The stakes for responsible corporate stewardship have never been higher.

Corporations today account for a greater proportion of our collective productivity than ever before. Of the 100 largest economies in the world, 71 are corporations, and only 29 are countries. U.S. corporations alone generated profits of $2.3 trillion in 2018—the highest in history. Reflecting their unprecedented scale, U.S. corporations have been blamed for accelerating environmental degradation and aggravating disparities in income and wealth. Calls for the exercise of corporate social responsibility have become increasingly urgent. Recognizing this urgency, the Business Roundtable last month embraced broad stakeholder governance and urged corporate leaders to focus on sustainable value creation. Yet, as directors of U.S. corporations seek to answer these calls, they remain subject to countervailing market pressure to deliver outsized stockholder returns in compressed time horizons.

To allow directors to mediate this challenge, and to facilitate responsible long-term corporate decision making, we have long supported a stakeholder-centered model of corporate governance and cautioned against rote application of the entrenched shareholder-primacy model. Recognizing that investors, and the asset managers who represent them, share with the rest of society an interest in sustainable prosperity, we have sponsored The New Paradigm—a reconception of corporate governance as a collaboration among shareholders, managers, employees, customers, suppliers, and the communities in which corporations operate.

(more…)

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

In Sciabacucchi, Chancery applies “first principles” to invalidate FFPs primarily on grounds that charter provisions may only regulate internal affairs, and that Securities Act claims are always external. In so concluding, Sciabacucchi adopts a novel definition of internal affairs that is narrower than precedent, and asserts that plaintiffs have a federal right to bring state court Securities Act claims. It describes all Securities Act plaintiffs as purchasers who are not owed fiduciary duties at the time of purchase. The opinion constrains all actions of the Delaware legislature relating to the DGCL to comply with its novel definition of “internal affairs.”

(more…)

Staff may not take a position or may respond orally to some no-action requests

On September 6, the SEC staff announced a new policy regarding its administration of the shareholder-proposal rule, Rule 14a-8 under the Securities Exchange Act of 1934. As before, the staff will monitor and provide informal guidance regarding shareholder proposals submitted pursuant to Rule 14a-8. Where a company seeks to exclude a proposal by submitting a no-action letter request, the staff will continue to review the request.

Under the new policy, instead of responding in writing that it concurs or disagrees, in some cases the staff may respond only orally. It may also, orally or in writing, decline to state a view with respect to the company’s reasons for excluding the proposal. Where the staff declines to take a view on a no-action letter request, the interested parties should not interpret that position as indicating that the proposal should or should not be included in the proxy statement for shareholder vote. The announcement made clear that under those circumstances, the staff is not weighing in on the merits of the argument and the company may have a valid legal basis on which to exclude the proposal. The parties may choose to seek adjudication of the issue in court.

(more…)

The SEC recently charged a large public accounting firm (Accounting Firm) with violations of its auditor independence rules (Independence Rules) in connection with more than 100 audit reports involving at least 15 audit clients, including several private funds. [1] According to the SEC’s order, the Accounting Firm represented that it was “independent” in audit reports issued on the clients’ financial statements. However, the SEC found that the Accounting Firm or its affiliates provided prohibited non-audit services to affiliates of those audit clients (including to portfolio companies of the private funds), which violated the Independence Rules. The prohibited non-audit services included corporate secretarial services, payment facilitation, payroll outsourcing, loaned staff, financial information system design or implementation, bookkeeping, internal audit outsourcing and investment adviser services. The SEC also found that certain of the Accounting Firm’s independence controls were inadequate, resulting in its failure to identify and avoid these prohibited non-audit services.

(more…)

Information and control rights are central aspects of leadership, management, and corporate governance. In practice, communication of private information and intervention in the decision-making process are common remedies for information asymmetries and conflicts of interest in a wide range of situations. The interplay between communication and intervention, however, is little understood.

In my article, Words Speak Louder Without Actions, which is forthcoming in the Journal of Finance, I show that the power of a principal to intervene in an agent’s decision exacerbates the underlying agency problem and as a result limits the ability of the principal to use her private information to influence the agent’s decision. The power to intervene can therefore be detrimental to the principal. This novel result has implications for the effectiveness of visionary management, the tension between the supervisory and advisory roles of corporate boards, and the value that sophisticated investors offer their portfolio companies.

