Monthly Archives: February 2021

Does Media Coverage Cause Meritorious Shareholder Litigation? Evidence from the Stock Option Backdating Scandal

Dain C. Donelson is Henry B. Tippie Excellence Chair in Accounting at University of Iowa Tippie College of Business; Antonis Kartapanis is Assistant Professor of Accounting at Texas A&M University Mays Business School; and Christopher G. Yust is Assistant Professor of Accounting at Texas A&M University Mays Business School. This post is based on their recent paper, forthcoming in the Journal of Law and Economics. Related research from the Program on Corporate Governance includes Lucky CEOs and Lucky Directors by Lucian Bebchuk, Yaniv Grinstein, and Urs Peyer (discussed on the Forum here).

Our recent paper uses the Wall Street Journal’s coverage of the stock option backdating scandal to examine whether media coverage causes meritorious shareholder litigation. While the media has a prominent role in covering corporate scandals, it is unclear whether the media coverage itself causes any subsequent litigation because the underlying corporate misconduct and firm characteristics may cause both the litigation and attract media coverage. Thus, meritorious litigation may have eventually occurred even in the absence of media coverage. Evidence on the causal relation between media coverage and meritorious litigation is timely due to growing concerns about the precipitous decline in newspapers nationwide and whether it will result in a significant decrease in corporate accountability (Grieco 2020; Knight Foundation 2019). The findings further have a number of important implications for the media, firms, and others.

We predict that media coverage will increase the likelihood of meritorious litigation because such coverage may increase the expected payoff of such litigation to plaintiffs’ lawyers. Specifically, the expected payoff is a function of the settlement probability, expected settlement amount, and expected litigation costs, and media coverage may affect each of these components. That is, media coverage can provide new “expert witness” information or increase the credibility of existing information, increasing both the probability of settlement and expected settlement amount. Additionally, negative media coverage may contribute to an abnormal price decrease, which may increase the settlement probability by establishing loss causation and increase settlement amounts by increasing shareholder damages. Finally, media coverage may lower investigation costs. That is, plaintiffs’ lawyers may rely on experts cited by the media, and coordination costs may be lowered by making it easier to assemble a class of affected plaintiffs.


ESG: The S Is Not for Short

Anthony Campagna is Executive Director and Duncan Paterson is Associate Director at ISS ESG, the responsible investment arm of Institutional Shareholder Services. This post is based on their ISS ESG 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); 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).

Key Takeaways

  • GameStop is a key example of the risks of short selling.
  • Responsible investors take different approaches to the practice.
  • Some avoid taking part, due to concerns related to values and to market integrity.
  • Some have taken advantage of the tool to further their ESG aims.
  • Increased access for retail investors to sophisticated financial tools will continue to influence market dynamics, with likely regulatory and investor implications.

How We Got Here

In the first four weeks of 2021 a select few stocks have experienced extreme levels of price movement and volatility. The most famous of these is GameStop (GME), which opened the year trading slightly below $20 per share, and amidst the frenzy and hysteria reached nearly $500 a share the morning of January 28th. The machinery behind this move is of one of the largest short squeeze plays observed in recent history. This saga has played out very publicly with a David vs Goliath feel, with the role of Goliath being played by large financial institutions and hedge funds, and David by a plucky army of retail investors using online and FinTech platforms like Reddit & Robinhood to communicate and coordinate as well as execute their trades.


Uptick in Restructurings May Outlast COVID-19 Pandemic

Paul Leake and Mark A. McDermott are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

The COVID-19 pandemic has caused massive disruption across the globe, resulting in a significant uptick in U.S. restructuring activity. According to AACER, a database of U.S. bankruptcy statistics, an estimated 7,128 business bankruptcies were filed in 2020, representing a 29% increase over the same period last year. Although Chapter 11 filings increased in 2020, many experts believe we have yet to see the full extent of the surge in filings that will occur in the aftermath of the COVID-19 crisis.

