Monthly Archives: March 2021

Deals in the Time of Pandemic

Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School and Caley Petrucci is a graduate of Harvard Law School. This post is based on their recent paper, forthcoming in the Columbia Law Review. 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).

The COVID-19 pandemic has brought new attention to the period between signing and closing in M&A transactions. Transactional planners heavily negotiate the provisions that govern the behavior of the parties during this window, not only to allocate risk between the buyer and seller, but also to manage moral hazard, opportunistic behavior, and other distortions in incentives. COVID-19, however, has exposed an important connection between the material adverse effect (MAE) clause and the obligation for the seller to act “in the ordinary course of business” between signing and closing. Our new paper, Deals in the Time of Pandemic, forthcoming in the Columbia Law Review (June 2021), is the first to examine the interaction between the MAE clause and the ordinary course covenant in M&A deals.


We constructed a new database of 1,300 M&A transactions announced between 2005 and 2020 with a transaction value of at least $1.0 billion, along with their MAE and ordinary course covenants—by far the most comprehensive, accurate, and detailed database of such deal terms that currently exists.


Trends to Watch: An Early Look at CEO Pay and the Impact of COVID-19 on Employee Compensation

Dan Marcec is a Senior Editor at Equilar, Inc. This post is based on his Equilar memorandum. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here); and Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).

Proxy season 2021 is rapidly progressing, and with that, critical perspectives with respect to COVID-19’s impact on Corporate America are taking shape. Most notably: How did the pandemic affect executive compensation, and what can we expect to see as we enter the recovery period in 2021 and into 2022?

Because executive pay is so closely tied to company performance, compensation packages reported in proxy filings provide a window into how companies reacted to the pandemic, and of course, how they expect the past year’s events to affect future company objectives. For example, many CEOs took cuts to their salaries and adjustments to their bonus payouts in light of COVID-19.

At the same time, very few companies made changes to their long-term incentive plans (LTIPs). An Equilar and Stanford study on compensation disclosures through the first half of 2020 found that over 500 companies disclosed changes to executive pay in that time frame. Of those, just 33 made changes to long-term incentive programs, and only nine reduced the target value of those incentive plans. These trends will continue to be on watch as the incentive plans designed in 2020 come to light through the filings currently being reported.


Revisiting the SEC Approach to Financial Penalties

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

On Tuesday [March 9, 2021], SEC Commissioner Caroline Crenshaw spoke to the Council of Institutional Investors. Her presentation, Moving Forward Together—Enforcement for Everyone, (discussed on the Forum here) concerned “the central role enforcement plays in fulfilling our mission, how investors and markets benefit, and how a decision made 15 years ago has taken us off course.” In her view, the SEC should revisit its approach to assessing financial penalties and should not be reluctant to impose appropriately tailored penalties that effectively deter misconduct, irrespective of the impact on the wrongdoer’s shareholders. Is this a sign of things to come?

Crenshaw observes that, generally, SEC Commissioners of all stripes believe in a strong enforcement program but differ on the effect of corporate penalties in achieving the SEC’s goals. Crenshaw believes that the SEC has overemphasized “factors beyond the actual misconduct when imposing corporate penalties—including whether the corporation’s shareholders benefited from the misconduct, or whether they will be harmed by the assessment of a penalty.” Not only is this approach “fundamentally flawed,” but, more importantly, it allows companies to profit from their own fraud and handcuffs the SEC, inhibiting it from crafting “tailored penalties that more effectively deter misconduct” and that create financial incentives to follow the rules and invest in compliance. In Crenshaw’s view, “enforcement best advances our agency’s goals when it concentrates the costs of harm with the person or entity who committed the violation. For these reasons, ensuring that the violator pays the price is key to a successful enforcement regime and to promoting fair and efficient markets more broadly.”


