Monthly Archives: June 2020

Shareholder Proposals Shaking Up Shareholder Say

Sofie Cools is professor of corporate law at the Jan Ronse Institute for Company and Financial Law. This post is based on a chapter, forthcoming in the Research Handbook on Comparative Corporate Governance. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk (discussed on the Forum here) and The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen.

One of the most remarkable recent developments with regard to shareholder power is how American shareholders have forced boards of directors to amend even charter provisions to strengthen shareholder rights. In stark contrast, shareholder proposals have (so far) been relatively rare in Europe. Is the American abundance of successful shareholder proposals the epitome of strong shareholder power? In a paper that is forthcoming in the Research Handbook on Comparative Corporate Governance (Edward Elgar), I critically analyze the role of such shareholder proposals and their effects on shareholder power and warn of too much euphoria. A comparative analysis of shareholder proposal rights and substantive shareholder rights yields two important lessons.

First, shareholder power related proposals in American companies are essentially closing the gap in substantive shareholder power that existed between the United States and Europe. In the past fifteen years, shareholders have successfully made proposals in individual American corporations to de-stagger the board, to elect directors by majority instead of plurality vote, to allow shareholders to request special meetings and to allow shareholders to include director nominees on the company’s proxy. In doing so, they managed to break down or reduce some of the most important barriers for meaningful shareholder voice in director elections in Delaware companies—barriers that have been uncommon in Europe. At the same time, several European jurisdictions have gradually softened the rule of at will removal of directors, thus allowing directors a higher degree of protection against removal.


A Framework for Management and Board of Directors Consideration of ESG and Stakeholder Governance

Martin Lipton is a founding partner, and Steven A. RosenblumWilliam Savitt are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Rosenblum, Mr. Savitt, and Karessa L. Cain. 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).

As directors and shareholders become increasingly attuned to ESG considerations and stakeholder-oriented governance, they have sought guidance about how to incorporate these imperatives into the board’s decision-making process—particularly regarding decisions that entail trade-offs or an allocation of resources between and among stakeholders and ESG objectives. Our answer to this question is rooted in the classic bedrock of board functioning: directors must exercise their business judgment. This is not only the practical answer—it is the essential animating principle of Delaware law.

Recently, many who continue to advocate for shareholder primacy, and therefore reject stakeholder governance, have sought to portray stakeholder interests in a zero-sum competition, arguing that it is impossible to properly exercise business judgment to reconcile such diverging interests. In their view, stakeholder governance is not only a radical departure from Delaware corporate law but also corrosive of the very essence of capitalism.


Value Creation in Private Equity

Markus Biesinger is Associate, Private Equity at the European Bank for Reconstruction and Development; Çağatay Bircan is Senior Research Economist at the European Bank for Reconstruction and Development; and Alexander Ljungqvist is the Stefan Persson Family Chair in Entrepreneurial Finance at the Stockholm School of Economics. This post is based on their recent paper.

Private equity (PE) firms are often said to use their industry expertise and operational know-how to identify attractive investments, to develop value creation plans for those investments, and to generate attractive investors returns by implementing their value creation plans. Although many studies refer to such value creation plans, there is no systematic evidence on what these plans typically look like or whether they help improve company operations or investor returns.

In a recent paper, we open up the black box of value creation in private equity with the help of confidential information on value creation plans and their execution. We find that plans are tailored to each portfolio company’s needs and circumstances and have become more hands-on. Successful execution varies systematically across funds and is a key driver of investor returns. Company operations and profitability improve in ways consistent with successful execution, even beyond PE funds’ exit.


Weekly Roundup: May 29–June 4, 2020

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This roundup contains a collection of the posts published on the Forum during the week of May 29–June 4, 2020.

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

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

Corporate Governance Update: EESG and the COVID-19 Crisis

Finding the Proper Balance of Legal and Consulting Advice for Compensation Committees

The Forum Attracts Numerous Citations from Academics and Practitioners

Sharpening the Tools at Hand: New Rulings Provide Sensible Balance to Section 220 Litigation

Compensation Impacts of COVID-19 on Performance-Based Incentive Awards

Competition Laws, Norms and Corporate Social Responsibility

An Alternative Paradigm to “On the Purpose of the Corporation”

An Alternative Paradigm to “On the Purpose of the Corporation”

Peter A. Atkins, Kenton J. King, and Edward B. Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Messrs. Atkins, King, Micheletti, and Cliff C. Gardner. 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).

