Monthly Archives: November 2022

Crafting the ‘G’ in ESG: Accountability in the Boardroom

Posted by Amma Anaman, Helle Bank Jørgensen, and Chantal Wessels, Nasdaq Center for Board Excellence, on
Tuesday, November 8, 2022
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Amma Anaman is Associate General Counsel and Legal Relationship Manager, Helle Bank Jørgensen is CEO of Competent Boards, and Chantal Wessels is Vice President, Head of Global Reporting and Corporate ESG at Nasdaq, Inc. This post is based on a publication by the Nasdaq Center for Board Excellence. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Koi 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.

As investment in environment, social and governance (ESG) gains momentum, investors and stakeholders increasingly expect swift and concrete sustainability initiatives from companies across the globe. But boards have lagged behind the ESG fervor. While 40% of directors were found to be ESG conscious with some level of knowledge in the space, only 8% of board directors were found to be competent and capable of effective, embodied action, according to a 2021 study of the top 100 public corporations internationally.

We recently considered the evolving perspectives in ESG, as well as tools and strategies for boards to meet the ESG expectations of their stakeholders.

ESG investment has skyrocketed in recent years. According to the Forum for Sustainable and Responsible Investment, the leading voice in sustainable investing across all asset classes, ESG investments grew 42% in just two years, rising to a total of $17.1 trillion in assets under management.

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Governance and the Decoupling of Debt and Equity: The SEC Moves

Posted by Henry T. C. Hu (University of Texas), on
Tuesday, November 8, 2022
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Henry T. C. Hu is the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School.  This post is based on his recent paper, forthcoming in Capital Markets Law Journal, and is part of the Delaware law series; links to other posts in the series are available here.

“Decoupling”—the unbundling of the rights and obligations of equity and debt through derivatives and other means—has posed unique challenges for corporate and debt governance. Corporate governance mechanisms, such as shareholder voting and blockholder disclosure, have faced “empty voting with negative economic ownership” and “hidden (morphable) ownership” issues. Debtor-creditor contract-based interactions have faced “empty crediting with negative economic interest,” “hidden interest,” and “hidden non-interest” issues. In 2006, the initial version of an analytical framework for decoupling was introduced. In that decade, foreign regulators, Delaware and other substantive law authorities, and private ordering started responding.

In 2021 and 2022, the Securities and Exchange Commission (SEC) voted out proposals directed at decoupling, as well as other proposals that may affect decoupling. My article, Governance and the Decoupling of Debt and Equity: The SEC Moves (forthcoming in Capital Markets Law Journal, 2022), is the first work to: (1) analyze the SEC proposals as a whole, propose significant changes, and offer ideas for enhancing the proffered cost-benefit analysis (CBA); and (2) situate the prospective SEC role with the roles that substantive law authorities and private ordering are already playing.

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Establishing Norms for Director Behavior to Enhance Board Culture and Effectiveness

Posted by Holly J. Gregory, Sidley Austin LLP, on
Tuesday, November 8, 2022
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Holly J. Gregory is a Partner and co-chair of the Global Corporate Governance practice at Sidley Austin LLP. This post is based on her Sidley memorandum.

Board culture—the shared values, beliefs, assumptions, and expectations that influence behavior in the boardroom—plays a considerable role in the board’s ability to govern in an effective and efficient manner. It affects how directors engage with one another and with management, the candor with which differing viewpoints are raised and deliberated, and the ease with which directors determine priorities and reach consensus. A positive board culture marked by trust, respect, and candor provides the foundation for collaborative and constructive discussions as the board assesses corporate opportunities and risks, manages transitions, and navigates crisis. Attentiveness to issues of board culture in normal times helps boards withstand stress in times of volatility and crisis.

The Value of Positive Behavioral Norms

Effective governance depends on how directors weigh in with their perspectives, stimulating discussion that challenges assumptions and biases in constructive ways. Moving from identification and deliberation of options and alternatives to formation of consensus (or at least a majority agreement) in an efficient manner requires a positive board culture built on norms for how directors will conduct themselves in undertaking their service as fiduciaries and in interacting with one another and management.

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The Role of Long-Term Shareholder Voice

Posted by Benjamin Colton, Ryan Nowicki, SSGA, on
Monday, November 7, 2022
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Benjamin Colton is Global Head of Asset Stewardship, and Ryan Nowicki is Assistant Vice President of Asset Stewardship at State Street Global Advisors. This post is based on their SSGA memorandum.

