Monthly Archives: October 2021

Delaware Supreme Court Clarifies the Standards for Demand Futility

Posted by Heather Sultanian, Sidley Austin LLP, on
Wednesday, October 27, 2021
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Heather Benzmiller Sultanian is an associate at Sidley Austin LLP. This post is based on her Sidley memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

A pair of opinions released by the Delaware Supreme Court in a single week have revisited longstanding precedent governing shareholder suits that claim corporate wrongdoing. As discussed in a companion post on this blog, the first of those opinions, Brookfield Asset Management Inc. v. Rosson, restricted the ability of shareholders to bring direct claims under certain circumstances, instead forcing them to pursue more procedurally challenging derivative suits. In the second case, United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, the Delaware Supreme Court adopted a new three-part demand-futility test that clarifies the standard shareholders must meet to file such derivative suits, without first taking their complaints to the company’s board of directors.

Background

United Food arose from a vote by Facebook’s board of directors in 2016 to pursue a stock reclassification plan that would allow CEO Mark Zuckerberg to sell most of his Facebook stock — which Zuckerberg planned to do to fulfill the “Giving Pledge,” under which he had committed to giving the majority of his wealth to philanthropic causes — while still maintaining voting control over the company. Days after Facebook announced the reclassification plan, several investors filed class action suits to block the plan, alleging that it was a self-interested deal that put Zuckerberg’s interests ahead of Facebook’s in violation of the board of directors’ fiduciary duties. Shortly before trial was scheduled to begin, Facebook abandoned the reclassification plan and mooted the pending litigation.

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Climate Stewardship

Posted by Benjamin Colton, Michael Younis, and Devika Kaul, State Street Global Advisors, on
Tuesday, October 26, 2021
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Benjamin Colton is Global Co-Head of Asset Stewardship, Michael Younis is Vice President, and Devika Kaul is Asset Stewardship Analyst at State Street Global Advisors. This post is based on their SSgA memorandum.

Voting Record

Our Voting Record on Climate Related Shareholder Proposals for 2ºC Scenario Proposals

Our voting on climate change is typically prompted by shareholder proposals. However, we may also take voting action against directors even in the absence of shareholder proposals for unaddressed concerns pertaining to climate change. The number of climate-related proposals on company ballots has been steadily increasing over the past few years. Annually, we review and vote every climate-related proposal in our portfolio. We also endeavor to engage with the proponents of shareholder proposals to gain additional perspective on the issue, as well as with companies to better understand how boards are managing relevant risks.

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Climate in the Boardroom 2021

Posted by Jessie Giles, Eli Kasargod-Staub, and Bryant Sewell, Majority Action, on
Tuesday, October 26, 2021
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Jessie Giles is Research Director, Eli Kasargod-Staub is Co-founder and Executive Director, and Bryant Sewell is Senior Research Specialist at Majority Action. This post is based on their Majority Action memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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 2021 proxy voting by the largest asset managers remained wholly insufficient to the scale and urgency of the climate crisis, according to a new report by Majority Action. Following years of accountability efforts from clients, fellow shareholders, and climate advocates, substantial progress has been made in asset manager support for climate-related shareholder proposals. Despite this, benchmarking of the world’s largest greenhouse gas emitters by the investor initiative Climate Action 100+ demonstrates that the companies primarily responsible for the production and consumption of fossil fuels causing climate change are not on track to decarbonize their operations by 2050.

Majority Action recommends that asset managers and owners enact their fiduciary responsibility for mitigating climate risks to their clients’ and beneficiaries’ portfolios by adopting or updating proxy voting policies to target limiting warming to 1.5°C, setting expectations that portfolio companies will take action to reduce their emissions consistent with that goal, and enabling voting against directors at companies that fail to do so. They should also establish and communicate clear, industry-specific standards for assessing corporate decarbonization plans aligned with limiting warming to 1.5°C, in particular in the climate-critical industries of oil and gas, electric power, and financial services, and disclosing company assessments against those standards. Asset owners are urged to revise asset manager search criteria, requests for proposals and assessments to include criteria for proxy voting on systemic climate risk at climate-critical companies.

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Direct vs. Derivative Standing

Posted by Andrew W. Stern, Sidley Austin LLP, on
Tuesday, October 26, 2021
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Andrew W. Stern is partner at Sidley Austin LLP. This post is based on his Sidley memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Every once in a while, a court admits it made a mistake. And, in even rarer circumstances, that admission comes from a court as prominent as the Supreme Court of Delaware. But that’s exactly what happened last week in Brookfield Asset Management, Inc. v. Rosson, in which Delaware’s highest court overruled its own 2006 holding in Gentile v. Rosette that certain claims of corporate dilution are “dual-natured” and may be pursued both as derivative claims and as direct claims by stockholders. The Court’s decision to revisit a much-criticized decision is likely to restore some predictability and analytic consistency to the resolution of an important and threshold question frequently presented in stockholder litigation: whether a claim is properly characterized as direct (on behalf of one or a class of a company’s stockholders) or derivative (on behalf of the company itself).

