Monthly Archives: May 2021

New Human Capital Disclosure Requirements; Inconsistent 10-K Disclosures

Melissa Pfeuffer is Capital Markets Business Development Practice Group Specialist at Mayer Brown LLP. This post is based on her Mayer Brown memorandum.

Prior to 2020, the last significant revisions to Regulation S-K were over 30 years ago. As modernization of the human capital disclosure requirements have caught up with the times, companies are faced with setting reporting precedents. See our previous post that provides an explanation of the Regulation S-K amendments.

How did companies respond to the SEC’s new human capital disclosure requirement? To answer this question, a new report published by Intelligize discusses the differences in hundreds of Forms 10-K filed by S&P 500 companies. With no two filings alike, analysis shows that companies seemed to build on each other as time progressed; earlier filings were shorter, and less-inclusive in their disclosures, while later filings were longer and more descriptive. The study sample in the report specifically focuses on Form 10-K filings made from November 2020 through March 2021. Varying in style and content, the filings examined were bucketed into three wide-ranging groups:


SEC Signals Need for Better Disclosures About Delayed Filings

Nicholas Grabar and David Lopez are partners and Fernando Martinez is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Grabar, Mr. Lopez, Mr. Martinez, Matthew Solomon, and Alexander Janghorbani.

On April 29, 2021, the Securities and Exchange Commission (the “SEC”) announced settled charges against eight public companies that filed notifications of late filings on Form 12b-25 (more commonly known as “Form NT”) without disclosing in those filings a pending restatement or correction of financial statements. [1]

These settlements are a reminder that filing a Form NT is not only a necessary procedural step when an issuer will be delayed in filing a 10-K, 10-Q, 20-F or other specified report; [2] it is also a decision point for making potentially sensitive disclosure to the market, and should reflect input from both a company’s IR and legal departments. The fines imposed in connection with these settlements ranged from $25,000 to $50,000 based on the number of deficient Form NTs filed.

Rule 12b-25 and Form NT: What do they require?

Rule 12b-25 requires a public company that is unable to meet the reporting deadline for an annual or quarterly report to file a Form NT no later than one business day after the due date of the report. In its Form NT filing, a company must explain in reasonable detail why it was unable to file the report on time and represent to the SEC that the reasons for the delay could not have been eliminated without “unreasonable effort or expense.” Form NT also requires a company to indicate whether it anticipates any significant change in its results of operations from prior periods and either provide a narrative and quantitative explanation of the expected change or state why a reasonable estimate cannot be provided.


Does Common Ownership Really Increase Firm Coordination?

Katharina Lewellen is Associate Professor of Business Administration at Dartmouth College Tuck School of Business, and Michelle Lowry is TD Bank Endowed Professor at Drexel University LeBow College of Business. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. 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 The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); and Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

In recent years, academics and regulators have raised concerns about the high levels of common ownership within U.S. firms. The argument is that common owners—that is, investors holding stakes in multiple firms within a single industry—have incentives to discourage competition among industry rivals in their portfolios. Common ownership has increased steadily over the past few decades, fueled by the rise in institutional ownership and the emergence of large and highly diversified institutional investors. Whereas only 17% of S&P 500 firms had a blockholder that also owned a block in a competitor firm in 1990, this fraction increased to 81% by the end of 2015.

A growing number of academic studies conclude that the rise in common ownership has indeed caused cooperation among firms to increase and competition to decrease. This evidence led to several prominent policy proposals to regulate or limit common ownership. However, empirical testing of the effects of common ownership is challenging as ownership and firm behavior could correlate for many reasons even in the absence of a causal link. In this paper, we evaluate the empirical approaches used in prior literature to identify the effects of common ownership. With a more thorough understanding of the advantages and shortcomings of each approach, we then revisit the conclusions of prior empirical studies that common ownership affects firm behavior.


