Monthly Archives: August 2020

Delaware Public Benefit Corporations—Recent Developments

Michael R. Littenberg and Emily J. Oldshue are partners and Brittany N. Pifer is an associate at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Littenberg, Ms. Oldshue, Ms. Pifer, Anne-Marie L. Beliveau, and Nellie V. Binder. Related research from the Program on Corporate Governance includes For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); 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).

Over the last few years, corporate purpose has been under a spotlight. This scrutiny, which has intensified in 2020 and shows no signs of abating, is coming from institutional investors that are integrating the consideration of environmental, social and governance factors into investment and voting decisions, as well as other stakeholders, in particular consumers, employees and regulators.

Public benefit corporation statutes provide an alternative for-profit corporate form that expressly takes corporate responsibility into account. The Delaware General Corporation Law was amended in 2013 to add a public benefit corporation alternative. However, until the most recent DGCL amendments in July, a PBC was in a large number of cases an impractical or unavailable alternative. In this Alert, we discuss recent changes to the DGCL that in some cases may make PBCs a more attractive alternative, as well as related market trends.

The Delaware Public Benefit Corporation Provisions

Public benefit corporation legislation was enacted in Delaware in 2013. As defined under the statute, a “public benefit corporation” is a for-profit corporation that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner. The public benefit to be promoted by the corporation must be specified in its certificate of incorporation. Under the DGCL, a “public benefit” is a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in that capacity), including but not limited to effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.


The Performance of Hedge Fund Performance Fees

Itzhak Ben-David is the Neil Klatskin Chair in Finance and Real-Estate at The Ohio State University Fisher College of Business; Justin Birru is Associate Professor at The Ohio State University Fisher College of Business; and Andrea Rossi is Assistant Professor of Finance at the University of Arizona Eller College of Management. This post is based on their recent paper.

One of the tenets of modern economics is that agency conflicts can be mitigated by implementing compensation contracts that align the agents interests with those of the principal. Over the past three decades, compensation contracts in the hedge fund industry have sought to achieve this goal by charging a variable performance fee to complement a fixed annual management fee of 1-2%. Performance fees, often called incentive fees, are typically around 20% of profits over a quarter or year and often are accompanied by provisions meant to ensure that incentive fees are only paid on profits exceeding a predetermined benchmark, which often includes the previous highest portfolio valuation. On its surface, the structure of hedge fund incentive fees appears to closely align the incentives of hedge fund managers and hedge fund investors. But how do these incentive fees fare in practice?


FedNow: The Federal Reserve’s Planned Instant Payments Service

Margaret Tahyar and Jai Massari are partners, and Andrew Samuel is an associate at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Tahyar, Ms. Massari, Mr. Samuel, Luigi De Ghenghi, Randall Guynn, and Daniel Newman

The FedNow Service

The Board of Governors of the Federal Reserve System (the Fed) announced details of its planned FedNow Service on August 6, 2020 in a release describing its core functionality and future implementation.

  • If launched as described in the release, FedNow will be a real-time gross settlement (RTGS) payment system with integrated clearing It will offer 24x7x365 payment processing for every bank in the United States (instant payments).

The initial launch target date is 2023 or 2024. This release may mark the start of the next phase of implementation work by the Fed and eligible participants.

  • The initial launch will provide baseline functionality and help banks manage the transition to a 24x7x365 service. It will include a liquidity management tool (FedNow LMT) so that FedNow participants can transfer funds between accounts at the Reserve Banks to meet the liquidity needs associated with instant payments.

The Fed stated that it will take a phased approach to implementation, including pilot programs, providing additional features and functionality over time.

The FedNow Service will facilitate end-to-end instant payment services for consumers and businesses, increase competition, and ensure equitable access to banks of all sizes nationwide.

The Federal Reserve is uniquely positioned to build an instant payment infrastructure, given our long history of operating payment systems to promote a safe, efficient, and broadly accessible payment infrastructure.”
—Governor Lael Brainard, The Future of RetailPayments in the United States (August 6, 2020)


SEC Revises Regulation S-K

Andrew R. Brownstein, Sabastian V. Niles, and Jenna E. Levine are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Brownstein, Mr. Niles, Ms. Levine, and Albertus G. A. Horsting.

