Yearly Archives: 2020

New Wave of Regulation S-K Amendments

Valerie Jacob, Pamela Marcogliese, and Sarah Solum are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Jacob, Ms. Marcogliese, Ms. Solum, and Darya Cheban-Katz.

In a nutshell

On November 19, 2020, the U.S. Securities Exchange Commission (“SEC”) announced that it adopted final amendments under Regulation S-K and the related rules and forms in an effort to modernize, simplify and enhance certain financial disclosure requirements.

In particular, the SEC eliminated the requirement for Selected Financial Data (Item 301), streamlined the requirement to disclose Supplementary Financial Information (Item 302) and adopted certain amendments to Management’s Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”) (Item 303). These new rules apply to registration statements and periodic reports. In addition, some of the rule changes are a codification of existing SEC guidance or an effort to clarify some of the Instructions to the Rules in Regulation S-K. Many of them opt for a principles-based approach in lieu of a prescriptive approach, allowing companies to decide how best to convey material information to investors. The SEC adopted certain parallel amendments applicable to foreign private issuers (FPIs), including to Forms 20-F and 40-F, in addition to other applicable conforming amendments to the SEC’s rules and forms.


Common Ownership, Competition, and Top Management Incentives

Martin C. Schmalz is Associate Professor of Finance at the University of Oxford’s Saïd Business School. This post is based on a recent paper by Prof. Schmalz; Miguel Antón, Associate Professor of Finance at the IESE Business School; Florian Ederer, Associate Professor of Economics at the Yale University School of Management; and Mireia Giné, Associate Professor of Finance at the IESE Business School. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here); and Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

The common ownership hypothesis suggests that when large investors own shares in more than one firm within the same industry, those firms may have reduced incentives to compete. Firms can soften competition by raising prices, reducing investment, innovating less, or limiting entry into new markets. Empirical contributions document the growing importance of common ownership and provide evidence to support the theory. Prominent antitrust law scholars whose work previously featured on this forum (Elhauge, Scott Morton & HovenkampHemphill & Kahan, claim that common ownership “has stimulated a major rethinking of antitrust enforcement.” Indeed, the Department of Justice, the Federal Trade Commission, the European Commission, and the OECD have all acknowledged concerns about the anticompetitive effects of common ownership and have even relied on the theory and evidence of common ownership in major merger cases.

But because managers rather than investors control firm operations and because managers may not know the extent of their main investors’ shareholdings in other firms, skepticism that common ownership affects product market outcomes may be warranted. In particular, skeptics note the lack of a clear mechanism that recognizes these agency frictions and informational constraints. This has fueled a vigorous debate about whether existing evidence on common ownership has a plausible causal interpretation and, if it does, how to effectively address the resulting regulatory, legal, antitrust, and corporate governance challenges. For example, SEC Commissioner Jackson writes on this forum that it was “far from clear how — even if top managers receive an anticompetitive signal from their pay packages — those incentives affect those making pricing decisions throughout the organization. […] For these reasons, I worry that the evidence we have today may not carry the heavy burden that, as a Commissioner sworn to protect investors, I would require to impose costly limitations.” Similarly, FTC Commissioner Noah Phillips remarked that “areas of research that I, as an antitrust enforcer, would like to see developed before shifting policy on common ownership [are] whether a clear mechanism of harm can be identified.”


How Does the Board Oversee ESG?

Paula Loop is Leader, Paul DeNicola is Principal, and Barbara Berlin is Managing Director at PricewaterhouseCoopers Governance Insights Center. This post is based on their PwC 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Now that you know what the board is overseeing when it comes to management’s development and execution of an ESG strategy, how exactly does the board go about overseeing these efforts? The board will have to consider a number of different topics/issues.

Where responsibility lies: Because ESG strategy should align with business strategy and focus on material risks and business drivers, the full board will want to understand the ESG messaging and how those risks are being mitigated. If this is a new area of focus for the board and the company, directors may need to assign detailed oversight to specific committees to help the ESG strategy launch smoothly. Ultimately, ESG issues will be relevant to all committees. For example, the nominating and governance committee will be interested in the shareholder engagement element, while the compensation committee will be interested in accountability through compensation. The audit committee will be interested in the disclosure, messaging, and metrics.

