Monthly Archives: November 2020

S&P 500 Companies No Longer Receive Drafts of Proxy Advisory Reports During 2021 Proxy Season

John R. Ellerman is partner and Szu Hui Ho is a consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum.


In July 2020, the Securities and Exchange Commission (SEC) adopted new rules regarding the solicitation and delivery of proxy voting advice by the proxy voting advice businesses. [1] These new rules, which are extensive and far reaching, will become effective during the 2022 proxy season. Effective December 1, 2021, proxy advisory firm Institutional Shareholder Services (ISS) and other proxy advisors will be required to grant free access to filing companies for review and feedback recommendations at the same time when the voting advice and accompanying materials are sent out to investors.

The proxy advisory firms will also be required to provide, in a timely manner, the registrant companies’ written responses to their investor clients before they vote on proxies—assuming there is a timely response to the advice by registrant companies. The intent of the proposed new rules by the SEC is to increase the transparency of the proxy voting advice. For reference, please see our Viewpoint on the subject. [2]


EQT: Private Equity with a Purpose

Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; Therese Lennehag is Head of Sustainability at EQT Parnters; and Nina Nornholm is Head of Communication at EQT Partners. This post is based on their recent paper, forthcoming in the Journal of Applied Corporate Finance. 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); Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The private equity (PE) industry has grown enormously over the past 20 years, from roughly $650 billion in assets under management (AUM) in 2000 to almost $5 trillion in September 2019 (of which some $1.7 trillion is now “dry powder”), an increase of 16% from the prior year and a more than seven-fold increase from 2000. In comparison, the Dow Jones Industrial Average has not even tripled over that period, even when using its peak before the COVID-19 induced crash.

There are consequences to this size. Limited partners (LPs) have become dependent upon the returns earned in PE, although there are questions whether the industry will continue to earn them in the future. This asset class has grown large enough that it is also raising questions about its contributions to systemic risk, such as climate change and income inequality. To date, there is little transparency on these and other sustainability issues at either the General Partner (GP) or portfolio company (PC) level. Questions are also being raised whether PE firms are paying their fair share of taxes. Unless addressed, the PE industry can again come under increased scrutiny and face questions about its license to operate.


SEC Adopts Rules to Modernize and Streamline Exempt Offerings

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

On November 2, 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments (the “Amendments”) to certain rules under the Securities Act of 1933, as amended (“Securities Act”) that are intended to, among other things, close gaps and reduce complexities in the exempt offering framework that may impede access to capital for issuers and thereby limit investment opportunities, while preserving or enhancing investor protections. The Amendments impact numerous types of exempt offerings, including offerings conducted under Regulation D and Regulation S. We highlight below certain of the Amendments that may be of particular interest to our clients that regularly conduct offerings under those exemptions. The Amendments will become effective 60 days after their publication in the Federal Register.


Regulation D is a series of rules that provides several exemptions from the registration requirements of the Securities Act. Rule 506(b) of Regulation D is a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act pursuant to which an issuer may offer and sell an unlimited amount of securities, provided that offers are made without the use of general solicitation or general advertising and sales are made only to accredited investors and up to 35 non-accredited investors who meet an investment sophistication standard. A second non-exclusive safe harbor, Rule 506(c) of Regulation D, is substantially the same as Rule 506(b) except that (1) offers may be made through general solicitation or general advertising and (2) all purchasers in the offering must be accredited investors and the issuer must take reasonable steps to verify their accredited investor status. Rule 506(c) provides a principles-based method for verification of accredited investor status, as well as a non-exclusive list of verification methods that issuers may use, but are not required to use, when seeking to satisfy the verification requirements with respect to natural persons. Offerings under both Rule 506(b) and Rule 506(c) must satisfy a number of other terms and conditions set forth in Regulation D, including the requirements in Rule 502(a) regarding integration (discussed below).