Recently a definition of corporate purpose has been proposed and elaborated on in a post on this Forum titled “On the Purpose of the Corporation” (the Corporate Purpose Memo). This post offers commentary on various aspects of the Corporate Purpose Memo, including three key takeaways:

  • The Corporate Purpose Memo’s proposed universal definition of corporate purpose for publicly traded business (for-profit) corporations—which rests on directors addressing ESG (environmental, social and governance) and stakeholder interests by “reasonably balanc[ing] the interests of all constituencies” without giving primacy to the shareholder constituency—rejects the basic fiduciary responsibility of directors of Delaware business corporations (and directors of corporations in other states that tend to follow Delaware law) under existing law to measure their actions by what is in the best interests of shareholders as a whole (the shareholder primacy governance model).
  • Moreover, in reaching for this new corporate purpose definition—prompted by the perceived need to push back those who “advocate a narrow scope of corporate purpose that is focused exclusively on maximizing shareholder value”—the Corporate Purpose Memo ignores the reality that the shareholder primacy governance model as it has evolved in fact embraces the ability of directors of Delaware business corporations to consider a broad array of ESG/stakeholder issues.
  • Directors of Delaware companies who chose to address ESG/stakeholder-oriented decisions pursuant to the stakeholder interests balancing act contemplated by the proposed new purpose definition—untethered from their overarching fiduciary responsibility to shareholders to act in their best interests—run the risk of losing the valuable protection of the business judgment rule.


First Impression Bias: Evidence from Analyst Forecasts

Thomas Ruchti is Assistant Professor of Accounting at Carnegie Mellon University Tepper School of Business. This post is based on a paper forthcoming in the Review of Finance by Professor Ruchti; David Hirshleifer, the Paul Merage Chair in Business Growth at the University of California at Irvine Paul Merage School of Business; Ben Lourie, Assistant Professor of Accounting at the University of California at Irvine Paul Merage School of Business; and Phong Truong, Assistant Professor of Accounting at the Pennsylvania State University Smeal College of Business.

In a seminal paper, Asch (1946) finds that if a person is described as “intelligent, industrious, impulsive, critical, stubborn, [and] envious,” people form a more positive impression of that person than when the descriptors are provided in the reverse order. Subsequent psychological research confirms that information received first tends to overshadow information received later, and that first impressions have a lasting effect on perceptions and future behavior (Anderson, 1981). This first impression bias causes a decision maker, assessing the outcomes of some process, to place undue weight on early experiences (Anderson, 1965). If the first impression is particularly positive, then assessments about the future tend to be unduly positive; the reverse is the case if the first impression is negative.

In our recent paper, we provide the first investigation of whether this bias exists in a field setting with finance professionals. We test whether an analyst’s first impression of a firm biases the analyst’s later forecasts and related behaviors. It is not immediately obvious whether this would occur, since analysts have pecuniary incentives to make accurate forecasts. On the other hand, forecasting future outcomes is a challenging and inherently subjective endeavor.


Temporary NYSE COVID-19 Exception From Shareholder Approval Requirements Under the “20% Rule”

Jeffrey MacDonald is an associate and Catherine Clarkin and Sarah Payne are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. MacDonald, Ms. Clarkin, Ms. Payne, Robert BuckholzJohn Mead, and Robert W. Reeder III.


In light of the impact of the COVID-19 pandemic, the New York Stock Exchange LLC (“NYSE”) filed notice of a proposed rule change on May 14 with the Securities and Exchange Commission (“SEC”), which became effective immediately. [1] Specifically, Section 312.03T (the “Temporary Rule”) of the NYSE Listed Company Manual (the “Manual”) provides a limited temporary exception from the application of the shareholder approval requirements in Section 312.03 of the Manual—also known as the “20% Rule”—and a limited attendant exception from the requirements of Section 303A.08 of the Manual (Shareholder Approval of Equity Compensation Plans). [2] The Temporary Rule is substantially similar to Nasdaq Listing Rule 5636T, which was filed by The Nasdaq Stock Market LLC on May 4, 2020 (the “Nasdaq Rule”). [3] Like the Nasdaq Rule, any securities issued in reliance on the exception must be issued by the later of June 30, 2020 and 30 calendar days following the date of the binding agreement governing the issuance, in each case, after the company has submitted a certification of its compliance with the requirements of the Temporary Rule and received approval from NYSE. Unlike the Nasdaq Rule, the Temporary Rule requires that a company certify that the proceeds of any issuance made pursuant to the Temporary Rule will not be used to fund any acquisition transaction and does not include a “safe harbor” provision waiving the requirement to obtain NYSE prior approval for transactions that meet specified conditions. The SEC is soliciting comments on the Temporary Rule for 21 days following publication in the Federal Register. [4]


Broadridge Virtual Shareholder Meetings (“VSMs”): Preliminary Statistics

Maryellen Andersen is Vice President of Corporate & Institutional Relations and a Corporate Governance Officer at Broadridge.

