Monthly Archives: May 2021

Chalking Up a Victory for Deal Certainty

Hille R. Sheppard is partner and Charlotte K. Newell is an associate at Sidley Austin LLP. This post is based on their Sidley memorandum, 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 The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

Last Friday [April 30, 2021], soon-to-be Chancellor McCormick issued a decision in Snow Phipps Group, LLC v. KCake Acquisition, Inc. that ordered the defendant buyers to specifically perform their agreement to acquire DecoPac Holdings, Inc. (“DecoPac” or the Company), which sells cake decorations and technology for use in supermarket bakeries. The 125-page decision, which opens with a quote from the incomparable Julia Child (“A party without cake is just a meeting”), and is rightly described by the Court as a “victory for deal certainty,” offers a detailed analysis of several common contractual provisions in the time of COVID-19. Despite its length, it is a must-read for those interested in the drafting and negotiation of M&A agreements generally, and their operation during the COVID-19 pandemic specifically.

Factual Background

The stock purchase agreement at issue was negotiated in early 2020, as the COVID-19 pandemic was unfolding. At least two key matters were discussed in the 48 hours before the agreement was signed on March 6, 2020. First, on March 4, buyers reduced their offer from $600 million to $550 million; sellers accepted, believing COVID-19’s impact on the market and other potential buyers left only a failed process as the alternative. Second, that same day, the sellers sought to carve “pandemics” and “epidemics” out from the definition of a “Material Adverse Event” (MAE). The buyers refused, though buyers’ counsel assuaged sellers’ counsel that the other broad carveouts (e.g., for an economic downturn) would provide protection if caused by the COVID-19 pandemic.


Keynote Address by Commissioner Crenshaw on Minding the Data Gaps

Caroline Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent Keynote Address at the 8th Annual Conference on Financial Market Regulation (CFMR). The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good afternoon. It’s great to be here at the annual Conference on Financial Market Regulation. I’ve enjoyed the discussions so far, and I am looking forward to hearing more. And I want to welcome Jessica Wachter, our new Chief Economist, to the SEC. I am very pleased that you are joining us, and I am looking forward to working with you.

Before I begin my remarks, I need to mention that the views that I express today are my own and do not necessarily reflect the views of the Commission or its staff.

To start, I want to note that I am thankful for the work that economists do inside and outside the SEC to help us understand the markets we regulate. It’s vital in terms of providing insight and analysis to help shape our regulatory approach. As those of you who have spoken to me may have noticed, I am not an economist. But I do have an economist’s love of good data and the data-driven rulemaking that can result.

Data are central to what we do at the SEC. Economists like you are on the front lines in terms of analyzing, interpreting, and using the data that we have, but without data, no one at the SEC would be able to do their jobs well.

Of course, when we collect data, especially data that contains personal or proprietary information, we need to protect and manage it carefully. Serious harm can come from the mismanagement of data. And we need to be cognizant of the impact on market participants of reporting and disclosure requirements.

However, serious harm can also come from regulating in the absence of relevant data. Without information about the markets that the SEC regulates, we may fail to address problems in our markets, or even make them worse. There is a cost if we fail to obtain the data we need to analyze and to understand the markets—and while the cost may be difficult to quantify, it is very real.


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

Andrew G. Gordon is partner at Equilar, Inc.; David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; and Courtney Yu is Director of Research at Equilar, Inc. This post is based on a recent paper by Mr. Gordon; Mr. Larcker; Ms. Yu; John D. Kepler, Assistant Professor of Accounting at Stanford Graduate School of Business; Amit Batish, Manager of Content and Communications at Equilar; and Brian Tayan, researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. 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) 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).

We recently published a paper on SSRN, Human Capital Disclosure: What Do Companies Say About Their ‘Most Important Asset? that examines corporate human capital disclosure choices following the SEC’s revision of Regulation S-K items last year.

