Monthly Archives: July 2021

Supreme Court’s Impending Decision Concerning Whether PSLRA Discovery Stay Applies in State Court

Andrew Clubok, Melissa Sherry, and Gavin Masuda are partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Clubok, Ms. Sherry, Mr. Masuda, Roman Martinez, Elizabeth Deeley, and Joseph Hansen.

Key Points:

  • While federal district courts have consistently applied the Private Securities Litigation Reform Act (PSLRA) automatic stay to halt discovery until a determination that the complaint states a viable claim for relief, state trial courts have been divided as to whether that stay applies to actions filed in state court.
  • If the Supreme Court rules in favor of petitioners, securities plaintiffs will not be able to use state court as an end-run to impose discovery on defendants before stating a viable claim for relief.
  • The scope of the PSLRA discovery stay has far-reaching implications for public companies and financial institutions that underwrite IPOs, which have been subjected to a wave of parallel federal-state securities litigation in recent years.

On July 2, 2021, the US Supreme Court granted certiorari in Pivotal Software, Inc. v. Superior Court of California on a critical issue of first impression at the federal appellate level: whether the PSLRA automatic stay of discovery pending a motion to dismiss in Securities Act cases applies to actions filed in state court.


The Securities Act of 1933 provides certain private rights of action for materially false or misleading statements contained in securities registration statements. Principally, under Section 11 of the Securities Act, persons who purchased securities pursuant or traceable to a materially false or misleading registration statement may sue for statutory damages. [1] The Securities Act further provides that certain private actions, including those arising under Section 11, may be brought in either federal or state court. [2]


Spotlight on Boards and Board Oversight of Business Strategy and Risk Management in a Post-Pandemic World

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell memorandum by Mr. Lipton, Steven A. Rosenblum, Adam O. Emmerich, William Savitt, and Karessa L. Cain.

In order to advise our clients we try to closely follow emerging and changing issues, developments and problems. In reviewing the matters we have been dealing with and the memos we have written in the past two years, we thought it would be helpful to list the high-profile stand-out issues for attention in the C-suite and boardroom that we have considered and discussed in our memos entitled Spotlight on Boards, Some Thoughts for Boards of Directors in 2021, and Risk Management and the Board of Directors.

  1. There is no true post-pandemic world. Viruses mutate at a rate that requires ongoing adjustments to address the situation as it develops. The pandemic experience will result in demand for major changes in all aspects of healthcare.
  2. The demand for inclusive capitalism continues to grow with greater demands for inclusion, diversity, equality, and social and racial justice.
  3. Climate change is likely to require even more substantial changes than presently recognized, as will other sustainability and long-term growth objectives.


Open Access, Interoperability, and the DTCC’s Unexpected Path to Monopoly

Dan Awrey is Professor of Law at Cornell Law School, and Joshua C. Macey is Assistant Professor of Law at University of Chicago Law School. This post is based on their recent paper.

In markets with significant scale economies and network effects, scholars and policymakers often tout open access and interoperability requirements as superior to both regulated monopoly and the break-up of dominant firms. In theory, by compelling firms to coordinate to develop common infrastructure, regulators can use these requirements to replicate scale and network economies without leaving markets vulnerable to monopoly power. Examples of successful coordination include the provision of electricity, intermodal transportation, and credit card networks.

This paper analyzes the history of U.S. securities clearinghouses and depositories in order to offer a significant qualification to this received wisdom. This history demonstrates that open access and interoperability requirements can actually serve as instruments by which dominant firms obtain and entrench their monopoly power. Specifically, by imposing high fixed costs to connect to common infrastructure, allowing dominant firms to dictate the direction and pace of innovation and investment, and reducing the scope for product differentiation, these requirements can prevent smaller firms from competing with their larger rivals. In these ways, open access and interoperability can actually exacerbate the very problems that they were designed to address.

Fifty years ago, American securities markets were supported by a number of regional clearinghouses and depositories, each connected to a regional stock exchange. Today, a single firm—the National Securities Clearing Corporation (NSCC)—is the only remaining clearinghouse, while another—the Depository Trust Corporation (DTC)—is the only remaining depository. DTCC owns both NSCC and DTC.


Voluntary Environmental and Social Disclosures

Marc S. Gerber is partner, Caroline S. Kim is counsel, and Jeongu Gim is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Gerber, Ms. Kim, Mr. Gim, Randi Val Morrison, and Yafit Cohn. 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).

