Yearly Archives: 2023

SEC Enforcement Mid-Year Review

Posted by Elizabeth P. Gray, A. Kristina Littman, and Adam Aderton, Willkie Farr & Gallagher LLP, on

Wednesday, June 14, 2023

Bankruptcy, Cryptocurrency, Financial institutions, Financial regulation, Monetary policy, SEC enforcement
More from: A. Kristina Littman, Adam Aderton, Elizabeth Gray, Erik Holmvik, Leigh Coutoumanos, Willkie

Elizabeth P. Gray, A. Kristina Littman, and Adam Aderton are Partners at Willkie Farr & Gallagher LLP. This post is based on a Willkie memorandum by Ms. Gray, Ms. Littman, Mr. Aderton, Leigh Coutoumanos and Erik Holmvik.

Introduction

The U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) has had a busy start to its Fiscal Year 2023 enforcement program, continuing its vigorous approach to enforcement with its use of novel theories and enhanced remedies. The Commission’s zealous approach has been particularly evident with respect to all aspects of crypto, as the SEC has claimed jurisdiction over crypto exchanges, [1] lending platforms, [2] and other intermediaries by not only charging exchanges for failing to register with the Commission but also by enforcing the more traditional anti-fraud and antimanipulation provisions of the Exchange Act.

A Heightened Focus on Crypto Lenders and Intermediaries

Crypto exchanges, lending platforms, and token issuers were top priorities for the Commission in the first half of Fiscal Year 2023, with a flurry of enforcement activity following the collapse of FTX Trading Ltd. (“FTX”). The SEC has been particularly active in bringing enforcement actions against unregistered exchanges, as well as unregistered offers and sales of securities.

Crypto asset exchanges and their operators are under heightened SEC scrutiny as of late. The Commission, for example, charged crypto asset exchange platform Beaxy.com (“Beaxy”) and its founder Artak Hamazaspyan with the unregistered offering of securities arising out of the platform’s offer of Beaxy token (“BXY”). [3] Windy, Inc. (“Windy”), the entity that came to operate and maintain the Beaxy platform following Hamazaspyan’s separation, and its executives were also the subjects of numerous charges, including operating an unregistered national exchange, clearing agency, and broker-dealer. [4] Interestingly, a market maker who coordinated with Beaxy’s operators to maintain liquidity of BXY was also charged with operating as an unregistered broker dealer. [5] By charging a market maker operating within an unregistered exchange, the Commission may be signaling a greater intent to prosecute not only exchanges, but also sophisticated entities that avail themselves of exchanges.

Voice Through Divestment

Posted by Marco Becht (Solvay Brussels School of Economics and Management), Anete Pajuste (Boston University), and Anna Toniolo (Harvard University), on

Wednesday, June 14, 2023

Climate change, divestment, ESG, fossil fuels, shareholder voice, voice, voting power
More from: Anete Pajuste, Anna Toniolo, Marco Becht

Marco Becht is a Professor of Finance at Solvay Brussels School of Economics and Management; Anete Pajuste is a Professor of Finance at Stockholm School of Economics (Riga), and Visiting Lecturer at Questrom School of Business, Boston University; and Anna Toniolo is Postdoctoral Fellow at the Program on Corporate Governance of Harvard 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; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

A common criticism of divestment is that not only it has little financial impact as there are too many willing buyers on the other side of the trade, but it also jettisons responsible investors’ voting power. Therefore, engagement is considered a better approach to addressing environmental, social and governance (ESG) issues (Broccardo, Hart, and Zingales 2020; Heinkel, Kraus, and Zechner 2001).

In our new paper, we argue that divestment is a form of voice when it contributes to change social preferences. Divestment pledges are statements of disapproval echoed through social media and the press, heard by policy makers, customers, employees, and boards. We show how the Fossil Free divestment movement has a much larger impact than is reflected in the reduction in shares held by responsible investors. Divestment pledges that went viral have depressed share prices of all high carbon emitters, including those with no significant divestment. By stigmatising target companies, divestment campaigns have increased reputation and stranded asset risks. The impact of fossil fuel divestment movement is further reflected in the net-zero commitments of many countries, regions, cities, and companies, which pose additional risks to investing in high-carbon emitters, making it rational for risk averse investors to decarbonize portfolios.

