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National Credit Union Administration Board v. Barclays Capital, Inc.: Court Permits Tolling Under Extender Statute

In National Credit Union Administration Board v. Barclays Capital Inc., No. 13-3183, 2015 WL 876526 (10th Cir. Mar. 3, 2015), the United States Court of Appeals for the Tenth Circuit held the claims brought by the National Credit Union Administration Board (“Plaintiff”) were barred by the statute of limitations. The court further held, however, the statute of limitations defense was unavailable to Barclays Capital, Inc., BCAP LLC, and Securitized Asset Backed Receivables LLC (together, the “Defendants”) as a result of their express promise not to assert it.

As an independent federal agency, Plaintiff regulates federally insured credit unions. Plaintiff may serve as conservator and liquidating agent when a credit union under conservatorship fails. While serving as conservator for U.S. Central Federal Credit Union and Western Corporate Federal Credit Union, Plaintiff alleged that the credit unions failed because they invested certain residential mortgage-backed securities (“RMBS”) based upon misleading “offering documents that misrepresented the quality of their underlying mortgage loans.” The RMBS were eventually downgraded to “junk status.”  

Plaintiff sought to recover from the issuers of the RMBS securities on behalf of the credit unions. Plaintiff and Defendants entered into a series of tolling agreements that would exclude time spent in settlement negotiations from any calculation of the statute of limitations. The Defendants also agreed not to “argue or assert” a statute of limitations defense in any future litigation.

After the negotiations failed, Plaintiff filed claims against the Defendants asserting violations of Sections 11 and 12(a)(2) of the Securities Act of 1933. Plaintiff alleged the securities’ offerings contained material misrepresentations about the quality of the underlying mortgage loans. The Defendants moved to dismiss the complaint for failure to state a claim, arguing Plaintiff’s federal claims were untimely under the Securities Act’s three-year statute of repose.

Plaintiff argued that the three-year period began on the date of the commencement of the conservatorship under the Federal Credit Union Act’s “Extender Statute.” Although filing suit more than three years after becoming the conservator, Plaintiff asserted that the time excluded by the tolling agreements made the filing timely and within the three-year period.   

The lower court rejected the Defendants’ argument that Plaintiff’s claims were time-barred and dismissed Plaintiff’s suit under the three-year limitations period of the Extender Statute. The court held the Extender Statute’s three-year limitations period could not be extended by a tolling agreement, and the Defendants’ promise not to assert a tolled limitations defense did not bar application of the unmodified limitation period in the Extender Statute.

On appeal, the court agreed that the limitations period in the Extender Statute could not be lengthened by a tolling agreement. Nonetheless, the court held that the Extender Statute was a statute of limitations, not a statute of repose. A statute of repose ended a cause of action, while a statute of limitations created an affirmative defense. A statute of limitations, unlike a statute of repose, could be waived. 

Whether a time period was a statute of limitation or period of repose depended upon a multifactor test. With respect to the Extender Statute, the provision (1) referred to itself as a “statute of limitations” and never used the term “repose”; (2) referred to the date a claim accrued, implicating a limitations-like analysis; (3) tied the limitations period to a variable dependent on an individual claimant’s cause of action; and (4) used phraseology indicating Congress’s intent to create a statute of limitations. In addition, the purpose and legislative history of the Extender Statute implied that it was “amenable to tolling, waiver, and estoppel agreements.”  

Although a limitations period could be tolled by agreement, the court found that this was not permitted under the language of the statute. The statute did not, however, preclude application of the promise made by Defendants not to assert a statute of limitations defense. The court found that the promise estopped the Defendants from raising the defense. 

  • It is often the case that an affirmative defense is meritorious and would be successful if raised, but the defense is nevertheless unavailable to the party seeking to assert it, either because that party neglected to raise it in the timely fashion or because that party is estopped from asserting it. This is true even for many constitutional rights. So it is unremarkable that a party can be estopped from asserting a statute of limitations defense, particularly when its promise not to do so is limited in scope, between two parties of equal bargaining strength, and facilitates a strong public policy of encouraging settlements. Such is the case here. Thus, while it is true that the NCUA's claims are outside the statutory period and therefore untimely, that argument is unavailable to Barclays because the NCUA reasonably relied on Barclays's express promise not to assert that defense. (citation omitted). 


In sum, the United States Court of Appeals for the Tenth Circuit found the Defendants’ argument that Plaintiff’s claims were outside the statutory period was unavailable due to the Defendants’ express promise not to assert that defense. Accordingly, the court reversed and remanded for further proceedings.

The primary materials for this post can be found on the DU Corporate Governance website.


Court Again Applies Garner in a Section 220 Records Request but Exact Reach of Section Remains Unclear

As discussed in an earlier post, the Delaware Court of Chancery in Indiana Electrical Workers Pension Trust Fund IBEW v. Wal-Mart Stores Inc. found that the Garner exception to attorney-client privilege applies to Section 220 records requests, meaning that attorney-client privilege will not necessarily prevent an order being granted requiring their production. In In Re Lululemon Athletica Inc. 220 Litigation, confirmed this approach but left the exact reach of the section unclear.

At issue were two sets of emails—some that Lululemon claimed were subject to attorney-client privilege and therefore need not be produced in response to a Section 220 request and somecontained in non-employee personal emails that Lululemon claimed were outside the reach of Section 220. 

With regard to the emails asserted to be privileged, the Court confirmed the finding of Indiana Electrical Workers Pension Trust Fund IBEW v. Wal-Mart Stores Inc. stating that those emails were

properly designated as privileged, and that privilege was not waived as to either  [but that] Plaintiffs have shown good cause to access those documents under the fiduciary exception as articulated in Garner and Wal-Mart.

Underlying the fiduciary exception is the importance of ―balanc[ing] the legitimate assertion of the attorney-client privilege by corporate fiduciaries in furtherance of full and frank communications with counsel on the one hand, with the right of a [stockholder] to discover what advice was given . . . when a breach of duty by those same fiduciaries is alleged.

Garner itself enumerated a number of factors that illustrate ―good cause to set aside privilege. The Supreme Court in Wal-Mart adopted and applied that analysis, identifying the following as relevant factors:

 [1] the number of shareholders and the percentage of stock they represent; [2] the bona fides of the shareholders; [3] the nature of the shareholders‘ claim and whether it is obviously colorable; [4] the apparent necessity or desirability of the shareholders having the information and the availability of it from other sources; [5] whether, if the shareholders‘ claim is of wrongful action by the corporation, it is of action criminal, or illegal but not criminal, or of doubtful legality; [6]whether the communication is of advice concerning the litigation itself; [7] the extent to which the communication is identified versus the extent to which the shareholders are blindly fishing; and [8] the risk of revelation of trade secrets or other information in whose confidentiality the corporation has an interest for independent reasons.

Thus, it is clear that under Delaware law, if plaintiffs satisfy the requirements of showing good cause, attorney-client privilege will not block the production of documents.

With regard to the emails of the non-employee directors, the Court was less definitive.  It left the door open for both plaintiffs and defendants to argue over whether such documents should be subject to a Section 220 request, noting that a court would have to conduct a careful review of the circumstances of the case, and in particular the facts relating to whether the sought-after documents were within the corporation’s possession, custody, or control.

It did not engage in that analysis in this case (and hence did not resolve whether such documents could be reached) because it found that non-employee emails were not necessary for plaintiff’s proper purpose (because plaintiffs could obtain the same information from other emails subject to a production order.)  Importantly however, the Court did not say that such emails could never be subject to a Section 220 production order and hence one can anticipate a future claim of this sort.  In fact, the Court was careful to note that the issue remains open

In Wal-Mart, this Court ordered that certain officers and directors who were designated as custodians in the Section 220 discovery had to search their personal devices and computers for responsive documents. (Defendant shall: . . . Collect and review data from the personal computers and devices of all Custodians.) Then -Chancellor Strine‘s ruling in Wal-Mart I did not announce a per se rule that directors‘ personal emails always are subject to discovery under Section 220; rather, it left open the possibility that, depending on Wal-Mart‘s policy for use of company information and documents on non-company devices, information residing in the directors‘ personal computers may or may not have to be produced.

Furthermore, while the Delaware Supreme Court affirmed then-Chancellor Strine‘s judgment en toto, the specific issue of whether Section 220 reaches directors‘ personal documents was not briefed or argued by the parties on appeal.