Key Takeaways

  1. As a long-term investor, representing quasi-permanent capital for companies held in our clients’ index portfolios, we are uniquely positioned and incentivized to encourage portfolio companies to consider long-term risks and opportunities in order to maximize long-term value for our clients.
  2. With many portfolio companies improving their shareholder engagement practices and approach to long-term financially material issues, our support for incumbent directors in contested elections has steadily increased over the last five years, reaching a new high in 2022.
  3. Some activist shareholders, companies, and policymakers are engaging in and/or proposing activities that can circumvent shareholder voice; such measures could result in capital markets characterized by a focus on short-termism, amplifying the influence of certain investors and stakeholders, often with limited investment time horizons.
  4. Boards and management teams that focus on managing material risks and emerging opportunities can maximize value for both companies and their diverse shareholder bases, thereby bridging the gap between short and long-term interests.

Introduction: A Critical Juncture for Shareholders

Faced with inflationary pressures, geopolitical uncertainty, and market volatility, companies’ commitment to an elevated culture of shareholder engagement has never been more critical. Coupled with these headwinds are the introduction of a universal proxy card and a shifting legislative environment. These developments have the potential to significantly alter the landscape of shareholder activism.

The universal proxy card (see below) presents a meaningful shift in how investors participate in shareholder democracy, as well as how companies and activist shareholders approach contested elections. In parallel with this development, new measures are currently being considered by policymakers, which intend to further empower individual investors. While we are supportive of the spirit and intent of these proposals to democratize the voice of shareholders, without thoughtful implementation these measures may result in unintended consequences for investors and companies alike.

At the same time, a short-term focus is being demonstrated by company actions, activist shareholder settlements, and legislative proposals, each of which has the potential to silence the long-term shareholder voice. Against this backdrop, the importance of considering long-term perspectives in these discussions has never been more important.

Our Role as a Long-term Investor amidst Diverse Shareholder Views

We appreciate that different investors have a broad spectrum of investment philosophes, risk appetites, and time horizons. We respect this diversity and value building relationships with our portfolio companies given our mutual objective of achieving long-term, risk-adjusted returns for our clients, who are the underlying shareholders in these companies. As a long-term investor, particularly in our index portfolios where we own a company for the duration of its inclusion in the index, we are a stabilizing force for our portfolio companies. We are uniquely positioned and incentivized to use our stewardship tools to encourage portfolio companies to consider long-term risks and opportunities, in an effort to create long-term value for our clients .[1]

By providing cost-effective and efficient vehicles to achieve diversification, our index products have increased access to financial markets for all investors – from individual workers saving for retirement to the world’s most sophisticated institutional investors.

State Street Global Advisors’ Asset Stewardship team aims to address all financially material issues – including environmental, social, and governance (“ESG”) issues – through our proxy voting and company engagement, thereby promoting the reduction of risk in our clients’ investments. In pursuing this mission, we have long recognized that activist shareholders can bring positive change to underperforming companies[2], particularly when boards or management do not respond to investor concerns. However, we are wary of activist shareholder models of engagement that favor short-term gains at the expense of long-term investor interests.

Our Approach to Engaging with Activist Shareholders and Nominee Candidates

We have a broad history of constructive engagement with management and boards of our portfolio companies, as well as with the activist shareholders who challenge them. This has occurred through dialogue and/or proxy contests. In recent years, we have increasingly witnessed activist shareholders dive deeper into emerging areas of company performance and board oversight, including financially material ESG issues[3]. As a result, board candidates increasingly offer multidisciplinary expertise in addition to direct industry experience[4].

Activist shareholders, often with short-term time horizons, would be well served to focus on bridging the gap between short and long-term interests. By demonstrating a compelling case for how their proposed strategy and director nominees are superior to the incumbent’s approach to value creation, activist shareholders could increase their base of support among voting shareholders. A focus on this approach is particularly relevant in today’s market environment marked by volatility and uncertainty, in which activist shareholders may be incentivized to drive their agendas and advocate for change.[5]

Despite a renewed focus on director quality by activist shareholders, our support for incumbent directors in proxy contests has increased year-over-year since 2017, reaching a new high in 2022 as seen in Figure 1[6].

