Monthly Archives: June 2021

Vanguard Insights on Evaluating Say on Climate Proposals

John Galloway is global head of investment stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); 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).

“Say on Climate” proposals encourage companies to disclose climate-related risks, targets, and transition plans in line with the reporting framework created by the Task Force on Climate-related Financial Disclosures (TCFD), a framework that Vanguard supports. By enabling shareholders to vote on these disclosures, companies gather important feedback on how their climate strategies relate to the goals of the Paris Agreement and meet shareholder expectations. While robust disclosure alone is not a guarantee of a credible transition plan, it is a key component that will enable investors to make informed decisions.

In recent months, we have seen an increase in the number of Say on Climate proposals presented to shareholders at company annual meetings. The specific form of these Say on Climate proposals varies by region and in specific details, but generally includes three requests:

  • Annual disclosure of greenhouse gas emissions and progress on goals
  • Disclosure of the company’s strategic plan for reducing future emissions and managing climate-related risks, and
  • The right for shareholders to cast recurring votes on the company’s climate plan or report

Some companies have put forth Say on Climate votes as management proposals, while others have publicly opposed shareholder proposals on the topic. And in some cases, a company has come to an agreement with an activist group on future plans, which has led the group to withdraw the proposal.


SEC Approves Nasdaq Rule Change Allowing Direct Listings with a Capital Raise

Ran Ben-Tzur is partner and Jennifer J. Hitchcock is an associate at Fenwick & West LLP. This post is based on their Fenwick memorandum.

In our prior article on the latest and greatest in direct listings, we noted that we were expecting that Nasdaq would follow the NYSE’s lead to allow for capital raising concurrently with a direct listing. On May 19, 2021, and after a number of back-and-forth proposals, the U.S. Securities and Exchange Commission approved a proposed Nasdaq rule change to allow for capital raising concurrently with a direct listing on the Nasdaq Global Select Market.

Direct Listings + Capital Raise

In addition to a direct listing where only existing stockholders offer their shares for resale to the public, the new Nasdaq rules will allow companies to raise primary capital at the time of the direct listing. Nasdaq refers to this new type of offering as a “Direct Listing with a Capital Raise.” This gives companies flexibility to raise capital in a direct listing on both Nasdaq and NYSE.

How Can My Company Qualify for a Direct Listing with a Capital Raise?

To qualify for a Direct Listing with a Capital Raise, the company’s unrestricted publicly held shares before the offering, plus the market value of the shares to be sold by the company in the direct listing must be at least $110 million (or $100 million, if the company has stockholders’ equity of at least $110 million), with the value of the unrestricted publicly held shares and the market value being calculated using a price per share equal to the lowest price of the price range established by the company in its S-1 registration statement.


New York Appellate Division, First Department Gives Green Light to First Post-Cyan Case

Veronica E. Callahan and Aaron F. Miner are partners and Stephanna F. Szotkowski is an associate at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter memorandum by Ms. Callahan, Mr. Miner, Ms. Szotkowski, John Hindley, Arthur Luk, Kathleen Reilly, and Michael D. Trager.

On April 29, 2021, a four-judge panel of the New York Appellate Division, First Department, held in Chester County Employees Retirement Fund v. Alnylam Pharmaceuticals, Inc., 2020-04534, 2021 WL 1679511 (1st Dep’t 2021), that an investor plaintiff sufficiently alleged violations of the Securities Act of 1933 (Securities Act) to survive a motion to dismiss. This is a significant development after the US Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), which held that state courts may exercise jurisdiction over class actions alleging violations of only the federal Securities Act. Indeed, Chester County is the first opinion by a New York appellate court allowing a Securities Act case to proceed to discovery.


As discussed in a previous Advisory, the Securities Act created a private right of action in order for investors to bring suit against issuers, officers, directors, and underwriters involved in the securities offering process. Even though the Securities Act created a federal cause of action, the Securities Act allows for concurrent federal and state jurisdiction for such suits. In addition, the Securities Act specifically prohibits the removal of cases from state to federal court. 15 U.S.C. § 77v(a).


