As readers undoubtedly have noted, one of the hot topics these days is the question whether corporations should change their state of incorporation from Delaware to that of another state, usually either Nevada or Texas. The dialog on this topic was already underway when Elon Musk supercharged the conversation by vowing, in reaction to the Delaware court’s disallowance of his $56 billion pay package, to have Tesla change its state of incorporation from Delaware to Texas. I suspect that the state of incorporation debate is going to be with us for some time to come, making it important for those of us who might have to participate in (or at least listen to) the conversation to get a handle on the key differences between the states.

Continue Reading Delaware or Another State: What’s the Difference?

It was roughly this same time a year ago when the banking industry in the U.S. was going through a series of serious events. Within the space of a few weeks during March through May last year, three of the five largest bank failures in U.S. history occurred. At the outset, a wider banking crisis was feared, but the Treasury Department, the Federal Reserve, and the FDIC acted forcefully, in effect backstopping all deposits, and the three bank failures did not lead to a systemic event. But while the immediate crisis was averted, many of the underlying problems – interest rate pressure, stress in the commercial real estate sector – continue, and now, a year later, the banking industry remains under stress. Problems have continued to emerge, and signs are that challenges in the industry will continue.

Continue Reading Thinking About Banks One Year After Last Year’s Crisis Events

Since OpenAI launched ChatGPT in November 2022, the race to capitalize on emerging artificial intelligence (AI) technologies has super-charged the financial markets. The stock prices of AI-associated companies, such as Nvidia and Super Micro Computer, have soared. Several AI-related companies  — such as, for example, Astera Labs and Rubrik — have recently successfully completed IPOs, so much so that that the long-moribund market for IPOs is showing definite signs of life. Other AI companies – including for example, Zapata and MultiplAI Health Ltd. — recently became public through mergers with SPACs.

With the consuming interest in AI in the financial markets, many companies want to try to catch some of the lightning for themselves. However, what the companies say about AI, their AI prospects, and their AI risks could have significant consequences for the companies’ corporate and securities litigation risks, as well as their risks of regulatory scrutiny.

Continue Reading AI, Risk, and Public Company Disclosures

One of the more distinctive developments in the capital markets in recent years has been the rise in the number of very large private companies. These companies are sometimes referred to as “unicorns,” as if they are very rare creatures — but the reality is that worldwide there over 1,230 of them.  Because the rise of so many large private companies is relatively recent, many of the legal principles and procedures relevant to these companies are just forming – giving rise to what University of Illinois Law Professor Verity Winship describes as the “gaps between private-market reality and legal structures that were designed for public companies.”

Among the “uncharted areas” is shareholder litigation; in a new paper, Professor Winship considers what shareholder litigation has meant in the context of these unicorn companies. What she found is that shareholder litigation involving these companies is rare, and that the procedural mechanisms available to investors are limited, at least by comparison to the mechanisms available to public company investors. Professor Winship describes her paper in an April 25, 2024,  Harvard Law School Forum on Corporate Governance post entitled “Unicorn Shareholder Suits” (here). The paper itself can be found here.  

Continue Reading Unicorn Companies and Securities Litigation

I am sure many readers were as surprised as I was by the news last week that the New York Court of Appeals had overturned the disgraced former movie producer Harvey Weinstein’s sexual misconduct-related criminal convictions, apparently due  to evidentiary decisions the trial court made. With the #MeToo phenomenon as a result back in our consciousness again, it somehow seems more than coincidental that on Friday a plaintiff shareholder filed a securities class action lawsuit against UK-based pharmaceutical development company Exscientia, P.L.C., after its CEO was terminated following revelations of allegedly improper relationship between the executive and two company employees. A copy of the April 26, 2024, complaint can be found here.

Background

Exscientia is an AI-driven pharma-tech company engaged in the design and development of medicines. In a February 13, 2024, press release, the company announced that its board had “decided to terminate” its CEO, Andrew Hopkins, and remove him as an Executive Director of the company, “in each case for cause and effective immediately.”

The press release stated that the board’s decision followed an investigation in which it was found that Hopkins “had engaged in relationships with two employees that the Board determined were in appropriate and inconsistent with the Company’s standards and values.” The press release went on to state that the board’s nominating committee was instituting a search for a new CEO and emphasized that Hopkins’s conduct did not affect the company’s financial statements and is unrelated to the company’s operational and financial performance.

The press release further stated that in the course of the investigation, the board had learned that the Chair of the company’s board of directors, David Nicholson, had “prior knowledge of the existence of the earlier of Dr. Hopkins’ relationships and had addressed the situation directly, with the involvement of other outside counsel, rather than in consultation with the Board,” and “following discussions with the Board, on February 12, 2024 Dr. Nicholson tendered his resignation from his positions with the Company.”


According to the subsequently filed securities lawsuit complaint, the company’s shares fell almost 23% on this news.

