Yearly Archives: 2024

No, SPACs Do Not Dilute Investors – A Theoretical and Empirical Analysis

Posted by Hal Scott (Harvard Law School) and John Gulliver (Program on International Financial Systems), on
Thursday, December 12, 2024
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Hal S. Scott is the Emeritus Nomura Professor of International Financial Systems at Harvard Law School and John Gulliver is the Kenneth C. Griffin Executive Director of the Program on International Financial Systems. This post is based on their recent paper.

Over the past decade, special purpose acquisition companies (“SPACs”) became a prominent method for private companies to go public through a merger transaction (“de-SPAC”) between a publicly-listed SPAC and a private company.

The SPAC boom peaked in 2020 and 2021 when there were 248 and 613 SPACs representing the majority of all IPOs both years. SPAC activity then began to decline after its boom in popularity attracted increased scrutiny from the SEC and its staff, including new accounting guidance that slowed the rate of SEC SPAC approvals. Moreover, articles published in 2022 and 2023 by Stanford Law Professor Michael Klausner and co-authors asserted that SPACs result in significant dilution of the initial shareholders in a SPAC that remain invested over the lifecycle of the de-SPAC merger process. They measured this supposed dilution using a metric they refer to as “net cash per share” (“NCPS”) and find that cash dilution for SPAC investors is 43%.

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Boards Must Lead Companies Through Today’s Political Turbulence

Posted by Michael W. Peregrine (McDermott Will & Emery) , on
Thursday, December 12, 2024
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Michael W. Peregrine is a Partner at McDermott Will & Emery LLP.

In the wake of current political volatility, corporate boards should continually exercise the full scope of their leadership role, in order to sustain the organizational mission and respond to stakeholder interests they serve.

Every incoming administration has the unquestioned right to seek to shape the government in support of its platform. Yet the headlines make clear that the current transition process is having an impact on the public discourse, the economy and, potentially indirectly, on corporate stability. Further uncertainty could arise as additional appointments are made, policies introduced, executive orders prepared and pardon powers are projected.

It’s anyone’s guess how long this controversy may continue. But there’s no guess as to the potential economic and social implications for corporate stakeholders of all stripes.

A company’s response to unpredictable circumstances requires board ownership. Volatility doesn’t serve to excuse corporate directors from their established duties. They don’t get to “opt out”; in fact, they’re expected to “lean in”. The board must engage “with ten toes on the ground,” as a full partner with executive management, to help guide the company through the uncertainty.

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Remarks by Chair Gensler Before the Investor Advisory Committee

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Wednesday, December 11, 2024
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. I am pleased to meet with the Investor Advisory Committee. As today’s meeting is the last of this Administration, I’d like to share some reflections about this Committee and its importance to everyday investors.

As is customary, I’d note that my views are my own as the 33rd Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.

When President Franklin Roosevelt and Congress enacted the securities laws in the 1930s, they had lived through the 1920s when hucksters, fraudsters, scam artists, and Ponzi-like schemers took advantage of investors. They learned what happens when unregulated markets were left on their own. They understood that protecting investors was critical to the functioning of capital markets.

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Remarks by Commissioner Peirce Before the Investor Advisory Committee

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Wednesday, December 11, 2024
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks. The views expressed in this post are those of Commissioner Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

As we close out 2024, allow me a moment to thank you for sharing your time and your wisdom this last year.  I look forward to working with all of you next year, which is likely to be a particularly eventful year for both the Commission and the Investor Advisory Committee.

Thank you also to the panelists who are joining you today to discuss arbitration and alternative assets.  Last year, the Office of the Investor Advocate and the Office of the Ombuds published a report concerning the use of mandatory arbitration clauses by registered investment advisers.[1] Though inconclusive as to the effects of mandatory arbitration on advisory clients, the report suggested “establishing uniform disclosure requirements for adviser arbitration information.” [2]  A disclosure regime can morph into a prohibitory regime. Today’s discussion, therefore, should not lose sight of the importance of allowing investors and their advisers to choose binding arbitration to resolve disputes.  Freedom of contract is a bedrock principle. Submitting a dispute to arbitration is, in many instances, a cheaper and less burdensome process than litigation.  Moreover, as Professor Todd Zywicki has pointed out, “although [] contractual provisions to arbitrate disputes are initially agreed to by contract, [] a substantial body of common law regulation has been built up by courts to ensure that [arbitration processes] are fair and effective alternatives to lawsuits.” [3]

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2024 Silicon Valley 150 Corporate Governance Report

Posted by Richard Blake, Wilson Sonsini Goodrich & Rosati, on
Wednesday, December 11, 2024
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Richard Blake is a Partner at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Blake, David Thomas, Jason Chan, Courtney Mathes, Barbara Novak, and Katherine O’Neal.

