Monthly Archives: March 2019

Weekly Roundup: March 8-15, 2019

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on

Friday, March 15, 2019

This roundup contains a collection of the posts published on the Forum during the week of March 8-15, 2019.

As California Goes, So Goes the Nation? The Impact of Board Gender Quotas on Firm Performance and the Director Labor Market

Posted by Steven Davidoff Solomon (University of California, Berkeley), on Friday, March 8, 2019

Tags: Board composition, Boards of Directors, California, Diversity, ESG, Firm performance, Firm valuation, Labor markets, State law

Letter on Stock Buybacks and Insiders’ Cashouts

Posted by Robert J. Jackson, Jr., U.S. Securities and Exchange Commission, on Friday, March 8, 2019

Tags: Executive Compensation, Incentives, Inside information, Insider trading, Investor protection, Repurchases, Securities regulation, Shareholder value

The Labor Market for Directors and Externalities in Corporate Governance: Evidence from the International Labor Market

Posted by Ugur Lel (University of Georgia) and Darius P. Miller (Southern Methodist University), on Saturday, March 9, 2019

Tags: Agency model, Board dynamics, Board turnover, Boards of Directors, Director qualifications, Incentives, International governance, Labor markets

Equity Market Structure 2019: Looking Back & Moving Forward

Posted by Jay Clayton and Brett Redfearn, U.S. Securities and Exchange Commission, on Sunday, March 10, 2019

Tags: Broker-dealers, Equity capital, Equity securities, Investor protection, Securities enforcement, Securities fraud, Securities regulation, Transparency

Corporate Opportunity Waivers in Private Equity and Venture Capital Investments

Posted by Matthew M. Greenberg, Christopher B. Chuff, and Taylor B. Bartholomew, Pepper Hamilton LLP, on Monday, March 11, 2019

Tags: Capital formation, Confidentiality, Conflicts of interest, Delaware cases, Delaware law, Disclosure, Fiduciary duties, Private equity, Private firms, Securities litigation, Small firms, Venture capital firms

The Strategies of Anticompetitive Common Ownership

Posted by Scott Hemphill and Marcel Kahan (New York University School of Law), on Monday, March 11, 2019

Tags: Antitrust, Asset management, Common ownership, Index funds, Institutional Investors, Mutual funds, Ownership

Technology and the Boardroom: A CIO’s Guide to Engaging the Board

Posted by Khalid Kark, Tonie Leatherberry and Debbie McCormack, Deloitte LLP, on Monday, March 11, 2019

Tags: Board communication, Board leadership, Board oversight, Boards of Directors, Cybersecurity, Director qualifications, Firm performance, Innovation, Management, Risk oversight, Shareholder value

Everything Old is New Again—Reconsidering the Social Purpose of the Corporation

Posted by Holly J. Gregory, Sidley Austin LLP, on Tuesday, March 12, 2019

Tags: Accountability, Boards of Directors, Corporate culture, Corporate Social Responsibility, ESG, Long-Term value, Shareholder primacy, Shareholder value, Short-termism, Sustainability

Behavioral Foundations of Corporate Culture

Posted by Ernst Fehr (University of Zurich), on Tuesday, March 12, 2019

Tags: Accountability, Behavioral finance, Contracts, Corporate culture, Incentives, Peer groups, Social networks, Transparency

Rule 14a-8 Exceptions and Executive Compensation

Posted by Cydney Posner, Cooley LLP, on Tuesday, March 12, 2019

Tags: Boards of Directors, Executive Compensation, No-action letters, Rule 14a-8, SEC, Securities regulation, Shareholder proposals, Shareholder voting, SLB 14J

Pre-Litigation Demand and Director Committees

Posted by Richard S. Horvath, Jr, Allen Matkins Leck Gamble Mallory & Natsis LLP, on Wednesday, March 13, 2019

Tags: Board independence, Boards of Directors, Delaware cases, Delaware law, Derivative suits, Securities litigation, Shareholder suits

