Monthly Archives: March 2022

Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information

Posted by Anat Alon-Beck (Case Western Reserve University), on
Monday, March 21, 2022
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Anat Alon-Beck is Assistant Professor at Case Western Reserve University School of Law. This post is based on her recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Unicorn valuations are notoriously inaccurate and well-documented in the finance literature. Silicon Valley’s dirty little secret is that a company can achieve a unicorn valuation by providing extensive downside protections to late-stage investors. Employees of these large, privately held companies do not have access to fair market valuation or financial statements and, in many cases, are denied access to such reports, even when requested.

Unicorn employees are granted equity as a substantial part of their compensation, however due to the inferior position of employees in comparison to the start-up founders and other investors, information shedding light on the value of their equity grants is often withheld.

Start-up founders, investors, and their lawyers sometimes systematically abuse equity award information asymmetry to their benefit. My paper, Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information, forthcoming in Maryland Law Review sheds light on the latest practice that compels employees, who are not yet stockholders, to waive their stockholder inspection rights under Delaware General Corporation Law (“DGCL”) Section 220 as a condition to receiving stock options from the company.

Perhaps the clearest indication of this new practice is the recent amendment to the National Venture Capital Association legal forms, which is intended to standardize a contractual “waiver of statutory inspection rights.” This waiver is designed to contract around stockholder inspection rights and prevent employees from accessing information about the value of their stock.

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Investors Expect Climate Action in 2022

Posted by Rodolfo Araujo, Marie Clara Buellingen, and Garrett Muzikowski, FTI Consulting, on
Monday, March 21, 2022
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Rodolfo Araujo is Senior Managing Director, Marie Clara Buellingen is Senior Director, and Garrett Muzikowski is Director at FTI Consulting. This post is based on their FTI memorandum. 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

In 2021, we saw investors scaling up to hold boards accountable for ESG oversight. Now, simple reporting isn’t enough — investors demand action.

From an investor’s perspective, a company’s directors are expected to proactively handle the governance of the corporation as well as govern risks and opportunities related to environmental and social (E&S) issues. In 2021, we saw the scales tip on holding boards accountable for oversight when it came to environmental, social and governance issues, known collectively as ESG. Such a perspective explains why directors are facing investor pressure on E&S, in particular.

This year might bring another shift of similar scale. While climate change has been a major focus since the 2016 Paris Agreement, our analysis below of shareholder proposals filed to date for 2022 indicates that investors are moving beyond climate change reporting to demanding companies set challenging, realistic, and science-based targets to reduce their greenhouse gas (GHG) emissions.

For companies, the message from investors is clear: If you simply track your emissions but do not have a credible and detailed strategy on climate risk mitigation, you are at risk of shareholder activism.

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ESG Disclosure in Silicon Valley

Posted by David Bell, Julia Forbess and Ron C. Llewellyn, Fenwick & West LLP, on
Sunday, March 20, 2022
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David A. Bell and Julia Forbess are partners and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick 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).

Throughout the last few years, investors, proxy advisors, governance professionals and a number of stakeholders have expressed a keen interest in how companies are managing their environmental, social and governance (ESG) associated risks and opportunities. Given the broad nature of ESG and the general dearth of reporting mandates, ESG disclosure practices can vary significantly. This report examines how technology companies in particular are responding to the growing interest in this space and the demands for more ESG-related disclosure by looking at the ESG reporting practices of the technology and life science companies included in the Fenwick – Bloomberg Law Silicon Valley 150 List (SV 150), which can serve as a proxy for technology companies more generally.

Key Takeaways

Our analysis of the public disclosures of the SV 150 companies shows the following:

  • Approximately 90% of SV 150 companies provide some level of ESG disclosure, with the vast majority of such companies (83%) choosing to disclose throughout multiple channels (e.g., sustainability reports, websites and/or proxy statements).
  • The amount and quality of ESG disclosure varied by size of company, with the larger SV 150 companies generally providing more comprehensive disclosure, including quantitative metrics.
  • ESG disclosures addressed a variety of topics, including carbon emissions and related reduction efforts, human capital management programs and initiatives, board and employee diversity, data protection and privacy. A significant majority provided disclosures related to human capital management, while smaller majorities included community impact and carbon emissions.
  • Approximately half of the SV 150 companies reported using a third-party standard or framework to guide their disclosure.
  • Only 17% of SV 150 companies provided independent assurance for their quantitative ESG metrics, such as GHG emissions.
  • The vast majority of SV 150 companies delegated primary oversight of ESG to the nominating and corporate governance committee or its equivalent.

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Delaware Court Limits Discovery in Appraisal Action

Posted by Yolanda C. Garcia and Annabeth L. Reeb, Sidley Austin LLP, on
Sunday, March 20, 2022
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Yolanda C. Garcia is partner and Annabeth L. Reeb is an associate at Sidley Austin LLP. This post is based on their Sidley memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here); and Appraisal After Dell by Guhan Subramanian.

