Yearly Archives: 2021

CEO’s Letter on SSGA 2021 Proxy Voting Agenda

Posted by Cyrus Taraporevala, State Street Global Advisors, on
Wednesday, January 13, 2021
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Cyrus Taraporevala is President and CEO of State Street Global Advisors. This post is based on his 2021 letter to board members.

I hope this letter finds you and your colleagues safe and healthy. Each year, State Street Global Advisors engages with investee companies such as yours about issues of importance to investors that we will be focusing on in the coming months. We do so for a simple reason: as one of the world’s largest investment managers, we have a fiduciary responsibility to our clients to maximize the probability of attractive long-term returns.

Of course, 2020 was no ordinary year. From a global health crisis that has taken the lives of nearly 2 million people, to a global conversation about racial justice, to continued long-term risks around the threat of climate change, the past year has cast a stark light on systemic vulnerabilities and reinforced the connections we see across sustainability, inclusion, and corporate resiliency.

As such, our main stewardship priorities for 2021 will be the systemic risks associated with climate change and a lack of racial and ethnic diversity. In particular, I want to explain how we intend to use our voice—and our vote—to hold boards and management accountable for progress on providing enhanced transparency and reporting on these two critical topics.

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Reconsidering the Evolutionary Erosion Account of Corporate Fiduciary Law

Posted by William W. Bratton (University of Pennsylvania), on
Wednesday, January 13, 2021
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William W. Bratton is Nicholas F. Gallicchio Professor of Law Emeritus at the University of Pennsylvania Carey Law School. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

My paper, Reconsidering the Evolutionary Erosion Account of Corporate Fiduciary Law, takes a new look at what has been the dominant account of corporate law’s duty of loyalty, an account that originated with Professor Harold Marsh, Jr.’s foundational paper, Are Directors Trustees? Conflicts of Interest and Corporate Morality, published in 1966. Marsh asserted that twentieth century courts steadily relaxed standards of fiduciary scrutiny applied to self-dealing by corporate managers. The law had degenerated in stages from a late nineteenth century rule of categorical prohibition to a regime of fairness review, much to the detriment of the shareholder interest. Marsh’s showing of historical lassitude complemented the then-prevailing account of a corporate governance system impaired by separated ownership and control and a legal system enervated by charter competition.

Marsh’s presentation of the late nineteenth and early twentieth century cases has been forcefully challenged in a recent book by David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law (Cambridge 2018). Building on previous work and making comparative reference to the law of the United Kingdom, Kershaw shows that, even as relaxation did indeed occur, Marsh much overstates its salience. Kershaw rejects the notion of an inappropriate accommodation of an unaccountable management class, instead explaining the relaxation as sensible adjustment in the ordinary course of the caselaw’s evolution—the result of judicial modification of principles from trust and agency law in their reapplication to corporate fact patterns. Kershaw does not erase erosion from corporate fiduciary law’s historical outline. But his account does negate the notion that categorical prohibition of self-dealing is the law’s natural base point.

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Allegations of Human Rights Violations and Other Litigation Trends

Posted by Linda Martin, Timothy Harkness, and David Livshiz, Freshfields Bruckhaus Deringer LLP, on
Wednesday, January 13, 2021
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Linda Martin and Timothy Harkness are partners and David Livshiz is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

One litigation trend that directors and senior management should monitor closely in 2021 is the increasing instance of claims brought by human rights activists seeking to hold companies, as well as corporate directors and senior management, accountable for human rights abuses committed by the corporation or within its supply chain. In early December, the United States Supreme Court heard arguments in Nestle USA Inc. v. John Doe 1 et al.

