Monthly Archives: September 2020

Remarks by Commissioner Peirce on The Role of Asset Management in ESG Investing

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at a Virtual Roundtable on The Role of Asset Management in ESG Investing Hosted By Harvard Law School and the Program on International Financial Systems. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, John [Gulliver] and thanks Hal [Scott] for inviting me to be part of this forum. It is a pleasure to be here with you all today. The views I express are my own and do not necessarily represent those of the Commission or my fellow Commissioners. For that matter, they may not represent the views of anyone else sharing this virtual conference hall.

During the COVID era, as has happened to many of you, a new dog came into my life. No, I have not adopted a dog. Much as I would love to have the company, my condo building has a prohibition on dogs with the exception of the large German Shepherd that somehow has negotiated an exemption. The dog I have developed a relationship with is smaller, but no less fierce than that German Shepherd. Her name is Lucy. She walks with her owner in the park during my morning runs. Lucy hates me. She did not always feel that way, but our relationship—along with so many others—COVID-cratered. During an attack earlier this week, her owner assured me that “She is just trying to say hello.” I did not stick around for the rest of the conversation. The source of her dislike of me seems to be my mask. I once ran by without one. Lucy was mildly friendly, but her masked human earnestly called me out for my exposed face and instructed me not to run if I could not do so with a mask. The second time I saw Lucy, her masked owner was wielding a large sign entreating me to: “Please wear a mask.” So now I wear a mask when I run by Lucy and Lucy lunges for me. What surprised me, however, is that her owner has stopped wearing one. To be fair, she does keep one hanging jauntily around her neck. So, here’s how it goes: I wear a mask when I pass Lucy and her owner, Lucy attacks me, her unmasked owner laughs at me while gently chiding Lucy, and I try to keep my cool by thinking about ESG, which is the only reason I told you this story.


SEC Expands Definition of “Accredited Investor”

Jessica Forbes and Stacey Song are partners and Joanna D. Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Forbes, Ms. Song, Ms. Rosenberg, and Jonathan S. Adler.

On August 26, 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments to the definition of “accredited investor” in Rule 501(a) of Regulation D under the Securities Act of 1933 (“Securities Act”), which expand the category of investors eligible to participate in private offerings under Regulation D. The amendments create new categories of accredited investors, including those that qualify irrespective of wealth, on the basis that they have the requisite ability to assess an investment opportunity, and codify certain staff interpretative positions. The amendments, which were initially proposed on December 18, 2019, were adopted substantially as proposed with a few modifications, which we discuss below. The final rule will become effective 60 days after publication in the Federal Register.

New Categories of Accredited Investors

The SEC expanded the categories of accredited investors for both natural persons and entities.

Professional Certifications, Designations, or Credentials. Under a new category in the amended definition, natural persons will be able to qualify as accredited investors based on certain professional certifications, designations, or credentials from an accredited educational institution that the SEC designates as qualifying an individual for accredited investor status. Such designations will be issued by an SEC order and posted to the SEC website, as modified from time to time. In the final rule, consistent with commenters’ suggestions, the SEC clarified that it will provide notice and an opportunity for public comment prior to issuing any final order regarding future designations of qualifying credentials.


Weekly Roundup: September 11–17, 2020

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This roundup contains a collection of the posts published on the Forum during the week of September 11–17, 2020.

SEC Changes Rules Affecting Risk Factors, Litigation and Disclosures by US Public Companies

What to Do About Annual Incentive Plans in the Pandemic

Directors’ Right to Access Privileged Communication

A View on the SEC Rule Regarding Human Capital Disclosures

The Revival of Large Consulting Practices at the Big 4 and Audit Quality

The Stakeholder Model and ESG

California Court Enforces Federal Forum Provision for IPO Securities Lawsuits

Boards Should Care More About Recent “Caremark” Claims and Cybersecurity

The Workforce Takes Center Stage: The Board’s Evolving Role

Lessons from Anthem-Cigna

California Bill Requires Companies to Include Directors From Underrepresented Communities on their Boards

Funding the Future: Investing in Long-Horizon Innovation

The Friedman Essay and the True Purpose of the Business Corporation

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on his Wachtell Lipton 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

