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What Should We Do About ChatGPT?

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Almost everyone seems to be talking about ChatGPT. This new AI-enabled chatbot, which can swiftly produce answers that feel as if a human wrote them, promises to revolutionize how we generate text. Although ChatGPT emerged just a few months ago, it is already causing turmoil across various fields. Microsoft embedded it into their Bing search engine. Google declared a “code red” and tried to introduce a competing bot. Universities are rethinking how to evaluate student performance, as ChatGPT can apparently pass exams in law, business, and medicine.

Despite the hype, ChatGPT is not perfect. It is prone to inaccuracies and … Read more

ISS Discusses Big EU Changes to Corporate Governance

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The rationale behind a number of recent EU legislation changes focusing on corporate governance has been to prioritise a long-term focus on governance through various transparency measures as well as some concrete requirements for action, and on allowing shareholders and other stakeholders to be well informed. This is evident in the revised Shareholder Rights Directive adopted in 2017, and also in the most recent legislative initiatives discussed in this review. The Corporate Sustainability Reporting Directive and the proposed directive on Corporate Sustainability Due Diligence revise current obligations and introduce new ones under EU law regarding company disclosure and corporate governance … Read more

Poison Pills in the Shadow of the Law

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Poison pills are one of the most powerful deterrents to hostile takeovers, making a takeover so unattractive and expensive that a potential acquirer declines to pursue it. A pill typically works by triggering the issuance of new shares to “old” shareholders when a hostile takeover threat arises, thus diluting the acquirer’s stake and making the acquisition unviable.

In the four decades since its invention, however, the pill has  sparked many debates about its benefits and drawbacks and particularly its impact on the adopting firm’s value. Though the pill’s deterrence of hostile takeovers may seem beneficial at first glance, a hostile … Read more

SEC Chair Gensler Speaks on Requirement to File Electronically

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Today [March 22], the Commission is considering a proposal under the Exchange Act to require broker-dealers and other registrants to submit forms electronically. I am pleased to support this proposal because, if adopted, it would advance the Commission’s efforts to modernize filing for a wide range of registrants.

We live in a digital age—paper certificates for U.S. treasuries have long been a thing of the past. Our markets and business models have been transformed by electronic trading, the cloud, artificial intelligence, and predictive data analytics. In 2023, one might think that all filings to the Commission already could be made

… Read more

Shadow Trading, Corporate Investments, and Macroeconomic Risk

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Corporate insiders engage in “shadow trading” when they use private information about their own firm to trade in the shares of economically connected companies such as suppliers, customers, or competitors. While legal scholars have long recognized that shadow trading can be profitable, SEC v. Panuwat (a recent case in which the head of business development at a pharmaceutical company traded in the stocks of a competitor) has reinvigorated the debate on the consequences of shadow trading and the extent to which it ought to be regulated.  We investigate these issues in a pair of forthcoming papers. In the first paper… Read more

Debevoise & Plimpton Discusses the Mindbody Problem

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Private equity sponsors compete ferociously for acquisition targets, with one of their principal tools being the speed with which they can move. A recent decision of the Delaware Court of Chancery (In Re Mindbody, Inc., S’Holder Litig., C.A. No. 2019-04420KSJM (Del. Ch. March 15, 2023)) explores the risks to a target company’s management of giving a private equity sponsor pole position in a sale process, as well as the risks to the sponsor itself from pursuing an inside track. The case illustrates that Revlon is alive and well in Delaware, while also adding to the cases suggesting that … Read more

John C. Coffee, Jr.: The Indicting of Trump and How to Avoid the Pitfalls

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The indictments of Donald Trump have begun to come down. New York will be first, but Special Counsel Jack Smart in Washington and the district attorney in Fulton County, Georgia, (Fani Willis) could follow shortly.

Lest there be any doubt, this post is written by someone who believes that the rule of law requires that Donald Trump face prosecution. But that does not imply that the prosecution will be a slam dunk or that Trump does not have defenses on which prosecutors have not yet fully focused. In particular, much may depend on how prosecutors frame their charges. This post … Read more

Davis Polk Discusses a New Front in M&A Litigation

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Plaintiff stockholder litigation against announced M&A deals continues to be a common feature of the U.S. M&A landscape, despite the prevalence of forum selection bylaws, the demise of disclosure only settlements and general skepticism by the Delaware courts.  Over the last 18 months, however, plaintiff stockholders have opened a new line of attack by claiming that discussions and negotiations of support agreements to vote or tender in favor of a merger, and rollover agreements (at times requested by private equity sponsors), trigger Section 203 of the Delaware General Corporation Law.

What is Section 203?

Section 203 is an antitakeover statute … Read more

Financial Institution Innovation Needed in Silicon Valley

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The failure of Silicon Valley Bank to find a buyer opens up the possibility (and the need) for a new kind of bank that is focused on financial stability as well as the traditional banking functions of lending and running payment systems.  The distinctive elements would be (1) deposit commitments with a penalty for early withdrawal and (2) mutual stock ownership by depositors that zeros out upon early deposit withdrawal.  Better than money market funds, this kind of bank would address the problem of enormous sums looking for safe storage within the financial system.

The general problem is that there … Read more

Shearman & Sterling Discusses Personal Liability in UK of Directors for Climate Strategy

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In a potentially precedent-setting case, 11 directors of global energy company Shell Plc (formerly Royal Dutch Shell Plc) [1] are being sued in their personal capacity over the company’s energy transition strategy. The claim, which has been filed in the English High Court, alleges that the strategy is “fundamentally flawed” and puts the global energy company at risk as the world transitions toward net zero, in breach of the directors’ fiduciary duties to the company.

The claim is brought by non-profit organization ClientEarth, and is supported by a group of institutional investors collectively holding more than 12 million Shell shares … Read more

Financial Stability Board Should Rethink Its Agenda on Non-Bank Financial Intermediation

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Non-bank financial intermediation (NFBI) – encompassing a broad range of capital sources, including broker-dealers, private funds, and open-end funds (OEFs) – is vital for the financing of the real economy, serving as a critical complement to the traditional banking sector. NBFI is generally most active in jurisdictions, like the United States, with robust capital markets that power investment in large and small-and-medium sized enterprises and which have high levels of retail and institutional investor participation. Given the importance of NBFI, the Financial Stability Board (FSB) – an international body composed of the world’s most important finance ministries, central banks and … Read more

Wachtell Lipton Discusses Larry Fink’s Annual Letters to Investors

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For more than ten years, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, has published separate annual letters — one to CEOs and another to BlackRock’s shareholders. This year, Fink combined the two letters into one to underscore that in serving its clients, BlackRock has also created value for its shareholders — a demonstration of stakeholder capitalism at work.

As we recently explained, major asset managers such as BlackRock play a critical role in supporting companies as they seek to fulfill their fundamental purpose of pursuing long-term, sustainable value creation. Central to this mission is … Read more

Do Companies Take Remedial Actions After Socially Irresponsible Behavior?

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Companies involved in scandals often suffer damage to their reputations from media, consumer, or investor criticism For instance, notable oil spills, from Exxon’s 1989 Exxon Valdez disaster to BP’s 2010 Deepwater Horizon debacle, resulted in both hundreds of millions of dollars in direct regulatory penalties and short-term stock market losses (Länsilahti 2012), substantial longer-term losses of reputational capital, (McGuire, Holtmaat, and Prakash 2020) and punitive legislation. The reputational consequences of socially irresponsible corporate actions may also escalate in light of a recent increase in investors’ interest in environmental, social, and governance (ESG) issues.

However, little … Read more

SEC Chair Gensler on Recent Bank Failures, Enhanced Cybersecurity for Market Entities

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Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on March 15th, 2023. I want to welcome members of the public who are listening in.

Before we get to today’s agenda, I want to address the events of the last week in the context of (1) enforcement and (2) market stability.

As to enforcement, as I said over the weekend: Our staff is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly. Without speaking to any individual entity or person, we will investigate

… Read more

How Changes to Form 8-K Disclosure Rules Affect Corporate Innovation

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Studies have shown that the disclosure of information can affect a company’s technological innovation in different ways, depending on how complete or timely it is. The complete disclosure can promote innovation by making capital providers more receptive to providing financing, reducing the likelihood that managers will be fired for poor innovation output, and disciplining managers during R&D project implementation. The timeliness of disclosure can undermine innovation by creating  managerial myopia that can cause under-investment in R&D. Since completeness and timeliness are valuable to investors and encouraged by accounting-standard setters, we investigate whether disclosures that have both characteristics are good or … Read more

Floating Forum Selection Clauses

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Most forum selection clauses refer specifically to the courts of a particular jurisdiction. Floating forum selection clauses are different.  A floating clause does not reference any court by name. Instead, it ties the choice of forum to a mutable fact that can change after the contract is made. The possibility that the identity of the chosen forum can change between the time of signing and the time of litigation explains why these provisions are described as “floating.”

This post first explains why a company might choose to write a floating forum selection clause into its contracts. It then examines when … Read more

Activist Shareholders in Corporate Governance: Lessons from Australia

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Much of the debate about activist shareholders is informed by experience in Northern Hemisphere markets, particularly the United States. In my recently published book, I examine the topic from an Australian perspective.

Australia is ideal for exploring shareholder activism for several reasons. It has a substantial share market, and its pensions and fund management industries are some of the largest in the world and own a considerable proportion of Australian listed equities. Australia’s public companies tend to have an ownership structure that is conducive to activism because of a low incidence of controlling blockholders. Australia also provides shareholders with generous … Read more

Davis Polk Discusses New DOJ Clawback, Messaging, and Monitorship Guidance

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This month brought additional guidance from DOJ, this time the much-anticipated compliance guidance on compensation structures to incentivize compliance and the use of personal devices and messaging apps to engage in business communications. The guidance was announced by the Deputy Attorney General (DAG) Lisa Monaco at the ABA’s 38th Annual National Institute on White Collar Crime. Criminal Division Assistant Attorney General (AAG) Kenneth Polite provided greater detail in his keynote address at the same conference. The guidance comes in two forms: (1) a new Criminal Division three-year “pilot program” that will include clawbacks and compensation structures as requirements … Read more

Rethinking Commercial Law’s Uncertain Boundaries

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In a forthcoming article, I observe that commercial law has uncertain boundaries, challenging the traditional view that commercial law is a separate and distinct body of law. Various provisions of the Uniform Commercial Code (UCC) may be overinclusive, conflicting with provisions of property and contract law. For example, UCC Section 2-510 allocates the risk of losing defective goods in shipment to the breaching party, even if the breach is insignificant and the parties are unaware of the breach when the goods are in transit and regardless of which party owns the goods at the time of loss. The UCC … Read more

Treasury, Fed, and FDIC Issue Joint Statement on Actions Relating to Silicon Valley Bank, Signature Bank

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Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all … Read more

How Public Short Campaigns Harm Product Innovation

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The GameStop short squeeze at the beginning of 2021 has brought attention to a class of short sellers who launch high-profile public short campaigns (PSCs) to talk down a target firm’s stock. These activist short sellers, unlike traditional short sellers who often keep their short positions private, publicly denounce their targets and present evidence of specific allegations, such as accounting irregularities and product deficiencies, or they may simply allege that a target’s stock is overvalued.

The increasing prominence of these activist short sellers prompts debate on what roles they play in the financial market. Critics and, in particular, the management … Read more

The Challenges of Succeeding a Long-Tenured CEO

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Financial theory suggests that a firm with strong corporate governance (e.g., an effective board of directors), keeps a CEO exactly as long as is optimal for the firm. When the firm’s board and other corporate governance mechanisms are ineffective, however, a CEO can stay on longer than is optimal, to the detriment of shareholder value (Brochet et al., 2021).

Theoretical studies (e.g., Casamatta and Guembel, 2010) indicate that a CEO’s decisions affect a firm’s future performance, potentially beyond the CEO’s tenure. However, the empirical evidence for this finding is almost nonexistent. If a long CEO tenure is indeed associated with … Read more

Sullivan & Cromwell Discusses New DOJ Policies for Prosecuting Corporate Crime

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On March 2 and 3, 2023, Deputy Attorney General Lisa Monaco and Assistant Attorney General Kenneth Polite gave speeches announcing new and amended Department of Justice policies and guidance for prosecuting corporate crime. Both sets of remarks—which built on earlier speeches in October 2021 and September 2022—expanded and clarified the Department’s positions with respect to four key areas of criminal corporate enforcement: (1) voluntary self-disclosure; (2) compliance-related compensation incentives; (3) employees’ use of messaging platforms and personal devices; and (4) corporate monitorships. These remarks offer guidance for companies seeking to meet the Department’s revised and expanded expectations pursuant to the … Read more

Do the Old Rules Apply to ESG Ratings and Benchmarks?