Over 20 years ago, McKinsey penned a famous piece called the “War for Talent,” which argued that corporate success in the dawning information age would hinge on a company’s ability to attract, retain, and develop the most talented members of the labor force. The concept that high-performing talent is both scarce and critical to performance triggered a cottage industry of professionals and specialists dedicated to developing “strategic” human resource programs that position companies to “win the war for talent” and serve as a competitive advantage. Those efforts are broadly referred to as human capital management (HCM).

The primary challenge, which still holds true today, is how to measure the contribution of human capital to corporate strategy and performance. Human capital is an intangible asset (employees are not capitalized on the balance sheet), and its value only shows up indirectly in future corporate results. While some studies link HCM to future performance, the methods for measuring HCM are tenuous at best. For example, Edmans (2011) finds that employee satisfaction scores (a proxy for HCM quality) are positively correlated with long-term stock performance. Employee satisfaction, however, is not a comprehensive measure of HCM.


Mitigating SPAC Enforcement and Litigation Risks

Glen Kopp, Glenn Vanzura, and Jason Linder are partners at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Kopp, Mr. Vanzura, Mr. Linder, and Bradley A. Cohen.

The meteoric rise in the use of special purpose acquisition companies (SPACs)—with more than $98 billion raised in over 300 deals year-to-date alone—has prompted increased government scrutiny of, and civil litigation involving, SPACs and their sponsors, directors, officers, and affiliates. SPAC-related civil litigation is heating up in U.S. state and federal courts, and the Securities and Exchange Commission’s (SEC) commencement of an informal investigation into investment banks’ SPAC activities portends a more aggressive enforcement posture under incoming SEC leadership. This Legal Update examines the evolving regulatory landscape for SPACs and the potential for SEC enforcement in the SPAC market, details emerging trends and risks posed by SPAC-related litigation in state and federal courts, and offers practical guidance for SPAC market participants to mitigate the regulatory and litigation risk posed by such transactions.

I. Background on SPACs

SPACs are shell (or “blank check”) companies formed by a sponsor group to raise capital in an initial public offering (IPO) with the express purpose of using the proceeds to identify and acquire a yet-to-be-identified privately held target company. The sponsor group typically brings expertise and experience in the business or industry sector in which the SPAC will pursue a transaction. After filing a registration statement and navigating the IPO process with the SEC, a publicly traded SPAC has a specific period of time—typically 18 months to two years—to combine with a private company in what is commonly referred to as a “de-SPAC-ing” transaction. If a business combination is not consummated during the designated time period, the public investors’ money must be returned. In the event of a business combination with a target company, SPAC investors have the option of redeeming the common stock portion of their investment (they are allowed to keep the warrant portion of their investment) or becoming shareholders of the combined company.


The Lipton Archive

Lawrence A. Hamermesh is Executive Director of the Institute for Law and Economics at the University of Pennsylvania Law School; Theodore N. Mirvis is partner at Wachtell, Lipton, Rosen & Katz; Leo E. Strine, Jr., the former Chief Justice of the Delaware Supreme Court, is Of Counsel at Wachtell, Lipton, Rosen & Katz; a Senior Fellow at the Harvard Law School Program on Corporate Governance; Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School; and Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School. This post is based on their Wachtell memorandum.

Last week, the University of Pennsylvania Carey Law School, and its Institute for Law and Economics, unveiled a new affiliated website, “The Lipton Archive.” The Lipton Archive is a living corporate law and governance history site focusing on the thought leadership of Martin Lipton of Wachtell, Lipton, Rosen & Katz.

The website has a searchable index of Lipton’s iconic memos from their inception and continuing into the future, as Lipton continues to address the emerging issues of this century. The memos are coded by key SSRN topics, can be searched by key words, and by date. In addition, all of Lipton’s scholarly articles, and several of his important yearly writings (e.g., his Spotlight on Boards series) are available in chronological order.

