Unfair Exchange: The State of America’s Stock Markets

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent remarks at George Mason University, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you so much, J.W. [Verret] and Ty [Gellasch], for that incredibly kind introduction. It’s a real honor to be here with you both today at George Mason, talking about the only issue you two have ever agreed on. Literally. They say that politics makes for strange bedfellows, [1] and, for reasons that will soon become clear, nowhere is that more true than when it comes to reforming America’s stock markets—so I’m grateful to both of you for your leadership on these issues.

Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s exceptional Staff. And let me add my own standard caveat: I absolutely expect that, in the fullness of time and wisdom, my colleagues will discover that, as usual, I was right.

As my colleagues can tell you, giving policy speeches like this one can be very stressful. Fortunately, before taking this job I had good practice speaking before skeptical audiences ready with hard questions. You see, this year my mother is celebrating her thirtieth year teaching the second grade, and for almost every one of those years I have visited her students, sat on the classroom carpet, and answered any questions her second graders might have about my life. [2] Trust me: once you’ve survived an hour on Mrs. Jackson’s carpet, you’re ready for anything.


Expulsion of LLC Member

Jason M. Halper and Nathan Bull are partners and James M. Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Holloman, and Mr. Fee and is part of the Delaware law series; links to other posts in the series are available here.

On August 13, 2018, Vice Chancellor Travis Laster of the Delaware Court of Chancery ordered Domain Associates, LLC (“Plaintiffs,” “Domain,” or the “Firm”), a venture capital firm, to pay its former member, Nimesh Shah (“Defendant” or “Shah”), the fair value of his 12.1% member interest as of the date he was forced to withdraw from the LLC, potentially worth millions of dollars. Domain had contended that Shah was entitled only to the amount of his capital account balance, or approximately $438,000. In his post-trial opinion, Vice Chancellor Laster also found the individual members of Domain jointly and severally liable for breaching the Domain LLC Agreement when they voted to force him to withdraw on April 18, 2016 but did not pay him his share of the fair value of the business. Significantly, after concluding that the LLC Agreement was silent as to the payout for a forced-out member, the Court looked not only to the Delaware Limited Liability Company Act (the “LLC Act”) but also to the Delaware Revised Uniform Partnership Act (the “Partnership Act”) for guidance because Domain operated in a manner akin to a general partnership, as distinct from other governance structures. The decision provides important guidance for drafting operating agreements governing Delaware entities, understanding the potential sources of law that may guide a court adjudicating intra-entity disputes, and in litigating disputes involving these agreements.


The Law and Economics of Environmental, Social, and Governance Investing by a Fiduciary

Max M. Schanzenbach is the Seigle Family Professor of Law at the Northwestern University Pritzker School of Law and Robert H. Sitkoff is the John L. Gray Professor of Law at Harvard Law School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Trustees and other fiduciary investment managers are under increasing pressure to consider environmental, social, and governance (“ESG”) factors in their investment decisions. For example, some charitable endowment managers, including those at Harvard and Stanford, face demands to divest from fossil fuel companies. Trustees and other fiduciaries of private trusts and pension funds face similar pressures to adopt ESG strategies. In a new working paper, we consider the law and economics of ESG investing by fiduciaries of private trusts, pensions, and charities.


Private Equity and Blockchain: New Infrastructure or New Asset Class?

Andrew Moyle and David Walker are partners and Stuart Davis is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Moyle, Mr. Walker, Mr. Davis, Tom Evans and Linzi Thomas.

Growth in applications for blockchain and tokenisation, combined with an increasing number of initial coin offerings (ICOs), mean that buyout firms should note developments in this sector.

Why Should PE Be Interested in Blockchain?

A shared blockchain ledger could drive a single interface between a PE fund and its investors, increasing transparency and efficiency, providing real-time updates for LPs on investments, and enhanced investment analytics. Blockchain technology could also be used to automate fund administration—traditionally a manual and time intensive process. However, back- and middle office process at PE houses are typically low volume, low margin activities, in our view limiting any cost and efficiency savings for a PE fund. Furthermore, investors and regulators will scrutinize any blockchain solution and the operational risks inherent in new technology implementation.


Glass Lewis Response To SEC Statement Regarding Staff Proxy Advisory Letters

Nichol Garzon is Senior Vice President and General Counsel at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Garzon.

The proxy advisor no-action letters, issued in 2004 to Egan-Jones and ISS, described the duty of investment advisers to ensure their proxy advisor(s) have the capacity and competency to adequately analyze proxy issues. While the SEC withdrew these no-action letters yesterday, the law in this area has not changed. Indeed, it has always been the law that an investment adviser, as a fiduciary to its clients, is required to take steps to avoid having a conflict of interest influence its decisions on behalf of clients.

