California Corporate-Board Quota Law Unlikely to Survive a Constitutional Challenge

bainbridgeFeatured Expert Contributor, Corporate Governance/Securities Law

Stephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

The California state legislature recently passed SB 826, which will impose gender diversity quotas on all public corporations whose principal executive offices are located in California. If the corporation has six or more directors, it must have at least three female directors. If it has five board members, it will have to have at least two female members. If the board has four or fewer members, it will be required to have at least one female director. Governor Jerry Brown signed the bill into law.

SB 826 has been criticized on various grounds. Some commentators contend that the business case for gender quotas has not been made, so it is unclear whether the bill will benefit companies and their shareholders. Other commentators contend that state-mandated gender quotas are unconstitutional. Former SEC Commissioner Joseph Grundfest recently posted an article assessing the arguments on both sides of those debates, which I highly recommend for readers interested in pursuing those issues.1

Regardless of one’s views of the constitutional and business merits of diversity mandates, however, SB 826 is bad policy and of dubious constitutional validity for reasons wholly unrelated to gender issues. Continue reading “California Corporate-Board Quota Law Unlikely to Survive a Constitutional Challenge”

What’s Extraterritorial on the Blockchain?: “In re Tezos Securities Litigation” and the Application of U.S. Securities Law to “Foreign” ICOs

Alter_Daniel_web2_8784879218361Featured Expert Contributor, Legal & Regulatory Challenges for Digital Assets

By Daniel S. Alter, a Shareholder in the New York, NY office of Murphy & McGonigle P.C.

*Ed. Note: This is Mr. Alter’s inaugural post as the WLF Legal Pulse’s newest Featured Expert Contributor. Prior to joining Murphy & McGonigle P.C., Mr. Alter was General Counsel for the New York State Department of Financial Services.

In July 2017, the Tezos Foundation—a Swiss non-profit organization—conducted an online initial coin offering (or ICO) that raised more than $230 million in value.  The terms of sale purportedly governing the ICO contained a forum selection clause designating Switzerland as the exclusive forum for all ICO-related litigation and choosing Swiss law to govern disputes.  Soon after the ICO concluded, however, purchasers of Tezos tokens brought suits in U.S. federal district court against multiple defendants (including American and European individuals and entities) involved in managing the token sale.

The plaintiffs alleged that the defendants had sold unregistered securities in violation of §§ 12 and 15 of the Exchange Act of 1934 (“Exchange Act”).  15 U.S.C. §§ 77l, 77O.  Once the cases were consolidated, several defendants moved to dismiss the complaint arguing, among other things, that—because the Exchange Act does not apply to the extraterritorial sale of unregistered securities—a foreign ICO cannot give rise to federal liability.[1] Continue reading “What’s Extraterritorial on the Blockchain?: “In re Tezos Securities Litigation” and the Application of U.S. Securities Law to “Foreign” ICOs”

How the SEC Can Be a Better Lifeguard: Commissioner Peirce’s Insightful Comments on Regulators’ Role in a Sea of FinTech Innovation

Alter_Daniel_web2_8784879218361Guest Commentary

By Daniel S. Alter, a Shareholder in the New York office of Murphy & McGonigle P.C. and a former general counsel for the New York State Department of Financial Services.

Earlier this month, Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce addressed a FinTech conference hosted by the Medici Project, which is a serious effort to build a blockchain-based securities exchange.  In her remarks, Peirce discussed two constructive approaches that financial regulators have taken worldwide in response to the tidal shift in technology that supports financial products and services.  The commissioner’s message to conference attendees should encourage all those in both the legal and entrepreneurial communities who, to date, have felt only the punitive response of SEC enforcement actions involving initial coin offerings, or ICOs.  And yet, Peirce’s comments stopped just short of advocating for the sort of regulatory approach that would likely be most effective in grappling with fast-paced FinTech developments. Continue reading “How the SEC Can Be a Better Lifeguard: Commissioner Peirce’s Insightful Comments on Regulators’ Role in a Sea of FinTech Innovation”

