Monthly Archives: August 2023

2023 Say on Pay & Proxy Results

Austin Vanbastelaer is Principal, and Justin Beck is a Consultant, and Kyle McCarthy is a Senior Associate Consultant at Semler Brossy LLC. This post is based on a Semler Brossy memorandum by Mr. Vanbastelaer, Mr. Beck, Mr. McCarthy, Todd Sirras, Nathan Grantz, and Anish Tamhaney.


46 Russell 3000 companies (2.1%) and 11 S&P 500 companies (2.3%) have failed Say on Pay thus far in 2023.


  • The current failure rate (2.1%) is 140 basis points lower than the failure rate at this time last year (3.5%)
  • The percentage of Russell 3000 companies receiving greater than 90% support (71%) is lower than the percentage this time last year (72%)
  • The current Russell 3000 average vote result of 89.9% is 70 basis points higher than the index’s year-end average vote in 2022, and the current S&P 500 average vote result of 88.8% is 140 basis points higher than the year-end average vote in 2022
  • The average Russell 3000 vote result thus far in 2023 is 130 basis points higher than the average S&P 500 vote result; this spread is closer than we observed in the previous two years


ESG in Mid-2023: Making Sense of the Moment

Leah Malone is a Partner and Emily B. Holland is Counsel at Simpson Thacher and Bartlett LLP. This post is based on a Simpson Thacher & Bartlett LLP memorandum by Ms. Malone, Ms. Holland, Martin BellStephen BlakeKaren Hsu Kelley and Alicia Washington. 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) and 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.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

The backlash against ESG in the United States has been unmistakable in 2023. More than one-third of states have passed anti-ESG laws in 2023, most ESG-related shareholder proposals failed to garner majority support, new lawsuits have been filed challenging companies’ ESG-related activities and decisions, and some companies seem to be distancing themselves from the term “ESG” itself. [1] But despite a heavy stream of opinion pieces, the business case for incorporating non-financial metrics into an evaluation of a company’s risk and opportunity profile (the very crux of ESG efforts) remains clear.

Instead, companies’ on-the-ground approaches to their ESG strategies are evolving in response to recent events. With proxy season complete, the Supreme Court term wrapped, Congress in recess and most state legislatures adjourned, we take stock of the current state of ESG for U.S. companies.

Proxy Season: A Drop in Support for E&S Shareholder Proposals

While shareholders can use engagement tools throughout the year to express their priorities and concerns, the casting of votes during proxy season is when shareholder views have the most acute impact. In recent years, proxy season has catalyzed the focus on ESG issues as many institutional investors made oversight and management of those issues both an engagement priority and a component of their voting policies. In response, public companies have been propelled to make changes. In large numbers, they have increased their voluntary reporting on ESG issues, [2] implemented and amended ESG-related policies, [3] set ESG-related goals and targets (including verified science-based targets), [4] and appointed executives to oversee sustainability efforts. [5]

Support for shareholder proposals has undoubtedly been an important part of this activity. For example, in 2021 a record 36 shareholder proposals relating to environmental and social (“E&S”) issues received majority support. [6] The most successful of these proposals related to issues involving the disclosure of workforce diversity (EEO-1) data, or reports on climate change transition plans, greenhouse gas emissions or targets. Since that time, a growing number of companies have begun disclosing this type of data. [7]


The New Paradigm: A Toolkit For Balancing Conflicting Stakeholder Interests and Protecting Long-Term Business Value

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 and Carmen X. W. Lu. 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) 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.

Companies today face pressure from stakeholders (including non-shareholder politicians and activists) to take positions on myriad issues. Some companies have found themselves swept into political, social and cultural conflicts. Others have been criticized for expending resources on issues that their boards and management have determined to have bearing on business value, but which some stakeholders regard as socio-political values. Climate and diversity, equity and inclusion (DEI) policies have faced particular scrutiny. The recent wave of demand letters, lawsuits and public clashes continue to stoke stakeholder divisions and draw scrutiny to board and management decision making.

Today’s stakeholder conflicts have raised questions as to how boards and management should best respond. The U.S. District Court for the Eastern District of Washington recently addressed this particular issue in its dismissal of discrimination claims brought against Starbucks’ DEI policies. In his oral opinion, Judge Bastian reaffirmed the business judgment deference granted to boards and denied the plaintiff’s efforts to advance what the court deemed to be a political agenda. “This is not a court of public policy,” Judge Bastian held, adding that “[c]ourts of law have no business involving themselves with legitimate and legal decisions made by the board of directors of public corporations.” See also, Pressure on DEI Initiatives Continues to Mount.


