Yearly Archives: 2022

Getting Out the Retail Vote: Targeting Reddit and New Social Tools in Proxy Solicitations

Posted by Steve Lipin and Keilley Banks, Gladstone Place Partners, on
Saturday, September 3, 2022
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Steve Lipin is founder and CEO and Keilley Banks is an analyst at Gladstone Place Partners. This post is based on their Gladstone Place memorandum.

The success of the get-out-the-vote campaigns for Nikola Corporation and Lucid Group shows that shareholder solicitation is not the same in the age of Robinhood and Reddit. Companies are using new communications strategies and channels to find retail shareholders and obtain their critical votes.

When faced with opposition from its founder and largest shareholder for an important proposal on the 2022 proxy, EV truck maker Nikola added an intense social media strategy in the proxy solicitation toolkit to rally enough shareholders to cast their “FOR” vote—66% of votes cast, 50.3% of shares outstanding and a quorum of 75% of the shares outstanding at the company’s twice delayed August 2nd meeting.

Trends: The use of new channels and tools reflects the changing nature of the investor community, many of whom are investing through Robinhood and other new platforms and swapping commentary on Reddit, StockTwits, YouTube, Twitter and others. Admittedly, both Nikola and Lucid are EV stocks that have captured the imagination of retail investors, and both were digital natives.

In the past five years, retail stock ownership, particularly among millennials and Gen Z, has skyrocketed, with a generation of investors who didn’t grow up reading The Wall Street Journal. A 2021 survey by Charles Schwab found that 15% of all U.S. stock market investors said they first began investing in 2020. Instead of the Journal, new investors look to @mrsdowjones, a self-described “financial pop star” and FinTok, which is Financial TikTok, a subcommunity of TikTok.

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Separating Ownership and Information

Posted by Paul Voss (Central European University) and Marius Kulms (Continentale Versicherung), on
Friday, September 2, 2022
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Paul Voss is Assistant Professor of Economics and Business at Central European University; and Marius Kulms is an Actuary at Continentale Versicherung. This post is based on their recent paper, forthcoming in the American Economic Review.

Our paper Separating Ownership and Information, forthcoming in the American Economic Review, provides a new perspective on the separation of ownership and control—the fundamental problem in corporate governance according to classical theories (Berle and Means 1932; Jensen and Meckling 1976). We show that the separation of ownership and control is necessary for efficient trade in the market for corporate control. Our results highlight the importance of communication between inside and outside shareholders and call mandatory disclosure requirements during takeovers into question.

We develop a model of the market for corporate control with two-sided asymmetric information. We build on the basic idea that insiders obtain private information by virtue of exercising control. Hence, the separation of ownership and control naturally leads to a separation of ownership and information. In the model, ownership and control are separated in that the insider (e.g., incumbent management) controls the firm but only has a minority stake in the outstanding shares. The majority of ownership rights reside with outside shareholders. By exercising control, the insider has private information regarding the target’s stand-alone value vis-à-vis the uninformed, outside shareholders. A potential bidder, who privately knows the value of the target under her management, can obtain control via a tender offer for the majority of shares. The insider can respond by a strategic (cheap talk) recommendation to the outside shareholders, who ultimately decide on the success of the takeover by their tendering decisions.

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Dealing with Activist Hedge Funds and Other Activist Investors

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Friday, September 2, 2022
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, and Anna Dimitrijević.

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

Introduction

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

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

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

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Weekly Roundup: August 26-September 1, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, September 2, 2022

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

Statement by Commissioner Uyeda on Final Rule Regarding Pay Versus Performance

Posted by Mark T. Uyeda, U.S. Securities and Exchange Commission, on Friday, August 26, 2022
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Statement by Chair Gensler on Final Rule Regarding Pay Versus Performance

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Friday, August 26, 2022
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Statement by Chair Gensler on Agreement Governing Inspections and Investigations of Audit Firms Based in China and Hong Kong

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Saturday, August 27, 2022
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Statement by Commissioner Crenshaw on Final Rule Regarding Pay Versus Performance

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on Saturday, August 27, 2022
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Statement by Commissioner Peirce on Final Amendments to the Whistleblower Program

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Sunday, August 28, 2022
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Statement by Chair Gensler on Final Amendments to the Whistleblower Program

