The last six months have been marked by profound changes in how we live and interact with one another. The COVID-19 pandemic has cast a spotlight on societal inequities and racial injustice and reinvigorated dialogue around sustainability and environmental reform. While lawyers have long engaged with corporate governance and more specifically ESG-related issues, the dialogue on those issues has recently focused sharply on the role of the corporation and the extent to which corporations should consider stakeholder interests other than stockholder pecuniary gain.
In this post, we take a closer look at online insurer Lemonade, Inc.’s successful July 2 … Read more
On July 23, 2020, the Commodity Futures Trading Commission (CFTC or Commission) voted 3-2 to approve a final rule (Final Rule) on the cross-border application of certain swap provisions under the Commodity Exchange Act (CEA).1 The Final Rule represents a significant rulemaking implementing Title VII of the Dodd-Frank Act.
Chairman Heath P. Tarbert said the Final Rule “provides critically needed regulatory certainty to the global swaps markets” and “properly balances protection of our national interests with appropriate deference to international counterparts.”2
In 2010, the Dodd-Frank Act amended the CEA to create a new regulatory framework for swaps. Congress added … Read more
On July 22, the SEC finalized a sweeping rule change to enhance the transparency around the role of proxy advisers. This follows an earlier proposal to reform the process for including shareholder proposals in a company’s proxy statement. These developments may give companies more ammunition against shareholder activism, while also highlighting the lack of transparency in the relationship between shareholders and companies. Even though the new rules address proxy advisers, it sets the stage for a closer look at how asset managers handle their relationship with corporations.
Virtually every large asset manager relies on proxy advisers in deciding how … Read more
Last August, the Business Roundtable (an organization of around 200 corporate CEOs) announced it was amending its Principles of Corporate Governance to eliminate the statement that the “primary purpose” of a corporation was to serve its shareholders. The CEOs wanted to reconcile the statement of principles to what they felt they actually do – namely, balance the interests of a number of corporate stakeholders, including customers, employees, suppliers, and communities.
The amendment reinvigorated the “shareholders vs. stakeholders” debate. The shareholder wealth maximization absolutists, like Professor Stephen Bainbridge at UCLA and a number of op-ed columnists at the Wall Street Journal… Read more
The coronavirus may have ended the office era. Even though governments allowed businesses to reopen, few workers have returned to offices. It is not clear how many will ever return. Tech giant Facebook, for example, plans to shift up to half of employee to remote work arrangements. Adjusting to this new normal requires firms to revisit and revise many practices and processes.
One of the most essential processes in corporate life is “onboarding” new directors: preparing them for their role at the company through a strategic process. Some analysts have even asked whether it is possible to onboard … Read more
The COVID-19 pandemic of 2020 – as well as government orders to contain it – have prevented countless people, babysitters to basketball players, from fulfilling their contracts. Are all of these parties legally liable for breaching their contracts? Or are they excused due to this extraordinary event? What about payments made in advance, such as tickets bought for a concert that has now been canceled, or a dorm room leased at a college that is now closed?
This coronavirus is new, but wars, floods, and even other pandemics have upset innumerable contracts over the years. In response, our courts … Read more
To many, the core securities laws on disclosure, fraud, and insider trading are desirable from an investor-protection perspective. But the dominant law and economics view is dubious of this thinking. Under this view, securities prices are discounted to reflect obstacles to the cash flows investors expect to receive, thereby preserving the returns those investors would expect even absent those obstacles. Information asymmetry in the stock market presents such an obstacle, and is therefore addressed by such a discount. Private ordering thus saves the day.
In Marginal Benefits of the Core Securities Laws, I aim to shed more light on … Read more
Interest in the environmental, social and governance (ESG) policies of companies and their impact on the wider community has continued to increase amongst institutional investors, retail shareholders and the media during the first half of 2020. The COVID-19 pandemic and the Black Lives Matter movement have both resulted in the “S” in ESG becoming rapidly more important as companies seek to reaffirm their public image in response to such events, defying any concerns that ESG issues would fall to the wayside at the onset of an economic crisis. In this article, we review some of the key ESG developments and … Read more
In my new paper, I explain how the creation of responsible artificial intelligence (AI) can address why women and under-represented minorities have a difficult time gaining a foothold in male-dominated industries. This is an especially important topic today as companies may hesitate to use AI because they fear that it may create discriminatory outcomes.
