Corporate Law

12/13/2019

Carney v. Adams and the Future of Delaware Corporate Law

Posted at 01:57 PM in Corporate Law, SCOTUS and Con Law | | Comments (0)

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12/05/2019

Here's the thing I don't understand about the implied covenant of good faith and fair dealing

In Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), the court reviews the Delaware law of the implied covenant:

“In order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998). In describing the implied contractual obligation, the plaintiffs must allege facts suggesting “from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter.” Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). That is because “[t]he implied covenant seeks to enforce the parties’ contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them.” El Paso, 113 A.3d at 184. Accordingly, “[t]he implied covenant is well-suited to imply contractual terms that are so obvious . . . that the drafter would not have needed to include the conditions as express terms in the agreement.” Dieckman, 155 A.3d at 361.

My question is simple: How do you know that the provision was left out because it was obvious? After all, if it was obvious, shouldn't the parties have put it in the contract? Put another way, how do you know the parties did think about it and decide to leave it out?

Posted at 11:58 AM in Corporate Law | | Comments (1)

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New Delaware guidance reaffirming the shareholder wealth maximization norm

Via our friend, prominent Delaware practitioner and blogger Francis Pileggi, we learned of Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), which he aptly describes as "notable for its application of the implied covenant of good faith and fair dealing in a partnership agreement that waives all conventional fiduciary duties, and replaces them with a contract-based standard of conduct. The decision ... is an exemplary exegesis of standards and nuances and subtleties that must be addressed before finding a breach of the implied covenant of good faith and fair dealing–especially when conventional default fiduciary duties in the alternative entity context are waived."

This decision is also worthy of attention because it finds a breach of the difficult-to-prove breach of the implied covenant of good faith and fair dealing. The court explains why, based on the facts presented, it is “reasonably conceivable” that the implied covenant was breached. See Slip op. at 48-49.  The court also reasoned that it was not surprising that there was no express term that barred manipulation of a “call price.”

If and when I ever get around to writing a long planned article on the implied covenant of good faith, this case will figure prominently. Having said that, however, here at PB.com we have been talking a lot about corporate purpose lately and so our attention was drawn to this passage from the opinion:

When exercising their authority, directors must seek “to promote the value of the corporation for the benefit of its stockholders.” “It is, of course, accepted that a corporation may take steps, such as giving charitable contributions or paying higher wages, that do not maximize corporate profits currently. They may do so, however, because such activities are rationalized as producing greater profits over the long-term.” Leo E. Strine, Jr., Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, 47 Wake Forest L. Rev. 135, 147 n.34 (2012). Decisions of this nature benefit the corporation as a whole and, by increasing the value of the corporation, increase the share of value available for the residual claimants. Nevertheless, “Delaware case law is clear that the board of directors of a for-profit corporation . . . must, within the limits of its legal discretion, treat stockholder welfare as the only end, considering other interests only to the extent that doing so is rationally related to stockholder welfare.”

Here we have more proof that those commentators who claim Delaware law does not mandate shareholder wealth maximization are either misinformed or disingenuous.

Posted at 11:53 AM in Corporate Law, Corporate Social Responsibility | | Comments (0)

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11/18/2019

Do a handful of corporate governance failures tell us whether the Chairman of the Board and the CEO jobs should be held by two people rather than one?

Joseph Mandato and William Devine:

Do recent events at Boeing and WeWork mean that American corporations can no longer afford to give the CEO job and the board chairman job to the same person?

To recap: during Dennis Muilenburg’s just-concluded tenure as both CEO and chairman of Boeing, Co., the nation’s 28th largest corporation attempted to contain costs and speed regulatory approval by outfitting its flagship airliner with a flawed flight control system. It then failed to tell pilots and the FAA about the flaws, despite apparently knowing about them.

These choices resulted in two plane crashes, the grounding of almost 500 planes worldwide, company losses that will exceed $7 billion, and the loss of 346 lives. Apparently seeing a connection between these results and the decision to let one man try to perform two jobs, the board removed Muilenburg as board chairman.

