Yearly Archives: 2021

Recent Trends In Securities Class Action Litigation

Posted by Janeen McIntosh and Svetlana Starykh, NERA Economic Consulting, on
Thursday, March 11, 2021
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Janeen McIntosh and Svetlana Starykh are Senior Consultants at NERA Economic Consulting. This post is based on a NERA memorandum by Ms. McIntosh, Ms. Starykh, Dr. David Tabak, and Zhenyu Wang.

In this year’s update to NERA’s annual study, “Recent Trends in Securities Class Action Litigation”, we analyze trends in securities class action filings and resolutions based on activity through 2020.

Highlights from this year’s report include:

  • Since the first COVID-19-related lawsuit in March 2020, 32 additional filings have included COVID-19-related claims in their complaints.
  • There were 326 federal securities class actions filed in 2020. This marks a 22% decline from 2019, primarily driven by fewer merger objection cases filed.
  • The percentage of new filings that were Rule 10b-5, Section 11, and/or Section 12 cases increased from 58% in 2019 to 64% in 2020. Other types of cases declined.
  • Continuing a 2019 trend, defendants the electronic technology and technology services sector faced the most securities class action filings at 23% of 2020’s total.
  • For the first time in five years, complaints including an allegation related to misled future performance outnumbered claims related to accounting issues, regulatory issues, or missed earnings guidance.
  • In 2020, 320 cases were resolved, marking a slight increase from the total number of cases resolved in 2019, but remaining below the number of cases resolved in 2017 and 2018.
  • Aggregate resolutions returned to a level relatively in line with 2017 and 2018 levels, but settlement declined while dismissals increased to outside the historical 10-year ranges.
  • The average settlement value in 2020 was $44 million, more than a 50% increase over the 2019 average of $28 million but still below the 2018 value.

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Speech by Commissioner Crenshaw on Moving Forward Together – Enforcement for Everyone

Posted by Caroline Crenshaw, U.S. Securities and Exchange Commission, on
Wednesday, March 10, 2021
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Caroline Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent speech to the Council of Institutional Investors. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I want to thank the Council of Institutional Investors for inviting me today [March 9, 2021]. You are tireless advocates for investors and staunch proponents of good corporate governance. The agenda for this year’s meeting covers a number of timely topics that are top of mind for me as well—from the impact of COVID-19 on members, to drivers behind the SPAC boom, to diversity and inclusion at U.S. companies. I’m pleased you are also talking about sustainable finance, proxy voting issues and ESG ratings. Further, I share CII’s prioritization of clawbacks and transparency as to executive pay, stock trades and share buybacks. Today I have been asked to speak about what’s next for the SEC. Before I do that, I will make the usual disclaimer that the views I express today are my own, and do not necessarily reflect those of staff, my fellow commissioners, or the agency.

In thinking about what I wanted to discuss today, of course I considered policy matters that I would like to see the Commission prioritize in the near term: Regulation Best Interest, the improvements needed in the proxy process, the need to finish implementing Dodd-Frank, and continuing updates to our market infrastructure. But I kept coming back to something even more foundational: our enforcement program. I want to talk about the central role enforcement plays in fulfilling our mission, how investors and markets benefit, and how a decision made 15 years ago has taken us off course. And I’ll explain how changing tack now will yield better outcomes in all these areas.

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Board Practices Quarterly: 2021 Boardroom Agenda

Posted by Natalie Cooper (Deloitte LLP), Robert Lamm (Deloitte LLP), and Randi Morrison (Society for Corporate Governance), on
Wednesday, March 10, 2021
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Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on a Deloitte/Society for Corporate Governance memorandum by Ms. Cooper, Mr. Lamm, Ms. Morrison, Debbie McCormack, Carey Oven, and Darla C. Stuckey.

This post identifies some of the key areas and trends expected to be on boardroom agendas this year, according to a December 2020 survey of in-house members of the Society for Corporate Governance. These areas look beyond perennial agenda items, such as strategy and risk, and instead focus on new and emerging topics as many companies continue to respond to unanticipated events that unfolded during 2020. The survey explored two specific topics in detail, pandemic response and recovery and human capital management, to obtain greater insight on shareholder engagement, meeting agendas, and disclosures.

