Monthly Archives: September 2021

​49 Law Firms Respond to Investment Company Act Lawsuits Targeting SPACs

Christian O. Nagler, Scott A. Moehrke, and Norm Champ are partners at Kirkland & Ellis LLP. This post is based on their Kirkland & Ellis memorandum.

Recently a purported shareholder of certain special purpose acquisition companies (SPACs) initiated derivative lawsuits asserting that the SPACs are investment companies under the Investment Company Act of 1940, because proceeds from their initial public offerings are invested in short-term treasuries and qualifying money market funds.

Under the provision of the 1940 Act relied upon in the lawsuits, an investment company is a company that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.

SPACs, however, are engaged primarily in identifying and consummating a business combination with one or more operating companies within a specified period of time. In connection with an initial business combination, SPAC investors may elect to remain invested in the combined company or get their money back. If a business combination is not completed in a specified period of time, investors also get their money back. Pending the earlier to occur of the completion of a business combination or the failure to complete a business combination within a specified timeframe, almost all of a SPAC’s assets are held in a trust account and limited to short-term treasuries and qualifying money market funds.


SEC Sanctions Company for Hypothetical Cyber Risk Factor

Robert Cohen, Michael Kaplan and Richard Truesdell are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Cohen, Mr. Kaplan, Mr. Truesdell, Greg Andres, Joseph Hall, and Matthew Kelly.

The SEC filed an enforcement action against a company for disclosing the risk that it “could” have a data privacy breach when it knew it already had experienced a breach. The action also shows the importance of software patch management, which can significantly reduce the number of incidents.

On August 16, the Securities and Exchange Commission (SEC) announced a settlement with Pearson plc (Pearson), a London-based company that primarily provides educational publishing services to schools and universities, for making a misleading risk factor disclosure about data breaches. Pearson collected large volumes of student data and administrator log-in credentials, and learned in March 2019 that millions of rows of data had been stolen by a sophisticated threat actor. The company mailed a breach notice to customers in July 2019 but did not disclose the breach in its SEC filings. Instead, its next SEC filing included a statement that a data privacy incident was a risk that “could result” in a major breach.

The company received a media inquiry a few days later, and gave the reporter a statement the company had prepared months before. The statement said that the data breach “may” have involved certain types of information that the SEC asserts the company already knew were involved. The statement also referred to the incident as “unauthorized access” and “expos[ure of] data” instead of disclosing that data had been removed, and did not include all of the types of data at issue. The statement said that the company had strict protections in place, had fixed the issue, and had no evidence the information had been misused, even though it had failed to patch the vulnerability for six months and was using an outdated encryption algorithm.


Statement by Commissioner Crenshaw Regarding Information Bundling and Corporate Penalties

Caroline Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. 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.

In March of this year, I gave a speech to the Council of Institutional Investors suggesting that the SEC should reconsider its approach to assessing penalties against corporate wrongdoers. [1] Rather than calibrating penalties to actual misconduct, some Commissioners have viewed corporate benefits as a limiting constraint on penalty amounts. [2] This approach posits that any penalty that exceeds the easily quantifiable benefits resulting directly from a securities law violation unfairly burdens the corporation’s shareholders. As I explained in March, this approach is flawed.

Corporate benefits are notoriously difficult to quantify. If we limit penalties to only those benefits that are easy to count, we will invariably undercount, leaving the corporation in a potentially better economic position for having committed the violation. That is precisely the wrong outcome to advance our goals of punishing misconduct and delivering effective specific and general deterrents. Paying a penalty cannot be just a cost of doing business.

And the imprecision of measuring corporate benefits is not just a result of complexity. Corporate defendants strategically release bad news in ways that dampen or obscure the market’s reaction. The resulting change in stock price therefore may not be an effective way to measure corporate benefits. Today’s enforcement action against The Kraft Heinz Company (“Kraft”) highlights this problem. In my view here’s why penalties should not be constrained by a mechanistic approach to corporate benefit:


Silicon Valley 150 Risk Factor Trends Report

Jose Macias and Lisa Stimmell are partners and Courtney Mathes is senior counsel at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Macias, Ms. Stimmell, Ms. Mathes, and Kenisha Nicholson.

The SV150 is released each year by Lonergan Partners, a leading executive search firm based in Silicon Valley, and is comprised of the 150 largest public companies in Silicon Valley, based on annual sales.

