Monthly Archives: November 2023

Which ESG proposals won the favor of investors?

Posted by Miles Rogerson, Diligent Market Intelligence, on
Thursday, November 30, 2023
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Miles Rogerson is a Financial Journalist at Diligent Market Intelligence. This post is based on his Diligent memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; and  Big Three Power, and Why it Matters (discussed on the Forum here) by Lucian A. Bebchuk and Scott Hirst.

A select group of ESG proposals have led the way in terms of shareholder support during the 2023 proxy season. Freedom of association, alongside broader human rights reporting proposals, won occasional majority support from investors in the 2023 proxy season, as shareholders identified employee retention and recruitment as a potential risk resulting from current market volatility.

In a market plagued by rising inflation and cost-of-living concerns, a number of shareholder proposals on pay equity and severance package approval were also forthcoming.

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When Bill Rolls Off: Continuity and Change on Corporate Boards

Posted by Peter Cziraki (Texas A&M University) and Adriana Robertson (University of Chicago), on
Thursday, November 30, 2023
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Peter Cziraki is the Assistant Professor of Finance at Texas A&M University and Adriana Robertson is the Donald N. Pritzker Professor of Business Law at the University of Chicago Law School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine Jr.

Over the last decade, there has been a major push to diversify corporate boards. For example, the proportion of women directors of firms in the S&P 500 index rose from around 10% in 2000 to over 30% in 2023. It is also well-established that larger firms have more women directors than smaller ones.We study where these women directors came from and how they’ve been absorbed in our paper, When Bill Rolls Off: Continuity and Change on Corporate Boards.

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Earnouts Update 2023

Posted by Gail Weinstein, Warren S. de Wied, and Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Wednesday, November 29, 2023
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Gail Weinstein is Senior Counsel and Warren S. de Wied 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. de Wied, Mr. Epstein, Philip Richter, Randi Lally, and Erica Jaffe, 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 Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here); Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders? (discussed on the Forum here) both 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.

Since the COVID-19 pandemic began in 2020, there has been a higher proportion of M&A deals including earnouts—used, as usual, to bridge gaps in buyers’ and sellers’ views of valuation in light of economic and financial uncertainties in the marketplace generally and with respect to specific businesses. Also, earnouts have been used in some deals this year to address difficulties in upfront financing as the M&A financing environment has remained challenging. In this Briefing, we discuss (i) the prevalence of earnouts in M&A deals; (ii) the trend in litigation over earnout disputes; (iii) a change in the frequency of certain earnout-related buyer covenants; (iv) basic Delaware legal principles relating to earnouts; and (v) the recent major Delaware earnout decisions, which reflect a new judicial trend of more frequent holdings against buyers. We also offer earnout-related practice points.
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Ousted

Posted by Yifat Aran (University of Haifa) and Elizabeth Pollman (University of Pennsylvania Carey Law School), on
Wednesday, November 29, 2023
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Yifat Aran is Assistant Professor of Law at the University of Haifa School of Law and Elizabeth Pollman is Professor of Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. This post is based on their symposium article, Ousted, forthcoming in Theoretical Inquiries in Law. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) by Lucian A. Bebchuk and Kobi Kastiel; and Lucky CEOs and Lucky Directors (discussed on the Forum here) by Lucian A. Bebchuk, Yaniv Grinstein, and Urs Peyer.

In an era of “founder-friendly” startup governance, dual-class stock, and technology companies dominating public markets, founder-CEOs are both admired as visionaries and feared as potential governance problems. The entrenchment of founder-CEOs’ control via dual and multi-class stock sparks concern over possible agency costs and insufficient accountability for poor performance, which leads to suspicion that these founders might retain lifetime control. This concern has spurred advocacy for the implementation of sunset provisions and equal treatment agreements, designed to mitigate the risks of enduring control and to promote equal treatment for all shareholders. Amid the twists and turns of this debate, we observe that a small but important point is missing: a substantial number of founder-CEOs have been ousted—forced or pressured to step down from the CEO role despite maintaining important indicia of control.

