Monthly Archives: December 2021

Directors Challenged to Respond to New DOJ Corporate Fraud Initiative

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on his McDermott Will & Emery memorandum.

The US Department of Justice’s (DOJ’s) new policy on corporate fraud enforcement and individual accountability is a significant development around risk, and corporate directors should be aware.

As Deputy Attorney General Lisa O. Monaco announced on October 28, the new policy represents a return to the stricter enforcement posture of the administration of Barack H. Obama. In that regard, the policy has implications for board oversight of the corporate legal function and will likely affect how boards evaluate risk and oversee the effectiveness of compliance and ethics programs.

According to Monaco, this shift in enforcement policies reflects the confluence of three developments: the increasing national security dimension associated with corporate crime, the dramatically increased role that data analytics is playing in corporate criminal investigations, and criminals’ interaction with emerging companies in the technology and financial sectors in a way that exploits the investing public. The DOJ’s overarching goal is to “protect jobs, guard savings, and maintain our collective faith in the economic engine that fuels this country,” Monaco said.

The leading theme of the new policy is its unambiguous prioritization of individual accountability in corporate criminal matters. This translates, in part, to a reminder for federal prosecutors to concentrate on individual accountability—at every level of the corporate hierarchy—from the beginning of a criminal investigation.


Silicon Valley and S&P 100: A Comparison of 2021 Proxy Season Results

David A. Bell is partner and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum.

In the 2021 proxy season, 143 of the technology and life sciences companies included in the Fenwick – Bloomberg Law Silicon Valley 150 List (SV 150) and 99 of the companies in the Standard & Poor’s 100 (S&P 100) held annual meetings that typically included voting for the election of directors, ratifying the selection of auditors of the company’s financial statements and voting on executive officer compensation (“say-on-pay”).

Annual meetings will often also include voting on one or more of a variety of proposals that may have been put forth by the company’s board of directors or by a stockholder that has met the requirements of the company’s bylaws and applicable federal securities regulations.

This post summarizes significant developments relating to stockholder voting at annual meetings in the 2021 proxy season among the SV 150 and S&P 100. [1]

Significant Findings

SV 150 companies saw less support for their executive compensation proposals in 2021. Seven SV 150 companies failed their say-on-pay vote compared to just four in the 2020 proxy season. At the same time, more stockholder proposals passed at SV 150 companies during the period, with average support reaching 30.4% compared to 25.5% in 2020. These results may portend more stockholder activism in the future as stockholders, regulators and other stakeholders focus their attention on how companies address more ESG-related policy issues.

Among the other key findings are:


Damages Awards Based on Controller’s Reliance on Outside Counsel’s Legal Opinion

Gail Weinstein is senior counsel and Mark H. Lucas and David L. Shaw are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Lucas, Mr. Shaw, Erica JaffeShant P. Manoukian, and Maxwell Yim, 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

In Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP (Nov. 12, 2021), the Delaware Court of Chancery ordered the general partner (the “General Partner”) of Boardwalk Pipeline Partners (the “Partnership”) to pay the former limited partners $690 million in damages (plus pre- and post-judgment interest, and costs) in connection with the General Partner’s $1.56 billion take-private of the Partnership. The Partnership’s master limited partnership agreement permitted a take-private if, in the future, certain regulatory changes occurred that were reasonably likely to have a material adverse effect (MAE) on the Partnership based on its pass-through tax status as an MLP. The only conditions to the General Partner’s right to effect a take-private were that it had received an opinion of legal counsel as to the MAE (the “Opinion Condition”) and that the General Partner had deemed the opinion acceptable (the “Acceptability Condition”). The General Partner received the opinion (the “Opinion”), from a highly regarded national law firm (known particularly for its energy, oil and gas practice) (the “Law Firm”). The General Partner deemed the Opinion acceptable and effected the take-private.