Findings

Respondents, primarily corporate secretaries, in-house counsel, and other in-house governance professionals, represent public companies (91%) and private companies (9%) of varying sizes and industries. [1] The findings pertain to all companies; public and private. Where applicable, commentary has been included to highlight differences among respondent demographics. The actual number of responses for each question is provided.

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SEC Brings Regulation FD Enforcement Action

Posted by John F. Savarese and Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Wednesday, March 10, 2021
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John F. Savarese and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

On Friday, the SEC brought an enforcement action charging a public company and three of its investor relations personnel with violations of Regulation FD, alleging that the company’s IR personnel had fed non-public information to sell-side research analysts in order to bring their consensus revenue views more into line with the company’s own internal estimates. The defendants are all contesting the charges, and the case will be litigated in federal court. While some commentators may see this as an instance of the SEC pushing the Regulation FD envelope, our view is this: if the SEC is ultimately able to substantiate its allegations at trial, the case will fall within what is generally understood to be the proper scope of Regulation FD. We explain below the reasons for this view.

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Call to Action on Sustainable Corporate Governance

Posted by Mervyn King, Paul Polman, Kerrie Waring, Bob Moritz, and Gilbert Van Hassel, on
Tuesday, March 9, 2021
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Professor Mervyn King S.C. is IIRC Chair Emeritus and author of King corporate governance codes; Paul Polman is Co-Founder & Chair of IMAGINE and former CEO of Unilever; Kerrie Waring is CEO of the International Corporate Governance Network; Bob Moritz is Global Chairman at PricewaterhouseCoopers LLP; and Gilbert Van Hassel is CEO of Robeco. This post is based on their open letter. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); 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 leaders in business, investment and financial institutions, and academia we welcome and encourage efforts in jurisdictions around the world to take action to embed the concept of sustainable development in corporate governance law, codes and initiatives.

Business sustainability, sustainable finance, corporate purpose and long-term value creation must begin with company boards and the systems of governance under which companies operate.

Director organisations have recognised the urgency of the climate crisis and the need to accelerate progress towards Paris and Sustainable Development Goals. To be able to do so, it is crucial that directors positively orientate towards long-term value creation rather than short-term profit maximisation for the company.

Business organisations have committed to move away from the concept of shareholder primacy towards fully addressing sustainability and ensuring that no stakeholders are significantly harmed.  Although the law already provides Board members with wide discretion when making decisions on behalf of the company on sustainability issues, incentives within existing corporate governance models too often prevent them from taking concrete steps to act on these intentions.

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House of Representatives Testimony on Climate Change and Social Responsibility

Posted by Veena Ramani, Ceres, on
Tuesday, March 9, 2021
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Veena Ramani is Senior Program Director of Capital Market Systems at Ceres. This post is based on her testimony before the U.S. House of Representatives Subcommittee on Investor Protection, Entrepreneurship and Capital Markets Hearing on Climate Change and Social Responsibility.

Thank you for the invitation and opportunity to appear before you today. I represent Ceres, a nonprofit organization working with investors and companies to build sustainability leadership within their own enterprises and to drive sector and policy solutions throughout the economy. Through our membership networks of more than 100 companies and almost 200 investors with over $30 trillion of assets under management, we work with private sector leaders to tackle the world’s biggest sustainability challenges, including climate change, water scarcity and pollution, and deforestation.

I am Senior Program Director for Capital Market Systems in the Ceres Accelerator for Sustainable Capital Markets. The Accelerator works to transform the practices and policies that govern capital markets in order to reduce the worst financial impacts of the climate crisis. It spurs capital market influencers to act on climate change as a systemic financial risk—driving the large-scale behavior and systems change needed to achieve a just and sustainable future and a net-zero emissions economy. Ceres has a 30 year history of working on climate change and ESG disclosures. This includes founding the Global Reporting Initiative, which is currently the de facto sustainability reporting standard used by over 13,000 companies worldwide.