Beyond Beholden

Posted by Da Lin (Harvard Law School), on Wednesday, March 13, 2019

Tags: Board independence, Boards of Directors, Conflicts of interest, Controlling shareholders, Decision making, Delaware articles

Democratic Senators and the Buyback Boogeyman

Posted by Jesse Fried (Harvard Law School) and Charles C.Y. Wang (Harvard Business School), on Wednesday, March 13, 2019

Tags: Capital allocation, Capital markets, Dividends, Employees, Long-Term value, Public firms, Repurchases, SEC, Securities regulation, Shareholder value, Stakeholders, US Senate

SEC Enforcement Against Self-Reporting Token Issuer

Posted by Pamela Marcogliese, Matthew Solomon and Alexander Janghorbani, Cleary Gottlieb Steen & Hamilton LLP, on Thursday, March 14, 2019

Tags: Blockchain, Cryptocurrency, Financial technology, Howey test, ICOs, SEC, SEC enforcement, Securities enforcement, Securities regulation

Farewell to Fairness: Towards Retiring Delaware’s Entire Fairness Review

Posted by Amir N. Licht (Interdisciplinary Center Herzliya), on Thursday, March 14, 2019

Tags: Business judgment rule, Delaware articles, Delaware law, Fairness review, Fiduciary duties, Merger litigation, MFW, Securities litigation

2019 Lobbying Disclosure Resolutions

Posted by Timothy Smith, Walden Asset Management and John Keenan, AFSCME, on Thursday, March 14, 2019

Tags: Disclosure, Institutional Investors, Lobbying, Political spending, Public perception, Reputation, Shareholder proposals, Shareholder rights, Transparency

2019 Lobbying Disclosure Resolutions

Posted by Timothy Smith, Walden Asset Management and John Keenan, AFSCME, on

Thursday, March 14, 2019

Disclosure, Institutional Investors, Lobbying, Political spending, Public perception, Reputation, Shareholder proposals, Shareholder rights, Transparency
More from: AFSCME, Walden Asset Management

Timothy Smith is Director of ESG Shareowner Engagement at Walden Asset Management and John Keenan is a Corporate Governance Analyst at the American Federation of State, County and Municipal Employees (AFSCME). This post is based on a joint Walden Asset Management and AFSCME memorandum by Mr. Smith and Mr. Keenan. Related research from the Program on Corporate Governance includes The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here) and Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here).

Corporate lobbying disclosure remains a pressing shareholder proposal topic for 2019. A coalition of at least 70 investors have filed proposals at 33 companies asking for disclosure reports that include federal and state lobbying payments, payments to trade associations and social welfare groups used for lobbying and payments to any tax-exempt organization that writes and endorses model legislation. This year’s campaign highlights the theme of corporate political responsibility, with a focus on climate change lobbying.

Corporate lobbying affects all aspects of the economy, including issues ranging from climate change and drug prices to financial regulation, immigration and workers’ rights. Lobbying can provide decision-makers with valuable insights and data, but it can also lead to undue influence, unfair competition and regulatory capture. In addition, lobbying may channel companies’ funds and influence into highly controversial topics with the potential to cause reputational harm.

Farewell to Fairness: Towards Retiring Delaware’s Entire Fairness Review

Posted by Amir N. Licht (Interdisciplinary Center Herzliya), on

Thursday, March 14, 2019

Business judgment rule, Delaware articles, Delaware law, Fairness review, Fiduciary duties, Merger litigation, MFW, Securities litigation
More from: Amir Licht

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya. This post is based on a recent paper by Professor Licht 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 Fixing Freezeouts by Guhan Subramanian.