Second Circuit Reaffirms that Confidentiality Agreements Can Create a Relationship of Trust for Insider Trading Purposes

Andrew Ehrlich, Gregory Laufer, and Richard Tarlowe are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Ehrlich, Mr. Laufer, Mr. Tarlowe, Udi Grofman, Brad Karp, and Audra Soloway. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

The question of whether and when a party can trade in securities when subject to an NDA is one that market participants frequently face. Recently, in United States Chow, 993 F.3d 125 (2d Cir. 2021), the Second Circuit offered important guidance on this topic when it affirmed the insider trading conviction of the managing director of an investment firm that was seeking to acquire a publicly traded company. The defendant’s firm and public company had entered into a nondisclosure agreement (“NDA”) requiring the firm to use any material nonpublic information (“MNPI”) obtained from the potential target solely for purposes of evaluating a potential acquisition. In violation of that restriction, the defendant disclosed MNPI to a business associate, who traded in the company’s securities and realized a $5 million profit.

Although Chow addressed several insider trading and other issues, this client alert addresses the one aspect of the decision that has particular practical implications for market participants. Specifically, the court held that an NDA merely requiring a party to keep information confidential—even if the NDA does not have an express trading prohibition—is sufficient to create a relationship of trust and confidence, a necessary element of an insider trading charge. In reaching that conclusion, the Second Circuit reaffirmed its prior holdings on this subject, but made the point even clearer. [1]


Remarks by SEC Chair Gensler at the Meeting of SEC Investor Advisory Committee

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks at the Meeting of SEC Investor Advisory Committee. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Good morning. Thank you Jennifer, Heidi, and all the committee members for having me. I enjoyed meeting with members of the Executive Committee yesterday and am thrilled to meet the whole committee for the first time. I’m grateful for the members’ time and willingness to represent the interests of American investors.

I know this committee has weighed in on a variety of policies that are of great importance to the agency and to the investing public. Every day, I’m motivated by working families and how they’re served by the agency’s mission.

At the heart of our mission and our work protecting investors—from new investors exploring the stock market for the first time to retirees living off their pensions. I look forward to your recommendations on representing investors’ interests in areas as diverse as climate risk disclosures and market structure.

On today’s panels, I know you’ll be discussing issues related to best execution and executive stock ownership. I look forward to seeing the readouts on these topics. In that regard, I wanted to share some thoughts about how I’m thinking through these matters.

First, let me turn to the requirements for best execution in the context of the National Best Bid and Offer (NBBO).


The Director’s Guide to Shareholder Activism

Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Leah Malone Director at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC 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).

This post is divided into two principal parts. The introduction analyzes the most important current trends in shareholder activism. The chapters that follow take a longer-term perspective.

We take an expansive view of shareholder activism. For many people, the phrase may conjure images of hedge funds waging proxy battles as they try to win control of their target’s board. That’s a part of activism, to be sure. But, for the purposes of this post, the term refers to the efforts of any investor to leverage their rights and privileges as an owner to change a company’s practices or strategy.

In this sense, shareholder activism may include an institutional investor’s engagement with companies around governance matters or a retail investor’s shareholder proposal, as well as a hedge fund’s proxy fight.

Shareholder activism in 2021

The COVID-19 crisis has left its mark on all aspects of society and business. Shareholder activism is no exception. In 2020, activists targeted fewer companies and put less capital to work in their campaigns as the pandemic roiled financial markets and sparked a deep economic recession. But there is ample evidence of a resurgence in 2021. What do boards of directors need to know to navigate this environment?


President Biden Signs Executive Order on Addressing Climate Change Risk through Financial Regulation

Andrew Olmem, J. Paul Forrester, and Thomas J. Delaney are partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

On Thursday, May 20, 2021, US President Biden signed an Executive Order, entitled “Climate-Related Financial Risk” (Climate Risk EO), that sets the stage for the US federal government, including its financial regulatory agencies, to begin to incorporate climate-risk and other environmental, social and governance (ESG) issues into financial regulation. The Climate Risk EO further demonstrates the priority the Biden administration is giving to addressing climate change and will likely accelerate ongoing efforts by federal financial regulators to adopt new, climate risk-related regulations. Of particular note, the executive order directs Treasury Secretary Janet Yellen to utilize the Financial Stability Oversight Council (FSOC) to coordinate the adoption of regulatory measures to address climate change on the part of the federal financial regulatory agencies. The US Securities and Exchange Commission (SEC) is already actively preparing a proposal to revise public company disclosure requirements to cover a range of ESG issues, [1] and the Federal Reserve Board has established two working committees to examine the climate-related risks to financial stability and to the safety and soundness of financial institutions. [2]

From the scope of the Climate Risk EO, it is evident that the administration believes that improved corporate disclosures on ESG are an important initial response to the risks posed by climate change, but that far broader regulatory reforms are likely over the next several years. The Climate Risk EO provides the policy framework for federal agencies to adopt new supervisory and regulatory measures with respect to not only insured depository institutions, but also insurers and other nonbank financial institutions, ERISA plans, the Federal Thrift Savings Plan (TSP), federal lending programs (US Department of Agriculture (USDA), US Department of Veterans Affairs (VA), Federal Housing Administration (FHA), and Ginnie Mae) and federal contractors. In addition, Secretary Yellen stated in her remarks on the signing of the Climate Risk EO that “[a]ssessments of climate-related financial risks may require new perspectives and new tools.” [3] She did no go on to elaborate what additional tools may be under consideration.


