Compendium

Securities and Corporate Law — Formation, Fiduciary Duty, and Shareholder Litigation

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Securities and Corporate Law — Formation, Fiduciary Duty, and Shareholder Litigation

US corporate law is fifty bodies of state law, dominated by Delaware. The federal securities laws regulate disclosure and antifraud; state corporate law regulates internal affairs — formation, governance, fiduciary duty, voting, takeovers. The interplay defines how American corporations are governed. This note treats the corporate-law half plus the shareholder-litigation interface: corporation formation (DGCL, MBCA, state-of-incorporation choice), board fiduciary duties (Smith v Van Gorkom 1985, Caremark 1996, Stone v Ritter 2006), the business judgment rule, enhanced scrutiny under Revlon / Unocal / Blasius, controlling shareholder transactions (MFW 2014, Match Group 2024), shareholder rights (proxy access, books-and-records, derivative suits, fee-shifting bylaws), takeover defenses (poison pills, staggered boards, Williams Act tender offers), federal securities fraud class action mechanics (10b-5 elements per Halliburton II 2014, scienter pleading post-PSLRA 1995, loss causation Dura 2005, fraud-on-the-market presumption), M&A practice (acquisition agreements, MAE clauses post-Akorn, fiduciary outs, no-shop / go-shop / matching rights), and recent enforcement trends. Sister notes securities-regulation-deep and securities-regulation-and-ma-practice cover overlapping ground with different emphases — the federal disclosure-and-antifraud regime and the M&A deal-practice mechanics respectively.

See also

1. Corporation Formation and the Internal Affairs Doctrine

1.1 State of Incorporation

A US corporation is a creature of the state under whose laws it was organized. The “internal affairs doctrine” — articulated in CTS Corp v Dynamics Corp of America, 481 US 69 (1987) and McDermott Inc v Lewis, 531 A.2d 206 (Del 1987) — provides that the law of the state of incorporation governs internal affairs (relationships among directors, officers, shareholders): election of directors, fiduciary duties, voting rights, the corporation’s right to sue or be sued in its own name, derivative-suit rules, indemnification. The law of the principal place of business or the forum may govern external matters (commercial contracts, torts, employment).

The doctrine permits issuers to choose their governance law independent of where they operate. About two-thirds of US public companies are incorporated in Delaware, including ~80% of new IPOs. Significant minority — Nevada, Texas (since the Texas Business Organizations Code 2006 and the Texas Business Court Act 2023), Maryland (REITs preferring its statute), Massachusetts (legacy mutual-insurance and trust forms), New York (some legacy industries).

1.2 The Delaware General Corporation Law (DGCL)

Title 8 of the Delaware Code. Originally enacted 1899; modernized 1967; amended nearly every year by the Delaware General Assembly. Key provisions:

  • § 102 — certificate of incorporation contents. § 102(a) mandatory contents; § 102(b)(1)-(7) permissive (waiver of preemptive rights, classification of board, etc.); § 102(b)(7) — director exculpation for breach of duty of care (added 1986 post-Smith v Van Gorkom). § 102(b)(7) was amended in 2022 to also permit officer exculpation (excluding for derivative claims and certain other carve-outs).
  • § 109 — bylaws — adoption, amendment.
  • § 141 — board of directors. § 141(a) — “business and affairs … shall be managed by or under the direction of a board.” § 141(b) — number, qualifications. § 141(c) — committees. § 141(d) — classified (staggered) board with up to three classes. § 141(e) — reliance on records, officers, experts. § 141(k) — removal of directors.
  • § 144 — interested director transactions; safe harbor with disinterested director approval, disinterested shareholder approval, or proof of substantive fairness.
  • § 145 — indemnification and advancement of expenses.
  • § 152 — consideration for stock.
  • § 211 — annual meeting requirement.
  • § 212 — voting rights, proxies.
  • § 213 — record date.
  • § 220 — books-and-records inspection by stockholders (subject to “proper purpose” requirement).
  • § 228 — written consent in lieu of meeting.
  • § 242 / § 251 / § 253 / § 262 / § 271 — charter amendments, mergers, short-form merger, appraisal, sale of substantially all assets.
  • § 251(h) — added 2013; permits short-form merger upon completion of qualified tender offer.
  • § 262 — appraisal rights — statutory dissenter’s remedy. Major 2018 reforms eliminated appraisal arbitrage for arms-length public mergers.
  • § 271 — sale of substantially all assets — requires shareholder approval.
  • § 273 — judicial dissolution.

