Monthly Archives: July 2020

Renewed Interest in IPOs of Public Benefit Corporations

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. 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 Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

I can think of only one public company that is currently a Delaware Public Benefit Corporation. That’s Laureate Education, which initially filed with the SEC in 2015 and went effective in 2017. (See this PubCo post.) Now, finally, we have a second company that has filed for its IPO as a PBC—Lemonade, Inc., which declares on the cover page of its prospectus that it is incorporated in Delaware as a PBC as a demonstration of its “long-term commitment to make insurance a public good.” It’s been quite a long dry spell since the PBC legislation was signed into law in 2013. In the last few years, however, we have witnessed intensifying investor focus on sustainability as a strategy (see, for example, this PubCo post), as well as swelling numbers of companies declaring their commitments to all stakeholders, as reflected, for example, in the Business Roundtable’s adoption of a new Statement on the Purpose of a Corporation (see this PubCo post) and the World Economic Forum’s Stakeholder Principles in the COVID Era (see this PubCo post). What’s more, new legislation just passed by the House in Delaware will, if ultimately signed into law, make it easier to slip in and out of PBC status. [Update: This bill was signed into law on July 16.] Will these trends toward sustainability and stakeholder capitalism, together with the Delaware legislation, fuel a renewed interest in the PBC for public companies and expecting-to-become public companies? Will Lemonade open the floodgates?


The Market for CEOs

Peter Cziraki is Assistant Professor of Economics at the University of Toronto and Dirk Jenter is Associate Professor of Finance at the London School of Economics & Political Science. This post is based on their recent paper.

CEOs have first-order effects on firms, which makes an efficient CEO labor market important. Several influential studies argue that the market for CEOs is well described by models with perfect competition and no frictions (Tervio 2008; Gabaix and Landier 2008; Edmans, Gabaix, and Landier 2009). Other influential studies argue that firms’ demand for managerial skills has shifted from firm-specific to general (and therefore transferrable) skills (Murphy and Zabojnik 2004, 2007; Frydman 2019).

In this paper, we document actual CEO hiring practices and compare them to the predictions of these (and other) theories. For all new CEOs in the S&P 500 from 1993 to 2012, we document their prior connections to the hiring firm, whether new CEOs were raided from other firms, and how hiring choices differ across firms. We focus on the largest publicly-traded companies as they face the fewest frictions in the managerial labor market and, because of the range of their activities, are likely to require CEOs with general skills.


Weekly Roundup: July 24–30, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 24–30, 2020.

Corporate Governance Update: Raising the Stakes for Board Diversity

Comment Letter on DOL Proposed Rule on ESG Investments

The Board’s Role in Guiding the Return to Work

CEO Succession Plans in a Crisis Era

A Flowchart of the Delaware Standards of Review

SEC Identifies Private Fund Deficiencies

Five Key Points About the DOL’s New Fiduciary Rule

Synthetic Governance

Letter to Clayton and Hinman on Virtual and Hybrid Meetings

Mutual Fund Performance and Flows During the COVID-19 Crisis

First Quarter Disclosure Trends and Second Quarter Disclosure Expectations

DOJ and SEC Update FCPA Resource Guide

ESG Agenda

Richard Fields is a Director of Corporate Stakeholder Engagement and Elizabeth Morgan and Cal Smith are partners at King & Spalding LLP. This post is based on their King & Spalding 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).

Oversight of Political and Social Statements

Many companies have made public statements in the wake of George Floyd’s death, addressing complex social issues including racism and inequality. More than 200 S&P 500 companies issued public statements, and many others have sent company-wide internal messages.

Our analysis of these statements shows that companies have become more comfortable making pronouncements with pointed statements that may be polarizing among stakeholders. While a number of these statements sound “corporate” and are unlikely to inspire or offend any readers, many go further. Just a few months ago many companies would have shied away from the phrase “Black lives matter.” A dam has broken.


