Monthly Archives: May 2021

Delaware Court Orders Up Prevention Doctrine to Require Reluctant Buyer to Close

Matthew Salerno, Mark McDonald, and James Langston are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Salerno, Mr. McDonald, Mr. Langston, Roger Cooper, and Pascale Bibi, 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 Snow Phipps v. KCAKE Acquisition, [1] the Delaware Court of Chancery ordered the buyer (Kohlberg) to close on its $550 million agreement to purchase DecoPac, a cake decorations supplier. In doing so, the court easily rejected the buyer’s claims that the COVID-19 pandemic resulted in a material adverse effect (“MAE”) and that the steps taken by the company to respond to the pandemic breached the ordinary course covenant. More novel was the way in which the court sidestepped the near-universal construct in leveraged buyouts that the seller will be entitled to a specific performance remedy requiring the buyer to close only if the buyer’s debt financing is also available. The court—pointing to the “prevention doctrine”—concluded that the buyer’s failure to use reasonable best efforts to obtain the debt financing was a breach of the agreement and, therefore, the buyer could not rely on the unavailability of debt financing to avoid being required to specifically perform its obligations under the contract. While alternative financing for the DecoPac transaction proved to be available and Snow Phipps and Kohlberg have agreed to close later this week, financial sponsor buyers will need to continue to be vigilant in ensuring that the prevention doctrine does not erode the remedies architecture that has become ubiquitous in leveraged buyouts.


The plaintiffs in the litigation were Snow Phipps Group, LLC, a private equity firm, and DecoPac Holdings Inc., the parent company of a supplier and marketer of cake decorating products to supermarkets for use in their in-store bakeries (together “DecoPac” or the “sellers”). [2] In the early months of 2020, as the COVID-19 pandemic began to worsen, DecoPac negotiated a sale of its cake decoration supply business to private equity firm Kohlberg & Company (“Kohlberg”). [3] The negotiations culminated in a $550 million stock purchase agreement (“SPA”) signed by DecoPac and Kohlberg’s acquisition vehicle KCAKE Acquisition, Inc. on March 6, 2020. [4] The $550 million purchase price reflected a $50 million reduction obtained by Kohlberg in the 48 hours prior to signing, reflecting Kohlberg’s estimates of the anticipated impact of the COVID-19 pandemic and market volatility on the DecoPac business and Kohlberg’s cost of financing the acquisition. [5]


Speech by Commissioner Lee on Myths and Misconceptions about “Materiality”

Allison Herren Lee is Acting Chair at the U.S. Securities and Exchange Commission. This post is based on her recent Keynote Remarks at the 2021 ESG Disclosure Priorities Event. The views expressed in the post are those of Acting Chair Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you, Neil [Stewart] for the introduction and for having me today as you discuss the important and timely topic of climate and ESG disclosures. I very much look forward to hearing from Janine [Guillot] and Julie [Bell Lindsay]. You both bring years of experience and significant expertise to these issues, and your organizations, SASB and CAQ, have contributed significantly to the development and understanding of ESG disclosure and assurance related to such disclosures.

This is a highly sophisticated audience of accountants, auditors, attorneys, and other professionals, with deep knowledge concerning public company accounting and other disclosures—how to identify, prepare, and verify them. The SEC needs your advice, your thoughts, and your expertise as we endeavor to craft a rule proposal for climate and ESG disclosures. [1]

As we all debate and deliberate over these issues, a great deal of attention is focused on the concept of materiality. Materiality is a fundamental proposition in the securities laws and in our capital markets more broadly. The system for public company disclosure is generally oriented around providing information that is important to reasonable investors. Although the SEC must craft the rules, and companies, with the help of lawyers and accountants, must comply with them, the viewpoint of the reasonable investor is the lens through which we all are meant to operate. [2] From a policy perspective, it is unfailingly simple and makes perfect sense: those with the money are the ones who decide how to spend it. And there is a clear corollary to that point—reinforced by Supreme Court precedent [3]—which is that investors are also the ones who decide what information they need to make those choices.


Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

Emily Johnston Ross is a Senior Financial Economist at the FDIC Center for Financial Research in the Division of Insurance and Research; Song Ma is Assistant Professor of Finance at Yale School of Management; and Manju Puri is J. B. Fuqua Professor of Finance at Duke University Fuqua School of Business. This post is based on their recent paper.

Private equity (PE) has become an important component in the financial system. An extensive literature explores the effects of private equity buyouts on firm-level outcomes, with some papers arguing that such buyouts positively affect the operations of target companies. At the same time, the private equity industry generates much controversy. Critics often argue that private equity transactions involve heavy financial engineering schemes that introduce a substantial debt burden on the target companies and default risks to the banking sector (Andrade and Kaplan, 1998; Kaplan and Strömberg, 2009). This concern could be exacerbated during an economic downturn due to the cyclicality of private equity investment (Bernstein, Lerner, and Mezzanotti, 2019).