Given the importance of Section 220 actions, any open issue is bound to be the subject of future claims.  So where are we now?  We know that attorney-client privilege will not necessarily block the production of some documents, but are left unsure of whether non-employee documents can be obtained or not.  I trust we will see the issue played out at some point in the future.


PricewaterhouseCoopers International Limited Terminated as a Party to NQ Mobile, Inc. Securities Litigation Based on the Failure to Plead Facts Necessary to Sustain “control” and “culpable participation.”

In In re NQ Mobile, Inc. Securities Litigation, No. 13cv7608, 2015 BL 87523 (S.D.N.Y. 2013), the United States District Court for the Southern District of New York granted PricewaterhouseCoopers International Limited’s (“PwC International”) motion to dismiss for failure to state a claim after determining that Lead Plaintiffs, who filed on behalf of persons who acquired American Depository Shares of NQ Mobile, Inc. (“NQ”), failed to plead facts necessary to sustain “control” and “culpable participation” by PwC International under Section 20(a) of the Securities Exchange Act of 1934 (the “Act”). 

Lead Plaintiffs brought a federal securities class action against Defendants NQ, various present and former NQ executives, NQ’s auditors PricewaterhouseCoopers Zhong Tiang (“PwC China”), and PwC International, the coordinating entity of PwC member firms. In the complaint, Lead Plaintiffs alleged that PwC International acted as a “controlling person” based on an underlying violation by PwC China of Section 10(b) and Rule 10b-5 of the Act. PwC International moved to dismiss under FRCP 12(b)(6).   

NQ, a Chinese company specializing in security and privacy-related mobile internet services, allegedly overstated its performance and concealed adverse facts about the business in public filings. Lead Plaintiffs alleged PwC China “issued unqualified audit opinions on NQ’s year-end financial statements for FY 2011 and 2012,” and PwC International acted as a “controlling person.”

To establish a prima facie case of control person liability, a plaintiff must show a primary violation, control of the perpetrator by the defendant, and culpable participation in the fraud in some meaningful way. “Control” is established by alleging the defendant possessed the power to direct the management and policies of the controlled person. “Culpable participation” is established by alleging particularized facts of the controlling person’s conscious misbehavior or recklessness.

The court found Lead Plaintiffs’ allegations conclusory, determining that control under Section 20(a) was not satisfied by a coordinating entity merely setting “professional standards and principles” under which the individual offices must operate. Furthermore, because PwC International did not provide any actual professional services for third parties, and the control person must have had actual control over the transaction in question, Lead Plaintiffs did not sufficiently plead that PwC International exerted actual control over the 2011 and 2012 NQ audits.

Lastly, after considering contrary district court opinions, the court reasoned a plaintiff must allege “culpable participation” and plead that element with particularity. Under these standards, the court found Lead Plaintiffs did neither because they failed to allege facts showing direct participation by PwC International in the NQ audits or that “PwC International acted with a culpable state of mind.”

Because the court found Lead Plaintiffs failed to plead facts necessary to sustain the elements of “control” and “culpable participation,” the court held Lead Plaintiffs failed to plead PwC International acted as a “controlling person.” Therefore, the court granted the motion to dismiss the Section 20(a) claim and terminated PwC International as a party.

Primary materials for this case may be found on the DU Corporate Governance website.


ATP, Chevron and the Inevitable Consequences: Bylaws Restricting Shareholder Proposals (Part 4)

This bylaw applies to director nominations and proposals to be considered at an annual meeting of stockholders.  The relationship between the bylaw and Rule 14a-8 is not entirely clear.  To the extent that the 1% threshold seeks to change the eligibility under Rule 14a-8 for the submission of proposals, it is presumably preempted.  

The bylaw does not, however, specifically reference Rule 14a-8.  Moreover, a description of the impact of the bylaw appears in a provision that describes proposals "that a stockholder intends to present to stockholders other than by inclusion in our proxy statement for the 2016 annual meeting".   The provision does not, therefore, appear to change the eligibility of shareholders to submit proposals under Rule 14a-8 but does will affect what shareholders can do at a meeting.

Of course, the restriction may provide a basis for arguing that proposals submitted by shareholders owning less than 1% can be excluded under Rule 14a-8. The Rule permits the exclusion of proposals that are "[i]mproper under state law." 17 CFR 240.14a-8(c)(1). The argument would be that a proposal is improper because the shareholder lacks the authority to make the proposal.  Moreover, Rule 14a-8 requires that the shareholder (or a representative) "attend the meeting to present the proposal."  Under the bylaw, however, the shareholder would presumably be prohibited from presenting a proposal that he or she had no authority to make.  

Even if the proposal remained in the proxy statement under Rule 14a-8, there is room to argue that the votes need not be counted since the shareholder lacks the authority to make the proposal.  Companies are, however, required to disclose voting rules in a Form 8-K for "any matter [that] was submitted to a vote of security holders".  See Item 5.07 of Form 8-K.  This suggests that matters submitted to shareholders under Rule 14a-8 must be reported.

Despite the uncertain relationship between the bylaw and Rule 14a-8 and issues of legality, the staff does not appear to have made significant comments.  The proposal was prefiled.  There are differences between the draft and the final version but they are modest and do not look like the types of changes that would arise from a close staff inspection.   

For a recent piece on Fee Shifting Bylaws and the approach taken by the Delaware courts to bylaws, see The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws)


ATP, Chevron and the Inevitable Consequences: Bylaws Restricting Shareholder Proposals (Part 3)

There are a number of things to observe with respect to the approach taken by Ashford.  First, issues exist with the company's authority to adopt the bylaw.    

Maryland allows bylaws that regulate the management and affairs of the corporation.  See MD Code Ann. § 2-110 (a) ("The bylaws may contain any provisions not inconsistent with law or the charter of the corporation for the regulation and management of the affairs of the corporation.").  The provision, therefore, says nothing about the right to impose limits on shareholders.  Limits are, however, expressly permitted in the articles.  MD Code Ann. § 2-104(b)(1) ("Any provision not inconsistent with law that defines, limits, or regulates the powers of the corporation, its directors and stockholders").    

Second, management controls a sizeable block of stock that can influence the approval process.  The bylaw requires only the support of a majority of the votes cast.  See Proxy Statement, at 47 ("Approval of the Proposed Bylaw Amendment requires the affirmative vote of the holders of a majority of all of the votes cast at the annual meeting.").  Management, however, owns almost 24% of the shares.  While there are other large shareholders, they are mostly large mutual funds.

Third, the proposed bylaw would eliminate proposals by all small shareholders.  To the extent this suggests that proposals by small shareholders (including unions) are unlikely to attract widespread support, the practice at Ashford does not bear this out.  In 2014, UNITE, a shareholder owning a small number of shares, submitted a proposal that urged "the Board of Directors to take all steps necessary under applicable law to cause the Company to opt out of Maryland's Unsolicited Takeover Act".  

The proxy statement pointed out the small size of UNITE's holdings.  Id. (noting that the proposal came from a shareholder holding "153 shares of common stock, which represents 0.0006% of the total shares outstanding on the record date.").  The company recommended that shareholders vote against the proposal.  Nonetheless, the proposal passed overwhemlingly, receiving 12,318,303 votes for and 6,857,642 against.

Presumably had the 1% bylaw for shareholder proposals been in place, this proposal would have been excluded.

For a recent piece on Fee Shifting Bylaws and the approach taken by the Delaware courts to bylaws, see The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws)


Name and Address of Beneficial Owner
 Amount and
Nature of
 Percent of

Ashford Hospitality Limited Partnership

    4,977,853     17.18 %

Monty J. Bennett

    1,308,207     5.23 %

David A. Brooks

    367,854     1.51 %

Douglas A. Kessler

    301,359     1.24 %

Mark L. Nunneley

    177,642     *  

Jeremy J. Welter

    74,380     *  

Deric S. Eubanks

    40,206     *  

W. Michael Murphy

    16,360     *  

Matthew D. Rinaldi

    7,200     *  

Stefani D. Carter

    6,400     *  

Curtis B. McWilliams

    6,800     *  

Andrew L. Strong

    6,400     *  

All directors and executive officers as a group (12 persons)

    7,290,590     23.68 %

Denotes less than 1.0% 

ATP, Chevron and the Inevitable Consequences: Bylaws Restricting Shareholder Proposals (Part 2)

We are discussing a bylaw submitted for shareholder approval at Ashford Hospitality Prime, Inc. that would restrict shareholder proposals to shareholders owning 1% of the outstanding shares for at least a year.  The proxy statement with the proposed bylaw is here.  

