Monthly Archives: November 2020

Statement of Commissioners Peirce and Roisman on Andeavor LLC

Hester M. Peirce and Elad L. Roisman are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in this post are those of Ms. Peirce and Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

We write to explain why we voted against the Commission’s settled action in the matter of Andeavor LLC. [1] A majority of the Commission found that Andeavor violated Exchange Act Section 13(b)(2)(B), which requires reporting companies to devise and maintain a system of “internal accounting controls,” when Andeavor repurchased its stock from shareholders after its legal department concluded that it did not possess material nonpublic information about a merger. [2] Because we believe the Commission’s finding entails an unduly broad view of Section 13(b)(2)(B), we respectfully dissent.

Make no mistake: Insider trading by public companies engaged in share repurchases is unacceptable, and we support all appropriate actions—including charges under Rule 10b-5—when companies use material nonpublic information to take advantage of their shareholders. We also support all appropriate actions under Section 13(b)(2)(B) when companies have inadequate internal accounting controls that threaten to erode confidence in their financial statements. In short, we have supported, and will continue to support, vigorous enforcement of the antifraud, disclosure, and other securities laws against corporate wrongdoers whenever appropriate. But the tools we use must be fit for the task. And in this case, we believe Section 13(b)(2)(B) is not the appropriate tool.


The Limits of Corwin in the Sale of a Company to a PE Buyer

Gail Weinstein is senior counsel, and Steven J. Steinman 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. Steinman, Mr. Mangino, Mark H. Lucas, Andrea Gede-Lange, and Shant P. Manoukian. 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 MINDBODY, Inc. Stockholders Litigation, the plaintiffs challenged the merger (the “Merger”) pursuant to which private equity firm Vista Equity Partners acquired MINDBODY, Inc. (the “Company”). The key allegations were that the Company’s CEO-founder-director (“RS”), due to his self-interest in obtaining liquidity and lucrative post-sale employment, “tilted” the sale process in favor of Vista rather than seeking to maximize the price on behalf of all the stockholders. The transaction was approved by a majority-independent board and the stockholders. However, the court ruled, at the pleading stage of litigation, that it was reasonably conceivable that RS may have breached his fiduciary duties to the stockholders; and, because his potential conflicts of interest were not disclosed, the alleged breaches were not “cleansed” under Corwin. The court also found it reasonably conceivable that the Company’s CFO (who was not a director) (“BW”) breached his fiduciary duties by following RS’s lead in the process.

We would observe that it is relatively common, especially when a sale process involves private equity bidders, for a CEO engaged in a sale process to want to obtain liquidity and post-closing employment. Mindbody underscores that the particular facts and circumstances will be critical to the court’s determination whether those desires constitute a disabling conflict of interest.


Delaware Reaffirms Director Independence Principle in Founder-Led Company

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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).

The Delaware Court of Chancery yesterday [October 26, 2020] dismissed a derivative lawsuit against the directors of Facebook. United Food & Commercial Workers Union v. Zuckerberg, C.A. No. 2018-0671-JTL (Del. Ch. Oct. 26, 2020). The decision is a notable application of Delaware’s presumption of director independence.

In 2016, Facebook’s board decided not to pursue a stock reclassification proposal that had been negotiated between a special committee of the board and the company’s founder and majority stockholder. A class action challenging the proposal on behalf of minority stockholders was dismissed as moot, and the Court awarded a negotiated fee to the plaintiffs’ lawyers. A stockholder then filed this follow-on derivative lawsuit against the company’s directors, alleging that they had wrongfully caused the company to incur expenses—by considering the proposal and defending themselves in the ensuing litigation. The directors moved to dismiss the complaint on the ground that a majority of the board was capable of independently determining whether the company should bring the claims asserted.


Decision Making in 50:50 Joint Ventures

Philip Zanfagna is a Business Analyst, Molly Farber is former Managing Director, and James Bamford is a Senior Managing Director at Water Street Partners. This post is based on their Water Street Partners memorandum.