Caremark Developments and the Imperative of Regular Risk Review

William Savitt is partner at Wachtell, Lipton, Rosen & Katz. This post is based on his Wachtell memorandum. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

Every day, the litigation environment reinforces the imperative for boards of directors to regularly review key enterprise risks. In a recently filed complaint, stockholders of NiSource, Inc, a natural gas supplier, sued to hold the company’s directors liable for breach of fiduciary duty arising out of a tragic 2018 pipeline accident that caused one fatality, multiple injuries, and mass evacuations. Alleging that the NiSource board disregarded “numerous red flags evidencing violations of gas pipeline safety laws that occurred over a number of years,” the stockholder plaintiff charged the directors with “bad faith oversight failures [that] are not protected under Delaware law.”

Whether the lawsuit ripens into fiduciary liability will turn on whether NiSource can persuade a court that it had in place control and monitoring functions commensurate with the scope and scale of the potential risk. Delaware’s courts have recently sustained against a motion to dismiss multiple “oversight” claims of this kind—often called Caremark claims, for the 1996 case where the theory of liability was first recognized—and such claims now regularly follow whenever a company has bad news. Once a Caremark claim survives a pleadings motion, it becomes a vehicle for extensive discovery and takes on substantial settlement value, even if not ultimately meritorious.


Weekly Roundup: May 14–21, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 14–20, 2021.

Cybersecurity Oversight and Defense — A Board and Management Imperative

Materiality: The Word that Launched a Thousand Debates

Do ESG Funds Make Stakeholder-Friendly Investments?

SEC Considering Heightened Scrutiny of Projections in De-SPAC Transactions

Which Corporate ESG News Does the Market React To?

The Lipton Archive

Human Capital Disclosure: What Do Companies Say About Their “Most Important Asset”?

Chalking Up a Victory for Deal Certainty

Court of Chancery Finds Pandemic Was Not an MAE—Snow Phipps

The Case for a Best Execution Principle in Cross-Border Payments

2021 Proxy Season Issues and Early Voting Trends

James J. Miller is Senior Managing Director at Alliance Advisors. This post is based on his Alliance Advisors memorandum.

With the proxy season in full swing, this post looks at the issues and trends that thus far have defined the 2021 season.


Director Elections

  • Year-over-year average investor support for directors remains statistically unchanged at 95.6% compared to last year’s support level at this time, however, many expect support levels to drop as the season progresses based on 2020 full-season results
  • Average support for female directors is 1.1 ppts. higher than male nominees—in line with prior years

Say on Pay

  • Increased opposition to say on pay votes at Russell 3000 companies and is more pronounced at S&P 500 companies (based on small sample)
  • The unusually low support levels (89.0% Russell 3000 and 87.1% S&P 500) coupled with a high failure rate 2%—twice as high as the failure rate observed at this time last year—likely indicate the discontent of shareholders/ proxy advisors with those companies that made significant changes to executive compensation without descriptive disclosure and/or a compelling rationale [1]


  • E&S hot topics remain unchanged—climate change, political activity, diversity—but shareholder support has greatly increased, most notably, at large institutions
  • Most expect support levels to beat historical averages as investors signal increased willingness to support reasonable proposals


The Case for a Best Execution Principle in Cross-Border Payments

Douglas W. Arner is Kerry Holdings Professor of Law at the University of Hong Kong; Ross Buckley is Scientia Professor and King & Wood Mallesons Chair of International Finance Law at the University of New South Wales; and Dirk A. Zetzsche is Professor and ADA Chair in Financial Law at the University of Luxembourg and Director of the Center for Business & Corporate Law at Heinrich Heine University in Duesseldorf. This post is based on a recent paper by Mr. Arner, Mr. Buckley, Mr. Zetzsche, and Maria Lucia Passador.

Cross-border payments are typically slow, with poor transparency, limited access, and much higher overall costs than domestic payments. Our new paper analyzes how the best execution principle, developed in the context of securities and derivatives regulation, should be applied to cross-border payments. Under this principle, financial institutions would be legally required to provide the most advantageous order execution in terms of speed, risks and costs for their customers given the prevailing market environment.