The company viewed the restriction as necessary given that some proposals could be "expensive and disruptive to the company's normal business operations."  The company mentioned that "some stockholders in the past may have abused the Stockholder Proposal process by submitting Stockholder Proposals with the intent of interfering with the board's management of the business and affairs of the company."  Imposing the requirements would " help ensure against frivolous, self-interested proposals which tend to abuse the corporate governance process."

The company's concern, however, appeared to be the activities of a single union.  As the proxy statement asserted:     

  • a large labor union has targeted the company, Ashford Trust and Ashford Inc. with stockholder proposals, and at Ashford Trust, a solicitation of written requests for a special meeting of Ashford Trust's stockholders, in what our board and the boards of Ashford Trust and Ashford Inc. believe is an attempt by this stockholder to assert its influence in a labor dispute at one of Ashford Trust's hotels. Our board believes that the proposals submitted by this union have motivations other than the best interests of the company's stockholders in mind. Our board believes the union's true motive is to further its own personal interests, at considerable expense to the company, and to the detriment of its stockholders.

The company indicated a belief that the union engaged in a practice with other companies of using proposals not to "enhance corporate governance practices" but to "gain leverage in labor negotiations." 

  • The union has a long history of using a nominal holding in company stock in what we believe is an effort to manipulate corporate governance for its bargaining advantage in other matters and so as to have a basis to provoke governance fights with corporate boards and management. Over the past decade, this union has submitted at least 32 stockholder proposals (not counting the proposals sent to the company, Ashford Trust and Ashford Inc.) to companies in the financial, hospitality, gaming and food sectors, the very sectors in which the union attempts to organize workers. We believe that this union holds negligible shares in various public companies, not for investment purposes, but for the sole purpose of being able to make stockholder proposals, which require significant management attention and corporate resources and cause management to focus on matters other than the operation of the business. Historically, this union has acquired shares in, and submitted stockholder proposals with respect to, public companies in which it holds a negligible economic interest but in which union activity by such public companies would have a significant economic impact on the union and its members. Based on these past actions, we believe that this union views the Stockholder Proposal process as a means to further its own goals and gain leverage in labor negotiations, rather than to enhance corporate governance practices. 

The proxy statement included a number of examples of the union submitting unsuccessful proposals to the company.  

  • On several prior occasions, the union has tried this same tactic with Ashford Trust. The union has attempted to pass proposals twice that, if passed, would affect Ashford Trust's corporate governance. For each of these proposals, Ashford Trust has had to expend resources and efforts on correcting misstatements by the union and ensuring that its stockholders were fully informed of the ramifications of the union's proposals. For example, in May of 2009, the union attempted to separate the roles of the Ashford Trust's Chairman and Chief Executive Officer, which Ashford Trust's board had determined was in the best interests of its company to combine the roles. This proposal was voted down by Ashford Trust's stockholders. Undeterred, four years later, in May of 2013, the union again sought to separate the roles of Ashford Trust's Chairman and Chief Executive Officer positions. Ashford Trust's stockholders voted this proposal down, too. That same year, Ashford Trust requested permission from the SEC to omit two of the union's other proposals from its 2013 proxy materials. In both instances, the SEC determined that it would not recommend enforcement action if Ashford Trust omitted the proposals. It seems clear that these sorts of proposals are not submitted with a view towards protecting or maximizing return on the union's nominal investment in any of Ashford Trust, Ashford Inc. or our company, or that of other stockholders, but rather to further the union's goals in labor negotiations.

The "substantial costs" associated with the proposals included the expending of "significant resources on protracted litigation".    

  • This year alone, the union has submitted nine separate proposals to the company, Ashford Trust and Ashford Inc. This abuse, instead of advancing the collective interests of the company's stockholders, needlessly wastes company resources. Our company, Ashford Trust and Ashford Inc. have incurred substantial costs in defending against these frivolous proposals. In addition, our board, management team and other employees have spent countless hours of their valuable time dealing with these proposals that could have otherwise been spent advancing the interests of the company and all of its stockholders. For example, Ashford Trust is currently expending significant resources on protracted litigation in Maryland state court to defend against seven improper proposals the union is attempting to raise at Ashford Trust's 2015 annual meeting of stockholders. These proposals were not brought properly or timely under Ashford Trust's bylaws and many of them simply attempt to usurp the responsibilities of Ashford Trust's management team and board of directors' obligations to manage the business and affairs of the company. We believe it is clear from these proposals that the true intent of the union is to harass Ashford Trust in an effort to achieve leverage in an unrelated labor dispute. It is this sort of abuse and waste of company resources that we wish to eliminate by approval of the Proposed Bylaw Amendment. 

The interaction with the union apparently convinced the company that no small shareholder should be allowed to submit proposals.  See Proxy Statement ("The board believes that a stockholder without a meaningful stake in the company should not be entitled to submit Stockholder Proposals, particularly, as we have seen historically, when those proposals are submitted to advance the interests of such stockholders, interests which may not be shared by the majority of stockholders of the company. The board strongly believes that stockholders who have a meaningful and long-term interest in the company are the stockholders that submit proposals more likely to be in the best interest of the company and its stockholders. Accordingly, those are the stockholders that should be entitled to submit Stockholder Proposals.").

For a recent piece on Fee Shifting Bylaws and the approach taken by the Delaware courts to bylaws, see The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws)


ATP, Chevron and the Inevitable Consequences: Bylaws Restricting Shareholder Proposals (Part 1)

Delaware is a mangement friendly jurisdiction and the cases arising in the jurisdiction largely reflect this approach.  This is particularly true with respect to the recent spate of decisions governing bylaws.  

Chevron upheld forum selection bylaws.  ATP, in the context of a non-stock company, upheld a fee shifting bylaw. In both cases, the courts allowed management to adopt bylaws for the first time that restricted shareholder rights in the context of judicial recourse.  The language of the decision was excessively broad, unmooring bylaws from any statutory language of the DGCL or the common law.    

It was only a question of time before the broad language would be used in other ways in order to limit shareholder rights.  Moreover, given Delaware's influence, it was also likely that the authority would be inovoked corporations formed in other states. 

This can be seen with respect to the proposal submitted by management of Ashford Hospitality Prime, Inc., a Maryland corporation.  A proposal in the proxy statement, if adopted, would limit shareholder proposals to shareholders who own beneficially and of record at least 1% of the outstanding shares of the company.  The proposed bylaw would provide: 

  • (1)   Nominations of individuals for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who: was a stockholder of record (a) has beneficially owned at least 1% of the outstanding shares of common stock of the Corporation (the "Required Shares") continuously for at least one year both at the time of giving of notice by the stockholder as provided for in this Section 11(a) andthrough and including at the time of the annual meeting (including any adjournment or postponement thereof)(b) who is a stockholder of record of the Corporation both at the time of giving of notice as provided for in this Section 11(a) and as of the time of the annual meeting (including any adjournment or postponement thereof), and (c) is entitled to vote at the meeting in the election of each individual so nominated or on any such other business and who has complied with this Section 11(a). 

The provision, therefore, imposes a significant threshold.   According to CII, the 1% threshold would require "about a $10 million position." In addition, however, the provision appears to impose procedural hurdles.  The language apparently disqualifies any street name owner from making proposals or nominating directors unless they hold the shares as record owners.  Street name owners would therefore have to withdraw shares from any nominee account (usually with a broker) and obtain a certificate.  Moreover, the provision does not, apparently, allow shareholders to aggregate their interests but instead allows only shareholders owning 1% or more of the shares to submit proposals.  The provision, therefore, effectively eliminates the right of small shareholders to make proposals.  

For a recent piece on Fee Shifting Bylaws and the approach taken by the Delaware courts to bylaws, see The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws).  


The Direction of Delaware Law

The Online Law Review for the University of Denver will, for the third time, publish an entire issue of student papers on a common topic in the area of corporate law and governance.  This one examines "The Direction of Delaware Law."  Past issues have involved discussions of the JOBS Act and proxy plumbing issues.  The third issue for the first time looks at topics under Delaware law. 

