Monthly Archives: April 2022

Proposed SEC Cyber Rules: A Game Changer for Public Companies

Paul Ferrillo is partner at Seyfarth Shaw LLP; Bob Zukis is Adjunct Professor of Management and Organization at the USC Marshall School of Business; and Christophe Veltsos is a Professor at Minnesota State University.

One month prior to their March 9th announcement, the SEC released their proposed cyber rules specifically for registered investment advisers and registered investment funds. They have now turned their attention to public reporting companies and are proposing regulatory changes to cyber incident reporting, cyber risk management and cyber governance.

The last time the SEC issued interpretive guidance for public companies on cyber risk was in 2018 (see 2018 Commission Statement and Guidance on Public Company Cybersecurity Disclosures). [1] Since then, there have been litigation releases that have also provided guidance to public companies on their cybersecurity disclosure controls and obligations. [2] We summarized some of these releases in a prior Harvard Law Forum article to help public companies understand the scope of their reporting obligations. [3]

What these prior Commission statements and litigation releases failed to deliver on, the new proposed rules significantly raise the bar on. These proposed rules appreciably increase corporate accountability on cyber risk from the boardroom on down. By becoming more specific and prescriptive the SEC is addressing observed shortcomings and inconsistencies in cyber incident reporting practices that range from whether an incident is even disclosed, what gets disclosed as well as when and how companies govern and manage cyber risk. No longer just unevenly interpreted self-regulatory guidance, these are proposed regulatory changes that apply to all issuers.

On March 9, 2022, when the SEC turned its attention to public companies, SEC Chair Gensler commented:


Back to Basics: Board Meetings

Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on their Deloitte/Society for Corporate Governance memorandum.

The pandemic prompted many companies to modify—at least temporarily—some of their core business, as well as board, practices in the face of health- and safety-related requirements that prevented or restricted travel and in-person gatherings. While the circumstances that gave rise to the restrictions were unwelcome, they provided companies an opportunity to review and re-evaluate the effectiveness of longstanding practices that, but for the pandemic, would likely not have taken place.

In this post, we look at whether the pandemic prompted lasting changes to key board meeting practices and processes. We present findings from a February 2022 survey of Society for Corporate Governance members representing more than 150 public and private companies. The intent of the survey was to understand long-term changes made in response to the pandemic in practices such as board meeting formats (frequency and length), virtual meeting approaches, attendance, and materials and agendas.


Respondents, primarily corporate secretaries, in-house counsel, and other in-house governance professionals, represent public companies (89%) and private companies (11%) of varying sizes and industries. [1] The findings pertain to all companies, public and private. Where applicable, commentary has been included to highlight differences among respondent demographics. The actual number of responses for each question is provided.


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

Gail Weinstein is senior counsel, and Steven Epstein and Philip Richter are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Richter, Warren S. de Wied, Erica Jaffe, and Randi Lally, 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 Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here); and Deals in the Time of Pandemic, by Guhan Subramanian and Caley Petrucci (discussed on the Forum here).

In Level 4 Yoga, LLC v. CorePower Yoga, LLC (Mar. 1, 2022), the Delaware Court of Chancery ordered CorePower Yoga, LLC to close the agreement it had entered into, pre-pandemic, to acquire the yoga studios owned by its franchisee, Level 4 Yoga, LLC. CorePower had contended, in March 2020, just before the first of three scheduled closings of the asset purchases, that it was no longer obligated to close the almost $30 million transaction due to the pandemic having emerged in the U.S. and businesses across the country, including Level 4’s studios, having shut down. In this post-trial decision, the court ruled that the pandemic did not constitute a “Material Adverse Effect” and that the closure of the studios did not violate Level 4’s covenant to operate, pending closing, in the ordinary course of business. The court ordered CorePower to close and to pay compensatory damages for the delay in closing.

