Monthly Archives: July 2022

Name That Boon: SEC Proposes Rules on ESG Fund Names & Disclosures

Matt Filosa is Senior Managing Director of Governance, William Edwards is Senior Managing Director, and Oliver Parry is Managing Director at Teneo. This post is based on a Teneo memorandum by Mr. Filosa, Mr. Edwards, Mr. Parry, Martha Carter, and Harvey Pitt.

On May 25th, the SEC proposed two rules that seek to provide the market with greater clarity on how funds incorporate ESG factors into their investment activities. While the SEC’s prosed rules are directed at investment companies and mutual funds, other companies are likely to be impacted as well. The proposed rules were also released at a time where the debate around the merits of ESG has greatly intensified.

To help companies make sense of all the recent ESG activity, we have provided our insights on:

  1. The recently intensified ESG debate and the heightened focus on “greenwashing;”
  2. The current state of “ESG funds;”
  3. The proposed SEC rules on fund names and ESG fund disclosure;
  4. How the proposed rules could potentially impact

ESG—What is it Good For? The ESG Debate Intensifies

The amount of public debate regarding the merits of ESG has been quite remarkable in recent weeks. Tesla CEO Elon Musk tweeted that ESG is “a scam.” Former Vice President Mike Pence penned a Wall Street Journal op-ed calling ESG “a craze.” These grave concerns about ESG seem to focus on companies weighing in on political issues such as abortion or LGBTQ rights, the opacity and inconsistency of 3rd party ESG ratings and companies being forced by large investors to tackle societal issues such as climate change and employee diversity. Perhaps surprisingly, a few individuals at asset management firms have also expressed concerns about ESG investing, further evidence that the investor community is not monolithic in its ESG beliefs.

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Stock Market Short-Termism: What the Empirical Evidence Tells Policymakers

Mark J. Roe is David Berg Professor of Business Law at Harvard Law School. This post is based on his recent paper, forthcoming in the Journal of Law, Finance, and Accounting, and also draws from his recent book, Missing the Target: Why Stock Market Short-Termism Is Not the Problem (Oxford University Press, 2022).

Related research from the Program on Corporate Governance includes Corporate Short-Termism – In the Boardroom and in the Courtroom (discussed on the Forum here) and Looking for the Economy-Wide Effects of Stock Market Short-Termism (discussed on the Forum here), both by Mark J. Roe; The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

In this paper and the related book section, I assess what the evidence on stock-market-induced short-termism tells us for policymaking. For this kind of policymaking purposes, we want to know whether the stock market is inducing economy-wide costs, and what the cheapest remedy would be for those costs. In public discourse, stock-market-induced short-termism is thought to be significant economically and socially.

Although the non-academic views seem to approach consensus that stock market short-termism is a major problem, there is no consensus in the academic studies on the subject. With the studies so divided, it’s hard to be sure that there’s a serious problem that should be prioritized over other economic problems the country faces.

Second, when we examine the mixed and divided evidence, we see that the evidence for short-termism tends to indicate that the short-termism involved is small. That is, strong studies find short-termism, but they generally find the inefficiencies to be small.

Third—and a contribution of the material that is not well-developed in the academic literature—the methodological setup needed for most successful empirical studies aims to reveal a local effect in a local treatment group. That method does not show that there is an economy-wide impact, and generally does not seek to show that it is. For the most part, the direct evidence that we want—is the economy suffering overall?—is not available. Most of the rigorous studies cannot readily scale to make an economy-wide finding.

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Twitter vs. Musk: Musk’s Opposition to Expedited Proceedings

This post provides the text of the response filed July 15, 2022, by Elon Musk to the Twitter complaint (discussed on the Forum here). This post is part of the Delaware law series; links to other posts in the series are available here.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

TWITTER, INC.,

Plaintiff, v.

ELON R. MUSK, X HOLDINGS I, INC., and X HOLDINGS II, INC.,

Defendants.