The Delaware Court of Chancery recently issued an opinion making a narrow but key distinction in appraisal proceedings: the petitioners’ underlying intent in filing a Section 262 action matters. The court held that petitioners should not be allowed to obtain full discovery where the sole purpose in bringing the appraisal proceeding is to investigate potential wrongdoing. In this case, such intent was determined from Petitioners’ de minimis financial stake in the company.

Key Factual Background

Two investors of Zoox, Inc., an autonomous ride-hailing venture, petitioned the Delaware Chancery Court for an appraisal of their shares pursuant to Section 262 of the Delaware Code. The Petitioners had previously served inspection demands pursuant to Section 220, but the merger in question closed prior to the completion of the five-day waiting period imposed under the statute, at which time Petitioners lost their standing to demand access to books and records. After the merger, Petitioners filed—but later withdrew—a complaint to enforce their Section 220 inspection rights prior to filing the underlying appraisal action. In voluntarily dismissing their Section 220 Action, the Petitioners noted their belief that, through the appraisal action, they “would be entitled, at a minimum, to discovery of the same material” previously sought in their books and records demand.

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The Evolving Role of ESG Metrics in Executive Compensation Plans

Posted by Maria Castañón Moats, Leah Malone, and Christopher Hamilton, PricewaterhouseCoopers LLP, on
Saturday, March 19, 2022
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Maria Castañón Moats is Leader of the Governance Insights Center, Leah Malone is Director of the Governance Insights Center, and Christopher Hamilton is Principal in Workforce Transformation at PricewaterhouseCoopers LLP. This post is based on their PwC 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 A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

The broad area of environmental, social, and governance (ESG) issues is undeniably making its way onto corporate boardroom agendas today. Many large institutional shareholders are asking companies to focus more, do more, and disclose more about ESG efforts. In fact, ESG is now the topic most often covered during shareholder engagements that include company directors.

As boards work to integrate ESG concerns into discussions of company strategy, many are also considering how to create the right incentives for achievement of ESG-related goals. Incentive plans have long been driven primarily by objective financial goals. That often means quantitative goals related to things like revenue, cash flow, units sold, EBITDA, earnings per share, or total shareholder return. But at many companies, a shift is underway as non- financial goals become more common. As of March 2021, more than half of companies in the S&P 500 (57%) used at least one ESG metric in their plans.

Many investors support—or are even urging—these changes. The 2021 Global Benchmark Policy Survey published by Institutional Shareholder Services (ISS) found that 86% of investors (and 73% of non-investors) think non-financial ESG metrics are an appropriate measure to incentivize executives. But investors are also clear—if ESG metrics are to be used, it needs to be done right. Metrics should be carefully chosen and should align with a company’s strategy and business model.

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Special Committee Report

Posted by Gregory V. Gooding, Andrew L. Bab, and Jeffrey J. Rosen, Debevoise & Plimpton LLP, on
Saturday, March 19, 2022
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Gregory V. Gooding, Andrew L. Bab, and Jeffrey J. Rosen are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Gooding, Mr. Bab, Mr. Rosen, Michael Diz, and Maeve O’Connor, 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

This post surveys corporate transactions announced during the period from July through December 2021 that used special committees to manage conflicts and key Delaware judicial decisions during this period ruling on the effectiveness of such committees.

While four of the 12 special committee transactions surveyed in this issue involved the proposed acquisition by a controlling stockholder of a controlled corporation, in only two of those did the controlling stockholder agree to subject the transaction to the vote of a majority of the unaffiliated stockholders. In the other two transactions the special committee approved the transaction notwithstanding the unwillingness of the controller to agree to the committee’s request for a majority of the minority approval condition. That unwillingness should not be surprising. As discussed further below, if the special committee has to negotiate for this condition—as opposed to it being offered by the controller up front—the benefit to the controller of agreeing is limited.

MFW’s Ab Initio Requirement: When Does the Beginning End and How Long Must It Last?

The Delaware Supreme Court’s 2014 MFW decision [1] provided a path by which a going-private merger—as well as other conflicted transactions between a Delaware corporation and its controlling stockholder—may be subject to business judgment review rather than the exacting test of entire fairness. MFW set forth six conditions required for a transaction to receive business judgment rule treatment, the first of which is that the controller condition the transaction ab initio on the approval of a special committee of independent and disinterested directors and on a majority-of-the-minority stockholder vote. [2] While one may debate the contours of the “independence” and “disinterest” required of the directors serving on the special committee and which stockholders are properly considered part of the “minority,” the requirement that MFW’s procedural protections be in place “from the beginning” presents particular conundrums. At what point is it too late to be ab initio? And why is this a requirement at all?

