Yearly Archives: 2023

The Oscillating Domains of Public and Private Markets

Posted by Alperen A. Gözlügöl (Leibniz Institute for Financial Research), Julian Greth (Leibniz Institute for Financial Research) and Tobias H. Tröger (Leibniz Institute for Financial Research) , on
Thursday, April 13, 2023
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Alperen A. Gözlügöl is an Advanced Researcher of the Cluster Law and Finance, Julian Greth is a Ph.D. Student and a Junior Researcher of the Cluster Law and Finance, and Tobias H. Tröger is Professor of Private Law, Commercial and Business Law, Jurisprudence at Goethe-University, and Director of the Cluster Law and Finance at the Leibniz Institute for Financial Research Sustainable Architecture for Finance in Europe. This post is based on their recent paper.

More than three decades ago, Nobel laureate Michael Jensen had predicted the ‘eclipse of the public corporation’ (Harvard Business Review, 1989). Time and again, market developments seemed to corroborate Jensen’s hypothesis with various trajectories of growing private markets and lagging public markets. Similarly, private markets have seen eye-catching growth in recent years, while public markets appear to be withering both in the US and Europe. Increased private capital raising and declining IPO and public company numbers in leading capital markets support this observation. These developments have caused much discussion, with some commentators again seeing a fundamental shift in the relevance of public and private markets for corporate finance and alarmed regulators.

In our recent article “The Oscillating Domains of Public and Private Markets”, we contribute to the debate about the future of capital markets and corporate finance on both sides of the Atlantic. We shed light on the fluctuating significance of public and private markets for corporate finance over time and challenge the conventional view of a linear trend from one market to the other. Although recent years have seen a steady rise of private markets, a deeper dive into modern financial history shows that these developments are not evidence per se of a stable and linear trend. Putting the recent developments in capital markets in a broader historical context reveals a more complex pattern that does not align with the ‘end of history’ type of predictions some have been making. In particular, financial history shows various boom-and-bust periods in private market activity (see Kaplan & Strömberg, 2009). Therefore, caution is called for when making absolute predictions about capital markets and corporate finance developments, as cyclical booms might purport to be secular trends.

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Use of Environmental and Social Metrics in Pay at Large U.S. Energy Companies: Trends and Observations

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Wednesday, April 12, 2023
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an article by Rachel Hedrick, Associate Director, and Kevan Marvasti, Associate Vice President, with ISS’ Governance Research & Voting unit. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian Bebchuk and Roberto Tallarita.

Overview

While market participant viewpoints on environmental and/or social (E&S) metrics in executive incentive programs have been and continue to be mixed, the prevalence of such metrics in public company executive incentive programs has continued to grow over the past few years. An ISS Corporate Solutions study showed that by June 30, 2021, approximately 20% of the S&P 500 Index had incorporated at least one E&S metric into their incentive programs. At the end of calendar year 2022, ISS data showed that 35% of the S&P 500 used at least one stand-alone E&S metric. This percentage would be even higher if it also included the number of companies that incorporated environmental or social performance into executives’ individual objectives or strategic goals.

Adoption of E&S Metrics

Energy Companies were Early Adopters and Continue to Use E&S Metrics

E&S metrics are now seen across all industries but some of the earliest adopters in the U.S. market were energy companies. The use of E&S metrics aligns with the greater potential impact such companies can have on the environment and the various business risks and opportunities that may be associated, as well as the necessary focus on worker and community safety. For purposes of this article, we have examined disclosure for S&P 500 companies within the 1010 GICS industry group. This GICS industry group incorporates both Energy Equipment and Services as well as Oil, Gas, and Consumable Fuels. See the Appendix for a full list of included companies.

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2022 Developments in U.S. Securities Fraud Class Actions Against Non-U.S. Issuers

Posted by Joni S. Jacobsen, David H. Kistenbroker, and Angela M. Liu, Dechert LLP, on
Wednesday, April 12, 2023
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Joni S. Jacobson, David H. Kistenbroker, and Angela M. Liu are partners at Dechert LLP. This post is based on a Dechert memorandum by Ms. Jacobsen, Mr. Kistenbroker, Ms. Liu, Christopher J. Merken, Andrew Stahl, and Austen Boer.