Meanwhile, during the last three and a half years of Adam Neumann’s just-concluded tenure as both CEO and chairman of WeWork, the office subleasing start-up’s financial reports regularly showed it spending two dollars for every dollar earned. The corporation’s commitment to this burn rate during those years resulted in operating losses that exceed $4 billion. ...

It's a topic we have frequently addressed here at PB.com:

Remove the CEO/Chairman of the Board Provision of the Dodd Bill

Section 973 of the Dodd Wall Street reform bill mandates new disclosures from all firms -- Main Street as well as Wall Street -- explaining "the reasons why the issuer has chosen— (1) the same person to serve as chairman of the board of ...

Continue reading "Remove the CEO/Chairman of the Board Provision of the Dodd Bill" »

Posted at 03:49 PM in Corporate Law, Wall Street Reform | | Comments (0)

Disney may split CEO and Chairman posts

The NYT is reporting that Disney's board is reconsidering its refusal to split the CEO and Chairman of the Board positions, both of which are currently held by Michael Eisner. I pulled up Eisner's employment contract and confirmed my rec...

Posted at 04:00 PM in Business | | Comments (0)

Jamie Dimon Crushes Challenge from Politicized Shareholder Activists

JP Morgan shareholders decisively rejected an effort by a highly politicized group ofshareholder activists to divest CEO/Chairman of the Board Jamie Dimon of the latter title: Jamie Dimon won more investor support this year than in 2...

Posted at 07:59 PM in Business, Shareholder Activism | | Comments (0)

Posted at 11:14 AM in Corporate Law |

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Keith Paul Bishop spotted a problem with the shareholder derivative suit against weWork's board

He reports:

WeWork is a Delaware corporation, but the lawsuit was filed in the California Superior Court.  California Corporations Code Section 800 provides that no action may be instituted or maintained in the right of a domestic or foreign corporation unless specified conditions are met.  One of these conditions is:

"The plaintiff alleges in the complaint with particularity plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file."

Superficially, this appears to be a standard "demand futility" pleading requirement.  The California statute, however, adds an additional requirement that must be met before a derivative action is filed.  In Re v. Weksel, 130 A.D.2d 640 (1987), the Appellate Division of the New York Supreme Court applied the same language in former Section 15702(a)(2) (governing derivative suits by domestic or foreign limited partnerships) to dismiss a plaintiffs' suit:

Although the complaint alleges why the plaintiffs believe that a demand upon the general partner would be futile, it does not state that the limited partnership or the general partner were informed in writing concerning the ultimate facts of each action or that a true copy of the complaint was delivered to either the limited partnership or the general partner, as California law requires (see, Cal Corp Code § 15702 [a] [2]).  Therefore, the plaintiffs' first cause of action must be dismissed as against the appellants.

Kevin LaCroix has a lengthy and detailed analysis of the lawsuit here.

While there is a lot going on here, and while the events that occurred after the company withdrew its IPO initiative, at one level this lawsuit is a failure to launch claim. Among the claimant’s grievances is the company’s failure to complete the IPO. This aspect of the case is a reminder that a lot can happen to companies on an IPO track, and if a would-be IPO company hits an obstacle and fails to complete the hoped-for offering, the company can get hit was a failure to launch lawsuit. This is important to remember because in that situation, the D&O insurance policy that will respond to the claim (and indeed the D&O insurance policy that will be responding to WeWork’s new lawsuit) is a private company D&O insurance policy. The possibility of these kinds of lawsuits is important to take into account when the pre-IPO company’s insurance coverage is being structured. Among other things, the policy’s Securities Claim exclusion must be worded in a way that it does not preclude coverage for these kinds of claims.

