Monthly Archives: July 2021

Further on the Purpose of the Corporation

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 Lipton memorandum by Mr. Lipton, William Savitt, and Carmen X. W. Lu. 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); 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 recent years, the concept of “corporate purpose” has been invoked as a shorthand to address a corporation’s commitment to include stakeholder governance—and with it commitments to sustainability, diversity, inclusion, social responsibility and other ESG issues—as part of a corporate strategy that achieves sustainable long-term growth and creates long-term value for the benefit of all stakeholders.

Recognizing the importance of corporate purpose in helping guide efforts to build back better following the pandemic, a distinguished group of academics at Oxford University formed the “Enactment of Purpose Initiative.” The Initiative seeks to encourage the elemental constituencies of a corporation—directors, management, asset owners and managers, and other internal and external stakeholders—to collaborate to articulate an actional principle of purpose, which, when applied to the special circumstances of each corporation, will orient the firm towards mission-driven growth that delivers both profit and social responsibility.


SPAC IPOs and Sponsor Network Centrality

Fangzhou Lu is Assistant Professor of Finance at the University of Hong Kong Business School. This post is based on a recent paper authored by Mr. Lu; Chen Lin, Stelux Professor in Finance at the University of Hong Kong Business School; Roni Michaely, Professor of Finance at the University of Hong Kong Business School; and Shihua Qin, Research Postgraduate Student at the University of Hong Kong Business School.

Special purpose acquisition companies (SPACs)—the shell companies whose sole purpose is to identify a private firm to merge with—have become an increasingly important channel for firms to raise money. In 2020, for instance, in the U.S. alone, 248 SPAC IPOS raised $83.4 billion, much more than that raised by traditional IPOs. However, SPACs are also known for underperforming after the acquisition. Since the identity of the merged firm is not known prior to the IPO, and there is little other advance information, investors must place their trust in SPAC sponsors. And here, our research shows there are discernible factors that can indicate the relative success of a SPAC.

SPAC sponsors are more important than in traditional IPOs because, similar to the role of VC’s general partners, investors give them a “blank check” and rely on them to invest it wisely later. The sponsors are also subject to few checks and balances, and a large part of their compensation is not tied to long-term performance, hence increasing the likelihood of less successful deals. All this means that the credentials, reputation, and quality of SPAC sponsors, which we measure using their network centrality, can be essential to a SPAC IPO’s eventual success. Network centrality measures how connected managers are, the extent to which they can exert influence in a social network, and the ability to obtain information. Finally, high network centrality signals to investors that the sponsors have some recognition of success and are regarded as trustworthy by others. These features make network centrality a good proxy for the reputation, experience, and quality of SPACs sponsors. Our research shows that the strength and extent of sponsors’ network connections in the private equity and venture capital industries is a major predictor of their performance. Sponsors with high network centrality are associated with better IPO fundraising, better acquisition targets, and better long-run stock returns, as well as the significantly higher operational performance of the target firm post-merger.


President Biden’s Executive Order on Promoting Competition

Sheila Adams is partner, Christopher Lynch is counsel, and Margaret Tahyar is partner at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Adams, Mr. Lynch, Ms. Tahyar, Ronan Harty, Howard Shelanski, and Jesse Solomon.

President Biden signed an ambitious Executive Order on July 9, 2021, which pushes several federal agencies to advance competition principles in a range of economic sectors, and establishes a White House Competition Council within the Executive Office of the President. Much of the Executive Order is broad and its true effects are not likely to be felt until those efforts play out in a variety of rulemakings and other agency proceedings and likely subsequent litigations.

On Friday, July 9, 2021, President Biden issued an Executive Order announcing that his Administration would prioritize steps to “address overconcentration, monopolization, and unfair competition in the American economy” (Competition Order). Described in a White House press release as a bold “whole-of-government effort,” the Competition Order sets out and reaffirms the Administration’s antitrust policy and encourages or directs federal agencies to take dozens of specific measures in key economic sectors to further this policy.


A number of federal agencies, in addition to the DOJ and the FTC, have historically played a role in promoting competition across industries. The Competition Order is directing executive agencies and encouraging independent agencies both to intensify those efforts and to implement policy priorities in furtherance of that objective via rulemaking or other agency efforts. While the Competition Order does include several specific initiatives that various agencies may adopt, much of the Competition Order is quite broad and, rather than enacting specific changes, directs or encourages federal agencies to consider potential rulemaking on topics as diverse as merger enforcement, Internet access, banking, and agribusiness. As a result, the true effects of the Competition Order are not likely to be felt until those efforts play out in a variety of rulemakings and other agency proceedings in the ensuing months and years. Many agency actions resulting from the Competition Order will be subject to legal challenge.


Putting the F into ESG—The Importance of Financial Materiality in ESG Investing

This post is based on an ISS EVA memorandum by Anthony Campagna, Global Director of Fundamental Research for Institutional Shareholder Services ISS EVA, and Gavin Thomson, Associate Director, ISS ESG, the responsible investment arm of Institutional Shareholder Services. 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).