Disgorgement Accounting After Liu v. SEC in Securities Enforcement Cases

J.W. Verret, CPA/CFF, is an Associate Professor at George Mason University School of Law, is a practicing forensic accountant at Veritas Financial Analytics, and is Counsel at Lawrence Law LLC. This post is based on his recent paper.

The Supreme Court’s landmark Liu v. SEC ruling curtails the SEC’s discretion in disgorgement remedies, limiting awards to a defendant’s “net profits” from wrongdoing. This shifts billions in settlement negotiations. But how should securities lawyers calculate these “net profits” in the wake of Liu?

My new draft article, available here, provides securities attorneys a guide for working with forensic accountants to develop defensible disgorgement calculations as they negotiate with the SEC and as they litigate on behalf of clients. By synthesizing key precedents with fundamental accounting principles, it gives lawyers a conceptual framework for engaging forensic accounting experts after Liu.

This is the first article to systematically link the precedent and guidance available in the remedies treatises cited by the Supreme Court in Liu v. SEC and related lower court opinions expanding on Liu and to then link those concepts to fundamental accounting and finance principles.


Recent Delaware Law Amendments Could Impact Shareholder Meetings

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an ISS memorandum by Marc Goldstein, Head of U.S. Governance Research at Institutional Shareholder Services, is part of the Delaware law series; links to other posts in the series are available here.

Several changes to the Delaware General Corporation Law (DGCL) took effect on August 1, 2023. While perhaps less significant than the 2022 amendments to the DGCL and Delaware Statutory Trust Act, which permitted exculpation of executive officers for violations of the duty of care and mandated that Delaware closed-end mutual funds be covered by a control share acquisition statute, respectively, a few of the 2023 changes are likely to have an impact on shareholder meetings in 2024 and beyond.

The most important amendments this year are to the vote requirements for forward and reverse stock splits. Going forward, Delaware companies will not be required to seek shareholder approval for any forward stock split, as long as the class of stock being split is the only class issued by the company. Reverse stock splits and increases or decreases in the number of authorized shares will now require approval by a majority of votes cast, rather than a majority of shares outstanding; provided that the class of stock in question is listed on a national securities exchange and the company would continue to meet listing requirements as to the minimum number of holders following the reverse split. Companies can choose to maintain the higher vote standards if they affirmatively opt out of the new provisions by specifying in the charter that forward or reverse splits require approval by a majority of outstanding shares.

Forward stock splits are typically carried out by relatively large companies, which tend to have high levels of institutional ownership, and such companies rarely have difficulty in obtaining approval for a forward split. By contrast, reverse stock splits are most often employed by microcap companies as a way to raise the share price and thereby avoid delisting for failure to meet the stock exchange minimum bid price requirement. Despite the obvious benefits to shareholders of maintaining the company’s listing, and the lack of any significant active opposition to a reverse split proposal, many such companies have struggled to obtain the necessary approval, due to low turnout by retail investors that has prevented them from garnering the affirmative vote of a majority of the voting power of outstanding shares. Over the past year and a half, more than 50 such companies – mostly incorporated in Delaware – have issued preferred shares with enhanced voting rights applicable only to a reverse split proposal, as a way to clear the hurdle imposed by the previous vote standard. Such workarounds should no longer be necessary at Delaware companies thanks to the change in the vote requirement.


Dealing with Activist Hedge Funds and Other Activist Investors

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, Steven A. Rosenblum, Karessa L. Cain, Elina Tetelbaum, Carmen X.W. Lu, and Anna Dimitrijević. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian A. Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian A. 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 (discussed on the Forum here) by Frankl and Kushner Leo E. Strine, Jr.

Activism has fully rebounded from the brief pandemic dip, with the past eighteen months seeing increased activity. As we have previously noted, regardless of industry, size or performance, no company is too large, too popular, too new or too successful to consider itself immune from activism. Although poor economic or stock price performance can increase vulnerability, even companies that are respected industry leaders and have outperformed the market and their peers have been and are being attacked. And companies that have faced one activist may be approached, in the same year or in successive years, by other activists or re-visited by a prior activist.

