Transcript
Welcome to shareholder Primacy from freefloat media, podcast about activist investing Securities Law and all the ways, the financial and legal worlds. Intersecting Collide in real life. I'm here with and Lipton a law professor at Tulane in New Orleans who teaches and researches Securities and business law. She holds up the legal end of our podcast and that's Mike Levin an activist investor who lives and works in Chicago. He covers the financial side of our podcast. Well, I am good morning. Let's look at a couple of fascinating subjects. First with all, the SPAC and dispatch and other deals. We can look at your holders can and cannot the rules for how shareholders can sue companies over. Basically busted deals. Problematically. Yes, there. Which is not the Pace about Elon Musk. Involving its board of directors. Terrific. Well let's let's go over. What I'm learning is section, 10B. And a fascinating case, then actually there's a couple of recent cases that illustrate developments in both what the courts think. And consequently what Congress and the SEC thinks about the various parties to Securities lawsuits. And I want to mention now that there is a There's some application to how investor generally an activist investors. Think about this as a litigation becomes a much more or an increasing feature in litigation, in activists activists projects. So before we get to the cases, why don't you School us from a minute in section 10B? Whatever that whatever that overarching federal statute that prohibits fraud in connection with any purchase or sale of the security and the SEC can bring enforcement actions under it. But it's all used by private plane. They were defrauded. Okay. So that's that's what in federal statute allows folks like me to sue companies whether they're public or private or whatever over alleged Security fraud. That's right. All right. So if I'm, if I'm and I've never done this, if but lots of other people have. Yeah, right. Exactly. Well, so if you're, if you're a plaintiff in one of these cases, what do you have to kind of show to forgetting the elements of fraud? But what do you have to show to, like be a plaintiff here? They're different. They're different elements to bring to bring up case specifically, under Section 10B. First that there was some kind of deception, usually that someone says something it wasn't true second that whatever they said was important, the legal term is material but it just means the statement wasn't about something irrelevant. It was about something that matters. They also have to show that whoever said the false thing did so intentionally. This wasn't an accident. Forth. The false statement has to be made in connection with a Securities transaction. It wasn't a mistake and about some other thing can be is about Securities, fraud, specifically the plaintiff, the investor has to rely on the fall statement. That's going to be very important. It's no good arguing, someone committed fraud but you didn't actually believe them anyway, you have to take in them seriously and acted on it. And finally you have to show damages, you suffered some kind of economic loss. That's traceable. All this. So any plaintiff bringing a claim under Section 10, B needs to show all of these things in order to win their case. all right, so there's a very long list of Facts. That a Plaintiff basically, an investor has to bring up and prove. Kind of happen. You just listed, you know, kind of five or six of them six on and have to be pleated as well right at the outset. Right. Exactly. So, so the parties could agree, we don't have to dispute these facts sometimes but frequently there's a lot of disagreement, not the facts and that's what that's what some of the evidence and the hearings are all about, all right? So the case is, the case is Case, Case is we're going to talk about in a moment. Turn on or have developments related to suing private companies versus public companies and that's gets to be relevant with some of the specs and Dax I know. So what is the what is that difference? Kind of important us here. Okay, so the difference when you're suing a public company versus a private company, a critical issue is relyance. Okay, so we as in any 10 became case, the investor needs to show, they relied on the false statement for a private company investors who are investing in a private company. They get diligence materials and they consume of those materials. But when you're talking about a public company, Showing Reliance is hard because investors make decisions on information that's filtered. Third hand. The company says, something false analysts hear it and recommend it by investors who never heard the false statement rely on the analyst recommendations of the Jim Cramer report of the Wall Street bets posting or whatever it was. Right. So they're not social media. They're not listening to the actual statements that the company made. And then there are investors who are indexed and they're not relying on anything. They're just buying at the market price, right? So these open market investors may have trouble demonstrating that they personally, relied on whatever the false information was that the companies putting out, but it's seems fairly obvious that if a publicly traded company like reports false earnings or something, some contingent of active investors is going to read that and trade on it, and that's going to influence the market price. So, anyone who buys at the market price, even if they didn't read the statement, personally, it's going to be relying sort of indirectly, on that false information. So courts came up with a special rule for public companies. When a company is publicly traded in an efficient market will presume that any false material statements affected, the company stock price, and investors are deemed to rely upon the false statements. If they buy at that price. So you don't have to show Reliance on an