In that case, plaintiffs—allegedly survivors of child slavery—sued US corporations for violations of international law under the Alien Tort Statute (ATS) alleging that defendants turned a blind eye to red flags of child slavery occurring on farms from which defendants sourced supplies. In 2018, the Supreme Court held that the ATS does not provide a basis for exercising jurisdiction over foreign (i.e. non-US) corporations under the ATS, but suggested that claims against directors, officers, and employees may survive. We anticipate that the Supreme Court will reach a similar decision in Nestle with respect to US corporations. But, with companies outside the scope of the ATS, we anticipate activist plaintiffs will increasingly target corporate directors and officers for any perceived misconduct on the part of the corporation, arguing that directors and officers turned a blind eye to human rights abuses within the company’s supply chain and/or failed to investigate red flags brought to the company’s attention. Given the potential reputational and economic risks posed by such claims, we recommend that senior management take steps to mitigate the risk of their being brought. We note that in at least one case, the existence of such corporate compliance programs proved useful in obtaining dismissal of human rights claims brought by activist plaintiffs.

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BlackRock’s 2021 Proxy Voting Guidelines Prioritize ESG Actions

Posted by Allie Rutherford and Rob Zivnuska, PJT Camberview, on
Tuesday, January 12, 2021
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Allie Rutherford and Rob Zivnuska are partners at PJT Camberview. This post is based on a PJT Camberview memorandum by Ms. Rutherford, Mr. Zivnuska, James Hamilton, and Eric Sumberg. 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).

Key Takeaways

  • BlackRock released proxy voting guidelines and stewardship expectations for 2021 that reflect its continued commitment to integrate ESG throughout its investment and stewardship functions and provide greater transparency around its efforts
  • Key guideline changes focus on climate risk, human capital management, diversity and stakeholder interests and provide a more clear path for BlackRock to vote against management when its expectations are not met
  • BlackRock announced plans to engage with over 1,000 companies globally on climate risk and is prioritizing engagement with approximately 150 companies on material social risks associated with addressing the needs of key stakeholders
  • BlackRock is among a number of investors who are taking a more assertive approach to ESG, including a new coalition of asset managers representing $9 trillion of AUM committing to investments aligned with net-zero carbon emissions by 2050; these actions signal the increased marketwide focus and momentum on ESG and the importance for companies to consider investor perspectives as they enhance practices and disclosures

Last week, BlackRock released its 2021 proxy voting guidelines for the U.S. and other major markets along with updated global principles and a new summary document outlining its stewardship expectations for the coming year. BlackRock began the year by providing a comprehensive roadmap for how it planned to realign its investment approach, engagement priorities and voting transparency with its policy positions on sustainability risk. These updated materials demonstrate how BlackRock intends to pair higher expectations for corporate responsiveness across a number of topics, including diversity, equity and inclusion and environmental risk, with a greater willingness to vote against management where these expectations are not met.

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COVID-19’s Impact on Buyer’s Obligation to Close

Posted by Mark Limardo, Michael Neidell, and Zachary Freedman, Olshan Frome Wolosky LLP, on
Tuesday, January 12, 2021
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Mark Limardo and Michael Neidell are partners and Zachary Freedman is a law clerk at Olshan Frome Wolosky LLP. This post is based on their Olshan 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

Seller’s COVID-related actions breached an “ordinary course” covenant, even though the COVID-19 pandemic did not give rise to a “material adverse effect.”

On November 30, 2020, in AB Stable VIII LLC v. Maps Hotels and Resorts One LLC et al., the Delaware Court of Chancery held that a seller’s response to the COVID-19 pandemic breached the seller’s obligation to conduct the target company’s operations between signing and closing “only in the ordinary course of business consistent with past practice in all material respects.” As a result, the buyer was not obligated to close on the sale and was entitled to the return of its deposit and costs.

In reaching this conclusion, the Court also examined the impact of the COVID-19 pandemic under several other contract provisions. Although the buyer ultimately prevailed, the Court rejected the buyer’s argument that the COVID-19 pandemic resulted in a “material adverse effect” (or MAE), because the COVID-19 pandemic fell within an MAE exclusion for “natural disasters or calamities.” In addition, the Court noted that the seller did not help its case by implementing COVID-related operational changes before any legal requirement to do so and by refusing to seek the buyer’s formal consent to such changes.