Key Points

  • The decision was based on atypical features of the transaction and the parties’ relationship. Due to the unusual background of the transaction, the parties had structured their asset purchase agreement without conditions or termination rights—suggesting that they had intended that the closing would occur even if a party breached the agreement. In addition, due to the parties’ relationship as franchisor and franchisee, CorePower (as the franchisor) had directed Level 4’s operational responses to the pandemic. Given the unique factual context, in our view the decision offers little predictive value as to future rulings on a buyer’s failure to close based on an extraordinary event occurring between signing and closing.
  • The court followed the same analytical framework for determining whether the target breached the ordinary course covenant as it applied in the prior two cases—AB Stable and Snow Phipps—in which it has addressed whether the pandemic excused a buyer from closing. In all three cases, the court has interpreted “ordinary course of business” to mean the ordinary course during “normal times” (rather than ordinary course in light of an extraordinary event having occurred); and has interpreted “consistent with past practice” to mean that the only relevant issue is whether the target’s own post-signing operations changed materially from its pre-signing (pre-pandemic) operations. In AB Stable, the court found that the target’s responses to the pandemic constituted a breach of the covenant and that the buyer therefore was not obligated to close; in both Snow Phipps and Level 4 Yoga, the court found that the target’s pandemic responses did not constitute a breach of the covenant and the court ordered the buyer to close.  These cases underscore the facts-intensive nature of the court’s determination as to breach of an ordinary course covenant.
  • The decision continues the Delaware courts’ almost invariable trend in finding that an extraordinary event occurring between signing and closing was not an MAE that excused a buyer from closing. There has only been one Delaware decision ever—Akorn (issued in 2018)—finding that a “Material Adverse Effect” (or “Material Adverse Change”) occurred that excused a buyer from closing. In all three pandemic-related cases, the court has found that the pandemic was not an MAE—based on the parties’ “MAE” definition, the extent of the pandemic’s impact, and/or the lack of “durational significance” of the impact. In Level 4 Yoga, the court found that, at the time CorePower asserted that it had a right not to close, it had no basis to believe that the effects of the pandemic would have durational significance as the closure of the studios was at that time expected to last only a few weeks.
  • The court emphasized that it “will not hesitate” to order specific performance by a buyer who improperly refuses to close.


SEC Proposes Climate Disclosure Regime

Joseph A. Hall, Margaret E. Tahyar, and Ning Chiu are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk 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; 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); and Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

The long-expected but controversial proposal would require disclosure of climate-related risks, greenhouse gas emissions and climate-related financial metrics. If adopted, the proposal would represent the most far-reaching public company disclosure and governance mandate to be introduced in decades.

After a year of anticipation, on March 21 the SEC proposed a sweeping climate disclosure regime for public companies in a 3-1 vote with the sole Republican commissioner issuing a separate dissenting statement. In the words of the majority, the proposed rules are designed to “provide registrants with a more standardized framework to communicate their assessments of climate-related risks as well as the measures they are taking to address those risks.” In the words of the dissent, the proposal “turns the disclosure regime on its head” and will harm investors, the economy and the SEC.

The proposal, which would apply to both domestic companies and foreign private issuers, aims to supersede, extend and regulate in prescriptive detail the largely voluntary disclosure practices that have grown organically over the last several years as many public companies have responded to demands from prominent institutional shareholders and climate advocates, and as part of companies’ own efforts to showcase their commitment to sustainability.


GameStop and the Reemergence of the Retail Investor

Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law and co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. This post is based on her recent paper, forthcoming in the Boston University Law Review.

The GameStop trading frenzy in 2021 marked the reemergence of the retail investor in the securities markets. An unprecedented number of new and largely inexperienced investors opened app-based brokerage accounts and began trading so-called meme stocks issued by companies that included GameStop, AMC and Express. Interest in these stocks, which was fueled by postings on social media, led to high levels of market volatility and charges of market manipulation. The price of GameStop alone soared from less than $4/share to a high of $483/share. During the course of the frenzy, several hedge funds that shorted the meme stocks suffered significant trading losses, at least one retail-oriented brokerage firm faced dramatically increased capital requirements forcing it to limit trading temporarily, regulators demanded information, and Congress held four hearings to determine what happened and whether regulatory reforms were warranted.

