Monthly Archives: September 2023

ESG Reporting for Private Companies

Posted by David A. Bell, Dan Dorosin, and Ron C. Llewellyn, Fenwick & West LLP, on
Wednesday, September 13, 2023
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David A. Bell and Dan Dorosin are Partners, and Ron C. Llewellyn is a Counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum. 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.

As we have noted in our previous report, environmental, social and governance (ESG) issues have garnered significant attention from a variety of stakeholders, resulting in increased reporting by many companies. While much of the focus regarding ESG reporting in the U.S. has been on public companies, and indeed there is not yet clear consensus on what “ESG” encompasses, ESG risks and opportunities can affect private companies as well, and there are several reasons why a private company might decide to report ESG data or undertake ESG-related initiatives in a manner similar to a public company. This overview explores some of the key factors that late-stage private companies should consider in deciding whether to initiate an organized ESG program (i.e., one that may with development over time evolve into a program similar to those in place at many public companies) and/or start preparation for ESG reporting. In addition, the overview outlines some steps that such a private company can take to begin its ESG journey.

To be clear, for many private companies, ESG considerations—however the particular company defines ESG—inform the core purpose, values and day-to-day operations of the business, often from the venture’s founding stage, and consideration of ESG in that context is of course beyond the scope of this overview. Rather, the goal here is to assist private companies that have been less focused on these topics as they encounter or consider ESG as their business develops.

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2023 U.S. Regional Brief

Posted by John Galloway, Vanguard, Inc., on
Tuesday, September 12, 2023
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John Galloway is Global Head of Investment Stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship.

Vanguard’s Investment Stewardship team conducts proxy voting and engagement on behalf of the Vanguard-advised funds. Our approach to evaluating portfolio companies’ corporate governance practices is centered on four pillars of good corporate governance, which are used to organize this brief: board composition and effectiveness, oversight of strategy and risk, executive compensation/remuneration, and shareholder rights.

During the past proxy year (July 1, 2022, through June 30, 2023), the team conducted 1,049 engagements with 832 companies in the United States, representing $3.1 trillion in equity assets under management in the region. The funds voted on 38,257 proposals across 4,231 companies in the region.

Board composition and effectiveness

Our primary interest when evaluating a company’s corporate governance profile is ensuring that the board of directors has the appropriate level of independence and mix of backgrounds, skills, experience, and diversity of personal characteristics to effectively provide independent oversight of management, company strategy, and material risks.

During the 2023 proxy year in the U.S., we engaged with portfolio company directors and executives on topics ranging from board and committee leadership refreshment to their onboarding processes for new directors. We saw many boards implement practices related to the universal proxy card (UPC) by increasing disclosure about their board skills matrices, director capacity and commitment policies, and board effectiveness assessments

Universal proxy card and proxy contests. U.S. Securities and Exchange Commission (SEC) rules requiring the use of UPC in contested director elections took effect in September 2022, allowing shareholders to vote on the same ballot for a combination of directors proposed by either management or a dissident. As we shared in an Insights piece earlier this year, our approach to evaluating proxy contests remained the same with the implementation of UPC; we continue to focus on assessing the strategic case for change, the company’s approach to governance, and the quality of director nominees.

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Does ESG Crowd Out Support For Government Regulation?

Posted by Hajin Kim (University of Chicago), Joshua Macey (University of Chicago), and Kristen Ann Underhill (Cornell University), on
Tuesday, September 12, 2023
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Hajin Kim and Joshua C. Macey are Assistant Professors of Law at the University of Chicago Law School, and Kristen Ann Underhill is Professor of Law at Cornell Law School. This post is based on their recent paper. 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) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita. 

A small but growing line of research has focused on whether voluntary corporate efforts to address social problems alter public support for regulation. These studies focus on public opinion because of the strength of its influence on public policy. Yet existing research on the topic has produced contradictory results. One study found that voluntary efforts undertaken by 100% of an industry can crowd out support for stringent regulations such as a complete ban on neonic insecticides. Another found that individual firm commitments can lead to a moderate increase in support for government regulation, particularly among conservatives.

In a new paper, we build on these prior studies to develop a more comprehensive conceptual framework for why voluntary efforts might sometimes crowd in and other times crowd out support for government regulation. We hypothesize that voluntary efforts could affect public support by changing perceptions of (1) the firm’s credibility, (2) the need for government regulation, (3) the feasibility of government regulation, and/or (4) the scope or seriousness of the underlying problem. Because these factors can move in opposing directions, we posit that, overall, voluntary efforts are unlikely to have a large influence on support for regulation, and that any influence will be heavily context-dependent.