While M&A theses have continued to catalyze activist activity, recent market volatility, ongoing macroeconomic headwinds and earnings pessimism have prompted activists to pivot to strategic and operational theses, particularly at companies facing cash flow constraints and slower growth following pandemic-era exuberance. Meanwhile, companies with robust balance sheets continue to face calls to return more cash to investors in the form of buybacks and special dividends. With some of the largest and most established activists sitting on record levels of committed capital, large- and mega-cap companies have become particularly attractive investment targets, hence resulting in several instances of “swarming.” The new universal proxy rules, which took effect this past proxy season, do not yet appear to have significantly affected activist tactics or levels of success, although the number of settlements increased this year, driven possibly by companies believing that activists are now able to more effectively target and replace at least some individual directors, and/or by activists believing that they are less likely to win multiple seats when shareholders can mix and match between activist nominees and company nominees.


Do Corporations Retain Too Much Cash? Evidence from a Natural Experiment

Hwanki Brian Kim is an Assistant Professor of Finance at Baylor University; Woojin Kim is a Professor of Finance at Seoul National University; and Mathias Kronlund is an Assistant Professor of Finance at Tulane University. This post is based on their recent paper, forthcoming in The Review of Financial Studies.

Many corporations have been criticized for accumulating large amounts of cash on their balance sheets. Does holding on to all this cash represent a good use of corporate resources? On the one hand, consistent with the label “cash hoarding” often used in this context, firms’ cash holdings could be excessive and harmful to their valuations. That would be the case, for example, if having large cash balances increases the likelihood that this money will be spent unwisely (Jensen, 1986) or if more productive alternative uses exist for the cash, such as investing in new projects or paying it out to investors. On the other hand, firms also hold cash for many legitimate reasons, in which case large cash holdings could be optimal even if they appear excessive. For instance, having an ample cash buffer can help a firm to better ride out recessions or industry downturns. Because of this tension, it is difficult to tell if firms are holding on to too much cash or just the right amount.

To evaluate whether firms retain too much cash, we ideally need an exogenous shock to firms’ cash retention policies and a way to measure the effect on valuations. If a firm retains the right amount of cash, any exogenous change away from this level will reduce the firm’s value. But if a firm retains too much cash, then a decrease in retention can raise the firm’s value.

In our paper, Do Corporations Retain Too Much Cash: Evidence from a Natural Experiment that was recently published in the Review of Financial Studies, we seek to shed light on this question through the lens of a natural experiment. For our empirical analysis, we study the effects of a 2014 tax reform in Korea that acted as a shock to firms’ incentives to accumulate cash. This reform was introduced with the specific intent of reducing firms’ cash retention by imposing a new tax on firms if they retained too much of their earnings.


New Ruling Highlights Unintended Consequences of Excluding Officers from Fiduciary Duty Waivers

Benet J. O’Reilly is a Partner and Lina Dayem is an Associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Delaware law provides parties with significant flexibility to restrict or eliminate fiduciary duties in LLC agreements.  Sophisticated parties regularly take advantage of this flexibility by eliminating fiduciary duties of members and directors of LLCs.  These same parties, however, often choose not to extend these waivers to officers of the LLCs, often stemming from a desire to ensure that officers still have a fiduciary duty to be loyal to the LLC.  A new ruling from the Delaware Court of Chancery highlights the unintended consequences of excluding officers from the scope of the fiduciary duty waiver.

In Cygnus Opportunity Fund, LLC, et al. v. Washington Prime Group, LLC, et al., [1] the Court denied dismissal of claims alleging that company officers breached their fiduciary duties by failing to provide adequate information to minority investors in connection with a tender offer by the controlling member and a subsequent squeeze-out merger.   In addition, the Court allowed the survival of claims against the officers, the board and the controlling investor, asserting a breach of the covenant of good faith in connection with the transactions.

Cygnus illuminates two key tensions (also examined herehere, and here): (i) the tension between the officers’ duties owed to the board of managers versus its fiduciary duties owed to the members and (ii) the tension between freedom of contract when drafting LLC agreements versus the backstop of the implied covenant of good faith and fair dealing. These facts are worth keeping in mind when drafting LLC agreements with fiduciary duty waivers and provisions that grant full discretion to one of the parties. Below we break down the Court’s analysis and key takeaways.