My paper, GameStop and the Reemergence of the Retail Investor, forthcoming in the Boston University Law Review, recounts the story behind the GameStop frenzy. It identifies key factors contributing to the reemergence of retail trading, the focus on meme stocks, and the growing power of social media. The GameStop frenzy was distinctive in that it reflected not just stock purchases by a substantial number of retail investors, but the demonstrable impact of those purchases on capital market pricing and volatility. This impact was facilitated by a decline in traditional barriers to capital market participation such as user-friendly brokerage apps, zero-commission trading, and the ability of small investors to purchase fractional shares. An unprecedented use of social media fueled retail engagement in the market even as it has raised questions about the wisdom of investors relying on social media posts to inform their investing decisions. Although the GameStop frenzy may be a product of the times, driven by the confluence of the pandemic lockdown, the liquidity of stimulus checks and the lure of virtual confetti, the reemergence of direct retail investors offers the prospect of a fundamental change in the capital markets. As such, it raises new regulatory questions.


SEC Proposes Landmark Standardized Disclosure Rules on Climate-Related Risks

David Cifrino is counsel and Jacob Hollinger is partner at McDermott Will & Emery LLP. This post is based on their MWE 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); 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.

The US Securities and Exchange Commission (SEC) proposed new climate change disclosure rules on March 21, 2022. The proposed rules (Release Nos. 33-11042; 34-99478) draw heavily on the “four pillar” disclosure framework developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and are significantly more prescriptive and granular than the SEC’s 2010 guidance on climate change-related disclosures. The rules would apply to disclosures by domestic and foreign companies that file periodic reports or registration statements with the SEC (collectively, registrants). Among other key features, the proposed rules include the following provisions:

  • Registrants would be required to provide detailed information about their handling of climate change issues, including climate-related governance, strategy, risk management and metrics and goals (the four TCFD pillars).
  • Registrants would be required to measure and disclose greenhouse gas (GHG) emissions in accordance with the GHG Protocol methodology, the most widely known and used international standard for calculating GHG emissions.
  • Larger registrants would be required to have the data they disclose regarding their direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2) attested to by independent “GHG emissions attestation providers.”
  • Larger registrants would be required to disclose data regarding their Scope 3 emissions (those that are the result of activities from assets not owned or controlled by the registrant, but that the registrant indirectly impacts in its upstream or downstream value chains through its activities) if material to them, or if they have set a GHG emissions reduction target or goal that includes its Scope 3 emissions.
  • Registrants would be required to add a note to their financial statements that provides disaggregated metrics and related disclosure concerning climate-related impacts included in line items of the financial statements required under existing financial statement requirements.

The rule proposal, which was approved for issuance by a 3-1 vote by the SEC, is subject to a comment period that ends 30 days after the date of publication of the proposed rules in the Federal Register or May 20, 2022 (60 days after issuance of the proposed rules), whichever period is longer. The SEC’s proposing release includes 201 specific requests for comment covering virtually all aspects of the rule proposal.


Weekly Roundup: April 1-7, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 1-7, 2022.

Social Contagion and the Survival of Diverse Investment Styles

The SEC’s Proposed New Short Disclosure/Sale Requirements

Shareholder Activism in the Regulated Utility Sector

SEC Proposes Unprecedented Cybersecurity Rules and Reporting Requirements

The Promise and Perils of Open Finance

EU Taxonomy and the Future of Reporting

SEC Proposes Rules Enhancing Cybersecurity Disclosures

Five Questions Boards Should Ask About the War in Ukraine

Post-Doctoral Corporate Governance Fellowships For Finance, Economics, and Accounting Researchers

SEC Proposes Short Sale Disclosure Rules

The SEC’s Proposed Climate-Related Disclosure Rules: Thoughts for Audit Committees

Corporate Leadership’s Indispensable Role in Promoting Equality

The Limits of SPAC Sponsor Earnouts

Statement by Chair Gensler on Registration of Security-Based Swap Execution Facilities

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Today [April 6, 2022], the Commission is considering a proposal to create a framework for the registration of security-based swap execution facilities (security-based SEFs). I am pleased to support this proposal because, if adopted, it would increase the transparency and integrity of the traditionally opaque over-the-counter security-based swap market, fulfilling a mandate under the Dodd-Frank Act of 2010 to register and regulate the platforms that trade these instruments.

The 2008 financial crisis had many chapters, but a form of security-based swaps—credit default swaps—played a lead role throughout the story. Thus, as part of the Dodd-Frank Act, Congress granted this agency broad authority to regulate security-based swaps, including the mandate we’re acting upon here today.