The site also has a narrative of Lipton’s career and thought leadership, which contains citations not only to his own work, but those of leading thinkers with whom he has engaged in constructive dialogue. Likewise, the site links to the rich materials on Penn Law’s Delaware Corporate Law Resource Center,, so that scholars, teachers, students, and practitioners may use them to conduct research, design interesting classroom and executive and legal education sessions, and deepen their understanding of the history and traditions of corporate governance.


Which Corporate ESG News Does the Market React To?

George Serafeim is the Charles M. Williams Professor of Business Administration at Harvard Business School, and Aaron Yoon is an Assistant Professor of Accounting Information and Management at Northwestern University Kellogg School of Management. 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); 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).

In a recent paper, we use a unique dataset that tracks daily ESG news across thousands of companies and examine to which ESG news the investors react to and why. This question is an important one as ESG related news can be found every day for hundreds of companies as events unfold, and as the media, analysts, regulators, and other stakeholders uncover information. More investors are integrating ESG information in their portfolio management as ESG news can have a major impact on companies. For example, Bank of America Merrill Lynch examined 24 major ESG controversies of S&P 500 companies during 2014-2019 and found that the total market cap loss amounted to $534 billion. In sum, more companies are investing resources in improving their performance on ESG issues and regulators are placing an increasing emphasis on understanding how ESG information flows to the market, seeking to learn how capital-market participants react to this information.

We find that market reacts only to ESG news that are identified as financially material for a given industry by sustainability accounting standards. For example, we find that the average price reaction to positive news that is classified as financial material by SASB is 60 basis points on the day of the news and 75 basis points during the two-day window from the day prior to the day of the news when there are at least three news articles. In addition, the market reaction is larger for news that receive more attention. Specifically, when we restrict the sample to have at least five news articles, the market reaction to positive news increases to 218 basis points and the reaction to negative news is 70 basis points on the day of the news. In contrast, we find no price reaction for the sample of ESG issues that are not classified as material according to SASB standards regardless of how we restrict our sample. Last, but not least, we find that the market reacts to news that is related to social capital issues (i.e., news that primarily relates to product safety, quality, affordability, and access). On average, the price reaction to positive news is 187 basis points on the day of the news and 241 basis points during the three-day window around the day of the news when there are at least three news articles. Overall, we conlcude that investors differentiate their reactions based on whether the news is likely to affect a company’s fundamentals, and therefore their reactions are motivated by a financial rather than a nonpecuniary motive.


SEC Considering Heightened Scrutiny of Projections in De-SPAC Transactions

George Casey, Adam Hakki, and Roger Morscheiser are partners at Shearman & Sterling LLP. This post is based on a Sherman & Sterling memorandum by Mr. Casey, Mr. Hakki, Mr. Morscheiser, Scott Petepiece, Ilir Mujalovic, Kristina Trauger, and other members of the Shearman & Sterling team.

One of the most noteworthy developments in M&A transactions in 2020 and 2021 has been a significant increase in the number of private companies combining with special purpose acquisition companies, or “SPACs,” resulting in the formerly private company becoming a public company (such combinations are commonly referred to as “de-SPAC transactions” or “de-SPACs”). In the four-year period from 2016 to the end of 2019, a total of 104 de-SPAC transactions were announced. [1] By comparison, in just the 15-month period from January 1, 2020 to March 31, 2021, a total of 197 de-SPAC transactions were announced. [2]

With this increase in de-SPAC transactions, however, has come increased focus by the Securities and Exchange Commission (SEC). One particular area of SEC focus has been the liability implications for disclosures in connection with de-SPAC transactions. On April 8, 2021, the Acting Director of the Division of Corporation Finance of the SEC (the “Acting Director”) issued a statement regarding the liability risks associated with such disclosures, particularly the disclosure of financial projections of the private company target in a de-SPAC transaction, suggesting that further guidance or rules may be forthcoming. Then, on April 27, 2021, Reuters published an article stating that, according to sources with knowledge of the discussions, the SEC is considering issuing new guidance on this subject.