Rosson arose from a private placement of common stock issued by TerraForm Power, Inc., at the time a public company controlled by a 51% stockholder. The controller purchased all of the newly issued stock, increasing its economic interest and voting power to 65.3%. Plaintiffs TerraForm common stockholders filed a derivative and class action complaint alleging that the stock had been issued for inadequate value, diluting the financial and voting interests of the minority stockholders and also damaging the company. Subsequent to the filing of the complaint, the controller acquired the balance of TerraForm shares that it did not already own, which under well-established Delaware precedent extinguished the ability of former TerraForm stockholders to pursue derivative claims. On defendants’ motion to dismiss the remaining direct claims, Vice Chancellor Sam Glassock noted that the type of claim at issue was classically derivative under Delaware jurisprudence: “the quintessence of a claim belonging to an entity: that fiduciaries, acting in a way that breaches their duties, have caused the entity to exchange assets at a loss.”

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BlackRock to Permit Some Clients to Vote

Posted by Cydney Posner, Cooley LLP, on
Monday, October 25, 2021
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. 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).

According to the Financial Times, “[p]ension funds and retail investors have complained for years over their lack of ability to vote at annual meetings when using an asset manager.” Last week, BlackRock, the largest asset manager in the galaxy with $9.5 trillion under management, announced that, beginning in 2022, it will begin to “expand the opportunity for clients to participate in proxy voting decisions.” BlackRock said that it has been developing this capability in response “to a growing interest in investment stewardship from our clients,” enabling clients “to have a greater say in proxy voting, if that is important to [them].” BlackRock will make the opportunity available initially to institutional clients invested in index strategies—almost $2 trillion of index equity assets in which over 60 million people invest across the globe. It is also looking at expanding “proxy voting choice to even more investors, including those invested in ETFs, index mutual funds and other products.” Will this be a good thing?

Clients will have four choices: they can cast votes themselves for all companies; they can vote in accordance with a shareholder proxy service, such as ISS or Glass Lewis; they can cherry pick certain proposals or companies that that they want to vote on themselves—perhaps the most controversial topics of day, such as climate or political spending disclosure—or they can continue to rely on BlackRock Investment Stewardship to vote their shares. BlackRock reports that, in the 12 months ended June 30, 2021, “BIS held more than 3,600 engagements with more than 2,300 companies. BIS voted at more than 17,000 shareholder meetings, casting more than 165,000 votes on behalf of our clients in 71 voting markets.” But now, if they so choose, some institutions will be able to conduct those engagements and make decisions themselves.

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Are Narcissistic CEOs All That Bad?

Posted by Brian Tayan (Stanford University), on
Monday, October 25, 2021
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Brian Tayan is a researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan; David Larcker, Professor of Accounting at Stanford Graduate School of Business; Charles A. O’Reilly, the Frank E. Buck Professor of Management at Stanford Graduate School of Business; and Anastasia Zakolyukina, Associate Professor of Accounting and Neubauer Family Faculty Fellow at University of Chicago Booth School of Business.

We recently published a paper on SSRN, Are Narcissistic CEOs All That Bad?, which examines the prevalence of narcissism among corporate CEOs and the impact that narcissism has on corporate stock-price performance and other outcomes.

The role that a CEO’s personality plays in determining outcomes is a topic of considerable interest to researchers, the media, and the public. This includes not only the association between certain personality types and stock-price performance, but also the impact of personality on strategic choices, governance quality, ethical standards, and corporate image.

Among the broad spectrum of personality types, one that garners significant attention is narcissism, because of its association with larger-than-life personalities. Narcissism is characterized by an inflated sense of self-importance, an excessive need for attention and admiration, and lack of empathy (see Exhibit 1). Common perception is that narcissism is highly prevalent among CEOs. This is because some of the traits that contribute to workplace advancement among executives—self-confidence, risk tolerance, a focus on goal achievement, and more extraverted personalities—are common to narcissists. This has resulted in a number of interesting studies of the subject. Narcissism is by no means required for career advancement and in some settings may impede it. Narcissists might share observable attributes with confident, dynamic, or transformational leaders, but the two are not synonymous. From an external standpoint, however, distinguishing between narcissistic and self-confident leaders can be difficult.

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Board Readiness for Shareholder Activism

Posted by Paul DeNicola, PricewaterhouseCoopers LLP, on
Monday, October 25, 2021
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Paul DeNicola is Principal at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on his PwC memorandum. 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).

For many people, proxy fights are almost synonymous with shareholder activism. But we view them as just one point on an activism continuum that also includes investors’ engagement with companies whose shares they hold, shareholder proposals, and more. Whenever an investor leverages their rights and privileges as an owner to influence a company’s practices or strategy, that’s shareholder activism.

