Earlier today, friend-of-the-BLPB Andrew Jennings released a podcast in his Business Scholarship Podcast series featuring me talking about my forthcoming piece in the Stetson Business Law Review, “Criminal Insider Trading in Personal Networks.”  You may recall me blogging about this piece as part of my report on the 2022 Law and Society Association’s 7th Global Meeting on Law and Society this past summer.  The SSRN abstract is as follows:

This Article describes and comments on criminal insider trading prosecutions brought over an eleven-year period. The core common element among these cases is that they all involve alleged tipper/tippee insider trading or misappropriation insider trading implicating information transfers between or among friends or family members (rather than merely business connections). The ultimate objectives of the Article are to explain and comment on the nature of these criminal friends-and-family insider trading cases and to posit reasons why friends and family become involved in criminal tipping and misappropriation–conduct that puts both the individual friends and family members and the relationships between and among them at risk.

I am grateful to be in the position of publishing this work in the near future (after a number of years of work on the larger project that includes the featured criminal cases).  I enjoyed talking to Andrew about it.  His podcast series has been a welcomed and valuable contribution to our field.  You can find out a lot about current business law research by listening to even a few of his podcasts.

The podcast featuring me is available through any of the following links:

Apple Podcasts and other podcast apps: https://podcasts.apple.com/us/podcast/joan-macleod-heminway-on-friends-and-family-insider/id1470002641?i=1000587717188

YouTube: Business Scholarship Podcast – Ep.164 – Joan MacLeod Heminway on Friends-and-Family Insider Trading

Website url: https://andrewkjennings.com/2022/11/27/joan-macleod-heminway-on-friends-and-family-insider-trading/

Check it out.  Consider subscribing!

Zhaoyi Li, Visiting Assistant Profoessor of Law at the Univeristy of Pittsburgh School of Law, has published a new article, Judicial Review of DIrectors’ Duty of Care: A Comparison Between U.S. & China. Here’s the abstract:

Articles 147 and 148 of the Company Law of the People’s Republic of China (“Chinese Company Law”) establish that directors owe a duty of care to their companies. However, both of these provisions fail to explain the role of judicial review in enforcing directors’ duty of care. The duty of care is a well-trodden territory in the United States, where directors’ liability is predicated on specific standards. The current American standard, adopted by many states, requires directors to “discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances.” However, both the business judgment rule and Delaware General Corporate Law (“DGCL”) Section 102(b)(7) shield directors from responsibility for their actions, which may weaken the impact of the duty of care requirement on directors’ behavior.

To better allocate the responsibility for directors’ violations of the duty of care and promote the corporations’ development, it is essential that Chinese company law establish a unified standard of review governing the duty of care owed by directors to companies. The majority of Chinese legal scholars agreed that a combination of subjective and objective standards would function best. Questions remain regarding how to combine such standards and implement them. In order to promote the development of China’s duty of care, these controversial issues need to be solved. This article argues that China’s Company Law should hold a first-time violator of the duty of care liable only in cases of gross negligence but hold directors liable in the cases of ordinary negligence if they have violated the duty of care in the past.

 

 

Yesterday, I taught my Corporate Finance students about public offerings (focusing on initial public offerings–IPOs) and exempt offerings of securities.  The front end of this course focuses on the instruments of corporate finance and the back end focuses on a number of different corporate finance transactional contexts.  Although Business Associations is a prerequisite for the course, Securities Regulation is not.  As a result, the 75 minutes I spend on public and exempt offerings is less doctrinally focused and more practically driven (unsurprising, perhaps, given the fact that my Corporate Finance course is a practical applied experiential offering).

Students prepare for the class session by reading parts of the SEC’s website on going public and exempt offerings and reviewing an IPO checklist created and modified by me from a timetable/checklist I generated while I was in full-time law practice.  Each student also must bring to class and be prepared to discuss a news article or blog post on public securities offerings.  I share general knowledge and we dialogue about insights gained from the discussion items they bring to class.  It usually turns out to be a fun and engaged class day, and yesterday’s class meeting proved to be no exception.

I captured the board work on my phone and have pasted the photos in below.  (I should note that I use a much more detailed public offering timeline in Securities Regulation, which I have memorialized in a series of PowerPoint slides.  But the whiteboard version depicted below seems to be at about the right level of detail for the students in this course.)  I am curious about how my coverage of public and exempt securities offerings might compare to what others give to this material in similar courses.  Feel free to share in the comments.

