Yesterday, in McRitchie v. Zuckerberg (Del. Ch.; 4/24), Vice Chancellor Laster confirmed that directors owe “firm-specific fiduciary duties” under Delaware corporate law. The plaintiff in this lawsuit against Meta is the well-known shareholder proposal proponent, shareholder advocate and corporate governance author, James McRitchie, who discussed the lawsuit in a blog post around the time it was filed. The lawsuit was supported by The Shareholder Commons (a non-profit that has been advocating for “beta stewardship” for the past several years) and, as described in this post after a December hearing, is predicated on the view that a “narrow, company-only view of shareholder primacy fails most shareholders, is inconsistent with modern investing practices, and threatens markets’ utility to allocate resources.”
VC Laster explains the arguments as follows:
[U]nder Modern Portfolio Theory, prudent investors diversify. Therefore, says the plaintiff, the law must operate on the assumption that a corporation’s stockholders are diversified. The plaintiff concludes that owing fiduciary duties to the corporation and its stockholders must mean owing duties that run to the corporation and its stockholders as diversified equity investors. Furthermore, according to the plaintiff, because the returns that accrue to diversified equity investors should generally track the economy as a whole, complying with fiduciary duties oriented to diversified equity investors must mean managing the corporation based on what would be best for the economy as a whole.
The complaint contends that Delaware follows this model and, if it doesn’t, the law should change. As to Meta, it argues that Meta is “the poster child for a systemically significant firm” and that the Meta board has managed the company “to generate firm-specific value at the expense of the economy as a whole” at least partially due to the directors’ own wealth being overly invested in Meta shares creating a conflict of interest.
The Meta directors moved to dismiss, conceding that they manage the company under a firm-specific model, but maintaining that Delaware law requires them to do so. VC Laster agreed.
Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.
He notes that the plaintiff’s principal argument “rests on policy” — that is, corporations would treat externality-creating activities differently under a diversified investor model. While saying “[t]here are reasons to be skeptical” of that argument, he also points out that the DGCL authorizes private ordering and tailored director duties in a company’s certificate of incorporation.
In a footnote, he points to an article from former Chief Justice Leo Strine that supports federally mandating that public companies “become Delaware public benefit corporations under a worker co-determination model.” Despite former Chief Justice Leo Strine expressing solidarity with the movement to address externalities since retiring from the bench, he notes that the authors “did not argue for changing the traditional fiduciary orientation of corporate law.”
Bloomberg recently reported that a third of S&P 500 trades are now executed in the last 10 minutes of the trading day, based on data from BestEx Research. The standard trading day is 390 minutes. The article attributes the concentrated trading to index funds that buy and sell near the closing of trading since “the last prices of the day are used to set the benchmarks they aim to replicate.” The increase is part of the decade-long trend of increasing assets in passive equity funds and active funds following along to take advantage of the liquidity.
The article goes on to describe the mechanism to determine closing prices — the closing auction — which “runs alongside the last minutes of continuous trading” and highlights that “nearly 10% of all US shares were traded in that closing auction last month.” If you haven’t had to deal with a trading halt recently and ever feel like those Market Watch notices the stock exchanges require are just one more thing to do in the throes of releasing material news, understanding this process and the trading volume over a short period may be a good reminder of the purpose behind those notification obligations.
NYSE recently reminded listed companies that, in addition to the 10-minute prior notice for material news announcements, they are also prohibited from publishing material news after the official close until the earlier of 4:05 p.m. ET or the publication of the official closing price for the security. NYSE states that “the requirement is designed to alleviate confusion caused by price discrepancies between trading prices on other markets after the NYSE official closing time, which is generally 4:00 p.m. ET, and the NYSE closing price upon completion of the auction, which can be after 4:00 p.m. ET.” It also reminds companies that they can refer to NYSE Connect for information about the timing of completion of closing auctions.
Excitement is growing among our editorial team for our “2024 Proxy Disclosure & 21st Annual Executive Compensation” Conferences. We cannot wait to meet in San Francisco and engage with you in person! Not to mention that we’ve got a terrific lineup of experienced speakers who will be addressing timely topics. With the SEC’s regulatory agenda continuing apace and no end in sight to the global, economic and political uncertainty we’ve faced in recent years, make sure you’re getting the guidance and knowledge you need (and expect from us!) through our conferences!