Key Changes in Risk Factor Disclosure Practices Under Amended Rules:

  • Risk Factor Summary. Rather than decrease the total number of pages of risk factors, most SV150 companies opted to maintain robust risk factor disclosure and, in accordance with the amended rules, add a risk factor summary to their Form 10-K filings. Last year, 73% of SV150 companies had more than 15 pages of risk factors, compared to 71% of the SV150 companies this year. Nearly all of the companies with more than 15 pages of risk factors this year added a risk factor summary to their Form 10-K filings.
  • Use and Number of Risk Factor Headings. Nearly all of the SV150 companies now include risk factor headings. In addition, there is much broader usage of risk factor headings. Last year, most companies included three or fewer total headings. This year, most companies include four to seven total headings, and have expanded beyond the two most prevalent headings from last year, risks related to the business and risks relating to ownership of the company’s stock.
  • General Risk Factor Heading. Many of the SV150 companies surveyed now include a “General Risk Factor” heading in their risk factors, and average more than four risk factors under this heading. Of note, following the effective date of, and consistent with, the amended rules, the SEC began issuing comment letters requesting that companies revise their risk factor section by relocating risks that could apply generically to any registrant or offering to the end of the risk factor section under the heading “General Risk Factors.”


Special Purpose Acquisition Companies and the Investment Company Act of 1940

E. Ramey Layne and Michael C. Holmes are partners and Robert Ritchie is counsel at Vinson & Elkins LLP. This post is based on a Vinson & Elkins memorandum by Mr. Layne, Mr. Holmes, Mr. Ritchie, and Zach Swartz.

Last week, a stockholder in three special purpose acquisition companies (“SPACs”—Pershing Square Tontine Holdings, Ltd. (“PSTH”), GO Acquisition Corp. and E.Merge Technology Acquisition Corp) brought novel claims against each SPAC, its sponsor and directors. [1] The suits claim that each SPAC is an unregistered investment company and that the compensation paid by the SPAC to its sponsor and its directors (notably the founder shares and warrants, or comparable interests in the case of PSTH) was illegal and void under the Investment Company Act of 1940 (the “Act”). [2] The suits have received a fair amount of press, in part because PSTH and its attempted investment in Universal Media Group (“UMG”) are high profile, and in part because two of the lawyers representing the plaintiff in the suit are Robert J. Jackson, Jr., an NYU law professor and former Securities and Exchange Commission (“SEC”) commissioner (who served in that role roughly two years from January 2018 to February 2020), and John Morley, a Yale Law professor.


What Do You Think About Climate Finance?

Johannes Stroebel is David S. Loeb Professor of Finance at NYU Stern School of Business, and Jeffrey Wurgler is Nomura Professor of Finance at NYU Stern School of Business. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

Scientists often describe climate change with superlatives. Urgent. Dire. Existential. The superlatives are all bad. Encouragingly, financial economists are devoting more and more attention to the intersection of climate and finance. Since time is short to define research agendas that help us manage the emerging financial and economic risks from climate change, we surveyed a number of finance experts and professionals to find the areas of agreement and coordinate on promising directions. Our full working paper, to be published in the November issue of the Journal of Financial Economics, may be found here.

Specifically, to reach academics, we collected 3,570 email addresses of professors of the top 100 finance departments. To reach practitioners, we used an email address list of 6,921 NYU Stern graduates working in finance. To reach those involved in policy, we identified 17 relevant public-sector institutions, such as the Federal Reserve Banks, the Bank of England, and the International Monetary Fund, and collected 955 emails of researchers or policymakers in their finance-related groups. Despite receiving only a single, unsolicited recruitment email with a link to our online survey, we received 861 complete responses—453 faculty, 294 practitioners, and 72 financial regulators—for a response rate of 7.5%, which compares well to the response rates typical of this sort of survey.


Weekly Roundup: August 27-September 2, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 27-September 2, 2021.

SEC Maintains Focus on Contingent Liabilities

ESG and Incentives 2021 Report

SEC Updates Qualified Client Threshold

2021 Say on Pay and Proxy Results

Corporate Racial Equality Investments—One Year Later

A Special Board Committee Can Help Drive Corporate and Transformational Success

M&A Rumors about Unlisted Firms

Private Equity Carve-Outs Ride Post-COVID Wave

Cross-Listings, Antitakeover Defenses, and the Insulation Hypothesis

The SEC’s Upcoming Climate Disclosure Rules

ESG 2.0—The Next Generation of Leadership

Corporate Directors’ Implicit Theories of the Roles and Duties of Boards

Spotlight on Boards

Spotlight on Boards

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, Steven A. RosenblumKaressa L. Cain, and Hannah Clark.