In 2019, our President and CEO Mindy Lubber testified before this committee on this topic. My testimony will update and complement the evidence she provided, which I have submitted by reference into the record. My testimony today also draws from past and current Ceres research and engagement with companies, investors and policymakers on climate change. It also draws from a report I authored last year entitled “Addressing Climate as a Systemic Risk: A call to action for U.S. financial regulators,” which outlines how and why U.S. financial regulators, who are responsible for protecting the stability and competitiveness of the U.S. economy, need to recognize and act on climate change as a systemic risk.

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House of Representatives Testimony on Climate Change and Social Responsibility

Posted by James Andrus, California Public Employees' Retirement System, on
Tuesday, March 9, 2021
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James Andrus is Investment Manager for the Board Governance and Sustainability at the California Public Employees’ Retirement System (CalPERS). This post is based on Mr. Andrus’ testimony before the U.S. House of Representatives Subcommittee on Investor Protection, Entrepreneurship and Capital Markets Hearing on Climate Change and Social Responsibility.

Thank you for the opportunity to testify at today’s hearing. My name is James Andrus, and I am an Investment Manager for the Board Governance and Sustainability program for the California Public Employees’ Retirement System (“CalPERS”). I am pleased to appear before you today on behalf of CalPERS. We applaud and support the Subcommittee’s focus on building a sustainable and competitive economy.

I will provide an overview of CalPERS, discuss our governing principles, and discuss critical areas in which more disclosures by public issuers are necessary: climate risk, charitable and political expenditures, human capital management, and board diversity. My testimony discusses how a system that ensures effective, accountable and transparent corporate governance is critical to capital formation with the objective of achieving the best returns and value for shareowners over the long-term. Ultimately, CalPERS’s primary responsibility is to our beneficiaries, so our long- term investment returns are central to our views on what information we need to make the right investment choices.

CalPERS

CalPERS is the largest public pension fund in the United States (“U.S.”), with approximately $450 billion in global assets and equity holdings in over 10,000 public companies globally. CalPERS is a fiduciary that provides nearly $25.8 billion annually in retirement benefits to more than 2 million members. Delivering investment returns is our investment office’s number one job. Nearly 55 cents of every dollar paid in those benefits comes from investment returns. Moreover, achieving good investment returns helps us avoid increasing the contributions required from California’s communities. Increasing contributions takes away budget resources otherwise available for those communities to provide public services. This means that our members depend upon safety and soundness in the capital markets for their retirement security. For these reasons, we are focused on sustainability issues that drive risk and return to our portfolio.

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Validation Capital

Posted by Edward B. Rock (New York University), Alon Brav (Duke University), and Dorothy S. Lund (University of Southern California), on
Monday, March 8, 2021
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Edward B. Rock is the Martin Lipton Professor of Law at New York University School of Law; Alon Brav is Peterjohn-Richards Professor of Finance at Duke University Fuqua School of Business; and Dorothy S. Lund is Assistant Professor of Law at the University of Southern California Gould School of Law. This post is based on their recent paper. 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).

Although it is well understood that activist shareholders challenge management, they can also serve as a shield. In our new paper, we describe “validation capital,” which occurs when a bloc holder’s—and generally an activist hedge fund’s—presence protects management from shareholder interference and allows management’s pre-existing strategy to proceed uninterrupted. In other words, sometimes an activist shareholder can serve as a “shark repellant” or a modern-day “white squire.”

And as is true of much shareholder intervention in governance, the provision of validation capital can represent a positive or negative for firm performance and shareholder value, depending on the circumstances. In the “happy story,” validation capital addresses information asymmetries between management and outside investors that may cause outsiders to misjudge management’s quality and vision for future successful performance. When a sophisticated bloc holder with a large investment and the ability to threaten management’s control chooses to vouch for management’s strategy after vetting it, this can send a credible signal to the market that protects management from disruption. More specifically, the validation capital signal affects other investors in two ways: first, it builds support for management among the general shareholder population; second, because of this support, activists will be less likely to prevail in a challenge to management’s strategy, and, as a result, less likely to attempt to do so. This protection ultimately benefits all of the shareholders, including the bloc holder, whose shares will increase in value.

