Monthly Archives: November 2020

Statement by Chairman Clayton on Harmonizing, Simplifying and Improving the Exempt Offering Framework

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission under the Government in the Sunshine Act.

Today we consider a recommendation from the Division of Corporation Finance that would harmonize, simplify and improve various structural and procedural aspects of our exempt offering framework under the Securities Act of 1933. The recommended amendments reflect a comprehensive, retrospective review of a framework that has, over time, unfortunately become difficult to navigate, for both investors and businesses, particularly smaller and medium-sized businesses. Some have referred to it as a “patchwork”—I will explain this in a bit more detail later. Today’s amendments would rationalize that framework, increase efficiency and facilitate capital formation, while preserving or enhancing important investor protections.


Statement by Commissioner Lee on Amendments to the Exempt Offering Framework

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

For decades, private offerings were the exception to the rule in our securities regime. The registration and reporting provisions in the federal securities laws are designed to level the playing field by requiring issuers to provide all investors with reliable, timely, and material information about investments. The public markets are designed to, and to a remarkable degree succeed at, offering a fair shake to the so-called mom-and-pop investor vis-à-vis a wealthy hedge fund. [1] What’s more, the discipline imposed by public markets drives more efficient capital allocation, which in turn drives our economy.

Exempt private offerings have traditionally served an important role in providing capital for smaller and medium-sized companies, often along their path to the public markets. It is well understood that retail investors operate at a severe disadvantage in the private market because of information asymmetries and other power imbalances. [2] Historically, the primary protection against this power imbalance was to limit private companies to capital raised from investors that are large or sophisticated enough to compete, or wealthy enough to bear the cost if they lose out. In recent years, however, the exception (or exemptions from registration) have swallowed rule, with statutory and regulatory changes steadily chipping away at restrictions on private offerings and exposing more and more retail investors to their risks.


Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance

Michal Barzuza is Nicholas E. Chimicles Research Professor of Business Law and Regulation at the University of Virginia School of Law; Quinn Curtis is Albert Clark Tate, Jr., Professor of Law at the University of Virginia School of Law; and David H. Webber is Professor of Law at the Boston University School of Law. This post is based on their recent paper, forthcoming in the Southern California Law Review. 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); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (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).

Our new paper Shareholder Value(S): Index Fund ESG Activism and The New Millennial Corporate Governance forthcoming in the Southern California Law Review documents and explains the increasing role of large index fund managers in promoting ESG issues at major companies. While often viewed as quiet on key corporate governance issues, we show that these asset managers aggressively press companies to address ESG concerns, especially board diversity and—more recently—climate change. Notably, we show that to promote ESG goals the big three challenged management by withholding votes from directors in uncontested elections, a channel of index fund activism that has not been examined in the existing literature.

We argue that index fund activism on ESG issues is a result of asset managers being locked in competition for the assets of the millennial generation. Millennials, more than their forebearers, integrate social values into their economic decisions. BlackRock CEO Larry Fink has said “[T]he sentiments of these generations will drive not only their decisions as employees but also as investors, with the world undergoing the largest transfer of wealth in history: $24 trillion from baby boomers to millennials.” Given the commodification of index funds and the inability to compete on returns, signaling commitment to ESG values provides an important competitive dimension to index fund operators. We analyze how this largely overlooked dimension influences index funds’ incentives and provide supportive data. Given the potential negative implications of being seen to lag on social issues among a generation in which cancel culture is predominant, the stakes for asset managers are extremely high.


Trump Legacy: Boom in Corporate Political Disclosure

Bruce F. Freed is President, Karl J. Sandstrom is counsel, and Dan Carroll is Vice President for Programs at the Center for Political Accountability. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here) and The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here).

How has the Trump presidency impacted corporate political disclosure and accountability? The answer might come as a surprise. It’s been a boon and a boom.

Over the past four years, more large publicly held U.S. companies than ever before have adopted sound transparency and oversight practices for their political spending. This trend has strengthened between the 2016 presidential election and next month’s, according to the 2020 CPA-Zicklin Index released this month.

The annual benchmarking of the S&P 500 companies is conducted by the Center for Political Accountability and The Wharton School’s Zicklin Center for Business Ethics Research. It rates the largest U.S. public companies for their political disclosure and accountability and includes these major findings:


Shifting Influences on Corporate Governance: Capital Market Completeness and Policy Channeling

Ronald J. Gilson is Charles J. Meyers Professor of Law and Business, Emeritus, and Curtis J. Milhaupt is Professor of Law at Stanford Law School. This post is based on their recent paper.

Corporate governance scholarship is typically portrayed as driven by single factor models, for example, shareholder value maximization, director primacy or team production. These governance models are Copernican; one factor is or should be the center of the corporate governance solar system. In this essay, we argue that, as with binary stars, the shape of the governance system is at any time the result of the interaction of two central influences, which we refer to as capital market completeness and policy channeling. In contrast to single factor models, which reflect a stable normative statement of what should drive corporate governance, in our account the relation between these two governance influences is dynamic.

