Monthly Archives: December 2021

Directors’ Fiduciary Duties and Climate Change: Emerging Risks

Cynthia A. Williams is the Osler Chair in Business Law at Osgoode Hall Law School at York University; Sarah Barker is a Partner and Head of Climate Risk Governance at MinterEllison; and Alex Cooper is a lawyer at the Commonwealth Climate and Law Initiative (CCLI). This post is based on a memorandum by Prof. Williams, Ms. Barker, Mr. Cooper; Robert G. Eccles, Visiting Professor of Management Practice at Oxford University Said Business School; and Ellie Mulholland, Director of the Commonwealth Climate and Law Initiative. 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 exemplified by the attention paid by the business and investor communities to the COP26 event, the last few years have seen a significant change in the understanding of climate change as a material risk to businesses, with government and capital markets responding. There has also been a notable increase in the number of so-called ‘Caremark’ claims against directors and officers for failing to exercise proper oversight surviving motions to dismiss. These two developments, construed together, indicate that directors and officers of Delaware corporations are navigating their corporations through an increasingly risky environment, and there is the potential that they may face litigation and ultimately personal liability for failing to manage these risks. Delaware directors and their attorneys must understand this new legal risk.

Climate change poses physical, economic transition and liability risks to corporations and their business models, which are already becoming apparent in the US. Wildfires and extreme storm events, the likelihood and intensity of which have been increased by climate change, have led to billions of dollars of losses. The Biden administration has emphasized climate change as part of US foreign and domestic policy as well as financial regulation, and has set a goal of reducing greenhouse gas emissions by 50-52% by 2030, as part of a transition to net zero greenhouse gas emissions, relative to 2005 levels, by 2050, and has released a long-term strategy detailing how the US can achieve this goal. An increasing number of countries worldwide have set out policies to reach net-zero greenhouse gas emissions by mid-century, and financial institutions and investors are increasingly asking their investee companies to demonstrate how their business models are compatible with the transition to a low-carbon economy. The US Securities and Exchange Commission (SEC) has indicated that it will enforce its existing guidance on the disclosure of climate change risk, and is widely expected to promulgate climate change and ESG disclosure requirements, while the Financial Accounting Standards Board has issued guidance to staff on the incorporation of ESG matters, including climate change, into financial statements. The Federal Reserve Bank Board of Governors has recognized climate change as posing a systemic risk to the US financial system. Climate litigation is becoming increasingly common and varied, and boards should be increasingly alert to the risk that their companies could find themselves the subject of strategic litigation or traditional compensation claims when climate losses arise.


Court of Chancery Enforces Advance Notice Bylaw

Andrew W. Stern and Kai Haakon E. Liekefett are partners and Charlotte K. Newell is an associate at Sidley Austin LLP. This post is based on their Sidley memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

On October 13, 2021, Vice Chancellor Joseph R. Slights III issued a post-trial decision affirming the CytoDyn Inc. board of directors’ decision to reject a stockholder nomination of directors for failure to supply information required by the company’s advance notice bylaw. This is the first decision from a Delaware court addressing informational deficiencies in such a nomination notice, and provides important guidance for the many public companies with similar bylaws.

Factual Background

CytoDyn has had an advance notice bylaw in place since 2015. These are common provisions which require a stockholder who wishes to nominate directors to provide information about the nominations by a certain deadline before the annual meeting. On July 1, 2021, the day before the pertinent deadline, a group of activist stockholders delivered a nomination notice. On July 7, the board met to discuss the nomination notice and determined to retain advisors. On July 20, the stockholder plaintiffs filed their preliminary proxy materials with the SEC, disclosing for the first time that they had formed a Delaware LLC, CCTV (“CytoDyn Committee to Victory”) to raise funds for their campaign.

On July 30, the CytoDyn board sent a letter rejecting the nominations for failure to comply with the Company’s bylaws. Although many deficiencies were identified, of particular import were two categories:


Engaging with State Street Global Advisors

This post is an interview of Benjamin Colton, Global Co-Head of Asset Stewardship at State Street Global Advisors, by Erica Lukoski, Managing Director and COO at PJT Camberview.

Key Takeaways

State Street Global Advisors is evolving its proactive and targeted approach to engagement, prioritizing climate change, human capital management (HCM) and diversity equity and inclusion, and expanding its stewardship team

Plans to publish new guidelines on HCM and effective climate transition disclosures, focusing on how companies will achieve their Net Zero commitments and encouraging interim progress on GHG reduction goals

Considering modifications to its director overboarding policy that would allow exceptions to current guidelines if boards provide disclosure of their policies for outside board service and how board contributions are evaluated

Refining its views on executive compensation, with a focus on encouraging increased exposure to the company’s stock price over time and guidance for inclusion of ESG metrics

Approach to Stewardship and Engagement

Erica Lukoski: Ben, you’ve been at State Street Global Advisors (SSGA) for three years and in your role as Global Co-Head of Asset Stewardship for almost two years. Can you tell us about your path to SSGA and your current position?


