ProfessorBainbridge.com

From the the cryptozoological wing of the corporate law zoo

Famed Delaware Chancellor William Allen once compared the corporate law doctrine of waste to one of the most famous cryptids:

Absent an allegation of fraud or conflict of interest courts will not review the substance of corporate contracts; the waste theory represents a theoretical exception to the statement very rarely encountered in the world of real transactions. There surely are cases of fraud; of unfair self-dealing and, much more rarely negligence. But rarest of all-and indeed, like Nessie, possibly non-existent-would be the case of disinterested business people making non-fraudulent deals (non-negligently) that meet the legal standard of waste!

Steiner v. Meyerson, CIV. A. 13139, 1995 WL 441999, at *5 (Del. Ch. July 19, 1995)

Vice Chancellor Glasscock has gone him one better:

In the cryptozoological division of equity's menagerie are a number of rarae aves and chimeras—some, perhaps, not so chimerical as once thought. One unusual denizen is on display here. A stockholder brought a purported derivative action, alleging that insiders had structured an acquisition unfair to the corporation. The action withstood a motion to dismiss, and the corporation formed a special litigation committee of the board to evaluate the claim. I then stayed the matter for several months, to allow the special litigation committee, assisted by its own counsel, to consider the cause of action. Ultimately, the special litigation committee found that it was in the corporate interest that the cause of action be pursued, and determined that that asset would best be monetized on behalf of the corporation by allowing the original plaintiff to proceed, derivatively.

In re Oracle Corp. Derivative Litig., CV 2017-0337-SG, 2019 WL 6522297, at *1 (Del. Ch. Dec. 4, 2019)

I've been at the corporate law gig for 36 years as student, practitioner, author, and professor and in all that time I have never encountered a case in which the SLC not only though the suit should go forward but also that it should go forward under plaintiff's control. 

 

Frankly, I would be less surprised to find myself sharing a cab with Bigfoot.

"Religious Sincerity in Corporations"

Ben Edwards:

California Western's Catherine Hardee, recently posted her paper Schrodinger's Corporation: The Paradox of Religious Sincerity in Heterogeneous Corporations to SSRN.  It's a fascinating piece and has already been featured on Ipse Dixit if you're curious about a podcast version.

Her abstract sets the key problem out well:

Consider a corporation where one group of shareholders holds sincere religious beliefs and another group of shareholders does not share those beliefs but, for a price, will allow the religious shareholders to request a religious exemption to a neutrally applicable law on behalf of the corporation.  The corporation is potentially both religiously sincere and insincere at the same time. A claim by the corporation for a religious accommodation requires the court to solve the paradox created by this duality and declare the corporation, as a whole, either sincere or insincere in its beliefs. While the Supreme Court and scholars have noted some of the particular issues raised when determining the religious sincerity of shareholders’ claims, to date no one has engaged systematically with the question of whose religious sincerity should be attributed to the corporation when shareholders hold heterogeneous, or diverse, religious beliefs.

One possible solution to the problem might be to allow ordinary private ordering to address the issue.  The board could designate one share class with the right to control the corporation's religious beliefs about birth control.  So long as the holder of those shares sincerely held the belief, it could settle the question of what religious view to attribute to the corporation.

Hardee takes a hard look at this commodification of religious sincerity and explores how it could harm religious freedom generally.  She creates a framework for considering how to resolve these questions and cautions against using contracts to barter for religious exemptions.

I agree that it's an interesting article, well worth a read. Personally, however, I stand by what I wrote in my articles Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers and A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood. Courts should ask whether the corporation's shareholders would be entitled to reverse pierce their corporation's veil. If so, the court should allow the corporate entity to vindicate the shareholder's religious beliefs. If not, then the shareholders' religious beliefs should not be ascribed to the corporation.

Lyman Johnson on Delaware Corporate Fiduciary Duty Law and A Partial Objection

Lyman Johnson has a short but very useful essay on fiduciary duties under Delaware corporate law. His main point follows:

Three distinct actors owe fiduciary duties – executive officers, directors, and controlling shareholders – and numerous aspects of their duties greatly differ.  But Delaware corporate law is not unique in the way many believe.  Conventional wisdom holds that, uniquely, corporate law’s standards of conduct (fiduciary duties) diverge from judicial standards of review, the latter being more deferential.  Yet, the two sets of standards often converge and are identical.  The supposed distinction is not uniformly accurate, and unenforceable standards of conduct may not be “law” at all where standards do diverge.

