Yearly Archives: 2020

When That Problematic Board Member Just Won’t Leave

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on his article, previously published in Forbes.

Sometimes a corporate director who’s the main source of a company’s reputational problems is the last one to recognize it.

That’s why, in order to protect the company from unwanted controversy and reputational harm, boards benefit from discreet tools to remove problematic officers and directors before their terms are up, and without going through a formal removal process. These self-executing tools are intended to resolve concerns without making a bad situation worse for the company, the board, and the implicated director.

Image problems arise from two circumstances that can pop up during a director’s term; the first class, circumstances of the director’s own doing; and the second class circumstances over which the director may not have had any direct responsibility. Once under public discussion, both types risk reputational harm to the company, interference or disruptions to the work of the board, and doubt (fair or unfair) on the fitness of the implicated director to serve.


IPOs Surge While Market Tightens, But Opportunities Remain

John J. Mahon and Eleazer Klein are partners at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

Special purpose acquisition companies (“SPACs”) grabbed the investment spotlight this year and remain among the most active investment classes in the market. While the SPAC model has evolved over the better part of the past two decades, SPACs have recently enjoyed an unprecedented surge in popularity as a result of a number of high-profile SPAC launches and subsequent business combinations. In this year alone, as of Oct. 9, 2020, there have been 138 SPAC initial public offerings (“IPOs”) yielding $53.6 billion in gross proceeds—a record haul for new SPAC launches. [1] To put these numbers in proper perspective, from 2004 to 2018, approximately $49.1 billion was raised across 332 SPAC IPOs in the United States. [2]


Both the aggregate IPO proceeds raised, as well as the average SPAC IPO size, have jumped considerably in 2020. Not surprisingly, that type of success breeds imitation, and interest in prospective new SPAC IPOs remains relatively high. However, based on feedback we have received, demand for new SPAC IPOs appears to have tightened in recent weeks, potentially as a result of the large amount of IPO proceeds already raised in 2020. Accordingly, prospective sponsors may face increasing pressure to differentiate their proposed SPACs from other recent or proposed offerings. In contrast, we expect that potential SPAC investors may see increasingly attractive investment opportunities as the SPAC IPO market further tightens and sponsors become more flexible on terms. To that end, we have already seen movement towards incentivizing larger IPO investors through various economic incentives, including through access to sponsor-level economics.


The CPA-Wharton Zicklin Model Code of Conduct

Bruce F. Freed is president of the Center for Political Accountability; Karl J. Sandstrom is senior counsel at Perkins Coie and formerly served on the Federal Election Commission; and William S. Laufer is the Julian Aresty Endowed Professor and Director of the Carol and Lawrence Zicklin Center for Business Ethics Research at The Wharton School at the University of Pennsylvania. This post is based on their recent memorandum. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); 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); and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).

How can U.S. public companies protect against the risks inherent in spending to influence elections when politics is hyperpartisan, citizens are polarized and a controversy can ignite a wildfire virally and potentially affect a company’s bottom line?

The Center for Political Accountability and The Wharton School’s Zicklin Center for Business Ethics Research have produced a new Model Code of Conduct for Corporate Political Spending to address these issues. Expanded and updated from a Model Code written by CPA in 2007, it provides a framework to guide not only companies’ political spending, but also their assessment of its impact and related ethical and societal considerations.

As the new Code’s preamble states: “Whether a company is directly contributing to or spending in elections or indirectly participating through payments to political or advocacy organizations, a code commits senior management and directors to responsible participation in our nation’s politics.


New Rule Governing Use of Derivatives by Registered Investment Companies and BDCs

John Mahon and Craig Stein are partners at Schulte Roth & Zabel LLP. This post is based on an SRZ memorandum by Mr. Mahon, Mr. Stein, Atul Joshi, and Karen Spiegel.