SPAC Governance: In Need of Judicial Review

Michael Klausner is the Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School; Michael Ohlrogge is Assistant Professor at NYU School of Law. This post is based on their recent paper.

SPACs have gotten their share of critical attention over the past year, including by us here and here. But there has been little attention paid to the weak corporate governance of many SPACs, and less attention paid to judicial review of alleged breaches of fiduciary duties. We have recently posted a paper on those topics here. In this post, we summarize that analysis.

The Delaware Chancery Court has recently gotten its first look at SPAC governance in the In Re Multiplan Stockholders Litigation case, which is currently pending. The defendants in the case have essentially argued that the conduct of sponsors and boards should be immune to judicial review when they enter into a merger (or “deSPAC”). That would be an unfortunate result for SPAC shareholders, and in our view the wrong answer under Delaware law.

The Central Conflict in a SPAC

In our earlier article and blog post, we explained how the economic structure of a SPAC creates an inherent conflict between a SPAC’s sponsor and its public shareholders. That conflict centers on the only decision a SPAC’s management must make—to merge or to liquidate.


U.S. Corporate Journey Towards Gender Diversity

Olivia Wakefield is Partner, Ira T. Kay is a Managing Partner/Founder, and Paige Patton is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. 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).

Executive Summary

  • Over the past five years, cultural, legislative, and governance factors have strongly influenced board diversity resulting in an increase of women directors serving on U.S. public company boards.
  • Women now hold 30% of board seats across the S&P 500, relative to 18% held five years ago . This increase should be considered a milestone in the journey, with expectations for continued progress over the coming years.
  • During this same five-year period, women board members have increased by a net amount of approximately 2,700 while, in contrast, men board members have declined by a net amount of approximately 1,900. These numbers were attained by examining a broader data set consisting of thousands of companies with more than $150 million in market capitalization. This total includes the Russell 3000, plus many more companies whose data were collected by DirectorMoves, a weekly publication which analyzes Board changes. This vast increase in women board members demonstrates the strong commitment of U.S. corporations in regard to board gender diversity.
  • In 2021, the departure rates for men board members are projected to be over four times higher than their women colleagues, with over 1,800 men departing boards as compared to 460 women departing during that same period (Source: DirectorMoves). This change reflects a shift in board composition that is driven by companies seeking both diversity and a broader mindset regarding the critical capabilities needed for today’s boards.
  • U.S. companies have made great strides towards a balance of gender diversity on boards. This is in addition to the nascent growing success of the recruitment of underrepresented minorities.
  • A potential challenge to meaningful board diversity may be current board governance practices ; more ongoing evaluations in terms of board structure, succession planning, term limits, and retirement ages may be required to further facilitate continued diversification.


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

William A. Birdthistle is Professor at the Illinois Institute of Technology Chicago-Kent College of Law; and Quinn Curtis is Professor at the University of Virginia School of Law. This post is based on their recent amicus brief.

In Hughes v. Northwestern University, the Supreme Court is set to address “Whether allegations that a defined-contribution retirement plan paid or charged its participants fees that substantially exceeded fees for alternative available investment products or services are sufficient to state a claim against plan fiduciaries for breach of the duty of prudence under the Employee Retirement Income Security Act of 1974.” This amicus brief in support of petitioners, signed by twenty-five investment law scholars, argues for the importance of well-constructed retirement plan menus featuring curated low-cost options. The full brief and list of signatories is available here.

Introduction and Summary of Argument

Defined contribution retirement plans currently hold almost ten trillion dollars in assets. The sponsors of those plans, typically employers, act as fiduciaries for participants in the plans. Participants construct portfolios by selecting a combination of investment options from lists of choices constructed by plan sponsors. Costs associated with retirement plan investments are important determinants of investor success and have long been an issue of concern to scholars and regulators. These costs vary widely from plan to plan. As a result of both conflicts of interest and simple fiduciary inattention, high fees are a problem in a substantial number of plans. Investors who incur excessive fees may lose tens of thousands of dollars in forgone returns, resulting in the need for those employees to spend additional years in the workforce prior to being able to retire.


Gensler Signals Greater Scrutiny for the Private Fund Industry

Aaron Gilbride is Counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Gilbride, Jennifer Cooper, Lee Hochbaum, Michael Hong, Leor Landa, and Gregory Rowland.

Chair Gary Gensler signaled once again, and perhaps in the clearest terms to date, his intention to bring greater scrutiny to the private fund industry. During prepared remarks, Chair Gensler indicated that SEC staff are considering changes to practices regarding private fund fees and expenses, side letters, performance metrics, fiduciary duty and conflicts of interest, and Form PF.

On November 10, 2021, in prepared remarks at the Institutional Limited Partners Association Summit, Securities and Exchange Commission (SEC) Chair Gary Gensler signaled once again, and perhaps in the clearest terms to date, his intention to bring greater scrutiny to the private fund industry. His remarks are available here.