Environmental, Social, and Governance (ESG) investing has evolved greatly as a concept over the past two decades. It now reaches nearly every aspect of the corporate and investment decision-making process, and rightfully so. This growth has presented so many amazing opportunities for investors and corporations to measure and improve practices across all aspects of the E, S, and G spectrum. It has also created a host of challenges for investment professionals who are trying to answer the question: “Does ESG matter?”

Globally ISS ESG continues to see and measure improvements in corporate ESG practice:

ISS ESG has also watched and listened as sustainability reporting continues to evolve, with different approaches developing in different global regulatory situations. While these changes have driven the availability of clean, comparable, and consistent data, challenges remain in the capture, measurement, and analysis of that data.


What Explains Differences in Finance Research Productivity During the Pandemic?

Brad M. Barber is Professor of Finance at the University of California Davis Graduate School of Management; Wei Jiang is Arthur F. Burns Professor of Free and Competitive Enterprise in the Finance Division at Columbia Business School; and Adair Morse is Associate Professor of Finance at the University of California Berkeley Haas School of Business. This post is based on a recent paper, forthcoming in the Journal of Finance, authored by Mr. Barber, Ms. Jiang, Ms. Morse; Manju Puri, J. B. Fuqua Professor of Finance at Duke University Fuqua School of Business; Heather E. Tookes, Professor of Finance at Yale School of Management; and Ingrid M. Werner, Martin and Andrew Murrer Professor in Finance at The Ohio State University Fisher College of Business.

Based on a survey of American Finance Association members in late 2020, this study explores disparate impacts of COVID-19 on research productivity and tests the main channels that could have contributed to the findings. We received 1,440 responses, 85.4% of which are from faculty members. Most of the survey responses are reported in Likert scales (from 1 to 5), which is accommodated by ordered logistic models. Because the pandemic hit everyone by complete surprise, and because the regressors in our models represent mostly pre-existing characteristics, endogeneity should not be a major concern for most of the inferences we made.

During the pandemic, 78.1% of faculty respondents report a decrease in research productivity and 60% report spending less time on research, while 14.5% of faculty report an increase in research productivity and 21.5% report spending more time on research. The variation in research effects relates to predetermined factors—family structure and gender. Research productivity of women and faculty with children, especially very young children (ages 0 to 5), is particularly negatively impacted by the pandemic, and these two factors appear to work independently without a significant interaction effect. Thus, the pandemic could set back recent efforts to ameliorate the gender disparity in academic finance. Also negatively impacted are junior faculty of both genders, as they are more likely to have young children and experience professional isolation. Because junior faculty are the group for whom current research productivity will have the greatest impact on future career outcomes, the impact of these distortions may have profound effects on research and on the profession as a whole.


Breach of Fiduciary Duties in Administering Defined Contribution Plans

Nancy G. Ross and Richard E. Nowak are partners, and Jed W. Glickstein is an associate at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

On July 2, 2021, the US Supreme Court granted certiorari in Hughes v. Northwestern University, No. 19-1401, to address the pleading standard that applies to breach of fiduciary duty claims under the Employee Retirement Income Security Act of 1974 (ERISA). Hughes is one of now hundreds of cases filed in recent years against the company sponsors and fiduciaries of defined contribution 401(k) and 403(b) plans alleging breaches of fiduciary duties for purportedly failing to adequately control the plan’s administrative costs or monitor the plan’s investments.

The plaintiffs in Hughes contended that the Northwestern University retirement plan paid too much for recordkeeping services by using multiple recordkeeping vendors, not soliciting bids for recordkeeping and not negotiating for fee reductions. The plaintiffs also alleged that the plan offered retail share classes of various mutual funds instead of less expensive institutional shares. The complaint mentioned various other potential theories of imprudence, including the number and type of investments offered to participants and those funds’ historical performance, but the plaintiffs did not discuss those theories in their certiorari petition.


Presidio Shines Light on Key Delaware Deal Litigation Trends and Topics

Edward B. Micheletti is partner, Bonnie W. David is counsel, and Ryan Lindsay is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

In Firefighters’ Pension System of the City of Kansas City, Missouri Trust v. Presidio, Inc., Vice Chancellor Laster of the Delaware Court of Chancery dismissed claims against directors of Presidio, Inc. (Presidio) and Presidio’s controlling stockholder arising out of the sale of Presidio, while sustaining claims against Presidio’s Chairman/CEO, the buyer (Buyer) and Presidio’s financial advisor. The case is notable for the stockholder plaintiff’s allegation of an undisclosed “tip” from the financial advisor to the buyer that purportedly allowed the buyer to strategically increase and structure its offer and close the deal.

