Monthly Archives: January 2022

The Materiality Debate and ESG Disclosure: Investors May Have the Last Word

Posted by David Lopez, Jared Gerber, and Jonathan Povilonis, Cleary Gottlieb Steen & Hamilton LLP, on

Monday, January 31, 2022

Board oversight, Boards of Directors, Disclosure, ESG, Institutional Investors, Materiality, Shareholder activism, Stakeholders
More from: David Lopez, Jared Gerber, Jonathan Povilonis, Cleary Gottlieb

David Lopez and Jared Gerber are partners and Jonathan Povilonis is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary 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, investors and regulators continued to focus on the scope and quality of public company disclosure of environmental, social and governance (ESG) information. In the background, the controversial debate intensified over whether ESG information, while of interest to many stakeholders, should be considered “material” for the purposes of the securities laws such that disclosure of inaccurate or misleading ESG information could be a basis for liability. Some commentators have recently defended the traditional view of financial materiality that focuses on the impact of disclosure on the economic value of a company, for which share price is often used as a proxy, whereas others have suggested a broader notion of materiality that would include any information investors decide is important to them.

While the debate rages on, however, market trends may well bypass the discussion altogether, with implications for risk assessment by boards and management. As ESG considerations become mainstream investment criteria for larger numbers of investors, the potential for ESG information to impact investment allocations (and therefore share price), and thus meet the traditional definition of financial materiality, increases significantly. If these trends continue into 2022 and beyond, public companies could face potential legal exposure concerning the accuracy of their voluntary ESG disclosure—even if the legal definition of materiality remains unchanged.

An Economic Substance Approach to SPAC Regulation and the Implications of MultiPlan for SEC Rulemaking

Posted by Harald Halbhuber (NYU), on

Monday, January 31, 2022

Information asymmetries, Investor protection, IPOs, Mergers & acquisitions, Securities regulation, SPACs, Special purpose vehicles, Underwriting
More from: Harald Halbhuber

Harald Halbhuber is a Research Fellow of the Institute for Corporate Governance & Finance and New York University School of Law.

Two seemingly unrelated topics have received a lot of attention recently. One is the rise of SPACs, shell companies that take private companies public by merging with them. The other is the economic substance approach in securities regulation. Over the past two years, SPACs have closed mergers with a total announced enterprise value of more than half a trillion dollars. While some observers have hailed SPACs as a welcome financial innovation, the SEC Chair recently expressed concerns (posted on this Forum) about the potential for regulatory arbitrage between SPACs and IPOs. Separately, when discussing rules for cryptocurrencies in December, the former and the current SEC Chair were in agreement that securities transactions should be regulated in accordance with their economic substance rather than their legal form.

In a new paper, I apply this economic substance approach in securities regulation to SPACs. As readers of this Forum know, when a SPAC merges with its target, SPAC shareholders are entitled to have their escrowed cash returned to them from a trust account. At that point, each shareholder makes an individual choice: walking away with their still risk-free cash or investing it in the target. The paper’s key insight for future regulation is that a SPAC shareholder’s decision to invest their escrowed cash in the target should be treated as the economic equivalent of purchasing target stock for cash. This allows for a better understanding of SPACs’ economic substance and more clearly identifies gaps in investor protection compared to IPOs. Most importantly, it offers a sound legal basis for crafting new rules that close these gaps. Along the way, the paper spells out the overlooked implications of the Delaware Chancery Court’s recent decision in the MultiPlan shareholder litigation for the future regulation of SPACs by the SEC.

Log4j: Enforcement Risk for Public Companies

Posted by Caitlyn M. Campbell, Scott Ferber, and Todd S. McClelland, McDermott, Will & Emery LLP, on

Monday, January 31, 2022

Cybersecurity, Disclosure, Internal control, Risk, Risk assessment, Risk management, Risk oversight, SEC enforcement, Securities enforcement
More from: Caitlyn Campbell, Kenji Price, Mark Schreiber, Paul Helms, Scott Ferber, Todd McClelland, McDermott Will & Emery

Caitlyn M. Campbell, Scott Ferber, and Todd S. McClelland are partners at McDermott, Will & Emery LLP. This post is based on a MWE memorandum by Ms. Campbell, Mr. Ferber, Mr. McClelland, Kenji M. Price, Paul M.G. Helms, and Mark E. Schreiber.

