Monthly Archives: April 2021

ESG: Investors Increasingly Seek Accountability and Outcomes

Posted by Peter Reali, Jennifer Grzech, and Anthony Garcia, Nuveen, on
Sunday, April 25, 2021
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Peter Reali is Managing Director and Head of Engagement, Responsible Investing, Jennifer Grzech and Anthony Garcia are Directors, Responsible Investing, at Nuveen. This post is based on their Nuveen 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).

The global pandemic motivated investors to increase their focus on the strategic impacts of environmental and social responsibility on long-term shareholder value. Now, more than ever, investors are using proxy votes to express their views on company behavior, rather than relying on company disclosure. And after an unprecedented year, the blurred lines between what constitutes E, S or G are highlighting the challenges of a one-size-fits-all approach to proxy voting.

Volume of E&S Shareholder Proposals is On the Rise

Proxy voting is the primary means for shareholders to communicate their views about a company’s environmental, social and governance (ESG) practices. Shareholder proposals tend to focus on a single, concrete call to action and provide investors with a more solid basis for any further action.

At the end of the 2020 proxy season, 90% of S&P 500 companies had published some kind of ESG report, up from 86% the prior year and 20% a decade ago. Despite this increase in transparency, the number of shareholder proposals requesting additional environmental and social information remains elevated. What’s behind this trend?

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Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies?

Posted by Matteo Gatti and Chrystin Ondersma (Rutgers), on
Saturday, April 24, 2021
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Matteo Gatti is Professor of Law and Chrystin Ondersma is Professor of Law and Judge Morris Stern Scholar at Rutgers Law School. This post is based on their recent paper. 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).

Broadening the corporate purpose to embrace stakeholderism has been a staple of corporate governance discussions in the last few years, especially after endorsements by the likes of Larry Fink, the Business Roundtable, Elizabeth Warren, and Bernie Sanders. Of particular interest are some recent reexaminations of stakeholderism, which rate it as a more realistic path to improvement for weaker constituencies than direct regulation. In particular, stakeholderism is considered to be a more feasible substitute to alternative reform routes, as recent impasses on the minimum wage and labor reform can attest. Also, by promoting an environment more conducive to passage of direct regulation, the theory goes, stakeholderism is a necessary first step for future incremental change.

In a new paper, Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies?, we show the structural shortcomings of stakeholderism in the context of one constituency—workers. Worryingly, not only do we see no evidence that stakeholderism can advance their cause, but we fear that such a stakeholderist regime would instead give corporations more leeway to pursue an agenda at odds with the interests of the workforce.

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Recent SPAC Shareholder Suits in New York State Courts: The Beginning Wave of SPAC Litigation

Posted by Douglas A. Rappaport, Jacqueline Yecies, and Stephanie Lindemuth, Akin Gump Strauss Hauer & Feld LLP, on
Friday, April 23, 2021
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Douglas A. Rappaport and Jacqueline Yecies are partners, and Stephanie Lindemuth is counsel at Akin Gump Strauss Hauer & Feld LLP. This post is based on their Akin Gump memorandum.

Key Points

  • Between September 2020 and March 2021, at least 35 SPACs have been hit with one or more shareholder lawsuits filed in New York state court.
  • These lawsuits generally allege that SPAC directors breached their fiduciary duties to shareholders by providing allegedly inadequate disclosures regarding proposed de-SPAC mergers. Some of these lawsuits also assert claims against the SPAC itself, as well as the target company and its board of directors, for allegedly aiding and abetting the SPAC directors’ breaches.
  • Although these cases are in their early stages and assert claims that are limited in scope, they signify that the plaintiffs’ bar is actively monitoring and pursuing SPACs. As additional de-SPAC transactions are announced and close, SPAC shareholder lawsuits are likely to multiply, potentially subjecting SPACs, their boards and sponsors to more significant civil risk and exposure.

For months, lawyers and industry experts have been expecting a surge of litigation and regulatory proceedings related to publicly traded special purpose acquisition companies (SPACs). Thus far, litigation and regulatory enforcement activity in the SPAC space has been relatively infrequent. However, recent activity in New York state court evidences that the wave is beginning.

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Weekly Roundup: April 16–22, 2021

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, April 23, 2021

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This roundup contains a collection of the posts published on the Forum during the week of April 16–22, 2021.