We hope many of you decide to join us in San Francisco on October 14 & 15. Our “early bird” deal for individual in-person registrations ends May 31st, so you need to act soon to take advantage of that rate. (Our early bird in-person Single Attendee Price is $1,750, which is discounted from the regular $2,195 rate!) If you can’t make it in person, we also offer a virtual option so you won’t miss out on the practical takeaways our speaker lineup will share, and we offer discounted rate options for groups of virtual attendees.
You can register now by visiting our online store or by calling us at 800-737-1271.
In mid-April, the DOJ launched a Pilot Program on Voluntary Self-Disclosure for Individuals — the latest in a string of sweeping DOJ policy changes aimed at encouraging voluntary disclosure of misconduct and holding the real “bad guys” accountable. We’ve previously covered those developments here, on CompensationStandards.com and on DealLawyers.com. Here are related DOJ announcements since early 2023, as a reminder:
While aimed at individual reporting, this latest pilot program is still focused on corporate wrongdoing. This DLA Piper alert addresses what GCs and compliance officers need to know and notes that this can be “an additional tool at their disposal to encourage their companies to invest in the development of trusted reporting channels and other compliance controls that prevent and detect misconduct – and allow the company to address, remediate, and disclose the misconduct, if appropriate – before an individual is incentivized to make reports outside of the company.”
DOJ’s message to companies is clear: Investing in building a culture of trust that rewards ethical behavior, and penalizes those who break the rules, is paramount. Further, if employees do not trust that their concerns will be taken seriously, addressed appropriately, and valued by the company, they may bring their concerns elsewhere – and the individual, not the company, will receive the benefit of the disclosure. These “sticks” also require companies to ensure they carefully assess when it may be appropriate to avail themselves of the DOJ’s incentives to come forward before their employees do.
If an individual engaged in misconduct but discloses and cooperates, they may receive a Non-Prosecution Agreement if certain criteria, detailed in the alert, are met. CEOs & CFOs do not qualify, and the Pilot Program will initially only apply to disclosures involving certain types of criminal conduct involving corporations:
1. Violations by financial institutions, their insiders, or agents, including money laundering, anti-money laundering, registration of money transmitting businesses, fraud statutes, and fraud against or compliance with financial institution regulators
2. Violations related to the integrity of financial markets undertaken by financial institutions, investment advisors, or investment funds by or through public companies or private companies with 50 or more employees, or by any insiders or agents of such entities
3. Violations by or through public or private companies related to foreign corruption and bribery, including violations of the Foreign Corrupt Practices Act, Foreign Extortion Prevention Act, and money laundering statutes
4. Violations by or through public or private companies with 50 or more employees related to healthcare fraud or illegal healthcare kickbacks committed
5. Violations by or through public or private companies with 50 or more employees related to fraud against, or deception of, the US in connection with federal contracts, and
6. Violations committed by or through public or private companies related to the payment or bribes or kickbacks to domestic public officials.
The alert concludes with action items for companies to consider beginning with reviewing existing compliance policies and procedures.
The memos started rolling in last week as after the FTC approved an expansive ban on the use of non-competes, with limited exceptions. As expected, at the end of the week, the US Chamber of Commerce filed suit in the U.S. District Court for the Eastern District of Texas challenging the rule.
As reported by HR Dive, the lawsuit argues that the FTC lacks authority to issue substantive regulations regarding unfair methods of competition, invokes the “major questions” doctrine and claims the ban is impermissibly retroactive — since the rule largely renders existing non-competes unenforceable, with an exception for “senior executives” as defined in the rule. This Simpson Thacher alert describes the potential timing for a decision:
The Court overseeing the Chamber’s lawsuit has set a schedule that would permit the Court to issue an order on the merits of the Chamber’s legal challenge before the Rule’s effective date. Assuming no changes to the schedule, the Court could therefore declare the Rule unlawful before the rule comes into effect.