Defendants’ Opposition To Plaintiff’s Motion To Expedite Proceedings

1. This Court should reject Plaintiff Twitter, Inc.’s (“Twitter”) unjustifiable request to rush this $44 billion merger case to trial in just two months. Twitter’s bid for extreme expedition rests on the false premise that the Termination Date in the merger agreement (“Agreement”) is October 24, glossing over that this date is automatically stayed if either party files litigation. By filing its complaint, Plaintiff has rendered its supposed need for a September trial moot.

2. Nor does the remainder of the Motion To Expedite (“MTE”) remotely justify extreme expedition, instead highlighting the complexity of the case and the impossibility of completing discovery on the timeline proposed. In fact, Twitter has engaged in tactical delay for two months by resisting Defendants’ information requests, causing Defendants “obvious prejudice” through an overly compressed schedule. Juwell Invs. Ltd. v. Carlyle Roundtrip, L.P., C.A. No. 2020-0338-JRS, at
92 (Del. Ch. May 14, 2020) (TRANSCRIPT) (“Amex”). Twitter’s sudden request for warp speed after two months of foot-dragging and obfuscation is its latest tactic to shroud the truth about spam accounts long enough to railroad Defendants into closing.

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The Rapidly Changing World of Human Rights Regulation: A Resource for Investors

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on a publication by Clare Bartram, ESG Specialist, Modern Slavery; Marie-Anaïs Meudic-Role, Associate, Norm-Based Research; Abigail Kyla Antonio, Analyst, Norm-Based Research; and Thiago Toste, Senior Associate, ESG Methodology Lead, Norm-Based Research at ISS ESG, the responsible investment arm of Institutional Shareholder Services.

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); 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).

Key Takeaways

  • The human rights regulatory landscape is changing rapidly, evolving from soft to hard law and with momentum towards mandatory due diligence.
  • These changes are driven by jurisdictions responding to human rights challenges with the introduction and strengthening of mandatory disclosure legislation and import controls.
  • Companies, and also increasingly investors, are subject to regulation that is expanding in its scope and enforcement and that requires identification, mitigation, remediation, and disclosure of adverse human rights impacts.
  • This post provides a resource for investors to navigate the human rights regulatory landscape, focusing on human rights due diligence, along with single-issue regulation on modern slavery, indigenous rights, and artificial Along with highlighting the strengths and limitations of current regulatory models, the paper includes an overview of key legislation on human rights globally.

Introduction

SFDR, MSA, CSDD, UNGPs, CSRD, WRO—the rapidly evolving human rights regulatory landscape is challenging to navigate. Governments are increasingly looking to institutionalise corporate transparency and due diligence obligations through national and regional regulation on human rights. There is growing momentum to mandate corporate due diligence on a broad spectrum of ESG challenges, including human rights.

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Genuine Commitment and Explicit Net Zero Targets

Rusty O’Kelley co-leads the Board and CEO Advisory Partners in the Americas, Rich Fields leads the Board Effectiveness practice, and Laura Sanderson co-leads the Board and CEO Advisory Partners in Europe at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Fields, Ms. Sanderson, PJ Neal, Jemi Crookes, and Elena Loridas.

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 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 (discussed on the Forum here) by Leo E. Strine, Jr.

As pressure mounts from stakeholders, sustainability has never been a bigger focus for boards.

Investors, lawmakers, regulators, employees, and customers are all focused on sustainability, and often wonder if the board is doing enough to set up the company for long-term success in an increasingly sustainability-minded environment. Around the world—from regulators in Europe to the Securities and Exchange Commission in the US—governments are actively considering new standards for consistent disclosure on sustainability related topics. Our research shows that 73% of boards are discussing sustainability strategy at least once per year, and 65% of directors say their board is making a genuine commitment to sustainability.

Source: Russell Reynolds Associates’ 2022 Global Board Culture and Director Behaviors Survey. “How often does your full board review…” N=956. 2022.

