Monthly Archives: October 2022

DOJ Revamps Corporate Criminal Enforcement Policies with Continued Emphasis on Compliance

Justin P. Murphy, Sarah E. Walters, and Edward B. Diskant are partners at McDermott Will & Emery LLP. This post is based on their MWE memorandum.

At a September 15, 2022, speech at New York University School of Law, US Deputy Attorney General (Deputy AG) Lisa Monaco announced several new policies intended to further the aggressive stance the US Department of Justice (DOJ) has taken under the Biden administration to corporate criminal enforcement.

The DOJ’s landmark new policies are focused on encouraging and enticing companies to self-report criminal violations and cooperate in DOJ investigations. They include:

  • First, for the first time, every DOJ component that prosecutes corporate crime will have to develop a formal program to incentivize voluntary self-disclosure. Importantly, the DOJ will not seek a guilty plea when a company has voluntarily self-disclosed, cooperated in the DOJ’s investigation and remediated misconduct.
  • Second, companies seeking cooperation credit need to come forward and disclose important evidence to the DOJ quickly. Companies—and prosecutors evaluating those companies—will now be “on the clock.” Undue or intentional delay in providing information and documents will result in a reduction or outright denial of cooperation credit.
  • Third, the DOJ will now formally encourage companies to hold in escrow or claw back compensation from executives and employees responsible for wrongdoing.

Deputy AG Monaco provided additional guidance with respect to significant changes announced in October 2021, including on how prior criminal, civil and regulatory misconduct by companies will be evaluated when deciding an appropriate resolution, and how and when monitors should be imposed.

Deputy AG Monaco also announced that the DOJ would seek an additional $250 million in targeted resources for corporate criminal enforcement and other corporate crime initiatives.


DEI Initiatives under Attack by Activists

Michael Delikat and J. T. Ho are partners, and Hong Tran is an Associate at Orrick, Herrington & Sutcliffe LLP.  This post is based on their Orrick memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst.

As early as 2015, activist shareholders have put forth proposals asking companies to implement diversity, equity and inclusion (DEI) policies and to provide more disclosure of the same. For example, in pursuit of greater transparency on these issues, the first half of 2022 has already surpassed 2021 in terms of the number of shareholder proposals for race-related audits.

Yet this pursuit of moving the needle towards the goal of achieving more positive results in the workplace on DEI has recently been met with resistance. A new wave of shareholder demands and proposals, often funded by conservatively-backed organizations, have sought to move the needle in the other direction with proposals for impact audits and demands for DEI policy retractions, accompanied by threats of reverse discrimination litigation. While these DEI push-back attempts have not gained much traction, it remains an open question whether they will slow the implementation of further DEI initiatives.

To attack DEI initiatives, activist shareholders have employed a number of tactics. One advocacy approach involves shareholder proposals. In 2022 alone, the National Center for Public Policy Research (NCPPR), a communications and research foundation dedicated to advancing the “conservative movement,” has submitted proposals, which resulted in 12 companies including Walmart, Lowe’s, Meta, Twitter, AT&T, and Johnson & Johnson, Bank of America and Levi Strauss & Co. putting their anti-DEI proposals to a vote. Most of these proposals requested that the board commission an audit analyzing how the company’s DEI policy impacts civil rights and non-discrimination, and the impacts of those issues on the company’s business. NCPPR has also commenced an initiative it calls “Stop Bank of America’s Divisive ‘Woke at Work’ Agenda,” asking individuals to sign on to a petition to BofA stating “[i]t is time to put an end to Bank of America’s radical and divisive ‘racial justice’ initiatives.” As of September 19, 2022, the NCPPR claims that 3,269 individuals have signed the petition, which has been directed to Bank of America’s CEO, Brian Moynihan.


Weekly Roundup: September 30-October 6, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 30-October 6, 2022.

The Irrelevance of Delaware Corporate Law

Stock Buyback Tax Raises Questions as to Application and Practical Effect

Section 220 Decisions Amplify Stockholders’ Rights to Inspect Books and Records

Know Your Customer: Informed Trading by Banks

​In re BGC Partners: Maybe Entire Fairness Review Isn’t So Bad After All

Enforcement Waves and Spillovers

PVP Q&A: Our Interpretations of the SEC’s New PVP Rules

Potential Litigation Risks Associated with the SEC’s Proposed Climate-Disclosure Rule

Friends in High Places: Political Ties and SEC Oversight of Foreign Firms

The Activism Vulnerability Report | Q2 2022

The Political Economy of the Decline in Antitrust Enforcement in the United States

The Political Economy of the Decline in Antitrust Enforcement in the United States

Filippo Lancieri is a Postdoctoral Researcher at ETH Zurich and a Research Fellow at the Stigler Center at the University of Chicago Booth School of Business, and Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance at University of Chicago Booth School of Business. This post is based on their recent paper.