The ability of job applicants to submit materials online can leave employers with far more information than they need, giving rise to new technological methods for screening applicants. However, some companies have gone further by creating AI programs to not only screen resumes and cover letters, … Read more
As we approach the first anniversary of the Business Roundtable’s abandonment of shareholder primacy and embrace of stakeholder governance, and the fourth anniversary of our development for the World Economic Forum of The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, we thought it useful to consider in broader context the key issues of corporate governance and investor stewardship today. While there is no universal consensus, the question underlying these issues can be expressed as: What is the corporation trying to achieve? What is its objective… Read more
Shareholder action is restricted to a binary choice, a decision that requires a “yes” or a “no.” For example, shareholders may be asked whether or not to participate in a tender offer, redeem SPAC shares, exercise preemptive rights, or approve a proposed shareholder resolution.
My forthcoming article, The Case for Non-Binary, Contingent, Shareholder Action, challenges this limited binary regime and calls for amending the law so that shareholders could act contingently, thus allowing more nuanced decisions. They could incorporate relevant information without having to rely on costly disclosure rules and condition their actions on the acts of others, such … Read more
Investments in private companies by way of share purchases from existing shareholders (secondary transactions) raise a unique set of complexities, which are often overlooked. Share issuances in company-led financing rounds (primary issuances) grab most of the headlines. However, secondary transactions present important opportunities for purchasers and paths to exit for existing shareholders, and they often mark a milestone for the company itself. At the same time, a purchaser can feel that it must walk a tightrope to diligence and structure and complete a secondary transaction – although, upon closer review, there is often significant room for negotiation and … Read more
On July 31, the IRS and Treasury proposed regulations (the “Carried Interest Regulations”) on the taxation of carried interest under Section 1061 of the tax code. Section 1061 was added to the tax code as part of the 2017 tax reform legislation and generally provides that capital gain allocated under certain carried interest arrangements is eligible for the favorable 20% U.S. federal income tax rate only if the underlying asset was held for more than three years at the time of sale.
The Carried Interest Regulations are, on the whole, consistent in most respects with the manner in which most … Read more
Over the last few years, misbehavior of corporate executives like Harvey Weinstein, Steve Wynn, Leslie Moonves, and Elon Musk has outraged many people around the world. The misconduct has ranged from the inadvisable to the unethical to the criminal. Almost all of it – when made public – has damaged the executives’ public reputations, diminished the value of their companies’ stock, and raised some serious legal and policy issues.
My recent article, Executive Private Misconduct, in The George Washington Law Review examines this convergence of private lives and public consequences of executive misbehavior. The article puts the legal issues … Read more
Climate change, economic insecurity and inequality, and worries that some companies and industries have grown too large, concentrated, and powerful have heightened concern about whether business entities conduct themselves in society’s best interests. The profound human and economic harm of COVID-19 will only deepen concern about whether our corporate governance system is working well for the many or instead subordinating the interests of employees and society to please the stock market. As a result, we are witnessing an increased demand that corporations, and the institutional investors who control the bulk of their stock, respect the best interests of society and … Read more
Both formal and informal institutions affect economic behavior in important ways, as economist Douglass C. North explained in his 1993 Nobel Prize lecture. Formal institutions include laws and regulations, and informal institutions include culture and norms. In a recent study, we explore the effect of social capital, an informal institution, on corporate innovation.
Social capital consists essentially of the shared values and social networks that create trust, enhance cooperation, and facilitate transactions within a given community. In a newly accepted paper at Journal of Corporate Finance, we provide evidence that social capital can also facilitate contracting for innovation within a … Read more
The increasing use of financial technologies (FinTech) by market participants has fostered a discussion among public authorities on the use of similar technologies for regulatory (RegTech) and supervisory (SupTech) purposes. Innovative technologies could also be applied to crisis resolution: the use of one or more resolution tools by a public authority to manage the failure of banks and financial firms in an orderly way. However, the features and market dynamics of resolution differ from those of RegTech and SupTech: There is little market incentive for the private sector to foster innovation in the area of crisis resolution. That is mainly … Read more
On July 16, 2020, Delaware’s Governor signed House Bill 341 (the “Amendments”), amending key provisions of Delaware’s General Corporation Law (“DGCL”). Among other things, the Amendments modify existing statutory provisions governing boards of directors’ power to adopt emergency bylaws, address other emergency board powers and effect changes to provisions enabling the indemnification of corporate officers. Except as noted below with respect to emergency powers, holding company mergers, the change to the definition of “officer” in DGCL § 145(c) and appraisal rights, the Amendments became effective on July 16, 2020.