The entire fairness doctrine occupies a central place in Delaware’s accountability tools for corporate directors. In a standard formulation, it calls on directors to establish “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price” (Cinerama, Inc. v. Technicolor, Inc.). As Professor Lawrence Hamermesh and Chief Justice Leo Strine, Jr. recently pointed out, this doctrine undergoes constant transformation:

Like all common law doctrines, the Delaware law defining the fiduciary duties of corporate directors has evolved, often rapidly, in the face of commercial change and experience. It will continue to do so…, while reserving a role for active judicial scrutiny in situations in which such objective decision makers are either absent or impaired, through lack of pertinent information or otherwise, from making a truly voluntary decision (emphasis added).

SEC Enforcement Against Self-Reporting Token Issuer

Posted by Pamela Marcogliese, Matthew Solomon and Alexander Janghorbani, Cleary Gottlieb Steen & Hamilton LLP, on

Thursday, March 14, 2019

Blockchain, Cryptocurrency, Financial technology, Howey test, ICOs, SEC, SEC enforcement, Securities enforcement, Securities regulation
More from: Alexander Janghorbani, Jim Wintering, Matthew Solomon, Pamela Marcogliese, Cleary Gottlieb

Pamela L. Marcogliese and Matthew Solomon are partners and Alexander Janghorbani is senior attorney at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Ms. Marcogliese, Mr. Solomon, and Mr. Janghorbani, and Jim Wintering.

On February 20, the Securities and Exchange Commission (the “SEC” or “Commission”) issued a cease-and-desist order against Gladius Network LLC (“Gladius”) concerning its 2017 initial coin offering (“ICO”). The SEC found that the Gladius ICO violated the Securities Act of 1933’s (“Securities Act”) prohibition against the public offer or sale of any securities not made pursuant to either an effective registration statement on file with the SEC or under an exemption from registration. [1] While this is far from the first time that the SEC has found that a particular ICO token meets the definition of a “security” under the Securities Act, [2] this is notably the first action involving an ICO token issuer that self-reported its potential violation. Due to this, and Gladius’s cooperation throughout the investigation, the SEC stopped short of imposing any civil monetary penalties among its ordered remedial measures.

This resolution reflects a continued indication that where ICO token issuers cooperate with the Commission, the SEC may be more likely to tailor its remedial measures solely those designed to (a) bring the tokens into compliance with securities laws, and (b) protect investors against any losses caused by their purchase of the illegally offered, unregistered securities—a position that SEC officials have taken publicly. [3]

Democratic Senators and the Buyback Boogeyman

Posted by Jesse Fried (Harvard Law School) and Charles C.Y. Wang (Harvard Business School), on

Wednesday, March 13, 2019

Capital allocation, Capital markets, Dividends, Employees, Long-Term value, Public firms, Repurchases, SEC, Securities regulation, Shareholder value, Stakeholders, US Senate
More from: Charles Wang, Jesse Fried

Jesse Fried is the Dane Professor of Law at Harvard Law School and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration. This post was authored by Professor Fried and Professor Wang. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Professor Fried and Professor Wang (discussed on the Forum here).

Last month, Senator Chuck Schumer, along with Senator and presidential candidate Bernie Sanders, declared they would introduce “bold” legislation to prohibit a public firm from repurchasing its own stock, unless the firm first invests in employees and communities, including paying workers at least $15 per hour and offering “decent” pension and health benefits. Welcome to Washington’s newest political ritual: Senators seeking to demonstrate their concern for workers by proposing bills that severely restrict—or even outlaw—buybacks. Unfortunately, these proposals appear motivated by misleading measures of corporate capital flows, as well as on a profound misunderstanding of how the U.S. economy works. If enacted, such bills could threaten not only the capital markets but the employees and communities the Senators claim to care about.

Leading Senate Democrats appear to believe that repurchases, when added to existing levels of dividends, harm workers and impair long-term investment by starving firms of needed capital. The Schumer-Sanders bill would join legislation introduced by Schumer and Senator Tammy Baldwin to give the Securities and Exchange Commission authority to reject buybacks that, in its judgment, hurt workers. It also would require boards to “certify” that a repurchase is in the “best long-term financial interest of the company.” Senator Baldwin has introduced another bill, co-sponsored by Senator (and presidential candidate) Elizabeth Warren that goes even further: It bans all open-market repurchases.