Below are the key findings from Wilson Sonsini Goodrich & Rosati’s 2024 Silicon Valley 150 Corporate Governance Report, which analyzes the corporate governance practices and disclosures of the Valley’s largest public companies based on reviews of proxy statements filed between October 1, 2023, and September 30, 2024 (referred to as 2024 in this report), as well as corresponding annual meetings and related documents

  • Virtual meetings are here to stay. Following the practice started during the COVID-19 pandemic, approximately 89% of the SV150 opted to hold a virtual meeting in 2024 rather than a physical one.
  • ESG/CSR disclosure in the proxy statement and on websites continued to remain strong throughout the SV150, with 83% of the top 100 companies having such disclosure in their proxies and 92% of the top 100 companies having such disclosure on their website.
  • Over three-quarters of the SV150 companies published an ESG Report on their website, with 98% of the top 50 companies doing so. Most of the companies that issued an ESG Report (80.3%) issued a single report rather than multiple reports. Nearly 50% of the ESG Reports contained an independent, third-party assurance of some of the data.
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Human Rights and Portfolio Risk: Why Investors Should Think Big

Posted by Erin Bigley and Luke Pryor, AllianceBernstein, on
Tuesday, December 10, 2024
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Erin Bigley is Chief Responsibility Officer and Luke Pryor is a Portfolio Manager and Senior Research Analyst at AllianceBernstein. This post is based on their AllianceBernstein memorandum.

With human rights regulations expanding, investors need a broader approach to assessing risk and opportunity.

Guidelines on human rights have helped shape some of the key principles of corporate responsibility. Increasingly, however, governments are hardening guidelines into law. Penalties for companies that fail to comply may be severe—but the risks to investors can be mitigated, in our view, by the right approach to research.

The launch in July 2024 of the European Union’s Directive on Corporate Sustainability Due Diligence (CSDDD) reflected a global trend for a tighter regulatory approach to ensure that businesses behave appropriately regarding human rights and the environment.

Previously, the regulatory regime had relied on persuasion, rather than enforcement. In 2011, for example, the UN Guiding Principles on Business and Human Rights (UNGPs) recognized that, under international law, companies have a duty to respect human rights. While not legally binding, the UNGPs formed the cornerstone of the business and human rights legal framework.

The CSDDD incorporates the standards of the UNGPs and other voluntary schemes but makes them mandatory for companies that meet certain criteria, such as net worldwide turnover of more than €450 million ($493 million) for EU companies, and net turnover generated within the EU of more than €450 million for non-EU companies. Financial penalties for companies that do not comply are steep, with the maximum penalty to be at least 5% of global turnover.

Compliance requirements and fines are not the only challenge for companies and investors. Like the voluntary frameworks, the emerging legally enforceable regulations are likely to differ across jurisdictions, exposing companies to multiple requirements. The new regulations are also pushing investors to think more broadly about how they account for human rights in their portfolios.

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Shareholder Preferences and Shareholder Democracy

Posted by Apostolos Thomadakis (ECMI), on
Tuesday, December 10, 2024
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Apostolos Thomadakis is Head of Research at the European Capital Markets Institute (ECMI) and Research Fellow at the Financial Markets and Institutions Unit at the Centre for European Policy Studies (CEPS) in Brussels.

The role of shareholders in corporate governance has evolved in recent decades, even in jurisdictions where shareholder influence has been limited. Traditionally, shareholder interests were held to be narrowly focused on maximising financial returns, with governance practices structured around this objective. However, growing awareness of environmental, social, and governance (ESG) issues has shifted the conversation. Shareholders today are increasingly vocal about matters beyond maximising financial performance, such as climate change, social justice, and corporate responsibility.

This evolution raises critical questions about shareholders’ power over the company and to what extend that power takes the form of democracy. To enhance corporate governance and align with shareholder preferences, the EU should strengthen the Shareholder Rights Directive II by making ESG resolutions binding, standardise ESG reporting for consistency, promote engaged shareholding, recognise the increasing importance of proxy advisors, empower the general meeting to approve sustainability reports and expand stewardship codes across Member States for active institutional investors.