Overview of Signficant Changes
- Adoption. DGCL §110, which
… Read more
While the obstacles women face in moving up the organizational hierarchy (captured in the popular metaphor of the “glass ceiling”) have been well studied, much less attention has been paid to understanding the circumstances women face after they reach senior managerial positions. This omission is notable because senior managers are in a different category from other employees: They tend to have substantial work histories and social and industry networks that could largely shield them from gender bias. Yet, it may be precisely in the context of leadership and authority that gender bias might be most evident.
We examine gender differences … Read more
The Office of the Comptroller of the Currency (the OCC) issued an interpretive letter (the Letter) confirming that national banks and federal savings associations (together, banks) may provide cryptocurrency custody services. This Letter is the latest in a series of actions taken or announced by Acting Comptroller Brian Brooks to clarify how traditional banking regulations apply to modern fintech activities.
Banks have provided safekeeping and custody services for a broad range of customer assets for centuries. The Letter clarifies that cryptocurrency safekeeping and custody activities are a modern version of these traditional banking activities that … Read more
On April 2, China’s Luckin Coffee announced that some of its employees, including the chief operating officer, had fabricated over $300 million in reported revenues. On April 21, the Securities and Exchange Commission and the U.S. Public Company Accounting Oversight Board alerted investors that firms based in “emerging markets, including China,” often do not satisfy the auditing standards normally met by firms traded on U.S. exchanges. In May 2020, the Nasdaq Stock Market ordered Luckin to delist and proposed stricter listing requirements for firms based in markets that restrict U.S. regulators’ access to information. Concurrently, the U.S. Senate enacted, and … Read more
ISS and Glass Lewis have arrogated to themselves the power to make law, promulgating a civil code of astounding breadth and detail, ruling over decisions on board composition, director qualifications, term limits, majority voting standards, executive compensation, capital structure, poison pills, staggered boards, the advisability of mergers, spin-offs and recapitalizations, and, increasingly, ESG policies ranging from animal welfare to climate change, diversity, data security and political activities. They enforce this civil code by advising their clients, institutional investors with huge, varied and increasingly concentrated holdings across the economy, to vote against proposals or against directors if any aspect of the … Read more
On July 10, the Securities and Exchange Commission (SEC) proposed a 35-fold increase – from $100 million to $3.5 billion – in the threshold for requiring institutional investment managers to publicly report their equity holdings on Form 13F. This is a remarkable development at a time when issuers and large sectors of the market are demanding more, not less, transparency from investment managers, particularly activist hedge funds.
Section 13(f) of the Exchange Act was adopted by Congress in 1975 and requires an institutional investment manager to file a report with the SEC if it exercises investment discretion over accounts … Read more
In a new paper, “Protecting Contract’s Hidden Parties,” I argue that harm to third parties from supply chains offers a compelling reason for requiring human rights due diligence in supply chains. Many scholars have turned to fiduciary duties or negligence theories to create incentives for companies to consider non-shareholder interests. My article shares this objective but takes a different path by examining a corporation’s duties to others in its role as a contracting party. This analysis can help to address human rights violations in supply chains and may also have implications for third-party harms arising in other types of contracts.… Read more
The economic consequences of the COVID-19 pandemic have upended countless budgets for 2020 and rendered long-term forecasts speculative at best. By now, most companies providing financial guidance have withdrawn it. Uncertainty abounds.
All the while, investors, proxy advisors, and other constituencies continue to demand pay-for-performance. Media and critics of executive compensation are culling through filings in search of companies taking actions that could be perceived as friendly to executives at the expense of stakeholders that may run counter to a strict pay-for-performance philosophy. Common modifications that may be taken in the current market to set more reasonable financial goals for … Read more
COVID-19 has led companies to patch-up financial reporting by adding estimates of pre-COVID-19 profits to their EBITDA. Recently, COVID-19 prompted measuring-equipment manufacturer Schenck Process, for example, to add back €5.4 million, resulting in an adjusted EBITDA of €18.3 million (termed, unsurprisingly, as ‘EBITDAC’ ). This may spark other U.S. corporations to use an EBITDAC metric in initial public offerings, which may result in litigation under Section 11 of the Securities Act of 1933 (Securities Act) over alleged omissions or material misstatements. This post seeks to analyze the use of EBITDAC against the civil liability provisions of Section 11 … Read more
The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The coronavirus pandemic and resulting recession, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies by the Business Roundtable, the World Economic Forum, the British Academy, BlackRock, Vanguard, State Street and other investors and asset … Read more
Fintech firms, once perceived as disruptors of the traditional banking industry, are now increasingly seen as attractive partners for established financial institutions. Partnership arrangements between banks and new financial technology startups have therefore mushroomed over the last several years. Such partnership agreements, which come in different forms and contexts, are usually advantageous for both sides: Banks may ordinarily suffer from legacy issues and cumbersome internal processes, and therefore benefit from fintech firms’ superior technology to develop new business ideas. At the same time, a bank’s broad customer base may allow a startup to benefit at an earlier stage from economies … Read more
Updates in the past two months to voluntary ESG disclosure frameworks raise questions for companies about these overlapping and arguably competing standards.