1.3 The Model Business Corporation Act (MBCA)

ABA Corporate Laws Committee model statute, adopted in some variant by ~30 states (Indiana, Iowa, Tennessee, Virginia, Washington, etc.). The MBCA tends to be more permissive on certain governance questions (e.g., shareholder approval requirements) and incorporates “best practices” articulated by the ALI’s Principles of Corporate Governance.

1.4 Nevada and Texas Alternatives

Nevada Revised Statutes Chapter 78 — Nevada has positioned itself as the “anti-Delaware” jurisdiction:

  • More expansive director and officer exculpation under NRS 78.138(7) — directors are presumed to act in good faith; rebuttal requires clear and convincing evidence of intentional misconduct or knowing violation of law.
  • Reduced fiduciary duty scrutiny — Shoen v SAC Holding (Nev 2006) endorses business judgment review at almost all points.
  • No appraisal in arms-length mergers (NRS 92A.390).

Tesla reincorporated in Texas after Tornetta v Musk (Del Ch 2024) rescinded Musk’s 2018 performance award; the move was challenged by stockholder plaintiffs but proceeded. Several other companies followed (Trump Media in 2024, Dropbox publicly considering Texas).

Texas Business Organizations Code + Texas Business Court Act 2023 — Texas created a specialized business court in 2023 (effective September 2024) for high-value disputes involving Texas entities. The Texas Stock Exchange (announced February 2024 by Texas Stock Exchange Group with backing from BlackRock and Citadel Securities; targeting 2026 launch) is positioning Texas as a parallel governance + listing center.

Delaware Senate Bill 21 (DSA 2024) — Delaware General Assembly enacted legislation March 2024 to clarify several aspects of corporate law in response to high-profile decisions, including limits on books-and-records demands and “consent” demands for shareholder-list information.

1.5 Public Benefit Corporations

Delaware Subchapter XV (§§ 361-368, added 2013, amended 2020) authorizes “public benefit corporations” (PBCs) — for-profit corporations with one or more public benefits in their certificate. Directors must balance pecuniary interests of stockholders, best interests of those materially affected, and the public benefits. PBCs have been adopted by Allbirds, Kickstarter, Patagonia (different structure), Vital Farms, Lemonade. ~3,000 Delaware PBCs as of 2023.

2. The Business Judgment Rule and Fiduciary Duties

2.1 The Three Core Fiduciary Duties

Duty of care — directors must inform themselves and exercise informed judgment. Smith v Van Gorkom, 488 A.2d 858 (Del 1985) — Trans Union board’s two-hour review of merger violated duty of care; personal liability imposed. Spawned § 102(b)(7) statutory exculpation provisions across all 50 states. Aronson v Lewis, 473 A.2d 805 (Del 1984) — directors are presumed to have acted on an informed basis.

Duty of loyalty — undivided loyalty to corporation and shareholders. Bars self-dealing, usurpation of corporate opportunity, competing with the corporation, trading on inside information. Guth v Loft, 5 A.2d 503 (Del 1939) — foundational corporate opportunity case. Broz v Cellular Information Systems, 673 A.2d 148 (Del 1996) — multi-factor corporate opportunity test.

Duty of good faith — sometimes treated as a separate duty (Disney IV, 2006) and sometimes subsumed into loyalty (Stone v Ritter, 2006). In re Walt Disney Co Derivative Litigation, 906 A.2d 27 (Del 2006) — even compensation arrangements as extravagant as Michael Ovitz’s $130M severance after 14 months survived BJR scrutiny because no bad faith was shown.

2.2 The Business Judgment Rule

The BJR is a presumption that directors acted on an informed basis, in good faith, and in the honest belief the action was in the best interests of the corporation. Aronson v Lewis, 473 A.2d 805 (Del 1984). The rule shifts the burden to the plaintiff to rebut the presumption.

If the BJR applies, courts will not second-guess a business decision absent waste (a decision so far beyond rational that no business person would have agreed to it) — Cinerama Inc v Technicolor Inc, 663 A.2d 1156 (Del 1995).

The BJR is rebutted by showing: lack of due care (gross negligence — informational); bad faith; self-interest of a majority of board; failure to consider material information.

2.3 Caremark Oversight Duty

In re Caremark International Inc Derivative Litigation, 698 A.2d 959 (Del Ch 1996) (Chancellor Allen). Directors’ duty of oversight: ensure that an information and reporting system exists, and that the board’s monitoring is reasonable. Stone v Ritter, 911 A.2d 362 (Del 2006) — formally placed Caremark within the duty of loyalty (good-faith component). To prevail, plaintiff must show:

  1. Directors utterly failed to implement any reporting or information system or controls; or
  2. Having implemented such a system, consciously failed to monitor or oversee its operations, thus disabling themselves from being informed of risks or problems requiring their attention.

