Monthly Archives: April 2022

Comment Letter on SEC Rule 10B-1 Position Reporting of Large Security-Based Swap Positions

Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School, and Shiva Rajgopal is Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School. This post is based on their recent comment letter to the SEC. Related research from the Program on Corporate Governance includes The Law and Economics of Equity Swap Disclosure by Lucian Bebchuk (discussed on the Forum here); 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.

Robert Eccles and Shiva Rajgopal jointly submit this letter in response to proposed Rule 10B-1 relating to position reporting of “large” security-based swap positions, which was published in the Federal Register as part of the Commission’s Release No. 34-93784 and the Beneficial Ownership Reporting (13D-G) proposal, file no. S7-06-22.

Shareholder activism—the practice of buying small stakes in public companies and pushing for change—is one of the best tools we have for holding companies accountable. The efforts of shareholder activists can benefit not just long-term investors (including the beneficiaries of pension funds, i.e., people like you and me), but also anyone who thinks that investors should be doing more to discover value relevant information about a firm and, if you are a socially conscious investor, to recognize the risk of climate change.

Around 20 percent of an S&P 500 firm is owned by the three passive indexers (BlackRock, Vanguard, and State Street) whose business model is the provision of low-cost index funds. Their business model is not designed to generate fundamental information that would suggest whether the company is under- or over- valued. As an example, consider the case of one prominent S&P 500 firm. That firm has under-performed the S&P 500 index by around 250 percent in the decade spanning 2010-2021. Will an asset management firm stay solvent if it underperformed the market by 250 percent? Yet, the big three passive indexers continue investing in that firm because the company is in the index. Who, if anyone, has the power to get that firm’s management to confront its problems? Undervalued firms usually attract the attention of activist shareholders. Overvalued firms usually attract short sellers.


Ten Questions to Ask Before Joining a Public Company Board of Directors

Sara B. Brody is partner and Jason T. Nichol is senior managing associate at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Brody, Mr. Nichol, and Thomas A. Cole.

Being asked to join the board of directors of a public corporation is an honor. Board membership can be an enriching experience and an avenue for personal and professional growth. However, in an increasingly litigious, regulated and complex public company landscape, director candidates should conduct thoughtful and targeted due diligence on a company and its existing board practices before committing to a role that should be expected to extend over multiple years. The following are ten questions director candidates should ask themselves and the prospective company. The answers to many of these questions can be found in a company’s public disclosures. To demonstrate diligence and an earnestness in learning more about a company, a prospective board candidate may choose to start there before confirming the answers through conversations with current and former directors, senior management or a recruiter.

1. What type of commitment am I making and am I the right fit?

The role of a public company director carries prestige and influence, often affording the director a platform to shape the strategic priorities and direction of some of the country’s best and most innovative companies. However, the significant investment of time and energy required for board service, including preparing for, traveling to, and attending board and committee meetings, should be weighed carefully against the director candidate’s existing executive and/or board duties (if any) and other personal obligations. Before accepting a director position, a candidate should have frank discussions with current and former board members about the time commitment required for board and committee service, the frequency and nature of meetings (i.e., in-person vs. telephonic or virtual, single day vs. multi-day and any time zone considerations), and when board materials are typically circulated to directors. Strong board and committee meeting attendance is especially important as the proxy rules require disclosure of the name of any director who attends less than 75% of the aggregate meetings of the board and the committee(s) on which the director serves, and proxy advisory firm ISS will generally recommend votes against any director falling below that threshold. A director candidate should also discuss with current or former directors whether they think the board is the “right” size to not only facilitate robust discussion and a diversified approach to decision making but also to equitably distribute work among the board and its various committees.


Different Strokes to Move the World

Martha Carter is Vice Chair and Head of Governance, Matt Filosa is Senior Managing Director of Governance, and Harvey Pitt is Senior Advisor at Teneo. This post is based on a Teneo memorandum by Ms. Carter, Mr. Filosa, Mr. Pitt, Sydney Carlock, Sean Quinn, and Morgan McGovern.

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); 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); and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.