The court held that the Opinion Condition was not satisfied, however–because the Law Firm delivered the Opinion in “bad faith” as it had been “contrived” to reach the result that the General Partner and its controller (the “Controller”) wanted. The court also held that the Acceptability Condition was not satisfied–because the General Partner (a limited liability company) relied on its sole member (whose board was comprised entirely of insiders) rather than on its board (which included independent directors) to make the acceptability determination. The court held that (i) the General Partner breached the partnership agreement when it effected the take-private without the conditions having been satisfied; and (ii) the General Partner and its Controller were not exculpated or otherwise protected from liability under the partnership agreement because their actions constituted “willful misconduct.”


SPACs Face Legislative Scrutiny

Carlos Juarez is a Manager for the Capital Markets Group at Mayer Brown LLP. This post is based on his Mayer Brown memorandum.

Two pieces of legislation aimed at imposing additional regulations on special purpose acquisition companies (“SPACs”) were recently introduced in the US House of Representatives.  H.R. 5910, the “Holding SPACs Accountable Act of 2021,” sponsored by Rep. Michael San Nicolas (D-GU), and H.R. 5913, the “Protecting Investors from Excessive SPACs Fees Act of 2021,” sponsored by Rep. Brad Sherman (D-CA), were both introduced on November 9, 2021 and subsequently referred to the House Committee on Financial Services (the “Committee”).  On November 16, after a full committee markup, H.R. 5910 and H.R. 5913 passed the Committee and were ordered reported by a vote of 27-23 and 29-23, respectively.

H.R. 5910 proposes to amend the securities laws to exclude all SPACs from the safe harbor for forward-looking statements (the “Safe Harbor”).  Currently, only forward-looking statements made in connection with the offering of securities by a blank check company are excluded from the Safe Harbor.  The Securities Act of 1933 (the “Securities Act”) defines a blank check company as “a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person” that issues “penny stock.”  The House bill would amend Section 27A of the Securities Act and Section 21E of the Exchange Act to replace the term “blank check company” with “a development stage company that has no specific business plan or purpose or has indicated that its business plan is to acquire or merge with an unidentified company, entity, or person.”  Without reference to issuing penny stocks, H.R. 5910 would exclude all SPACs from the Safe Harbor, not just SPACs issuing penny stock.

In May 2021, the Committee circulated a draft version of H.R. 5910 in advance of its hearing, entitled “Going Public: SPACs, Direct Listings, Public Offerings, and the Need for Investor Protections.”


Remarks by Chair Gensler Before the Healthy Markets Association Conference

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the Healthy Markets Association Conference. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you for the kind introduction, Ty [Gellasch]. It’s great to be with the Healthy Markets Association.

As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

I’d like to start by discussing an overarching principle I consider when thinking about public policy.

This principle has been around since at least antiquity. Aristotle captured it with his famous maxim: Treat like cases alike. [1]

This was as true two thousand years ago as it is in two thousand twenty-one.

Finance is constantly evolving in response to new technologies and new business models. Such innovation can bring greater access, competition, and growth to our capital markets and our economy.

Our central question is this, though: When new vehicles and technologies come along, how do we continue to achieve our core public policy goals?

How do we ensure that like activities are treated alike?


No More Old Boys’ Club: Institutional Investors’ Fiduciary Duty to Advance Board Gender Diversity

Anat Alon-Beck is Assistant Professor at Case Western Reserve University School of Law; Michal Agmon-Gonnen is a Judge in the District Court of Tel Aviv and Professor at Tel Aviv University Buchmann Faculty of Law; and Darren Rosenblum is Professor at McGill University Faculty of Law. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); and Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here).

State Street Global Advisors (“SSGA”), one of Wall Street’s “Big Three” asset managers, has very recently been featured in the news for adopting a new policy where its recruiters will need to seek a diversity panel’s approval if they want to hire a white male management candidate over a woman or an ethnic minority. SSGA has been quick to reject these “factually inaccurate” reports that stipulate approval would be required to hire a white man, but they have also emphasized their continued focus on diversity.

The past twenty years have brought a sea of change regarding corporate diversity. Most of the world’s top ten economies have embraced some form of regulation to advance boardroom gender equality, with California being the latest to adopt such legislation. Critics, mostly in the United States, question whether the State should force companies to implement gender diversity on boards.

