Beware of Post-Closing Unjust Enrichment Claims

Rory K. Schneider is a Partner and Colin O. Lubelczyk is an Associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Schneider, Mr. Lubelczyk, Martha E. McGarry, Andrew J. Noreuil, and Camila Panama and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) by John C. Coates, IV.

There are several contractual provisions that sellers often use to limit their liability for post-closing claims brought by a buyer in the context of a private company purchase agreement. Reliance disclaimers, non- survival of representations and warranties, exclusive remedy, and no-recourse provisions in their typical forms, however, only go so far in court. Even where there is no explicit carve-out for fraud claims, as a matter of “public policy,” Delaware courts have generally not enforced contract provisions that prevent a buyer from asserting fraud claims against sellers and/or their affiliates for making false representations and warranties or knowing that representations and warranties made by other seller parties were false.

A consequence of this judicial approach is that it has exposed limited partners and selling shareholders to derivative unjust enrichment claims, of which there have been an increasing number of cases over the last several years. These unjust enrichment claims have proven difficult to dismiss at the pleading stage, thereby exposing affiliates to precisely the type of protracted litigation that, in many cases, the contracting parties agreed that seller affiliates should not have to face. In light of this, sellers and their counsel should consider adding contractual language to specifically preclude unjust enrichment claims that are not dependent upon any proof of wrongdoing. The law in Delaware remains unsettled on the extent to which explicit protections against such claims would result in their prompt dismissal, but at the least, their inclusion may make buyers less apt to file the claims in the first place and make courts more willing to reject them.


Do Investors Care About Impact?

Julian F. Kölbel is Assistant Professor of Sustainable Finance at the University of St. Gallen. This post is based on a recent paper, forthcoming in the Review of Financial Studies, by Professor Kölbel; Florian Heeb, Postdoctoral Associate at the MIT Sloan School of Management; Falko Paetzold, Assistant Professor for Social Finance at EBS University; and Stefan Zeisberger, Associate Professor of Fintech – Experimental Finance at the University of Zurich. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaHow Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; and Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita. 

Do investors care about impact? Yes, in the same way, they care about pandas.

Sustainable investing is discussed as a potentially powerful mechanism to address negative externalities by appealing to investors’ prosocial preferences. The sustained growth in sustainable investing funds suggests that prosocial preferences are prevalent among individual investors. By expressing these preferences in their investment decisions, investors might shape the economy and society.

However, a crucial question remains: Do individual investors genuinely care about the impact of their investments, or are they driven by the warm glow associated with choosing a “green” option? The answer to that question is decisive for whether and how the sustainable investing industry has an impact. We provide this answer in our paper «Do Investors Care About Impact?”, recently published in the Review of Financial Studies.

A priori, one might expect two alternative behaviors. The standard view is that investors derive utility from the positive impact of investments and thus pay more for an investment with more impact. This view is embedded in many theoretical models of sustainable investing. However, research on charitable giving suggests that individuals can be surprisingly indifferent to the magnitude of their impact. For example, prior research in psychology has shown that people donate about the same amount to save one or four panda bears. People care a lot about pandas, no doubt. But it is more the emotions about pandas, not the number of pandas, that drive decisions. Our paper finds that investors care about impact as people care about pandas.


First Look at PvP Disclosure Trends From the 2023 Proxy Season

Amit Batish is Senior Director of Content at Equilar, Inc. This post is by Mr. Batish and Courtney Yu. Related research from the Program on Corporate Governance includes Stealth Compensation via Retirement Benefits by Lucian Bebchuk and Jesse M. Fried.

The 2023 proxy season has officially come to a close. Over the last few months, public companies across the U.S. filed their proxy statements with the Securities and Exchange Commission (SEC), disclosing key elements of their policies related to corporate governance and executive compensation. The marquee topic of this proxy season was Pay Versus Performance (PvP), as it was the first year that companies were required to disclose tabular and narrative information reflecting the relationship between compensation actually paid (CAP) to a company’s named executive officers (NEOs) and the company’s financial performance.

Since the SEC’s announcement of the new PvP rules in August 2022, human resources, finance and legal teams have worked diligently to address the requirements and provide a crisp and clear proxy disclosure. To better understand and unveil how companies addressed first-year requirements, Equilar examined the proxy statements of the Equilar 500—the largest U.S. public companies by revenue. This post features a summary of findings from the analysis and a first-look at trends captured from PvP disclosures and calculations.

Due to the complex nature of the PvP disclosure, many internal teams began collaboration on calculations months in advance of proxy season. Among the topics discussed in those early meetings was the concept of the CAP calculation—one of the most critical components of the disclosure requirement. The goal of the CAP calculation is to capture the change in fair value of previously granted awards to named executive officers (NEOs), painting a clear picture of how much an executive has gained from equity awards over time. Separately, companies are also required to disclose their total shareholder return (TSR) and the TSR of their peer group.