Did Delaware Really Kill Corporate Law? Shareholder Protection in a Post-Corwin World

Matteo Gatti is Professor of Law at Rutgers Law School. This post is based on his recent article published in the NYU Journal of Law and Business, and 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

Corwin v. KKR is considered one of the most important corporate law decisions of this century. Corwin shields directors from the enhanced scrutiny of Revlon in favor of the business judgment rule whenever a transaction “is approved by a fully informed, uncoerced vote of the disinterested stockholders.” Commentators see Corwin as the poster child of an increasingly more restrained approach by Delaware courts—something labeled with expressions such as “Delaware’s retreat,” “the fall of Delaware standards,” and even “the death of corporate law.”

Supporters of the decision applaud the shift from courts to markets in determining whether directors satisfactorily performed in the sale of the company. In an age of enhanced investor sophistication due to the growing size of institutional ownership, the argument goes, the judiciary has ceded the role of optimal decision maker to shareholders. However, the mainstream view among scholars is that Corwin is a setback in shareholder protection. To some, directors’ legal obligations are now limited to full disclosure. Others think that enhanced scrutiny is no longer available and the sole constraint directors face is the shareholder vote. In the views of critics of Corwin, the structure, nature, and quality of the substitute (vote vs. judicial review) are not compelling.


DOJ and SEC Update FCPA Resource Guide

Cheryl Scarboro and Jeffrey Knox are partners, and David Caldwell is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Ms. Scarboro, Mr. Knox, Mr. Caldwell, Nick Goldin, and Adam Goldberg.

In early July 2020, the U.S. Department of Justice (“DOJ”) and U.S. Securities and Exchange Commission (“SEC”) released the second edition of their joint guidance on the U.S. Foreign Corrupt Practices Act (“FCPA”), A Resource Guide to the U.S. Foreign Corrupt Practices Act (the “updated Resource Guide”). The updated Resource Guide is the first new edition since the initial release of the joint guidance in November 2012 and the first update since June 2015. While much of the updated Resource Guide remains the same, DOJ and SEC have revised the guidance to reflect recent case law, DOJ policies and enforcement actions. Perhaps most notable are changes made to account for the Second Circuit’s 2018 decision (in United States v. Hoskins) relating to anti-bribery jurisdiction over non-U.S. nationals based on conspiracy or accomplice liability. The updated Resource Guide also references a number of recent DOJ policies related to corporate compliance programs and enforcement; provides guidance with respect to anti-corruption compliance in the context of merger-and-acquisition due diligence; and makes several other changes that companies, individuals and compliance professionals may find helpful in addressing potential FCPA compliance risks.

The Resource Guide: Background

Although the FCPA was enacted in 1977, the number of enforcement actions brought by DOJ and SEC remained relatively low for nearly 25 years. Calls for guidance on the FCPA from the business community and the defense bar grew as enforcement actions ramped up between 2007 and 2010, leading to the DOJ’s announcement in 2011 that a “lay person’s guide” to the FCPA would be released the following year. The result was the first edition of the Resource Guide, issued on November 14, 2012.


First Quarter Disclosure Trends and Second Quarter Disclosure Expectations

Pamela L. Marcogliese and Michael Levitt are partners and Amy Fisher is a law clerk at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

The coronavirus pandemic (COVID-19) has had a significant impact on many if not all US publicly-traded companies. Whether companies suffered breaks in their supply chains, closures of their sites, or faltering demand as consumers were forced to stay at home, companies endured disruptions that, in some cases, materially impacted their results. Yet, despite this unprecedented dislocation, even when the SEC provided a 45-day grace period for making periodic filings, including 10-Q filings, we found that most S&P 500 companies filed their SEC reports on time.

We outline below some of the notable COVID-19 disclosure trends from the most recent quarterly reports of S&P 500 companies and provide recommendations on what companies should consider when preparing this quarter’s SEC disclosure.