According to a familiar narrative, the demise of antitrust enforcement in the United States was caused by the spreading of the Chicago School approach to antitrust. In the late 1960s and 1970s, scholars affiliated with or trained at the University of Chicago challenged U.S. antitrust law by arguing that antitrust enforcement was incoherent and harmful to competitive markets. They argued that antitrust should be based on economic principles of price theory and industrial organization, with emphasis on maximizing consumer welfare, and argued that antitrust law and enforcement should be narrowed. These ideas found receptive ears in different administrations and in the U.S. judiciary, which significantly reduced civil antitrust enforcement.

This is a positive story of “enlightened technocrats” reflecting the best ideas in academia in their design of law and public policy. The major evidence for this theory is that Chicago-School ideas (and accompanying citations) made their way into supreme court opinions, lower court opinions, and various guidance documents issued by regulators, and that indeed the law and enforcement priorities moved radically in the direction of Chicago views in the decades following their publication.

However, this narrative raises several questions. First, the stated objective of the Chicago School approach was to improve antitrust enforcement and increase market competition by focusing antitrust policy on the most serious violations (for example, price-fixing), while limiting its impact on other types of commercial behavior that could be understood as pro-competitive (for example, vertical restraints). Yet the evidence indicates that market competition declined and markups increased during the era of Chicago-School ascendency. Second, the Chicago School approach was almost immediately challenged by economists who rejected its simple price-theoretical approach—many drawing on the burgeoning fields of game theory and information economics. By the 1980s and 1990s, the “post-Chicago” approach had largely overtaken the earlier Chicago view in economics departments and law schools. If the enlightened technocratic story were to be believed, the post-Chicago view would have displaced the Chicago view in law and policy, but it has not, except on the margins. Third, the enlightened technocrat narrative does not explain (or demonstrate) causation between the emergence of the ideas and the implementation of policy. Indeed, it flies in the face of another contribution of the University of Chicago: public choice theory. George Stigler, an exponent of the Chicago School, famously affirmed that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit”. Yet the technocratic narrative assumes exactly the opposite—that an antitrust law that benefited inefficient producers was replaced by an antitrust law that advanced the public interest.

In a new working paper (from where we base this contribution) we focus on the political economy of the decline of antitrust enforcement between the 1950s and today. We start by documenting the decline in US civil antitrust enforcement since the mid-1970’s. We then move to establish that this decline was not driven by voters’ preferences. Our conclusion is based on an examination of polling data, presidential speeches, and related sources.

In American democracy, elected officials are not required to follow the polls; they may use their discretion in determining policy and then take their chances during elections. The president also appoints powerful regulators with the consent of the senate, and those regulators too enjoy significant policy discretion.  Our analysis then considers these more complex forms of public accountability. We start by looking at instruments employed by elected officials—the passage of new laws and the enactment of Presidential Executive Orders—and then look at regulations, nomination hearings, enforcement decisions, and judicial decisions. We find that elected officials have almost never used their powers in an overt way to restrict antitrust law—either directly (by passing laws or issuing executive orders) or indirectly (by nominating or voting to confirm judges and regulators who during confirmation hearings publicly advocated restriction of antitrust enforcement). For example, antitrust was not a salient topic during the nomination hearings of Supreme Court nominees until the rejection of Robert Bork in 1987—when Bork received significant pushback for his antitrust views. From then on, most justices gave assurances that they would promote strong enforcement.  However, they did otherwise once they reached the Court, and in a manner that was significantly more salient than their pro-business votes.

Indeed, nearly all key decisions that reshaped antitrust policy were made by regulators and judges with relatively little democratic accountability. These range from internal FTC and DOJ prioritization to hidden budget cuts sponsored by Congress.

These data, however, are not enough to separate the enlightened technocrat story from a potential capture of public policy. To disentangle both explanations, we focus on overall economic outcomes, opportunities and mechanisms.

