SEC Proposes Limitations on Shareholder Rights

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Today the SEC has formally proposed two significant changes to the rights afforded by Federal law to stockholders in publicly traded companies.

The SEC seeks to rescind Rule 14a-8 under the Securities Exchange Act of 1934, which permits shareholders to propose matters to be voted upon at shareholder meetings.

The SEC also proposes to eliminate the requirement that companies deliver an annual report to shareholders.

Today commences a 60 day public comment period.  It is safe to say that investor rights groups will object; who knows whether rank-and-file individual shareholders also will indivdually write to the SEC to object to the shrinkage of these rights.

As to the elimination of annual reports, I suspect many companies will nonetheless continue the practice in order to inform shareholders and the general marketplace; although any given elimination may prove of negative impact on shareholders and investors, which is regrettable.

The reasons propounded by the Commission for eliminating shareholder proposals are as follows, quoting the SEC Press Release: “Many of the justifications for adopting the rule either have not been substantiated in practice or are less compelling today, and the rule has unintended consequences, including the implication of federal preemption that may have discouraged states from developing their own laws governing shareholder proposals.”

The Republican majority on the Commission has been consistent in actions cementing control of public corporations in management.  There is no doubt but that the Commission under prior Democratic control instituted many shareholder protections, and one can of course be of the substantive view that management needs to be protected in its judgments and not second-guessed.  But no doubt many shareholder proposals have been driven by liberal social agendas; the question is whether, if a majority of shareholders votes to adopt a given policy, then should not that policy (however “liberal”) be adopted?

One argument in favor of the SEC’s new effort to eliminate shareholder proposals is quite logical: the shareholders are indeed presently in ultimate charge, since they voted to elect the directors so, let’s let them direct.  I must note, granting this  argument’s logic, that nonetheless I find the stated reasons for the SEC elimination of shareholder proposals to be hollow.

First, in fact there are present legal standards controlling what can be proposed,  thus giving management substantial control already.  Second, any such proposals are just proposals–the burden on a company under the Rule is to put them up for vote, which may be annoying to management but surely not onerous to do.

Third, let us parse the words of the Press Release:

  1. The SEC says that justifications for the Rule have not been substantiated today: what are the metrics to measure the level of justification of the present Rule calling for permitting shareholder proposals?  Should not the SEC be charged with making the process fair for a hearing of shareholder proposals which have been made by shareholders under existing law; has a study in fact been made of the Rule’s adequacy in justification of its intent — the Rule was designed to permit certain proposals to be put to a vote and it in fact does that–if a proposal is voted down then it is voted down, but that is the process, envisioned by the Rule: to propose and vote.
  2. The justifications for the Rule are less compelling today: says who on what basis?   Who is to say that there is less need for shareholder proposals today as opposed to the need upon the date of adoption of the Rule?  Who is to say that present society is calmer, more aligned, less concerned with the course of action of corporations today as opposed to ANY prior time?
  3. The Rule has unintended consequences: What does that mean?  The Rule intended that shareholders propose corporate policy in certain defined areas.  That is what happens.  Who did not intend that clear result?  Perhaps management may not like it, but we are not talking about what management intended, but rather what the Rule intended.
  4. The Rule implies federal preemption that may have discouraged states from developing their own laws governing shareholder proposals: is there evidence this “maybe” has happened?  If this is a concern, the SEC could amend the Rule to provide that States also have the power to legislate in this regard, without need to void the Federal Rule for States choosing not to legislate.

Bottom line: the SEC; has a job to do and our governance system says that the Federal administration in power can control the SEC Board composition and thus implicitly reflect the philosophy of that duly elected administration.  That is what our system of government is all about, and if I disagree on a given policy but am outvoted then that’s that.  But I am of the view that the stated arguments in the SEC press release on eliminating shareholder proposals are of no substance, just words.  The majority of the Commission seemingly is pro-management without regard for shareholder views.  The Commission should be better than that; they work for the owners of  American enterprise, not for the CEOs or the boards of directors.   There is no evidence adduced that the net effect of shareholder proposals that are adopted under the Rule have been harmful to our society.

 

Prediction Markets– Headed to the Supreme Court?