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The ongoing coronavirus pandemic and resulting economic and social turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, are propelling a decisive inflection point in the responsibilities of boards of directors. The 2016 and 2020 statements of corporate purpose by the World Economic Forum and the 2019 embrace of stakeholder capitalism by the Business Roundtable, together with current statements of policy by most of the leading corporations, institutional investors, asset managers and their organizations, as well as governments and regulators in and outside the United States, lead us to summarize the purpose of the corporation:

The objective and purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to ensure its success and grow its value over the long term. This requires consideration of, and regular engagement with, all the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, communities and society at large) as determined by the corporation and its board of directors using their business judgment. Fulfilling this purpose in such a manner is fully consistent with the fiduciary duties of the management and the board of directors and the stewardship duties of shareholders (institutional investors and asset managers), who are essential partners in supporting the corporation’s pursuit of its purpose.


Corporate Directors’ Implicit Theories of the Roles and Duties of Boards

Steve Boivie is Professor of Management at Texas A&M University Mays Business School; Michael C. Withers is Associate Professor of Management at Texas A&M University Mays Business School; Scott D. Graffin is Professor of Management at the University of Georgia Terry College of Business; and Kevin P. Corley is Professor of Management and Entrepreneurship at Arizona State University W.P. Carey School of Business. This post is based on their recent paper, forthcoming in the Strategic Management Journal.


In the fifteen years since the passage of the Sarbanes-Oxley (SOX) Act in the U.S., several institutional and regulatory changes have helped reshape boards of directors. During this time, other factors have emerged to place greater pressure on boards as well. In particular, larger activist investors have applied pressure on boards to focus their efforts on managerial oversight. Increasingly third-party rating services and proxy advisors such as Institutional Shareholder Services (ISS) have suggested boards need to be more independent and focused on shareholder interests. Given this changing context, we conducted extensive interviews with 50 active directors and executives to try and better understand how directors view their jobs and what they view as some of the best practices.

How do directors view their board service?

Our informants consistently told us they view their primary task as working with the executive team to help improve and inform decision making. From this perspective, directors need to trust their CEO in terms of the strategic direction of the firm, and if that trust is not there, the CEO should be removed. Directors do not necessarily view their responsibility as explicitly monitoring for opportunism. Reflecting this point, one director stated, “The board has a separate fiduciary responsibility to work on behalf of shareholders, but that doesn’t mean that they’re beholden to someone other than the management team, because the management team has that same responsibility.” Interestingly, however, as managers prepare for and conduct due diligence in expectation of deep discussions and probing from the board on strategic issues, indirect monitoring often occurs through an “invisible hand.”


ESG 2.0—The Next Generation of Leadership

Kurt B. Harrison is a senior member of Russell Reynolds Associates’ Financial Services sector and co-head of the global Sustainability practice; Emily Meneer leads Russell Reynolds Associates’ Sustainability practice Knowledge team; and Beijing Zhu is a member of Russell Reynolds Associates’ Financial Services sector Knowledge team. This post is based on their Russell Reynolds memorandum.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver Value to All Stakeholders?, both 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).

As anyone involved with ESG will attest, the current level of demand for ESG leadership talent is unsurpassed and unrelenting.

Even firms with long-standing track records of successfully integrating ESG principles into their organizations are finding it more difficult than ever to stay ahead of dynamic and constantly evolving ESG expectations. Companies that have previously resisted establishing a formalized ESG policy and framework are finally bowing to pressure from their investors, consumers, employees, boards and regulators, and now find themselves scrambling to catch up. As ESG has gone from being a functional requirement to a commercial imperative, best-in-class organizations are embracing ESG in part because they firmly believe in the financial benefits of incorporating sustainability into their corporate and investment strategies.

All of these factors have led to an avalanche of demand for ESG leadership talent, straining what was already a very thin talent pool. It is clear that next-generation ESG leaders will look quite different from earlier archetypes, as the scope of the role grows and requires a far more senior and agile executive to be considered as a credible “ESG 2.0” leader.


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