Interest in SPACs is Booming…and So is the Risk of Litigation

Posted by Stephen Fraidin, Gregory P. Patti, Jr. and Jason Halper, Cadwalader, Wickersham & Taft LLP, on Friday, April 16, 2021
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Statement by Commissioner Peirce on Rethinking Global ESG Metrics

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Friday, April 16, 2021
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Integrating Sustainability and Long Term Planning for the Biopharma Sector

Posted by Myrto Kontaxi (Biopharma Sustainability Roundtable) and Brian Tomlinson (Chief Executives for Corporate Purpose), on Saturday, April 17, 2021
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When Disclosure Is The Better Part of Valor: Lessons From The AT&T Regulation FD Enforcement Action

Posted by Douglas Chia, Soundboard Governance, on Sunday, April 18, 2021
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Surge in SPACtivity Leads to Litigation and Regulatory Risks

Posted by Caitlyn Campbell, McDermott Will & Emery LLP, on Monday, April 19, 2021
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Anticipating Harassment: #MeToo and the Changing Norms of Executive Contracts

Posted by Rachel Arnow-Richman (University of Florida), James Hicks (UC Berkeley), and Steven Davidoff Solomon (UC Berkeley), on Monday, April 19, 2021
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How Boards Can Get Human Capital Management Right in Five (Not So) Easy Steps

Posted by Paul Washington and Rebecca Ray, The Conference Board, on Monday, April 19, 2021
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SEC Approves NYSE’s Amended “Related Party” and “20%” Stockholder Approval Rules

Posted by Eleazar Klein and Evan A. Berger, Schulte Roth & Zabel LLP, on Tuesday, April 20, 2021
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The Activism Vulnerability Report Q4 2020

Posted by Jason Frankl and Brian Kushner, FTI Consulting, on Tuesday, April 20, 2021
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How Much Do We Trust Staggered Difference-in-Differences Estimates?

Posted by David Larcker (Stanford), Charles C.Y. Wang (Harvard Business School), and Andrew Baker (Stanford), on Tuesday, April 20, 2021
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The Giant Shadow of Corporate Gadflies

Posted by Kobi Kastiel (Tel Aviv University & Harvard Law School) and Yaron Nili (University of Wisconsin), on Wednesday, April 21, 2021
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Was Milton Friedman Right about Shareholder Capitalism?

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Wednesday, April 21, 2021
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Acting Director of SEC’s Corp Fin Issues Statement on Disclosure Risks Arising from De-SPAC Transactions

Posted by Adam Brenneman, Jared Gerber, and Rahul Mukhi, Cleary Gottlieb Steen & Hamilton LLP, on Thursday, April 22, 2021
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A New Theory of Material Adverse Effects

Posted by Robert T. Miller (University of Iowa), on Thursday, April 22, 2021
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A New Theory of Material Adverse Effects

Posted by Robert T. Miller (University of Iowa), on
Thursday, April 22, 2021
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Robert T. Miller is Professor of Law and F. Arnold Daum Fellow in Corporate Law at the University of Iowa College of Law. This post is based on his recent paper, forthcoming in Business Lawyer, 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 The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In a paper forthcoming in Business Lawyer, I propose a new, systematic understanding of material adverse effects that resolves the major outstanding problems in the Delaware caselaw on MAEs.

As is well known, business combination agreements almost never define the phrase “material adverse effect,” and so the meaning of that key expression derives primarily from a line of Delaware cases starting with In re IBP Shareholders Litigation. In that case, the court said that a material adverse effect requires an event that substantially threatens the overall earnings potential of the target in a durationally-significant manner. In implementing this standard in IBP and subsequent cases, the courts have had to determine how the target’s earnings should be measured (e.g., by EBITDA or by some other measure of cashflow), how changes in earnings should be determined (e.g., which fiscal periods should be compared with which), and how large a diminution in earnings must be in order to count as material. Neither IBP nor subsequent cases have provided clear and compelling resolutions of these issues. On the contrary, later cases have introduced yet new problems, such as whether it matters that the risk that has materialized and adversely affected the target’s business was known to the acquirer at signing, whether material adverse effects should be measured in quantitative ways, qualitative ways, or both, and whether a material adverse effect must be felt by the company within a certain period of time after the occurrence of the event causing the effect.