From a practical standpoint, the most significant part of the 1970 Milton Friedman essay in the New York Times was the headline: “The Social Responsibility Of Business Is to Increase its Profits.” For a half-century, that phrase has been used to summarize the essay, and alongside Friedman’s similar views in a 1962 treatise, also used in support of “shareholder primacy” as the bedrock of American capitalism. “Shareholder primacy” and “Friedman doctrine” became interchangeable. The Friedman doctrine was a precursor to, and became a doctrinal foundation for an era of short-termism, hostile takeovers, extortion by corporate raiders, junk bond financing and the erosion of protections for employees, the environment and society generally, all in support of increasing corporate profits and maximizing value for shareholders. This concept of capitalism took hold in the business schools and the boardrooms, became ascendant in the eighties and continued as Wall Street gospel until 2008, when the perils of short-termism were vividly illuminated by the financial crisis, and the long-term economic and societal harms of shareholder primacy became increasingly urgent and impossible to ignore. Since then, acceptance of and reliance on the Friedman doctrine has been widely eroded, as a growing consensus of business leaders, economists, investors, lawyers, policymakers and important parts of the academic community have embraced stakeholder capitalism as the key to sustainable, broad-based, long-term American prosperity. This is illustrated by the World Economic Forum’s request that I prepare a new paradigm for corporate governance which it published in 2016 and its issuance of the 2020 Davos Manifesto embracing stakeholder and ESG (environment, social and governance) principles, as well as the 2019 abandonment of shareholder primacy and adoption of stakeholder governance by the Business Roundtable. So too, has corporate purpose and stakeholder and ESG governance been embraced by index fund managers BlackRock, State Street, Vanguard and other major investors.


Funding the Future: Investing in Long-Horizon Innovation

Sarah Keohane Williamson is CEO, Ariel Babcock is Head of Research, and Allen He is Associate Director at FCLTGlobal. This post is based on their FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here).

Executive Summary

Effective long-term capital allocation is fundamental for innovating and creating value; investment in research and development (R&D) fuels this growth. Successful R&D can be transformational for an organization and for broader society. But while worldwide spending on R&D has slowly increased, R&D returns have been declining. What’s driving this decline? Emerging evidence suggests a short-term mindset lies at the heart of this puzzle.

R&D spending, especially long-horizon R&D project spending, faces a unique set of short-term pressures relative to other types of long-term investment. When facing short-term financial pressures, behavioral biases including manager risk aversion and uncertainty around forecasting potential future returns (among other things) lead to a tendency among management teams to cut long-horizon projects first. The declining tenure of managers, the lack of innovation-linked metrics in incentive compensation plans, the typically asymmetric return profile of long-horizon projects, and an investment community that often ignores the potential impact of long-horizon innovation spending in a company’s valuation analysis all contribute to this problem.


California Bill Requires Companies to Include Directors From Underrepresented Communities on their Boards

Elizabeth Gonzalez-Sussman and Ron Berenblat are partners and Ian A. Engoron is an associate at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum.

On August 30, 2020, the California State Legislature passed a new and unprecedented bill intended to promote greater diversity in corporate boardrooms. If signed into law by the governor, California’s Assembly Bill (AB) 979 would require each publicly held corporation whose principal executive offices are located in California to have a minimum number of directors from an “underrepresented community” on its board of directors. The bill defines “underrepresented community” to include any individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender. Two years ago, California became the first state to enact legislation requiring public companies headquartered in the state to include a minimum number of females on their corporate boards. If enacted, AB 979 would establish nearly identical requirements as the bill related to the representation of females on corporate boards and follow the prior bill as new Section 301.4 of the California Corporations Code.


Lessons from Anthem-Cigna

Gail Weinstein is senior counsel and Steven Epstein and Brian T. Mangino are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Mangino, Erica Jaffe, Shant P. Manoukian, and Maxwell Yim. 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 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 In re Anthem-Cigna Stockholders Litigation (Aug. 31, 2020), the Delaware Court of Chancery characterized the rise and fall of the proposed merger of equals of Cigna, Inc. and Anthem Corporation as a “corporate soap opera, [with] the members of executive teams at Anthem and Cigna play[ing] themselves [and] [t]heir battle for power span[ing] multiple acts.” After the merger agreement was signed, Cigna “turned against the Merger” and created “roadblocks” to its consummation. Ultimately, a final injunction against the merger was issued on antitrust grounds, which resulted in termination of the merger agreement. Following a ten-day trial, Vice Chancellor Laster held, in a 310-page opinion, that Cigna had breached the merger agreement covenants under which it was obligated to try to consummate the merger, but that no damages were payable because the injunction likely would have been issued (and thus the merger would not have closed) anyway. The court also held that Anthem did not breach its covenants to try to obtain antitrust approval; and that, under the language of the merger agreement, Cigna was not entitled to a Reverse Termination Fee. The court summarized: “Neither side can recover from the other [and] [e]ach party must bear the losses it suffered as a result of their star-crossed venture.”


