Monthly Archives: July 2022

Delaware M&A Developments

Posted by Andre Bouchard, Kyle Seifried, and Jaren Janghorbani, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Wednesday, July 27, 2022
, , , , , ,
More from: , , , , ,

Andre Bouchard, Kyle Seifried and Jaren Janghorbani are Partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Bouchard, Mr. Seifreid, Ms. Janghorbani, Laura C. Turano, and Ross A. Fieldston, and is part of the Delaware law series; links to other posts in the series are available here.

In Totta v. CCSB Financial Corp., the Delaware Court of Chancery, in an opinion by Chancellor McCormick, held that a charter provision that gave the board “conclusive and binding” authority to construe the charter’s terms did not alter the standard of review applicable to fiduciary duty claims related to those board decisions. The applicable charter provision prohibited a stockholder from exercising more than 10% of the company’s voting power. In the face of a proxy contest, the board adopted a new interpretation of that voting limitation allowing the board to aggregate the holdings of multiple stockholders that the board determined to be acting in concert. Relying on that new interpretation, the board instructed the inspector of elections not to count any votes above the 10% limit submitted by the insurgent, its affiliates or its nominees. This instruction was outcome determinative and the insurgents brought suit to invalidate the board’s instruction to the inspector of elections. The company argued that the court was required to uphold the instruction based on the board’s “conclusive and binding” interpretation of the charter provision. The court rejected that argument, reasoning that a corporate charter (unlike an alternative entity’s organizational documents) cannot modify the standards by which director actions are reviewed, and that the board’s self-serving and new interpretation of the voting limitation in the face of a live proxy contest was inequitable because the board did not have a “compelling justification” under the Blasius standard of review for their interference with the election. Because the board’s actions were inequitable, the court ordered the inspector of elections to disregard the board’s instruction and count the insurgent’s votes that had previously been excluded.

READ MORE »

Comment by Commissioners Peirce and Uyeda on the Financial Accounting Foundation Draft Strategic Plan

Posted by Hester M. Peirce and Mark T. Uyeda, U.S. Securities and Exchange Commission, on
Tuesday, July 26, 2022
, , , , , ,
More from: , ,

Hester M. Peirce and Mark T. Uyeda are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in the post are those of Commissioners Peirce and Uyeda, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you for the opportunity to comment on the Strategic Plan Draft for Public Comment (“Draft Plan”) of the Financial Accounting Foundation (“FAF”). We share the FAF’s commitment to independent, objective standard-setting for financial accounting and reporting. High quality financial accounting and reporting standards are central to the success of the United States’ capital markets. Accordingly, we write to urge the FAF to approach with care Goal #6: “Engage with stakeholders, regulators, and Congress to determine the appropriate way, if any, for the organization to contribute to future sustainability reporting.” [1] Introducing sustainability standard-setting to the FAF runs the risk of degrading the independence and effectiveness that are the hallmarks of the FAF’s two standard-setting boards, the Financial Accounting Standards Board (“FASB”) and the Governmental Accounting Standards Board (“GASB”).

The Draft Plan, citing the “growing demand by investors and other users of financial reports for greater consistency and comparability in reporting related to sustainability,” pledges “to ensure our organization can constructively contribute, as appropriate, to any future standard-setting relating to sustainability reporting.” [2] Sustainability reporting is at the center of many conversations in corporate, institutional investor, and regulatory circles. The FAF’s interest in these conversations, therefore, is understandable, but should be tempered by an appreciation for the fundamental differences between accounting and sustainability standards. [3] These differences underpin the argument against the FAF’s involvement in sustainability standard-setting. [4]

Accounting and Sustainability Standards Are Fundamentally Different

Throughout its five decade history, the FAF and the accounting standard-setters it oversees have sought “to establish and improve financial accounting and reporting standards.” [5] As the FAF itself has explained: “If companies . . . just made up numbers to represent their revenues, profits, or spending, the result would be economic chaos. Investors wouldn’t know where to invest.” [6] Standardized financial reporting makes sense of the would-be chaos and provides accurate, objective guidelines for communicating information about the financial condition and operational results of public companies. [7] When the FAF established the FASB in 1973, it did so to “create and improve financial accounting standards that provide useful information to investors and others who rely on accurate financial information.” [8] Since that time, the main objective of the FAF has been to ensure that the FASB fulfills its mission of establishing and improving high-quality financial accounting and reporting standards. [9] These standards give investors confidence in financial reporting and make it easier for them to compare financial reports across time periods and companies. [10] The singular focus of financial reporting—painting an accurate financial picture of a company for investors—lends itself to objective, auditable, quantifiable, and comparable metrics. [11]

READ MORE »

The Complex, Contentious, and Changing Nature of Financial Reporting Standards

Posted by Robert Eccles (Oxford University), and Kazbi Soonawalla (Oxford University), on
Tuesday, July 26, 2022
, , , , , , ,
More from: ,

Robert G. Eccles is Visiting Professor of Management Practice, and Kazbi Soonawalla is a Senior Research Fellow in Accounting at Oxford University Said Business School. This post is it is based on the second part of a three-part series on financial reporting by Professor Eccles and Dr. Soonawalla.