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Activist Settlements: Fiduciary Questions for Boards

Posted by Neil Whoriskey, Milbank LLP, on
Monday, September 11, 2023
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Neil Whoriskey is a Partner at Milbank LLP. This post is based on his Milbank memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch.

Boards often settle actual or threatened proxy fights by trading away board seats to activists. Delaware courts will analyze this trade as a defensive device, much like greenmail, where the board trades away something valuable to avoid a battle for corporate control.  It follows that, like greenmail or a poison pill, this defensive device would be subject to scrutiny under the Unocal standard [1]. Yet boards in general seem to be remarkably lax in analyzing whether they have fulfilled their fiduciary duties in making such a trade. Below are questions boards should be able to answer before awarding partial control of their company to an activist.

Duty of Loyalty

To survive the enhanced scrutiny of Unocal, the board bears the burden of proving that it has identified a threat to corporate policy and effectiveness, that its motivation in implementing the defensive measure is “proper and not selfish or disloyal” and that the defensive measure is reasonable in relation to the threat identified. [2]

  1. Has the board identified a cognizable threat?

What the company typically gets in return for trading away board seats is, at best, avoiding any further cost and distraction from a proxy fight, a short standstill commitment, a say in who steps off the board and a say in who gets added to the board.  It follows that the “threat” neutralized by this trade is (i) the short-term threat of continued expense and distraction, and (ii) the longer-term threat that, if elected by stockholders, the activist’s original nominees may disrupt the agenda and priorities of the board to a greater extent than nominees appointed in the settlement.

At the point when settlement is reached, the board should have a very well-developed idea of exactly just how distracting and expensive a proxy fight will be. This defines the short-term threat. Before turning over board seats to avoid this cost and distraction, the board should also determine whether the cost and distraction, by itself, rises to the level of an actual “threat to corporate policy and effectiveness,” or if it is merely an expensive nuisance. [3]

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Capital-Market Effects of Tipper-Tippee Insider Trading Law: Evidence from the Newman Ruling

Posted by Andrew T. Pierce (Georgia State University), on
Monday, September 11, 2023
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Andrew T. Pierce is an Assistant Professor of Accounting at Georgia State University. This post is based on an article forthcoming in the Journal of Accounting & Economics. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation (discussed on the Forum here) by Jesse M. Fried.

One of the most distinguishing features of US securities regulation is strict enforcement of insider trading. However, because of long-run persistence in insider trading enforcement and a lack of variation in the underlying laws, we have surprisingly little well-identified empirical evidence on the market benefits conveyed by strictly regulating insider trading.

In my article, Capital-Market Effects of Tipper-Tippee Insider Trading Law: Evidence from the Newman Ruling, which is available on SSRN and forthcoming in the Journal of Accounting and Economics, I exploit the landmark December 2014 Newman ruling issued by the 2nd Circuit Appeals Court, which reduced the risk of prosecution for managers (tippers) and investors (tippees) by limiting the types of exchanges that trigger insider trading liability. The US Department of Justice sharply critiqued the Newman decision as “one of the most significant developments in insider trading law in a generation that [would] limit the Government’s ability to prosecute some of the most common, culpable, and market-threatening forms of insider trading.”

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Significant Rule Changes for Private Fund Advisers

Posted by Laura Ferrell, Aaron Gilbride, and Jamie Lynn Walter, Latham & Watkins LLP, on
Sunday, September 10, 2023
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Laura Ferrell, Aaron Gilbride, and Jamie Lynn Walter are Partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Ferrell, Mr. Gilbride, Ms. Lynn Walter, Michael J. Milazzo, Mike Hart-Slattery, and. Haley Hohensee.

On August 23, 2023, the Securities and Exchange Commission (SEC) adopted a final rule package (each a Rule, and together, the Rules) that modifies the regulation of private fund advisers under the US Investment Advisers Act of 1940, as amended (the Advisers Act). See a table summarizing the key provisions of the Rules here.

Among other things, the Rules require that all SEC-registered[1] private fund [2] advisers:

  • prepare and distribute quarterly statements to investors containing detailed information on fees, expenses, compensation, and performance;
  • obtain and distribute to investors an annual audit for each private fund such advisers manage (using the same standards applied to annual private fund audits under Rule 206(4)-2 under the Advisers Act (the Custody Rule)); and
  • obtain and distribute to investors a fairness or valuation opinion from an independent opinion provider in connection with an adviser-led [3] secondary transaction, as well as distribute to such investors a written summary of any key relationships with the independent opinion provider.

