Monthly Archives: May 2020

Corporate Governance Update: EESG and the COVID-19 Crisis

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. 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 has caused a societal crisis of far-reaching implications. For the moment, employee, environmental, social and governance (EESG) concerns may appear to have taken a back seat to economic survival, but in the longer term, a robust corporate response will require firms to re-evaluate their priorities. Once the economic recovery has begun in earnest, there is likely to be heightened investor interest in, and public scrutiny of, key areas of EESG, particularly as they relate to firm performance, human capital and enterprise resilience. The COVID-19 pandemic has shown that the nexus between corporate performance and societal wellbeing has never been stronger. The potential role of major corporations in perpetuating global inequities and exacerbating the disparate effects of large-scale crises, and their capacity to ameliorate human suffering through private sector action in support of government initiatives, are indisputable. For better or worse, the pandemic and future crises are likely to increase the extent to which the public perceives large corporations as entities that can and should bear a heavy burden of corporate social responsibility.

Stockholders are compelled by recent events to acknowledge that EESG-related risks have the potential to affect the creation and preservation of long-term wealth. Corporate disclosures have begun to change accordingly, as both public and private companies are focusing on stakeholder-centric communications in response to the human capital impact of the crisis. While EESG-related disclosures generally have been presented separately from financial disclosures, the pandemic has blurred the line between the two sets of issues. In the aftermath of the COVID-19 pandemic—itself fundamentally an EESG event—investors will want to know whether, and how, firms are preparing for a variety of worst case scenarios. Companies will face increased pressure to enhance their disclosure around risk management, particularly with respect to systemic crises that are non-financial in origin.


NYSE Provides Temporary Exception to Certain Shareholder Approval Requirements

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

The SEC has declared immediately effective (yet another) proposed change to the rules of an exchange—this one from the NYSE. The NYSE has adopted new Section 312.03T of the NYSE Listed Company Manual, which will provide a temporary exception, through June 30, 2020, from the application of the shareholder approval requirements for specified issuances of 20% or more of the outstanding shares (Section 312.03) and, in certain narrow circumstances, by a limited exception for issuances to related parties or other capital-raising issuances that could be considered equity compensation (Sections 312.03 and 303A.08). Although not entirely congruent, the exception appears to be modeled closely on the comparable Nasdaq exception that was approved just over a week ago. (See this PubCo post.) In light of the unprecedented disruption in the economy as a result of COVID-19, many listed companies “are experiencing urgent liquidity needs during this period of crisis due to lost revenues and maturing debt obligations.” The temporary exception is designed to respond to this unprecedented emergency and to help companies access necessary capital quickly.

COVID-19: Due Diligence Considerations for M&A Transactions

Thomas W. Christopher and Alexander B. Johnson are partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Christopher, Mr. Johnson, David S. Allinson, Joshua M. Dubofsky, Austin Ozawa, and Nineveh Alkhas. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

Buyers in M&A transactions should consider a number of due diligence items in response to COVID-19 and the governmental response thereto.

As parties pursue mergers and acquisitions transactions during, and in the wake of, the COVID-19 pandemic, both buyers and targets should consider a number of factors from a due diligence perspective, including the impact of COVID-19 and related developments on the target from a legal, compliance, human resources, business, insurance, financial, and operational perspective. This post identifies some of the issues buyers should consider when undertaking legal due diligence in connection with an M&A transaction, and highlights for targets some of the types of due diligence questions they may need to address.

Due Diligence Considerations

As with any due diligence investigation, due diligence related to the COVID-19 pandemic should be tailored to the particular target company. Accordingly, the applicability of each of the topics discussed below will likely vary based on the particular target company, its industry and geography, and a number of other factors.


Investors Continue To Deserve More From Boards and Courts On Mutual Fund Fees

Aaron T. Morris is a partner at Barr Law Group. This post is based on a Barr Law memorandum by Mr. Morris and Mark T. Hebner.