Companies are increasingly providing disclosure about their current efforts and future commitments on environmental and social (E&S) matters. [1] The percentage of S&P 500 companies publishing sustainability or corporate social responsibility (CSR) reports that address E&S matters continues to grow, reaching 90% in 2019. [2] Similarly, one study found that, in 2020, 98% of the top 100 companies by revenue in the United States reported on their sustainability efforts. [3] Consistent with this trend, 78% of companies responding to a survey by the Society for Corporate Governance in January 2021 reported publicly disclosing E&S goals, metrics or information, [4] up from 67% of respondents in a similar May 2019 survey. [5]

To date, these increased E&S disclosures have been largely voluntary, as companies have responded to requests for this information from investors, interest groups, employees, and other stakeholders. The scope of required E&S disclosures in Securities and Exchange Commission (SEC) filings remains primarily principles- and materiality-based. Recent statements and actions by the SEC and its Staff, however, indicate that the SEC is likely to mandate additional E&S disclosure requirements in the near future. As companies face growing demands for increased voluntary and mandatory E&S disclosures, companies also face increasing risks of litigation, as well as scrutiny from regulators, investors, and other third parties, over the accuracy and reliability of those E&S disclosures.


Stewardship Excellence: ESG Engagement In 2021

This post is based on an Institutional Shareholder Services memorandum by Dr. Julia Haake, Managing Director, Global Head of Stewardship & Engagement at ISS ESG. 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).

The Evolution and Big Drivers of Engagement

Over the past decade and more, various soft and hard law initiatives have combined with investor demand as active ownership approaches and engagement have grown globally, driving more common frameworks for investment stewardship for investors seeking positive change at companies they invest in.

Since the 1970’s and 1980s, active ownership and engagement strategies have grown in sophistication and created an awareness of the importance of long-term sustainability and impacts on corporate performance and risk mitigation. When the Principles for Responsible Investment (PRI) were launched in 2006 and the financial crisis hit in 2008, stewardship and engagement gradually received broader attention and more formal frameworks for investment stewardship quickly materialized, as evidenced by the launch of the UK Stewardship Code in 2010. The subsequent decade saw growth in the evidence for positive financial outcomes from good stewardship and responsible investing, but also in the increasing risks from globally recognized issues such as climate change and social inequalities.

Some of the strong drivers of the increased investor activity in engagement are the various ‘soft law’ initiatives that have been proliferating around the globe. With close to 4,000 signatories, the PRI via their Principle 2 is still clearly one of the largest global industry advocacy organizations, representing over $100 trillion in assets.


Outsourcing Active Ownership in Japan

Kazunori Suzuki is Professor of Finance at Waseda Business School. This post is based on a recent paper by Professor Suzuki; Marco Becht, Professor of Finance at Université Libre de Bruxelles; Julian Franks, Professor of Finance at London Business School; and Hideaki Miyajima, Professor of Commerce at Waseda Business School.

The Japanese stock market is large and most companies are widely held. The fraction of foreign ownership has been rising steadily and Japanese institutional investors are increasingly committed to active ownership. There have been a number of high profile hedge fund activist campaigns at internationally well-known companies like Sony and, most recently Toshiba. Yet, research on international hedge fund activism has shown that activist campaigns have been comparatively unsuccessful in Japan, including at Sony. The giant Government Pension Investment Fund (GPIF) was instrumental in setting up the Global Asset Owners’ Forum that engages on Environmental, Social and Governance (ESG) internationally, yet it is unclear how much progress has been made in GPIF’s home country. ESG engagement is often conducted in private and is therefore unobservable.

The research paper provides evidence that active ownership in Japan can be successful when conducted in private. It relies on data from the Japan Engagement Consortium (JEC), a stewardship service provided by Governance for Owners Japan (GOJ) serving Japanese and international clients. Its purpose is to engage companies on behalf of the JEC members. The decision to engage with a particular company is taken by GOJ but after consultation with consortium members. To be selected for engagement at least one consortium member must hold shares in the target. An agenda is agreed after preliminary meetings have taken place with the prospective target company. The service heavily relies on personal meetings, reputation, and discretion. There is an explicit understanding that contacts with the target companies are kept private, even if the target company rejects the invitation to engage.


Buybacks: Look Before You Leap

Allen He is Associate Director at FCLTGlobal. This post is based on his FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here), and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

As the global economy rebounds, companies are preparing to launch a record wave of buybacks. Buybacks have become a global phenomenon over the past 20 years, with many companies viewing them as an attractive alternative to dividends in returning capital to shareholders. They are flexible, recycle excess cash to the economy, and provide tax advantages in certain jurisdictions.

While buybacks can indeed be an effective way to distribute capital under certain circumstances—and can be used to signal to investors that their stock is undervalued – care must be taken to mitigate the downsides of buying back shares.

Common pitfalls

As tempting as buybacks may be as a quick way to return funds to shareholders, there are several pitfalls to consider.

From a strategic perspective, timing a buyback poorly can lead to losses. Companies cannot perfectly predict the market and often buy at market peaks, rather than troughs, due to overconfidence. This is also the tendency when the firm is generating excess capital. It can be mitigated by taking a long-term dollar-cost averaging approach to buybacks, adjusting the strategy based on market conditions and adopting a break-even scenario analysis.


