Monthly Archives: April 2022

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

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. This post is based on their recent paper.

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).

Global consensus is growing on the contribution that corporations and financial markets must make towards the net-zero transition in line with the Paris Agreement goals. Regulatory measures and shareholder or stakeholder initiatives now abound to create a more sustainable economy. Crucially, however, the focus of those initiatives largely remains on public companies. In a new paper, we show why we should be concerned about the role of private companies on the path to net zero and explore ways to address this gap.

Public companies had once constituted a large part of the economy, especially in the United States. This no longer holds true with a decreasing number of IPOs and a strong surge in delistings (see, e.g., Asker et al., 2015). Private companies also impose significant externalities on the environment in the U.S. A recent report from the Clean Air Task Force and Ceres provides the most damning evidence. Hilcorp Energy Co., a private oil and gas company in the U.S., is the largest methane emitter in the country, reporting almost 50 per cent more methane (a pernicious type of greenhouse gas (GHG)) emissions than the largest public counterpart, ExxonMobil. For other GHG emissions, Hilcorp is only slightly edged out by ExxonMobil, with this pair taking second and first place respectively. Overall, in the top 10 methane emitters in the U.S., there are five private companies. In terms of other GHG emissions, there are six private companies in the top 20. A cursory look at the website of these companies reveals that they neither report their environmental impact nor do they have any climate strategy and targets.


Corwin Cleanse Clarified: Key Lessons for Interested Directors

Robert Velevis is partner and Natalie Piazza 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Since Corwin v. KKR Financial Holdings LLC, Delaware courts have adhered to the proposition that “when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.” However, The Delaware Court of Chancery recently issued an opinion (available here) clarifying the application of Corwin to the fiduciary duties of interested directors. The Court declined to dismiss a complaint alleging that the defendant directors’ approval of a merger was a breach of the directors’ duty of loyalty and constituted unjust enrichment. Specifically, the Court rejected the defendant directors’ contention that Corwin “cleansed” the transaction, and, as a consequence, explained that a duty of loyalty analysis was still appropriate. In what follows, we describe this case and offer some important takeaways concerning interested directors.

Key Factual Background

In May 2020, the board of directors of WinView, Inc. closed a merger whereby WinView merged with a wholly owned subsidiary of a Canadian company to create a new entity, Engine Media Holdings, Inc. Following the consummation of the merger, several stockholders sued, claiming that the named directors breached their fiduciary duties to the company and its shareholders and were unjustly enriched as a result.


Big Three Institutional Investor Updates

Shaun Bisman is principal and Felipe Cambeiro is an analyst at Compensation Advisory Partners. This post is based on their CAP memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Blackrock, Vanguard, and State Street (the “Big Three”) are among the largest and most influential institutional investors in the world with current assets under management (AUM) of $10.0, $8.2, and $4.1 trillion respectively. Given their size, they have ownership stakes in many U.S. publicly traded companies. As a result of their holdings, the Big Three have the power to influence proxy voting outcomes, and any policy update, should be closely monitored by companies.

For the 2022 proxy season, the Big Three released their proxy voting guidelines and engagement priorities. These updates are a way for the public, and companies, to understand the Big Three’s positions and priorities for 2022.

In the following chart we summarize a variety of policy updates from the Big Three that focuses on executive compensation, Compensation Committee voting, human capital management, board composition and board of director overboarding.


Remarks by Chair Gensler Before the Ceres Investor Briefing

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the Ceres Investor Briefing. 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 Ceres for today’s investor briefing. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

As you all likely know by now, in March, the Commission voted on a proposal to mandate climate-risk disclosures by public companies.

A Long Tradition

Let me put the proposal into the context of our long tradition of disclosures.

The 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.

Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.

The first disclosures revolved around companies’ financial performance, who runs the company, and how much of a company’s resources were dedicated to paying those executives.

In addition to such historical information, though, investors want to assess potential risks. Risk, by its definition, often involves events that have not yet occurred.

In 1964, the SEC started to offer guidance about disclosure of risk factors. The agency later adopted disclosure requirements related to Management’s Discussion and Analysis in Form 10-K. The existing environmental-related disclosure requirements date back to the 1970s. The Commission elaborated on these requirements repeatedly in subsequent decades. This includes the SEC’s guidance from 2010 regarding climate-related disclosures.


