Monthly Archives: July 2024

Anti-ESG Proposals Surged in 2024 But Earned Less Support

Posted by Heidi Welsh, Sustainable Investments Institute, on
Wednesday, July 31, 2024
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Heidi Welsh is the Executive Director at the Sustainable Investments Institute (SI2). This post is based on her recent Si2 memorandum.

Shareholder proponents who do not support limiting corporate environmental impacts, promoting diversity, or providing investors with more ESG disclosure flooded this year’s corporate annual meeting agendas. They filed more than 100 shareholder proposals and 81 had gone to votes as of June 30, 2024. Support averaged only 1.9 percent, less than half what they earned just three years ago.  In other words, 98 percent of shares cast on these proposals registered opposition. This stands in sharp contrast to all the other proposals from more mainstream shareholders; while pro-ESG support has diminished, it nonetheless remains at about 19 percent on average—ten times more than for anti-ESG.

The anti-ESG proposals continued to focus largely on disrupting the current business world consensus that diversity, equity, and inclusion improves companies and benefits investors. But they also continued to suggest that corporate political involvement favors liberals and took aim at efforts to mitigate climate change. A new batch of right-wing evangelical groups joined long-time proponents in 2024.

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Multiple-voting shares in Europe – A comparative law and economic analysis

Posted by Klaus J. Hopt (Max Planck Institute) and Susanne Kalss (Vienna University of Economics and Business), on
Wednesday, July 31, 2024
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Klaus J. Hopt is Director emeritus and Professor at the Max Planck Institute for Comparative and International Private Law in Hamburg, Germany; Susanne Kalss is Professor and Managing Board Member of the Institute for Business Law at the Vienna University of Economics and Business. This post is based on their working paper.

Whether the rule should be one share, one vote or multiple-voting shares (dual-class stock) is, in international legal and economic terms, highly controversial. The European Union’s 27 Member States as well as the United States all have very different rules. Lately the EU has attempted a harmonization. On February 14, 2024, the European Council agreed on a Multiple Voting Rights Directive, for inclusion in the Listing Act, that permits multiple voting shares as a minimum harmonization. The European Parliament agreed on 24 April 2024. This is a step in the right direction but falls short in that it is limited to the SME growth market. The EU Member States are trending towards broader approval of multiple-voting shares. Germany recently executed a complete turnaround in a law of 11 December 2023 that largely permits multi-voting shares, but only with limits and clear restrictions for listed companies to protect other shareholders. France followed suit with a law of June 2024, and an Italian law of March 2024 went in the same direction. The reason for these laws has been concern for national stock exchanges, the promotion of start-ups and the competitiveness of the respective country. Economically, the question is still highly controversial. Traditionally, agency theory predominately preferred the one-share, one-vote principle due to the risks for non-multiple-voting shareholders. More recent views tend to see and emphasize more the overall advantages. A recent article of ours discusses the legal situation in the 27 EU member states in comparison with the United Kingdom and the United States and deals with the pros and cons of multiple-voting shares from an economic and legal policy perspective:

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Director Wins In Claim of Improper Removal – But Still Loses

Posted by Robin E. Wechkin, Sidley Austin LLP, on
Wednesday, July 31, 2024
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Robin E. Wechkin is Counsel at Sidley Austin LLP. This post is based on her Sidley memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In Barbey v. Cerego, Inc., the Delaware Supreme Court affirmed a post-trial judgment denying relief to the plaintiffs in a Section 225 action, despite what the court called the “unusual and troubling circumstances of [the] case.”  The Supreme Court’s decision illustrates the limitations of Section 225 proceedings.  The underlying Court of Chancery decision shows that voiding board actions may in some cases have no practical effect, even when a board acts in the context of entity-altering corporate transactions.

The plaintiffs in Barbey were an ousted Cerego, Inc. director and the foundation the director represented.  Cerego, a Delaware corporation, was the parent of Cerego Japan, Inc. (CJ), a wholly-owned subsidiary and a Japanese entity.  Cerego and CJ effected an “inversion,” in which their positions flipped.  Cerego became the subsidiary and CJ became the parent company.  The inversion was accomplished by means of a tender offer: CJ solicited Cerego’s stockholders to tender their Cerego shares in exchange for shares in CJ.  When the tender offer was complete, CJ owned a supermajority of Cerego’s shares.  CJ used its supermajority power to remove the entirety of Cerego’s board, replacing it with a single new director of CJ’s choosing.

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2024 Proxy Season Review: Five takeaways

Posted by Jamie Smith, EY, on
Tuesday, July 30, 2024
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Jamie C. Smith is a Director at EY’s Center for Board Matters. This post is based on her EY memorandum.

In 2024 companies secured strong support on key voting items despite increasing complexity. This year’s proxy season included a busier year for activism amid a demanding economic context, a recalibrated shareholder proposal landscape, and emerging topics of focus such as artificial intelligence (AI). It also included growing political and regulatory uncertainty in a pivotal election year, and more scrutiny of both companies and investors from diverse stakeholders related to the impacts of business and stewardship decisions on societal challenges and financial performance.

