2021 Say on Pay Changes

Todd Sirras is Managing Director, Justin Beck is Consultant, and Austin Vanbastelaer is Senior Consultant at Semler Brossy LLP. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Beck, Mr. Vanbastelaer, Alexandria AgeeSarah Hartman, and Kyle McCarthy. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.

Emerging themes from this year’s Say on Pay and proxy voting season suggests a fundamental shift in shareholder and proxy advisor perspectives on compensation. The primary themes of the 2021 proxy season include:

  1. S&P 500 companies have received more scrutiny and lower vote results.
    The S&P 500 failure rate is 3.7% compared to 2.8% for the Russell 3000, even though the ISS “Against” recommendation rate is lower for the S&P 500 (10.2%) than the Russell 3000 (11.0%). Last year the difference was minimal.
  2. Shareholders have been highly critical of special awards and long-term incentive adjustments.
    Shareholders and proxy advisors maintain that special awards should be granted infrequently and to specific executives, with rigorous performance conditions and not be additive to regular annual pay. S&P 500 companies that made positive adjustments to payouts or in-flight PSUs had a nearly 10 percentage point higher failure rate.
  3. Environmental and social proposals received greater support, especially involving matters on EEO, diversity and inclusion, and climate impact.
    The percent of social and environmental proposals that received above 50% support is 18% and 40%, respectively, which is significantly higher than the 9% and 16% rates at this time last year.

Proxy advisors and several institutional investors released guidelines at the onset of Covid-19 to set expectations on how they would evaluate various Covid-related compensation plan adjustments. Most guidance homed in on acceptable adjustments to add discretion in short-term plans, while advising against long-term plan adjustments. Shareholders and proxy advisors held many companies accountable to these communicated guidelines; however, the rules were more rigidly applied to larger cap companies. Elevated scrutiny of the largest companies raises a discussion about how shareholders have evaluated Covid-19 actions in relation to potential long-term compensation changes.


Hall of Mirrors: Corporate Philanthropy and Strategic Advocacy

Raymond Fisman is Slater Family Professor in Behavioral Economics at Boston University. This post is based on a recent paper, forthcoming in the Quarterly Journal of Economics, by Mr. Fisman; Marianne Bertrand, Chris P. Dialynas Distinguished Service Professor of Economics at the University of Chicago Booth School of Business; Matilde Bombardini, Professor at the University of British Columbia Vancouver School of Economics; Brad Hackinen, Assistant Professor in Business, Economics and Public Policy at the University of Western Ontario Ivey Business School; and Francesco Trebbi, Professor of Business and Public Policy at the University of California, Berkeley Haas School of Business. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

Public officials face an inherent tension in getting feedback on proposed rules and regulations—the best-informed parties are also very likely those with an interest in seeking particular outcomes. If you’re interested in, say, the costs and benefits of green energy requirements, utility companies could surely provide expert advice on the costs and benefits of such rules. The very same experts, however, might be tempted to minimize the benefits and overstate the costs, in an effort to minimize the regulatory burden imposed on their businesses. Relative to private companies, non-profits and research institutions may be seen as more impartial or even adversarial to corporate perspectives. If regulators hear the same message from, say, both utility companies and non-profits like Greenpeace or Earthjustice, they might give more weight to their suggestions.

This captures, in theory, the process by which regulators in the U.S. elicit feedback from the public on proposed rules, and adjust final regulations in response to a slate of public comments from wide-ranging sources. This feedback, submitted by any interested party—for-profits, non-profits, lawmakers, and individuals—can be weighed by rule makers taking into account both the expertise and potential bias of the commenter.

In our paper, forthcoming in the Quarterly Journal of Economics, we show how financial ties between companies and non-profits—possibly unbeknownst to regulators—can subvert this process of information acquisition and lead to regulations that favor the interests of companies rather than the general public. Non-profits receive donations from corporations or their foundations, and lend their support to companies’ regulatory agendas in return.