There is more and more evidence that the weakening of antitrust enforcement that has continued in an almost steady manner since the mid 1970’s did not increase overall economic efficiency—rather, it benefited big businesses. We bolster this hypothesis by examining a range of historical factors starting in the 1970s that explain why big business would turn its attention to antitrust enforcement and how business obtained advantages in the public arena, allowing it to push forward an anti-antitrust agenda. These range from increases of international imports to an explosion in the revolving doors targeting FTC and DOJ officials.

We have no smoking gun—special interests do not openly promote their attempts to influence policy to their benefit. Nonetheless, the evidence points in a single direction: big businesses greatly promoted the Chicago School as a driver of antitrust enforcement because it benefitted from its lax views, and this behind the doors influence was the major reason why it has dominated US antitrust policy since then.

The complete paper is available for download here.

The Activism Vulnerability Report | Q2 2022

Jason Frankl and Brian G. Kushner are Senior Managing Directors at FTI Consulting. This post is based on their FTI Consulting memorandum.  Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian A. Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Frankl and Kushner Leo E. Strine, Jr. (discussed on the Forum here).

Introduction and Market Update

With Labor Day marking the unofficial end of summer, FTI Consulting’s Activism and M&A Solutions team welcomes readers to our eleventh edition of the quarterly Activism Vulnerability Report, which reports the results of our Activism Vulnerability Screener following 2Q22, plus other notable trends and themes in the world of shareholder activism.

During 2Q22, the U.S. stock markets experienced considerable volatility as inflation remained a concern for investors. In July 2022, the U.S. Federal Reserve enacted its second consecutive 75 basis point interest rate increase, following a similar increase in the previous month. [1] These factors, when combined with an inverted yield curve, early signs of a softening labor market and a second consecutive quarterly decline in GDP, have exacerbated investors’ concerns of a looming recession. [2] [3]

While the market has gained some ground from the lows of summer, as of September 1, 2022, the Dow Jones Industrial Average (“DJIA”) was down 12.9% year-to-date for 2022, the S&P 500 was lower by 16.8% and the Nasdaq Composite fell by 24.7%. Over the same period, the CBOE Volatility Index (“VIX”) was up over 30.2%. [4]


How the SEC’s Executive Compensation Disclosure Rule Could Impact the 2023 Proxy Season

Sydney Carlock is a Managing Director, Martha Carter is Vice Chair & Head of Governance Advisory, and Sean Quinn is a Senior Managing Director, at Teneo. This post is based on a Teneo memorandum by Ms. Carlock, Ms. Carter, Mr. Quinn, and Mr. Filosa. Related research from the Program on Corporate Governance includes Stealth Compensation via Retirement Benefits by Lucian A. Bebchuk and Jesse M. Fried.


To help companies prepare for 2023 proxy statements and annual shareholder meetings, we summarize below the key elements of the final rules, how key stakeholders (activists, investors, proxy advisors) may use them and key considerations for companies subject to the new disclosure rules.

Executive Summary

  • The new rules require the following qualitative and quantitative disclosure in the company’s 2023 Proxy Statement (or similar disclosure) regarding the relationship between executive pay and company performance:
    • A table including certain executive compensation measures (including
      a new measure: Compensation actually paid) and certain financial performance measures (company total shareholder return or TSR peer TSR, net income and a financial metric of the company’s choosing), covering five years of data.
    • A description (narrative, graphical or both) of the relationship between executive compensation actually paid and the measures included in the table.
    • A description of the relationship between the company’s TSR and the peer groups’ TSR as a whole.
    • A list of three to seven performance metrics (in no particular order) that are deemed the most important in determining executive compensation for the most recently ended fiscal year (the covered year).
    • Companies with a calendar fiscal year end are required to implement the disclosure in their 2023 proxy statements.
    • Details of the rule are described in greater detail in the Appendix on page 4.
  • Investors and proxy advisors are very likely to utilize this new disclosure to inform their analysis of the company’s 2023 “Say on Pay” vote, potentially flagging companies with higher compensation actually paid during years of declining performance or those that frequently change performance metrics.
  • Given this potential impact on investors and proxy advisors, ensuring an effective narrative in your company’s proxy statement and engagement materials will be essential heading into the 2023 proxy season.


Friends in High Places: Political Ties and SEC Oversight of Foreign Firms

Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School and Xian Gu is an Associate Professor in Finance at Durham University Business School. This post is based on their recent paper.

