Yearly Archives: 2023

2023 Corporate Governance developments

Posted by Melissa Sawyer, Lauren S. Boehmke and Marc Treviño, Sullivan & Cromwell LLP, on
Monday, September 25, 2023
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Melissa Sawyer, Lauren Boehmke, and Marc Treviño are Partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Sawyer, Ms. Boehmke, Mr. Treviño, Susan M. Lindsay, June Hu, and H. Rodgin Cohen.

Hot Topics for Boards and Committees

Board Agenda Topics

Addressing the Use of Artificial Intelligence

Many boards are seeking a general understanding of AI, how their companies and peers are using it, and potential risks and concerns arising from the use of AI, including any cybersecurity, privacy and other liability issues, as well as employee and ethical implications. Although there is not one correct approach for overseeing AI risks, boards of companies that rely on AI for material products, services or operations (or relevant committee members) may want to consider receiving training on AI and associated risks, as well as management reports on the company’s use of AI.

Assessing the Business Impact of Macro Trends

As political, social, economic, climate and health conditions continue to fluctuate, challenging some companies’ ability to manage risks, some boards are asking management to sensitize the assumptions underlying the company’s strategic plan to take account of different potential scenarios. Some boards will also receive periodic updates from outside advisors on conditions in the various markets in which the company operates, with a particular focus on China.

Preparing for Heightened Antitrust Scrutiny

With antitrust scrutiny intensifying in the U.S. and internationally, some boards are obtaining briefings on the competitive landscape, potential regulatory risks and opportunities, and the increased time and cost required to engage in M&A transactions.

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‘Killer Acquisitions’ Reexamined: Economic Hyperbole in the Age of Populist Antitrust

Posted by Jonathan Barnett (USC Gould School of Law), on
Monday, September 25, 2023
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Jonathan Barnett is a Professor of Law at USC Gould School of Law. This post is based on his recent paper forthcoming in the University of Chicago Business Law Review. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, Darius Palia, and Ge Wu; The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian; and Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk. 

Antitrust and competition regulators in the United States, the European Union, the United Kingdom, and other prominent jurisdictions have recently emphasized the risk posed to competitive markets by so-called “killer acquisitions.”  According to this assertion, which has been adopted by much of the policy and scholarly literature, leading technology platforms—commonly known as “Big Tech”—regularly engage in serial acquisitions of startups to suppress competitive threats posed by small innovators.

These claims have already had palpable effects on the merger review process.

Policymakers in the US and the EU have advocated lowering or shifting the burden of proof in merger review, or lowering or eliminating the reporting threshold, to challenge more easily acquisitions of startups by large technology platforms.  In May 2023, the European Union’s Digital Markets Act went into force, which requires the largest technology platforms to report all acquisitions of firms in digital markets.  In June 2023, the FTC (with the “concurrence” of the Department of Justice) released proposed revised pre-merger notification requirements, which require notifying firms to disclose all acquisitions during the preceding 10 years in markets where the merging parties had “horizontal overlaps” (regardless of firm size).  In August 2023, the FTC and the DOJ released proposed revised merger guidelines, which raise concerns about the competitive risks posed by incumbent acquisitions of “nascent” competitors.

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SEC Adopts Substantive Requirements for Advisers to Private Funds

Posted by David N. Solander, McDermott Will & Emery LLP, on
Sunday, September 24, 2023
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David N. Solander is a Partner at McDermott Will & Emery LLP. This post is based on his MWE memorandum.

On August 23, 2023, the US Securities & Exchange Commission (SEC) adopted new and amended rules (the New Rules) under the Investment Advisers Act of 1940 (Advisers Act) that focus on the SEC’s desire to address what it views to be “risks and harms that are common in an adviser’s relationship with private funds and their investors.” Throughout this article, we will summarize the New Rules, explore their effect on investment advisers to private funds and highlight some of the SEC’s stated views in the adopting release.