SEC guidance

On March 25, 2020, the Division of Corporation Finance issued guidance on how companies should disclose the evolving business risks affecting several areas of disclosure. On April 8, 2020, the Division urged companies to provide as much information as practicable about their current financial and operating status and future operational and financial planning. It underscored the importance of providing more forward-looking information and reminded companies to carefully craft forward-looking statement safe harbors that would help to protect them from liability.


Mutual Fund Performance and Flows During the COVID-19 Crisis

Lubos Pastor is Charles P. McQuaid Professor of Finance at the University of Chicago Booth School of Business and Blair Vorsatz is a PhD student at the University of Chicago Booth School of Business. This post is based on their recent paper. 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).

Active equity mutual funds are well known to have underperformed passive benchmarks net of fees. Even so, the active management industry continues to manage tens of trillions of dollars. The puzzling coexistence of a large underperforming active management industry and an accessible passive management industry raises an important question: why are investors willing to tolerate this underperformance?

One popular hypothesis is that active funds outperform in market downturns, when investors value performance the most. The COVID-19 crisis is particularly suitable for testing this hypothesis, for two reasons. First, investors surely want to hedge against such an unprecedented output contraction and unemployment surge. Second, large price dislocations during this crisis provide opportunities for active managers to perform well. For example, the S&P 500 experienced its steepest descent in living memory, losing 34% of its value in the five weeks between February 19 and March 23 before bouncing back by over 30% in the following five weeks through the end of April.


The SEC’s Spring 2020 RegFlex Agenda

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

With so much going on in connection with COVID-19 and its impact, it would be easy to overlook the rest of the SEC’s agenda. And it’s a lengthy one. The new Spring Regulatory Flexibility Act Agenda was published at the end of June, so it’s time to look at what’s on deck for the SEC in the coming year or so. (That reference to “on deck” may be the only sports anyone gets this year….) SEC Chair Jay Clayton has repeatedly made clear his intent to make the RegFlex Agenda more realistic, streamlining it to show what the SEC actually expects to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following 12 months. See this PubCo post and this PubCo post.) The SEC’s Spring 2020 short-term and long-term agendas reflect the Chair’s priorities as of March 31, when the agenda was compiled. What stands out here are the matters that have, somewhat surprisingly, moved up onto the final-rule-stage agenda—think universal proxy—from perpetual residence on the long-term (i.e., the maybe never) agenda.


Letter to Clayton and Hinman on Virtual and Hybrid Meetings

Amy Borrus is Executive Director at the Council of Institutional Investors; Sanford Lewis is Director of the Shareholder Rights Group; Mindy Lubber is President and CEO of Ceres; Lisa Woll is CEO of US SIF; and Josh Zinner is CEO of the Interfaith Center on Corporate Responsibility. This post is based on their letter to SEC Chairman Jay Clayton and division of corporation finance director William Hinman.

We are writing on behalf of the investors, asset managers and asset owners represented by our members, who collectively represent hundreds of institutional investors with at least $45 trillion in assets under management. Our organizations recognize the exceptional circumstance of this year’s AGM season in the midst of the Covid-19 crisis. Due to this pandemic, shareholder meetings at most companies quickly went from being in-person to virtual. This led to considerable confusion and technical difficulties, in many cases inhibiting shareholder participation in meetings. We are concerned about the potential for poor precedents for conduct of shareholder meetings, and in some circumstances, deliberate actions that limited shareholder participation at various companies. Although we recognize that state law, individual companies and intermediaries must step up, we believe that there are appropriate steps that the SEC can take to help improve the situation.

Certainly there was substantial strain on many corporate secretaries this year given the late hour of the change from in person to virtual meetings for most companies, as well as the need to conduct meetings with management and board members in multiple locations due to travel and public health restrictions, relying on sometimes iffy technology and broadband connections. We understand that Broadridge, which had provided the platform for nearly all virtual meetings before the pandemic, did not have bandwidth to accommodate all companies to hold meetings when they had planned. And we appreciate the April 7th guidance provided by the SEC, and that other providers became more active in offering virtual meeting platforms. [1]


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