After steady annual increases over the past decade, the number of VSMs jumped significantly in the first five months of 2020. [1] This is due to several factors related to the COVID-19 pandemic, including: social distancing guidelines from federal, state, and local authorities that dissuade groups of people from gathering; company travel restrictions on management, directors, and staff; and temporary permission to hold “virtual-only” shareholder meetings by several states that otherwise restrict them. Apart from factors related to the pandemic, the number of VSMs was expected to increase modestly year-over-year as familiarity with them grows among companies and shareholders, and as the greater shift toward digital communications unfolds.

Broadridge’s VSM service supports applicable rules and regulations for conducting shareholder meetings and provides functional choices for issuers and shareholders to utilize, consistent with best practices. [2] The platform provides a means for shareholders to vote at the meeting and, when meetings have shareholder proposals, proponents may present them by living voice. Participants can submit questions to management during the meeting, through a ‘question box.’ Many issuers utilize a function to enable validated shareholders to also submit questions in advance of their shareholder meetings.


Competition Laws, Norms and Corporate Social Responsibility

Ross Levine is the Willis H. Booth Chair in Banking and Finance at the University of California, Berkeley Haas School of Business. This post is based on a paper authored by Professor Levine; Wenzhi Ding, Research Postgraduate Student at the University of Hong Kong; Chen Lin, the Stelux Professor in Finance at the University of Hong Kong; and Wensi Xie, Assistant Professor at the Chinese University of Hong Kong Business School. 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).

Investors and companies increasingly focus on corporate social responsibility (CSR). For example, Larry Fink, the CEO of BlackRock, the world’s largest asset manager, argued in 2020 that, “… a company cannot achieve long-term profits without embracing … the needs of a broad range of stakeholders,” such as customers, employees, suppliers, and the communities where the company operates. In 2019, the Business Roundtable, a group of U.S. CEOs, committed to investing in their employees, dealing fairly and ethically with suppliers, and protecting the environment. Moreover, about 1500 international companies with almost $90 trillion of assets were signatories to the United Nations-supported Principles for Responsible Investing. While many companies express support for CSR, CSR activities differ markedly across firms and countries, raising questions about what determines CSR.

In this paper, we focus on one potential determinant of CSR activities—product market competition—and evaluate differing views about the impact of competition on CSR. One set of views holds that competition spurs CSR. For example, the stakeholder value maximization view argues that intensifying competition induces firms to (1) strengthen relationships with customers, workers, suppliers, and local communities to repel other firms that are increasingly trying to compete for those stakeholders and (2) CSR strengthens those relationships by signaling the firm’s commitment to honor implicit agreements to ensure worker well-being, provide safe products to customers, fulfill informal agreements with suppliers, and protect the environment. A related view, the product differentiation view, also stresses the positive effects of competition on CSR. It stresses that an intensification of competition spurs firms to differentiate their products to obtain greater pricing power and cushion the adverse ramifications of competition on profits. Boosting CSR is one strategy for accomplishing that differentiation.


Congress Legislative Developments—Potential Delisting of Foreign Companies from U.S. Securities Exchanges

Michael E. Borden and Peter Roskam are partners and Justin Becker is an associate at Sidley Austin LLP. This post is based on their Sidley memorandum.

On May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act, by unanimous consent. The key effect of S. 945 is that it prohibits certain companies from listing and trading their securities on any U.S. securities exchanges or through any other method regulated by the U.S. Securities and Exchange Commission (SEC) if the Public Company Accounting Oversight Board (PCAOB) is prevented from reviewing the companies’ audits.

After the bill passed, on the same day, a bill with the same language was introduced in the U.S. House of Representatives by Rep. Brad Sherman, D-Calif., chairman of the House Financial Services Committee’s subcommittee on Investor Protection, Entrepreneurship and Capital Markets. Significantly, Rep. Sherman’s subcommittee has jurisdiction over this bill in the House, which could increase the likelihood of its enactment.

Text of both bills, statements by Sens. John Kennedy, R-La., and Chris Van Hollen, D-Md., cosponsors of the Senate bill, and statements by Rep. Sherman, demonstrate that the legislative intent was to address Chinese companies listed on U.S. securities exchanges.


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