Monthly Archives: October 2022

Corporate Tax Breaks and Executive Compensation

Eric Ohrn is an Associate Professor of Economics at Grinell College. This post is based on his recent paper, forthcoming in the American Economic Journal. Related research from the Program on Corporate Governance includes Pay Without Performance: The Unfulfilled Promise of Executive Compensation and Executive Compensation as an Agency Problem both by Lucian A. Bebchuk and Jesse M. Fried.

Corporate Tax Breaks Increase Executive Compensation

Over the past 40 years, the value of compensation packages awarded to corporate executives in the US has risen dramatically. At the same time, a less well-known trend has shaped the US economy: in the presence of increased pretax corporate profits, effective corporate income tax rates have decreased significantly.

These trends motivate an obvious, but empirically unaddressed question: Do corporate tax breaks increase executive compensation? There is, of course, mechanical reason to believe this relationship exists. Corporate tax breaks increase after-tax income that can be used to increase executive compensation via either a competitive market for managerial talent or rent capture by the executives.

Understanding whether and to what extent tax breaks are used to increase executive compensation is important as policymakers, ostensibly, design corporate tax breaks to incentivize desired behaviors such as job creation, capital investment, or the adoption of clean energy sources, rather than to pad the pockets of corporate executives. Answers to these questions are also timely as the Tax Cuts and Jobs Act (TCJA) has accelerated the decline in effective corporate tax rates in the US and placed additional downward pressure on corporate tax rates worldwide.

In a new study, I address this question by measuring the effect of two recent US federal corporate tax expenditures (or “breaks”) on the value of compensation awarded to executives at large publicly traded corporations. I find both corporate tax breaks significantly increase executive compensation. I estimate that for every dollar generated by the tax breaks, compensation of the top five highest paid executives at publicly traded US firms increased by 17 to 25 cents.


Despite Slowdown in SPAC Activity, Opportunities Remain

Christopher M. BarlowC. Michael Chitwood, and Gregg A. Noel, are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Barlow, Mr. Chitwood, Mr. Noel, Raquel FoxHoward L. Ellin, and P. Michelle Gasaway. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates.

Key Points

  • SPAC activity continued to slow in the first half of 2022, a sharp decline from the number of deals and IPOs in the same period in 2021. Redemption rates soared, and a record number of SPAC deals were terminated.
  • Factors contributing to the slowdown include disappointing performance by newly de-SPACed companies, rising inflation, macroeconomic uncertainty and increased regulatory scrutiny from the SEC.
  • Lawsuits and demands continue throughout the SPAC life cycle. Filings of SPAC-related securities lawsuits through the first half of 2022 are on pace to exceed the total number of SPAC-related lawsuits filed in 2021.
  • SPAC participants have to consider the new 1% excise tax on stock buybacks by U.S. public corporations starting in 2023.
  • Despite the challenges, opportunities remain in the SPAC market, and we expect participants will continue to explore innovative strategies to pursue transactions.

Slowdown in SPAC Activity in the First Half of 2022

The first half of 2022 experienced a slowdown in SPAC activity when compared to recent years. Only 77 de-SPAC M&A deals were announced in the first half of 2022, compared to 167 de-SPAC transactions in the same period of 2021. In addition, only 69 SPAC IPOs were priced in the first half of 2022, compared to 362 SPAC IPOs priced in the first half of 2021. [1]

2022 has also had the highest number of withdrawn SPAC deals on record, with 143 SPAC IPOs withdrawn and 46 de-SPAC transactions terminated through the end of August 2022. SPACs that went public during the SPAC boom of 2020 are now approaching their deadlines to complete initial business combinations and must make the choice to either seek an extension (and likely see high redemptions) or dissolve.


Private Company Board Compensation and Governance

Susan Schroeder and Bertha Masuda are partners and Bonnie Schindler is principal at Compensation Advisory Partners. This post is based on a CAP report by Ms. Schroeder, Ms. Masuda, Ms. Schindler, Mr. Evans and Mr. Brown.  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; and Paying for Long-Term Performance (discussed on the Forum here) by Lucian A. Bebchuk and Jesse M. Fried.