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A Jam-Packed Spring 2022 Agenda for the SEC

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

The SEC has posted its Spring 2022 Reg-Flex agenda and it’s crammed with pending and new rulemakings—and they’re all going to be proposed or adopted in October! (Ok, admittedly, that’s an exaggeration, but not much of one.) Here is the short-term agenda and here is the long-term agenda. According to SEC Chair Gary Gensler, the “U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world….But we cannot take that for granted. As SEC alum Robert Birnbaum and his team said decades ago, ‘no regulation can be static in a dynamic society.’ That core idea still rings true today.” Gensler’s public policy goals for the agenda are “continuing to drive efficiency in our capital markets and modernizing our rules for today’s economy and technologies.” As with recent prior agendas, SEC Commissioner Hester Peirce has almost no kind words for the agency’s plans—“flawed goals and a flawed method for achieving them.” In fact, she went so far as to characterize the agenda as “dangerous”: in her view, the agenda represents “the regulatory version of a rip current—fast-moving currents flowing away from shore that can be fatal to swimmers. Just as certain wave and wind conditions can create dangerous rip currents, the pace and character of the rulemakings on this agenda make for dangerous conditions in our capital markets.” There’s no dispute that the agenda is laden with major proposals—human capital, SPACs, board diversity. What’s more, many of these proposals—climate disclosure, cybersecurity, Rule 10b5-1—are apparently at the final rule stage. Whether or not we’ll see a load of public companies submerged by the rip tide of rulemakings remains to be seen, but there’s not much question that implementing them all would certainly be a challenge in any case.
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ESG Disclosure Trends in SEC Filings

Maia Gez, Era Anagnosti, and Taylor Pullins are partners at White & Case LLP. This post is based on a White & Case memorandum by Ms. Gez, Ms. Anagnosti, Mr. Pullins, Colin Diamond, Scott Levi, and Melinda Anderson.

The regulatory landscape for ESG disclosure by U.S. public companies faces potentially dramatic changes, with the Securities and Exchange Commission (“SEC”) proposing rules that would mandate comprehensive climate change disclosures and integrate key aspects of sustainability reporting with annual reports. [1] Against this backdrop, White & Case surveyed the SEC filings of 50 companies in the Fortune 100 to assess the latest trends in ESG disclosure.

Survey of ESG Disclosure—2020 to 2022

For its fourth annual survey of ESG disclosure in SEC filings, [2] the White & Case Public Company Advisory Group reviewed the annual meeting proxy statements and annual reports of 50 companies in the Fortune 100. [3] In these 100 SEC filings, we focused on 12 categories [4] of ESG disclosure in annual reports and proxy statements filed with the SEC in 2020, 2021 and 2022. The key trends and takeaways from our survey are discussed below.

Climate-Related Disclosure Takes the Spotlight in 2022

In the fall of 2021, ahead of Form 10-K filings, the SEC issued a sample comment letter on climate disclosure [5] and also issued bespoke comment letters to a number of companies questioning their materiality assessments with respect to climate disclosure. Climate-related disclosure significantly increased in both Form 10-K and proxy statement filings of the surveyed companies, with many companies including such disclosure for the first time in 2022. Our survey focused on the ways climate disclosure changed year-over-year among the surveyed companies.

The Seven ESG Topics on the Rise in 2022

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Lessons from the Goldstein Opinion

Ethan Klingsberg and Meredith Kotler are partners and Victor Ma is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields 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 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); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

Vice Chancellor Laster’s recent opinion in Goldstein v. Denner provides a useful reminder of the importance of documenting board meetings, updates, and communications in formal corporate board documents, as they will likely later be part of the record on any motion to dismiss in a direct or derivative action. This reminder is especially important when a sale of the company or other material determination by the board may be in the company’s future.

