Yearly Archives: 2022

Recent Delaware Court of Chancery SPAC Opinions

Posted by Nathan E. Barnett and Benjamin Strauss, McDermott Will & Emery LLP, on
Wednesday, March 30, 2022
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Nathan E. Barnett and Benjamin Strauss are partners at McDermott Will & Emery LLP. This post is based on their MWE memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes SPAC Law and Myths by John C. Coates (discussed on the Forum here).

Highlighted below are several recent opinions from the Delaware Court of Chancery relating to special purpose acquisition companies (SPACs) that provide helpful guidance to sponsors, investors and practitioners. These cases are a good reminder that well-worn principles of Delaware law still apply in the SPAC context:

  • In In re Multiplan Corp. Stockholder Litigation, 2022 WL 24060 (Del. Ch. Jan. 3, 2022), the court, on a motion to dismiss (meaning that inferences are drawn in favor of the plaintiff and claim dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances), (i) held the entire fairness standard of review (the most onerous standard under Delaware law) applied to a de-SPAC transaction where SPAC fiduciaries (including the sponsor) allegedly suffered from inherent conflicts with public stockholders due to the economic benefit they received in the transaction and (ii) denied dismissal of stockholders’ fiduciary duty claims against those fiduciaries for allegedly making materially misleading disclosures that impaired the stockholders’ ability to make a fully informed decision whether to redeem their stock in connection with the transaction.
  • In Brown v. Matterport, Inc., 2022 WL 89568 (Del. Ch. Jan. 10, 2022), the court held that the plain terms of a lock-up provision in a SPAC’s bylaws rendered the lock-up inapplicable to certain of the post-closing stockholders since those stockholders did not receive their post-closing shares “immediately following” the merger transaction, as was required under the lock-up provision. Delaware courts will apply the literal text of a contract (e.g., bylaws) as opposed to what may have been the spirit of the agreement.
  • In In re Forum Mobile, Inc., 2022 WL 322013 (Del. Ch. Feb. 3, 2022), the court denied appointment of a custodian over a defunct Delaware corporation (whose shares retained a CUSIP number) where the petitioner intended to revive the corporation in order to access the public markets. Delaware has a long-standing policy against permitting entrepreneurs to manipulate Delaware law for the purposes of reviving defunct Delaware entities with still-extant listings and using them as vehicles to access the public markets.

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Proxy Season 2022: Early Trends in Executive Compensation

Posted by Amit Batish, Equilar, Inc., on
Tuesday, March 29, 2022
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Amit Batish is Director of Content at Equilar, Inc. This post is based on an Equilar memorandum by Mr. Batish and Courtney Yu. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The 2022 proxy season is now in full swing. Over the next two months, thousands of U.S. public companies will file proxy statements highlighting trends pertaining to their governance practices, including those related to executive compensation. In this post, Equilar examines a sample of early DEF14A proxy filings from Equilar 500 companies—the 500 largest U.S. public companies by revenue—as of March 18, 2022, to offer a preview of how executive compensation was structured in 2021, as well as key trends to watch through the remainder of proxy season.

CEO Pay Appears to Bounce Back Strongly From Pandemic “Woes”

Following the onset of the COVID-19 pandemic, several companies adjusted their executive pay packages to ease the burden of the pandemic on employees. For example, many CEOs saw salary cuts, adjustments to bonus payouts, changes in long-term incentive plans (LTIPs) and more. Ultimately, many companies restored those adjustments, but median CEO pay declined from $12.2 million in 2019 to $12 million in 2020 (Figure 1).

Two years after the start of the pandemic, the early data shows that CEO pay is back on the rise. In 2021, median total direct compensation for companies included in the analysis increased to $14.3 million. This change from $12 million in 2020 would represent a near 20% increase, should the trend persist. Over the last two years, many companies elected to award their CEOs for staying on board and guiding their organizations through turbulent times, likely contributing to the increase in pay.