Either showing must demonstrate bad faith (a conscious disregard for known duties).

The post-2019 Caremark renaissance:

  • Marchand v Barnhill, 212 A.3d 805 (Del 2019) — Blue Bell Creameries’ board failure to monitor food safety after listeria deaths gave rise to a viable Caremark claim. Court found the lack of any food-safety committee or system-level monitoring was a Caremark “Red Flag.”
  • In re Clovis Oncology, Inc Derivative Litigation, 2019 WL 4850188 (Del Ch Oct 1, 2019) — board failure to monitor clinical trial protocol compliance survived motion to dismiss.
  • Boeing 737 MAX (In re The Boeing Co Derivative Litigation), 2021 WL 4059934 (Del Ch Sept 7, 2021) — Chancellor Karessa Cain. Board’s failure to actively monitor airplane safety (no separate safety committee, audit committee’s safety oversight inadequate) supported Caremark claim. $237.5M settlement March 2022.
  • McDonald’s / Stein, In re McDonald’s Corp Stockholder Derivative Litigation, 289 A.3d 343 (Del Ch 2023) (Vice Chancellor Laster). Extended Caremark duty to officers (not just directors) — McDonald’s former Chief People Officer’s alleged ignoring of sexual harassment complaints stated a Caremark claim against the officer.

2.4 Officer Fiduciary Duties

Gantler v Stephens, 965 A.2d 695 (Del 2009) — officers owe the same fiduciary duties as directors, including duty of care and duty of loyalty (with Caremark oversight component per McDonald’s).

The 2022 amendment to § 102(b)(7) (effective August 2022) permits officer exculpation for breaches of duty of care, with carve-outs for derivative claims (officers exculpation does not apply in derivative actions); claims brought directly by the corporation; and intentional misconduct, knowing violations of law, transactions from which the officer derived improper personal benefit.

3. Enhanced Scrutiny — Revlon, Unocal, and Blasius

When transactional context creates structural conflict, Delaware applies “enhanced scrutiny” rather than BJR — directors bear the burden of proving reasonableness.

3.1 Unocal — Defensive Measures

Unocal Corp v Mesa Petroleum Co, 493 A.2d 946 (Del 1985). Board’s adoption of defensive measures in response to a perceived threat triggers enhanced scrutiny: directors must show (i) reasonable grounds for believing a danger to corporate policy and effectiveness existed (the “threat” prong); (ii) the defensive measure was reasonable in relation to the threat posed (the “proportionality” prong).

Unitrin Inc v American General Corp, 651 A.2d 1361 (Del 1995) — refined proportionality test: defensive measure must not be “preclusive” (mathematically or realistically impossible to undertake a successful proxy contest) or “coercive” (forcing the result rather than permitting the shareholder to choose).

Air Products & Chemicals Inc v Airgas Inc, 16 A.3d 48 (Del Ch 2011) — Vice Chancellor Chandler upheld Airgas’s combination of poison pill + staggered board against Air Products’ three-year tender offer campaign. A staggered board + poison pill can be effectively “preclusive” if entrenched directors continue to refuse to engage.

3.2 Revlon — Sale of Control

Revlon Inc v MacAndrews & Forbes Holdings Inc, 506 A.2d 173 (Del 1986). When sale of corporate control is inevitable, directors’ duty shifts to obtaining the best price reasonably available for stockholders. The board becomes “auctioneer.”

Revlon’s triggers (Paramount Communications Inc v QVC Network Inc, 637 A.2d 34 (Del 1994)):

  1. Active bidding process for the company.
  2. Board’s response to a bidder’s offer that abandons long-term strategy in favor of breaking up the company.
  3. Approval of a transaction resulting in change of control (cash deals, stock deals where target shareholders end up with less than majority of post-merger entity).

Lyondell Chemical Co v Ryan, 970 A.2d 235 (Del 2009) — Revlon does not require any particular process; the question is whether the board acted to maximize value. Bad faith requires “utter failure” to attempt to obtain best value.

C&J Energy Services v City of Miami General Employees’, 107 A.3d 1049 (Del 2014) — Revlon does not require a market check or auction. Single-bidder negotiation can satisfy Revlon if board has informed view of market.