The Lawsuit

On April 26, 2024, a plaintiff shareholder filed a securities class action lawsuit in the District of New Jersey against the company; Hopkins; and Nicholson. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between March 23, 2022, and February 12, 2024.

The complaint alleges that during the class period the defendants made false or misleading statements or failed to disclose that: “(i) Defendant Hopkins had engaged in improper relationships with employees that were inconsistent with the Company’s standards and values; (ii) Defendant Nicholson had prior knowledge of Defendant Hopkins’s relationships and had improperly addressed Hopkins’s misconduct without consulting the Board; (iii) the Company’s maintenance and enforcement of its Code of Business Conduct and Ethics was inadequate to safeguard against the foregoing conduct; (iv) the foregoing failures subjected the Company to a heightened risk of disruptive leadership transitions and/or reputational harm; and (v) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

It has been some time since the whole #MeToo movement first went viral following Ronan Farrow’s blockbuster October 2017 article in the New Yorker article about Harvey Weinstein (although, to be sure, the #MeToo movement predated the article).  Readers will recall that at that time there was a series of revelations of misconduct involving a number of corporate executives and other figures. In many instances, corporate and securities lawsuits followed in the wake of these revelations. At the time, I was tracking the lawsuits, in the same way that in later periods I have tracked, for example, COVID-related securities suits or SPAC-related securities suits.

Like many viral movements, the #MeToo story had its moment, but as a result of the short attention spans that the social media world produces, the focus soon moved elsewhere. This new lawsuit is an unfortunate reminder that though the world may have moved on to other topics, the problems underlying the #MeToo movement apparently have not gone away. This lawsuit is a reminder that the kinds of improper relationships all too often revealed as part of the #MeToo movement are not only harmful for the victims of the misconduct, but harmful to the companies and firms that the perpetrators are involved with.

Though there was a time when there were enough #MeToo-related securities suits for me to count and track, the litigation phenomenon died down a few years ago, just as the viral #MeToo movement itself did as well. The incidence of this new lawsuit based on allegations of improper conduct is a reminder that even though the social media world’s attention may have moved on to other things, the underlying problem has not gone away, and, as this case shows, it still represents a form of corporate and securities liability exposure, as well.

For some readers, the allegations in this lawsuit may be reminiscent of the circumstances involved in the lawsuit that McDonald’s filed in 2020 against its former CEO Stephen Easterbrook. Indeed, both situations involved allegations that the company’s CEO engaged in improper relations with company employees.

However, as discussed here, the crux of the lawsuit McDonald’s filed against Easterbrook was the allegation that Easterbrook had lied to investigators about his relationships, which had resulted in his being terminated “without cause.” The company contended that further investigation had revealed that it had clear grounds for termination “with cause.” The lawsuit settled with Easterbrook agreeing to return equity grants and cash with a total value of $105 million (which he would have forfeit if he had been terminated with cause). So the McDonald’s situation was similar to this one in that both circumstances involved improper relations between the company CEO and employees. Otherwise the situations are quite a bit different.

It is nonetheless interesting to reflect on the allegations in this latest lawsuit. This would be a very different lawsuit if the full board investigation had followed the first alleged instance of misconduct – that is, if the Board chair had engaged the entire board, rather than trying to handle it, as he apparently did, on the q.t and by himself. The fact that the board chair kept the prior incident quiet and tried to handle it on his own without the rest of the board’s involvement arguably makes this a different lawsuit – although it remains to be seen if what is alleged here amounts to securities fraud, rather than a species of mismanagement. In that regard, it will be interesting to see what the court ultimately makes of the question whether the plaintiff can sustain his burden of establishing falsehood and scienter.

As readers know, I view my role to try to track trends as they develop; for example, as noted above, I have tracked COVID-related cases and SPAC-related cases. When it was relevant, I also #MeToo cases. This case shows that not all cases (in fact, arguably not even most cases) match up to a current trend. And sometimes apparent trends are a reflection of perennial factors, rather than related developments within a given time frame.

One further observation about trend-spotting and reporting. It piqued my interest about this case to learn that this company describes itself as “an artificial intelligence (AI) driven Pharma-tech company that engages in the design and development of differentiated medicines for diseases with high unmet patient needs.” The AI hook grabbed my attention. In the end, however, this case had nothing to do with this company’s AI-based business strategy. The AI-related hook does not make this case itself an “AI-related” case, and I have not counted it as such. I emphasize this point because I anticipate that in coming months there will be much discussion of AI-related litigation and AI-related risks.

My point is that the mere fact that a company involved in a corporate or securities lawsuit has an AI-based business strategy does not make the lawsuit AI-related; in my view, the case doesn’t “count” as AI-related unless the allegations in the lawsuit related specifically to the AI business strategy. In this case, because the allegations in this lawsuit had nothing to do with the company’s AI-based business strategy, it does not “count” as AI-related. I will, however, be watching closely as cases come in, as I anticipate there will be further (perhaps many) lawsuits in the months ahead that do involve the defendant company’s AI-related business strategy.