In The Long and Winding Road to Financial Reporting Standards we reviewed the history of how accounting standards came to exist in the U.S. as Generally Accepted Accounting Principles (U.S. GAAP) issued by the Financial Accounting Standards Board (FASB) and international Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). We showed that it took years and was simultaneously tedious and contentious. Such is the world of standard setting of any kind. Here we examine the state of financial reporting standards today to draw some lessons for the work of the International Sustainability Standards Board (ISSB) which has just begun.

As our previous piece made clear, standards are social constructs, not something grounded in the laws of physics. While there may be technically worse answers there is never a single “scientifically correct” one. Standards enable and influence the dialogue between the companies who use them for reporting and investors who use the reported information for decision making. Human judgement and compromises are involved. The process takes place in a broader regulatory context which is itself nested in a political context of competing interests.

People who are unfamiliar with financial reporting assume it’s all pretty cut and dried. Their belief is that the clear standards which have been around for decades make it easy for companies to know how to report and straightforward for auditors to know how to audit. Most of all they assume that reported figures like revenue, profit, liabilities, and assets are absolute, and that a true and calculable measure of company “value” exists.

READ MORE »

C-Suite View of Volatility, War, Risks, and Growth for Global Business

Posted by Charles Mitchell, The Conference Board, Inc., on
Tuesday, July 26, 2022
, , , , , , ,
More from: , , , ,

Charles Mitchell is Executive Director of Knowledge Content & Quality at The Conference Board, Inc. This post is based on a Conference Board memorandum by Mr. Mitchell, Rebecca L. Ray, Ataman Ozyildirim, and Dana Peterson.

Energy, inflation, cyber risk, and recession are immediate CEO concerns. For long-term growth, the emphasis is on technology, automation, and upskilling existing workforces.

The War as Change Accelerator

The Russian invasion of Ukraine is proving to be the ultimate “grey swan” event—an event whose possible occurrence may be predicted but whose probability is considered small—creating extraordinary volatility and uncertainty with global ramifications for national economies, the business environment, consumers, and humanitarian relief. While the war has certainly forced many businesses to put part of their strategic plans on hold, our latest global survey of 750 CEOs and other C-suite executives shows it is also acting as an accelerator, speeding up strategy refinement and innovation, especially around cyber risk, supply chains, renewable energy, and crisis and contingency planning.

The war’s impact appears far-reaching. Just 9 percent of companies in our global survey say the war will have no material impact on their business operations in the coming year, though all companies will be dealing with energy and food inflation.

This special C-Suite Outlook midyear survey, conducted between May 10 and 24, is a follow-up to our annual survey released in January 2022, C-Suite Outlook 2022: Reset and Reimagine. The latest survey focuses on the impacts of the Russia-Ukraine conflict on the global business environment and firm-level operations. We asked about the actions executives are taking to mitigate the amplified risks caused by the conflict and their concerns about what may come next as the conflict continues. A separate section looks at longer-term growth strategies following back-to-back global shocks (i.e., the global pandemic and the war) and how CEOs and C-suite executives plan to attract and retain valuable talent in a time of acute labor shortages.

READ MORE »

Global M&A Industry Trends: 2022 Mid-Year Update

Posted by Malcolm Lloyd, Colin Wittmer, and John Potter, PricewaterhouseCoopers LLP, on
Monday, July 25, 2022
, , , , , , ,
More from: , , ,

Malcolm Lloyd is Deals Leader, PwC Global and EMEA; Colin Wittmer is Deals Leader, PwC US; and John D. Potter is Deals Sector Leader, PwC US. Deal professionals across PwC’s network of firms contributed to this post. This post is part of a series that covers an overview of global trends impacting the deals market.

Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) by John C. Coates, IV; The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian; and Deals in the Time of Pandemic (discussed on the Forum here) by Guhan Subramanian and Caley Petrucci.

What a difference six months makes. At the start of 2022, dealmakers were riding high from the best year on record for global M&A, with more than 60,000 publicly disclosed deals breaking US$5tn in value for the first time. We predicted that this year wasn’t likely to top 2021 in the face of growing headwinds—but the market expected M&A to continue to prosper. Fast-forward to mid-year. Not only have the headwinds grown stronger, but new ones have emerged, including rapidly accelerating inflation and interest rates, lower stock prices, and an energy crisis deepened by the Russia–Ukraine conflict.