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The steady growth of sustainable finance in recent years poses difficult questions on how regulators should approach it. In the European Union (EU), for example, there has been an explosion of new rules aimed at addressing a broad array of concerns about investors’ reliance on the quality of sustainable financial products. In a new paper, we explore one aspect of those products, namely ESG ratings and benchmarks offered by information intermediaries. We address a simple research question: How much should the law on sustainable finance mirror traditional financial law? We also develop two sub-questions: (i) how “new” is sustainable … Read more

Debevoise & Plimpton Discusses ESG and Antitrust

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Companies, banks, insurers and asset managers are increasingly working together within their industries on environmental, social and governance (“ESG”) initiatives to achieve shared goals on climate change, labor rights and other social issues. In the eyes of many, collective action is necessary to move the needle on systemic issues (such as phasing out unsustainable technologies) that individual effort has yet to achieve. As with all collaboration between industry participants, however, ESG initiatives are subject to antitrust laws. Regulators and legislators have recently reinforced this point. Given their focus on this issue, it is important that businesses engaged in joint ESG … Read more

How Litigation Risk Affects Companies’ Liquidity

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Securities litigation has become a major source of risk to businesses. From 2007 to 2016 the number of securities class actions (SCAs) filed each year increased by roughly 70 percent in the U.S. and by 115 percent worldwide (PricewaterhouseCoopers, 2017).

Many studies (e.g., Gande and Lewis, 2009; Hadlock and Sonti, 2012) show that stock prices drop when a firm or its peers are sued. However, a less researched question is how firms respond to a perceived increase in litigation risk (or ex-ante litigation risk). We are particularly interested in the effect of that risk on firms’ liquidity, on which theory … Read more

SEC Commissioner Speaks at Columbia’s Going Public in the 2020s Conference

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Good morning and thank you, [Columbia Law School] Dean [Gillian] Lester, for the introduction. I am honored to speak to this distinguished group of academics, practitioners, and regulators at today’s “Going Public in the 2020s” conference. My remarks reflect solely my individual views as a Commissioner and do not necessarily reflect the views of the full Commission or my fellow Commissioners.

This conference is part of the New Special Study of the Securities Markets (the “New Special Study”),[1] which is an ambitious effort to critically re-think how the securities markets should be regulated in the 21st century. One

… Read more

Fraud-on-the-Market Liability in the ESG Era

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Fraud-on-the-market (“FOTM”) suits are thought to generate considerable benefits for society – namely, those associated with increased stock-market liquidity and price accuracy. But these suits are also said to impose outsized costs. The federal courts have thus long tried to efficiently screen out FOTM claims that do not sufficiently implicate the benefits, even if judges do not always describe their work in these terms.

In Halliburton II (2014), the Supreme Court rejected arguments for shifting the relevant FOTM screening framework to an inquiry into price impact (burden on the plaintiff) rather than on the longstanding inquiry into market efficiency (burden … Read more

Skadden Discusses SEC Guidance on Pay-Versus-Performance Disclosure

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The staff of the Securities and Exchange Commission’s (SEC’s) Division of Corporate Finance recently issued guidance to address open questions related to the final pay-versus-performance (PVP) disclosure rules adopted in 2022. The 15 new Compliance & Disclosure Interpretations (C&DIs) are the first published guidance from the staff on the PVP rules and cover a broad range of topics. While they are helpful in answering a number of open questions, they also raise additional questions of their own and leave a number of other important issues unresolved. Key takeaways from the C&DIs are summarized below.1

PVP Disclosure Outside the Annual

… Read more

Should Labor Abandon Its Capital?

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Public pension funds and labor union funds (together “labor’s capital”) have faced years of criticism from both the left and the right. The current battle between ESG and anti-ESG advocates, and the introduction of legislation at the state level trying to redefine the fiduciary duties of pension trustees, is just the latest round in a series of fights over pensions that go back to the 1970s.

Laissez-faire conservatives and anti-ESGers argue that pensions have become politicized and that pension underfunding threatens taxpayers. They alternate between attacks on what these funds may invest in (by trying to narrow fiduciary duty) and … Read more

SEC Chair Gensler Speaks Before the Investor Advisory Committee

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Good morning. I am pleased to join the Investor Advisory Committee. As is customary, I’d like to note that my views are my own and I am not speaking on behalf of the Commission or SEC staff.

I want to start by welcoming our new Investor Advocate, Cristina Martin Firvida.

I also would like to thank this Committee with regard to one of your recent recommendations. The Financial Accounting Foundation announced recently that it will make the Financial Accounting Standard Board’s accounting standards available to the public at no cost.[1]

I look forward to hearing about your potential recommendation

… Read more

Does Stock Indexing Impede or Facilitate Arbitrage and Price Discovery?

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What is the effect of stock indexing on information arbitrage and the efficacy of the price discovery process? Forty-five years after John C. Bogle, the Vanguard Group founder, launched the world’s first index mutual fund, and 30 years after the debut of State Street’s S&P 500 ETF on Jan. 22, 1993, index investing continues to grow.

The rise of stock indexing has reshaped investing by democratizing access to low-cost passive strategies. Yet, it has also raised concerns that stock indexing impedes arbitrage and degrades price discovery. The conventional argument is that indexing is akin to free riding on other people’s … Read more

Davis Polk Discusses NYSE and Nasdaq Clawback Rule Proposal

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On February 22, 2023, the New York Stock Exchange and the Nasdaq Stock Market released their respective versions of a proposed rule that implements the SEC’s clawback rule mandated by Section 954 of the Dodd-Frank Act. The SEC’s final rule, which was adopted in October 2022 as Rule 10D-1 of the Securities Exchange Act of 1934 (the Exchange Act), directed U.S. stock exchanges to adopt listing standards requiring all listed companies, including foreign private issuers (FPIs), emerging growth companies (EGCs) and smaller reporting companies (SRCs), to adopt and comply with a written clawback policy, to disclose the policy and to … Read more

Using ETFs to Conceal Insider Trading

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On August 17, 2021, the Securities and Exchange Commission (SEC) filed the first lawsuit charging insider trading in an economically related stock. A former employee of Medivation (MDVN, a mid-sized biopharmaceutical company) was charged for trading on confidential information about the acquisition of MDVN at a significant premium. However, unlike a typical case of insider trading, the former employee did not trade shares of MDVN. Instead, prior to the release of this price-sensitive information, the insider purchased short-term, out-of-the-money options in Incyte (INCY), a related mid-sized biopharmaceutical company.

This trading is alleged to have breached MDVN’s insider trading policy and … Read more

ISS Discusses Russell 3000 Boards Becoming More Diverse

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There has been a lot of talk about how to increase racial and ethnic diversity on U.S. corporate boards as well as many initiatives to help nominating committees identify candidates from under-represented groups. To assess the current situation, ISS Corporate Solutions took a look at the diversity trend in the Russell 3000 over five years, with a special focus on Black/African American directors in recognition of Black History Month.

Key Takeaways

  1. For the first time, minority directors occupy more than 20% of board seats among Russell 3000 companies
  2. Black/African Americans saw the highest increase in directorships, a rise of more

… Read more

How a Supreme Court Anti-Bribery Decision Helped Create a Corporate Protection Racket

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On June 27, 2016, the Supreme Court dramatically changed anticorruption law and enforcement in the United States. In McDonnell v. United States, the court reversed the corruption conviction of the former governor of Virginia and considerably constricted the legal definition of “bribery.” As a result, many corruption cases were decided in favor of defendants, and federal and state prosecutors declined to bring many anti-bribery cases that would have been filed pre-McDonnell.

McDonnell represents a unique, exogenous decrease in the probability of corruption enforcement in the United States. In a new paper, we argue that this decrease led … Read more

Skadden Discusses Suit Alleging NBA “Top Shot” NFTs Were Securities

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On February 22, 2023, Judge Victor Marrero of the U.S. District Court for the Southern District of New York issued an order in Friel v. Dapper Labs, Inc., denying Dapper Labs and its CEO’s motion to dismiss a putative securities class action. The court held that, at the pleading stage and accepting all allegations as true, plaintiffs adequately alleged that Dapper Labs violated Sections 5 and 12(a)(1) of the Securities Act of 1933 (Securities Act) by offering National Basketball Association (NBA) Top Shot Moments non-fungible tokens (Moments) without a registration statement. The court also held that plaintiffs adequately alleged control … Read more

The Adani Group Scandal Casts Doubt on the Rule of Law in India

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Sound policymaking has helped India modernize and achieve robust economic growth, positioning it to become an increasingly important player on the world stage. But recent developments – and scandals – show that the government must address some major issues if it wants to sustain India’s global rise. — Nouriel Roubini[1]

As India chairs the G20 meeting in Bengaluru, the country emerges as one of the most economically powerful and politically important countries in the world. However, recent events are casting doubts on its commitment to the rule of law and undermining the trust of global investors.

The latest troubling … Read more

Covington Discusses Corporate Political-Disclosure Shareholder Proposals

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The 2023 proxy season is underway for public companies and their investors. Corporate secretaries, lawyers, and executives are actively engaged in the SEC’s shareholder proposal process. Consistent with recent proxy seasons, a significant number of companies are receiving proposals calling for new or enhanced political disclosures. Although these proposals have been around for some time, recent contentious election cycles, debate over hot-button issues, including the Supreme Court’s 2022 decision in Dobbs v. Jackson Women’s Health Organization, and increased investor focus on ESG matters (as well as criticism of such focus) have cast an ever-increasing focus on disclosure of corporate political … Read more

The Great Startup Sellout and the Rise of Oligopoly

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Startup acquisitions by incumbent firms have been on the rise for the last few years. These acquisitions often allow larger companies to acquire new technologies or talent, while startups gain access to resources and a wider customer base. One notable example is the acquisition of WhatsApp by Facebook in 2014 for a reported $19 billion. WhatsApp was a relatively small startup at the time, with only 55 employees, but had gained immense popularity as a messaging app with over 450 million active users. Facebook saw the potential for growth in messaging and decided to acquire WhatsApp to expand its own … Read more

A Top DOJ Official Speaks on Corporate Enforcement and Compliance

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Thank you, Brian, for the kind introduction. It’s great to be here with all of you. Today, I will share a snapshot of our 2022 enforcement results as well as our policy approach to white-collar and corporate crime.

I have the pleasure of serving as a Deputy Assistant Attorney General, or DAAG, in the Department of Justice’s Criminal Division. In this role, I’m responsible for overseeing the more than 200 prosecutors in the division’s Fraud Section and Appellate Section – both of which play a critical role in the department’s fight against economic crimes.

I’ve devoted the last decade of

… Read more

Why the Poison Pill Is Still Relevant After All These Years – Even in Japan  

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More than 40 years after its invention by lawyer Martin Lipton, the poison pill remains the subject of important judicial decisions and academic debate over corporate governance questions, in both the United States, its country of origin, and Japan, its adopted home. The pill’s development has taken divergent paths in the two countries because of their markedly different corporate governance environments. Yet today, shareholder activism and concern for environmental, social, and governance (ESG) issues may be causing those paths to converge, a possibility highlighted by recent judicial decisions on anti-activist pills in the Delaware courts and the Japanese Supreme Court.… Read more

Davis Polk Discusses SEC Adoption of T+1 Settlement, Effective May 2024

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The SEC adopted a final rule to shorten the standard settlement cycle for most securities transactions from two business days (T+2) to one business day following the trade date (T+1). Many market participants had favored a September 3, 2024 compliance date (falling on the Tuesday after Labor Day) to provide more time to prepare for the transition to the shortened cycle, but the SEC adopted a May 28, 2024 compliance date (the Tuesday after the Memorial Day weekend), an extension of two months from the proposed rule.

The final rule is intended to benefit investors by reducing the credit, market, … Read more

The Determinants and Consequences of Appointing Activist Directors

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In recent years, an increasingly popular strategy among hedge fund activists has been to acquire  seats on the boards of target companies. These board seats are held by what we refer to as “activist directors,” who may be affiliated with the activists or nominated by them. However, obtaining board representation has costs, which include the direct costs of getting board representation and the risk of staking one’s reputation on the company’s future performance. Additionally, board positions come with fiduciary responsibilities to all shareholders, and access to inside information may limit the ability of activists to trade the stock of targets.… Read more

OECD Presents New Research on Corporate Sustainability

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The Organisation for Economic Co-operation and Development (OECD) has published a new report on sustainability policies and practices for corporate governance. It includes a new dataset comparing the main trends and features of corporate sustainability at the global level, as well as the comparative analysis of legal and regulatory frameworks in fourteen jurisdictions (Brazil, India, Japan, Mexico, People’s Republic of China, the United States, among others), with a particular focus on the Latin America region. The report also presents the results of OECD surveys conducted with 275 Latin American companies comprising around half of the region’s market capitalisation and … Read more

How to Reform Our Abysmal Insider Trading Framework 

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The U.S. insider trading framework is a mess.  Principles apply that are inconsistent with one another and that treat similarly situated persons in a disparate manner. In my 2021 book and a forthcoming book chapter, I argue that, rather than piecemeal changes, the U.S. insider trading regimen should be revised to comport with concepts of fairness and to align with the framework of other developed markets.