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Acting Director of SEC’s Corp Fin Issues Statement on Disclosure Risks Arising from De-SPAC Transactions

Posted by Adam Brenneman, Jared Gerber, and Rahul Mukhi, Cleary Gottlieb Steen & Hamilton LLP, on
Thursday, April 22, 2021
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Adam Brenneman, Jared Gerber, and Rahul Mukhi are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Brenneman, Mr. Gerber, Mr. Mukhi, Nicolas Grabar, Giovanni P. Prezioso, and Leslie N. Silverman.

Last week, John Coates, the Acting Director of the SEC’s Division of Corporation Finance (“Corp Fin”), released a statement discussing liability risks in de-SPAC transactions.

The statement focused in particular on the concern that companies may be providing overly optimistic projections in their de-SPAC disclosures, in part based on the assumption that such disclosures are protected by a statutory safe harbor for forward-looking statements (which is not available for traditional IPOs). Director Coates’s statement questions whether that assumption is correct, arguing that de-SPAC transactions may be considered IPOs for the purposes of the statute (and thus fall outside the protection offered by the statutory safe harbor). He therefore encourages SPACs to exercise caution in disclosing projections, including by not withholding unfavorable projections while disclosing more favorable projections.

The statement has received considerable media attention and is plainly part of a broader effort by the Commission staff to identify potential securities law and policy concerns with the growing SPAC market. In addition to statements by staff in the Division of Corporation Finance, the effort includes:

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Was Milton Friedman Right about Shareholder Capitalism?

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Wednesday, April 21, 2021
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on an American Enterprise Institute roundtable conversation between Mr. Lipton; R. Glenn Hubbard, Dean Emeritus and Russell L. Carson Professor of Economics and Finance at Columbia Business School and visiting scholar at the American Enterprise Institute; and Clifford Asness, founder and chief investment officer of AQR Capital Management. 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).

Michael Strain: Good afternoon, I’m Michael Strain, Director of Economic Policy Studies at the American Enterprise Institute, and I want to start by thanking you all for joining this discussion of shareholder capitalism. Fifty years ago last month, economist and Nobel laureate Milton Friedman published his famous essay in The New York Times Magazine arguing that the social responsibility of businesses is to increase their own profits. This view has been controversial ever since. While campaigning back in July, Joe Biden said that the idea that a corporation’s sole or primary responsibility is to its shareholders is not only wrong, but “an absolute farce.”

Adding fuel to the debate, the U.S. Business Roundtable appears to have retreated from its earlier shareholder capitalism stance by issuing a statement about a year ago that embraced the idea that corporations and their managements have a responsibility to a broader group of stakeholders, including customers, suppliers, and workers. And that’s the question that we want our distinguished panel to take up in the next 45 minutes or so: Should executives manage their companies for the benefit of all stakeholders or should they simply focus on maximizing shareholder value? But before jumping into our subject, let me tell you a little about each of our three panelists:

Cliff Asness is the founder and chief investment officer of AQR Capital Management. Besides running a highly successful investment company, Cliff has long been an active researcher who’s published peer-reviewed articles on a variety of financial topics in many publications. He is also a trustee of the American Enterprise Institute.

Marty Lipton is a founding partner of the law firm Wachtell, Lipton, Rosen & Katz, which specializes in advising major corporations on mergers and acquisitions and matters affecting corporate policy and strategy. Widely credited with having invented the poison pill as a way of protecting corporations from market shortsightedness, Marty has been a major public intellectual on the social role of corporations in serving not only their shareholders, but other corporate constituencies.

Glenn Hubbard is Dean Emeritus and Russell L. Carson Professor of Economics and Finance at Columbia Business School. Glenn was chairman of the Council of Economic Advisers under President George W. Bush and is at present a visiting scholar at AEI.

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The Giant Shadow of Corporate Gadflies

Posted by Kobi Kastiel (Tel Aviv University & Harvard Law School) and Yaron Nili (University of Wisconsin), on
Wednesday, April 21, 2021
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Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and a Research Fellow at the Harvard Law School Program on Corporate Governance; and Yaron Nili is assistant professor at the University of Wisconsin Law School. This post is based on their recent paper, forthcoming in the Southern California Law Review. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and Towards the Declassification of S&P 500 Boards, by Lucian Bebchuk, Scott Hirst, and June Rhee.