American investors pay $100 billion every year in mutual fund fees. These fees are deducted from their savings and reduce future investment returns. Over 20 years, the compounded drag on investment returns is well into the trillions, which begs the question: Is even one dollar of these fees “excessive” under the fiduciary standards of the Investment Company Act? [1]

The answer from mutual fund boards and federal district courts has been a resounding “no.” Each of the billions of dollars in annual fees was approved by independent boards of directors, and each instance in which investors have challenged a fee has been rejected by a federal judge.

But, as discussed herein, there appears to be good reason to question whether mutual fund fees are, in fact, universally fair. If price constraints on fees make up a “three-legged stool”—a term coined by academics in reference to (i) competitive pressures; (ii) board oversight; and (iii) excessive fee lawsuits—then the more than $20 trillion in assets supported by this “stool” are in a precarious position. Two of the legs—boards and federal courts—have demonstrated little appetite for disrupting the fees charged by advisors, and recent court decisions have begun to further deteriorate the effectiveness of board oversight. The remaining leg, the competitive market, has been left to function largely on its own (a state of affairs that Congress expressly sought to avoid). And while it’s certainly true that some investors have caught on to high fees in recent years and have moved to lower cost options, competition has yet to eradicate significant pricing anomalies in the marketplace.


Director Compensation Practices in the Russell 3000 and S&P 500: 2020 Edition

Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post relates to a report co-authored by Mr. Tonello with Mark Emanuel and Todd Sirras and published by The Conference Board, Semler Brossy, and ESG data analytics firm ESGAUGE.

At its core, the director role is primarily one of stewardship rather than execution. While “pay for performance” has become a mantra for executive compensation in the last decade, the concept does not extend in the same way to director pay. Rather, director pay structures are oriented toward compensating for time commitments and leadership. Retainers and per-meeting fees for board and board committee services reflect the time spent on company-related activities. Supplemental retainers for board chairs, lead directors, and board committee chairs reward the additional responsibility of service in leadership positions. To be sure, equity grants are widely used but, rather than being linked to specific performance measures, they are meant more generally to establish an ongoing interest in the long-term prospects of the business.

Yet, today’s corporate directorship is at the forefront of rapidly evolving economic and social changes that are affecting the notion and purpose of the corporation itself. The board slate increasingly represents a diverse array of experiences and viewpoints, while individual directors are asked to exercise judgment and provide coordinated guidance on an expanding set of stakeholder issues. Though compensation is expected to remain rooted in the stewardship function of boards, pay plans will necessarily need to evolve in response to the increased complexity of the independent director role and the level of scrutiny to which it is subject.


ESG in the Mainstream: Sell-Side Analysts Addressing ESG Concerns

David A. Katz, and Sabastian V. Niles are partners and Carmen X. W. Lu is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton 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).

S&P Global, Northern Trust and T. Rowe Price recently announced the expansion of their ESG analytics offerings: S&P Global has launched its proprietary S&P Global ESG Scores which covers more than 7,300 companies; Northern Trust has launched its ESG Analytics Summary which provides investors with snapshots of their portfolio’s ESG performance; and T. Rowe Price moved forward with deep integration of their proprietary “Responsible Investing Indicator Model” (RIIM) into buy-side investment professional analyses of individual companies and overall portfolio holdings and plans to implement portfolio-level ESG reporting into certain product offerings. The S&P Global ESG Scores use data from the SAM Corporate Sustainability Assessment (CSA), an annual evaluation of companies’ sustainability practices which was acquired by S&P Global from RobecoSAM last year. Northern Trust has partnered with ratings agency IdealRatings to provide data for its ESG Analytics Summary. T. Rowe Price’s RIIM builds an environmental, social and ethical profile for companies and the overall portfolio, and the UN Sustainable Development Goals are represented across the range of RIIM-measured factors.


Weekly Roundup: May 22–28, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 22–28, 2020.

Remarks by Commissioner Peirce at Meeting of the SEC Investor Advisory Committee

Human Capital: Key Findings from a Survey of Public Company Directors

On the Purpose of the Corporation

Opening Remarks by Chairman Clayton at the Meeting of the Asset Management Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at the Meeting of the Asset Management Advisory Committee. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Ed [Bernard]. [1] I would like to welcome everyone to the second meeting of the Commission’s Asset Management Advisory Committee. I am glad that the Committee is able to meet virtually today.

