Katie LaVoy is Counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. LaVoy and Ben Cross. 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 (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian 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 (discussed on the Forum here) by Leo E. Strine, Jr.
The past few years have brought significant attention to environmental, social and governance (ESG) principles, whether related to climate change, sustainability, human capital management or diversity, equity and inclusion. As boards of directors consider their risk management and oversight responsibilities, what weight should they give ESG issues?
Caremark and subsequent cases establish that directors may be held liable under the duty of loyalty for a failure of oversight if (1) directors “failed to implement any reporting or information system or controls” or (2) despite such a system or controls, the directors “consciously failed to monitor or oversee its operations, thus disabling themselves from being informed of risks or problems requiring their attention.” [1] Thus, the board’s fiduciary duties require that it exercise oversight—within its informed, good faith discretion—of the company’s strategy and “mission-critical” risks in pursuit of long-term value, including by implementing and monitoring an effective compliance program and related system of controls. [2]
Are ESG Issues and Opportunities “Mission-Critical”?
Leo Strine, former Chief Justice of the Delaware Supreme Court, recently advocated for consideration of employee, environmental, social and governance factors as interconnected to the board’s duty to monitor ordinary compliance. [3] Certainly, a recitation of board duties and responsibilities typically includes topics such as corporate strategy, financial integrity, risk oversight and oversight of key executives. With the individual topics of E[nvironmental], S[ocial] and G[overnance] covering such a broad range of topics, it is difficult to disagree with the conclusion that every company will need to consider some elements of ESG to be mission-critical. For example, within these broad topic areas lie many board-level responsibilities that fit unequivocally under the ESG umbrella, such as CEO succession and compensation, talent development and compliance with environmental and safety laws and regulations. Ignoring elements of ESG risk or failing to implement information systems and controls that allow board consideration of these types of ESG topics may indeed be the kind of failure that would sustain a Caremark claim.
SEC Proposed Reforms of SPACs: A Comment from Andrew Tuch
More from: Andrew Tuch
Andrew F. Tuch is Professor of Law at Washington University in St. Louis. This post is based on his comment letter submitted to the SEC. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates, IV.
The Securities and Exchange Commission released proposed rules for special purpose acquisition companies (SPACs), shell companies, and projections (the Release). In a comment letter I filed with the SEC, I provide a critical assessment of this proposal.
The Commission proposed far-reaching changes intended to enhance investor protections and align disclosure and liability rules in de-SPACs more closely with those in traditional IPOs. An under-appreciated feature of the proposed reforms is that they would subject de-SPACs to provisions closely modeled on Rule 13e-3 of the Exchange Act, which applies to going-private transactions, including management buyouts. Intended to tackle potential conflicts of interest and other abuses, Rule 13e-3 requires extensive disclosures about the substantive fairness of going-private transactions and must be carefully navigated by transaction planners. Although I discuss other aspects of the proposed reforms in my comment letter, I focus here on the proposed rules modeled on Rule 13e-3.
Of these rules, proposed Items 1606 and 1607 are the most important. They would require SPACs to state whether they reasonably believe the de-SPAC and any related financing transaction are fair to the SPAC’s unaffiliated security holders and to discuss the material factors upon which such belief is based (Item 1606). They would also require SPACs to state whether the SPAC or SPAC sponsor has received any report, opinion, or appraisal from an outside party relating to the transaction and summarize that third party opinion, among other matters (Item 1607).
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