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I highly recommend these podcasts from the ABA Business Law Section:

VC Law: Episode 8: Capital Raising Considerations for Emerging Companies with Jose Ancer, author of Silicon Hills Lawyer and partner at Optimal Counsel (here)

Host Gary J. Ross talks with Jose Ancer, partner (and CTO) at Optimal Counsel and the author of Silicon Hills Lawyer, an internationally-recognized legal blog on emerging companies and VC fundamentals. Gary and Jose discuss the advantages and disadvantages of different securities instruments for emerging companies, including convertible notes and pre-money and post-money SAFEs; friends & family vs. angel rounds; the Series Seed and NVCA documents; valuation caps; and the significance of relationship building in the VC world.

VC Law: Episode 9: Discussing down round financings with Troy Foster, partner at Perkins Coie (here)

Host Gary J. Ross discusses down round financings with Troy Foster, partner and firmwide co-chair of emerging companies and venture capital practice at Perkins Coie. Topics covered include common provisions in down round term sheets, such as pay-to-play and pull-up mechanisms; anti-dilution adjustment mechanisms; obtaining the consent of previous investors; Section 228 notices; and Business Judgment Rule vs. Entire Fairness Review.

The Federalist Society has posted a review of the oral argument in Mallory v. Norfolk Southern (here):

Under Pennsylvania law, a foreign corporation “may not do business in this Commonwealth until it registers” with the Department of State of the Commonwealth. State law further establishes that registration constitutes a sufficient basis for Pennsylvania courts to exercise general personal jurisdiction over that foreign corporation. Norfolk Southern Railway objected to the exercise of personal jurisdiction, arguing that the exercise violated the Due Process Clause of the Fourteenth Amendment. The trial court agreed and held Pennsylvania’s statutory scheme unconstitutional. The Pennsylvania Supreme Court affirmed. The Supreme Court is to decide if a state registration statute for out-of-state corporations that purports to confer general personal jurisdiction over the registrant violates the Due Process Clause of the Fourteenth Amendment.

Look there are two massive business stories right now – FTX and Twitter – and I have worked very, very hard to avoid learning anything about crypto, so Twitter it is.

Eventually there will be writing – so much writing – about all of this (me and everyone else), but as I type, it’s being reported that there has been a massive exodus of Twitter employees who largely do not want to work for Elon Musk; Musk, in a paranoid fear of sabotage, locked all employees out of the offices until Monday before demanding they all fly to San Francisco for a meeting on Friday, and engineers responsible for critical Twitter systems left.  Most of us who are actually on Twitter are waiting for one big bug to take the system down (I’ve set up an account, by the way, at Mastodon).  And maybe that won’t happen – maybe Musk will eventually turn things around – but he’s certainly made things a lot more difficult for himself in the interim.

I’ll save my bigger lesson musings for other formats, but for now, I’ll make a minor point: the Delaware Court of Chancery did not, of course, order Musk to complete the deal, but he settled in the shadow of other broken deal cases and clearly saw the writing on the wall.  Though there are only a few cases on point, Chancery has not hesitated to order reluctant buyers to complete mergers – in fact, I’m unaware of any case where an acquirer was found to be in breach and specific performance was not awarded – but in the first of these, IBP v. Tyson, Chancellor Strine agonized over the social dislocation that might be caused by forcing an unwilling buyer to complete a sale.  Part of the reason he ultimately ordered specific performance was because the business case for the deal remained unchanged; as he put it:

A compulsory order will require a merger of two public companies with thousands of employees working at facilities that are important to the communities in which they operate. The impact of a forced merger on constituencies beyond the stockholders and top managers of IBP and Tyson weighs heavily on my mind. The prosperity of IBP and Tyson means a great deal to these constituencies. I therefore approach this remedial issue quite cautiously and mindful of the interests of those who will be affected by my decision….

[T]here is no doubt that a remedy of specific performance is practicable. Tyson itself admits that the combination still makes strategic sense. At trial, John Tyson was asked by his own counsel to testify about whether it was fair that Tyson should enter any later auction for IBP hampered by its payment of the Rawhide Termination Fee. This testimony indicates that Tyson Foods is still interested in purchasing IBP, but wants to get its original purchase price back and then buy IBP off the day-old goods table. I consider John Tyson’s testimony an admission of the feasibility of specific performance…

Probably the concern that weighs heaviest on my mind is whether specific performance is the right remedy in view of the harsh words that have been said in the course of this litigation. Can these management teams work together? The answer is that I do not know. Peterson and Bond say they can. I am not convinced, although Tyson’s top executives continue to respect the managerial acumen of Peterson and Bond, if not that of their financial subordinates.

