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VC Travis Laster on my article, DExit Drivers

Delaware VC Travis Laster says my article, DExit Drivers, makes many interesting points that make it worth reading. 😎 

I've posted a new article to SSRN: DExit Drivers: Is Delaware's Dominance Threatened?

I've posted DExit Drivers: Is Delaware's Dominance Threatened? to SSRN:

Abstract: For over a century, Delaware has led the corporate law landscape, though it has not been without competitors. States such as Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Tennessee, and Virginia have attempted to rival Delaware, attracted by its significant tax revenue from incorporations. Today, Nevada emerges as a notable challenger, actively promoting "DExit" – a push for companies to leave Delaware. Consequently, this analysis primarily examines the choice between Delaware and Nevada.

Widespread discussion of the potential for mass DExit was triggered by recent criticisms from business leaders and prominent corporate lawyers. While such complaints have not yet triggered a mass exodus from Delaware, many firms are reportedly considering changing their corporate domicile. But is Delaware’s dominance genuinely at risk? Are these just isolated incidents or signs of a broader trend?

This article provides both and empirical and a qualitative analysis of firms that reincorporated from Delaware to another state between 2012 and 2024. It analyzes these firms based on size, filing status, and new state, along with their stated motivations.

The data suggest two main conclusions. First, almost all reasons given for reincorporation seem implausible. If DExit becomes more frequent, plaintiff lawyers should scrutinize these disclosures, particularly focusing on enhanced liability protections for controllers, directors, and officers, suggesting possible conflicts of interest requiring entire fairness review.

Second, the number of reincorporations from Delaware remains minimal compared to the vast number of new incorporations Delaware attracts annually. Given the strong inertia behind the initial incorporation decision and the weak drivers for DExit, it is unlikely to become widespread soon.

Trump pledges to fire SEC Chair Gary Gensler: Does the President have the power to do so?

Per Bloomberg:

Donald Trump said he would fire the Securities and Exchange Commission chair and pick crypto-friendly regulators if he returns to the White House in a bid to court virtual currency enthusiasts and harness the industry’s growing influence in the political arena.

Curiously, the question of whether the President has the power to remove SEC Commissioners without cause is an open one. Before we get to that question, however, let’s start with the issue of Gensler’s status as SEC chair.

Reorganization Plan No. 10 of 1950 section 3 provides that the President has the power to designate a member of the Commission to serve as its chairman. Dicta in some decisions and some law review commentary argues that the President therefore can remove a Commissioner from the position of chairman. See, e.g., S.E.C. v. Blinder, Robinson & Co., Inc., 855 F.2d 677, 682 (10th Cir. 1988) (stating that "the chairman serves at the President's pleasure"); Adam C. Gillette, Form over Function: How Collins v. Yellen Signals A Threat to the Independence of Multimember Financial Regulatory Agencies, 26 N.C. Banking Inst. 109, 129 (2022) ("The President is free to name a new chair from the members at any time."). This seems to be the general understanding. Certainly, it is what I’ve always understood.

So if reelected Trump likely could remove Gensler from his post as chairman and designate a different member of the Commission to serve as chairman. But can he remove Gensler as a Commissioner?

15 U.S.C. sec. 78d provides for appointment of commissioners, but contains no statutory guidance as to their removal from office. In Free Enter. Fund v. Pub. Co. Acctg. Oversight Bd., 561 U.S. 477 (2010), Chief Justice Roberts' majority opinion noted that "[t]he parties agree that the Commissioners cannot themselves be removed by the President except under the Humphrey's Executor standard of 'inefficiency, neglect of duty, or malfeasance in office,' and we decide the case with that understanding." Id. at 487 (citations omitted). In a dissent joined by Justices Stevens, Ginsburg, and Sotomayor, Justice Breyer complained that:

One last question: How can the Court simply assume without deciding that the SEC Commissioners themselves are removable only “for cause”? ... Unless the Commissioners themselves are in fact protected by a “for cause” requirement, the Accounting Board statute, on the Court's own reasoning, is not constitutionally defective. I am not aware of any other instance in which the Court has similarly (on its own or through stipulation) created a constitutional defect in a statute and then relied on that defect to strike a statute down as unconstitutional. 

Id. at 545-46 (emphasis in original).

He went on to state that:

It is certainly not obvious that the SEC Commissioners enjoy “for cause” protection. Unlike the statutes establishing the 48 federal agencies listed in Appendix A, infra, the statute that established the Commission says nothing about removal. It is silent on the question. As far as its text is concerned, the President's authority to remove the Commissioners is no different from his authority to remove the Secretary of State or the Attorney General. 