(more…)

The Delaware Chancery’s refusal to dismiss a derivative allegation in a suit claiming that Goldman Sachs directors were paid excessively may soon provide a decision that offers companies guidance on setting board of director pay (Stein v. Blankfein, Court of Chancery of the State of Delaware, C.A. No. 2017-0354-SG (Del. Ch. May. 31, 2019). This guidance may come despite the court’s initial doubts that the facts, when more fully developed, would yield a holding against Goldman.

If the case is not settled before the next phase of the case, the Chancery’s application of the “entire fairness” standard may provide greater clarity on how directors are paid and whether pay levels are excessive. The “entire fairness” standard, as applied to director pay setting, was articulated in the 2017 Investor’s Bancorp case, and has a standard that is less differential than the “business judgment rule”. (See “Delaware Supreme Court ruling moves the goalposts on director compensation,” Executive Pay Matters, February 16, 2018).

The initial court decision raises several notable issues.

(more…)

Executive compensation is not only a consideration close to the pocket book of CFOs but also a topic of increasing importance to managements and boards. As major economies show signs of recovering from the 2008 recession, compensation can become more decisive to retaining and motivating critical senior executive talent. But, executive compensation also continues to be scrutinized by major investors, proxy advisory firms and increasingly regulators—given the losses incurred by shareholders over the last couple of years. Thus, companies will have to critically review their existing compensation plans and how they adapt these plans for a changing economy. CFOs can play a critical role in framing the financial impacts of compensation plans and influence the public perception of these plans. This CFO Insights article lays forth some critical considerations for CFOs.

(more…)

The biggest irony of the 2008 financial crisis is that the market crash was both initially triggered and ultimately alleviated by massive bank mergers. A wave of mergers by Bank of America, Citigroup, JPMorgan, and Wells Fargo in the late 1990s created the “too big to fail” banks that became so central to the crisis. Less than a decade later, the federal government orchestrated multibillion-dollar emergency acquisitions by several of these firms to stem the panic. Thus, these four dominant banks—which control forty-two percent of the assets in the U.S. banking system—owe their existence to megamergers. Now, critics worry that that these firms are not only “too big to fail,” but also “too big to jail,” “too big to manage,” and “too big to supervise.”

Of course, this is not the first time that bank mergers have raised public policy concerns. In the 1950s, for example, a massive merger movement sparked fears of then-unprecedented consolidation in the financial sector. Many of these deals did not require federal approval. Several years later, Congress established a comprehensive oversight regime for bank mergers in an attempt to rein in unregulated consolidation. Under the Bank Merger Act of 1960, banks would have to get approval from their federal regulators before combining.

(more…)

Overview

At first glance, the patterns and trends of the 2019 proxy season don’t seem to indicate shifts that are beyond marginal in terms of proxy voting impact. But in closer analysis, in conjunction with recent investor behavior and industry trends (e.g., Business Roundtable Statement on the Purpose of a Corporation signed by 181 CEOs disavowing shareholder-centrism in favor of greater commitment to stakeholders and society), the results of the 2019 proxy season evince an already-shifting pattern of voter behavior, and contain important clues as to what companies must do to prepare for the 2020 proxy season.

Throughout this post, we will note some of the specific issues to watch out for 2020 proxy season.

(more…)

If effecting change at a single institution is like reversing the course of an aircraft carrier, revamping the proxy system is something akin to turning around a whole fleet. Undaunted by the task, it appears that the SEC’s Investor Advisory Committee has gotten nearly all of its own boats pointed in the same direction. At a meeting September 5th, the IAC’s Investor-as-Owner Subcommittee recommendation on proxy plumbing received overwhelming support from all but two members of the bipartisan committee.

The IAC, chaired by Anne Sheehan, former director of governance for CalSTRS, was established by Dodd-Frank to provide the Commission with findings and recommendations on issues ranging from governance standards to the functioning of the market. Following last year’s SEC Roundtable, the Investor-as-Owner Subcommittee was tasked with disentangling the inefficiencies and complex interests of the proxy system.

(more…)

In my article, Reforming Pensions While Retaining Shareholder Voice, published in the Boston University Law Review as part of the symposium on Institutional Investor Activism in the 21^st Century: Responses to A Changing Landscape, I argue that the ongoing shift in the public sector from defined benefit to defined contribution pension plans is taking place in the worst possible way, at least from a shareholder rights perspective, one that silences the shareholder voice of millions of workers. I also offer alternative defined-contribution formulations that would help retain that critically important shareholder voice.