Posted at 09:51 AM in Corporate Law |

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11/12/2019

California Board of Directors Gender Quota Law has Negative Effect on Stock Price of Covered Companies

Keith Paul Bishop:

Three researchers (two at Clemson and one the University of Arizona) recently announcedthe results of their study of the impact of California's board gender quota law (SB 826) on publicly traded [sic] firms headquartered in California.  They found that these companies experienced "a large negative stock market reaction" when the law was signed last year by then Governor Jerry Brown.  See Acknowledging Potentially "Fatal" Flaws, Governor Signs Board Gender Quota Bill.

The researchers also examined the costs of the law, finding bad news for smaller firms:

"The costs of board expansion are negligible for the largest firms but substantial for the smallest".  

They also observe that small firms may have a more difficult time attracting female directors. The Wall Street Journal was quick to note the study, labeling it in an editorial published on Saturday a "board diversity tax".

Posted at 11:41 AM in Corporate Law |

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11/11/2019

Among Elizabeth Warren's many dubious policy proposals perhaps the most absurd is her revival of the concession theory of the corporation

Splendid analysis by Abdurrahman Kayıklık

Posted at 04:07 AM in Corporate Law |

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11/10/2019

Keith Paul Bishop on how the SEC's proposed Rule 14a-8 amendments interact with California corporate law

State Law And Shareholder Representatives

Did The SEC Misstate State Law In Proposing Changes To Shareholder Proposal Rule?

Posted at 04:06 PM in Corporate Law, Securities Regulation |

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10/30/2019

A case comment by yours truly on Tornetta v. Musk

Posted at 01:09 PM in Corporate Law |

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10/26/2019

Wachtell, Lipton's False Gospel of the Law of Corporate Social Responsibility and the Reasoning Behind It

A new Harvard post by famed lawyer Martin Lipton, founding partner of Wachtell, Lipton, Rosen & Katz, and fellow WLRK partner William Savitt contains an astonishing number of erroneous statements about the purpose of the corporation.To wit:

Nor does any rule of law mandate director obeisance to the ideology of share-price maximization. No statute anywhere enshrines or even endorses the objective of share-price maximization. Nor does case law require directors to manage the ongoing business and affairs of the corporation with the paramount goal of maximizing share price. Directors may be obligated to seek the highest price in the context of a corporate auction, and the market’s perception of a corporation’s future prospects, as reflected in the stock price, is no doubt a relevant factor in deciding how to manage the company to maximize its potential. But not even the most aggressive reading of precedent identifies share-price maximization as the polestar of director decision-making.

What part of Dodge v. Ford Motor Co. do Lipton and Savitt fail to understand:

There should be no confusion (of which there is evidence) of the duties which Mr. Ford conceives that he and the stockholders owe to the general public and the duties which in law he and his codirectors owe to protesting, minority stockholders. A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes. [Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).]

Or eBay?

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that. [eBay Dom. Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010).]

To be sure, those cases do not require short-term profit maximization at the expense of the long-term health of the business, but neither do they contemplate what Lipton and Savitt call "a cooperative exercise among a corporation’s shareholders, directors, managers, employees, business partners, and the communities in which the corporation operates."

Lipton and Savitt might try to explain these cases and their ilk away. Many lawyers and scholars have tried to do that before. And they were all wrong. That's not just my opinion, it's also the opinion Delaware Chief Justice Leo Strine:

... advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion, under the law of the most important American jurisdiction--Delaware. [Leo E. Strine, Jr., The Dangers of Denial: The Need for A Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761 (2015).]

Let's just pause a moment to savor that word: "pretend," How wonderfully well put.

And, as Strine pointed out, he is not alone in so reading the case law:

[T]he finest corporate law judge of his era--and arguably the finest overall trial judge of his era--Chancellor William T. Allen ... dilated on the two major traditions in American corporate law. In that essay, Chancellor Allen gave his own reading of Dodge v. Ford Motor Co., where the Michigan Supreme Court observed that “[a] business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.” He explained:

Dodge v. Ford . . . reflects as pure an example as exists of the property conception of the corporation. In this conception, the corporation is seen as it is in its nineteenth century roots, as essentially a sort of limited liability partnership. The rights of creditors, employees and others are strictly limited to statutory, contractual, and common law rights. Once the directors have satisfied those legal obligations, they have fully satisfied all claims of these “constituencies.” This property view of the nature of corporations, and of the duties owed by directors, equates the duty of directors with the duty to maximize profits of the firm for the benefit of shareholders.

