Yearly Archives: 2020

The Spread of Covid-19 Disclosure

Posted by Daniel J. Taylor (Wharton), on
Wednesday, July 8, 2020
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Daniel Taylor is Associate Professor of Accounting at the Wharton School of the University of Pennsylvania. This post is based on a recent paper by Professor Taylor; David F. Larcker, James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Bradford Lynch, PhD Student at The Wharton School; and Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business.

We recently published a paper on SSRN (“The Spread of COVID-19 Disclosure”) that examines disclosure practices across all U.S. public companies during the initial spread of COVID-19.

Investors rely on corporate disclosure to make informed decisions about the value of companies they invest in. Corporate disclosure includes not only financial statement information that quantifies earnings, cash flows, and changes in the value of assets, but also supplemental information to explain, qualify, or forecast future performance and risks. While the Securities and Exchange Commission requires minimum standards of information in filings, it allows flexibility to go beyond these minimums within the filing and through alternative public channels (such as press releases, earnings conference calls, and industry conferences).

Shareholders value transparency because it improves their ability to price securities, and over time, shareholders’ demand for transparency has led to a steady increase in the amount of information that companies voluntarily disclose beyond regulatory requirements. For a variety of reasons, however, a company might prefer to release less information to the public. A company in a competitive industry or developing a new product might not want to divulge proprietary information that will disadvantage it relative to peers. Alternatively, it might lack foresight about future performance and, out of a desire to avoid legal liability for making inaccurate statements, prefer to disclose less information or use less precision when making statements.

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The Role of Long-Term Institutional Investors in Activism

Posted by Bhakti Mirchandani and Victoria Tellez, FCLTGlobal, on
Wednesday, July 8, 2020
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Bhakti Mirchandani is Managing Director and Victoria Tellez is a research associate at FCLTGlobal. This post is based on their FCLTGlobal memorandum. 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) and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

Executive Summary

The prevailing wisdom is that activist investors can drive corporate short-term behavior themselves. The prevailing wisdom is wrong. At just 0.3% of total global equity assets under management (AUM) in 2018, activists depend on the support of long-term investors for their influence.

Without clarity on long-term shareholders’ views, companies perceive short-term pressure coming from their investors, and assume the activists speak for the entirety of the shareholder register. Having a strong investor/corporate dialogue well before an activist campaign arises is the way to encourage companies to proactively improve the drivers of long-term value creation—such as bolstering their governance, honing strategies for growth, and engaging with long-term investors. Strong long-term performance is the best way to limit opportunity for an activist campaign. Indeed, rather than being a spectator, long-term investors have a significant role to play alongside companies to counteract short-term activist behaviors. It is well within the power of these long-term investors to either amplify or dampen the short-term impact of activism, serving as essential players of the activism ‘game.’

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DOL Proposes New Rules Regulating ESG Investments

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, July 7, 2020
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, David M. Silk, David E. Kahan, Sabastian V. Niles, Alicia C. McCarthy, and Carmen X. W. Lu. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).

As ESG investing continues to accelerate, the Department of Labor (“DOL”) has proposed for public comment rules that would further burden the ability of fiduciaries of private-sector retirement plans to select investments based on ESG factors and would bar 401(k) plans from using a fund with any ESG mandate as the default investment alternative for non-electing participants. The proposal asserts that “ESG investing raises heightened concerns under ERISA,” and, in contrast to the broader investor community’s recognition that ESG is about value and performance, and despite growing evidence that the investment returns of ESG funds can outperform those of non-ESG funds, the proposal reflects the DOL’s continued concern that ESG investment might “subordinate return or increase risk for the purpose of non-pecuniary objectives.” In terms of defining what would be an ESG-themed fund or mandate triggering heightened scrutiny and procedural requirements, the proposed rule casts the net widely to reach those featuring “one or more environmental, social, corporate governance, or similarly oriented assessments or judgments in their investment mandates, or that include these parameters in the fund name.” Such assessments and judgments have, of course, become common and mainstream, with investors, companies and fiduciaries of all kinds bringing their business determinations to bear.

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Fiduciary Duty of Disclosure Does Not Apply to Individual Transactions with Equityholders

Posted by Taylor B. Bartholomew, Matthew M. Greenberg and Joanna J. Cline, Pepper Hamilton LLP, on
Tuesday, July 7, 2020
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Matthew Greenberg and Joanna Cline are partners, and Taylor Bartholomew is an associate at Pepper Hamilton LLP. This post is based on a recent Pepper memorandum by Mr. Greenberg, Ms. Cline, Mr. Bartholomew, and Christopher B. Chuff. This post is part of the Delaware law series; links to other posts in the series are available here.