Motivated by Albert Hirschman’s evocative book, Shifting Involvements: Private Interest and Public Action, we posit that all corporate governance systems undergo repeated shifts in the relative weights of the two influences on the system. Capital market completeness determines the corporate ownership structure and privileges shareholder governance and value maximization by increasing the capacity to slice risk, return, and control into different equity instruments. The capability to specify shareholder control rights makes the capital market more complete, tailoring the character of influence associated with holding particular equity securities and its reciprocal, the exposure of management to capital market oversight. Policy channeling, the instrumental use of the corporation for distributional or social ends, pushes the corporate governance gravitational center toward purposes other than maximizing shareholder value. We argue that disappointment with corporate performance—whether the result of unrealistic expectations, the choice of mechanisms incapable of delivering the desired results, or rising dissatisfaction with the prevailing balance of the two influences—is an endogenous driver of the repeated shifts in the relative weights of capital market completeness and policy channeling. The actors who experience disappointment with corporate performance and the methods chosen to shift the weights of the two influences will differ over time and across different governance systems. But the pattern is not unique to a particular corporate governance system or time period.


Pandemic Preparation: 72-Hour Response Plan to Government Inquiry

Charles J. Clark and Barry A. Bohrer are partners and Christian J. Ascunce is an associate at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.


This post provides guidance covering key questions that your organization may face as a result of a regulatory and enforcement inquiry during COVID-19, including a checklist to aid your response. Considering and approving these best practices is good; mastering and implementing them so that you may reflexively employ them is ideal. And a critical component of this is identifying outside counsel that you trust, that knows you and your business, and that can respond quickly to assist you in this high-stakes and fast-moving context.

For additional updates regarding COVID-19, see Market Trends 2019/20: COVID-19 from a Securities Law Perspective, COVID-19 Update: SEC and Nasdaq Response and Updated SEC C&DIs, SEC’s Conditional Reporting Relief and COVID-19 Disclosure Guidance: First Analysis, SEC Reporting Companies: Considering the Impact of the Coronavirus on Public Disclosure and Other Obligations: First Analysis, and COVID-19 Ramifications for Public Companies—SEC Disclosures, SEC Filings and Shareholder Meeting Logistics: First Analysis. For an overview of practical guidance on COVID-19 covering various practice areas, including securities, see Coronavirus (COVID-19) Resource Kit.


How Boards Can Calibrate Executive Compensation to The Risk of Disruption

Seymour Burchman and Blair Jones are Managing Directors at Semler Brossy Consulting Group. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Thanks to emerging digital technologies, many industries are now facing a new wave of disruption. Artificial intelligence is powering autonomous vehicles, while data analytics are reshaping financial services and other consumer industries. AI-powered advances by themselves, according to a 2019 McKinsey study, could boost annual global GDP by $13 trillion, or an additional percentage point. And the coronavirus pandemic, by promoting remote work and commerce, has accelerated this process.

Companies in many industries now face serious threats to their business models. Yet executive compensation as a whole has been surprisingly slow to adapt to the challenge. Most programs still emphasize the same basic financial metrics on growth and profitability—which tend to focus executives on current programs rather than creative projects to meet the looming disruption.

Metrics that promote innovation and transformation are still relatively weak. Many companies rely on three-year performance periods that are too long or too short to capture the strategies they are implementing—and may thereby be contributing to the steady decline in corporate investment over the past decade. Also, boards frown on using discretion and qualitative measures in pay packages, even as they want their companies to be more agile and adjust strategies frequently. A clash is inevitable.


2020 Annual Corporate Directors Survey

Paula Loop is Leader, Paul DeNicola is Principal, and Leah Malone is Director at the PricewaterhouseCoopers LLP Governance Insights Center. This post is based on their PwC memorandum.


2020 has presented unprecedented challenges for companies. While the year generally started like any other, by the end of the first quarter, the COVID-19 pandemic created an unprecedented global health emergency. Business was upturned across the globe, unemployment shot through the roof, US GDP took the greatest fall on record, and many workforces shifted to an entirely remote setting, all while communities confronted untold sickness and fatalities. America also saw a new level of social unrest, as protests for racial justice swept the nation. Against all of this, a presidential election looms.

With everyday life upended, boardrooms changed drastically. Gone were the site visits, strategy retreats, and board dinners. Gone was the boardroom itself. But the work didn’t slow, and most directors reported devoting significantly more time to their duties.

In many ways, directors believe that boards and companies have met the early challenge, even during the crisis. Boards show increased awareness and increased focus on areas that institutional shareholders have emphasized in recent years, like environmental, social, and governance (ESG) issues and shareholder engagement. They have made changes to deal with problems in company culture, and they are thinking more broadly about issues like company strategy and executive compensation. In many ways, they are responding to the current climate and to shareholder concerns. But in other ways, boards continue to be plagued by seemingly intractable problems. Directors continue to report dissatisfaction with the performance of some of their peers. Board refreshment still lags as leadership frequently avoids both the tough conversations with directors who should be replaced and the hard work of long-term board succession planning. Boardroom discussions suffer as directors, keen to maintain a collegial atmosphere, avoid sharing dissenting views. And even while making some improvements in boardroom diversity, directors aren’t always convinced of the importance of that diversity.


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