The key undoing of the U.S. insider trading framework has been the Supreme Court’s rejection of the parity of information and access approaches embraced by lower federal courts, as exemplified by the Second Circuit’s … Read more

Debevoise Discusses Proposed SEC Rule to Prohibit Conflicts of Interest in Certain Securitizations

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On January 25, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued a proposed rule to prohibit material conflicts of interest in the sale of asset-backed securities (“ABS”). The proposed rule is a re-proposal of a rule that was first proposed in 2011 and is required by section 27B of the Securities Act of 1933[1] (the “Securities Act”), a provision added by Section 621 of the Dodd-Frank Act.  As the initial proposal was subject to substantial industry commentary, much of the preamble to the re-proposal is directed at addressing previous comments.  If adopted this time, the proposed rule would … Read more

Comparing Auditors’ and Users’ Materiality Judgments

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Materiality is a ubiquitous concept in accounting and auditing. Accounting and disclosure rules, with few exceptions, are bounded by materiality, meaning that if a matter is immaterial, it is often exempted from the accounting rules. In respect to audits, the auditors’ opinion speaks to whether financial statements are presented fairly in all “material” respects in accordance with an accounting framework. The SEC indicates that a matter is material if there is a “substantial likelihood that a reasonable person would consider it important (SAB No. 99).” Therefore, materiality is fundamentally user-defined, meaning that auditors and accountants have the unenviable task of … Read more

Skadden Discusses Digital Asset Insider Trading Case

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On February 7, 2023, Ishan Wahi (Ishan), a former Coinbase product manager, pled guilty to wire fraud charges in an indictment in the U.S. District Court for the Southern District of New York (SDNY).

Ishan admitted that he had used material nonpublic information from his employer to tip his brother and a friend to purchase a variety of digital assets prior to announcements by Coinbase that the assets would be listed on the company’s platform.

Ishan’s brother previously pled guilty to one count of conspiracy to commit wire fraud.

Notably, the day before the former product manager’s guilty plea and … Read more

Davis Polk on When Gaming Runs Afoul of Disclosure Controls and Whistleblower Rights

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On February 3, the SEC announced a $35 million settlement with Activision Blizzard stemming from the company’s alleged failure to maintain adequate disclosure controls and procedures relating to workplace misconduct complaints and for a violation of a whistleblower protection rule.

In its periodic filings with the SEC between 2018 and 2021, Activision included risk disclosures relating to its dependence on personnel with specialized skills and the high level of employee mobility and competitive pressures in the gaming industry. According to the order, during that same timeframe, Activision “lacked controls and procedures designed to ensure that information related to employee complaints … Read more

SEC Chair Gensler on Proposed Rules About Investment Adviser Custody

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Today [February 15], the Commission is considering a proposal to expand and enhance the role of qualified custodians when registered investment advisers custody assets on behalf of their investors. I support this proposal because, in using important authorities Congress granted us after the financial crisis, it would help ensure that advisers don’t inappropriately use, lose, or abuse investors’ assets.

The Commission’s custody rule for investment advisers, first adopted in 1962, was last updated in 2009. Importantly, though, Congress granted us new authorities in 2010 in response to the financial crisis and Bernie Madoff’s frauds. In particular, Congress gave us authority

… Read more

Board Committee Charters and ESG Accountability

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Increasing corporate focus on environmental, sustainability, and governance (“ESG”) has prompted considerable criticism from across the ideological spectrum.  Those who disagree with that focus – viewing it as a breach of fiduciary duty and antithetical to profit maximization – have sparked a so-called “anti-ESG” movement.  But even those who believe that ESG aligns with shareholder value and the best interests of the corporation raise concerns, especially about how best to ensure that corporate ESG commitments are  not merely rhetorical, greenwashing, or a passing fad.  To shed light on these concerns and gain perspective about the potential illusory or short-term nature … Read more

SEC Chair Gensler Addresses New Rules on the Settlement Cycle

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Today [February 15], the Commission is considering whether to adopt amendments to important features of the clearing and settling process. I support this adoption because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets.

Some of you know that I like romantic comedies. Yesterday was Valentine’s Day. Thinking about today’s recommendation brings me to that classic 1987 film “Moonstruck,” starring Nicolas Cage and Cher. Cher plays Loretta, whose father is a plumber named Cosmo. In one scene, Cosmo examines a family’s broken pipes, turns to the homeowners, and just shakes his head.

… Read more

Profiting from Rival Firms’ Cyberattacks

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In a recent case, the Securities and Exchange Commission (SEC) pursued an unconventional form of insider trading involving Medivation Inc., an oncology-focused biopharmaceutical firm and one of its former, senior executives. According to the SEC, the executive  profited from trading shares not of Medivation, but of another biopharmaceutical firm, based on his confidential information about Medivation as a merger target.

In a new study, we seek to better understand the informativeness of another form of unconventional insider trading and its role in the stock market. Specifically, we investigate whether directors or senior executives of industry peer firms (hereafter, peer insiders… Read more

Skadden Discusses What New SEC Insider Trading Rules Mean for Directors

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In December 2022, the U.S. Securities and Exchange Commission (SEC) modified the rules governing preset stock trading programs for corporate insiders, known as 10b5-1 plans, which begin taking effect this year. The new rules will require directors, executives and other insiders to rethink their own preplanned trading programs, and companies will need to revisit their policies, and disclosure controls and procedures.

Below are answers to questions you may have. These are simplified and omit some conditions, exceptions and other details, so consider this just an overview and introduction.

What’s behind the changes?

The SEC’s Rule 10b5-1 allows insiders to establish … Read more

The Effects of SEC Comment Letters on Compensation Contract Efficiency

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In a new paper, we examine whether SEC comment letters on deficiencies in compensation disclosure have an impact on executive-compensation “contract efficiency,” meaning the extent to which such contracts align with shareholder interest. The goal of comment letters is not to change firms’ compensation contract design but to make sure that compensation details are disclosed in compliance with securities regulations so that shareholders are informed. We posit, however, that these letters indirectly influence compensation contract design by improving disclosure.

Improved disclosure can lead to changes in compensation contracts because better-informed market participants strengthen market discipline. In fact, one of the … Read more

Is Social Justice a Corporate Scam?

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Last December, Subaru boasted in TV ads of having donated over $250 million to charity in the last few years.  The company specifically claimed that it was the ASPCA’s largest corporate donor. Animal lover that I am, I got a warm feeling from those ads and, when I need a car, I might well turn to Subaru, as my son has done.  Not everyone feels this way.

In his new book, “Woke Inc.: Inside Corporate America’s Social Justice Scam”,[1] wunderkind and high-flying tech entrepreneur Vivek Ramaswamy suggests that Subaru and I are woefully misguided. His writing style is so … Read more

Risk-Seeking Corporate Governance

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Several developments suggest that venture capitalists (VCs) are retreating from their traditional corporate governance role of monitoring their portfolio companies. Startup founders are retaining more equity and control over their companies, and contrary to past practice, some VCs say they will never remove a founder. At the same time, startups are taking unprecedented risks – defying regulators, growing in unsustainable ways, and racking up billion-dollar losses. There have also been a series of high-profile scandals at the likes of Uber, WeWork, FTX, where VCs have proven unable or unwilling to prevent founder misbehavior.

In a new article, we propose that … Read more

ISS Discusses Dual-Class Share Structures in Europe

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While unequal voting structures in the U.S. are commonly associated with technology and media companies, there is no such industry specific tendency in Europe – with its tradition of so-called “loyalty shares” and government ownership. This paper surveying dual class share structures in Europe follows an earlier piece looking at similar structures in the U.S.

Key Findings

  1. More than twice as many companies in France have unequal voting rights than those that don’t have them
  2. The split in Sweden is around 50:50
  3. Greece and Portugal have no companies with unequal voting rights
  4. Loyalty shares as well as other unequal voting

… Read more

Skadden Discusses ESG in 2022 and Predictions for 2023

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Following another year of increasing focus on environmental, social and governance (ESG) considerations by companies, investors and regulators alike, ESG appears to have cemented its position in the corporate landscape. As set out in our 28 July 2022 client alert “H1 2022 — ESG Trends and Expectations”, although the invasion of the Ukraine highlighted the need to accelerate the green energy transition, the unforeseen event did not slow progress on a number of other key ESG themes.

In this article, we examine the key ESG topics impacting businesses in the second half of 2022, which included the green … Read more

How Companies Evaluate Their Corporate Governance

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Practitioners and academics alike debate best practices in corporate governance, but rarely do companies reveal how they determine what governance practices work best for them. In a new paper, we report the results of interviews on this topic with 29 chief audit executives (CAEs) from U.S. publicly traded companies.

CAEs are in a unique position to evaluate corporate governance, most often reporting administratively to the CEO or CFO and functionally to the audit committee. This reporting structure allows them to regularly interact with management, while also being held accountable as the “eyes and ears” of the board. CAEs lead … Read more

What is the SEC Hiding?

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Under Chair Gary Gensler, the U.S. Securities and Exchange Commission (SEC) has been on a transparency rampage – proposing extensive new disclosure obligations on public companies, activist investors, private funds, and (maybe soon) so-called “unicorn” startups. When it comes to sharing information about its own operations, however, the Commission has been less enthusiastic.

Take the SEC Whistleblower Program. When Congress created this program in 2010, it sensibly barred the commission from disclosing “any information . . . which could reasonably be expected to reveal the identity of a whistleblower.” But concerns have been mounting that the … Read more

SEC Chair Gensler Speaks Before Small Business Capital Formation Advisory Committee

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Good morning. It is good to join the advisory committee for your first meeting of the year. As is customary, I’d like to note that my views are my own and I am not speaking on behalf of the Commission or SEC staff.

I want to start by thanking the members—13 of you—who are concluding your terms with the committee. Further, I appreciate that at the end of today’s meeting a number of you will be sharing your parting perspectives.

Before that, though, the Commission will benefit from hearing the discussions on all of the matters on today’s agenda: alternatives

… Read more

Does ESG Information Affect Individual Investors’ Portfolio Choices?

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Socially responsible investing (SRI) involves considering environmental, social, and governance (ESG) issues when picking stocks.  Once a niche area of fund management, the volume of global sustainable investment in five major markets reached $35.3 trillion at the start of 2020, a 54.5 percent increase since 2016 and 35.9 percent of total assets under management.  Assets in sustainable investment products in Europe are expected to outnumber conventional funds as investors’ growing focus on material risks, including climate change and social inequality, pushes these strategies into the mainstream.  In the U.S., more than eight in 10 individual investors (85 percent) express interest … Read more

Mayer Brown Discusses Five Steps for Directors to Consider About Risk Governance

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Historically, directors have been protected from personal liability in connection with risk management by the high standard set in the seminal 1996 Caremark[1]case. In recent years, however, courts have held that certain plaintiffs have pled facts sufficient to avoid dismissal of suits seeking to hold directors liable for failing to discharge their oversight duties. In addition, the staff of the Securities and Exchange Commission has recently made written requests to some public companies regarding their disclosure of risk oversight. In this article, we provide background on these developments and identify five steps that directors may want to consider … Read more

Does the Market Misprice Companies’ “Strategic Alternatives” Announcements?

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Seeking “strategic alternatives” is a euphemism for a company trying to sell itself, which typically results in an acquisition premium for shareholders, and many announcements of strategic alternatives explicitly state that the goal is maximizing shareholder value. Upon a company’s announcement that it is evaluating strategic alternatives, its stock price on average jumps more than 5 percent. Yet, over the next six months, the price drops 9 percent, more than erasing the initial gain. In a new article, we explain how the market misprices the news so severely.

Questioning the Status Quo

The traditional theory of financial markets is the … Read more

Simpson Thacher Discusses Supreme Court Case on Standing and Direct-Listing Shares

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On December 13, 2022, the Supreme Court granted certiorari to consider whether Sections 11 and 12(a) of the Securities Act require a plaintiff who purchased shares through a direct listing to plead and prove that he bought shares registered under a specific allegedly misleading registration statement. Slack Techs. v. Pirani, No. 22-200. Petitioners (defendants below) are appealing a 2021 Ninth Circuit decision interpreting the “such security” language in Section 11[1] and Section 12(a)[2] to mean any share, registered or unregistered, and holding that plaintiff need not prove that he bought registered shares. Pirani v. Slack Techs.… Read more

Skadden Discusses Delaware Chancery Decision Questioning Fundamental SPAC Structure

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With all the SPAC activity and scrutiny over the past several years, it was only a matter of time before the Delaware courts had an opportunity to weigh in on SPAC stockholder litigation.