On October 19, 2021, a federal district court judge held a hearing on a motion for a preliminary injunction in a case challenging California’s board gender diversity statute, SB 826. The motion argued that the legislation is unconstitutional under the equal protection provisions of the 14th Amendment. The 9th Circuit held that the plaintiff has standing to challenge SB 826’s constitutionality because he “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex.” In a 2021 case, the federal district court judge dismissed a lawsuit attempting to invalidate the new California law on the basis of lack of standing, but the decision was reversed by the 9th Circuit.


Weekly Roundup: December 3–9, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of December 3–9, 2021.

Revisiting the SEC’s Proxy Advisor Rule

Investment Law Scholars’ Amicus Brief in Hughes v. Northwestern University

U.S. Corporate Journey Towards Gender Diversity

SPAC Governance: In Need of Judicial Review

Court of Chancery Enforces Advance Notice Bylaw

Directors’ Fiduciary Duties and Climate Change: Emerging Risks

The New DOL Proposal May Change the ESG Game

Corporate Culture

What 2022 Has in Store for Finance Professionals

What 2022 Has in Store for Finance Professionals

Dr. Maximilian Horster is Head of ISS ESG, the responsible investment arm of Institutional Shareholder Services Inc. This post is based on  his ISS ESG memorandum. 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); 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).

Key Takeaways

  • 2022 will be marked by far-reaching regulatory developments and voluntary commitments in the finance sector.
  • The current focus on Net Zero commitments will extend to include consideration of biodiversity risks.
  • The market will see an ever-widening range of new ESG strategies and approaches, will broaden geographically and thematically, and see new participants helping to shape the ESG discourse.
  • The banking sector’s role in financing solutions to climate change will be extended to ensuring that their loan books stand up to climate stress testing.
  • Transparency will be key as more investors become active owners, both in the passive and actively managed space.
  • Latin American and Asian markets will play an increasingly influential role in global responsible investment.
  • ESG data and service providers will be more heavily scrutinized, and be called on to serve an increasingly diverse client base of financial market participants worldwide.


Corporate Culture

Gary B. Gorton is the Frederick Frank Class of 1954 Professor of Finance; Jillian Grennan is Assistant Professor of Finance at the Duke University Fuqua School of Business; and Alexander Zentefis is Assistant Professor of Finance at the Yale School of Management. This post is based on their recent paper.

Research in finance and economics on corporate culture is at an exciting stage. As we describe in our survey on Corporate Culture, we are on the precipice of a new paradigm in the study of corporations. While futuristic visions of a workplace once seemed far-fetched, leaders foresee an immersive, hybrid world where social interaction, commerce and the internet all meet. Analogous to leaders’ visions of an internet where one is inside of it, rather than on the outside looking at it, economics and finance scholars are moving from an external, contract-based view of corporations to an internal approach that seeks to understand firms’ inner workings. Researchers have long been interested in firms, management, workers’ incentives and output, but for convenience reasons, many scholars simplified away from the internal, social elements. Yet new advances in theory and data are enabling researchers to bring these elements—that in sum make up what leaders often refer to as corporate culture—into the set of forces that can be modeled and measured.


The New DOL Proposal May Change the ESG Game

Melissa Kahn is Managing Director of Retirement Policy for the Defined Contribution team at State Street Global Advisors. This post is based on her SSgA memorandum.

On October 13, the Department of Labor (DOL) issued a proposal that would roll back some of the environmental, social and governance (ESG) investing rules that were finalized by the Trump administration at the end of 2020. The Trump administration rules caused uncertainty regarding fiduciaries’ ability to use ESG funds in the retirement plans that they sponsor.

The latest proposal matters because we believe that plan sponsors can more confidently incorporate ESG funds into their retirement plans if the proposal is finalized. Although the fiduciary responsibilities of ERISA plan sponsors have remained consistent in previous ESG guidance documents, [1] the continual issuance of guidance under different administrations has led to uncertainty for plan sponsors, resulting in a reluctance to include ESG funds in retirement plans. With increasing reliance on ESG factors in fund construction, we believe that plan sponsors will be closely watching the outcome of this proposal to determine whether they can incorporate ESG funds into their retirement plans in the near future.


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