Monthly Archives: February 2021

Supreme Court Relies on “Bridgegate” Case to Vacate Second Circuit Decision

Greg Andres, Angela Burgess, and Paul Nathanson are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Andres, Ms. Burgess, Mr. Nathanson, Neil MacBride, Martine Beamon and Kenneth Wainstein.

On January 11, 2021, the Supreme Court vacated the Second Circuit’s controversial decision in United States v. Blaszczak, which held that proof of a benefit to the tipper is not a required element for criminal insider trading claims brought under Title 18 of the U.S. Code. Although the Supreme Court ordered reconsideration on other grounds— whether certain government information may be considered “property” for the purpose of a scheme to defraud—the impact on the insider trading decision may be the more significant consequence. 

The Second Circuit’s Decision in United States v. Blaszczak

As we discussed in a past client memorandum, in 2019 the Second Circuit in United States v. Blaszczak expanded insider trading liability by affirming the convictions of four individuals of wire fraud, securities fraud, and conversion charges under Title 18. The government charged the defendants—a government employee, a consultant, and two hedge fund analysts—with violating both Title 15 and Title 18 of the U.S. Code. The jury acquitted the defendants under Title 15, which is the traditional basis to charge insider trading, but convicted on certain Title 18 counts. [1] On appeal, one of the defendants’ arguments was that the District Court wrongly instructed the jury that an element that applied under Title 15 did not apply under Title 18: that the tipper disclosed information for a “personal benefit” that was known to the recipients of the tip.


A Conversation with Bill Ackman

Stephen Fraidin is a partner at Cadwalader, Wickersham & Taft LLP. This post is based on a conversation between Mr. Fraidin and Mr. William Ackman, Founder and CEO of Pershing Square Capital Management, in a keynote session at the Cadwalader Fifth Annual Finance Forum. Their discussion covered the current state of the financial markets, the resurgence of SPACs, and more.

STEPHEN FRAIDIN (SF): It’s always a pleasure to have an opportunity to have a conversation with Bill Ackman. Bill, I’d like to start with a personal question: at what point in your life did you realize or decide that what you wanted to do was become a professional investor?

BILL ACKMAN (BA): Actually when I went to work for my dad after college. He ran a firm that arranged financing for real estate developers and owners. It’s a service business, and after being in that business for six months or a year, it seemed like the real estate developer investors were having more fun than the service providers. So, I didn’t want to be a service provider—I wanted to be on the other side of the table. I was also contemplating whether to go to business school, which I thought would be a good way to transition from service provider to investor. I didn’t know much about investing, so I asked my dad: who do you know that’s a good investor? My dad mentioned a guy named Leonard Marx. I don’t know if you remember the name, but Leonard Marx was a very successful real estate investor and also a very successful stock market investor. And I happened to meet him, and he recommended I read a book called The Intelligent Investor by Benjamin Graham, which is kind of a value investing classic. I read the book, and it’s a bit like Jean-Paul Sartre’s essays on existentialism: you either read it and say “OK, I believe, I’m interested,” or it doesn’t appeal to you. I was intrigued, and from that moment on I became passionate about investing. I went to business school, and then from there I decided I wanted to start my own firm.

SF: Great. So Bill, I would say that we’re right now in a time of significant instability, both market instability and social instability. We’ve got the changeover of U.S. presidential administration. We’ve got the pandemic. We’ve got extraordinarily low interest rates. We’ve got, I think, a recession. How does all of this affect you as an investor? How do you see that instability playing out?


COVID-19 and Comparative Corporate Governance

Martin Gelter is Professor of Law at Fordham University School of Law; and Julia M. Puaschunder is a Post-Doctoral Researcher at Columbia University, and a faculty member at The New School of Public Engagement and affiliate of its Department of Economics. This post is based on their recent paper, forthcoming in the Journal of Corporation Law. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

COVID-19 accounts for a once-in-a-lifetime external economic shock coming down on world society. When the novel coronavirus SARS-CoV-2 emerged in December 2019, the general public in much of the world, let alone business leadership, was not yet particularly concerned. A year into the outbreak of the pandemic, over two million individuals have died directly from the pandemic, which has sickened over hundred million counted people but also affected all of us in the way we live, interact and perform in markets. Country governments have taken harsh measures to combat the disease, including lockdowns that have caused unprecedented disruptions to work life and to the economy.