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Developments in U.S. Securities Fraud Class Actions Against Non-U.S. Issuers

Posted by David H. Kistenbroker, Joni S. Jacobsen, and Angela M. Liu, Dechert LLP, on
Friday, March 18, 2022
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David H. Kistenbroker, Joni S. Jacobsen, and Angela M. Liu are partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Kistenbroker, Ms. Jacobson, Ms. Liu and Anna Q. Do.

Introduction

Overall, securities class action filings dropped in 2021, down 35% from 2020. [1] This decrease is driven largely by a drop in new merger and acquisition class actions. Similarly, the number of securities class actions against non-U.S. issuers dropped significantly from 88 in 2020 to only 42 in 2021. [2] In contrast, as compared to all securities class actions, the percentage of cases against non-U.S. issuers decreased, but only slightly, from 27% in 2020 to 20% in 2021.

In 2021, plaintiffs filed a total of 42 securities class action lawsuits [3] against non-U.S. issuers.

  • As was the case in 2020, the Second Circuit continues to be the jurisdiction of choice for plaintiffs to bring securities claims against non-U.S. issuers. Roughly 75% of these 42 lawsuits (32) were filed in courts in the Second Circuit. A majority (20) of these lawsuits were filed in the Southern District of New York, followed closely by the Eastern District of New York (12). The Third, Ninth and Seventh Circuits followed with 5, 3 and 2 complaints, respectively.
  • Continuing the trend in 2020, most non-U.S. issuer lawsuits were against companies with headquarters and/or principal place of business in China and Canada. Of the 42 non-U.S. issuer lawsuits filed in 2021, 18 were filed against non-U.S. issuers with headquarters and/or a principal place of business in China, and 7 were filed against non-U.S. issuers with a headquarters and/ or principal place of business in Canada, followed by 4 non-U.S. issuers with headquarters and/or principal place of business in the United Kingdom.
  • g The Rosen Law Firm led with the most first-in-court filings against non-U.S. issuers in 2021 (12), followed by Pomerantz LLP (9). This is consistent with the trend in 2018-2020, when the Rosen Law Firm was the most active plaintiff law firm in this space. Also like the trend of the last several years, the Rosen Law Firm and Pomerantz LLP were appointed lead counsel in the most cases in 2021 (with 6 and 5, respectively), followed closely by Glancy Prongay & Murray LLP and Robbins Geller Rudman & Dowd LLP (with 3 each).
  • The majority of securities class actions against non-U.S. issuers (26 of 42) were filed in the third and fourth quarters of 2021.
  • While the suits cover a diverse range of industries, the largest portion of the suits involved the software and programming industry (10) and the biotechnology and drugs industry (7).

An examination of the types of cases filed in 2021 reveals the following substantive trends:

  • About 24% of the cases involved alleged misrepresentations in connection with regulatory requirements and/or approvals (10). This includes seven cases involving alleged misrepresentations in connection with China’s regulatory requirements and/or approvals—with four involving China’s regulations on data protection and cybersecurity.

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The EU Sustainable Corporate Governance Initiative: Where are We and Where are We Headed?

Posted by Wolf-Georg Ringe (University of Hamburg) and Alperen A. Gözlügöl (Leibniz Institute for Financial Research), on
Friday, March 18, 2022
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Wolf-Georg Ringe is Director of the Institute of Law & Economics at the University of Hamburg and Visiting Professor at the University of Oxford Faculty of Law; Alperen A. Gözlügöl is Assistant Professor at the Law & Finance cluster of the Leibniz Institute for Financial Research SAFE.

The European Union, frequently seen as the international pace-setter in ESG regulation, is currently making some decisive changes to its regulatory framework. As readers of this Forum will know, the EU had started a sustainable corporate governance initiative back in 2020. This initiative was backed by an Ernst & Young report, called a “study on directors’ duties and sustainable corporate governance”. The initiative and especially the EY study drew fierce criticism, also from many U.S. scholars, indicating some misleading and erroneous elements (such as Roe et al (2020); Coffee, Jr. (2020)).

The Initiative gained global attention partly because of taking stock with the “corporate purpose” debate. It indicated that an EU level initiative to empower corporate directors to integrate wider interests into corporate decisions was in sight. Specifically, a reform option was to require (or allow) “company directors to take into account all stakeholders’ interests which are relevant for the long-term sustainability of the firm or which belong to those affected by it (employees, environment, other stakeholders affected by the business, etc.), as part of their duty of care to promote the interests of the company and pursue its objectives…”.

Just now, the European Commission (‘Commission’) has followed up with a long-awaited Proposal for a Directive on corporate sustainability due diligence (‘CSDD’). The delay in the adoption of the Proposal including the trouble with the Regulatory Scrutiny Board (a quality control and support body for Commission impact assessments and evaluations at early stages of the legislative process) that unusually issued two negative opinions in itself indicates controversies surrounding the initiative.