investor by investor bases. The mere fact that this public information is out, there is presumed to influence market prices and therefore investors can show relates if they bought at the market price. That's how public company fraud coins to proceed. All right, so so and we'll get to these these, this specific cases a second. But then what sort of what sort of Problems. Do investors encounter when they sort of make this these role, this Reliance I suppose. Well, yeah. But on the market Doctrine, by the way, has no logical limiting principle. So, lots and lots of different kinds of information might be considered material to an Investor's decision to invest, and then it becomes fair game for a Security fraud claim. For example, ordinary product advertisements, it's not earnings report filed with the SEC. It's an ad aim to Consumers but investors might use that information when deciding whether to buy or sell. There's evidence that some do you use that information and their trades affect prices for everyone else. Now suddenly ordinary product, advertisements, can be the subject of security clients and then it goes further. Let's say you know Coca-Cola is having a problem with the price of bottles. It's like that, you know, if Coke is having a problem with bottle pricing, probably Pepsi is going to have a bottle price problem and you might very well assume oh coconuts bottle price problems. Therefore I'm going to trade Pepsi that means if Coke lies about its bottle prices, Pepsi investors May After that into their judgments about Pepsi which will affect Pepsi's stock price. Does that mean every investor who bought Pepsi stock gets to sue Coke when Coke lies. And that's not just a weird, hypothetical? It just came up in this one case brought by the SEC and employee of a pharmaceutical company learned, his company was going to be acquired, and he also knew that when one company announces, its a merger Target similar, companies are viewed by the market as being in play and all their stock prices go up. So he bought shares of a completely different company. Not his employer. Using this inside information. He had about his own company stock, and the SEC brought a claim against him for insider trading and one at a jury trial. Now, imagine if that applies to lawsuits by private Planet, it opens the door to virtually unlimited liability. You may remember some listeners may remember 20 years ago when sent had that huge fraud Scandal. Sure. Yeah. Before that fraud was revealed send it had offered to buy out another company called ABI and it was going to pay and send in. Stock Abi's price rose on the news but then ABI stock price collapsed. When the fraud extended was revealed. The third circuit allowed purchasers of ABI stock to sue sentence auditor on the theory that if ABI shareholders could sow, that sentence Auditors should have anticipated that their audit report of sending would be used by ABI shareholders than a bi shareholders had a claim against them. But then, and I'm just like to understand the history and the difficulty of this problem, the second circuit had this case, involving Nortel another big fraud Telecom company. That was part of the title comple. The talk about literally 2000s. Nortel was a customer of a company called JDS uniface. So people bought JDS univas making oh it's getting all this great Nortel business when Nortel collapsed so to JDS uniface all the Mortal shareholders of course suede mortality because mortality committed fraud but then JDS uniface shareholders sued Nortel saying you lied about your business that affect the JDS because You were buying JDS products. So it caused JDS stock price to collapse and they sued. And the second circuit said no. We're not going to let JDS shareholder soon or too far. That's a little too much. That's right. So all this to a head. case, that was The fruit of Rome. I hope I pronouncing that correctly. I don't know. Yeah, right, I saw that okay was it is rarely company and it was acquired in a stock for stock deal by an American. New stock to make this acquisition and the intention was that it stopped would be publicly traded and because ifs was shooting news, stock, that was going to be publicly traded and had to register. Those new shares with the SEC that document that I have filed with the SEC, was technically a perspective for the sale of, if FF shares a written offer to sell, if FF stock, it was selling it to buy fruit and then it would be publicly traded. And because this was stock issued in a merger, the prospectus had all this information about fruit roll. That had been drafted by fruit around and it turned out. It was alive, it was all alive. So purchasers of ifs stocks and hey, this was false information, supplied by fruit, Aroma in the perspective for buying ifs stock, we should be able to sue fruit around because by lying about its own business, it led us on our understanding of ifs and the second circuit said, nope. Even though those, you can't do that. It appeared in the prospectus for the Of ISF stock, but they were statements about frodon. And if F purchasers can't, sue Fruita roam over them. This seems absurd to be the statements were in a perspect. Document by definition. They were designed to be read by iff investors but I also understand the second circuit's problem here. So where do we stop at what point can Pepsi shareholders Sue Coke because Coke lying about its bottle prices affects Pepsi prices and this was the basic problem that we were walking into. All right, so and and fruit. And you wrote about this within the past couple months, this this then extends into an area that a lot of activists have been focusing on which is spaces and d-spacing companies. So let's go help me here. Vocation a SPAC is just a shell entity. It's a publicly traded company but it has no business at all until it identifies, a private company to acquire once it acquires that private company, the