Monthly Archives: June 2020

MFW Pitfalls: Bypassing the Special Committee and Pursuing Detrimental Alternatives

Christopher B. Chuff is an associate and Joanna Cline and Matthew Greenberg are partners at Pepper Hamilton LLP. This post is based on a recent Pepper memorandum by Mr. Chuff, Ms. Cline, Mr. Greenberg, and Taylor Bartholomew. This post 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

On June 11, the Delaware Court of Chancery issued important guidance [1] to boards of directors of Delaware corporations and their controlling stockholders seeking to utilize the dual protections of MFW [2]—a special committee and a majority of the minority vote—to insulate themselves from fiduciary liability in connection with various corporate transactions.

First, the court held that when a corporation’s board or the corporation’s controller bypasses the special committee and negotiates directly with the corporation’s minority stockholders, MFW cleansing and the resulting application of business judgment review will be unavailable.

Second, the court held that when a corporation and its controller empower a special committee to consider and “say no” to various transaction alternatives, but retain the authority to pursue an alternative that is detrimental to the minority, any resulting special committee and stockholder approval of the transactions submitted for their approval will be found to be tainted by coercion, such that MFW cleansing will be unobtainable.

Thus, while the court’s decision confirms that the dual protections of MFW can be effective to protect against fiduciary liability claims, boards of directors and controlling stockholders who wish to maximize the effectiveness of those protections must be sure to avoid these and other pitfalls.


Human Capital Management: The Mission Critical Asset

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.

Human capital management (HCM) is one of the most significant corporate governance themes emerging in 2020, shining a spotlight on a topic that had already been a growing focus for many stakeholders. HCM sits at the intersection between investors, the workforce and consumers, it tugs at many deep-rooted social and political societal values, and it can be a polarizing issue for regulators and legislators. But as we have moved toward a talent-based economy, human capital is not only a key asset for companies, but rather, it is a “mission critical asset”. [1]

Over the last few months, many companies have had to make very difficult decisions that directly impact their workforce. Against this backdrop, the basis for evaluating company performance with respect to HCM considerations will be a multi-faceted review over a long horizon, where short-term foot faults will reverberate with a company’s stakeholders over the long-term. At a time when there are many critical, competing demands on a company’s time, the temptation to backburner HCM must be resisted. Companies that should take the time to thoughtfully implement and communicate their HCM efforts will be recognized by their stakeholders.


Going Beyond “Use-Of-Proceeds” to Reach International Sustainability Targets

Viola Lutz is Associate Director and Mélanie Comble is an Associate with ISS ESG climate solutions. This post is based on their recent ISS ESG 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).

More than a decade after the first Green Bond issuance, the original model of Use-of-Proceeds deals, where proceeds are spent on specifically identified projects, appears insufficient to meet international sustainability targets. The market has seen a number of new structures in the past year alone—from sustainability-linked bonds dedicated to general corporate purposes to transition bonds. As the market grows and continues to innovate, the question is: how can one ensure transparency and trust and what lessons can be drawn from the Green Bond Principles’ success story?


Director and Officer Duties in Management Buyouts: A Comparative Assessment

Andrew F. Tuch is Professor of Law at Washington University School of Law. This post is based on his recent chapter, forthcoming in the Research Handbook on Comparative Corporate Governance (Edward Elgar Publishing).

The U.S. and U.K. regulatory frameworks diverge in important ways—especially concerning their fiduciary duties. Scholars have therefore found it useful to compare how the two frameworks govern both merger and acquisition (M&A) transactions and self-dealing transactions. But scholars have yet to comparatively assess U.S. and U.K. regulations for the M&A transaction that may pose the greatest risk of self-dealing: the management buyout (MBO).

In a paper that is forthcoming in the Research Handbook on Comparative Corporate Governance (Edward Elgar), I comparatively assess U.S. and U.K. law governing MBOs, focusing on the duties of directors and officers in these systems. The analysis casts doubt on persistent but mistaken perceptions about U.S. and U.K. corporate fiduciary duties for self-dealing. The U.K. no-conflict rule is seen as strict, the U.S. fairness rule as flexible and pragmatic. As the analysis for MBOs demonstrates, these fiduciary rules operate similarly, tasking neutral or disinterested directors with policing self-dealing, enabling commercially sensitive responses to conflict of interest. The analysis also reveals stronger formal private enforcement of corporate law and more robust disclosure rules in the United States. But because the available empirical evidence fails to justify broad claims that corporate fiduciaries’ misconduct is more severe under either regime, the analysis identifies U.K. law-related measures that may serve similar functions to formal enforcement and mandatory disclosure in constraining misconduct by corporate fiduciaries. These include informal enforcement by the U.K. Takeover Panel, stronger shareholder rights, and potentially greater monitoring by institutional investors.