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Key Considerations for Fiscal Year 2020 Form 10-K and 20-F Filings

Posted by Waldo D. Jones, Clinton M. Eastman, and Rami Marinean, Sullivan & Cromwell LLP, on
Monday, March 8, 2021
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Waldo D. Jones is partner and Clinton M. Eastman and Rami Marinean are associates at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Jones, Mr. Eastman, Mr. Marinean, Catherine M. Clarkin, Robert W. Downes and John Horsfield-Bradbury.

As issuers prepare their Form 10-K and 20-F filings for fiscal year 2020, they should consider recent and upcoming changes to the disclosure rules of the Securities and Exchange Commission (“SEC”) and trending disclosure topics. This post summarizes several of those disclosure considerations and highlights the key changes to SEC rules that will affect Form 10-K and 20-F filings this upcoming reporting season.

General Disclosure Trends

As issuers prepare their annual SEC reports, they should consider a number of disclosure topics that continued to receive SEC and investor attention over the past year. Although some issuers may not need to make changes at this time, all issuers should evaluate whether their disclosures adequately address these topics. Issuers should also consider whether other issues that have received increasing attention present material risks that should be discussed, such as the misuse of customer data or exposure to government investigations and related liabilities.

COVID-19 Disclosure. In March and June 2020, the SEC issued guidance for reporting on the impact of the COVID-19 pandemic and related business and market disruptions. The guidance encourages companies to address the impact of COVID-19 on their business and financial condition, including liquidity and capital resources, and include questions that issuers should consider when assessing the effects of COVID-19. Importantly, the SEC staff indicated that disclosures should enable an investor to understand how management and the board of directors are analyzing the current and expected impacts of COVID-19 and be updated as facts and circumstances change. In preparing Form 10-K or 20-F filings, issuers should consider such topics as:

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Human Capital Management Proxy Disclosures

Posted by Avi Sheldon, Semler Brossy, on
Monday, March 8, 2021
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Avi Sheldon is a consultant at Semler Brossy Consulting Group LLC. This post is based on a Semler Brossy memorandum by Mr. Sheldon, Blair Jones, Andrew Friedlander, and Matthew Mazzoni.

Given growing stakeholder focus on Human Capital Management (HCM), we sought to understand how companies would approach the HCM disclosure within proxy statements this year. Our study of a sample of proxies filed in December 2020 and January 2021 offers an early proxy season preview of HCM disclosure practices.

Background

In 2020 the Securities and Exchange Commission (SEC) amended certain Regulation S-K rules as part of its ongoing initiative to modernize non-financial disclosure. The rules include a new principles-based requirement that companies address HCM details within the 10-K’s description of the business, to the extent such details are material to understanding the business. The new 10-K disclosure has pushed companies to develop and refine their strategy for communicating HCM actions, processes, and metrics. The requirement arrives when companies are engaging with stakeholders on social topics like HCM more than ever before, with Covid-19 accelerating the trend. Such engagement typically relies on a range of communications channels to deliver a holistic and harmonic narrative, especially given the conservative approach to disclosure that is appropriate for the 10-K. We speculate that 2021 will be an inflection point for the communication of HCM details, including in filings beyond the 10-K such as the proxy statement.

Key Findings

Given the tailwinds behind HCM disclosure, we were not surprised to find that recent proxy statements reflect a surge in the degree and prevalence of HCM details relative to prior years. Specifically, we found:

  1. 62% of recent proxy statements we analyzed included specific HCM-related details that extend beyond “boilerplate” claims; more than 2x the rate of prior-year proxies
  2. The companies that provided HCM details in prior proxies materially expanded such disclosures this year
  3. HCM disclosures covered a range of topics and degrees of detail, and appeared in a variety of locations within the proxy; no one-size-fits-all approach

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