Monthly Archives: August 2020

TikTok: Familiar Issues, Unfamiliar Responses

Paul Marquardt is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on his Cleary memorandum.

Initial press reports last November that the Committee on Foreign Investment in the United States (CFIUS) had commenced a review of ByteDance’s acquisition of, the service that was merged into ByteDance’s video-sharing site TikTok and helped fuel its expansion, were not particularly surprising to those familiar with CFIUS and its concerns. However, recent departures from established CFIUS processes in the TikTok matter are striking and concerning for persons engaging in cross-border transactions involving the United States, calling into question the scope, apolitical nature, confidentiality, and security focus of the CFIUS process.

CFIUS’s concerns regarding the protection of personal information of U.S. citizens stretch back to the Obama Administration, and while TikTok may not appear to be a particularly sensitive platform, it has had significant privacy issues in the past, including well-publicized security concerns, allegations of censorship, and an FTC fine for illegally collecting the personal information of children. It is not particularly surprising that these concerns would attract CFIUS review.


20 Imperatives for Fall 2020 Shareholder Engagement

Matt Filosa is Managing Director, Sean Quinn is Managing Director, and Sydney Carlock is Senior Vice President at Governance Advisory at Teneo. This post is based on a Teneo memorandum by Mr. Filosa, Mr. Quinn, Ms. Carlock, and Martha Carter.


The once-in-a-hundred years global pandemic and once-in-a-generation global protests have created a seminal moment for companies and their leaders to reestablish and reinforce the basic tenets by which they run their businesses. The expansiveness of the role of the CEO and the board, as demonstrated by environmental, social, and governance (ESG) issues, will continue. Many changes are underway with the expanded attitude of stakeholder capitalism, the broader mandate of running a business, and positioning its governance. These changes will need to be communicated effectively to all stakeholders. One of the first opportunities for companies to rearticulate their values, strategy, board roles, and management actions is in the cycle of fall shareholder engagement. For this pivotal year of 2020, the traditional fall shareholder engagement season takes on heightened significance. In that regard, how should companies prepare for those engagement discussions with investors, and what will be asked of them and their leaders?


Four ESG Highlights from the 2020 Proxy Season

Steve W. Klemash is Americas Leader; Jamie C. Smith is Investor Outreach and Corporate Governance Specialist, and Rani Doyle is Executive Director, all at the EY Center for Board Matters. This post is based on their EY 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).

The 2020 proxy season saw companies and investors navigating a rapidly evolving business environment, including new virtual modes of communication and working.

The COVID-19 pandemic, including its widespread, multidimensional impacts and acceleration of changes and risks, is casting a spotlight on corporate resiliency. It is also challenging recent company commitments to stakeholder capitalism, driving attention to environmental, social and governance (ESG) matters, and reshaping areas of corporate and investor focus.

To help boards navigate this new normal and meet evolving stakeholder expectations, this report examines four ESG developments from the 2020 season and considers how investor and corporate perspectives and priorities are changing in the wake of the pandemic, the growing push to eradicate systemic racism, and other macro developments. [1]


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

Jessica Strine is CEO, Robert Main is COO, and  Marc Lindsay is Director of Research at Sustainable Governance Partners LLC. This post is based on a SGP memorandum by Ms. Strine, Mr. Main, Mr. Lindsay, and Amy Hernandez.

For many, the 2020 proxy season required channeling of Winston Churchill for needed encouragement: “If you’re going through hell, keep going.” With companies, investors, and the public focused on the COVID-19 pandemic and racial equality movement, many spring discussions between companies and their shareholders had little to do with the ballot items at the upcoming shareholder meetings. Yet these meetings proceeded apace—albeit in a virtual format that presented its own challenges—and several noteworthy environmental, social, and governance issues (ESG) trends emerged from the final tallies.