Introduction

In 2022, plaintiffs filed 34 securities class action lawsuits against non-U.S. issuers. [1]

  • As was the case in 2021 and 2020, the Second Circuit continues to be the jurisdiction of choice for plaintiffs bringing securities claims against non-U.S. issuers. Roughly 80 percent of these 34 lawsuits (28) were filed in courts in the Second Circuit. A majority (20) of these lawsuits were filed in the Southern District of New York, followed by the Eastern District of New York (8). The Third (3), Ninth (2), and Fourth (1) Circuits followed.
  • Continuing the trends in 2021 and 2020, most non-U.S. issuer lawsuits were against companies with headquarters and/or principal places of business in China. Of the 34 non-U.S. issuer lawsuits filed in 2022, 11 were against non-U.S. issuers with headquarters and/or principal places of business in China, followed by the United Kingdom (6), Canada (4), and Switzerland (3).
  • Pomerantz LLP led with the most first-in-court filings against non-U.S. issuers in 2022 (10), followed by The Rosen Law Firm, P.A. (8), and Robbins Geller Rudman & Dowd LLP (7). Although Pomerantz and The Rosen Law Firm jockey for the most active plaintiff’s law firm, in 2022 Pomerantz took the top spot that The Rosen Law Firm had occupied from 2018 through 2021. Also, like the trend of the last several years, The Rosen Law Firm was appointed lead counsel in the most cases in 2022 (with 6), followed closely by Pomerantz and Levi & Korsinsky, LLP (with 4 each) and Robbins Geller (with 3).
  • A slim majority of securities class actions against non-U.S. issuers (18 of 34) were filed in the first and second quarters of 2022, a departure from 2021, where the majority of lawsuits were filed in the third and fourth quarters.
  • Although the suits cover a diverse range of industries, the largest portion of the suits involved the education and schooling industry (5), the retail industry (4), and the software and programming, money center banks, and biotechnology and drug industries (3 each).

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Using transparency to build trust: A corporate director’s guide

Posted by Maria Castañón Moats, Paul DeNicola, and Matt DiGuiseppe, PricewaterhouseCoopers LLP, on
Tuesday, April 11, 2023
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Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Matt DiGuiseppe is Managing Director at the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Using transparency to build trust

Trust is earned by saying what we will do, sharing why, and delivering what we said we would—transparently. When things don’t work as expected (and every so often, they won’t), we explain and try again. This is certainly true for building trust with the stakeholders of a corporation. However, the information asymmetry that exists between management, the board, and shareholders is unlike any other in business. And often competitive, legal, confidentiality, and other concerns mean that the board cannot be as transparent as it would like. This makes establishing trust between the board and its key stakeholders a challenge.

The challenge is not insurmountable. At its core, corporate governance is putting in place the structures that will allow for effective decision making so that stakeholders can trust the oversight process even if they can’t observe it. For many years, the prescribed disclosures regarding a company’s practices and procedures were sufficient to establish trust. However, that trust appears to be eroding at a time when the board’s mandate is expanding, and the quality of board oversight is receiving additional attention.

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The Corporate Governance of Public Utilities

Posted by Aneil Kovvali (Indiana University) and Joshua Macey (University of Chicago), on
Tuesday, April 11, 2023
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Aneil Kovvali is an Associate Professor of Law at the Indiana University Maurer School of Law, Bloomington. Joshua C. Macey is an Assistant Professor of Law at the University of Chicago Law School. This post is based on their recent paper, forthcoming in the Yale Journal on Regulation.

Rate regulated public utilities supply one-third of the electricity in the United States and own nearly all of the transmission and distribution lines that transport electricity to meet customer needs. Recently, they have also been at the center of high-profile corporate scandals. FirstEnergy and ComEd, for example, have been accused of bribing regulators to receive favorable treatment for coal-fired generators and nuclear reactors. PG&E pled guilty to eighty-four counts of manslaughter for its role in California wildfires. Utilities across the country have emerged as powerful opponents of state and federal climate action.

While none of these scandals can be attributed to a single cause, they are all, at least in part, failures of corporate governance. Corporate governance mechanisms are generally designed to encourage directors and officers to focus on generating financial returns for shareholders. That is because shareholders are normally considered the “residual claimants” on the corporation: shareholders have a claim on what is left over after the corporation has collected revenue from its customers and met its legal obligations to regulators, creditors, and workers.  Because shareholders are entitled to the firm’s residual value, they normally internalize the consequences of corporate decisions. If a corporation delivers better products or invests in a more efficient technology, the shareholders profit. If the corporation loses market share to competitors that offer better or cheaper service, or if it experiences increased costs due to its failure to meet regulatory obligations or invest in efficient technologies, the shareholders are the first to take a financial loss. Creditors, by contrast, cannot collect more than they are contractually owed, and they lose the value of their investment only if the firm experiences financial distress. For these reasons, corporate governance mechanisms focus managers and directors on shareholder concerns. Shareholders elect the board of directors, which hires managers that—like the directors—owe fiduciary duties to the shareholders. The market for corporate control focuses on shareholder interests.