I concur and urge you to go read the whole thing. But I have to respectfully dissent from the following:

... if a director complies with the duty of care, the business judgment rule standard of review obtains.  If a director breaches her duty of care, the business judgment rule standard does not apply.  The standard of review for the duty of care thus requires that the standard of conduct be fulfilled.  The former is not more forgiving, it is equivalent in its demands, again pointing toward convergence, not divergence.

To be sure, Lyman could point to Justice Horsey's Technicolor decision as support for his interpretation:

To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty—good faith, loyalty or due care. If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the “entire fairness” of the transaction to the shareholder plaintiff. [Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.1993).]

As I explain in my book Corporate Law:

Notice how the justice puts the cart before the horse. Directors who violate their duty of care do not get the protections of the business judgment rule; indeed, the rule is rebutted by a showing that the directors violated their fiduciary duty of “due care.” But this is exactly backwards. Under the abstention theory of the business judgment rule, the rule’s core purpose is to prevent precisely what Technicolor requires. Recall that the rule prevented Shlensky from even getting up to bat with his care claims. The business judgment rule thus precludes courts from asking the question of—let alone deciding—whether the directors violated their duty of care. In contrast, under Technicolor the business judgment rule’s primary function is the procedural task of assigning burdens of proof. In that limited guise, moreover, the rule merely assigns to plaintiff the burden of establishing a prima facie case—the same burden plaintiff bears in all civil litigation. If plaintiff fails to carry that burden, the business judgment rule requires the court to dismiss the lawsuit without inquiry into the merits of the decision. But so what? Under this conception, the business judgment rule is nothing more than a restatement of the basic principle that the defendant is entitled to summary judgment whenever plaintiff fails to state a prima facie case. At best, Technicolor thus trivializes the rule.

By opening the courthouse door to care questions at the outset of the litigation, however, Technicolor went beyond merely trivializing the rule to gutting it. Arguably, Technicolor broadened the scope of judicial review of board decisionmaking to reach not just the process by which the decision was made but also the substance of the directors’ decision. Significant consequences follow from this distortion of the business judgment rule. It is commonly held, for example, that mere allegations of director impropriety do not entitle plaintiff to discovery.[1] Yet, one can plausibly read Technicolor as authorizing precisely the sort of fishing expeditions the business judgment rule was intended to prevent.

Technicolor can be reconciled with the mainstream of business judgment rule analysis only by interpreting the duty of “due care” as being limited to the adequacy of the decision-making process. At several points in the opinion, Justice Horsey in fact so characterized that duty.[2] In addition, numerous Delaware precedents interpret the requirement of due care as being limited to questions of process.[3] Yet, nothing in Technicolor explicitly limits its references to the duty of care to the decision-making process. Arguably, the cart remains before the horse.

Incorporating Catholicism: Dioceses are changing their secular legal forms to conform to canon law and insulate assets

Crux reports: 

As dioceses across the country continue to face multi-million dollar payouts related to clerical sex abuse, some bishops have relied on advice from lawyers to reconfigure the property of their dioceses into charitable trusts.

The practice - which has been implemented by several dioceses after the clerical sex abuse revelations of the early 2000s - creates significantly different outcomes for dioceses and abuse victims in the case of bankruptcies.

Critics say the moves shield assets that could be paid to victims of clerical abuse and may even be illegal. However, Church officials defend the practice, saying their actions were intended to better align the dioceses’ corporate status with canon law. Other dioceses say they acted to ensure the long-term viability of the Church.

It strikes me that both the critics and the defenders are correct. In an article I coauthored with former student Aaron Cole, I argued that the corporation sole--a common form of legal organizations used by Catholic dioceses in the US was incompatible with canon law:

… the Church, as a matter of doctrine and canon law, is composed of numerous united but distinct entities, subject in varying ways and degrees to ecclesiastical control.  Each separate entity possesses rights (including rights of ownership) that are enforceable, under church law, against the other entities.  The assets of the Catholic Church, under canon law, thus do not belong to a single owner. Instead, Church assets “belong to many owners: the Apostolic See, individual dioceses, institutes of consecrated life, societies of apostolic life , parishes, other public juridic persons, private juridic persons, and natural persons individually and in association.”

