Monthly Archives: April 2021

Supreme Court to Weigh in on Presumption of Reliance in Securities Class Actions: Goldman Sachs v. Arkansas Teacher Retirement System

Jason Halper is partner, Matthew Karlan is special counsel, and Nicholas Caros is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum. Related research from the Program on Corporate Governance includes Rethinking Basic, by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here); and Price Impact, Materiality, and Halliburton II, by Allen Ferrel and Andrew H. Roper (discussed on the Forum here).

On March 29, the United States Supreme Court heard oral argument in Goldman Sachs Group, Inc., et al. v. Arkansas Teacher Retirement System, et al., No. 20-222. The closely-watched case raises a host of important issues concerning the substantive and procedural requirements for certifying a securities fraud class action. Most notably, the Court will clarify what evidentiary burden a defendant bears in attempting to rebut the “fraud on the market” presumption of reliance that permits claims asserted under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) to proceed as class (as opposed to individual) actions. While the Court has opined on this issue in past decisions, including in its seminal Basic v. Levinson decision in 1988, which established the doctrine, and more recently in Amgen and Halliburton I & II, the lower courts have struggled to apply those rulings consistently.

More broadly, the case implicates the challenges lower courts have faced in applying the Supreme Court’s instruction that class action plaintiffs, whether in the Section 10(b) context or otherwise, “must affirmatively demonstrate” compliance with Federal Rule of Civil Procedure 23. As the Court held in Comcast and Wal–Mart, the “Rule ‘does not set forth a mere pleading standard.’ Rather, a party must not only ‘be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact,’ typicality of claims or defenses, and adequacy of representation, as required by Rule 23(a). The party must also satisfy through evidentiary proof at least one of the provisions of Rule 23(b),” including that “questions of law or fact common to class members predominate over any questions affecting only individual members.” Importantly, the Court made clear that “such an analysis will frequently entail ‘overlap with the merits of the plaintiff’s underlying claim.’”


Gender Diversity in the Silicon Valley

David A. Bell and Dawn Belt are partners and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

Fenwick has released its updated study about gender diversity on boards and executive management teams of the technology and life science companies included in the Silicon Valley 150 Index and very large public companies included in the Standard & Poor’s 100 Index. [1] The Fenwick Gender Diversity Survey uses 25 years of data to provide a better picture of women’s participation at the most senior levels of public companies in Silicon Valley.

The report reviews public filings from 1996 through 2020 to analyze the gender makeup of boards, board leadership, board committees and executive management teams in the two groups, with special comparisons showing how the Top 15 largest companies in the SV 150 fare, as they are the peers of the large public companies included in the S&P 100. [2]

Executive Summary

Gender diversity in corporate leadership—and diversity in the business world more broadly—continues to drive vigorous discussion across the country, with Silicon Valley and the tech industry often at the center of heightened scrutiny. In recent years, some aspects of gender diversity saw significant gains. The S&P 500 reached a milestone of no longer having any all-male boards. In politics, the United States elected its first woman vice president, California’s own Kamala Harris, on the heels of a 2018 midterm election that ushered in a record number of women to serve in Congress. California became the first state in the U.S. to require public companies to include women and people from underrepresented communities on their corporate boards—moving the needle toward gender equity. Finally, in December 2020 Nasdaq proposed rules that would require companies listed on its exchanges to generally have at least two “diverse” directors, including at least one woman director—or explain to stockholders why they do not. Public pressure to move from the status quo continues to be spurred on by institutional investors, regulators, lawmakers, employees, customers and other stakeholders. All of these discussions are taking place amid a national focus on issues of racial and ethnic diversity.


Federal Court Dismisses Derivative Complaint Seeking to Impose ESG Initiatives on a Public Company

Rick Horvath is of counsel and Peter Stone and Edward Han are partners at Paul Hastings LLP. This post is based on their Paul Hastings 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); 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).

In the past year, there has been a concerted effort by certain plaintiff firms to weaponize environmental, social, and governance (“ESG”) principles to attack corporate boards. On March 19, 2021, the United States District Court for the Northern District of California in Ocegueda v. Zuckerberg, Ca. No. 3:20-cv-04444-LB (N.D. Cal. Mar. 19, 2021), struck a blow against these efforts by granting defendants’ motion to dismiss. In dismissing plaintiff’s complaint, the Court applied fundamental principles of corporate law which set a high pleading bar a plaintiff must clear to impose ESG initiatives on a public company through litigation. Hopefully, courts will continue to carefully apply these principles to deter this litigation strategy. Indeed, the adoption of ESG initiatives is fundamentally a business decision involving the board of directors and the stockholders, a decision that does not belong in the courtroom.