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Strengthening pay practices

Posted by Will Arnot, Diligent Market Intelligence, on
Tuesday, November 28, 2023
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Will Arnot is Senior Editorial Specialist at Diligent Market Intelligence (DMI). This post is based on DMI’s recent special report, Investor Stewardship 2023. Related research from the Program on Corporate Governance includes Stealth Compensation via Retirement Benefits and Paying for long-term performance (discussed on the Forum here) both by Lucian Bebchuk and Jesse M. Fried; and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay (discussed on the Forum here) by Jesse M. Fried.

2023 marked the first time in four years S&P 500-listed issuers awarded compensation packages based on a down market. In 2022, the S&P 500 index’s total return was -19.4% and companies generally responded as investors would expect, with average granted compensation for companies in the index decreasing to $15.7 million in 2022, down from $17.5 million in 2021.

Despite these tough market conditions, investors responded positively to more modest CEO payouts. 2023 marked the first proxy season in five years where support for advisory “say on pay” proposals at S&P 500 companies increased in comparison to the previous year. Proposals of this kind received 92.1% support on average in 2017, bottoming out at 87.7% average support in 2022. 2023, however, bucked the trend, with “say on pay” resolutions winning 88.9% average support, according to Diligent Market Intelligence’s (DMI) Voting module.

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Law and Political Economy in China: The Role of Law in Corporate Governance and Market Growth

Posted by Tami Groswald Ozery (Hebrew University of Jerusalem), on
Tuesday, November 28, 2023
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Tami Groswald Ozery is Assistant Professor at the Hebrew University of Jerusalem, Israel. This post is based on her book, Law and Political Economy in China. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards (discussed on the Forum here) by Lucian A. Bebchuk and Assaf Hamdani.

Scholars have long regarded certain attributes of corporate governance, particularly legal protections of private ownership, as prerequisites for financial development, deep capital markets and economic growth. Yet, the development of the Chinese market challenges many of the underlying assumptions of this “law matters” thesis. For decades, China achieved substantial growth and developed markets while preserving market control, state ownership, and relatively weak legal institutions. Informal means and functional substitutes provided investors with credible assurances that filled in some of the voids of law by incentivizing growth and governing markets.

The enduring efficacy of these functional substitutes has left its observers puzzled and resulted in a broad intellectual and popular disregard for the role of law in China’s economic rise. Laws and legal institutions are often portrayed as window dressing or as a marginal governing tool at best. Corporate governance institutions are similarly dismissed as a political mirage. The tightening of market controls in China in recent years and the rising presence of political institutions in firms (discussed, here), in conjunction with China’s economic slowdown, further reinforce the widespread skepticism about the importance of law in China’s socialist market economy.

In my newly released book,  “Law and Political Economy in China: the Role of Law in Corporate Governance and Market Growth” (Cambridge University Press, 2023), I call to reevaluate this approach. The role of law in the Chinese market, I argue, has been wrongly undervalued.

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The Delaware-Inspired Next Step Toward Brazil Becoming the South American Leader in Corporate Law: Making Public Company Arbitrations a Matter of Public Record

Posted by Caio Machado Filho (Chediak Advogados), Francisco Rüger Antunes Maciel Müssnich (Ferro, Castro Neves, Daltro & Gomide Advogados), and Leo E. Strine, Jr (University of Pennsylvania), on
Monday, November 27, 2023

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Caio Machado Filho is a Partner at Chediak Advogados, Francisco Rüger Antunes Maciel Müssnich is a Partner at Ferro, Castro Neves, Daltro & Gomide Advogados, and Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. This post is based on their recent paper.

One of the most important functions that corporate and securities laws play is in encouraging capital formation that can promote greater wealth for the well being of society as a whole.  At the core of this important role of law is ensuring that investors in companies are ensured that their legitimate expectations of fair treatment by corporate managers and controlling stockholders are met, that there are limits on self-dealing and opportunistic behavior, and that investors are provided with reliable information to exercise their rights and hold corporate managers accountable for fulfilling their legal and fiduciary duties.  For this role to be accomplished in companies with publicly listed shares, the regulatory system must not only function, it must do so credibly and with disclosure to the investors affected by adjudication of cases affecting their interests.  Not only that, the learning about best practices that emerge from public decisions in corporate and regulatory cases helps encourage better corporate governance and convergence toward more trustworthy approaches that encourage investment.