private company becomes publicly traded. So it's track is just an alternate route for a private company to go public, but there's this interim, period. The SPAC is still trading publicly. It's identified a Target and then when it actually goes and and and and, and before the actual merger happens, the SPAC shares should trade on an assessment of the value of the private Target company because the structures are going to become the target company. But, and we all know there's been, shall we say over enthusiastic hyping of these private a little bit? The whole Space is this reputation of irrational, exuberance author, right? After the merger, the private company goes public, the whole thing, collapses, allegedly in some cases due to fraud. So you see where this is going shareholders, hear us back is going to buy a promising, private company. They buy shares of the SPAC, then the SPAC merges. The truth comes out and the price collapses. So, these shareholders Sue and they say, hey, I bought the SPAC shares. Based on these fraudulent statements about the target, I should get to sue the Target and now there's this ninth circuit case, it was called, Max Royal versus ativa, and it's actually about the fact that took the car company, Lucid public and the night circuit, help, you bought your shares, prior to the merger. At that time, they were two separate companies. You bought shares in the SPAC. You can't sue Lucid for lying about its business. If you only bought the SPAC, so on the one hand, I get the night circus concern. Here about the slippery. Slope investors could sue anybody for anything. It's one company suing over statements about another company, but it's A spatula, right? Acquire a private company. It's absurd to say that statements about the private companies are in statements about the SPAC, the SEC even adopted these new rules for specs, and it explicitly says, The private company should be considered a co-issuer of stock with the SPAC. So this entire facts case, as you know, has gotten very, very sketchy and the night, circus just opened the door to more abuse. Right. So activists like me who are looking at? busted spax basically are Dbacks that want to As I said, when we introduced this want to litigate some of this which is a way to for us increasingly to start to put pressure on, companies are going to be a little limited appears. In our ability to do that. Exactly. And part of the reason you want to sue the Target and not the acquirer is because it's often a lot easier to show that the target intentionally lie. The acquirer knows less about the targets business. It's not always obvious that the acquirer knows anything. So you have. So you have to make the target, a defendant as a practical matter. Except now, apparently you can't not prior to the merger anyway. Not if you bought prior to the merger, oh, so so activists that want to try to kind of put that pressure have to keep that in mind exactly when they when they start to think hard about not just owning a SPAC. But you know what the recourse would be? Once that once the share price kind of, oh man, I learned something today. This is really, this is, this is gonna be something else when I look at my back and I have a couple again, you know, there's a whole range of things activists can do but this is an increasing increasingly important way to try to pressure companies so well. Yeah, and so I mean Like litigation is moved into Delaware in the corporate space and part because the the federal space is just becomes so limited. All right, so so this is going to potentially limit some of this litigation but are there other implications we should mention? No, I mean, I'm ruling. So I wonder if the plan is, would want to go to the Supreme Court over it, but then I don't know. The Supreme Court is terribly friendly to Securities litigation right now, and the SEC really is sort of limited. It changed its rules for for, you know, by treating specs, as the target company, is a co-registered with the SPAC but that won't affect this kind of litigation and there's not a whole lot the SEC can do unless Congress steps in and well, so so the reekers here would be either the Supreme Court or Congress and that's very unlikely at this. Oh man. All right, well let's let's think about that. Take a quick break. And then we can we can return in a minute and we'll talk about Tesla and director pay here at shareholder Primacy. Is the free flow media podcast Network, where we cover the, who of the business news? Because investing isn't a, what it's a, who check out our other podcast business pants for fact-based snark covering companies in Executives and the proxy Countdown. The only podcast that treats company meetings like sporting events find them on iTunes Spotify or wherever you get your podcasts back to the show. Welcome back to shareholder privacy. I'm Ann Lipton here with Michael Levin and so, we have once more into the breach, with Tesla, this time related to its other big compensation case. It's a really big case except that Elon musk's case over Shadows this case. And this case a compensation involves its board of directors. So I would say we promised not to talk about Tesla again but we're totally gonna talk about Tesla again. It's actually inevitable. So they just do too many wacky things. It's the gift that keeps on giving from a corporate Professor perspective. It absolutely is oh What is this case about? It's this case is not about Elon musk's Bay. This case is about what the directors at Tesla paid themselves. Over a period of four years. From 27 to 2020. and a different plane if the plaintiff in the muskies was a guy by the name of tornetta, The plaintiff in this case was a pension fund, the police and fire pension funded Detroit. So we'll call it the Detroit case and in 2020, they sued the directors and said, we think you overpaid yourself and they made all sorts of horrible allegations about