Yearly Archives: 2021

SEC Acknowledges that Disgorgement Principles Apply to Administrative Proceedings

Posted by Robert Cohen, Tatiana Martins, and Fiona Moran, Davis Polk & Wardwell LLP, on
Wednesday, March 3, 2021
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Robert Cohen, Tatiana Martins, and Fiona Moran are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

In a recently issued administrative order, the SEC implicitly acknowledged that the limiting principles for disgorgement that the Supreme Court outlined in Liu v. Securities and Exchange Commission apply to administrative proceedings. This opens the door for counsel and settling parties to use the limiting principles when negotiating an administrative order at the end of an investigation.

The Backdrop of Liu

As discussed in a previous client memorandum, the Supreme Court in Liu v. Securities and Exchange Commission upheld the SEC’s authority to seek disgorgement in district court actions, provided that the award is (1) “for the benefit of investors,” that is, distributed to investors; [1] (2) based on the amount accrued to the wrongdoer without recourse to joint-and-several liability; and (3) limited to “net” profits after deducting legitimate business expenses. The Supreme Court’s decision was rooted in “equity jurisprudence” and the text of Section 21 of the Securities Exchange Act, 15 U.S.C. § 78u(d)(5), which authorizes the SEC to seek in federal court “any equitable relief that may be appropriate or necessary for the benefit of investors.” According to the Court, disgorgement is an “equitable” award when the above conditions are satisfied.

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Climate Risk and the Transition to a Low-Carbon Economy

Posted by Jessica McDougall and Danielle Sugarman, BlackRock, Inc., on
Tuesday, March 2, 2021
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Jessica McDougall and Danielle Sugarman are Directors at BlackRock Investment Stewardship, BlackRock, Inc. This post is based on their BlackRock memorandum.

BlackRock believes that sustainability risk, particularly climate risk, is investment risk. Accordingly, sustainability is a key component of our investment approach.

As we set out in our Global Principles, we expect companies to articulate how they are aligned to a scenario in which global warming is limited to well below 2° C, consistent with a global aspiration to reach net zero greenhouse gas (GHG) emissions by 2050.

The following provides more detail on our approach to engagement on climate risks and opportunities and the transition to a low-carbon economy.

Climate Risk and the Energy Transition as an Investment Issue

Climate risk presents significant investment risk—it carries financial impacts that will reverberate across all industries and global markets, affecting long-term shareholder returns, as well as economic stability. As BlackRock’s Chairman and CEO, Larry Fink, wrote in his 2021 letter to CEOs, “there is no company whose business model won’t be profoundly affected by the transition to a net zero economy…” and we have already “begun to see the direct financial impact [of climate change] as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system.”

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Biden’s “Money Cop” to Shine a Light on ESG Disclosure

Posted by Stacey H. Mitchell, Cynthia M. Mabry, and Kenneth J. Markowitz, Akin Gump Strauss Hauer & Feld LLP, on
Tuesday, March 2, 2021
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Stacey H. Mitchell and Cynthia M. Mabry are partners and Kenneth J. Markowitz is a consultant at Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump memorandum by Ms. Mitchell, Ms. Mabry, Mr. Markowitz, Meaghan Jennison, and Bryan Williamson. 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).

Key Points:

  • Mandatory ESG requirements could be an early priority for SEC chair nominee Gary Gensler, with increasing calls from within the SEC to require material ESG risk disclosures.
  • The EU recently implemented mandatory ESG disclosure requirements, and the U.K. imposed mandatory climate-related financial disclosures; the U.S. may soon follow suit.
  • The international business community has taken significant steps toward the promulgation of standardized ESG disclosure metrics, with the World Economic Forum’s universal ESG reporting metric framework the latest development.

As public companies prepare their annual reports to reflect an unprecedented 2020, many are doing so mindful that investors and stakeholders continue to demand robust environmental, social and governance (“ESG”) disclosures. However, despite years of discussion and the wide availability of reporting frameworks, the disclosure of material ESG issues remains a somewhat nebulous task, leaving companies and investors alike grasping for ways to evaluate and compare ESG practices and risks. That is likely to change, though, as regulatory developments around the world and President Biden’s nomination of so-called “Money Cop” Gary Gensler to lead the country’s top securities regulator suggest that the disjointed potpourri of ESG reporting practices appears to be approaching its denouement.

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SEC Division of Corporation Finance Directed to Focus on Climate-Related Disclosures

Posted by David M. Silk, Sabastian V. Niles, and Carmen X.W. Lu, Wachtell, Lipton, Rosen & Katz, on
Tuesday, March 2, 2021
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David M. Silk and Sabastian V. Niles are partners and Carmen X.W. Lu is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Silk, Mr. Niles, Ms. Lu, and Ram Sachs.