This increase in support can be attributed to:

  • A lack of focus and substance on long-term strategy in dissidents’ rationale, coupled with engagement models that over-emphasize short-term performance periods, which come at the expense of long-term investor interests and could result in the “greenwashing“ of ESG issues[7]
  • The greater responsiveness of incumbent management and boards of target companies, as well as improved board independence, enhanced focus on ongoing board refreshment, and elevated quality and experience of incumbent directors
  • Our commitment to standing behind portfolio companies during the global pandemic, while they focused on financial resiliency and navigated immediate challenges, including employee health, customer protection, and supply chain safety

Figure 1: Our Support in Global Proxy Contests, 2017-2022

Our approach to nominee selection reflects our belief that strong, independent, and effective boards underpin value creation at companies in which we invest. On behalf of the company’s shareholders, Boards: 1) oversee management; 2) provide guidance on strategic matters; 3) select the CEO and other senior executives; 4) create a succession plan for the board and management; 5) provide risk oversight; and, 6) assess the performance of the management team.[8]

As previously emphasized, nominating committees that comprise independent directors are best placed to assess which individuals can properly fulfill these duties, and act as effective fiduciaries. As long-term shareholders, we vote for members of the board, including nominating committee members, who play a critical role in determining board composition. While our default position is to support the committees’ judgement, we consider the following factors when evaluating dissident nominees:

  • Strategy presented by dissident nominees versus that of current management, as overseen by the incumbent board
  • Effectiveness, quality, and experience of the management slate
  • Material governance failures and the level of responsiveness to shareholder concerns and market signals by the incumbent board
  • Sustained company underperformance and lack of a compelling recovery plan
  • History of both company and activist shareholder engagement cultures

Universal Proxy

Starting August 31, 2022, the use of universal proxy cards is now required in all non-exempt director election contests at publicly-traded companies in the US.[9] The changes are as follows:

  • Shareholders voting by proxy in contested elections have the same flexibility in voting for directors as shareholders who physically attend and vote at the shareholder meeting
  • All shareholders have the ability to vote for a combination of director nominees from competing slates, gaining the ability to “mix and match” for the first time
  • The minimum share ownership required for shareholders to nominate a director to the board has been significantly lowered, decreasing associated costs and barriers to entry

Academic evidence has indicated this change will not systemically favor either activist shareholders or incumbent boards[10]. As such, we welcome this development, since it has the potential to strengthen shareholder voice and may lead to more balanced vote outcomes.[11]

Nonetheless, we will carefully monitor evidence of an increase in the following possible outcomes, as well as their potential unintended consequences:

  • Settlements between activist shareholders and companies, with board seats used as bargaining chips[12]
  • Proxy campaigns used in place of shareholder proposals to further a broader set of topics of interest to shareholders
  • Contested elections due to decreased cost and lower barriers to entry[13]

As long-term investors in portfolio companies on behalf of our clients, we will remain invested well after dissident directors leave the board and short-term investors exit the stock. We believe that leveraging board seats as bargaining chips diminishes shareholder democracy. This also mutes our opportunity to advocate for a company’s long-term performance that aligns with our clients’ interests.

Upholding Shareholder Democracy

Despite improvement in shareholder engagement, companies are increasingly engaging in entrenchment tactics that circumvent shareholder voice and the democratic process. These developments come against the backdrop of recent market volatility, the global pandemic, and inflationary concerns. Such practices include, but are not limited to:

  • Entering into preferred financing agreements that require investors to vote their shares in line with all management proposals
  • Establishing new special voting class shares (e.g., “Founder’s shares”) well after the company has gone public
  • Failing to provide sufficient disclosure that explains compelling rationale behind changes to shareholder rights, capital allocation, and/or governance structure
  • Refusing to engage constructively with shareholders regarding board composition, shareholder rights, or competitive offers to buy the company and/or its assets
  • Adopting shareholder rights plans (“poison pills”) with no time-bound limits and/or compelling rationale

Unsurprisingly, these company actions are often cited by activist shareholders in their argument for board refreshment.[14] Through our engagement with portfolio companies and activist shareholders, we will continue to apply close scrutiny to the practices above.

Supporting Investor Choice on Proxy Voting

We are supportive of giving our clients greater choice around how their shares are voted. Today, clients invested through our separately managed account structures have the option to retain proxy voting authority over the securities held in their accounts that we manage for them. We are continuing to explore the possibility of providing investor choice to more products and client types.

