Monthly Archives: September 2022

Dealing with Activist Hedge Funds and Other Activist Investors

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, and Anna Dimitrijević.

Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.


The SEC rule requiring a universal proxy card in director election proxy fights becomes effective today. The resurgence of activism is already in progress, and the universal proxy card may significantly facilitate some proxy contests in which an activist is seeking to elect one or more directors to a company’s board to replace incumbent(s). It will also affect proxy contest strategies, tactical considerations and the behavior of proxy advisory firms assessing competing director slates. As stated by ISS in its report on the universal proxy card:

The indisputable fact about the universal proxy card (UPC) is that it is a far superior way for shareholders to exercise their voting franchise than the two-card system that has dominated proxy contests for decades. But like the kid that receives the hot new toy at Christmas, only to become frustrated by its complex instructions, proxy advisors and investors will have to carefully navigate the first few UPC contests. Although UPC contests will increase the workflow of institutional investors, many funds have ramped up teams to evaluate these situations in recent years, so they are likely well prepared for this shift.

As we have previously noted, regardless of industry, size, performance or “newness” to the public markets, no company should consider itself immune from activism. No company is too large, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have been, and are being, attacked. And companies that have faced one activist may be approached, in the same year or in subsequent years, by other activists or re-visited by the prior activist. The past two years of substantial economic, societal and market shifts have created new vulnerabilities and opportunities for activists and for companies.


Weekly Roundup: August 26-September 1, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 26-September 1, 2022.

Statement by Commissioner Peirce on Final Amendments to the Whistleblower Program

Statement by Chair Gensler on Final Amendments to the Whistleblower Program

ECB Tilts Toward Climate, but Investors Can Go Further

The Important Legacy of the Sarbanes Oxley Act

The Economics of Corporate Governance

Board Leadership, Meetings, and Committees

California State Court Applies Discovery Stay in Securities Act Claim

SEC Climate Disclosure Comments Reveal Diversity of Views

Corporate Political Spending and State Tax Policy: Evidence from Citizens United

SEC Bulletin on Conflicts of Interest for Broker-Dealers and Investment Advisers

Universal Proxy Rules: Roadmap for Annual Meetings

Turning Down the Heat on the ESG Debate: Separating Material Risk Disclosures from Salient Political Issues

Robert Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; and Daniel F.C. Crowley is a partner at K&L Gates LLP. This post was authored by Professor Eccles and Mr. Crowley.

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; 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; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discuss on the Forum here) by Leo Strine.

With political battle lines drawn over environmental, social and governance (ESG) disclosures, it is fair to ask whether the sustainability movement is itself sustainable. As a registered Republican (Crowley) and a registered Democrat (Eccles), we do hope that it proves to be sustainable because we see this movement as fundamental to how the capital markets can support the well-being of all Americans. But the movement is currently facing grave political challenges. The underlying reason for this is the conflating of material risk disclosures wanted by investors and resisted by companies with related political issues. Being clear about the distinction between the two would be useful to both parties.

Many Democrats see ESG as an opportunity to pursue desired social change through collective action in the form of democratic capitalism.  Most Republicans view the ESG movement as an offshoot of the Green New Deal and therefore akin to thinly-veiled Marxism.  While there may be some truth to both views, neither accurately reflects marketplace and regulatory developments over the past quarter century.  Indeed, the history of major downturns in our financial markets is largely a history of management failure to disclose known business risks in time for investors to avoid catastrophic losses.  When such failures have become widespread, Congress and the U.S. Securities and Exchange Commission (SEC) have routinely stepped in to require additional corporate disclosures.  This article will retrace some of the key developments in order to demonstrate that sustainability is not new, nor is it mainly about scoring social justice warrior points.  Rather, it is about what regulations are necessary to ensure that the assumption of risk by investors is adequately informed.