Board members at privately held and family-owned companies play an important role in governance and oversight and should be appropriately compensated for their contributions and efforts. However, the appropriate amount of compensation has been difficult to determine due to the lack of available market data on private company board pay.

To address this data deficiency, Compensation Advisory Partners (CAP) and Family Business and Private Company Director magazines conducts our Private Company Board Compensation and Governance Survey. The new 2022 third edition of the survey contains over 1,200 responses, an increase of about 300 participants from the prior full version of the survey in 2020. The high number of survey participants illustrates the enthusiasm and need for this data.


Green Energy Depends on Critical Minerals. Who Controls the Supply Chains?

Adnan Mazarei is a nonresident senior fellow at the Peterson Institute for International Economics, and Luc Leruth is a visiting resident scholar at the International School of Economics at Tbilisi University and an associate researcher at the University of Clermont-Ferrand. This post is based on a recent paper by Mr. Mazarei, Mr. Leruth, Pierre Régibeau, chief competition economist in DG Competition at the European Commission, and Luc Renneboog, Professor of Corporate Finance at Tilburg University and associate researcher at the European Corporate Governance Institute.

With the accelerating transition away from fossil fuels, awareness of the role of minerals critical to the production of clean energy (including cobalt, copper, lithium, nickel, and rare earth elements) has increased. There is a sharper focus on rising prices; production; delivery delays; as well as on the vulnerability of their supply chains. The Russian invasion of Ukraine has exacerbated these concerns.

Several of the factors that increase the risks to the stability and reliability of the supply chains of green energy are well researched. These include geographical concentration of the main components of the supply chain; climate risks; and environmental, social, and governance (ESG) issues. The concentration of production in one or a few countries makes the supply chains relying on those minerals vulnerable not only to market power and logistical risks but also to geopolitically induced disruptions, especially through trade restrictions.

The issue of who ultimately controls the production of minerals and the governance context in which they operate are also very important but much less researched. Production of a mineral could be widely dispersed globally, but a particular entity (a holding company or a few competing companies located in a country where authorities have the power to force a coalition if it suits their geopolitical interest) may have ultimate control (including through subsidiaries) over the decisions of the top firms producing that mineral, even if they are in different countries. That entity would then have a high degree of control, including market power, over the global production of that mineral and the supply chains that use it. More generally, there is a risk associated with imperfect information about entities that control a (mining) process, including their ultimate objectives, the geopolitical tendencies of the country in which they are located, and the length of time they intend to hold the controlling shares.


Voluntary ESG “Materiality” Assessments — Legal Considerations and Dos and Don’ts

Paul A. Davies, Sarah E. Fortt, and Betty M. Huber are partners and Global Co-Chairs of Latham & Watkins’ Environmental, Social, and Governance practice. This post is based on a Latham memorandum by Mr. Davies, Ms. Fortt, Ms. Huber, Mr. Green, Ms. Grewal and Mr. Pierce. 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; 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.

ESG and Legal Liability Risks

As ESG continues to grow in importance, regulators, investors, and other stakeholders have increasingly sharpened their scrutiny of companies’ ESG actions and reporting. ESG-related disclosures have already triggered claims based on public reporting (or the absence of public reporting) in both formal and informal venues. Additionally, public watchdog groups will likely double down on their attempts to bring about ESG reform via litigation geared towards marketing and other representations. A well-conducted ESG materiality assessment serves as a key step in a company’s process of understanding the ESG risks and opportunities relevant to its business and stakeholders, and in managing possible ESG-related legal liability risks.

While “ESG materiality assessment” has become a term of art, companies should take care to clarify that the term materiality in this context is intended to reflect priority ESG issues, and specifically flag that the term does not carry the same meaning as it does under securities and other laws in the US or other jurisdictions.