The issue serves a number of purposes.  It is a learning exercise for students, both in developing strong writing skills and learning to thoroughly research a topic.  It provides online content for the Law Review, a place where law reviews have been struggling.  See Essay: Law Faculty Blogs and Disruptive Innovation.  And finally, it provides a mechanism for scholarship that can be quickly published.  The DU Law Review published this issue approximately six weeks after the last paper was completed.  

In this issue, students have explored in pithy but thorough papers assorted issues under Delaware law.  The papers address a myriad of subjects, not all of which can be fairly characterized as management friendly.  In this issue: 

Robin Alexander has written an article on director independence, particularly the cases that address the impact of business and personal relationships.  See Director Independence and the Impact of Business and Personal Relationships.

Riley J. Combelic has written an article that focuses on the obligations of the board of directors in connection with the selection and oversight of financial advisors.  See Rural Metro Corp and Ensuring Fairness in a Fairness Opinion

Charles Gass has looked at the development of the doctrine of waste, the safety value that allows actions even for board decisions that fall within the business judgment rule.  See Outer Limits:  Fiduciary Duties and the Doctrine of Waste.

Jennifer McLellan has written an article on appraisal rights and the multiple tests used by the courts in assessing share valuation.  See An Appraisal of Appraisal Rights in Delaware

Gabrielle Palmer has examined the right of shareholders to inspect corporate records in the context of socially responsible activity.  See Stockholder Inspection Rights and an “Incredible” Basis:  Seeking Disclosure Related to Corporate Social Responsibility

Patrick J. Rohl  has tackled the development of forum selection bylaws.  See The Reassertion of the Primacy of Delaware and Forum Selection Bylaws


Delaware Chancery Court Clarifies Limits of §220 Record Confidentiality

In a December 31, 2014 letter, the Delaware Chancery Court clarified that financial information some previously ordered produced by Winmill & Co. Incorporated (“Winmill”) was subject to confidentiality protection. The Ravenswood Inv. Co. v. Winmill & Co., C.A. No. 7048-VCN, (Del. Ch. Dec. 31, 2014). Specifically, the court concluded the financial statements produced by Winmill would remain confidential for one year following the production to Ravenswood Investment Co., L.P. (“Ravenswood”).

In Ravenswood Investment Co., L.P. v. Winmill & Co., C.A. No. 7048-VCN, 2014 BL 152126 (Del. Ch. May 30, 2014), Ravenswood initiated the suit seeking access to requested books, records, and financial statements pursuant to 8 Del. C. §220. Winmill proposed a trading restriction that would prohibit Ravenswood from trading in Winmill stock as a condition of inspection. The court, however, declined to impose the restriction, finding that the proposal was contrary to Delaware law and stockholders’ fundamental rights. The court held that Ravenswood did not meet the clear evidence standard of bad faith and, as a result, each party would bear the cost of its own attorneys’ fees.

In producing information, Winmill proposed the information produced remain confidential until it (a) became publicly available, (b) one year after Ravenswood received the documents, or (c) four years from the date of the document. Ravenswood objected to this proposal, wanting documents older than one year to be free from confidentiality restrictions. Winmill requested that Ravenswood’s access to books and records be conditioned upon an indemnification undertaking. Ravenswood objected and the matter returned to the Chancery Court.

The court concluded some confidentiality protection was appropriate. While difficult to establish the “correct” moment in time to treat information as public, the court found one year after the production to Ravenswood was a reasonable amount of time. Additionally, the court clarified that financial information did not warrant confidential treatment after three years. The court concluded that to add an indemnification condition to a right provided by Section 220 would unduly impair a shareholder’s rights.

The primary materials for this case may be found on the DU Corporate Governance website


Bourbonnais v. Ameriprise Fin. Servs. Inc.: Securities Fraud Investigation 

In Bourbonnais v. Ameriprise Financial Services., Inc., No. 14-C-966, 2015 BL 47543 (E.D. Wis. Feb. 24, 2015), Thomas and Donna Tesch and William Bourbonnais (“Plaintiffs”) filed a class action suit against financial advisor, Paul Renard, SII Investments, Inc., and Ameriprise Financial Services, Inc. (together, the “Defendants”), alleging securities fraud. Plaintiffs asserted that the Defendants violated Section10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.  Plaintiffs also contended the Defendants violated the Wisconsin Uniform Securities Law, the Wisconsin Organized Crime Control Act, and acted with negligence.

According to the complaint, Renard was a registered broker with Ameriprise Financial Services and SII Investments from 1998 until 2013. He allegedly sold Plaintiffs non-traditional exchange-traded funds (“ETFs”).  Specifically, the complaint asserted that Renard sold multiple leveraged and inverse ETFs in approximately $100,000 increments and that that the Plaintiffs held them for anywhere between two and four years.  Ultimately, the Plaintiffs lost most of their investments in the instruments.

Non-traditional ETFs “are leveraged or inverse ETFs that seek to deliver multiples of the daily performance of the index or benchmark they track.” According to Plaintiffs, these securities generally have an investment objective period of a single day and allegedly are not suitable for retail investors “who plan to hold them for longer than one trading session, particularly in volatile markets.”   

The complaint alleged Renard had no legal justification for recommending the ETFs and that he violated Ameriprise policy by soliciting the investment. Moreover, Renard allegedly testified that Ameriprise employees directed him to solicit and then report the transaction as unsolicited. Plaintiffs also asserted that SII Investments failed to oversee Renard and knew that his customers were losing money. The plaintiff class termed themselves “ordinary people” who sought low risk accounts and that the brokers involved selected accounts that were not suitable for retail investors. Accordingly, the complaint alleged that SII failed to establish a system to properly monitor and advise the plaintiffs of the suitability of their accounts.

The Defendants moved to dismiss for failure to state a claim, to strike the class, and to arbitrate. They asserted that the plaintiffs failed to plead their claims with the particularity required for fraud charges under Rule 9(b) and the Private Securities Litigation Reform Act of 1995.

Federal rule of Civil Procedure 12(b)(6) requires the court to accept well-pleaded factual allegations.  Moreover, Rule (8)(a) requires the complaint to include a short statement showing entitlement to relief and Rule 9(b) requires claims of fraud to be pled with particularity. Under the Private Securities Litigation Reform Act, the complaint must specify each alleged misleading statement and provide an explanation of how it is misleading.  Furthermore it requires the plaintiff to “state with particularity” facts that provide strong support that the defendant purposely committed fraud.

The court granted the Defendant’s motion to dismiss with leave for Plaintiffs to file an amended complaint. The court found Plaintiffs failed to state sufficiently particularized allegations.  See Id. (“In truth, Plaintiffs do not really dispute the defendants' assertion that the complaint fails to identify individual omissions or misrepresentations with particularity.”). 

The court, however, indicated the belief that Plaintiff would be able to meet this burden with respect to at least some of the Defendants.  Id. (“It appears clear that Plaintiffs will be able to state a § 10(b) claim with the required particularity directly against at least Renard and perhaps under principles of respondeat superior or apparent authority against Ameriprise and SII.”).   

The primary materials for this case can be found on the DU Corporate Governance Site


SEC v. Tavella: Court Grants SEC’s Motion for Default Judgment And Gives SEC Opportunity to Supplement Contested Remedies

In SEC v. Tavella, No. 13 Civ. 4609 (NRB), 2015 BL 1982 (S.D.N.Y. Jan. 06, 2015), the United States District Court for the Southern District of New York granted the motion by the Securities and Exchange Commission (SEC) for default judgment against eight Argentinians for failure to respond to an SEC action for numerous securities violations and granted the SEC the opportunity to supplement its remedial request for disgorgement of prejudgment interest.

According to the allegations in the complaint, the eight Argentinian defendants (“Defendants”) were involved in numerous violations of American securities law. The securities in question were distributed by Biozoom (formerly known as Entertainment Arts), a penny stock company traded on the OTCBB. Biozoom represented its stock was divided among 3 corporate officers and 34 outside investors. In May 2009, Medford Financial purchased all of the shares. Biozoom, however, disclosed only the corporate officers had sold and that outside investors maintained their investment in Biozoom. In October 2012, Medford Financial announced the sale of 39,600,000 to Le Mond Capital, but actually sold 59,730,000 shares. 

Between January and May 2013, according to the SEC, Defendants opened accounts at U.S. broker-dealers making combined deposits totaling 15,685,000 shares. Defendants represented that the shares were purchased from the original 34 outside investors or persons who had acquired shares from these investors when in fact those shares had been conveyed to Medford Financial years earlier. Eventually, “Biozoom and other entities began to tout that Biozoom had ‘created the world's first portable, handheld consumer device' to instantly and non-invasively measure certain biomarkers’” and as a result of the campaign, shares underwent a “dramatic increase” and eventually “peaked at over $4 per share.” 