The March-April Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:
– Lessons From the Activision-Microsoft Merger – Delaware Chancery’s Moelis II Decision Provides Cautionary Tale for Boards and Activists – Sears and (the Limited Scope of) Controlling Stockholder Fiduciary Duties
– Delaware Chancery Reminds Us That Directors Generally May Not Share Confidential Information With Stockholders Who Nominated Them
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
On the Proxy Season Blog, I recently shared that Tesla has filed its preliminary proxy statement, and it includes a proposal requesting that shareholders ratify Musk’s 2018 pay package that the Delaware Chancery Court ordered rescinded. The blog shares some interesting tidbits from the disclosure, including that even Tesla isn’t sure how this ratification will be treated under Delaware law.
Filed less than three months after Musk previewed moving Tesla’s state of incorporation on X, the proxy also includes a proposal for redomestication. It notes that Tesla’s “outside directors as well as management had previously explored the possibility of a redomestication (though without coming to a decision one way or the other),” but begins the detailed description of the work done by the board, the special committee and its advisors with the February 4 board meeting after Musk’s social media post. Here are some highlights of the process description:
– The special committee was comprised of one member who was not on the board at the time of the 2018 grant. A second member had stepped down after the committee’s authority was expanded to include consideration of whether Musk’s 2018 award should be ratified.
– It engaged four special advisors — outside counsel, Delaware counsel, a corporate law and governance expert and a financial advisor.
– From its formation on February 10 to its final approval meeting on April 16, the special committee held 16 meetings that took more than 26 total hours and engaged in work outside meetings for more than 200 hours.
– That work included interviews of the seven other directors and five members of management, a visit to Tesla’s headquarters by counsel, a conversation with the external auditor and reviews of reports from a governance expert & financial advisor, numerous legal decisions, letters from stockholders, and academic articles.
– The proxy justifies the tight turnaround by saying that the committee assessed the timeline with its counsel, determined that the proposal should be considered at Tesla’s annual meeting for greater shareholder participation, and felt it took the time it needed since the company agreed to the special committee’s request to move the date of the annual meeting by a month after “negotiation over various potential dates.”
This Delaware question seems to be part of the current corporate zeitgeist — not just because of Musk. This Wilson Sonsini alert notes that a conversation has emerged recently about Delaware as the favored state of incorporation and that many clients have inquired about this. Clients cited the number of recent cases with unexpected results, a perception that Delaware judges have an increasingly suspicious attitude toward corporate players, that Delaware case law can pose particular challenges for companies with influential founders or stockholders and the active plaintiff’s bar.
The alert concludes with the expectation that Delaware is likely to remain popular after listing numerous reasons Delaware has been “a favored state of incorporation for over a century.” Those include:
– A talented, responsive, and knowledgeable judiciary.
– An up-to-date and carefully considered statute.
– Developed case law.
– A nimble and user-friendly Secretary of State’s Office.
– Delaware law’s flexibility.
– Delaware’s sophisticated bar and Delaware law as a known currency.
For us corporate folks, here’s more on the Delaware judiciary, some of which you probably know and some of which you may not:
The Court of Chancery […] consists of seven judges, increased from five judges in 2018 to handle the court’s ever-growing workload. There are no juries or punitive damages. The Delaware Superior Court is the other trial court in Delaware, with jurisdiction over business disputes that do not come within the ambit of the Court of Chancery—for example, many types of contract disputes involving claims for money damages. The five judges who serve on the Complex Commercial Litigation Division of the Delaware Superior Court are experienced and routinely decide business disputes quickly, and parties can elect to proceed without a jury trial.
The judges come from Delaware’s generally respected and sophisticated bar—and often its corporate bar. As a result, the judges are generally well versed or expert in corporate law from the moment they take the bench. In contrast to the approach of many other jurisdictions, Delaware judges are not elected and are instead appointed and vetted through a careful process: candidates apply to become judges; candidates are screened by Delaware’s Judicial Nominating Commission, which consists of Delaware lawyers and officials and makes recommendations to the Delaware governor; Delaware’s governors are known for carefully evaluating and selecting judges; and any judicial nominee selected by the governor must be confirmed by the Delaware Senate. Delaware’s judges serve 12-year terms.
