Monthly Archives: September 2016

Climate Change, Sustainability and Other Environmental Proposals

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. The following post is based on a Simpson Thacher publication authored by Ms. Cohn, Karen Hsu Kelley, and Avrohom J. Kess.

In recent years, a growing group of investors has called upon issuers to make available certain sustainability-related disclosures. In this same vein, several non-profit organizations, such as the Sustainability Accounting Standards Board (“SASB”), the Global Reporting Initiative (“GRI”), the Climate Disclosure Standards Board (“CDSB”) and the International Integrated Reporting Counsel (“IIRC”), have developed voluntary sustainability reporting standards for issuers to consider. While the Securities and Exchange Commission (“SEC”) is currently seeking public comment in connection with its Disclosure Effectiveness Initiative on whether it should “increase or reduce the environmental disclosure required” in Regulation S-K, it is unclear whether any sustainability-related disclosures will be mandated. In the absence of an SEC rule requiring sustainability disclosures, shareholders seeking to influence corporate action on sustainability reporting, as well as on climate change and other environmental issues, have increasingly turned to shareholder proposals in an effort to achieve their goals. These proposals have come in various forms; while some proposals seek increased disclosure, other proposals target companies’ corporate governance regime by requesting the nomination of directors with expertise in environmental matters or linking executive compensation with sustainability criteria.


The Effect of Prohibiting Deal Protection in M&A: Evidence from the United Kingdom

Fernán Restrepo is John. M. Olin Fellow and Gregory Terrill Cox Fellow in Law and Economics at Stanford Law School. Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School. This post is based on a recent paper by Mr. Restrepo and Professor Subramanian.

In any public-company acquisition, the need for shareholder and regulatory approvals creates a window between the date of the deal signing/announcement and the date that the acquirer can close the deal. This window, which is approximately three months on average, introduces the possibility that a higher-value bid will emerge between the signing and the closing. Because the target board’s fiduciary duty typically requires consideration of any such higher offer, the acquirer cannot eliminate this risk through contracting with the target. Instead, the typical solution in public-company M&A is “deal protection” (equivalently, a “lockup agreement”) which provides value to the first bidder in the event that the target board accepts a higher-value bid. Coates and Subramanian (2000) define a deal protection device as “a term in an agreement related to an M&A transaction involving a public company target that provides value to the bidder in the event that the transaction is not consummated due to specified conditions.”


Disclosure-Only Settlements in M&A Litigation

Meredith E. Kotler is a partner and Vanessa C. Richardson is an associate in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Kotler and Ms. Richardson. This post is part of the Delaware law series; links to other posts in the series are available here.

Since our last blog post on the changing landscape of disclosure-only settlements in the Delaware Court of Chancery, there have been developments in several areas, including the continued lower filing rates for shareholder litigation in Delaware, the adoption of the Trulia “plainly material” standard for supplemental disclosures by the Seventh Circuit, and the lower standard for disclosures required in order for plaintiffs’ lawyers to be awarded a fee in the mootness context.

Lower Filing Rates in Delaware

As expected, fewer cases challenging mergers have been filed in Delaware since In re Trulia, Inc. Stockholder Litigation was issued in January 2016. A report on Shareholder Litigation from Cornerstone found that only 64 percent of M&A deals faced litigation during the first six months of 2016, which is the lowest rate since 2009. We predict this trend will continue, and plaintiffs instead may attempt to file these suits in other forums that may be more willing to accept disclosure-only settlements. These attempts, however, will be hampered by exclusive forum bylaws, which have been widely adopted by public companies. There is some speculation that corporations may waive such bylaws in the hope of a quick, disclosure-only settlement in another forum, but it remains to be seen how receptive other courts would be to that approach.


CEO Pay and the Rise of Relative Performance Contracts: A Question of Governance?

Brian Bell is Associate Professor of Economics at University of Oxford and John Van Reenen is a Professor of Applied Economics at the MIT Sloan School of Management. This post is based on a recent paper by Professors Bell and Van Reenen. Related research from the Program on Corporate Governance includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Lacklustre growth seems to be the new normal almost everywhere in the world except for one area—the pay of Chief Executive Officers (CEO). For S&P500 firms, the average CEO made 31 times the wage of the average production worker in 1970 but rose to 325 by 2008 (Conyon et al., 2011) and 335 in 2015. This has not gone unnoticed by politicians and the media.

CEO pay could have risen purely through market forces. For example, globalization and technological change enables a CEO to leverage his ability (it is rarely a “her”) over a larger scale. As the size of firms increases so does CEO pay (e.g. Gabaix and Landier, 2008). But other factors may also play an important role as attested by many corporate governance scandals. And why does CEO pay rise when firm performance does not? Or when firms do well for reasons unrelated to the talent or effort of the CEO, for example a stock market bubble or oil price boom? To provide fresh evidence on these questions, our new research uses UK publicly listed firms as a case study because since the late 1990s, there has been a major shift towards rewarding CEOs based on relative performance. A typical “Long Term Incentive Plan” (LTIP) is to grant executives equity conditional on improving shareholder returns relative to a “peer group” of large firms in the same sector (e.g. being among the top quartile of performers over a three year period). These relative performance contracts contrast to more standard US-style stock option contracts that are based on general improvements in equity prices.


Observations on the FDIC’s Examination Guidance for Third-Party Lending

Pratin Vallabhaneni is an Associate at Arnold & Porter LLP. This post is based on an Arnold & Porter publication.