Key takeaways:

  • Fees and expenses. Gensler expressed concern about a perceived lack of transparency in private fund fees and expenses and singled out consulting fees, advisory fees, monitoring fees, servicing fees, transaction fees, and director’s fees, among others, during his remarks. He noted that he has asked the SEC staff to consider potential recommendations to bring greater transparency to fee arrangements.


SEC’s New Approach to No-Action Requests for Shareholder ESG Proposals

Era Anagnosti and Maia Gez are partners and Scott Levi is an associate at White & Case LLP. This post is based on a White & Case memorandum by Ms. Anagnosti, Ms. Gez, Mr. Levi, Colin J. Diamond, and Danielle Herrick. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

On November 3, 2021, Corp Fin issued new guidance which signals a major shift in the SEC’s approach to no-action requests to exclude shareholder proposals relating to environmental and social (“E&S”) matters. Previously, the SEC allowed a company to exclude a shareholder proposal if the company demonstrated that it did not have social or ethical significance for the company. Now, a company will need to demonstrate that the proposal does not raise significant social or ethical issues with broad societal impact.

The new guidance also suggests that proposals requesting that companies report in line with established E&S national or international frameworks may not amount to the impermissible “micromanagement” companies have recently alleged with mixed success. An apparent push by the SEC to promote sustainability initiatives, this guidance creates an ostensibly more difficult threshold for no-action relief, and will likely result in more E&S-styled shareholder proposals—which may not be significant to a particular company’s business or call for detailed sustainability reporting—either making it onto the agenda for a company’s shareholder meeting or ending in a settlement with the company.

Specifically, the Division of Corporation Finance (“Corp Fin”) of the SEC issued Staff Legal Bulletin 14L (“SLB 14L”) [1], which rescinds Corp Fin’s prior positions in Staff Legal Bulletins 14I, 14J and 14K (the “rescinded SLBs”) [2] regarding Rule 14a-8(i)(5), the economic relevance exception, and Rule 14a-8(i)(7), the ordinary business exception, greatly limiting the availability of these bases to omit shareholder proposals, which will likely make it more difficult for companies to exclude shareholder proposals—particularly E&S-related proposals—through no-action requests. The new guidance appears to position Corp Fin to advance certain larger policy priorities of the SEC via the shareholder proposal process. Key takeaways are discussed below.


Statement by Chair Gensler on Holding Foreign Companies Accountable Act

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. 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.

Today [Dec. 2, 2021], the Securities and Exchange Commission adopted final amendments to its rules implementing the Holding Foreign Companies Accountable Act of 2020 (HFCAA). Today’s amendments finalize the interim final rules that the Commission adopted in March, which had addressed the submission and disclosure requirements of the HFCAA, with two modifications. First, they clarify how the requirements apply to variable interest entities. Second, they include requirements to tag information such as the auditor name and location. Today’s release also establishes procedures the Commission will follow in identifying issuers and prohibiting trading by certain issuers under the Act.

This final rule furthers the mandate that Congress laid out and gets to the heart of the SEC’s mission to protect investors.

We have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the Public Company Accounting Oversight Board (PCAOB). While more than 50 jurisdictions have worked with the PCAOB to allow the required inspections, two historically have not: China and Hong Kong.

Last year — once again on a bipartisan basis — Congress said that it’s time for audit firms in all jurisdictions around the world to comply fully with Sarbanes-Oxley. The HFCAA mandated that, if governmental authorities don’t allow the auditors of foreign companies to open their work papers to PCAOB inspection for three consecutive years, the securities of companies audited by those firms could be prohibited from trading in the U.S.


Revisiting the SEC’s Proxy Advisor Rule

Paul Rose is the Robert J. Watkins/Procter & Gamble Professor of Law at the Ohio State University Moritz College of Law; and Christopher J. Walker is the John W. Bricker Professor of Law at the Ohio State University Moritz College of Law. This post builds on their recent report, which they discussed further in two prior posts on the Forum.

After a methodical, decade-long review of the role of proxy advisors, the Securities & Exchange Commission (SEC) promulgated a final rule in June 2020 intended to increase the transparency, accuracy, and completeness of the information proxy advisors provide their institutional investor clients. This proxy advisor rule was the subject of a vigorous debate during the notice and comment period, and the SEC modified its proposed rule significantly as a result of discussion and feedback from proxy advisors, institutional investors, academics, and others.

As we detailed in a report prepared for the U.S. Chamber Center for Capital Markets Competitiveness, the final rule took a flexible and measured approach that requires proxy advisors to provide conflicts of interest disclosures, to ensure that companies that are the subject of their voting advice have such advice made available to them in a timely manner, and to provide that proxy advisors’ clients have the means to become aware of any registrant’s response to the proxy voting advice. The rule also codified (at 38) the SEC’s longstanding interpretation, dating back to 1956, that “persons who do not seek proxy authority themselves,” including those providing proxy advice, “nevertheless engage in solicitation when they communicate with shareholders in a manner reasonably calculated to ‘result’ in a proxy vote,” and are subject to the proxy rules’ antifraud provision.


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