Comment on PCAOB’s Proposed Auditing Standard

Posted by Jack T. Ciesielski and Amy C. McGarrity, PCAOB Investor Advisory Group PCAOB Investor Advisory Group, on

Tuesday, June 13, 2023

Accounting standards, Analyst communication, Audits, Board oversight, Capital markets, External auditors, investors
More from: Amy McGarrity, Jack Ciesielski, PCAOB Investor Advisory Group

Jack T. Ciesielski is an the Investment Manager and founder of R.G. Associates, Inc. and Amy C. McGarrity is Chief Investment Officer and Chief Operating Officer of Colorado PERA. This post is based on their comment letter.

The Members of the Investor Advisory Group (MIAG) appreciate the opportunity to comment upon the
PCAOB’s “Proposed Auditing Standard – General Responsibilities of the Auditor in Conducting an Audit and Proposed Amendments to PCAOB Standards” (Proposal). [1] We agree with PCAOB Chair Erica Y. Williams that “Our capital markets never stop evolving, and PCAOB standards must keep up to keep investors protected. The Proposal would modernize standards that are foundational to audit quality, ensuring they are ﬁt to meet today’s challenges.”

We understand the proposed standard AS 1000, “General Responsibilities of the Auditor in Conducting an Audit,” would entirely replace AS 1001, “Responsibilities and Functions of the Independent Auditor,” AS 1005, “Independence,” AS 1010, “Training and Proﬁciency of the Independent Auditor,” and AS 1015, “Due Professional Care in the Performance of Work.” We commend the Board for undertaking this project to bring the interim auditing standards into the twenty-ﬁrst century, and approve the combination of the four single standards into one comprehensive standard. Our letter ﬁrst addresses several major areas in the Proposal that we believe need attention if this is to be a high-quality standard. It then oﬀers our views on the questions provided in the Proposal.

Congressional Sustainable Investing Caucus

Posted by U.S. Representative Sean Casten (IL-06), and U.S. Representative Juan Vargas (CA-52), on

Tuesday, June 13, 2023

climate risk, ESG, Financial institutions, Financial regulation, Monetary policy, sustainable investing
More from: Juan Vargas, Sean Casten

U.S. Representative Sean Casten (IL-06), and U.S. Representative Juan Vargas (CA-52) are members of the House Financial Services Committee. 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 Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales.

There are $8.4 trillion in U.S. assets under management in funds that prioritize environmental, social and governance (ESG) factors. This represents 13 percent – or 1 in 8 dollars of the total US assets under professional management. Globally, the value of assets engaged in sustainable investing is estimated at $41 trillion. It has grown rapidly and is projected to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.

Given the rapid growth of this asset class, it is necessary for Congress to better understand and monitor this space so we can ensure robust investor protections while still preserving necessary market access. For that reason, we created the Congressional Sustainable Investment Caucus.

Sustainable investing is not a new concept. For over a decade, U.S. retail and institutional investors have considered ESG factors in their investment decisions.

This approach helps investors secure insight into issues that are important to their capital allocation strategies but are not always fully or consistently disclosed in corporate reporting. These issues include but are not limited to climate change, diversity, and labor rights. Investors believe these issues are material and need to be accounted for when assessing market opportunities and risks.

Recent research suggests some sustainable investment strategies achieve comparable or even better financial returns than conventional investments over the long term. However, the justification for ESG investment is not solely dependent on value. It is no less rational to choose to maximize ESG criteria over expected returns than it is to choose to ‘shop local’ rather than favoring cheaper imported goods. A vibrant, free market does not optimize to a single utility function.

Insider Trading Disclosure Update: Rulemaking Activity

Posted by Matthew Kaplan, Benjamin Pedersen, and Jonathan Tuttle, Debevoise & Plimpton LLP, on

Monday, June 12, 2023

Disclosure, Insider trading, Pay for performance, Rule 10b-5-1, SEC, Securities Act, Securities fraud, Securities litigation
More from: Anna Moody, Ashley Yoon, Benjamin Pederson, Jonathan Tuttle, Mark Flinn, Matthew Kaplan, Debevoise & Plimpton

Matthew E. Kaplan, Benjamin R. Pederson, and Jonathan R. Tuttle are Partners at Debevoise & Plimpton LLP. This post is based on a memorandum by Mr. Kaplan, Mr. Pederson, Mr. Tuttle, Anna Moody, Ashley Yoon, and Mark Flinn. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation (discussed on the Forum here) by Jesse M. Fried.

