On August 24, 2023, the Second Circuit Court of Appeals issued its much-anticipated decision in Kirschner v. JP Morgan Chase Bank, holding that the syndicate term loans at issue were not securities. As noted in our earlier blog post, the SEC declined the court’s request to file an
The U.S. Court of Appeals for the Second Circuit held that a statement of opinion that reflects some subjective judgment can nevertheless be actionable under the securities laws if it misleads investors into thinking that the issuer had historical or factual support for the judgment made. But the court also held that corporate officers’ certifications of financial statements are nonactionable opinions in the absence of allegations that the officers either did not believe their certifications or knew that the financial statements were false or misleading.
The SEC suffered a significant loss last week in its ongoing legal battle with Ripple over the XRP digital token. While the District Court held that Ripple’s initial sales of XRP to institutional investors constituted the sale of unregistered securities, it was a Pyrrhic victory as the court held that all other ways in which Ripple sold or distributed XRP did not involve the sale of unregistered securities. In particular, the court held that Ripple’s program to sell XRP to public buyers on digital asset exchanges, as well as its distribution of XRP as compensation to employees and third parties, did not constitute the offer or sale of securities. The court also rejected the SEC’s arguments that Ripple used the institutional buyers as underwriters to sell XRP to the public. The opinion, if followed by other courts in pending litigation with the SEC, could have a far-reaching impact on the cryptocurrency markets, especially with respect to secondary market crypto trades on digital asset exchanges.
The Delaware Court of Chancery rejected a lawsuit by a Walt Disney Company stockholder to compel inspection of Disney’s books and records relating to the company’s opposition to Florida’s “don’t say gay” law – a stance that allegedly caused the Governor and legislature to retaliate against Disney. The decision in Simeone v. The Walt Disney Company (Del. Ch. June 27, 2023) holds that inspection of corporate books and records is not available under Delaware law unless the requesting stockholder – not his or her attorneys, who might have their own agenda – has stated a proper purpose for making such a demand. It also emphasizes the role that a corporation’s board of directors must play in making business decisions about controversial social and political issues. In addition, the ruling confirms that a board may exercise its business judgment to consider the interests of “corporate stakeholders” – such as “the workforce that drives a company’s profits” – when making decisions related to building the enterprise’s long-term value.
The gloves are off. The SEC’s recent enforcement actions against leading crypto exchanges suggest that the SEC has decided that time’s up for the crypto industry as it currently exists in the United States.
After spending years urging industry participants to come in and register, the SEC has made clear, by going after some of the biggest players in the space, that it does not intend to tolerate exchange operators’ offering of unregistered crypto trading in the United States, at least as to retail investors where the tokens are securities. From the SEC’s perspective, most crypto tokens are securities, so, if a company wants to provide the securities-like infrastructure to trade those tokens, it must be registered with the SEC – whether as an exchange (matching buyers and sellers), a broker-dealer (trading crypto on behalf of others), or a clearing agency (facilitating trade settlement).
The en banc Court of Appeals for the Ninth Circuit affirmed the dismissal of a shareholder derivative action in light of an exclusive-forum bylaw requiring assertion of derivative claims in the Delaware Court of Chancery, even though the plaintiff had pled a federal claim that was subject to exclusive federal jurisdiction and could not have been litigated in the Delaware court. The June 1, 2023 ruling in Lee ex rel. The Gap, Inc. v. Fisher could further encourage the adoption of similar forum-selection provisions and could discourage shareholders’ efforts to circumvent state-forum provisions by filing derivative actions alleging federal-law proxy claims in federal court.