Outside of the 2020 annual meetings, it was equally clear that investors’ attention to ESG is accelerating. While some wondered, early in the pandemic, whether ESG was a luxury good that would cease to matter in a market downturn, facts on the ground suggest the opposite: early studies found that ESG-oriented investment strategies have outperformed the market during recent months, [1] and calls for a stakeholder-centric “Great Reset” have become mainstream within the business world. Importantly, like the companies in which they invest, asset managers find themselves subject to increased scrutiny to ‘build back better’ by their clients, employees, investors, regulators and communities. With this backdrop, it is not surprising that ESG has become many top asset managers’ “new standard for investing.” [2]


An Inflection Point for Stakeholder Capitalism

Seymour Burchman and Seamus O’Toole are managing directors at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy 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).

From the Business Roundtable to BlackRock, there’s growing pressure on companies to respect all major stakeholders—employees, customers, suppliers and local communities, as well as investors. Meanwhile, a variety of innovations are effectively making these stakeholders central to long-term company success. Digital technologies, new ways of organizing work and transactions, and the shift to the service economy have forced businesses to prioritize the interests of all stakeholders—adding significant opportunities and risks.

As a result, unless the company’s survival is in question, stakeholder-centricity is becoming essential to its overall management. Even under short-term pressures such as pandemics, executives and directors will need to view the company as operating within an integrated ecosystem. Only by supporting all major stakeholders, through calibrated and balanced incentives, will companies achieve sustained success.


The Resurgence of SPACs: Observations and Considerations

Andrew R. Brownstein, Andrew J. Nussbaum, and Igor Kirman are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum co-authored by Mr. Brownstein, Mr. Nussbaum, Mr. Kirman, and other members of the firm, including Matthew M. Guest, David K. Lam, and DongJu Song.

The special purpose acquisition company (“SPAC”) is on the rise. A surge of offerings by a series of high-profile SPACs in the last several months has led to record levels of capital being raised by SPACs in 2020. As SPACs become a routine part of M&A processes, private company sellers and their shareholders are being presented with new opportunities that require informed and creative navigation.

I. Background

A SPAC is a company formed to raise capital in an initial public offering (“IPO”) to finance a subsequent merger or acquisition within a time frame specified in its charter, typically two years. The target firm, which must not yet be identified at the time of the SPAC’s IPO, becomes public as a result of the transaction (often referred to as a “business combination” or a “de-SPAC transaction”). So far this year, a total of $30.4 billion of capital has been raised by SPACs in over 75 IPOs, a marked increase from the previous record, set in 2019, of $13.6 billion raised in 59 IPOs. The average size of SPAC IPOs has also grown from approximately $230 million in 2019 to more than $400 million so far in 2020.

Along with larger offering sizes, a greater number of SPACs are being established by prominent former public company executives with the goal of acquiring a target in the executive’s industry or a related industry. A number of large, well-regarded financial institutions and private equity firms are also sponsoring SPACs. Not coincidentally, a growing number of deal announcements by SPACs have been well received by investors, and many companies that have gone public through a de-SPAC transaction have maintained stock prices well above the SPAC’s IPO price. These trends have helped SPACs become a fixture of the current M&A environment and reduced their historical associations with financial underperformance and risk.


The Pandemic and Executive Pay

Aniel Mahabier is CEO and Founder, Iris Gushi is Research Operations Lead, and Thao Nguyen is a Research Analyst at CGLytics. This post is based on their CGLytics memorandum.