When companies decide to pursue a joint venture (JV), a critical first step is determining the appropriate level of ownership and control. Given a choice, most companies would prefer to be the majority partner, believing such a structure provides greater control and decision-making efficiency. Being a minority partner, however, is also appealing in certain cases by limiting capital outlays, reducing operating responsibility and resource demands, lowering risk exposures, and keeping the JV off of the company’s consolidated financials. [1] A third option is a 50:50 joint venture.

There are a number of factors that might drive JV partners to an equal equity split. Most simply, such structures reflect the partners making equivalent cash and non-cash contributions to the venture upon formation. Beyond this, equal ownership might be a function of regulatory requirements for local partners to hold at least a 50% ownership stake, or a reflection of neither party wanting to consolidate the venture’s financials. The choice of 50:50 is often the default practical solution for partners when contributions are roughly equal and neither is willing to cede control. Or, companies may favor 50:50 ownership due to a desire to build an independent, long-term sustainable business based on balanced contributions, risks, and rewards between complementary partners.


Weekly Roundup: November 6–12, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 6–12, 2020.

SEC Proposes Limited Exemption for Finders

Securities Litigation Trends During COVID-19

Evolving Compensation Responses to the Global Pandemic

SEC Adopts Amendments to Auditor Independence Rules

Rising Threat of Securities Liability for SPAC Sponsors

SEC Extends Its Focus on MNPI Clearance Procedures

ISS Proposes 2021 Benchmark Voting Policy Changes

Don’t Go Chasing Waterfalls: Fiduciary Obligations in the Shadow of Trados

2020 Top 250 Report

Rewriting History II: The (Un)Predictable Past of ESG Ratings

What to Expect From the Biden Administration

Law and Reputation

D&O Insurance Policy Does Not Cover Costs in Appraisal Proceeding

D&O Insurance Policy Does Not Cover Costs in Appraisal Proceeding

Theodore N. Mirvis and Ian Boczko are partners and Nicholas C.E. Walter is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

The Delaware Supreme Court has held that D&O insurers are not required to cover costs incurred by a respondent corporation in an appraisal action. In re Solera Insurance Coverage Appeals, Nos. 413/418, 2019 (Del. Oct. 23, 2020). The en banc decision clarifies Delaware law on the scope of insurers’ responsibilities and reinforces that an appraisal action is a neutral proceeding that is “not designed to address alleged wrongdoing.”

In 2015, Solera entered into a merger agreement. After the closing, a group of dissenting stockholders petitioned for appraisal. In July 2018, the Court of Chancery found that the fair value of the petitioners’ shares was lower than the merger consideration they had been offered. Nevertheless, the petitioners were still entitled, by statute, to $38 million in pre-judgment interest. Solera sought to recoup this interest, plus attorneys’ fees, from its D&O insurers on the basis that it constituted a “Loss” resulting from a “Securities Claim,” which was defined in the policy as “any actual or alleged violation” of any statute, rule or common law.


Law and Reputation

Roy Shapira is Associate Professor at IDC Herzliya Radzyner Law School. This post is based on his recently published book, Law and Reputation: How the Legal System Shapes Behavior by Producing Information.

“Reputation matters” has become a mantra in the business world. And corporate legal scholars have been increasingly referring to reputational concerns as important forces that shape our behavior across a wide range of phenomena. Yet so far the legal literature has stayed remarkably silent on exactly how reputation works, or how reputation interacts with the law. My new book, titled Law and Reputation (Cambridge University Press, 2020), examines these important questions.

The book starts with the basic questions of what reputation is and why it is noisy. Not all bad news is created equal. Some companies and businessmen emerge from failures unscathed while others go bankrupt. To better understand why similar behaviors lead to different reputational outcomes, I break the process of reputational sanctioning into its different components: revelation, diffusion, certification, and attribution of information. Damning information has to be widely diffused so that it reaches a critical mass of stakeholders in order for the reputational sanction to be meaningful. Information that was widely diffused has to be certified as credible for the company’s stakeholders to consider it seriously. And information that was diffused and certified has to first be attributed to deep-seated flaws that are likely to reoccur in the future, in order for the company’s stakeholders to update their beliefs and act on it.


