Monthly Archives: October 2022

IPO Readiness: IPO Equity Awards

Mike Kesner and Tara Tays are Partners, and Jonah Saraceno is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum.


As we continue our IPO-related Viewpoint series, we note the marked reduction in the number of traditional or SPAC-related initial public offerings (IPO) in 2022 when compared to 2021 IPO-activity. For a variety of reasons, 2022 has been a challenging year in the market and particularly within the industries that are traditionally heaviest in terms of public offerings ¾ biotech and high tech. This article focuses on understanding practices related to equity awards made at or around IPO. More specifically, we examined the prevalence and timing of IPO grants, the type of equity vehicles used, and the size of IPO award pool among 400+ IPOs from January 1, 2021 through December 31, 2021. Further, we analyzed the data for notable differences based on industry. See Figure 1 for a breakdown of the types of industries included in our review.

Our research indicates that ~60% of companies that went public in 2021 granted equity to employees within the three months leading up to and including their IPO (for purposes of this Viewpoint, we refer to this group as “IPO awards”). Granting IPO awards can be beneficial to the company, equity recipients, and the new broader shareholder base. For the company, equity grants help facilitate the motivation and retention of key talent through a time of exciting considerable change. Such awards are also essential when a company seeks to hire key talent who will be critical to the future success of the newly public company. For employees, in addition to providing recognition for contributions toward a significant milestone and celebrating the private-to-public transition, they provide an initial or increased opportunity to become owners in the company. For shareholders, they provide direct alignment between management and shareholders, as the IPO price serves as a common baseline for aligning management’s rewards and shareholder returns.


Chancery Court Finds Conflicted Controller Spinoff Met MFW Prerequisites

Gail Weinstein is Senior Counsel, and Steven J. Steinman and Randi Lally are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Ms. Lally, David L. Shaw, Mark H. Lucas, and Maxwell Yim, 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 Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani. 

In In re Match Group, Inc. Derivative Litigation (Sept. 1, 2022), a stockholder of IAC/InterActiveCorp (“Old IAC”) challenged the multi-step reverse spin-off that was initiated by the company’s controller, a company allegedly indirectly controlled by Barry Diller. Vice Chancellor Morgan T. Zurn, at the pleading stage of litigation, found that the transaction met the MFW prerequisites for business judgment review and dismissed the case.

Background. While the transaction shifted some voting power from the controller to the minority stockholders, certain minority stockholders were dissatisfied with the transaction’s diversion of cash to the post-spin company and the allocation of assets as between the controller and the post-spin company. The reverse spinoff, which concededly was a conflicted controller transaction with the controller standing on both sides of the transaction, was approved by a special committee of the pre-spin company’s board and by the pre-spin company’s minority stockholders. The plaintiffs claimed breaches of fiduciary duties by the pre-spin company’s board, the controller, and the controller’s alleged controller—alleging that the transaction had been orchestrated by the controller to benefit the post-spin company but to the detriment of the minority stockholders. The court disagreed with the plaintiff’s contentions that the special committee was not independent, was not empowered to choose its own advisors and definitively “say no,” and did not meet its duty of care, and that the minority shareholder vote was not fully informed.


Quarterly Review of Shareholder Activism – Q3 2022

Mary Ann Deignan is Managing Director and Head of Capital Markets Advisory; Rich Thomas is Managing Director and Head of European Shareholder Advisory; and Christopher Couvelier is Managing Director at Lazard. This post is based on a Lazard memorandum by Ms. Deignan, Mr. Thomas, Mr. Couvelier, Emel Kayihan, Antonin Deslandes, and Leah Friedman. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei JiangDancing with Activists (discussed on the Forum here) by Lucian A. 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.

Observations on Global Activism Environment Through Q3 2022

1. Continued Robust Activity Fueled by Strong Q3

  • 44 new campaigns launched in Q3, a 52% increase over prior year Q3, marking the third consecutive quarter of significant year-over-year increased activity
  • Total campaigns YTD (171) up 39% over the same period last year, already approaching the total for full-year 2021 (173)
  • Continuing an H1 trend, Technology companies were the most frequently targeted in Q3, accounting for 22% of new activist targets
  • With 5 new campaigns in Q3, Elliott continued to accelerate its 2022 pace and has now launched 11 campaigns YTD (more than double the next most prolific names)

2. U.S. Targets in the Crosshairs

  • North American targets accounted for two-thirds of all new campaigns in Q3, above H1 (55%) and 2018 – 2021 average (59%) levels
  • Q3 activity in the U.S. (28 new campaigns) represented a 133% increase over prior year Q3 (12 new campaigns)
    • U.S. activity YTD (96 new campaigns) is up 43% year-over-year, and has now matched the total for full-year 2021
  • Recent U.S. campaigns have targeted mega-cap industry leaders (including Cardinal Health, Chevron, Disney, Pinterest and PayPal)


2025 climate action plan – Driving portfolio companies towards net zero 2050

Carine Smith Ihenacho is Chief Governance and Compliance Officer, Wilhelm Mohn is Global Head of Corporate Governance, and Alexis Wegerich is Head of ESG Analytics at Norges Bank Investment Management. This post is based on their NBIM memorandum.