As the board determines where ESG oversight will be assigned, it may want to consider the following questions:


Global Securities Litigation Trends

David H. Kistenbroker, Joni S. Jacobsen and Angela M. Liu are partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Kistenbroker, Ms. Jacobson, Ms. Liu, Jeffrey Masters, Gregory Noorigian, and Austen Boer.


The landscape of global securities litigation is continuing to evolve rapidly. As explained in “Developments in Global Securities Litigation,” a white paper prepared by Dechert in 2018 and the subsequent July 2019 update, multinational companies must continue to brace for a new era of global securities litigation as they may be forced to defend against securities class actions not only in the United States, but also around the world, as collective action mechanisms continue to evolve.

With its decision in Morrison v. National Australia Bank Ltd., the United States Supreme Court closed the door on plaintiffs bringing “F-cubed” cases in the United States whereby foreign investors sue a foreign issuer based upon a security traded on a foreign exchange. While litigants continue to grapple with the scope of Morrison, the landmark opinion has presented enterprising plaintiffs the opportunity to look for relief beyond the U.S. Indeed, if Morrison created a vacuum for securities class actions, other countries such as the Netherlands, Australia, and Israel are in a position to fill it.

This post provides the latest update to the White Paper and July 2019 Report. Part I briefly updates the recent jurisprudence in the U.S. following the Supreme Court’s landmark ruling in Morrison. Part II then reviews the developments of collective shareholder litigation in various jurisdictions around the world, including the European Union and its member states, the United Kingdom, Australia, Canada, Israel, and Japan. Lastly, Part III provides a summary of the key findings and takeaways of which issuers should be aware in order to navigate the ever-changing global landscape of securities litigation.


2020 U.S. Shareholder Activism

Melissa Sawyer and Marc Treviño are partners, and Lauren Boehmke is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Sawyer, Mr. Treviño, Ms. Boehmke, and Nathan Ludewig. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

A.  Pandemic’s Impact On Activism Strategies And Responses

Shifting Focus of Activism Campaigns

The impact of the COVID-19 pandemic on U.S. businesses has extended to shareholder activism—not only have activism levels decreased so far this year, but the strategies deployed by activists, and the ways issuers respond to these strategies, have also changed. After several years of activists focusing on M&A theses, this year we have observed activists shifting their focus towards board change, operational improvements and management change in higher proportions than previous years.

According to Lazard, 34% of global activism campaigns launched during the first half of this year had M&A objectives, compared to approximately 47% of campaigns last year. Almost one-third of the M&A-focused campaigns were initiated prior to the onset of the pandemic in March. In addition, a number of activist-initiated sale processes were delayed by the pandemic. Interestingly, one of the few big ticket M&A deals that signed in the first half of this year, Chevron’s $5 billion acquisition of Noble Energy, drew Elliott’s attention; in September, Elliott revealed a stake in Noble and unsuccessfully encouraged the company’s stockholders to vote against the transaction.


Reducing PCAOB Authority Over Auditor Independence

J. Robert Brown is a Board Member of the Public Company Accounting Oversight Board. This post is based on his recent public statement.

Today [Nov. 19, 2020], we are considering amendments to our standards and rules on auditor independence. [1]

For over 150 years, the auditing profession has served as a gatekeeper for the financial disclosure process. At its core, the integrity of the audit has always depended upon an exacting standard of independence between audit firms and their clients.

In the wake of Enron and other corporate accounting scandals, investor confidence in that gatekeeper role of auditors evaporated. Auditor independence had eroded, placing the objectivity of audit firms and the reliability of audits in doubt. [2] To address the concerns, Congress created a strong, independent regulator that would “further the public interest in the preparation of informative, accurate, and independent audit reports.” [3]

Recognizing the critical importance of auditor independence, [4] the PCAOB was given explicit authority to develop its own standards governing auditor independence and to make its own determinations as to what they should include. [5] Congress expected the PCAOB to use its authority to set standards, to examine audit firms’ compliance with rules and standards, and to investigate and bring disciplinary action for matters relating to independence and the integrity of the audit.


A Continued Call for Boardroom Diversity

John Galloway is global head of investment stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

Vanguard has long advocated for diversity of experience, personal background, and expertise in the boardroom. Diverse groups make better decisions, and better decisions can lead to better results for shareholders over the long term. [1] In 2017, we were a leader in advocating for gender diversity on boards. In 2019, we made more explicit our view that diversity includes not just gender but also other personal characteristics such as race, ethnicity, national origin, and age. We have also encouraged boards to publish their perspectives on diversity, to disclose board diversity measures, and to cultivate diverse pools of candidates for open director seats.

