Monthly Archives: March 2022

Backed by SPACs, IPOs Hit New Heights in 2021

Posted by Joel Rubinstein, Michael Immordino, and John Guzman, White & Case LLP, on
Thursday, March 24, 2022
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Joel Rubinstein, Michael Immordino, and John Guzman are partners at White & Case LLP. This post is based on a White & Case memorandum by Mr. Rubinstein, Mr. Immordino, Mr. Guzman, Kaya Proudian, and John Vetterli. Related research from the Program on Corporate Governance includes SPAC Law and Myths by John C. Coates (discussed on the Forum here).

The global IPO market made up for lost time in 2021. After a slow 2019 and a pandemic-battered 2020, new issues came roaring back last year—3,021 listings (inc. SPACs) raised US$601.2 billion, valuing the newly floated companies at US$2.7 trillion. Overall, this was a year-on-year increase of 88 percent in volume and 87 percent by value.

A proportion of last year’s activity reflected pent-up demand, with new issues that might have taken place in the previous year deferred until 2021. But even without that effect, last year was remarkable, with IPO activity hitting new heights.

One significant driver was the continuing boom in the market for special purpose acquisition companies (SPACs)—particularly evident in the first half of 2021 and the expansion to European markets. Last year’s global IPO figures included the launch of no fewer than 681 SPACs, which collectively raised US$172.3 billion. That was a major increase from 2020, itself a record year for blank check companies.

Nevertheless, excluding SPACs, the IPO market still enjoyed a record year, with 2,340 new issues raising US$428.9 billion. By volume, IPO activity rose 73 percent compared to 2020; by value, 2021 was 81 percent ahead.

A boom across regions

Unlike in some previous years, the IPO surge was global, rather than restricted to the largest markets. That said, the biggest listing in 2021, the flotation of Rivian Automotive, came in the US. The California-based company designs, develops and manufactures electric vehicles and accessories for the consumer and commercial markets, and raised US$13.7 billion when it listed on Nasdaq.

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E&S Metrics and Executive Compensation

Posted by Eric Shostal and Krishna Shah, Glass, Lewis & Co., on
Wednesday, March 23, 2022
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Eric Shostal is Senior Vice President of Research and Engagement, and Krishna Shah is Manager of Executive Compensation at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here), and The Perils and Questionable Promise of ESG-Based Compensation by Lucian Bebchuk and Roberto Tallarita (discussed on the Forum here).

Introduction

Stemming from increasing shareholder stewardship on matters of risk, investors have expanded the scope of their evaluation of companies from pure financials to include topics like human capital management, diversity, safety—the list goes on. And for good reason: research has shown a linkbetween good environmental and social (E&S) practices and strong financial performance.

To promote that link, boards are increasingly basing a portion of executive incentives on non-financial metrics that measure E&S performance. Of the $6.96 billion paid to S&P 500 CEOs in 2021, at minimum nearly $600 million (8.6%) was based on E&S performance, including approximately $515 million tied to short-term incentives (STIs) and approximately $83 million tied to long-term incentives (LTIs). Since E&S performance is often measured along with other unweighted considerations the true number could be much higher, and it is increasing.

In recent years, the percentage of U.S. companies that included some type of E&S consideration within their executive incentives has risen steadily from 16% in 2019, to 21% in 2020, and 25% in 2021. The year-on-year increases are even more stark at the top: approximately half of all S&P 500 companies included some form of E&S consideration under an incentive plan in 2021, compared to 39% in 2020.

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Next-Generation Securitization: NFTs, Tokenization, and the Monetization of “Things”

Posted by Steven L. Schwarcz (Duke University), on
Wednesday, March 23, 2022
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Steven L. Schwarcz is Stanley A. Star Distinguished Professor of Law & Business at Duke University School of Law. This post is based on his recent paper, forthcoming in the Boston University Law Review.

In Next-Generation Securitization: NFTs, Tokenization, and the Monetization of ‘Things’, forthcoming in the Boston University Law Review, I examine the recent phenomenon of non-fungible tokens (NFTs) and tokenization. These are being used to monetize—that is, to raise cash by selling to investors interests in—a diverse range of non-cash-generating assets, including art, collectible cars, access to basketball video highlights, prestigious real estate, and even fictitious real estate used in video games. Although the market for these monetization transactions already is in the tens of billions of dollars and rapidly growing, there is virtually no regulation. My paper has two goals: to help regulators, investors, and other market participants understand these transactions, including their risks and benefits, and to analyze how these transactions should be regulated to preserve their benefits and minimize their risks.

Monetizing assets has a long and established pedigree, encompassing securitization, project finance, production payments, and similar transactions that raise cash by selling interests in cash-generating assets or projects. The difference with NFT and tokenization transactions (collectively, “non-cash-flow monetizations”) is that the underlying assets do not themselves generate cash. Nor may those assets be sold to generate cash. Hence, investors in interests in non-cash-flow monetizations have only one way of being repaid: by reselling their interests to other investors. That limited source of repayment creates liquidity risk (among other risks). Illiquidity is the main cause of bankruptcy as well as a major systemic threat to the financial system.