Foreign firms that are traded in the U.S. markets, represent a significant proportion of publicly-traded firms. Such firms are subject to U.S. securities regulation. The legal bonding theory suggests that by subjecting themselves to U.S. law, foreign issuers enhance their value in the eyes of investors. However, compared to U.S. domestic firms, foreign firms are much less frequently the subject of official SEC enforcement actions. In this study, we provide a first investigation of how the political landscape, specifically the bilateral political ties between the U.S. and a foreign issuer’s home country, plays a role in SEC’s oversight of U.S.-listed foreign firms.

The SEC’s oversight of publicly-traded firms includes both routine monitoring through comment letter reviews of firm’s reporting compliance and pursuing enforcement actions against firms if their public reporting is deficient. One difficulty in analyzing SEC’s selection of enforcement targets lies in the limited public information on the SEC’s first-stage informal inquiry.  In this study, we investigate both comment letters and formal enforcement actions and integrate our results into one picture.

We examine 10-K and 20-F related comment letters, and enforcement actions against foreign issuers related to accounting and auditing issues. Our empirical analysis reveals two main sets of findings. First, political ties between a foreign firm’s home country and the U.S. are an important determinant of SEC oversight, including both the likelihood of receiving comment letters and that of being subject to an SEC enforcement action. If a foreign firm’s home country has stronger political ties with the U.S., then the frequency of comment letters issued by the SEC is lower, the tone of the comment letters is less negative and litigious, and the firm is less likely to be the subject of an SEC enforcement action. The effect of political ties is more pronounced during Democratic presidencies. We did not find any significant impact of the political relationship on private securities fraud litigation, i.e. class action lawsuits. READ MORE »

Proposed rules on Shareholder Proposals: A Comment From The Shareholder Commons

Frederick Alexander is Founder of The Shareholder Commons. This post is based on a recent comment letter submitted to the U.S. Securities and Exchange Commission regarding the proposed rules on substantial implementation, duplication, and resubmission of shareholder proposals by The Shareholder Commons.

This post is based on a comment letter submitted to the SEC regarding The proposed rules on Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals by The Shareholder Commons. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

A. Introduction

We submit this letter in response to the Securities and Exchange Commission’s (the “Commission”) requests for comment on the Proposed Rules. The Proposed Rules would improve the process by which it is determined whether a proposal made by a shareholder must be included in a company proxy statement and presented for a vote at the company’s annual meeting under Rule 14a-8. The release accompanying the Proposed Rules (the “Release”) also reaffirms the standards that the Commission adopted in 1998 for determining whether a company could exercise the right to exclude a proposal that related to ordinary business (the “1998 Standards” and “Reaffirmation.”)

We strongly support the Proposed Rules and Reaffirmation. As noted in the Release, the current rules permitting companies to exclude proposals that (i) have been substantially implemented, (ii) are duplicative of other proposals already submitted for the same meeting, or (iii) that have been submitted in prior years create uncertainty and are not optimally drafted to implement the purpose of Rule 14a-8. We support these proposals for the reasons set forth in the comment submitted to the Commission regarding the Proposed Rules on July 25, 2022, by The Shareholder Rights Group, an association of which TSC is a member.

In this comment, we highlight positive impact that the Proposed Rules and Reaffirmation will have on the ability of shareholders to express their views and exercise oversight regarding the social and environmental impact that companies have on the economy and diversified portfolios. This is a critical area where the interests of shareholders and management are more likely to diverge than they are on proposals that are only oriented to the enterprise value of the company itself.


Potential Litigation Risks Associated with the SEC’s Proposed Climate-Disclosure Rule

Nicolas Grabar is Senior Counsel, Jared Gerber is a Partner, and Charity E. Lee is an Associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Grabar, Mr. Gerber, Ms. Lee, and Laura Harder. 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.

On March 21, 2022, the SEC issued for public comment a new climate-related rule proposal [1] that, if adopted, would require registrants to provide certain climate-related information in their registration statements and annual reports filed with the SEC. Specifically, the proposed rule would require:

  • A new section in annual reports and registration statements titled “Climate-Related Disclosure,” which would include climate-related governance, risk, business impacts, targets and goals and other related disclosures;
  • Disclosure of a company’s Scope 1, Scope 2 and, if material, Scope 3 GHG emissions, along with an attestation report from an independent GHG emissions expert covering the Scope 1 and Scope 2 emissions disclosures; and
  • A new footnote to a registrant’s audited financial statements that provides climate-related metrics and impacts on a line-item [2]

This memorandum addresses potential causes of action that could arise under U.S. law based on a company’s climate-related disclosures if the rule is promulgated as proposed, as well as potential defenses to those claims.