Icahn-Illumina Contest: Board Accountability and the UPC

Ele Klein is Partner and co-chair of the M&A and Securities Group, and Brandon S. Gold is an Associate at Schulte Roth & Zabel LLP. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

The circumstances surrounding gene sequence business Illumina, Inc.’s acquisition of GRAIL, Inc. for $8 billion in cash and stock and Carl Icahn’s proxy contest to hold the board accountable provide a cautionary tale for directors who feel invincible, as well as lessons for shareholders seeking to hold boards accountable in light of the SEC’s new universal proxy regime.

When a company structures an acquisition in a way that avoids the need for shareholder approval, its directors may take some comfort from their knowledge that shareholders cannot reverse their decision and they may feel less inclined to sufficiently justify the rationale and the price for the acquisition. While it is not rare for an acquirer to close on a transaction even in the face of informal shareholder opposition, it is extremely noteworthy when a board takes so much comfort from their insulation from accountability that they close a transaction in the face of formal opposition from governments and antitrust regulators around the world. Shareholders who do not have the right to reject a transaction still have tools at their disposal to hold the boards of acquirers responsible for strategic missteps and value-destructive decisions through traditional director elections at annual meetings.

Icahn’s decision to launch a proxy contest to replace three of the nine directors of Illumina’s board at its upcoming annual meeting was a clear referendum on the board’s decision to close its acquisition of Grail considering formal investigations and opposition from antitrust regulators in the U.S. and the E.U. and the significant resulting legal risks and liabilities. Shareholders — and governments around the world­ — had foreseeable concerns with the proposed acquisition from the get-go. These included the fact that the company was spending $8 billion to re-acquire a company it had just spun off four years earlier and obvious antitrust issues that would be presented by the gene sequencing business’s acquisition of a company developing cancer tests reliant on gene sequencing.


Fairness Opinions and SPAC Reform

Andrew F. Tuch is a Professor of Law at Washington University in St. Louis. This post is based on his recent paper. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates, IV.

Under the emerging regulatory framework for special purpose acquisition companies (SPACs), mergers of SPACs, known as de-SPACs, must be “fair” to public (or unaffiliated) SPAC shareholders, and transaction participants face heightened liability risk for disclosure errors. This framework is a product of the SEC’s reform proposal for SPACs (SPAC Reform Proposal) and recent decisions of the Delaware Court of Chancery. In this environment, third-party fairness opinions have been regarded as a de facto requirement for de-SPACs.

In a paper available here, I examine the emerging regulatory landscape by analyzing the significance of third-party fairness opinions and the proposed disclosure-oriented reforms. These opinions typically assess whether the consideration paid in a transaction is fair, from a financial point of view, to a party or group. The assessment of fairness opinions sheds light on the difficulties associated with evaluating and demonstrating a de-SPAC’s value for public shareholders. The heightened risk of disclosure liability adds to the stakes, given the transaction value’s materiality to public shareholders and the potential ramifications of any misstatement or omission for those involved.

The evidence suggests that a low quality market emerged for fairness opinions. SPAC fiduciaries obtained opinions that provided virtually no substance from less reputationally sensitive financial advisors and disclosed these opinions to public investors in an apparent effort to give assurance as these investors decided whether to exercise redemption rights


Chancery Court Highlights Tension Between Freedom of Contract and Corporate Fiduciary Duties

John A. Kupiec and Mark E. McDonald are Partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Kupiec, Mr. McDonald, Julie Bontems, and Ayah Al-Sharari and is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision, the Delaware Court of Chancery grappled with the question whether—and to what extent—claims for breach of fiduciary duty can be waived ex ante in a corporate shareholder agreement.  Specifically, in New Enterprise Associates 14 LP v. Rich, the court denied a motion to dismiss claims for breach of fiduciary duties brought against directors and controlling stockholders of Fugue, Inc. (the “Company”) by sophisticated private fund investors who had agreed to an express waiver of the right to bring such claims. [1] Importantly, the court found that fiduciary duties in a corporation can be tailored by parties to a shareholders agreement who are sophisticated, and were validly waived by the voting agreement in this case (which specifically addressed the type of transaction at issue).  The court, however, held that public policy prohibits contracts from insulating directors or controlling stockholders from tort or fiduciary liability in a case of intentional wrongdoing, which the court found was plausibly alleged in this case. The court’s opinion has implications for sophisticated investors in venture capital and other private transactions involving Delaware corporations. The opinion cautions against overreliance on express contractual waivers, on the one hand, while also serves as a reminder that at least in some circumstances sophisticated parties can contract around default legal principles (including fiduciary duties), even with respect to corporations.


Director-Shareholder Engagement: Getting It Right

Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Matt DiGuiseppe is Managing Director at the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

When done right, director-shareholder engagement can pay dividends for both the investor and the company. We identify the key steps for directors—and investors—to get the most out of these exchanges.

Years ago, “shareholder engagement” was an earnings call led by the company’s CEO and CFO, or a
meeting with the investor relations team. Any contact was handled by company management.

