Monthly Archives: September 2022

California’s proposed Climate Corporate Accountability Act goes belly up

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

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

“California Approves a Wave of Aggressive New Climate Measures” was a headline in the NYT on Thursday, and that included a “record $54 billion in climate spending, a measure to prevent the state’s last nuclear power plant from closing, sharp new restrictions on oil and gas drilling and a mandate that California stop adding carbon dioxide to the atmosphere by 2045.” But one climate bill didn’t make the cut. That was SB 260, California’s Climate Corporate Accountability Act, which, on Wednesday, failed to pass in the California legislature, notwithstanding much ink being devoted to it this past year (see, e.g., this Bloomberg article). Had the bill been signed into law, it would have mandated reporting and disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” Those requirements for GHG emissions reporting and attestation exceeded even the SEC’s proposed climate disclosure proposal. (See this PubCo post.) And, under the existing broad definition of “doing business” in California, the bill would have captured a large number of companies, estimated to be about 5,500, including many incorporated outside of California. (Nothing new for the Golden State—see this PubCo post and this PubCo post.) According to Politico Pro, Scott Wiener, the sponsor of the legislation, said in a statement that he was “deeply disappointed in this result….If we want to avoid a full climate apocalypse, we need to understand corporate pollution—all the way down the supply chain.” He added that “he ‘won’t give up’ and that he’s ‘very likely’ to reintroduce SB 260 next year.” Time will tell.

Although the bill had sailed through one chamber of the legislature, it failed to pass the second chamber. The vote was 37 in favor, 25 opposed and 18 “no vote recorded,” which is equivalent to a “no” vote. Politico Pro reported that the “bill had survived the Assembly Appropriations Committee with amendments that watered down penalties for noncompliance from monetary fines to discretionary action by the state attorney general. Wednesday’s vote fell largely along party lines, with nearly a third of Democrats, mostly moderates, declining to vote.”


How Compensation Decisions Support CEO Succession

Blair Jones and Deborah Beckmann are Managing Directors at Semler Brossy Consulting Group LLC. This post is based on their Semler Brossy memorandum, originally published in Directorship magazine.

Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita.

One of a board’s most important responsibilities is selecting the CEO. Most boards have annual succession planning discussions and robust procedures to prepare for a transition. But, recognizing both the shrinking of leaders’ tenures and the shifting skill sets needed for future success, many boards are now making succession planning a continual process. Centered on an ongoing conversation with the CEO, the process might start with one or two candidates and then expand, internally or externally, as needed. Even under ideal conditions, however, succession is a sensitive process.

One way that boards can smooth the process is to prepare for a variety of compensation decisions. Compensation sends important signals, both intended and unintended. Choices about pay should support the motivation and retention of leading candidates as well as individuals in key supporting roles.

For example, the pay of internal candidates will likely need to change as their roles and mandates expand and as the board evaluates their capabilities. With the actual transition, the board may need to adjust compensation for the new CEO, the former CEO, and other executives remaining with the organization, along with any new senior leaders. One-time actions may be required to maintain stability throughout the leadership change.


Boards Need More Women: Here’s How to Get There

Maria Moats is Leader of the Governance Insights Center, and Shannon Schuyler is Chief Purpose and Inclusion Officer at PricewaterhouseCoopers LLP. This post is based on their PwC 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.

The board plays a critical role in bringing an organization’s strategic vision to life. As stewards, they help guide the organization through challenging times and are responsible for providing sound oversight that can help to sustain future success.

Ideally, the people sitting around the table in a corporate boardroom will each provide different sets of skills, areas of knowledge, and varied work and life experiences that collectively make the board stronger. But when too many sitting directors have similar backgrounds, diversity of perspective can suffer.

Increasing board diversity is by no means a new discussion. There are a number of benefits to board diversity, and directors have shared how valuable it is. According to PwC’s Annual Corporate Directors Survey, directors agree that increasing board diversity brings unique perspectives to the boardroom (93%) and improves relationships with shareholders (90%). More than four out of five say that it enhances board performance (85%), and about three-quarters agree that it improves strategy/risk oversight (76%) and company performance more broadly (75%).

With developments like the new Nasdaq listing requirement, we are already seeing some positive changes. In addition, large institutional investors and other stakeholders are also demanding more diverse boardrooms, but the fact remains—only 30% of director seats at S&P 500 companies are filled by women.


Weekly Roundup: September 16-22, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 16-22, 2022

A Primer on DAOs

Risk Management and the Board of Directors

ESG, Stakeholder Governance, and the Duty of the Corporation

The Global ESG Regulatory Framework Toughens Up

CEO Succession Practices in the Russell 3000 and S&P 500: 2022 Edition

Delaware’s Shifting Judicial Role in Business Governance

Safeguarding Trust: The Board’s Role in Integrating ESG and ERM

What’s Next for US M&A

SEC Issues Final Rules for Pay Versus Performance Disclosure

Chancery Court Enjoins Annual Meeting in Defense of Stockholder Franchise

Sarbanes-Oxley § 404 at Twenty

Sarbanes-Oxley § 404 at Twenty

Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA School of Law. This post is based on his recent paper.

