Monthly Archives: March 2022

Statement by Chair Gensler on Proposal on SPACs, Shell Companies, and Projections

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 [March 30, 2022], the Commission is considering a proposal to strengthen investor protections in special purpose acquisition companies (SPACs). I am pleased to support this proposal because, if adopted, it would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings (IPOs).

Aristotle captured an overarching principle with his famous maxim: Treat like cases alike. [1]

SPACs present an alternative method to go public from traditional IPOs. I don’t just mean the first stage—when the blank-check company goes public (which I call the “SPAC blank-check IPO”). I’m also referring to the second stage, often called the de-SPAC (which I call the “SPAC target IPO”).

Nearly 90 years ago, Congress addressed certain policy issues around companies raising money from the public with respect to information asymmetries, misleading information, and conflicts of interest. [2]

For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations. Today’s proposal would help ensure that these tools are applied to SPACs.

First, Congress said, companies raising money from the public should provide full and fair disclosure at the time investors are making their crucial decisions to invest. To address such disclosure, today’s proposal would:


The COVID-19 Pandemic’s Fleeting and Lasting Impact on Executive Compensation

Mike Kesner is partner and Linda Pappas and Joshua Bright are principals at Pay Governance LLC. This post is based on a Pay Governance memorandum by Mr. Kesner, Ms. Pappas, Mr. Bright, and Ira Kay. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The 2021 proxy season was dominated by COVID-19. Close to half of Standard & Poor (S&P) 500 companies took some type of COVID-19-related action in 2020, including base salary reductions, modifications to incentive plan targets, and the grant of special awards.

Despite the significant upheaval in compensation, financial results, and stock price performance during 2020, shareholders supported 97.3% of Say on Pay votes among Russell 3000 companies through November 30, 2021, with strong average support of 92.2%. Sixty-two companies—or 2.7%—failed Say on Pay, including some large, “name-brand” companies. The reasons for these high-profile failures can be primarily attributed to several factors including the use of positive discretion in determining annual incentive payouts, modifications to in-flight long-term incentive (LTI) awards, grants of “out-sized” stock awards without a compelling rationale, and a disconnect between pay and performance.

Part of the strong showing in shareholder support can be attributed to Institutional Shareholder Services (ISS) recommending a vote for Say on Pay at 88.5% of Russell 3000 companies, which was only down 0.5% compared to the 2020 proxy season. While ISS approved most companies’ Say on Pay proposals, those companies that received an against recommendation from ISS were more likely to fail Say on Pay (24%) compared to prior years (for example, 18.4% in 2020, 18.8% in 2019, and 17.1% in 2018). Thus, ISS influence increased in 2021 and an against recommendation was far more likely to result in a failed Say on Pay vote compared to prior years.

The 2021 compensation year has also been filled with continued uncertainty due to COVID-19, supply chain issues, workforce shortages, and—most recently—inflation fears and the Russia-Ukraine conflict, so what should we expect to see (or not see) during the 2022 proxy year compared to 2021?


Post-Pandemic? What to Look For in the 2022 Proxy Season

Blair Jones is Managing Director, Sarah Hartman is Senior Associate Consultant, and Austin Vanbastelaer is Senior Consultant at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy memorandum.

The wrenching Covid-19 pandemic is far from over, but investors will see something of a return to business as usual in the 2022 proxy season. Last year, most companies refrained from split performance years, discretionary awards, liquidity-focused metrics, and other pandemic-induced responses of 2020. This proxy season will revert toward the pre-pandemic focus on financial metrics and conventional pay-for-performance structures.

Rather than a complete reversion, however, investors should expect a “new normal.” We’re seeing some likely permanent pandemic-influenced changes, as talent market considerations and ongoing uncertainty prod boards to challenge traditional practices. We expect flexible reward structures, more room for structured discretion, and greater consideration of non-financial metrics—the latter from governance conversations related to environmental, social, and human capital concerns. We urge advisors and investors to keep an open mind about these changes.

Compensation Challenges from the Market for Talent

The pandemic directly and indirectly affected the market for executive talent in all companies, not just high-growth businesses. Covid-19 accelerated a number of corporate trends, especially in e-commerce and other digitization. It also unleashed a new wave of entrepreneurship, with startups both competing for talent and disrupting established businesses.


2022 Proxy Season and Shareholder Voting Trends

Matteo Tonello is managing director of ESG at The Conference Board, Inc. This post is based on a The Conference Board/ESGAUGE memorandum, in collaboration with Russell Reynolds Associates and The Rutgers Center for Corporate Law and Governance, by Mr. Tonello, Paul Washington, and Merel Spierings.