In parallel with this client offering, some policymakers have proposed new measures that intend to further empower individual investors. While we are supportive of the spirit of these legislative proposals, we are concerned by possible unintended consequences, including:

  • Amplifying the voting influence of select shareholders, such as activists with short-term interests, those outsourcing responsibility to proxy research advisors, and company insiders
  • Creating challenges for companies to reach a voting quorum
  •  Diminishing the opportunity for clients to benefit from the experience of institutional investors in exercising a long-term perspective in voting decisions

The Long-Term Shareholder Provides a Stabilizing Voice

In an environment increasingly defined by market volatility and the outsized influence of a few short-term oriented actors, long-term shareholders play a unique and important role. Shareholders focused on maximizing long-term value creation and sound corporate governance practices – a precondition for long-term performance – are more important than ever. Indeed, when making any significant decisions relating to capital allocation and long-term strategy, particularly those with voting implications, companies can benefit from soliciting and considering the long-term shareholder voice in this process.

Investors with long-term horizons, sufficient resources, and productive relationships with their portfolio companies are ideally positioned to deliver value for their clients. These stewards of capital can advocate for enhanced governance practices and risk mitigation of financially material issues, and keep companies focused on long-term strategy.

For these reasons, defensive company entrenchment tactics, last-minute settlements with activist shareholders, and evolving legislative environments all have the potential to cause adverse effects on constructive engagement – silencing the voice of long-term shareholders and potentially upending shareholder democracy. This outcome would be detrimental to the critical role that effective boards – who are elected by shareholders to represent their interests – play in keeping management focused on the long-term goals of their companies.

Conclusion: Bridging the Time-Horizon Gap

The diverse investment philosophies among capital markets participants represent an inherent mismatch between investors with short and long-term time horizons. As a long-term investor, and stabilizing presence for our portfolio companies, we provide a consistent and constructive voice to portfolio companies through our voting and engagement activities.

While our quasi-permanent holding period may differ from that of activist shareholders, enhancing long-term value creation at companies that we both own is a mutually beneficial goal. Boards and management teams can bridge the gap between short and long-term interests by remaining focused on managing material risks and emerging opportunities.

Activist shareholders can better build consensus among voting shareholders by nominating dissident directors focused on long-term strategy and value creation. Generally, director nominees who serve as responsible stewards by fulfilling their fiduciary duty will more likely have the support of long-term shareholders.

At State Street Global Advisors, we will continue to serve as a constructive partner to our portfolio companies and a consistent voice to their boards and management teams. In contested elections, we will continue to engage with both companies and activist shareholders, giving stronger consideration to approaches that bridge short and long-term interests. This will effectively improve long-term, risk-adjusted returns, well after activist shareholders exit an investment.

While there may always be an inherent divergence between investors with short and long-term objectives, we believe that healthy competition, constructive dialogue, and transparent debate fuel shareholder democracy. As such, resisting any efforts to disenfranchise the voice of long-term shareholders will benefit the average investor, who has benefited greatly from the development of strong and efficient capital markets.

The complete memorandum is available here.

Endnotes

1“Why Index Investing is Good for Markets – And Investors”. State Street Global Advisors. (August 2019)
https://www.ssga.com/investment-topics/environmental-social-governance/2019/10/why-index-investing-is-good-for-markets.pdf (go back)

2Brav, Alon. Jiang, Wei and Kim, Hyunseob. ”The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes” Oxford University Financial Review. (June 2015) http://rfs.oxfordjournals.org/content/28/10/2723.full.pdf (go back)

3“H1 2022 Review of Shareholder Activism”, Lazard Capital Markets Advisory Group. (July 2022)
H1 2022 Review of Shareholder Activism (lazard.com) (go back)

4“Shareholder Activism in 2021” Insightia. (January 2022) (go back)

5Gonzalez, Juan Pablo, Goodman, Anthony, van Biesen, Tanya, Olson, Nels. “The Return of the Activist Investor” Korn Ferry (August 2022) https://www.kornferry.com/insights/this-week-in-leadership/the-return-of-the-activist-investor (go back)

6State Street Global Advisors Voting Data as of date 8/1/2022 (go back)

7“The Effect of Shareholder Activism on Corporate Strategy”, Spencer Stuart, Evercore & NYSE Governance Services. (April 2016) https://www.spencerstuart.com/research-and-insight/the-effect-of-shareholder-activism-on-corporate-strategy (go back)

8“Global Proxy Voting and Engagement Guidelines” State Street Global Advisors. (March 2022).(go back)