Almost two decades ago, the late securities law scholar Larry Ribstein used the then newly adopted Sarbanes-Oxley Act of 2002 (“SOX”) as a case study of federal regulatory responses to capital market crises. Ribstein drew three conclusions from that study:

First, the appropriate regulatory course is often unclear, given the uncertain costs and benefits of regulation. Second, even if theoreticians can propose a regulatory solution that seems to work, political realities and the interplay of interest groups often intervene to prevent this solution from being adopted. Third, even if markets have malfunctioned, market actors often are better able than politicians to correct them.

In light of those concerns, Ribstein argued for including sunset provisions in major changes in the federal laws regulating securities and corporate governance, especially with respect to regulatory responses to disclosure abuses resulting from new devices or practices. Roberta Romano similarly argued that “the best means of responding to the typical pattern of financial regulation—legislating in a crisis atmosphere under conditions of substantial uncertainty followed by status quo stickiness—is to include as a matter of course in such legislation and regulation, sunset provisions requiring subsequent review and reconsideration . . ..” Both scholars premised their arguments on the belief that major reform legislation in this field tends to come after a major stock market bubble bursts, a proposition I likewise embraced in my book Corporate Governance After the Financial Crisis. In the political ferment following bursting of a bubble, I argued, “policy entrepreneurs . . . spring into action, hijacking the legislative response to the crisis to advance their agenda,” which may not be socially optimal. The political pressure associated with the fallout from a burst bubble, moreover, “does not facilitate careful analysis of costs and benefits.” The result is often “rules that were wrong from the outset or may quickly become obsolete.”


Chancery Court Enjoins Annual Meeting in Defense of Stockholder Franchise

Andrew Freedman, Lori Marks-Esterman, and Kenneth Silverman are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Freedman, Ms. Marks-Esterman, Mr. Silverman, Jacqueline Ma, and Matthew Traylor, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Chancery Court recently preliminarily enjoined a stockholders meeting in Bray v. Katz, No. 2022-0489-LWW (Del. Ch. June 24, 2022) (transcript). The case concerns a board of directors’ decision in advance of the upcoming annual meeting to lower the quorum requirement for stockholders meetings; it did so in order to preempt certain stockholders from blocking the election of the company’s slate of director nominees. The Court concluded that the board of directors acted with the primary purpose of impeding the exercise of stockholder voting power. Accordingly, the Court determined that the board’s actions implicated the heightened Blasius standard of review, which requires defendants to demonstrate a “compelling justification” for frustrating the stockholder franchise. In an exacting bench opinion, the Court found that defendants failed to demonstrate any such justification. Vice Chancellor Will’s ruling demonstrates the close scrutiny Delaware courts give to corporate acts that entrench the board and disenfranchise stockholders.


UpHealth Inc. (the “Company”) had a nine-person classified board (the “Board”) with two co-chairs. Defendant Avi Katz (“Katz”), founder of the Company’s SPAC sponsor, GigCapital, served as one co-chair; the other co-chair was legacy UpHealth founder and plaintiff Chirinjeev Kathuria (“Kathuria”). The Company’s Class I directors, each serving three-year terms, were up for election at the 2022 annual meeting, originally scheduled for June 28, 2022.

After the Nomination Window Closes, A Majority of the Board Changes the Slate

The Company’s advance notice deadline passed on April 25, 2022, without any stockholder proposing any nominees for election.


SEC Issues Final Rules for Pay Versus Performance Disclosure

Daniel Laddin is a founding partner and Louisa Heywood is an analyst at Compensation Advisory Partners. This post is based on their CAP memorandum. Related research from the Program on Corporate Governance includes Stealth Compensation via Retirement Benefits and Paying for long-term performance (discussed on the Forum here) both by Lucian A. Bebchuk and Jesse M. Fried.

A little more than 12 years after the 2010 Dodd-Frank Act was signed into law, the SEC has issued final rules on the topic. This was expected after the SEC re-opened the comment period on Pay Versus Performance disclosure in January. Intended to standardize the presentation of existing information related to the relationship between executive pay and company performance for investors, the final rules may also pose a new and significant burden on some companies with respect to their equity valuation processes and are substantially different from the proposed rules.

Dodd-Frank 953(a) requires issuers to show “…the relationship between executive compensation actually paid and the financial performance of the issuer…” The SEC’s definition of “compensation actually paid” is far removed from how many would interpret this term, particularly for equity-based compensation. It has decided to use an approach for equity-based compensation similar to “realizable pay” and essentially “marks to market” outstanding and unvested equity awards on a “fair value” basis from the grant date to the vesting date. This approach effectively accrues the equity value over the vesting period, with the heaviest impact on value likely to be in the year of grant. It is a fundamentally different approach from the proposed rules of 2015 where the value of equity would have been recognized in its entirety upon vesting, similar to existing definitions of “realized pay.”

The Pay Versus Performance requirements are meant to enable shareholders to directly compare executive compensation with company financial performance over a multi-year period. In the SEC’s view, assigning the burden of computing this relationship to investors is costly and inequitable. Therefore, the SEC implemented rules to standardize information presentation without, in its view, imposing unusual additional expense on issuers.


