Monthly Archives: February 2025

Corporate Governance and Firm Value

Posted by Marcel Kahan (NYU Law) and Emiliano Catan (NYU Law), on
Thursday, February 20, 2025
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Marcel Kahan is the George T. Lowy Professor of Law at New York University School of Law, and Emiliano Catan is the Catherine A. Rein Professor of Law at New York University School of Law. This post is based on their recent paper.

Scholars have long debated how corporate governance affects firm value. The topics analyzed include, among many others, board composition, proxy access, poison pills, antitakeover statutes, staggered boards, hedge fund activism.

Confronted with conflicting arguments, scholars have turned to empirical evidence to resolve the theoretical debates. An approach that has become increasingly popular over the past few decades is to measure the effect of governance mechanisms on Tobin’s Q: the market value of a company divided the replacement cost of the company’s assets.

Q regressions come in two variants, cross-sectional and “within firm.” A typical within firm study uses a panel dataset involving many firms that become treated during the sample period to regress firm Q  against a treatment indicator, a vector of firm indicators, a vector of time indicators, and possibly other control variables. This research design effectively compares the post-treatment changes in the Q of treated firms to contemporaneous changes in Q in firms for which treatment status has not changed during the same period. If the coefficient estimate for the treatment indicator is positive (or negative), this is taken as evidence that treatment enhanced (or reduced) firm value.

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Shareholder Proposals: Staff Legal Bulletin No. 14M (CF)

Posted by Cicely LaMothe, Securities and Exchange Commission (SEC), on
Thursday, February 20, 2025
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Cicely LaMothe is a Deputy Director of Disclosure Operations at the Securities and Exchange Commission (SEC).

A. The Purpose of This Bulletin

This bulletin is part of a continuing effort by the Division to provide guidance on important issues arising under Exchange Act Rule 14a-8. Based on a review of Staff Legal Bulletin No. 14L and the staff’s experience applying the guidance contained in it, and after re-examining the Commission’s statements on the matters addressed in that bulletin, the Division is rescinding Staff Legal Bulletin No. 14L. [1] This bulletin is intended to clarify the Division’s views on the scope and application of Rule 14a-8(i)(5) and Rule 14a-8(i)(7). In addition, this bulletin addresses certain other aspects of Rule 14a-8 and provides responses to questions that may arise in light of the timing and content of this bulletin.

When explaining the ordinary business exclusion in Rule 14a-8(i)(7), the Commission has said that “[c]ertain tasks are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight. . . . However, proposals relating to such matters but focusing on sufficiently significant social policy issues . . . generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.” [2] In addition, the Commission has said that the determination as to whether a proposal deals with a matter relating to a company’s ordinary business operations is “made on a case-by-case basis, taking into account factors such as the nature of the proposal and the circumstances of the company to which it is directed.” [3] In light of these statements, it is the staff’s view that a “case-by-case” consideration of a particular company’s facts and circumstances is a key factor in the analysis of shareholder proposals that raise significant policy issues. In addition, the text of Rule 14a-8(i)(5) references the relationship of the proposal to the individual company, requiring analysis of whether the proposal is “significantly related to the company’s business.” Accordingly, where relevant to the arguments raised to the staff by companies and proponents, the staff will consider whether a proposal is otherwise significantly related to a particular company’s business, in the case of Rule 14a-8(i)(5), or focuses on a significant policy issue that has a sufficient nexus to a particular company, in the case of Rule 14a-8(i)(7). Our views on the application of both rules are described below.

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Delaware Legislators and Governor Propose Landmark Legislation

Posted by William B. Chandler III, Amy Simmerman, and Brad Sorrels, Wilson Sonsini Goodrich & Rosati, on
Wednesday, February 19, 2025
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William B. Chandler III, Amy Simmerman, and Brad Sorrels are Partners 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 February 17, 2025, Delaware’s legislative leaders and Governor announced landmark legislation and initiatives that would, if enacted into law, result in welcome and much-needed amendments to Delaware corporate law to address problems of recent vintage. The legislation and initiatives address critical topics, including director independence, controlling stockholders, stockholders’ books and records inspection rights, and plaintiffs’ attorney fee awards. The legislative efforts have been introduced at a time of growing debate over the vitality of Delaware corporate law and in response to case law developments that have frustrated boards of directors, corporate management, and investors. These legislative efforts would, in our view, restore Delaware law to what it was before those recent developments and mark a return to the stability, predictability, and balance that long characterized Delaware law.

Many clients have been discussing with us their concerns about Delaware law. We think that clients evaluating these issues will want to seriously consider the potential benefits of the proposed amendments, combined with the already significant built-in advantages that have long made Delaware the primary state of incorporation, and closely monitor their status.

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Too Many Mergers? The Golden Parachute as a Driver of M&A Activity in the 21st Century

Posted by Jeffrey N. Gordon (Columbia Law School), on
Wednesday, February 19, 2025
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Jeffrey N. Gordon is Richard Paul Richman Professor of Law at Columbia Law School. This post is based on his recent paper.