Disclosing Corporate Diversity

Atinuke O. Adediran is Associate Professor of Law at Fordham University School of Law. This post is based on her recent paper, forthcoming in the Virginia Law Review. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here); and Duty and Diversity by Chris Brummer and Leo E. Strine, Jr. (discussed on the Forum here).

Since 2020, diversity has become a central concern for corporations and their leaders, prompting many corporations to voluntarily integrate gender and racial diversity in particular, into their Corporate Social Responsibility (“CSR”), or Environmental, Social and Governance (“ESG”) disclosures. In my paper, Disclosing Corporate Diversity, I use machine-learning techniques to analyze 3,461 CSR/ESG reports for 1,288 public companies listed on Nasdaq Stock Market LLC (Nasdaq) and the New York Stock Exchange (NYSE) for the five-year period between 2017 and 2021. I provide empirical evidence that in the last five years, public companies have firmly integrated diversity disclosures into their CSR/ESG disclosures.

I argue that these disclosures are important not only for shareholder transparency, but that they can be used instrumentally to increase corporate diversity for other stakeholders, including employees, suppliers, customers, community members, advocacy groups of various types, activists, reformers, and the public. I note that scholars and others have underappreciated this possibility for two reasons. The first is that scholars routinely write about disclosures in the context of CSR/ESG, but not often in the context of corporate diversity, even though diversity is part of CSR/ESG. The second is about the limits of the securities laws. Like other forms of disclosures under the securities laws, diversity disclosure rules often focus on shareholder transparency rather than to address concerns about the lack of diversity in corporations for all stakeholders.


SPAC-Related Enforcement and Litigation: What to Expect in 2022

Alex Wyman, Colleen Smith, and Kristin Murphy are partners at Latham & Watkins LLP. This post is based on their Latham memorandum. Related research from the Program on Corporate Governance includes SPAC Law and Myths by John C. Coates (discussed on the Forum here).

Key Points:

  • The SEC has indicated that it will continue its focus on SPACs, including by proposing rules to further regulate SPACs this spring, which could lead to increased SEC enforcement activity involving SPACs and de-SPAC’ed public companies.
  • Federal prosecutors, under directives from US Deputy Attorney General Lisa Monaco to invigorate efforts to combat corporate crime, are likely to increase their focus on SPAC-related securities matters, including on issues involving insider trading and investor fraud.
  • Private securities class action lawsuits targeting SPACs, SPAC directors, and operating company executives are increasingly common in light of regulatory scrutiny and a proliferation of short seller attacks.
  • Key court decisions are expected in early 2022 that may clarify or limit the application of MultiPlan’s entire fairness standard of review and resolve questions involving the application of the Investment Company Act of 1940 to certain SPACs.

SEC Enforcement Division Continues Focus on SPACs

The Securities and Exchange Commission (SEC or Commission) Chair Gary Gensler has signaled his desire to have the SEC propose rules in April 2022 to increase its scrutiny of special purpose acquisition companies (SPACs) and private companies that go public through de-SPAC transactions.

On December 9, 2021, Chair Gensler delivered public remarks before the Healthy Markets Association in which he expressed concerns about information asymmetries, the potential for misleading information and fraud, and conflicts of interest that he believes are inherent in de-SPAC transactions. [1]


The Capitalist and the Activist

Tom C.W. Lin is the Feinberg Chair Professor of Law at Temple University Beasley School of Law. This post is based on his recent book. 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); 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); and Exit vs. Voice by Eleonora Broccardo, Oliver Hart, and Luigi Zingales (discussed on the Forum here).

Today, corporations and their executives are at the frontlines of some of the most important and contentious issues of our time, such as the Russian invasion of Ukraine, voting rights, gun violence, racial justice, climate change, and gender equity. Through their policies, pronouncements, investments, and divestments, businesses and business leaders are directly engaging with the significant challenges confronting modern society. This is the new reality of business, activism, and politics in contemporary America.

My new book, The Capitalist and the Activist, explores this complicated new reality of contemporary corporate social activism—its driving forces, promises and perils, and implications for our laws, public policies, and businesses. It does so mindful of the structural shortcomings and systemic limitations of capitalism and activism, yet hopeful of progress.

The roots of contemporary corporate social activism can be traced to three large, interconnected developments in business, law, and society. Specifically, the evolution of corporate purpose from one of zealous shareholder primacy to one of more expansive stakeholder governance, the convergence of the public and private sectors, and the expansion of corporate political rights have all helped foster a fusion of capitalism and activism that is at the heart of contemporary corporate social activism.