How does private equity interact with and affect the stability of the financial system, especially during periods of crisis? In a recent paper titled Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis, we investigate this question by examining private equity investors’ engagement in the failed bank resolution process in the aftermath of the 2008 crisis. This is a novel setting in which to study private equity and financial stability. Bank failures and resolutions are a salient feature of financial crises, and have a significant real effect on the economy (Bernanke, 1983; Granja, Matvos, and Seru, 2017). Indeed, banks are central to the functioning of financial markets and have important externalities (Gorton and Winton, 2003). Our setting allows us to examine private equity investors’ role in one of the most crucial steps in stabilizing the financial system in a crisis.


2021 Say on Pay & Proxy Results

Todd Sirras is Managing Director, Justin Beck is Consultant, and Austin Vanbastelaer is Senior Consultant at Semler Brossy LLP. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Beck, Mr. Vanbastelaer, Alexandria Agee, Sarah Hartman, and Kyle McCarthy. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, and Executive Compensation as an Agency Problem, both by Lucian Bebchuk and Jesse Fried.

2021 Say on Pay Results

Breakdown of Say on Pay Vote Results

22 Russell 3000 companies (3.3%) failed Say on Pay thus far in 2021. 14 companies failed since our last report and are highlighted in bold on page 3 of this report. Our evaluation of the likely reasons for failure indicates that four of the twenty-two failed Say on Pay votes are due in part to Covid-19 related actions.


Remarks by Commissioner Lee on Leveraging Regulatory Cooperation to Protect America’s Investors

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the 2021 Section 19(d) Conference. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good afternoon. It’s a privilege to welcome you all to the annual Section 19(d) Conference. I want to start by commending NASAA and SEC staff for their work in putting this event together. And thanks to our colleagues from NASAA and FINRA for joining us and for being steadfast partners in our shared investor protection work. Our organizations work closely together throughout the year, but this conference represents an important opportunity for us to reflect on the policy and regulatory concerns that we share, and to deepen our cooperative partnership.

The issues on the agenda today are all critically important for investors: Regulation Best Interest, gamification of trading, ESG, and the private markets. I’d like to touch briefly on each topic but ultimately focus my remarks on the private market and the need for certain critically important reforms to enhance investor protection and increase visibility into that market.

Regulation Best Interest

With Reg BI having been in effect for nearly a year now, we are in a position to begin assessing whether it is functioning as intended—as an elevated standard of care and with clear, understandable disclosures regarding what investors can expect from their advisory relationships. The SEC, FINRA, and the states have all been actively focusing on Reg BI compliance in their examination programs, and those exams should provide a reliable source of data we can mine to consider the effectiveness of the rules as well as potential enhancements. [1] And, as Commissioner Crenshaw observed recently, [2] we are now in a position to test investors’ understanding of the actual Forms CRS that are being filed and other disclosures under Reg BI to determine whether they are effective. Given that disclosure is at the core the SEC’s mission, [3] what could be more important than devoting the resources necessary to ensure we are getting that fundamental undertaking right? What’s more, when we rely heavily on disclosure—as we have with Reg BI—to accomplish our investor protection mission, it is incumbent upon us to employ effective analytical techniques to test the effectiveness of such disclosures.


Diversity and Performance in Entrepreneurial Teams

Sophie Calder-Wang is assistant professor of real estate at The Wharton School of the University of Pennsylvania; Paul A. Gompers is Eugene Holman Professor of Business Administration at Harvard Business School; and Kanyuan Huang is a PhD student in accounting at UCLA. This post is based on their recent paper.

Diversity and inclusion have become an increasingly central issue in many workplaces, but what are the performance implications of diversity-promoting efforts for firms and workers?

In recent years, policymakers have proposed and implemented gender (or race/ethnicity) quotas in many settings. For instance, the Norwegian government enforced a gender quota on corporate boards. More recently, California has become the first state in the U.S. to mandate racially or otherwise diverse directors. In principle, a diverse team can perform better because of its members’ broader perspectives and knowledge base. Still, at the same time, differences in backgrounds may hinder communication or trust, thus lowering overall productivity.

In this study, we examine the role of diversity and performance in an entrepreneurial setting by examining a unique setting where Harvard Business School MBA students proposed and worked on new business ventures as a team. We have three main findings: First, when students are free to choose their teammates, we find strong tendencies, up to 25% more likely, to select someone who shares the same gender or race/ethnicity. Second, when students are randomly assigned to teams with balanced demographic characteristics by a computer algorithm, we find that more diverse teams performed worse than homogeneous teams. Nonetheless, when students form teams voluntarily, diverse teams performed just as well as homogenous teams. Lastly, we find that when a faculty advisor is a woman, teams with more women performed significantly better. We do not find any differential performance effect on teams when a faculty advisor is a man.