This paper argues that the prevailing corporate governance regime in the United States has produced a level of mergers and acquisition activity that is higher than the social optimum because of a high-powered incentive for a CEO to exit through target-side M&A, the contemporary golden parachute.

In the late 19th through the 20th century M&A activity was characterized by “waves” that reflected adaptations to changing external environment, whether the efficient production frontier, regulatory constraints, or capital market developments.  Economically motivated parties saw the opportunities in changing the boundaries of the firm; successful first-movers spawned imitators, hence a wave, which eventually subsided, often alongside deteriorating capital market conditions.  The 21st century is different.  There is a persistently high level of M&A.  Yes, there are fluctuations but not “waves.”  The troughs in M&A activity over the past 25 years commonly exceed the peaks of prior waves.

This pattern can be explained at least in part by the introduction of an internal driver of M&A activity, the “golden parachute,” a super-bonus payoff to a target CEO.   Golden parachutes were introduced as a corporate governance innovation in the 1980s to overcome managerial hostility to an unsolicited premium bid. Over time, especially as executive compensation radically shifted toward stock-based pay, golden parachutes have become increasingly lucrative, platinum in many cases They now provide a CEO with a high-powered incentive to become a target CEO, compensating the CEO like a deal-hunting investment banker, and thus have changed the pattern of M&A activity.

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Climate and Energy Executive Orders: Implications for Corporate Sustainability

Posted by Matteo Tonello and Andrew Jones, The Conference Board, Inc., on
Wednesday, February 19, 2025
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Matteo Tonello is Head of Benchmarking and Analytics and  Andrew Jones is a Senior Researcher, ESG Center at The Conference Board, Inc. This post is based on their Conference Board memorandum.

On January 20, 2025, the president signed three significant climate and energy-related executive orders—“Declaring a National Energy Emergency,” “Unleashing American Energy,” and “Putting America First in International Environmental Agreements”—and rescinded several executive orders from prior administrations, including those focused on reducing emissions and expanding clean energy infrastructure. This article analyzes the key provisions of each order and their potential impact on corporate sustainability practices.

Key Insights

  • Intended to strengthen US energy security and boost economic competitiveness, these climate- and energy-related executive orders mark a pivotal shift in federal climate policy.
  • Despite federal rollbacks, large and multinational corporations will remain subject to new ESG regulations such as California’s climate disclosure laws and the EU’s Corporate Sustainability Reporting Directive, maintaining momentum toward decarbonization.
  • Diverging state and federal climate policies are creating a fragmented regulatory landscape in the US, challenging corporations to develop flexible compliance strategies that address both progressive state mandates and federal deregulatory initiatives.
  • While withdrawal from the Paris Agreement is unlikely to significantly impact corporate climate efforts, the absence of federal contributions to global climate finance could prompt firms to play a larger role in funding climate adaptation and mitigation initiatives.
  • The recent growth in voluntary corporate climate disclosures, risk management, and renewable energy investments highlights the strong influence of market trends, investor expectations, and global standards in driving sustainability, beyond domestic policy shifts.

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Corporate Governance Trends in the United States

Posted by Rich Fields, Melissa Martin, and Rusty O’Kelley, Russell Reynolds Associates, on
Tuesday, February 18, 2025
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Rich Fields leads the Board Effectiveness Practice, Melissa Martin is a member of the Board Effectiveness Practice, and Rusty O’Kelley is a Managing Director, at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum.

Adapting to a new, evolving political and regulatory landscape

Governance leaders predict boards will devote substantial time to navigating the significant expected shifts in the political and regulatory spheres of the second Trump administration. Within the first days of the new administration, scores of new executive orders triggered some companies and law firms to establish “war rooms” to strategize on the policy changes likely to affect their business, customers, and clients. While impacts will vary significantly by company and industry, there is a widespread expectation that the environment will be more business friendly, with diminished regulatory demands and enforcement risks.

President Trump’s intended agency nominees signal dramatic change, such as the nomination of Paul Atkins to chair the Commission. Atkins, a former SEC Commissioner, is seen as pro-business, with the Wall Street Journal labelling him as a “regulatory skeptic.”. Most expect the SEC to minimize burdens on public companies, backing away from climate disclosure rules and likely lessening support for enforcement. Likewise, in contrast to the first term’s four Labor Secretaries (who were often perceived as anti-union), the current pick for Secretary of Labor has espoused a more measured position. Merger enforcement actions by the FTC and DOJ have already reached a near 20-year low, in part, due to strong anti-merger rhetoric, more aggressive policies, and higher procedural rules. The agencies may relax their 2023 FTC and DOJ guidelines, adopting an even less aggressive approach given the incoming administration’s stance on curtailing merger guidelines and settling merger investigations.

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Granting Favors: Insider-Driven Corporate Philanthropy

Posted by Leeor Ofer (Harvard Law School), on
Tuesday, February 18, 2025
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Leeor Ofer is a fellow at the Harvard Law School Program on Corporate Governance and an S.J.D. candidate at Harvard Law School. This post is based on her recent article, forthcoming in the Ohio State Law Journal.