Rulemaking Activity

SEC Adopts New Rule 10b5-1 Trading Plan and Trading-Related Disclosure and Reporting Requirements

On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the Exchange Act and new disclosure requirements relating to trading activity of corporate insiders and the trading policies of issuers. The amendments, among other things, add significant new conditions to the availability of Rule 10b5-1’s affirmative defense to insider trading liability, including: (i) a cooling-off period; (ii) a certification as to the absence of possession of no material nonpublic information; (iii) limitations on overlapping and single trade plans; and (iv) a requirement to act in good faith. In addition, the amendments create new disclosure requirements regarding: (i) the adoption, modification and termination of Rule 10b5-1 and other trading arrangements by Section 16 officers; (ii) insider trading policies and procedures of issuers; and (iii) the timing of option awards to named executive officers made in close proximity to the issuer’s release of material nonpublic information. The amendments also augment the reporting obligations under Section 16 of the Exchange Act for transactions made pursuant to a Rule 10b5-1 trading arrangement and gifts. The full text of the final rules is available here.

‘Not A Thing’: Six Legal Reasons the Federal ‘Debt Ceiling’ is Null & Void

Posted by Robert C. Hockett (Cornell University) , on

Monday, June 12, 2023

budgetary policy, debt ceiling, debt regulation, Financial institutions, Monetary policy, Risk management, U.S. Treasury
More from: Robert Hockett

Robert C. Hockett is the Edward Cornell Professor of Law at Cornell University. This post is based on his recent piece.

Writing in outrage for over a decade about the illegality of the putative ‘debt ceiling as I, along with several distinguished colleagues, have been doing, I am not a little relieved to see some of our longstanding arguments gaining traction. I am a little bit troubled, however, by how attention has centered almost solely upon the 14^th Amendment to the U.S. Constitution.

The 14^th Amendment is, to be sure, one of the grounds upon which the ‘debt ceiling’ must be declared null and void – for reasons even beyond those we’re hearing right now, as I’ll indicate. But there are at least five additional such grounds. It might then be helpful to elaborate them, along with their mutual complementarities, in summary fashion.

My hope in so doing will be to supply responsible members of Congress, our President, and his Treasury Secretary with the fortitude needed to end the present tragicomedy, now ritually repeated with dispiriting regularity any time that a Democrat is in the White House and Republicans hold one or both Chambers of Congress, once and for all.

I’ll proceed as follows: Part 1 provides essential constitutional and federal budgetary background information helpful in understanding the ‘debt ceiling’ and its obsolescence since 1974 if not its invalidity ab initio. Part 2 then elaborates the seven legal bases for treating the ‘debt ceiling’ as the nullity that it is. Part 3 then suggests a strategy for responsible legislators and executives in ignoring the ‘debt ceiling’ going forward, at least until its formal but unnecessary repeal. I then conclude and look forward.

The Never-Ending Story: CEO Succession Planning

Posted by Carey Oven and Bob Lamm, Deloitte & Touche LLP, on

Sunday, June 11, 2023

board agenda, board effectiveness, Board leadership, CEOs, Decision-making, Executive Compensation, Succession
More from: Bob Lamm, Carey Oven, Deloitte

Carey Oven is National Managing Partner and Bob Lamm is Independent Senior Advisor at the Center for Board Effectiveness, Deloitte & Touche LLP. This post is based on their Deloitte memorandum.

Deloitte’s Chief Executive Program has engaged in a series of dialogues with current CEOs as well as those who are (or were) considered for CEO roles. The following is a high-level thematic summary of the Program’s work on succession planning, with a focus on how boards might improve their strategy in this area.

It is no secret that the number of areas involving board oversight has increased dramatically, especially in recent years. The role of the corporation in society, workplace strategies, and climate change are just some of the newer topics that boards are expected to address. And of course, this is in addition to the many perennial items of governance like risk management and guiding the company’s long-term strategy.

It may be a truism to say that every topic on the board’s agenda is important. But governance experts generally believe that CEO succession is among the most important director responsibilities. [1] The CEO is usually the most visible and prominent position within a company. [2] When things go well, an effective succession planning strategy can result in a CEO with transformative leadership potential who executes on the company’s long-term vision and adds value for shareholders and other stakeholders. [3] And, just as importantly, business history is littered with cautionary tales of what can happen when the succession process goes awry. [4]

Drag-Along Provisions and Covenants Not to Sue in the Private Company M&A Context

Posted by Amy L. Simmerman, David J. Berger, and Ryan J. Greecher, Wilson Sonsini Goodrich & Rosati, on

Saturday, June 10, 2023

Delaware articles, Delaware cases, Delaware Court of Chancery, Delaware law, Drag-along rights, Mergers & acquisitions
More from: Amy Simmerman, David Berger, James Griffin-Stanco, Jason Schoenberg, Ryan Greecher, Wilson Sonsini Goodrich & Rosati

Amy L. Simmerman, David J. Berger, and Ryan J. Greecher are Partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Ms. Simmerman, Mr. Berger, Mr. Greecher, James G. Griffin-Stanco, and Jason B. Schoenberg, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) by John C. Coates, IV; The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo, and Guhan Subramanian; and Deals in the Time of Pandemic (discussed on the Forum here) by Guhan Subramanian and Caley Petrucci.

