Monthly Archives: January 2023

​Antitrust and ESG

Damian G. Didden is a Partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Didden, Adam Emmerich, Jonathan Moses, and Sabastian Niles. Related research from the Program on Corporate Governance includes Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

As boards continue to evaluate how environmental, social and governance (“ESG”) considerations factor into corporate operations, some lawmakers and regulators have raised potential antitrust concerns about coordinated efforts.  For example, several U.S. Senators sent letters to law firms admonishing them to advise clients of increased congressional scrutiny of “institutionalized antitrust violations being committed in the name of ESG.”  And, a group of state attorneys general inquired whether an investor-driven initiative on climate risks called Climate Action 100+ implicates antitrust laws.  FTC Chair Lina Khan opined last month in The Wall Street Journal that ESG benefits are no defense for otherwise illegal mergers.

As we have previously explained (most recently here), a board’s decision to take account of ESG factors is neither a corporate charitable activity nor anticompetitive.  Quite the opposite.  It reflects a business judgment that taking account of ESG matters, such as long-term sustainability, can create value and reduce risk for all company stakeholders.  Some regulators in the United States have recognized that ESG considerations and antitrust principles are not in conflict.  For example, a recent letter signed by seventeen state AGs argues that mutual support of climate policies by investment fund managers does not violate the Sherman Act.  Antitrust regulators in the United Kingdom and the European Union, moreover, have offered specific guidance on applying antitrust laws to sustainability agreements and similar multi-firm conduct.  As these regulators correctly recognize, in most circumstances, antitrust principles should not be a serious impediment to incorporating ESG into decision-making that is otherwise in the corporate interest.


Voting Rights in Corporate Governance: History and Political Economy

Sarah C. Haan is Class of 1958 Uncas and Anne McThenia Professor of Law at Washington and Lee University School of Law. This post is based on her recent paper, forthcoming in the Southern California Law Review. 

Voting rights became the subject of sharp legal wrangling in American political elections when the U.S. Supreme Court decided Bush v. Gore in 2000, and again thirteen years later with its decision in Shelby County v. Holder. The result has been legal action, academic debate, and media attention focused on Americans’ voting rights.

Something similar has been happening to shareholder voting rights in the United States, though it has garnered much less attention. Many aspects of shareholder voting rights are now in flux, with major changes involving dual-class structures, ballot access, broker voting, and the universal proxy. Behind the scenes, asset managers are utilizing pass-through and client-directed voting mechanisms to transfer direct voting power back to their clients, a trend that threatens to shift power in companies in close votes.

The current moment has an antecedent in the original Gilded Age—the last major period in which shareholder voting rights experienced transformative change. In a new article, I connect the old Gilded Age to our current New Gilded Age and shed new light on an old mystery in corporate law history—what explains the rise of one-share-one-vote in American corporate law? One-share-one-vote was not the dominant voting rule in the U.S. at the start of the nineteenth century, but had become dominant by that century’s end.


The controversy over proxy voting: The role of asset managers and proxy advisors

Jan Krahnen is Professor of Corporate Finance at the Goethe-University Frankfurt; Arnoud Boot is Professor of Corporate Finance and Financial Markets at the University of Amsterdam; Lemma Senbet is William E. Mayer Chair Professor of Finance at the University of Maryland; and Chester Spatt is Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon’s Tepper School of Business. This post is based on their statement on proxy voting. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here) by Lucian A. Bebchuk and Scott Hirst.


In this statement, we assess the role and power of proxy advisors and asset managers in corporate governance, an industry that is characterized by a limited number of voting advisory firms (ISS and Glass-Lewis), accompanied by the growing dominance of index investing in an industry with a few large asset managers, such as BlackRock, Vanguard, and State Street. We discuss the business model of proxy advisory firms and contrast its objectives with those of asset managers in the context of the informational screening/filtering role and voting analysis. This discussion concludes with a set of policy recommendations, such as: (a) requiring disclosure of advisory firms’ other businesses, (b) increasing the transparency of the business model of proxy advisory firms, particularly around the rationale for their general guidelines for voting recommendations, (c) ensuring that the regulatory burden on proxy advisory firms does not discourage entry, and (d) increasing the regulatory oversight of the voting process with a view to incorporating investor preferences in proxy voting.


EU Finalizes ESG Reporting Rules with International Impacts

Thibault Meynier, Sarah H. Mishkin, and Matthew Triggs are Associates at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Meynier, Ms. Mishkin, Mr. Triggs, John Horsfield-Bradbury, Olivier de Vilmorin, and Samuel E. Saunders. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and For Whom Corporate Leaders Bargain (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto TallaritaRestoration: 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.; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.


