Yearly Archives: 2022

The Corporate Governance Gap

Posted by Kobi Kastiel (Tel Aviv University) and Yaron Nili (University of Wisconsin), on
Tuesday, February 1, 2022
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Kobi Kastiel is Associate Professor of Law at Tel Aviv University, and Lecturer on Law at Harvard Law School; and Yaron Nili is Associate Professor of Law and the Smith-Rowe Faculty Fellow in Business Law at the University of Wisconsin Law School. This post is based on their recent paper, forthcoming in the Yale Law Journal. Related research from the Program on Corporate Governance includes Learning and the Disappearing Association between Governance and Returns, by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang (discussed on the Forum here); and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

A reliable system of corporate governance is an important requirement for the long-term success of public companies. After decades of research and policy advocacy, there is a growing sense that many public corporations are finally nearing the promised land: their boards seem more diverse, large investors seem more engaged, and directors seem more accountable than ever. But is this perception accurate?

In a new paper, forthcoming in the Yale Law Journal, we explore this question by providing a comprehensive empirical account of the differences in the governance arrangements and shareholder engagements between large- and small-cap corporations. We compiled a rich and detailed historical dataset from a diverse array of sources, some of it hand-collected and coded, for both S&P 1500 and the bottom 200 companies of the Russell 3000 companies, which sheds new light on the corporate governance of mid- and small-cap companies.

As the paper reveals, while many large, high-profile companies are more attentive to shareholder demands and tend to serve as models of desirable governance practices, the picture is considerably different in the far corners of corporate America, away from the limelight of the S&P 500. In these smaller, less-scrutinized corporations, the adoption of governance arrangements is less organized or systematic and often significantly departs from the norms set by larger companies. This results in what this paper calls the “Corporate Governance Gap.”

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The 2022 Boardroom Agenda

Posted by Robert Lamm and Carey Oven, Deloitte LLP, on
Tuesday, February 1, 2022
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Robert Lamm is an independent senior advisor at the Center for Board Effectiveness and Carey Oven is national managing partner at the Center for Board Effectiveness and chief talent officer of Deloitte Risk & Financial Advisory and Deloitte & Touche LLP. This post is based on a Deloitte memorandum by Mr. Lamm, Mr. Oven, Maureen Bujno, Krista Parsons, Caroline Schoenecker, and Audrey Hitchings. 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).

The role of the corporation and the board in an ever-changing world

The saying “the more things change, the more they stay the same” has been around for a long time, but events of the past few years suggest that it may no longer be true. Those events have stress tested the status quo to a remarkable degree: We have experienced and continue to experience wave after wave of a global pandemic, domestic and global political and geopolitical uncertainty, the increasingly menacing existential threat of climate change, and demands for racial and political justice—to name just a few.

From the perspective of business, these developments have been accompanied by another challenge to the status quo—the increasingly widespread belief that corporations cannot and should not ignore the world around them, but rather should be engaged members of society and act to address the challenges we face.

For example, the 2021 Edelman Trust Barometer reported that “sixty-one percent of respondents expect CEOs to fill the void left by government in fixing societal problems, while 65 percent feel CEOs should be as accountable to the public as they are to their shareholders.” [1]

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M&A Outlook for 2022

Posted by Jim Langston, Kyle Harris, and Nickolas Bogdanovich, Cleary Gottlieb Steen & Hamilton LLP, on
Tuesday, February 1, 2022
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Jim Langston and Kyle Harris are partners and Nickolas Bogdanovich is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

2021 was a historic year for mergers and acquisitions activity. While some reversion to the mean may be in store, we expect robust dealmaking to continue in 2022. As boards of directors and management teams seek opportunities in this competitive market, they will need to navigate a dynamic regulatory landscape and should expect investors and other stakeholders to focus on ESG metrics in the evaluation of M&A transactions to a greater extent than before.

Market Overview: Will the Boom Continue?

Attitudes among corporate executives, investment professionals and their advisors reveal a general optimism about the prospects for M&A in 2022. And who could blame them? 2021 was a historic year for M&A, with a record $5.8 trillion in global announced transactions.

There are headwinds brewing, some of which are not new but have yet to fully play out: projected interest rate increases, enhanced scrutiny of transactions from antitrust and foreign investment authorities, potential tax law changes, the recurrence of new COVID-19 variants and various macroeconomic uncertainties. In addition, some tailwinds (particularly government stimulus) are weakening.

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The Materiality Debate and ESG Disclosure: Investors May Have the Last Word

Posted by David Lopez, Jared Gerber, and Jonathan Povilonis, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, January 31, 2022
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David Lopez and Jared Gerber are partners and Jonathan Povilonis is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary 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).