Navigating the ESG landscape: Comparison of the “Big Three” Disclosure Proposals

Heather Horn, Valerie Wieman, and Andreas Ohl are partners 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) and Will Corporations Deliver Value to All Stakeholders?, (discussed on the Forum here) both by Lucian A. Bebchuk 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 Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

After years of increasingly vocal demand for enhanced transparency about ESG matters from investors and other stakeholders, regulators and standard setters in various jurisdictions issued definitive proposals to transform ESG reporting in 2022. So far this year, proposed ESG disclosures have been released in the European Union (EU) as part of the Corporate Sustainability Reporting Directive (CSRD), internationally by the International Sustainability Standards Board (ISSB), and in the US by the SEC. These “big three” proposals would each require expansive sustainability disclosures — although their proposed scopes and other details vary. All three proposals were subject to public comment periods that have now closed.

With a global network of reporting requirements that encompass a broad spectrum of value chain contributors, it is likely that most companies will find themselves impacted by one or more of the proposed disclosure regimes. Proactive companies are in the process of assessing the scope and applicability of the proposals so that the appropriate planning can begin now. An SEC registrant that has a subsidiary listed in the EU and a subsidiary in a jurisdiction that requires ISSB reporting, for example, may be subject to the requirements in all three proposals. With equivalency — that is, whether disclosures for one reporting framework can satisfy some or all of the requirements of another — not yet determined, companies captured in multiple reporting regimes have a vested interest in understanding which reporting applies and where it aligns and diverges. Understanding the similarities and differences will help companies develop the requisite reporting strategy, data gathering processes, and related controls, providing for a streamlined process and effective deployment of resources.

This post compares and contrasts key provisions among the three proposals. We offer our perspectives on the proposals, including some of the suggestions we have made to each regulator or standard setter to enhance operability. By understanding the requirements of the different proposals, preparers can develop the appropriate reporting strategy, one designed to capture the right data the first time.


A Critical Analysis of the DOJ’s New Policy on Corporate Criminal Enforcement

J.W. Verret is an Associate Professor at George Mason Law School and is Counsel at Lawrence Law LLC.

The Department of Justice has once again issued a rewrite of its policy memo on corporate criminal enforcement and settlement. For the last twenty years it has become a right of passage for every new Deputy Attorney General to provide their own tweaks to the prior Deputy AG’s memo on corporate settlements.

And just as the seasons regularly follow each other, these tweaks are inevitably followed by law firm legal memos that read the tea leaves in the latest memo to provide an update for corporate clients. This essay is partly such a tea leaf reading exercise, but it also partly offers a critical analysis of some unfair expectations contained in the new guidelines.

When considering when and how to charge the collective associations, interests and contracts that corporations represent, a host of policy questions always arise. These questions have been at the heart of debates over corporate criminal investigations since the dawn of DOJ’s focus in this era just after the Watergate hearings exposed bribery and fraud in US public companies.


SEC charges executives with insider trading—10b5-1 plan provided no defense

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 Insider Trading via the Corporation (discussed on the Forum here) by Jesse M. Fried.

It may look like just another run-of-the-mill insider trading case, but there’s one difference in this settled SEC Enforcement action: according to the SEC, it involved sales under a purported 10b5-1 trading plan while in possession of material nonpublic information. As you probably know, to be effective in insulating an insider from potential insider trading liability, the 10b5-1 plan must be established when the insider is acting in good faith and not aware of MNPI. Creating the plan when the insider has just learned of MNPI, as alleged in this Order, well, kinda defeats the whole purpose of the rule. That’s not how it’s supposed to work, and the two executives involved here—the CEO and President/CTO of Cheetah Mobile—found that out the hard way, with civil penalties of $556,580 and $200,254. The company’s CEO was also charged with playing a role in the company’s misleading statements and disclosure failures surrounding a material negative revenue trend. According to the Chief of the SEC Enforcement Division’s Market Abuse Unit in this press release, “[w]hile trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”