The SEC has adopted a set of amendments to the periodic disclosure requirements relating to a registrant’s business, legal proceedings and risk factors, which will go into effect 30 days after publication in the Federal Register. The amendments will affect a wide variety of SEC filings, including upcoming annual and quarterly reports and registration statements (including for spin-offs and IPOs). The stated purpose of the amendments, which are the most recent step in the SEC’s disclosure modernization exercise, is to make SEC disclosure documents more relevant to investors while reducing the burden on issuers. The changes eliminate certain prescriptive requirements in favor of a more flexible “principles-based, registrant-specific” approach, designed to elicit more tailored disclosures. The amendments also permit increased use of summaries, cross-references and hyperlinks in order to reduce repetition, among other changes seeking to discourage overly lengthy disclosure that can make it more difficult to identify important information.

While some have criticized the amendments as not going far enough or as being insufficiently prescriptive, the potential impacts may be significant.

Companies will need to update their disclosure controls, practices and procedures, transition to principles-based materiality assessments that call for more judgments and consultation, plan for and draft more tailored (non-boilerplate) business, human capital, compliance and risk factor discussions germane to their industry and business models and newly consider whether certain voluntary disclosures made in other documents (e.g., proxy statements, sustainability/CSR/ESG reports and human capital management reports) ought now be included, in whole or in part, in annual and quarterly reports where material.


SEC Preparing Proposals to Implement Recommendations Regarding Emerging Market Listings

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

For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” or “NCJs,” including China. To address this issue, in May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on public companies that are audited by a registered public accounting firm that the PCAOB is unable to inspect, and a version was subsequently passed by the House as an amendment to a defense funding bill. Around the same time, Nasdaq also proposed rule changes aimed at addressing similar issues in restricted markets, including new initial and continued listing standards. (See this PubCo post.) Now, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, has issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies. The Report makes five recommendations “designed to address risks to investors in U.S. financial markets posed by the Chinese government’s failure to allow audit firms that are registered with the Public Company Accounting Oversight Board (PCAOB) to comply with U.S. securities laws and investor protection requirements.” In this Statement, the SEC Chair Jay Clayton, Chief Accountant Sagar Teotia and the Directors of various SEC Divisions responded to the Report, indicating that Clayton had already “directed the SEC staff to prepare proposals in response to the report’s recommendations for consideration by the Commission and to provide assistance and guidance to investors and other market participants as may be necessary or appropriate. The SEC staff also stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.”


ESG + Incentives 2020 Report

John Borneman is Managing Director, Tatyana Day is Senior Consultant, and Olivia Voorhis is a Consultant at Semler Brossy. This post is based on a Semler Brossy report by Mr. Borneman, Ms. Day, Ms. Voorhis, and Kevin Masini. 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 Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Shareholders have increasingly highlighted the importance of measures of social and environmental sustainability as a key component of ESG. The COVID-19 crisis and growing focus on racial inequities will only accelerate the demand for companies to expand their definition of social responsibility to include the broader societal impact of the corporation.

In recent years, debates over the role of the corporation in society have become more prominent, with corporations increasingly seen as responsible towards a broad group of stakeholders. Though some critics have argued that these debates don’t portend a fundamental departure from how businesses currently operate, there does seem to be a true shift in shareholder demands. Pushing for responsibility to a wider range of stakeholders is an attempt to encapsulate and operationalize these demands, with a growing emphasis on the long-term social and environmental sustainability of the corporate model.

As part of, and in response to, these demands are growing calls for increased transparency and standardization of companies tracking and disclosing ESG progress. The “Big Four” accounting firms, for example, are partnering with the World Economic Forum International Business Council to set standards for disclosure on ESG issues, with the intention of identifying common, verifiable ESG metrics for all companies to report on. Third-party ESG rating systems are gaining prominence as sustainability-linked loans and ESG investing  gather momentum. The SEC’s Investor Advisory Committee has also recommended the SEC require standardized ESG disclosures. Environmental and social sustainability metrics are key pillars of many of these disclosure initiatives.


Leadership in Turbulent Times: Better Foresight, Better Choices

Andrew Blau is Managing Director and Lauren is a Senior Strategy Consultant at Deloitte. This post is based on their Deloitte Center for Board Effectiveness memorandum.

A global pandemic shuts down normal life around the world. Market volatility creates price swings not seen in nearly a century. Millions of people turn out to protest racism and social injustice and call for meaningful and lasting change. [1] To many, the world feels more turbulent and uncertain than it ever has. Many are left to wonder: How might business and society be remade as a result?

Although it is impossible to know precisely what the world will look like in the coming years, companies can ill afford to do nothing until the future becomes clear. As renowned management scholar Peter Drucker once said, “[t]he greatest danger in times of turbulence is not the turbulence itself, but to act with yesterday’s logic.” [2]

Boards can play a key role in guarding against that danger, and it is critical that they collaborate with management to make use of time-tested tools to help them improve resilience in a rapidly changing landscape. Scenario planning—a technique specifically created to navigate uncertain futures— is one such tool that boards and leaders can rely on to help their organizations do more than simply react to and recover from the recent turbulence. Effective scenario planning can help organizations adapt to a future no one can predict and position themselves to thrive in the long run.