“China Agritech” SCOTUS Case Will Turn on Justices’ Opinions of Class Actions

supreme courtDuring oral arguments this coming Monday in China Agritech, Inc. v. Resh (click here for WLF’s amicus brief) the U.S. Supreme Court ostensibly will be considering a technical issue regarding statutes of limitations: when should the doctrine of “equitable tolling” be applied to extend the deadline for filing a class action lawsuit? But how the justices determine the scope of that judge-made doctrine has little to do with applying well-established equitable doctrines in this area of the law (there aren’t any) and everything to do with how warmly they feel about class litigation as a vehicle for providing effective relief for large numbers of plaintiffs with small claims. The evidence suggests that the Court is far less enamored with class actions than it once was and will use China Agritech to cut back on their use. Continue reading ““China Agritech” SCOTUS Case Will Turn on Justices’ Opinions of Class Actions”

Settlement of Lawyer-Driven “Merger Tax” Litigation Stumbles in New York

ny state courtsTo paraphrase an Oscar-winning song, it’s hard out there for a corporate merger.  In recent years, opportunistic plaintiffs’ attorneys have descended upon proposed mergers of publicly owned companies, filing lawsuits to delay the proceedings alleging that management breached its fiduciary duty to the shareholders.

But one look at the typical settlement demonstrates that these cases are almost always cash grabs for the attorneys while providing almost no benefit for the allegedly harmed shareholders.  The defendant usually agrees to “disclose” additional, trivial information about the merger, while paying the plaintiffs’ attorneys thousands of dollars in legal fees.  It comes as little surprise that these claims are colloquially known as “merger tax” suits, with the “tax” being the attorneys’ fees public corporations now feel obligated to pay any time they want to combine. Continue reading “Settlement of Lawyer-Driven “Merger Tax” Litigation Stumbles in New York”

Perpetual Dual Class Stock versus the SEC’s Dubious Raised Eyebrow Power

bainbridgeFeatured Expert Contributor, Corporate Governance/Securities Law

Stephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

Newly confirmed SEC Commissioner Robert J. Jackson, Jr., gave his inaugural speech at Berkeley on February 15, 2018. In it, he criticized—in an admittedly nuanced way—the growing phenomenon of dual class stock. As he explained, most U.S. public corporations have a single class of common stock in which all shares have one vote per share. In recent years, however, some companies—especially in the tech sector—have gone public with a so-called dual class capital structure, which typically has two classes of common stock.

One class will have the traditional one vote per share, but the other will have multiple votes—usually 10—per share. The former shares are the ones sold to the public in the IPO, while insiders hold the super-voting shares. Facebook is a paradigmatic example: Mark Zuckerberg’s super-voting shares represent only 16% of the company’s equity but give him 60% of the total voting power. Continue reading “Perpetual Dual Class Stock versus the SEC’s Dubious Raised Eyebrow Power”

“U.S. v. Martoma”: Second Circuit’s Latest, but Perhaps not Last, Word on Insider-Trading Tippee Liability

Featured Expert Contributor, Corporate Governance/Securities Law

bainbridgeStephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

Matthew Martoma was a portfolio manager at S.A.C. Capital Advisors, LLC, a hedge fund owned and managed by Steven A. Cohen, which had been the subject of numerous insider trading investigations. One of those investigations resulted in Martoma being charged with insider trading on the stocks of a pair of drug companies developing a new Alzheimer’s disease drug treatment. Martoma had received tips of material nonpublic information about the treatment from two drug company employees. Martoma was convicted and appealed.

In a 2-1 opinion by Chief Judge Katzmann, the Second Circuit affirmed Martoma’s conviction. Its decision in United States v. Martoma is the first major interpretation of the Supreme Court’s decision in Salman v. United States, and the first effort to determine the remaining scope, if any, of the Second Circuit’s 2014 decision in United States v. Newman. Continue reading ““U.S. v. Martoma”: Second Circuit’s Latest, but Perhaps not Last, Word on Insider-Trading Tippee Liability”