Monthly Archives: June 2021

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

Posted by Margaret E. Tahyar, Randall D. Guynn, and Betty Moy Huber, Davis Polk & Wardwell LLP, on
Thursday, June 10, 2021
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Margaret E. Tahyar and Randall D. Guynn are partners and Betty Moy Huber is counsel at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

The Biden Executive Order on Climate-Related Financial Risk (the Executive Order) is the latest significant step by the Administration to analyze and mitigate the risks that climate change poses to the U.S. economy, businesses, workers and the financial system. [1] It aims to advance the Biden Administration’s policy of promoting disclosure of climate-related financial risk, mitigating climate-related financial risk, promoting job creation and social and economic justice goals and reaching net-zero emissions by 2050.

The Executive Order contains directives to various federal regulators to take actions to address climate-related financial risk in five different broad areas: government-wide strategy; coordination among financial regulators; Department of Labor actions to safeguard worker life savings and pensions; federal lending, underwriting, and procurement; and the federal budget. This memorandum focuses on those areas of the Executive Order that are most likely to create risks and opportunities for the private sector. These are, in our view, the impact on the financial sector, which will indirectly impact other sectors, the impact on environmental, social or governance (ESG) investing and the impact on those who sell goods and services to the federal government via government procurement.

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Remarks by SEC Chair Gensler at the CFO Network Summit

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Wednesday, June 9, 2021
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks at the CFO Network Summit. 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.

Thank you, Jean, for that kind introduction and for your question. Before I answer, as is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

Your question is particularly relevant for this audience. I welcome the opportunity to share some thoughts on executive stock ownership and the means by which insiders—CFOs, other executives, directors, and senior officers—sell shares in the companies with which they’re affiliated.

The core issue, as this audience knows, is that these insiders regularly have material information that the public doesn’t have.

When I started out in finance, the accepted practice was that such insiders would limit their transactions to what was known, then and now, as open trading windows: limited periods of time following quarterly earnings announcements and other major company disclosures.

About 20 years ago, the SEC further addressed this issue in Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies themselves to buy and sell stock as long as they adopt their trading plans in good faith, before becoming aware of material nonpublic information.

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How Informative Is the Text of Securities Complaints?

Posted by Adam B. Badawi (University of California at Berkeley), on
Wednesday, June 9, 2021
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Adam B. Badawi is Professor of Law at University of California at Berkeley School of Law. This post is based on his recent paper.

Much of the research in law and finance reduces long, complex texts down to a small number of variables. Prominent examples of this practice include the coding of corporate charters as an entrenchment index and characterizing dense securities complaints by using the amount at issue, the statutes alleged to have been violated, and the presence of an SEC investigation. A persistent concern of legal scholars is that this type of reduction loses much of the nuance and detail embedded in legal text. In a recent paper, I use text analysis and machine learning to assess what we might be losing by not taking text seriously enough. Or, to put it another way, I ask what we can learn from a closer analysis of legal documents. The answer, it turns out, is quite a lot.

The body of text that I use in the paper is a corpus of over five thousand private securities class action complaints that collectively contain over 90 million words. There are a couple attractive features of using this source of legal documents. The first is that these complaints are subject to the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”), which means that many of them go into significant detail about the underlying allegations. This is particularly true for the consolidated complaints that get filed after the selection of lead counsel, a group of documents where each one averages nearly 25,000 words. The second desirable feature is that the vast majority of these cases results in one of only two outcomes. The cases are either dismissed—sometimes voluntarily and sometimes via a motion to dismiss—or they produce a settlement. The binary nature of these outcomes makes it a bit easier to generate predictions through machine learning.

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SEC Approves Nasdaq’s Direct Listing Rule

Posted by Brian Hirshberg, Mayer Brown LLP, on
Wednesday, June 9, 2021
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Brian Hirshberg is partner at Mayer Brown LLP. This post is based on his Mayer Brown memorandum.

On May 19, 2021, the Securities and Exchange Commission (“SEC”) approved proposed rule changes submitted by The Nasdaq Stock Market LLC (“Nasdaq”) that allow companies to list in connection with a concurrent primary offering. The approved rule allows a company that has not previously had its equity securities registered under the Securities Exchange Act of 1934, as amended, to list its equity securities on the Nasdaq Global Select Market at the time of effectiveness of a registration statement pursuant to which the company will sell its shares in the opening auction on the first day of trading.

In determining whether the market value requirement for an initial listing is satisfied, Nasdaq will deem the requirement to be met if the amount of the company’s unrestricted publicly-held shares before the offering, along with the market value of the shares to be sold by the company in its opening auction, is at least $110 million (or $100 million, if the company has stockholders’ equity of at least $110 million). For comparison, a company may list in connection with a traditional underwritten initial public offering with a minimum $45 million market value. Nasdaq will calculate the market value using a price per share equal to the lowest price of the price range disclosed by the company in its registration statement (shares held by officers, directors or owners of more than 10% of the company’s common stock are excluded from the calculation).