On Oct. 28, 2020, the SEC voted to adopt new Rule 18f-4 under the Investment Company Act of 1940, as amended (“1940 Act”), to provide a modernized and comprehensive regulatory framework for the use of derivatives by regulated funds, including mutual funds (other than money market funds), exchange-traded funds (“ETFs”), registered closed-end funds and business development companies (“BDCs”) (collectively, “funds”). [1] Subject to various conditions, Rule 18f-4 will allow funds to enter into derivatives transactions, notwithstanding the restrictions on the issuance of “senior securities” and the use of leverage imposed by Sections 18 and 61 of the 1940 Act. [2]

In connection with the adoption of Rule 18f-4, the SEC also amended Rule 6c-11 under the 1940 Act relating to leveraged/inverse ETFs and adopted new reporting requirements and amendments to certain disclosure forms. The new rule and related amendments will become effective 60 days after publication in the Federal Register, with a compliance date of 18 months after the effective date. Hedge funds and other private investment funds are not subject to the new rule or the related amendments.


2020 Use of ESG Measures in Incentive Plans Report

Thomas Kohn is a Consultant and Erin Bass-Goldberg is Managing Director at FW Cook. This post is based on their FW Cook report. 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); Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here); Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).


Driven by multiple stakeholders embracing the premise that a strong ESG proposition is an essential element to sustainable long-term company performance, attention on company ESG behavior and transparency is rapidly increasing. Following are recent developments contributing to enhanced focus on ESG:

Institutional Investors: Large institutional investors are encouraging companies to increase transparency in their disclosure of various ESG measures. Examples include State Street’s August 2020 letter to companies advocating that they articulate “risks, goals, and strategy as related to racial and ethnic diversity” [1] and BlackRock’s January 2020 letter to companies stating that it “will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” [2]

Employee and Shareholder Activists: A number of high-profile employee and shareholder activist criticisms on ESG issues have garnered significant media attention in recent years, including the heir to Disney criticizing the company for its pay practices, [3] Google employees’ protest over the company’s handling of sexual harassment allegations, [4] and the employee-backed shareholder proposal at Amazon for the company to release a comprehensive plan on addressing climate change. [5]


Environmental Spinoffs: The Attempt to Dump Liability Through Spin and Bankruptcy

David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business; and Andrew C. Baker is a student at Stanford University School of Law. This post is based on their recent paper.

We recently published a paper, Environmental Spinoffs: The Attempt to Dump Liability Through Spin and Bankruptcy, that examines the practice of companies spinning off their environmental liabilities into separate companies that prove to be inadequately capitalized to meet their obligations.

A core tenant of economics is that the creation of shareholder and stakeholder value requires a complete and accurate accounting of the costs and benefits of business decisions. If costs are ignored or excluded, corporate decisions are distorted, leading to investment that might not otherwise be approved or would be priced differently. The omitted costs, however, do not disappear. They shift to parties not represented in the transaction—and are typically borne by society and redressed through taxation, lawsuits, or regulation. This problem is known as the externality problem.

Examples of externalities are plentiful. In the financial crisis, the risk of inadequately structured mortgage loans and securitizations ultimately fell on U.S. taxpayers. The aggressive marketing and prescription of opioid painkillers has led to the addiction and death of thousands of Americans. Oil and gas extraction through hydraulic fracturing (“fracking”) has in some cases led to water and land contamination. And for many decades—leading up to and including today—industrial production has created byproducts that compromise land, water, or air quality, and require costly remediation. In all of these cases, society is the residual claimant, bearing the cost of outcomes that might never have occurred if they were properly included in the original business decision.


Weekly Roundup: November 20–26, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 20–26, 2020.

Acquisition Experience and Director Remuneration

Investing in a SPAC

Joint Statement by Commissioners Lee and Crenshaw on Amendments to Regulation S-K

Russell 3000 Database of Executive Compensation Changes in Response to COVID-19

Risks of Back-Channel Communications with a Controller

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

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

Why Have CEO Pay Levels Become Less Diverse?

SEC Adopts Rules to Modernize and Streamline Exempt Offerings

EQT: Private Equity with a Purpose

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).


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