Monthly Archives: July 2018

Delaware’s Voluntary Sustainability Certification Law

John Mark Zeberkiewicz is a Director at Richards, Layton & Finger, P.A. This post is based on a Richards, Layton & Finger publication by Mr. Zeberkiewicz 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 Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

On June 27, 2018, Delaware Governor John Carney signed legislation enacting the Delaware Certification of Adoption of Transparency and Sustainability Standards Act (the “Act”), which will become effective on October 1, 2018. The Act, which is the first of its kind, represents Delaware’s initiative to support sustainability practices by providing Delaware-governed entities a platform for demonstrating their commitment to corporate and social responsibility and sustainability. It reflects Delaware’s recognition that sustainability and responsibility are not merely buzzwords that companies deploy to appeal to a broader range of consumers. Rather, those terms embody business practices and systems that are designed to foster innovation and long-term growth while promoting business practices intended to provide societal benefits.


An Empirical Comparison of Insider Trading Enforcement in Canada and the US

Anita Anand is a Professor of Law and holds the J.R. Kimber Chair in Investor Protection and Corporate Governance at University of Toronto Faculty of Law. This post is based on a recent paper authored by Professor Anand; Stephen Choi, Murray and Kathleen Bring Professor of Law at NYU Law School; Adam C. Pritchard, Frances and George Skestos Professor of Law at University of Michigan Law School; and Poonam Puri, Professor of Law at York University Osgoode Hall Law School.

Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Canadian and American securities market regulators have differing approaches to enforcement. Canadian securities law is largely driven by provincial or territorial legislation and implemented by the jurisdiction’s respective securities commissions. In contrast, the American development of securities law is driven by the federal Securities and Exchange Commission (SEC), with state regulators taking a secondary role. Although provincial securities regulators in Canada have entered into memoranda of understanding with the SEC to facilitate investigations involving conduct in both countries, the enforcement regimes remain separate.

The two countries also vary in their approach to insider trading. While Canada has legislation with explicit prohibitions against insider trading, in the U.S. restrictions on insider trading are nominally based on the prohibition against fraud found in Rule 10b-5 of the Securities Exchange Act (17 CFR § 240.10b-5), but the insider trading prohibition in the U.S. is more accurately a species of common law. U.S. courts have generally been willing to accommodate the SEC in developing this insider trading prohibition without legislation or rulemaking.


State Treasurers’ Opposition Against Forced Arbitration or Class Action Waivers in Shareholder Agreements

John Chiang is California State Treasurer; Michael Frerichs is Illinois State Treasurer; Michael l. Fitzgerald is Iowa State Treasurer; Tobias Read is Oregon State Treasurer; Joe Torsella is Pennsylvania State Treasurer; and Seth Magaziner is Rhode Island State Treasurer. This post is based on their recent joint letter to the SEC.

Dear Chairman Clayton:

As a bipartisan coalition of State Treasurers from across the country, we recognize the dire fiscal matters that face our nation and understand the pitfalls that imperil the financial security of American investors. As institutional investors ourselves, we observe the critical importance of rigorous enforcement of the state and federal securities laws. That’s why we write to express our serious concern with reports that the SEC may be considering a fundamental shift in policy that would—for the first time—allow publicly traded companies to block shareholder lawsuits through the use of forced arbitration clauses in IPO filings. [1] We write to express our support for your previous statements indicating you would prefer not to take up the issue [2] and to urge you, should the issue arise in circumstances you do not control, to preserve the Commission’s long-standing policy barring public companies from adopting forced arbitration clauses.


Further Thoughts on Elon Musk’s Compensation

Joseph Bachelder is special counsel at McCarter & English LLP. This post is based on an article by Mr. Bachelder, Howard Berkower, and Andy Tsang originally published in the New York Law Journal.

Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here), by Lucian Bebchuk and Jesse Fried, and Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Our previous post reported on the $2.6 billion stock option granted earlier this year by Tesla, Inc. (Tesla) to its Chairman and CEO, Elon Musk, representing 12 percent of Tesla shares outstanding on the option grant date (the “Musk Option”). Mr. Musk is one of the founders of Tesla, as described in Tesla’s proxy statements.

This post compares Mr. Musk’s ownership and certain of his arrangements at Tesla with those of “Founder CEOs” at 10 other high-tech companies. “Founder CEOs” are CEOs (or, in two cases, Executive Chairmen who had previously served as CEO) who founded or co-founded the enterprise. The post also comments on legal aspects of the award under Delaware law. Finally, it discusses briefly the stockholder class action derivative complaint regarding the Musk Option filed under seal on June 5 (a redacted version was made public on June 7) in the Delaware Chancery Court against Tesla directors including Mr. Musk and Tesla as nominal defendant. Tornetta v. Musk et al, No. 2018-0408.


Weekly Roundup: July 6-12, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 6-12, 2018.

Metamorphosis: Digital Assets and the U.S. Securities Laws

SLB 14I: Impact of Board Discussion on 2018 NALs

The Inapplicability of Corwin and Section 220

Are Merger Clauses Value Relevant to Target and Bidder Shareholders?

The Constitutionality of SEC-Appointed Judges

The “Hidden” Tax Cost of Executive Compensation

A Fresh Look at Board Committees

Mutual Fund Transparency and Corporate Myopia

Testing the Limits of Morrison

Investing for Impact

ISS Senate Hearing Statement

Gary Retelny is President and CEO of Institutional Shareholder Services, Inc. This post is based on an ISS statement addressed to the Chairman and a Ranking Member of the U.S. Senate Committee on Banking, Housing and Urban Affairs.