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

Posted by Hester M. Peirce and Elad L. Roisman, U.S. Securities and Exchange Commission, on
Tuesday, June 8, 2021
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Hester M. Peirce and Elad L. Roisman are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in this post are those of Ms. Peirce and Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Today [June 4, 2021], the Commission removed William D. Duhnke III from the Public Company Accounting Oversight Board (PCAOB) and announced that it will seek candidates to fill all five seats on the PCAOB, including those that are currently occupied by members whose terms have not ended. We have serious concerns about the hasty and truncated decision-making process underlying this action.

Although the Commission has the authority to remove PCAOB members from their posts without cause, [1] in all of our actions, we should act with fair process, fully-informed deliberation, and equanimity, none of which characterized the Commission’s actions here. Instead the Commission has proceeded in an unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future. We are unaware of any similar action by the Commission in connection with its oversight of the PCAOB. [2] These actions set a troubling precedent for the Commission’s ongoing oversight of the PCAOB and for the appointment process, including with respect to attracting well-qualified people who want to serve. A future in which PCAOB members are replaced with every change in administration would run counter to the Sarbanes Oxley Act’s establishment of staggered terms for Board members, [3] inject instability at the PCAOB, and undermine the PCAOB’s important mission by suggesting that it is subject to the vicissitudes of politics.

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Pandemic Risk and the Interpretation of Exceptions in MAE Clauses

Posted by Robert T. Miller (University of Iowa), on
Tuesday, June 8, 2021
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Robert T. Miller is Professor of Law and F. Arnold Daum Fellow in Corporate Law at the University of Iowa College of Law. This post is based on his recent paper, forthcoming in the Journal of Corporation Law. 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 Deals in the Time of Pandemic by Guhan Subramanian and Caley Petrucci (discussed on the Forum here).

The MAE cases arising from the COVID-19 pandemic have focused attention on the exceptions found in typical MAE definitions. As is well known, such definitions commonly except from the definition events related to certain systematic risks, such as changes in business, market or industry conditions, changes in law, or force majeure events. Cases such as AB Stable and KCake in Delaware and Fairstone in Canada have involved the interpretation of such exceptions in two ways—one simple and one complex—both of which I discuss in a new paper forthcoming in the Journal of Corporation Law and in a shorter related article in Business Law Today.

The simpler issues involved whether a pandemic is a “natural disaster” or “calamity” (AB Stable) or perhaps an “emergency” (Fairstone) under an exception in the MAE definition for force majeure events. Courts have had little trouble resolving such issues using traditional methods of contract interpretation. Some of the literature surrounding such decisions has confused force majeure clauses with exceptions in MAE definitions for force majeure events (the former excuse a seller from performing, while the latter require a buyer to perform and so are almost functional opposites), but that is a relatively minor issue.

Much more important is the fact that the recent MAE cases have exposed a latent ambiguity in the typical MAE definition. Such definitions define a capitalized “Material Adverse Effect” to be any event that has, or would reasonably be expected to have (the exact language varies), an (uncapitalized) material adverse effect on the target, except for certain excepted events (perhaps subject to exclusions for events affecting the company disproportionately). It is counterintuitive, though patently correct under the plain language of the typical MAE definition, that a Material Adverse Effect is not a material adverse effect but an event that causes a material adverse effect. The definition is thus inherently causal. The tacit assumption underlying the definition is that, for a given event, we can say unambiguously whether that event causes (e.g., “would reasonably be expected” to result in) a material adverse effect on the target or not. In the recent MAE cases, however, the causal background to the alleged material adverse effect was more complex. The claim, for example, was that a first event (the pandemic) caused a second event (governmental lockdown orders), which second event caused the material adverse effect on the company. If the MAE definition allocates the risk of both events to the same party, then of course that party bore the risk of any resulting material adverse effect. But what happens if the MAE definition allocates the risk of one event (such as the pandemic) to the target but the risk of the other event (such as lockdown orders) to the acquirer (under an exception for changes in law)?

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ESG Scrutiny From the SEC’s Division of Examinations

Posted by Michael Osnato, Michael Wolitzer, and Meaghan Kelly, Simpson Thacher & Bartlett LLP, on
Tuesday, June 8, 2021
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Michael Osnato, Michael Wolitzer, and Meaghan Kelly are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Osnato, Mr. Wolitzer, Ms. Kelly, David Blass, Allison Bernbach, and Carolyn Houston. 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 run up to the 2020 presidential election, we had predicted that a Biden administration would usher in an era of heightened SEC scrutiny. We also anticipated that ESG (environmental, social and governance) and SRI (socially responsible investing) would become a priority for the SEC’s Division of Examinations (the “Exam Division”). For more on this priority shift, see Simpson Thacher, The SEC Under New Management—Outlook for 2021 and Beyond.