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Annual Meeting Filing and Disclosure

Posted by Brian Breheny, Raquel Fox, and Marc Gerber, Skadden, Arps, Slate, Meagher & Flom LLP, on
Wednesday, March 23, 2022
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Brian Breheny, Raquel Fox and Marc Gerber are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Breheny, Ms. Fox, Mr. Gerber, Ryan Adams, Andrew Bond, and Blake Grady.

As companies finalize materials for annual shareholder meetings, we recommend consideration of the following key requirements and disclosures:

  • SEC proxy filing requirements;
  • website and submission requirements;
  • proxy statement disclosures; and
  • post-meeting requirements.

A summary of these requirements and disclosures are included below.

SEC Proxy Filing Requirements

File proxy card, notice of internet availability and other soliciting materials with the Securities and Exchange Commission (SEC). In addition to filing the proxy statement, companies should confirm that the proxy card, the Notice of Internet Availability of Proxy Materials (if applicable) and any other written communication materials used in connection with the annual meeting solicitation are filed with the SEC. Companies should file the proxy card together with the proxy statement and file separately the Notice of Internet Availability of Proxy Materials as additional proxy soliciting materials. Unless a company specifically chooses otherwise, an annual report (and likewise, information included with the annual report, such as a letter to shareholders) are not considered to be “soliciting materials” or required to be “filed” with the SEC, or subject to Regulation 14A or the liabilities under Section 18 of the Exchange Act. [1]

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The Law and Economics of Equity Swap Disclosure

Posted by Lucian A. Bebchuk (Harvard Law School), on
Tuesday, March 22, 2022
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Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. This post is based on his recent paper, The Law and Economics of Equity Swap Disclosure, which is in turn based on a comment letter he filed with the Securities and Exchange Commission in response to a request for comments on its proposal regarding the disclosure of equity swaps.

Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The Securities and Exchange Commission has put forward for public comment a rule proposal that would mandate immediate disclosure of the acquisition of any equity swap position with a dollar value exceeding $300 million. In my paper The Law and Economics of Equity Swap Disclosure, and in a comment letter I filed with the Commission, I provide a critical assessment of this proposal.

The Commission proposed several rules in its recent Release No. 34-93784 (the “Release”). My focus is on one important element of the Proposed Rules—the mandated disclosure of “equity-based swaps” (“the Equity Swap Rule”). I do not discuss other aspects of the Proposed Rules such as those regarding the disclosure of “credit default swaps.”

I begin by discussing a serious cost that the Equity Swap Rule would impose—its detrimental effect on hedge fund activism—that the Commission might have overlooked and that is not considered in the Release.

I then identify a problematic disparity between the treatment of equity swaps and equity securities that the Proposed Equity Swap Rule would introduce. I also explain that the rationales put forward in the Release cannot justify introducing such a disparity.

Finally, based on the preceding analysis. I identify a number of issues that the Commission should analyze before putting forward for public comment any proposed rule governing disclosure of equity swaps. Without analyzing these issues, and receiving public comment on the results of such an analysis, the Commission would not have an adequately informed basis for concluding that a rulemaking in this area would protect investors and promote efficiency, competition, and capital formation.

Below is a more detail account of my analysis:
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Statement by Commissioner Crenshaw on Proposed Mandatory Climate Risk Disclosures

Posted by Caroline Crenshaw, U.S. Securities and Exchange Commission, on
Tuesday, March 22, 2022
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Caroline A. Crenshaw 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 Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today marks an important and long-awaited step forward for the Securities and Exchange Commission. While other jurisdictions and independent bodies have made significant strides to provide investors and companies with a basic framework for climate-related disclosures, [1] for too long we have left the U.S. markets to rely solely on outdated and outmoded guidance. [2]

In that vacuum, companies and investors fend for themselves. Companies do not know which regime to follow, what information to disclose, and how best to disclose it. Investors try to figure out how to compare different regimes, how to use discordant information, and how to discern whether it’s even accurate. All the while, these data have become more important than ever to investors as they make their investment and voting decisions. [3] The result has been frustration — with companies making disparate climate disclosures that vary in scope, specificity, location, and reliability; [4] and investors who do not have accurate, reliable, and comparable information.

As a Commissioner, it is not my job to decide for millions of investors what information is material to them. [5] Rather, it is my job to listen and engage with investors and the markets. It’s to protect investors and to help ensure the fair and efficient allocation of resources. It’s to help provide ground-rules for disclosures so the market and investors can operate effectively. [6] And, what is abundantly clear after reviewing the comment file for months, and listening to investors and companies for years, is that it’s time to modernize and standardize. [7]

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Corporate Governance Lessons from New Chief Legal Officer Surveys

Posted by Michael W. Peregrine (McDermott Will & Emery) and Charles W. Elson (University of Delaware), on
Tuesday, March 22, 2022
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Michael W. Peregrine is partner at McDermott Will & Emery LLP, and Charles W. Elson is Founding Director of the Weinberg Center for Corporate Governance and Woolard Chair in Corporate Governance (ret.) at the University of Delaware.