In a stated desire to standardize company ESG disclosures and provide investors with comparable information, the U.S. Securities & Exchange Commission (“SEC”) has proposed its climate-related disclosure rule for U.S. publicly-traded companies and certain foreign issuers.

A brief summary of the proposed rule is provided below. We have also analyzed how some of the SEC’s proposed disclosure requirements compare to the two other major global initiatives that are also seeking to standardize company environmental, social and governance (“ESG”) disclosures—the International Sustainability Standards Board (“ISSB”) and the European Union’s Corporate Sustainability Reporting Directive (“CSRD”). While the SEC’s decision to utilize existing climate disclosure standards may be welcomed by some companies, companies will still be faced with many questions as to how to respond to the SEC’s proposed rule in the context of the other two global initiatives. We contemplate some of those questions and offer some practical suggestions for your consideration below.

A Summary of the SEC’s Proposed Rule on Climate-related Disclosures

 Qualitative disclosure requirements would include a description of:

  • board and management team oversight of a company’s climate-related risks;
  • how climate-related risks and events may impact a company’s strategy, business model and financial statements;
  • any processes to identify and manage climate-related risks; and (iv) any climate transition plan and scenario analysis.


On the Audit Committee’s Agenda: What’s on the Horizon for 2022

Maureen Bujno is Managing Director, Krista Parsons is Managing Director and Audit Committee Programs Leader, and Kimia Clemente is Senior Manager at at the Center for Board Effectiveness, Deloitte & Touche LLP. This post is based on a Deloitte memorandum by Ms. Bujno, Ms. Parsons, Ms. Clemente, and Nidhi Sheth.


The past year has made it clear that many of the fundamental changes to organizations that were brought on by the pandemic are here for the long haul. The impacts of widespread remote work, accelerated digital transformation, and shifts in talent dynamics have been far-reaching, and the full scope of their effects—and related risks—is not yet certain.

The audit committee’s role in overseeing risk and financial reporting is more important than ever in this evolving context, as organizations navigate increasingly complex reporting requirements and a shifting regulatory landscape. Effective oversight requires committee members to stay up to date on these changes while understanding how emerging risks may impact the organization. This post highlights five areas of focus—financial reporting and controls; enterprise risk management; environmental, social, and governance; cyber risk; and digital finance transformation—that likely will be recurring topics of discussion for audit committees in 2022. While these topics cover only certain aspects of audit committee responsibilities, their importance and prominence on agendas is reflected in audit committee member survey responses captured in the recent Deloitte and CAQ Audit Committee Practices Report. Each topic highlighted also includes probing questions audit committees can consider posing to management to help them stay ahead of issues, navigate pitfalls, and fulfill the organization’s responsibilities to investors and other key stakeholders.

Financial reporting and internal controls

The fundamental role of the audit committee is overseeing the integrity of the financial statements, which entails accurate financial reporting with strong internal control over financial reporting, but that doesn’t mean the associated responsibilities are static or predictable. Companies continue to navigate uncharted waters in areas such as remote work, shifting talent requirements, and emerging technologies that impact the finance organization and evolve how business is conducted. With these large-scale changes comes an increased risk for fraud. It is critical in the current environment for audit committees to understand the development of new controls and the testing and rationalization of existing ones.


Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies

David H. KistenbrokerJoni 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, Julia Markham Cameron, and Melissa A. Vallejo. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here); and Price Impact, Materiality, and Halliburton II by Allen Ferrell and Andrew Roper (discussed on the Forum here).


In 2021, securities class action litigation on the whole remained at a steady high, and life sciences companies were, once again, popular targets of such lawsuits. [1] In this post, we analyze and discuss trends identified in last year’s filings and decisions so that prudent life sciences companies can continue to take heed of the results.