What’s Next for US M&A

Gregory Pryor and Michael Deyong are partners at White & Case LLP. This post is based on their White & Case memorandum.

As predicted in our previous M&A report, 2022 has not lived up to the runaway performance of 2021. As activity—still at impressive levels considering everything that has been thrown at the deal market—takes a breather, we consider five fundamental trends that may play out over the coming months.

1. Rates and financing costs to increase

The increasing interest rate environment has, and will inevitably continue, to make deal financing more costly as spreads widen. Leveraged loans and high-yield bonds are at the riskier end of the curve, and PE firms rely heavily on this financing. It is likely that direct lenders will step in to pick up some of the slack left by more cautious capital markets. Either way, buyers dependent on acquisition financing will need to adjust for this accordingly—potentially, by using their cache of dry powder to write larger equity checks.

2. Acquirers will capitalize on attractive multiples

It is reasonable to expect that M&A activity will continue with a more cautious tone, as it was headed toward the end of the second quarter. However, deals will continue. Companies that set their sights on assets and have a clear, well-articulated strategic rationale for pursuing those deals will press ahead with the support of their shareholder bases. PE has ample dry powder at its disposal and has proven adept at capitalizing on market dislocations in the past. Indeed, the markdown in EBITDA multiples will make many opportunities all the more compelling over the next six to 12 months, and acquisitions made during this period promise to deliver when valuations recover.


Safeguarding Trust: The Board’s Role in Integrating ESG and ERM

Maria Castañón Moats is Governance Insights Center Leader and Jamie Gamble is Managing Director at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

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; 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.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

The war in Ukraine is a human tragedy. From a business management perspective, it is also an example of old-school “global geo-political risk.” But the fast, overwhelming exodus from Russia and support for Ukraine isn’t driven primarily by old-school operational risk concerns over raw material costs and supply chain disruptions. For most companies, the primary enterprise risk of continued engagement with Russia, or the failure to support Ukraine, is to stakeholders’ trust that the company shares their personal values.

The past three years provide a long list of events outside the control of corporate leadership and outside the traditional value chain that nonetheless have presented serious risk to enterprise value. COVID and Ukraine are the obvious global examples. In the US, civil unrest over racial injustice, the January 6 attack on the capital, election law changes, political fights over education and LGBTQ+ rights, and the recent decision by the Supreme Court to overturn Roe v. Wade are all socio-political issues on which employees, customers, investors, and communities want the companies they associate with to take action that aligns with their own beliefs. That call from stakeholders is a strategic issue for companies, as well as a moral one. PwC’s most recent Consumer Intelligence Series shows that more than 80% of consumers/employees are more likely to buy from/work for a company with strong performance on climate issues. More than 70% are more likely to buy from/work for companies with strong performance on social issues and the same for governance issues. Employees and the customer overwhelmingly see environmental, social, and governance (ESG) issues as a reason to connect with a company. And the link between trust and ESG is strongest among young people.

The market data frames a simple question at the heart of nearly every company’s strategy: How do we become the company that everyone between the ages of 15 and 35 wants to work for, buy from and identify with on social media? Getting the answer wrong can: make it impossible to recruit and retain talent; damage the brand and platform; increase capital costs by driving away socially responsible investors; and end executive careers.


Delaware’s Shifting Judicial Role in Business Governance

Randall S. Thomas is Professor of Law and John S. Beasley II Chair in Law and Business at Vanderbilt University School of Law, Robert B. Thompson is Peter P. Widenbruch, Jr. Professor of Business Law and Georgetown University Law Center, and Harwell Wells is I. Herman Stern Professor of Law and Temple University James E. Beasley School of Law. This post is based on their recent paper, forthcoming in The Business Lawyer, and is part of the Delaware law series; links to other posts in the series are available here.

What do Delaware judges do all day—and what does it mean for the governance of American businesses? In our new article, “Delaware’s Shifting Judicial Role in Business Governance,” we take a close look at the work of the country’s preeminent business court, Delaware’s Court of Chancery, in order to examine the changing nature of judicial review of governance of American businesses. Drawing on a detailed study of all cases filed in 2018 in Delaware, and comparing our findings to a previous survey of such litigation two of us performed almost twenty years ago, our new study reveals that the past two decades have seen fundamental changes both in the corporate and business law issues brought before the Chancery Court and in the kind of work that court is doing.

Once the bulk of the court’s work was straightforward: the Chancellors applied fiduciary duties to resolve governance disputes in publicly held corporations. The common law of fiduciary duties, as developed by the court, was (and remains) the backbone of corporation law in the United States. When for instance takeovers became the dominant corporate governance issues in the 1980s, the court issued a series of opinions applying fiduciary duties to the facts and developed a new jurisprudence for mergers and acquisitions in cases such as Unocal, Revlon, and Blasius. Our previous study, which looked at all cases filed in 1999 and 2000, found that the main work of the Court of Chancery during that period was to apply fiduciary duties to resolve disputes over the governance of publicly traded corporations, usually in an acquisition setting.


Page 2 of 6
1 2 3 4 5 6