We have outlined below the potential federal and state law causes of action that a plaintiff might bring against a company in connection with the climate-related disclosures that would be required by the SEC’s proposed rule.

Federal Securities Claims

Potential Causes of Action

The new disclosure requirements created by the SEC’s proposed rules could give rise to litigation based on alleged violations of the federal securities laws. Plaintiffs seeking to bring such a suit would likely allege one or more of the following causes of action:

  1. Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”), and
  2. Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated

Section 11 of the Securities Act imposes liability on issuers, directors, underwriters, and others for material misstatements or omissions in a registration statement. [3] Section 12(a)(2) generally imposes liability on any person who offers to sell or sells a security by means of a material misstatement or omission in a prospectus. [4] Notably, a plaintiff bringing either a Section 11 or Section 12(a)(2) claim does not need to prove scienter (i.e. that the defendant acted with an intent to deceive or recklessness) or reliance. [5] However, under Section 11, non-issuer defendants have an affirmative defense to liability if they show that (i) for portions of the registration statement that were prepared by experts, they had no reasonable grounds to believe that the expert-prepared portion was untrue and did not actually believe it to be untrue, or (ii) for portions that were not prepared by experts, after reasonable investigation, they believed that the statements in the non-expert-prepared portion were true and free of material omissions. A similar affirmative defense exists under Section 12(a)(2) if non-issuer defendants show that, in the exercise of “reasonable care,” they could not have known of the alleged misstatement or omission.

Section 10(b) and the corresponding Rule 10b-5 more broadly prohibit the making of any untrue statement or omission of a material fact in connection with the purchase or sale of securities with the intent to defraud or deceive. [6] Thus, Section 10(b) and Rule 10b-5 cover a broader range of statements than the Section 11 and 12(a)(2) claims discussed above, as they are not limited to statements in registration statements and prospectuses. Additionally, unlike claims under Section 11 and 12(a)(2), which are generally limited to disclosures made in connection with offerings of securities within the prior three years, claims under Section 10(b) and Rule 10b-5 can be brought by investors in previously issued securities traded on the secondary market (including common stock).

Section 15 and Section 20(a) provide that any person who directly or indirectly “controls” another person found liable for a violation of the Securities Act or Exchange Act, respectively, or any regulation thereunder is jointly and severally liable, to the same extent as the controlled person, to any person to whom the controlled person is liable. Thus, liability requires that the “controlled” person violated the relevant federal securities law(s) (the “primary violator”), and proof that the person alleged to have violated with Section 15 or 20(a) “controlled” the primary violator.

Because the SEC’s proposed rule requires additional disclosure in a company’s annual reports and in registration statements, these new disclosures could provide additional statements for investors to challenge as misrepresentations and omissions under these federal securities laws. Even before the SEC’s proposal, private litigants in the U.S. were increasingly pursuing claims challenging environmental disclosures, as well as other social and corporate governance disclosures. For example, in recent years, securities litigation has been filed after events such as natural disasters, oil spills, data privacy breaches, allegations of bribery and corruption, and workplace misconduct.

Given the rise in this kind of securities litigation, it seems likely that plaintiffs will challenge climate- related disclosures made under the proposed SEC rules by companies that experience similar catastrophic events claiming that the climate-related disclosures were misleading because they failed to adequately disclose the conditions that led to the events, particularly with respect to the disclosures called for by the requirements for:

  • Climate-related risk disclosures – disclosures inter alia about climate-related risks [7] or opportunities reasonably likely to have a material impact on the company, the actual and potential impacts of the identified risk, and resilience of the company’s business strategy in light of potential future changes in climate-related risks); and
  • Climate-related metric disclosures – disclosures regarding certain climate-related physical impacts [8], transition impacts [9], transition expenditures [10], and mitigation expenditures [11].

