Yearly Archives: 2024

Shopify and the Problem of Shareholder “Approval” at Multi-Class Companies

Posted by Oren Lida and Dimitri Zagoroff, Glass, Lewis & Co, on
Thursday, August 15, 2024
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Oren Lida is an Analyst and Dimitri Zagoroff is a Senior Editor at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

Media reporting can make proxy season seem more dramatic than it is. While breathless coverage of board strife, impossibly high executive pay figures and shareholder activism at well-known companies is the norm, the overwhelming majority of director election and executive compensation proposals pass with majorities of 90% and upwards.

The handful of proposals that fail understandably draw headlines – yet many proposals opposed by a majority of shareholders fly under the radar. That’s because (with some notable exceptions) most reporting fails to acknowledge how multi-class share structures, which give certain shares typically held by founders and insiders more voting power than those held by institutional and retail investors, obscure investor sentiment.

Proxy voting is highly technical in and of itself, and its ultimate influence on how companies are run is even more complicated. So why does the impact of multi-class share structures matter? Because giving insiders and founders disproportionate voting power often serves to effectively silence ordinary shareholders, threatens the agency and objectivity of the board and removes a key safeguard against excessive pay, related party transactions, and other potential misuses of investor capital.

In this post, we look at how inequitable voting rights influenced 2024 AGM results at Shopify, and at the broader impact of multi-class share structures on the board and its role.

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Dual Class Contracting

Posted by Roberto Tallarita (Harvard Law School), on
Thursday, August 15, 2024
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Roberto Tallarita is an Assistant Professor of Law at Harvard Law School. This post is based on his recent article forthcoming in the Journal of Corporation Law.

Dual-class structures are one of the most controversial topics in corporate governance. Many find them objectionable, on the grounds that they violate fundamental principles of shareholder democracy, reduce accountability of managers, and distort the controller’s incentives to create value for all shareholders. Others, in contrast, believe that dual-class structures protect the founders’ entrepreneurial vision from myopic market pressures, improve the controller’s incentives with respect to risk-taking, and strengthen the managers’ bargaining power vis-à-vis buyers of the company. The debate remains unresolved.

The choice between dual-class and single-class structures has been the subject of academic and policy debates for many years. But voting inequality is a spectrum, not a binary choice. A dual-class structure that allows the controller to have a majority of votes with only 4.8% of the shares (such as the one chosen by Pinterest, for example) is much more unequal than a dual-class structure that requires the majority shareholder to have at least 35% of the shares (such as the one adopted by Cognizant). Similarly, a dual-class structure that may last for the entire life of the founders (such as the one chosen by Google, for example) or in perpetuity (such as the one chosen by Facebook) is much more unequal than a dual-class structure that expires after five years (such as the one chosen by Groupon). If voting inequality matters, then the choice between more unequal and less unequal structures must be taken seriously. READ MORE »

From Commitment to Implementation – An Analysis of Corporate Climate Actions

Posted by Rob Berridge and Gabriel Gerson, Ceres, on
Wednesday, August 14, 2024
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Rob Berridge is a Senior Director and Gabriel Gerson is a Senior Associate at Ceres. This post is based on their Ceres memorandum.

Overview

As the physical and financial impacts of climate change reach new heights, many institutional investors are addressing climate risks and opportunities in their portfolios with renewed urgency. One of the main ways they do this is by engaging with the managers and the boards of the companies they own through dialogues and by filing shareholder proposals when necessary.

Shareholder proposals are beneficial for several key reasons. They allow shareholders to act like an immune system for financial markets and companies, identifying risks and asking companies to address them. Companies frequently respond positively by making commitments to address investor concerns. These commitments often lead to substantial improvements in corporate practices and important real-world, economic impacts.

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Do Investors Care about Biodiversity?

Posted by Zacharias Sautner (University of Zurich), on
Wednesday, August 14, 2024
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Zacharias Sautner is a Professor of Sustainable Finance at the University of Zurich. This post is based on a recent article forthcoming in the Review of Finance by Professor Sautner, Professor Alexandre Garel, Professor Arthur Romec, and Professor Alexander F. Wagner.

Biodiversity Loss and its Consequences

Biodiversity, the variety of living organisms in all habitats, is deteriorating at an unprecedented and alarming rate. Biodiversity collapse jeopardizes the goods and services humans obtain from all ecosystems, with potentially far-reaching economic implications. Given the potentially dramatic financial consequences of the loss of biodiversity, firms, investors, and financial market regulators are increasingly paying attention to the topic. For example, the Taskforce on Nature-related Financial Disclosures (TNFD), modeled after the Taskforce on Climate-related Financial Disclosures (TCFD), was launched in 2021 and released its final disclosure recommendations in September 2023. Also in September 2023, the Network for Greening the Financial System released a framework to help central banks and supervisors identify and assess nature-related transition and physical risks.

However, the link between biodiversity and finance has received little attention by academics. In our paper, we take a step toward filling this gap by introducing to the finance literature a science-based measure, the corporate biodiversity footprint (CBF), and exploring whether investors price this footprint.

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DOJ Launches Corporate Whistleblower Awards Pilot Program

Posted by Maria Cruz Melendez, Andrew M. Good, and Bora P. Rawcliffe, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, August 13, 2024
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Maria Cruz Melendez and Andrew M. Good are Partners and Bora P. Rawcliffe is a Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

On August 1, 2024, the Department of Justice’s Criminal Division launched the Corporate Whistleblower Awards Pilot Program (the Program), following up on its announcement in March 2024 of a plan to offer whistleblower awards.