In May 2013, Defendants allegedly began selling shares of Biozoom in the public market. In June 2013, a number of the Defendants sought to wire proceeds to foreign accounts. Shortly thereafter, the SEC issued an order to suspend trading of Biozoom securities.

On July 3, 2013, the SEC commenced this action, seeking a temporary restraining order and a freeze on Defendants’ Biozoom shares and sales proceeds. Defendants retained two separate American attorneys, both of whom withdrew before the filing of the motion for default judgment. Defendants failed to respond to the complaint despite multiple extensions. The clerk of the court then certified Defendants’ default under FRCP 55(a), citing prolonged inaction.   

The SEC submitted a request for four separate remedies: permanent injunction, disgorgement of illegal proceeds, civil penalties, and disgorgement of prejudgment interest. The court approved a permanent injunction finding Defendants possessed a “substantial likelihood of future violations of illegal securities conduct.” The court agreed Defendants’ misrepresentations demonstrated scienter and that their violations demonstrated systematic wrongdoing. The court also approved the request for disgorgement of illegal proceeds. The court did, however, amend the amounts to be disgorged for four of the eight defendants due to calculation errors.

Civil penalties were also awarded, but the court reduced the amounts sought by the SEC. The court noted that, without more information, the role of each Defendant in the Biozoom scheme was left unclear. The court reduced penalties to $160,000 per Defendant, citing inadequate evidence of culpability necessary to  warrant penalties as high as the requested $2 to $6.2 million per Defendant.

The last remedy sought was disgorgement of prejudgment interest. The court had the discretion to require disgorgement of prejudgment interest in order to deprive defendants of the benefit of holding their illicit gains over time. When utilizing this remedy, courts generally use the IRS underpayment rate to calculate the applicable interest rate.

Because the funds had been subject to a freeze order, Defendants were already denied access to those assets. The SEC did not assert facts indicating Defendants had violated the freeze order in a manner that provided improper access to the proceeds.  As a result, the court deferred any decision on the imposition of prejudgment interest until after the Agency had “an opportunity to establish the actual amount of the returns, if any, that have accumulated on the frozen assets" or to show the Defendants had violated the asset freeze.  

The primary materials for this case may be found on the DU Corporate Governance website. 


Two Cases with Possible Implications for Corporate By-Laws

Two recent cases in Delaware has possible implications for corporate by-laws and the how corporations attempt to control both the type of proceedings parties must agree to and the forum in which parties must proceed.

The Delaware Supreme Court just added more ammunition to those favoring arbitration by applying for the first time the McWane doctrine (also known as the first-filed rule and articulated in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970)) to dismiss an action because an arbitration proceeding had been earlier-filed.  In LG Electronics, Inc. v. InterDigital Communications, Inc., No. 475, 2014 (Del. Supr., April 14, 2015).  The McWane doctrine states that “litigation should be confined to the forum in which it is first commenced, and a defendant should not be permitted to defeat the plaintiff’s choice of forum in a pending suit by commencing litigation involving the same cause of action in another jurisdiction of its own choosing.‟

In LG Electronics, Chancellor Laster held that the Court could exercise its discretion under McWane “freely in favor of the stay when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.”

The facts were somewhat unusual as there was no certainty as to whether the parties had actually agreed to arbitrate.  This ambiguity allowed the Court to find that the case presented “the rare instance when both the arbitral tribunal and the court have jurisdiction such that McWane could apply.”

LG argued that McWane could not apply because an arbitration proceed did not constitute a “prior action” under McWane –and in fact, no Delaware court had ever applied McWane to dismiss a lawsuit in favor of first-filed arbitration. The Court disagreed, finding that arbitral tribunal could provide “prompt and complete justice,” and noting that the interests of justice are better served if the tribunal deciding the overall matter in the first instance determines procedural disputes like the instant one. “Allowing parties to seek judicial review every time an arbitrator rules on—or, as in this case, declines to rule on—a procedural issue would frustrate the arbitral process.”

The decision in LG Electronics should be read together with the Chancery Court’s opinion in UtiliPath, LLC v. Hayes, Del. Ch., No. 9922-VCP, 4/15/15) finding that McWane does not apply if the parties agree in their contract that Delaware courts have jurisdiction over the dispute pursuant to a non-exclusive forum selection clause.  The clause at issue read


In UtiliPath there was a prior-pending action in the Eastern District of Pennsylvania when an action was filed in Delaware.  In light of above forum-selection language, Vice Chancellor Donald F. Parsons Jr. found that he was precluded from dismissing the lawsuit on McWane grounds because the parties clearly and unambiguously agreed that jurisdiction and venue would properly lie in the chancery court pursuant to a non-exclusive forum selection clause in the redemption agreement.

Consider the impact of these decisions taken together and what they may mean for corporate by-laws. Forum selection by-laws are receiving strong support in both Delaware courts and its legislature.  Corporations will likely now seek to adopt by-laws that require at least non-exclusive Delaware forum selection.  If they do, under Utilipath, first-filing in another jurisdiction will not prevent a Delaware filing.  Further, the strong support of arbitration shown by both the Delaware legislature in its passing of the Rapid Arbitration Act and the Delaware courts in LG Electronics suggests that by-laws requiring arbitration stand a strong chance of success –particularly given Boilermakers Local 154 Retirement Fund v. Chevron Corp., discussed here and here.


Special Projects Segment: The Proposed Crowdfunding Rules for Non-Accredited Investors and the Potential Associated Costs for Small Issuers

We are discussing possible rulemaking for equity crowdfunding under the JOBS Act.

One of the overall issues with the Proposed Crowdfunding Rules before the Securities and Exchange Commission (“SEC”) is the potential cost to those small issuers who might seek to take advantage of raising money through this type of offering. In particular, the proposed financial statement disclosures required pursuant to § 227.201(t) may cause such an offering to be cost prohibitive to many small issuers.

Under § 227.201(t), if the issuer’s aggregated offerings pursuant to § 4(a)(6) of the Securities Act of 1933 during the preceding 12 month period: (i) are less than or equal to $100,000, then the issuer’s principal executive officer must certify that the financial statements are true and complete in all material respects; (ii) exceed $100,000 but are $500,000 or less, then the issuer’s financial statements must be reviewed by an independent public accountant; and (iii) exceed $500,000, then the issuer’s financial statements must be audited by an independent public accountant. Under all three scenarios, the issuer must provide four financial statements: balance sheet, income statement, statement of cash flows, and statement of changes in stockholder’s equity. The issuer must provide those financial statements for the two most recent fiscal years or since the issuer’s inception. Additionally, the financial statements must include related footnotes and be prepared in accordance with Generally Accepted Accounting Principles (“GAAP”).

For an issuer that plans to raise $100,000 or less, the requirement that the principal executive officer certifies the financial statements as true and correct does not create an added expense. However, once an issuer decides to raise more than $100,000, additional costs are imminent. According to a 2014 survey by the Financial Executives Research Foundation, the average audit cost for a private company was $174,858 in 2013, an increase of 3.7% from 2012. Crowdfund, CPA, a company that specializes in helping issuers find a CPA firm that specializes in crowdfunding offerings and can provide the required “review” or “audit” service, estimates that a large public accounting firm charges a minimum of $15,000 for an audit, but the audit fee range for a mid-sized company is $50,000-$150,000. Crowfund, CPA, also estimates that the minimum cost for a financial statement review is $5,000.

While it is difficult to pinpoint the actual cost of a financial statement review or audit because each issuer, its business, and financial condition is unique, what is abundantly clear is that requiring an issuer to undertake a review or an audit under the Proposed Crowdfunding Rules could be quite cost prohibitive. Requiring a small issuer to spend a minimum of $5,000 for a financial statement review before it can seek to raise a minimum of $100,001 and up to a maximum of $500,000 is a significant upfront investment. Even more concerning is the potential up front cost of an audit for an issuer seeking to raise more than $500,000. These potential costs may well prevent many small issuers from taking advantage of the crowdfunding rules – rules that were proposed to grant such issuers easier access to the capital markets. 