It is also possible that inaccuracies in the metrics required to be disclosed under the SEC’s proposal could give rise to securities liability. Indeed, plaintiffs have already brought claims alleging material misrepresentations regarding how companies calculate the financial impact of certain projects with climate change implications. Similar allegations of misrepresentations or omissions could arise from each of the categories of disclosure required the proposed rule. For example, under the proposed rule:

  • Registrants would be required to disclose certain information concerning the board’s oversight of climate-risks and management’s role in assessing and managing those risks. To comply with this new disclosure requirement, a company might describe an extensive climate-related governance structure where in reality the governance structure does not exist or is substantially less robust than described.
  • Registrants would also be required to disclose in their registration statements and annual reports, their Scope 1 [12], Scope 2 [13] and Scope 3 [14] greenhouse gas (“GHG”) emissions. To comply with this new disclosure requirement, a company might disclose a certain level of Scope 1 emissions where in reality, the emissions are much higher.

Potential Defenses: The Materiality Problem and Safe Harbors

Though there are a number of potential bases for federal securities claims based on a company’s climate-related disclosures under the SEC’s proposed rules, we expect potential plaintiffs may face significant hurdles in successfully pursuing these claims.

First, at least in the near term, the materiality element may pose the most significant challenge for potential plaintiffs. Disclosures are considered “material” for these purposes if there is a substantial likelihood that a reasonable investor would consider the disclosed information important in deciding how to vote or make an investment decision. [15] Under this standard, the impact of any given piece of information on a company’s stock price generally is a key element of the materiality analysis under current law. [16] But it is not clear that the market would necessarily consider all of the disclosures required by the SEC’s proposed rules to be important so as to make them “material” under this historical test. [17] Indeed, certain disclosure requirements seem to be based not on what a “reasonable investor” would view as important, but instead on what general stakeholders and the greater public would find significant. For example, the Scope 3 emissions disclosures seem to be based on general concern over climate accountability, rather than the company’s own long-term financial value.

Second, even if a plaintiff were successful in establishing liability, there may be additional challenges for a plaintiff when it comes to proving damages. For example, damages under Section 10(b) and Rule 10b-5 are generally calculated based on the share price decline that occurs when the “truth” concerning prior alleged misstatements and omissions is revealed to the market. As a result, if there is not a significant decrease in the value of the security upon the revelation of the truth, for example because the alleged misstatements or omissions do not have a substantial impact on the company’s performance or outlook, or because the market does not place much value on those disclosures, potential damages may be very small. Although damages under Section 11 and 12(a)(2) are calculated somewhat differently, both provisions contain affirmative defenses if a defendant can show the plaintiff’s losses were not caused by the alleged misstatement or omission, which may also limit potential exposure where there are not significant share price declines following the disclosure of alleged truth concerning the climate-change related disclosure. [18]

Third, for eligible issuers, the Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a safe harbor for forward looking statements that are “identified as forward looking statements, and [are] accompanied by meaningful cautionary statements,” that are immaterial, or that are not made with “actual knowledge” that the statement was false and misleading. [19] The forward looking statements safe harbor likely applies, for example, to the proposed disclosures regarding climate-related impacts on a company’s strategy and business model, including the assessment of the resilience of the company’s business strategy in light of potential future changes in climate- related risks. Even for issuers and offerings that are not eligible for the PSLRA safe harbor, the “bespeaks caution” doctrine provides a similar defense where a forward-looking statement is accompanied by meaningful cautionary language.

Fourth, the SEC’s proposed rule itself also contains a safe harbor for Scope 3 emissions disclosures. [20] Pursuant to this limitation, any statement made in a document filed with the SEC regarding Scope 3 emissions required by the proposed rules is deemed not to be a fraudulent statement, unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith. According to the SEC’s proposing release, the proposed safe harbor is intended to mitigate potential liability concerns associated with providing emissions disclosure based on third-party information.

Fifth, non-issuer defendants, such as underwriters, may be able to assert a due diligence defense for Section 11 claims and a reasonable care defense for Section 12(a)(2) claims described above. This is particularly true where the non-issuer needs to rely on experts for certain information – such as the attestation report from an independent expert for the Scope 1 and Scope 2 emissions disclosures – because a non-issuer is generally entitled to rely on that expertise in the absence of “red flags” concerning the reliability of the information provided by the experts. [21]

State Law Claims

Derivative Shareholder Litigation

As an alternative to securities lawsuits, plaintiffs could also seek to use disclosures required by the SEC’s proposed rule or securities class actions filed concerning those disclosures to form the basis for state-law claims against a company, such as shareholder derivative suits brought on behalf of the company against directors and officers of the company alleging that officers and directors breached their fiduciary duties to shareholders and caused harm to the corporation. [22]