The Apache Log4j vulnerability continues to command significant attention throughout the public and private sectors. In a recent interview, the director of the US Cybersecurity and Infrastructure Security Agency (CISA) described Log4j as the “most serious vulnerability” she has seen in her decades-long career. On December 22, 2021, CISA, along with the Federal Bureau of Investigation (FBI), the National Security Agency (NSA) and international law enforcement partners, issued a joint advisory cautioning that malicious cyber actors are already scanning and exploiting some of the many thousands of vulnerable systems around the world.

In Depth

Security researchers predict that organizations will be contending with the vulnerability (and its fallout) for months to come. CISA created a dedicated Log4j webpage to provide an authoritative, up-to-date resource with mitigation guidance and resources for network defenders as well as a community-sourced GitHub repository of affected devices and services. These government resources are setting the baseline on reasonable security for Log4j response and, in essence, providing a potential roadmap for legal compliance.

Theranos: The Limits of the “Fake It Till You Make It” Strategy

Posted by Carrie H. Cohen, James M. Koukios, and Christine Y. Wong, Morrison & Foerster LLP, on

Sunday, January 30, 2022

Corporate fraud, Due diligence, Institutional Investors, Misconduct, Securities fraud, Securities litigation, Tech companies, Theranos
More from: Carrie Cohen, Christine Wong, James Koukios, Rachael Hanna, Sophie Cash, Morrison & Foerster

Carrie H. Cohen, James M. Koukios, and Christine Y. Wong are partners at Morrison & Foerster LLP. This post is based on a Morrison & Foerster memorandum by Ms. Cohen, Mr. Koukios, Ms. Wong, Sophie H. Cash, and Rachael Hanna.

In a case that tested the limits of the “fake it till you make it” approach to a startup business, on January 3, 2022, a jury in the U.S. District Court for the Northern District of California convicted Elizabeth Holmes, founder and former CEO of now-defunct Theranos Inc., on one count of conspiracy to commit wire fraud and three counts of wire fraud against Theranos investors. Each count carries a maximum sentence of 20 years in prison. The jury failed to reach a verdict on three additional counts of wire fraud against Theranos investors and found Holmes not guilty on the multiple counts of conspiracy and wire fraud against Theranos patients.

The trial, which lasted for 14 weeks, called into question more than just Holmes’ questionable business practices and investment solicitation; it was arguably a referendum on “fake it till you make it” practices, such as intentionally overstating, and thereby misrepresenting, a fledgling company’s current capabilities, success, or profitability, while banking on the notion that its aspirations will eventually follow the desired trajectory and become a reality. The case also highlighted the importance of investors doing adequate due diligence.

Chancery Court Allows deSPAC Litigation to Proceed

Posted by John R. Ablan, Philip O. Brandes, and Brian J. Massengill, Mayer Brown LLP, on

Sunday, January 30, 2022

Boards of Directors, Conflicts of interest, Delaware cases, Delaware law, Fairness review, Fiduciary duties, Merger litigation, Mergers & acquisitions, Securities litigation, SPACs, Special purpose vehicles
More from: Brian Massengill, John Ablan, Philip Brandes, Mayer Brown

John R. Ablan, Philip O. Brandes, and Brian J. Massengill are partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

On January 3, 2022, the Delaware Court of Chancery issued an opinion denying motions to dismiss in In re Multiplan Corp. Stockholders Litigation, a stockholder action arising out of the completed business combination for Churchill Capital Corp III (“Churchill”), a special purpose acquisition company (“SPAC”), and Multiplan Inc. (“MultiPlan”). The court’s opinion has important implications for SPAC sponsors, directors, officers and other stakeholders because of its application of traditional Delaware corporate law concepts to a “deSPAC” business combination transaction. This Legal Update (i) summarizes the facts alleged by the plaintiffs in the case and the court’s conclusions; and (ii) provides key takeaways and practical considerations.

Background

Churchill’s IPO and Business Combination with MultiPlan

As with virtually all modern SPACs, Churchill consummated an initial public offering (“IPO”) without any business operations of its own and instead was formed for the sole purpose of searching for, and consummating a business combination with, an operating company; a process it had two years to complete following its IPO. In exchange for a purchase price of $10.00 per unit, investors in Churchill’s IPO received units comprised of one share of Class A common stock and one-fourth of a warrant to purchase one share of Class A common stock at a strike price of $11.50. Churchill deposited $10.00 per unit sold in the IPO into a trust account, and funds placed in the trust account generally could be released only (i) upon completion of a business combination or (ii) in the absence of a business combination having been completed within the two-year window, upon dissolution and, in such case, the funds, plus interest, would be returned to Class A stockholders.