Boardroom diversity will continue to be a focus of Vanguard’s stewardship activities in 2021 and beyond. While we have seen progress, we recognize that some companies may be in the early stages of developing and implementing a boardroom diversity strategy. There are also regional differences to take into account, and in some cases country-specific regulations that create unique situations for diversity data disclosure. But when we see a lack of commitment to progress on diversity—for example, a board lacking any gender diversity or any racial or ethnic diversity—we become concerned that long-term shareholder returns may suffer.


Diversity in the Workplace

John Galloway is global head of investment stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship.

Vanguard’s views on diversity extend beyond the boardroom to leadership teams and workforces. As firms compete for employees with the right skills and experience, they face greater pressure on how they attract, develop, and retain their workforces.

This post outlines our expectations of boards on a range of workforce diversity, equity, and inclusion matters, including how our views on this topic will affect our engagements and voting.

Our workforce diversity expectations of public companies

Strengthen oversight of diversity-related strategy and risks. We look for companies to publish policies on employee recruitment, retention, and inclusion. We expect them to outline the steps the board is taking to ensure that employees feel they can succeed.

Disclose diversity measures beyond the boardroom. We seek disclosure of workforce diversity measures (gender, race, and ethnicity) at the executive, nonexecutive, and overall workforce levels. Globally, companies should reflect these and other categories appropriate to their local jurisdictions, industries, and company-specific needs.


2020 Key Executive Compensation and Employee Benefits Considerations

Aimee M. Adler and Bruce E. Simonetti are partners and Michael Gerald is senior counsel at Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump memorandum by Ms. Adler, Mr. Simonetti, Mr. Gerald, Robin M. Schachter, and Rolf Zaiss. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation; and Executive Compensation as an Agency Problem, both by Lucian Bebchuk and Jesse Fried.

COVID-19 has, among other things, had an impact on executive compensation and employee benefits, and given rise to a number of new issues and considerations. These compensation issues present challenges for companies seeking to incentivize and retain key employees in the midst of the current economic conditions while balancing competing responsibilities to various stakeholders.

Below is a summary of certain executive compensation and employee benefits issues that companies, boards and compensation committees may want to consider or be aware of during these continued turbulent and uncertain times as they begin to approach year-end compensation decisions and a review of compensation levels and existing and new awards and programs.


Event Driven Securities Litigation

Elisa Mendoza is Vice President and Jeff Lubitz is Executive Director at ISS Securities Class Action Services LLC. This post is based on their ISS memorandum.

Social and environmental disasters, such as the #MeToo movement, the Deepwater Horizon oil spill, the opioid crisis, data privacy breaches with a vast number of companies such as Yahoo! Inc., Equifax, Inc., are well covered events in the news. These events impact peoples’ lives and many perceive a correlation between these events and civil litigation on the part of the injured or affected persons. However, it may not occur to the average person that these and other similar events have driven many securities class actions since 2016 onward. In fact, the trend of event-driven litigation is rising each year, while the more traditional accounting-based allegations are on the decline. No one can foresee a catastrophic event occurring or witness what goes on behind the closed doors of a publicly traded company or know that a data breach is occurring until after the event has occurred and been exposed. That exposure, sometimes a result of negligence or potentially outright fraud, can often lead to a sharp decline in the stock price and as such, impacts the investors in that stock negatively. Hence, the new trend of event-driven securities class action litigation is on the rise and resulting in more and more recoveries for shareholders, despite more tenuous arguments being the basis of the lawsuits.

When referencing securities litigation, it generally brings to mind well publicized accounting scandals, such as WorldCom, Inc. or Enron Corporation which delivered billions in investor recoveries. These cases hinged on schemes to inflate earnings or cooking up fake holdings and hiding debt through the use of special purpose vehicles or special purposes entities. The accounting fraud for both companies was eventually discovered by internal audits or SEC probes and are examples of the more traditional path leading to a securities class action being brought against any company. The nature of securities class actions for many decades has rested on traditional accounting-based allegations related to revenue recognition, improper allowance for losses, delayed asset impairment, or other violations of generally accepted accounting principles.


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