In 2021, investors and regulators continued to focus on the scope and quality of public company disclosure of environmental, social and governance (ESG) information. In the background, the controversial debate intensified over whether ESG information, while of interest to many stakeholders, should be considered “material” for the purposes of the securities laws such that disclosure of inaccurate or misleading ESG information could be a basis for liability.  Some commentators have recently defended the traditional view of financial materiality that focuses on the impact of disclosure on the economic value of a company, for which share price is often used as a proxy, whereas others have suggested a broader notion of materiality that would include any information investors decide is important to them.

While the debate rages on, however, market trends may well bypass the discussion altogether, with implications for risk assessment by boards and management. As ESG considerations become mainstream investment criteria for larger numbers of investors, the potential for ESG information to impact investment allocations (and therefore share price), and thus meet the traditional definition of financial materiality, increases significantly. If these trends continue into 2022 and beyond, public companies could face potential legal exposure concerning the accuracy of their voluntary ESG disclosure—even if the legal definition of materiality remains unchanged.

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An Economic Substance Approach to SPAC Regulation and the Implications of MultiPlan for SEC Rulemaking

Posted by Harald Halbhuber (NYU), on
Monday, January 31, 2022
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Harald Halbhuber is a Research Fellow of the Institute for Corporate Governance & Finance and New York University School of Law.

Two seemingly unrelated topics have received a lot of attention recently. One is the rise of SPACs, shell companies that take private companies public by merging with them. The other is the economic substance approach in securities regulation. Over the past two years, SPACs have closed mergers with a total announced enterprise value of more than half a trillion dollars. While some observers have hailed SPACs as a welcome financial innovation, the SEC Chair recently expressed concerns (posted on this Forum) about the potential for regulatory arbitrage between SPACs and IPOs. Separately, when discussing rules for cryptocurrencies in December, the former and the current SEC Chair were in agreement that securities transactions should be regulated in accordance with their economic substance rather than their legal form.

In a new paper, I apply this economic substance approach in securities regulation to SPACs. As readers of this Forum know, when a SPAC merges with its target, SPAC shareholders are entitled to have their escrowed cash returned to them from a trust account. At that point, each shareholder makes an individual choice: walking away with their still risk-free cash or investing it in the target. The paper’s key insight for future regulation is that a SPAC shareholder’s decision to invest their escrowed cash in the target should be treated as the economic equivalent of purchasing target stock for cash. This allows for a better understanding of SPACs’ economic substance and more clearly identifies gaps in investor protection compared to IPOs. Most importantly, it offers a sound legal basis for crafting new rules that close these gaps. Along the way, the paper spells out the overlooked implications of the Delaware Chancery Court’s recent decision in the MultiPlan shareholder litigation for the future regulation of SPACs by the SEC.

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Log4j: Enforcement Risk for Public Companies

Posted by Caitlyn M. Campbell, Scott Ferber, and Todd S. McClelland, McDermott, Will & Emery LLP, on
Monday, January 31, 2022
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Caitlyn M. Campbell, Scott Ferber, and Todd S. McClelland are partners at McDermott, Will & Emery LLP. This post is based on a MWE memorandum by Ms. Campbell, Mr. Ferber, Mr. McClelland, Kenji M. Price, Paul M.G. Helms, and Mark E. Schreiber.

The Apache Log4j vulnerability continues to command significant attention throughout the public and private sectors. In a recent interview, the director of the US Cybersecurity and Infrastructure Security Agency (CISA) described Log4j as the “most serious vulnerability” she has seen in her decades-long career. On December 22, 2021, CISA, along with the Federal Bureau of Investigation (FBI), the National Security Agency (NSA) and international law enforcement partners, issued a joint advisory cautioning that malicious cyber actors are already scanning and exploiting some of the many thousands of vulnerable systems around the world.

In Depth

Security researchers predict that organizations will be contending with the vulnerability (and its fallout) for months to come. CISA created a dedicated Log4j webpage to provide an authoritative, up-to-date resource with mitigation guidance and resources for network defenders as well as a community-sourced GitHub repository of affected devices and services. These government resources are setting the baseline on reasonable security for Log4j response and, in essence, providing a potential roadmap for legal compliance.

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Theranos: The Limits of the “Fake It Till You Make It” Strategy

Posted by Carrie H. Cohen, James M. Koukios, and Christine Y. Wong, Morrison & Foerster LLP, on
Sunday, January 30, 2022
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Carrie H. Cohen, James M. Koukios, and Christine Y. Wong are partners at Morrison & Foerster LLP. This post is based on a Morrison & Foerster memorandum by Ms. Cohen, Mr. Koukios, Ms. Wong, Sophie H. Cash, and Rachael Hanna.

In a case that tested the limits of the “fake it till you make it” approach to a startup business, on January 3, 2022, a jury in the U.S. District Court for the Northern District of California convicted Elizabeth Holmes, founder and former CEO of now-defunct Theranos Inc., on one count of conspiracy to commit wire fraud and three counts of wire fraud against Theranos investors. Each count carries a maximum sentence of 20 years in prison. The jury failed to reach a verdict on three additional counts of wire fraud against Theranos investors and found Holmes not guilty on the multiple counts of conspiracy and wire fraud against Theranos patients.