Business bankruptcies peaked at 13,683 in 2009 at the height of the financial crisis and steadily declined in the years thereafter before leveling off to approximately 6,000 filings per year from 2014 to 2019. Although Chapter 11 filings rose in 2020, we did not see the same volume of filings as occurred in 2009. This is in large part due to the unprecedented support provided by the federal government, which allowed many companies that otherwise would have had to file for bankruptcy to weather the economic effects of the pandemic. Looking ahead, while COVID-19 vaccines are now being distributed, uncertainty remains as to when they will be widely available, whether the second stimulus package—including $284 billion in additional loans under the Paycheck Protection Program (PPP)—will be sufficient support for small businesses in the interim, whether certain consumer trends (e.g., business travel) will return to pre-pandemic levels, and how quickly the economy and troubled companies can rebound. These and other factors will affect the volume of Chapter 11 filings in 2021 and beyond.

The chart below depicts corporate Chapter 11 filing volume over time.


HLS Forum Sets Several New Records in 2020

Leeor Ofer is a co-Editor of the Forum and a Fellow at the Harvard Law School Program on Corporate Governance.

The operations of the Harvard Law School Forum on Corporate Governance during 2020 set several new records. During this year, in which the Forum published more than 950 posts, the Forum:

  • Attracted more than 200,000 unique readers a month (an increase of 48% compared to 2019).
  • Attracted more than 3.6 million page views (an increase of 38% compared to 2019).

Established in 2006 by Professor Lucian Bebchuk and the Harvard Law School Program on Corporate Governance, the Forum has become the leading online resource and the central outlet for the exchange of ideas and debate in the fields of corporate governance and financial regulation. As in past years, the Forum attracted readers from over 225 countries and territories. As former Delaware Chief Justice Leo Strine observed, “[i]t is amazing to see the [Forum] become required reading among the intelligentsia … of corporate governance.”

The Forum’s posts are distributed daily, not only through its website, but also via TwitterLinkedIn, and Facebook, and the Forum’s daily email announcement. Followers of the Forum have increased during 2020 to over 13,600 on Twitter, over 11,600 on LinkedIn, over 1,600 on Facebook, and the number of subscribers to the Forum’s daily email release of new posts has grown to over 7,000. To subscribe to our daily email release or to follow the Forum through any of these channels, please click the icons at the top of our sidebar.

To date, the Forum has published more than 8,900 posts by more than 6,900 different contributors, including prominent academics, public officials, executives, legal and financial advisors, institutional investors, and other market participants.

In the past fifteen years, Forum posts have had considerable influence on the corporate governance field. Forum posts have attracted over 1400 citations in articles by academics and practitioners (see our post on these citations) and over 90 citations in materials issued by courts, regulators, and national organizations (see our post on these citations).

While most posts are solicited by the Editors, the Forum welcomes submissions of unsolicited posts for consideration. Further information about submitting posts can be found here.

Members of the Forum’s editorial team have commonly been drawn from the Fellows of the Program on Corporate Governance. Former members of the editorial team who now hold academic positions include Itai Fiegenbaum (Willamette University), Tamar Groswald Ozery (Hebrew University of Jerusalem), Scott Hirst (Boston University), Robert Jackson (NYU), Kobi Kastiel (Tel Aviv University), James Naughton (Virginia), Yaron Nili (Wisconsin), Noam Noked (Chinese University of Hong Kong), Greg Shill (Iowa), R. Christopher Small (University of Houston), Holger Spamann (Harvard), and Andrew Tuch (Washington University).

The success of the Forum has been made possible by the contribution of numerous authors, as well as by the engagement of the Forum’s ever-growing readership. As we celebrate another record-breaking year, we are deeply grateful for the support of our contributors and readers and look forward to continued fruitful engagement this year!

Corporations Should Reconsider the Value of Their Political Action Committees

Douglas Chia is Founder and President of Soundboard Governance LLC and a Fellow at the Rutgers Center for Corporate Law and Governance. This post is based on his Soundboard Governance memorandum. Related research from the Program on Corporate Governance includes 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 Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here).

The fallout from the storming of the Capitol building on January 6, 2020 by organized groups of militant and militarized Trump supporters at the behest of the President himself has been widespread, and there has been a backlash by corporate America. Scores of major corporations were quick to restrain or press the “pause” button on their political action committee (PAC) contributions.