The European Union has finalized the Corporate Sustainability Reporting Directive (“CSRD”) that will introduce more detailed sustainability reporting requirements for EU companies, non-EU companies meeting certain thresholds for net turnover in the EU and companies with securities listed on a regulated EU market. The CSRD entered into force on January 5, 2023 and is substantially consistent with the provisional version published in June 2022.

The rules will be phased in starting from January 1, 2024 for certain large EU and EU-listed companies, and will apply to all in-scope companies by January 1, 2028.

As CSRD reporting is phased in, EU subsidiaries of non-EU parents may be required to begin reporting under the CSRD before their non-EU parent comes in scope, and the CSRD includes transitional provisions on how EU subsidiaries of non-EU groups should prepare reporting before the non-EU parent provides its own CSRD reporting.

In-scope companies will be required to disclose information both about how sustainability-related factors, such as climate change, affect their operations and information about how their business model impacts sustainability factors. The scope of required reporting covers environmental, social and human rights and governance factors. Environmental factors include not only climate (including Scopes 1, 2 and 3 greenhouse gas emissions) but also water/marine resources, circular economy, pollution and biodiversity. The precise disclosure requirements are being developed for the European Commission by the European Financial Reporting Advisory Group (“EFRAG”), a non-profit advisory group, which released an initial draft of the first set of standards in late November 2022 for consideration by the Commission.


Delaware Courts Provide Guidance on Incumbent Board Enforcement of Advance Notice Bylaws

Edward Micheletti is a Partner and Ryan Lindsay is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum. This post 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 The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; and Dancing with Activists (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch.

In late 2021 and early 2022, two decisions from the Court of Chancery addressing advance notice bylaws reiterated, consistent with long-standing Delaware law, that clear and unambiguous advance notice bylaws will be enforced. These decisions also noted that application of such bylaws remains subject to equitable review to determine if the incumbent board acted manipulatively or otherwise inequitably in rejecting stockholder board nominees.[1] However, these decisions also articulated slightly different standards of review — with the court in the first decision holding that under the court’s equitable review a stockholder could prove “compelling circumstances” justifying a finding of inequitable conduct, while the court in the second decision expressly applied enhanced scrutiny, placing the burden on the incumbent board to demonstrate it acted reasonably.[2]

The Court of Chancery’s most recent decision on this topic further reiterates that clear and unambiguous bylaws will be enforced. Furthermore, the decision clarifies that enhanced scrutiny focusing on the reasonableness of incumbent board conduct is the standard of review that applies to the application of even validly enacted advance notice bylaws. Therefore, when assessing a board’s application of an advance notice bylaw, the court will analyze whether the board has identified proper corporate objectives and has justified its actions as reasonable in relation to those objectives.


Update on ESG, Stakeholder Governance, and Corporate Purpose

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Adam O. EmmerichKevin S. SchwartzSabastian V. Niles and Anna M. D’Ginto. 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 TallaritaDoes Enlightened Shareholder Value add Value (discussed on the Forum here) 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.; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

As we previously described (most recently here and here), environmental, social, and governance (ESG) topics have become prominent (and polarized) political issues in recent months.  In the two months since our last update, significant developments in the attack on ESG have occurred in a few areas, as illustrated in the examples set out below.  In providing this update, we underscore that the public and political scrutiny of ESG must not dissuade directors and officers from confronting and addressing ESG risks — to the contrary, fiduciary duties and Caremark obligations require it, and the long-term value of the corporation depends on it.

Asset Managers, ESG Funds, and Proxy Advisory Firms.  The major asset managers remained in the spotlight, with BlackRock in particular subject to continued criticism due to CEO Larry Fink’s outspoken support for ESG.  For example, Florida announced that it would begin divesting $2 billion worth of assets currently managed by BlackRock.  Louisiana, Missouri, South Carolina, Arkansas, Utah, and West Virginia made similar announcements over the course of 2022.  ESG funds have also been affected, suffering significant outflows in 2022 with more money flowing out of than into such funds for the first time in over a decade.  Finally, the proxy advisory firms have become targets of the anti-ESG coalition, joining asset managers as a punching bag for opponents of so-called “woke” capitalist policies.  In January 2023, 21 Republican attorneys general authored a letter to Institutional Shareholder Services and Glass Lewis, the two major proxy advisory firms in the United States, challenging whether their net-zero emissions policies are based on the financial interests of investment beneficiaries rather than on other social goals, and asserting that their boardroom diversity policies may violate contractual and fiduciary duties as well as state anti-discrimination laws. 