Delaware M&A Update

Jeffrey D. Marell, Krishna Veeraraghavan and Jaren Janghorbani are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on their Paul, Weiss memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Minority Shareholder’s Vote Required by Pre-Disclosure Voting Agreement Did Not Count for Corwin Purposes

In In re Pattern Energy Group Inc. Stockholders Litigation, the Delaware Court of Chancery denied a motion to dismiss a class action challenging the sale of Pattern Energy to Canada Pension Plan Investment Board due to allegations that the special committee and certain officers involved in the sale process improperly favored Canada Pension due to the preference of Riverstone Holdings LLC, a private equity fund that formed Pattern Energy and controlled its upstream supplier. The court, in an opinion by Vice Chancellor Zurn, held that the approval of the transaction by a majority of the minority stockholders did not cleanse the transaction under Corwin because such approval was partly based on the vote of a large holder of preferred shares that was contractually bound, pre-disclosure, to vote in accordance with the board’s recommendation, and therefore its vote was not fully informed for purposes of Corwin. For the opinion, click here.

Delaware Court of Chancery Holds 35% Shareholder Not a Controller

In In re GGP, Inc. Stockholder Litigation, the Delaware Court of Chancery dismissed a class action challenging the acquisition of GGP by Brookfield Property Partners, L.P. Brookfield, who had rescued GGP from bankruptcy, held approximately 35% of GGP’s stock. In addition to its right to designate three members to the GGP board for so long as it owned 20% of GGP’s stock, Brookfield had a standstill agreement with GGP that entitled Brookfield to vote its shares, up to 10% of the outstanding shares of GGP, for or against any non-Brookfield nominee to the GGP board. The standstill also required that transactions between GGP and Brookfield be approved by a majority of the minority GGP stockholders, and provided that GGP would not waive certain provisions of the standstill for other large stockholders unless it granted a similar waiver to Brookfield. The plaintiff challenged the acquisition by Brookfield, arguing that Brookfield was a controller owing fiduciary duties to the minority GGP stockholders and therefore the transaction was subject to entire fairness review. The court, in an opinion by Vice Chancellor Slights, held that Brookfield did not exercise control over GGP, in part because the contractual standstill arrangements with GGP decreased the influence that Brookfield had over the company. Nor did Brookfield exercise control over the merger, as the special committee that negotiated and approved the merger was independent from Brookfield. Moreover, the court concluded that the merger was approved by an informed and uncoerced stockholder vote, and therefore the transaction was cleansed under Corwin. For the opinion, click here.


Comment on Climate Disclosure

Nell Minow is Vice Chair of ValueEdge Advisors. This post is based on her comment letter to the U.S. Securities and Exchange Commission. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

The accountability processes of government and business are each ideal for optimizing different policy issues, and we get into trouble when we let one take on the role of the other. What has made the US capital markets the most robust and respected in the world is the combination of market- and government-based structures and especially the comprehensive transparency of our public companies. The nature of capitalism is to maximize profits, and it is up to the government to make sure that happens without externalizing costs onto the public who have no capacity to provide a market-based response. Corporate executives would always prefer less disclosure. Investors would prefer more. Because of the collective choice problem, there is no way for investors to make a market-based demand for more information as effectively and efficiently as having the government set the floor for what must be disclosed.

It is within this context that the questions will always arise about when it is time to add more to the already extensive information that issuers must provide to investors. As the request for comments and Commissioner Lee’s outstanding presentation on materiality suggest, that time has come for ESG. The reason it is the fastest-growing sector of investment vehicles [1] is a reflection of increasing concerns about the inadequacy of GAAP numbers in assessing investment risk. Let me emphasize that; ESG and climate change disclosure concerns are entirely and exclusively financial. That is what makes them a have-to-have, not a nice-to-have.


Litigation Risk and Debt Contracting: Evidence from a Natural Experiment

Zhihong Chen is Associate Professor of Accounting at the Hong Kong University of Science and Technology; Ningzhong Li is associate professor, at the University of Texas at Dallas Naveen Jindal School of Management; and Jianghua Shen is Assistant Professor of Accounting at Xiamen University. This post is based on their recent paper, forthcoming in the Journal of Law and Economics.

Nevada is second to Delaware in attracting out-of-state incorporations, with 8% of all public incorporations by firms in states outside the firms’ headquarters states. In June 2001, Nevada changed its state corporate law by substantially reducing the legal liability for breaching fiduciary duties (the legislative change, hereafter). Under the new Nevada corporate law, by default, directors and officers (D&Os) of firms incorporated in Nevada are not liable for breaching their fiduciary duties unless their behaviors involved intentional misconduct, fraud, or a knowing violation of law, whereas prior to the change, by default, D&Os have such liability. This legislative change was implemented swiftly and applied to all firms incorporated under Nevada corporate law without a requirement for shareholder approval. In our paper forthcoming in the Journal of Law and Economics, we use the exogenous decrease in legal liability of D&Os due to the legislative change to study how litigation risk affects loan contract terms and related borrower-lender agency conflicts.