Plaintiffs bringing derivative suits must allege that there has been a substantive breach of fiduciary duties such as the duty of care, duty of loyalty, or duty of good faith. The duty of care requires the board of directors to exercise care in making decisions on behalf of the company, based on adequate information and a good faith belief that the decisions are in the best interest of the company and its stockholders. [23]

Again, even before the SEC’s proposed rules, a number of such derivative suits have been brought concerning environmental, social and governance issues. For example, a recent trend has been for shareholders to sue when the board fails to meet an announced goal, such as increasing board diversity. Although many of these suits have been dismissed because the challenged statements about achieving such a “goal” were considered “inactionable puffery,” or because plaintiffs had otherwise failed to allege any material facts to support an inference that the statements were false or misleading, it is possible that the new disclosures required by the SEC’s proposed rule could provide additional ammunition for such suits challenging failures to meet announced climate change goals.

Plaintiffs in the U.S. may seek to emulate more novel causes of action that are being pursued outside to the U.S. and, for example, try and bring suit for breach of the duties of good faith if a company includes a GHG emissions reduction target or goal in its disclosures but falls short of its goals.

Potential Defenses to Shareholder Derivative Suits

Just as with the potential securities suits described above, plaintiffs are likely to face challenges in pursuing these kinds of shareholder derivative suits.

As an initial matter, before bringing derivative suits plaintiffs must generally fulfill procedural requirements, including first demanding that the board bring suit or showing that making such a demand would be futile because of director conflicts. [24] Also, courts typically evaluate duty of care claims using the business judgment rule, pursuant to which a court will uphold the decisions of the board as long as the decisions are made (1) in good faith, (2) with the care that a reasonably prudent person would use, and (3) with the reasonable belief that the directors are acting in the best interests of the corporation. [25] The business judgment rule is in essence a presumption in favor of the board, which generally can only be defeated if the plaintiff can provide gross negligence, bad faith, or a conflict of interest. [26]

Other Considerations

Another way in which the SEC’s proposed rule may result in increased litigation risk is by allowing plaintiffs in other types of litigation to use the content of the disclosures themselves, even without alleging that the disclosures contain any alleged omissions or misstatements.

For example, the climate-related disclosures could be used as evidence in litigations bringing state law tort claims about environmental damage caused by a company’s operations, and consumer protection claims about misrepresentations about the environmental impact of a company’s products or the company’s environmentally safe business practices. Similarly, plaintiffs may seek to use the disclosures to allege “greenwashing” claims in which plaintiffs allege misleading information and misrepresentation with respect to a company’s affirmative sustainability claims.


If the SEC promulgates the proposed rule in its current or substantially similar form, there are a number of litigation risks that could arise from the required disclosures, including securities litigation, shareholder derivative claims, and other state law torts. However, as discussed above, there are also a number of legal obstacles that could limit a plaintiff’s ability to prove those claims. And even if a plaintiff were able to do so, there are additional hurdles that the plaintiff would need to overcome to establish damages.


1The proposal is set forth in the SEC’s March 21, 2022 release, available here.(go back)

2 For further detail about the proposed rule, please refer to our alert memos on the proposed disclosures for financial statements, GHG emissions(go back)

315 U.S.C.A § 77k.(go back)

415 U.S.C.A. § 77l (a)(2).(go back)

515 U.S.C.A § 77k; see also Rombach v. Chang, 355 F.3d 164, 169 n.4 (2d Cir. 2004) (“Neither Section 11 nor Section 12(a)(2) requires that plaintiffs allege the scienter or reliance elements of a fraud cause of action.”).(go back)

6Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 267 (2014) (“Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5 prohibit making any material misstatement or omission in connection with the purchase or sale of any security.”).(go back)

7Under the proposed rule, “climate-related risks” means the actual or potential negative impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operations, or value chains, as a whole.(go back)

8Physical impacts during the year of “severe weather events and other natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise.” Rule 14-02(c).(go back)

9Impact during the year of transition activities, defined as “any efforts to reduce GHG emissions or otherwise mitigate exposure to transition risks.” Rule 14-02(d).(go back)

10Expenditures during the year “to reduce GHG emissions or otherwise mitigate exposure to transition risks.” Rule 14- 02(f).(go back)

11Expenditures during the year “to mitigate the risks from severe weather events, and other natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise.” Rule 14-02(e).(go back)

12“Scope 1 emissions” are direct GHG emissions from operations that are owned or controlled by the registrant. These might include emissions from registrant-owned or controlled machinery, vehicles or operations.(go back)

13“Scope 2 emissions” are indirect GHG emissions primarily resulting from the generation of energy purchased and consumed by the registrant. These emissions include purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant.(go back)

14“Scope 3 emissions” are all indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain. These emissions are a consequence of the registrant’s activities but are generated from sources that are neither owned nor controlled by the registrant.