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REITs in 2021

Posted by Adam O. Emmerich and Robin Panovka, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 12, 2021
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Adam O. Emmerich and Robin Panovka are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Emmerich, Mr. Panovka, Scott K. Charles, Jodi J. Schwartz, Sabastian V. Niles, and Karessa L. Cain.

For REITs—as for so much else—2020 was a tale of two cities, of boom and bust, from strength in a few sectors, to silent streets, offices, shops, theaters and airports, and huge market dislocations, from which the world continues to slowly emerge. Many REITs are well positioned for strong recovery and growth as the pandemic slowly recedes. At the same time, REITs have learned important lessons from the seismic shifts experienced in 2020, some of which may require rethinking strategic plans and business models. In this unusually complex context, some of the key issues REIT boards will be grappling with as 2021 begins include:

  1. Post-Pandemic Opportunities. As the pandemic fades, one of the tougher questions, particularly for the stronger REITs, will be how and when to go on offense, whether that means dusting off pre-Covid deals or deal-plans (in many cases with adjustments to price or exchange ratio, asset mix, personnel or other factors), new M&A ideas, levering up, share-buybacks, going private, shedding non-core assets or other strategic transactions. The uncertainties around the timing of vaccinations and the resurgence of infections, and in some cases new investor or lender constraints, are sure to complicate things.
  2. Role in a Digital Society. Every traditional business enterprise, including REITs, has to ask itself how it will fit in in the rapidly digitizing economy. Whether it’s e-commerce, remote working, telemedicine, telelearning, drones, self-driving cars, the app-ification of everything, or any of the other trends accelerated by Covid, real estate will never be the same. The debate will continue as to which of the changes precipitated or accelerated by Covid will stick, which will recede, and which have been turbo-charged, and only time will tell. That said, while it’s tempting to assume that things will go back to the “pre-Covid normal”, in most cases that’s unlikely, and even incremental changes can have significant impact on revenues and business models.

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Report on Practices for Virtual Shareholder Meetings

Posted by Douglas K. Chia and Ann S. Lee (Rutgers Center for Corporate Law and Governance, The Society for Corporate Governance, and the Council of Institutional Investors), on
Monday, January 11, 2021
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Douglas K. Chia is a fellow at Rutgers Center for Corporate Law and Governance, and Ann S. Lee is a JD candidate at Rutgers Law School. This post is an excerpt from the report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meeting, co-chaired by Amy Borrus, Executive Director of the Council of Institutional Investors, and Darla Stuckey,  CEO of the Society for Corporate Governance.

The scope of this post comprises the conduct during the VSM and the related disclosures made before and after the meeting. It is designed to outline expectations, as well as evolving practices, for VSMs once a company has decided to hold its annual meeting using a VSM platform. It also highlights certain areas of the VSM experience. In this sense, the post should be used as a guide for—but not an endorsement of—VSMs.

There are many factors that each of the over 4,000 publicly listed companies in the U.S. should consider when deciding on the best format for its annual meeting, including available resources, nature of the items of business to be voted on, composition of the shareholder base, historical attendance, level of comfort with new technology, and shareholder appetite. Each company should look at its particular facts and circumstances, evaluate all of its options, and hold its annual meeting in a way that bests serve the needs of the company and its shareholders.

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Predicting Litigation Risk via Machine Learning

Posted by James P. Naughton (University of Virginia), on
Monday, January 11, 2021
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James Naughton is Associate Professor of Accounting at the University of Virginia Darden School of Business. This post is based on a recent paper by Mr. Naughton; Gene Moo Lee, Assistant Professor of Accounting and Information Systems at the University of British Columbia Sauder School of Business; Xin Zheng, Assistant Professor of Accounting and Information Systems at the University of British Columbia Sauder School of Business; and Dexin Zhou, Assistant Professor of Economics and Finance at CUNY Baruch College Zicklin School of Business.