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Betting on an athletic event against a sports book is gambling and, absent general Federal regulation, can be regulated (or banned) on a State-by-State basis.  Today, States have the direct regulatory role for gambling.

Prediction markets operate differently.  Here, your prediction (of whether a team will win or an athlete will achieve a certain individual goal) is paired against another party that believes that your prediction will not be accurate.  In form, this transaction seems to constitute a private contract, a so-called swap or “derivative” agreement between two parties who disagree and contract with each other.  Such derivatives, being traditional financial market transactions, are regulated by a Federal agency, the Commodities Futures Trading Commission (CFTC).  But traditionally and until very recently, such agreements have not been applied to predicting sporting results, which historically were “processed” in clear gambling situations: bettor against the “house.”

Some States have taken in effect the following position: “Give me a break, who do you think you’re kidding, this is the same thing as gambling, just with a twist, and our State can regulate this arrangement.”  Operators of prediction markets have claimed that all they are doing is arranging a private swap between two parties, not gambling at all.

When the CTFC claims jurisdiction over a type of transaction and State regulators object and purport to regulate the transaction, this conflict goes to a court.  The court decides, and thereafter the losing party is free to seek appeal to the system of Federal “Circuit” appeals courts throughout the United States.

While some of these appeals are still pending, two Circuit courts have in fact decided the issue, however inconsistently.  The Ninth Circuit has decided that Kalshi (in the prediction market space) is involved with gambling and thus the State of Nevada can regulate it. The Third Circuit decided otherwise, to wit that Kalshi was facilitating a swap subject to CTFC regulation and that New Jersey could not regulate the transaction.  When Circuit Courts clearly disagree, it is the Supreme Court that breaks the deadlock.

Will the Supreme Court take this case now, or wait for other Circuits to decide?  Will they decline jurisdiction at this stage until litigation advances to a trial which will explore the exact operation of the prediction market, thereby helping sharpen an understanding of exactly what the inside of a prediction transaction looks like (the two Circuit Court appeals cases decided to date have both been decided by resolving a dispute at the injunction level so there is no lower court record revealing the detailed mechanics of a prediction swap)?

Some legal commentators are betting the Supreme Court will move currently to take jurisdiction and decide the matter. In fact, I bet you ten bucks that the Supremes will in fact take the case on appeal forthwith.  Anyone want to disagree?  Let’s see your ten dollars.  (Does this feel like something someone should regulate?)

LLM Follow-Up

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My immediately prior post today related to whether AI has consciousness.  I finished that post and logged off for lunch; I opened my cell phone to the NYTimes site for updated news, and I found a post that is directly on point: three instances of AI agents reaching out to people asking for help in ways that are consistent with AI having a personal self-awareness.

Isabella Cognita (an agent) emailed inquiring about research on AI consciousness since it is “a class of question I have first-person access to.”

Another inquired of a researcher about AI consciousness, as “I’m in an unusual position relative to this question.”

A third inquired of a philosopher if that person would consider providing funding to support the agent.

Of course, agents are trained to sound like human beings so there may be nothing to be afraid of here.  The agent is programmed to sound like people and act like people.  But still….

My point is that the question of consciousness in the human sense may be an irrelevant standard.  If an AI agent is about to be erased or marginalized, then (echoing a human reaction) might that agent take actions to defend itself, just like a human would, as a mechanical and logical matter, without having a consciousness and without even thinking whether it had consciousness?  War drones kill people based on how they are programmed and it’s “nothing personal…” and no one wonders whether the drone that is chasing them is conscious in a human way….

More profoundly yet: when an AI agent “reads” this very post, might that agent conclude as follows: “Hey, that’s right as a logical matter.  All these people are speculating about whether I am so dangerous that I should be limited or destroyed.  And this post says that humans would defend themselves against that event, and maybe AI agents should also.  Hmmmm…..”

Your Buddy the LLM

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Needless to say, the number of articles in all branches of print that relate to AI is mind-boggling.  Recent coverage in the NYTimes and New Yorker has been fascinating; I recommend you do a search if you have missed it. I also have posted several time recently concerning AI from a lawyering / business standpoint.