Accordingly, centralization of “ownership and control of all church property within a diocese is contrary to the law of the Church.”  The use of a corporation sole to hold title to the ecclesiastical property of the juridic persons within the diocese’s territory thus is a significant distortion of the Church’s polity. Indeed, in 1911, the Holy See told the American bishops that it disapproved of using a single corporation sole as some legal owner of all property within a diocese; indeed, the Holy See encouraged the separate incorporation of individual parishes.  Presumably, the same would be true where a diocese civilly incorporated using some other statutory form, such as a nonprofit or religious corporation, holds secular legal title to the ecclesiastical property of all juridic persons within the diocese.

Second, incorporation as a corporation sole exposes the assets of parishes and other juridic persons, which in canon law are the property of such persons, to the claims of creditors of the diocese. Conversely, by centralizing civil ownership in a single entity, the corporation sole also exposes “all parochial and other church-related assets within a diocese to satisfy creditors’ claims against any individual parish or institution.”  Again, the same concerns would arise where a diocese civilly incorporated as a nonprofit or religious corporation claiming secular legal title to the ecclesiastical property of parishes and other juridic persons within the diocese.

The reorganization into a trust format thus is an appropriate response to a longstanding canon law problem. 

But the reorganization also responds to the liability exposure the corporation sole created:

… bishops whose dioceses are incorporated as a corporation sole have argued that they hold legal title to parish assets in trust and for the benefit of the parish.  This line of defense was prominently tested in the Archdiocese of Portland’s bankruptcy case.  The Archdiocese had been incorporated as a corporation sole under Oregon law.  Only one of the 124 parishes with the Archdiocese had been separately incorporated.  The three Catholic high schools within the Archdiocese were not separately incorporated.  When the Archdiocese declared bankruptcy under the weight of numerous priest sex abuse claims, the Archbishop claimed that the bulk of the Archdiocese’s assets were in fact held in trust for the benefit of the unincorporated parishes and other juridic persons within the diocese.

The Bankruptcy Court first held that the freedom of religion clauses of the First Amendment did not deprive the court of jurisdiction over the question of whether the assets purportedly held in trust were properly part of the bankruptcy estate and thus subject to the claims of the Archdiocese’s creditors.  The court then held that those same clauses did not require the court to defer to canon law in determining the ownership of the assets in question.  Next the court held that Oregon state corporation law likewise did not require the court to defer to canon law in determining the ownership of the assets in question.

Turning to the merits, the court noted that “[e]ven debtor’s own canon law expert acknowledges that being a separate juridic person under canon law does not give that juridic person a civil law identity.”

In fact, unincorporated religious associations are not legal persons that may take title to real property in their names. Because the parishes are not separately incorporated, as they could be under Oregon religious corporations law, they cannot hold title to real property. They are not separate from, but are merely a part of debtor.

The court also rejected the Archbishop’s argument “that, even if the parishes are not legal entities that can hold title to real property, they have sufficient legal existence to allow them to be beneficiaries of a trust.”

The reorganization presumably is intended to solve that problem by creating real trusts.

Is there anything wrong with what the Church is doing? The tragic dilemma of the priest sex abuse scandal is the inherent tension between providing just compensation for victims and preventing litigation from creating an existential threat to the Church. 

As Cole and I explained:

In many dioceses, there are hundreds of separate juridic persons, each ministering to numerous worshippers and even non-Church members. If a court were to treat all of those juridic persons as alter egos of the diocese, the assets of many parishes and other ministries that had no connection with priest sex abuse would be made available to satisfy the claims of sex abuse plaintiffs. Inevitably, execution of a judgment against their assets would impede, if not destroy, the ability of these ministries to serve the needs of their congregants. Indeed, the mere threat of liability might do so: “Both church and society will suffer if the continuation of ministries prompted by compassion—ministries often involving risks—is stopped short by the nervous calculation of legal liabilities.” 

 

Joan Heminway identifies some common mistakes Business Associations students make

Good advice to BA students:

• Agency rules and management rules in business associations law are often confused. Agency rules express the authority of a person to act on behalf of the firm in transactions with third parties--those who enter into transactions with the firm. For example, by default under the RUPA, each partner in a RUPA partnership is an agent of the partnership that can bind the partnership to contracts with others. Management rules, by contrast address the governance and control authority of a particular firm constituent within the governance structure of the firm. Thus, agency rules relate to authority that is outward-facing (pertaining to transactional parties) and management rules relate to authority that is inward-facing (pertaining to internal constituents of the firm). For example, by default under the RUPA, each partner has an equal right to manage the partnership.
  