BATS Exchange Open Letter: Calling for Lower Access Fees, More Disclosure

In early January, BATS Global Markets, Inc. (“BATS”), the third largest U.S. equity market operating four equities exchanges, suggested significant changes to the U.S. market structure in an open letter to the U.S. securities industry (“the industry”). BATS also indicated that it would petition the Securities and Exchange Commission (“SEC”) to implement its proposed changes. 

BATS suggested open and constructive dialog about potential market structure between industry and the SEC as a key factor in improving the U.S. equity market for all investors, while still providing for appropriate competition among markets and market participants. BATS also noted the growing concern within the industry regarding the amount of trading done away from the displayed exchanges and the incentives brokers received for routing orders to one destination over another.  

Some market professionals have advocated for a “grand compromise” that would impose dramatic regulatory change in the form of a trade-at prohibition. This would force order flow to the exchanges in order to decrease access fees and ban exchange rebates for market participants. BATS believes this compromise would ultimately be harmful and more expensive to end investors. As the letter states:

BATS believes that a “grand compromise” between industry professionals would ultimately be harmful to end investors. While exchanges, including BATS, would stand to benefit from increased volume directed to them, and brokers would benefit from a reduction in exchange fees, investors will likely pay more both in the form of potentially wider spreads as well as fewer and inferior execution choices resulting from restrictions on competition.

As an alternative, BATS advocated for regulatory changes in the following areas: Access Fees, Order Handling Transparency, Small Trading Centers, and a revision to Regulation NMS. 

BATS favors a reduction in the access fee currently imposed in Regulation NMS. The Exchange proposed a reduction of close to 80% for certain liquid securities. BATS recommended that any liquidity rebate be less for highly liquid securities. It is proposed an access fee reduction for the most liquid securities from 30 cents per 100 shares ($0.0030) down to 5 cents per 100 shares ($0.0005). For less liquid securities, access fee caps would be tiered based on a security’s characteristics. BATS argued that this approach would preserve the benefits of the current market structure while providing more opportunities to improve the trading experience for illiquid securities. Additionally, the access fee reduction in the most liquid securities would reduce incentives to route away from the exchanges. 

To better inform investors with respect to their brokers’ order handling decisions, BATS proposed that all Alternative Trading Systems (“ATSs”) should be required to provide customers with their rules of operation. This disclosure would include full descriptions of order types, pricing tiers, all forms of order-routing logic, and transparent participant eligibility guidelines. Using this information, institutional investors could better determine if a venue and/or order routing product met their trading needs. These transparency initiatives, in combination with the access fee reductions discussed above, provided a more “elegant” solution to bringing volume back to the exchanges than the “grand compromise.”

According to BATS, all exchanges and ATSs, regardless of their size, have a significant competitive advantage by virtue of the “trade through rule.” The trade through rule, under Regulation NMS, requires all market participants to do business with all execution venues that display orders to the market. BATS argues that while in some cases the marginal operating cost for a “new” exchange is near zero, market participants may incur substantial costs when trying to connect to these small venues. To combat this problem, BATS proposed a revision to Regulation NMS that provided until an exchange or other currently-protected market center achieved greater than 1% share of consolidated average daily trading volume in any rolling three-month period: (1) it should no longer be protected under the trade through rule; and (2) it should not share in/receive any NMS plan market data revenue. 

The result of implementing these provisions would serve two purposes. First, client costs in connecting to small exchanges and ATSs would potentially be reduced. This would give the small exchanges and ATSs flexibility to route around them if they chose to and also continue to protect displayed limit orders for the larger venues. Second, market data revenue that may be the basis for the continued operation of marginal venues would be taken away. 

The ultimate goal of BATS’ letter is to generate feedback from the industry as well as garner support of its proposals before sending a petition of the proposed changes to the SEC.  

The primary materials for this post are available on the DU Corporate Governance Website.

December comment letter:

Jan. 6: 

Rulemaking petition:


Court Declines to Dismiss Allegations of Material Misstatements and Omissions Surrounding Company’s IPO

In In re Fairway Group Holding Corp. Securities Litigation, 2015 BL 12688 (S.D.N.Y. Jan. 20, 2015), the District Court for the Southern District of New York granted in part and denied in part the motions to dismiss the complaint brought by Jacksonville Police and Fire Pension’s (“Plaintiff”) against Fairway Group Holding Corp. (“Fairway”), Sterling Investment Partners, et al. (“Sterling”), certain directors and officers of Fairway, and the syndicate of underwriters involved with Fairway’s initial public offering (collectively, the “Defendants”) alleging securities fraud.   The complaint specifically alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 in connection with Fairway’s initial public offering (“IPO”).

According to the allegations in the complaint, Defendants in the period preceding the IPO made certain representations about Fairway’s business in the grocery store industry, specifically regarding new store growth, same store sales growth, and deferred tax assets reported in the financial statements. Plaintiff alleged that the statements were misleading and that it relied upon the statements in purchasing stock after the IPO.   

Plaintiffs alleged that Fairway’s statements about its “proven ability to replicate its store model” and its “scalable infrastructure” indicated Fairway’s ability to continue its new store growth strategy, which failed to be true. Plaintiffs further alleged that statements about the “disruption” to sales caused by Hurricane Sandy omitted that in actuality, sales were boosted by the storm. Lastly, Fairway stated beliefs about future taxable income that were alleged to be false.  Defendants argued Plaintiff did not adequately plead a material misstatement or omission, scienter, or loss causation.

A prima facie claim under Rule 10b-5 requires allegations of “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” The Private Securities Litigation Reform Act (“PLSRA”) requires a securities fraud complaint to specify each statement alleged to have been misleading, the reasons such statements were misleading, and include the information on which such belief was formed.

Scienter refers to the required state of mind. The PLSRA requires the complaint to allege facts giving rise to a strong inference of scienter.  Plaintiff can meet the pleading standard by showing that the Defendant had the motive and opportunity to commit the alleged act or by showing  “circumstantial evidence of conscious misbehavior or recklessness.”

The court found that the IPO constituted a sufficient motive to commit fraud. Id. (“Plaintiff alleges that in misrepresenting and concealing the state of Fairway's business, defendants were able to raise millions of dollars in the offering, nearly recouping their entire $150 million investment in Fairway, "that they otherwise would not have been able to if they presented a more complete and accurate financial snapshot." ).  Further, because Defendants were officers and directors of the company with access to all the key company information, the court inferred they had ample opportunity to commit fraud.   

Additionally, the court found loss causation was inferred due to the drop in share prices following Plaintiff’s purchases of Fairway stock and the Defendants’ correction to their previous false statements. Plaintiff, therefore, adequately alleged violations of Rule 10b-5.

Section 20(a) liability arises where the defendant controls the person who commits a fraudulent act and is therefore responsible “in some meaningful sense.” Plaintiff’s claim under this section survived as to all Defendants except for Sterling Advisors, a member of Sterling Investment Partners. While the other Defendants met the elements of Section 20(a), the court found Sterling Advisors only gave advice and did not reach the needed level of control.

Finally, Sections 11 and 12 apply to omissions and misstatements of material fact in a registration statement or in a prospectus, and Section 15 assigns liability to those persons with control over anyone liable under Sections 11 or 12. The court found Plaintiff sufficiently alleged omissions and misstatements required by Section 11. It also found, however, that Section 12(a)(2) did not apply because Plaintiff did not allege that shares were acquired in the IPO. 

Ultimately, the court found Plaintiff sufficiently alleged claims under Section 10(b) and 20(a) of the Securities Exchange Act and Rule 10b thereunder, as well as Sections 11 and 15 of the Securities Act. The court also dismissed Plaintiff’s claims as to defendant Sterling Advisors and all claims under Section 12(a)(2) of the Securities Act.

The primary materials for this case may be found on the DU Corporate Governance Website.


The Second Circuit Prevents UBS from Arbitrating $350 Million Claim Against Nasdaq in Facebook IPO

In Nasdaq OMX Group, Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d. Cir. 2014), the Second Circuit Court of Appeals held defendants could not require Nasdaq OMX Group Inc. and the Nasdaq Stock Market LLC (collectively “Nasdaq”) to arbitrate claims concerning Nasdaq’s alleged mismanagement of the highly anticipated initial public offering (“IPO”) of Facebook, Inc. (“Facebook”).