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U.S. Say-On-Golden Parachute Failure Rate & CEO Golden Parachute Values in 2022

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Monday, April 10, 2023
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an article by Jolene Dugan, Vice President, and Chris Scoular, Sr. Associate, with ISS’ Governance Research & Voting unit. Related research from the Program on Corporate Governance includes Golden Parachutes and the Wealth of Shareholders (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang; and The CEO Pay Slice (discussed on the Forum here) by Lucian Bebchuk, Martijn Cremers, and Urs Peyer.

Introduction

A U.S. say-on-golden parachute proposal is an advisory shareholder vote on compensation that becomes payable to Named Executive Officers (NEOs) as a result of a change-in-control event. These votes typically accompany a merger, business combination, or other transaction, and they provide shareholders a say on transaction-related executive compensation payments, similar to a say-on-pay vote at an annual shareholder meeting. Like a say-on-pay vote, the golden parachute vote is advisory in nature and its passage is generally not required for the underlying transaction to occur.

The golden parachute disclosure rules require that companies disclose in tabular form an estimation of the total value of the NEOs’ cash severance, accelerated equity, continuing perquisites or benefits, pension or other non-qualified deferred compensation, excise tax payments, or any other payments (such as a retention bonus or a transaction bonus). Cash severance payouts and equity acceleration benefits may take many forms including:

  • Single trigger: cash severance or equity vesting occurs automatically upon a change in control;
  • Double trigger: a qualifying termination must occur in connection with a change in control in order for payouts to be made or equity vesting to occur; or
  • Modified single trigger: a voluntary resignation in connection with a change in control may trigger cash payouts or equity vesting.

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DOJ Announces Changes to Corporate Compliance Program Evaluation Criteria

Posted by Justin P. Murphy, Julian L. André, and Sarah E. Walters, McDermott Will & Emery LLP, on
Monday, April 10, 2023
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Justin P. Murphy, Julian L. André, and Sarah E. Walters are partners at McDermott Will & Emery LLP. This post is based on their MWE memorandum.

During speeches on March 2 and 3, 2023, at the American Bar Association (ABA) National Institute on White Collar Crime (the 2023 White Collar Conference), Deputy Attorney General (DAG) Lisa Monaco, Assistant Attorney General (AAG) for the Criminal Division Kenneth A. Polite, Jr. and other US government officials announced significant changes to the US Department of Justice’s (DOJ) Evaluation of Corporate Compliance Programs (ECCP) and continued to emphasize the importance of effective and robust compliance policies.

First, DAG Monaco and AAG Polite announced DOJ’s first-ever Pilot Program on Compensation Incentives and Clawbacks (Pilot Program) requiring companies to “develop compliance-promoting criteria within its compensation and bonus systems.” The new Pilot Program—as well as announcements relating to additional resource commitments to corporate criminal enforcement—are part of DOJ’s broad initiative to “invigorate” corporate criminal enforcement and empower companies to invest “in compliance, in culture, and in good corporate citizenship.”

Second, in evaluating a company’s compliance policies relating to identifying, reporting, investigating and remediating potential misconduct, prosecutors should now consider a company’s policies and procedures relating to messaging applications (including third-party encrypted messaging applications), ephemeral messages, other communications platforms and the use of personal devices. Companies that do not adopt policies to preserve and produce such messages could jeopardize their ability to obtain a favorable resolution.

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What boards should know about balancing ESG critics and key stakeholders

Posted by Maria Castañón Moats, Paul DeNicola, and Matt DiGuiseppe, PricewaterhouseCoopers LLP, on
Sunday, April 9, 2023
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Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Matt DiGuiseppe is Managing Director at the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on their PwC 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; 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; 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.

Environmental, social and governance (ESG) topics are often discussed as if there is a collective understanding about what they mean. But company leaders, regulators, investment analysts, portfolio managers, activists and retail investors may use the ESG acronym to talk about everything from investment strategies and investment vehicles to corporate social responsibility (CSR) and shareholder proposals. Put them all in a room together and they will quickly realize they may not be on the same page.

