Monthly Archives: April 2022

Ten Thoughts on the SEC’s Proposed Climate Disclosure Rules

Michael Littenberg is partner, Marc Rotter is counsel, and Hannah Shapiro is a law clerk at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and  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); Stakeholder Capitalism in the Time of COVID by Lucian Bebchuk, Kobi Kastiel and Roberto Tallarita (discussed on the Forum here); Corporate Purpose and Corporate Competition by Mark Roe (discussed on the Forum here).

Last month, the Securities and Exchange Commission proposed long-awaited rules that would mandate enhanced climate-related disclosures by public companies. In this post, we provide an overview of this significant, and controversial, rulemaking proposal. We also provide our views on where the rules fit into governance, compliance and disclosure more broadly.

A Bit of Background and the Broader Context

Enhanced environmental disclosure has been a topic of discussion within the SEC since the 1970s. More recently, with the January 2021 change-over in administration and the resulting shift in rulemaking philosophy, climate disclosure has been an area of increasing SEC focus. Among other actions, during February 2021, shortly after taking office, then-Acting Chair Allison Herren Lee issued a statement directing the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings.

In March 2021, the SEC launched a public consultation requesting input from investors, registrants and other market participants about whether current disclosures adequately inform investors about climate change. Approximately 600 unique comment letters were submitted to the SEC by leading issuers, institutional investors, trade associations, NGOs and others (Ropes & Gray advised several clients on their comment letters). Many of the more significant letters are cited in the SEC’s Proposing Release for the new climate disclosure rules.


Remarks by Commissioner Crenshaw at Virtual Roundtable on the Future of Going Public and Expanding Investor Opportunities

Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at a Virtual Roundtable on the Future of Going Public and Expanding Investor Opportunities. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you Hal [Scott] for that kind introduction and for inviting me to speak today. I am honored to precede such an esteemed panel of practitioners and academics. As always, I must give my standard disclaimer that my remarks are my own and do not necessarily represent the views of the Commission or its staff.

I cannot emphasize enough how important discussions such as today’s are—thinking through some of the most pressing questions in our markets. And, one of those areas is Special Purpose Acquisition Companies, or SPACs. Now, of course, this was an issue that we were paying attention to well before the notice and comment period for the SPAC rulemaking proposal. But nothing takes place in a vacuum, and the meteoric rise in SPACs and the Commission’s proposed rulemaking must be considered in the context of changes in both the public and private markets. So today’s topic is particularly apt. I hope the roundtable will be one of many, and that such discussions will lead to academic work, public input, and engagement from all stakeholders and interested parties.

As you are all aware, the U.S. public markets provide many benefits, including disclosures and safeguards at the offering stage followed by periodic reporting, public trading venues that offer high degrees of liquidity, and an ecosystem of laws and regulations that provide investors with protections and remedies when needed. In 2020, 165 operating companies went public via a traditional initial public offering (IPO). [1] There were a total of 248 SPAC IPOs that same year, [2] meaning roughly 60% of all IPOs were conducted through SPACs. While that level of SPAC activity may not be sustained over the long-term, it is clear SPACs provide an alternative to the traditional IPO model, and may offer some competitive challenges. That’s a good thing. But, perhaps, we need to be careful not facilitate a race to the bottom in terms of public market protections. And since the boom, the Commission and its staff identified several areas of concern with SPACs. Such concerns include misaligned incentives, several points of dilution that may disproportionately impact retail investors, and a lack of liability that may be creating an unjustified advantage in this path to the public markets over the traditional IPO. [3] The questions and challenges of how to adequately address these concerns in a balanced way remain. And I, of course, look forward to your thoughts and engagement on the SPACs proposed rulemaking.


