Earlier this week, I wrote about Judge Edward M. Chen's ruling in Sender v. Franklin Res., Inc., 2015 U.S. Dist. LEXIS 171453, 3-4 (N.D. Cal. Dec. 22, 2015). Judge Chen applied California Corporations Code Section 419 to a Delaware corporation on the basis that the replacement of a lost or stolen stock certificate was not governed by the internal affairs doctrine. Although Corporations Code Section 419 applies to lost, stolen or destroyed certificates, it is not the only statute that expressly applies to those circumstances.
Section 8405 of the California Commercial Code provides that if an owner of a certificated security claims that it has been "lost, destroyed, or wrongfully taken", the issuer must issue a new certificate if the owner:
- Requests replacement before the issuer has notice that the certificate has been acquired by a "protected purchaser" (Section 8303);
- Files a sufficient indemnity bond; and
- satisfies other "reasonable requirements" imposed by the issuer.
At least with Division 8, we have a choice of law rule. Under Section 8110 of the Commercial Code, the local law of the "issuer's jurisdiction" governs, among other matters, an issuer's duties and liabilities under Chapter 4 (which includes Section 8405). The term "local law" refers to the law of the jurisdiction other than its conflict of law rules. UCC Commercial Code Comment #1. An "issuer's jurisdiction" is the jurisdiction under which the issuer of the security is organized or, if permitted by the law of that jurisdiction, the law of another jurisdiction specified by the issuer. Cal. Comm. Code § 8110(d). The statute specifically permits an issuer organized under California law to specify the law of another jurisdiction as the law governing, among other things, the rights and duties of the issuer with respect to registration of transfer. Delaware's version of the statute does not include a similar authorization.
Bidding Adieu To Plain Meaning
On Monday, I wrote about the SEC's settlement with BlueLinx Holdings Inc. Also on Monday, the SEC announced "Company Punished for Severance Agreements That Removed Financial Incentives for Whistleblowing". In this latter case, the company agreed to a civil monetary penalty of $340,000 for "removing the critically important financial incentives that are intended to encourage persons directly with the Commission staff about possible securities law violations". The SEC's position directly conflicts with the plain meaning of the words of its own rule, Rule 21F-17. A waiver of a reward may remove an incentive, but it is no impediment, to whistleblowing. Companies, however, are not in business to fight with their regulator (after all, there is no money in it). Thus, the SEC can succeed in promulgating a new rule (i.e., a waiver of an incentive is tantamount to an impediment) simply by coercing a few companies into relatively modest settlements and then issuing press releases. The SEC can then count on scores of law firms to issue memoranda full of parlous warnings that waivers of possible whistleblower rewards are trouble with a capital "T". The upshot is that not only is the SEC's position not challenged, it is amplified.