Beyond Beholden

Posted by Da Lin (Harvard Law School), on

Wednesday, March 13, 2019

Board independence, Boards of Directors, Conflicts of interest, Controlling shareholders, Decision-making, Delaware articles
More from: Da Lin

Da Lin is Lecturer on Law at Harvard Law School. This post is based on her recent article, forthcoming in the Journal of Corporation Law. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Corporate law has long been concerned with director independence. In controlled companies, the perceived problem is that directors might feel pressured to reciprocate a past kindness from the controlling shareholder or fear retaliation. As a result, the conventional marker of independence is the absence of substantial prior or ongoing relationships to the controlling shareholder.

In my forthcoming article, Beyond Beholden, I challenge that standard narrative. I argue that the prospect of future rewards from the controlling shareholder also influences director behavior. Simply put, directors may be motivated to be on good terms with controlling shareholders because controlling shareholders may reward them in return.

Pre-Litigation Demand and Director Committees

Posted by Richard S. Horvath, Jr, Allen Matkins Leck Gamble Mallory & Natsis LLP, on

Wednesday, March 13, 2019

Board independence, Boards of Directors, Delaware cases, Delaware law, Derivative suits, Securities litigation, Shareholder suits
More from: Richard Horvath, Allen Matkins

Richard S. Horvath, Jr, is partner at Allen Matkins Leck Gamble Mallory & Natsis LLP. This post is based on his Allen Matkins memorandum and is part of the Delaware law series; links to other posts in the series are available here.

On February 12, 2019, in the matter captioned City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, et al., C.A. No. 2017-0341-KSJM, Vice Chancellor McCormick of the Delaware Court of Chancery provided further guidance on the pre-litigation demand requirement. This decision reaffirms and applies the principle under Delaware law that, while a pre-litigation demand “tacitly concedes” a board of directors is disinterested and independent for purposes of responding to the demand that concession only goes so far. As such, the board, or a subcommittee designated with the task of investigating and responding to the demand, must still in fact act independently, disinterestedly, in good faith, and with due care. While the derivative claims in Corvi were ultimately dismissed, the Court’s decision provides a helpful outline of the steps a board of directors should take in responding to a pre-litigation demand.

Rule 14a-8 Exceptions and Executive Compensation

Posted by Cydney Posner, Cooley LLP, on

Tuesday, March 12, 2019

Boards of Directors, Executive Compensation, No-action letters, Rule 14a-8, SEC, Securities regulation, Shareholder proposals, Shareholder voting, SLB 14J
More from: Cydney Posner, Cooley

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power by Lucian Bebchuk.

In October last year, Corp Fin issued a new staff legal bulletin on shareholder proposals, 14J, that examined the exception under Rule 14a-8(i)(7), the “ordinary business” exception, addressing, among other topics, the application of the rule to proposals related to executive or director comp. Post-shutdown, Corp Fin has now posted several no-action responses that consider the exception in that context. Do they provide any color or insight?

Executive comp or ordinary business?

One of the issues addressed in the SLB is how the staff approaches the application of Rule 14a-8(i)(7) to proposals that, in addition to implicating executive/director comp, also involve ordinary business matters. The question the staff then asks is: what is the real underlying focus of the proposal? Is it really concerned primarily with senior executive and/or director compensation, or is it just styled as an executive comp proposal, but “its underlying concern relates primarily to ordinary business matters that are not sufficiently related to senior executive and/or director compensation”? The goal is to avoid elevating form over substance so that “a proposal is not included simply because it addresses an excludable matter in a manner that is connected to or touches upon senior executive or director compensation matters.” Elsewhere in the SLB, the staff notes that, in “determining whether the focus of a proposal is senior executive and/or director compensation or, instead, an ordinary business matter, we consider both the resolved clause and supporting statement as a whole.”