Increasingly, investors of all kinds are using the full spectrum of activist tools to weigh in on environmental, social, and governance (ESG) issues. Indeed, it’s likely 2021 will be remembered as the year that ESG became a key part of shareholder activists’ strategies.

A handful of newly-launched ESG-focused activist firms and their high-profile proxy contests are a big part of the reason why. In addition, large institutional investors have reported that they’re engaging with companies around climate risk disclosures, D&I, and other ESG topics with much greater frequency. Some have said they increasingly chose to vote against directors at companies they felt weren’t handling these matters appropriately. And the number of shareholder proposals focused on environmental and social matters that received majority support reached a record high during the 2021 proxy season.

What connects all these activities—from engagement to proxy contests—is how they demonstrate many shareholders’ conviction that good performance on ESG-related matters builds value, while poor performance destroys it. Obviously, companies and their boards can’t afford to take those views lightly. It’s more important than ever for directors to take a holistic view of shareholder activism and to understand their role in navigating the challenges it may pose.

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SEC Highlighting the Need to Consider Climate Change Disclosures in SEC Filings

Posted by Michael Littenberg and Marc Rotter, Ropes & Gray LLP, on
Sunday, October 24, 2021
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Michael Littenberg is partner and Marc Rotter is counsel at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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 late September, the staff of the SEC’s Division of Corporation Finance published a sample comment letter relating to climate change disclosures. While the sample letter does not break new ground substantively, it underscores the SEC’s increasing focus on climate disclosures and its views more generally on the relevance to investors of climate-related risks. In this post, we discuss the sample comment letter and take-aways for public companies.

A Bit of Background—the SEC Turns up the Heat on Climate Disclosure

Since the change in administration, the SEC’s focus on climate disclosure has been increasing. In early February, Satyam Khanna was named Senior Policy Advisor for Climate and ESG to then-Acting Chair Allison Herren Lee. Later that month, Acting Chair Lee issued a Statement indicating she was directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. The Statement indicated that, as part of its enhanced focus in this area, the staff would (1) review the extent to which public companies are addressing the topics identified in the SEC’s 2010 climate risk guidance, (2) assess compliance with disclosure obligations under the federal securities laws, (3) engage with public companies on these issues and (4) absorb critical lessons on how the market is currently managing climate-related risks.

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The Stablecoins Debate

Posted by David L. Portilla and Will C. Giles, Cravath, Swaine & Moore LLP, on
Sunday, October 24, 2021
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David L. Portilla is partner and Will C. Giles is senior attorney at Cravath, Swaine & Moore LLP. This post is based on their Cravath memorandum.

In 1982 E. Gerald Corrigan, then president of the Federal Reserve Bank of Minneapolis, asked “Are Banks Special?” [1] He did so at the behest of Paul Volcker when Volcker was chairman of the Federal Reserve Board and at a time when there was “rapid change, with market innovation and new sources of competition” to banks from nonbanks and the “perception that banks’ competitive position—and presumably their market share—has slipped”. [2] Corrigan’s paper provided an approach to think about the future scope of banking activities and bank structure that, in hindsight, appears to have predicted largely how banking law would evolve for at least the next 20 years after his writing. [3]

At a time when we once again see a rapid pace of innovation in the financial sector and banks are facing increased competition from new nonbank innovators, we thought it appropriate to turn back to Corrigan’s perceptive and influential work to see what lessons it can offer. As described below, his analysis provides yet another lens through which to view the stablecoin debate. Moreover, his struggles with how to consider money market mutual funds (“MMFs”) helps inform the debate, given not only that MMFs and stablecoins have similarities, but also that MMFs were, at the time of the essay (as stablecoins are now), relatively small, new and novel financial products.

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ESG Regulatory Reform

Posted by Katie McShane, Cadwalader, Wickersham & Taft LLP, on
Saturday, October 23, 2021
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Katie McShane is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on her Cadwalader memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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).

With ESG (Environmental, Social and Governance) funds on a dramatic incline, an incline expected to continue going forward, it seems inevitable that regulatory reform is on the horizon. Europe has been leading the charge in the incorporation of ESG considerations into its regulatory framework. As we look to gauge what type of regulatory reform might be around the corner for us here in the U.S., specifically in the realm of fund finance, it is useful to look at the regulatory developments in the EU.

Regulatory Reform in the EU

The most relevant EU regulation in this space is the Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March of this year. The SFDR imposes mandatory ESG disclosure obligations on asset managers and other financial markets participants, and is a major milestone in the EU’s efforts to ensure a systematic and transparent approach to sustainability within financial markets, thereby preventing greenwashing and ensuring comparability.

By way of background, the SFDR was introduced by the European Commission alongside the Low Carbon Benchmarks Regulation and the Taxonomy Regulation as part of a package of legislative measures stemming from the European Commission’s Action Plan on Sustainable Finance.

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