Daily Archives: Monday, October 7, 2019

Climate in the Boardroom

Posted by Eli Kasargod-Staub, Majority Action, on
Monday, October 7, 2019
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Eli Kasargod-Staub is Executive Director of Majority Action and the Climate Majority Project. This post is based on his Majority Action report. 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); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Key Climate-Related Shareholder Resolutions Would Have Passed with BlackRock and Vanguard Support

The world’s largest asset managers BlackRock and Vanguard control the largest blocks of shares in nearly every publicly traded firm in the U.S. The pattern of ownership is seen in the energy and utility industries, and across the companies at which there were critical climate votes in 2019 (see Figure 13). The two asset managers were both in the top five common stock shareholders at all 28 companies with critical climate resolutions.

BlackRock and Vanguard were the two largest shareholders at 18 of these 28 companies.

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The Reverse Agency Problem in the Age of Compliance

Posted by Asaf Eckstein (Ono Academic College) and Gideon Parchomovsky (University of Pennsylvania), on
Monday, October 7, 2019
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Asaf Eckstein is Associate Professor of Law at Ono Academic College and Gideon Parchomovsky is Robert G. Fuller, Jr. Professor of Law at University of Pennsylvania Law School and Professor of Law at Hebrew University School of Law. This post is based on their recent paper.

The agency problem, the idea that corporate directors and officers are motivated to prioritize their self-interest over the interest of their corporation, has had long-lasting impact on corporate law theory and practice. In recent years, however, as federal agencies have stepped up enforcement efforts against corporations, a new problem that is the mirror image of the agency problem has surfaced—the reverse agency problem.

The surge in criminal investigations against corporations, combined with the rising popularity of settlement mechanisms including Pretrial Diversion Agreements (PDAs), and corporate plea agreements, has led corporations to sacrifice directors and officers in order to reach settlements with law enforcement authorities, at all cost. While such settlements are in the best interest of companies and shareholders, they have devastating effects for individual directors and officers.

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Implied Private Right of Action Under the Investment Company Act

Posted by Rich Lincer, Robin Bergen, and Adam Brenneman, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, October 7, 2019
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Rich Lincer, Robin Bergen, and Adam Brenneman are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lincer, Ms. Bergen, Mr. Brenneman, Marc Rotter, and Steven Xie.

In a recent decision, Oxford University Bank v. Lansuppe Feeder, LLC, the United States Court of Appeals for the Second Circuit held that parties that enter into contracts that violate the Investment Company Act of 1940 (the “Act”) have a private right of action under § 47(b) of the Act to sue for rescission of those contracts. The Second Circuit’s holding departs from prior decisions by two other Circuit courts and several district court decisions, amplifying potential contractual and litigation risks for funds and “inadvertent investment companies,” as well as such entities’ investors, lenders and contractual counterparties.

In Oxford University Bank, [1] a private fund issuer, which otherwise would have been required to register as an investment company, relied on the § 3(c)(7) exemption from the definition of “investment company” in the Act. The § 3(c)(7) exemption requires, among other things, that owners of the issuer’s outstanding securities be, at the time of acquisition of such securities, “qualified purchasers” (“QPs”) or “knowledgeable employees.” Holders of a class of junior notes of the issuer alleged a violation of the exemption and sued for rescission of the indenture under which the notes were issued.

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