Early last year, in January 2022, Vice Chancellor Lori Will of the Delaware Court of Chancery issued a groundbreaking opinion in MultiPlan Corp. Stockholders Litigation that paved the way for SPAC stockholders to bring direct breach of fiduciary duty claims against SPAC boards and sponsors.

Among the notable aspects of the decision, MultiPlan clarified that “well-worn fiduciary principles” under Delaware law would apply to Delaware SPAC board … Read more

Wachtell Lipton Discusses Mergers and Acquisitions–2022 and 2023

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2022 was a tale of two halves for M&A.  The beginning of the year was active, as robust dealmaking carried over from the record-breaking levels of 2021 to drive approximately $2.2 trillion worth of global deals through the first half of the year, compared to approximately $2.7 trillion worth of such deals announced over the same time period in the previous year.  M&A activity slowed considerably after the first half of 2022, however, as significant dislocation in financing markets, an increasingly volatile stock market, declining share prices, concerns over inflation, rapidly increasing interest rates, war in Europe, supply chain disruption … Read more

SEC Commissioner Urges Reform of Regulation D and Private Markets

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Thank you Thomas [Kim] for that lovely introduction and I’m very pleased to be here at the Securities Regulation Institute giving the Alan B. Levenson Keynote Address. Director Levenson was the consummate public servant who left an enduring mark on the Division of Corporation Finance, and the Commission more generally. I’m happy to say that his legacy of combating corporate corruption and promoting integrity in our markets lives on today.

Before I begin, let me make my standard disclaimer – the views I express today are my own and do not necessarily represent the views of the SEC or my

… Read more

How Institutional Ownership and Board Diversity Affect Innovation

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In a new paper, we investigate the relationships between institutional ownership, board diversity, and corporate innovation in U.S.-listed firms. Institutional investors play a crucial role in a firm’s operation and exert considerable influence on the efficient monitoring of innovative investment. Theory predicts that institutional ownership has a positive effect on innovation investment. However, after separating the institutional investors into eight types and two categories – active (investment company, independent investment adviser, public pension fund) and passive (bank trust, insurance company, private pension fund, university and foundation endowments, miscellaneous) — we find that active institutional investors drove this positive relationship. A … Read more

Debevoise Discusses Malicious Corporate Deepfakes

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Content generated by artificial intelligence (“AI”) continues to improve and become more convincing.  These realistic images, audio, and videos, where used for purposes of a misrepresentation or to falsely spread information, are commonly dubbed “deepfakes.”  Governments around the world are taking notice of deepfakes and beginning to respond.  As reported by the Wall Street Journal, China’s internet regulator announced rules last month to restrict the creation of deepfakes by, for example, prohibiting their use to spread “fake news” or other information disruptive to the economy or national security.  In the European Union, the recently updated Code of Practice on … Read more

The Corporate Governance Cartel

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In recent years, major institutional investors in the U.S. have combined their efforts on environmental, social, and governance (“ESG”) matters. Large institutional investors now vote in lockstep on a variety of corporate issues, jointly lead governance initiatives, and often adopt mutually supportive stances on social and environmental campaigns. This unprecedented cooperation has been boosted by the emergence of institutional investor consortia – advocacy groups and trade associations that represent their members’ collective interests. Chief among these organizations are the Council of Institutional Investors (CII), a trade association that represents asset managers, pension funds, and union funds with combined assets of … Read more

Debevoise & Plimpton Discusses Delaware Chancery Decision Allowing Caremark Claim Against an Officer

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In a January 25, 2023 decision (In Re McDonald’s Corp. S’Holder Litig., C.A. No. 2021-0324-JTL (Del. Ch. Jan. 25, 2023)), the Delaware Court of Chancery declined to dismiss claims that a corporate officer, who led the company’s human resources function, breached his fiduciary duties by “allowing a corporate culture to develop that condoned sexual harassment and misconduct.” The plaintiffs claimed that the officer breached a “Caremark” duty by consciously ignoring “red flags” signaling misconduct. Despite the fact that no prior Delaware case had applied Caremark duties to an officer, the court declined to dismiss the claims, … Read more

Can a Greenhouse Gas Disclosure Rule Lead to Emissions Reductions?

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In response to growing concern about the effects of climate change, different regions of the world have adopted mandatory greenhouse gas (GHG) disclosure rules, including Australia, the European Union, and the United Kingdom. Notably, the U.S. Securities and Exchange Commission (SEC) proposed an extensive climate reporting rule in 2022. The goal of these programs is frequently to inform stakeholders of the climate change-related risks faced by emitters. For example, the SEC’s proposed rule aims to inform investors.

Although the explicit intent is rarely to affect emissions, the law and economics literature highlights various cases (e.g., restaurant hygiene and mine safety) … Read more

Cleary Gottlieb Discusses M&A in 2023

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Consensus opinion coming into 2022 was that high M&A volume would continue, albeit not quite at the record-setting pace of 2021. The market had other plans. Volume decreased much more sharply from the 2021 high than was commonly expected. While overall deal volume was generally in line with averages from 2017-2020, 2022 was a tale of two halves—there was a marked drop from H1 to H2, with Q4 representing the lowest Q4 global deal volume in the past six years.[1] Significant stock market volatility wrought havoc on valuations. Higher interest rates and a retreat by large banks from the … Read more

Cleary Gottlieb Discusses the SEC’s Disclosure Agenda and Corporate Governance

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In 2022, public companies witnessed a new kind of corporate governance activism. New rules and regulations from the Securities and Exchange Commission (the SEC) use the lever of mandated disclosure to push for corporate governance actions, and in some cases what amounts to reforms. The SEC’s broad foray into governance represents an expansion of historically more limited SEC rules in the governance space, mostly focused on audit committee and auditor independence and more general disclosure of board structures and oversight. Many commentors note that investors were well able to push companies historically for disclosure on governance matters and that the … Read more

Davis Polk Discusses Revised Thresholds and Filing Fees under Hart-Scott-Rodino Act

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The Federal Trade Commission (FTC) has announced revised Hart-Scott-Rodino Act (HSR) reporting thresholds and filing fee amounts, up to a $2.25 million fee for the largest deals. Under the new thresholds, a transaction is reportable if, due to the transaction, the acquiring person will hold voting securities, assets, or non-corporate interests valued over $111.4 million. These changes will apply to all transactions that close on or after the effective date, which is expected to be February 23.

The exact effective date for these updated reporting thresholds and filing fee amounts will depend on when the changes are published in the … Read more

John C. Coffee, Jr.: The Blaszczak Bombshell and What It Will Mean

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United States v. Blaszczak[1] has long been a one-off case that did not fit the mold of the traditional insider trading prosecution, but now — following a 2-1 decision of the Second Circuit in December, reversing most of the convictions in the case — it may destabilize the law on insider trading for some time to come. Such reversals are rare, and Blaszczak has multiple implications, some ominous and some ironic.

At the outset, it must be understood that Blaszczak was distinctive in two important respects:

First, it involved the leaking of confidential information by gossipy government bureaucrats to … Read more

SEC Issues Strategic Plan for Fiscal Years 2022-2026

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Our Goals

Protecting the Investing Public; Maintaining a Robust, Relevant Regulatory Framework; Supporting a Skilled and Diverse Workforce

The United States has the largest, most sophisticated, and most innovative capital markets in the world. U.S. capital markets represent about 40 percent of the global capital market. Companies and investors access the U.S. capital markets at a higher rate than do market participants in other economies with their respective markets. For example, debt capital markets account for 80 percent of financing for non-financial corporations in the United States. By contrast, outside the United States, nearly 80 percent of lending to such

… Read more

Sustainability, Asset Redeployability, and Board Gender Diversity

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A vital yet surprisingly overlooked aspect of corporate sustainability is asset redeployability. Redeployable assets are those that can be used in several ways. Assets with high redeployability promote sustainability because they can be re-assigned for various purposes as circumstances change, reducing the need to create new assets and thereby conserving natural resources. This is akin to recycling.

In a new paper, we investigate how the gender of corporate board members affects their views of asset redeployability. Many shareholder activists and institutional investors believe that more gender diversity on the boards promotes sustainability. As a result, our research connects two critical … Read more

Cadwalader Discusses New SEC Rule 10b5-1 Trading Plan Rules

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On December 14, 2022, the U.S. Securities and Exchange Commission (“SEC”) unanimously adopted final rules adding new conditions applicable to Rule 10b5-1 trading plans and requiring disclosure of the adoption, modification or termination of Rule 10b5-1 trading plans by directors and officers of public companies.  In addition, the new rules require disclosure of option grant practices and insider trading policies and procedures of public companies and amend disclosure requirements for option grants to named executive officers close in time to an issuer’s disclosure of material nonpublic information.  Finally, the new rules amend Forms 4 and 5 to require reporting persons … Read more

How Weakening the Fiduciary Duty of Loyalty Affects Corporate Culture

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Corporate culture binds employees together and directs their collective behavior at work. It also has an important impact on the success of organizations. Studying the determinants of corporate culture has been difficult, however, because of its unobservable nature. In a recent working paper, we investigate how the fiduciary duty of loyalty affects corporate culture in the U.S by using quantitative measures that Li et al. (2021) have developed with machine learning techniques. Our paper offers insights into the long-standing agency cost problem and the intra-firm balance between principles and freedom.

A fundamental tenet of corporate law, the fiduciary duty of … Read more

Davis Polk Discusses SEC Package of Equity Market Structure Proposals

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The SEC recently proposed a set of sweeping equity market structure reforms across four rule proposals that would make highly significant changes to how national market system (NMS) stock orders are priced, executed and reported.  The proposals include:

  • a new requirement for certain retail orders to be subject to order-by-order competition, rather than being routed directly to market makers (the Order Competition Rule);
  • an SEC-level best execution rule (the Proposed Regulation Best Ex);
  • an adjustment to the tick sizes at which NMS stocks can be quoted or traded (the Tick Sizes Proposal); and
  • a proposal to expand the scope and

… Read more

Rethinking Cautions Accompanying Investment Predictions

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We are constantly bombarded with warnings about dangers to our health or wellbeing. Sometimes, however, the warnings might facilitate the danger. In a new article, I show how the cautionary statements that commonly accompany predictions of corporate performance fall into this camp.

The judicially created “bespeaks caution doctrine”[1] and a highly controversial provision in the Private Securities Litigation Reform Act (PSLRA)[2] enable speakers to avoid liability for failed predictions regarding corporate performance through cautions that accompany the predictions. Unfortunately, the cautions in court decisions applying these defenses constitute misdirection which, if anything, facilitates securities fraud.

To understand why, … Read more

Sullivan & Cromwell Discusses ESG Considerations for Financial Institutions in 2023

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As U.S. financial institutions assess their ESG risks, opportunities, policies and procedures for 2023, key considerations include the numerous significant ESG developments in 2022—in particular, recent proposals and initiatives announced by financial regulators with respect to climate-related risk management and disclosures—and overarching regulatory, political, investor and litigation trends. This memorandum summarizes several ESG considerations that are expected to be particularly relevant.

SIGNIFICANT LEGAL AND REGULATORY DEVELOPMENTS IN 2022

SEC’s proposed climate-related disclosure rules:  On March 21, 2022, the Securities and Exchange Commission proposed expansive climate-related disclosure requirements in a proposing release that, if adopted, would require U.S. public companies and … Read more

A Pressing Topic for the Corporate Social Voice

By and by

The frightening deficiencies in U.S. public health preparedness are an appropriate, and pressing, topic to be addressed by the recently dormant corporate social voice.

One of the central tenets of the corporate social responsibility movement is a broader perspective on corporate purpose, focusing on the interests of all organizational stakeholders – including shareholders, employees, communities, suppliers, and customers. These stakeholders are increasingly challenging corporations to address sensitive social and political issues, particularly when they perceive government as unwilling or unable to do so.

And, over the last several years, portions of the business community have responded to this challenge, … Read more

Chief of DOJ’s Criminal Division Announces Revisions to Corporate Enforcement Policy

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Professor O’Sullivan, thank you for that kind introduction. It’s a pleasure to be here with you all today [January 17] at Georgetown. Not only am I an alum of the Law Center, I’m an alum of this building, Gewirz Residence Hall.

Much has changed since I was a student here. There was no International Law Building, no Ginsburg Fitness Center, no courtyard.