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SPAC Disclosure of Net Cash Per Share: A Proposal for the SEC

Posted by Michael Klausner (Stanford University), Michael Ohlrogge (New York University), and Harald Halbhuber (New York University), on
Tuesday, March 29, 2022
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Michael Klausner is the Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School; Michael Ohlrogge is Assistant Professor of Law at NYU School of Law; and Harald Halbhuber is partner at Shearman & Sterling LLP and a Research Fellow at New York University School of Law, Institute for Corporate Governance & Finance. Related research from the Program on Corporate Governance includes SPAC Law and Myths by John C. Coates (discussed on the Forum here).

In earlier posts on this blog here and here, we have summarized our research findings regarding the extent to which SPACs have dissipated substantial amounts of cash underlying their publicly held shares by the time they enter into a “deSPAC” merger. We further found that a SPAC’s pre-merger net cash per share is highly correlated with its post-merger share price. The less cash per share delivered to a merger target, the greater the losses tend to be for nonredeeming SPAC shareholders. In the time since we wrote our article, our predictions have largely been borne out. The average share price of SPACs that merged in 2021 is now $6.30, roughly matching the actual net cash per share those SPACs delivered in their mergers. That $6.30 share price represents a steep loss compared to the $10 that SPAC shareholders would have received if they redeemed their shares.

Net cash per share, therefore, is highly material to a shareholder’s redemption decision. SPACs, however, do not disclose their net cash per share, and piecing this figure together based on what SPACs do disclose is a difficult and uncertain task even for a sophisticated shareholder. In a paper we have just posted here, we propose an approach that the SEC could consider in requiring SPACs to disclose their net cash per share as of the time of a merger.

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SEC Comment Letter on Share Repurchase Disclosure Modernization

Posted by Ira Kay and Mike Kesner, Pay Governance LLC, on
Tuesday, March 29, 2022
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Ira T. Kay is managing partner/founder and Mike Kesner is partner at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

Introduction and Background

Pay Governance recently submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) on its proposed rules to modernize the disclosure of share repurchases. [1] As background, the SEC is proposing companies furnish a new form (Form SR) containing detailed information on daily share repurchases no later than one business day after the execution of a repurchase. Though the proposed rules require Form SR to be furnished for each day of a share repurchase process, the SEC is asking the public for opinions regarding level of detail, frequency, and potential exemptions/exceptions. In our comment letter we acknowledge not being experts on share repurchase disclosure, but we wanted to address aspects of the SEC’s business case for the proposed changes. Namely, we were concerned with the SEC’s reference to claims of certain commentators that share repurchases were being used by executives to unjustly enrich themselves at the expense of shareholders, employees, and long-term investment in the company.

Below are a few of the comments included in the SEC proposal:

  • “Share price- or EPS-tied compensation arrangements could incentivize executives to undertake repurchases in an attempt to maximize their compensation.”
  • “Share repurchases [are used] as a tool to raise the price of an issuer’s stock in a way that allows insiders and senior executives to extract value from the issuer instead of using the funds to invest in the issuer and its employees.”
  • “[There] is the potential for share repurchases to be used by issuers as a mechanism to inflate the compensation of their executives in a manner that is not transparent to investors or the market.” [2] In addition to the above, the SEC also indicated the new disclosure requirements “may improve the ability of investors to identify issuer repurchases potentially driven by managerial self-interest, such as seeking to increase the share price prior to an insider sale or to change the value of an option or other form of executive compensation,” [3] further reinforcing the notion that share repurchases are used to benefit executives at the cost of other stakeholders.

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BlackRock’s 2022 Engagement Priorities

Posted by Breanne Dougherty, Victoria Gaytan, and Hilary Novik-Sandberg, BlackRock Investment Stewardship, on
Monday, March 28, 2022
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Michelle Edkins is Managing Director of BlackRock Investment Stewardship. This post is based on a BlackRock Investment Stewardship memorandum by Ms. Edkins, Breanne Dougherty, Victoria Gaytan, and Hilary Novik-Sandberg.