Our discussion of the New Rules has been separated into five parts:

  1. The Restricted Activities prohibit some practices unless certain consent or disclosure obligations are met (walking back many outright prohibitions sought in the rule proposal).
  2. Preferential Treatment restrictions and disclosure obligations, which are generally designed to address side letter arrangements favoring certain private fund investors.
  3. The obligations of advisers to send Quarterly Statements to investors.
  4. Requirements for advisers when undertaking Adviser-Led Secondaries.
  5. The Mandatory Audits provision for private funds and the Written Annual Review requirement to document annual compliance reviews under Rule 206(4)-7.

The New Rules also add books and records requirements to document compliance.

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The EU’s New ESG Disclosure Rules Could Spark Securities Litigation in the US

Posted by Raquel Fox, Simon Toms, and Jeongu Gim, Skadden, Arps, Slate, Meagher & Flom LLP, on
Saturday, September 23, 2023
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Raquel Fox and Simon Toms are Partners and Jeongu Gim is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Fox, Mr. Toms, Mr. Gim and Tansy Woan. 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; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, and 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.

Key Points

  • The EU’s comprehensive new ESG disclosure requirements will force many multinationals with operations in Europe to decide how much information to disclose where, and to take measures to ensure their disclosures are consistent.
  • The granular information required by the EU could feed litigation in the U.S. if the disclosures appear false or misleading, or are inconsistent with disclosures in other jurisdictions.
  • With a new U.K. disclosure mandate and expected additional SEC disclosure rules, companies could face conflicting demands for ESG information from the EU, U.K. and U.S.

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Who are the new directors?

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Friday, September 22, 2023
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an ISS Corporate Solutions memorandum by Sandra Herrera Lopez, Ph.D., Vice President, ESG Content & Data Analytics, & Veronica Nikitas, Senior Associate, Compensation & Governance Advisory at ISS Corporate Solutions.

A look at the demographic makeup of the latest independent board directors

Bringing on new board members presents a valuable opportunity for companies to benefit from fresh insights and expertise. In the following analysis, ISS Corporate Solutions examined the current directors across Russell 3000 companies to understand the diverse composition of the most recent group of independent directors.

KEY FINDINGS:

  • Underrepresented groups including women, Asians, and African Americans are gaining ground
  • The average age of new directors is 58, which is higher than the average age for tenured directors when they joined a board
  • 28% of new directors participate in another Russell 3000 board

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Weekly Roundup: September 15-21, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, September 22, 2023

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This roundup contains a collection of the posts published on the Forum during the week of September 15-21, 2023

Financial Implications of Rising Political Risk in the US

Posted by Stephen Davis (Harvard Law School), on Friday, September 15, 2023
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In 2022, Corporate Time Horizons Shorten, Investors’ Lengthen

Posted by Allen He, Jessica Pollock, FCLTGlobal, on Saturday, September 16, 2023
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The EU Corporate Sustainability Reporting Directive -what non-EU companies should know

Posted by Peter Pears, Tim Baines, and Oliver Williams, Mayer Brown LLP, on Sunday, September 17, 2023
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Discretionary Investing by ‘Passive’ S&P 500 Funds

Posted by Peter Molk (University of Florida), and and Adriana Robertson (University of Chicago), on Monday, September 18, 2023
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2023 Proxy Season Digest

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Monday, September 18, 2023
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Guarding Against a Short Attack

Posted by Richard J. Grossman, Neil P. Stronski and Demetrius A. Warrick, on Tuesday, September 19, 2023
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CEO Succession Practices in the Russell 3000 and S&P 500

Posted by Matteo Tonello, The Conference Board, on Tuesday, September 19, 2023
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Supply Chains: From Out of Sight To Front and Center on the Board Agenda

Posted by Ben Shrewsbury, Andrew Hayes, and Fawad Bajwa, Russell Reynolds Associates, on Wednesday, September 20, 2023
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Wildest Campaigns of 2023

Posted by Jason Booth, Will Arnot, and Miles Rogerson, Diligent Institute, on Wednesday, September 20, 2023
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Statement by Commissioner Uyeda on Updates to the Names Rule

Posted by Mark T. Uyeda, U.S. Securities and Exchange Commission, on Thursday, September 21, 2023
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Statement by Chair Gensler on Updates to the Names Rule

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Thursday, September 21, 2023
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Statement by Chair Gensler on Updates to the Names Rule

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Thursday, September 21, 2023

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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent statement. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Today, the Commission is considering final rules to update the Names Rule. I am pleased to support this rule adoption because it will help ensure that a fund’s portfolio matches a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.