Justice Department Updates Its Guidance on Corporate Compliance Programs

Stephen Cutler and Nicholas Goldin are partners and David Caldwell is an associate at Simpson Thacher & Bartlett LLP. This post is based on their Simpson Thacher memorandum.

Earlier this month, the Criminal Division of the Department of Justice updated its guidance for prosecutors to use when evaluating a company’s compliance program in the context of corporate charging and settlement decisions. [1] While the revised guidance is very similar to DOJ’s April 2019 version, [2] it includes substantive updates in a number of areas—including regarding how compliance programs are resourced, how they evolve and adapt, and how they address pre-acquisition due diligence and post-acquisition compliance integration in mergers and acquisitions.


As with prior versions, the updated guidance continues to emphasize at the outset that the Criminal Division does not use any “rigid formula” to evaluate compliance programs, and instead states that each company’s risk profile requires “particularized evaluation.” The revisions (italicized below), however, add notable language with respect to the factors DOJ will consider in its individualized determination:


Time to Rethink the S in ESG

Jonathan Neilan is Managing Director; Peter Reilly is Senior Director; and Glenn Fitzpatrick is a Consultant at FTI Consulting. This post is based on their FTI Consulting 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).

Putting the ‘S’ in context

In early 2019, we wrote a paper highlighting that the focus on Environmental, Social & Governance or ‘ESG’ issues in the capital markets had firmly shifted from the margin to the mainstream. This shift was reflected in the scale of capital being invested in ESG oriented investment funds alongside a generally greater societal awareness (and acceptance) of an urgency to step up efforts to address environmental issues and climate change.

As we continued to engage with companies and investors during the course of 2019—and we assessed the corporate reputation challenges being encountered by many companies—it became increasingly clear that factors which fall within the ‘S’ of ESG are as common as (and for some companies more so than) those within ‘E’ and ‘G’ in contributing to business risk and, in turn, causing lasting damage to a company’s reputation.

Factors which fall within the ‘S’—frequently customer or product quality issues, data security, industrial relations or supply-chain issues—commonly impact businesses and ‘destroy value’. This prompted us to reconsider if ‘social’ was the correct word for the ‘S’ in ESG and whether ‘Stakeholder’ might be more appropriate. Indeed, the use of the term ‘social’ may have contributed to a failure to conceptualise the ‘S’ in ESG, leading to an absence of focus and measurement from the market.

The scope of ‘S’ has progressively widened over the past two decades, which reflects the evolving business environment of the 21st century where businesses and markets are increasingly interconnected and interdependent. Over and above human rights; labour issues; workplace health & safety; and product safety and quality, ‘S’ factors now also incorporate the impact of modern supply-chain systems and the adoption of technology across all business sectors.


Addressing Climate as a Systemic Risk: A Call to Action for Financial Regulators

Veena Ramani is Senior Program Director, Capital Markets Systems at Ceres. This post is based on her Ceres report.

Executive Summary

Systemic risks have the potential to destabilize capital markets and lead to serious negative consequences for financial institutions and the broader economy. Under this definition, climate change, like the current COVID-19 crisis, is indisputably a systemic risk. Its wide-ranging physical impacts, combined with expected transitions to a net-zero carbon economy and other socio-economic ripples, are likely to manifest in both cumulative and unexpected ways and present clear systemic risks to U.S. financial markets—and the broader economy. Left unmanaged, these risks could have significant, disruptive consequences on asset valuations, global financial markets and global economic stability.

This post, “Addressing Climate as a Systemic Risk: A call to action for U.S. financial regulators,” outlines how and why U.S. financial regulators, who are responsible for protecting the stability and competitiveness of the U.S. economy, need to recognize and act on climate change as a systemic risk. It provides more than 50 recommendations for key financial regulators to adopt, including the Federal Reserve Bank (the Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CTFC), state and federal insurance regulators, the Federal Housing Finance Agency (FHFA), and the Financial Stability Oversight Council (FSOC).