Not surprisingly, corporate governance is at a critical juncture. Firms have struggled to adapt to lockdowns with severe and drastic effects on their performance. Restrictions have caused GDP drops estimated to likely become 50 times larger than those experienced during the 2008 world financial recession. Unemployment levels increased worse than during the Great Depression, already now also exhibiting worse inequality.

Our paper speculates whether COVID-19 will have a lasting effect on corporate governance around the world. How will large corporations be run and controlled differently? Will the interaction between firms and their shareholders and other stakeholders change due to a different balance of powers between interest and the political environment?


r/BlackRockAnnualLetter: Climate Change and ESG in the Age of Reddit

Shaun Mathew, Daniel Wolf, and Sarkis Jebejian are partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis memorandum by Mr. Mathew, Mr. Wolf, Mr. Jebejian, Ed Lee, David Feirstein, and Sophia Hudson. 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).

  • BlackRock’s rollout of Larry Fink’s annual letter last week was overshadowed by the Reddit-driven mania involving GameStop and other heavily shorted stocks.
  • The evolving (and sometimes wild) market dynamics associated with the rapid rise of the day-trading retail investor base, coupled with a resurgent, short-term focused shareholder activism environment, underscore the importance for public companies of deepening relationships with their largest and longest-term investors.

Last week, BlackRock published the 2021 version of Larry Fink’s annual CEO letter. Consistent with BlackRock’s pronouncements over the last 12 months, the single biggest focus in the letter is climate change. The upshot is that BlackRock is now asking companies to disclose a plan for how their business model will be compatible with a net-zero economy (which BlackRock defines as one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically established threshold necessary to keep global warming well below 2⁰C). Acknowledging that climate disclosure can be cumbersome, particularly in light of the current alphabet soup of competing sustainability reporting frameworks, BlackRock has endorsed convergence under the single standard proposed by the IFRS. In the interim, BlackRock continues to support TCFD- and SASB-aligned sustainability reporting.


Advisers by Another Name

Paul G. Mahoney is David and Mary Harrison Distinguished Professor at the University of Virginia School of Law, and Adriana Z. Robertson is Honourable Justice Frank Iacobucci Chair in Capital Markets Regulation and Associate Professor of Law and Finance at the University of Toronto Faculty of Law. This post is based on their recent paper. 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); The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

The rise of index mutual funds and ETFs is an important development in the U.S. capital markets. Trillions of dollars are invested in vehicles that attempt to track the performance of broad market indices such as the S&P 500 as well as hundreds of lesser-known, specialized indices. While index investing is often described as “passive,” the term is not entirely accurate. Most indices are not purely mechanical. Instead, their construction generally involves the exercise of discretion by an index committee empowered to select among securities meeting the index criteria and to change those criteria over time. Research has shown that in some cases, the discretionary component can be substantial. To a greater or lesser extent, then, an index fund outsources the selection of its portfolio to the index committee responsible for the index it tracks. Because an index fund seeks to mimic the underlying index that it tracks, any inclusion or exclusion decision made at the index level can be expected to feed through to the fund’s portfolio.

Traditionally, the person or entity responsible for selecting a mutual fund’s portfolio was its investment adviser. Investment advisers to mutual funds and EFTs are regulated under the Investment Advisers Act of 1940 (IAA) and the Investment Company Act of 1940 (ICA). These advisers sometimes delegate some or all of their portfolio management duties to sub-advisers, who are themselves treated as investment advisers under both the IAA and the ICA. Yet while an index provider that licenses an index to a fund provides a similar service, to date, the SEC has not taken the position that such an index provider constitutes an investment adviser to that fund. In our paper, Advisers by Another Name, forthcoming in the Harvard Business Law Review, we argue that in some cases, index providers constitute advisers under the IAA and ICA as interpreted by the courts. We further contend that the SEC should clarify when index providers cross the line into investment advice by adopting a safe harbor rule or interpretation.


How We Evaluate Shareholder Proposals

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

Shareholder proposals serve as an important tool for investors to voice their perspectives and seek change at public companies. Vanguard index funds are practically permanent investors in approximately 13,000 public companies worldwide, and Vanguard hears from a wide range of stakeholders who want to understand our decision-making process for voting on shareholder proposals on behalf of Vanguard funds.

Many shareholder proposals address environmental or social matters such as climate risk, human rights, diversity, political spending, or data privacy. Others suggest changes to governance practices or shareholder rights. Not all shareholder proposals are created equal, though, and corporate governance is constantly evolving. The nature of shareholder proposals changes from year to year, as do the factors that inform our analysis of each one.