The Names Rule reflects a basic idea: A fund’s investment portfolio should match a fund’s advertised investment focus. In essence, if a fund’s name suggests an investment focus, the fund in turn needs to invest shareholders’ dollars in a manner consistent with that investment focus. Otherwise, a fund’s portfolio might be inconsistent with what fund investors desired when selecting a fund based upon its name.

In crafting the federal securities laws, Congress understood the importance of how funds describe themselves—including through the names they choose. Thus, in the Investment Company Act of 1940, Congress included fund naming provisions. In 1996, Congress amended these provisions to authorize the Securities and Exchange Commission to define registered investment company names as “materially deceptive or misleading.”[1]

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Statement by Commissioner Uyeda on Updates to the Names Rule

Posted by Mark T. Uyeda, U.S. Securities and Exchange Commission, on
Thursday, September 21, 2023
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Mark T. Uyeda is a Commissioner at 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 Commissioner Uyeda, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you, Chair Gensler, and my thanks to the staff for their presentations. Today, the Commission is adopting amendments to rule 35d-1 under the Investment Company Act, known as the “fund names rule,” and related Form amendments, including to Form N-PORT. While the adopting release makes a number of changes from the proposal, they ultimately do not go far enough.

With these amendments, the Commission overemphasizes the importance of a fund’s name, as if to suggest that investors and their financial professionals need not look at the prospectus disclosures. These amendments also will entail significant compliance costs for funds to implement – costs not captured in our particular method of estimating time burdens and costs under the Paperwork Reduction Act – which ultimately will be borne by investors. Alternatively, funds might simply select generic or exceedingly complex names that do little to help investors.

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Wildest Campaigns of 2023

Posted by Jason Booth, Will Arnot, and Miles Rogerson, Diligent Institute, on
Wednesday, September 20, 2023
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Jason Booth is an Editorial Manager, Will Arnot is a Senior Editorial Specialist, and Miles Rogerson is a Financial Journalist at Diligent Market Intelligence. This post is based on a Diligent memorandum by Mr. Booth, Mr. Arnot, Mr. Rogerson, Rebecca Sherratt, and Joe Lyons. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Amid depressed financial markets and soaring inflation, activists are placing a heightened focus on company profitability and have been increasingly unforgiving of companies failing to maximize profits and streamline operations.

In this section, the Diligent Market Intelligence (DMI) editorial team reveals our picks for the wildest activist campaigns of the 2023 season.

So far this year, we’ve seen the godfather of shareholder activism lock horns with a biotech giant while simultaneously defending his holding company from a shorts attack, veteran activist Nelson Peltz back down from a fight, and divisive mergers and acquisitions, some of which have developed into heated lawsuits.

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Supply Chains: From Out of Sight To Front and Center on the Board Agenda

Posted by Ben Shrewsbury, Andrew Hayes, and Fawad Bajwa, Russell Reynolds Associates, on
Wednesday, September 20, 2023
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Ben Shrewsbury and Andrew Hayes are Managing Directors, and Fawad Bajwa is a Leader at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. Shrewsbury, Mr. Hayes, Mr. Bajwa, Mike Nurminen, Gregory Gerin, and Vijuraj Eranazhath.

Supply chains have become an increasingly crucial board priority. Here’s why.

Supply chains have always been vulnerable to disruption, but our current combined crises of COVID-19’s after-effects, the ongoing war in Ukraine, and ripples from recent trade wars have caused disturbances at never-before-seen magnitudes. Furthermore, increased expectations from internal and external stakeholders to operationalize sustainability have resulted in supply chain functions taking a more central role in the sustainability journey. Recent changes in universal proxy rules are likely to result in more challenges to boards from single issue activists/groups (e.g., climate and sustainability). Consequently, supply chains have become a strategic priority for many organizations, shifting them from out of sight to front and center on C-suite and—in an increasingly significant trend—board agendas.

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