Yearly Archives: 2020

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.


Companies’ Response to Delaware Supreme Court Upholding Federal Forum Provisions

John Laide is manager of corporate governance research at Deal Point Data, LLC. This post is based on his Deal Point Data memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

A review of charter and bylaw filings in the six months since the Delaware Supreme Court upheld federal forum provisions (“FFP”) shows that FFPs are becoming standard in the governing documents of IPO companies and among existing companies, an initial spike of adoptions that has steadily leveled off. On March 18, 2020, the Delaware Supreme court ruled in Salzberg v. Sciabacucchi that FFPs are facially valid under Delaware law. Securities Act of 1933 claims arising from public offerings can be brought in state or federal courts. FFPs require the federal courts be the exclusive forum for the resolution of these claims. FFPs can reduce the costs and burdens from facing multi-jurisdictional litigation and provide more predictability regarding the outcome of these disputes. FFPs can also prevent state court forum shopping by plaintiffs.

Recent IPOs

Of the 49 companies in Deal Point Data’s coverage universe (i.e., companies included in major indices) that completed their IPO since the March 18 decision, 84% of the companies have included FFPs in their governing documents, most frequently in the charter (68% in charter or in both charter and bylaws). For the Delaware incorporated IPO companies, 89% have included FFPs.


2020 Top 250 Report

Andrew R. Lash and Joey Choi are consultants and Matt Lum is a principal at FW Cook. This post is based on their FW Cook report. 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).

Overview and Background

Since 1973, FW Cook has published annual reports on long-term incentive grant practices for executives. This report, our 48th edition, presents information on long-term incentives granted to executives at the 250 largest U.S. companies in the S&P 500 Index. It is intended to inform boards of directors and compensation professionals in designing and implementing effective long-term incentive programs that promote long-term success for their companies in supporting strategic objectives and aligning pay delivery with performance.

Definition of Long-Term Incentive

To be considered a long-term incentive for purposes of this report, a grant must reward performance and/or continued service for a period of one year or more and cannot be limited by both scope and frequency:

  • A grant with limited scope is awarded to only one executive or a very small or select group of
  • A grant with limited frequency is an award that is not part of a company’s regular grant For example, a grant made as a hiring incentive, replacement of compensation forfeited from prior employer or promotional award is not considered a long-term incentive for this report.
  • A grant with limited scope but without limited frequency (annual grants of performance shares made only to the CEO) may be considered a long-term incentive, and vice versa (one-time grants made to all executives).


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

Sarath Sanga is Associate Professor at Northwestern University Pritzker School of Law, and at Kellogg School of Management (by courtesy); and Eric L. Talley is the Sulzbacher Professor of Law at Columbia Law School, faculty co-director of the Millstein Center for Global Markets and Corporate Ownership. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here); and Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley by Jesse Fried and Brian Broughman (discussed on the Forum here).

In a newly-released working paper, we tackle a fundamental financial and governance conundrum that nearly every venture capital (VC) backed company faces: when there are multiple classes of stock, how should directors discharge their fiduciary duties?

In a typical VC-backed firm, the founders and other early employees hold common stock while VC investors hold tranches of preferred stock. As preferred stockholders, VC investors enjoy a variety of special rights, which can include, for example, board representation, consent rights, priority payments upon exit, and options to convert preferred shares or redeem them for cash. But this arrangement bakes a shareholder conflict right into the firm’s capital structure: When strategic business decisions implicate preferreds’ special rights, the interests of preferred shareholders inevitably conflict with those of common. In such cases, what should the board of directors do?


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