As a long-term and globally diversified financial investor, our return depends on sustainable development in economic, environmental and social terms. We will be a global leader in managing the financial risks and opportunities arising from climate change.

It is the goal of our responsible investment management for our portfolio companies to align their activities with global net zero emissions in line with the Paris Agreement. On this basis, our ambition is for our portfolio companies to achieve net zero emissions by 2050.

This post describes our approach to managing climate risks and opportunities. It sets out the actions we aim to take over the period 2022-2025. These actions are targeted at improving market standards, increasing portfolio resilience, and effectively engaging with our portfolio companies. At the heart of our efforts is driving portfolio companies to net zero emissions by 2050 through credible targets and transition plans for reducing their scope 1, scope 2 and material scope 3 emissions.


Considerations for Dual-Class Companies Contemplating M&A Transactions

Ian A. Nussbaum is a partner, Bill Roegge and Meredith Klionsky are associates at Cooley LLP. This post is based on a memorandum by Mr. Nussbaum, Mr. Roegge, Ms. Klionsky, and Mr. Nimetz. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here) both by Lucian Bebchuk and Kobi Kastiel.

The rise of founder-led, venture capital-backed companies in recent years has coincided with a surge of companies implementing dual-class share structures in connection with their initial public offerings. A dual-class structure typically entitles the holders of one class of the company’s common stock (often designated as Class B common stock) to multiple votes per share and the class of common stock offered to the public (often designated as Class A common stock) to a single vote per share. In a small number of cases, a class of common stock is offered to the public that has no voting rights at all. Allocating high-vote shares to a class of stockholders – typically the founders, a combination of founders and pre-IPO investors, or all pre-IPO stockholders (including holders of equity granted under employee equity plans and warrantholders) – allows those stockholders to maintain majority voting control after completion of the company’s IPO, while, over time, a majority of the company’s economic ownership becomes widely dispersed among new public stockholders. Prominent dual-class companies include Alphabet, Meta Platforms, Snap and Lyft.

There are compelling rationales for adopting a dual-class structure, but even proponents of the structure generally acknowledge that these benefits are significantly mitigated once the dual-class shares are out of the hands of the founders and/or pre-IPO stockholders. Accordingly, the charters of companies with dual-class structures often provide that any “transfer” (broadly defined) by the original high-vote stockholders will result in automatic conversion of the transferred shares into the company’s ordinary, low-vote shares. [1] Unfortunately, these broadly worded transfer provisions can have significant unintended impacts on M&A transactions involving these companies by making it unclear whether a high-vote stockholder could enter into a voting agreement [2] in support of the transaction without triggering an automatic conversion of that holder’s high-vote shares to low-vote shares. [3]

A review of charters adopted by dual-class tech companies that went public in 2020 and 2021 suggests that companies (and their legal counsel) have become cognizant of this issue, as the vast majority of those charters contain an explicit carve out to the transfer restrictions, permitting high-vote stockholders to enter into voting agreements in connection with an M&A transaction approved by the company’s board. [4] However, such exceptions were not universal and, as will be discussed below, the vast majority of dual-class charters adopted before 2016 that contained transfer restrictions did not include M&A voting agreement carve outs.


Statement by Commissioner Lizárraga on Meeting Investor Demand for High Quality ESG Data

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

Thank you, Peter, for that kind introduction. It is a pleasure to be here with you today. I look forward to learning from today’s discussion, and appreciate the opportunity to participate in this important exchange of ideas and perspectives.

It’s an exciting time for ESG. You are working in a dynamic, fast-growing sector of our capital markets that is grabbing headlines and continuing to generate enormous interest among investors and the general public.

You’re directly involved with some of the most consequential scientific challenges of our time – from climate change, to artificial intelligence, to big data analytics.

As active participants in this space, your contributions and innovative ideas can enrich the conversation.

I’d like to share with you a snapshot of what’s happening in the U.S. ESG has become a lively topic that has moved beyond strictly financial circles. Several states are making headlines for their push against ESG investing, while other states are proactive in their ESG investments.


Remark by Commissioner Uyeda to the Small Business Capital Formation Advisory Committee

Mark T. Uyeda is a Commissioner at 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 Commissioner Uyeda, and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Carla [Garrett]. Good morning and welcome. I have been looking forward to the Advisory Committee convening in-person and I am grateful that we have this opportunity today.

