Yearly Archives: 2023

SEC Adopts Updates to Schedule 13D and 13G Reporting

Posted by Andrew Freedman and Elizabeth R. Gonzalez-Sussman, Olshan Frome Wolosky LLP, on
Tuesday, October 24, 2023
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Andrew Freedman and Elizabeth Gonzalez-Sussman are Partners at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes The Law and Economics of Equity Swap Disclosure (discussed on the Forum here) by Lucian Bebchuk; The Law and Economics of Blockholder Disclosure (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

On October 10, 2023, the Securities and Exchange Commission (the “SEC”) announced that it has adopted amendments to the rules governing beneficial ownership reporting on Schedules 13D and 13G.

In its adopting release entitled “Modernization of Beneficial Ownership Reporting,” the SEC has amended certain rules regarding the beneficial ownership reporting regime, most notably by shortening the deadline for filing an initial Schedule 13D from the existing ten calendar days after the date one crosses the 5% beneficial ownership threshold to five business days after crossing the threshold and clarifying that the deadline for filing Schedule 13D amendments will be within two business days after the triggering event.

We are pleased that the new rule amendments set forth more reasonable filing deadlines than those initially proposed by the SEC in February 2022 and do not codify certain rules governing group activity or when to deem certain holders of cash-settled derivative securities as beneficial owners of the reference security, as originally proposed. For example, the originally proposed rules, if adopted, would have (1) required an initial Schedule 13D to be filed within five calendar days after crossing the 5% beneficial ownership threshold and Schedule 13D amendments to be filed within one business day of a triggering event; and (2) codified circumstances under which two or more persons would be deemed to have formed a “group” within the meaning of Section 13(d)(3) of the Exchange Act.

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The CEO Shareholder: Straightforward Rewards for Long-term Performance

Posted by Joel Paula, FCLTGlobal, on
Monday, October 23, 2023
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Joel Paula is a Research Director at FCLTGlobal. This post is based on a FCLTGlobal memorandum by Mr. Paula, Jess Gaspar, Matt Leatherman, and Sarah Williamson. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) by Lucian Bebchuk and Jesse Fried.

EXECUTIVE SUMMARY

To be successful, companies need to attract and reward leaders who create value over the long term, but executive remuneration often focuses on short- term targets. Shareholders and their advisors similarly focus on short-term returns as a primary metric in the evaluation of pay plans. Replacing these short term-oriented approaches with direct long-term stock ownership by executives is a better solution.

It’s no surprise that executive remuneration stands out as one of the most visible and closely examined aspects of a publicly listed company’s corporate governance program.

Companies, and their corporate boards who set remuneration policy, are facing increasing pressure on executive pay amid rising shareholder scrutiny of pay plan proposals. Last year’s proxy season in the United States saw a record number of say-on-pay failures. Yet say-on-pay voting at publicly listed companies has arguably had the opposite of its intended effect, driving up executive compensation and showing little relationship to long-term shareholder interests.

Total shareholder return is the most common metric that shareholders employ to align interests, but it is often short term-oriented. By tying executive pay to stock prices over short periods of time, companies and investors are actually putting their long-term interests at risk.

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The 401(k) Conundrum in Corporate Law

Posted by Natalya Shnitser (Boston College Law School), on
Monday, October 23, 2023
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Natalya Shnitser is an Associate Professor at Boston College Law School. This post is based on her article forthcoming in the HBLR. 

With over $10 trillion in assets, employer-sponsored defined-contribution retirement plans play an important role in the corporate governance ecosystem. Yet the governance of such plans has been largely overlooked in existing corporate law scholarship.

In The 401(k) Conundrum in Corporate Law, forthcoming in the Harvard Business Law Review, I draw on recent developments in employee benefits law—including the dramatic rise of retirement plan litigation—to fill in gaps in the academic analysis of the relationship between institutional investors and corporate retirement plans.

Scholarship on institutional investors has emphasized that the largest fund managers also have business lines that offer services to retirement plans sponsored by U.S. companies, including the 401(k) plans now commonly offered by private-sector employers. As a result, scholars have advanced the theory that institutional investors—and particularly mutual funds—have been deferential to corporate management at least in part out of fear of losing the corporations’ retirement plan business. Under this theory, the incentives to preserve or grow their 401(k) business—for example, to be selected as the recordkeepers or to have their index funds included on the investment menus of corporate plans—may cause mutual fund managers to vote with corporate management, even when doing so may not be in the best interest of the fund investors.

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California enacts major climate-related disclosure laws

Posted by Loyti Cheng, David A. Zilberberg and Emily Roberts, Davis Polk & Wardwell LLP, on
Sunday, October 22, 2023
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Loyti Cheng and David A. Zilberberg are Counsels, and Emily Roberts is a Partner at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Cheng, Mr. Zilberberg, Ms. Roberts, Stephen A. Byeff, Michael Comstock, and Timothy J. Sullivan. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, 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; Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

Under a pair of California laws signed by Governor Newsom on October 7, 2023, many large U.S. companies will be required to make broad-based climate-related disclosures starting as early as 2026. These laws will have a profound impact on companies doing business in California, with certain disclosure requirements going beyond the requirements of the SEC’s proposed climate-related disclosure rule or the current practices of most public companies.

