Yearly Archives: 2022

The Rise of Climate Litigation

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Thursday, March 3, 2022
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Shagun Agarwal is a Climate Solutions Associate at ISS ESG. This post is based on his ISS memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

Climate litigation is an increasingly common and accessible area of environmental law, and is being used to hold countries and public corporations to account for their climate mitigation efforts and historical contributions to the problem of climate change.

A Global Surge in Litigation

There is a clear upward trend in the use of climate litigation. Until 2017, the total number of climate litigation cases was 884 across a total of 24 countries, with 654 of these cases being in the United States. By 2020, this number had nearly doubled to 1,550 cases across 38 countries.

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Private or Public Equity? The Evolving Entrepreneurial Finance Landscape

Posted by Michael Ewens (Caltech) and Joan Farre-Mensa (University of Illinois at Chicago), on
Thursday, March 3, 2022
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Michael Ewens is Professor of Finance and Entrepreneurship at the California Institute of Technology, and Joan Farre-Mensa is Associate Professor of Finance at the University of Illinois at Chicago. This post is based on their recent paper.

The U.S. entrepreneurial finance market has undergone dramatic changes over the last two decades. Capital raised by privately-held venture capital (VC)-backed startups grew from $28.9 billion in 2002 to $118.2 billion in 2019 (in real 2012 dollars). At the same time, the number of annual IPOs in the U.S. has declined from an average of 436 from 1991 through 2000 to an average of 113 from 2001 through 2020. In Private or Public Equity? The Evolving Entrepreneurial Finance Landscape, we review the changes in the entrepreneurial finance market and provide a framework to analyze their causes and consequences.

We begin by describing the regulatory differences between publicly-listed and private firms, and how these regulatory differences translate into differences in the financing and informational frictions the firms face. Next, we explore how several regulatory, technological, and competitive changes affecting both startups and their investors have altered the costs and benefits of going public over the last two decades. These changes have impacted both early-stage and late-stage startups, leading to shifts in both the supply and demand for private and public equity capital.

At the early-stage level, technological innovations such as cloud computing in 2006 have decreased startups’ financing needs, particularly during the initial, experimental stage of the entrepreneurial process. At the same time, the emergence of incubators and of new online platforms that help connect investors to startups—alongside the regulatory changes that have facilitated them—have contributed to a marked increase in the fundraising options available to early-stage startups. We show that a key consequence of these changes is that entrepreneurs raising their first round of venture capital now retain 30 percent more equity in their firm and are more likely to control their board of directors than their earlier counterparts.

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C-Suite and Board Engagement in a COVID-19 Environment

Posted by Jen Veenstra and Kristin Chisesi, Deloitte, on
Thursday, March 3, 2022
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Jen Veenstra and Kristin Chisesi are managing directors at Deloitte. This post is based on a Deloitte memorandum by Ms. Veenstra, Ms. Chisesi, Carey Oven, Karen Mazer, and Caroline Schoenecker. Related research from the Program on Corporate Governance includes Stakeholder Capitalism in the Time of Covid by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

Facilitating board interactions in a COVID-19 environment

Boards fulfill an essential oversight role for CEOs and their management teams. C-suite executives can help the board to carry out its responsibilities, including providing critical information and insights. As companies continue to navigate the pandemic and the associated economic fallout, it is particularly critical that executives provide boards with information and analysis in order to help achieve resilience and execute the enterprise’s strategy.

Through subject matter interviews and a culmination of research studies, we highlight how some key C-suite members can help the board and facilitate better board interactions in the current environment:

CEO

More than other C-suite leaders, CEOs have the potential to mobilize their boards as a strategic asset. That is particularly true as companies reposition themselves for growth, and possibly brace for increased shareholder activism.

The pandemic has presented a range of challenges, including a focus on workforce health and well-being and return-to-work strategies that have elevated human capital management to a boardroom issue. However, CEOs have had to contend with much more than the pandemic this past year. Accelerating social change and renewed emphasis on corporate purpose beyond shareholder primacy continue to shape the future and amplify uncertainty. Despite—or possibly because of—these and other challenges, boards expect CEOs to articulate the vision and strategy that will allow their companies to thrive regardless of what comes next.

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Board Disclosure of Race and Ethnicity Gains Traction

Posted by Susan Angele, Annalisa Barrett, and Stephen Brown, KPMG, on
Wednesday, March 2, 2022
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Susan Angele, Annalisa Barrett, and Stephen Brown are Board Leadership Senior Advisors at KPMG. This post is based on their KPMG memorandum, a version of which originally appeared in The Power of Difference by the National Association of Corporate Directors.

Pressure on corporations to increase and disclose their board’s diversity continues to intensify. The murder of George Floyd and other Black Americans in the spring of 2020 and the subsequent social unrest accelerated corporate efforts around diversity, equity, and inclusion as well as stakeholder and regulator demands for faster progress and greater transparency.