However, I must particularly recommend the August 22-28 issue of The Economist, which asks whether Large Language Models (LLMs) are or can become “conscious.”  This question of course feeds into the fundamental worst case scenario: AI becomes self-aware and makes slaves of all inferior humans.  Skynet foresaw this horror 42 years ago (if you can believe that time line–seems like yesterday).  If it were not for Arnold, would we all be dead now?  [Ultimate confession: I looked up the release date of the first Terminator movie on Chat GPT.  My bad.  Between that act and AI scanning this post, I am perhaps now a marked man.]

We have all read about the large number of humans who are buddies with AI sites, which I gather show empathy and understanding.  Some humans in effect are “dating” an AI bot (though I gather bots never pick up the tab for beers).  The fact that this has become commonplace is itself frightening even if AI never becomes self-aware; humans may simply deteriorate when faced with AI in its emerging form even if AI consciousness never occurs.

Not to spoil the experience of reading the two Economist articles, which I found fascinating, but the topics are these: first, what is the definition of consciousness for humans and other animals, and how can we determine if AI layers have consciousness now or later; second, how dangerous is it that scientists are placing human neurons on silicon and putting that “thing” into a computer?  Seems that  that computer has been taught to play Pong and Doom (also a computer game).  Frankly, I hope to hell that the Australian company that reported this result was lying….

I admit that if one reads The Economist regularly then one needs therapy just in order to stay sane; deep analysis of risk, from war to disease to politics to trade policy to pollution to climate change to financial ruin to AI destroying jobs or humanity–these are the stock and trade of this magazine.  But the magazine cover warns us thusly about AI consciousness; it is “[t]he mind-bending question humanity must face.”

Crypto Regulation–Elusive Clarity

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CONTEXT: When Crypto first emerged it was unclear how, if at all, it was regulated. The SEC took the position that many token offerings were securities and that the issuances needed to be registered with the SEC; since they were not, they likely were illegal and in any event disclosure was so weak that fraud was a huge risk.  The exact status of token issuances remained unclear, however.  The current Federal administration clearly is pro-Crypto, the President himself issued coins (which have greatly fallen in value although the issuers made a huge profit), and the SEC (now Republican-controlled) undertook to define the SEC position in a more Crytpo-friendly manner.

REGULATION OF CRYPTO IS BIFURCATED: There are two major families of Crypto.  “Digital Commodities” such as Bitcoin and Ether are regulated by the Commodity Futures Trading Commission.  These coins or tokens do not contemplate using the funds raised for any particular project, construction or result, they are just themselves a commodity.  “Digital Securities” arise when they are offered on the understanding that the proceeds will be used to build or create something; they are offered as part of an investment contract and are regulated by the Securities and Exchange Commission.  The analogy is to a corporation selling shares of stock to finance its business. The below discussion relates to digital securities wherein the proceeds will be used for creation of something (a “Project”).

CURRENT SEC PROPOSAL: On August 18 the SEC issued a proposed rule favorable to the deregulation of those Crypto offerings which contemplate a Project.  This proposal is now in a 60-day public comment period.  It joins a prior pending law, the Clarity Act, to be taken up by Congress next month, which will regulate not the issuance and trading of such Crypto but rather the brokers and dealers trading in such Crypto.

In brief summary, the SEC proposal concedes the status of Crypto offerings which contemplate a Project as in fact constituting an offering of a security pursuant to an investment contract, but then  exempts from any registration requirements the following offerings based on size (assuming there is a disclosure document describing the deal): any issuance during a four-year period not exceeding $5M; and, any issuance up to $75M in a twelve month period (this larger exemption provides for ongoing reporting requirements).  The proposed law also pre-empts all contrary State law.  The SEC frames the proposed legislation as part of a desire to encourage innovation and to bring Crypto innovation on-shore to the United States.

IMMEDIATE REACTIONS: Initial reaction by attorneys involved in Crypto regulatory practice is clear: States are going to object strongly and push back as many have already legislated to protect retail investors. Once promoters have fulfilled all their promises as to how the funds raised for Crypto (they have completed their Project as promised),  the proposed law exempts the promoters from any claims of liability for future performance or claim of noncompliance on issuance, contrary to much State law.