Cross-border payments currently rest on a system of large, globally connected correspondent banks. The relationship among payment institutions determines how orders are routed. Payment institutions charge their clients on a “cost plus profit” basis and some institutions benefit from rebates based on liquidity volume (kick-backs) and from reduced rates and soft commissions elsewhere in the payment chain. Overall, there is little incentive for payment institutions to put their clients first in terms of speed, costs and risks in this environment of “best friends”. Applying a “best execution” requirement for cross-border payments would be transformative in the same way as its application in the US, EU and UK in the context of securities transactions.

In drafting a best execution rule for cross-border payments we suggest six issues be considered.


Court of Chancery Finds Pandemic Was Not an MAE—Snow Phipps

Gail Weinstein is senior counsel, and Philip Richter and Steven Epstein are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Warren S. de Wied, and Randi Lally, 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 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 Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

The Delaware Court of Chancery has issued its much anticipated post-trial decision in Snow Phipps Group, LLC v. KCake Acquisition, Inc. (April 30, 2021), which involved private equity firm Kohlberg’s attempted termination of its $550 million deal to acquire DecoPac, Inc. from private equity firm Snow Phipps. Kohlberg contended that the COVID-19 pandemic constituted a “Material Adverse Effect” (MAE) on DecoPac; and that DecoPac’s responses to the pandemic constituted a breach of its covenant to operate, pending closing, in the ordinary course of business. Then-Vice Chancellor (now Chancellor) Kathaleen McCormick found that (i) the pandemic did not constitute an MAE and (ii) DecoPac did not breach its ordinary course covenant. The court ruled that Kohlberg therefore must close the acquisition.

In the only other Delaware decision on these pandemic-related issues (AB Stable, issued November 30, 2020), the court similarly held that the pandemic was not an MAE under the merger agreement at issue in that case—but held that the target company’s responses to the pandemic constituted a breach of its ordinary course covenant. The buyer was entitled not to close, Vice Chancellor Laster ruled in that case.


Statement by Commissioner Peirce on S&P Dow Jones Indices LLC

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Today [May 17, 2021] the Commission announced a settled enforcement action against S&P Dow Jones Indices LLC (“S&P DJI”). The Commission charged S&P DJI with violating Section 17(a)(3) of the Securities Act, which prohibits, in the offer and sale of securities, engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit on the purchaser. In charging S&P DJI, the Commission addresses conduct that is outside the reach of Section 17(a)(3). Moreover, this precedent, if not appropriately confined to its particular facts, will open the door to subsequent expansions of the securities laws to reach all manner of actors and conduct with even more tenuous connections to the offer and sale of securities. Accordingly, I do not support bringing this action.


Is Public Equity Deadly? Evidence from Workplace Safety and Productivity Tradeoffs in the Coal Industry

Erik Gilje is Assistant Professor of Finance at The Wharton School of the University of Pennsylvania, and Michael Wittry is Assistant Professor of Finance at the Fisher College of Business at The Ohio State University. This post is based on their recent paper.

Privately held and publicly traded firms are responsible for roughly equal portions of U.S. economic output, but are subject to extremely large differences in agency and financial frictions, which can lead to significant variation in corporate policies and real outcomes. Using detailed asset-level data from the U.S. coal industry, our paper examines how listing related frictions affect potential tradeoffs that firms face between workplace safety and firm productivity.

Theory offers competing predictions on how listing status might relate to workplace safety. On the one hand, the cost of adverse workplace incidents could be higher for public companies, which have greater disclosure requirements and reputational risk, and are subject to greater stockholder and political pressure than private firms. Public firms also have greater access to external capital markets, potentially alleviating cuts to safety investments when internally constrained. These factors each point towards public firms having safer workplaces than their private counterparts.

On the other hand, private firms have less diversified ownership, which may alleviate agency costs arising from information asymmetry. Ownership concentration may also limit risk-sharing opportunities, and thus, risk-taking. Further private firm owners may have strong social ties to the local community and derive personal utility from a safe workplace and good relationships with employees. These factors would suggest that public firms engage in activities that result in a higher workplace injury and accident propensity.


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