The COVID-19 pandemic has had a major impact on the US economy. Businesses that have seen financial impact have laid off or furloughed employees, cut salaries, and in some cases, received state aid in order to preserve cash and stay afloat. In addition to these measures, some businesses have taken an additional step and adjusted the compensation practices for their Executives and Board Members (mainly in form of reduced base salaries and cash fees). So far in 2020 we have seen 634 companies listed on the Russell 3000 (114 of which are listed on the S&P 500 index) issue some type of pay adjustments to Executives, and to their Board of Directors. As a result, the total amount of base salary reductions for CEOs of these companies are expected to approximately equate to USD 180 million in 2020. For this study, CGLytics looked at the 554 companies that had issued pay adjustments to Executives and their Board as of May 31, 2020. The study examines how companies have reduced CEO, NEO and Director pay, and questions if enough is being done in light of the pandemic. READ MORE »

The Evolution of CEO Compensation in Venture Capital Backed Startups

Michael Ewens is Professor of Finance and Entrepreneurship at the California Institute of Technology; Ramana Nanda is Sarofim-Rock Professor of Business Administration at Harvard Business School; and Christopher Stanton is Marvin Bower Associate Professor of Business Administration at Harvard Business School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried and Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried.

Venture capital investors have developed an extensive set of tools to help address financing frictions for startups stemming from adverse selection and moral hazard. These include a focus on rigorous due diligence, complex security design, staged financing and active investment through extensive control rights, such as board seats. However, despite the importance of VC-backed firms and the wealth of information on these many solutions, little is known about the compensation contracts of founder-CEOs in private, venture capital-backed firms.

This gap is important for two reasons. First, exploring when professionalized CEO contracts emerge in the firm’s lifecycle reveals important features of how VCs implement dynamic contracts. Theory suggests that, at least initially, venture capital contracts have to leave founders bearing substantial non-diversifiable risk at the birth of firms in order to screen entrepreneurs. However, the value of screening is likely to fall as firm performance becomes publicly observed, suggesting that incentive alignment should increasingly dominate screening motives as firms mature.


Weekly Roundup: August 14–20, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 14–20, 2020.

Managerial Duties and Managerial Biases

The Other “S” in ESG: Building a Sustainable and Resilient Supply Chain

Seeing Through the Regulatory Looking Glass: PCAOB Inspection Reports

Emerging ESG Disclosure Trends Highlighted in GAO Report

Trends in U.S. Director Compensation

Update on Special Purpose Acquisition Companies

Testing the Theory of Common Stock Ownership

Investors and Companies Can Drive ESG Metrics Forward Together

SEC Tightens Regulations on Proxy Advisory Firms

The SEC Takes Action on Proxy Advisory Firms

Comment on the Proposed DOL Rule

Chancery Court Rules That Pre-Closing Attorney Client Privilege Over Deal Related Communications Stays with Sellers

A Controller’s Direct Discussions With Minority Stockholders May Render MFW Unavailable

A Controller’s Direct Discussions With Minority Stockholders May Render MFW Unavailable

Gail Weinstein is senior counsel and Steven Epstein and Matthew V. Soran are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

In In re HomeFed Corporation Stockholder Litigation (July 13, 2020), the Delaware Court of Chancery held that the going-private transaction involving HomeFed Corporation (the “Company”) and its controlling stockholder, Jefferies Financial Group Inc., did not meet the prerequisites, under MFW, for business judgment review. Chancellor Bouchard, at the pleading stage of the litigation, found that it was reasonably conceivable that MFW’s “ab initio” requirement had not been met–that is, that the controller had not conditioned the proposed transaction on approval by both an independent special committee and a majority of the minority stockholders before the controller engaged in “substantive economic negotiations.” Chancellor Bouchard rejected the defendants’ motion to dismiss and ruled that the transaction will be reviewed under the more stringent entire fairness standard.

Key Points

  • The decision amplifies the court’s recent focus on direct discussions between a controller and minority stockholders as a basis on which MFW business judgment review may be rendered unavailable. The court’s discussion suggests that direct communications between a controller and minority stockholders, whether they occur before or after the MFW conditions are put in place, may be problematic for MFW purposes, as they may interfere with the special committee’s effective functioning in negotiating the transaction on behalf of the minority stockholders as contemplated by MFW. The court also found in its recent Dell Technologies decision that direct discussions between a controller and minority stockholders (in that case, after the MFW protections were in place) may have indicated that the special committee did not function effectively for MFW purposes.


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