These might include emissions associated with the production and transportation of goods a registrant purchases from third parties, employee commuting or business travel, and the processing or use of the registrant’s products by third parties. Under the proposed rules, a registrant would be required to disclose Scope 3 emissions if “material” or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.(go back)

15TSC Industries v. Northway, 426 U.S. 438, 448-49 (1976).(go back)

16However, it is important to note that volatility of stock price, by itself, is typically considered insufficient for the relevant information to be deemed material. See, e.g., SEC Staff Accounting Bulletin “No. 99 – Materiality” (August 13, 1999), available here; see also ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 205 (2d Cir. 2009).(go back)

17Plaintiffs bringing Section 10(b) and Rule 10b-5 claims face the additional challenges of proving scienter, actual reliance, and loss causation in addition to materiality. See Amgen Inc. v. Connecticut Ret. Plans & Tr. Funds, 568 U.S. 455, 460 (2013) (“To recover damages in a private securities-fraud action under § 10(b) of the Securities Exchange Act of 1934…and Securities and Exchange Commission Rule 10b–5, 17 CFR § 240.10b–5 (2011), a [] plaintiff must prove “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the *461 purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.”). Plaintiffs bringing claims under Rule 10b- 5 must also meet the heightened pleading standards for such claims, which requires the plaintiff to plead with particularity facts raising a strong inference of scienter. See Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 321 (2007) (Holding that the Private Securities Litigation Reform Act imposed a heightened pleading standard in actions brought pursuant to Section 10(b) and Rule 10b-5 requiring plaintiffs to state with particularity facts giving rise to a “strong inference that defendant acted with the required state of mind”).(go back)

1815 U.S.C.A. § 77l(b); 15 U.S.C.A § 77k(e).(go back)

1915 U.S.C.A. § 77z-2.(go back)

20SEC’s March 21, 2022 release, available here.(go back)

21In re Worldcom, Inc. Securities Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004).(go back)

22Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993) (In a stockholder derivative suit, “a stockholder asserts a cause of action belonging to the corporation.”).(go back)

23United Food & Com. Workers Union v. Zuckerberg, No. 404, 2020, 2021 WL 4344361 at *1049-1050 (Del. 2021) (Discussing the duties of care and loyalty that directors and officers owe to corporations under Delaware law).(go back)

24Rales, 634 A.2d at 932 (“Because directors are empowered to manage, or direct the management of, the business and affairs of the corporation [] the right of a stockholder to prosecute a derivative suit is limited to situations where the stockholder has demanded that the directors pursue the corporate claim and they have wrongfully refused to do so or where demand is excused because the directors are incapable of making an impartial decision regarding such litigation.”).(go back)

25Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)(“It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company…absent an abuse of discretion, that judgment will be respected by the courts. The burden is on the party challenging the decision to establish facts rebutting the presumption”), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).(go back)

26Aronson, 473 A.2d at 812 (“While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence.”).(go back)


PVP Q&A: Our Interpretations of the SEC’s New PVP Rules

Mike Kesner and John R. Ellerman are partners and Ira T. Kay is Managing Partner and Founder at Pay Governance LLC. This post is based on their Pay Governance 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. 


The Securities and Exchange Commission (SEC) released its final rules regarding the mandated “Pay Versus Performance” (PVP) disclosure on August 25, 2022. The new rules are the culmination of various proposals by the SEC dating back to 2015 when the agency first issued proposed PVP disclosure rules required by the Dodd-Frank legislation. Pay Governance LLC summarized the new rules in a recent Viewpoint (see SEC Releases Final Rules Regarding Pay-Versus-Performance (PVP) Disclosures, dated August 31, 2022).

After further analysis of the new rules and the opportunity to discuss them with clients and colleagues, we have prepared this follow-up Viewpoint to share additional insights in the form of Questions and Answers (Q&As) which we believe will help enhance clients’ understanding of the rules and their implementation. We plan on providing additional Viewpoints including an executive summary, sample graphics, and the narrative disclosures that can be used to illustrate the PVP relationship in the near future.


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