The Department of Labor’s ESG-less Final ESG Rule

Joseph Lifsics is an associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Lifsics and Lennine Occhino. 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); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

On October 30, 2020, the U.S. Department of Labor (“DOL”) released its final regulation (“Final Rule”) relating to a fiduciary’s consideration of environmental, social and governance (“ESG”) factors when making investment decisions for plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In response to the proposed rule (the “Proposal”), the DOL received several thousand comments, the vast majority of which opposed the new rule. Many plan sponsors and investment professionals voiced objection to the Proposal’s antipathy towards the consideration of ESG factors. In the Final Rule, the DOL generally softened its stance toward the consideration of economic ESG factors, but retained its opposition to the consideration of non-pecuniary ESG or other non-pecuniary factors.

Comparing Investment Options

The Proposal modified the longstanding “investment duties” ERISA regulations describing a fiduciary’s duties of prudence and loyalty under Section 404 of ERISA by adding that the fiduciary must specifically compare how the relevant investment compares to other similar investments. Some comments to the Proposal wondered whether fiduciaries would be required to “scour the market” and analyze each comparable investment option. Other comments objected on the basis that some investment opportunities may be so unique or time-sensitive that comparing the opportunity against alternatives would not be possible or practical. In response, the Final Rule requires that a fiduciary must compare an investment opportunity with the opportunity for gain associated with reasonably available investment alternatives with similar risks.


Why Have CEO Pay Levels Become Less Diverse?

Torsten Jochem is Associate Professor of Finance at the University of Amsterdam; Gaizka Ormazabal is Associate Professor of Accounting and Control at University of Navarra IESE Business School; and Anjana Rajamani is Associate Professor of Finance at Erasmus University Rotterdam School of Management. This post is based on their recent paper.

In our working paper, we examine the evolution of cross-sectional variation in CEO pay levels.  Using a wide sample of over 5,000 U.S. public firms, spanning from 2002 to 2018, we document a new stylized fact: Over the last decade, the variation in CEO pay levels across firms (i.e., the “second moment of pay”) has declined precipitously. The decline in CEO pay level variation not only holds at the economy-level but also within industry groups, within industry-size groups, and in firms’ compensation peer groups (see Figure 1).


SEC Enforcement Division Releases Final Chapter of Jay Clayton-Led SEC

Robin Bergen and Matthew Solomon are partners and Alex Janghorbani is senior attorney at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Bergen, Mr. Solomon, Mr. Janghorbani, Samuel Chang, and Kal Blassberger.

On the eve of the U.S. presidential election last week, the SEC Enforcement Division released its annual report for fiscal year 2020 (the “Report”), providing an overview of the Division’s enforcement figures, developments, and areas of focus in what Director Stephanie Avakian described as “the most challenging year in recent memory.” [1] This past year has marked, together with the longest shutdown in government history the year prior, a challenging but reasonably productive time for the SEC’s enforcement program. Just as last year’s report highlighted the Division’s struggles during the fiscal shutdown, the final annual report of the Clayton-led SEC focuses on the significant disruption the COVID-19 pandemic has caused to the Division’s operations, investigations, and priorities, including the suspension of testimony for several months, establishment of a Coronavirus Steering Committee, and redirection of resources toward COVID-related fraud. This time around, however, the Division could not avoid a drop-off in the number of enforcement cases, which seems attributable at least in part to the pandemic and its profound impact on the SEC’s operations.

More fundamentally, the Division’s stated enforcement and operational priorities remain largely consistent with recent annual reports, with no significant signals of a change in emphasis during the lame-duck session. And while the election of President-elect Joseph Biden and the wind down of the Clayton era marks the opportunity for new leadership to begin crafting priorities from a clean slate, any significant shifts will likely take time to be expressed to the market. Meanwhile, in the intervening months and even years, a number of the hundreds of ongoing investigations relating to the Division’s current priorities (including many in their early stages) will continue to materialize through enforcement actions. Market participants should thus take note of the Division’s stated areas of focus, which themselves may color any new priorities of the new administration.


ISS Releases New Benchmark Policies for 2021

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

Yesterday, ISS released its new benchmark policies, effective for shareholder meetings on or after February 1, 2021. In addition to anticipated policy changes (see this PubCo post) regarding board racial and ethnic diversity, shareholder litigation rights (such as exclusive federal forum provisions) and director accountability for governance failures related to environmental or social issues, ISS also made a number of other policy changes and clarifications, not previewed during the comment period, that generally relate to changing market practices, certain shareholder proposals and policies that were announced previously but subject to a transition period.