Id. at 546. 

A 2013 Harvard Law Review note argued "that if the President were to remove an SEC commissioner without cause, a reviewing court would uphold the removal." Note, The SEC is not an Independent Agency, 126 Harv. L. Rev. 781, 782 (2013). 

A 2022 blog post on the Yale Journal of Regulation's Notice & Comment site stated that "[i]t is widely assumed that SEC commissioners are insulated from removal by the President without good cause, but this view lacks any clear statutory basis" and concluded that "much of the current impetus around implied removal protection suggests that, were the Supreme Court to address the issue squarely, presidential removal power would win the day."

SEC chairs traditionally have resigned after a Presidential election in which control of the White House changes hands. If Gensler declined to fall on his sword, it is unclear whether he can be fired.

Pro-Hamas protestors cost UCLA over $10 million

From the UCLA Faculty Association blog:

UCLA topped all 10 campuses in costs, spending $10 million on safety and security and $400,000 for building repairs, graffiti removal and other cleanup between March 1 and June 25...

UCLA also thus account for about 1/3 of the total $29 million+ the UC system paid to deal with the protests.

A sharp partisan divide has developed with regard to higher education

From Gallup:

It’s hardly surprising. One survey after another for years has told us that the professoriate leans sharply left relative to the country as a whole.  The academy has been the intellectual engine driving transgressive and progressive agendas that have now burst into the public scene. And then came last spring’s encampments and performative protests.The problem is that higher education is fundamental to our economy. Whether conservatives like it or not, much of the research that keeps our economy and our military lead over our competitors comes out of universities. Universities and conservatives need to figure out a way to live with each other.

 

Charles Elson in the Financial Times re SB 313

My dear friend Charles Elson has a great op-ed in the Financial Times on SB 313. Sadly. it's behind a paywall. But here's the money quote (which I think is fair use):

The bill passed by Delaware’s general assembly jettisons the state’s traditional approach of protecting investors. Now sent to Delaware Governor John Carney for approval, it would allow the management of companies to strike secret side deals with big shareholders, bypassing the board on governance questions previously reserved for directors. For example, the bill would allow agreements giving a single shareholder veto power over the hiring or firing of a chief executive.

I don't object to boards making precommitments (see my article Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law). Instead, I agree with the points made by the Delaware Supreme Court inn Grimes v. Donald, 673 A.2d 1207 (1996), in connection with a CEO compensation package that allegedly would cause the corporation to commit financial suicide if it terminated the CEO:

... business decisions are not an abdication of directorial authority merely because they limit a board's freedom of future action. A board which has decided to manufacture bricks has less freedom to decide to make bottles. In a world of scarcity, a decision to do one thing will commit a board to a certain course of action and make it costly and difficult (indeed, sometimes impossible) to change course and do another. This is an inevitable fact of life and is not an abdication of directorial duty.

If the market for senior management, in the business judgment of a board, demands significant severance packages, boards will inevitably limit their future range of action by entering into employment agreements. Large severance payments will deter boards, to some extent, from dismissing senior officers. If an independent and informed board, acting in good faith, determines that the services of a particular individual warrant large amounts of money, whether in the form of current salary or severance provisions, the board has made a business judgment. That judgment normally will receive the protection of the business judgment rule unless the facts show that such amounts, compared with the services to be received in exchange, constitute waste or could not otherwise be the product of a valid exercise of business judgment.

Having said that, however, I completely agree with Charles that such arrangements must be fully and fairly disclosed. I also agree that management should not be able to make such deals. Such deals should be the board's sole prerogative. Finally, I agree that the board must comply with its fiduciary duties of care and loyalty at the time it enters into the contract. I emphasize the timing because we're talking about precommitments. There's no point in making porecommitments if you can weasel out of them by claiming your fiduciary duty precludes you from performing when the time comes.  Hence, I criticized delaware cases finding that the board has a continuing duty to constantly reassess the merits of such a contract.

Yours truly quoted in the WSJ re Delaware SB 313

From today's WSJ:

[SB 313] expands the breadth and power of stockholder agreements, which are often used by activist investors to gain board seats and by founders to coordinate control. ...

“The law raises some fundamental questions about corporate governance,” said Stephen Bainbridge, a law professor at the University of California, Los Angeles who signed the letter in opposition. “The issue of, ‘Should boards be able to essentially give away their powers through contract?’ There is a lot of disagreement about that.”

The stakes are high for Delaware. “Keeping companies incorporated in Delaware is job one in that state,” he said.