Today’s proposal would do two key things. First, it would create a framework for the registration of security-based SEFs, based upon the 14 core principles for these entities spelled out in the Dodd-Frank Act. This framework would harmonize with the SEF framework promulgated by our sibling agency, the Commodity Futures Trading Commission (CFTC).

The SEC originally proposed rules for security-based SEFs in 2011. Subsequently, the CFTC put its rules in place. We’ve heard over the years that the CFTC’s framework is working well. In fact, Bank of England economists found that that regime saves end users millions of dollars per day. [1]


The Limits of SPAC Sponsor Earnouts

Michael Klausner is the Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School; Michael Ohlrogge is Assistant Professor at NYU School of Law. This post is based on their recent paper. Related research from the Program on Corporate Governance includes SPAC Law and Myths by John C. Coates (discussed on the Forum here).


SPACs have been widely criticized for their misalignment of sponsor and shareholder interests and for the dilution inherent in their structure. A major source of these problems is the sponsor’s “promote,” under which sponsors receive 20% of post-IPO shares essentially for free. Earnouts, which cancel promote shares if post-merger price targets are not met, have been recently pitched as a solution to these problems. In their SEC filings, SPACs describe earnouts as aligning incentives and reducing dilution. Commentators have similarly touted earnouts. In its recent Multiplan decision, the Delaware Chancery Court also raised the possibility that an earnout covering all of a sponsor’s promote might cure SPACs of the inherent conflict of interest between sponsors and shareholders.

In a recent study, however, we find that sponsor earnouts, as currently structured, do little either to algin incentives or to reduce dilution. SPAC proxy statements that state or imply otherwise are misleading. We show that earnouts could be restructured to improve their effectiveness, but substantial misalignment and dilution would still remain, and we propose a framework for accurate disclosure of earnouts to investors. In this post, we address only the impact of earnouts on the alignment of sponsor and shareholder interests.

Misalignment of Sponsor and Shareholder Interests

The fundamental challenge facing any effort to align SPAC sponsor and shareholder interests is the fact that SPACs must either merge or liquidate; and if they liquidate, sponsors get nothing. The shares that sponsors receive in their promote do not participate in a liquidation, nor do any shares or warrants that sponsors purchase. Thus, although a sponsor will pursue the most valuable merger it can find, it will still prefer a value-decreasing merger over a liquidation. In principle, a merger yielding a penny a share is better for a sponsor than a liquidation. Shareholders, on the other hand, get back their investment of $10 per share plus accrued interest if a SPAC liquidates. They, therefore, would prefer a liquidation over a merger unless the merger will be worth more than about $10 per share. As we show in prior research, experience with SPACs over the past decade shows that they commonly enter into value-decreasing mergers. Average market-adjusted, one-year post-merger returns have been negative for every year in the past decade, with an overall one-year average of negative 25% in excess of the Nasdaq and negative 23% in excess of the S&P 500. The average share price of SPACs that merged in 2021 is currently $6.23—close to a 40% drop from the $10 plus interest that SPAC shareholders could have received if they redeemed their shares. Thus, the concern about sponsor incentives is not hypothetical.


Corporate Leadership’s Indispensable Role in Promoting Equality

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; and Leo E. Strine, Jr. is Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. This post is based on their Wachtell 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); 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.

Last Friday, the 2020 California board diversity statute requiring publicly held domestic or foreign corporations whose principal executive office is located in California to have a minimum of “one director from an underrepresented community” on its board by December 31, 2021 was struck down by a Los Angeles County Superior Court judge as violating the Equal Protection Clause of the California Constitution.  Under the statute: “‘Director from an underrepresented community’ means an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”

From the inception of California’s predecessor 2018 statute that required gender diversity on corporate boards, many who cared about improving board diversity feared that the statute had state and federal constitutional vulnerabilities, including because California was purporting to regulate corporations that were domiciled outside California and thus intruding on their internal corporate affairs.  But the positive effects of California’s statute have been substantial as board diversity from underrepresented communities has increased markedly since its enactment.  It is our hope that corporate America will continue to focus on the need to increase racial, gender and other types of diversity and to capitalize on the full range of talent in our great nation, not just at the boardroom level, but from the ground floor up all the way through to the C-Suite.


Page 6 of 8
1 2 3 4 5 6 7 8