October 28, 2021

Volume XI, Number 301

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October 28, 2021

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Senator Blumenthal Urges SEC To Investigate Fee-Shifting Charter Provisions

Yesterday, Senator Richard Blumenthal wrote a letter to the Securities and Exchange Commission asking that the “Commission protect investors and America’s capital markets from a serious and imminent threat.”  According to the Senator, this isn’t an ordinary threat, this threat is “leaves shareholders unable to protect their interests; it undermines the integrity of our capital markets, threatens to decrease market participation, and ultimately puts America’s prosperity at risk.”  The threat?  Fee shifting charter provisions.   Here’s what Senator Blumenthal wants the SEC to do:

I call upon the Commission to commence investigation of Alibaba Group Holding, Ltd., one of several companies that have elected to include fee-shifting provisions in their governing documents but failed to disclose it in offering statements.  The SEC should label such provisions as major risk factors and require corporations to publicly disclose them before any initial public offering.  More broadly, the SEC should clarify that fee-shifting provisions are inconsistent with federal securities law.  At a minimum, I urge the SEC to refuse to permit registration statements to move forward for any company that includes these provisions in violation of our federal securities laws.

I was more than a little perplexed by Senator Blumenthal’s claim that Alibaba Group Holding, Ltd. had failed to disclose the existence in its offering documents.  In fact, Alibaba had filed itsamended and restated memorandum articles of association as an exhibit to its registration statement on Form F-1 (Alibaba is a Cayman Islands company).  They include the following provision:

Unless otherwise determined by a majority of the Board, in the event that (i) any Shareholder (the “Claiming Party”) initiates or asserts any claim or counterclaim (“Claim”) or joins, offers substantial assistance to or has a direct financial interest in any Claim against the Company and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits in which the Claiming Party prevails, then each Claiming Party shall, to the fullest extent permissible by law, be obligated jointly and severally to reimburse the Company for all fees, costs and expenses (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) that the Company may incur in connection with such Claim.

I was able to find this “undisclosed” provision in the company’s public filings within seconds.

Senator Blumenthal also doesn’t explain why it is right or fair for plaintiffs’ law firms to play the tort lottery at the expense of shareholders who ultimately bear the costs of frivolous litigation.

You can read Senator Blumenthal’s letter here.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IV, Number 311
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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