The use of ESG as an umbrella term for so many topics has led to misperceptions and, at times, controversy about whether focusing on certain risks and opportunities violates duties to investors. Activist investors, environmental groups and others have challenged companies to do more to combat climate change. On the other hand, various state attorneys general have raised concerns about how ESG factors, like climate, are used by asset managers in the proxy voting process, by pension plan managers when making investment decisions and in financial institutions’ lending to the energy sector. As companies come under greater pressure to provide ESG disclosures, the information they publish and the story they tell has, in some cases, been conflated by some to assume that those companies “have an agenda.” This has been an area of concern in some boardrooms.

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Chancery Court Provides Roadmap for Retroactive Validation of Shareholder Votes

Posted by Perrie Weiner, Aaron Goodman, and Paul Chander, Baker McKenzie, on
Saturday, April 8, 2023
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Perrie Weiner and Aaron Goodman are Partners and Paul Chander is an Associate at Baker McKenzie. This post is based on a Baker McKenzie memorandum by Mr. Weiner, Mr. Goodman, Mr. Chander, and Alexandra Stackhouse and is part of the Delaware law series; links to other posts in the series are available here.

In brief

In December 2022, the Delaware Chancery Court sent shockwaves throughout the SPAC world when it ruled that single class votes on charter amendments were invalid under Delaware law. This is the process utilized by many, if not most, SPACs seeking approval of their merger with the target company.

In Garfield v. Boxed, Inc., [1] the Delaware Court of Chancery held that a stockholder vote was invalid under Section 242 of Delaware General Corporation Law (“DGCL”) where a special purpose acquisition company (SPAC) had a multi-class stock structure and Class A and Class B stockholders voted together as a single class on charter amendments to increase the number of shares. Plaintiff, a Class A common stockholder, argued that the vote was invalid because holders of Class A shares had a right to vote on the amendments as a standalone class. The Chancery Court agreed. By invalidating these votes, the Boxed decision cast doubt on the capital structure for dozens of post de-SPAC companies with billions worth of securities. The Chancery Court explained that where the de-SPAC M & A transaction closed in reliance on the challenged amendments, the validity of the merger could be attacked.

Boxed resulted in the immediate creation of a new brand of securities claims and a potential tsunami of SPAC litigation. Recognizing the widespread harm this would cause, on February 20, 2023, searching for a way to reconcile belated challenges to the very reverse merger by which hundreds of SPAC targets were taken public and where such companies had long since been operating as public companies, the Chancery Court held that affected companies could retroactively validate these “pooled” stockholder votes under Section 205 of the DGCL. The Court’s first written decision regarding Lordstown Motors Corp. illustrates how affected companies may seek retroactive validation of stockholder votes taken in contravention of Section 242.

Accordingly, post-de-SPAC companies should follow the Court’s guidance to seek retroactive validation of pooled shareholder votes under Section 205 to resolve any concerns about their capital structure stemming from the Boxed decision and avoid related securities litigation.

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Paramount Global Settles CBS – Viacom Merger Lawsuit for $122.5 Million

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Friday, April 7, 2023
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services. This post is based on an ISS memorandum by Jarett Sena, Esq., Director of Litigation Analysis, ISS Securities Class Action Services, and Jeff Lubitz, Managing Director, ISS Securities Class Action Services.

Paramount Global has agreed to pay $122.5 million to shareholders in order to resolve allegations that the CBS-Viacom merger of 2019 was unfair, per a recent filing with the SEC. The $30 billion “controlled transaction” created ViacomCBS, Inc. – the multibillion-dollar entertainment empire that owns well-known television brands such as Paramount, CBS, MTV, Nickelodeon, and Showtime– which was later renamed Paramount Global.

The lawsuit – filed on behalf of Viacom shareholders in the Delaware Court of Chancery – specifically asserts breach of fiduciary duty claims against Redstone-controlled media company National Amusements Inc. (“NAI”) and the members of the special Viacom committee that approved the merger.

At the center of the allegations is media mogul Shari Redstone and her “unrelenting” desire to “re-unify” the two “family” businesses and rival the legacy of her late father, Sumner Redstone. For years, Sumner Redstone declared that he did not want Shari Redstone to control Viacom or CBS, as he did not think she was suitable for the job. As Mr. Redstone’s health began to deteriorate, however, Ms. Redstone purportedly embarked on a three-year campaign to prove him wrong and become a “media magnate,” culminating in the 2019 transaction.

During the sale process, Ms. Redstone allegedly insisted that the post-merger company be run by Viacom CEO Robert Bakish. To secure Redstone’s governance priorities, the Viacom board allegedly agreed to accept a lower price than what it was worth – $1 billion less than it had bargained for a year earlier. The shareholder complaint specifically alleges the following:

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