Thank you to everyone participating, including Commissioners Peirce and Lee; our panelists; and the members of the Committee. I would like to particularly thank Ed for his leadership in crafting the agenda for today’s meeting, and Dalia and her team for their many contributions in a compressed timeframe. Thank you also to the Commission staff in the Office of Information Technology and the Office of the Secretary, whose work allowed us to hold today’s meeting remotely. And, importantly, thank you to all of those interested individuals who are listening to our meeting through the Commission’s website.

I look forward to hearing the Committee’s insights into the effects of the pandemic on the asset management industry and, in particular, our long-term Main Street investors. An essential component of our national response to, and recovery from, COVID-19 will be the continuing, orderly operation of our markets and the continued flows of capital and credit throughout our economy. The asset management industry has a pivotal role to play in both orderly market operation and the generation and absorption of capital flows. Investment funds and advisers are an important link between these market realities and the interests of our long-term Main Street investors. As the effects of COVID-19 and our societal response unfold, it is important that we discuss these matters in real time and with clear heads.


Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee Relating to ESG Disclosure

Allison Bennington is a member of the SEC Investor-as-Owner Subcommittee. This post is based on the recommendations of the Investor-as-Owner Subcommittee by Ms. Bennington; Anne Sheehan, Chair of the SEC Investor Advisory Committee; and John Coates, Chair of the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee.

For close to 50 years, the SEC has periodically contemplated whether ESG [1] disclosures are material and should be incorporated into its integrated disclosure regime for SEC registered Issuers. [2] This recommendation asserts that the time has come for the SEC to address this issue. Addressing ESG disclosure now will (a) provide investors with the material, comparable, consistent information they need to make investment and voting decisions, (b) provide Issuers with a framework to disclose material, decision-useful, comparable and consistent information in respect of their own businesses, rather than the current situation where investors largely rely on third party ESG data providers, which may not always be reliable, consistent, or necessarily material,(c) level the playing field among all US Issuers regardless of market cap size or capital resources, (d) ensure the continued flow of capital to US Issuers, and (e) enable the SEC to take control of ESG disclosure for the US capital markets before other jurisdictions impose disclosure regimes on US Issuers and investors alike.

Background to Recommendation:

The SEC Investor Advisory Committee has held three sessions on the topic of ESG Disclosures in 2016, 2018 and 2019. [3] We have heard the perspectives of a variety of market participants and have evaluated their supporting documentation. Members of this Committee have also spoken with a number of investment advisors, asset managers and asset owners, US and foreign Issuers, third party data providers, NGO’s, and proponents of third-party disclosure frameworks. The message that we have heard consistently is that investors consider certain ESG information material to their investment and voting decisions, regardless of whether their investment mandates include an “ESG-specific” strategy. Our work has informed us that this information is material to investors regardless of an Issuer’s business line, model or geography, and is different for every Issuer. Yet, despite a plethora of data, there is a lack of material, comparable, consistent information available upon which to base some of these decisions.


Material Adverse Effect Clauses and the COVID-19 Pandemic

Robert T. Miller is a Professor of Law at the University of Iowa College of Law. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In a working paper just posted on SSRN, I consider whether the COVID-19 pandemic, the governmental responses thereto, and a company’s actions taken in reaction to both of these are likely to constitute a “Material Adverse Effect” (MAE) within the meaning of a typical MAE clause in a public company merger agreement. In addition to the conclusions about COVID-19 and MAEs summarized below, the paper also reviews important Delaware caselaw on MAEs, identifies open problems in those cases, and suggests a more comprehensive theory of MAEs that rationalizes the caselaw and solves most of the open problems.

As to COVID-19 and MAEs, although in any particular case everything will depend on the exact effects on the company and the precise wording of the MAE clause, nevertheless because MAE definitions tend to follow common patterns, some general conclusions about typical MAE clauses are warranted, including the following:


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