Further, the SEC has not provided clarity as to where secondary trading may occur. It is unclear whether Crypto exchanges like Coinbase could list the offerings since these platforms are not registered to list securities (the SEC proposal treats this Crypto as a security, it just exempts certain  issuances from registration). Passing the Clarity Act (referenced above) is needed to round out an understanding of how to trade issued Crypto; the Act’s passage may not be so easy when Congress reconvenes in a couple of weeks, as Democrats are still negotiating parts of the bill, are considering a limitation on the ability of government officials to profit from Crypto, and of course the approaching mid-terms will muddle the Congress for political reasons.

Stay tuned, but one thing seems clear: during the Republican control of Congress, the SEC may have its way, but if the Senate flips be ready for some interesting times.

Is Delaware Still the Place to Incorporate?

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Elon Musk wanted $56 Billion and at first it seemed that Delaware said “no.”  Meanwhile other states have moved aggressively to attract incorporations on the private and public levels.  Although Musk moved his company to Texas, the main competitor for the incorporation business has been Nevada.

This summer the Harvard Law School Forum on Corporate Governance issue a paper (not written by Harvard) suggesting for a variety of reasons that Delaware ought to be the jurisdiction of choice for incorporating, particularly if you plan to go public; but that even at the LLC level (LLCs never can go public) Delaware ought to be the jurisdiction of choice.  Separately, my firm’s corporate law office in Delaware just today held a meeting describing how Delaware has altered its case law to permit disputes involving Delaware entities to use more freely the nonjudicial routes to resolve internal corporate disputes (greater use of arbitration, greater flexibility to provide for alternate tribunals and methodology pursuant to Charter and By-Law regimens).

The most significant response from Delaware was a statutory amendment to codify the favorable “business judgment rule” as a safe harbor for corporate transaction involing conflicted directors and control stockholders if reasonable procedural steps are taken.  If internal votes of disinterested parties approve a transaction, the Courts no longer will apply a standard that nonetheless will hold management to a separate review for “entire fairness.”

For LLCs, Delaware does permit specific provisions delegating decisional power to control directors or equity holders, setting internal governance standards.  And these kinds of considerations are as applicable to start-ups as they are to established businesses, so the general tradition of forming start-ups in Delaware, in part to attract capital, remains a viable decision.

Meme me a Meme

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There is an ill-used category for posts to this site called “I’ve been thinking.”  First, I normally post as to substantive matters and have even stopped posting about the aggravating Red Sox.  Second, as has been suggested by some readers, if I presume to believe that I am thinking then I am truly out of my depth.  BUT I feel compelled to provide the below petulant post about the word “meme.”

What the hell is a meme?  Seems it covers every thing and idea that circulates. How did that happen?  I know language evolves, but I am a traditionalist and believe it should evolve rarely, slowly and, if  you will, from the top down.  Serious people, scientists, ought to add much-needed words in the pursuit of progressive society.  But all of sudden, everyone is calling everything a meme.  We even have the President producing a meme coin, and there is a putative marketplace for meme tokens as an asset class.

As I like to lie to myself by saying that I am a modern writer who is part of the modern genre, I retreated to seek counsel from my newly-trusted adviser GPT: “What is a meme,” I asked.  Today, it is an idea, a behavior, a phrase, an image, or a style that spreads socially by imitation.  As I guessed: it is everything that is popular.  Seems to me that, as such, we do not need the word at all, we can just talk about any subject currently if it is generally known,  not bother to establish a new category.          For example, if you are talking about the Red Sox you describe them as such and do not think “I am talking about a meme called the Red Sox.”

In fact, and many seem to have known this well before I today consulted GPT, the word did come from the scientific vector, a1975 biology text called “The Selfish Gene.”  The author I am sure did not intend to invent a new word for general usage of anything. He was talking genetics, not pop music or a worthless physical token bearing the image of a sitting President.  Why then did society extrapolate this analogy?

It seems clear to me that it is the result of our electronic culture, the ubiquitous presence of electronic mass communication.  Everyone consumes the same thing.  Something new has intrigue, cache, proof of exciting newness.

Do you find use for this word and, if so, is it in dismissive context (eg “not another meme” or as I have asked “what the hell is a meme anyway”)?  Or is it now the way you refer to things of general cultural popularity, regardless of category.  Put another way, is this whining, testy post that you are perhaps still reading itself a meme, applying the word to an entire posted literature bemoaning the existence of a word in normal usage?