Investment advisers who vote proxies on behalf of their clients generally follow policies and procedures that address how to vote proxies when the adviser has a conflict, and they are required to disclose these policies to their clients, such as:


Growth in CEO Pay Since 1990

Joseph Bachelder is special counsel and Andy Tsang is a senior financial analyst at McCarter & English LLP. This post is based on a McCarter & English memorandum by Mr. Bachelder and Mr. Tsang. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein and The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

The following chart sets forth CEO pay at large U.S. companies for 1990, 2000, 2010 and 2016. In addition, the chart projects CEO pay for 2020.

Median CEO Pay at Large U.S. Companies
Year $ Millions Change from 1990
1990 $2.2 0%
2000 $9.4 317%
2010 $9.9 341%
2016 $12.1 438%
2020 (Projected) $13.8 514%
Note: Dollar amounts shown in the chart were adjusted for inflation, reflecting 2018 dollars. For detail regarding the surveys on which the chart is based see Attachment A to this Bulletin.

For purposes of the chart, CEO pay is based on proxy statement reporting. It includes:


The Universal Proxy Gains Traction: Lessons from the 2018 Proxy Season

David Whissel is Senior Vice President and Director of Corporate Governance at MacKenzie Partners, Inc. This post is based on a MacKenzie Partners memorandum by Mr. Whissel. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

Despite recent reports that it has been shelved as an item on the SEC’s agenda, the universal proxy card, which makes it easier for shareholders to pick-and-choose from a combination of management and dissident nominees in a proxy contest, found new life this year as it was used for the first time in a proxy contest involving a US-listed company, and was on the verge of being implemented in at least two other contests that were settled prior to the proxy being mailed.

The universal proxy card has long been a topic of discussion among regulators and industry practitioners, and it looked like the initiative had gained sufficient traction in October 2016 as then-SEC Chair Mary Jo White proposed a new rule on the issue. However, the new SEC administration had reportedly put the universal proxy on the back burner and shifted its attention towards other rulemaking initiatives. It is somewhat surprising, then, that the private ordering that occurred this year primarily emanated from issuers rather than activists, who have historically been more outspoken in their support of the universal proxy.


SEC No-Action Letters on Investment Adviser Responsibilities in Voting Client Proxies and Use of Proxy Voting Firms

Steve WoloskyAndrew Freedman, and Ron Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Wolosky, Mr. Freedman, and Mr. Berenblat.

As reported in our prior Client Alert, the Securities and Exchange Commission (“SEC”) issued a statement in July announcing that it will host a roundtable regarding the U.S. proxy process. The roundtable, expected to be held in November, will give the SEC an opportunity to discuss with market participants various topics, including the hotly debated role of proxy voting firms. On September 13, 2018, the Division of Investment Management of the SEC (the “Staff”) issued an Information Update stating that in developing the roundtable agenda, the Staff has been considering whether prior SEC guidance on the responsibilities of investment advisers with regard to voting client proxies and retaining proxy voting firms should be “modified, rescinded or supplemented.” As part of this process, the Staff announced that it has revisited no-action letters it issued in 2004 to Egan-Jones Proxy Services (“Egan-Jones”) and Institutional Shareholder Services (“ISS”) that provided guidance regarding the reliance of investment advisers on the recommendations of proxy voting firms and determined to withdraw these letters effective immediately.


Study of the German Corporate Governance Code Compliance

Christian Strenger is Academic Co-Director at the Center for Corporate Governance at HHL Leipzig Graduate School of Management; Johannes Beyenbach is a Research Associate at the Center for Corporate Governance at HHL Leipzig Graduate School of Management; Marc Steffen Rapp is Professor of Business Administration and head of the Management Accounting Research Group at Philipps-Universität Marburg; and Michael Wolff is a Professor at the University of Göttingen. This post is based on their recent paperRelated research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

Scope of the Study

The aim of the study is to analyze the compliance behavior of the largest listed German firms with the German Corporate Governance Code in 2017 (subsequently the “Code”). The Code was introduced in February 2002 and provides three types of provisions that encompass the German governance environment:


SEC Ratification for Defective Administrative Proceedings

R. Daniel O’Connor and Daniel V. Ward are partners and David Nasse is counsel at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

The Securities and Exchange Commission (“SEC” or “Commission”) has issued an order clearing the way for cases to proceed before its own administrative law judges (“ALJs”), notwithstanding a Supreme Court decision issued earlier this year that declared the SEC’s prior appointment of ALJs to be unconstitutional. Respondents in nearly 200 SEC proceedings with pending cases will now be granted the opportunity to have their case reheard by a different ALJ. Through the ratification order, the Commission has also attempted to comply with the Appointments Clause of the Constitution. Whether this post hac ratification passes constitutional muster, however, remains to be tested in the courts.


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