What persuades me that specific performance is a workable remedy is that Tyson will have the power to decide all the key management questions itself. It can therefore hand-pick its own management team. While this may be unpleasant for the top level IBP managers who might be replaced, it was a possible risk of the Merger from the get-go and a reality of today’s M A market.

The impact on other constituencies of this ruling also seems tolerable. Tyson’s own investment banker thinks the transaction makes sense for Tyson, and is still fairly priced at $30 per share. One would think the Tyson constituencies would be better served on the whole by a specific performance remedy, rather than a large damages award that did nothing but cost Tyson a large amount of money.

Well, Elon Musk is an … unusual … buyer of companies, and I doubt we’ll see his like again soon, but he’s definitely illustrating a worst case scenario for forcing a merger over a buyer’s objections.  He famously performed no diligence on the company before signing the deal, and tried to back out immediately thereafter, so there was no point where he engaged in any serious analysis of Twitter’s systems or planning for what he’d do with ownership.  His whiplash changes to policies, his mistaken firings, and his basic misunderstanding of Twitter’s business all demonstrate the dangers of selling a company to a buyer who is not prepared to run it.

Which begs the question whether Chancery will be more hesitant in future cases to order specific performance.

In Twitter’s case, the parties had agreed to an unusually strong specific performance provision – which barred Musk from even contesting the propriety of specific performance were he found to be in breach – but whatever parties’ contractual agreements, specific performance ultimately lies in the court’s discretion, and the court has to decide whether it is an appropriate remedy.  Though Delaware places great weight on parties’ agreements that specific performance is appropriate and breach would cause irreparable harm, the court must also determine that the order “not cause even greater harm than it would prevent.”  What made the Twitter deal so uniquely high stakes was that the parties had also agreed that, in the absence of specific performance, the most Musk could be ordered to pay in damages was $1 billion, which was far less than the damage he had inflicted on Twitter in the interim and certainly less than what shareholders were owed.  Had the court been unwilling to award specific performance, his bad behavior would, essentially, have been rewarded with a slap on the wrist.

Deal planners, I assume, know all of this, which makes me wonder if, going forward, there will be more uncertainty about enforcement, and whether merger agreements will be more likely to provide that knowing and intentional breaches can result in uncapped damages.  At least that way, parties will be protected if they are concerned that Delaware courts – looking at the Twitter wreckage – might be less willing to order specific performance in the future.

 

 

 

As much as I love being a professor, it can be hard. I’m not talking about the grading, keeping the attention of the TikTok generation, or helping students with the rising mental health challenges.

I mean that it’s hard to know what to say in a classroom. On the one hand, you want to make sure that students learn and understand the importance of critical thinking and disagreeing without being disagreeable.

On the other hand, you worry about whether a factual statement taken out of context or your interpretation of an issue could land you in the cross hairs of cancel culture without the benefit of any debate or discussion.

I’m not an obvious person who should be worried about this. Although I learned from some of the original proponents of critical race theory in law school, that’s not my area of expertise. I teach about ESG, corporate law, and compliance issues.

But I think about this dilemma when I talk about corporate responsibility and corporate speech on hot button issues. I especially think about it when I teach business and human rights, where there are topics that may be too controversial to teach because some issues are too close to home and for many students and faculty members, it’s difficult to see the other side. So I sometimes self censor.

My colleagues who teach in public universities in Florida had even more reason to self censor because of the Stop WOKE act, which had eight topics related to race, gender, critical race theory and other matters that the State deemed “noxious” or problematic.

Yesterday, a federal court issued a 139-page opinion calling the law “dystopian.” The court noted that Justice Sotomayor could violate the law by guest lecturing in a law school and reading from her biography where she talks about how she benefitted from affirmative action. That’s absurd.

I had the chance to give my views to the Washington Post yesterday. This law never personally affected me but as the court noted, the university is the original marketplace of ideas. I told the reporter that one of my areas of expertise, ESG, is full of the kinds of issues that the government of the State of Florida has issues with. I told him that I was glad that I worked at a private university because academic freedom makes me more comfortable to raise issues.  I noted that students need the ability to play devil’s advocate and speak freely because there’s no way to mold the next generation of thinkers and lawmakers without free speech. I explained that you can’t write the laws if you’re not willing to hear more than one point of view. 