Additionally, the Rules place restrictions on certain activities by all private fund advisers (including exempt reporting advisers), including:

  • charging or allocating to the private fund regulatory, examination, or compliance fees or expenses of the adviser, unless such fees and expenses are disclosed to investors;
  • reducing the amount of an adviser carried interest clawback by the amount of certain taxes (or assumed taxes), unless the adviser discloses the pre-tax and post-tax amount of the clawback to investors;
  • charging or allocating fees or expenses related to a portfolio investment on a non-pro rata basis, unless the allocation approach is fair and equitable and the adviser distributes advance written notice of the non-pro rata allocation (along with an explanation of why such allocation is fair and equitable);
  • charging or allocating to the private fund fees or expenses associated with an investigation of the adviser without disclosure and consent from fund investors (the Rules also prohibit charging or allocating such fees or expenses if the investigation results in a sanction for violating the Advisers Act); and
  • borrowing money, securities, or other fund assets, or receiving an extension of credit, from a private fund client without disclosure to, and consent from, fund investors.

Finally, the Rules require all SEC-registered investment advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

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SEC Finds Forms 12b-25 Not Up to Snuff

Posted by Cydney S. Posner, Cooley LLP, on
Saturday, September 9, 2023
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Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

Earlier this week, the SEC announced settled enforcement actions against five companies for deficient disclosure in Forms 12b-25 that they filed regarding late reports. Why?  On the heels of filing those Forms 12b-25, the companies announced financial restatements or corrections that were not even alluded to in those late notification filings. Over two years ago, the SEC charged eight companies for similar violations detected through the use of data analytics in an initiative aimed at Form 12b-25 filings that were soon followed by announcements of financial restatements or corrections. (See this PubCo post.)  Apparently, the SEC believes that companies are still flubbing this one and does not seem to consider these errors to be just harmless foot faults.  In connection with the 2021 enforcement actions, the Associate Director of Enforcement hit on a central problem from the SEC’s perspective with deficiencies of this type: “In these cases, due to the companies’ failure to include required disclosure in their Form 12b-25, investors relying on the deficient Forms NT were kept in the dark regarding the unreliability of the company’s financial reporting or anticipated material changes in operating results.” These charges should serve as a reminder that completing the late notification is not, to borrow a phrase, a trivial pursuit and could necessitate substantial time and attention to provide the narrative and quantitative data that, depending on the circumstances, could be required.

Public companies are required to file Forms 12b-25 when they are requesting additional time to file a periodic report. If the company was unable to file the periodic report on a timely basis without unreasonable effort or expense and complies with all of the requirements of the Rule, the late report will be deemed to be timely filed—essentially giving the company an extension.

More precisely, under Rule 12b-25, if a company fails to file a Form 10-K or 10-Q within the prescribed time period, the company must file a Form 12b-25 with the SEC no later than one business day after the report’s due date. The Form 12b-25 must disclose that the company is unable to timely file and explain the reason why.  The company is also required to affirm that the periodic report will be filed within 15 calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the original due date, and is then required to file the report within that timeframe.

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Proceduralism: Delaware’s Legacy

Posted by Dalia Tsuk Mitchell (George Washington University), on
Friday, September 8, 2023
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Dalia Tsuk Mitchell is The John Marshall Harlan Dean’s Research Professor of Law at George Washington University Law School. This post is based on her recent article published in the University of Chicago Business Law Review, and is part of the Delaware law series; links to other posts in the series are available here.

The 1980s were a watershed moment in the history of corporate law. In a series of decisions addressing the board of directors’ duties in friendly mergers and hostile takeovers, the Delaware Supreme Court seemed to depart from its historical deference to directors’ discretion and instead subjected directors’ actions to judicial review. In Smith v. Van Gorkom (1985), the Court held that the highly experienced and long-tenured directors of Trans Union were grossly negligent when they approved a merger agreement, even though the merger provided Trans Union’s shareholders with an almost 50% premium over the market price of the stock. Less than six months later, in Unocal Corp. v. Mesa Petroleum Corp. (1985), the Court held that a target board must demonstrate that a threat to corporate policy existed and that its actions were reasonable given the nature of the threat to justify defensive measures. Shortly thereafter, in Revlon, Inc. v. MacAndrews & Forbes Holdings (1986), the Court declared that a company’s board must strive to ensure that the shareholders receive best price if it decides to allow the sale of the company. In all, the Delaware Supreme Court’s willingness to subject directors’ decisions to review and insist on fair or best price for the shareholders seemed to deviate from Delaware’s historical deference to directors’ business judgment. As Martin Lipton pointedly charged at the time, “Delaware has misled corporate America . . . It lured companies in with a promise that the business judgment rule would govern corporate law. It’s obvious that the state has reneged” (quoted in William Meyers, Showdown in Delaware: The Battle to Shape Takeover Law, Institutional Investor, Feb. 1989, at 75).