Human Capital Disclosures Findings From 2020 10-Ks

Neri Bukspan and Marc Siegel are partners in Financial Accounting Advisory Services at EY. This post is based on their EY memorandum.

Trends and observations


In August 2020, the Securities and Exchange Commission (SEC) introduced an important new requirement for registrants to provide disclosures about human capital. The new requirements were introduced in connection with the SEC rulemaking streamlining some of the disclosure requirements for business, legal proceedings and risk factors under Regulation S-K.

Commencing with most reports filed after 9 November 2020, companies now provide in their annual reports and registration statements a description of human capital resources to the extent material to an understanding of their business. Specifically, a registrant must disclose a description of “human capital resources, including the number of persons employed” and “measures or objectives that the registrant focuses on in managing the business (such as depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”


Corporate Purpose and Corporate Competition

Mark J. Roe is David Berg Professor of Business Law at Harvard Law School. This post is based on his 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).

The large American corporation faces ever-rising pressure to pursue a purpose that is more than just for shareholder profit. This rising pressure interacts with sharp changes in industrial organization in a way that ought to be further analyzed and considered: at the same time that purpose pressure has been increasing, firms’ capacity to accommodate pressure for a wider purpose is rising as well.

I begin this paper by contrasting classical corporate purpose—shareholder primacy—with the wider purpose sought today. I then ask: In principle, is purpose pressure more likely to succeed in a competitive industry or a non-competitive one?

Once we see that accommodating a nonprofitable purpose in a competitive market faces more hurdles than in a noncompetitive one, I then explore the extent to which the facts-on-the-ground match the expected relationship. I start with the evidence of decreasing competition and then turn to the evidence that stakeholders do better in markets where competition is weak. More profitable firms share profits with stakeholders and are more socially responsible than less profitable firms.


Incorporating ESG Measures Into Executive Compensation Plans

Kristen Sullivan is Partner, Sustainability and KPI Services, at Deloitte & Touche LLP, and Maureen Bujno is Managing Director and Audit & Assurance Governance Leader at the Center for Board Effectiveness, Deloitte & Touche LLP. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried, and Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried.


With the 2021 proxy season underway, environmental, social, and governance (ESG) topics are dominating the conversation. While dialog between companies, investors, and other stakeholder groups has accelerated on a variety of ESG topics, the role of ESG in long-term value creation had already been steadily increasing. According to a recent study, investors that collectively manage $17.1 trillion in US-domiciled assets have adopted sustainable investing strategies, which integrate ESG criteria within investment decisions. Sustainable investing has increased nearly 43% since 2018, demonstrating that the incorporation of ESG considerations into investment decisions has gained significant traction. [1] Many companies now recognize that developing and implementing an ESG strategy is more the norm than an exception and are evaluating how best to demonstrate progress through robust measures and enhanced disclosures.

Investors have made their ESG expectations known and will likely continue to use their voting power to hold companies accountable for meaningful progress, demonstrated through effective disclosure, on ESG issues in this year’s proxy season. For example, in his 2021 annual letter to CEOs, BlackRock CEO Larry Fink reinforced his previous call for companies to align ESG and climate disclosures with leading standards, such as the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD). His 2021 letter further emphasized a focus on climate, specifically net-zero strategies, as well as on pertinent talent strategy elements such as diversity, equity, and inclusion. Given this and similar statements, it is not surprising that in 2021, many investors have signaled plans to increase support for shareholder sustainability proposals.


The WeWork Decision and its Implications for Director Email Accounts

Nicholas O’Keefe is partner, Douglas F. Curtis is senior counsel, and Max Romanow is an associate at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter memorandum by Mr. O’Keefe, Mr. Curtis, Mr. Romanow, and Matthew J. Douglas, and is part of the Delaware law series; links to other posts in the series are available here.


A recent Delaware court decision, In re WeWork Litigation, put a spotlight on the risk of corporate employees and directors destroying privilege by communicating through email. Questions about the security and confidentiality of electronic communications have been around for a long time. But at least under Delaware law, the WeWork decision expanded the applicability of a test that was originally intended for evaluating privilege in the context of employer-employee disputes where the employee uses a work email address for communicating with his or her personal attorney. WeWork applied the test and held that privilege was destroyed where two employees of Sprint, a company then 84% owned by SoftBank Group Corp. (SoftBank), exchanged emails about The We Company (WeWork), which was another company in which SoftBank had a significant investment, using their Sprint email accounts. This broader application of the test has implications for whether companies communicating privileged information with their outside directors through email accounts held by those directors with their employers risks destroying privilege.


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