Behavioral Foundations of Corporate Culture

Posted by Ernst Fehr (University of Zurich), on

Tuesday, March 12, 2019

Accountability, Behavioral finance, Contracts, Corporate culture, Incentives, Peer groups, Social networks, Transparency
More from: Ernst Fehr

Ernst Fehr is Professor of Economics at the University of Zurich. This post is based on a recent paper by Professor Fehr.

Talking about corporate culture has become quite popular in the business world. But why should companies care about corporate culture at all? Why do “soft” concepts like culture matter? Can’t companies simply rely on “hard” economic forces—the value of clear and efficient institutional rules and their associated financial incentives?

Corporate culture is important because human behavior is always co-determined by the set of social norms that prevail in a company and are the core of its culture. It is in the company’s interest to shape these norms through a cooperative culture that mobilizes employees’ voluntary cooperation in the pursuit of the firm’s overall goals. Our research provides behavioral foundations for cooperative culture, based on important scientific insights from experimental and behavioral economics as well as from contract economics.

Everything Old is New Again—Reconsidering the Social Purpose of the Corporation

Posted by Holly J. Gregory, Sidley Austin LLP, on

Tuesday, March 12, 2019

Accountability, Boards of Directors, Corporate culture, Corporate Social Responsibility, ESG, Long-Term value, Shareholder primacy, Shareholder value, Short-termism, Sustainability
More from: Holly Gregory, Sidley Austin

Holly J. Gregory is partner at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, previously published in Ethical Boardroom. 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).

At a time when trust in US business is at an all-time low, according to the Edelman Trust Barometer, the idea that the corporation should be run solely for the benefi of the shareholders is being questioned, including by large institutional shareholders. [1]

In a recent survey of 500 institutional investors, Edelman found that investors are increasingly taking into account as investment factors longer-term social and environmental considerations and the corporation’s cultural health. They are also expecting companies to take a stand on relevant social issues. A full 98 per cent of investors surveyed indicated that “public companies are urgently obligated to address… societal issues to ensure the global business environment remains healthy and robust”. [2]

The top five issues of concern cited were cybersecurity, income inequality, workplace diversity, national security and immigration. More broadly, in his January 2018 letter to CEOs, BlackRock CEO Larry Fink discussed the need for portfolio companies to have a “sense of purpose” and shared his view that to “prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate”. [3]

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Monthly Archives: March 2019

Weekly Roundup: March 8-15, 2019

As California Goes, So Goes the Nation? The Impact of Board Gender Quotas on Firm Performance and the Director Labor Market

Letter on Stock Buybacks and Insiders’ Cashouts

The Labor Market for Directors and Externalities in Corporate Governance: Evidence from the International Labor Market

Equity Market Structure 2019: Looking Back & Moving Forward

Corporate Opportunity Waivers in Private Equity and Venture Capital Investments

The Strategies of Anticompetitive Common Ownership

Technology and the Boardroom: A CIO’s Guide to Engaging the Board

Everything Old is New Again—Reconsidering the Social Purpose of the Corporation

Behavioral Foundations of Corporate Culture

Rule 14a-8 Exceptions and Executive Compensation

Pre-Litigation Demand and Director Committees

Beyond Beholden

Democratic Senators and the Buyback Boogeyman

SEC Enforcement Against Self-Reporting Token Issuer

Farewell to Fairness: Towards Retiring Delaware’s Entire Fairness Review

2019 Lobbying Disclosure Resolutions

2019 Lobbying Disclosure Resolutions

Farewell to Fairness: Towards Retiring Delaware’s Entire Fairness Review

SEC Enforcement Against Self-Reporting Token Issuer

Democratic Senators and the Buyback Boogeyman

Beyond Beholden

Pre-Litigation Demand and Director Committees

Rule 14a-8 Exceptions and Executive Compensation

Executive comp or ordinary business?

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