First, I’d like to thank Commissioner Andrea Seidt for her service on the Advisory Committee and providing the important perspective of state securities regulators. State securities regulators play an important role in the development and implementation of rules governing small business capital formation. I also take this opportunity to welcome Bill [William] Beatty. I have known Bill, as well as his predecessor Michael Stevenson at the Washington Department of Financial Institutions, for many years through NASAA [North American Securities Administrators Association]. I thank you all for your service.

I am concerned by certain market and regulatory trends. First, the number of publicly-traded companies continues to go down. This results in a narrower set of economic opportunities for retail investors, who generally are unable to access investments in private markets. According to one recent report, “the number of US companies traded on major US exchanges has declined significantly in recent decades. For example, after peaking in 1996 at more than 8,000 companies, the number of domestic US-listed public companies decreased nearly 50% by 2019 (i.e., to approximately 4,300 companies).” [1] Although higher regulatory compliance costs may not be the sole factor driving this decrease, we should aim to improve the regulatory balance to incentivize companies to go or remain public.


The Cobalt Conundrum: Net Zero Necessity vs Supply Chain Concerns

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS ESG publication by Nicolaj Sebrell, CFA, Head of Energy, Materials, & Utilities; and Arthur Kearney, Associate, Metals & Mining, at ISS ESG, the sustainable investing arm of Institutional Shareholder Services.

Decarbonization and the voyage to Net Zero require many changes to the energy sector, including the electrification of transport and buildings. Economies around the world are transitioning from running on fossil fuels for energy to using metals and minerals, including cobalt, copper, lithium, nickel, rare earths, and graphite.

In the past, ISS ESG has discussed commodity investing using an environmental, social, and governance (ESG) framework. Today we look at a critical metal for electric vehicle (EV) and battery production: cobalt. The International Energy Agency (IEA)’s Sustainable Development Scenario foresees cobalt demand growth of 5x between 2020 and 2040.

Pressure on the cobalt supply chain is already apparent, and this could intensify if not properly addressed. The largest current supplier of cobalt is the Democratic Republic of Congo (DRC), which provides about 70% of world supplies. Relying on a single natural material supply source with questionable ESG credentials (discussed below) poses risks, as the ongoing European energy crisis demonstrates. Diversifying the world cobalt supply is possible. One option is sourcing from countries such as Australia that perform better on ESG indicators such as strong institutions and respect for human rights. Reviewing present demand and supply, exploring relevant ESG concerns, and identifying some potential alternative supply chain approaches may be useful to investors seeking opportunities to encourage ESG-responsive cobalt production.


The Valuation Treadmill: How Securities Fraud Threatens the Integrity of Public Companies

James J. Park is a Professor of Law at UCLA. This post is based on his recent book The Valuation Treadmill: How Securities Fraud Threatens the Integrity of Public Companies.

This year marks the twentieth anniversary of the passage of the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley essentially requires every large public corporation to dedicate substantial resources to preventing securities fraud. How did securities fraud become such a significant regulatory concern for public companies? While the bankruptcies of Enron and WorldCom were the proximate cause of Sarbanes-Oxley, the law addressed a broader set of pressures that emerged gradually over the decades and still persist today. My book, The Valuation Treadmill: How Securities Fraud Threatens the Integrity of Public Companies, traces the history of securities fraud regulation from the 1960s to the present to better understand the problem of public company securities fraud.

The book makes the novel argument that securities fraud emerged as a significant risk for public companies as investors changed how they valued stocks. As investors adopted modern valuation models and attempted to develop projections of a corporation’s ability to generate earnings into the future, it became more important for public companies to meet market expectations about their performance. Public corporations now have a structural incentive to issue misleading disclosure to create the appearance that their economic prospects are brighter than they really are.


ESG Reporting: Asset Managers Express Divergent View

Lindsey Stewart is Director of Investment Stewardship Research at Morningstar, Inc. This post is based on his Morningstar 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 TallaritaDoes 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.

Executive Summary

The newly formed International Sustainability Standards Board issued two draft climate and sustainability reporting standards, which closed for public comment at the end of July. The ISSB aims to set a “global baseline,” internationally consistent minimum sustainability reporting standards for companies. In this paper, we examine the comment letters from 20 large asset managers responding to the ISSB. Such analysis can help investors better understand the underlying thinking driving managers’ approaches to environmental, social, and governance issues.

Morningstar also sent a response to the ISSB. We strongly believe that as asset owners and asset managers invest globally, they need some international convergence to be able to report meaningful aggregated information to end-users. On the whole, asset managers firmly agree with this but their responses in key areas addressed by the draft standards—particularly materiality, greenhouse gas emissions disclosures, and international alignment—suggest that this goal will be difficult to achieve without major changes in approach by either the ISSB or other standard-setters globally.


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