3.3 Blasius — Manipulation of Shareholder Franchise

Blasius Industries Inc v Atlas Corp, 564 A.2d 651 (Del Ch 1988). When board action’s primary purpose is to interfere with stockholder voting, “compelling justification” required (the most demanding standard short of entire fairness). Atlas board’s increase in board size to thwart Blasius’s consent solicitation invalidated.

MM Companies Inc v Liquid Audio Inc, 813 A.2d 1118 (Del 2003) — Blasius applied to defensive measure deployed during proxy contest.

Recent Blasius-adjacent cases involving advance-notice bylaw enforcement (Truist Bank v United Western Bancorp (Del Ch 2024), TripAdvisor (Del Ch 2024)) test whether bylaw amendments adopted to obstruct a proxy challenge constitute Blasius “compelling justification” failures.

3.4 Entire Fairness — Self-Dealing

Weinberger v UOP Inc, 457 A.2d 701 (Del 1983) — for transactions where directors are on both sides (controlling shareholder squeeze-outs, going-privates), the directors bear the burden of proving entire fairness — “fair dealing” (timing, structure, negotiation, disclosure) and “fair price” (financial and economic considerations).

4. Controlling Shareholder Transactions — MFW and After

4.1 The MFW Framework

Kahn v M & F Worldwide Corp, 88 A.3d 635 (Del 2014). For a controlling shareholder squeeze-out merger, business judgment review (rather than entire fairness) applies if:

  1. The controller conditions the transaction at the outset on approval by an independent special committee AND a majority-of-the-minority (MOM) stockholder vote.
  2. The special committee is independent.
  3. The special committee is empowered to freely select its own advisors and to say no.
  4. The special committee meets its duty of care in negotiating a fair price.
  5. The vote of the minority is informed.
  6. The vote of the minority is uncoerced.

Each MFW protection must be in place from the outset and must function effectively for BJR to apply.

In re MFW Shareholders Litigation, 67 A.3d 496 (Del Ch 2013) — Chancellor Strine’s underlying decision.

4.2 MFW Extensions — Match Group and Beyond

Match Group, In re Match Group Inc Derivative Litigation, 315 A.3d 446 (Del 2024). Resolved a sharp circuit-split (well, Delaware Supreme Court split with itself) on whether MFW applies to all controller transactions or only freezeouts:

Held — MFW applies to ALL controller transactions (not just freezeouts) where the controller stands on both sides or obtains a non-ratable benefit. Without all six MFW protections, entire fairness review applies.

Match’s reasoning: post-IAC reverse-spinoff transaction was a “controller transaction” because Barry Diller obtained a non-ratable benefit (changes to capital structure favoring his control); entire fairness review applied; the plaintiffs’ complaint survived motion to dismiss.

The Match decision was viewed as expanding controller-transaction scrutiny; the Delaware General Assembly in 2024 considered (but did not enact) responsive legislation to narrow Match.

Sears Hometown & Outlet Stores Inc Stockholders Litigation, 309 A.3d 474 (Del Ch 2024) — applied Match. Lampert’s controlling-shareholder transactions reviewed under entire fairness absent MFW compliance.

4.3 Common Ground With Federal Securities Law

When a controller squeeze-out is structured as a tender offer + short-form merger (DGCL § 251(h)), federal disclosure law (Schedule TO + Schedule 14D-9) interlaces with the state-law fiduciary review. Pure Resources, In re Pure Resources Inc Shareholders Litigation, 808 A.2d 421 (Del Ch 2002) — controller tender offers can avoid entire fairness if structured with non-coercion safeguards; modified by post-MFW landscape.

5. Shareholder Rights — Proxy, Books-and-Records, Derivative Suits, Bylaws

5.1 Proxy Access and Rule 14a-8

Section 14(a) of the Exchange Act + Rule 14a-8 — shareholder proposal rule. Shareholders satisfying eligibility thresholds (post-September 2020 amendments: 15,000 owned 2 years, or $2,000 owned 3 years) may submit a proposal for inclusion in the proxy statement.

Substantive grounds for exclusion under Rule 14a-8(i):

  1. Improper under state law.
  2. Violation of law.
  3. False or misleading.
  4. Personal grievance.
  5. Substantially implemented.
  6. Conflicting proposal.
  7. Ordinary business operations (the “ordinary business” exclusion — the most-litigated).
  8. Director nominations.
  9. Substantially duplicative.
  10. Failure to receive sufficient support in prior submissions.
  11. Resubmission limitations.
  12. Investment Company Act 1940 violations.
  13. Specific amount of dividends.