Furthermore, these roots are simultaneously powered and amplified by new technology. Activists and citizens can readily organize, communicate, and fundraise to bring their concerns to the powerful in business and government like never before. Tens of millions of people can be reached, millions of dollars raised, and thousands gathered to raise awareness or protest an issue in a matter of minutes, hours, or days.


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

Nicholas Goldin and Karen Hsu Kelley are partners and Shanice Hinckson is an associate at Simpson Thacher & Bartlett LLP. This post is based on their Simpson Thacher memorandum.

On Wednesday, by 3-1 vote, the SEC approved proposed rules aimed at enhancing and standardizing disclosures made by public companies regarding cybersecurity risk management, strategy, governance and incident reporting, [1] reflecting the third rulemaking project the Commission has proposed in connection with cybersecurity in the past year. [2] The proposal, if adopted, would require mandatory reporting of material cybersecurity incidents and mandatory ongoing disclosures regarding companies’ governance, risk management, and strategy with respect to cybersecurity risks.

By way of background, in October 2011, the Division of Corporation Finance issued guidance that addressed disclosure obligations relating to cybersecurity risks and incidents explaining that, although no existing disclosure requirement explicitly refers to cybersecurity risks and cyber incidents, public companies nonetheless may be obligated to disclose material risks and incidents in various sections of their periodic reports, e.g., their description of business, risk factors and management’s discussion and analysis of financial condition and results of operation sections. [3] In 2018, the Commission issued interpretive guidance to reinforce and expand upon the 2011 Staff Guidance by identifying existing provisions in Regulations S-K and S-X that may require disclosure about cybersecurity risks, governance, and incidents. [4] Notably, the guidance did not create any new obligations.


Russian Invasion of Ukraine: Potential Litigation Issues

Daniel Perry is partner, Melanie Yanez is special counsel, and Stephen Benz is an associate at Milbank. This post is based on their Milbank memorandum.

The Russian military’s invasion into Ukraine and the resulting economic sanctions imposed by various nations against certain Russian entities and individuals have, among other things, created volatility and uncertainty in the economic markets. This economic uncertainty has forced many companies, lenders and investors to seek guidance on their legal rights with respect to certain contractual obligations, especially in these key areas:

  • Force Majeure Clauses
  • Frustration of Purpose Doctrine
  • Impossibility and Impracticability Defenses
  • Discharge of Contracts Requiring Performance That Is No Longer Legal
  • Material Adverse Event Provisions
  • Know Your Customer and Anti-Money Laundering Requirements

This post provides a broad overview of these legal issues. The analysis of any particular contract, transaction or dispute, however, is necessarily fact-specific and will depend on, among other things, the specific contract language and conduct of the parties in each instance, as well as the governing law applicable to that contract, transaction or dispute. In addition, we understand that each institution must address the legal issues while taking into account commercial decisions, including avoiding reputational harm. As the situation continues to develop, the legal landscape as well as commercial practices will continue to change and evolve.

Force Majeure Clauses

The concept of force majeure excuses a contractual party from performing under the contract when there is an occurrence of an unexpected event beyond the control of the party, and the event prevents that party, either temporarily or permanently, from performing.


How Investors are Assessing Directors on ESG Matters

Hannah Orowitz and Rajeev Kumar are Senior Managing Directors at Georgeson LLC. This post is based on their Georgeson 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); 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); and Exit vs. Voice by Eleonora Broccardo, Oliver Hart, and Luigi Zingales (discussed on the Forum here).

Companies are increasingly facing opportunities and threats from environmental, social and governance matters. Is your board at risk?

As a board member it is critical to stay informed and up to date to ensure effective oversight over strategy and risk as well as to manage the company’s ability to meet rapidly evolving investor, market and regulatory expectations. An important course of action is to understand how investors are assessing directors when it comes to ESG matters. Read on to find out how you can identify any weaknesses and prepare your board to withstand increased investor scrutiny.

ESG is on the agenda

Historically many ESG matters, in particular the “E” and the “S” issues, were not considered “board business.” Now, many directors expect to see ESG topics appearing on their meeting agendas. However, the fact remains that many boards lack the context and understanding of ESG to successfully shape and oversee its strategy for their organizations.

While directors’ duties have not changed, investor expectations have. Board leadership and oversight is now essential to integrating ESG into the company’s overall strategy and measuring, managing, and communicating progress. These matters have taken a firm hold across companies of all sizes, all industries and all markets, meaning boards cannot afford to be complacent when it comes to ESG.


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