The Delaware courts also act quickly. […] There is a direct right of appeal from the trial courts to the Delaware Supreme Court and, in certain circumstances, appeals can be heard on an expedited basis in a matter of weeks or even days. Even in less exigent cases, the Delaware courts often hear cases in months rather than years.
The alert suggests that companies considering other states of incorporation carefully consider relevant counterpoints to their concerns about Delaware and, for other states, to understand the “substance of the corporate law” and the “landscape of their courts.” To that end, the alert discusses a non-exhaustive list of considerations for Texas, Nevada and California. Delaware corporations considering a reincorporation should also consider the Chancery Court’s decision in TripAdvisor (although that’s been granted interlocutory review).
As the agenda notes, the Committee will discuss whether there are potential changes to Regulation Crowdfunding that could improve the exemption and hear from speaker USC Professor Melody Chang, PhD on the experiences of women and racial minority business owners who participated in Reg CF.
In the afternoon, following remarks from Valerie Szczepanik, Director of the SEC’s Office of Strategic Hub for Innovation and Financial Technology (FinHub), addressing the regulatory landscape for cryptocurrency and token offerings, committee members will consider how to encourage angel investments.
A few years ago, I shared observations as I was heading out on parental leaves for my son and my daughter. Now, I’m gearing up for a different reason – thoracic surgery. Medical leaves are a reality for many, yet they’re rarely discussed openly. Here are my learnings in case they’re helpful to anyone else out there:
1. There is no perfect time. I know my career will endure a 6-week pause. That said, it’s tempting to try to wait for the “perfect time.” Right now is inconvenient because my practice has momentum, everything is going well, there are lots of events I want to attend and people I want to see. When it comes to things like this, there is never an ideal moment. But when it comes to your quality of life, you’ve got to play to win. Which brings me to…
2. Don’t neglect your health. Although this is a condition I’ve had my entire life, years of running and yoga helped me mask (but not eliminate) my symptoms. I had planned to just make do. But earlier this year, a friend’s health scare prompted me to revisit medical results that I’d brushed off, and to get a second opinion. Things were more severe than I realized. I’m facing surgery now on my own terms, ensuring a healthier future.
3. Medical issues are not a sign of weakness. I worried people would think less of me – or maybe not want to work with me? – if I wasn’t the picture of perfect health. This was the case even though I know I’ve never felt that way about others. In fact, some of the strongest and most admirable people I know are the ones who have been dealt a difficult hand in life with their physical circumstances. Strength does not mean having everything go your way. That’s just luck. Luck eventually runs out for everyone – and that’s a good thing! Because it gives us all empathy. Which is a reminder that…
4. My colleagues and clients are wonderful (and yours are too). I hate imposing on people and for various reasons, I was nervous about sharing my need to take leave. Come to find out, my colleagues at Fredrikson and CCRcorp have given me nothing but authentic support and resounding well-wishes. They are selflessly jumping in to ensure that the trains keep running and that clients will be well-supported during my absence. John even offered to take my parents to a baseball game when they are there with me in Cleveland for the procedure! (my dad loves the Guardians.) My clients also have been incredibly understanding and do not seem to be writing me off. If you are facing a similar situation, I think you will find this to be true as well.
5. Redefine “balance” and “success.” A lot of us have a hard time stepping away from work when deadlines are looming or when we’re working on something interesting. When I returned to private practice last year, many folks in our community shared thoughtful advice about how to find a better balance, which I very much appreciated, and which I’ve been using to plan my days and my overall approach. I used to operate on the assumption that things would shake out, on balance, if I worked overtime whenever the work was there and focused on “life” when there was a break in the action. That strategy served me very well early in my career and has helped me learn and grow, so I’m not saying it’s wrong. But “balance” looks different in these middle years, and “success” currently means building up a team to deliver great results. That’s all fine for now, and maybe in 10 years there will be another round of new meanings.
I (still) know I’m not alone on this journey of balancing life & lawyering. I’d welcome more emails to liz@thecorporatecounsel.net with any experiences & “lessons learned” that you want to share. I’m extremely grateful to John, Dave, Meredith, all of our CCRcorp HQ folks, and all of my Fredrikson colleagues, for being very good at what they do, and willing to handle some “extras” for the next month or two. Thank you also to my clients and friends for their patience with me! See you all soon.