Rule 14a-8(i)(7) “ordinary business” — modified by SEC Staff Legal Bulletins, with significant pendulum swings. SLB 14L (November 2021, Gensler-era) loosened the standard, allowing more environmental and social proposals; SLB 14M (February 2025, Atkins-era) reversed and tightened back to pre-2021 frame.

Universal Proxy (Rule 14a-19, effective September 2022) — all director nominees on a single proxy card in contested elections. Lowered the bar to mounting partial slates; activists no longer need to file a complete short-slate proxy to put nominees forward.

5.2 Books-and-Records — DGCL § 220

DGCL § 220 provides stockholders with a statutory right to inspect “books and records” for a “proper purpose.” Reasonable for investigating potential mismanagement or wrongdoing, valuation, communication with other stockholders.

The Delaware Supreme Court tightened the showing in AmerisourceBergen v Lebanon County Employees’ Retirement Fund, 243 A.3d 417 (Del 2020) — plaintiff must show “credible basis from which the court may infer possible mismanagement”; eviscerated the “no purpose other than” line of cases.

Books-and-Records 2024 Amendments — DGCL § 220 amendments enacted by Delaware Senate Bill 21 in early 2024 narrowed the scope of “books and records” to limit electronic communications (e.g., text messages, emails not approved by formal corporate action). Plaintiffs challenged the amendments under the federal preemption and First Amendment in litigation pending through 2025.

5.3 Derivative Suits

A shareholder may sue on behalf of the corporation if the corporation refuses to bring a claim. Procedure governed by Federal Rule 23.1 (federal court) and Chancery Rule 23.1 (Delaware).

Demand requirement — plaintiff must either make pre-suit demand on the board or plead with particularity why demand would be futile.

Aronson v Lewis, 473 A.2d 805 (Del 1984) — demand futility test (where the board that would consider demand approved the underlying transaction): plaintiff must allege particularized facts creating reasonable doubt that (a) directors are disinterested and independent, or (b) the challenged transaction was a valid exercise of business judgment.

Rales v Blasband, 634 A.2d 927 (Del 1993) — modified Aronson for cases where the board did not approve the underlying transaction.

United Food and Commercial Workers Union v Zuckerberg, 262 A.3d 1034 (Del 2021) (Chief Justice Strine) — unified the Aronson and Rales tests into a single three-part formulation:

  1. Director-by-director — would a majority of the demand board face a substantial likelihood of liability on the claim?
  2. Did a majority of the demand board lack independence from someone who faces substantial likelihood of liability?
  3. Did a majority of the demand board receive a material personal benefit from the challenged conduct?

If any of the three is “yes” for a majority of directors, demand is excused.

5.4 Fee-Shifting Bylaws and Forum Selection

Forum selection bylaws — DGCL § 115 (added 2015) permits charter or bylaw provisions designating Delaware Chancery Court as the exclusive forum for internal corporate claims. Boilermakers Local 154 Retirement Fund v Chevron Corp, 73 A.3d 934 (Del Ch 2013) (Chancellor Strine) upheld validity.

Federal forum selection — Salzberg v Sciabacucchi, 227 A.3d 102 (Del 2020) — upheld provisions in certificates of incorporation requiring Securities Act claims to be filed in federal court (rather than state court). Closed the post-Cyan-loophole of state-court 1933 Act class actions.

Fee-shifting bylaws — ATP Tour Inc v Deutscher Tennis Bund, 91 A.3d 554 (Del 2014) (briefly upheld director-adopted fee-shifting bylaw). Delaware overruled in 2015 by amendments to DGCL §§ 102 and 109 — banned fee-shifting bylaws in stock corporations.

5.5 Inspection of List for Proxy Contest

DGCL § 219 — record-date stockholder list available to other stockholders for purposes “reasonably related” to a proxy matter. Crown EMAK Partners LLC v Kurz, 992 A.2d 377 (Del 2010) — broad reading.

6. Takeover Defenses

6.1 The Poison Pill (Shareholder Rights Plan)

Originated by Wachtell Lipton’s Martin Lipton in 1982. Validated in Moran v Household International Inc, 500 A.2d 1346 (Del 1985).

Mechanics: triggered when an acquirer crosses an ownership threshold (typically 10-20%) without board approval. Triggered rights entitle all other shareholders to purchase additional shares at deep discount, massively diluting the acquirer’s stake. Acquirer cannot rationally cross the threshold without negotiating with the board.

Modern variants:

  • NOL pill — preserve net operating loss carryforwards at lower thresholds (4.9%).
  • Wolf-pack pill — addresses coordinated activist groups; lowered threshold (e.g., 10%).
  • Williams-Act-Friendly pill — exempts qualifying offers meeting specified terms.