Ongoing Calls for Corporate Disclosure

Corporate political spending has long been an issue in corporate governance, and the objections have steadily grown louder and gained more support. Prominent corporate governance experts have been calling for regulatory action for years now, most notably 10 professors (including Director of the Harvard Law School Program on Corporate Governance, Lucian Bebchuk, and future SEC Commissioner Robert Jackson) who filed a rule-making petition to the SEC in 2011 that received over one million comment letters in support, and Bruce Freed of the Center for Political Accountability who has led the movement to persuade corporations be more transparent about their political contributions. Former Delaware Supreme Court Chief Justice Leo Strine has also contributed scholarly work to the conversation.


The Future of the Virtual Board Room

Andrew Lepczyk is a research analyst and Barton Edgerton is associate director of research at the National Association of Corporate Directors. This post is based on their NACD memorandum.

Since the beginning of the COVID-19–induced lockdowns, there has been no shortage of experts forecasting drastic shifts in the way that work gets done—including the work of the board. In the second half of the year, NACD surveyed 749 directors to better understand the impact of COVID-19 on corporate governance. Although there were initial challenges in adapting to a virtual working environment, directors were able to continue to govern effectively. Directors reported major shifts in the role that digital technology played in corporate governance, suggesting that the virtual setting for board meetings will be more popular following the pandemic. This increased adoption could show up first in committee meetings in the near term, but long term, it has the potential for increasing adoption for full-board meetings as directors become more comfortable with the technology.

Most of these changes are due to the abrupt shift to working remotely, sparked by the pandemic, and the relatively seamless ability for directors, and society as a whole, to adapt to these new circumstances. Recent survey data from NACD confirms this effect in corporate governance, suggesting that the adaptation of working remotely is here to stay.


ESG Disclosures

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 their Wachtell memorandum.

Earlier this week, the U.S. Securities and Exchange Commission (SEC) announced the appointment of Satyam Khanna as its Senior Policy Advisor for Climate and ESG. Mr. Khanna will advise the agency on environmental, social, and governance matters and advance related new initiatives across the SEC’s offices and divisions. In addition to prior positions with the SEC, including as counsel to former SEC Commissioner Robert J. Jackson Jr., Mr. Khanna previously served with the Financial Stability Oversight Council at the U.S. Treasury Department and as an advisor to Principles for Responsible Investment (PRI). This latest appointment, together with the Biden Administration’s executive order issued last week aimed at tackling the climate crisis, indicate a clear shift towards greater regulatory focus and oversight on climate change and other ESG matters.

In the past, the SEC has declined calls to implement ESG-specific disclosures, preferring to rely on traditional materiality formulations as the benchmark for disclosures. In the absence of regulatory directives, investors, asset managers and companies have pushed forward with voluntary ESG disclosure frameworks in an effort to generate comparable, decision-useful data that can be used to measure companies’ ESG risks, progress and performance. It now appears that U.S. regulators will consider playing a more central role in disclosure practices: the Biden Administration’s executive order stated that “[t]he Federal Government must drive assessment, disclosure, and mitigation of climate pollution and climate-related risks in every sector of our economy.” Similarly, acting SEC chair Allison Herren Lee has supported a disclosure regime that would ensure that financial institutions produce standardized disclosure of their exposure to climate risks, and it is widely expected that incoming SEC chair Gary Gensler will support ESG-related rulemaking. The SEC’s Investor Advisory Committee (some of whose former members are now in the Biden Administration) also last year recommended that the SEC focus on updating reporting requirements to include “material, decision-useful ESG factors,” highlighting investor need for such information in connection with investment and voting decisions, the benefits of direct disclosure by issuers, the need to level the playing field between issuers and opportunities to promote the flow of capital to the U.S. markets and domestic issuers of all sizes. The SEC’s Asset Management Advisory Committee has also been considering ESG-related matters and potential recommendations.


SEC Issues Guidance in Light of Ongoing Surge in SPAC IPOs

William B. Brentani, Mark A. Brod, and Daniel N. Webb are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Brentani, Mr. Brod, Mr. Webb, Atif Azher, Elizabeth A. Cooper, and Michael O. Wolfson.