But the ethos of the school has always been about providing a world-class legal education to individuals hailing from diverse backgrounds, perspectives, and careers. The Law Center accurately describes itself as “the place where theory meets practice, where

… Read more

Why Passive Investors Care About Audit Quality

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In recent decades, the rise of index funds (or passive investors), has caused heated debates over the efficacy of their stewardship role in corporate governance. Passive owners cannot influence the governance of a firm by selling its stock because the index composition determines whether the stock is in the fund. This  may increase passive investors’s incentives to monitor, vote  with their shares, and engage behind the scenes with companies. On the other hand, some scholars and commentators have questioned whether index funds deliver on their promises because stewardship seems too expensive for low-cost, low-overhead index funds.

In a recent study, … Read more

Paul Weiss Discusses the State of Antitrust Enforcement at the Beginning of 2023

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2022 was an active year for the U.S. federal antitrust enforcement agencies. There were important developments in all key areas of the agencies’ remit, from merger enforcement to civil conduct cases to criminal prosecutions. 2023 may prove to be one of the most consequential for antitrust enforcement in the Biden administration, with the anticipated release of new merger guidelines and several cases set for trial.

Mergers

The Antitrust Division of the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) are soon set to release draft revised merger guidelines. These new guidelines would replace the agencies’ Horizontal Merger … Read more

When Will Investors Vote for Socially Beneficial but Costly ESG Policies?  

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Investors are increasingly interested in whether firms implement environmental, social, and governance (ESG) policies that, for example, reduce the firms’ carbon footprints, diversify their workplaces, or better protect customers’ private information. Some socially beneficial policies (e.g., improving energy-efficiency) may also improve shareholder wealth or would do so with appropriate government actions (e.g., given a carbon tax). However, political realities, and the exhaustion of opportunities that are not costly to the firm, will increasingly present firms with a social dilemma: whether to adopt a policy that benefits society but does not benefit the firm enough to cover its cost. For example, … Read more

Wachtell Lipton Discusses Antitrust and ESG

By , , and by

As boards continue to evaluate how environmental, social and governance (“ESG”) considerations factor into corporate operations, some lawmakers and regulators have raised potential antitrust concerns about coordinated efforts.  For example, several U.S. Senators sent letters to law firms admonishing them to advise clients of increased congressional scrutiny of “institutionalized antitrust violations being committed in the name of ESG.”  And, a group of state attorneys general inquired whether an investor-driven initiative on climate risks called Climate Action 100+ implicates antitrust laws.  FTC Chair Lina Khan opined last month in The Wall Street Journal that ESG benefits are no defense for otherwise … Read more

Market Practices and the Awareness/Use Problem in Insider Trading Law

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In a new article, I respond to an article by Professor Andrew Verstein concerning the awareness/use problem in insider-trading law. As many readers know, this problem arises because, although Rule 10b-5 prohibits persons bound by a duty of confidentiality from trading securities on the basis of material, non-public information (“MNPI”), it is unclear just what it means to trade on the basis of such information. Do you violate the rule if you trade merely while you are aware of MNPI, even though that MNPI played no causal role in your decision to trade (i.e., the awareness rule)? Or does a … Read more

Simpson Thacher Discusses Second Circuit Decision Curtailing Title 18 Insider Trading Liability

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On December 29, 2022, the Second Circuit issued its highly anticipated opinion on remand in United States v. Blaszczak (“Blaszczak II”), reconsidering the case following the Supreme Court’s January 2021 vacatur of the Second Circuit’s original decision upholding multi-count convictions of defendants for, at bottom, illegally trading on material non-public information misappropriated from the government. In two respects, the decision represents a challenge to the government’s ability to make use of a recent—though largely untested—fraud statute in order to avoid the elements of traditional insider trading in criminal cases. First, the decision makes it difficult in some cases … Read more

A Better Way to Manage Corporate Political Activism

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Corporate political activism (CPA) is defined as activities that are visible to stakeholders and that support or oppose issues viewed as politically charged. Social media and press accounts suggest a growing desire among consumers, employees, and shareholders for companies to engage in  CPA.. The reality is that most people are not politically active and perceive most brands as apolitical and in the middle.

Contrary to the accepted narrative, evidence from peer-reviewed, academic research shows that CPA does not help – but can harm – companies on many fronts. Specifically, CPA can harm a company’s brand equity, employee productivity, and financial … Read more

Making Audit Committee Disclosure More Transparent Requires Investor Feedback

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The role of the audit committee in a company’s board of directors has changed significantly since the passage of the Sarbanes-Oxley Act of 2002 (SOX). Traditionally, audit committees have overseen the company’s independent auditor, the internal audit function, and other financial reporting-related functions. More recently, many audit committees have taken on additional oversight responsibilities, such as overseeing enterprise risk management (ERM), environmental, social and governance (ESG) reporting, and cybersecurity.

Since these additional responsibilities are not explicitly required by SOX or the Securities and Exchange Commission (SEC) and are not assigned uniformly in all boards, stakeholders must rely on boards … Read more

SEC Commissioners Dissent to Charges Against McDonald’s for Flawed Disclosure of CEO Firing

By and by

We are unable to support the charges against McDonald’s Corporation (“McDonald’s”) for failing to disclose sufficient information regarding the termination of its former CEO, Stephen Easterbrook, in its 2020 proxy statement.  The Order[1] casts McDonald’s, the victim of Mr. Easterbrook’s deception, as a securities law violator through a novel interpretation of the Commission’s expansive executive compensation disclosure requirements.

The Commission’s Order finds, among other things, that McDonald’s violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-3 thereunder because the company failed to provide the disclosure required by Item 402(b) and (j)(5) of Regulation S-K.  Item … Read more

Economic and Normative Implications of Algorithmic Credit Scoring

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Commercial use of artificial intelligence (AI) is accelerating and transforming nearly every economic, social, and political domain. Yet, academic commentary on algorithmic decision-making in financial services has warned that historical data could result in biased algorithmic tools.[1] Bias, among other risks, is an essential consideration. However, there is a gap in recent literature on the potential optimal outcomes if risks are mitigated. Algorithmic credit scoring can significantly improve banks’ assessment of consumers and credit risk, especially for previously marginalized consumers. It is, therefore, helpful to examine the commercial considerations often discussed in isolation from potential normative risks.

In a … Read more

Latham & Watkins Discusses 10 ESG Issues to Keep Top of Mind in 2023

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Both anticipated and less expected changes occurred across the ESG landscape in 2022. Anticipated changes included regulatory developments across the globe, including in the US, the UK, and the EU. Less expected changes included global and regional political shifts, such as the fallout from the Russian invasion of Ukraine, the continued evolution of governmental policies following the COVID-19 pandemic (such as responses to labor market challenges and reshoring efforts), and growing political tensions throughout the world.

In 2023, investors, customers, regulators, and other key stakeholders are expected to continue to demand corporate responsiveness on ESG issues. However, how these stakeholders … Read more

Assessing the SEC’s Role As Enforcer Against Financial Misconduct

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The Securities Exchange Act grants the SEC ample authority and discretion to investigate and seek sanctions related to violations of the securities laws, with the goal of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation (SEC, 2013).[1] To be sure, this is the SEC’s stated objective. Like most regulatory agencies, though, the SEC is subject to resource constraints – as well as to pressures from both the political and business spheres, which might steer it away from the fulfillment of its mission.

We directly assess the SEC’s objectives, as revealed by the observed SEC regulatory policies, … Read more

ISS Discusses the Largest Class Action Settlements of 2022

By and by
In a remarkable year of class action activity, investors across the globe agreed to settlements totaling over $7.4 billion[1] in 2022, a greater than 75% increase from 2021. (A substantive year in review for the U.S. market will be documented in the ISS Securities Class Action Services “Top 100 U.S. Class Action Settlements of All-Time” report published later this month.)

In this overview, ISS Securities Class Action Services reviews the largest shareholder-related settlements of 2022. A number of high-profile cases dominated the landscape, including Twitter and Teva in the United States, while the Steinhoff International mega-settlement commanded much of

… Read more

Perceptions of Regulatory Uncertainty in Antitrust Practices

By , , and by

The U.S. is the largest market for merger and acquisition (“M&A”) activity, with nearly 7,900 transactions accounting for a record $2.6 trillion in value in 2021.[1]  The primary M&A enforcement agencies in the United States, the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ), evaluate the potential antitrust risk of reported mergers, monitor remedies, and challenge deals deemed to reduce competition applying jointly published guidelines. The Biden administration appointed leaders to the FTC and DOJ who promised that traditional approaches to antitrust would not be followed and suggested changes to both substance and process to antitrust … Read more

Skadden Discusses Recent Contests Under the Universal Proxy Rules and the 2023 Outlook

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The Securities and Exchange Commission’s (SEC’s) new universal proxy rules, which took effect for meetings after August 31, 2022, require the use of “universal” proxy cards in all director election contests, except for elections held by registered investment companies and business development companies. Previously in contested elections, the company and the dissident stockholder each distributed separate and different proxy cards. Stockholders not attending the meeting in person and voting by proxy could only vote on a single card, limiting their choices to either the nominees on the company card or the dissident card, with no option to “mix and match.” … Read more

How Social Connections and Information Leaks Affect the Stock Prices of Takeover  Targets

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The stock prices of takeover targets typically increase substantially prior to merger announcements[1] This increase attracts considerable public attention because it is usually perceived to be associated with the leaking of inside information. Hence, the numerous  Securities and Exchange Commission (SEC) cases against individuals and entities accused of trading on inside information about upcoming mergers and acquisitions.

These cases typically involve suspected  leaks of confidential information through social connections. Senior executives or board members often initiate the leaks, which spread among the social networks that are either directly or indirectly linked to them. For example, in a case filed … Read more

Fed, FDIC, OCC Jointly Warn Banks About Crypto-Asset Risks

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The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) are issuing the following statement on crypto-asset1 risks to banking organizations.

The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector. These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of, including:

  • Risk of fraud and scams among crypto-asset sector participants.
  • Legal uncertainties related to custody practices,

… Read more

Why We Need Multistate Business Entities

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Business entities are generally formed state-by-state. While this separatist approach has many shortcomings, scholars and policymakers have considered only one alternative: the federalization of business entity formation. Yet limiting the choices to two is false and distortive. It is false because another alternative – multistate formation and regulation of business – is possible. It is distortive because it deprives policymakers of the advantages of multistate corporations and other business entities. In a new article, we show that multistate business entities are, in fact, preferable to both state separatism and federalization.

Background on the Market for Entity Formation

When entrepreneurs … Read more

Debevoise Discusses Treasury Guidance on Corporate Minimum Tax and Tax on Stock Buybacks

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On December 27, 2022, Treasury released Notices 2023-7 and 2023-2 (the “Notices”). The Notices provide initial guidance on the 15% corporate minimum tax on the book income of large corporations (the “CAMT”) and the non-deductible 1% excise tax on certain corporate stock buybacks by publicly traded companies (the “Buyback Tax”) that were included in the Inflation Reduction Act (the “IRA”).[1] The CAMT and the Buyback Tax both are effective January 1, 2023. The CAMT Notice provides immediate guidance on time-sensitive areas of uncertainty, such as tax-free transactions that may give rise to financial statement income, and requests comments on … Read more

Does the Market Demand Climate-Related Disclosure Regulation?

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On March 21, 2022, the Security and Exchange Committee (SEC) proposed that all public firms disclose climate-change risk and greenhouse-gas (GHG) emission information in their financial statements. According to SEC Chair Gary Gensler, the proposal “would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do.” Was he right? Would government-mandated GHG reporting meet investor demand and aid efficiency? After all, companies might not provide information voluntarily because the cost of producing and disseminating it, including the proprietary costs, exceeds the benefits to shareholders (Admati and Pfleiderer, 2000). In a … Read more

Arnold & Porter Discusses SEC Case on Impeding and Retaliating Against Whistleblower

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On November 22, 2022, the US Securities and Exchange Commission (SEC or Commission) filed an amended securities fraud complaint against Adam Rogas, the former Chief Executive Officer of NS8, Inc. (NS8), alleging that, among things, Rogas engaged in whistleblower impeding and retaliation against the NS8 employee who blew the whistle on Rogas’ fraudulent conduct. The case follows In re David Hansen, a whistleblower impeding action the SEC settled against the co-founder and Chief Information Officer of NS8. As Arnold & Porter partner Jane Norberg, who was the former Chief of the SEC’s Office of the Whistleblower, discussed in a … Read more

The ESG Gap

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In recent years, demand for companies to promote environmental, social, and governance (“ESG”) values has increased dramatically. Investment in ESG-oriented mutual funds (green funds), rose globally by 53 percent in 2021 to $2.7 trillion (Kishan, 2022). Bloomberg forecasts that by 2025 ESG assets may hit $53 trillion – a third of global assets under management. Not only are people investing more in ESG, but they are willing to pay higher fees for such investments. A recent study found that investors are willing, on average, to pay 20 basis points more for an investment in a fund with an … Read more

Kirkland & Ellis Discusses Final Labor Department Regulations on ERISA Fiduciaries and ESG

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In recent years, few topics within the U.S. Department of Labor’s (the “DOL”) purview have garnered as much interest as the potential consideration of environmental, social and governance (“ESG”) factors by fiduciaries of plans subject to the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”) when investing plan assets. A closely related issue is whether, and how, fiduciaries should vote proxies and exercise other shareholder rights on behalf of ERISA-covered plans.