FinCEN Seeks Public Comment on the Corporate Transparency Act’s Beneficial Owner Reporting Requirements

E.K. McWilliams and Alexander E. Cottingham are associates at Jenner & Block LLP. This post is based on a Jenner memorandum by McWilliams, Mr. Cottingham, Sarah F. Weiss and Andrew Weissmann.

On April 5, 2021, the Financial Crime Enforcement Network (FinCEN), the enforcement arm of the United States Treasury, issued an Advance Notice of Proposed Rulemaking (Notice) seeking comment on the implementation of the Corporate Transparency Act (Act). FinCEN posed 48 questions to the public regarding the Act, a bill that Congress enacted in January 2021. The Act requires certain organizations that are incorporated or doing business in the United States to disclose to FinCEN specified information on their beneficial owners. The Act also directs FinCEN to establish a national database of that beneficial ownership information. Responses to the Notice are requested on or by May 5, 2021. FinCEN must promulgate its final rules by January 1, 2022.

FinCEN’s 48 questions serve as a possible guide to FinCEN’s goals, which appear to be an accurate and detailed national database of beneficial ownership information that could clarify complex ownership structures and reveal important associations between corporate entities and beneficial owners. FinCEN’s 48 questions suggest that FinCEN is interested in strengthening the Act’s ability to detect and cut through complex ownership structures.


Do ESG Funds Make Stakeholder-Friendly Investments?

Aneesh Raghunandan is Assistant Professor of Accounting at the London School of Economics, and Shivaram Rajgopal is Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business 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); 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).

In March 2021, the SEC created a new Climate and ESG Task Force to proactively identify misconduct related to ESG investing. This taskforce was created out of the SEC’s concern that asset managers may be misleading investors by marketing certain funds as ESG-friendly but not making investment decisions consistent with such marketing. This concern is shared by many members of the asset management industry. For example, in a recent op-ed, BlackRock’s former Chief Investment Officer for Sustainable Investing, Tariq Fancy, states:

“…our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.”

Given these concerns, in this paper we attempt to verify whether ESG-oriented funds’ claims, of picking portfolio firms that exhibit superior treatment of all stakeholders—consumers, employees, the environment, taxpayers, and shareholders—are borne out by the evidence. Our empirical approach focuses on whether self-labeled ESG-oriented mutual funds invest in firms with better track records with respect to these groups of stakeholders based on fundamental measures of behavior—or misbehavior—toward each group. Our primary measure of stakeholder-centric behavior is portfolio firms’ compliance with social (e.g., labor or consumer protection) and environmental laws. We also consider a host of other measures of stakeholder-centric behavior related to each of “E”, “S”, and “G”: carbon emissions, reliance on taxpayer-funded corporate subsidies, CEO compensation, board composition, and the balance of power between management and the shareholder.


Materiality: The Word that Launched a Thousand Debates

Janine Guillot is CEO of the Sustainability Accounting Standards Boards (SASB) and Jeffrey Hales is Chair of the SASB Standards Board and the Charles T. Zlatkovich Centennial Professor of Accounting at the University of Texas at Austin.

The legal concept of “materiality” is foundational to the corporate disclosure regime in the US. It provides the conceptual basis for the disclosure of certain information used by investors in making voting and investment decisions. At the Sustainability Accounting Standards Board (SASB), we have often referred to “financial materiality” as a guiding principle for our work. Indeed, we believe that disclosure standards make the disclosure of financially material information more decision-useful by enhancing the extent to which those disclosures are reliable, consistent across time, and comparable across peers. However, a recent article, “Corporate Governance Update: ‘Materiality’ in America and Abroad” (May 1, 2021), misunderstands SASB’s position on the topic of materiality and especially misunderstands SASB’s use of the term “materiality” in a global context.

SASB’s Standards Development Process Has Not Changed

The authors suggested that certain changes SASB recently proposed to the definition of materiality in our Conceptual Framework represent a “deliberate step” toward the broader concepts of materiality that underpin the European Commission’s sustainability reporting directive and the World Economic Forum’s stakeholder capitalism metrics project. This is not the case.


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