Engagement Priority* Key Performance Indicators (KPIs)
Board quality and effectiveness

Quality leadership is essential to performance. Board composition, effectiveness, diversity, and accountability remain top priorities

 Board effectiveness—A core component of BIS’ work to advance our clients’ economic interests is direct engagement with a board member, so that we can provide direct feedback from our perspective as a long-term shareholder. For those companies with which we wish to engage to understand their board’s role, we seek dialogue with the most appropriate non-executive, and preferably independent, director(s) who has been identified by the company as having a responsibility to meet with shareholders.

Board quality—We look to companies to disclose their approach to ensuring meaningful board diversity and encourage the board to set out the self-identified demographic profiles of the directors in aggregate, consistent with local law, and how this aligns with the company’s strategy and business model.
Strategy, purpose and financial resilience

A purpose driven long-term strategy, underpinned by sound capital management, supports financial resilience

 In discussing their corporate strategy and financial resilience, we encourage companies to set out how they have integrated business relevant sustainability risks and opportunities. To aid investor understanding, companies can demonstrate in their disclosures how they are aligning their strategy with their purpose to address these risks and opportunities and create long-term value, evidenced by metrics relevant to their business model. BIS encourages companies to disclose industry- or company-specific metrics to support their narrative on how they have considered key stakeholders’ interests in their business decision-making.
Incentives aligned with value creation

Appropriate incentives reward executives for delivering sustainable long-term value creation

 BIS looks to companies to disclose incentives that are aligned with long-term value creation and sustained financial performance, underpinned by material and rigorous metrics that align with the company’s long-term strategic goals.
Climate and natural capital

Business plans with targets to advance the transition to a low-carbon economy. Managing natural capital dependencies and impacts through sustainable business practices

 Climate—We encourage companies to discuss in their reporting how their business model is aligned to a scenario in which global warming is limited to well below 2°C, moving towards global net zero emissions by 2050. Companies help investors understand their approach when they provide disclosures aligned with the four pillars of the TCFD—including scope 1 and 2 emissions, along with short-, medium-, and long-term science-based reduction targets, where available for their sector.

Natural Capital—We look to companies to disclose detailed information on their approach to managing material natural capital-related business risks and opportunities, including how their business models are consistent with the sustainable use and management of natural resources such as air, water, land, minerals and forests.
Company impacts on people

Sustainable business practices create enduring value for key stakeholders—employees, customers, suppliers and communities

 We look to companies to demonstrate a robust approach to human capital management and provide shareholders with the necessary information to understand how their approach aligns with their stated strategy and business model.

We look to companies to disclose the actions they are taking to support a diverse and engaged workforce, and how that aligns with their strategy and business model.

We look to companies to discuss in their disclosures how the board oversees management’s approach to due diligence and remediation of adverse impacts to people arising from their business practices.

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Beyond the Target: M&A Decisions and Rival Ownership

Posted by Luca X. Lin (HEC Montreal), on
Monday, March 28, 2022
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Luca X. Lin is Assistant Professor of Finance at HEC Montreal. This post is based on a recent paper authored by Mr. Lin; Miguel Anton, Associate Professor of Financial Management at IESE Business School; Jose Azar, Associate Professor of Economics at the University of Navarra; and Mireia Gine, Associate Professor of Financial Management at IESE Business School. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here); and Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

There has been a long-standing question on why U.S. shareholders remain largely inactive in standing up against acquisitions that destroy shareholder wealth. Although not all acquisitions require the voting approval of shareholders, large shareholders can still exert their influence through other means such as the threat of exit or behind-the-scenes interventions. However, in our recently published paper in the Journal of Financial Economics, we suggest that many acquiring firm shareholders may not actually have the incentive to ex-ante prevent and ex-post oppose acquisitions that are seemingly value-destroying, even if they have the capability to do so.