It is probably worth noting that while there were a number of #MeToo-related securities lawsuit filed after the movement had gone viral, many of the cases did not fare particularly well (refer, for example, here and here).  To be sure, the securities suit filed against Signet Jewelers that was at least in part #MeToo-related did settle for $240 million, but that lawsuit encompassed a variety of different allegations including allegations of financial misrepresentations. The #MeToo lawsuit that was filed against CBS, which “barely” survived dismissal, settled for $14.75 billion. The overall record in these kinds of cases is, at best, mixed.

The “G” in ESG stands for “governance.” ESG is of course of one of the most au courant topics in the corporate and securities world, and the inclusion of governance as one of the three ESG pillars inferentially suggests that governance is a new – or at least newly relevant – topic. The reality is, however, that governance is a perennial topic. Its relevance has never diminished, and it remains as important as ever. However, principles of corporate governance do evolve with changing times. It is this evolution of corporate governance that is at the heart of a new book on the topic.

The book, which is entitled “Corporate Governance: Understanding the Board-Management Relationship,” and was written by H. Stephen Grace, Jr., Ph.D, Founder and President of H.S. Grace & Company, Inc.; Suzanne Gilbert, Member Board of Advisors of Grace & Co. Consultancy, Inc.; Joseph P. Monteleone, Esq, Principal Catamount Services, LLC; and S. Lawrence Prendergast, Chairman of the Board of Trustees, Turrell Fund, explores the values-based origin of governance principles; examines the recent progression of governance concepts and considers several recent circumstances that explain the changing concepts; and reviews some of the practical implications of these changing concepts and principles. The book, more information about which can be found here, is a useful and readable summary of current understandings and best practices in corporate governance.

Continue Reading Book Review: Corporate Governance: Understanding the Board-Management Relationship

In recent years, one of the curses of the corporate and securities litigation world has been the ubiquitous filing of merger objection lawsuits in connection with proposed M&A transactions. When a deal is announced, plaintiffs’ lawyers almost always file one or more of these suits in which they seek additional proxy disclosures. After the defendant company agrees to make additional disclosures, the plaintiffs’ lawyers dismiss the suits in exchange for the payment of a so-called “mootness fee.” It is a process that the well-respected jurist Richard Posner famously described as “no better than a racket.”

Now, in a recent decision written by Judge Frank Easterbrook, the Seventh Circuit has identified additional tools and ammunition that companies and other objectors can use to try to fight these kinds of lawsuits —  which, the appellate court specially recognized, have no purpose other than to transfer money from companies to plaintiffs’ lawyers.

Continue Reading Will the Seventh Circuit’s Recent Opinion Deter Merger Objection Lawsuits?

Policyholders are often surprised when their professional liability insurers contend they (that is, the insurers) have the right, after a determination of non-coverage, to seek recoupment of amounts paid under the policy. These disputes can be controversial enough even when the policy expressly provides the insurer with the right to seek recoupment; the controversy is greater when the policy does not expressly provide for recoupment but the insurer nonetheless seeks reimbursement in reliance on its reservation of its rights to seek recoupment.

A recent decision by the Sixth Circuit, applying Michigan law, explored these issues and ultimately affirmed the district court’s ruling that the insurer was entitled to recoup amounts paid in defense after the underlying complaint was amended to remove the only covered claims, even though the policy contained no express recoupment provision. The appellate court’s decision raises several interesting issues, as discussed below. A copy of the Sixth Circuit’s April 8, 2024, opinion can be found here. (Hat tip to Geoffrey Fehling of the Hunton Andrews Kurth law firm whose LinkedIn post linked to the appellate opinion, here).

Continue Reading 6th Circ. Affirms Insurer’s Recoupment Right Even Without Express Policy Grant

The IPO market has been in the doldrums since 2021, but there are promising signs that IPO activity could be on the rebound in 2024. Given the potential for the return of significant IPO activity, it is worth noting that IPO transactions entail certain risks, including in particular for the IPO companies’ private equity backers, as discussed in the following guest post written by Michelle Grimaldi, Assistant Vice President, Claims, Fair American Insurance and Reinsurance Company; Elan Kandel, Member, Bailey Cavalieri LLC; and James Talbert, Associate, Bailey Cavalieri LLC. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.

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Continue Reading Guest Post: Looking Ahead: Risks Attendant to a Potential Rebound in the IPO Market for Private Equity
Lisbon

The D&O Diary continued its European sojourn with a visit last week to the sun-drenched and, even though it was still just April, summerlike, country of Portugal. I have to say that writing this blog post about our visit to Portugal was as much fun as I have ever had in writing for this site. Portugal, my friends, is a wonderful place, as I believe the pictures below will show.

Continue Reading Portugal