GRI Launches Sector-Specific Disclosure Framework
On July 8, 2020, the Global Reporting Initiative (GRI) published an initial draft of a standard for ESG disclosures for the oil & gas industry. The draft, open for public comment until October 6, 2020, marks the first sector-specific ESG disclosure framework created by GRI, which, unlike the Sustainability Accounting Standards Board (SASB), has before now provided only a uniform framework for all industries.
The GRI sector program, currently in its pilot … Read more
In 1985, the Delaware Supreme Court, in Unocal Corp. v. Mesa Petroleum Co., held that the “omnipresent specter” of a conflict of interest sufficiently clouds judicial review of anti-takeover measures to require application of enhanced scrutiny. Notably, the court essentially took judicial notice of the inherent nature of the conflict that “of necessity” confronts the directors in these cases. Thus, the court delayed application of the deferential business judgment rule until directors could satisfy the court that a threat to the corporation existed and that adopted anti-takeover devices were reasonably related to the perceived threat.
Today, political divisiveness … Read more
On July 10, 2020, the Securities and Exchange Commission (the “SEC”) proposed changes that would substantially reduce the number of investors required to file quarterly reports showing their holdings of U.S.-listed equities on Form 13F. The SEC’s proposal would increase the 13F reporting threshold 35 fold — from $100 million to $3.5 billion — and eliminate the ability to exclude de minimis positions from reporting on Form 13F. According to the SEC, almost 90% of the investment managers who file a Form 13F today would no longer be required to do so. However, the SEC’s data … Read more
Experienced litigators know that an adverse appellate decision (even from the U.S. Supreme Court) rarely ends their case. The question is instead: What is the next move? What defenses do we fall back on? So it is likely to be with Liu v. SEC, which, by an 8-1 margin, resolved that the SEC does have the authority to order disgorgement. Still, the Court subjected this authority to the important qualifications that: (1) the ill-gotten gains consist only of the net gains (with all “legitimate expenses” being deducted); (2) the recovery is returned to the injured investors (and thus not … Read more
On July 16, 2020, the Court of Justice of the European Union (CJEU) struck down the EU-U.S. Privacy Shield as a valid mechanism for transferring personal data from the European Economic Area (EEA) to the United States (Schrems II). The European Commission Standard Contractual Clauses (SCCs) for data transfers remain valid but are subject to increased due diligence on the part of data exporters to ensure that the privacy laws of the importing country are adequate. Below, we discuss the background to Schrems II, the judgment itself and key takeaways.
In 2013, Austrian privacy activist Max Schrems filed a … Read more
Three catalysts are causing a fundamental reorientation of domestic and international monetary and payment systems: Facebook’s Libra, China’s central bank digital currency (the Digital Currency / Electronic Payment (DCEP) system), and the COVID-19 pandemic. These catalysts stand in stark contrast to all previous disruptions and are the focus of our new paper.
First, and crucially, each catalyst is likely to have a systemic effect on domestic and international payment systems. Second, all three systemic catalysts are operating concurrently. Third, all three are mutually reinforcing – developments and regulatory changes affecting one will often directly affect the others.
While Bitcoin … Read more
Even in the best of times, corporate leaders gripe about the cost of government regulations. An average hedge fund spends more than 7 percent of its total operating costs on various forms of compliance. For the banking industry, compliance expenses are estimated at $270 billion –10 percent of operating costs. In my paper, “Regulations as Automatic Stabilizers,” I show that regulations have a critical economic benefit: More heavily regulated companies fare significantly better during extreme economic downturns. In other words, regulations are automatic stabilizers during economic downturns. What is more, regulations do not negatively affect firm performance during … Read more
The Delaware Supreme Court’s recent decision in Fir Tree v. Jarden marks an important milestone in the law of appraisal, making clear that unaffected market price can and should be decisive in some appraisal actions. Because the court’s opinion relied on the proposed methodology we advocated in our recent article, Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets, published in the 2019 edition of the Business Lawyer,  we here offer some observations about the Jarden opinion and the future of the law of M&A appraisal.