Versata Enterprises Inc v Selectica Inc, 5 A.3d 586 (Del 2010) — upheld NOL pill at 4.99% threshold.

The Williams Companies Inc Stockholder Litigation, 2021 WL 754593 (Del Ch Feb 26, 2021) (Vice Chancellor McCormick) — invalidated an “anti-activist pill” with a 5% trigger and aggressive definition of “groups.” Held the pill unreasonable under Unocal.

6.2 Staggered Boards

DGCL § 141(d) — board may be classified into up to three classes, with one class elected each year. A staggered board takes two annual cycles to flip majority.

The combination of staggered board + poison pill is the most powerful structural defense. Bebchuk and Subramanian (2002) found takeover bids 75% more likely to succeed against companies without staggered boards.

The trend has been toward declassification — most large-cap S&P 500 companies have annual elections. The Shareholder Rights Project (Harvard, 2011-2015) led declassification campaigns at 100+ companies.

6.3 The Williams Act Tender Offer Regime

Williams Act of 1968 added Sections 13(d), 13(e), 14(d), 14(e), 14(f) to the Exchange Act.

  • § 13(d) — 5%+ beneficial ownership reporting on Schedule 13D.
  • § 13(e) — issuer tender offers (going-private rules under Rule 13e-3).
  • § 14(d) — tender offers for 5%+ of equity securities. Schedule TO required. Disclosure to target shareholders; minimum 20 business day offer period; all-holders rule; best-price rule; right of withdrawal.
  • § 14(e) — antifraud in tender offers.
  • § 14(f) — change-in-control through tender offer disclosure.

Rule 14d-9 — target’s recommendation (Schedule 14D-9), must be filed within 10 business days of the commencement of the tender offer. The board recommends to tender, recommends against, takes no position, or is unable to take a position.

Rule 14e-3 (17 CFR § 240.14e-3) — broader than 10b-5; prohibits trading by anyone in possession of material non-public information about a tender offer that has commenced or is about to commence and who knows the information originated from the bidder or target. No fiduciary breach required. Upheld in US v O’Hagan, 521 US 642 (1997).

6.4 White Knights and White Squires

A “white knight” is a friendly alternative bidder solicited to counter a hostile takeover. A “white squire” is a friendly investor placed strategically (e.g., Buffett’s Berkshire Hathaway investing in Bank of America 2011, GE 2008, Goldman Sachs 2008).

Selling control to a white knight may itself trigger Revlon; courts have recognized the board’s right to favor a long-term-oriented bidder when consideration is largely stock and a stable shareholder mix is plausibly value-enhancing (Paramount v Time, 571 A.2d 1140 (Del 1990)).

6.5 Hostile vs Friendly — Statistics

Hostile takeovers are uncommon in the modern era of poison pills. In 2024 only ~3% of US M&A deals (by count) and ~5% (by value) were classified as hostile. Most “hostile” announcements convert to friendly negotiated deals within weeks (Microsoft / Activision had no hostile element; Elon Musk / Twitter began hostile and settled).

Activist campaigns are the modern substitute — pressure for change through public letters, proxy fights, and board representation rather than full takeovers.

7. Federal Securities Fraud — Rule 10b-5 Class Actions

The intersection of corporate law and federal securities law produces the largest class actions in US history (Enron 6.13B, Tyco 2.65B, Bank of America Merrill Lynch 3B, etc.).

7.1 Elements of a 10b-5 Claim

Per Halliburton II v Erica P. John Fund, 573 US 258 (2014):

  1. Material misrepresentation or omission — TSC Industries Inc v Northway, 426 US 438 (1976) — “substantial likelihood that the disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” Basic Inc v Levinson, 485 US 224 (1988) — for contingent events (mergers), materiality is probability x magnitude.
  2. Scienter — Ernst & Ernst v Hochfelder, 425 US 185 (1976) — required “mental state embracing intent to deceive, manipulate, or defraud.” Negligence insufficient. Recklessness sufficient in most circuits (the Second, Ninth, et al. recognized; the Third Circuit Bowers articulation).
  3. Connection with purchase or sale — Blue Chip Stamps v Manor Drug Stores, 421 US 723 (1975).
  4. Reliance — Affiliated Ute Citizens v United States, 406 US 128 (1972) (presumption for omissions); Basic v Levinson, 485 US 224 (1988) — fraud-on-the-market presumption for trading on efficient markets.
  5. Economic loss + loss causation — Dura Pharmaceuticals Inc v Broudo, 544 US 336 (2005) — loss causation requires linkage between misrepresentation and economic loss (not just inflated purchase price).