Using a sample of horizontal mergers between U.S. public firms from 1988 to 2016, we first document that most top shareholders of the acquiring firms also hold shares across a significant number of non-merging industry rivals of the merging firms. There is robust and consistent evidence in the M&A literature that non-merging industry rivals on average gain upon the announcement of a merger in their industry, due to reasons such as efficiency gain at the expense of the merging firms, a change in industry structure, or takeover threats inducing an improvement in corporate policies. Therefore, it is important to study whether acquiring firm shareholders’ rival ownership can affect their incentives regarding these acquisitions.

When shareholders hold a diversified portfolio of multiple firms within the same industry, they internalize the industry externalities of an individual firm’s corporate decisions at the portfolio level. Monitoring is costly, while shareholders have limited attention and resources. Therefore, it is unlikely that diversified shareholders monitor every decision by every portfolio firm. We argue that shareholders with a diversified industry portfolio may take a portfolio approach when evaluating a firm’s corporate decisions, that is, only when a firm’s decision generates externalities large enough to have value implications for the shareholders’ overall industry portfolio will such shareholders devote resources to get involved in said decision.

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Board Oversight of ESG: Preparing for the 2022 Proxy Season and Beyond

Posted by David M. Silk, Sabastian V. Niles, and Carmen X. W. Lu, Wachtell, Lipton, Rosen & Katz, on
Monday, March 28, 2022
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David M. Silk and Sabastian V. Niles are partners and Carmen X. W. Lu is counsel at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

Last year’s proxy season saw investor support for an unprecedented number of ESG proposals, on issues ranging from climate change to human capital management to diversity, equity and inclusion. Proxy advisory firms increasingly recommended that shareholders vote for such proposals. We also saw the emergence of ESG-driven withhold campaigns targeting individual directors. This upcoming 2022 proxy season will likely remain hotly contested as investors, proxy advisors and other stakeholders further scrutinize companies’ ESG credentials. The Securities and Exchange Commission’s recent guidance limiting exclusion of Rule 14a-8 proposals and proposed new rules on climate-related disclosures, and the new ISS and Glass Lewis proxy voting guidelines on climate, board and workforce diversity and “responsiveness” will continue to lend support to ESG-related shareholder proposals. As a result, companies and major institutional investors will need to continue to focus on the relevance, impact and risks of a proposal on an individual company.

Boards now face heightened expectations for how they oversee ESG, with some investors prepared to hold directors, particularly committee chairs, directly accountable (through director specific withhold/against votes and targeted public commentary) for a company’s perceived ESG underperformance, shortfalls versus peers or failures of oversight.

We set forth below some key considerations for companies and directors as they continue to prepare for the upcoming proxy season and beyond:

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Recent SEC Enforcement Developments

Posted by Haimavathi V. Marlier, Jina Choi, and Michael D. Birnbaum, Morrison & Foerster LLP, on
Sunday, March 27, 2022
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Haimavathi V. Marlier, Jina Choi, and Michael D. 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, with links to primary resources. This has been a busy month for SEC rulemaking and enforcement alike, and we examine the following questions:

  • What can we glean from the recently issued proposed rules targeted at investment advisers, including advisers to private funds and institutional investment managers?
  • How does the SEC propose to strengthen its whistleblower program?
  • Can cooperation with the SEC mitigate adverse outcomes?
  • What do the SEC’s actions signal about its priorities?

1) Proposed Rule Changes on Private Fund Adviser Reporting, Cybersecurity, and Short Sales: In February 2022, the SEC voted to propose three sets of rules that would (1) impose new disclosure requirements on private fund advisers, (2) specify cybersecurity risk management requirements for registered investment advisers (RIAs) and others, and (3) increase short sale disclosure obligations on certain institutional investment managers. The thread linking these proposed rules appears to be an effort by the SEC to promote greater transparency and disclosure to investors.

First, on February 9, 2022, the SEC proposed new rules related to periodic disclosures by private fund advisers that impose heightened disclosure and other requirements on RIAs and exempt reporting advisers to private funds. The proposed rules would require these advisers to provide private fund investors with quarterly statements, cause the private funds to undergo financial statement audits, distribute to investors a fairness opinion under certain circumstances, and prohibit certain practices and undisclosed preferential treatment, among other things.