Agency theory suggests that borrowers and lenders have major conflicts when borrowers are insolvent or close to insolvency. To the extent that D&Os owe fiduciary duties to the lenders when a borrowing firm is insolvent and possibly when it is in the “zone” or “vicinity” of insolvency, the legislative change reduces the lenders’ legal tools to enforce their rights. Therefore, we predict that the legislative change will exacerbate borrower-lender conflicts. Anticipating the increased conflicts, lenders will impose more unfavorable loan contract terms, such as higher interest rates and more restrictive covenants.


SEC Focuses Enforcement Efforts on SPAC Transactions

Marc Berger, Michael Osnato, Jr., and Brooke Cucinella are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Berger, Mr. Osnato, Ms. Cucinella, Joshua Levine, Nicholas Goldin, and Regina Wang.

In one of the first major enforcement actions charging a special purpose acquisition company (“SPAC”), the SEC recently charged SPAC Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus Inc., and Momentus’s founder and former CEO Mikhail Kokorich with misleading claims about Momentus’s technology and the national security and foreign ownership risks associated with Kokorich. While the facts of the case reflect a straightforward alleged offering fraud, the SEC’s public remarks about the matter, as well as the creative remedies, reflect the agency’s intense ongoing focus on the SPAC market and apparent intention to send a strong message to market participants.

Momentus, an early-stage space transportation company, aspires to provide satellite-positioning services with in-space propulsion systems powered by water plasma thrusters. Stable Road completed its initial public offering (“IPO”) for $172.5 million in November 2019, with proceeds held in trust for the benefit of shareholders until completion of a business combination. In late August or early September 2020, Stable Road began due diligence on Momentus’s technology, and on October 7, a merger between Stable Road and Momentus was announced. Before publicly announcing their merger agreement, Momentus and Stable Road disclosed information to potential private investment in public equity (“PIPE”) investors. On November 2, 2020, Stable Road filed a Form S-4 registration statement, which it amended on December 14, 2020 and March 8, 2021.


Quarterly Review of Shareholder Activism

Mary Ann Deignan is a Managing Director, Jim Rossman is Managing Director and Co-Head of Capital Markets Advisory, and Christopher Couvelier is a Managing Director at Lazard. This post is based on a Lazard memorandum by Ms. Deignan, Mr. Rossman, Mr. Couvelier, Rich Thomas, Lauren Ortner, and Michael Hinz. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Observations on the Global Activism Environment in H1 2021

1. U.S. Activity Leads Global Market in H1 2021

  • 94 new campaigns were initiated globally in H1 2021, in line with H1 2020 levels
    • Year-over-year stability buoyed by a strong Q1, with Q2’s new campaigns launched (39) and capital deployed ($9.1bn) below multi -year averages
  • H1 was distinguished by several high-profile activist successes at global mega-cap companies, including ExxonMobil (Engine No. 1), Danone (Bluebell and Artisan Partners) and Toshiba (Effissimo, Farallon, et al.)
  • U.S. share of H1 global activity (59% of all campaigns) remains elevated relative to 2020 levels (44% of all campaigns) and in line with historical levels
    • The 55 U.S. campaigns initiated in H1 2021 represent a 31% increase over the prior-year period
  • After only initiating one new campaign in Q1 2021, Elliott launched five campaigns in Q2 2021 and returned to being the period’s most prolific activist
  • H1 2021 activity in Europe slowed following a record-setting end to 2020; the region’s 21 new campaigns included Elliott’s agitation at GlaxoSmithKline and Bluebell’s campaigns at Danone and Vivendi
  • 10 campaigns were launched at Japanese targets in H1, and the share of non-U.S. activity represented by Japanese targets (26%) reached the highest level in recent years
    • The activist success at Toshiba is viewed as a watershed moment in Japanese activism that may catalyze further scrutiny of Japan’s corporate governance system


Rethinking Securities Law

Marc I. Steinberg is the Radford Professor of Law at the Southern Methodist University Dedman School of Law. This post is based on his recently published book, Rethinking Securities Law (Oxford University Press).