In the second half of 2020, numerous complaints were filed in federal courts across the country, generally asserting that the boards of directors of defendant public companies (1) breached their fiduciary duties by failing to nominate a diverse set of candidates for election to the board of directors, in contravention of the companies’ statements in favor of diversity, (2) breached their fiduciary duties by ignoring red flags of allegedly unlawful discriminatory employment practices within their organizations, and/or (3) violated the federal proxy laws and regulations by failing to disclose the companies’ allegedly discriminatory practices in the companies’ annual proxy statements seeking the election of the directors. These claims were derivative in nature, and sought both to recover damages for the corporations on whose behalf the complaints were purportedly brought and to impose corporate governance reforms.


Statement by Acting Director Coates on SPACs, IPOs and Liability Risk under the Securities Laws

John Coates is Acting Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Mr. Coates, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs). [1] [2] Shareholder advocates—as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves [3]—are sounding alarms about the surge. Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public. [4] With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing.

The staff at the Securities and Exchange Commission are continuing to look carefully at filings and disclosures by SPACs and their private targets. As customary, and in keeping with the Division of Corporation Finance’s ordinary practices, staff are reviewing these filings, seeking clearer disclosure, and providing guidance to registrants and the public. They will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.


Sustainable Investing in Equilibrium

Lubos Pastor is Charles P. McQuaid Professor of Finance and Robert King Steel Faculty Fellow at the University of Chicago Booth School of Business; Robert F. Stambaugh is Miller Anderson & Sherrerd Professor of Finance and Professor of Economics at The Wharton School of the University of Pennsylvania; and Lucian A. Taylor is Associate Professor of Finance at The Wharton School of the University of Pennsylvania. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes 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 The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

Sustainable investing considers not only financial objectives but also environmental, social, and governance (ESG) criteria. Assets managed with an eye on sustainability have grown to tens of trillions of dollars and seem poised to grow further. Given this rapid growth, the effects of sustainable investing on asset prices and corporate behavior are important to understand.

We analyze both financial and real effects of sustainable investing through the lens of an equilibrium model. The model features many heterogeneous firms and agents, yet it is highly tractable, yielding simple and intuitive expressions for the quantities of interest. The model illuminates the key channels through which agents’ preferences for sustainability can move asset prices, tilt portfolio holdings, determine the size of the ESG investment industry, and cause real impact on society.

In the model, firms differ in the sustainability of their activities. “Green” firms generate positive externalities for society, “brown” firms impose negative externalities, and there are different shades of green and brown. Agents differ in their preferences for sustainability, or “ESG preferences,” which have multiple dimensions. First, agents derive utility from holdings of green firms and disutility from holdings of brown firms. Second, agents care about firms’ aggregate social impact. In a model extension, agents additionally care about climate risk. Naturally, agents also care about financial wealth.


Weekly Roundup: April 2–8, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 2–8, 2021.

Comment Letter on Rule 144 Holding Period and Form 144 Filings

Twenty Years Later: The Lasting Lessons of Enron

A Revised Monitoring Model Confronts Today’s Movement Toward Managerialism

Changing Investment Stewardship Practices in a Post Covid-19 World

2020 in Hindsight: Key Considerations for Directors in 2021

Fair Price for Delaware Fiduciary Actions Can Exceed Appraisal Fair Value

Credit for Climate Action

PCAOB Approves Formation of New Standards Advisory Group to Further Enhance Stakeholder Engagement and Provide Advice

Erin Dwyer is Deputy Director of the Office of External Affairs at the Public Company Accounting Oversight Board. This post is based on a publication authored by PCAOB Staff.

The Public Company Accounting Oversight Board (PCAOB) today [March 29, 2021] approved the formation of a new advisory group that further expands the PCAOB’s stakeholder engagement and provides new opportunities for investors and other stakeholders to advise the Board.

Today’s unanimous vote to approve the charter of the Standards Advisory Group (SAG) creates an 18-person expert body. Under the charter, representatives from the investor community will hold the most SAG seats (five), followed by audit professionals (four), and three seats each for audit committee members or directors, financial reporting oversight personnel, academics and others with specialized knowledge. SAG members will serve two-year terms.