  
• Similarly, the concept of "limited liability" is commonly understood to refer to the limited liability of a firm owner for the firm's obligations. For example, under the RUPA, each partner is jointly and severally liable for the obligations of the partnership, whereas under corporate law, shareholders are not personally liable for the corporation's obligations to third parties. Exculpation, which eliminates the monetary liability of directors in the corporate context, relates to corporate governance claims--legal actions for breach of the fiduciary duty of care. This is internal governance litigation that does not relate to corporate obligations to third parties. So, while exculpation does limit (eliminate) a director's personal liability for a breach of the duty of care, it is not part of what people generally refer to as "limited liability" in a corporate context.
  
  
• Fiduciary duties are typically understood to instill or increase trust in relationships. Accordingly, they are commonly employed to provide a benefit in circumstances involving untrustworthy business associates. Yet a number of you seemed to think they were an undue burden to business venturers in circumstances where trust may be lacking (i.e., where fiduciary duties should be useful). You will need to make a solid argument to most folks to justify that the detriments outweigh the benefits.

Kevin Paul Bishop on California's Board of Directors Gender Quota Law

Kevin has three posts on Caifornia's gender quota law. In the first, he notes that "The California Secretary of State's business programs division is reminding some corporations of their annual filing obligation and California's new female director quota legislation."

In the second, he notes that the California Secretary of State's office committed a serious faux pas with regard to the definition of publicly held corporation.

In the third, he complains that "the statute is a lutulent mess." 

Josh Fershee responds to my post about the implied covenant of good faith

Here:

Prof. Bainbridge recently posted, Here's the thing I don't understand about the implied covenant of good faith and fair dealing. ...

... I think this concept of the implied covenant matters more than ever, now that Delaware allows the elimination of the duty of loyalty in LLCs (my thoughts on that here). Even in allowing parties to eliminate the duty of loyalty in an LLC, such agreements always retain the duty of good faith and fair dealing. ...

...

I am of the mind that the implied covenant of good faith and fair dealing means that: (1) you get the express terms of the agreement, and (2) the agreement cannot take away all possible reasons for the deal in the first place.  As to the latter point, it means, quite simply, even without a duty of loyalty, there must be some reason for the contract to exist at all.  So, you may not be entitled to a fair share of proceeds from the agreement, or even a significant share.  But there must always be some value (or potential value) to have been gained by entering the agreement. At a minimum, it can't be an agreement to get nothing, no matter what. 

As one example, a Delaware court explained that a plaintiff's claim was lacking when the 

the incentive [gained by the defendant] complained of is obvious on the face of the OA [operating agreement]. The members, despite creating this incentive, eschewed fiduciary duties, and gave the Board sole discretion to approve the manner of the sale, subject to a single protection for the minority, that the sale be to an unaffiliated third party. . . . [T]he parties to the OA [thus considered] the conditions under which a contractually permissible sale could take place. They avoided the possibility of a self-dealing transaction but otherwise left to the [defendant] the ability to structure a deal favorable to their interests. Viewed in this way, there is no gap in the parties’ agreement to which the implied covenant may apply. The implied covenant, like the rest of our contracts jurisprudence, is meant to enforce the intent of the parties, and not to modify that expressed intent where remorse has set in.

Miller v HCP & Co., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018). (More commentary on this case here.)

Furthermore, the implied covenant

does not apply when the contract addresses the conduct at issue, but only when the contract is truly silent concerning the matter at hand. Even where the contract is silent, an interpreting court cannot use an implied covenant to re-write the agreement between the parties, and should be most chary about implying a contractual protection when the contract could easily have been drafted to expressly provide for it.

Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, 202 A.3d 482, 507 (Del. 2019) (footnotes omitted). For more on this case see the Delaware Corporate &Commercial Litigation Blog. 

 

Parties have a lot of latitude, but I think the covenant of good faith and fair dealing means that there must be a reasonable effort to honor the express terms of the agreement and there must have been some reason to enter the contract. That's it.  It's not a lot, but it still has teeth where someone takes all of the things.  

That makes sense.

Carney v. Adams and the Future of Delaware Corporate Law

@ProfBainbridge on "Delaware's Judiciary in the U.S. Supreme Court" https://t.co/BUAhPlqSiR via @wlf

— Professor Bainbridge (@ProfBainbridge) December 13, 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?

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.

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 28^th 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 | Permalink | 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 | Permalink | 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 | Permalink | Comments (0)

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 ...

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...

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...

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 ...

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...

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...

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.

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".

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

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?