Last year, in particular the second half of the year, saw a vibrant market for initial public offerings (“IPOs”) of special purpose acquisition companies (“SPACs”). Coming out of this surge in SPAC offerings, the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) published new disclosure guidance on December 22, 2020. [1] With the publication of this guidance, the Staff sought to remind SPAC sponsors, underwriters and other market participants of key concerns they have noted in their comment letters for SPAC filings in connection with IPOs and business combination transactions.

This guidance is particularly focused on the potential conflict of interest between a SPAC’s public shareholders, on the one hand, and a SPAC’s sponsor, directors, officers and their affiliates (the “insiders”), on the other hand. The insiders’ economic interests in the SPAC often differ from the economic interests of public shareholders in a number of important ways. As the Staff notes, this difference may lead to conflicts of interest, in particular as the insiders evaluate potential targets for the SPAC’s initial business combination.

The Staff notes that, unlike in the traditional IPO process where a private operating company’s securities are valued through market-based price discovery, the SPAC insiders are solely responsible for deciding how to value potential targets. While this is often cited as a reason why SPACs provide greater certainty for private companies considering a traditional IPO, the Staff points out that this can lead to potential conflicts of interest and risks for the public shareholders of the SPAC. Therefore, the Staff repeatedly emphasizes the importance of clear disclosure regarding these potential conflicts of interest and the nature of the insiders’ economic interests in the SPAC.


New Human Capital Disclosure Requirements

Margaret Engel is a founding partner at Compensation Advisory Partners. This post is based on her CAP memorandum.

Effective November 9, 2020, the Securities Exchange Commission (SEC) issued final rules that modernized the requirements of Regulation S-K applicable to disclosure of the description of the business (Item 101), legal proceedings (Item 103) and risk factors (Item

105). The new rules require companies to greatly expand their human capital management disclosure using a principles-based approach. Relatively few aspects of the rules are prescriptive, giving companies wide latitude to tailor disclosure. Given this latitude, we anticipate that companies will struggle when deciding what human capital disclosure should be included in their 10-Ks. CAP has reviewed early disclosures to provide some guidance to calendar year end companies on the topics that early human capital disclosures address and how much detail companies have typically provided.

Compensation Advisory Partners (CAP) provides a summary of the amendments of Regulation S-K related to human capital disclosure below. We also reviewed a sample of human capital disclosures made by early filers with fiscal years ending before December 31, 2020. Insights gleaned from our review will be helpful to calendar year companies who will soon be crafting their own human capital disclosure for the first time early in 2021.


Private Equity – Year in Review and 2021 Outlook

Andrew J. Nussbaum and Steven A. Cohen are partners, and Katherine L. Chasmar is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Nussbaum, Mr. Cohen, Ms. Chasmar, Jodi J. Schwartz, Nicholas G. Demmo, and Igor Kirman.

2020 was a tale of two halves: during the first half of the year, global private equity deal volume fell precipitously, declining more than 20% relative to the same period in 2019; in the second half of the year, private equity dealmaking roared back to life, ending the year at approximately $582 billion, its highest level since 2007, as private equity firms acquired and invested in companies and businesses in record numbers even as the global Covid-19 pandemic continued to wreak havoc on the broader economy.

We review below some of the key themes that drove private equity deal activity in 2020 and our expectations for 2021.

Pandemic Takes a Toll. As we describe in our recent memo, Mergers and Acquisitions—2021, the Covid-19 pandemic took a toll on pending M&A transactions in the first half of 2020. Private equity was no exception to this trend, with private equity buyers alleging violations of interim operating covenants and pointing to “material adverse effect” clauses in transaction agreements as justification to call off deals or renegotiate. In May 2020, Sycamore Partners and L Brands announced that they had mutually agreed to terminate a deal signed earlier in the year in which Sycamore would pay $525 million for a majority stake in Victoria’s Secret, after Sycamore had sued alleging breaches of interim operating covenants, among other things. That same month, Carlyle and Singapore sovereign wealth fund GIC announced that they would abandon their deal, entered into in December 2019, to acquire a 20% stake in American Express Global Business Travel. In other cases, deals survived, but the terms were recut. For example, after Advent International signaled that it wanted out of its agreement to acquire Forescout Technologies for $1.9 billion struck in February 2020, the parties ultimately agreed to proceed with the transaction at a reduced price of $1.6 billion.


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