Signaling Through Carbon Disclosure

Patrick Bolton is Barbara and David Zalaznick Professor of Business at Columbia Business School, and Marcin T. Kacperczyk is Professor of Finance at Imperial College London. This post is based on their recent paper.

Twenty years ago, a few visionary NGOs (most prominently the Carbon Disclosure Project (CDP)) started tracking corporate carbon emissions, the main cause of global warming. By now over 1700 publicly traded companies around the world (more than 15% of all listed companies) are disclosing their carbon emissions, and investors are better informed than ever about the climate change transition risks they are exposed to. Yet, the role and effects of carbon disclosure are still not fully understood. In this study, we take a systematic look at carbon disclosure by studying the (stock) market effects of firm-level carbon emission disclosures.

Whether and how carbon disclosures matter is not fully known, but many prominent commentators agree that reporting of carbon emissions is a crucial step in combatting climate change. Michael Bloomberg, the first chairman of the Task Force on Climate-Related Financial Disclosures (TCFD) has stated that: “Without reliable climate-related financial information, financial markets cannot price climate-related risks and opportunities correctly and may potentially face a rocky transition to a low-carbon economy…” Yet, a recent HSBC study found that even though “A key goal [of disclosure] is to give investors more information about which companies are prepared for the shift to a low-carbon economy, and which are not… in practice, investors have shown more muted interest in the data that is generated. An HSBC survey of 2,000 investors found that just 10 percent viewed the disclosures as a relevant source of information.”


Inclusion of ESG Metrics in Incentive Plans: Evolution or Revolution?

John Ellerman and Mike Kesner are partners, and Lane Ringlee is managing partner at Pay Governance LLC. 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).

Environmental, Social, and Governance (ESG) issues are some of the most prominent facing Corporate America: shareholders and other stakeholders have significantly increased the focus on a corporation’s social responsibilities, including promoting a fair and diverse workplace, providing employees with a living wage, and improving the environment. Large institutional investors are demanding enhanced disclosure of employee demographics and diversity efforts as well as a full discussion of the near- and long-term steps that will be taken to attain net-zero emission goals.

Given the intense focus on ESG, Pay Governance LLC conducted a survey of companies in January 2021 to document how companies have been responding to the focus on ESG and whether it is resulting in a change in the design of incentive compensation plans. We had several goals in mind in conducting the survey.


Energizing the M&A Market Post-Crisis

Jennifer F. Fitchen and Brent M. Steele are partners at Sidley Austin LLP. 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).

During these unprecedented times, all of us have had to acclimate to new ways of working, adapting creatively to the changed environment. Economic activity, including M&A dealmaking, has inevitably been depressed by the COVID-19 crisis, especially in Q2 2020—but industries and businesses have found novel solutions to the problems they face. By Q4, M&A was again beginning to surge.

In this post, we examine the creative deal structures that are being employed with much greater frequency throughout the M&A market. Based on interviews with 150 US corporates and private equity firms, this post analyzes the ways in which M&A is moving forward in spite of the pandemic.

Q2 2020 saw a marked downturn in M&A activity relative to pre-crisis transaction levels. But, since then, dealmaking has bounced back strongly. While a full-scale recovery may not be achievable in the immediate future, there are many reasons to be positive.

The increased use of creative deal structures will be an important part of that story, helping buyers and sellers to overcome some of the risk aversion holding M&A back in the currently volatile and uncertain environment—and enabling more confident parties to pursue emerging opportunities. Indeed, we are already witnessing such an increase, reflected in the rising number of joint venture transactions and the boom in the launch of special purpose acquisition vehicles (SPACs).


State Street Global Advisors’ Annual Asset Stewardship Report

Benjamin Colton and Robert Walker are Global Co-Heads of Asset Stewardship at State Street Global Advisors. This post is based on their SSgA memorandum.

In 2020, we voted in over 19,000 meetings and engaged with over 2,400 companies. In all, our engagement activities encompassed companies representing 78% of our 2020 equity AUM.