California passed two climate-related disclosure bills:

  • S.B. 253, the Climate Corporate Data Accountability Act, which will require certain companies to disclose their direct (scope 1), indirect (scope 2) and value chain (scope 3) greenhouse gas (GHG) emissions, and
  • S.B. 261, the Climate-Related Financial Risk Act, which will require certain companies to disclose climate-related financial risks pursuant to the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.

Both bills lack crucial detail and are unclear in several key respects, and companies will have to await further amendments or implementing regulations to understand their true impact. Ultimately, these laws will require thousands of companies to devote significant resources and incur significant expenses to develop the infrastructure necessary to support these new disclosure requirements, which in certain critical ways go beyond the forthcoming SEC climate-related disclosure rule (applicable to most domestic and foreign private issuer public companies). In addition, some companies that will be subject to the California bills may also be subject to the EU’s Corporate Sustainability Reporting Directive (CSRD) (applicable to companies with EU operations meeting certain thresholds). As such, companies will likely need to be prepared to contend with overlapping, yet distinct, climate-related disclosure requirements in multiple jurisdictions.

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TNFD Recommendations for Nature Related Disclosures

Posted by Austin J. Pierce, Betty M. Huber, and Sarah E. Fortt, Latham & Watkins LLP, on
Saturday, October 21, 2023
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Austin J. Pierce is an Associate, Betty M. Huber and Sarah E. Fortt are Partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Pierce, Ms. Huber, Ms. Fortt, Paul Davies, Michael D. Green, and James Bee. 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 Bebchuk, Kobi Kastiel, Roberto Tallarita; and 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.

TNFD looks to raise natural capital on par with climate in organizations’ disclosure of sustainability-related impacts, dependencies, risks, and opportunities.

Key Points:

  • Natural capital is quickly rising in importance for various public and private sector
  • The Taskforce on Nature-related Financial Disclosures’ recommendations are likely to serve as a catalyst for further expectations in this area.
  • Organizations may wish to start developing a strategy on natural capital to reflect these

On September 18, 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published recommendations for organizations’ assessment, management, and disclosure of nature-related issues (the Recommendations). These recommendations were the result of a two-year engagement process, featuring several beta versions to receive and process commentary from a range of stakeholders. The process builds on several years of growing attention to the fundamental role of nature — including the 2022 Global Biodiversity Framework that nearly 200 countries adopted in a Paris Agreement-type moment for nature.

Several high-profile companies, asset managers, and civil society organizations have endorsed TNFD. Paired with emerging regulatory attention on nature and biodiversity, this endorsement is likely to speed adoption of the Recommendations — which many anticipate will follow a similar path as the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) took with climate. As such, companies need to be aware of these developments and start considering a plan forward.

This Client Alert provides an overview of the Recommendations, as well as next steps and parallel developments in the market. It also highlights initial steps that organizations should consider in developing their nature-related strategies.

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Transaction Satisfied “Entire Fairness,” Despite Serious Sale Process Flaws—BGC Partners

Posted by Gail Weinstein, Philip Richter, and Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Friday, October 20, 2023
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Gail Weinstein is Senior Counsel, Philip Richter and  Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Andrea Gede-Lange, Matthew V. Soran, and Thomas Lee, 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 Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders? (discussed on the Forum here) by John C. Coates, Darius Palia and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

In In re BGC Partners (Aug. 10, 2023), the Delaware Supreme Court, in an en banc decision, without commentary, affirmed the Court of Chancery’s post-trial decision (Aug. 19, 2022) holding that the acquisition of a company indirectly controlled by the buyer’s controller met the entire fairness standard—notably, notwithstanding the lower court’s finding that there were serious flaws in the sale process. BGC Partners follows two other decisions in recent years in which the Court of Chancery also has found entire fairness satisfied in conflicted-controller transactions despite serious flaws in the transaction process—Hsu Living Trust v. Oak Hill (2020) and ACP Master v. Sprint/Clearwater (2017). These decisions stand in contrast to the Delaware courts’ historic trend of virtually never finding, when the entire fairness standard applies, that it has been satisfied.

Key Points

  • There is now increased potential for a buyer to establish that a transaction meets the stringent “entire fairness” standard—even if the sale process was seriously flawed. BGC Partners furthers the court’s evolution toward an emphasis on the fairness of the price over the fairness of the process in the “unitary” entire fairness analysis. Notwithstanding this evolution, however, in our view, even after BGC Partners, in the event of a clearly materially unfair price or process, it would be unlikely that the court would find entire fairness satisfied.
  • There is still a high bar to establishing entire fairness—in each of the recent decisions, the court found that, although there were serious process flaws, there was strong evidence that the special committee and its advisors had functioned effectively and had achieved a fair price.
  • Buyers should consider taking certain steps to maximize the potential of a finding of entire fairness—see “Practice Points” below.