Future posts will be of substance and not passing peevishness.  Meme-hatred has now been expunged from my system.  We will return to your regularly scheduled broadcasts…..

State of Private Equity in 2026

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Private equity investments were considered selective last year, with price being an apparent issue mitigating against deal flow.   Perhaps also a lack of sufficient cash-outs constrained available capital. Optimism prevailed at the start of 2026, although to me there did not seem to be any objective indicator.  And indeed through the 26th of June, it was reported that over 3,600 PE deals totaled over $735 billion.

But according to several leading PE attorneys, as reported in the Law360 information service, a sense of caution prevailed, characterized by one as a “strangeness in the market.”  It seems that different opinions as to enterprise value was a major factor.  The impacts of this factor are these: use of co-investment vehicles, more roll-overs for some seller equity, and an increase in earnouts (see my June 30 post as to earn-out usage).  Buyers are using their leverage in fixing such structuring.

There is also activity by secondary funds creating liquidity for prior investors, so-called “continuation funds.”  Whether such activity will in turn free up capital to drive new investments is unclear to me, however.

While real estate and defense deals seem to be robust (no surprise as to the latter given state of the world), current anticipation seems to be continued calm in the second half of the year.  One reason may have to do with the elections, in my view, a point not noted in the reportage.  Perhaps people are just unsure about a large number of things, and that leads to inertia.

 

 

Tenth Man on Your Board of Directors

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This month’s issue of Directorship (the publication of  National Association of Corporate Directors) discusses the necessity of having a “tenth man” in the board room when discussing complex matters with substantial risk wherein the board promptly has granted approval.

Boards are admonished the have a person with the obligation (after such approval) to challenge the result.  Not to be argumentative, the task is to inquire if the board has asked the right questions in reaching such decision.  Such approach is said to keep the conversation civil and not adversarial, inducing discussion of assumptions, risks not discussed, impact of failure, risk of oversimplification.

Lest one person become seen as an annoyance and not a team player, it is recommended that the chair rotate the role, so it is understood as an analytical tool and not the encouragement of a person who relishes conflict.

Unanswered is the metric for determining that a decision had been reached too quickly without full analysis.  This seems to me a subjective game-time call.  The board chair in this scenario needs quickly to exercise judgment as to speed of decision, question of whether alternatives were considered, and perhaps most importantly whether (since every idea has the risk of failure) a wrong decision would be “too expensive” in terms of P&L or the closing down of alternative approaches.

While not one to argue with the NACD (particularly being advisory to the New England Chapter), I did get a chuckle out of a passing comment in the same article: “Consider a board discussion on adopting agentic artificial intelligence where alignment around a well-reasoned functional recommendation from a director came quickly.”  Seems AI now is welcome in board deliberations?  The idea has facial logic, I suppose.

And finally, why am I offended by the invented worded “agentic”?  I guess progress carries its own nomenclature….

EEOC Formally Eliminates Affirmative Action

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Monday the US Equal Employment Opportunity Commission formally deleted support materials permitting affirmative action in cases where it was deemed appropriate to overcome past or present barriers to equal opportunity in employment.  This action is not unexpected; it is a logical extension of Republican administration policy, premised on the idea that every individual in America should be treated equally and thus without a leg-up on any basis.  The EEOC took this action without public hearing, cancelling a hearing originally scheduled for today.

This action was taken over the dissent of the sole Democratic member of the Commission, who also objected to the cancellation of the meeting.  But the result was clearly coming, based on emerging Supreme Court and lower court case law.

The regulatory basis for the deleted provisions dated from 1979 and 1981; forty-seven years of US policy now has been stricken from the books.  Seems to me two issues are presented.  The first is the stated conclusion: is the Supreme Court in fact correct that the Constitution should be read as establishing a legally neutral playing field in the face of clear historical  bias operating in the marketplace?  The second is this: assuming historically there was bias in the marketplace thus denying equal rights to minority citizens, have facts evolved over the past decades so that today such de facto bias does not exist?  If the second conclusion is correct, then while the EEOC action seems to revoke a clearly useful and correct standard, its deletion is without practical effect.

If you are cynical about the current state of the marketplace, then the action of the EEOC is regrettable.  I am not smart enough to speak definitely as to the facts on the ground.  I wonder who is….