Connecting the Dots: Breaking the ESG Code

Dan Romito is Consulting Partner and Addison Holmes is an Associate in ESG Strategy & Integration at Pickering Energy Partners. This post is based on their Pickering Energy Partners memorandum. 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).

Executive Summary

In this post, we analyze how the language used in the capital markets is evolving as a result of trends in ESG investing. We suggest that traditional index investors can no longer be described as passive, due to their active engagement with corporates. Further, we analyze how activist engagements are beginning to hinge more and more on ESG themes. We then describe the dependence of ESG analysis on vast sets of unstandardized data. Finally, we contend that management teams must have a strategy around the data they disclose. We believe it is imperative for corporates to evolve alongside the changing tide emerging within the capital markets.

We recommend the following seven action items for evolving with the markets:

  1. Take time to understand the data already being utilized by ratings providers along with the outputs reflected in investment analysis (i.e., SSGA R-Model, Blackrock Aladdin Climate, etc.)
  2. Ensure ESG disclosures are on topics material to economic reality rather than those that tell an easy marketing story—PR marketing and Investor marketing is analogous to Oil and Water
  3. The corporate sustainability report as it is known today is a great start, but it represents only the second inning of the ballgame—evolution is required to take control of the narrative
  4. Recognize that commitment to one framework is not enough – investors treat frameworks and ratings as a mosaic and use proprietary methodologies to piece together and measure differentiators
  5. Realize that ESG disclosures in their current form do not provide the underlying context required to properly value intangibles, implying a disconnect in firm value
  6. Understand that replicating peer efforts does not provide a unique perspective and in most cases compounds the “echo chamber” concern, especially at the board level
  7. Invest in a comprehensive cybersecurity program, as it is critical both to financial and to ESG performance, and is probably one of the next “shoes to drop”


SEC Increasingly Turns Focus Toward Strength of Cyber Risk Disclosures

Vivek Mohan, David Simon, and Richard Rosenfeld are partners at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Mohan, Mr. Simon, Mr. Rosenfeld, and Julie L. Sweeney.

On June 11, 2021, the US Securities and Exchange Commission (“SEC” or “Commission”) announced that it would focus on cybersecurity disclosures made by public companies as part of its regulatory agenda. [1] Given the SEC’s continued interest in cybersecurity issues, high-profile ransomware attacks and executive orders issued by President Biden, it is no surprise that the SEC is focused on taking an increasingly active role in a whole-of-government response to cybersecurity threats. Although it will be some time before a final rule on cybersecurity risk disclosures is issued, a proposal from the SEC is expected in October 2021. In the meantime, public companies should begin preparing for what is likely to be a new SEC rule mandating cybersecurity disclosures.

This Legal Update provides background on the new SEC chairman and the SEC rulemaking process, the SEC’s prior guidance on cybersecurity disclosures and steps that public companies can begin taking now to prepare for enhanced SEC oversight of cybersecurity disclosures.


Was the Exxon Fight a Bellwether?

Thomas Ball is Senior Vice President, James Miller is Managing Director, and Shirley Westcott is Senior Vice President at Alliance Advisors. This post is based on an Alliance Advisors memorandum by Mr. Ball, Mr. Miller, Ms. Westcott, and Brian Valerio. 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).


The most groundbreaking development this proxy season was that Exxon Mobil, one of the largest corporations in the world, lost three board seats in a proxy fight with Engine No. 1, giving the dissident control of a quarter of the board. [1] Engine No. 1 focuses on impact investing and recently announced it is starting an Exchange-Traded Fund (ETF) (ticker symbol—VOTE) that will actively vote proxies to advance this agenda. [2] Engine No. 1 launched in December with approximately $250 million in assets [3] and owned 0.02% of Exxon’s outstanding shares. [4]

The outcome marks a victory for those shareholders that have been pushing back on Exxon’s climate-related plans and disclosures, and follows several years in which the SEC allowed the omission of climate-related shareholder proposals. The high-profile campaign led by the dissident—and ultimately supported by pension plans and a slew of other investors—aimed at expressing disapproval of the company’s governance on this issue.

Engine No. 1 targeted Exxon because it believed the company’s recent strategies have not yielded positive results and the company was slow to adapt to changes in the energy industry. [5] Critics pointed to Exxon’s relatively light focus on reducing carbon emission and investments in renewable energy compared to its peers and European counterparts. Engine No. 1 also highlighted financial underperformance and Exxon’s lack of board experience in the energy industry. [6] It argued that Exxon should aim to be part of an energy transition because while “[t]here might still be money in oil now … the key to profitability involved taking a longer view on the health of the business.” [7]


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