Background. Corporate executives, directors and other insiders are constantly exposed to material non-public information, making it sometimes difficult for them to sell company shares without the risk of insider trading, or at least claims of insider trading. To address this issue, in 2000, Congress developed the Rule 10b5-1 affirmative defense. In general, Rule 10b5-1 allows a person, when acting in good faith and not aware of MNPI, to establish a formal trading contract, instruction or plan that specifies pre-established dates or formulas or other mechanisms—that are not subject to the person’s further influence—for determining when the person can sell shares, without the risk of insider trading. According to the SEC, people are “aware” of MNPI “if they know, consciously avoid knowing, or are reckless in not knowing that the information is material and nonpublic.” To be effective, the contract, instruction or plan must also conform to the specific requirements set forth in the Rule. In effect, the Rule provides an affirmative defense designed to demonstrate that a purchase or sale was not made “on the basis of” MNPI. If a 10b5-1 contract, instruction or plan is properly established, the issue is not whether the person had MNPI at the time of the purchase or sale of the security; rather, that analysis is performed at the time the instruction, contract or plan is established.


What It Means for a Board To Exercise Oversight

Stephen F. Arcano and Jenness E. Parker are Partners, and Matthew P. Majarian is an Associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.


  • Delaware courts have become more willing to allow stockholders to pursue claims that directors breached their duty to oversee risk management and compliance.
  • Directors are most vulnerable to suits where they have not established oversight processes for monitoring risks in “mission critical” aspects of the business or where “red flags” arguably should have alerted the board to looming problems.
  • Boards need to ensure that they are devoting enough attention to risks and compliance and carefully document their oversight efforts.

Directors’ fiduciary duty of loyalty to the company and its stockholders includes a duty to oversee the company’s operations. That, in turn, includes an obligation to take reasonable measures to implement and oversee risk management and compliance controls. Where a board fails to do this, directors may be vulnerable to lawsuits by stockholders. In Delaware, whose law governs most large American corporations, these are known as Caremark claims.

Historically, these kinds of suits have been very difficult to maintain because they require that plaintiffs show bad faith on the board’s part. And a bad outcome does not suffice to show bad faith.

Nonetheless, over the past several years, Delaware courts have allowed an increasing number of Caremark claims to survive a motion to dismiss and proceed to discovery. In these cases, the stockholder plaintiff adequately alleged a lack of corporate control systems or the existence of “red flags” suggesting improper oversight. As a recent decision put it, Caremark claims, “once rarities … have in recent years bloomed like dandelions after a warm spring rain.”

Boards need to take these recent rulings into account in considering how to oversee their companies’ risk management and compliance.


2023 US Proxy and Annual Reporting Season

Laura D. Richman is Counsel, and Jennifer J. Carlson and David A. Schuette are Partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

With the calendar just turning to autumn, the proxy and annual reporting season may seem a long
way off. However, in light of the amount of work and planning that goes into the proxy statement,
annual report, and annual meeting of shareholders, this is the ideal time to begin preparations. This
post provides an overview of key issues that companies should consider as they get ready
for the upcoming 2023 proxy and annual reporting season.

This post describes pending and announced US Securities and Exchange Commission (SEC)
rulemaking, based on the US Securities and Exchange Commission’s (SEC) spring 2022 regulatory agenda (SEC Regulatory Agenda), [1] that potentially could impact the 2023 or subsequent proxy seasons. While these discussions reference the dates targeted in the SEC Regulatory Agenda for final or proposed rules, he actual dates for SEC action could be earlier or later.

Pay Versus Performance

In August 2022, the SEC finally adopted a “pay versus performance” rule in accordance with a Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandate that requires SEC-reporting companies to disclose in a clear manner the relationship between executive compensation actually paid September 22, 2022 and the financial performance of the company. [2] As adopted, the rule generally requires disclosure of five years of pay versus performance data in proxy and information statements in which executive compensation information is required to be included pursuant to Item 402 of SEC Regulation S-K. The new pay versus performance disclosures must be included in proxy and information statements that are required to include such compensation information for fiscal years ending on or after December 16, 2022. Thus, the new rule will generally apply for the upcoming 2023 proxy season.


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