

The article notes that: 

In a letter sent to executives of the Steering Committee for Climate Action 100+, Republicans led by Ohio Rep. Jim Jordan are demanding a treasure trove of documents that illustrate the coalition’s network of influence…. “Woke corporations are collectively adopting and imposing progressive policy goals that American consumers do not want or do not need. An individual company’s use of corporate resources for progressive aims might violate fiduciary duties or other laws, harming its viability and alienating consumers,” Republicans warned. “But when companies agree to work together to punish disfavored views or industries, or to otherwise advance environmental, social, and governance (ESG) goals, this coordinated behavior may violate the antitrust laws and harm American consumers.”

A Pacific Legal Foundation press release from Nov. 16 (here) reports the following, which may be of interest to #corpgov types overseeing DEI initiatives.

Today, Joshua Diemert, a former City of Seattle employee, filed a federal lawsuit against the City and Mayor Bruce Harrell for subjecting him to a racially hostile work environment…. Diemert endured years of harassment and racial discrimination in the workplace. Some incidents officially sanctioned by the city were so severe that they created a racially hostile working environment. For example:

• He was pressured to resign from a position rather than take FMLA leave because he was told that taking FMLA leave would be an exercise of his “white privilege” and would deny a “person of color” an opportunity for promotion.
• On multiple occasions, upper-level managers verbally told him and other department employees that new positions should be filled with people of color, particularly senior roles.
• He was forced to attend training that demanded he acknowledge his complicity in racism, not based on his personal actions or beliefs but because he is white.
• When he spoke up against egregiously racist messaging at a required workshop, his coworkers labeled him a white supremacist. And belligerent colleagues continuously berated him about his race.

“Instead of supporting its employees and providing them with opportunities, the City of Seattle is encouraging racial discrimination and harassment through its Race and Social Justice Initiative,” said Laura D’Agostino, an attorney at Pacific Legal Foundation. “Seattle employees should be treated as individuals with dignity and evaluated by the content of their character, not the color of their skin.”… The case is Joshua Diemert v. City of Seattle, filed in the United States District Court for the Western District of Washington.

When it comes to FTX, I’ll let the crypto people talk about the implications for that space generally, and I’m sure we all have our opinions on Samuel Bankman-Fried’s conduct – both before the collapse, and his endless apology tour afterwards – but what will live on for me is not any of that, but the 14,000 word hagiography that Sequoia had published on its website until very recently; they took it down after the bankruptcy declaration, though of course you can’t erase anything from the internet.

Sequoia has gotten a lot of flak for it not only for the fawning coverage, but because it revealed that Bankman-Fried actually was playing a video game during his pitch meeting.  More than that, after FTX raised $1 billion in its B round, it apparently held a “meme round” of financing, and raised $420.69 million from 69 investors.

Such revelations have inspired a lot of criticisms of the due diligence process today, not only by Sequoia but also by other FTX investors like Ontario Teachers’ Pension Plan.

But what really stood out to me not just was the evidence of due diligence failure, but the fact that Sequoia intentionally, by their own volition, put this article on its own website.  It wanted you to know that this was who they were funding, and this was the process they used.  They believed this would give them credibility, perhaps with founders, perhaps with their own investors – and they may very well have been right.

I’ve previously blogged (twice!), and written an essay about, about how the changes to the securities laws create these situations (though, of course, macroeconomic changes are responsible as well, as this Financial Times article explains).

In particular, my point is that the securities laws cultivate investors with particular preferences, and that leads to particular corporate outcomes.  As relevant here, in 1996, Congress gave the green light for private funds to raise unlimited amounts of capital, without becoming subject to registration under either the Securities Act or the Investment Company Act, so long as their own investors consist solely of persons with $5 million in assets.   At the same time, Congress and the SEC also made it easier for operating companies to raise capital while remaining private, so long as they mostly limit their investor base to these newly supercharged private funds.  The illiquid nature of the funding vehicles (necessitated by their private, non-tradeable status) encourages a short-termist orientation in search of a quick payout.  Due to the high-risk nature of these investments, private funds invest in multiple firms in the expectation that most will fail but a few will become outsized hits.  The result has been that one category of investor – wealthy, institutional, private, illiquid, risk-seeking, and with limited ability to express negative sentiment – has come to dominate the private markets.   And that’s how you end up with Sequoia bragging about funding being based on obscene numbers rather than DCF models. 

The securities laws are ultimately supposed to facilitate the efficient allocation of capital, but unfortunately, too much weight is being put on “let sophisticated investors make their own choices” and not enough on how these rules shape these sophisticated investors themselves and their preferences, which may not up end up aligning with society’s preferences.

In a press release issued today (here), “Florida Chief Financial Officer (CFO) Jimmy Patronis announced that the Florida Treasury will begin divesting $2 billion worth of assets currently under management by BlackRock.”  Stated Patronis:

Using our cash … to fund BlackRock’s social-engineering project isn’t something Florida ever signed up for. It’s got nothing to do with maximizing returns and is the opposite of what an asset manager is paid to do. Florida’s Treasury Division is divesting from BlackRock because they have openly stated they’ve got other goals than producing returns. As Larry Fink stated to CEOs “[A]ccess to capital is not a right. It is a privilege.” As Florida’s CFO I agree wholeheartedly, so we’ll be taking Larry up on his offer. There’s no lack of companies who will invest on our behalf, so the Florida Treasury will be taking its business elsewhere.

At some point, these millions/billions being divested from Blackrock are going to add up to real money.