Modern-day shareholders influence corporate America more than ever before. From demanding greater accountability of executives to lobbying for a variety of social and environmental policies, shareholders today have the power to alter how American companies are run. Indeed, much attention has been directed towards the rise of large institutional investors and their influence on corporate governance and competition. But that attention has also largely left out of public and academic debate one of the most unique corporate governance actors: “corporate gadflies.” As we document in our recent study, forthcoming in the Southern California Law Review, much of the corporate governance agenda setting in the U.S. has been, and still is, dominated by a handful of individuals with limited resources, who own tiny slivers of most large companies, rather than by the “Titans of Wall Street.”

Our study is the first to address the giant shadow that corporate gadflies cast on the corporate governance landscape in the United States. How does an economy with corporate equity in the trillions of dollars cede so much governance power to corporate gadflies? More importantly, should it? In answering these questions, we make three contributions to the literature. First, using a comprehensive dataset of all shareholder proposals submitted to the S&P 1500 companies from 2005 to 2018, our study offers a detailed empirical account of both the growing power and influence that corporate gadflies wield over major corporate issues and of their power to set governance agendas. Second, we use the context of corporate gadflies to elucidate a key governance debate over the role of large institutional investors in corporate governance. Specifically, we underscore the potential concerns raised by the activity of corporate gadflies and question the current deference of institutional investors to these gadflies regarding the submission of shareholder proposals. Finally, the study proposes policy reforms aimed at reframing the current discourse on shareholder proposals and potentially sparks a new line of inquiry regarding the role of investors in corporate governance.

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How Much Do We Trust Staggered Difference-in-Differences Estimates?

Posted by David Larcker (Stanford), Charles C.Y. Wang (Harvard Business School), and Andrew Baker (Stanford), on
Tuesday, April 20, 2021
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David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration at Harvard Business School; and Andrew Baker is a J.D. candidate at Stanford Law School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here).

Difference-in-differences (DiD) has been the workhorse statistical methodology for analyzing regulatory or policy effects in applied finance, law, and accounting research. A generalized version of this estimation approach that relies on the staggered adoption of regulations or policies (e.g., across states or across countries) has become especially popular over the last two decades. For example, from 2000 to 2019, there were 751 papers published in (or accepted for publication by) top tier finance or accounting journals that use DiD designs. Among them, 366 (or 49%) employ a staggered DiD design. Many of the staggered DiD papers address significant questions in corporate governance and financial regulation.

The prevalent use of staggered DiD reflects a common belief among researchers that such designs are more robust and mitigate concerns that contemporaneous trends could confound the treatment effect of interest. However, recent advances in econometric theory suggest that staggered DiD designs often do not provide valid estimates of average treatment effects.

In a paper recently posted on SSRN, we find that staggered DiD designs often can, and have, resulted in misleading inferences in the literature. We also show that applying robust DiD alternatives can significantly alter inferences in important papers in corporate governance and financial regulation.

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The Activism Vulnerability Report Q4 2020

Posted by Jason Frankl and Brian Kushner, FTI Consulting, on
Tuesday, April 20, 2021
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Jason Frankl and Brian Kushner are Senior Managing Directors at FTI Consulting Inc. This post is based on their FTI memorandum. 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 & Market Update

FTI Consulting’s Activism and M&A Solutions team welcomes our clients, friends and readers to our sixth quarterly Activism Vulnerability Report, documenting the results of our Activism Vulnerability Screener from the recent fourth quarter of 2020, as well as other notable trends and themes in the world of shareholder activism and engagement. Almost one year ago to the day, we sat down to write this report for the fourth quarter of 2019. Our team had just begun the shift to working from home offices and spare bedrooms, while still adjusting to full days of video conference calls due to the rapidly spreading COVID-19 coronavirus.

While it was not until the latter half of the fourth quarter of 2020, or even the start of 2021, that many of the pandemic’s biggest concerns began to subside, many areas of the market remained incredibly resilient throughout the year. The S&P 500 Index, the Dow Jones Industrial Average Index and the Nasdaq Composite Index rose 16.3%, 7.3% and 43.6%, respectively, in 2020. While the three leading indices all ended the year on solid ground, the incredible market voracity from the COVID-19 pandemic should not be overlooked. The S&P 500 Index reached an all-time peak of 3,386 on February 19, before it fell 33.9% in just 32 days to 2,237. As measured from March 23, 2020, however, the Index regained the previous high in less than five months on August 18 (an increase of 51.5%). For the S&P 500 Index and the Nasdaq Composite Index, the period of 2019 and 2020 represents the best two-year performance since 1998 and 1999, during the heart of the Dot-Com boom.

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