Some background: across the country, states and cities face enormous pressure to reform traditional defined-benefit pension plans and replace them with defined-contribution plans. Defined-benefit pension plans promise workers fixed payments in retirement. Defined-contribution plans, like the familiar 401(k), do not guarantee any benefit, instead offering workers a chance to save and invest on their own. The push to shift from defined-benefit to defined-contribution funds is motivated by concern over underfunded pensions, shifting the risk of underfunding from the employer to individual workers. The extent and scope of such underfunding is highly controversial.

(more…)

Shareholders and regulators across the globe are demanding improvements in board oversight of corporate culture. Institutional investors seek to better understand companies’ approaches to human capital management (“HCM”), tone at the top, and the attendant reputational risks.

Corporate culture is a business issue for companies and their boards. The new generation of workers weighs workplace culture when choosing their jobs, and the protracted low rates of unemployment have added fuel to the talent war. Best-in-class companies are therefore seeking to distinguish their corporate cultures from those of their peers in ways that will attract and retain today’s top talent. Carefully focused, boards could play a significant role in this effort, even if they remain unmoved by the demands of their other stakeholders.

(more…)

As foreshadowed by Corp Fin Director Bill Hinman at an event in July put on by the U.S. Chamber of Commerce (see this PubCo post), Corp Fin has announced that it is revisiting its approach to responding to no-action requests to exclude shareholder proposals. In essence, the staff may respond to some requests orally, instead of in writing and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. How will companies respond?

Here is the substance of the announcement:

“The staff will continue to actively monitor correspondence and provide informal guidance to companies and proponents as appropriate. In cases where a company seeks to exclude a proposal, the staff will inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to state a view, with respect to the company’s asserted basis for exclusion. Starting with the 2019-2020 shareholder proposal season, however, the staff may respond orally instead of in writing to some no-action requests. The staff intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.

“The staff continues to believe, as noted in Staff Legal Bulletin 14I and Staff Legal Bulletin 14J, that when a company seeks to exclude a shareholder proposal from its proxy materials under paragraphs (i)(5) or (i)(7) of Rule 14a-8, an analysis by its board of directors is often useful.

“If the staff declines to state a view on any particular request, the interested parties should not interpret that position as indicating that the proposal must be included. In such circumstances, the staff is not taking a position on the merits of the arguments made, and the company may have a valid legal basis to exclude the proposal under Rule 14a-8. And, as has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court.”

(more…)

SPAC activity has enjoyed a healthy uptick in recent years. More SPACs went public in 2018 than in any year since 2007, raising more than $10 billion in capital to deploy towards new investment opportunities. Private equity sponsors are increasingly finding themselves on the opposite side of the table from SPACs as the owner of a portfolio company considering a sale to a SPAC. A sale to a SPAC makes sense for certain portfolio companies, though it does raise certain issues for sellers that do not exist in a regular sale process and there have been some high profile “busted” sales of portfolio companies to SPACs. This article highlights certain key considerations for private equity sponsors in navigating a potential sale to a SPAC.

Is your Portfolio Company a Suitable Candidate for being a Public Company?

A sale to a SPAC is fundamentally an alternative to an IPO in terms of an exit strategy for your portfolio company. Like an IPO and unlike a regular way sale process it is unlikely you will be able to cash out 100% of your equity stake in the sale. You will therefore need to determine that your portfolio company is a suitable candidate for the public trading markets and that there will be enough investor support so that the company will trade well and allow you to sell the remainder of your equity stake in the company at an attractive valuation. Selling to a SPAC will also require that your company satisfy certain public disclosure requirements as part of the approval process for the transaction, akin to the level of information disclosed in an IPO prospectus, which includes preparing financial statements that meet certain SEC requirements.

(more…)

[On Sept. 11, 2019], Institutional Shareholder Services Inc. (ISS) announced the results of its 2019 Global Policy Survey (a.k.a. ISS 2019 Benchmark Policy Survey) based on respondents including investors, public company executives and company advisors. ISS will use these results to inform its policies for shareholder meetings occurring on or after February 1, 2020. ISS expects to solicit comments in the latter half of October 2019 on its draft policy updates and release its final policies in mid-November 2019.