9“Fact Sheet: Universal Proxy Rules for Director Elections”, U.S. Securities and Exchange Commission. (July 2022)
https://www.sec.gov/files/34-93596-fact-sheet.pdf (go back)

10Hirst, Scott. “Comment Letter to SEC: Universal Proxy”. (June 7, 2021) https://www.sec.gov/comments/s7-24-16/s72416-8893542-241143.pdf (go back)

11Hirst, Scott. “Universal Proxies”. Yale Journal on Regulation. Vol 35, No.2. (September 25, 2017)
https://ssrn.com/abstract=2805136 (go back)

12“The Activist Report: 13D Monitor. 10 Questions with Ben Colton”, 13D Monitor. (February 2022) (go back)

13Liekefett, Kai H.E. “Welcoming the Universal Proxy”, Sidley (July 2022) https://www.sidley.com/-/media/publications/welcoming-the-universal-proxy.pdf?la=en (go back)

14Bebchuk, Lucian A. and Brav, Alon and Jiang, Wei and Keusch, Thomas, “Dancing with Activists” (June 1, 2017). Journal of Financial Economics, Harvard Law, Columbia Business School and European Corporate Governance Institute.
https://ssrn.com/abstract=2948869 (go back)

Revisiting the Effect of Common Ownership on Pricing in the Airline Industry

Posted by Patrick Dennis (University of Virginia), Kristopher Gerardi (Federal Reserve Bank of Atlanta), and Carola Schenone (University of Virginia), on
Monday, November 7, 2022
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Patrick Dennis and Carola Schenone are Associate Professors of Commerce at the University of Virginia, McIntire School of Commerce and Kristopher Gerardi is a financial economist and senior adviser in the research department of the Federal Reserve Bank of Atlanta. This post is based on their recent paper, forthcoming in the Journal of Finance. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here) by Lucian A. Bebchuk and Scott Hirst; New Evidence, Proofs, and Legal Theories on Horizontal Shareholding (discussed on the Forum here) and Horizontal Shareholding both by Einer Elhauge.

The common ownership hypothesis suggests that large, institutional investors who own equity stakes in firms that compete in the same industry have an incentive to reduce competition by, for example, increasing prices, lowering production, or increasing barriers to entry. The theory behind the hypothesis is relatively straightforward. Firms are tasked with maximizing shareholder value, which typically coincides with simply maximizing their own profits. However, if shareholders also own equity in direct competitors, then maximizing shareholder value implies that firms have an incentive to maximize some combination of their own profits as well as those of their competitors. But if firms consider their competitors’ profits when making business decisions then competition may decline and consumer welfare may decrease.

The hypothesis began to garner significant attention from academic researchers, regulators, and practitioners with a highly influential and provocative paper by Azar, Schmalz, and Tecu (2018) (hereafter AST) that claimed to find evidence of anti-competitive effects from increased institutional common ownership. The AST paper provided empirical evidence from the airline industry showing that markets with higher levels of common ownership concentration are characterized by higher average ticket prices.

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Top 5 SEC Enforcement Developments

Posted by Haimavathi Marlier, Jina Choi, and Michael Birnbaum, Morrison & Foerster LLP, on
Monday, November 7, 2022
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Haimavathi Marlier, Jina Choi, and Michael Birnbaum are Partners at Morrison & Foerster LLP. This post is based on their Morrison & Foerster memorandum.

In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important SEC enforcement developments from the past month, which was an active one as the SEC Division of Enforcement closed out its fiscal year. This month we examine:

  • A rare Regulation FD action that could be headed to a jury trial;
  • Charges against a broker-dealer and investment adviser for failing to guard 15 million customers’ personally identifiable information, or “PII”;
  • An insider trading action involving an allegedly improper Rule 10b5-1 plan;
  • A significant negligence settlement against a major aerospace company and its former CEO for failing to disclose safety issues in public statements regarding airplane crashes; and
  • A settlement with 16 registrants assessing penalties totaling more than $1 billion for employees’ use of off-channel, and therefore unpreserved, communications to conduct firm business.