Update by Chairman Clayton on the Commission’s Targeted Regulatory Relief to Assist Market Participants Affected by COVID-19 and Ensure the Orderly Function of our Markets

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on a recent public statement issued by Mr. Clayton, William Hinman, Dalia Blass, and Brett Redfearn. The views expressed in this post are those of Mr. Clayton, Mr. Hinman, Ms. Blass, and Mr. Redfearn, and do not necessarily reflect those of the Securities and Exchange Commission or its staff.


The U.S. Securities and Exchange Commission’s efforts in response to the COVID-19 pandemic are centered, first and foremost, on the health and safety of our employees and all Americans. The Commission’s recognition of the corresponding need of market participants to also prioritize health and safety while ensuring the continuity of operations essential to the orderly function of our capital markets, drove the prompt actions of the Commission and its staff in the early stages of the pandemic’s effects in the United States. We have assessed these actions in light of developments over the past several months, current conditions and our expectations in order to adjust our efforts as necessary or appropriate. This statement provides a collective, cross-Divisional update based on that assessment.

Below is a summary of the current targeted, temporary relief and assistance provided by the Commission and staff, along with the staff’s views on whether and, if so, how that relief should be adjusted taking into account market outreach and observations. It is clear that the need for certain relief remains, such as relief to ensure continued remote operations and to provide flexibility in light of continued market volatility. Other forms of current relief, however, are unlikely to be extended. For example, the Commission and its staff provided temporary, targeted, and conditional relief and assistance to issuers and registrants from certain filing and delivery deadlines in recognition of the impact of COVID-19 on operations while also maintaining important investor protections. As market participants have worked to implement business continuity plans and adjusted in many cases to a more remote and distributed workforce, the present need for extensions of certain regulatory deadlines has diminished.


Asset Manager Perspective: Shareholder Proposals on Sustainability

Snorre Gjerde is Analyst, Sustainability; Wilhelm Mohn is Head of Sustainability; and Carine Smith Ihenacho is Chief Corporate Governance Officer at Norges Bank Investment Management. This post is based on their Norges Bank 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 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).

Voting on shareholder proposals allows investors to exercise their ownership rights by holding the board accountable and steering companies in the right direction. In many markets, an increasing number of proposals focus on the environmental and social aspects of companies’ activities. Emerging academic research indicates that some of these proposals may have positive financial implications for the target company, if adopted. However, the increasing number of proposals can also present challenges for investors. These proposals address many complex and distinctive issues, and filers may pursue objectives beyond the best interests of the company.

Faced with this situation, asset managers need efficient solutions that enable them to vote in favour of relevant, value-adding initiatives, and vote against proposals that are misaligned with shareholder value. Shareholder proposals can be instrumental in driving adoption of more responsible business practices at companies. We emphasise the importance of making considered voting decisions and recommend an analytical approach focused on materiality, limited prescriptiveness and consideration of company context. We call on filers to utilise the proposal mechanism to raise material sustainability risks that a company is managing inadequately, and not as a tool for micro-managing company operations or drawing attention to tangential issues.


Supreme Court Limits SEC Disgorgement Remedy

John F. SavareseWayne Carlin and David B. Anders are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

In an 8-1 decision issued today in Liu v. SEC, the Supreme Court upheld the SEC’s authority to obtain disgorgement from securities law violators, but also indicated some limitations on the scope of the remedy. Some observers had raised questions about the continued viability of the disgorgement remedy after the Court’s 2017 decision in Kokesh v. SEC. [The June 22, 2020] decision makes clear that SEC disgorgement is alive and well. Nevertheless, in light of some comments in this opinion, the SEC will likely need to rein in some of its prior practices.

The SEC has statutory authority to obtain “equitable relief” in federal court. The agency has long taken the position that orders of disgorgement are within the inherent equitable powers of a court. In Kokesh, the Court held that disgorgement is a penalty for statute-of-limitations purposes, which raised the question of whether the SEC’s view of the scope of equitable relief is correct. In today’s decision, the Court noted that courts of equity have routinely deprived wrongdoers of their net profits in order to provide fair compensation to their victims. This led to the conclusion that Kokesh does not preclude the SEC from recovering ill-gotten gains from wrongdoers, with certain limitations.


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