On November 22, 2022, the Department of Labor issued a final regulation (the “Final Regulation”) on these topics. The Final Regulation will generally be effective on … Read more

The Value of Executive Visibility

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In a new paper, we examine how the visibility of executives affects the value of their firms. We define executive visibility as the ubiquity of the executive’s public profile, separate from that of the firm. Communications and public relations professionals increasingly advocate for executive visibility to make the executive appear more relatable, personable, and trustworthy to stakeholders.[1] A global survey of 1,700 non-CEO executives conducted by the communications agency Weber Shandwick (2020) found that 81 percent believe their CEOs should be personally visible as the face of their company.[2] In short, the executive should be not only … Read more

ISS Discusses ESGF Rating as a Measure of Investing Quality

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Investors routinely consider both the ESG quality (i.e., the quality of a company’s management approach to environmental, social and governance (ESG) risks and opportunities) and the Financial quality (i.e., a company’s risk-adjusted profitability) of a firm in their day-to-day investment due diligence. Up until now the two have been looked at somewhat in isolation, however. Marrying the financial ‘F’ pillar with ESG performance can help create a more holistic approach to investing. This is exactly the use case for the new ISS ESGF solution.

The good management of long-term ESG risks may aid in the reduction of financial risks

… Read more

A Beginner’s Guide to the SBF Prosecution: Where the Legal Issues Lie

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The spectacle of a shambling billionaire with an adolescent personality, an inconsistent memory, a fondness for using his depositors’ funds for his own personal purposes, and an eagerness to talk in self-destructive ways to the press has fascinated everyone. This column will leave to psychiatrists and journalists the assessment of Samuel Bankman-Fried’s (“SBF”) character, but important legal issues lurk in his case that are central to the field of white collar crime and that have seldom been explored adequately by appellate courts.

Let’s begin by looking at what has happened so far. The Southern District of New York’s U.S. Attorney’s … Read more

Kirkland & Ellis Discusses the FTC’s Newly Rediscovered Penalty Offense Authority

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The FTC recently announced the first use of its “Penalty Offense Authority” in many years. The agency dusted off this statutory tool as part of its multifaceted effort to continue to obtain monetary relief in its consumer protection enforcement actions in the wake of the agency’s Supreme Court loss in AMG Capital Management, LLC v. FTC, which stripped the agency of its ability to obtain monetary remedies pursuant to Section 13(b) of the FTC Act.

Section 5(m)(1)(B) of the FTC Act authorizes the Commission to obtain civil penalties from parties engaging in conduct with actual knowledge that the conduct … Read more

Institutional Directors: Do They Matter?

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Over the last two decades, the dramatic increase in institutional investors’ ownership of rival companies has raised questions about collusive corporate policies.[1] However, it is still unclear how common shareholders engage with and influence corporate decision-making, especially when it comes to antitrust issues (Ginsburg and Klovers, 2018; Scott Morton and Hovenkamp, 2017; Hemphill and Kahan, 2019).[2]

One frequently mentioned mechanism is board representation (Azar 2021; Eldar, Grennan, and Waldock, 2021). Its plausibility rests on the well-settled principle in U.S. corporate law that directors are responsible for making all major corporate decisions (Bebchuk, 2004). Given their considerable ownership stake … Read more

Simpson Thacher Discusses Final Labor Department Rule on ESG Investing, Proxy Voting

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The U.S. Department of Labor (the “DOL”) recently issued a final rule (the “Final Rule”) that seeks to clarify the circumstances under which a fiduciary subject to ERISA may consider climate change and other environmental, social and governance (“ESG”) factors when making investment decisions (and exercising shareholder rights) on behalf of ERISA plans and “plan asset” vehicles.[1]

Background

For nearly 40 years, the DOL has issued guidance that sought to provide a framework for ERISA fiduciaries considering investments for reasons other than investment performance (i.e., “collateral factors”). ESG investing, impact investing, … Read more

New Challenges to the Internal Affairs Doctrine

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A Delaware vice chancellor recently lamented that “Delaware should not be determining employment law for the country and for the world.”[1]  That remarkable assertion was a reference to the gradual expansion of the internal affairs doctrine, which provides that the law applicable to the internal governance of a business entity is that of the chartering jurisdiction. The contours of the internal affairs doctrine have never been defined with precision, which is why several recent developments have placed new pressures on the doctrine’s boundaries. These fall into roughly three categories:

Corporate governance for noninvestors.  Especially in the ESG era, … Read more

Debevoise Discusses What the GDPR Can Tell Us About State Privacy Laws

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The EU’s General Data Protection Regulation 2016 (the “GDPR”) changed the global privacy landscape, and has been called the “gold standard” for data protection regulation. Recently, a number of U.S. states have introduced privacy laws, which borrow certain GDPR concepts (the “State Privacy Laws”): the Californian Consumer Rights Privacy Act 2020 (the “CPRA”) which amends the California Consumer Privacy Act (the “CCPA”); the Virginia Consumer Data Protection Act; the Colorado Protection of Personal Data Privacy Act (the “CPA”); the Connecticut Public Act Concerning Personal Data Privacy & Online Monitoring; and the Utah Consumer Privacy Act.

Thus far, … Read more

The Legal Primacy Norm in Corporate Law

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The debate over the corporation’s purpose is today a central topic of corporate law scholarship. So far, the discussion has advanced little beyond a two-sided view, considering only the approaches known as shareholder primacy and corporate social responsibility (CSR). In a new article, I offer an innovative way to resolve this fundamental debate about corporate law – a proposal that recognizes the need for the law to take stakeholder interests into account, while at the same time not impairing entities’ and shareholders’ legitimate claims, and operating within the existing structure of corporate law. I argue that corporate law, both descriptively … Read more

SEC Chair Gensler on Final Amendments to Insider Trading Requirements

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Today [December 14], the Commission will consider whether to adopt amendments to Rule 10b5-1, as well as new required corporate disclosures related to executive officers’ and directors’ trading. I am pleased to support these new requirements because, if adopted, they will help close potential gaps in our insider trading regime.

The amendments address the means by which companies and company insiders — such as chief executive officers, chief financial officers, other executives, directors, and senior officers — trade in company shares.

The core issue is that company insiders regularly have material information that the public doesn’t have. Stock-based executive compensation

… Read more

Stakeholder Engagement

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A common argument against stakeholder governance is that it renders managers less accountable while doing little to improve the welfare of stakeholders. Lucian Bebchuk and Roberto Tallarita call this “The Illusory Promise of Stakeholder Governance.” But what if stakeholder governance actively empowered stakeholders? Rather than being merely just of and for the stakeholders, it could become governance by the stakeholders as well.

In a new article, I survey disclosure by S&P 100 companies to get a picture of how they engage their stakeholders and incorporate that engagement into corporate governance. I look primarily at disclosure in the companies’ sustainability or … Read more

Market Trends, Shareholder Activism, the SEC, and Litigation Get Lively Airing at Columbia Law School M&A and Corporate Governance Conference

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Top practitioners, judges, regulators, and scholars gathered at Columbia Law School on December 2 to offer their unique perspectives and cutting-edge insights on a variety of topics related to M&A and corporate governance. The topics included current M&A market trends, the role of institutional investors and shareholder activists in dealmaking, and the impact of the SEC and litigation developments on M&A.

The day-long event started with a panel exploring current trends and trajectories in the M&A market. The panel was moderated by Professor Jeffrey N. Gordon of Columbia Law School and included panelists Lauren Hirsch, a reporter for DealBook at … Read more

CEO Activism as a Call to Arms

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CEO activism, the practice of CEOs or other executives taking a public stance on social, political, or environmental issues not directly related to their companies’ businesses, has been on the rise these past few years.  Moreover, several well-publicized polls have shown that somewhere between 64 and 77 percent of consumers believe that leaders should engage in this behavior.  We wondered, however, whether CEO activism might change people’s opinions about social issues and lead them to support a campaign around those issues.

After the murder of George Floyd in 2020, we asked our research team to search corporate websites and … Read more

ISS Discusses Human Rights-Related Shareholder Proposals

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The topic of human rights is of major concern among many stakeholder groups, spanning the public, private, and social sectors (e.g., companies, investors, consumers, NGOs, governments, intergovernmental organizations, etc.). Human rights issues present material risks to not only companies, but also to institutional investors, as reputational as well as regulatory and litigation risks, can impact both companies and their investors. Reputational costs stemming from, say, damaging viral news stories could negatively impact consumer loyalty, brand perception, and ultimately share price. As many institutional investors engage with companies to increase alignment on ESG performance and reporting, the ‘S’ in ESG (Environmental, … Read more

How Market Feedback Affects CEO Pay

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Stock prices affect various corporate decisions such as the amount of CEO compensation, as emphasized in traditional pay-for-performance studies, and capital investment. However, an unanswered question is whether changes in firms’ stock price in a short window around events related to their corporate governance matter for the compensation of their CEOs. In a new paper, we analyze whether these short-term price changes factor into compensation policies more than suggested by the traditional pay-for-performance argument (which is normally based on stock returns over one year or longer). We refer to decision makers’ learning from changes in stock prices as the market … Read more

Covington Discusses Responsibly Audited AI and the ESG/AI Nexus

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Companies have increasingly leveraged artificial intelligence (“AI”) to facilitate decisions in the extension of credit and financial lending as well as hiring decisions.  AI tools have the potential to produce efficiencies in processes but have also recently faced scrutiny for AI-related environmental, social, and governance (“ESG”) risks.  Such risks include AI ethical issues related to the use of facial recognition technology or embedded biases in AI software that may potentially perpetuate racial inequality or have a discriminatory impact on minority communities.  ESG and diversity, equity, and inclusion (“DEI”) advocates, along with federal and state regulators, have begun to … Read more

What the Rise of Indexing Means for Corporate Governance

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The amount of assets that passive (index) funds have under management has grown significantly in recent decades. Domestic passive funds and ETFs now manage more than half of all assets under management (AUM) of domestic equity mutual funds and ETFs, and the Big Three passive fund managers (BlackRock, State Street, and Vanguard) cast over a quarter of the votes in S&P 500 companies. The growth in the voting power of passive funds has attracted the attention of market participants, academics, and regulators. For example, concerns about their outsized influence have led a group of senators to propose the INDEX Act, … Read more

Davis Polk Discusses Antitrust Law and ESG Initiatives

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In the U.S., some members of Congress and state AGs have advocated for greater antitrust scrutiny of industry-wide ESG initiatives, while other state AGs have argued that such initiatives are procompetitive. In the EU and the U.K., competition authorities have issued guidance to support industry-wide ESG initiatives. In this environment, firms contemplating joining ESG initiatives should seek advice to understand the global antitrust landscape.

Antitrust and ESG: New developments and key issues

Firms routinely incorporate environmental, social, and governance (ESG) goals as part of normal corporate operations. In the U.S., some federal and state elected officials and enforcement officials recently … Read more

From “Corporate Social Responsibility” to “Corporate Social Liability”?

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The debate about corporate social responsibility has recently moved into new territory: the establishment of what can be called corporate social liability or CSL. CSL goes beyond classic tort and company law and may result in vicarious liability of parent companies for the misconduct of subsidiaries and third-party business partners. Its main focus has been on violations of obligations involving human rights and the environment. In a recent paper, I assess the novel elements of international developments involving CSL.

Various legislative actions and court cases, particularly in Europe, have contributed to the emergence of CSL:

  • The EU Council and

… Read more

ISS Discusses Dell’s $1 Billion Top-20 Settlement of Shareholder Lawsuit

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On November 16, 2022, Dell Technologies Inc. reached a $1 billion settlement with shareholders, according to a recently filed 8-K filed with the U.S Securities and Exchange Commission. The announced agreement looks to resolve investors’ allegations that they were short-changed billions of dollars for their Class V stock in connection with a 2018 transaction that turned Dell into a public company. The settlement comes as the shareholder lawsuit alleging various breaches of fiduciary duties against Michael Dell, Silver Lake, and others was set to go to trial next month in the Delaware Court of Chancery.