The 2021 proxy season was unprecedented, with record support for shareholder proposals on environmental and social (E&S) issues, growing opposition to director elections, and significant support for governance proposals, especially at midsized and smaller companies. [1]

The season was unpredictable as well. Not only did institutional investors move faster than ever before to implement their views through their voting—thereby often getting ahead of proxy advisory firms and leaving companies with little time to adjust their practices—at times they surprised boards and management teams by voting against the company’s position after what seemed to be positive discussions.

This shift in voting practices is expected to continue into 2022 and should be considered in the context of the related underlying shifts currently underway in corporate America: changes in both “what” companies are supposed to address (that is, the ever-growing array of environmental, social & governance (ESG) issues) and “who” (that is, the shift toward multistakeholder capitalism in which companies are placing a higher priority on serving the long-term welfare of constituents, such as employees, beyond their shareholders). [2] Major institutional investors, especially those with large passive index funds, have embraced these shifts toward a focus on ESG and a multistakeholder model, and that is coming through in their support for E&S shareholder proposals. [3]

But institutional investors are not the only driving force here: the ongoing COVID-19 pandemic and the current US administration’s agenda have accelerated the focus on E&S issues. And in many ways, investors are responding to mounting pressures from their own upstream clients. This means the proxy season has become an arena where the broader evolution of the role of the corporation in society is playing out. In that broader context, there is no single correct answer for what companies should do. But this post and its six supplemental briefs highlight what to expect in the coming proxy season and—perhaps more importantly—suggest steps boards and CEOs can take to prepare.


The SEC’s Short-Sale Experiment: Evidence on Causal Channels and on the Importance of Specification Choice in Randomized and Natural Experiments

Hemang Desai is Distinguished Professor of Accounting at Southern Methodist University Cox School of Business. This post is based on a recent paper authored by Mr. Desai; Bernard Black, Nicholas J. Chabraja Professor of Finance at Northwestern University Law School; Katherine Litvak, Professor of Law at Northwestern University Pritzker School of Law; Woongsun Yoo, Assistant Professor of Finance at Central Michigan University; and Jeff Jiewei Yu, Associate Professor of Accounting at the University of Arizona Eller College of Management.

In July 2004, the SEC announced a randomized experiment to study the effects of short-sale restrictions on securities markets. The experiment was announced as part of the short-sale regulations in Regulation SHO. In the experiment, the SEC suspended short-sale restrictions (price tests) for one-third of the firms (“pilot” firms) in the Russell 3000 Index (R3000), that traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), or the Nasdaq national market (Nasdaq). For the pilot firms, the SEC suspended the uptick rule for the NYSE and AMEX firms and the similar but less restrictive bid test for Nasdaq firms during a roughly two-year period (May 2, 2005 through July 5, 2007). It left some but not all of the prior short-sale restrictions in place for the remaining firms (“controls”). The uptick rule and the bid test essentially forbade short sales at a price below the last trade. The SEC’s objective in conducting the experiment was to study the effects of removing these short-sale restrictions on market volatility, share prices, and liquidity.

It was unclear, at the time, to what extent the short-sale restrictions affected substantive (valuation-based) short selling. Many market developments had weakened whatever effect the restrictions may once have had. Consistent with doubts about the importance of the short-sale restrictions, initial studies of the experiment found little to no direct impact of removing the restrictions on open short interest, share returns and volatility (SEC Office of Economic Analysis, 2007; Alexander and Peterson, 2008; Diether, Lee and Werner, 2009). As expected, these studies did find some improvement in the volume of short-sales and the speed of execution of short trades, especially for NYSE firms. Based on these findings, the SEC in 2007 removed these restrictions for all firms.

Despite little evidence of direct impact of the Reg SHO experiment on pilot firms, an array of over 60 more recent papers in accounting, finance, and economics report that suspension of the price tests had wide ranging indirect effects on pilot firms, including on earnings management, investments, leverage, acquisitions, management compensation, workplace safety, and more (see Internet Appendix, Table IA-1 for a summary). Some of these papers find that the Reg SHO experiment affected behavior of third parties such as auditors and analysts.


Recent Delaware Court of Chancery SPAC Opinions

Nathan E. Barnett and Benjamin Strauss are partners at McDermott Will & Emery LLP. This post is based on their MWE memorandum, 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 SPAC Law and Myths by John C. Coates (discussed on the Forum here).