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Enhancing Controls and Procedures for Climate‑Related Disclosures

Posted by Marc S. Gerber, Caroline S. Kim and Randi Val Morrison, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, December 10, 2024
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Marc S. Gerber is a Partner and Caroline S. Kim is a Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. Randi Val Morrison is Senior Vice President and General Counsel at the Society for Corporate Governance. This post is based on a Skadden memorandum by Mr. Gerber, Ms. Kim, Ms, Morrison, Jeongu Gim, and Khadija L. Messina.

I. Introduction

Earlier this year, the Securities and Exchange Commission (SEC) adopted long-anticipated rules mandating climate-related disclosures in public companies’ annual reports and registration statements (SEC Climate Rules). [1] While the new rules subject many disclosure requirements to a materiality standard, they nevertheless mandate significant climate-related disclosures and disclosure-related determinations for companies.

In response to multiple legal challenges, however, in April 2024, the SEC voluntarily stayed the effectiveness of the climate disclosure rules pending judicial review. [2]

While the stay and the upcoming change in administration call into question the future of the SEC Climate Rules, these developments do not necessarily mean “pencils down” for companies when it comes to preparing more generally for climate-related disclosures. [3] Even amid uncertainty with respect to the fate of the SEC Climate Rules, the SEC made clear that its 2010 climate guidance, [4] which provided the basis for the sample comment letter issued in September 2021 by the Division of Corporation Finance [5] and subsequent comment letters to companies, remains applicable.

In addition, maintaining the momentum of preparing for compliance aligns with broader investor and other stakeholder expectations for robust voluntary climate-related disclosures.

Against this evolving landscape, companies should proactively consider the need to enhance their disclosure controls and procedures [6] (DCP) and make other preparations for climate-related disclosures regardless of whether the SEC Climate Rules become effective. Even if the SEC Climate Rules are scaled back or overturned, companies are required under existing securities laws to evaluate and disclose in their periodic reports material impacts from climate-related matters, as discussed below.

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Incorporating Natural Capital into Engagements

Posted by Elena Leofanti, Glass, Lewis & Co., on
Monday, December 9, 2024
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Elena Leofanti is Director of Stewardship at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Leofanti, Shane Carroll, and Stephanie Radcliffe.

Biodiversity risk represents a significant and growing financial risk, with the potential to impact global economic value directly and indirectly through operational risks, transition costs, environmental liabilities and more. A 2020 report by the World Economic Forum estimated that over half of the world’s GDP, about $44 trillion, is moderately or highly dependent on nature and its services, putting it at risk due to biodiversity loss.

Institutional investors, especially those who prioritize looking at long-term risk, are increasingly moving to incorporate natural capital into their risk assessments. Currently, companies disclose limited data on biodiversity-related metrics and unlike more established, mandated ESG priorities, biodiversity risk is not as easily defined.

Broadly defined, natural capital is the world’s stock of natural assets which include geology, soil, air, water and all living things. As with financial capital, when we draw down too quickly on resources without accounting for repayment or giving nature time to recover, for example by clear-cutting forests, we run the risk of ecological, social and economic liabilities (Source).

With a topic this all-encompassing, it can be very difficult for investors to determine the extent of material biodiversity risks in their portfolio. Usually, investors with exposure to high-risk sectors with high resource dependencies, such as agriculture, fisheries and pulp & paper, or high environmental impacts, such as oil & gas, mining and chemicals, are more likely to have material risks.

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Carbon Burden

Posted by Lubos Pastor (University of Chicago), Robert F. Stambaugh (University of Pennsylvania), and Lucian A. Taylor (University of Pennsylvania), on
Monday, December 9, 2024
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Lubos Pastor is the Charles P. McQuaid Professor of Finance and Robert King Steel Faculty Fellow at the University of Chicago Booth School of Business, Robert F. Stambaugh is the Miller Anderson and Sherrerd Professor of Finance and Professor of Economics at The Wharton School of the University of Pennsylvania, and Lucian A. Taylor is the John B. Neff Professor in Finance at The Wharton School of the University of Pennsylvania. This post is based on their recent paper.

Summary

We quantify the U.S. corporate sector’s carbon externality by computing the sector’s “carbon burden”—the present value of social costs of its future carbon emissions.  Our baseline estimate of the carbon burden is 131% of total corporate equity value. Among individual firms, 77% have carbon burdens exceeding their market capitalizations, as do 13% of firms even with indirect emissions omitted. The 30 largest emitters account for all the decarbonization of U.S. corporations predicted by 2050. Predicted emission reductions, and even firms’ targets, fall short of the Paris Agreement. Firms’ emissions are predictable by past emissions, investment, climate score, and book-to-market.

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