Corporate charitable giving has long been considered a key tool in companies’ environmental, social, and governance (ESG) arsenal. Notably, in 2023, corporate giving in the United States is estimated to have exceeded $36 billion. And while corporate philanthropy can generate value for firms, their shareholders, and society at large, it can also act as a channel for corporate insiders to increase their own benefit.

For instance, under CEO Jamie Dimon, JPMorgan Chase donated millions to the American Museum of Natural History, where Dimon’s wife served on the advisory council. Similarly, Enron contributed significant sums to the University of Texas M.D. Anderson Cancer Center, where two of its directors held leadership roles. Indeed, corporate charitable donations to nonprofits affiliated with directors (“conflicted grants”/”conflicted giving”) may well represent self-dealing at shareholders’ expense. Nonetheless, under U.S. law, shareholders are not entitled to vote on, or otherwise directly participate in, the decision-making process regarding corporate philanthropy. Furthermore, because companies are not required to disclose corporate charitable gifts in their filings with the SEC, and voluntary disclosure is severely lacking, most corporate giving flies below the radar.

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SEC Staff Publishes New C&DIs on Types of Shareholder Engagement Could Cause Loss of Schedule 13G Eligibility

Posted by Amy R. Dreisiger, Joseph A. Hearn, and Dalia O. Blass, Sullivan & Cromwell LLP, on
Tuesday, February 18, 2025
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Amy R. Dreisiger, Joseph A. Hearn, and Dalia O. Blass are Partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Dreisiger, Mr. Hearn, Ms. Blass, H. Rodgin Cohen, Robert W. Downes, and Eric M. Diamond.

Today, the Staff in the Division of Corporation Finance at the Securities and Exchange Commission published one new and one revised Compliance and Disclosure Interpretation (C&DI) under Regulation 13D-G. The C&DIs address circumstances in which a greater-than-5% shareholder’s engagement with an issuer’s management could cause the shareholder to be deemed to hold the subject securities with a “purpose or effect of changing or influencing control of the issuer” and, therefore, lose eligibility to report its beneficial ownership on Schedule 13G and require it to report on the more disclosure-intensive Schedule 13D. Although the extent to which the C&DIs are expected to result in a change in practice by filers is unclear, institutional investors may wish to review their approach to interactions with companies in which they have reportable investments.

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ISS 2025 US Benchmark Policy Guidelines

Posted by Alessandra Murata, Michael Bergmann, and Michael Mencher, Cooley LLP, on
Monday, February 17, 2025
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Brad Goldberg and Alessandra Murata are Partners, and Michael Bergmann is a Special Counsel, at Cooley LLP. This post is based on a Cooley memorandum by Ms. Murata, Mr. Bergmann, Mr. Mencher, Beth Sasfai, Brad Goldberg, and Megan Arthur Schilling.

On December 17, 2024, one of the two most influential proxy advisory firms, ISS, released its Proxy Voting Guidelines Benchmark Policy Changes for 2025: US, Canada, and Americas Regional, which provides updates to its voting policies for the 2025 proxy season. The full 2025 ISS Benchmark Voting Policy document is expected to be published in the coming weeks. This alert provides a high-level description of the US policy updates, which will apply for shareholder meetings held on or after February 1, 2025.

Similar to 2024, ISS has introduced significantly fewer policy changes than Glass Lewis, focusing only on poison pills, special purpose acquisition company (SPAC) extensions and a change from general environmental to natural capital-related terminology. Notably, ISS has not added any policies related to artificial intelligence (AI), unlike Glass Lewis, which included new policies regarding AI board oversight and shareholder proposals.

ISS also has provided a preview of possible future policy changes regarding the use of performance-based versus time-based equity awards in US executive compensation programs in its Executive Summary Global Proxy Voting Guidelines Updates for 2025 and Process of ISS Benchmark Policy Development. In addition, ISS issued updates to its FAQs on Executive Compensation Policies and Equity Compensation Plans.

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The Industry Veteran CEO: Friend or Foe?

Posted by Jonathan Doorley and Greg Roumeliotis, Brunswick Group LLP, on
Sunday, February 16, 2025
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Jonathan Doorley is Partner and Greg Roumeliotis is a Director at Brunswick Group LLP. This post is based on their Brunswick memorandum.

Director nominees with CEO experience have long featured in Board slates put forward by activist investors. Those candidates were typically from outside the target company’s industry, and the applicability of their experience was often questioned. However, there is an emerging trend of activist investors utilizing CEOs with direct industry experience at competitor companies, and even attempting to bring back retired CEO predecessors as Directors. As the stigma of joining a dissident slate continues to dissipate, the quality of Director candidates is increasing, and they are more likely to have highly relevant industry expertise and even personal ties to the incumbent management team and Board. Companies are now sometimes fighting not just against outsiders, but against former colleagues, mentors or industry peers. This dynamic presents a new set of considerations for companies preparing for and responding to activist attacks.

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