Many have since argued that the 1980s marked the end of managerialism (the idea that expert managers could be trusted to lead corporations as they deemed beneficial for all corporate stakeholders) and the birth of shareholder valuism (the notion that corporations should maximize value only to the shareholders) as corporate law’s normative anchor. As Karen Ho writes, the 1980s blitz of hostile takeovers was a means to an end, namely removing the “elite, complacent, and self-serving managerial class” that has presumably “squandered corporate resources extravagantly on themselves or on ill-advised expansions” and “unlocking the value of ‘underperforming’ stock prices” to the benefit of the shareholders (Karen Ho, Liquidated: An Ethnography of Wall Street 130 (2009)).

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Weekly Roundup: September 1-September 8, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, September 8, 2023

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This roundup contains a collection of the posts published on the Forum during the week of September 1-September 8, 2023

Trends in Shareholder Proposals

Posted by Nathan Williams, Jamie McGough, and Donald Kalfen, Meridian Compensation Partners, on Friday, September 1, 2023
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Board Practices: Artificial intelligence

Posted by Natalie Cooper (Deloitte LLP), Bob Lamm (Deloitte LLP), and Randi Val Morrison (Society for Corporate Governance), on Saturday, September 2, 2023
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ESG + Incentives 2023 Report

Posted by Matthew Mazzoni and Jennifer Teefey, Semler Brossy LLC, on Sunday, September 3, 2023
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The State of Climate Disclosure and Governance

Posted by Randi Morrison (Society for Corporate Governance) and Salvatore Schiano (Persefoni), on Monday, September 4, 2023
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Lessons from the 2023 Proxy Season: Advance Notice Bylaws and Officer Exculpation

Posted by Douglas K. Schnell and Daniyal Iqbal, Wilson Sonsini Goodrich & Rosati, on Tuesday, September 5, 2023
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Pay Equity-Related Shareholder Proposals in 2023

Posted by J.T. Ho, Robert Bee, and Hayden Goudy, Orrick, Herrington & Sutcliffe LLP, on Tuesday, September 5, 2023
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Corporate Stakeholders and CEO-Worker Pay Gap: Evidence From CEO Pay Ratio Disclosure

Posted by Mei Cheng (University of Arizona) and Yuan Zhang (University of Texas at Dallas), on Wednesday, September 6, 2023
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Trend in Delaware Merits Heightened Attention by Acquirors

Posted by Ethan Klingsberg & Victor Ma, Freshfields Bruckhaus Deringer LLP, on Wednesday, September 6, 2023
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Corporate Governance and Risk-Taking: A Statistical Approach

Posted by Steven L. Schwarcz (Duke University), on Thursday, September 7, 2023
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Board Oversight of Diversity, Equity, and Inclusion

Posted by Blair Jones (Semler Brossy), Anna Natapova (Semler Brossy), and Chuck Gray (Egon Zehnder), on Thursday, September 7, 2023
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Board Oversight of Diversity, Equity, and Inclusion

Posted by Blair Jones (Semler Brossy), Anna Natapova (Semler Brossy), and Chuck Gray (Egon Zehnder), on
Thursday, September 7, 2023
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Blair Jones is a Managing Director at Semler Brossy LLC, Anna Natapova is Principal at Semler Brossy LLC, and Chuck Gray is Coleader of the US CEO and Board Practice at Egon Zehnder. This post is based on a Semler Brossy memorandum by Ms. Jones, Ms. Natapova, Mr. Gray, and Cynthia Soledad. 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, 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.

Well-run diversity, equity, and inclusion (DE&I) initiatives can yield many benefits, including improved talent attraction and retention rates, better decision-making through diverse perspectives, and stronger relationships with customers, clients, and suppliers. On the other hand, poorly resourced DE&I efforts can put a business at risk and hinder progress.

What separates the good from the bad? Organizations that lead in DE&I devote meaningful energy from a strategic perspective by aligning DE&I with business strategy, dedicating sufficient resources, and emphasizing accountability. Simply hiring a chief diversity and inclusion officer is far from enough. Where should boards begin and what questions should they ask to best steward the company’s DE&I efforts?

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