BRT Statement of Corporate Purpose: Debate Continues

Randi Val Morrison is Vice President at the Society for Corporate Governance. This post is based on her Society for Corporate Governance 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); Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here); and For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

A new WSJ op-ed: “‘Stakeholder’ Capitalism’ Seems Mostly for Show” (Lucian Bebchuk and Roberto Tallarita, Harvard Law School Program on Corporate Governance) posits that the corporate CEOs that signed onto the Business Roundtable’s (BRT) updated Statement of Purpose of a Corporation last year appear to have done so primarily to generate positive PR rather than to reflect real change in how their companies operate based on the fact that few signatory CEOs sought or obtained board approval or ratification. The conclusion rests on the theory that if CEOs believed that signing onto the updated statement was an “important corporate decision,” they would not have signed on without their board’s approval as a matter of good corporate governance. The assertion that few signatory CEOs sought or obtained board approval or ratification is based on responses to the authors’ inquiries from 48 companies, or approximately 27% of all CEO signatories, and the authors’ extrapolated expectation that the balance of companies that did not respond to their inquiry would have responded similarly.*

The op-ed theorizes: “The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. That may be because they believe their companies are already meeting the standard for taking care of stakeholders. But it still implies that they believed signing the statement wasn’t a major step for their businesses.” The op-ed seeks to further support its view about signatory CEOs taking action merely for appearances based on the authors’ review of the companies’ corporate governance guidelines, which purportedly commonly reflect a “shareholder primacy” approach.


Renegotiating Deal Terms? Delaware Reminds Fiduciaries of Unremitting Duties

Ian Nussbaum, Wendy Brenner, and Barbara Mirza are partners at Cooley LLP. This post is based on a Cooley memorandum by Mr. Nussbaum, Ms. Brenner, Ms. Mirza, Barbara Borden, Peter Adams, and Sarah Lightdale, 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).

In Captain Phillips, a pirate hijacks a ship and turns to the captain and says (in what is an amazing improvised line) “Look at me, I’m the captain now.” [1] While the comparisons between piracy and M&A will take us only so far, let us start with an observation: boards and special committees overseeing M&A transactions—much like ship captains in treacherous waters—need to be wary of other constituencies attempting to overtake their role not only once the transaction has been signed, but through the twists and turns of the entire deal.

Section 141(a) of the Delaware General Corporation Law imbues boards with the unique authority to manage or direct the affairs of a corporation. An important corollary to that statutory authority is the bedrock principle under Delaware law that directors are fiduciaries to the corporation and its stockholders. Two recent Delaware cases [2] serve as reminders that fiduciaries must continue to exercise care in discharging their duties throughout the life of a deal—that is, as it is often put, directors’ and officers’ fiduciary duties are unremitting. In the M&A context, most breach of fiduciary duty cases assert claims that arise at the time the board approves the entry into the definitive transaction document. In that setting, it is well understood that such decisions require the directors to act with the utmost care, on an informed basis and in the best interests of the corporation and its stockholders. However, the decisions in Fort Myers v. Haley and the Dell Stockholders Litigation involved breach of fiduciary duty claims stemming from actions taken after the initial announcement of the proposed transactions. These opinions show that, in situations where parties renegotiate deal terms in response to stockholder opposition of the original terms, plaintiffs (and thereby the court) will scrutinize the process that led to the board’s decision to approve the revised deal terms. If anything, these cases underscore how critical it is for officers and directors to keep the full board (or the special committee in charge of negotiating the transaction) informed of material developments, engaged in the negotiation of any material deal terms after signing, and ultimately in control of the sales process throughout the pendency of a deal.


Weekly Roundup: August 21–27, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 21–27, 2020.

The Evolution of CEO Compensation in Venture Capital Backed Startups

The Pandemic and Executive Pay

The Resurgence of SPACs: Observations and Considerations

An Inflection Point for Stakeholder Capitalism

2020 Proxy Season: A Look Back, and A Look Forward

Four ESG Highlights from the 2020 Proxy Season

TikTok: Familiar Issues, Unfamiliar Responses

Stockholders Versus Stakeholders—Cutting the Gordian Knot

Funding the Future: Investing in Long-Horizon Innovation

For Whom Corporate Leaders Bargain

McDonald’s Clawback Suit Against Former CEO: A Cautionary Tale

Comment on the Proposed DOL Rule

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