The Acting Chair of the U.S. Securities and Exchange Commission (SEC), Allison Herren Lee, has issued a statement directing the Division of Corporation Finance to enhance its focus on public company disclosures concerning climate change, including by updating the SEC’s formal 2010 guidance regarding such disclosure to “take into account developments in the last decade.”

As part of this enhanced focus, the SEC staff will: (1) review the extent to which public companies have addressed the topics identified in the 2010 guidance (e.g., impact of legislation and regulation, impact of international accords, indirect consequences of regulation or business trends, physical impacts of climate change such as severe weather, etc.); (2) assess compliance with disclosure obligations under the federal securities laws; (3) engage with public companies on climate-related disclosure issues; and (4) absorb critical lessons on how the market is currently managing climate-related risks. The Acting Chair’s statement concludes with:

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An Introduction to Activist Stewardship

Posted by Robert Eccles (Oxford University), Aeisha Mastagni (CalSTRS), and Kirsty Jenkinson (CalSTRS), on
Monday, March 1, 2021
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Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; Aeisha Mastagni is Portfolio Manager within the Sustainable Investment & Stewardship Strategies Unit at the California State Retirement System (CalSTRS); and Kirsty Jenkinson is Head of Sustainable Investment & Stewardship Strategies at CalSTRS. 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and 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).

The time has come for “activist stewardship.” Simply put, this means putting the skills and techniques of activist hedge funds to work where a company’s financial performance is deteriorating and traditional engagement tools have failed to produce meaningful results to protect value and mitigate long-term risks, including recognizing the importance of environmental, social, and governance (ESG) risks. Historically, ESG issues have been the province of the engagement and stewardship group in the asset manager due to their importance in creating value over the long-term. These groups have sought to change corporate behavior through private, constructive conversations. Large asset managers, including asset owners who manage their own assets, have been rapidly increasing their commitment to engagement and, more broadly, to stewardship activities including proxy voting and advocacy work with regulators and policy makers.

Despite this growing commitment to engagement, there are some companies who remain absolutely implacable after years or even decades of efforts by their shareholders. We call them “Corporate Castles.” They are uninterested in engaging with their shareholders, let alone stakeholders. They have drawn a moat around their corporate walls and are exercising every means at their disposal to persist in their practices, even as their financial performance declines and the negative externalities they are creating in the world persist. For such companies, the traditional tools of engagement, typically used in selective and discrete fashion, are simply not effective.

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Shareholder Activists Gear Up for a Busy 2021 – With New Tools and Tactics

Posted by Bruce H. Goldfarb and Alexandra Higgins, Okapi Partners, on
Monday, March 1, 2021
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Bruce H. Goldfarb is the President and Chief Executive Officer and Alexandra Higgins is a Managing Director at Okapi Partners.

As we near the end of the first quarter of 2021, the number of activist campaigns appears to be on track to outpace last year. In a recent poll of readers, activism research provider Insightia found that 59% of readers surveyed expected an increase in the number of companies targeted by shareholder activists this year compared to 2020.

Corporate management teams also face a very different operating environment from the one that prevailed throughout most of 2020. Last proxy season, the combination of economic disruption and the view from some market participants that the timing wasn’t right to wage a proxy campaign, slowed activism. But just as quickly as the markets recovered, activist investors started training their sights at possible targets again.

A key difference this year is that many of the changes in our economy and society that emerged in 2020—including a heightened focus on social justice, racial equality, climate change and other ESG issues—will increasingly find their way into the tactics used by activist shareholders.

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Intelligently Evolving Your Corporate Compliance Program

Posted by Michael S. Stanek, Sarah E. Walters, and Martha K. Louks, McDermott, Will & Emery LLP, on
Monday, March 1, 2021
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Michael S. Stanek and Sarah E. Walters are partners, and Martha K. Louks is director of technology services at McDermott, Will & Emery LLP. This post is based on a McDermott Will & Emery memorandum by Mr. Stanek, Ms. Walters, Ms. Louks, Michelle Lowery, and Katharine O’Connor.

All companies—big and small—are collecting a tsunami of data. The US Department of Justice (DOJ) has now challenged corporate America to harness and analyze that data to improve corporate compliance programs by going beyond the risk profile of what has happened to better understanding the risk profile of what is happening. But where to begin? Artificial intelligence, which is already used to assist in the review and production of documents and other materials in response to government subpoenas and in corporate litigation, is invaluable in proactively reviewing data to identify and address compliance risks.

Takeaways

  • DOJ expects compliance programs to be well resourced and to continually evolve.
  • DOJ wants companies to assess whether their compliance program is presently working or whether it is time to pivot.
  • DOJ uses data in its own investigations and it expects the private sector to rise to the occasion and analyze its own data to identify and address compliance risks.
  • The data is there—mountains of it—and the key is to find an efficient way to analyze that data to improve the compliance program.
  • Artificial intelligence is an important tool for solving the challenge of big data and identifying and remediating compliance risks effectively, quickly and regularly, in conjunction with further periodic review.