In Dohmen v. Goodman, the Delaware Supreme Court declined to impose an affirmative fiduciary duty of disclosure on a general partner arising out of the general partner’s solicitation of capital contributions from a limited partner where the general partner knowingly made misrepresentations in the process. The court’s decision provides a comprehensive roadmap not only for general partners in assessing the scope of their fiduciary duties when communicating with limited partners under Delaware law, but also corporate fiduciaries more generally.

Background

In 2010, Bert Dohmen formed Croesus Fund, L.P. (the Fund) as a Delaware limited partnership with the intention of starting a hedge fund. Dohmen also formed Macro Wave Management, LLC to serve as the Fund’s general partner. In 2011, Albert Goodman made an initial capital contribution in the Fund and became a limited partner. During the same year, Dohmen himself also invested in the Fund. Following Goodman’s investment, Goodman inquired several times as to whether there were other investors in the Fund. Dohmen stated that he had several friends who were liquidating assets in order to participate in the Fund, but, according to the court, no friends of Dohmen’s were actually doing so and Dohmen was aware of this. In 2011, Goodman again invested in the Fund. Dohmen represented to Goodman that his friends were interested in the Fund and were reviewing certain investment documents, which the court characterized as a knowingly false statement. In 2012, Dohmen informed Goodman for the first time that there were only two investors in the Fund. Dohmen offered to allow Goodman to withdraw his investments, but Goodman declined. By 2014, the net asset value of the Fund declined to $100,000. Goodman did not receive a return of any portion of his investment.
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Five Ways a Sustainability Strategy Provides Clarity During a Crisis

Posted by Thomas Singer, The Conference Board, Inc., on
Monday, July 6, 2020
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Thomas Singer is a principal researcher in corporate leadership at The Conference Board, Inc. This post is based on his Conference Board.memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The COVID-19 pandemic is requiring companies to focus on survivability—whether they have the financial, human, and other resources to make it through this period of intense disruption. This is also a time, however, for companies to consider the value of their existing sustainability strategies. [1] Companies with robust sustainability programs are more likely to perform well during a downturn. And five key elements of a fully developed sustainability program—a defined corporate purpose, a clear view of what is material (and what is not), an awareness of broader societal challenges, a robust level of engagement and transparency with stakeholders, and a collaborative culture—should improve a company’s ability to prosper in the long run.

Rather than setting aside their sustainability strategies, companies should view the current crisis as an opportunity to reevaluate and strengthen their sustainability programs.

Almost a decade ago, The Conference Board released a report outlining the business case for sustainability. The report highlighted that “awareness has increased among leaders that durable business models cannot be solely based on the maximization of financial performance, and that shareholder value is feeble if the company fails to recognize a broader nexus of stakeholder interests—including those of employees, customers and suppliers, regulators, and the local communities where the company operates.” [2]

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The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934

Posted by Oliver Binz (INSEAD) and John R. Graham (Duke University), on
Monday, July 6, 2020
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Oliver Binz is an Assistant Professor of Accounting and Control at INSEAD and John Graham is the D. Richard Mead, Jr. Family Professor at Duke University’s Fuqua School of Business. This post is based on their recent paper.

The Security Exchange Act of 1934 ( “the Act”) is the most expansive secondary market regulation enacted in the history of the United States. The Act was the first federal law to mandate disclosure of audited financial statements, it established the Securities and Exchange Commission (SEC), and is still the basis of much financial litigation. However, according the 2003 Economic Report of the President, “whether SEC enforced disclosure rules actually improve the quality of information that investors receive remains a subject of debate among researchers almost 70 years after the SEC’s creation.” Some even argue that the Act did not improve the quality of information at all. In our new study, The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934, we revisit the passage of the Act and, using novel data and methodology, conclude that the Act’s implementation of a mandatory disclosure system and increase in enforcement of accounting standards and financial regulation made earnings disclosures more informative to investors.

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Chancery Court Denies Motion to Dismiss and Application of MFW Safe Harbor

Posted by Meredith Kotler, Paul Tiger, and Marques Tracy, Freshfields Bruckhaus Deringer LLP, on
Sunday, July 5, 2020
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Meredith Kotler and Paul Tiger are partners and Marques Tracy is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In a 94-page opinion issued last Thursday, Vice Chancellor Laster denied defendants’ motion to dismiss in In re Dell Technologies Inc. Class V Stockholders Litigation, [1] finding that the complaint alleged facts that made it “reasonably conceivable” that the safe harbor established by Kahn v. M&F Worldwide Corp. (“MFW”), 88 A.3d 635 (Del. 2014), would not apply and thus that entire fairness could be the operative standard of review, rather than the more favorable business judgment standard. While the facts in Dell are unique, the opinion offers helpful guidance to boards seeking the benefit of MFW, particularly on issues relating to establishment of a special committee, its role in negotiations, potential threats or coercion, and director independence.