Proposed Legislation and Regulatory Scrutiny. One way this shift has manifested is in proposed legislation. Last month, the Climate Risk Disclosure Act of 2021 was introduced by Senator Elizabeth Warren and Representative Sean Casten. The Act would direct the SEC to promulgate rules requiring public companies to disclose additional information about their greenhouse gas emissions and fossil fuel assets, and how climate change would affect their valuation. There has also been an increase in regulatory attention in this area. In March 2021, the SEC released a request for public comment on climate change disclosures. Also in March 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement, with the stated initial focus on identifying material misstatements in issuers’ disclosure of climate risks under existing rules, as well as to analyze disclosure and compliance issues relating to advisers’ ESG strategies. In its announcement, the Task Force solicited tips and whistleblower complaints related to ESG. And earlier this month, SEC Chair Gary Gensler told the House of Representatives Financial Services Committee that he expected the SEC to propose new rules on corporate climate risk disclosures in the second half of 2021. Additionally, the Exam Division’s April 9, 2021 Risk Alert highlights deficiencies, internal control weaknesses and effective practices identified during recent examinations of investment advisers, registered investment companies and private funds related to ESG investing. For more on this Risk Alert, see our prior post on the Forum.

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Proposed EU Directive on ESG Reporting Would Impact US Companies

Posted by Sander de Boer and Julie Santoro, KPMG, on
Monday, June 7, 2021
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Sander de Boer is Senior Manager at KPMG in the Netherlands, and Julie Santoro is Partner at KPMG in the U.S. This post is based on a KPMG by Mr. de Boer, Ms. Santoro, Wim Bartels, Matthew Chapman, Maura Hodge, and Mark Vaessen. 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).

A new EU proposal would significantly expand the scope of ESG reporting by companies operating in Europe.

Applicability

Proposal for a Corporate Sustainability Reporting Directive (CSRD)

EU-listed companies, and other companies operating in the EU that are ‘large’ (see definition below).

Fast facts, impacts, actions

The following are key points about the proposed CSRD, which would amend an existing EU Directive and take effect in 2023. US companies with operations in the EU should take care to understand the effect of the proposed disclosures and related assurance requirements.

  • Extended coverage. The current rules scope in ‘large’ public interest entities. The amendments would extend coverage to all ‘large’ (see new definition below) companies and all companies (other than micro-companies) with securities listed on EU-regulated markets; a three-year deferral would apply to small and medium-sized listed companies. These changes would extend the scope from under 12,000 to nearly 50,000 companies.
  • Extended ESG reporting For companies reporting on ESG matters for the first time, the disclosures would be extensive, covering the environmental, social and governance categories of ESG. For companies already in the scope of the current rules (Non-Financial Reporting Directive), new disclosures would include information that is material for stakeholders other than investors, as well as disclosures about social, human and intellectual capital.
  • New assurance The CSRD would introduce mandatory limited assurance over the ESG reporting (including the processes followed in preparing it). The scope may be extended to full assurance after three years.

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

Posted by Sinan Gokkaya (Ohio University), Xi Liu (Miami University), and René M. Stulz (The Ohio State University), on
Monday, June 7, 2021
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Sinan Gokkaya is associate professor of finance at Ohio University College of Business; Xi Liu is assistant professor of finance at Miami University; and René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on their recent paper. 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).

Despite the importance of mergers and acquisitions (or just acquisitions for simplicity) for corporations and for the reallocation of capital within the economy, there is still considerable debate on whether firms create value for shareholders with these investments and why so many acquisitions appear to be unsuccessful. In an attempt to understand the drivers of acquisition performance, an enormous finance literature has focused on acquirer and target characteristics, on the incentives and characteristics of CEOs and directors, the nature of the deals, and so on. However, this literature has not penetrated inside the black box of the firm’s internal decision-making process for acquisitions, most likely because of difficulty in measuring organizational structure and skills pertaining to acquisitions. In our paper titled “Do firms with specialized M&A staff make better acquisitions?”, we open this black box by manually constructing a novel and comprehensive sample of US public firms employing specialized M&A staff from 2000 to 2017 and provide the first in-depth investigation of the impact of specialized M&A staff on acquisition outcomes.

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House Releases Draft Legislation Eliminating SPAC Safe Harbor for Forward Looking Statements

Posted by Ran Ben-Tzur and Jay Pomerantz, Fenwick & West LLP, on
Monday, June 7, 2021
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Ran Ben-Tzur and Jay Pomerantz are partners at Fenwick & West LLP. This post is based on their Fenwick memorandum.

The rise of special purpose acquisition companies (SPACs) as a popular alternative structure for taking a company public in the past year has caused increased regulatory scrutiny surrounding the SPAC structure. On May 24, 2021, the U.S. House Committee on Financial Services will hold a hearing regarding SPACs, direct listings, public offerings and investor protections associated with these offerings. In advance of the hearing, the committee released draft legislation amending the Securities Act of 1933 and the Securities Exchange Act of 1934 to specifically exclude all SPACs from the safe harbor for forward-looking statements. If passed, this amendment would create increased potential liability for inaccuracies in forward-looking statements for companies looking to go public through a SPAC.

Previous SEC Statement

In April 2021, by John Coates, Acting Director of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC), issued a public statement questioning whether projections, a key component of the disclosures made in connection with taking a company public through the SPAC structure, are covered by the safe harbor under the federal securities laws for forward-looking statements. For more information on the Coates statement, including its implications for companies looking to go public through a SPAC, please see our previous alert, SEC’s New Guidance on Liability Risks Likens SPACs to IPOs.

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