According to the allegations, Nasdaq, on May 18, 2012, scheduled secondary trading for the Facebook IPO to begin at 11:00 a.m. Eastern Standard time. Technical difficulties with “Cross,” the computerized system that typically launches IPO trading by matching buy and sell orders to determine the opening price, caused a delay in the commencement of trading. As a result, over 30,000 orders entered between 11:11:00 a.m. and 11:30:09 a.m. were not included in the completed IPO Cross. Nasdaq canceled some of these orders and released the others into the market at 1:50 p.m. In addition, Cross failed to transmit certain trade confirmations for orders placed before 11:30:09 a.m. Consequently, Nasdaq members could not determine if their orders processed and what position they held in Facebook securities.

The Securities and Exchange Commission (“SEC”) initiated an investigation and ultimately brought disciplinary charges against Nasdaq. Nasdaq settled the case with the SEC and paid a civil penalty of $10 million. The SEC press release for this case can be found here.

In the aftermath of the Facebook IPO, Nasdaq amended its rules to permit the establishment of a voluntary procedure to compensate Nasdaq members injured in connection with the Facebook IPO. Defendant, UBS Securities, LLC (“UBS”), did not pursue that opportunity for relief and instead initiated an arbitration proceeding against Nasdaq under a separate services agreement for breach of contract, indemnification, breach of implied duties of good faith and fair dealing, and gross negligence and sought over $350 million in damages.

Nasdaq commenced a declaratory judgment action to prevent UBS from pursuing arbitration. On June 28, 2013, the United States District Court for the Southern District of New York ruled in Nasdaq’s favor, and UBS appealed to the Second Circuit. 

UBS contended the district court erred in exercising federal question jurisdiction in a case presenting only state law claims. UBS also contended the district court improperly concluded the court, rather than an arbitrator, should decide whether UBS’s claims were subject to arbitration. Lastly, UBS challenged the district court’s decision that its claims against Nasdaq were not arbitrable.

With respect to federal question jurisdiction, the Second Circuit observed that a court may properly exercise jurisdiction over a “special and small” category of actual state claims that present significant, disputed issues of federal law. Although UBS’s arbitration demand asserted only New York state law claims, the claims necessarily raised actually disputed issues of federal securities law. In addition, the issues presented were of substantial importance to the federal system, as a whole, and, as a result, the exercise of federal jurisdiction in these circumstances would not disrupt any federal-state balance approved by Congress.

In considering the role of the courts in resolving the issue of arbitrability, the Second Circuit relied on the premise that the law generally treated the issue as one for judicial determination “unless the parties clearly and unmistakably provide[d] otherwise.” Nasdaq and UBS were parties to a bilateral service agreement that was silent as to who should decide arbitrability. Accordingly, the Second Circuit held the district court correctly determined that it should resolve the arbitrability of UBS’s claims, rather than commit that question to an arbitrator.

The Second Circuit also affirmed the trial court’s decision that the relevant issues were not subject to arbitration. Both UBS and Nasdaq agreed their agreement to arbitrate was valid; therefore, the only issue on appeal was whether the agreement covered UBS’s claims. The Second Circuit looked to the language of the contract to define the disputes subject to arbitration. The service agreement stated the parties intended to submit all disputes to arbitration “except as provided in the Nasdaq OMX Requirements.” The “Nasdaq OMX Requirements” incorporated Nasdaq rules and rule interpretations. Because Nasdaq Rule 4626(a) forbid claims on losses experienced during trading on the exchange, the Second Circuit held that the parties could not have intended to arbitrate claims precluded by the provision.   

In conclusion, the Second Circuit Court of Appeals upheld the district court’s decision to enjoin UBS from pursuing arbitration against Nasdaq and remanded the case to the district court for further proceedings.

The primary materials for this case may be found on the DU Corporate Governance website. 



On July 21, 2014, the fourth anniversary of the Dodd-Frank Act, Democrats and Republicans on the House Financial Services Committee published separate reports regarding the law. The 30-page report prepared by Democratic members of the Committee remarked that regulators had made “tremendous progress” in implementing the Dodd-Frank Act. The Democratic report, however, claimed the Republican Majority stymied this progress through its concerted efforts to underfund regulators’ operations, pressure regulators relentlessly to weaken regulations, and otherwise erect roadblocks to implementation.  

The Democrats’ report complimented the rules put in place by regulators, including the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”). The report applauded the Dodd-Frank Act for providing shareholders a non-binding vote to approve or disapprove executive compensation and golden parachutes. It also claimed the SEC has recovered more than $9.3 billion in civil fines and penalties since 2011, due to the increased authority the Dodd-Frank Act provided the SEC.

With respect to whistleblower enhancements in the Dodd-Frank Act, the report noted that the SEC has already received more than 6,573 tips from 68 countries. Additionally, in order to implement the Dodd-Frank Act, “the CFTC has completed 65 final rules, orders, and guidance documents resulting in the registration and enhanced oversight of 102 Swap Dealers, two Major Swap Participants, 22 Swap Execution Facilities, and four Swap Data Repositories.”

Moreover, the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to ensure American consumers “get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protects them from hidden fees, abusive terms, and deceptive practices through strong enforcement of consumer protection laws.” The report credited the CFPB with returning $4.6 billion to 15 million consumers subjected to unfair and deceptive practices. The report praised the CFPB for creating a qualified mortgage rule that established a federal standard for all home loans to ensure borrowers can repay their loans.

Additionally, the qualified mortgage rule prohibited lenders from receiving financial rewards for subprime loans that encouraged lenders to steer borrowers into more expensive loans. This included prohibitions on “yield, spread premiums” that lenders provided brokers to encourage the origination of riskier loans to borrowers, especially minorities, who otherwise qualified for superior loans. The Democrats’ report also praised the implementation of the Volcker Rule that limits financial institutions receiving government assistance, proprietary trading and investment in and sponsorship of hedge funds and private equity funds. Because of the Volcker Rule, “banks have shifted away from speculative trading to investments in the real economy.” 

Despite this progress, the Democratic report accused the Republican Majority of engaging in a campaign to repeal, weaken, or otherwise pressure regulators to significantly modify provisions in almost all of the titles of the Dodd-Frank Act. The report also alleged the Republican Majority underfunded regulators like the SEC and CFTC and subjected their rulemakings to constant implementation hurdles. For example, the report stated the Republican Majority passed bill H.R. 2308 in the 112th Congress and H.R. 1062 in the 113th Congress that would subject SEC rulemakings to stricter cost-benefit standards. Moreover, the report criticized the bills for not providing further funding to the SEC, even though the bills would require significantly more resources for economic analysis before the SEC could issue rulemakings. In addition, the report stated the Republican Majority refused to adequately increase the funding of the SEC and CFTC despite the fact their responsibilities increased under the Dodd-Frank Act. The report cautioned, “[i]f enacted, the cumulative effect of these efforts would render the Dodd-Frank Wall Street Reform and Consumer Protection Act essentially toothless, inviting a return to the opacity, risk, and deregulation that caused the 2008 crisis.” 

The Democratic report concluded that since the Dodd-Frank Act’s passage, increased stability in the market has led to economic growth. The report indicated that the private sector created almost 9.7 million payroll jobs since February 2010. In addition, unemployment is now at 6.1 percent, its lowest level since September 2008. Moreover, real GDP growth now stands 5.5 percent higher than its pre-recession high in late 2007. Nevertheless, the Democrats’ report called the Republican Majority a roadblock in regulators’ Dodd-Frank Act implementation progress.  

The primary materials for this case may be found on the DU Corporate Governance website. 


The Curious Case of Etsy

Etsy has just gone public.  Prices on the first day doubled.  The DealBook wrote a story suggesting that Etsy was only the second (and by far the largest) B Corporation to go public.  See Etsy I.P.O. Tests Pledge to Balance Social Mission and Profit.  As the article noted: 

  • Etsy is one of a growing number of companies, called B Corps, that pledge to adhere to social and environmental accountability guidelines set by a nonprofit organization called B Lab. And Etsy on Thursday became only the second for-profit company to go public out of more than 1,000 companies that have that certification.

Etsy is a B Corporation, having been certified as such (Etsy was certified in 2012).  But as the article pointed out, Etsy is in fact not incorporated under the benefit corporation statute in the state of incorporation (in this case, Delaware).  Id. ("B Lab is giving companies four years from the date any relevant state legislation is passed to comply with the state law or risk losing B Corp certification.").  In fact, Esty is incorporated in Delaware as a traditional corporation.  The articles are here.  The bylaws are here.