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Recent Proxies Highlight COVID-Related Incentive Actions for September FYE Companies

Posted by Melissa Burek, Eric Hosken, and Bonnie Schindler, Compensation Advisory Partners, on
Sunday, February 28, 2021
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Melissa Burek is founding partner, Eric Hosken is a partner, and Bonnie Schindler is a principal at Compensation Advisory Partners. This post is based on a CAP memorandum by Ms. Burek, Mr. Hosken, Ms. Schindler, and Whitney Cook. 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).

Compensation Advisory Partners’ analysis of approximately 100 S&P Composite 1500 companies found that annual incentive plan modifications are the most frequent recent executive pay action taken in response to COVID-19. The analysis is part of CAP’s ongoing efforts to track executive compensation and human capital actions related to COVID-19. Forty-two percent of the companies—which have fiscal year ends near September 30 and recently filed their proxies—made COVID-19-related changes to their incentive plans. Of the companies that made incentive changes, 60 percent made annual incentive changes, 14 percent made long-term incentive changes, and 26 percent changed both incentive plans. The most prevalent annual incentive actions were 1) adding or exercising discretion, 2) adding or changing the performance measures, and 3) adjusting the performance period.

Annual incentive changes are the most prevalent actions taken recently by public companies impacted by COVID-19, according to a Compensation Advisory Partners analysis of proxy filings of 101 S&P Composite 1500 companies with fiscal year ends (FYEs) near September 30. The CAP analysis—which is part of our ongoing efforts to track executive compensation and human capital actions related to COVID-19—shows that 42 percent—or 42 companies—made COVID-19-related changes to their executive incentive plans. Of the 42 companies, 60 percent made annual incentive changes, 14 percent made long-term incentive changes, and 26 percent changed both types of plans.

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How Boards Can Prepare for Activism’s Next Wave

Posted by Chris Ruggeri, Joel Schlachtenhaufen, and Annie Adams, Deloitte LLP, on
Saturday, February 27, 2021
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Chris Ruggeri is a Principal, Deloitte Transaction and Business Analytics, Deloitte & Touche LLP; Joel Schlachtenhaufen is a Principal, M&A Services Deloitte Consulting LLP; and Annie Adams is Senior Manager, M&A Services Deloitte Consulting LLP. This post is based on a Deloitte memorandum by Mr. Ruggeri, Mr. Schlachtenhaufen, Ms. Adams, Maureen Bujno, and Bob Lamm. 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).

Introduction

As we begin to see the light at the end of the tunnel of a pandemic that upended all of our lives and disrupted almost every business, activist investors are getting in gear, and the pieces are expected to be in place for continued growth in merger and acquisition activity through 2021. Political unrest, accelerating social change, and renewed emphasis on corporate purpose beyond shareholder primacy will continue to shape the future and inject uncertainty. Our world is literally changing before our eyes, and we have to ask ourselves, how will this affect shareholder activism in 2021 and beyond, and what will the impact be on M&A activity? And how have the events of 2020 changed what board directors need to do to be prepared for M&A generally and to deal with activists that might emerge?

The 2020 slowdown set the stage

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The Capital Markets Tug-of-War Between US and China

Posted by Alissa Kole, GOVERN, on
Saturday, February 27, 2021
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Alissa Kole is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Kole. Related research from the Program on Corporate Governance includes Alibaba: A Case Study of Synthetic Control, (discussed on the Forum here); and China and the Rise of Law-Proof Insiders (discussed on the Forum here), both by Jesse M. Fried and Ehud Kamar.

For the first time in modern history, Sino-American tensions are spilling in the capital market space, with the final announcement of de-listing of three Chinese telecoms from the New York Stock exchange earlier this month. This delisting, as well as the regulatory measures that underpin it, culminate a long debate on the future of foreign, notably Chinese issuers, on American exchanges. Much is at stake: over 700 Chinese companies are traded on US stock and bond markets, the vast majority in the less regulated over-the-counter market.

Whether Chinese issuers should be listed on American exchanges and how dozens of them were able to do so in direct and American Depository Receipts (ADRs) listings was explored at length in “China Hustle”, a 2017 documentary that highlighted the laissez-faire attitude of successive American administrations and the Securities and Exchange Commission (SEC) to Chinese issuers, which it has so far rarely investigated, much less enforced.

In fact, Chinese issuers are not the only ones that have received unwanted interest after they tapped into foreign capital markets where institutional investors deploy billions of dollars of savings. When Saudi Aramco, the Saudi national oil company, contemplated its listing two years ago, a number of institutional investors protested when the London Stock Exchange announced that it would relax its listing standards, to attract the mega IPO.

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