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Why the SEC’s Proposal for “Modernization of Beneficial Ownership Reporting” Is Flawed

Last February, the Securities and Exchange Commission proposed to “modernize” the reporting of beneficial ownership of a company’s stock under section 13(d) of the 1934 Securities Exchange Act.  As I explained in a recent comment letter to the SEC, the proposal is flawed in several ways. First, it risks suppressing proxy contests, which are the principal, if not the sole, method for holding corporate managers accountable to shareholders. Second, to the degree the Commission is concerned about improper tipping of information related to activist engagements, that concern can and should be addressed by developing new rules specific to such tipping … Read more

ISS Discusses Shareholder Resolutions on Lobbying

Shareholder resolutions filed in the 2022 proxy season reflect continuing investor concern over lobbying activities and whether they are consistent with a company’s public positions and aligned with shareholder interests. However, the passage of only two such resolutions indicates that the majority of shareholders are satisfied with company efforts to address these concerns.

In this series of snapshots, ISS Corporate Solutions examines the key corporate issues raised by this season’s shareholder resolutions. This time, we look at resolutions on lobbying, including activities focused on climate. Voting results are based on filings by companies up to June 13, 2022.

More shareholder

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The Lummis-Gillibrand Responsible Financial Innovation Act

On June 10, 2022, U.S. senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced S. 4356, their Responsible Financial Innovation Act, to transfer most regulation of cryptoproducts to the Commodity Futures Trading Commission (CFTC}, essentially ousting the SEC, presumably perceived to be a more aggressive regulator, from oversight of cryptoproducts that were securities.

The senators’ timing could not have been worse. Between November 2021 and June 21, 2022, global crypto capitalization fell 69 percent, led by Bitcoin, the industry leader, which declined 70 percent, Coinbase, the leading crypto exchange, which fell 86 percent, and Tether, a supposedly safe form of … Read more

Debevoise Discusses FTC Focus on Private Equity

On June 13, 2022, the Federal Trade Commission’s (“FTC”) five commissioners aired their ideological differences over the regulation of private equity-backed consolidation and the tools used to police such deals via a consent agreement settling the FTC’s challenge to a $1.1 billion merger of veterinary clinics. The Commission’s majority used the consent to impose potentially significant and unprecedented limitations on future acquisitions of related businesses.

The Commission’s statements and relief granted in the consent agreement could have far-reaching implications for future private equity acquisitions, particularly roll-up strategies.

FTC Settles with JAB on Veterinary Clinics Acquisition

Monday’s consent agreement settles an … Read more

The Implications of Complexity in CEO Pay Packages

Tying chief executive officer (CEO) pay to performance goals aims to solve a classic principal-agent problem, helping to ensure that the CEO acts in the best interest of shareholders. But can it be too much of a good thing – can compensation contracts be too complex?  Our research says yes.

Compensation contracts have numerous features, including different forms of compensation (e.g., salary, bonus, stock, and stock options), a variety of performance metrics, multiple periods for measuring performance, and different performance benchmarks (whether measured in relation to a specific pre-set target or the performance of a peer company). Compensation committees use … Read more

SEC Commissioner Peirce Criticizes Regulatory Flexibility Agenda

Chair Gensler’s Regulatory Flexibility Agenda[1] for the Securities and Exchange Commission sets forth flawed goals and a flawed method for achieving them. The agenda, if enacted, risks setting off the regulatory version of a rip current—fast-moving currents flowing away from shore that can be fatal to swimmers. Just as certain wave and wind conditions can create dangerous rip currents,[2]the pace and character of the rulemakings on this agenda make for dangerous conditions in our capital markets.

I. The Agenda Devotes the Agency’s Limited Resources to Rulemaking Proposals Disconnected from Our Core Mission

The Agenda continues to shun

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Corporate Criminal Liability for ESG Initiatives Is on Its Way

The Securities and Exchange Commission (“SEC”) has signaled that it wants to increase enforcement against “greenwashing” – misrepresentation of a company’s environmental actions.  It is not yet clear, though, whether these enforcement efforts will expand the risk of corporate criminal liability. In a new paper, I argue that they will, and that businesses should think about their risks regarding potential criminal fraud in the environmental area.