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Weekly Roundup: October 13-19, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, October 20, 2023

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This roundup contains a collection of the posts published on the Forum during the week of October 13-19, 2023

2023 Proxy Season Review

Posted by Chuck Callan, and Mike Donowitz, Broadridge, on Friday, October 13, 2023
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Statement by Commissioner Uyeda on Final Rules Regarding Short Sale Activity

Posted by Mark T. Uyeda, U.S. Securities and Exchange Commission, on Saturday, October 14, 2023
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Statement by Chair Gensler on Final Rules Regarding Short Sale Activity

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Saturday, October 14, 2023
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Boards Confront Evolving Risks and Pressures During Another Disruptive Year

Posted by Amy Rojik, BDO, on Sunday, October 15, 2023
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The Social Costs (and Benefits) of Dual-Class Stock

Posted by Gregory H. Shill (University of Iowa), on Monday, October 16, 2023
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2024 U.S. Proxy Season: Proxy Voting, Governance, and ES Matters

Posted by Laura D. Richman, Mayer Brown LLP, on Monday, October 16, 2023
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Standardization and Innovation in Venture Capital Contracting: Evidence from Startup Company Charters

Posted by Robert Bartlett (Stanford Law School), on Tuesday, October 17, 2023
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Important MFW Developments

Posted by Gail Weinstein, Steven Steinman, and Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on Tuesday, October 17, 2023
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Securities Law Precedents, Legal Liability, and Financial Reporting Quality

Posted by Allen Huang (Hong Kong University of Science and Technology), on Wednesday, October 18, 2023
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Directors: Take Activist Threats to Your Reputation with a Grain of Salt

Posted by Patrick Ryan, Lex Suvanto, Edelman Smithfield, on Wednesday, October 18, 2023
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Considerations for Technology Companies in Pre-IPO Limbo

Posted by Allison Spinner, Shannon Delahaye and Andrew Gillman, Wilson Sonsini Goodrich & Rosati, on Thursday, October 19, 2023
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Rethinking Acting in Concert: Activist ESG Stewardship is Shareholder Democracy

Posted by Dan W. Puchniak (Yong Pung How School of Law), and Umakanth Varottil (National University of Singapore), on Thursday, October 19, 2023
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Rethinking Acting in Concert: Activist ESG Stewardship is Shareholder Democracy

Posted by Dan W. Puchniak (Yong Pung How School of Law), and Umakanth Varottil (National University of Singapore), on
Thursday, October 19, 2023
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Dan W. Puchniak is a Professor at Yong Pung How School of Law, Singapore Management University and an ECGI Research Member, and Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore and an ECGI Research Member. 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; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Robert H. Sitkoff and Max M. Schanzenbach.

Activist campaigns by shareholders on environmental, social, and governance (ESG) issues continue to hog the limelight. Even though the results in the 2023 proxy season have been mixed, investors’ razor sharp focus on ESG matters continues unabated, and it remains to be seen whether recent political backlash against ESG is likely to be long-lasting.

The prominence of ESG activism is traceable to an episode in May 2021 when Engine No. 1, an investment fund, received plaudits from the “responsible investment community” for leading a campaign which successfully placed three dissident independent directors on ExxonMobil’s board. The aim of its activist campaign was to promote a more sustainable business model within ExxonMobil, a company with a history of denying climate change. Remarkably, Engine No. 1 was able to achieve this feat despite owning a mere 0.02 percent of ExxonMobil’s shares. The key to Engine No. 1’s success was its ability to inspire major institutional investors – such as BlackRock, Vanguard, and State Street – to follow its lead by voting in support of its activist ESG campaign.

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Directors: Take Activist Threats to Your Reputation with a Grain of Salt

Posted by Patrick Ryan, Lex Suvanto, Edelman Smithfield, on
Wednesday, October 18, 2023
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Patrick Ryan is an Executive Vice President and Lex Suvanto is a Managing Partner at Edelman Smithfield. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. 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 Frankl and Kushner Leo E. Strine, Jr.

Criticizing boards and management teams in public letters and news media often gets shareholder activists what they want from boards. These tactics, common in proxy contests, regularly work in the absence of dissident director nominations. At times, just the threat of a public campaign and negative media coverage can get activists their desired results, even board seats.

Directors may agree to activist demands when they believe doing so serves shareholders’ best interests, including by avoiding the costs and distraction of a proxy fight. Another reason boards give in to activists, rarely acknowledged but supported by empirical evidence, is directors’ fear of the damage a prolonged campaign will do to their public image and the related personal and professional consequences.[1]

These concerns are overblown. They are based on misperceptions, particularly common among directors without activism experience, about how a public activist campaign will unfold at their company, e.g., what activist attacks and the ensuing media coverage will look like. Activists, of course, can take advantage of and even encourage these misconceptions to increase negotiating leverage.

Overestimating the reputational threat from activists can lead to negative outcomes for boards and shareholders. While compromise may be the best path forward in an activist engagement, a fear-driven “settlement at all costs” mentality can lead to hasty settlement agreements with unforeseen consequences. When agreeing to add a particular activist director to the board, for example, incumbent directors may fail to realize how the activist’s shorter investment horizon will conflict with the expectations of other large shareholders, or how much time the activist will demand of management. The board may also be unprepared for the increased probability of material, non-public information leaks.[2]

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