Statement by Chair Gensler on Reopening of Comment Period for Pay Versus Performance

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on

Saturday, January 29, 2022

Dodd-Frank Act, Executive Compensation, Financial reporting, Incentives, Pay for performance, Performance measures, SEC, Securities regulation
More from: Gary Gensler, U.S. Securities and Exchange Commission

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 [January 28, 2022], the Commission is reopening the comment period for a proposed rule for corporate disclosure of “pay versus performance.” I support this proposed rule because, if adopted, it would strengthen the transparency and quality of executive compensation disclosure.

The rule proposal would fulfill a mandate from Congress under the Dodd-Frank Act of 2010, passed after the 2008 financial crisis.

“Pay versus performance” disclosures describe the relationship between the executive compensation an issuer actually paid and the financial performance of that issuer. Such disclosures would make it easier for shareholders to assess the company’s decision-making with respect to its executive compensation policies.

The Commission has long recognized the value of information on executive compensation to investors. The first requirements to make disclosures about executive compensation originated in the 1933 Act. Since then, from time to time the Commission has continued to update compensation disclosure requirements.

In 2015, the Commission proposed rules to implement the Dodd-Frank Act’s “pay versus performance” requirement. These proposed rules relied upon total shareholder return as the sole measure of financial performance. Some commenters expressed concerns that total shareholder return would provide an incomplete picture of performance.

Statement by Commissioner Lee on Reopening of Comment Period for Pay Versus Performance

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on

Saturday, January 29, 2022

Dodd-Frank Act, ESG, Executive Compensation, Financial reporting, Incentives, Pay for performance, Performance measures, SEC, Securities regulation
More from: Allison Herren Lee, U.S. Securities and Exchange Commission

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Financial incentives drive how executives perform in their role as fiduciaries to companies and their shareholders. Understanding what those incentives are and whether they are actually working – that is, if and how they link to company performance – is critical for investors in evaluating a company’s compensation practices.

The Dodd-Frank mandate for a rule requiring companies to disclose the relationship between executive compensation actually paid and the financial performance of the company is among the most useful, straightforward, and commonsense provisions in that law. Yet, it has been over eleven years since Dodd Frank imposed that mandate, and over six years since the SEC proposed such a rule. In that time, executive compensation—and the gap between pay for executives and everyday workers—has grown tremendously. [1] Investors need to understand if that growth is concomitant with the value created. In other words, are shareholders getting their money’s worth? That question, central to good corporate governance, is what this proposed disclosure seeks to address.

I’m pleased that the Commission is preparing to finalize this rule. Today’s reopening of the comment file allows commenters a new opportunity to offer their views and the Commission the opportunity to ensure it is relying on current data. The reopening release highlights certain changes the Commission is considering to its proposed approach to help ensure the disclosure captures how companies actually link financial performance to executive compensation, while still preserving important comparability in disclosure from company to company. Specifically, the reopening release contemplates providing companies additional flexibility through disclosure of, in addition to the proposed performance metric of total shareholder return, other metrics of their choosing. [2]
READ MORE »

Statement by Commissioner Peirce on Reopening of Comment Period for Pay Versus Performance

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on

Saturday, January 29, 2022

Dodd-Frank Act, Executive Compensation, Financial reporting, Incentives, Pay for performance, Performance measures, SEC, Securities regulation
More from: Hester Peirce, U.S. Securities and Exchange Commission

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

While I agree that we should move forward on this nearly twelve-year-old Dodd-Frank rulemaking mandate, I do not agree with the approach taken in this release. Instead of fixing critical shortcomings of the 2015 Proposing Release, the re-opening release doubles down on a flawed proposal and raises the prospect of additional disclosure requirements. These supplemental requirements would increase the burdens of public company reporting, but seem likely to be of dubious use to investors. The re-opening release recognizes at some level that more discretion and flexibility is needed than the 2015 Proposing Release afforded, but that recognition oddly manifests itself in a flurry of new prescriptions. The additional requirements raised in this release go well beyond the statutory mandate of Section 953(a), are not responsive to the comment file, and do not seem warranted in light of current executive compensation practices related to company performance. I would have preferred a re-opening release that solicited further comment on whether we should permit companies greater flexibility to determine which financial performance measure is appropriate in this context and to determine how to calculate executive compensation actually paid. I respectfully dissent, but look forward to hearing commenters’ reactions.