Traditionally, empirical models in accounting and finance have focused on parameter estimation—in other words, what is the relation between the dependent and independent variable (i.e., does X cause Y)? However, a number of these studies generate inferences using variables that are estimates of unobservable firm attributes derived from traditional regression models. For example, estimates of securities litigation risk, a rare but important economic event, are typically generated from logistic regression models. Because of how these estimates are used in the literature, their accuracy has important implications for the conclusions drawn in a number of studies. In the case of securities litigation risk, researchers generally use estimates in two ways. First, researchers include litigation risk as a control variable in a regression specification where litigation is a correlated omitted variable. In these models, an inaccurate estimate of litigation risk can bias the coefficients of interest, thus affecting subsequent inferences. The second way in which these estimates are used is to create treated and control observations in a natural experiment. Typically, researchers will identify a regulatory event that affects litigation risk, and examine its impact using a difference-in-difference methodology where the treated firms have high values for litigation risk and the control firms have low values for litigation risk. In these studies, an inaccurate estimate of litigation risk can result in firms being misclassified, and therefore affect subsequent inferences.

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Major Changes to MD&A and Related Requirements

Posted by Nicolas Grabar, Jeffrey D. Karpf, and David Lopez, Cleary, Gottlieb, Steen & Hamilton LLP, on
Monday, January 11, 2021
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Nicolas Grabar, Jeffrey D. Karpf, and David Lopez are partners at Cleary, Gottlieb, Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Grabar, Mr. Karpf, Mr. Lopez, and Patrick Courtien.

On November 19, 2020, the Securities and Exchange Commission adopted amendments to Regulation S-K, including changes to its MD&A requirements that will make significant and long-overdue improvements to a central disclosure requirement of the U.S. securities laws.

The twin themes of the amendments are dropping outmoded requirements and taking a more principles-based approach. This post provides a brief summary of the changes.

The amendments will become effective 30 days after they are published in the Federal Register, so probably in January 2021. At that time advance voluntary compliance is permitted, so long as registrants provide disclosure responsive to an amended item in its entirety. Compliance is not mandatory until a registrant reports on its first fiscal year ending on or after 210 days following publication—so for a calendar-year end filer, the Form 10-K for 2021—but we would expect that many issuers will find the new rules congenial and begin complying sooner.

The full text of the SEC release adopting the amendments is available here.

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Where Things Stand at the End of 2020

Posted by Gail Weinstein, Steven Epstein, and Warren S. de Wied, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Sunday, January 10, 2021
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Gail Weinstein is senior counsel and Steven Epstein and Warren S. de Wied are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. de Wied, Philip Richter, Steven J. Steinman, and Robert C. Schwenkel, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

As this most unusual and difficult year comes to an end, still with us are the global pandemic, government lockdowns, economic decline, and geopolitical instability that it ushered in. In this Quarterly, we note major developments in 2020 in the M&A/PE corner of the world.

The COVID-19 Pandemic

While devastating personally and politically, the COVID-19 pandemic is proving to be, from the M&A/PE perspective, much like other major crises—the uncertainty it created had a major impact, but that was followed by resilience, adaptation, and, in many industries, what now appears to be movement toward normalcy.

Deal activity. The negative impact on deal activity was extreme initially, but we have seen a reemergence of transactions. Most deals signed in the days just before the pandemic hit did close, albeit on occasion with a renegotiation of price. Most deals that were being negotiated at that time were put on pause or terminated as businesses prioritized the pressing matters related to the pandemic. Starting in the third quarter of the year, however, and continuing during the fourth, there has been a meaningful uptick in deal activity.

Worldwide M&A activity (by deal value) was down 31% in the first quarter of this year compared to the previous three months–the largest quarterly fall since 2013. Activity during the first nine months of the year reflected an 18% decrease from the year before–the slowest first nine months of the year since 2013. U.S. M&A activity decreased 38% compared to last year, but rebounded by 400% between the second and third quarters of this year. Worldwide private equity activity (by deal value) in the third quarter showed a decline of only 0.5% from the same period last year, after rebounding 69% between the second and third quarters this year (with technology and industrial firm targets accounting for 41% of this year’s PE deals). U.S. PE deal activity declined by 20.6% through the third quarter compared to last year, but has started to rebound.

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