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Weekly Roundup: March 11-17, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, March 18, 2022

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This roundup contains a collection of the posts published on the Forum during the week of March 11-17, 2022.

Women and M&A

Posted by Afra Afsharipour (UC Davis), on Friday, March 11, 2022
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Remarks by Chair Gensler Before the Investor Advisory Committee

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Friday, March 11, 2022
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The Ongoing Debate at the SEC on Climate Disclosure Rules

Posted by Cydney Posner, Cooley LLP, on Saturday, March 12, 2022
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Delaware Confirms Importance of Up-to-Date and Unambiguous Advance Notice Bylaws

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on Sunday, March 13, 2022
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Scales Tipped Toward More Women Joining Boards in California in 2021

Posted by Cydney Posner, Cooley LLP, on Monday, March 14, 2022
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Preliminary Procedures in Shareholder Derivative Litigation: A Beneficial Legal Transplant?

Posted by Martin Gelter (Fordham University), on Monday, March 14, 2022
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2022 Proxy Season Preview

Posted by Chuck Callan (Broadridge), Paul DeNicola (PwC) and Matt DiGuiseppe (PwC), on Monday, March 14, 2022
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IPO Readiness: Establishing an Initial Equity Program and Share Reserve Pool

Posted by Mike Kesner, Tara Tays, and Brian Lane, Pay Governance LLC, on Tuesday, March 15, 2022
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Countercyclical Corporate Governance

Posted by Aneil Kovvali (University of Chicago), on Tuesday, March 15, 2022
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EU Publishes Draft Corporate Sustainability Due Diligence Directive

Posted by Dr. Johannes Weichbrodt, James Ford, and Libby Reynolds, Mayer Brown LLP, on Tuesday, March 15, 2022
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ESG Leader or Laggard?

Posted by Hannah Orowitz, Georgeson LLC, on Wednesday, March 16, 2022
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The False Promise of ESG

Posted by Jurian Hendrikse (Tilburg University), on Wednesday, March 16, 2022
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The Russian Invasion of Ukraine: A Lesson in Stakeholder Capitalism?

Posted by Peter Essele, Commonwealth, on Wednesday, March 16, 2022
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What Exactly Is an Independent Director?

Posted by Shana Elberg, Lisa Laukitis, and Maxim Mayer-Cesiano, Skadden, Arps, Slate, Meagher & Flom LLP, on Thursday, March 17, 2022
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Trading Ahead of Barbarians’ Arrival at the Gate: Insider Trading on Non-Inside Information

Posted by Georgy Chabakauri (London School of Economics), Vyacheslav Fos (Boston College), and Wei Jiang (Columbia University), on Thursday, March 17, 2022
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Coming to Terms with a Maturing ESG Landscape

Posted by Peter Reali, Jennifer Grzech, and Anthony Garcia, Nuveen, on Thursday, March 17, 2022
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Coming to Terms with a Maturing ESG Landscape

Posted by Peter Reali, Jennifer Grzech, and Anthony Garcia, Nuveen, on
Thursday, March 17, 2022
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Peter Reali is Managing Director and Global Head of Stewardship, Jennifer Grzech is Director of Responsible Investing, and Anthony Garcia is Senior Director of Responsible Investing at Nuveen. This post is based on their Nuveen 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; and For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID, both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

The momentum and support for environmental, social and governance (ESG) integration into the investment process has reached critical mass. Most companies now recognize the strategic need to have an ESG story, and some are even leveraging ESG leadership as a key differentiator from competitors.

Stakeholders may be looking for 2022 to represent the year that real-world impact is universally accepted as being in the long-term best interests of businesses. However, investors may disagree on how far the market is from that reality. Yet, it is becoming increasingly apparent to investors and stakeholders alike that there is market conflation of the inputs that go into corporate management of ESG risks and opportunities — such as reporting, policies and oversight — and the outputs of improvement on important environmental and social indicators — such as lower carbon emissions or greater pay equity among workers. For example, one interpretation of progress among the Climate Action 100+ universe of companies (i.e., the world’s largest corporate greenhouse gas emitters) is that nearly 85% have established oversight for climate risk. Another interpretation is that less than 3% of those companies have disclosed a quantifiable and trackable strategy in line with net zero emissions.

As stakeholders push for stronger stances and tangible outcomes, investors must navigate the shifting sands of financial materiality and the appropriateness of setting expectations for companies that may not yield results for years, if not decades. But with a recognition that the entire financial system will be significantly affected by long-term environmental and social (E&S) impacts comes a responsibility for investors to credibly address risks and opportunities today, rather than years in the future.

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