Plaintiffs filed a total of 59 securities class action lawsuits against life sciences companies in 2021. Filings against life sciences companies in 2021 represented a 17.5% decrease from the previous year, but a 19.4% increase from five years prior. Of these cases, the following trends emerged:

  • Consistent with historic trends, the majority of suits were filed in the Second, Third and Ninth Circuits, with a 19.3% increase in suits filed in the Ninth Circuit. The Third Circuit, on the other hand, saw a 57.9% decrease in filings from the previous year—from 29 in 2020 to 9 in 2021. Within these circuits, the Northern District of California had the most filings, with 13 overall.
  • A few plaintiff law firms were associated with about three-fourths of the filings against life sciences companies: Pomerantz LLP (27 complaints), Glancy Prongay & Murray LLP (11 complaints) and Bronstein, Gewirtz & Grossman, LLC (8 complaints).
  • Slightly more claims were filed in the second half of 2021 than in the first half, with 29 complaints filed in the first and second quarters, and 30 complaints filed in the third and fourth quarters.
  • 6 cases were filed against companies with COVID-19 related products.


Ninth Circuit Panel Rejects Claim that Twitter Misled Investors

Neal A. Potischman and Edmund Polubinski are partners and Micayla Hardisty is an associate at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Potischman, Mr. Polubinski, Ms. Hardisty, and David B. Toscano.

The Ninth Circuit last week issued a decision confirming that companies working through product-specific issues do not need to provide investors with “real-time updates” about every aspect of the work. A panel of three judges wrote, “While society may have become accustomed to being instantly in the loop about the latest news . . . , our securities laws do not impose a similar requirement.”

On March 23, 2022, in Weston Family Partnership v. Twitter, Inc., et al., a panel of the United States Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal of a complaint against Twitter and certain of its executives alleging securities fraud under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.

In a passage that is sure to be cited by defendants in the future in cases alleging selective disclosure of information, the panel ruled that “[s]ecurities laws . . . do not require real-time business updates or complete disclosure of all material information whenever a company speaks on a particular topic. To the contrary, a company can speak selectively about its business so long as its statements do not paint a misleading picture.” (Op. at 5.)

The case arose from public statements that Twitter made about a product it offers to advertisers. Twitter has historically gathered user data and then shared that data with advertisers so that they may tailor ads to different users. In 2017, Twitter began allowing users to opt out of this data sharing.


Remarks by Chair Gensler Before the FBIIC and FSSCC

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the Joint Meeting of the Financial and Banking Information Infrastructure Committee (FBIIC) and the Financial Services Sector Coordinating Council (FSSCC). 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.

Thank you. It’s good to be with the Financial and Banking Information Infrastructure Committee (FBIIC) as well as the Financial Services Sector Coordinating Council (FSSCC). As is customary, I’d like to note that my remarks are my own, and I’m not speaking on behalf of the Commission or SEC staff.

As some of you may know, I often like to talk about the founding of our nation’s securities laws in the 1930s.

So again, today, I’d like to discuss the ’30s—but this time, I actually mean the1830s.

In 1834, exactly a century before the SEC was established, the Blanc brothers in Bordeaux, France, committed the world’s first hack. The two bankers bribed telegraph operators to tip them off as to the direction the market was headed. Therefore, they gained an information advantage over investors who waited for the information to arrive by mail coach from Paris.

The brothers weren’t convicted for their actions, as France didn’t have a law against the misuse of data networks. [1] The Blancs thus pocketed their francs, point-blank.

You may be wondering what all this has to do with the SEC. Well, I think it’s telling that the world’s first cybersecurity attack involved securities.

Nearly two hundred years after the Blancs stole information about the securities markets, the financial sector remains a very real target of cyberattacks. What’s more, it’s become increasingly embedded within society’s critical infrastructure.

As the famous bank robber Willie Sutton purportedly once said, regarding why he robbed banks: “Because that’s where the money is.” [2]


A Deconstruction of the Short-Termism Thesis

Charles Nathan is Consulting Partner at Finsbury Glover Hering. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Don’t Let the Short-Termism Bogeyman Scare You by Lucian Bebchuk (discussed on the Forum here); Corporate Short-Termism – In the Boardroom and in the Courtroom by Mark J. Roe (discussed on the Forum here); and Looking for the Economy-Wide Effects of Stock Market Short-Termism by Mark J. Roe (discussed on the Forum here).