As a result, directors have traditional fiduciary duties to shareholders.  They may not, legally, dispense with the obligations to shareholders in order to benefit the community.  The S-1, therefore, was very careful to discuss community obligations as a long term benefit to the corporation.  The Form S-1 is here

As the S-1 stated: 

  • Adherence to our values and our focus on long-term sustainability may negatively influence our short- or medium-term financial performance.  Our values are integral to everything we do, and accordingly, we intend to focus on the long-term sustainability of our business and our ecosystem. We may take actions that we believe will benefit our business and our ecosystem and, therefore, our stockholders over a period of time, even if those actions do not maximize short- or medium-term financial results. However, these longer-term benefits may not materialize within the timeframe we expect or at all. For example: 
  • we may choose to prohibit the sale of items in our marketplace that we believe are inconsistent with our values even though we could benefit financially from the sale of those items;
  • we may choose to revise our policies in ways that we believe will be beneficial to our members and our ecosystem in the long term even though the changes are perceived unfavorably among our existing members;
  • or we may take actions, such as investing in alternative forms of shipping or locating our servers in low-impact data centers, that reduce our environmental footprint even though these actions may be more costly than other alternatives.

So, as currently configured, Etsy has the same fiduciary obligations as other corporations.  In that sense, investors are taking no greater risk than with any other investor in any other corporation, at least with respect to the legal obligations of directors. 

Indeed, Etsy apparently has five years to reincorporate as a B Corporation to maintain its B Corporation status.  The S-1 contained no commitment with respect to that step and, to the exent the board considers the issue, it will have to determine that amending the articles is in fact in the best interests of shareholders (rather than the community). 


Assistant Director of the Center for Transactional Law and Practice (Emory Law School)

Per Dean Bobby Ahdieh:  "Emory is expanding the leadership of its growing Transactional Law Program – previously headed by Tina Stark and Carol Newman, and now led by Sue Payne.  See the announcement below.”

Emory Law School seeks an Assistant Director of the Center for Transactional Law and Practice to teach in and share the administrative duties associated with running the largest program in the Law School.  Each candidate should have a J.D. or comparable law degree and substantial experience as an attorney practicing or teaching transactional law.  Significant contacts in the Atlanta legal community are a plus. 

Initially, the Assistant Director will be responsible for leading the charge to further develop the Deal Skills curriculum.  (In Deal Skills – one of Emory Law’s signature core transactional skills courses – students are introduced to the business and legal issues common to commercial transactions.)  The Assistant Director will co-teach at least one section of Deal Skills each semester, supervise the current Deal Skills adjuncts, and recruit, train, and evaluate the performance of new adjunct professors teaching the other sections of Deal Skills

As the faculty advisor for Emory Law’s Transactional Law Program Negotiation Team, the Assistant Director will identify appropriate competitions, select team members, recruit coaches, and supervise both the drafting and negotiation components of each competition.  The Assistant Director will also serve as the host of the Southeast Regional LawMeets® Competition held at Emory every other year. 

Additionally, the Assistant Director will be responsible for the creation of two to three new capstone courses for the transactional law program.  (A capstone course is a small, hands-on seminar in a specific transactional law topic such as mergers and acquisitions or commercial real estate transactions.)  The Assistant Director will identify specific educational needs, recruit adjunct faculty, assist with curriculum design, and monitor the adjuncts’ performance.   

Besides the specific duties described above, the Assistant Director will assist the Executive Director with the administration of the transactional law program and the Transactional Law and Skills Certificate program.  This will involve publicizing the program to prospective and current students, monitoring the curriculum to assure that students are able to satisfy the requirements of the Certificate, and counselling students regarding their coursework and careers.  The Assistant Director can also expect to participate in strategic planning, marketing, fundraising, alumni outreach, and a wide variety of other leadership tasks. 


Emory University is an equal opportunity employer, committed to diversifying its faculty and staff.  Members of under-represented groups are encouraged to apply.  For more information about the transactional law program and the Transactional Law and Skills Certificate Program, please visit our website at:

To apply, please mail or e-mail a cover letter and resumé to: 

Kevin Moody

Emory University Law School

1301 Clifton Road, N.E.

Atlanta, GA  30322-2770




Khazin v. TD Ameritrade Holding Corporation: Dodd-Frank Whistle-Blower Must Arbitrate Reprisal Claims

In Khazin v. TD Ameritrade Holding Corp., 773 F.3d 488 (3d Cir. 2014), the United States Court of Appeals for the Third Circuit (the “Court of Appeals”) affirmed the district court’s holding, which dismissed Boris Khazin’s (“Khazin”) Dodd-Frank retaliation claim against TD Ameritrade Holding Corp., TD Ameritrade Inc., Amerivest Management Co., and Luke Demmissie (collectively “TD”). In addition, the Court of Appeals affirmed the district court’s holding, which compelled arbitration pursuant to a predispute arbitration agreement between Khazin and TD. The Court of Appeals concluded that Khazin’s claim did not qualify for the statutory exemption from the arbitration agreement with TD.

According to the factual allegations, Khazin worked for TD providing professional financial services and performing due diligence on the company’s outgoing financial products. Khazin signed an agreement with TD, agreeing to arbitrate any dispute related to his employment. After discovering the price of one of TD’s products failed to comply with applicable securities regulations, Khazin suggested a price change to his supervisor, Demmissie. Upon learning that the proposed price change would result in a loss of $1,150,000 in revenue, Demmissie allegedly instructed Khazin to discontinue communication about the pricing violation and informed Khazin that TD would not make the price change. Khazin’s employment was later terminated for a supposed billing inconsistency.

Khazin filed suit in New Jersey state court, alleging violation of both state law and the Dodd-Frank Act. After the court dismissed his claims without prejudice for lack of subject matter jurisdiction, Khazin brought a whistleblower claim under the Securities Exchange Act.  See 15 U.S.C. § 78u-6(h).  TD then filed a motion to dismiss and to compel arbitration in accordance with the arbitration agreement between Khazin and TD.

In its motion, TD argued the anti-arbitration provision in the Dodd-Frank Act, which provided an exemption from predispute arbitration agreements (“Anti-Arbitration Provision”), did not apply to claims brought under 15 U.S.C. § 78u-6(h), and therefore did not shield Khazin from his contractual obligation to arbitrate the dispute. As an alternative, TD argued Dodd-Frank’s Anti-Arbitration Provision did not provide retroactive exemption from an arbitration agreement signed, as in Khazin’s case, prior to the enactment of the Act. 

The district court held the Anti-Arbitration Provision did not invalidate arbitration agreements executed prior to the passage of Dodd-Frank. Consequently, the court granted TD’s motion to dismiss and compelled Khazin to arbitrate.  Khazin appealed, arguing the Anti-Arbitration Provision and the essence of the Dodd-Frank Act rendered his arbitration agreement unenforceable.

SOX created protection for whistleblowers and provided them with a private right of action.  See 18 U.S.C. § 1514A.  Dodd-Frank included provisions that prohibited employer retaliation against whistleblowers.  The Act included a private right of action for violations of the anti-retaliation provision.  See 15 U.S.C. § 78u-6(h).  In addition, the Act provided that “[n]o predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.” 18 U.S.C. §1514A(e)(2).  

The Court of Appeals held that the anti-arbitration provision applied only to actions under 18 U.S.C. §1514A and not actions under 15 U.S.C. § 78u-6(h).  In doing so, the Court relied on the language of the Anti-Arbitration Provision and the structure of the Act.

First, the Court of Appeals reasoned that the phrase “arising under this section” in 18 U.S.C. §1514A(e)(2) expressly limited the application of the Anti-Arbitration Provision to disputes arising under SOX.  Because Khazin’s claim arose under Dodd-Frank, the court held the Anti-Arbitration Provision was not applicable.  

The Court of Appeals also found the structure of the Dodd-Frank Act particularly relevant, noting that Congress did not add an anti-arbitration provision to the Dodd-Frank cause of action but simultaneously appended anti-arbitration provisions to claims arising under various other sections. Thus, the Court of Appeals determined that Congress deliberately excluded Dodd-Frank claims from anti-arbitration protection, despite Khazin’s argument that the omission was inadvertent. Consequently, the Court of Appeals affirmed, though on different grounds, the district court’s order dismissing Khazin’s claim and compelling arbitration pursuant to his employment agreement. 

The primary materials for this post can be found at the DU Corporate Governance website

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