the kind of money that they were taking out of the company. Um, for two or three years, the case wound its way through Delaware Chancery Court in front of our old friend, Chancellor McCormick, who is, you know, hearing all these. She seems to have adopted the musk and Tesla for herself. They once they absolutely it would have been slides but slides retired she reassigned the case as to herself and yeah no it was great as you'll hear in a minute. I met her, it was wonderful and they sued in 2020 and then the case kind of bumped the long and then lo and behold the about a year ago in July the parties announced a proposed settlement. No trial, no, whatever. They just said, okay? We got to a place where we can settle this and the saddlehead settlement at two elements. First was a lot of money. The directors were going to return 750 million dollars, approximately worth of shares options and also cash. To the company. So, that was, that was a settlement. We said, okay, you were they agreed? We'll give that, we'll give them money back. Estimates, are that it's about a third of what they were paid in that four year period of time. And again, there was a lot of it was Tesla stock which, you know, well, my understanding is it's one of the top couple derivative settlements ever in oz in Delaware. So it was huge. That way, there was also a second element which was a bunch of corporate governance reforms Essentially the parties saying we're going to make sure this doesn't happen again. And there were three such reforms. The first was a better process for paying directors. So they're going to have certain committees and higher consultants and look at different things and it was a process they're going to have to go through Second was better disclosure. So in the proxy statement each year, when they cover direct or pay, it's not going to be a little paragraph about this. How much we're paying ourselves, but it's supposedly a lot more detail about that process that I just referred to. So, that's nice. You know, activists are investors are okay, we like, you know, better process, we like disclosure home The third part, got my attention, the third part was a mandatory vote by Tesla shareholders. On directors comp for period of five years. So they would have the chance to vote yay, or nay up or down about whether the Tesla directors. In fact would get paid for for that, for that fiscal period. And I saw that, and I sat up. I said wow this is not really been done before the idea of shareholders, not only seeing what directors were paid with a lot more transparency but actually getting new approve, it Was quite the big deal. And so I saw that I said, well, this is pretty cool. That would be, that would be wonderful. I'd love to be able to vote on Direct, especially a Tesla. Yeah, I mean, yeah, shareholders, don't if Cheryl just don't approve it. It's it's considered a conflicted transaction. So yeah, exactly. Right. So what makes this vulnerable place? Yeah. Um, so that was the elements of the settlement, but there was a couple of problems with the settlements and one of them about the vote, at least got my attention. If you read over the settlement, I don't read these things. Again, I'm not the lawyer on this podcast. I don't tend to read these things carefully. I read this one carefully. You could read really easily that the language of the proposed settlement around the vote was as we would say not enforceable. It was actually pretty pretty vague and Silent that you could interpret very easily that the result a negative result of a vote here would be strictly advisory. So they were offering to settle it with requiring shareholder votes but the shareholder votes could easily be non-binding on the right. Yes. Correct. Just like executive saying, just okay. Yeah, oh yeah. Well, it's either weird. There's nothing accidental in whatever happens at Tesla so I I kind of thought now this this isn't right. And so I last October or last fall a year ago, I wrote up an objection to this. And filed it with the Chance Record and said, I think this settlement needs to be revised to provide for a much more stronger enforcement mechanism in fact to make the vote binding and make it very clear. I there was a hearing on the settlement on the proposed settlement last October, so I got myself over to Delaware and appeared before a Chancellor McCormick for for a hearing and presented my objection. It was kind of fun. Never been to Wilmington before driving through had never been a chance to record. And it was it was very pleasant Chancellor McCormick I think was Just delighted to hear from a real. There's a whole there's a whole there's a whole little pantomime. They go through and there any shareholders in the room? And I said, here I am and so we we talked about it and I voice my objection and you know, most of the hearing, you know, related to like the legal fees that the plaintiffs attorneys wanted to collect. They are looking for like 250 million dollars. In legal fees and I'm looking around the room and there's like, you know, 20 attorneys and little me and I, oh, I represented myself. I didn't have a Delaware. I went, I went as we say, Pro Se. Yeah to argue this. And I'm looking around saying, wow, I'm standing between, you know, 50 of these lawyers and 250 million dollars. I'm sure they want to talk about. Um, and so we We argued it and that was, like I said, last October and we're, we wait at this point. Here. Sorry nearly a year. Yeah, well it's been over a year since the settlement was announced in July of 2023. The hearing was October. Yeah. You know what? Part of the yeah I'm wondering. What? Part of the delay was remember we were waiting the size of the attorney's fee because we're waiting on that, the Dell kace out of the Delaware Supreme Court. Well, there are, there was that Yes, there was, there was the there were waiting for the Dell case, which I knew would come out