Audit Committee Challenges and Priorities in the Upcoming Quarter and Beyond

Krista Parsons is Managing Director of the Center for Board Effectiveness and Eric Knachel is Partner, Audit & Assurance, at Deloitte LLP. This post is based on their Deloitte memorandum.


Does it feel like Groundhog Day? On a personal level, it may feel like each day blends into the next, and many of us find ourselves waiting for the current conditions to pass so things can get back to normal. But companies can’t simply take a wait-and-see attitude. They need to respond quickly to the change in the business landscape, both internally (e.g., forecasting, systems, and process) and externally (e.g., communication with stakeholders, go-to-market strategies). It’s not only about how long the current environment will last, but how to position the company in the current environment and prepare for the “new normal.” If companies stay the course and don’t evolve during the pandemic, they are likely to fall behind competitors.

Audit committees have a critical role in helping companies evolve and thrive in this environment. To provide effective oversight and help company executives navigate these challenging times, audit committees need to ask direct, targeted questions of management to understand what alternatives were considered and chosen in addressing key issues. Audit committees should be aware of issues that are top of mind, trending, and ongoing, as well as the tension points, challenges, and alternative solutions associated with those issues.


What to Expect From the Biden Administration

Matthew Solomon, Francesca L. Odell, and James Langston are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Solomon, Ms. Odell, Mr. Langston, Michael Albano, Helena Grannis, and Mary Alcock.

Over the weekend, former Vice President Joseph R. Biden, Jr. was declared the winner of the U.S. presidential election. Although President Trump has yet to concede and press reports suggest he will continue to make his case in court, thoughts have turned to what the Biden administration will mean for federal regulation of business and finance.

In many ways, the future will depend on whether the centrist, coalition-building Biden of yesteryear will show up, or if he will embrace the more progressive wing of the Democratic party that has since grown in influence. Below we lay out our initial reactions on how the Biden presidency is likely to reshape the corporate landscape.

The SEC’s Regulatory and Enforcement Focus

Who Will Chair the Commission? With, at best, a 50/50 Senate, it may be challenging for President-elect Biden to appoint a Securities and Exchange Commission Chair from the far left wing of the Democratic Party. Nevertheless, the important role of anti-Wall Street Senators, such as Elizabeth Warren, in the campaign will likely be felt in making the appointment and in the operation and funding of the agency going forward.


Rewriting History II: The (Un)Predictable Past of ESG Ratings

Florian Berg is a Postdoctoral Associate in Economics, Finance and Accounting at MIT Sloan School of Management; Kornelia Fabisik is Assistant Professor of Finance at Frankfurt School of Finance & Management, and Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management. 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); 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); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

Importance of ESG Ratings

Research on environmental, social, and corporate governance (ESG) topics has exploded over the last years. The surge in academic work mirrors the massive rise in the importance of ESG principles in the investment management industry. For example, funds that invest according to ESG principles attracted net inflows of $71.1bn globally between April and June 2020, despite the Covid-19 crisis, pushing assets under management in these funds to an all-time high of over $1tn.

A key challenge for researchers and investment professionals lies in the measurement of a firm’s “ESG quality,”’ that is, in quantifying how well a firm performs with respect to ESG criteria. To address this challenge, most empirical ESG analyses have resorted to ESG scores (or ratings) constructed by professional data providers. The growing usage of these vendors’ ESG scores has raised questions by policymakers, investors, researchers, and firms about their reliability, consistency, and overall quality.

Refinitiv ESG Downloads

In a new paper we document widespread changes to the historical ESG scores of Thomson Reuters Refinitiv ESG (“Refinitiv ESG” henceforth). We further show that the rewriting of these scores has important implications for analyses linking ESG scores to outcome variables such as firm performance or stock returns. The ESG scores constructed by Refinitiv ESG, formerly known as ASSET4, are influential. Refinitiv ESG is a key ESG rating provider and ESG scores by Refinitiv ESG have been used (or referenced) in more than 1,000 academic articles over the past 15 years (see Figure 1). Moreover, Refinitiv ESG data are used by many major asset managers to manage ESG investment risks.


Page 5 of 8
1 2 3 4 5 6 7 8