Universal Proxy Rules: Roadmap for Annual Meetings

Andrew Freedman and Kenneth Mantel are partners and Ian Engoron is an associate at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

The rules adopted by the U.S. Securities and Exchange Commission (the “Commission”) in November 2021 regarding the use of “universal proxy cards” for contested director elections, and certain related matters, are set to take effect for stockholder meetings to be held after August 31, 2022. The core impact of these rules will be that both companies and stockholders nominating director candidates generally will be required to include all director nominees on their respective proxy cards distributed to stockholders (while continuing to allow for other differences between those proxy cards), giving stockholders voting by proxy the ability to vote “for” the election of any director candidate regardless of which proxy card they use. [1] Further, under the new regime, both companies and stockholders nominating director candidates will have the ability to express support for, and solicit votes for the election of, candidates nominated by the other through the use of their respective universal proxy cards and accompanying proxy statements. These rules also add certain processes and timeframes to the director nomination and proxy solicitation process and impose new requirements on companies and nominating stockholders.

In light of these developments, we have prepared this “roadmap” as a reference tool for stockholders considering whether to nominate director candidates for election at an annual meeting of stockholders occurring after August 31, 2022 at companies required to comply with the Commission’s proxy rules. As you will see below, under the new rules, in most circumstances, nominating stockholders will not be required to prepare additional documents or follow an accelerated timeframe for nominations, as the required disclosures can be addressed in the nomination notice and proxy statement as submitted/filed on typical timeframes.

Please note that this roadmap covers general issues with respect to the director nomination and proxy solicitation process at a high level and is not a substitute for situation-specific review and analysis needed for a stockholder preparing to move forward with a director election campaign.


SEC Bulletin on Conflicts of Interest for Broker-Dealers and Investment Advisers

W. Hardy Callcott and Corin R. Swift are partners and Benjamin F. Farkas is a senior managing associate at Sidley Austin LLP. This post is based on their Sidley memorandum.

On August 3, 2022, the U.S. Securities and Exchange Commission (SEC) published a Staff Bulletin providing guidance regarding conflicts of interest under broker-dealer Regulation Best Interest (Reg BI) and investment adviser fiduciary duty standards. [1] The Bulletin, entitled “Standards of Conduct for Broker-Dealers and Investment Adviser Conflicts of Interest,” signals the Staff’s continued focus on conduct standards and expansive interpretation of these standards. [2] The Bulletin also reminds firms of their obligation—often beyond disclosure—to address conflicts and to have rigorous and dynamic policies in place to identify and address conflicts.

After an introductory background section summarizing conflict-of-interest rules under Reg BI [3] and investment advisers’ fiduciary duty, [4] the Bulletin takes the form of answers and guidance in response to 13 questions posed by a hypothetical firm. These questions and answers are grouped around concepts discussed in previous Reg BI guidance: identifying conflicts of interest, eliminating conflicts of interest, mitigating conflicts of interest, limited product menus, and disclosing conflicts of interest. [5] A few themes running through the Bulletin are discussed below.

Broad Scope

Although formally the Bulletin cannot and does not articulate legal rules beyond the existing requirements of Reg BI and investment advisers’ fiduciary duty with respect to conflicts of interest, its interpretation of these requirements is broad, and the Staff appears to treat the two standards as identical. The Bulletin’s first “answer” opens with a statement that “[a]ll broker-dealers, investment advisers, and financial professionals have at least some conflicts of interest with their retail investors”—a view the SEC itself has never explicitly expressed. Its last answer warns that a firm that has policies and procedures in place to identify and address conflicts cannot “stop worrying” but must continue to evaluate whether its policies remain adequate as it becomes aware of new information. In short, the Bulletin effectively mandates not only that broker-dealers and investment advisers have an initial conflicts identification process but also that they have an ongoing conflicts monitoring process. Throughout the Q&A, the Staff generally discusses the duties of broker-dealers and investment advisers with respect to conflicts as a coherent whole without considering whether Reg BI’s requirements differ from an investment adviser’s fiduciary duty. And it provides no guidance on how a firm can know that it has done enough to address any particular conflict. This framing shows a broad and aggressive approach to enforcing conflicts of interest for both broker-dealers and investment advisers.


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