In the asserted transaction valued

… Read more

Angels and Devils: The Early Crypto Entrepreneurs

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After the collapse of FTX and a summer of crypto failures (Terra Luna, Celsius, Three Arrows), the Securities and Exchange Commission (SEC) will want to act quickly and treat more digital assets as “securities.”  But which ones?  In a new article, I attempt an answer by re-interpreting the Howey test for determining what is an “investment contract” and thus a security.

The first crypto entrepreneurs – such as Satoshi Nakamoto (Bitcoin) and Vitalik Buterin (Ethereum) – look like the angel investors who have long funded traditional startups.  They engage in “for-profit philanthropy,” investing financial capital in startups but also contributing … Read more

Cooley Discusses CFPB Bulletin Analyzing Rise in Crypto-Asset Complaints

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On November 10, 2022, the Consumer Financial Protection Bureau issued a bulletin analyzing consumer complaints submitted to the CFPB over the past four years related to crypto-assets and platforms. According to the CFPB, fraud, scams and transaction issues accounted for almost two-thirds of those complaints. Indeed, shortly after the bulletin’s release, CFPB Director Rohit Chopra in other public commentary described crypto as “a new vector for fraudsters.” Underlying many of the complaints were concerns with the level of customer service provided by crypto companies when issues arose.

The bulletin describes risks to consumers and steps consumers can take to protect … Read more

The Questionable Virtues of Chapter 11 in the FTX Bankruptcy

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On November 14, 2022, FTX, the third largest crypto exchange in the world, filed for bankruptcy. Since then, the company, its many affiliates, and its 30-year-old owner and founder, Sam Bankman-Fried, have been investigated by lawmakers and regulators across many jurisdictions, including the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the U.S. Attorney for the Southern District of New York. Early reports indicate that the company faces aggregate claims from creditors in the billions of dollars and has traditional, liquid assets that fall far short of meeting these liabilities.

The bankruptcy declaration reveals the … Read more

Skadden Discusses DOJ Antitrust Enforcement Against Interlocking Directorates

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In April 2022, Assistant Attorney General Jonathan Kanter of the Department of Justice’s Antitrust Division (DOJ) previewed the DOJ’s intent to more aggressively enforce the prohibition on interlocking directorates under Section 8 of the Clayton Act, 15 U.S.C. § 19. During a speech to antitrust enforcers at an annual spring summit, AAG Kanter stated, “For too long, [DOJ] Section 8 enforcement has essentially been limited to our merger review process.” AAG Kanter indicated that, going forward, the DOJ would be “ramping up efforts to identify violations across the broader economy” and that it “will not hesitate to bring Section 8 … Read more

The Effect on Dividend Payouts of Board Independence

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In a new paper, we use agency theory to explore the effect of board independence on dividend policy. Over the past few decades, many studies have incorporated several market imperfections into their model of capital markets, such as transaction costs, taxes, and shareholder heterogeneity. We focus on agency costs, which can be mitigated by effective governance mechanisms, such as a more independent board of directors.

In our study, we exploit as a quasi-natural experiment enactment of the Sarbanes-Oxley Act of 2002 (SOX) and the associated exchange listing requirement that public companies have a majority of independent directors.

Dividends serve as … Read more

Wachtell Lipton Discusses Key Issues for Boards in Corporate Governance for 2023

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While the world recovers from the worst of the pandemic, the economic, political and social repercussions will continue to play out in ways that, while unpredictable, are in some respects characterized by observable patterns of cause-and-effect and cyclicality.  The pendulum has been swinging back as, for example, the Federal Reserve has been ratcheting up interest rates and tightening liquidity, activist activity is once again on the rise, Republicans have taken control of the House, and back-to-office policies have been eased into effect.  In this environment, stasis is the exception rather than the norm, and boards must continue to be nimble … Read more

The Monitoring Role of Social Media

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The rapid growth of social media over the past two decades has presented firms with a significant challenge: Users of social media can share and disseminate damaging information with potentially adverse consequences. Prominent examples that went viral include accounts of racist and sexist treatment of employees at Walmart, unsafe working conditions at Amazon, unfair pay practices at Chipotle, and environmental violations at Nestlé. As noted by social psychologist Takuya Sawaoka, “[t]he internet now allows […] thousands of people to participate in collective […] [monitoring], in a way that wasn’t possible before” (Meinch, 2021). These anecdotes suggest an important, yet unexplored, … Read more

Willkie Farr Discusses Personal Liability for Executives in the Wake of Cyber Incidents

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A new and potentially significant tool in regulatory enforcement is emerging for executives whose companies suffer a cybersecurity incident.  The Federal Trade Commission (“FTC”), in a recently proposed Decision and Order, held James Rellas, the Chief Executive Officer (“CEO”) of Drizly LLC (“Drizly”), personally liable for presiding over the company’s failure to implement and apply appropriate information security practices, which led to a data breach resulting in the exposure of 2.5 million consumers’ personal information.[1]

The decision marks the first time a senior corporate officer has been found to have personal civil liability … Read more

Shareholder Primacy and Basketball

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I recently participated in a festschrift for retired justice (and noted stakeholderist) Leo E. Strine, Jr., hosted by the University of Pennsylvania Journal of Law and Business. Justice Strine’s interventions in the debate over shareholder primacy have added heft, pragmatism, and public mindedness to the stakeholderist side. In my contribution to the symposium, I try to surface a hidden aspect of the debate.

I argue that shareholder primacy creates a competition with a single endpoint, the very best kind of game. The exhilarating tournament that results, separate and apart from any ethical or instrumental justification, is an underappreciated aspect of … Read more

Debevoise & Plimpton Discusses the Myth of Artificial Intelligence Errors

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Machines are increasingly making important decisions that have traditionally been made by humans, such as who should get a job interview or who should receive a loan. For valid legal, reputational, and technical reasons, many organizations and regulators do not fully trust machines to make these judgments by themselves. As a result, humans usually remain involved in AI decision making, which is referred to as a “human-in-the-loop.” For example, in the detection of skin cancer, the process may now involve an AI machine reviewing a photograph of a mole and making a preliminary assessment of cancer risk, followed by a … Read more

How Board Gender Quotas Affect Stock Prices

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Women have traditionally suffered from discrimination in the labor market (Tatli et al., 2013) and are under-represented in upper management (Thams, Bendell and Terjesen, 2018). To address this widespread gender imbalance, many countries have implemented gender diversity policies ranging from enforceable quotas with hard or soft sanctions to voluntary recommendations included in corporate governance codes. While multiple European Union (EU) member states developed their own legislation, the European Parliament introduce on June 7 a gender quota so that, by 2026, “at least 40% of non-executive director posts or 33% of all director posts are occupied by the under-represented sex… Read more

Wachtell Lipton Discusses ESG and Stakeholder Governance Within the Framework of Fiduciary Duties

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Over the past decade, investors, companies, and commentators have increasingly accepted and adopted stakeholder governance as the way to pursue the proper purpose of the corporation and have embraced consideration of environmental, social and governance (ESG) issues in corporate decision-making toward that end.  But an emerging movement opposed to any consideration, at all, of ESG factors threatens to erase the gains that have been made over the past ten years and revert to the outdated view that the purpose of a company is solely to maximize short-term shareholder profits.

This debate is playing out very publicly, with politicians at the … Read more

The FTX Collapse: Why Did Due Diligence, Regulation, and Governance Evaporate?

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FTX[1] is a Bahamas-based cryptocurrency exchange founded in 2019 that, at its peak in 2021, had over 1 million users, making it the world’s third largest crypto exchange by volume. Since November 11, 2022, though, FTX has been in bankruptcy, having borrowed extensively and used the assets of its clients in a likely and spectacular fraud.

Why did the capital-markets system fail to provide the checks and balances that investors count on, leaving the crypto market in the hands of operators hostile to regulation? How can we avoid a system beholden to Sam Bankman-Fried, Mark Zuckerberg, Elon Musk, and … Read more

Skadden Discusses DOJ’s First Criminal Monopolization Case in Decades

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Last month, the Department of Justice Antitrust Division announced its first criminal attempted monopolization charges in more than 40 years. In the case, U.S. v. Zito, Nathan Nephi Zito, the owner of a Montana paving company, pleaded guilty to a violation of Section 2 of the Sherman Act after allegedly attempting to allocate geographic markets per the terms of a proposed agreement with his only rival. The guilty plea came about after the rival blew the whistle on the attempt and cooperated with the Antitrust Division by recording phone calls with Mr. Zito. The guilty plea is notable because, … Read more

Let’s Stop Treating Crypto Trading as If It Were Finance

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Members of Congress and financial regulators from the Federal Reserve, U.S. Treasury, SEC, CFTC, and CFPB appear set on regulating the crypto trading system (traded coins and associated marketplaces, exchanges, brokerages, lending, staking, derivatives, intermediaries, and enablers) as part of the traditional financial services system. Policy discourse on this topic has centered around which – rather than whether – financial regulators should be in charge of crypto trading. In advancing this view, Congress and the regulators appear to be following a path laid out by crypto companies seeking legitimacy through inclusion (on their own terms), in regulated finance.

Supporters of … Read more

Olshan Discusses FINRA, Stock Exchange Crack Down on Small-Cap IPO “Ramp and Dump” Schemes

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On November 17, 2022, the Financial Industry Regulatory Authority (“FINRA”) issued a special alert to FINRA members concerning the heightened threat of fraud in small capitalization initial public offerings (“IPOs”). At the same time, both the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market (“NASDAQ”) released separate notices to their members expressing similar regulatory scrutiny in connection with small-cap IPOs. In Regulatory Notice 22–25, FINRA observed the recent trend of significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in China and other … Read more

Fraud on the Crypto Market

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Investors now routinely turn to crypto asset trading for portfolio appreciation and diversification, but significant investor protection concerns loom. Between 2017 and 2019, thousands of crypto assets were offered to the public and others through initial coin offerings. Many of those offerings were legitimate, and the crypto assets they facilitated continue to support applications and actively trade on crypto exchanges. But many other crypto asset initial offerings were riddled with fraud, with crypto asset sponsors and others misrepresenting to investors key aspects of the offering.

Now, as crypto asset investing has evolved to include widescale secondary trading of crypto assets … Read more

Paul Hastings Discusses SEC’s Crypto Victory in the LBRY Case

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On November 7, a federal judge ruled that LBRY Credits (“LBC”) are securities, and thus LBRY violated Section 5 of the Securities Act of 1933 by selling LBC.[1] LBRY responded with a tweet describing the ruling as “extraordinarily dangerous precedent that makes every cryptocurrency in the U.S. a security, including ethereum.”[2]

SEC v. LBRY, Inc. treads new ground in one sense. It is the first time a federal court has found a token sold outside of an Initial Coin Offering (“ICO”) to be a security. The real question is whether the ruling really means every cryptocurrency is a … Read more

Does Student Loan Forgiveness Have Significant Benefits for the Economy?

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Student loans are becoming a major challenge for the United States. An estimated 43 million borrowers owe about $1.6 trillion dollars, meaning a significant fraction of U.S. households is burdened with debt that is not dischargeable in bankruptcy. The problem has taken on increased political and economic significance since the Biden Administration announced a federal student-loan forgiveness program that opponents have criticized as a $400-billion social welfare program for the well-to-do.

In a new paper, we take a novel approach to student loan forgiveness by empirically exploring whether it has important economic benefits that could at least partially offset its … Read more

Skadden Discusses First OFAC and FinCEN Parallel Enforcement Actions on Virtual Currency

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On October 11, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN) announced settlements for approximately $24 million and $29 million, respectively, with virtual currency exchange Bittrex, Inc. (Bittrex). The settlements represent the first parallel enforcement actions by FinCEN and OFAC in the virtual currency space and OFAC’s largest virtual currency enforcement action to date. The investigations by OFAC and FinCEN found that the company engaged in apparent violations of several sanctions programs and willful violations of the Bank Secrecy Act’s (BSA’s) anti-money laundering (AML) program and suspicious activity … Read more

How Patent Thickets Distort the Acquisition Market

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Patent thickets are dense webs of overlapping intellectual property rights. They are common in industries ranging from semiconductors to smartphones to pharmaceuticals.  When many firms own the underlying patents, thickets complicate licensing negotiations and increase the risk of holdup and litigation. These costs can be enormous: In 2021, for example, Intel paid $2.1 billion to VLSI Technology after a jury ruled that it had infringed two of VLSI Technology’s semiconductor patents. Conversely, firms that build their own patent thickets can use them to defend against litigation or even to crowd out competitors. This strategy allowed pharmaceutical companies such as AbbVie, … Read more

SEC Enforcement Chief Speaks on Penalties, Investigations, and Compliance

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Throughout my first year as Director, I have spoken[1] often about the public’s declining trust in our institutions and financial markets.[2] I have observed that, while there is no single cause for this decline of trust, it is in part due to the perception that we—the regulators—are failing to hold bad actors accountable, and that there are two sets of rules: one for the big and powerful and another for everyone else.