1. Reg FD Litigation Appears to Be Headed to Trial After SDNY Judge Dismisses Cross-Motions for Summary Judgment

On September 8, 2022, Judge Engelmayer of SDNY denied cross-motions for summary judgment in SEC v. AT&T, Inc. et al. and set a Reg FD litigation on a course to trial for the first time. As discussed in detail in MoFo’s recent client alert, in March 2021, the SEC filed a complaint against AT&T and three investor relations (IR) executives alleging violations of Reg FD, which prohibits a public company from providing selective disclosures of MNPI to particular persons outside the company, without also disclosing such information to the public. The SEC alleged that, in March and April of 2016, AT&T and members of its IR department violated Reg FD by disclosing AT&T’s “projected and actual financial results” to “stock analysts from approximately 20 Wall Street firms on a one-on-one basis” in an effort to lower consensus revenue estimates for Q1 2016 so that AT&T would not fall short. According to the complaint, AT&T’s conduct came on the heels of missed consensus revenue estimates in two of the previous three quarters. As alleged, AT&T’s selective disclosures of MNPI prompted these analysts to significantly reduce their revenue estimates for Q1 2016, and AT&T ended up exceeding these projections by 0.1%.

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Seven Key Considerations for a Reverse Stock Split by a Delaware Corporation

Posted by Jeremy Barr, Valerie Ford Jacob, and Pamela Marcogliese, Freshfields Bruckhaus Deringer LLP, on
Sunday, November 6, 2022
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Jeremy Barr is Counsel, Valerie Ford Jacob is Global Co-head of Capital Markets & Partner, and Pamela Marcogliese is a Partner at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Given recent stock market declines, many listed companies currently trade at substantially reduced share prices relative to earlier in 2022. Reduced share prices can cause many challenges for a listed company, one of which is that if a company listed on the NYSE or Nasdaq trades below $1.00 per share over 30 consecutive trading days, the company may be delisted by the applicable exchange. One of the principal ways companies seek to increase their share price and, if applicable, maintain their listing eligibility is by implementing a reverse stock split (sometimes referred to as a share consolidation). Below, we discuss some of the key issues for a board of directors and management team to consider when weighing the costs and benefits of a reverse stock split.

What is a reverse stock split?

In a reverse stock split, a company reclassifies its issued and outstanding shares into a smaller number of shares (for instance, every five outstanding shares are reclassified into one share). When the reverse stock split becomes effective, outstanding shares are exchanged for a lower quantity of shares based on the designated ratio, and these “post-split” shares trade under a new CUSIP number. At least at the outset, the company’s stock price increases in the same proportion as the number of shares decreases.

What triggers delisting on the NYSE or Nasdaq?

Both the NYSE and Nasdaq require listed companies to maintain a share price above $1.00.

  • The NYSE will issue a deficiency letter to a listed company if the average closing price of its shares is less than $1.00 over a 30 consecutive trading-day period. NYSE listed companies must notify the NYSE within 10 business days of receipt of the deficiency notice of either their intent to cure or to be subject to the exchange’s suspension and delisting procedures. NYSE listed companies have six months to cure the deficiency following receipt of the deficiency letter. The cure period can be extended to the company’s next annual meeting if a shareholder vote is required to approve the reverse stock split (even if beyond six months from receipt of the deficiency letter).
  • Nasdaq will issue a deficiency letter to a listed company if its shares fail to satisfy the $1.00 minimum closing bid price requirement for 30 consecutive business days. Like companies listed on the NYSE, Nasdaq listed companies have a 180-day period to cure the deficiency following receipt of the deficiency letter. However, unlike the NYSE, a second 180-day period is available for companies listed on the Nasdaq Capital Market tier if the company satisfies the $1 million market value of publicly held shares requirement and meets all other initial inclusion requirements of the Nasdaq Capital Market (other than the $1.00 closing bid). Companies listed on the Nasdaq Global Select Market or Nasdaq Global Market tiers that are unable to comply with the initial 180-day compliance period may transfer to the Nasdaq Capital Market to take advantage of the additional 180-day compliance period offered by that tier.

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Shareholder Voting Trends (2018-2022)

Posted by Matteo Tonello, The Conference Board, Inc., on
Saturday, November 5, 2022
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Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post relates to Shareholder Voting Trends Live Dashboard, an online dashboard published by The Conference Board in partnership with ESG data analytics firm ESGAUGE and in collaboration with Russell Reynolds Associates and Rutgers Center for Corporate Law and Governance. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

This post provides an overview of shareholder resolutions filed at Russell 3000 and S&P 500 companies through mid-July 2022, including trends regarding the volume and topics of shareholder proposals, the level of support received by those proposals when put to a vote, and the types of proposal sponsors. The report is accompanied by a Live Dashboard, which contains the most current figures and enables data cuts by market index, business sectors, and company size groups. Please refer to the dashboard for the most recent data.