The trial, which lasted for 14 weeks, called into question more than just Holmes’ questionable business practices and investment solicitation; it was arguably a referendum on “fake it till you make it” practices, such as intentionally overstating, and thereby misrepresenting, a fledgling company’s current capabilities, success, or profitability, while banking on the notion that its aspirations will eventually follow the desired trajectory and become a reality. The case also highlighted the importance of investors doing adequate due diligence.

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Chancery Court Allows deSPAC Litigation to Proceed

Posted by John R. Ablan, Philip O. Brandes, and Brian J. Massengill, Mayer Brown LLP, on
Sunday, January 30, 2022
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John R. Ablan, Philip O. Brandes, and Brian J. Massengill are partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

On January 3, 2022, the Delaware Court of Chancery issued an opinion denying motions to dismiss in In re Multiplan Corp. Stockholders Litigation, a stockholder action arising out of the completed business combination for Churchill Capital Corp III (“Churchill”), a special purpose acquisition company (“SPAC”), and Multiplan Inc. (“MultiPlan”). The court’s opinion has important implications for SPAC sponsors, directors, officers and other stakeholders because of its application of traditional Delaware corporate law concepts to a “deSPAC” business combination transaction. This Legal Update (i) summarizes the facts alleged by the plaintiffs in the case and the court’s conclusions; and (ii) provides key takeaways and practical considerations.

Background

Churchill’s IPO and Business Combination with MultiPlan

As with virtually all modern SPACs, Churchill consummated an initial public offering (“IPO”) without any business operations of its own and instead was formed for the sole purpose of searching for, and consummating a business combination with, an operating company; a process it had two years to complete following its IPO. In exchange for a purchase price of $10.00 per unit, investors in Churchill’s IPO received units comprised of one share of Class A common stock and one-fourth of a warrant to purchase one share of Class A common stock at a strike price of $11.50. Churchill deposited $10.00 per unit sold in the IPO into a trust account, and funds placed in the trust account generally could be released only (i) upon completion of a business combination or (ii) in the absence of a business combination having been completed within the two-year window, upon dissolution and, in such case, the funds, plus interest, would be returned to Class A stockholders.

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Statement by Chair Gensler on Reopening of Comment Period for Pay Versus Performance

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Saturday, January 29, 2022
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Today [January 28, 2022], the Commission is reopening the comment period for a proposed rule for corporate disclosure of “pay versus performance.” I support this proposed rule because, if adopted, it would strengthen the transparency and quality of executive compensation disclosure.

The rule proposal would fulfill a mandate from Congress under the Dodd-Frank Act of 2010, passed after the 2008 financial crisis.

“Pay versus performance” disclosures describe the relationship between the executive compensation an issuer actually paid and the financial performance of that issuer. Such disclosures would make it easier for shareholders to assess the company’s decision-making with respect to its executive compensation policies.

The Commission has long recognized the value of information on executive compensation to investors. The first requirements to make disclosures about executive compensation originated in the 1933 Act. Since then, from time to time the Commission has continued to update compensation disclosure requirements.

In 2015, the Commission proposed rules to implement the Dodd-Frank Act’s “pay versus performance” requirement. These proposed rules relied upon total shareholder return as the sole measure of financial performance. Some commenters expressed concerns that total shareholder return would provide an incomplete picture of performance.

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Statement by Commissioner Lee on Reopening of Comment Period for Pay Versus Performance

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on
Saturday, January 29, 2022
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Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Financial incentives drive how executives perform in their role as fiduciaries to companies and their shareholders. Understanding what those incentives are and whether they are actually working – that is, if and how they link to company performance – is critical for investors in evaluating a company’s compensation practices.

The Dodd-Frank mandate for a rule requiring companies to disclose the relationship between executive compensation actually paid and the financial performance of the company is among the most useful, straightforward, and commonsense provisions in that law. Yet, it has been over eleven years since Dodd Frank imposed that mandate, and over six years since the SEC proposed such a rule. In that time, executive compensation—and the gap between pay for executives and everyday workers—has grown tremendously. [1] Investors need to understand if that growth is concomitant with the value created. In other words, are shareholders getting their money’s worth? That question, central to good corporate governance, is what this proposed disclosure seeks to address.

I’m pleased that the Commission is preparing to finalize this rule. Today’s reopening of the comment file allows commenters a new opportunity to offer their views and the Commission the opportunity to ensure it is relying on current data. The reopening release highlights certain changes the Commission is considering to its proposed approach to help ensure the disclosure captures how companies actually link financial performance to executive compensation, while still preserving important comparability in disclosure from company to company. Specifically, the reopening release contemplates providing companies additional flexibility through disclosure of, in addition to the proposed performance metric of total shareholder return, other metrics of their choosing. [2]
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