2023 Proxy Season Review: Rule 14a-8 Shareholder Proposals

Melissa Sawyer and Marc Treviño are Partners, and June Hu is an Associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Sawyer, Mr. Treviño, Ms. Hu, H. Rodgin Cohen, and Lauren Boehmke.


The number of Rule 14a-8 proposals submitted to S&P Composite 1500 companies reached over 800 for the first time in the core proxy season. Compared, however, to the more substantial year-over-year increases in 2022 (9%) and 2021 (12%), the year-over-year [1] increase in the total number of submissions was more modest in H1 2023 (3%). Voted shareholder proposals increased by 13% (543 vs. 481 H1 2022), reflecting recent changes in the SEC’s stance on no-action relief (further discussed in Section H) and a decrease in settlement rate. [2]

Consistent with 2022, proposals on environmental and social/political (“ESP”) topics remained the focus of the proxy season, representing 65% of total submissions (vs. 63% in H1 2022). Notably, the number of voted environmental proposals increased by 57% year over year, and 26% more individual companies— including several companies that did not receive any ESP proposals during the past five years—had at least one ESP proposal reach a vote. The polarization in the dialog on these topics, which is intensifying on the broader national stage, also is reflected in Rule 14a-8 proposals this year. In H1 2023, so-called “anti-ESG” proponents submitted 89 proposals, up 65% from H1 2022 and 256% from 2021. [3]

The increase in proposals has been accompanied by record low shareholder support and pass rates. [4] In particular, after enjoying a steady decade-long rise before dropping for the first time last year, average support for ESP proposals further decreased (to 19% vs. 28% in H1 2022 after a record high of 32% in H1 2021). Only 5% of overall and 2% of ESP proposals that went to a vote passed (vs. 12% and 14% in H1 2022). Nonetheless, frequent ESP proponents, such as As You Sow, have indicated that they will not be influenced by the low shareholder support this year and intend to resubmit proposals at companies where votes exceeded the resubmission threshold under Rule 14a-8. [5]


Private Equity and Venture Capital Fund Performance: Evidence from a Large Sample of Israeli Limited Partners

Alon Brav is the Bratton Family Distinguished Professor at Duke University, Guy Lakan is a Phd Candidate at the Hebrew University of Jerusalem, and Yishay Yafeh is the Julius Feinstein Chair in Accounting & Finance and a Professor at the Hebrew University of Jerusalem. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here) and The Specter of the Giant Three (discussed on the Forum here) both by Lucian Bebchuk and Scott Hirst.

Pension funds and institutional investors around the world have been allocating an increasing fraction of their assets under management to private equity (PE), venture capital (VC), and other types of private funds. Public pension funds tracked by Preqin, for example, have steadily increased their allocations to this asset class over the past decade, with the median allocation rising from 18.1% in 2010 to 30.3% in 2020, and 79% of investors stating that they expect to allocate a larger proportion of their funds to private equity by 2025.

In our paper, Private Equity and Venture Capital Fund Performance: Evidence from a Large Sample of Israeli Limited Partners, publicly available on SSRN, we study the performance of non-US based limited partners. The performance of non-US limited partners may differ from what has been documented for US limited partners for various reasons, such as differences in access to top performing funds, differences in skill or ability to select successful PE or VC fund general partners, and differences in fees.

Our study relies on a unique and comprehensive data set of on all capital calls and distributions associated with investments in PE, VC, and other types of private funds for a 20-year period ending in December 2019 by the eight largest institutional investors in Israel, managing 76% of all retirement savings. This cash flow data constitutes part of the information that the institutions managing retirement savings are mandated to report to the Capital Market, Insurance, and Savings Authority at the Ministry of Finance. The data set is therefore free of survivorship and other biases documented in the literature in the context of some commercial data sources on PE and VC fund performance. Much like their peers elsewhere, institutional investors in Israel, including pension funds, life insurance plans, and other forms of long-term savings known as provident funds, have increased their allocations to illiquid assets from 12% of assets under management in 2010 to 17% in 2020. Their investments in PE, VC, and other types of private funds have increased from a mere 1% of their assets under management in 2010 to 5% in 2020. This increase in the allocation of funds to PE and other funds coincided with a dramatic increase of 250% in the total value of assets under management during this time period, driven by the introduction of mandatory retirement savings. As a result, the volume of investment by Israeli LPs in PE and other types of private funds has become economically large in absolute, not only relative, terms.


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