In another article reflecting on his judicial career, Chancellor Allen indicated that he understood Delaware law as requiring directors, when they are not subject to the duty to maximize current stock value as in Revlon, to maximize the value for (hypothetical) stockholders who have entrusted their capital to the firm indefinitely.

In order for their argument to work, Lipton and Savitt therefore must join hands with what Strine called "forms of legal thought tied to deconstructionist linguistics and philosophy, such as critical legal studies," which "are premised on the idea that authors themselves can never understand what they intend to say or are in fact saying."

Basically, to paraphrase Strine, Lipton and Savitt are accusing Strine and other "accomplished jurists such as Chancellor Chandler, Chancellor Allen, and Justice Moore" with not understanding what they wrote, even though they wrote those opinions in high-profiles context and even though those jurists underscored their understanding of the importance of the subject matter they were addressing.

I think I understand why Lipton and Savitt are spewing the nonsense. First, I'm guessing they're assuming Elizabeth Warren will be the next President and they're trying to give their clients an argument against government-mandated corporate social responsibility. Why do I say that? How else would you explain this comment in their post?

We are deeply skeptical that mandatory corporate governance regulation is the solution.

Second, just as Lipton spent the 1980s defending corporate managers from corporate raiders during the heyday of the hostile takeover, he has spent much of recent years defending today's managers against activist hedge funds. Hence, he and Savitt justify their approach as being necessary to "curtail, if not eliminate, short-termism and to combat activist pressure for financial engineering focused on short-term gain."

I am not unsympathetic to both concerns. But that doesn't justify pretending that the law is other than what it actually is.

Posted at 05:20 PM in Corporate Law, Corporate Social Responsibility |

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09/25/2019

Much Buzz About the Internal Affairs Doctrine

Francis Pileggi:

For readers who follow the law regarding forum selection clauses, a recent article by Professor Joseph Grundfest should be of interest. The good professor addresses the December 2018 Court of Chancery decision in Sciabacucchi v. Salzberg (highlighted on these pages), and the intersection of Delaware law and Federal law in the context of forum selection clauses and the internal affairs doctrine. The abstract follows to his article titled: The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

A Harvard Forum post by Grundfest himself summarizes the paper. It explains the core problem and is typically punchy:

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect.

Moshen Manesh:

During a four-month span in late 2018, two events occurred at opposite ends of the country that could dramatically reshape the regulation of corporations in America. First, in September 2018, California enacted the nation’s first law mandating board gender diversity for all public corporations that are physically headquartered in California.[1] Second, in December 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg ruled that a corporation may not in its governing documents regulate the rights of its shareholders arising under federal securities law.[2] Although seemingly unrelated, I argue in a forthcoming article that both events share at their core a challenge to the internal affairs doctrine – a doctrine that is at the foundation of the state-based system of corporate law in the United States. ...

Challenges at the edges of the internal affairs doctrine, like those that emerged in late 2018, are a problem unlikely to go away for Delaware. Since California enacted its first-in-the-nation board diversity statute, state legislatures in Illinois and New Jersey have considered similar bills. And earlier this year, an activist  shareholder initiated litigation against the New Jersey-chartered Johnson & Johnson, pressing it to adopt a bylaw provision mandating arbitration for all shareholder claims brought under federal securities law. These developments suggest that skirmishes at the frontiers of the internal affairs doctrine are likely to persist. And these skirmishes could both erode Delaware’s hegemony and fundamentally reshape the regulation of corporate America.