Background

In 2016, Dell Technologies (“Dell” or the “Company”) acquired EMC Corporation with a combination of cash and newly-issued shares of Class V stock. A critical feature of the Class V shares was the existence of a conversion right: if the Company listed its Class C shares on a national exchange, then the Company could forcibly convert the Class V shares into Class C shares pursuant to a pricing formula that the Court characterized as “superficially simple” and that commentators had suggested could be influenced to the disadvantage of the Class V stockholders by the existence of the conversion right itself.

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Roadmapping Practical Human Capital Management Considerations

Posted by Pamela Marcogliese, Elizabeth Bieber and Thomas Lair, Freshfields Bruckhaus Deringer LLP, on
Saturday, July 4, 2020
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Pamela L. Marcogliese is a partner, Elizabeth Bieber is counsel, and Thomas Lair is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

As discussed in our previous post, in order for companies to successfully manage HCM issues arising in 2020, it will be important for them to be proactive. How companies do that will be a function of each company’s profile, its available resources and its individual culture, but there will be some common themes that emerge. At the highest level, companies will need to be proficient in two ways: viewing HCM through a broader lens as a key component of the company’s strategic focus and effectively communicating ongoing efforts with stakeholders in a meaningful way.

Creative Solutions During Difficult Times

Many companies have been faced with difficult choices regarding compensation. There isn’t a right or wrong way to handle these difficult decisions—in practice, we have seen a panoply of options and opportunities for companies to demonstrate the value they place on their workforce, even if they are reducing compensation costs. These decisions depend on each company’s facts and circumstances.

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An Analysis of the Supreme Court’s Decision in Liu v. SEC

Posted by Kyle DeYoung, Lex Urban, and Wesley Wintermyer, Cadwalader, Wickersham and Taft LLP, on
Saturday, July 4, 2020
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Kyle DeYoung is partner, Lex Urban is special counsel, and Wesley Wintermyer is an associate at Cadwalader, Wickersham and Taft LLP. This post is based on their Cadwalader memorandum.

On June 22, 2020, the U.S. Supreme Court threw the SEC a lifeline in the highly-anticipated decision of Liu v. SEC. In an 8-to-1 decision, the Justices held that the SEC may continue to obtain disgorgement in federal court, albeit in a significantly narrowed fashion.

Although the SEC has routinely sought, and often secured, disgorgement as a form of “equitable relief” in federal courts since the 1970’s, commentators questioned this practice, as the SEC’s authorizing statutes do not list disgorgement as an available judicial remedy. The issue came to the fore in June 2017, when the Supreme Court decided Kokesh v. SEC, in which the Justices reasoned that disgorgement was a “penalty” subject to a five-year statute of limitations. In an attention-grabbing footnote, the Court stressed that it was not passing judgment on “whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” Many commentators read this to signal the Court’s willingness to consider the unresolved question of the SEC’s disgorgement authority. Liu v. SEC presented that opportunity. The Court upheld disgorgement as an available remedy, but held that disgorgement awards must be limited to wrongdoers’ net profits as opposed to their gross illicit gains. The Court also cast doubt on whether the SEC may obtain disgorgement in cases were funds will be remitted to the U.S. Treasury as opposed to returned to identifiable victims.

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Does Common Ownership Explain Higher Oligopolistic Profits?

Posted by Edward B. Rock and Daniel L. Rubinfeld (NYU), on
Friday, July 3, 2020
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Edward B. Rock is the Martin Lipton Professor of Law at New York University School of Law and Daniel L. Rubinfeld is Professor of Law at New York University School of Law. This post is based their recent paper. Related research from the Program on Corporate Governance includes Horizontal Shareholding (discussed on the Forum here) and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding (discussed on the Forum here) both by Einer Elhauge; Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

There is compelling evidence that both concentration and profitability in oligopolistic industries have increased over the past two decades. Over roughly the same time period, the concentration of shareholding in the hands of the largest institutional investors has dramatically increased, with an increase in the degree to which investors (such as Vanguard, State Street and BlackRock) own large equity stakes in competing portfolio companies. A number of authors—focusing initially on airlines and commercial banking—have argued that the growth in this “common ownership” has caused the increase in oligopoly profits. They have followed this with a variety of policy responses.

We start with the core puzzle. The “Structure-Conduct-Performance paradigm”—which asserts a connection between concentration and profits—has long been a staple of antitrust policy. Yet, compelling empirical support for this connection has historically been sparse, for reasons well discussed in the Industrial Organization literature. Interestingly, according to the empirical evidence, something changed around 2000. Since then, the evidence for a link between concentration and profitability has become quite strong. As a result, an adequate theory must explain two things. First, why is there a correlation between concentration and profitability? Second, why has there been a strong(er) correlation post 2000 than pre-2000?

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