While there is a growing patchwork of regulations encouraging board diversity of gender, race and ethnicity, and sexual orientation and gender identity, the only board demographic information that all U.S. public companies are currently required to disclose is the age of each director. Nasdaq’s Board Diversity Rule is poised to have the most widespread impact to date, which will require most companies listed on its U.S. exchange to annually disclose board diversity statistics using a standardized template and to have at least two diverse directors or explain why they do not. This includes one director who self-identifies as female and one director who self-identifies as an “underrepresented minority” or as a member of the LGBTQ+ community. [1]

Nasdaq’s rule follows California SB 826 and AB 979, [2] which require public companies headquartered in California to have—depending on board size—one or more directors who self-identify as female as well as one or more directors who self-identify as coming from an “underrepresented community” (i.e., racially or ethnically diverse or LGBT). [3]

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Is Economic Nationalism in Corporate Governance Always a Threat?

Posted by Martin Gelter (Fordham University), on
Wednesday, March 2, 2022
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Martin Gelter is Professor of Law at Fordham University School of Law. This post is based on his recent paper. 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; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and 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).

During the past decades, participants in corporate law and corporate governance academic debates around the world have generally been skeptical of policies implementing economic ‘Nationalism’ or ‘protectionism.’ While these are chiefly subjects of other areas of law, such as foreign direct investment or international trade law, literature in recent years has documented a close interaction with corporate law and governance. This paper argues that corporate governance policies intended to serve a particular country’s interest may not always be as bad as we usually think.

Economic protectionism and convergence in corporate governance

A key trend antagonistic to protectionism is international convergence in corporate governance, which partly developed from the larger globalization debate. During the 1990s and 2000s, scholars argued whether and to what extent corporate governance laws and practices would converge to a single model, with the likely endpoint being one that favors the interests of all equity investors collectively (rather than, e.g., controlling shareholders, the government, or employees). Ultimately, the convergence debate can be seen as a more prominent aspect of the globalization debate that took place at the time.

Participants in the convergence debate observed a growing propensity among multinational corporations to access capital markets, growing capital markets in many countries, the unraveling of control blocks, and a reduction of state ownership, all of which paralleled a partly convergent legal development. The direction of causality was not always clear. On the one hand, a system prioritizing the interests of all equity investors may be a precondition for capital market development and separation of ownership and control; on the other hand, causation may be reversed, meaning that a growing interest group of equity investors throughout society, including among beneficiaries of retirement plans, may have helped to make shareholder-oriented corporate law more politically acceptable.

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SEC Proposes Unprecedented Cybersecurity Rules

Posted by Adam Fee, Antonia M. Apps, and George S. Canellos, Milbank LLP, on
Wednesday, March 2, 2022
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Adam Fee, Antonia M. Apps, and George S. Canellos are partners at Milbank LLP. This post is based on a Milbank memorandum by Mr. Fee, Ms. Apps, Mr. Canellos, Sean M. Murphy, Joel Harrison, and Matthew Laroche.

On February 9, 2022, the SEC voted to propose rules mandating sweeping cybersecurity measures for registered advisers and funds. [1] The proposal reflects the first SEC rules specifically addressing cybersecurity programs and reporting.

Most notably, the rules would impose a rapid reporting requirement when advisers face serious cyberattacks. Advisers would have to report any “significant cybersecurity incident” within 48 hours of its discovery by confidentially filing a proposed new Form ADV-C.

The reporting requirement would be triggered if (1) a cyberattack “significantly disrupts or degrades” the ability of an adviser or its private fund clients to “maintain critical operations,” or (2) the attack results in unauthorized access to “adviser information” or “fund information” resulting in “substantial harm” to the adviser, its clients, a fund, or investors. The proposed rule offers specific examples of “significant cybersecurity incidents,” including a malware attack that shuts down an adviser’s “websites or email functions” or a system breach that impedes a fund’s ability to “conduct its business” or results in the “theft of fund information.”

The 48-hour clock begins to tick as soon as an adviser has a “reasonable basis to conclude” that a significant incident has or is occurring. Certainty is not the standard. The proposed rules make clear that advisers must not wait until they “definitively conclude[] that an incident has occurred or is occurring.”

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The Need for Disclosure About Worker Voice

Posted by Larry W. Beeferman (Harvard Law School), on
Tuesday, March 1, 2022
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Larry W. Beeferman is a Fellow at the Labor and Worklife Program at Harvard Law School. This post is based on his recent paper.

An Introduction to Worker Voice

Despite an increasing focus on company disclosures about workforce-related policies and practices, little attention has been given to very important issues of worker voice: the opportunity and ability of workers to speak out and up about their experience at the workplace and how what they say is heard, discussed, and acted upon. At its core, worker voice is identified with freedom of association, unions, and collective bargaining. However, it may take other forms: directly, by solicitation of worker views through surveys, briefings, suggestion or innovation systems, town halls, quality circles and self-managed work teams; or indirectly, by means of staff associations, health and safety committees, works councils, and board representation.

Why It is Important for Companies and for Workers

Why is worker voice important? Large segments of the workforce have strongly expressed their need for voice not only on matters typically within the compass of collective bargaining—such as pay, benefits, job security and mobility, etc.—but also others—ranging from harassment, work schedules, and how work is done, to company strategy as to relates to the impact of technological change and the alignment of company practice with claimed company values.

