Monthly Archives: September 2021

The SEC’s Upcoming Climate Disclosure Rules

Sarah Solum, Valerie Ford Jacob, and Michael Levitt are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Solum, Ms. Jacob, Mr. Levitt, Pamela Marcogliese, Elizabeth Bieber and Heather Kellam. 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).

In his remarks before the Principles for Responsible Investment “Climate and Global Financial Markets” webinar on July 28, 2021, SEC Chair Gary Gensler provided insights into what companies might expect from the SEC’s upcoming climate disclosure rules. Gensler’s remarks follow in the wake of other similar proposals for enhanced climate disclosure made by authorities in the European Union and various European countries.

“When it comes to disclosure, investors have told us what they want,” Gensler said in his speech. “More than 550 unique comment letters were submitted in response to my fellow Commissioner Allison Herren Lee’s statement on climate disclosures in March. Three out of every four of these responses support mandatory climate disclosure rules.” Gensler believes that “the SEC should step in when there’s this level of demand for [climate] information relevant to investors’ decisions.”

Gensler said that new climate change rules follow in the footsteps of historical changes the SEC has made to disclosure requirements, such as adding new requirements for risk factors in 1964, MD&A in 1980 and stock compensation in the 1990’s.

Gensler analogized this evolving public company disclosure to the expansion of the Olympics:


Cross-Listings, Antitakeover Defenses, and the Insulation Hypothesis

Nan Yang is Assistant Professor of Finance at the Hong Kong Polytechnic University; Albert Tsang is Professor of Accounting at the Hong Kong Polytechnic University; Lingyi Zheng is a postdoctoral fellow at the Hong Kong Polytechnic University. This post is based on their recent paper, forthcoming in the Journal of Finance Economics. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk; and Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

Understanding why firms cross-list their shares abroad has attracted many studies in finance (Karolyi, 2006, 2012). These studies has argued that overseas listings can broaden firms’ shareholder base, or bond firms to stronger legal enforcement and more prestigious financial intermediaries in the hosting countries. While these studies mainly focus on the capital market benefits of cross-listings (e.g., lower cost of capital, higher stock valuation, and higher liquidity), we examine a new motive for cross-listing: to insulate firms from hostile takeovers. In our paper, forthcoming in the Journal of Finance Economics, we provide strong evidence that firms are more likely to cross-list in foreign countries when facing corporate control threats.

Kastiel and Libson (2019) is the first to propose this new motive in their insulation hypothesis. They argue that cross-listing can protect firms from potential hostile takeovers owing to the increased costs and barriers for acquirers. If acquirers launch tender offers in both domestic and foreign exchanges, they can be subject to massive direct fees. Acquirers would also be concerned about immense complexity, uncertainty, and possible litigation risk when dealing with different accounting regimes, governance, and other regulatory requirements between jurisdictions. The complexity, uncertainty, and litigation risk also represent significant costs because time is crucial in the success of a takeover attempt, and these matters could cause serious delays in the merger process.


Private Equity Carve-Outs Ride Post-COVID Wave

Germaine Gurr and Arlene Arin Hahn are partners at White & Case LLP. This post is based on a White & Case memorandum by Ms. Gurr, Ms. Hahn, Darragh Byrne, Ferdinand Mason and Tzi-Yang Seow.

Last spring, Dell spun off its cloud computing business, VMWare, in a deal valued at nearly US$63 billion, with the equity from the deal funneled to existing shareholders including Dell itself and the PE firm Silver Lake Partners, Dell’s strategic financial partner since 2013.

The unconventional Dell deal serves as a bellwether for surging PE carve-out activity, and for increasingly out-of-the-box dealmaking.

Corporate divestitures to PE have boomed over the past 12 months. Following the market pause in Q2 2020, such deals spiked to highs not seen for at least four years.

H2 2020 witnessed US$254 billion in private equity carve-outs, according to data from Dealogic. The momentum carried over into 2021: In H1, US$281.1 billion in such deals was recorded, a 197% year-on-year increase. The numbers reveal a rise in deals at the top end of the market, as volume of 436 deals in H1 2021 was only a 12% rise on H1 2020—and a drop on the 520 transactions struck in the second half of 2020.

The Dell VMWare deal—though unusual in many ways—exemplified the strength of the US market for PE carve-outs. US-based deals were responsible for US$133.5 billion of deal value, nearly half of the global total.


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