Jarden involved the not-so-uncommon situation where an acquirer … Read more
Following their January publication of Draft Vertical Merger Guidelines (draft guidelines) for public comment, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) (collectively, the agencies) issued final Vertical Merger Guidelines (Guidelines) on June 30, 2020.1 This marks the first official guidance update on vertical mergers from either of the agencies since the Non-Horizontal Merger Guidelines were published by the DOJ in 1984 (1984 guidelines),2 and the first time that the agencies have jointly issued vertical merger guidance, albeit over the continued objection of two FTC commissioners.
The new guidance aims to provide merging parties and their counsel … Read more
From its February 2020 peak to a March 2020 trough, the S&P 500 index fell 34 percent. This fall was accompanied by extreme volatility, at a level last seen during the global financial crisis. Invariably the selloff was accompanied by media speculation about the onset of another Great Depression. However, the incidence of COVID-19 cases during most of this selloff was not yet at extreme levels, as evidenced by Exhibit 1 below.
Exhibit 1: S&P 500 index and incidence of global COVID-19 case counts, as reported by the Johns Hopkins COVID-19 dashboard. Source: Bloomberg.
So what drove the precipitous market … Read more
Notwithstanding the impact of COVID-19 on the global economy and market participants, from the perspective of regulators, working groups and industry leaders, the anticipated cessation of the London Interbank Offered Rate (“LIBOR”) remains the end of calendar year 2021. Indeed, the UK Financial Conduct Authority (“FCA”) has confirmed this 2021 deadline. The Bank of England (“BoE”) has explained that that the global market volatility caused by COVID-19 highlights the need to shift away from LIBOR, pointing out that LIBOR rates rose as central bank policy rates fell, reflecting low activity for the LIBOR market.
While the worldwide … Read more
The global financial crisis highlighted the interconnectedness of international financial markets and the risk of contagion it posed. The crisis also emphasized the importance of supranational regulation and regulatory cooperation to help address and ameliorate that risk.
Yet, although capital flows are global, securities regulation is not. As a 2019 report by the International Organization of Securities Commissions (IOSCO) notes, the regulatory challenges, which were revealed so starkly during the global financial crisis, have by no means dissipated over the last decade. According to IOSCO, lack of international standards, or differences in the way jurisdictions implement such standards, can lead … Read more
The COVID-19 pandemic has created significant financial distress for many businesses and there have been a number of bankruptcy filings recently, with more likely on the horizon. As a result, there is likely to be an increase in acquisitions of companies or assets out of bankruptcy. Companies considering bankruptcy sale-transactions need to consider the structure that best suits their needs—e.g., a “363 sale” offering a separate sale process and potentially speed, or a sale as part of the plan of reorganization or liquidation plan, which allows for the sale to be incorporated into the plan process. It also … Read more
In corporate democracy, the default system for electing directors is voting, but shareholders are free to commit their votes by contract. In private companies, shareholders routinely do so, using shareholder agreements – contracts among the owners of a firm – to bargain directly over directorships and other rights of control. In recent years, disputes involving these agreements have increasingly appeared before Delaware’s courts. In late 2019, the Delaware Supreme Court issued a controversial decision addressing whether the parties to a shareholder agreement together formed a controlling shareholder and holding that, in this case, they did not. Economists and legal scholars, … Read more
In the public imagination, Wirecard was Germany’s biggest tech company success story – a €24 billion high-growth payment processor doing deals across the globe and pioneering new technologies. While naysayers complained about its opaque corporate and financial practices and raised doubts about its business model, most observers admired its nimble approach to surmounting regulatory barriers to international expansion. In a world intoxicated by companies with unlimited growth prospects, it was a winner.
The reality was much different. Most of Wirecard’s reported business didn’t exist. And the company hadn’t made any money in years. How could something like this happen in … Read more
The past six months have been marked by a profound upheaval that has accelerated the growing focus on both the purpose of the corporation and the role of the board in overseeing and leading the corporation in ways that promote sustainable business success. For a number of years, there has been a growing sense of urgency around issues such as climate change, environmental degradation, globalization, workplace inequality and the need to keep pace with rapidly evolving technologies. Then, in recent months, the COVID-19 pandemic prompted a systemic shock, which has been accompanied by a long overdue awakening regarding endemic racial … Read more