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Sunday, August 28, 2022
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ECB Tilts Toward Climate, but Investors Can Go Further

Posted by Vivek Bommi, Eamonn Buckley, and Markus Peters, AllianceBernstein L.P., on Monday, August 29, 2022
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Board Reforms, Stock Liquidity, and Stock Market Development

Posted by Buhui Qiu and Thomas Y. To (University of Sydney), on Monday, August 29, 2022
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ISS Provides Guidance on the Universal Proxy Card

Posted by Kai Liekefett, Derek Zaba, and Leonard Wood, Sidley Austin LLP, on Monday, August 29, 2022
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The Important Legacy of the Sarbanes Oxley Act

Posted by Michael W. Peregrine (McDermott Will & Emery) and Charles W. Elson (University of Delaware), on Tuesday, August 30, 2022
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The Economics of Corporate Governance

Posted by Mathieu Pellerin (Dimensional Fund Advisors), on Tuesday, August 30, 2022
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Board Leadership, Meetings, and Committees

Posted by Matteo Tonello, The Conference Board, Inc., on Tuesday, August 30, 2022
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California State Court Applies Discovery Stay in Securities Act Claim

Posted by Susan E. Engel, Matthew Rawlinson, and Peter Trombly, Latham & Watkins LLP, on Wednesday, August 31, 2022
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SEC Climate Disclosure Comments Reveal Diversity of Views

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Wednesday, August 31, 2022
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Corporate Political Spending and State Tax Policy: Evidence from Citizens United

Posted by Cailin Slattery (University of California Berkeley), Alisa Tazhitdinova (University of California Santa Barbara), and Sarah Robinson (University of California Santa Barbara), on Wednesday, August 31, 2022
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SEC Bulletin on Conflicts of Interest for Broker-Dealers and Investment Advisers

Posted by W. Hardy Callcott, Corin R. Swift, and Benjamin F. Farkas, Sidley Austin LLP, on Thursday, September 1, 2022
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Universal Proxy Rules: Roadmap for Annual Meetings

Posted by Andrew Freedman, Kenneth Mantel, and Ian Engoron, Olshan Frome Wolosky LLP, on Thursday, September 1, 2022
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Turning Down the Heat on the ESG Debate: Separating Material Risk Disclosures from Salient Political Issues

Posted by Robert Eccles (Oxford University), and Daniel F. C. Crowley, K&L Gates LLP, on Thursday, September 1, 2022
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Turning Down the Heat on the ESG Debate: Separating Material Risk Disclosures from Salient Political Issues

Posted by Robert Eccles (Oxford University), and Daniel F. C. Crowley, K&L Gates LLP, on
Thursday, September 1, 2022
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Robert Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; and Daniel F.C. Crowley is a partner at K&L Gates LLP. This post was authored by Professor Eccles and Mr. Crowley.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discuss on the Forum here) by Leo Strine.

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

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

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Universal Proxy Rules: Roadmap for Annual Meetings

Posted by Andrew Freedman, Kenneth Mantel, and Ian Engoron, Olshan Frome Wolosky LLP, on
Thursday, September 1, 2022
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Andrew Freedman and Kenneth Mantel are partners and Ian Engoron is an associate at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

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

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

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

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

Posted by W. Hardy Callcott, Corin R. Swift, and Benjamin F. Farkas, Sidley Austin LLP, on
Thursday, September 1, 2022
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W. Hardy Callcott and Corin R. Swift are partners and Benjamin F. Farkas is a senior managing associate at Sidley Austin LLP. This post is based on their Sidley memorandum.

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

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

Broad Scope

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

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

Posted by Cailin Slattery (University of California Berkeley), Alisa Tazhitdinova (University of California Santa Barbara), and Sarah Robinson (University of California Santa Barbara), on
Wednesday, August 31, 2022
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Cailin Slattery is Assistant Professor of Business and Public Policy at University of California Berkeley Haas School of Business; Alisa Tazhitdinova is Assistant Professor of Economics at the University of California, Santa Barbara; and Sarah Robinson is a PhD candidate in economics at the University of California, Santa Barbara. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita; and The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss.