Proxy season trends

During this proxy season, directors received more support despite investors’ increased focus on board effectiveness and director accountability. Say-on-pay support also increased this season despite growing stakeholder scrutiny of executive compensation. Still, binary votes may not reflect the nuance behind investors’ voting decisions, or the engagement and enhanced communications companies undertook to secure that support. Such efforts remain paramount: opposition votes on the re-election of directors in certain leadership roles signal investor willingness to use director elections as a lever to escalate governance concerns and hold board members accountable.

At the same time, a higher cost of capital combined with universal proxy cards created new vulnerabilities for companies this year and drove changes to activist campaigns. Support also surged for governance-focused shareholder proposals and stabilized for environmental and social proposals following a two-year decline. Both investors and companies have recalibrated to a shareholder proposal landscape marked by more robust company sustainability disclosures and narrower, more prescriptive proposal requests

To help directors understand the evolving proxy landscape and changing stakeholder expectations, as inputs to making informed decisions that support long-term value creation, we examine five takeaways from the 2024 proxy season and actions for boards to consider.[1]

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Business Judgment and Valuing Impacts

Posted by Dennis West (University of Oxford), and Dimitrij Euler (Value Balancing Alliance), on
Tuesday, July 30, 2024
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Dennis West is Chair of the Board at Greenings and PhD Candidate at the University of Oxford and Dimitrij Euler is Director of Sustainable Finance at Value Balancing Alliance. This post is based on their recent report.

Introduction

About twelve years ago, when we first wrote about the relevance of social and environmental information to corporate governance[1], scholars and practitioners alike raised three main issues: Why is social-environmental information a relevant legal and accounting problem?[2] How can “non-financial” issues be measured? Should they be relevant and measured for decision-making? In the meantime, many jurisdictions have adopted legal norms or practice guidance on issues concerning sustainable governance. Despite the recent pushback (Eccles, 2023)[3], ever since the UN Global Compact, the UNEP Finance Initiative, and the Taskforce on Climate-Related Financial Disclosures a new consensus has emerged: Board members and executives are not just permitted to consider social-environmental issues, they are expected to do so in their strategy and leadership work and required for compliance, reporting, and risk management.[4] Similarly, corporate entities cannot avoid liability by simply applying the three lines of defence to reputational and operational risks.

At the same time, impact valuation significantly matured in the last two decades from an economic policy analysis tool to a method of accounting for corporate impacts. In this article, we formulate our key challenge and argument of what measurement and valuation of corporate impacts means for the research and practice of corporate governance. We provide evidence to our argument based on a series of three sprints with companies – a new cross-sector collaboration method for agile sustainable development[5] – that deal with the three questions above: Why, how, and if valuing impact has a bearing on business judgment and wider issues in what we call sustainable governance. In so doing, the sprints initiate three pathways of reengagement, recalibration, and realignment of corporate governance with a systems view of corporate value and impacts.

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Delaware Governor Signs Controversial “Market-Practice” Amendments to General Corporation Law

Posted by Mark Thierfelder, Eric Siegel, and Rick Horvath, Dechert LLP, on
Tuesday, July 30, 2024
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Mark Thierfelder, Eric Siegel, and Rick Horvath are Partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Thierfelder, Mr. Siegel, Mr. Horvath, Neil Steiner, Lisa Perri, and Joni Jacobsen and is part of the Delaware law series; links to other posts in the series are available here.

Key Takeaways

  • Amendments were adopted to restore market practices impacted by three recent Court of Chancery decisions.
  • Amendments simplify the approval of a merger by a board of directors, thereby removing the potential for certain technical foot faults.
  • Amendments permit parties to a merger agreement to contract for the ability to seek penalties or consequences in the event of a breach and for appointing stockholder representatives.
  • Amendments permit corporations to enter into stockholder governance agreements that may otherwise constrain the discretion of a board of directors under Delaware law.

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Negative Trading in Congress

Posted by Peter Molk (University of Florida), and Frank Partnoy (UC Berkeley School of Law), on
Monday, July 29, 2024
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Peter Molk is a Professor of Law at the University of Florida Levin College of Law and Frank Partnoy is the Adrian A. Kragen Professor of Law at the University of California Berkeley School of Law. This post is based on their recent article forthcoming in the Indiana Law Journal.

We previously have investigated short selling in several empirical settings, including “negative activism” that targets companies. In our most recent study, we turn to short selling by members of Congress – “negative trading in Congress” – a controversial topic that might seem more appropriate for a blockbuster film than for academic study.

Yet we show that truth is as strange as fiction: Congressional negative trading is not only common but is associated with positive abnormal financial returns. Simply put, when members of Congress bet on stock price declines, they make money. In contrast, we do not find a similar association for long positions taken by members of Congress. There exists an asymmetry between “positive” versus “negative” Congressional trading.