Highlighted below are several recent opinions from the Delaware Court of Chancery relating to special purpose acquisition companies (SPACs) that provide helpful guidance to sponsors, investors and practitioners. These cases are a good reminder that well-worn principles of Delaware law still apply in the SPAC context:

  • In In re Multiplan Corp. Stockholder Litigation, 2022 WL 24060 (Del. Ch. Jan. 3, 2022), the court, on a motion to dismiss (meaning that inferences are drawn in favor of the plaintiff and claim dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances), (i) held the entire fairness standard of review (the most onerous standard under Delaware law) applied to a de-SPAC transaction where SPAC fiduciaries (including the sponsor) allegedly suffered from inherent conflicts with public stockholders due to the economic benefit they received in the transaction and (ii) denied dismissal of stockholders’ fiduciary duty claims against those fiduciaries for allegedly making materially misleading disclosures that impaired the stockholders’ ability to make a fully informed decision whether to redeem their stock in connection with the transaction.
  • In Brown v. Matterport, Inc., 2022 WL 89568 (Del. Ch. Jan. 10, 2022), the court held that the plain terms of a lock-up provision in a SPAC’s bylaws rendered the lock-up inapplicable to certain of the post-closing stockholders since those stockholders did not receive their post-closing shares “immediately following” the merger transaction, as was required under the lock-up provision. Delaware courts will apply the literal text of a contract (e.g., bylaws) as opposed to what may have been the spirit of the agreement.
  • In In re Forum Mobile, Inc., 2022 WL 322013 (Del. Ch. Feb. 3, 2022), the court denied appointment of a custodian over a defunct Delaware corporation (whose shares retained a CUSIP number) where the petitioner intended to revive the corporation in order to access the public markets. Delaware has a long-standing policy against permitting entrepreneurs to manipulate Delaware law for the purposes of reviving defunct Delaware entities with still-extant listings and using them as vehicles to access the public markets.


Proxy Season 2022: Early Trends in Executive Compensation

Amit Batish is Director of Content at Equilar, Inc. This post is based on an Equilar memorandum by Mr. Batish and Courtney Yu. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The 2022 proxy season is now in full swing. Over the next two months, thousands of U.S. public companies will file proxy statements highlighting trends pertaining to their governance practices, including those related to executive compensation. In this post, Equilar examines a sample of early DEF14A proxy filings from Equilar 500 companies—the 500 largest U.S. public companies by revenue—as of March 18, 2022, to offer a preview of how executive compensation was structured in 2021, as well as key trends to watch through the remainder of proxy season.

CEO Pay Appears to Bounce Back Strongly From Pandemic “Woes”

Following the onset of the COVID-19 pandemic, several companies adjusted their executive pay packages to ease the burden of the pandemic on employees. For example, many CEOs saw salary cuts, adjustments to bonus payouts, changes in long-term incentive plans (LTIPs) and more. Ultimately, many companies restored those adjustments, but median CEO pay declined from $12.2 million in 2019 to $12 million in 2020 (Figure 1).

Two years after the start of the pandemic, the early data shows that CEO pay is back on the rise. In 2021, median total direct compensation for companies included in the analysis increased to $14.3 million. This change from $12 million in 2020 would represent a near 20% increase, should the trend persist. Over the last two years, many companies elected to award their CEOs for staying on board and guiding their organizations through turbulent times, likely contributing to the increase in pay.


SPAC Disclosure of Net Cash Per Share: A Proposal for the SEC

Michael Klausner is the Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School; Michael Ohlrogge is Assistant Professor of Law at NYU School of Law; and Harald Halbhuber is partner at Shearman & Sterling LLP and a Research Fellow at New York University School of Law, Institute for Corporate Governance & Finance. Related research from the Program on Corporate Governance includes SPAC Law and Myths by John C. Coates (discussed on the Forum here).

In earlier posts on this blog here and here, we have summarized our research findings regarding the extent to which SPACs have dissipated substantial amounts of cash underlying their publicly held shares by the time they enter into a “deSPAC” merger. We further found that a SPAC’s pre-merger net cash per share is highly correlated with its post-merger share price. The less cash per share delivered to a merger target, the greater the losses tend to be for nonredeeming SPAC shareholders. In the time since we wrote our article, our predictions have largely been borne out. The average share price of SPACs that merged in 2021 is now $6.30, roughly matching the actual net cash per share those SPACs delivered in their mergers. That $6.30 share price represents a steep loss compared to the $10 that SPAC shareholders would have received if they redeemed their shares.

Net cash per share, therefore, is highly material to a shareholder’s redemption decision. SPACs, however, do not disclose their net cash per share, and piecing this figure together based on what SPACs do disclose is a difficult and uncertain task even for a sophisticated shareholder. In a paper we have just posted here, we propose an approach that the SEC could consider in requiring SPACs to disclose their net cash per share as of the time of a merger.