Stark Choices for Corporate Reform

Aneil Kovvali is the Harry A. Bigelow Teaching Fellow & Lecturer in Law at the University of Chicago Law School. This post is based on his recent paper, forthcoming in the Columbia Law Review. 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 Bebchuk and Roberto Tallarita; and Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

Corporate law has been wracked by a decades-long debate. A majority of academics and practitioners support shareholder primacy, the view that corporations exist solely to generate financial returns for shareholders. But an increasingly vocal minority supports stakeholder governance, the view that corporate leaders should consider the interests of a broader range of stakeholders, including workers, consumers, and members of surrounding communities. Shareholder primacy theorists have long claimed that stakeholder governance would be costly or ineffective in advancing the interests of stakeholders. But they have recently escalated their attacks by insisting that stakeholder governance rhetoric is potentially dangerous to stakeholders: eminent commentators have suggested that adopting corporate governance measures to promote stakeholder interests could “derail,” “crowd out,” “impede,” “cannibalize” or otherwise prevent governmental reforms and regulations that would do more to advance stakeholders’ interests.

The hypothesis that reformers face a stark choice between internal corporate governance reforms and external regulations plays an important role in the case against stakeholder governance. Workers and other stakeholder constituencies have plainly suffered in the past few decades. Stakeholder governance is a movement born of desperation over the plight of these constituencies, and pessimism about the likelihood of effective and helpful government intervention. The stark choice hypothesis seeks to play one concern against the other.


Weekly Roundup: April 22-28, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 22-28, 2022.

SEC Rules Would Make SPAC Process More Burdensome than Traditional IPOs

Liability for Non-Disclosure in Equity Financing

California Court Finds California Board Diversity Law Unconstitutional

SPACs Remain in the SEC’s Crosshairs

The SEC’s Proposed Rules for P4P Disclosures

Litigation Risks Posed by “Greenwashing” Claims for ESG Funds

AI Oversight Is Becoming a Board Issue

Creditor Deemed a Controller by Dint of Its Voting Power

ESG and Climate Change Blind Spots: Turning the Corner on SEC Disclosure

Top 5 SEC Enforcement Developments

The Corporate Calendar and the Timing of Share Repurchases and Equity Compensation

Q1 2022 Review of Shareholder Activism

Q1 2022 Review of Shareholder Activism

Rich Thomas is Managing Director, Christopher Couvelier is Director, and Leah Friedman is Vice President at Lazard. This post is based on a Lazard memorandum by Mr. Thomas, Mr. Couvelier, Ms. Friedman, Jim Rossman, and Antonin Deslandes.

Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Observations on the Global Activism Environment in Q1 2022

Record Pace for Global Activism, Led by U.S.

  • 73 new campaigns launched globally in Q1 marks the busiest quarter on record and, when combined with Q4, the busiest six-month period for activism since 2018
  • The U.S. continues to account for the largest share of global activity, representing 60% of new campaigns and 55% of capital deployed
    • Q1 activity in APAC accelerated, accounting for 16% of new campaigns vs. 2021’s recent low of 11%
  • While Icahn and Starboard were both prolific in Q1 (launching four and three new campaigns, respectively), “first timers” and smaller-cap focused funds accounted for a higher proportion of activity than in prior years

Robust Activity in Europe Despite PullBack Since Onset of Ukraine Crisis

  • Europe registered 15 new campaigns in Q1, representing a 50% jump in activity compared to Q1 2021
    • French companies were disproportionately targeted in Q1, representing ~27% of European targets—nearly 3x the country’s historical share
  • Activity has declined following the onset of the Ukraine crisis, particularly from non-European activists; agitation may have pivoted to behind-the-scenes pressure rather than public campaigns


The Corporate Calendar and the Timing of Share Repurchases and Equity Compensation

Ingolf Dittmann is a Professor of Finance, Amy Yazhu Li is a PhD candidate, and Stefan Obernberger is an Associate Professor of Finance at Erasmus University Rotterdam, and Jiaqi Zheng is a PhD candidate in Finance at the University of Oxford. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse M. 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 M. Fried (discussed on the Forum here).

The growth in buyback volumes over the past two decades has raised concerns that CEOs are misusing share repurchases to maximize their own personal wealth at the expense of long-term shareholder value. The main concern is that CEOs use share repurchases to temporarily increase the stock price above its fundamental value so that they can sell their shares at higher prices. Share repurchases would then constitute a transfer of wealth from non-selling to selling shareholders, implying a negative effect on long-term shareholder value. In 2018, SEC Commissioner Robert J. Jackson Jr. backed up this concern in a speech posted to this forum, claiming that “what we are seeing is that executives are using buybacks as a chance to cash out their compensation at investor expense.”