Two prominent new surveys on the role and function of the Chief Legal Officer (“CLO”) contribute to “best practices” expectations that the corporate legal function assumes a significant hierarchical position within the organization. This is a particularly important development, given the upcoming 20th anniversary of the Sarbanes-Oxley Act and renewed interest in the degree of board oversight of legal affairs.

One of these documents is the “Chief Legal Officer Survey” published annually by the Association of Corporate Counsel (“ACC”). The other document is the survey, “General Counsel in the Boardroom”, from a partnership of Diligent Corporation and Corporate Counsel.

Collectively, the two surveys provide boards of directors with a strong sense of standards and guidelines they should consider when monitoring the effectiveness of their company’s legal function. They also identify significant areas for improvement in terms of CLO authority, responsibility and access to leadership. For these and other reasons this survey should be closely considered by the board of directors and any committee with delegated responsibility over the corporate legal affairs function.

It is critical that the board exercise informed oversight in connection with this responsibility, and not simply rely on the CEO’s judgment with respect to the structure, operation and stature of the corporate legal affairs department.

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Statement by Chair Gensler on Proposed Mandatory Climate Risk Disclosures

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Monday, March 21, 2022
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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, the Commission is considering a proposal to mandate climate-risk disclosures by public companies. I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.

Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. That principle applies equally to our environmental-related disclosures, which date back to the 1970s.

Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. For example, investors with $130 trillion in assets under management have requested that companies disclose their climate risks. [1] Further, the 4,000-plus signatories to the UN Principles for Responsible Investment—a group with a core goal of helping investors protect their portfolios from climate-related risks—manage more than $120 trillion as of July 2021. [2]

Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. One report found that nearly two-thirds of companies in the Russell 1000 Index, and 90 percent of the 500 largest companies in that index, published sustainability reports in 2019 using various third-party standards, which include information about climate risks. [3] SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change.

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Statement by Commissioner Peirce on Proposed Mandatory Climate Risk Disclosures

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Monday, March 21, 2022
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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.

Thank you, Chair Gensler. Many people have awaited this day with eager anticipation. I am not one of them. Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures. The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency. For that reason, I cannot support the proposal.

The proposal turns the disclosure regime on its head. Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company’s present and prospective performance through managers’ own eyes. How are they thinking about the company? What opportunities and risks do the board and managers see? What are the material determinants of the company’s financial value? The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies. [1] It identifies a set of risks and opportunities—some perhaps real, others clearly theoretical—that managers should be considering and even suggests specific ways to mitigate those risks. It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.

As you have already heard, the proposal covers a lot of territory. It establishes a disclosure framework based, in large part, on the Task Force on Climate-Related Financial Disclosures (“TCFD”) Framework and the Greenhouse Gas Protocol. It requires disclosure of: climate-related risks; climate-related effects on strategy, business model, and outlook; board and management oversight of climate-related issues; processes for identifying, assessing, and managing climate risks; plans for transition; financial statement metrics related to climate; greenhouse gas (“GHG”) emissions; and climate targets and goals. It establishes a safe harbor for Scope 3 disclosures and an attestation requirement for large companies’ Scope 1 and 2 disclosures.

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Statement by Commissioner Lee on Proposed Mandatory Climate Risk Disclosures

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on
Monday, March 21, 2022
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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.

Shelter from the Storm: Helping Investors Navigate Climate Change Risk [1]

This is a watershed moment for investors and financial markets as the Commission today addresses disclosure of climate change risk—one of the most momentous risks to face capital markets since the inception of this agency. The science is clear and alarming, [2] and the links to capital markets are direct and evident. [3]

Thus, I’m very pleased to support today’s proposal and I want to extend my sincere thanks to staff across the agency for their hard work in crafting the proposing release. [4] I also want to thank Chair Gensler for his focus and commitment to this issue, and his counsel, Mika Morse, whose talents have been integral to finalizing this proposal. Today’s proposal is extremely well done, skillfully leverages widely-accepted market-driven solutions including those created by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol, and responds to longstanding demand for Commission action to enhance climate-related disclosures for investors and markets.

* * *

Maintaining an effective disclosure regime for public companies is among the most important and foundational roles of the Commission. We have broad authority to prescribe disclosure requirements as necessary or appropriate in the public interest or for the protection of investors. [5] Importantly, with that authority comes responsibility. We have a responsibility to help ensure that investors have the information they need to accurately price risk and allocate capital as they see fit. We have a responsibility to millions of families with retirement savings and college funds whose economic well-being is linked to our financial markets. And we have a responsibility to stay firmly focused on facts and science and their implications for financial markets.

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