SEC Comment Letter on Share Repurchase Disclosure Modernization

Ira T. Kay is managing partner/founder and Mike Kesner is partner at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

Introduction and Background

Pay Governance recently submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) on its proposed rules to modernize the disclosure of share repurchases. [1] As background, the SEC is proposing companies furnish a new form (Form SR) containing detailed information on daily share repurchases no later than one business day after the execution of a repurchase. Though the proposed rules require Form SR to be furnished for each day of a share repurchase process, the SEC is asking the public for opinions regarding level of detail, frequency, and potential exemptions/exceptions. In our comment letter we acknowledge not being experts on share repurchase disclosure, but we wanted to address aspects of the SEC’s business case for the proposed changes. Namely, we were concerned with the SEC’s reference to claims of certain commentators that share repurchases were being used by executives to unjustly enrich themselves at the expense of shareholders, employees, and long-term investment in the company.

Below are a few of the comments included in the SEC proposal:

  • “Share price- or EPS-tied compensation arrangements could incentivize executives to undertake repurchases in an attempt to maximize their compensation.”
  • “Share repurchases [are used] as a tool to raise the price of an issuer’s stock in a way that allows insiders and senior executives to extract value from the issuer instead of using the funds to invest in the issuer and its employees.”
  • “[There] is the potential for share repurchases to be used by issuers as a mechanism to inflate the compensation of their executives in a manner that is not transparent to investors or the market.” [2] In addition to the above, the SEC also indicated the new disclosure requirements “may improve the ability of investors to identify issuer repurchases potentially driven by managerial self-interest, such as seeking to increase the share price prior to an insider sale or to change the value of an option or other form of executive compensation,” [3] further reinforcing the notion that share repurchases are used to benefit executives at the cost of other stakeholders.


BlackRock’s 2022 Engagement Priorities

Michelle Edkins is Managing Director of BlackRock Investment Stewardship. This post is based on a BlackRock Investment Stewardship memorandum by Ms. Edkins, Breanne Dougherty, Victoria Gaytan, and Hilary Novik-Sandberg.

Engagement Priority* Key Performance Indicators (KPIs)
Board quality and effectiveness

Quality leadership is essential to performance. Board composition, effectiveness, diversity, and accountability remain top priorities

Board effectiveness—A core component of BIS’ work to advance our clients’ economic interests is direct engagement with a board member, so that we can provide direct feedback from our perspective as a long-term shareholder. For those companies with which we wish to engage to understand their board’s role, we seek dialogue with the most appropriate non-executive, and preferably independent, director(s) who has been identified by the company as having a responsibility to meet with shareholders.

Board quality—We look to companies to disclose their approach to ensuring meaningful board diversity and encourage the board to set out the self-identified demographic profiles of the directors in aggregate, consistent with local law, and how this aligns with the company’s strategy and business model.

Strategy, purpose and financial resilience

A purpose driven long-term strategy, underpinned by sound capital management, supports financial resilience

In discussing their corporate strategy and financial resilience, we encourage companies to set out how they have integrated business relevant sustainability risks and opportunities. To aid investor understanding, companies can demonstrate in their disclosures how they are aligning their strategy with their purpose to address these risks and opportunities and create long-term value, evidenced by metrics relevant to their business model. BIS encourages companies to disclose industry- or company-specific metrics to support their narrative on how they have considered key stakeholders’ interests in their business decision-making.
Incentives aligned with value creation

Appropriate incentives reward executives for delivering sustainable long-term value creation

BIS looks to companies to disclose incentives that are aligned with long-term value creation and sustained financial performance, underpinned by material and rigorous metrics that align with the company’s long-term strategic goals.
Climate and natural capital

Business plans with targets to advance the transition to a low-carbon economy. Managing natural capital dependencies and impacts through sustainable business practices

Climate—We encourage companies to discuss in their reporting how their business model is aligned to a scenario in which global warming is limited to well below 2°C, moving towards global net zero emissions by 2050. Companies help investors understand their approach when they provide disclosures aligned with the four pillars of the TCFD—including scope 1 and 2 emissions, along with short-, medium-, and long-term science-based reduction targets, where available for their sector.

Natural Capital—We look to companies to disclose detailed information on their approach to managing material natural capital-related business risks and opportunities, including how their business models are consistent with the sustainable use and management of natural resources such as air, water, land, minerals and forests.

Company impacts on people

Sustainable business practices create enduring value for key stakeholders—employees, customers, suppliers and communities

We look to companies to demonstrate a robust approach to human capital management and provide shareholders with the necessary information to understand how their approach aligns with their stated strategy and business model.

We look to companies to disclose the actions they are taking to support a diverse and engaged workforce, and how that aligns with their strategy and business model.

We look to companies to discuss in their disclosures how the board oversees management’s approach to due diligence and remediation of adverse impacts to people arising from their business practices.


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