7.2 PSLRA Pleading

The Private Securities Litigation Reform Act of 1995 (Pub L 104-67) raised pleading bars for federal securities class actions:

  • Particularity for false statements under Rule 9(b) — must specify each statement, why false, and reasons for it being misleading.
  • Strong inference of scienter under 15 USC § 78u-4(b)(2) — Tellabs Inc v Makor Issues & Rights Ltd, 551 US 308 (2007) — “at least as compelling as any opposing inference of nonfraudulent intent.”
  • Automatic discovery stay during motion to dismiss.
  • Lead-plaintiff selection — presumption to largest financial stake (15 USC § 78u-4(a)(3)(B)).
  • Safe harbor for forward-looking statements (15 USC § 78u-5) — if accompanied by meaningful cautionary language, or made without actual knowledge of falsity.
  • Limited proportionate liability for non-knowing defendants.

7.3 Halliburton II and Price Impact

Halliburton Co v Erica P. John Fund Inc, 573 US 258 (2014) — preserved the Basic v Levinson fraud-on-the-market presumption but permitted defendants to rebut at class certification by direct evidence of no price impact.

Goldman Sachs Group Inc v Arkansas Teacher Retirement System, 594 US 113 (2021) — court must consider all evidence of price impact at class certification, including the “generic statement defense” (statements too general to have caused inflation). Resolved a Second Circuit / district court split.

7.4 SLUSA and Cyan

Securities Litigation Uniform Standards Act of 1998 (SLUSA) — preempts state-law class actions alleging fraud in connection with “covered securities.” 15 USC § 78bb(f).

Cyan Inc v Beaver County Employees Retirement Fund, 583 US 416 (2018) — held that Securities Act of 1933 class actions can proceed in state court. SLUSA does not preempt state-court 1933 Act class actions. Major plaintiffs’ avenue, particularly in California (post-Cyan, California state court was the leading 1933 Act class action venue).

The Salzberg v Sciabacucchi response — federal-forum bylaws in certificates of incorporation requiring 1933 Act claims to be filed in federal court — substantially closed the Cyan loophole at the company-level (subject to state-by-state enforceability).

7.5 Liability Theories — Janus and Lorenzo

Janus Capital Group Inc v First Derivative Traders, 564 US 135 (2011) — narrowed primary liability under Rule 10b-5(b) — “maker” of a statement is one with “ultimate authority over the statement.” Mutual fund advisor was not “maker” of fund prospectuses.

Lorenzo v SEC, 587 US 71 (2019) — defendant who disseminated false statements drafted by others but knew them to be false could be held liable under Rule 10b-5(a) or (c), even if not the “maker” under (b). Substantially neutralized Janus for SEC enforcement.

7.6 Class Action Mechanics

Federal Rule 23(b)(3) class certification — typicality, adequacy, numerosity, commonality, predominance of common issues, superiority of class adjudication. PSLRA lead-plaintiff process superimposed.

Settlements ranging from < 13M in 2024; mean $44M (Cornerstone Research data).

Attorney fee structures — typically a percentage of recovery (25-30% for early-stage, 15-25% for large), with billing rates and lodestar cross-checks. Subject to court approval.

Opt-out class — securities class actions are opt-out (Rule 23(b)(3)). Sophisticated investors increasingly opt out to pursue individual claims and capture more than the per-share class recovery (Texas Pacific Group, BlackRock, the New York City pension funds have opt-out programs).

7.7 SEC Enforcement vs Private Litigation

Securities fraud has parallel SEC enforcement and private 10b-5 tracks. SEC remedies: disgorgement (limited by Liu v SEC, 591 US 71 (2020) — must be returned to investors); civil penalties (tiered Tier 1/2/3); injunctive relief; officer-and-director bars; cease-and-desist orders. Administrative proceedings before ALJs (rapidly narrowed by SEC v Jarkesy, 603 US 109 (2024) — Seventh Amendment right to jury trial for securities fraud penalties).

Trump-era SEC enforcement (2025-) — substantial pivot away from crypto enforcement, ESG disclosure, climate. Wells notices reduced ~60% YoY (2024 vs 2023). Whistleblower bounty program continues.

8. M&A Practice — Brief Overlap

Detailed in securities-regulation-and-ma-practice. Key fiduciary touchpoints:

8.1 Deal Structures

  • Statutory merger under § 251 — board approval + stockholder vote (majority of outstanding, unless charter higher).
  • Stock-for-stock merger — Form S-4 + 14A or joint S-4/14A.
  • Asset purchase — § 271 requires stockholder approval if “substantially all” assets. The Hollinger / Black case (Del Ch 2004) parsed “substantially all” qualitatively.
  • Tender offer + § 251(h) short-form merger — bypasses second-step vote if tender offer captures ~50%+ and other conditions met.