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2023 Annual ESG Preparedness Report

Posted by Frederik Otto, Jeannette Lichner and Adélaïde Levassor, The Sustainability Board, on
Monday, November 27, 2023
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Frederik Otto is Executive Director, Jeannette Lichner is Senior Advisor, and Adélaïde Levassor is Advisor of The Sustainability Board (TSB). This post is based on the 2023 Annual ESG Preparedness Report by Mr. Otto, Ms. Lichner, Ms. Levassor, and Vicky Moffatt. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; How Twitter Pushed Stakeholders Under The Bus (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo; 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.

1. Sustainability Governance is increasing ‘On Paper’

In 2019, just over half of the businesses had a board policy for ESG oversight. This number increased to 88% globally in 2023, and almost all US companies onboard except for five.

ESG oversight is primarily measured by the presence of a board committee that addresses environmental, social, and governance (ESG) issues in its charter. We also source some of this information from proxy reports, corporate governance guidelines, and annual reports. It is important to note that we often see dramatic differences in disclosure between these documents. That means that a somewhat comprehensive approach to governance stipulated in the sustainability report might not translate into the relevant committee charter, or other documents or vice versa. READ MORE »

SEC Adopts Final Rules to Amend Beneficial Ownership Reporting Rules

Posted by Stephen Fraidin, Erica Hogan and Richard Brand, Cadwalader, Wickersham & Taft LLP, on
Sunday, November 26, 2023
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Stephen Fraidin, Erica Hogan, and Richard Brand are Partners at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader 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 A. Bebchuk; The Law and Economics of Blockholder Disclosure (discussed on the Forum here) by Lucian A. 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.

Overview

On October 10, 2023, the SEC adopted rule amendments related to Section 13 beneficial ownership reporting rules (the “Final Rules”).  In brief, the Final Rules accelerate the filing deadlines for Schedules 13D and 13G, provide guidance on the formation of a “group” and provide guidance on the treatment of cash-settled derivatives.  The Final Rules adopted by the SEC addressed the concerns raised in many of the comment letters.  The final rulemaking is the culmination of a deliberative and thorough process undertaken by Chair Gensler, the other SEC Commissioners, and its staff members. We believe the end result is a final rule that balances the considerations of all market participants and achieves a principal purpose of the SEC, which is to maintain fair, orderly and efficient markets and facilitate capital formation.  Further details of the rule amendments are provided below.

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California’s Comprehensive Climate Accountability Regime: Setting an Aggressive New National Standard

Posted by William J. Stellmach, Adam Aderton and William L. Thomas, Willkie Farr & Gallagher LLP, on
Saturday, November 25, 2023
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William J. Stellmach and Adam Aderton are Partners and William L. Thomas is a Counsel at Willkie Farr & Gallagher LLP. This post is based on a Willkie memorandum by Mr. Stellmach, Mr. Aderton, Mr. Thomas, Elizabeth P. Gray, Archie Fallon, and Maria Chrysanthem. 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 Twitter Pushed Stakeholders Under The Bus (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo; 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.

On October 7, 2023, California adopted a new set of far-reaching climate laws in the form of SB 253, the Climate Corporate Data Accountability Act (CCDAA), and SB 261, the Climate-Related Financial Risk Act (CRFRA) (collectively, the “California Climate Accountability Regime”).[1] Because of the sheer size of the California market—the world’s fifth largest economy—the new legislation effectively will re-shape the Environmental, Social and Governance (“ESG”) and climate transparency debate far beyond the state’s borders.

Under the CCDAA, companies operating within California with annual revenues exceeding $1 billion must begin publicly reporting their greenhouse gas (“GHG”) emissions, including indirect emissions impacts resulting from their activity, starting in 2026. Under the CRFRA, companies operating in California with annual revenues exceeding $500 million must publish biennial climate-related financial risk reports disclosing both climate-related financial risk and measures taken to reduce and adapt to such risk by January 1, 2026. Covered companies under both bills must pay an annual fee, the amount of which is to be determined.

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