While this concern has received a lot of attention from U.S. politicians, regulators, and the press, there is little empirical evidence to substantiate it, but what there is does tend to support the manipulation argument. For example, earlier research finds that insiders (Bonaime et al., 2013) and specifically the CEO (Moore, 2020) are more likely to sell equity when firms buy back stock. More notably, Edmans et al. (2021) present evidence consistent with stock price manipulation around the vesting of CEOs’ equity.

In our paper, we take a fresh look at the question of whether CEOs use share buybacks to sell equity at inflated stock prices. The major insight of our paper is that both the timing of buyback programs and the timing of equity compensation, i.e., the granting, vesting, and selling of equity, are largely determined by the corporate calendar. We define the corporate calendar as the firm’s schedule of financial events and news releases throughout its fiscal year, such as blackout periods and earnings announcements. We argue that this calendar determines when firms implement decisions about buyback programs and equity compensation and when firms and CEOs can execute trades in the open market. As a consequence, share repurchases and equity compensation are positively correlated. However, this correlation disappears once we account for the corporate calendar. Therefore, we conclude that the correlation between share repurchases and equity compensation is spurious and should not be interpreted causally. Consistent with this insight, we do not find systematic evidence of price manipulation when the CEO’s equity vests or when the CEO sells her vested equity. In conclusion, we find no evidence to support the claim that CEOs systematically misuse share repurchases at the expense of shareholders.


Top 5 SEC Enforcement Developments

Michael D. Birnbaum, Jina Choi, and Haimavathi V. Marlier are partners at Morrison & Foerster LLP. This post is based on their Morrison & Foerster memorandum.

As a fitting cap to a busy month, on March 30, the SEC Division of Examinations announced its 2022 Examination Priorities. These priorities are consistent with the recent activities of the SEC more generally, as exemplified by the Top 5 Enforcement Developments below. The Examinations program will focus on private funds, environmental, social, and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets.

These priorities, in addition to the key developments below, provide high-level guidance to in-house counsel and compliance professionals keeping abreast of the recent SEC developments.

1) Proposed Rules Changes on Cybersecurity

On March 9, 2022, the SEC proposed rules that appear to formalize the Enforcement Division’s recent scrutiny of public company cybersecurity disclosures by requiring specific disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting. If adopted, the rules would require that issuers report material cybersecurity incidents within four business days of a materiality determination. The proposed rules would also require public companies to provide periodic updates about previously reported material cybersecurity incidents and to disclose immaterial cybersecurity incidents, which, in the aggregate, are deemed to be material. The amended rules also would require periodic reporting about (i) a public company’s policies and procedures to identify and manage cybersecurity risks; (ii) the company’s board of directors’ cybersecurity expertise and oversight of cybersecurity risks; and (iii) management’s role and expertise in assessing and managing cybersecurity risk and implementing cybersecurity policies and procedures.

Although the SEC has stated that the goal of these proposed rules is to enhance cybersecurity disclosures to investors, the practical operation of these requirements in an environment that often requires forensic investigation and flexibility has caused some cybersecurity professionals alarm. Critics of the proposed rules have expressed concerns that requiring specific disclosure about an incident’s impact on such things as business operations may not be possible within four days of a materiality determination, and have questioned the lack of a law enforcement exception to the four-business-day deadline.


The Perils and Promise of ESG-Based Compensation: A Response to Bebchuk and Tallarita

Ira T. Kay is managing partner/founder of Pay Governance LLC. This post relates to The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

Evolution of Environmental, Social, and Governance (ESG) metrics-based incentive programs within large corporations: What impact will they have on the companies themselves and broader society?

Overall Conclusion: Bebchuk and Tallarita (BT) raise several significant and valid criticisms/questions of the ESG/stakeholder incentive movement based upon some empirical analysis and their deep understanding of corporate governance, agency theory, and performance.

However, the ESG incentive metrics debate has significant momentum due to substantial pressure on large corporations to include ESG/stakeholder components in executive incentive arrangements. Our view is based upon recent trends of companies considering or including ESG incentive metrics in executive pay plans, an extensive academic literature and business press, in addition to the substantial impetus from employees, consumers, large and small shareholders, public pension systems, Federal and state governments, the media and other external parties.