Setting the Stage for the SEC’s ESG Actions

Frustration with greenwashing has been growing as more and more money chases ESG investments. The term “ESG” – environmental, social, and governance initiatives – is … Read more

Skadden Discusses Senate Bill to Create Regulatory Structure for Crypto and Other Digital Assets

In recent years, innovation in the blockchain or “Web3” space has been impacted by uncertainty on the regulatory front. Undoubtedly, the greatest area of uncertainty has involved the Securities Exchange Commission (SEC) and its application of the so-called Howey test when determining whether a cryptocurrency or other digital asset is being offered as an investment contract for purposes of applying U.S. securities law. Despite repeated calls for regulatory clarity from industry members, lawmakers and even SEC commissioners, little progress has been made in achieving that clarity.

Industry members have therefore increasingly come to the conclusion that a long-term solution will … Read more

The Need for Engaged Governance During Existential Crises: The Case of Aerojet Rocketdyne

Engaged shareholder voting is often perceived as the linchpin of sound corporate governance. That reputation is well deserved: Even as corporate governance has broadened its sights of late to accommodate a wider set of stakeholders, the pivotal role of shareholders in corporate decision making remains very much at the core of corporate law. Particularly within public companies, the shareholder voting franchise is a signature vehicle through which informed investors voice their approval, their concerns, and even their repudiation of managerial decisions. Highly diversified shareholders and institutional investors frequently engage the services of proxy advisers to help them become informed about … Read more

ISS Discusses Global Crackdown on ESG Greenwashing

The meteoric global rise of ESG investing is increasingly being met with an equally ambitious regulatory disclosure regime, and, targeting greenwashing, policymakers are beginning to bare their teeth. In the latest salvo, on 25 May the US Securities and Exchange Commission (SEC) voted 3:1 to approve two proposals enhancing scrutiny of ESG funds and advisers’ ESG practices. One proposal seeks to expand the rule governing fund naming conventions and the other proposes additional disclosure requirements by funds and investment advisers about ESG investment practices.

Overview of SEC proposals

While the proposed changes to the Names Rule are ostensibly engendered by

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Why Do Companies Going Public Choose Controversial Governance Structures, and Why Do Investors Let Them?

Over the past three decades, there has been increasing concern about how corporate governance structures such as classified boards and dual class stock entrench managers, reduce director effectiveness, and reduce firm value. Likely as a result, mature firms have increasingly eliminated these structures. While almost 60 percent of S&P 1500 companies had classified boards in the 1990s, only 35 percent had them in 2017. The percentage of companies with dual class shares has also dropped, from 12 percent of the S&P 1500 in the 1990s to 7 percent in 2017.

Strikingly, newly public firms’ structures have moved in the opposite … Read more

Sullivan & Cromwell Discusses Supreme Court Decision on Exemption to Federal Arbitration Act

Among other things, the Federal Arbitration Act (FAA) authorizes U.S. courts to enforce arbitration agreements in “contract[s] evidencing a transaction involving commerce,” but excludes from its scope “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  On June 6, 2022, the U.S. Supreme Court ruled in Southwest Airlines Co. v. Saxon, 596 U.S. ___, 2022 WL 1914099 (June 6, 2022), that workers “who load cargo on and off airplanes belong to a ‘class of workers in foreign or interstate commerce’” to which the FAA does not apply.[1]  In … Read more

Bipartisan Group of Former SEC Officials and Securities Experts Confirms Longstanding SEC Authority on Climate Disclosure

[Editor’s Note: This post is based on a comment letter submitted to the U.S. Securities and Exchange Commission on June 16, 2022. The full letter is available here. Also, please see the Note at the end of this post.]

The Working Group on Securities Disclosure Authority respectfully submits these comments on the Commission’s recent proposal related to mandated, standardized climate-related disclosures for investors. We write to make clear the view among experts in securities law that the Commission has statutory authority to promulgate disclosure rules in this area.

Our bipartisan Working Group is comprised of leading academics, … Read more

SEC Chair Gensler Issues Statement on Request for Comment on “Information Providers”

Today [June 15], the Commission voted to issue a request for comment to help determine which “information providers,” such as index providers, model portfolio providers, and pricing services, might come under the Commission’s definition of an investment adviser. The role of these information providers in today’s markets raises important questions under the securities laws as to if they are providing investment advice rather than merely information. I am pleased to support this request because it will help inform our consideration of when—and under what facts and circumstances—these providers are giving “investment advice.”