8.2 Acquisition Agreement Anatomy

  • Representations and warranties — disclosure-schedule heavy in private deals; survival post-closing (public deals typically no survival).
  • Covenants — interim operating, no-shop with fiduciary out, regulatory cooperation.
  • Closing conditions — bring-down of reps, no MAE, regulatory approvals, financing (in financial-buyer deals).
  • MAE / MAC — material adverse effect / change clauses. Akorn Inc v Fresenius Kabi AG, 198 A.3d 724 (Del 2018) (Vice Chancellor Laster) — first Delaware Chancery case finding an MAE. Channel Medsystems Inc v Boston Scientific Corp, 2019 WL 6896462 (Del Ch Dec 18, 2019) — even reprehensible target conduct did not establish an MAE. COVID-19 MAE litigation (Forescout v Advent, AB Stable v MAPS Hotels, etc.) — mixed results, mostly enforcing deals.
  • Termination rights and break-up fees — typical 3-4% of equity value for friendly deals.
  • Reverse termination fees — protects target if buyer walks (typically 6-8% of equity value).
  • Specific performance — Twitter / Musk (Del Ch 2022, Chancellor McCormick) — Musk’s attempt to walk met with specific-performance trial, drove closing.

8.3 No-Shop, Go-Shop, Matching Rights

  • No-shop — target cannot solicit other bidders during pendency.
  • Fiduciary out — exception permitting board to consider an unsolicited superior proposal.
  • Go-shop — limited period (typically 30-45 days) post-signing during which target can actively solicit competing offers. Common in PE-led deals where signing without auction is preferred.
  • Matching rights — buyer’s right to match a superior proposal received during fiduciary-out period.

8.4 Representations and Warranties Insurance

R&W insurance has become standard in private M&A — substitutes for indemnification escrow. Global R&W premium >$80B in 2023. Major carriers: AIG, Aon Affinity (broker), Marsh JLT Specialty (broker), Tokio Marine HCC, Liberty GTS, Beazley, Berkshire Hathaway Specialty Insurance, Allianz GCS.

9.1 Tornetta v Musk and Texas Reincorporation

Tornetta v Musk, 2024 WL 343699 (Del Ch Jan 30, 2024) (Chancellor McCormick). Rescinded Tesla’s 2018 performance award to Musk, valued at over $56B at the time of decision. Found:

  • Musk was a controlling shareholder.
  • The compensation committee was not independent.
  • The process was not fair (negotiations were sham).
  • The disclosure to stockholders was not adequate.
  • Entire fairness review applied; defendants failed.

Tesla shareholders ratified the award a second time in June 2024 by majority vote. The Chancellor in December 2024 (Tornetta II) rejected the ratification’s effect as a curative measure. The case is on appeal to the Delaware Supreme Court in 2026.

Tesla reincorporated in Texas effective late 2024. Trump Media reincorporated in Florida. Several others followed.

9.2 Boards and AI Oversight

Several derivative complaints filed 2023-2024 alleging Caremark breach for inadequate AI governance — Microsoft, Alphabet, Meta. Survivorship likely depends on specific harm + lack of any controls (per Marchand framework). No major settlements yet.

9.3 Universal Proxy Effects

Universal Proxy (Rule 14a-19, effective September 2022) has materially changed activism. Engine No. 1’s 2021 ExxonMobil campaign predated the rule and was decisive. Post-UP campaigns: Trian / Disney 2024 (Peltz lost but with significant minority support); Land & Buildings / Macerich 2024.

9.4 ESG Backlash and Anti-ESG Bylaws

State legislative response to ESG investing — Texas (anti-fossil-fuel-boycott divestment law, SB 13 2021); Florida (anti-ESG state pension law, HB 3 2023); Tennessee, Oklahoma, others. Vanguard exited Net Zero Asset Managers initiative December 2022; State Street, JPMorgan and others exited Climate Action 100+ February 2024.

9.5 Securities Class Action Volume

~210 filings in 2024 (Cornerstone Research) — down from peak ~400 in 2019. AI-related cases growing (Microsoft, Nvidia, C3.ai, others). Crypto-related cases continuing despite enforcement pullback. Anti-corporate-discrimination (anti-DEI) cases growing through 2024-2025.

10. Where to Read More

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