Most executives and board members believe that their companies already do factor in the treatment of key stakeholders as stakeholder interests are baked into the business strategy essential to survival and success. For example, employee and customer satisfaction are essential to the profitability and overall success of the company and thus, specific stakeholder metrics and goals may not need to be imbedded in incentive plans.

However, this perspective—while mostly valid—has been supplanted by events and momentum. Inclusion of such metrics has been embraced by many executives and board members particularly in situations where signaling of organizational priorities and performance improvement in specific areas are desired.


ESG and Climate Change Blind Spots: Turning the Corner on SEC Disclosure

Donna M. Nagy is the C. Ben Dutton Professor of Law and Executive Associate Dean at Indiana University Maurer School of Law–Bloomington; and Cynthia A. Williams is the Osler Chair in Business Law at Osgoode Hall Law School at York University. This post is based on their recent paper, forthcoming in the Texas Law Review.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Will Corporations Deliver Value to All Stakeholders?, by Lucian A. Bebchuk and Roberto Tallarita.

The SEC in the 1970s began efforts to provide investors with material information about environmental risks facing publicly traded companies, and in 2010, it issued related guidance to clarify for such companies their climate-risk disclosure responsibilities. But notwithstanding the fundamental shift since then amongst institutional investors and asset managers toward the integration of environmental, social and governance (ESG) data into fundamental value analysis, for more than a decade the loud and repeated calls for increased ESG disclosure went largely unanswered by the SEC. This regulatory approach began to change in 2021, when Interim SEC Chair Allison Herren Lee welcomed public input on climate-change disclosures. And now under SEC Chair Gary Gensler, the SEC is seeking public comments on a bold and thoughtfully framed rule proposal for the enhancement and standardization of climate-related disclosures (Release No. 33-11042, March 21, 2022).

Our paper looks back and analyzes four particular areas in which the SEC resisted ESG disclosure reform or impeded shareholders’ access to ESG information. These areas are: (1) the SEC’s refusal to act on several rulemaking petitions submitted during the years 2009 to 2018, which called for expanded ESG disclosure; (2) the SEC’s grudging promulgation of rules concerning social disclosures as required by Congress in the Dodd-Frank Act of 2010; (3) the SEC’s 2020 revisions to SEC Rule 14a-8, which make the submission of shareholder proposals more difficult, thereby thwarting investor efforts to raise ESG concerns; and (4) an SEC commitment beginning in 2016 to move away from line-item disclosure to a more principles-based system.


Creditor Deemed a Controller by Dint of Its Voting Power

Lynn K. Neuner and Jonathan K. Youngwood are partners and Janet Gochman is senior counsel at Simpson Thacher & Bartlett LLP. This post is based on their Simpson Thacher memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

On February 28, 2022, the Court of Chancery of Delaware denied dismissal of a breach of fiduciary duty claim in a putative class action brought by a target company’s former stockholders against the target’s largest creditor, which had threatened to block the target’s pending SPAC merger unless the target’s board agreed to a series of amendments to debt and warrant agreements. Blue v. Fireman, 2022 WL 593899 (Del. Ch. 2022) (Zurn, V.C.). The court concluded that plaintiffs sufficiently pled that the creditor was the target’s controller by virtue of its voting power and, therefore, owed the target’s stockholders a duty of loyalty. The court further determined that plaintiffs pled that the creditor breached that duty by refusing to vote its proxy in favor of the merger unless it received the amendments it sought.


In 2020, around the time the target was negotiating the key terms of its pending merger with a SPAC, its largest creditor demanded favorable amendments to debt and warrant agreements. The creditor controlled 83% of the target’s voting power through an irrevocable proxy. After the target board unanimously approved the merger documents, the creditor declared that it would not vote its proxy in favor of the merger unless its demands were met. The target board went on to approve the amendments and announced the merger, which was valued at approximately $120 million. Plaintiffs, former target stockholders, commenced this action alleging breach of fiduciary duty, among other claims, against the creditor and its affiliates as controllers, and certain directors the creditor had appointed to the target’s board. Plaintiffs alleged that as a result of the amendments, $40 million in merger consideration was diverted from the target’s stockholders to the creditor. Defendants moved to dismiss.


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