and read it. The other thing that happened was the day after tornado, the tornado decision was announced in January the very next day. And so, here I am. I'm like a party to this case now, right? So I'm getting all the pleading I had, you know, was able to file my objection in the famous Delaware filing serve system which is maddening at the time. A very friendly clerk had helped me to like file. It four different times. You know, the first filing was double space, the second filing didn't list the word count. I mean, it was a weird stuff, but so now, but now I'm getting all these pleading because I'm a party to it. So you know somebody changed Ferns and they were five filing. So around that. So I got all that anyway. So in the day after tornado was announced in this case in the Detroit case, a chance for sent a ladder. saying, to all the parties in the Detroit case, I know your oven waiting and what I understood was that normally, there's a guideline that on settlements, you get 90 days, And the 90 days had passed easily. So we're waiting, waiting, waiting. And so the day after, she sends this letter, that says, I know, you're still waiting. She said the big one of the big issues here is your legal fees. The 250 million dollars at the plaintiff lawyers. Want she expects that the arguments that are reasoning, whatever in on the tornado, legal fees, which are, you know, somewhere in the five to six, whatever billion dollar range will bear on The arguments for the legal fees in this case, right? So you're gonna have to wait longer for me to decide on the legal fees in tornado. And then I will decide on the legal fees in this Detroit case, right? So we're waiting and then there was one other interesting little Dimension to this. That we can mention. So about a month ago or so we're a month and a half ago, just out of the blue a letter shows up from the parties not from me from the plane. And the defendants saying I know we've been waiting Um, but some of the options. That were going to be returned as part of the 250 million dollars a 750 million dollars. Some of those options are starting to expire and, you know, the first little tranche of options is going to expire and it's going to change the damages in the case by like 200 hours, right? You know, no big deal but there's more options are going to start to expire pretty soon the next tranche expires like in June of 2025. And we'd like to get this wrapped up. Yeah, that's awkward. Because before that because not gonna settle. It has to go to trial. They want to. Yeah. Right. It's going to be some. I thought about that. Oh, she could totally say no. We want to try this. Now, I don't have my understanding. Is that once the settlement gets this far, right? So so she said so the parties had said we were willing to sever the legal fee arguments apart from the substance of the settlement. Whether the amount is the right number was 750 million is the right number. Whether the corporate governance changes were the right number and so there's this letter of three four pages later, you can find it on on the docket And and in the letter it said and we are aware of no other issues related to the settlement other than the legal fees. And so I then wrote a letter myself, wait a minute folks, there's actually and I had actually voiced, two objections, the main one had to do with the vote. There was another one related to the allocation of the 750 million dollars. The settlement was silent as to how the 750 years going to be allocated, among all the ten or eleven directors. And there was, there was a path where you could see, you know, in the other directors are that were in this were like Larry Ellison at Oracle and James Murdoch from News Corp and and Kimball musk. You know, there's all these defendant and and there since there was no allocation stated in the draft settlement, you know, Larry Ellison could pay it for everybody or maybe Elon Musk could pay it for everybody. Yeah. Right. And so I and that was and that would have a really created some very interesting and probably really horrible conflicts so that was the right. When I wrote my objection wrote to objections, that was the first one anyway. So I said to in my letter know, they're still more going on here, it's as if the parties didn't even read my objection and I hope that the chancellor is taken. Mine under advice man, as well. So that happened and we're and again we we continue to wait, but there was that little interesting. Development in the case. So like he's only about a month or so ago, okay. So right. Well know that, that sounds really interesting. I'm like oh see if we get an answer, right? Yeah my hope is that in order is forthcoming pretty soon. People have been waiting a while. Yeah. And and Chancellor McCormick says the amounts, fine. But listen to Levin. Take seriously, what he says about the allocation and the other likely objected addresses specifically. So that'll be right? Yes, my my I've been told by the attorneys that were there. I had some a couple of other attorneys that were just visiting they hearing and they said, yeah, that she'll probably probably include what you were saying in this so at least that's my hope. Anyway, well, I really hope you get a chance to make some more. So let's wrap up there. They'll be more than we'll cover next time. Yes indeed we will. Thanks it's been terrific talking about all this This is shareholder Primacy hosted by hand lifting and me Mike Levin. I'm an independent activist investor, and an advisor to investors about their activist situations. And of course, is the Michael M, Fleischman professor in business law, and Entrepreneurship at Tulane law school and an Affiliated Tulane's Murphy Institute. You can find Mike at the activist investor.com and you can find an at two lane.edu. Our podcast is of course produced and distributed by a free flow media. Thanks for listening. We will talk again soon.