In a roundtable for the Daily Journal, partner Laurie Mims was interviewed about securities law trends and cases to watch. The panel of leading securities lawyers discussed Elon Musk's twitter trouble with investors and ultimately the SEC, recent U.S. Supreme Court rulings Cyan v. Beaver County Employees Retirement Fund and Lucia v. SEC, and recent Delaware Chancery and Ninth Circuit rulings that impact securities practitioners. Excerpts from Laurie's Q&A are below.
What potential issues may arise from Elon Musk’s settlement with the SEC over his now-infamous tweet on taking Tesla private? What are the lessons to be learned from the settlement?
It is not particularly unusual in the sense of a CEO making statements that relate to the stock, particularly the value of the stock—we all routinely see SEC subpoenas, inquiries, and certainly civil cases in such scenarios. What makes this situation unique is, first of all, Elon Musk’s celebrity status. Second is the fact that Tesla is suffering from many other issues and was already on the rocks with its investors, and with the SEC to some degree. I do think that the speed was probably just as much on the part of the accused, Tesla and Elon Musk, as it was the SEC. It sounded like there were settlement talks from the beginning with the SEC, and they wanted to get it resolved as quickly as possible, so that they could move on with their business. That’s not going to resolve all of the civil litigation that arises from the same issue, but that’s a lower risk than something like the overhang of an SEC investigation.
His punishment seems kind of light in a way—the amount of the fine and the fact that his ability to control the company has not really been changed. It remains to be seen whether the new chairman will exert any real power.
What are your thoughts on the Delaware Chancery Court’s finding of a material adverse effect in Akorn, Inc., v. Fresenius Kabi AG, et al., C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018) (Laster, V.C.)?
One of the more interesting pieces, and probably what’s going to have a bigger effect on companies outside of the pharmaceutical and biotech life sciences realm, is the ordinary course operating standard. Vice Chancellor Laster found that the financial problems that happened, some of which were due to regulatory compliance issues, but some of which were due to a changed competitive environment, materially affected the progress of the company. He looked at the durational effect.
There was also this unique way of looking at whether a change of 20 percent was enough to be material, and experts looked at different benchmarks. For example, they said a 20 percent drop would be the second largest drop ever in the stock market if that were to happen. So they said, “How can that not be material?” But they also looked at breakup fees, and other negotiated changes in prices that occur.
So I thought that part of the opinion was particularly interesting and more likely to have an impact on both the transactional side (how merger agreements are drafted), and also litigation (which arguments people put forth for trying to get out of a merger). It is quite an opinion.
What is the antici-pated impact of the U.S. Supreme Court’s unanimous ruling in Cyan Inc. v. Beaver County Employees Retirement Fund, 583 US _ (2018), holding the SLUSA does not strip state courts of jurisdiction to adjudicate class actions alleging only 1933 Securities Act violations, nor does it authorize removing such suits from state to federal court?
These types of claims are usually brought against companies that have recently IPOed or have done a secondary fundraising round—usually, they are not well-established companies. The burden of having to litigate in state court, without the discovery stay, is a big one and is something that often drives early settlement. This is something that companies that are considering an IPO, or particularly considering a secondary public offering, should keep in mind because basically all that needs to happen is the IPO or the secondary offering, and then a stock drop within a year, and if that happens and the amount is significant, you’re likely to see one of these cases.
What are your thoughts on the recent decision in the Northstar Financial Advisors Inc. v. Schwab Investments et al. class action—a case 10 years in the making—on SLUSA preclusion of state-law class-action claims arising from prospectus disclosures? How does it square with other circuits’ rulings?
The reasoning of the majority of the opinion did not seem complicated or novel to me. The reasoning is it should depend on the gravamen of the complaint or the gist as to what caused the harm. That’s the typical way that these sorts of provisions are interpreted so that they avoid results by artful pleading.
Read the full report here.