This commentary offers insights for what may lie ahead in the following areas:

  • The continued increase in the number of shareholder proposals related to social and environmental policies of the company.
  • Shareholder expectations regarding climate-related targets and disclosure.
  • The success of many shareholder proposals on civil rights or racial equity audits.
  • The alignment of corporate political activity and the firm’s stated values.
  • The pressure on smaller public companies to endorse governance practices that are now widely used by their larger counterparts.
  • The emerging link between softening support for director elections and company say-on-pay support levels, on the one hand, and investors’ dissatisfaction with corporate ESG performance, on the other.

The project is conducted by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with leadership advisory and search firm Russell Reynolds Associates and Rutgers University’s Center for Corporate Law and Governance (CCLG).

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Lawsuit Against Meta Invokes Modern Portfolio Theory To Protect Diversified Shareholders

Posted by Frederick Alexander, The Shareholder Commons, on
Friday, November 4, 2022
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Frederick Alexander is the CEO of The Shareholder Commons. This post is based on the class action filed against the directors of Meta Platforms (formerly Facebook, Inc.), and is part of the Delaware law series; links to other posts in the series are available here.

New Lawsuit Argues that Directors Failed to Consider Portfolio Impacts of Corporate Decisions

On Monday, October 3, a class action was filed in the Delaware Court of Chancery against the directors of Meta Platforms (formerly Facebook, Inc.), alleging that they breached their fiduciary duties by ignoring the impact of the company’s operations on the diversified portfolios of its shareholders. Among other matters, the McRitchie v Zuckerberg complaint challenges (1) the conduct revealed by Frances Haugen, the “Facebook Whistleblower,” (2) the large distributions of cash made to shareholders through stock repurchases, and (3) the board’s rejection of shareholder proposals that would have helped discern the broader impact of the company’s business model.

The complaint is based on the traditional shareholder primacy model, which provides that directors have fiduciary duties to the holders of a company’s residual equity–generally its common shareholders. It does not seek to expand those duties to encompass other stakeholders. However, the complaint does drill down on an issue that courts have yet to fully address: the fiduciary implication of the fact that modern investors are generally diversified, so that their interests extend beyond (and may be in opposition to) the maximization of the value of future cash flows to be received from owning a company’s shares.

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Losing Control? The 20-Year Decline in Loan Covenant Violations

Posted by Thomas P. Griffin (Villanova University), Greg Nini (Drexel University), and David C. Smith (University of Virginia) , on
Friday, November 4, 2022
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Tom Griffin is an Assistant Professor of Finance at Villanova University, Villanova School of Business, Greg Nini is an Associate Professor of Finance at Drexel University, LeBow College of Business, and David Smith is the Virginia Bankers Association Eminent Professor of Commerce at the University of Virginia, McIntire School of Commerce. This post is based on their recent paper. 

In our paper, Losing Control? The 20-Year Decline in Loan Covenant Violations, we show that the annual proportion of U.S. public firms that report a financial covenant violation dropped by nearly 70% over the last 20 years. Given that these “tripwires” serve as an important tool for lenders seeking to protect their financial claim prior to payment default, the secular trend has drawn concern from policymakers and industry professionals. For example, a member of the U.S. Senate Banking Committee warned that “the large leveraged lending market exhibits many of the characteristics of the pre-2008 subprime mortgage market. These loans are generally poorly underwritten and include few protections for lenders.”

We highlight that the role of financial covenants in incomplete contracting theory is not to grant decision rights to lenders in as many states as possible, but rather to allocate control to the party with greatest incentive to make a value-maximizing decision. Borrowers retain decision rights in normal states because their payoff structure generally incentivizes joint surplus maximization, but lenders have the right to intervene when incentive conflicts are likely to bias borrowers toward inefficient behavior. Since agency problems worsen as borrowers approach financial distress, the transfer of control rights is contingent on a signal that imperfectly captures the underlying economics of the borrower.

Adopting terminology from medical diagnostic testing, a more restrictive covenant package is beneficial because it has a lower probability of a false negative outcome, in which the borrower is distressed but fails to violate a covenant. However, we stress that a more restrictive covenant package is costly because it creates a higher probability of a false positive outcome, in which the borrower violates despite not being financially distressed.

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