Guidance on Climate-Related Disclosure

Posted by Benjamin Colton, Devika Kaul, and Michael Younis, State Street Global Advisors, on

Friday, January 28, 2022

Asset management, Climate change, Environmental disclosure, ESG, Index funds, Institutional Investors, Shareholder proposals, Shareholder voting, Sustainability
More from: Benjamin Colton, Devika Kaul, Michael Younis, SSgA

Benjamin Colton is Global Head of Asset Stewardship, and Devika Kaul and Michael Younis are Vice Presidents in Asset Stewardship at State Street Global Advisors. This post is based on their SSgA memorandum.

At State Street Global Advisors, we believe climate change poses a systemic risk to all companies in our portfolios. Managing climate-related risks and opportunities is a key element in maximizing long-term risk-adjusted returns for our clients. As a result, we have a longstanding commitment to enhance investor-useful disclosure around this topic. We have encouraged our portfolio companies to report in accordance with recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) [1] since we first endorsed the framework in 2017. Since then, companies have improved the quality and quantity of climate-related disclosure and investors have matured their expectations. Yet, there is more progress to be made.

This post outlines our expectations with respect to climate-related disclosure and our approach to voting and engagement on this important topic. It draws upon insights from our engagement with portfolio companies, including over 250 climate-focused engagements conducted in 2021. We will continue to use our voice and our vote to ensure investors receive the information we need to assess how companies are approaching climate-related risks and opportunities and hold them accountable on their progress.

Blockchain in the Banking Sector: A Review of the Landscape and Opportunities

Posted by David L. Portilla, David J. Kappos, Minh Van Ngo, Sasha Rosenthal-Larrea, John D. Buretta and Christopher K. Fargo, Cravath, Swaine & Moore LLP, on

Friday, January 28, 2022

Banks, Blockchain, Clearing houses, Cryptocurrency, Financial institutions, Financial regulation, Financial technology, Securities regulation, Stablecoins
More from: Arvind Ravichandran, Christopher Fargo, David Kappos, David Portilla, John Buretta, Minh Van Ngo, Sasha Rosenthal-Larrea, Cravath

David L. Portilla, David J. Kappos, Minh Van Ngo, Sasha Rosenthal-Larrea, John D. Buretta and Christopher K. Fargo are partners at Cravath, Swaine & Moore LLP. This post is based on a Cravath memorandum by Mr. Portilla, Mr. Kappos, Mr. Ngo, Ms. Rosenthal-Larrea, Mr. Buretta, Mr. Fargo, and Arvind Ravichandran.

I. Introduction

When interest in blockchain began to accelerate a few years ago, the expectations surrounding its uses were lofty. Blockchain was touted as technology that could fix our supply chains, our healthcare system and even our democracy. Yet, when the experiments conducted on potential blockchain applications, including pilot programs conducted in the financial services and banking industry, fell short of these expectations, industry interest in blockchain use cases waned. In some cases, those interested in blockchain technology found that traditional, centralized databases could provide the same functionalities as blockchain at a lower cost.

However, with the recent shift in the U.S. government’s attitude towards blockchain and cryptoassets, now is an opportune time for the U.S. financial industry to revisit the more mature, developed technology, using blockchain to improve existing products and services and offer new, more cost-effective products and services. Blockchains, both public and private, can be implemented across a variety of use cases in the financial world, opening up new sectors of banking services that benefit both banks and customers by allowing faster, cheaper, more secure and more inclusive transactions.

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Monthly Archives: January 2022

The Materiality Debate and ESG Disclosure: Investors May Have the Last Word

An Economic Substance Approach to SPAC Regulation and the Implications of MultiPlan for SEC Rulemaking

Log4j: Enforcement Risk for Public Companies

In Depth

Theranos: The Limits of the “Fake It Till You Make It” Strategy

Chancery Court Allows deSPAC Litigation to Proceed

Background

Churchill’s IPO and Business Combination with MultiPlan

Statement by Chair Gensler on Reopening of Comment Period for Pay Versus Performance

Statement by Commissioner Lee on Reopening of Comment Period for Pay Versus Performance

Statement by Commissioner Peirce on Reopening of Comment Period for Pay Versus Performance

Guidance on Climate-Related Disclosure

Blockchain in the Banking Sector: A Review of the Landscape and Opportunities

I. Introduction

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