In recent decades, the use of information providers

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Asset Managers as Regulators

The corporation’s role in society is in flux. Previous generations saw government as an important bulwark against corporate harm. Today, by contrast, corporate America is thought to be a solution to government dysfunction around issues like inequality and the environment. In addition, the “Big Three” asset manager giants that specialize in index funds – Vanguard, State Street, and BlackRock – have voiced concern over these same issues and promised that they will push companies to address them.

In a new article, I evaluate this shift in the corporate political environment. I argue that demand for regulation has outstripped supply, and … Read more

Wachtell Lipton Discusses Stakeholder Capitalism and ESG as Tools for Value Creation

Recent high profile investigations into greenwashing, the ongoing war in Ukraine and soaring energy costs have prompted questions as to the purpose and value of ESG, and more broadly, stakeholder capitalism.  Some have criticized stakeholder capitalism and ESG as “woke” politics, a threat to shareholder interests and a distraction for boards and management.  Others have questioned whether stakeholder capitalism and ESG can straddle “doing good” and “doing well.”  Uncertainty also abounds as to what ESG truly means.

We believe stakeholder capitalism and ESG are fundamentally frameworks to enhance the sustainable long-term value of a corporation.  Both are tools for boards … Read more

The Unsung Upside of Share Repurchases

Stock repurchases by issuing corporations have always been controversial. But they have become even more so recently because of the perception that the excess funds used to finance buybacks have come from tax cuts and other sources (such as government bailouts) that were intended to stimulate reinvestment or enhance wages and benefits for workers. As a result, critics have proposed that tax law be amended to discourage buybacks (and possibly dividends as well) on the theory that the benefits of such distributions go mostly to executives (who are compensated in large part with equity) and to already wealthy stockholders.

The … Read more

Sullivan & Cromwell Discusses SEC Amendments Requiring Electronic Filing

On June 2, 2022, the Securities and Exchange Commission (the “SEC”) adopted amendments[1] to Regulation  S-T, the Securities and Exchange Act of 1934 (the “Exchange Act”) and certain forms, including Forms 144, to mandate the electronic filing or submission of documents that are currently permitted to be filed in paper form, including “glossy” annual reports to security holders, Forms 144 in the case of public companies, Forms 6-K, notices of exempt solicitations and exempt preliminary roll-up communications and annual reports of employee stock purchase, savings and similar plans on Form 11-K. The rules also mandate the use of Inline … Read more

Do Investor Reactions Differ Across the Lifecycle of ESG Initiatives?

Firms often take on environmental, social, and governance (ESG) initiatives to increase their sustainability and the positive feelings among investors. However, specific ESG initiatives, like all business initiatives, rarely continue indefinitely, and “pruning” them is an integral part of firms’ strategic approach to ESG. Firms may discontinue even successful ESG initiatives, perhaps because of financial strain or uncertainty from developments like the COVID-19 pandemic. In a recent paper, we investigate how investors’ reactions to ESG might change over the lifecycle of an ESG initiative. Specifically, we test the idea that investors are most sensitive to the ethical implications of … Read more

Davis Polk Discusses Reopening of Comment Period for SEC’s Dodd-Frank Clawback Rule

On June 8, 2022, the Securities and Exchange Commission announced that it is again reopening the comment period for its proposed clawback rule, a rule that has been required to be promulgated since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This new comment period is the SEC’s third request for comments on the clawback rule, with comments previously requested on proposals published in July 20151 and October 20212. As part of this reopening, which did not include a new version of the proposed rule, the SEC Staff released a … Read more

Does Mandatory Board Gender Balancing Reduce Firm Value?

As a social-policy instrument, forced board-gender balancing is in principle unrelated to firms’ economic performance. Nonetheless, imposing such a policy may have unintended consequences (positive or negative) for firm value, which is important for all of a firm’s constituencies – not only shareholders – to understand properly.