In those speeches, I also outlined steps that we in the SEC’s Division of Enforcement would take, and have taken, to address the decline in public

… Read more

Do Favorable ESG Ratings Lead to More Socially Responsible Behavior?

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One of the hottest topics in the business world is ESG ratings, which are designed to measure the environmental, social, and governance risks of a company. The idea is that increased transparency about companies’ ESG risks will motivate those with a low scores to improve and at least match the performance of competitors with high scores. Yet research on whether these ratings actually work is surprisingly sparse.

In a new study, we examined how companies responded to some of the first ESG ratings in the early 1990s issued by KLD Research & Analytics (KLD), a pioneering ESG rating agency. Contrary … Read more

Debevoise & Plimpton Discusses the EU AI Liability Directive’s Impact on Artificial Intelligence Legal Risks

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On September 28, 2022, the European Commission released a proposal to change the legal landscape for companies developing and implementing artificial intelligence in EU Member States. This AI Liability Directive would require Member States to implement rules that would significantly lower evidentiary hurdles for victims injured by AI-related products or services to bring civil liability claims. Most importantly, the Directive would create a “presumption of causality” against the AI system’s developer, provider, or user.

The proposed AI Liability Directive should be seen as part of a broader package of EU legal reforms aimed at regulating AI and other emerging technologies. … Read more

Can Shareholder Lawsuits Police Companies’ Climate Disclosures?

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In March 2022, the SEC proposed mandatory climate disclosures for public companies.[1]  While climate activist investors applauded the proposed rules, opponents lamented their scope and cost, arguing that the SEC lacks the authority to promulgate such rules. But the debate  largely overlooked a key point: The success of a climate disclosure regime – mandatory or voluntary – rests on accuracy of the disclosure.  By some accounts, the private right of action is the most effective way to prevent companies from providing misleading information to their shareholders.  The SEC lacks the resources  and, in a controversial area like climate, may … Read more

Columbia Law School to Hold 2022 Conference on M&A and Corporate Governance

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On December 2, 2022, Columbia Law School will hold its 2022 Conference on Mergers & Acquisitions and Corporate Governance. The event is co-sponsored by the school’s Ira M. Millstein Center for Global Markets and Corporate Ownership, the Columbia Law School Center on Corporate Governance, and the law firm of Paul Hastings LLP.

The event brings together members of the federal and Delaware judiciaries, government regulators, academics, and prominent M&A and corporate governance practitioners. This year’s panelists are scheduled to include Delaware Chancellor Kathaleen St. J. McCormick, Delaware Vice Chancellor Lori W. Will, U.S. Senior District Judge Jed S. Rakoff, Chief … Read more

Do Individual Directors Matter?

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A fundamental question in corporate governance research is whether the board of directors affects firm value. Some argue that directors contribute no additional value to the firm and may even lower its value if they act only as a rubber stamp on the CEO’s decisions. However, the weight of evidence is that directors can increase value by, for example, using their experiences and connections to improve firm performance in specific settings.

Yet, largely absent from the literature is an investigation of whether individual directors possess unique characteristics that increase value, irrespective of which boards they sit on or the prevailing … Read more

FTC Chair Khan on the Enforcement Policy Regarding Unfair Methods of Competition

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When Congress passed the FTC Act in 1914, it didn’t just create a new agency. It created new law for that agency to enforce. Section 5 of the Act provides that “unfair methods of competition in or affecting commerce” are “hereby declared unlawful.”1 The next clause states, “The Commission is hereby empowered and directed to prevent” businesses “from using unfair methods of competition.”2

Together these sentences form the heart of the Commission’s legislative mandate in the domain of competition.3, 4 Accordingly, over the last century the Commission used its Section 5 authority to challenge a host of unlawful business practices.

… Read more

Estimating the Cost of Control Rights in the Corporate Loan Market

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Financial covenants have gone in and out of style over the last 30 years. They serve to transfer control rights to lenders when a borrower’s financial metrics breach pre-set contractual thresholds and so provide an interesting laboratory to study debtholder-shareholder conflicts and how they are potentially resolved. First, covenants can enhance efficiency by making contracts between lenders and their borrowers more complete. Second, through the contingent transfer of control during the term of the loan, they provide scope for renegotiation and wealth transfers that are primarily at the discretion of the lender.

In practice, covenant violations are associated with a … Read more

SEC Announces Enforcement Results for FY 2022

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The Securities and Exchange Commission today [November 15] announced that it filed 760 total enforcement actions in fiscal year 2022, a 9 percent increase over the prior year. These included 462 new, or “stand alone,” enforcement actions, a 6.5 percent increase over fiscal year 2021; 129 actions against issuers who were allegedly delinquent in making required filings with the SEC; and 169 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders. The SEC’s stand-alone enforcement actions in fiscal year 2022 ran the gamut of … Read more

Social Washing or Credible Communication?

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Investor demand for information about firms’ environmental, social, and governance (ESG) commitments has prompted substantial corporate disclosure of their ESG activities. However, these disclosures often raise questions of “social washing,” where firms make unsubstantiated claims or misrepresent their company as more socially responsible than it is.

In a recent study, we consider social washing related to diversity, equity, and inclusion (DEI). Beginning in 2020, the Securities and Exchange Commission (SEC) required publicly-traded firms to include under Item 1 “Business” of their 10-K filings a description of the registrant’s human capital resources, including the number of persons employed by the registrant … Read more

SEC Investment Management Chief Speaks on Regulation Outside the U.S.

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Good morning.  Thank you, Mark, for your kind invitation to speak with you all today – and congratulations on the 25th anniversary of this conference.  I am deeply honored to be giving the Scott Friestad Memorial Keynote address, particularly since we are joined today by his son, Wilson.  Thank you, Wilson, for your gracious introduction.

Although my time at the SEC began after Scott’s passing, Scott’s diligence, excellence, and commitment to public service continue to resonate within the agency today.  Indeed, I see those traits in the colleagues by whom I’m inspired every day in the Division of Investment

… Read more

All Stick and No Carrot? Reforming Public Offerings

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The traditional IPO was once the dominant path to raising capital for a growing company, but challengers, most notably SPACs and direct listings, have emerged.  In our essay, we argue that the regulation of public offerings should seek to facilitate the transition from private company to public when this transition maximizes the joint welfare of investors and the issuer. Although the SEC frequently invokes investor protection as the goal of securities regulation, investors bear the cost of regulation, too. A lighter regulatory touch may be appropriate if markets have efficient price discovery.

To identify efficient pricing, we start with the … Read more

Sullivan & Cromwell Discusses Expiration of Legacy NAFTA Investor Protections

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In 2020, the United States-Mexico-Canada Agreement (“USMCA”) entered into force, replacing the 1994 North American Free Trade Agreement (“NAFTA”).  Both treaties include certain protections that the contracting states must afford to nationals of the other contracting states investing in their territory, and provide for arbitration as a forum to recover losses from breaches of those protections.  However, USMCA contains additional limitations and restrictions on foreign investors’ rights to pursue claims in arbitration for breach of the treaty’s terms.  Under Annex 14-C of USMCA, claims related to foreign investments established or acquired while NAFTA was in place (so-called “Legacy Investments”) may … Read more

How Companies Distract Investors When Disclosing Bad News

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SEC regulations require public firms to disclose any “material event” on a form 8-K filed within a certain time period. These events include earnings announcements, changes in an executive or director, changes in auditor and the issuance of new debt or equity. The news can be good or bad, and firms often issue press releases explaining the event.

We examine whether firms forced to disclose bad news issue press releases touting unrelated news around the time of the filing to distract investors. We study a broad sample of thousands of 8-K filings that are accompanied by press releases and find … Read more

How Mandatory Disclosure Affects the Takeover Market for Private Banks

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Financial disclosure is critical for the efficient allocation and reallocation of capital. However, the debate on the costs and benefits of disclosure mandates is unresolved, and the empirical evidence is mixed. In a new paper, we contribute to this debate by investigating the role of disclosure mandates in the takeover market for banks.

Mergers and acquisitions are essential means of capital reallocation, helping to direct assets towards their best use by reallocating control rights over companies. In 2021 alone, the announced global M&A transaction volume exceeded $5 trillion. Financial disclosures play a critical role in M&A, allowing acquirers to evaluate … Read more

Arnold & Porter Discusses State Attorneys General Probes of Banks with Net-Zero Pledges

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On October 19, 2022, 19 Republican state attorneys general (the AGs) launched a coordinated investigation by issuing civil investigative demands (CIDs) to six major US banks. The CIDs seek information related to the banks’ membership in the United Nations’ Net-Zero Banking Alliance (NZBA) and other climate-related initiatives. The NZBA is an alliance of 120 banks from 41 countries representing 39% of global banking assets. According to the NZBA commitment statement, member banks commit to transitioning their own operational greenhouse gas (GHG) emissions and GHG emissions attributable to their lending and investment portfolios to align with pathways to net zero … Read more

What CEOs Really Get Paid under Long-term Incentive Plans

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U.S. public firms increasingly use long-term performance-based plans to compensate CEOs. Under these plans, CEOs are expected to receive different levels of pay based on how the firm performs relative to various performance goals over multi-year periods. For example, Tesla gave Elon Musk a controversial pay package in 2018 with an initial estimated value of $2.6 billion and a potential payout of over $50 billion. However, to realize the payout, Musk needs to meet 12 market capitalization milestones and 16 revenue- or earnings-based milestones in the coming 10 years. What Musk will actually receive at the end of the performance … Read more

Debevoise & Plimpton Discusses White House’s Blueprint for an AI Bill of Rights

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On October 4, 2022, the White House released the Blueprint for an AI Bill of Rights (the “Blueprint”), which provides non-binding “principles” for organizations in both the public and private sectors to use when developing or deploying artificial intelligence (“AI”) or other automated systems.

The Blueprint does not include many new ideas for AI compliance. Instead, it represents a collection of principles that have been included in laws and guidance published by governments and organizations around the world. But unlike many of those guidelines, it takes a rights-based approach that is focused on AI’s potential harm, rather than a risk-based … Read more

Insider Trading and Clinical Drug Trials

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For at least a quarter century, the Securities and Exchange Commission (SEC) has pursued claims of unlawful insider trading where the information at issue was material to the stock price of the sponsor of a clinical trial. In recent years, almost half of these cases were also prosecuted criminally, some resulting in prison sentences. Because the cases arise out of work in a medical academic setting, those charged may not have understood the broad reach of the law, including the misappropriation theory. Training and prophylactic measures may be deficient. The trading based on inside information about clinical trials is similar … Read more

Kirkland & Ellis Discusses First-Ever CFIUS Enforcement Guidelines

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On October 20, 2022, the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) released its first-ever guidelines (the “Guidelines”) pertaining to the enforcement actions that CFIUS may take under applicable statutes and regulations (“CFIUS Rules”). The Guidelines are neither comprehensive nor binding, nor do they provide CFIUS with any new authorities, but they do provide insight into how CFIUS will approach enforcement. They may also forecast an increase in CFIUS’s enforcement activities, which have been limited to date.

We summarize the key aspects of the Guidelines and provide related takeaways below.

Types of Violations

The Guidelines … Read more

Corporate Governance Beyond the Shareholder and Stakeholder Models

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In a new paper, we compare the main models of corporate governance (Schoenmaker, Schramade and Winter, 2022). One is the stakeholder model, which recognizes that companies have responsibilities to society that are broader than just making a profit. A problem with that model, though is that it includes multiple goals, making it difficult to hold management accountable. Moreover, the traditional stakeholder model tends to focus on stakeholders who are directly involved with the company, such as employees and customers. Stakeholders without such a direct relation are given short shrift, even though the company’s conduct clearly affects them – and future … Read more

Skadden Discusses Final FinCEN Rule on Beneficial Ownership Reporting

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On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a long-awaited final rule implementing the beneficial ownership information (BOI) reporting requirements of the Corporate Transparency Act (CTA). The final rule adopted much of FinCEN’s December 8, 2021, proposed BOI reporting rule, though FinCEN made several notable amendments in the final rule.1

Among other things, the final rule:

  • adjusts some of the reporting timelines established in the proposed rule;
  • does not recognize additional types of entities that are exempt from the CTA’s reporting requirements, but clarifies the application of certain exemptions and that no filing

… Read more