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Not Even a Raging Bull Market Can Rescue SPACs

Posted by Michael Eisenband, FTI Consulting, on
Monday, July 29, 2024
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Michael Eisenband is Global Co-Leader of Corporate Finance & Restructuring at FTI Consulting. This post is based on his FTI Consulting memorandum.

Special-purpose acquisition companies, better known as SPACs (also referred to as “blank check companies”), which have continued to unravel practically en masse while carving out their place in the lore of investing manias. The recent Chapter 11 filing of Fisker, Inc., an EV automaker taken public in late 2020 via a reverse merger with a SPAC[1] that sported a market value exceeding $6 billion within several months of the deal closing, was another reminder of how woefully many of these post-reverse merger SPACs have continued to perform. For the restructuring profession, this boom-to-bust reversal of fortunes for SPACs was arguably foreseeable and is still in the early innings.

Much has been written on the meteoric rise and fall of SPACs since 2020, when renowned investors, and often, famous celebrities[2] were rushing to cash in on the SPAC craze, thereby providing potential investment targets with an end-run to a fast-tracked IPO and a public listing. A New York Times article from December 2020 noted that 25% of global IPO proceeds in 2020 were raised by SPACs, easily an all-time high, with nearly 250 newly formed SPACs going public that year.[3] It got even better in 2021. Overall, some $210 billion of equity capital was raised by nearly 750 large U.S. SPAC IPOs from 20192022, with the majority of capital ($126 billion) raised in 2021.[4]

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Clawback Provisions that Go Beyond SEC Requirements are Prevalent Among Large-Cap Companies

Posted by Stephen Hom, Erin Bass-Goldberg, and Emma van Beek, FW Cook, on
Sunday, July 28, 2024
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Stephen Hom is a Principal, Erin Bass-Goldberg is a Managing Director, and Emma van Beek is a Consultant at FW Cook. This post is based on their FW Cook memorandum.

In October 2022, the SEC adopted final clawback rules mandated by the Dodd-Frank Act, which required companies listed on the NYSE and Nasdaq to adopt a clawback policy to recover excess incentive compensation from current and former executive officers in the event of a financial restatement.

Final listing standards went into effect on October 2, 2023 and required listed companies to adopt compliant clawback policies by December 1, 2023.

While waiting for the SEC to finalize the clawback rules, many companies voluntarily adopted clawback policies often with provisions that went beyond the Dodd-Frank Act requirements. For example, in response to high profile corporate incidents, some companies provided their boards with the discretion to clawback incentive compensation in the event of executive misconduct absent financial restatement.

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Is a delay in the cards for California’s climate accountability laws?

Posted by Cydney Posner, Cooley LLP, on
Sunday, July 28, 2024
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Cydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

You might recall that, in 2023, California Governor Gavin Newsom signed into law two bills related to climate disclosure: Senate Bill 253, the Climate Corporate Data Accountability Act, and SB261, Greenhouse gases: climate-related financial risk. SB 253 mandates disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California.” SB 253 has been estimated to apply to about 5,300 companies. SB 253 requires disclosure regarding Scopes 1 and 2 GHG emissions beginning in 2026, with Scope 3 (upstream and downstream emissions in a company’s value chain) disclosure in 2027. SB 261, with a lower reporting threshold of total annual revenues in excess of $500 million, requires subject companies to prepare reports disclosing their climate-related financial risk in accordance with the TCFD framework and describing their measures adopted to reduce and adapt to that risk. SB 261 has been estimated to apply to over 10,000 companies. SB 261 requires that preparation and public posting on the company’s own website commence on or before January 1, 2026, and continue biennially thereafter. Notably, the laws exceed the requirements of the SEC’s climate disclosure regulations because, among other things, one of the laws covers Scope 3 emissions, and they both apply to both public and private companies that meet the applicable size tests. (For more information about these two laws, see this PubCo post.) Interestingly, even when Newsom signed the bills, he raised a number of questions. (See this PubCo post.) Specifically, on SB 253, Newsom said “the implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure. I am directing my Administration to work with the bill’s author and the Legislature next year to address these issues. Additionally, I am concerned about the overall financial impact of this bill on businesses, so I am instructing CARB to closely monitor the cost impact as it implements this new bill and to make recommendations to streamline the program.” Similarly, on SB261, Newsom said that “the implementation deadlines fall short in providing the California Air Resources Board (CARB) with sufficient time to adequately carry out the requirements in this bill,” and made a similar comment about the overall financial impact of the bill on businesses. So it was fairly predictable that something of a do-over was in the cards. Now, as reported here and here by Politico, Newsom has proposed a delay in the compliance dates for each bill until 2028. A spokesperson for Newsom “said the proposal ‘addresses concerns’ about cost, timeline and the ‘entirely new and significant workload for the state and the entities covered by these new requirements.’”

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