Despite these challenges, we believe that M&A will play an increasingly important role in corporate strategies—and there might even be better opportunities for investors to generate healthy returns in today’s environment, as valuations come down. Indeed, dealmakers have good reasons to reset their strategic priorities and make bold moves to get deals done in the areas of their M&A pipeline that matter most. Specifically, it is imperative to plan or prepare to win over stakeholders early, understand how inflation can be a game-changer, and prioritise increasingly urgent workforce strategies in acquisitions and integration (as we detail below).

Looking to the second half of the year, dealmakers are facing arguably one of—if not the—most uncertain and complex environments in recent memory. Deal values declined by 20% compared to the first half of 2021, and are likely to decrease further as the economic fallout is priced into global markets. Deal volumes have fared better, falling back to strong pre-pandemic levels, when M&A activity averaged 50,000 deals per year from 2017–19. But of particular note, the number of megadeals (deals with a value in excess of US$5bn) decreased by almost 40% between the second half of 2021 and the first half of 2022, as executives grew more cautious and regulatory scrutiny increased in several key markets.

READ MORE »

Can We Trust the Accounting Discretion of Firms with Political Money Contributions? Evidence from U.S. IPOs

Posted by Antonios Kallias (Cardiff University), Konstantinos Kallias (University of Portsmouth), and Song Zhang (University of St Andrews ), on
Monday, July 25, 2022
, , , , ,
More from: , ,

Antonios Kallias is a Lecturer in Accounting and Finance at Cardiff Business School; Konstantinos Kallias is a Senior Lecturer in Accounting and Financial Management at Portsmouth Business School; and Song Zhang is a Lecturer in Banking and Finance at the Centre for Responsible Banking & Finance, University of St Andrews School of Management. This post is based on their recent paper, forthcoming in the Journal of Accounting and Public Policy.

Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita; and The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss.

In our paper, Can we trust the accounting discretion of firms with political money contributions? Evidence from U.S. IPOs, which was recently accepted for publication in the Journal of Accounting and Public Policy, we investigate the use of accounting discretion by initial public offering (IPO) firms with political money contributions (PMCs).

IPOs are conducive to the study of how political connections and accounting discretion interact; the reported financial data in IPO prospectuses claim a substantially larger influence on investment decisions than the financial statements released by listed companies, as there is little, if any, coverage of the issuing firm prior to going public. The information asymmetries generate competing incentives in IPO earnings reporting. One possibility is that managers systematically report discretionary accruals that result in reduced profitability, aimed at detracting attention from themselves and their political network. Alternatively, the influence that political ties have over the institutional and regulatory landscape could favor reporting decisions that raise the accounting bottom line and, consequently, the IPO offer price. Both predictions, despite the opposite directions, are consistent with earlier research describing an antagonistic relationship between political connections and accounting quality.

Our study broadens the extant research by testing these predictions against a different reporting motivation, whereby IPO issuers with PMCs utilize accounting discretion to inform rather than mislead investors. Two empirical patterns and a puzzle are in line with the use of accruals as a signaling device. First, discretionary accruals are likely to be informative when investors are generally optimistic about the firm’s prospects. Second, income-increasing reporting can signal expected political gains while suppressing disclosure of the underlying political quid pro quo agreements. However, research on IPO issuers with PMC activity exclusively attributes signaling capacity to PMCs, creating a paradox where the magnitude of the reported effects contradicts with the small political budgets of the issuers.

READ MORE »

Recent ESG Litigation and Regulatory Developments

Posted by Lauren Aguiar, Anita Bandy, and Tansy Woan, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, July 25, 2022
, , , , , , , , ,
More from: , , , , ,

Lauren Aguiar and Anita Bandy are partners and Tansy Woan is counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Aguiar, Ms. Bandy, Ms. Woan, Susan L. Saltzstein, and Jessie K. Liu.

Key Points

  • In March 2022, the SEC released long-awaited proposed rules mandating ESG disclosures, controls implementation, risk management, corporate governance and financial reporting. Meanwhile, the agency continues to use its existing enforcement authority to bring actions related to ESG disclosures and statements.
  • Driven by what appears to be increased focus on sustainability and ethical supply chains, consumers are more frequently bringing lawsuits alleging that ESG-related statements violate state laws. Misstatements, not omissions, tend to form the basis of the claims that are successful.
  • Despite recent dismissals of securities claims challenging ESG-related disclosures, plaintiffs remain undeterred, filing amended complaints alleging fraud and breach of fiduciary duty claims. They have also increasingly turned to books-and-records demands, seeking company documents and other information.
  • Companies should carefully manage their ESG-related initiatives, performance and disclosures.