Under the Program, whistleblowers who voluntarily provide the Criminal Division with original and truthful information about corporate misconduct that results in a criminal or civil forfeiture greater than $1 million are now eligible for a financial award. The award may be up to 30% of the first $100 million in net proceeds forfeited and up to 5% of any net proceeds forfeited between $100 million and $500 million.

Any award is subject to specific eligibility criteria, discussed below, and requires, among other things, a whistleblower’s cooperation. The Program complements another pilot program launched early this year that offers nonprosecution agreements to qualifying individuals who voluntarily disclose information about the same kinds of offenses.

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The short-termism trap: Catering to informed investors with limited horizons

Posted by James Dow (London Business School), Jungsuk Han (Seoul National University), and Francesco Sangiorgi (Frankfurt School of Finance and Management), on
Tuesday, August 13, 2024
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James Dow is a Professor of Finance at London Business School, Jungsuk Han is an Associate Professor of Finance at Seoul National University, and Francesco Sangiorgi is an Associate Professor of Finance at Frankfurt School of Finance and Management. This post is based on their recent article published in the Journal of Financial Economics.

Introduction

Publicly traded firms face pressure from equity market investors with short investment horizons. This forces companies to make decisions that favor immediate gains over long-term value creation. But existing economic models of short termism cannot explain how this could be seriously damaging to the economy.  In our recent study, “The Short-Termism Trap: Catering to Informed Investors with Limited Horizons,” published in the Journal of Financial Economics, we present a model that illustrates how the short-term focus of informed investors can lead firms and the stock market into a destructive cycle of short-termism.

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Special Committee Midyear Report

Posted by Gregory Gooding, William Regner, and Andrew Bab, Debevoise & Plimpton LLP, on
Monday, August 12, 2024
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Gregory V. Gooding, William Regner, and Andrew Bab are Partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Gooding, Mr. Regner, Mr. Bab, Caitlin Gibson, and Matthew Ryan, and is part of the Delaware law series; links to other posts in the series are available here.

This issue of the Debevoise & Plimpton Special Committee Report surveys corporate transactions announced during the first half of 2024 that used special committees to manage conflicts, and key Delaware judicial decisions rendered during this period that relate to issues relevant to the use of special committees.

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Imputing Proxy Advisor Recommendations

Posted by Jonathon Zytnick (Georgetown University), on
Monday, August 12, 2024
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Jonathon Zytnick is an Associate Professor of Law at Georgetown University Law Center. This post is based on his recent working paper.

The recommendations of proxy advisors are the subject of extensive academic research. Yet in recent years, proxy advisor recommendations have become largely unavailable for use in academic research. In a recent paper, I use shareholder votes to impute the recommendations of the two major proxy advisors with a high degree of accuracy. I place the imputed recommendations on my website for use by academics.

Two proxy advisors combine for a 97% market share: Institutional Shareholder Services (ISS) and Glass Lewis, with ISS the far larger of the two. There is no widespread access to the recommendations of either. Until recently, academics studying corporate governance have universally relied on ISS’s Voting Analytics database for ISS recommendations, but sometime between 2020 and 2022, ISS removed its recommendations from that dataset, both retroactively and on an ongoing basis. Academics have traditionally had limited or no access to Glass Lewis recommendations. The lack of access to proxy advisor recommendations creates a need for a practical, accurate substitute.

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Under Pressure—Rethinking Board Practices

Posted by Randi Lesnick, Andrew Levine, and Joel May, Jones Day, on
Sunday, August 11, 2024
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Randi Lesnick and Andy Levine are Co-Chairs of Corporate Practice and Joel May is a Partner at Jones Day. This post is based on a Jones Day memorandum by Ms. Lesnick, Mr. Levine, Mr. May, and Jennifer Lewis.

Today’s corporate boards are facing unprecedented challenges, an evolving and expanding risk profile—and a significantly heavier workload. Demands of board service have risen as director responsibilities must take into account increased regulation, expanding concepts of risk oversight, a highly complex business environment, geopolitical factors, and social dynamics. Even those who adhere to notions of shareholder primacy recognize that topics like DEI and sustainability now fit squarely within the board’s purview. Moreover, the 24/7 news cycle and instantaneous social media put corporate leaders in the spotlight full-time, requiring them to respond effectively, and in real time, to developments.

From our seat as legal advisors to boards, we see a higher level of legal risk than ever before. Recent Delaware case law in areas including bylaw provisions, executive pay, the use of special committees, stockholder agreements, and even de-SPAC transactions invite concern and create uncertainty. Further, stockholder plaintiffs have continued to challenge director decision-making through derivative lawsuits, with some alarming and distinctive recent successes.

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Significant Amendments to the DGCL Are Set to Become Effective

Posted by Amy Simmerman and Jason Schoenberg, Wilson Sonsini Goodrich & Rosati, on
Saturday, August 10, 2024
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Amy Simmerman is a Partner and Jason Schoenberg is an Associate at Wilson Sonsini Goodrich & Rosati. This post is based on their Wilson Sonsini memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

On August 1, 2024, an extensive and important set of amendments to the Delaware General Corporation Law (the DGCL) will become effective. The amendments, which will apply both prospectively and retrospectively, were largely intended to address several recent Delaware Court of Chancery decisions that many practitioners considered inconsistent with prevailing market practice. Our previous client alert detailing the proposal of these DGCL amendments is available here. The most pertinent information about the new amendments is described below.

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