Preparing for the 2023 Proxy Season

David M. Lynn, Scott Lesmes, and John Hensley are Partners at Morrison & Foerster LLP. This post is based on a Morrison & Foerster memorandum by Mr. Lynn, Mr. Lesmes, Mr. Hensley, and Leemor Banai.

Public companies need to consider recent developments when preparing for the 2023 proxy and annual reporting season. We summarize key regulatory developments, recent guidance, important disclosure considerations and updates to the voting guidelines of the proxy advisory firms.

Pay Versus Performance

In August 2022, the SEC adopted the pay versus performance disclosure requirements that the SEC was directed to promulgate by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act).[1] Companies (subject to certain exceptions discussed below) will need to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.

New Item 402(v) of Regulation S-K requires that companies provide a new table disclosing specified executive compensation and financial performance measures for the company’s five most recently completed fiscal years. This table will include, for the principal executive officer (PEO) and, as an average, for the company’s other named executive officers (NEOs), the summary compensation table measure of total compensation and a measure of “executive compensation actually paid,” as specified by the rule. The financial performance measures to be presented in the table are:

  • Cumulative total shareholder return (“TSR”) for the company;
  • TSR for the company’s self-selected peer group;
  • The company’s net income; and
  • A financial performance measure chosen by the company and specific to the company that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company’s NEOs to company performance for the most recently completed fiscal year.


Weekly Roundup: January 20-26, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 20-26, 2023

Compensation Season 2023

Get boardroom ready: five ways to improve executive interactions with the board

Amendments to Rule 10b5-1’s Defense to Insider Trading Liability & Related Disclosures

M&A Predictions and Guidance for 2023

The CEO’s ESG dilemma

Financing Year in Review: The Tide Turns

How Twitter Pushed Stakeholders Under The Bus

ISS Updates Frequently Asked Questions for Equity Compensation Plans, Peer Group Selection and Compensation Policies

SEC Strategic Plan for Fiscal Years 2022-2026

Amendments to Rules Governing Trading Plans and Insider Filings

Oversight of Proxy Voting Advisors: US and EU Regulators Converge

Oversight of Proxy Voting Advisors: US and EU Regulators Converge

Stephen M. Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance and Chair of the Best Practice Principles Oversight Committee (OC) 2020-2022; and Konstantinos Sergakis is a Professor of Capital Markets Law and Corporate Governance, University of Glasgow, and Chair of the OC 2023-Present.

The proxy voting advisory and research industry, which includes leaders ISS and Glass Lewis, are increasingly at the center of a whipsaw debate between those who urge that investor stewardship be constrained and those who advocate for it to be enhanced. Regulators have long been drawn into the vortex. But until recently two of the world’s prominent market watchdogs—the US Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA)—had taken opposite tacks on how to address the industry. Today they have converged on the same path, as first became clear in an under-reported October 2022 conference in Rome. There an SEC representative, speaking virtually, spelled out for the first time the Commission’s new, EU-like approach to proxy advisory and research firms.

Implications of this regulatory conjunction have immediate consequences for proxy advisors, as well as for companies and investors on both sides of the Atlantic. Before we address those effects, however, it is important to spotlight the two regulators’ perspectives.

ESMA’s road has been consistent. In 2013, facing issuer calls to install hard rules on proxy advisors, the Authority instead asked the industry to develop its own code of best practice. Five rival firms—ISS, Glass Lewis, Manifest, PIRC, and Proxinvest (now part of Glass Lewis)—collaborated to respond with global-scope principles that tackled service quality, potential conflicts of interest, and communications. Federated Hermes’s EOS arm later joined the original group of signatories.


Amendments to Rules Governing Trading Plans and Insider Filings

Eleazer Klein and Adriana Schwartz are Partners, and Daniel A. Goldstein is an Associate at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum. Related Program research includes Insider Trading Via the Corporation (discussed on the Forum here) by Jesse Fried.

On Dec. 14, 2022, the Securities and Exchange Commission (the “SEC”) adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”), that include, among other things, changes to Rule 10b5-1(c)(1)’s affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5 under the Exchange Act. These changes are aimed at addressing concerns that have long been raised as to whether corporate insiders purport to utilize 10b5-1 plans under the affirmative defense in situations that in fact involve opportunistic trading while in possession of material non-public information (“MNPI”). As discussed below, the amendments may impact fund managers who have board representation or otherwise have access to MNPI. The SEC also adopted amendments to Forms 4 and 5 filed under Section 16 of the Exchange Act to require that filers identify transaction that have been executed pursuant to 10b5-1 plans as well requiring Forms 4 to be filed to report gifts of securities (and no longer allow for deferred reporting of gifts on Form 5).


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