The decision—which the court labeled as an “Opinion,” indicating it was intended to cover significant or novel issues—addresses several deal litigation topics and is worthy of analysis by M&A practitioners. The court discusses (i) the applicable standard of review for the sale of a controlled company to a third party, and the applicability of the “Synthes safe harbor”; (ii) potential liability for financial advisors premised on a “fraud-on-the-board” theory; and (iii) the continuing trend of breach of fiduciary duty claims against officers, who are not protected by exculpation provisions in a corporation’s certificate of incorporation.


The case arose from the acquisition of Presidio in December 2019. Approximately seven months earlier, in May 2019, Presidio’s controlling stockholder began exploring a sale of the company, assisted by financial advisor LionTree Advisors, LLC (LionTree). The controller and LionTree held early exploratory meetings with a potential financial buyer, and Clayton Dubilier & Rice, LLC (CD&R), a potential strategic buyer. In June 2019, LionTree and Presidio’s chairman/CEO met with CD&R about a possible transaction with Presidio. CD&R allegedly suggested to the chairman/CEO that it desired a merger of equals with a portfolio company, in which his continued employment would not be guaranteed.


Addressing the Consultation Conundrum

Lindsey Stewart is Senior Manager of Investor Engagement at KPMG LLP. This post is based on his KPMG memorandum. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Key points

  • Recent UK government consultations have the common aim of reinforcing the UK’s position as a world-class investment destination, but they approach that aim with differing priorities.
  • In responding to these consultations, UK shareholders—who overall are staunch defenders of the “one share one vote” principle—are carefully weighing up the costs and benefits of giving greater control to company founders and directors.
  • Proposals of BEIS” “Restoring Trust” consultation—such as those on internal controls attestations, the Audit and Assurance Policy, and the Resilience Statement—could help bridge the gap
  • The ongoing consultations are a unique opportunity for all stakeholders to influence the direction of corporate governance standards in the UK.

There’s been a flood of reviews and consultations from the UK government on the future of UK PLC as it seeks to “build back better” after the pandemic—a fact that public policy and governance experts can’t fail to have noticed.

My colleagues and I, in KPMG’s UK Audit practice, have unsurprisingly focused our attention on the 230-page consultation from the Department for Business, Energy and Industrial Strategy (BEIS): “Restoring Trust in Audit and Corporate Governance’.

Around the same time as “Restoring Trust” was issued, two other reviews were published by HM Treasury—the UK Listings Review by Lord Jonathan Hill and the Review of UK Fintech by Ron Kalifa OBE.


Chair Gensler’s Insight on the SEC’s New Regulatory Agenda

Brian V. Breheny and Raquel Fox are partners and Caroline S. Kim is counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Breheny, Ms. Fox, Ms. Kim, Andrew Brady, Ryan Adams, and Keema Givens.

In prepared remarks on June 23, 2021, Chair Gary Gensler of the Securities and Exchange Commission (SEC) provided additional insight into the commission’s recently announced regulatory agenda and its shift in priorities. His statement and the agenda show that new public company disclosures will be at the forefront of upcoming and pending rulemakings. In response to the regulatory agenda, the two Republican commissioners, Hester Peirce and Elad Roisman, issued a joint statement voicing concerns about efforts to undo certain recently adopted rules.

Although the timing and ultimate outcome of the new rulemakings remain to be seen, public companies should expect to see a number of proposals in the coming months, which will be subject to public comments before final adoption by the SEC. Significant proposed and final SEC rulemaking items from both the short-term agenda and long-term agenda are summarized below.

Short-Term Agenda

ESG Disclosures. Chair Gensler, then-Acting SEC Chair Allison Herren Lee and senior members of the SEC staff [1] have made a number of statements this year about environmental, social and governance (ESG) issues. The commission now expects to adopt proposed rules to require enhanced ESG disclosures in the following areas:


Strengthening Internal Controls: What Do Investors Need?

Lindsey Stewart is Senior Manager of Investor Engagement at KPMG LLP. This post is based on a KPMG memorandum by Mark Baillache, and Sophie Gauthier-Beaudoin.

Robust controls over financial reporting enhances trust in business and improves reporting quality. The UK already has requirements in this area but there is widespread agreement among users of financial reporting that there is much room for improvement.

In March, the long-awaited consultation on ‘Restoring Trust in Audit and Corporate Governance’ was published by the Department for Business, Energy and Industrial Strategy (BEIS). One of its key proposals is that the UK should adopt a strengthened internal controls framework for companies, similar to the US Sarbanes-Oxley Act (SOX) which requires directors to attest to the effectiveness of internal controls over financial reporting. The proposal explores a number of options featuring varying degrees of auditor involvement with the intention that premium listed companies be required to apply them first, followed by all other Public Interest Entities after two years.

Learnings from the US experience

Although much has been said and written about the time and cost of implementing a more robust internal controls regime, the experience in the United States suggests that the benefits justify the expense.

Research and evidence demonstrate that SOX has strengthened the reliability of financial reporting in the US delivering tangible benefits for the capital markets, including:

  • Improved quality of financial reporting
  • More robust financial controls
  • Rebalancing the relationship between the auditor and management
  • Highlight problems early and an early warning for fraud


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