As public scrutiny and interest in corporate commitments aimed at environmental, social and governance (ESG) criteria continue to increase, mechanisms to enforce ESG-related disclosures have developed as well. The Securities and Exchange Commission (SEC) has proposed new rules aimed at ESG disclosures and initiated enforcement using its existing regulatory framework. Plaintiffs are also pursuing consumer actions and alleging securities fraud for ESG-related disclosures. Companies should be conscious of this increased enforcement and litigation landscape when determining ESG initiatives and disclosures.

READ MORE »

The Proposed SEC Climate Disclosure Rule: A Comment from Norges Bank Investment Management

Posted by Carine Smith Ihenacho, and Severine Neervoort, Norges Bank Investment Management, on
Sunday, July 24, 2022
, , , , , , , , , ,
More from: , , , ,

Carine Smith Ihenacho is Chief Governance and Compliance Officer and Severine Neervoort is Senior Analyst, Corporate Governance at Norges Bank Investment Management. This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by Norges Bank Investment Management, authored by Ms. Ihenacho; Ms. Neervoort; Snorre Gjerde, Interim Head of Environmental Initiatives; and Wilhelm Mohn, Global Head of Corporate Governance.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; 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).

On 17 June 2022, Norges Bank Investment Management (NBIM) responded to the Securities and Exchange Commission (SEC)’s consultation on proposed rules to enhance and standardise climate-related disclosures for investors.

NBIM is the investment management division of the Norwegian Central Bank and is responsible for investing the Norwegian Government Pension Fund Global. We work to safeguard and build financial wealth for future generations. We are a globally diversified investor, with approximately USD 404 bn invested in listed equities and USD 137 bn in fixed income in the United States.

Climate change may give rise to transition and physical risks, as well as opportunities for companies. How these are managed may impact their financial performance and thereby our long-term returns as a shareholder. Therefore, we expect companies to report on their exposure to climate-related risks and opportunities, how these are managed, and relevant performance metrics. We expect companies to disclose a strategy and implementation plan to address these risks, and to report on progress towards such plans.

We welcome the Commission’s proposed rules, which we believe will lead to more consistent, comparable, and reliable climate-related reporting from companies, and thereby help investors get a better picture of companies’ value. Better sustainability reporting can also contribute to well-functioning and efficient markets. Corporate disclosure increases market efficiency, and sustainability reporting has been associated with more accurate analyst forecasts and lower costs of capital for disclosing firms.

READ MORE »

Trends and Updates from the 2022 Proxy Season

Posted by Pamela Marcogliese, Elizabeth Bieber, and Sarah Ghulamhussain, Freshfields Bruckhaus Deringer LLP, on
Saturday, July 23, 2022
, , , , , , , , , ,
More from: , , , , , ,

Pamela Marcogliese is partner, Elizabeth Bieber is counsel, and Sarah Ghulamhussain is a senior associate at Freshfields Bruckhaus Deringer LLP. This post is based on Freshfields memorandum by Ms. Marcogliese, Ms. Bieber, Ms. Ghulamhussain, Yunah Ko, Lauren Lee and Evelyne Kim.

The extraordinary 2022 proxy season comprised significant developments in governance, environmental and sustainability issues, shareholder engagement, investor considerations, and activism matters.

Freshfields’ corporate governance team reviewed trends and developments for this year’s proxy season, summarizing the key takeaways and guidance across the following core areas: boards and directors refreshment trends, board and senior management diversity, SEC updates, climate disclosure and engagement, environmental and social shareholder proposals, governance trends and proposals, executive compensation considerations, activism and proxy advisory firm updates and investor updates.

High-level takeaways are outlined below, and the full report can be found here. We hope this serves as a helpful benchmarking reference as you consider how your own company policies live up to evolving regulation and investor expectations.

READ MORE »

Diversity Leaders Open New Doors for Equity Investors

Posted by Gayle Baldwin and Vivian Lubrano, AllianceBernstein, on
Friday, July 22, 2022
, , , , ,
More from: , ,

Gayle Baldwin is a Senior Vice President and Senior Research Analyst, and Vivian Lubrano is a Portfolio Manager for Portfolios with Purpose at AllianceBernstein. This post is based on their AllianceBernstein memorandum.

Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr. 

A company’s success increasingly hinges on its capacity to see and meet challenges from different perspectives, and a deep bench of diverse talent often provides an important competitive advantage. Promoting DEI does a lot of good, for employees, the business and investors alike, by creating a more inclusive, productive labor force.

The global workplace identity is steadily changing—across age, gender, sexual orientation and especially race. In the US, for example, 75% of working-age adults identified as white in 2010, according to the US Census Bureau. The number dropped to 64% in 2020 and is expected to fall to about 53% as the next generation reaches adulthood (Display).

Forward-looking companies are embracing these demographic changes. We think those that harness a more diverse population by reshaping their recruiting, culture and employee development will have a clear strategic advantage.

READ MORE »

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