Companies clearly are attentive to the impact of worker voice on financial performance. Some fiercely resist worker voice in the form of unions; others not only accept but also engage in overall constructive, win-win relationships with unions. Yet others set practices on the premise that “worker engagement, input, and collaboration” can spur “innovation, motivation and productivity” and that “inclusive, participatory workplaces” can enable attraction and retention of “better talent.”

Recently articulated company commitments to “stakeholder capitalism” necessarily warrant workers having a voice in how decisions which concern them as stakeholders are made.

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Overcoming the Hurdles to Board Leadership on Climate Change

Posted by Dan Konigsburg, Aurelien Rocher, and Jo Iwasaki, Deloitte, on
Tuesday, March 1, 2022
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Dan Konigsburg is Global Corporate Governance Leader, Aurelien Rocher is Senior Manager, and Jo Iwasaki is Corporate Governance Advisory Lead at Deloitte. This post is based on their Deloitte 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; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and 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).

Climate change has emerged as a central and existential risk for organizations—and fertile and critical ground for innovation. Yet new Deloitte research shows that many audit committees, an essential bulwark in helping companies manage and respond to risks and opportunities, haven’t yet sufficiently placed climate change initiatives at the core of their agendas.

Among the more than 350 board audit committee members in 40 countries surveyed in Q4 2021 by the Deloitte Global Boardroom Program, nearly 60% say they don’t regularly discuss climate change during meetings. And nearly half say they lack the basic literacy in climate issues they need to make informed decisions. While results vary by region (see sidebar, “EMEA moving ahead”), more than two-thirds (70%) say they have yet to complete an assessment of how climate change will affect their company’s operations, supply chain, and customers.

Alarmingly, this report finds that “systemic threat barely features on audit committee meeting agendas, and there seems to be little appreciation of the impact climate change will have on the company’s business model and long-term strategy,” says Kerrie Waring, CEO) of the International Corporate Governance Network, which promotes global standards of corporate governance and investor stewardship (figure 1).

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SEC Continues March Towards More Intrusive Regulation of Private Funds

Posted by David Blass, Michael Osnato, and Michael Wolitzer, Simpson Thacher & Bartlett LLP, on
Tuesday, March 1, 2022
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David Blass, Michael Osnato, and Michael Wolitzer are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Blass, Mr. Osnato, Mr. Wolitzer, Marc Berger, Nicholas Goldin, and Meaghan Kelly.

In a split 3-1 vote earlier today [Feb. 9, 2022], the SEC proposed sweeping new rules targeted at private equity and other private funds. [1] The proposal, if adopted, would essentially change commercially negotiated terms, in particular the negotiated indemnification provision, by substantive regulation. It also would significantly expand the disclosure of standardized fee and expense information and broadly prohibit certain practices in the private funds industry. The proposed rules assume a bleak view of the conduct and business practices of private fund managers, as well as a view that private fund investors, generally some of the most sophisticated and well-represented investors in the world, are insufficiently prepared to protect their commercial interests. For example, and in an abrupt departure from longstanding, negotiated market practice, the proposed rules would prohibit, by regulation, a fund manager being indemnified in cases of ordinary negligence. Such a term has been commercially negotiated for decades, and questions are sure to emerge about whether such a prohibition exceeds the SEC’s authority and whether the SEC has provided a sufficient economic justification for that type of intrusive prohibition.

Taken together with the Commission’s recent proposed amendments to Form PF, [2] which would mandate confidential reporting of a wide range of ordinary course fund and portfolio company activity under the guise of monitoring systemic risk, today’s rule proposals suggest that the regulator is seeking fundamental changes in the manner it regulates the private funds industry. Commissioner Peirce in her dissent characterized the proposed rules as a “sea change.” [3]

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SPAC Law and Myths

Posted by John C. Coates (Harvard Law School), on
Monday, February 28, 2022
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John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post is based on his recent paper.

Special purpose acquisition companies (SPACs) were the financial-legal hit of 2021, before they weren’t. SPACs broke records and displaced to an extent conventional initial public offerings (C-IPOs), even as C-IPOs also boomed.

SPACs spiked, in part, because of myths about their financial attributes, which others have debunked.

(See Michael Klausner, Michael Ohlrogge and Emily Ruan, A Sober Look at SPACs, Yale J. on Reg (forthcoming 2022, discussed on the Forum here); Minmo Gahng, Jay R. Ritter, Donghang Zhang, SPACs (January 29, 2021))

But SPACs also benefited from widespread and persistent circulation of several myths about SPAC law and its uncertainties. SPAC promoters falsely claimed—and continue to claim—that:

  1. securities regulations ban projections from being used in conventional IPOs,
  2. liability related to projections was lower and more certain in SPACs than it was (and is),
  3. the Securities and Exchange Commission (SEC) registration process makes C-IPOs slower than SPACs,
  4. the SEC changed SPAC accounting rules in early 2021,
  5. this “change” was the sole or primary reason the SPAC wave slowed, and
  6. the Investment Company Act clearly does not apply to SPACs.

In a paper available here, each of these myths is shown to be false.

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