I hope that we get back to the days when professors don’t self censor, whether there’s a law in place or not. Of course there are some statements that are unacceptable and should never be taught in a classroom.

But I worry that some in this generation don’t know the difference between controversial and contemptible. That goes for my friends of all ideologies.

I worry that some students are missing out on so much because our society doesn’t know how to engage in civil discourse about weighty topics. So people either rant or stay silent.

In any event, my rant is over.

Today is a day for celebration.

Congratulations to my colleagues in public universities.

Reason has won out.

About a month ago, I covered a lawsuit challenging FINRA’s constitutional status.  A review of the docket since that time reveals motions for two Gibson Dunn lawyers to appear on behalf of FINRA, Amir C. Tayrani and Alex Gesch.  FINRA’s Answer in the matter is set to be filed on December 12th.

What conclusions can be drawn from FINRA’s decision to bring the Gibson Dunn team out for the matter?  At the very least, a review of Tayrani’s resume shows that FINRA takes the challenge seriously.  Tayrani’s biography states that he has briefed 21 cases on the merits at the Supreme Court and lists some standout wins, including:

  • Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011):  Decision decertifying the largest employment-discrimination class action in history.
  • Citizens United v. FEC, 558 U.S. 310 (2010):  Landmark campaign-finance ruling recognizing the First Amendment right of corporations to make expenditures in support of political candidates.

Given the current composition of the Supreme Court, FINRA is likely making the right decision to invest heavily in its defense early on in this matter.  When I wrote about the risk posed by these kinds of challenges in Supreme Risk, I highlighted the need for a robust response in the courts.  I argued that all SROs should be monitoring any case bringing these challenges:

Awareness of existing constitutional challenges creates an opportunity to attempt to persuade courts to render favorable decisions. When SROs and federal administrative agencies recognize that a pending action may create adverse or favorable precedent, they may devote more resources to the matter. For SROs that are not parties to the action, this may mean that they should hire sophisticated outside counsel to prepare persuasive amicus briefs to inform and influence the court. For SROs that are parties to a case presenting a constitutional challenge, they may allocate additional personnel and resources to the matter to increase the likelihood of a favorable decision. Additionally, they may coordinate with other SROs with interests at stake in the matter to bring in additional support.

Given the critical role self-regulatory organizations play in our financial system, FINRA should probably alert the exchanges, and other stakeholders about the need to ensure that the courts render a fully-informed decision.  

FINRA might also consider passing the hat around to other SROs as it defends this case.  Gibson Dunn isn’t cheap.  The precedent established here or in another similar challenge will matter to those SROs.

Dear BLPB Readers:

“The University of Michigan Law School invites junior scholars to attend the 9th Annual Junior Scholars Conference, which will take place in person on April 21-22, 2023 in Ann Arbor, Michigan. The conference provides junior scholars with a platform to present and discuss their work with peers, and to receive detailed feedback from senior members of the Michigan Law faculty. The Conference aims to promote fruitful collaboration between participants and to encourage their integration into a community of legal scholars. The Junior Scholars Conference is intended for academics in both law and related disciplines. Applications from graduate students, SJD/PhD candidates, postdoctoral researchers, lecturers, teaching fellows, and assistant professors (pre-tenure) who have not held an academic position for more than four years, are welcome.

Applications are due by January 9, 2023.”
 

Co-blogger John Anderson and I are considering submitting a late proposal for the inclusion of a discussion group in the Business Law Workshop for the 2023 annual meeting of the Southeastern Association of Law Schools (SEALS). The 2023 conference is scheduled to be held from July 23 – July 29 at the Boca Raton Resort and Club. A draft title and description for the possible discussion group follow.

Stock Ownership and Trading by Government Officials – Time for Reform?

Allegations of unlawful insider trading by government officials have again been making headlines. Multiple Senators were investigated for suspiciously timed trades in advance of the COVID-19 market collapse. A February 2022 Business Insider article identified members of both houses of Congress hailing from both major political parties who have failed to comply with applicable federal legislation. And a recent poll found that more than three-quarters of American voters think members of Congress have an “unfair advantage” in trading stocks. This discussion group focuses on insider trading by government officials and the need for and nature of possible responses.

Please contact me as soon as possible if you are interested in participating. We need to assemble a group of at least ten folks in total, at least half of whom are from SEALS member schools.  And the program is filling up fast!