A framework for analysis

The funds’ voting is governed by their board-approved proxy voting guidelines, and the Vanguard Investment Stewardship team uses various inputs to inform the funds’ decisions on every shareholder proposal up for vote at a portfolio company. These inputs include disclosure by the company, third-party research, and direct engagements with the company as well as with the proposal’s proponents.


2021 Proxy Season: Executive Compensation Considerations

Jeannemarie O’Brien and Erica E. Bonnett are partners and Alison E. Beskin is an associate at Wachtell, Lipton, Rosen & Katz LLP. This post is based on their Wachtell memorandum. 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).

The Covid-19 pandemic and related economic conditions have impacted executive compensation in a number of ways, and disclosure of these impacts is a salient issue for the 2021 annual proxy season. In addition to the myriad technical requirements governing annual proxy statements as set forth in Securities and Exchange Commission (“SEC”) rules and guidance, proxy advisory firms such as Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”) have adopted frameworks for evaluating executive pay in the context of the pandemic. Companies should seek to ensure that their annual proxy statements comply with all applicable SEC requirements while also addressing the heightened scrutiny surrounding executive pay programs.

  • Disclosing Adjustments to Annual Incentive Programs. Mid-year adjustments to 2020 annual incentive plan performance metrics, measurement periods and payment thresholds will be analyzed closely, as will above-target payouts under revised programs. Companies should explain why the relevant adjustments were made (including how specific challenges rendered prior performance metrics stale) and should consider providing a comparison of resulting payouts with the payouts that would have applied under the original program design.


CFO Signals

Greg Dickinson is Managing Director of CFO Signals and Lori Calabro is Editor of Global CFO Signals at Deloitte LLP. This post is based on their Deloitte memorandum.

Each quarter (since 2Q10), CFO Signals has tracked the thinking and actions of CFOs representing many of North America’s largest and most influential companies.

All respondents are CFOs from the US, Canada, and Mexico, and the vast majority are from companies with more than $1 billion in annual revenue.


BlackRock’s 2021 CEO Letter

Betty Moy Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk 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); and 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).

[On January 26, 2021], BlackRock released its annual Letter to CEOs, which is also commonly referred to as the “Fink Letter.” With the firm managing approximately $9 trillion in assets, this open letter is widely read by public companies, market participants and other stakeholders to better understand the mega investor’s outlook. This post boils down BlackRock’s 2021 letter to what we think is its essence. Not surprisingly, climate risk remains a top focus area. “No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day,” explains Larry Fink, Chairman and CEO of BlackRock.

The Letter to CEOs provides what we believe are some valuable insights to companies seeking to implement disclosures or take action related to climate change, diversity, equity and inclusion (DEI), and environmental, social and governance (ESG) matters. For further consideration, we’ve included some of BlackRock’s own disclosures.


Stakeholder Capitalism: From Balance Sheet to Value Sheet

Beatriz Pessoa de Araujo is a partner at Baker McKenzie and Adam Robbins is Head, Future of Investing Initiatives at the World Economic Forum. This post is based on their recent Baker McKenzie/World Economic Forum 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); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

The gradual pace of social progress is occasionally punctuated by periods of rapid change. We are undoubtedly in the midst of one of these shifts, as pandemic, climate risks, and economic and racial inequality test society’s resilience, and rapidly force new ways of operating.

These rapid shifts are increasingly presenting leaders with some of the most severe business, economic and social challenges in decades, forcing them to reassess business practices and indeed the very purpose of the corporations they serve. Stakeholder capitalism has made headlines over the past 18 months as the World Economic Forum, the Business Roundtable and society have called on corporate leaders to include the voice of stakeholders in their decision making. Yet stakeholder theories are not a novel idea and have in fact emerged over the past decades. They are making headlines now as a reaction to the perceived shortcomings arising from a narrow focus on short-term shareholder profit maximisation, an approach that began to take hold at the end of the 20th century, principally from the Chicago school of economic thought in the 1970s.

The current pandemic, climate, and inequality crises have hastened the implementation of stakeholder oriented business practices, but they build the multi-decade evolution of stakeholder theory. The following are examples of some of the seminal theories that inspired the proliferation of stakeholder and sustainability-focused concepts found in modern business management, investment, accounting and corporate reporting.


Page 4 of 8
1 2 3 4 5 6 7 8