ISS reports that, in response to its online policy survey, it received 522 responses, including from 176 investors and related organizations and 346 non-investors, of which 258 represented organizations based in the U.S. ISS also held five roundtables in the U.S. related to board and shareholder rights, compensation and environmental and social shareholder proposals. In response to its request for comment on proposed policy changes, ISS received feedback in English from 23 commenters, including institutional investors and non-investors, such as corporate issuers, non-profit organizations, special-interest trade associations, law firms and others. ISS also notes that, in April, it issued special guidance related to COVID-19 (see this PubCo post) and pandemic-related pay decisions (see this PubCo post).


Varieties of Shareholderism: Three Views of the Corporate Purpose Cathedral

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya. This post is based on a chapter in the forthcoming Research Handbook on Corporate Purpose and Personhood. 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).

The perpetual debate over the objective, or purpose, of the corporation shows no signs of abating. The most recent additions to this discourse leverage the disruption wrought by the Covid-19 pandemic to propound claims for or against (but usually for) stakeholderism—namely, a stakeholder-oriented corporate governance. The World Economic Forum has thus endorsed Stakeholder Principles in the COVID Era, about which it declared that the “first priority is to win the war against coronavirus” and committed to “continue to embody ‘stakeholder capitalism’”. These calls come on the heels of the Business Roundtable’s 2019 Statement on the Purpose of a Corporation, in which prominent corporate leaders proclaimed “a fundamental commitment to all of our stakeholders.”

Against this backdrop, this Chapter seeks to make three modest contributions by offering three views of the corporate purpose cathedral that bear on the role of law in it. These views underscore the difference and the tension between an individual perspective and a societal or national legal perspective to the purpose of the corporation.


Cyber: New Challenges in a COVID-19–Disrupted World

Mary Galligan is Managing Director and Deborah Golden is Principal and U.S. Cyber and Strategic Risk Leader at Deloitte & Touche LLP. This post is based on their Deloitte memorandum.

Background: The pre-COVID-19 environment

Cyber, and the challenges it presents to businesses of all types and sizes, was on the board’s agenda well before the onset of the COVID-19 pandemic. Many boards, including their committees, engaged in a wide range of activities to stay informed and vigilant on the topic. As a result, these boards had reason to believe that they were exercising an appropriate degree of oversight regarding cyber.

As in so many other areas, the pandemic and the many disruptions it has caused have created new challenges for boards to consider. In addition, an increasing focus on areas such as the use of data, privacy, and artificial intelligence (AI) ethics has further expanded the areas that boards need to address. This post discusses the nature of those changes and how boards can adapt to the new environment, supporting a resilient response to the new challenges and opportunities of cyber.

What has changed?

The changes brought about by the COVID-19 pandemic with respect to cyber are extensive. However, the most significant ones are as follows:


Risks of Back-Channel Communications with a Controller

Gail Weinstein is senior counsel and Steven Epstein and Warren S. de Wied are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. de Wied, Andrew J. Colosimo, Erica Jaffe, and Bret T. Chrisope, 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 United Food v. Mark Zuckerberg and Facebook (Oct. 26, 2020), a stockholder of Facebook, Inc. brought suit seeking damages, on behalf of the corporation, for losses Facebook incurred by pursuing and then abandoning a reclassification of its capital structure (the “Reclassification”). The Reclassification had been proposed by, and would have primarily benefitted, the company’s controlling stockholder, Mark Zuckerberg. The Reclassification was later abandoned at Zuckerberg’s request. The Delaware Court of Chancery dismissed the suit, holding that, because a majority of the directors were independent and disinterested with respect to the Reclassification, the plaintiff was not excused from first having made a demand on the board to bring the derivative litigation.

Although the suit was dismissed, and the focus of Vice Chancellor Laster’s opinion is on the issue of “demand futility,” the case nonetheless provides a reminder of the potential risks from flaws in a board process. These include the possibility of reputational damage, as well as the potential for personal liability for directors who (without disclosure to and supervision by the board) share information with a controlling stockholder about the board’s process while the board is considering a transaction in which the controller is personally interested.


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