July 6, 2018

The Honorable Michael Crapo
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, D.C. 20510
The Honorable Sherrod Brown
Ranking Member
Committee on Banking, Housing and Urban Affairs
United States Senate
Washington, D.C. 20510

Dear Chairman Crapo and Ranking Member Brown:

Thank you for holding the hearing on June 28, 2018 on “Legislative Proposals to Examine Corporate Governance.” Institutional Shareholder Services Inc. (ISS) thanks the Committee for its commitment to ensuring that corporate governance in the United States is robust and works to support our nation’s capital markets and economy. To this end, ISS respectfully submits this statement, as well as the enclosed document, for inclusion in the hearing record in order to help clarify misconceptions and to correct misinformation about ISS and the proxy advisory industry that were raised during last week’s hearing.


Investing for Impact

Bhagwan Chowdhry is Professor at UCLA Anderson School of Management; Shaun Davies is Assistant Professor at the University of Colorado at Boulder; and Brian Waters is Assistant Professor at  the University of Colorado, Boulder. This post is based on their recent article, forthcoming in the Review of Financial Studies.

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 (discussed on the Forum here).

Investing in the twenty first century is increasingly influenced by the mantra of “doing well by doing good”—the idea that investors can beat the market by targeting socially valuable businesses. Attractive as it may sound, opportunities for “doing well by doing good” must be limited or else businesses would not need special cajoling to allocate resources to social projects. An important question, then, is how socially-minded investors should direct scarce capital when a business is socially- valuable but not profitable enough to deliver market returns. This is the topic of our research article “Investing for Impact” forthcoming in the Review of Financial Studies. READ MORE »

Testing the Limits of Morrison

Veronica E. Callahan and Vincent A. Sama are partners and Jennifer Wieboldt is an associate at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter memorandum by Ms. Callahan, Mr. Sama, Ms. Wieboldt, John A. Freedman, Daphne Morduchowitz, Catherine B. Schumacher.

On June 19, 2018, the Court of Appeals for the Second Circuit in Giunta v. Dingman, No. 17-1375-cv, 2018 WL 3028686 (2d Cir. Jun. 19, 2018), reversed and vacated the dismissal of Plaintiffs’ securities fraud complaint concerning a Bahamian resident and his Bahamian company, Out West Hospitality Ltd. (OWH), holding that there were sufficient allegations of connections with the United States to constitute a “domestic transaction.” The district court had dismissed, citing Morrison v. National Australia Bank, which held that Section 10(b) of the Securities and Exchange Act of 1934 does not apply extraterritorially. [1] Since Morrison was decided, plaintiffs’ lawyers have been testing the limits of what constitutes a “domestic” transaction for purposes of a federal securities fraud claim. The Second Circuit’s decision in Giunta provides additional guidance to practitioners regarding what constitutes a domestic transaction under the Exchange Act and further broadens the scope of what transactions involving foreign corporations can be considered “domestic” and subject to claims under US securities laws.


Mutual Fund Transparency and Corporate Myopia

Vikas Agarwal is H. Talmage Dobbs, Jr. Chair and Professor of Finance at Georgia State University J. Mack Robinson College of Business; Rahul Vashishtha is Associate Professor of Accounting at Duke University Fuqua School of Business; and Mohan Venkatachalam is R.J. Reynolds Professor of Accounting at Duke University Fuqua School of Business; This post is based on their recent article, forthcoming in the Review of Financial Studies.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

Considerable anecdotal and large-sample evidence suggests that pressure from institutional investors to report superior short-run financial performance can hinder investment in innovative projects that hurt short-term profits but generate value in the long run. But what incentivizes institutional investors to place excessive focus on short-run results? In Mutual Fund Transparency and Corporate Myopia (Review of Financial Studies, 2018, 31(5), pp. 1966-2003), we explore the role of mandated frequent disclosures of portfolio holdings by mutual fund managers in shaping their emphasis on short-term corporate performance and the concomitant myopic underinvestment in innovative activities by investee firms’ managers.

Our focus on the mutual fund portfolio disclosures is motivated by prior work that argues that fund managers’ short-term focus stems from their career concerns (e.g., Shleifer and Vishny, 1990) [1] and greater transparency about their actions (i.e., portfolio choices) can amplify these concerns (e.g., Prat, 2005). [2] Intuitively, the idea is that fund managers are concerned about their own performance measurement, which is used by fund investors to infer fund managers’ stock picking abilities. Suppose a fund manager invests in a firm that is making significant R&D investments that will only payoff in the long run but results in poor short-term earnings and stock price performance. Such a fund manager runs the risk that fund investors may attribute poor short-term performance of the investee firm to poor stock selection ability, resulting in fund outflows and job termination. Thus, career concerns reduce fund managers’ willingness to “ride-out” the declines in short-term performance of investee firms. READ MORE »

A Fresh Look at Board Committees

Steve W. Klemash is Americas Leader, Kellie C. Huennekens is Associate Director, and Jamie Smith is Associate Director, at the EY Center for Board Matters. This post is based on their EY publication.

In this age of innovation and transformation, today’s board members face increasingly complex challenges in overseeing corporate culture, strategy and risk oversight.

The digital revolution has facilitated radical changes in business models and made cybersecurity a strategic business imperative. Intangible assets have become a primary driver of long-term value, making the talent agenda mission-critical. Companies are adapting to changes in the labor market, digitization and automation, and a growing spotlight on corporate values and purpose. And all of this is occurring against a backdrop of rising geopolitical tensions and trade policy challenges.

We have tracked board structures since 2013, examining how S&P 500 companies are using board committee structure to address oversight needs. This post is based on a review of the 418 proxy statements filed as of 15 May 2018. The same set of companies in 2018 and 2013 were examined to provide consistency in the review.


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