In this post, we provide highlighted insights from our voting and engagement activities, as well as core campaign, sector and thematic takeaways.


Directors’ Career Concerns: Evidence from Proxy Contests and Board Interlocks

Shuran Zhang is Assistant Professor of Finance at Hong Kong Polytechnic University. This post is based on her recent paper. Related research from the Program on Corporate Governance includes Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge by Bo Becker, Daniel Bergstresser, and Guhan Subramanian (discussed on the Forum here).

Proxy contests often focus on directorial positions, where activist shareholders nominate an alternative slate of directors in an attempt to replace incumbent board members. Given shareholders’ limited ability to vote out directors in uncontested elections (e.g., Cai, Garner, and Walkling, 2009), proxy contests remain a powerful mechanism for director removal. In recent years, activists have become increasingly successful in accessing the US boardroom. According to FactSet, activists obtained board seats in 73% of proxy contests in 2014. At the firm level, prior research shows that proxy contests create shareholder value for target firms (e.g., Dodd and Warner, 1983; Mulherin and Poulsen, 1998; Fos, 2017). At the director level, however, proxy contests can impose significant career costs on individual directors. Existing evidence suggests that, following proxy contests, directors suffer losses of board seats not only at target firms but also at nontarget firms (Fos and Tsoutsoura, 2014). Despite the adverse effects of proxy contests on directors’ careers, little is known about whether or how directors respond to proxy contests. To mitigate potential career consequences, directors may change their behavior and initiate policy changes at other firms where they also hold board seats, that is, interlocked firms.


Integrating ESG Into Corporate Culture: Not Elsewhere, but Everywhere

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. 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); 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).

A prominent securities regulator recently observed that “ESG no longer needs to be explained.” ESG is firmly ensconced in the mainstream of corporate America, a frequent topic in boardrooms, C-suites, investor meetings, and regulators’ remarks. Perhaps less obvious is that ESG has yet to be mainstreamed, as it were, in internal corporate governance and operations at the individual company level. In order to be a meaningful factor in effectuating corporate purpose, ESG—or, more accurately, EESG (including Employees as well as Environmental, Social, and Governance)—must be integrated throughout corporate affairs, not just in the boardroom.

The internal mainstreaming of EESG is the next step in its remarkable journey from activist wishlists to board and regulatory agendas. The good news is that this should not be difficult for most organizations to accomplish, so long as corporate leaders recognize that engaging with EESG considerations is not something that happens “elsewhere,” but “everywhere.” When EESG is integral to the culture and values of a company, it will naturally be incorporated in the work that is done throughout governance and operations, including strategic planning, risk management, compensation, communications, and disclosure. This approach to EESG is beneficial in a number of important ways: It is conducive to long-term value creation and responsive to investor interests; it improves efficiency and transparency while demonstrating commitment to EESG goals; and it can help forestall legal liability and reputational harm.


SEC’s Regulation FD Action Highlights Risks Associated with Private Calls to Analysts

Caitlyn Campbell is partner at McDermott Will & Emery LLP. This post is based on her McDermott Will & Emery memorandum.

On Friday, March 5, 2021, the US Securities and Exchange Commission (SEC) announced a rare litigated action against a large public company and three of its investor relations employees for alleged violations of Regulation FD (Fair Disclosure).

Overview of Regulation FD

In 2000, the SEC adopted Regulation FD to address issuers’ selective disclosure of material nonpublic information and to promote the full and fair disclosure of information. The rule provides that when an issuer, or a person acting on its behalf, discloses material, nonpublic information to certain entities or individuals (in general, securities market professionals and shareholders who may trade on the basis of the information), the issuer must also publicly disclose that information. In its release announcing the new rule, the SEC expressed its concern that “many issuers [were] disclosing important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public.” The SEC noted that this practice leads to a loss of investor confidence in the integrity of the markets because investors perceive that certain market participants have an unfair advantage.


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