Monthly Archives: October 2021

Investors and Regulators Turning up the Heat on Climate-Change Disclosures

Jason Halper is partner and Sara Bussiere and Timbre Shriver are associates at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Bussiere, Ms. Shriver, Melis Acuner, Mark Beardsworth and Kevin Roberts. 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).

As investors’ calls for greater climate-related corporate accountability grow louder, the “E” in ESG—environmental, social and governance—looms larger than ever, particularly from the perspective of directors facing oversight responsibilities and the challenge of providing adequate disclosure. That reality became even clearer when a little-known hedge fund with a relatively small stake in ExxonMobil successfully elected three insurgent directors at the company’s annual meeting after quietly garnering the support of other stakeholders by appealing to their interest in environmental and governance issues. [1]

Of course, investors have been signaling the importance of environmental issues for years. In 2007, the $240 billion California State Teachers’ Retirement System (“CalSTRS”) formed a Green Initiative Task Force focused solely on “managing sustainability-related risks, including climate risks, and taking advantage of appropriate sustainability-themed investments.” [2] Blackrock, the largest asset management company in the world by assets under management, has published guidance concerning its expectations with respect to climate-related disclosures, stating that “climate risk—physical and transition risk—presents one of the most significant systemic risk[s] to the long-term value of our clients’ investments.” [3] Earlier this year, Blackrock voted for two shareholder proposals requiring Berkshire Hathaway Inc. to issue disclosures addressing how the company is managing climate risk, noting that the company “is not adapting to a world where environmental, social, governance (ESG) considerations are becoming much more material to performance.” [4] Though neither proposal was approved, Blackrock’s dissatisfaction prompted other institutional investors to express their discontent, increasing pressure on the company to modify its approach. In 2017, research conducted by the Sustainability Accounting Standards Board (“SASB”) found that climate change “is likely to have material financial impacts on companies in 72 out of 79 industries, representing 93 percent of the U.S. equity market, or $27.5 trillion.” [5] And investors are increasingly demanding that companies change their approach to managing climate-related risks and more thoroughly disclosing those efforts. We expect these demands to hit a fever pitch following the “code red for humanity” recently issued by the United Nations’ recent Intergovernmental Panel on Climate Change (“IPCC”) report and in the months leading up to the United Nations’ Conference of the Parties 26 (“COP26”) in Glasgow in November of this year. [6]

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The Reliability of Your Company’s Carbon Footprint

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

Just how reliable are those carbon footprints that many large companies have been publishing in their sustainability reports? Even putting aside concerns about greenwashing, what about those nebulous Scope 3 GHG emissions? As we all know, the SEC is now is the midst of developing a proposal for mandatory climate-related disclosure. (See, e.g., this PubCo post and this PubCo post.) The WSJ reports that “[o]ne problem facing regulators and companies: Some of the most important and widely used data is hard to both measure and verify.” According to an academic cited in the article, the “measurement, target-setting, and management of Scope 3 is a mess….There is a wide range of uncertainty in Scope 3 emissions measurement…to the point that numbers can be absurdly off.”

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Cybersecurity and Disclosures

Paul Ferrillo is partner at Seyfarth Shaw LLP; Bob Zukis is Adjunct Professor of Management and Organization at the USC Marshall School of Business; and George Platsis is Senior Lead Technologist at Booz Allen Hamilton. This post is based on a memorandum authored by Mr. Ferrillo, Mr. Zukis, Mr. Platsis, and Christophe Veltsos.

 “The Vulcan mind meld, also known as the mind link, mind probe, mind fusion, mind touch, or simply meld, was a telepathic link between two individuals. It allowed for an intimate exchange of thoughts, thus in essence enabling the participants to become one mind, sharing consciousness in a kind of gestalt.” [1]

—The Star Trek definition of “Mind Meld”

The United States Securities and Exchange Commission (SEC or Commission) recently issued two critical Consent Orders, First American Title [2] and Pearson, [3] both articulating the need for timely, fulsome, and accurate disclosures to the market when a data breach occurs. These two Consent Orders are the first precedents that offer guidance on what the SEC is expecting on cybersecurity risk related to what the board needs to know, when they need to know it and when they need to disclose it.

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The Audit Committee’s Role in Sustainability/ESG Oversight

Stephen G. Parker is Partner, and Tracey-Lee Brown and Gregory Johnson are Directors at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC 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).