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How to Make Your 2022 Climate Resolutions Stick

Posted by Veena Ramani, National Association of Corporate Directors (NACD), on
Saturday, March 26, 2022
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Veena Ramani is a research director at FCLTGlobal. This post is based on her NACD memorandum, a version of which originally appeared in NACD BoardTalk. 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?, both by Lucian A. Bebchuk and Roberto Tallarita; and For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID, both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

The novelty of the new year is waning, and many resolutions are already losing steam—or have been abandoned altogether. What have we learnt? That anything worth doing is going to take more than changes in the margins. Resolutions, especially the big ones, tend to fizzle without serious lifestyle changes.

A version of this is playing out right now with climate change commitments in the capital markets. As it stands, approximately 60 percent of Fortune 500 companies have declared their climate resolutions in the form of greenhouse emissions reductions goals. Of these, 17 percent have set “net-zero” carbon emissions goals. But market and investor reactions to these ambitions have been muted. The Edelman Trust Barometer 2021 reveals that 72 percent of investors do not believe companies will live up to their environmental, social, and governance (ESG) commitments. Seventy-nine percent of global investors (and a staggering 92 percent of US investors) are concerned that companies will be unable to meet their net-zero goals.

Why the mistrust? Perhaps the answer lies in the chasm between what corporate climate resolutions are and the actions they have been taking in their business. Recent research has highlighted a vast gap between corporate climate commitments and strategic plan disclosures. While 81 of the world’s 100 largest companies had set climate targets as of September 2021, only 17 had referenced climate change in investor presentations on the organizations’ strategic plans and only five had provided substantive details. In other words, their “lifestyle” hasn’t really changed.

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Implications of Lee for a Board’s Decision to Reject a Nomination Notice

Posted by Gail Weinstein, Steven Epstein, and Philip Richter, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Saturday, March 26, 2022
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Gail Weinstein is senior counsel, and Steven Epstein and Philip Richter are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Richter, Warren S. de Wied, Brian T. Mangino, and Matthew V. Soran, and is part of the Delaware law series; links to other posts in the series are available here.

In Strategic Investment Opportunities v. Lee Enterprises (Feb. 14, 2022), the Delaware Court of Chancery reviewed the decision by the board of directors of Lee Enterprises, Inc. (“Lee”) to reject the director nominations notice provided by its dissident stockholder Strategic Investment Opportunities LLC (“Opportunities”). Opportunities is an affiliate of hedge fund Alden Global Capital LLC, which is in the midst of a hostile takeover bid for Lee. The court found, first, that the nomination notice plainly did not comply with the technical requirements of Lee’s advance notice bylaw. The court then applied an enhanced scrutiny standard of review to determine whether Lee’s directors had breached their fiduciary duties by not waiving, or allowing Opportunities to cure, any technical defects in the nomination notice. The court found that the directors’ actions had been “reasonable and appropriate” under the circumstances and upheld their rejection of the nominations.

Key Point

The decision emphasizes that, generally, a stockholder must comply precisely with the technical requirements of advance notice bylaws—but also reaffirms that a board must act in good faith and equitably in rejecting even a plainly non-compliant nomination notice. Reaffirming long-standing principles relating to the validity of advance notice bylaws, the court stressed that Lee’s advance notice bylaw was adopted on a “clear day,” far in advance of Alden’s takeover bid and the nomination notice; that the bylaw requirements were unambiguous and reasonable; and that Lee had not interfered with Opportunities’ ability to comply. The court endorsed a corporation’s “genuine interest in enforcing its Bylaws so that they retain meaning and clear standards that stockholders must meet” and readily found that Opportunities’ notice did not comply with “the letter” of Lee’s bylaw. The decision serves as a reminder, however, that a board must act in good faith and equitably when deciding to reject a nomination notice, even when the notice is non-compliant with the bylaw, is submitted outside a takeover context, and/or involves nominations for a minority of the board seats.

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