Today, the picture is quite different. In PwC’s 2021 Annual Corporate Directors Survey, more than half (53%) of directors say that board members (other than the CEO) engaged directly with the company’s shareholders during the prior year.

Part of this shift in engagement relates to investors’ recent focus on environmental, social and governance (ESG) concerns, and the desire to hear from directors about how the company is approaching those issues. In 2021, ESG topped strategy as the most common discussion topic, it was raised in 43% of discussions, up from 23% in 2020. [1] Directors can be well-positioned to give investors a long-term view of the company’s plans.


The SEC Revolving Door and Comment Letters

Michael Shen is an Assistant Professor of Accounting at NUS Business School, National University of Singapore, and Samuel T. Tan is an Assistant Professor of Accounting at the School of Accountancy, Singapore Management University. This post is based on their recent paper, forthcoming in The Journal of Accounting and Public Policy. 

The revolving door between the Securities and Exchange Commission (SEC) and the private sector has been the subject of a great deal of scrutiny in recent years. The SEC regulates, and enforces laws concerning, public companies, with a mission that includes “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation“. However, SEC employees who leave the agency regularly find themselves aiding the very corporations the SEC is regulating, and working against the SEC’s regulatory activities. Between 2001 and 2010, over 400 former SEC employees filed statements that they intended to represent an external party before the SEC.

In our study, forthcoming at the Journal of Accountancy and Public Policy and available at SSRN, we examine the impact of the revolving door on the SEC’s comment letter process, a crucial process by which the SEC exercises its regulatory mission.

The Sarbanes-Oxley Act of 2002 requires the SEC to review companies’ filings at least once every three years, and the SEC sends comments to the company when SEC staff believe that the disclosures in its filings can or should be improved. This review process leads to a dialogue between the firm and SEC staff, in which the SEC may make requests of the firm, for example to amend one or more past filings, and in which the firm may negotiate for more desirable outcomes, for example to simply revise future filings. Firms often involve external lawyers in this conversation with the SEC, and these lawyers may have formerly been employed by the SEC.


SEC Final Share Repurchase Disclosure Rules Less Burdensome Than Expected

Brad Goldberg and Jaime L. Chase are Partners and Asher Herzog is an Associate at Cooley LLP. This post is based on a Cooley memorandum by Mr. Goldberg, Ms. Chase, Mr. Herzog, Cydney Posner, Reid Hooper, and Stephanie Gambino. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows (discussed on the Forum here) by Jesse M. Fried, and Charles C.Y. Wang; and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay (discussed on the Forum here) by Jesse M. Fried.

On May 3, 2023, the Securities and Exchange Commission (SEC) voted at an open meeting to adopt final rules to require enhanced disclosure about issuer share repurchases under the Securities Exchange Act of 1934, as amended. The final rules will:

  • Require tabular disclosure to be filed quarterly [1]  in an exhibit to Forms 10-Q and 10-K of an issuer’s [2]  repurchase activity aggregated on a daily basis, replacing the current requirements in Item 703 of Regulation S-K to disclose monthly repurchase data. Foreign private issuers (FPIs) filing on forms available exclusively to FPIs will have to disclose quarterly the same daily repurchase data on a new Form F-SR, in place of the current requirements in Item 16E of Form 20-F to disclose monthly repurchase data.
  • Require a company to disclose quarterly via a checkbox whether any of its Section 16 officers or directors – or senior management or directors for FPIs – purchased or sold shares (or other units) that are the subject of a company share repurchase plan or program within four business days before or after the announcement of the plan or program.
  • Revise and expand Item 703 to require a company to disclose in its Forms 10-Q and 10-K:
    • The objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases.
    • Any policies and procedures relating to purchases and sales of the company’s securities by its officers and directors during a repurchase program, including any restrictions on those transactions.


Investor Group Launches Plan to Boost Corporate Climate Engagement

Jason M. Halper is a Partner and Sara Bussiere and Duncan Grieve are Special Counsel at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaHow Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales.

The Institutional Investors Group on Climate Change (IIGCC), a European membership body for investor collaboration on climate change, announced the launch of its Net Zero Engagement Initiative (NZEI). A primary goal of the initiative is to “support investors align more of their investment portfolio with the goals of the Paris Agreement” while also increasing the number of companies subject to investor engagement on climate change. While Climate Action 100+, of which IIGCC is a coordinating member, “has transformed the scale and prominence of climate engagement with 166 high emitting focus companies, many more companies need to be engaged to align portfolios with net zero,” said IIGCC.

As of the end of March 2023, 93 investors have agreed to participate in NZEI, including Allianz, BNP Paribas, the Church of England Pensions Board, and Schroders. 107 companies across a wide range of industries have received letters requesting confirmation that the companies have developed, or intend to develop, a net zero transition plan, which “provides a key tool for understanding the alignment of investment portfolios.” The letters state that the “plans should set out both a company’s emissions targets and a strategy for how it intends to deliver them. Recognising that most companies will not be able achieve net zero by themselves, they should also set out how they intend to support the transition more broadly.”


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