“Building on our concerted effort to improve our outreach over the last several years, we are now taking the PCAOB’s engagement to a higher level by creating a new, more effective structure for the Board to receive advice from our stakeholders on key PCAOB initiatives,” said PCAOB Chairman William D. Duhnke III. “The formation of the Standards Advisory Group extends the dialogue we’ve advanced with investors and others since 2018 and gives stakeholders additional and tangible opportunities to assist the Board in accomplishing its mission.”


Will Nasdaq’s Diversity Rules Harm Investors?

Jesse M. Fried is Dane Professor of Law at Harvard Law School. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

In December 2020, Nasdaq asked the Securities and Exchange Commission (SEC) to approve new diversity rules. The aim is for Nasdaq-listed firms to have at least one director self-identifying as female and another self-identifying as an underrepresented minority or LGBTQ+. To avoid forced delisting, a firm must “diversify or explain”: either have two such diverse directors, or say why it does not. Nasdaq also wants firms to disclose every director’s self-identified race, gender, and LGBTQ+ status.

While tipping its hat to the social justice movement, Nasdaq justifies the proposed rules by claiming the rules will benefit investors. Nasdaq’s 271-page proposal to the SEC cites numerous studies in an attempt to support this claim.

In a paper recently posted on SSRN, Will Nasdaq’s Diversity Rules Harm Investors?, I explain that the empirical evidence provides little support for the notion that gender or ethnic diversity in the boardroom increases shareholder value. In fact, rigorous scholarship—much of it by leading female economists—suggests that increasing board diversity can actually lead to lower share prices. The adoption of Nasdaq’s proposed rules may well generate substantial risks for investors.


Credit for Climate Action

Margaret E. Peloso is partner, Sarah E. Fortt is counsel, and Lindsay Hall is senior associate at Vinson & Elkins LLP. This post is based on a Vinson & Elkins memorandum by Ms. Peloso, Ms. Fortt, Ms. Hall, Sarah K. Morgan, Benjamin S. Lippard, and Austin J. Pierce. 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).

The Fourth National Climate Assessment, issued by the U.S. Global Change Research Program, found that climate change is already having an impact on businesses and communities across the United States. The report also found that, without significant global mitigation and adaptation efforts, climate change will inflict increasing disruption and damage. International reports have made similar findings. As a result of these existing and anticipated disruptions, climate change has become a major business concern for many company executives and investors.

Certain members of the financial sector have been proactive in evaluating ways to reduce the greenhouse gas (“GHG”) emissions attributable to their operations and financings, adopting climate governance and risk-management actions at a greater rate than other sectors. In fact, as of this writing, each of the major U.S. banks has made a commitment to “net zero” or “Paris Aligned” reductions in their financed greenhouse gas emissions. As part of this effort, members of the financial sector have both created and joined a series of initiatives designed to better account for their “financed emissions,” or the emissions generated by the operations of entities in which a financial institution invests or to which it lends money.


Using Household Balance Sheets to Promote Consumer Welfare and Define the Necessary Role of the Welfare State

Jonathan R. Macey is Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale Law School. This post is based on his recent paper, forthcoming in the Texas Law Review.

In a recent paper, I point out that access to credit sometimes provides a provide a path out of poverty and even a gateway to real prosperity for those who use the funds to start a business, but when credit is granted improvidently it can lead to financial ruin for the borrower up to and including homelessness and food insecurity. In light of the extreme range of consequences from the granting of consumer credit, it is peculiar that the various extant regulatory approaches to consumer lending do not distinguish between these two wildly disparate effects of the lending process. Rather current approaches to regulation focus almost exclusively on disclosure of certain features of the loan and the annual percentage rate (“APR”) associated with the loan.

A better regulatory approach would be to utilize the analytic framework developed in this paper, which utilizes the effects of borrowing on the balance sheet of the household taking on consumer debt. The key to this framework is based on the fact that it is easy to determine how the proceeds from a particular loan will be allocated, because borrowers must generally inform lenders about how the proceeds of a loan will be deployed. With this basic, non-technical, yet critical item of information, it is possible to determine whether, ex ante (which in this context means at the moment the loan is made), the immediate effects of the loan on the borrower’s balance sheet.


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