My recently published book, Rethinking Securities Law (Oxford University Press 2021) (ISBN 978-0-19-758314-2), focuses on many key aspects of securities regulation and recommends meaningful reforms that should be implemented. The book addresses such fundamental subjects as the disclosure regimen of the federal securities laws, exempt offerings (for issuers as well as in the resale setting), the Securities Act registration framework, corporate governance, private securities litigation, insider trading, mergers and acquisitions, and the SEC itself. The book’s final chapter provides a summary of recommendations for adoption, numbering about 125 such recommendations.

Insofar as I am aware, this book is the first comprehensive treatment of revising the securities laws since the American Law Institute’s adoption of the Federal Securities Code over four decades ago. The book’s objective is to identify the deficiencies that currently exist, address their failings, proffer recommendations for correcting these deficiencies, and set forth an analytical prescription for remediation in an effort to espouse a sound and coherent securities law framework.

I am pleased thus far with the reaction to the book. For example, former SEC Chairman Harvey Pitt states: “For anyone who cares about strengthening capitalism, improving the efficiency of our capital markets, and protecting investors, Professor Marc Steinberg’s creative and thought-provoking book Rethinking Securities Law is a must read.” Professor Stephen Bainbridge of UCLA opines that Rethinking Securities Law “should be a strong candidate for law book of 2021….” And former SEC General Counsel Ralph Ferrara states: “… By substantially enhancing the rules-based consolidation of six separate securities statutes advocated by the American Law Institute, Steinberg has formulated an ecosystem of fairness and excellence to sustain access and exchange in our capital markets.”


U.S. Companies Focus on Four Areas of Human Capital Management Disclosure

Scott Allen and Laura Wanlass are Partners and Jacob Harden is a Senior Consultant at Aon plc. This post is based on their Aon memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

As more companies provide required disclosure of their human capital management following a new SEC rule in 2020, we’re getting a more complete picture of disclosure trends and the topics that companies are providing details on. 

It’s been less than a year since a new disclosure rule by the Securities and Exchange Commission (SEC) took effect, which required companies to provide additional detail in their 10-K reports around their human capital management (HCM). The issue is a hot topic for institutional investors and their advisors, particularly since the COVID-19 pandemic, and many of them supported the SEC rule.

As an update to our previous article on the first 100 10-K disclosures, this post includes an analysis of 725 companies who have filed since then—providing a more complete picture of disclosure trends and hot topics in HCM.

Quantitative and qualitative disclosures based on the new rule fit primarily into the 13 categories listed below. Using these categories, we calculated the prevalence of each along with the type of disclosure, with additional breakouts by industry.

  • Geography (distribution of workforce)
  • Turnover and attrition
  • Diversity
  • Hiring and promotion practices
  • Health and safety
  • Leadership development
  • Compensation and benefits
  • COVID-19 health measures
  • Talent development
  • Pay equity
  • Engagement
  • Collective bargaining agreements
  • Principles and values


SEC Returns Spotlight to Cybersecurity Disclosure Enforcement

William Johnson, Scott Ferber, and Matthew Hanson are partners at King & Spalding LLP. This post is based on a King & Spalding memorandum by Mr. Johnson, Mr. Ferber, Mr. Hanson, and Charles Cain.

On June 15, the Securities and Exchange Commission announced a settlement with First American Financial Corporation for what the SEC found were inadequate disclosure controls and procedural violations, revealed in connection with a cyber incident last spring. Since the SEC published guidance in early 2018 regarding disclosure principles related to cybersecurity vulnerabilities, it appears to have taken care to be thoughtful in not second-guessing companies’ good faith decisions about whether and when to disclose such vulnerabilities, bringing charges only in two cases where disclosure lagged awareness of the vulnerability by approximately two years. In the First American matter, however, the gap between awareness and disclosure was less than 6 months, but the SEC still found that the company’s policies and procedures were inadequate.

The SEC’s order in First American is consistent with its published guidance and public statements by SEC officials, all of which emphasized the need for company employees with knowledge of security vulnerabilities to share that information with those responsible for making SEC disclosures.

In a related development, recently the SEC’s Enforcement Division sent information requests to what appears to be a wide range of companies asking about how they responded to a high-profile software vulnerability that came to light in late 2020 involving an information technology company. The information requests in this new Enforcement sweep also ask recipients to provide information about other compromises, including those that were not disclosed at the time.


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