Because ESG encompasses strategy, risk and opportunity, the board plays a vital role. But ESG is a broad topic, and the board should consider assigning various aspects of oversight to specific committees. Here we outline the role the audit committee can play in overseeing ESG disclosures.

Why the hype about ESG disclosures?

In recent discussions about environmental, social, and governance (ESG) issues, large institutional investors have been the loudest in the push for greater corporate transparency. Investors want to know how companies are addressing ESG risks and opportunities because of their potential impact on shareholder value. Environmental issues such as climate change and social issues such as racial injustice and inequality can affect a company’s cost of capital, long term growth prospects, and ultimately, its viability. That may be one reason why one in four S&P 500 companies cited “ESG” when discussing business strategy on their earnings calls for Q4 2020 the highest in 10 years.

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SPAC Momentum Continues in Europe

Michael Levitt, Mark Austin, and Dr. Christoph Gleske are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Levitt, Mr. Austin, Dr. Gleske, Dirk-Jan Smit, Kate Cooper, and Dr. Stephan Pachinger.

Since our publication in March (US SPAC Boom Spreads to Europe), the SPAC market in Europe has continued to grow, with nearly 30 SPACs listed so far in 2021. Euronext Amsterdam has been taking the lead with over 40% of the European SPAC listings, along with three on the Frankfurt Stock Exchange. In London, the Financial Conduct Authority has published its final policy statement in relation to the SPAC regime, which came into force on 10 August and looks set to encourage SPAC listings in London, with several in preparation and more being discussed.

We have updated the table which we published in March to show current trends in the features of SPACs that have listed in Amsterdam and Frankfurt, with a comparison to the typical SPAC structure in the United States. We have also included updates for how the structure has been used for London SPAC listings historically and where the requirements set out in the FCA’s recent policy statement impact that structure. We expect London market practice to change going forward to largely mirror that in other jurisdictions.

Among the four jurisdictions, Frankfurt and the US are the most similar. For a Frankfurt-listed SPAC, entities organized in Luxembourg or The Netherlands have recently been used to resemble the US SPAC structure. In addition, the Frankfurt Stock Exchange has introduced listing rules specifically for SPACs to make it easier for them to list in Frankfurt.

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The HCM Funnel

Greg Arnold is Managing Director and Andrew Friedlander is Senior Associate at Semler Brossy LLC. This post is based on their Semler Brossy 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).

Investor demands, societal pressures and competition for employees are pushing boards to be intentional about where and how they focus on human capital management (HCM). Leading companies view HCM as a value driver and strategic differentiator.

Boards should view HCM topics the same way they view other key strategic items — as an essential component of company oversight. But some companies are struggling to determine where to focus and how to drive real change in the organization. Many have expanded the purview of the compensation committee to include HCM metrics and some have renamed the committee to reflect this broader oversight. Additionally, increased disclosure requirements and expectations have raised the bar for clarity on how HCM ties to the business strategy. With the growing number of HCM measures, disclosure frameworks and investor perspectives, companies need to set priorities on their differentiators and areas where improvement will drive better business performance.

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Chancery Court Decision on the “Effect of Termination” Provision

Gail Weinstein is senior counsel, and Amber Banks (Meek) and Maxwell Yim are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Ms. Banks, Mr. Yim, Andrea Gede-Lange, Shant P. Manoukian, and Bret T. Chrisope, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

The Delaware Court of Chancery’s recent decision in Yatra Online v. Ebix (Aug. 30, 2021) serves as a reminder that, under the “Effect of Termination” provision in most merger agreements, a party’s termination of the agreement extinguishes all liability of both parties for pre-termination breaches of the agreement, except as the parties may have otherwise specifically provided in the agreement. The Ebix case illustrates that, depending on how the parties have drafted the provision, a party can be left with no remedy for the willful breaches and wrongful failure to close of the other party.

Ebix, Inc. allegedly had a change of heart about proceeding with its agreed acquisition of Yatra Online, Inc. after the deal became less attractive to Ebix when the COVID-19 pandemic emerged. Allegedly, Ebix then blatantly breached its representations and covenants in the Merger Agreement and “strung along” Yatra with pretextual delays while in fact Ebix never intended to close. Yatra ultimately became “fed up” with Ebix’s misconduct, and, when several renegotiated end dates had passed with no sign that Ebix intended ever to close, Yatra sued Ebix for damages and exercised its right to terminate the Merger Agreement. The court held, however, that Yatra had no remedy because it had terminated the Merger Agreement and the Effect of Termination provision, as drafted, extinguished liability for pre-termination breaches without any carveout for liability for willful breaches.