The Workforce Takes Center Stage: The Board’s Evolving Role

Erica VoliniSteve Hatfield, and Jeff Schwartz are principals at Deloitte Consulting LLP. This post is based on their Deloitte memorandum.

As organizations respond to recent events related to COVID-19 and social justice movements, many strategic businesses, operating, and investment plans for 2020 and beyond have become irrelevant, impracticable, or both. These events have challenged the status quo. As a result, for boards and managements, the ability to lead in highly adaptable and decisive ways is now on the front burner.

After considering the unprecedented challenges of 2020 in the context of preparing the 10th annual report on Human Capital trends, Deloitte released two reports in May 2020: our regular annual report on the top 10 trends for 2020 (The social enterprise at work: Paradox as a path forward) and a special report on the 2020 trends with a focus on the COVID-19 pandemic (Returning to work in the future of work: Embracing purpose, potential, perspective, and possibility during COVID-19). The special report, on the intersection of human capital trends and priorities against the COVID-19 pandemic, is the backdrop of this post.


Boards Should Care More About Recent “Caremark” Claims and Cybersecurity

Paul Ferrillo is partner at McDermott Will & Emery LLP; Bob Zukis is Adjunct Professor of Management and Organization at the USC Marshall School of Business; and Christophe Veltsos is a professor at Minnesota State University. 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 Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

There have been several cases in the last two years relating to the landmark Caremark case that established the key precedent surrounding the role and performance of corporate director responsibilities and director liability when it comes to the exercise of risk oversight.

In many of the cases, there is a clear roadmap for plaintiff’s attorneys and claims that is leading straight to cybersecurity litigation. The ongoing failures of most corporate boards to satisfactorily oversee cybersecurity risk could generate a Caremark-type claim.

As advisors, instructors, litigators, observers and advocates for digital and cybersecurity governance reform over much of the last decade, we share the opinion that boardrooms have generally been behind the learning curve in sufficiently understanding and overseeing this critical business risk and its implications to corporate stakeholders. The stage is now being set for litigation to step in and hold corporate boards and directors to new levels of corporate and personal accountability; to hold them accountable for what they’ve failed to do.


California Court Enforces Federal Forum Provision for IPO Securities Lawsuits

Boris Feldman, Doru Gavril, and Pamela L. Marcogliese are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Feldman, Mr. Gavril, Ms. Marcogliese, Mary Eaton, and Meredith Kotler.

On September 1, 2020, the California Superior Court, San Mateo County, granted a motion to dismiss a putative securities class action brought under the federal Securities Act of 1933 because the company’s charter provided that such lawsuits may only be maintained in federal court. [1] The ruling was long awaited by companies, securities litigators, and observers of the decade-long saga of IPO litigation in state courts. It is the first ruling enforcing such a provision after the Delaware Supreme Court upheld their validity under Delaware law earlier this year in Sciabacucchi.

The ruling confirms that companies about to go public—whether through a public offering, direct listing, or SPAC transaction—should adopt a federal forum provision in their charter or bylaws to eliminate the risk of duplicative securities class actions being filed in state court to extract a quick settlement. The ruling also suggests that a federal forum provision adopted after the going public event may also be enforceable under certain circumstances. Finally, the language of the provision matters and should be carefully weighed with experienced counsel.

The decade-long battle over state IPO litigation

The federal Securities Act of 1933 allows shareholders to sue the company, the signatories of its registration statement, any company control persons, and any underwriters, in connection with a registration statement that allegedly suffers from material misrepresentations or omissions. The plaintiff is not required to plead fraud. Strict liability applies to the company (while the other defendants benefit from an affirmative due diligence defense that realistically can only be established after incurring significant costs of discovery). Most public companies that experience a stock drop after going public are targeted by such lawsuits, styled as class actions and seeking damages sometimes ranging in the billions. Most of these lawsuits are dismissed by federal courts. So plaintiffs began filing them in state courts.


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