While the survey included questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fell into the following categories: (1) board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding; (2) board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role; (3) compensation; and (4) climate change risk oversight and disclosure. We previously provided an overview of the survey questions.

The ISS report distinguishes responses from investors versus non-investors. Investors primarily include asset managers, asset owners, and institutional investor advisors. In contrast, non-investors mainly comprise public company executives, public company board members, and public company advisors.

(more…)

Three recent Delaware Court of Chancery appraisal decisions offer a wealth of guidance not only regarding the determination of a merger partner’s fair value, but also regarding elements that potentially undermine a quality sale process and strategic considerations for litigating valuation and sale process issues.

Statutory appraisal litigation, initiated after virtually every sizeable merger, requires the Delaware Court of Chancery to determine the fair value of a target company’s shares, exclusive of any merger-created value, as of the effective date of the merger. Though the appraisal statute broadly empowers the Court to consider “all relevant factors” in determining fair value, the Delaware Supreme Court has clarified the particular importance of certain market-based factors, namely, unaffected market price and merger consideration. Though the unaffected market price is an “important indicator” of fair value (so long as the stock is trading in an efficient market), deal price that is the product of “a robust market check will often be the most reliable evidence of fair value[.]”

(more…)

As US public companies and their audit committees maintain an almost decade-long trend of increased voluntary disclosures to shareholders about audits, it’s clear that rigorous oversight of public company audits by independent audit committees helps protect investors, and disclosing information about that oversight process contributes to investor confidence.

Many investors, regulators and other stakeholders share the view that increased transparency regarding the audit committee’s oversight process builds investor confidence. [1]

EY’s Center for Board Matters (CBM) measured this trend in its eighth annual assessment of voluntary disclosures by Fortune 100 companies relating to the important audit oversight role carried out by audit committees.

To help raise awareness of the audit, and audit committees’ important role in the audit process, the CBM seeks to shed light on the types of information about the audit available to investors—beyond disclosures required by laws or regulations—and how the availability of information is increasing.

To carry out this assessment, CBM has reviewed the proxy statements of Fortune 100 companies to compare audit-related disclosures from 2012–19, providing a clear view of trends.

(more…)

Today’s equity crowdfunding is a sucker’s game. It’s no wonder. The prospect of allowing the general public—widows, orphans, grandmothers, and all—the chance to invest in private companies for the first time in eighty years understandably spooked the powers that be. First Congress and then the SEC in turn layered requirement after requirement on crowdfunding companies seeking to raise money from the public capital markets. The result, unfortunately, is a burdensome compilation of regulations that is widely regarded as not being worth the effort, especially when companies can raise at most only $1.07 million for their troubles.

Regulation CF almost certainly does not reflect the investor protections that market forces on their own would require from companies seeking funding. But, of course, that’s sort of the point—at least since 1933, the government has always dictated what investor protections (largely disclosure based) firms seeking public money should provide. What would the market for investor protections look like without the interpolation of government regulation? In the past, the answer to that question could come only from speculation. Yet if we could look to actual market demands, we might discover more effective investor protections than what legislators and bureaucrats dream up. Coupling such market-tested protections with raising the cramped amounts ceiling might well rescue equity crowdfunding from its current irrelevancy.

(more…)

The debate regarding the adoption of sustainable governance principles has reached a crescendo. This debate started with whether corporate boards should factor Environmental, Social, and Governance (“ESG”) and similar sustainability concerns into their decision-making process. That debate is fairly settled. Boards should. The debate has since shifted to whether the dominant shareholder primacy model embraced by Delaware should be replaced by a stakeholder governance model as a proxy for ESG initiatives.

Under existing Delaware law, a board of directors can—and many times should—consider ESG factors in their efforts to prioritize shareholder value. That a board of directors is protected in approving ESG initiatives with the potential to promote shareholder value, however, is not enough. The board also needs investor support. If desiring to adopt ESG initiatives, a board could develop meaningful relationships with the company’s long-term shareholders—including permanent investors such as mutual funds and ETFs. Indeed, many of these long-term shareholders are increasingly issuing ESG policy statements and committing to long-term stewardship principles. There is thus a growing overlap between long-term shareholders on one hand and stakeholders more broadly on the other to create sustainable value. And that value creation squarely fits within the current shareholder primacy model. No change to a stakeholder governance model is needed.

(more…)