On July 29, 2016 the Federal Deposit Insurance Corporation (“FDIC”) released its proposed Examination Guidance for Third-Party Lending (“Proposal”). [1] The Proposal, which supplements the FDIC’s Guidance for Managing Third-Party Risk (“Third-Party Guidance”), [2] is directed primarily at banks whose primary federal regulator is the FDIC that maintain partnerships with third-party firms (e.g., marketplace lenders) in connection with their provision of credit products. The FDIC has stated that it will accept written comments on the Proposal until October 27, 2016. The Proposal is significant, both in terms of its regulatory policy and practical implementation implications. This post provides background context and select considerations for banking, specialty finance, and financial technology (“FinTech”) firms to consider as they grapple with the Proposal’s implications.


Special Meeting Proposals

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. The following post is based on a Simpson Thacher publication authored by Ms. Cohn, Karen Hsu Kelley, and Avrohom J. Kess.

Shareholders petitioning the board for the special meeting right propose either to create the right or, in circumstances where the right already exists, lower the minimum share ownership threshold required to exercise the right. As of June 30, 2016, 295 companies in the S&P 500 already provided their shareholders with the right to call a special meeting outside of the usual annual meeting, as compared with 286 companies at this time last year. Among companies in the Russell 3000, approximately 1,300 provide their shareholders with the right to call special meetings. During the 2016 proxy season, 19 special meeting shareholder proposals went to a vote at Russell 3000 companies. Of these, five proposals sought to create the right, one of which received majority shareholder support to create the right for holders of 15% of the company’s outstanding common stock. The other 14 proposals sought to lower the ownership threshold with respect to an existing right, two of which received majority support; these proposals requested to lower the threshold of an existing right to 10% from either 25% or 50%. Overall, shareholder proposals relating to special meetings received average shareholder support of 41.5% this proxy season.


Venture Capital 2.0

Joseph A. McCahery is Professor of International Economic Law at Tilburg University Law School, TILEC and ECGI; and Erik P.M. Vermeulen in Professor of Business Law and Finance at Tilburg University Law School and TILEC, and Vice President of Philips Lighting. This post is based on a recent paper by Professors McCahery and Vermeulen. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here) and Delaware Law as Lingua Franca: Evidence from VC-Backed Startups, by Jesse Fried, Brian Broughman, and Darian Ibrahim (discussed on the Forum here).

Over the last decade, a wide consensus has emerged regarding the changing structure of the venture capital industry. For example, with a few notable exceptions, most traditionally structured venture capital firms have delivered uninspiring returns. This has not only led to a significant decrease in the number of venture capital funds, but also has steered many funds toward the less risky and growth stage companies. Declining expectations stimulated remaining funds to focus on companies founded by serial entrepreneurs with considerable track records. While this trend resulted in a significant increase in the returns to investors, it also created a “funding gap” in the development of early to mid-stage companies. According to this perspective, the solution to the funding, investment and liquidity gaps is for new sources of capital—be they government, corporate or crowd—to provide founder-entrepreneurs with capital, capacities and connections that allows them to start, scale and grow their businesses. In our paper, Venture Capital 2.0: From Venturing to Partnering, which was recently made publicly available on SSRN, we evaluate the likely impact of each of the different financing options to young and high growth companies and whether they can, with greater network resources, improve access to follow-on funding in later stages of a start-up’s development.


Weekly Roundup: August 26–September 1, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 26–September 1, 2016.

Blockholders: a Survey of Theory and Evidence

Corporate Litigation: Advancement of Legal Expenses

D.C. Circuit Approval of the Constitutionality of SEC Administrative Proceedings

Adam S. Hakki is partner and global head of the Litigation Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling publication by Mr. Hakki, Stephen FishbeinMark D. Lanpher, and Claudius O. Sokenu.

On August 9, 2016, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit issued Lucia v. SEC, a significant decision that holds that the Securities and Exchange Commission’s (“SEC” or “Commission”) use of administrative law judges (“ALJs”) is constitutional. In so doing, the D.C. Circuit ruled that the SEC’s use of ALJs does not violate the Appointments Clause of the Constitution because, rather than acting as officers of the United States, the SEC’s ALJs act as employees who lack the authority to issue “final decisions.” With at least one similar case pending in another Circuit, and a number of appeals challenging the constitutionality of Administrative Proceedings (APs) pending before the Commission itself, Lucia is an important precedent-setting decision.


Price Impact, Materiality, and Halliburton II

Allen Ferrell is Harvey Greenfield Professor of Securities Law at Harvard Law School and Andrew H. Roper is Lecturer in Law at Stanford Law School and Executive Vice President with Compass Lexecon. This post is based on a forthcoming article by Professors Ferrell and Roper. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

In a recent article entitled Price Impact, Materiality, and Halliburton II, Drew Roper and I discuss various themes and issues that have arisen in the lower court rulings applying the Supreme Court’s ruling in Halliburton v. Erica John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”). The Supreme Court’s decision in this important case reaffirmed the availability of the fraud-on-the-market presumption of “reliance” for purposes of a Rule 10b-5 class certification. At the same time, the Court held that defendants could rebut the presumption if they could provide “direct evidence” that the alleged misrepresentations did not in fact impact the price of the security (i.e., a lack of price impact).

We first identify three general themes that emerge from these decisions. First, when addressing confirmatory misrepresentations—alleged misrepresentations by a defendant that falsely confirm existing market expectations—some courts have concluded that a lack of a change in the security’s price at the time of the misrepresentation does not rule out a potential price impact associated with the alleged misrepresentation. For instance, in McIntire v. China MediaExpress Holdings, Inc., 38 F. Supp. 3d 415, 433 (S.D.N.Y. 2014), defendants argued that there was no statistically significant price increase when the misrepresentations at issue were made. The court found that this evidence was insufficient to rebut the Basic Inc. presumption because a “material misstatement can impact a stock’s value … by improperly maintaining the existing stock price.” This ruling raises the question concerning the scope of a “maintenance” theory of price impact.


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