In January 2010, decades of legal precedent were overturned when the Supreme Court, in Citizens United v. FEC, decided that the government cannot restrict independent political expenditures by corporations, labor unions, and other associations. Critics decried the devastating impacts of independent spending by corporations. For example, the editorial board of the New York Times wrote that it “paved the way for corporations to use their vast treasuries to overwhelm elections and intimidate elected officials into doing their bidding.”

The Citizens United ruling was in fact followed by a substantial increase in independent spending.  Spencer and Wood (2014) find that although spending increased in all states post-Citizens, the increase in independent expenditures was twice as large in states that restricted corporate spending before the ruling. Similarly, Petrova, Simonov and Snyder (2019) find that Citizens United led to significant increases in political advertising. The question remains whether this increase in political spending had a meaningful effect on government policies.

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SEC Climate Disclosure Comments Reveal Diversity of Views

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Wednesday, August 31, 2022
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS Corporate Solutions publication by Paul Hodgson, Senior Editor at ISS Corporate Solutions, Noam Cherki, Regulatory Affairs Intern, and Karina Karakulova, Director of Regulatory Affairs and Public Policy, at Institutional Shareholder Services.

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) 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 Bebchuk, Kobi Kastiel, and Roberto Tallarita.

The Securities and Exchange Commission in March published its long-awaited proposed rule requiring U.S.-listed companies and foreign private issuers to provide more in-depth and standardized climate-related information in their registration statements and annual reports. The regulator has received about 11,000 comments on the proposal—far more than usual—and continues to get submissions nearly a month after the close of the official review period. Our analysis shows that while there was overwhelming investor support for climate disclosure regulation in general, comments diverge significantly on the recommended regulatory path ahead.

Comment Perspectives

ISS Corporate Solutions examined a representative range of comments from investors (both asset owners and managers) and investor groups, such as CalSTRS, BlackRock, The Council of Institutional Investors; non-profits and consumer protection groups, such as As You Sow and Ceres; former SEC chairs and commissioners; legal and academic scholars; corporations, such as Occidental Petroleum, Hewlett-Packard and United Airlines; banks, including Norges Bank and Citigroup; associations, such as the Society for Corporate Governance and the Business Roundtable; and auditing firms such as EY. Comments from different parties did not always fall along corporates vs. investors, though some did. The Business Roundtable and the Chamber of Commerce described the proposed disclosures as completely unworkable.

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California State Court Applies Discovery Stay in Securities Act Claim

Posted by Susan E. Engel, Matthew Rawlinson, and Peter Trombly, Latham & Watkins LLP, on
Wednesday, August 31, 2022
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Susan E. Engel and Matthew Rawlinson are partners and Peter Trombly is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Engle, Mr. Rawlinson, Mr. Trombly, Samir Deger-Sen, and Morgan E. Whitworth.

A recent decision, if widely adopted, could spare companies from unnecessary discovery costs in claims that may not survive a threshold pleadings challenge.

Key Points:

  • State courts across the country have reached conflicting conclusions on whether the Private Securities Litigation Reform Act’s (PSLRA) automatic stay of discovery pending a ruling on a complaint’s legal sufficiency applies to cases filed in state court.
  • Breaking from the majority approach among California courts, a San Mateo County Superior Court conducted a thorough statutory interpretation analysis and concluded that the PSLRA requires a stay of discovery in state court.
  • If state courts were to reach consensus on this conclusion or if the US Supreme Court were to adopt it securities plaintiffs would possess less leverage to coerce settlements by filing in state court and forcing companies to engage in early discovery.

On July 25, 2022, a California state court held that the PSLRA imposes an automatic stay of discovery during the pendency of a motion to dismiss or its equivalent in state-court actions arising under the Securities Act of 1933. [1] Recognizing that this question has divided state courts across the country, the court urged the US Supreme Court to provide the “last word” on this important and recurring issue “as soon as possible.” [2]

Background

The Securities Act of 1933 imposes disclosure obligations on issuers seeking to sell securities to the public. In general, Section 5 of the Securities Act requires issuers to register securities offerings with the Securities and Exchange Commission. [3] Section 12(a)(1) imposes liability on any person who sells unregistered securities, [4] and “control persons” of a seller of unregistered securities may be held liable pursuant to Section 15. [5] Private plaintiffs may bring certain Securities Act claims including claims under Sections 12(a)(1) and 15in either federal or state court. [6]

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