Weekly Roundup: June 4–10, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 4–June 10, 2021.

Institutional Investor Survey 2021

Do Firms With Specialized M&A Staff Make Better Acquisitions?

ESG Scrutiny From the SEC’s Division of Examinations

Pandemic Risk and the Interpretation of Exceptions in MAE Clauses

Statement by Commissioner Peirce and Commissioner Roisman on The Commission’s Actions Regarding the PCAOB

How Informative Is the Text of Securities Complaints?

Private Sector Implications of Biden’s Executive Order on Climate-Related Financial Risk

Cash-for-Information Whistleblower Programs: Effects on Whistleblowing and Consequences for Whistleblowers

Principles for Board Governance of Cyber Risk

Principles for Board Governance of Cyber Risk

Sean Joyce is Global and US Cybersecurity, Privacy, and Forensics Leader PricewaterhouseCoopers LLP (PwC); Daniel Dobrygowski is Head of Governance and Trust at the World Economic Forum (WEF) Centre for Cybersecurity; and Friso Van der Oord is Senior Vice-President of Content for the National Association of Corporate Directors (NACD). This post is based on a co-publication by PwC, the Internet Security Alliance, NACD, and the WEF, authored by Mr. Joyce; Mr. Dobrygowski; Mr. Van der Oord; Peter Gleason, NACD President & CEO; Larry Clinton, Internet Security Alliance President; and Joe Nocera Leader of PwC’s Cyber and Privacy Innovation Institute.

Accelerating digitalization puts new pressures on companies to overhaul their business models and, indeed, fundamentally reimagine how they conduct business. Given that companies are increasingly judged on how well they protect their own information as well as the data entrusted to them by customers and partners, cybersecurity and cyber resilience have become vital concerns for any trustworthy organization.

The growth of our global digital footprint has ensured that cybersecurity will remain a priority for business leaders for years to come. As a result, cybersecurity governance will continue to be a matter of importance for boards of directors. As we are seeing when boards consider environmental, social and governance (ESG) factors, [1] companies that manage the entire portfolio of risks, including cyber, do better in the marketplace.

As a result of a rapidly changing cyber-threat landscape and proliferating regulations, it has become clear that boards, especially, need stronger foundations to govern cyber risks effectively. This report details the work of the leading organizations in this field, the World Economic Forum, the National Association of Corporate Directors (NACD) and the Internet Security Alliance (ISA), along with our global partners and our project adviser, PwC; in it we share our consensus-based, principled approach to delivering successful cyber-risk governance at board level.


Cash-for-Information Whistleblower Programs: Effects on Whistleblowing and Consequences for Whistleblowers

Aiyesha Dey is Høegh Family Associate Professor of Business Administration, Jonas Heese is Marvin Bower Associate Professor of Business Administration, and Gerardo Pérez Cavazos is Assistant Professor of Business Administration, all at Harvard Business School. This post is based on their recent paper.

Cash-for-information whistleblower programs have gained momentum as a regulatory tool to enforce corporate misconduct. Yet, little is known about how financial incentives affect whistleblowers’ decisions to report potential misconduct to authorities. Similarly, there is no large-sample evidence on the consequences for whistleblowers under these programs. We study these questions using over 5,000 whistleblower lawsuits brought under the False Claims Act (FCA) against firms accused of defrauding the government.

Effects of Financial Incentives

Proponents of cash-for-information programs point to the large number of tips that regulators receive from whistleblowers and the success in terms of cases and penalties imposed on corporations. They argue that these programs simply compensate whistleblowers for taking the risk of reporting wrongdoing to the authorities. In contrast, critics argue that cash-for-information programs motivate employees to file meritless allegations with regulators that waste resources of regulators and accused firms alike. Further, they argue that these programs incentivize employees to share information directly with regulators, instead of reporting the issue internally, which might be preferable, as firms can better assess tips in the context of their business and better resolve issues than the authorities.


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