As is increasingly common, the Goldstein plaintiffs’ claims for breaches of fiduciary duty relating to a sale of the company were preceded by a Section 220 “books and records” demand through which the plaintiffs obtained not only board minutes and presentations to the board, but also certain electronic communications by officers, directors, and the target’s financial advisor relating to the sale process. Whenever these documents failed to reflect that the board had received certain communications or considered certain subject matter, the Court held that it was required—at least at the pleading stage—to credit the plaintiffs’ assertions that these communications and deliberations had failed to occur. In addition, at one point, the Court pointed to gaps and contradictions between the electronic communications versus the minutes, and drew the inference—again at the pleading stage—that the relevant narrative provided in the minutes was untrue.

Comprehensive minutes, coupled with equally comprehensive (and consistent) disclosure in a merger proxy statement or recommendation statement on Schedule 14D-9, may well be the best defense for target company boards and officers against the risk from Section 220 demands and post-closing “sale process” claims by plaintiffs. The merger proxy statement and recommendation statement on Schedule 14D-9, which are distributed to the stockholders after the merger agreement has been signed and announced, are not the places to start to fill in gaps in the minutes. Moreover, a board is much more likely to be able to exclude electronic communications from a Section 220 demand’s production, and to limit a Section 220 demand’s production to only minutes and the formal board packages, if the minutes are comprehensive.

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Statement by Chair Gensler on Proposed Amendments to Rule 14a-8

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, the Commission will consider proposed amendments to Rule 14a-8 that would provide greater certainty as to the circumstances in which companies are able to exclude shareholder proposals from their proxy statements. I am pleased to support the proposed amendments because, if adopted, they would improve the shareholder proposal process.

When shareholders buy stock in a public company, they own a piece of the company, which comes with certain rights under state law. That includes the right to elect directors to the company’s board and the right to make proposals to the management team for consideration by fellow shareholders.

This aspect of shareholder democracy is not new. In the Securities Exchange Act of 1934, Congress included provisions about shareholder participation in the proxy process. For decades, there have been debates about which shareholder proposals must be included in the proxy for consideration by other shareholders and which can be excluded.

We first adopted a version of what is now Rule 14a-8 in 1942, and it has been amended from time to time since. In 2020, the SEC addressed separate aspects of Rule 14a-8.

Currently, existing Rule 14a-8 outlines the 13 substantive bases in which companies may exclude shareholder proposals from their proxy materials. Today’s proposed amendments would revise three of those bases for exclusion. Specifically:

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Statement by Commissioner Peirce on Proposed Amendments to Rule 14a-8

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I. Introduction

Thank you, Mr. Chair. As you just heard, this recommendation [1] concerns Exchange Act Rule 14a-8, the rule that governs when public companies must include shareholder proposals in their proxy statements. We last amended this rule less than two years ago [2] and have yet to experience a full proxy season with these changes in effect. The September 2020 amendments recalibrated the rule to balance the benefit of allowing shareholder proposals to be included in a company’s proxy materials with the reality that consideration of such proposals consumes company and shareholder resources.

I cannot support today’s plan to upset that careful calibration by narrowing companies’ ability to exclude proposals that they have substantially implemented, are duplicative of other proposals, or are resubmissions of prior failed proposals. A better approach would be for the Commission to allow sufficient time to see how our 2020 rules operate, and then review the results to determine whether further changes are appropriate.

The Proposing Release speaks in dramatic terms of “shareholder suffrage,” [3] but shareholders’ ability to vote in corporate elections is not at issue. Rather, the proposal we are considering is about whether shareholders have to vote on the same issues over and over again. The Proposing Release also speaks in pragmatic terms of reducing subjectivity in our shareholder proposal process. [4] That objective is commendable to ensure consistency over time and across different companies and proponents. The proposed amendments, however, introduce new terms for our staff to interpret and market participants to debate. Any new ambiguity is likely to be resolved in favor of favored shareholder-proponents, and any new clarity is likely to narrow the three exclusion categories. Let me briefly address each of the three bases for exclusion at issue in this proposal.

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