In the early 2020’s it is received wisdom in a broad swath of corporate America that stock market short-termism is a malady adversely affecting the future of public companies in the United States and increasingly around the world. This belief goes well beyond board rooms and executive suites, and finds a welcoming reception among many financial journalists, corporate law judges, a large number of academics in business and law schools, politicians on both sides of the aisle on Capitol Hill and denizens of the Executive Branch up to and including President Biden. In the all-too-common perception, hedge funds, so-called “activist” investors, rapacious private equity firms and, sadly, many institutional investors of otherwise stellar character are hell-bent on forcing corporate managers to forgo wealth-building long-term strategies and investments, particularly in R&D, capital investment and more equitable distribution of corporate revenues among the core corporate constituencies. Instead, according to the many vocal proponents of the short-termism thesis, the perpetrators of short-termism are demanding that corporations engage in faddish financial engineering with the goal of maximizing short-term earnings, forcing corporate divestitures and break-ups, engaging in going private transactions and seeking sales and mergers—all solely to generate near-term stock price appreciation to reward the insatiable short-term focused stock market.

To be sure, there are some voices to be heard espousing the other side of the short-termism narrative. But whatever the merits of their arguments, there seems to be no question which viewpoint resonates the most widely and is clearly far ahead in the court of public opinion. This is not to say, however, that the alleged perpetrators of short-termism, principally activist investors and private equity firms, have receded from the scene. On the contrary, they are almost certainly more active and more richly financed today than at any time in our economic history. As a result, the drum beat of proposed cures for sort-termism is increasing in intensity and the possibility of legislative and regulatory counteractions seems to be growing.


Weekly Roundup: April 8-14, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 8-14, 2022.

SEC Proposes Landmark Standardized Disclosure Rules on Climate-Related Risks

SEC Proposes Climate Disclosure Regime

Chancery Court Rules Target’s Pandemic Responses Did Not Breach Ordinary Course Covenant

Back to Basics: Board Meetings

Proposed SEC Cyber Rules: A Game Changer for Public Companies

Russian Invasion of Ukraine: Potential Litigation Issues

SEC Proposes Cybersecurity Risk Management, Strategy, Governance and Incident Disclosure Rules

The Capitalist and the Activist

Disclosing Corporate Diversity

Remarks by Chair Gensler Before the Ceres Investor Briefing

Corwin Cleanse Clarified: Key Lessons for Interested Directors

Private Companies, Brown-Spinning, and Climate-Related Disclosures in the U.S.

Comment Letter on Modernizing Section 13(d) and (g) Beneficial Ownership Reporting

Comment Letter on Modernizing Section 13(d) and (g) Beneficial Ownership Reporting

Theodore N. Mirvis, Adam O. Emmerich, and David A. Katz are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a comment letter to the U.S. Securities and Exchange Commission by Mr. Mirvis, Mr. Emmerich, Mr. Katz, Trevor S. Norwitz, William Savitt, and Sabastian V. Niles.

Related research from the Program on Corporate Governance includes The Law and Economics of Equity Swap Disclosure by Lucian A. Bebchuk (discussed on the Forum here); 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.

We are pleased to submit the following comments with respect to the Securities and Exchange Commission’s Release Nos. 33-11030; 34-94211; File No. S7-06-22 (the “Release”). We have long been advocates for reform in this area and we have previously petitioned the Commission for rulemaking to modernize aspects of the beneficial ownership reporting rules that are the subject of the Release. [1] The Commission’s proposed rulemaking outlined in the Release (the “Proposal”) is an important step forward for market transparency and addresses many of the deficiencies in the current rules that inappropriately permit investors to accumulate significant stakes in publicly traded securities in secrecy and profit from information asymmetries at the expense of other market participants. We applaud the efforts of the Commission and the Staff in making the Proposal and creating greater market transparency.

We, however, urge the Commission to take further steps to ensure that Section 13(d) of the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) completely fulfills its stated purpose, which is to “alert investors in securities markets to potential changes in corporate control and to provide them with an opportunity to evaluate the effect of these potential changes.” [2] Specifically, we recommend the adoption of the following additional changes to ensure that the amended rules deliver greater accountability, transparency and fairness to the public markets:


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