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Key Takeaways From Recent SEC Cybersecurity Charges

Michael Osnato is partner, Allison Bernbach is senior counsel and William LeBas is an associate at Simpson Thacher & Bartlett LLP. This post is based on their Simpson Thacher memorandum.

On August 30, 2021, the SEC announced three settlements with eight registered investment advisers and broker-dealers for violations of Rule 30(a) of Regulation S-P (the “Safeguards Rule”) and, in the case of one of the firms charged, for violations of Section 206(4) and Rule 206(4)-7 of the Advisers Act, resulting in hundreds of thousands of dollars in fines (ranging from $200,000 to $300,000) for the firms. The settlements reflect the Enforcement Division’s continued focus (for issuers and advisers alike) on cybersecurity, as well as a continued focus on advisers’ adherence to adopted policies and procedures. These actions originated in examinations and may reflect the developed expertise of the Exams Staff (working with the SEC’s specialized Cyber Unit) on cybersecurity issues.

The settlements come on the heels of a number of initiatives and publications by the SEC with respect to cybersecurity risks. [1] In its 2021 Examination Priorities, the Division of Examinations (“Examinations”) noted that it “will also focus on controls surrounding . . . the electronic storage of books and records and personally identifiable information maintained with third-party cloud service providers, and firms’ policies and procedures to protect investor records and information.” Examinations also published a January 2020 report regarding effective cybersecurity practices for market participants, as well as a COVID-related risk alert in August 2020 that included focus on cyber risks.

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Crises as Opportunities for Growth: The Strategic Value of Business Group Affiliation

Jason Zein is Associate Professor of Finance at the University of New South Wales Sydney School of Banking and Finance. This post is based on a recent paper authored by Mr. Zein; Ronald Masulis, Scientia Professor of Finance at the University of New South Wales Sydney School of Banking and Finance; Peter Pham, Associate Professor of Finance at the the University of New South Wales Sydney School of Banking and Finance; and Alvin E. S. Ang, Assistant Professor of Finance at Hang Seng University of Hong Kong School of Business.

In many markets around the world, a substantial fraction of publicly listed firms are members of family-controlled business groups. Despite widespread concerns over their corporate governance impacts, family business groups have continued to expand, with no end to their dominance in sight. For example, from 2002 to 2012, a period which includes the Global Financial Crisis (GFC), the total annual sales as a percentage of GDP of the top 10 largest family business groups in South Korea increased from 53% to 80%, with two-thirds of the gain occurring after this crisis. While previous studies suggest that groups exploit their economic and political influence to perpetuate their market dominance over nongroup affiliated firms, little is known about the conditions under which groups are able to expand their market power and strengthen their competitive positions over time.

In our paper titled Crises as Opportunities for Growth: The Strategic Value of Business Group Affiliation, which is available on SSRN, we investigate whether business groups exploit crises to expand their economic power. Our study is motivated by the surprising lack of empirical evidence that links internal financing benefits of group affiliation to their product market positions. This is despite the large body of evidence in the industrial organization literature documenting that financially strong firms have a “deep pockets” advantage which enable them to capture market share from their financially constrained rivals. In a similar vein, we argue that the internal capital markets (ICMs) of business groups provide their affiliates with a clear strategic advantage during crisis periods, allowing them to capture market share from standalone rivals with limited access to external capital.

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Weekly Roundup: September 23–30, 2021


More from:

This roundup contains a collection of the posts published on the Forum during the week of September 24–30, 2021.

The Impact of a Principles-Based Approach to Director Gender Diversity Policy


A New Way of Seeing Value


SEC’s Investor Advisory Committee Recommends Changes to Rule 10b5-1 Trading Plans


Five Essential Strategy Questions Boards Should Be Asking


Board Structure Is Key to Oversight


C-Suite Executives Should Fill the Trust Gap



Delaware Supreme Court Announces New Demand Futility Test




Proxy Season Climate-Related Voting Trends Report


The Deterrent Effect of Insider Trading Enforcement Actions





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