Vice Chancellor J. Travis Laster of the Delaware Court of Chancery recently issued a decision addressing whether a covenant not to sue set forth in a stockholders’ agreement is enforceable under Delaware law, with the result that a stockholder would be precluded from challenging a sale of the corporation. [1] Such covenants have become increasingly common among private companies, and the covenant in this case was based on a National Venture Capital Association form.

The court concluded that as a general matter, such covenants not to sue are enforceable under Delaware law, but that the circumstances in an individual case will matter and such covenants cannot protect boards of directors and other defendants from liability for intentionally harmful conduct. In this case, the court determined that because the underlying allegations could support claims for intentional misconduct by the board and a controlling stockholder, the covenant not to sue could not serve as a basis to dismiss the claims.

Embracing Environmental Justice Initiatives to Advance Corporate Objectives

Posted by Tatjana Vujic, Arie T. Feltman-Frank, and Daniel L. Robertson, Jenner & Block LLP, on

Friday, June 9, 2023

Corporate culture, Disclosure, Environmental disclosure, environmental justice, internal stakeholders, regulation, Risk oversight
More from: Arie Feltman-Frank, Daniel Robertson, Steven Siros, Tatjana Vujic, Jenner & Block

Tatjana Vujic is Special Counsel, and Arie T. Feltman-Frank and Daniel L. Robertson are Associates at Jenner & Block LLP. This post is based on a Jenner & Block memorandum by Ms. Vujic, Mr. Feltman-Frank, Mr. Robertson, and Steven Siros. 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.

Earth Week 2023 brought with it two significant environmental justice developments. The week began with New Jersey Governor Phil Murphy announcing the adoption of regulations aimed at reducing pollution in historically overburdened communities and those disproportionately impacted by health and environmental stressors. President Biden then capped the week off by issuing an Executive Order on Revitalizing Our Nation’s Commitment to Environmental Justice for All which further embeds environmental justice initiatives throughout the federal government (read our analysis of that order here). These actions display the heightened emphasis on environmental justice that has led to these and other significant developments at the federal and state levels.

The United States Environmental Protection Agency (USEPA) defines environmental justice as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.” With increased funding provided by the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the American Rescue Plan Act, federal agencies are investing at unprecedented levels to advance environmental justice.

The Biden administration also developed the Justice40 Initiative, with a goal of ensuring that 40% of the overall benefits of certain federal investments flow to “disadvantaged communities that are marginalized, underserved, and overburdened by pollution.” The Climate and Economic Justice Screening Tool geospatially identifies such disadvantaged communities, which include federally recognized Tribes and Alaska Native villages.

Weekly Roundup: June 2-8, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on

Friday, June 9, 2023

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of June 2-8, 2023.

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Yearly Archives: 2023

SEC Enforcement Mid-Year Review

Introduction

A Heightened Focus on Crypto Lenders and Intermediaries

Voice Through Divestment

Comment on PCAOB’s Proposed Auditing Standard

Congressional Sustainable Investing Caucus

Insider Trading Disclosure Update: Rulemaking Activity

Rulemaking Activity

SEC Adopts New Rule 10b5-1 Trading Plan and Trading-Related Disclosure and Reporting Requirements

‘Not A Thing’: Six Legal Reasons the Federal ‘Debt Ceiling’ is Null & Void

The Never-Ending Story: CEO Succession Planning

Drag-Along Provisions and Covenants Not to Sue in the Private Company M&A Context

Embracing Environmental Justice Initiatives to Advance Corporate Objectives

Weekly Roundup: June 2-8, 2023

Environmental, Social Policy & Related Corporate Governance Issues in Proxy Season 2023

Mission and Goals of the Racial Justice Initiative

Investor Group Launches Plan to Boost Corporate Climate Engagement

SEC Final Share Repurchase Disclosure Rules Less Burdensome Than Expected

The SEC Revolving Door and Comment Letters

Director-Shareholder Engagement: Getting It Right

Chancery Court Highlights Tension Between Freedom of Contract and Corporate Fiduciary Duties

Fairness Opinions and SPAC Reform

Icahn-Illumina Contest: Board Accountability and the UPC

First Look at PvP Disclosure Trends From the 2023 Proxy Season

Do Investors Care About Impact?

Beware of Post-Closing Unjust Enrichment Claims

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