Ann Lipton:

By now, regular readers of this blog are aware that I’ve been especially forceful in arguing that litigation limits in corporate charters and bylaws can only address matters of corporate internal affairs, and that federal securities claims are beyond their scope.  Vice Chancellor Laster adopted a similar view in his Sciabacucchi v. Salzbergdecision, where he invalidated charter provisions that purport to require that all Section 11 claims against the company be brought in federal court.  Now that the matter is on appeal to the Delaware Supreme Court (Docket No. 346,2019) – and the opening brief is due today –  a lot of articles about the scope of the internal affairs doctrine are dropping. [She links a number of them]

Kevin LaCroix:

After the U.S. Supreme Court’s March 2018 decision in the Cyancase that state courts retain concurrent jurisdiction for ’33 Act liability actions, one idea that circulated was that companies could avoid securities class action lawsuits in state court by adopting a charter provision designating a federal forum for these kinds of suits. Unfortunately, in December 2018, Delaware Chancery Court Vice Chancellor Travis Laster held in Sciabacucchi v. Salzburg that under Delaware law federal forum provisions are invalid and ineffective, as discussed here. The Sciabacucchi decision, which is now on appeal, is the subject of a comprehensive critique in a recent article by Stanford Law Professor Joseph Grundfest, entitled “The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi” (here). Professor Grundfest argues that Sciabacucchi was wrongly decided and that a under a “straightforward” application of applicable Delaware statutory law, federal forum provisions are valid and permitted.

I recommend reading all of them.

 

Posted at 03:41 PM in Corporate Law, SCOTUS and Con Law, Securities Regulation |

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09/07/2019

A First Challenge to California’s Board Gender Diversity Law

Cydney Posner:

As reported here on Bloomberg, a conservative activist group has filed a lawsuit, Crest v. Alex Padilla, in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of SB 826, California’s Board gender diversity legislation. This appears to be the first litigation filed to challenge the new law. Framed as a “taxpayer suit,” the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. 

I don't know enough about taxpayer standing under California constitutional law to know whether the lawsuit will survive a standing challenge. Nor do I know enough about equal protection law under the California constitution to know if the suit has substantive merit.

Interestingly, the issue about which I do know something is not involved in the suit:

Interestingly, there was no challenge to the legislation as a violation of the “internal affairs doctrine,” which generally provides that the law of the state of incorporation governs those matters that pertain to the relationships among or between the corporation and its officers, directors and shareholders. The new gender diversity mandate would likely be viewed as a matter of internal corporate governance, and Section 2115.5 of the new law purports to make the mandate expressly applicable to foreign corporations with outstanding shares listed on a major U.S. stock exchange—to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated. Of course, because of standing issues, different plaintiffs would have been required to make a claim of that nature.

Posted at 04:04 PM in Corporate Law, SCOTUS and Con Law |

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09/03/2019

Why are corporations defined as entities?

I offer an answer here.

Posted at 12:29 PM in Corporate Law |

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09/01/2019

Using corporate governance to effect social changes is fundamentally undemocratic

Omari Scott Simmons argues:

The embrace of shareholder activism as a tool to bring about broad social change is a welcome development. It reflects a trend of outsourcing public functions and values to private actors and stems in part from a frustration with interest group politics and existing democratic processes in the public context. However, overreliance on shareholder activism and similar private tactics may lead to an expectations gap; they are not an effective surrogate for persistent, organized, mobilized social movements that employ diverse tactics in traditional democratic venues.

What we are seeing these days is yet another attempt by the left to by pass democracy and achieve social changes they prefer without getting approval from a majority of citizens. The left used the courts to bypass democracy for years (See, e.g., Roe v. Wade). Now that the Supreme Court has a fairly solid conservative majority, the left is shifting to corporate governance to coerce corporate leaders--some of whom themselves are social justice warriors eager to cooperate--into adopting leftist policy preferences.

There's a law review article here.

Posted at 04:26 PM in Corporate Law |

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08/28/2019

Where Is Your Corporation's Principal Executive Office (Or Offices)?

Keith Paul Bishop offers some guidance to this question that became even more fraught with the passage of the California gender quota bill.

Posted at 03:47 PM in Corporate Law |

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