In other words, the potential valuation effect of forced director-gender balancing is an empirical question. Our research addresses this important issue using the powerful setting provided by Norway’s pioneering quota law from 2003. This law, which regulated all Norwegian public liability companies (“Allmennaksjeselskaper” or ASA, which can raise equity capital from the … Read more

Debevoise Discusses Shareholder Climate Activism and 401(k) Plans

In December 2021, As You Sow, a non-profit foundation promoting environmental and social corporate responsibility, filed shareholder proposals on behalf of Amazon.com and Comcast Corporation shareholders for action at each of their 2022 annual meetings. The Amazon proposal and the Comcast proposal were identical, requesting that the board of directors prepare a report with the board’s assessment of how the company’s retirement plan options align with the company’s climate action goals. The supporting statement suggested that the report include, at the discretion of the board of directors, how the company could provide employees with more sustainable investment options, such … Read more

Consumer Responses to Corporate Bankruptcy

Distressed firms may avoid an otherwise beneficial Chapter 11 reorganization because they fear losing customers.  In our recent paper, we use two experiments to estimate the effect of corporate bankruptcy on consumer demand for a bankrupt firm’s products. We find that learning about a Chapter 11 bankruptcy filing reduces a consumer’s willingness to pay for the bankrupt firm’s products by 18-35 percent, depending on the industry.

We consider three reasons why consumers might care about a corporate bankruptcy. First, consumers might worry that a bankruptcy could lead to liquidation, preventing them from taking advantage of warranties, return policies, reward … Read more

SEC Chair Gensler Speaks Before Investor Advisory Committee

Good morning. It is great to join the Investor Advisory Committee (IAC) today. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or Securities and Exchange Commission staff.

I would like to welcome the new members of this Committee. The eight of you bring a wide-ranging set of experiences to this group, coming from government, academia, funds, non-profits, and the U.S. Navy. Thank you for volunteering your time and energy on behalf of investors.

Today’s meeting marks a year since I first had the opportunity to meet

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Investor Information Gathering and the Resolution of Uncertainty

Gathering additional information is an instinctive response to uncertainty. This behavior is found in many settings, perhaps most pervasively in capital markets. For example, if investors observe an earnings number that differs from what they expected, they might seek to better understand the number by gathering additional information and context from financial statements or corporate disclosures. Such efforts may not fully resolve the uncertainty that prompted them, particularly if uncertainty is more difficult to resolve as it increases. Thus, the intensity of investors’ information gathering efforts may reflect both the uncertainty that motivated their search and the residual uncertainty that … Read more

SEC Chair Gensler Speaks on Plans to Overhaul Stock Trading

Thank you, Rich (Repetto), for that kind introduction. It is good to be with you again. As is customary, I’d like to note my views are my own, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

Rich, at last year’s conference, you and I spoke about how technology has transformed and continues to transform our equity.[1]

This has led to some good things. For example, retail investors have greater access to markets than any time in the past.

This technological transformation, though, also has led to challenges, including market segmentation, concentration, and potential

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Don’t Forget the “G” in ESG: The SEC and Corporate Governance Disclosure

In March 2022, the SEC proposed rules (the “Proposed Rules”) that, if adopted, will require public companies to include extensive climate-related disclosures in their periodic reports.[1]  According to the SEC, this disclosure will help investors “make informed judgments about the impact of climate-related risks on current and potential investments.”[2]  However, requiring public companies to disclose information about climate-related risks is not enough to protect investors or ensure that they are fully informed.  The SEC also needs to require public companies to disclose additional information about their corporate governance practices, especially those relating to shareholder rights.

In my recent … Read more

Debevoise Discusses European Parliament’s Response to EC’s Proposal to Review AIFMD

On May 16, 2022, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament published a draft report on the European Commission’s proposal for review of AIFMD. We previously reported on the Commission’s proposal at the end of 2021. The new report takes into account many of the concerns raised by the industry and simplifies many of the newly introduced requirements in a helpful manner. It is therefore generally an improvement on the version published last year, but it remains to be seen how many of the proposed changes will be picked up in the course of the … Read more

How Accounting Employees’ Incentives Affect Financial Reporting Quality

An extensive body of literature that spans accounting, corporate finance, management, and other adjacent disciplines examines the relationship between senior executives’ contractual incentives (e.g., bonus plans, stock and option holdings) and various properties of their firms’ financial reporting and disclosures. The collective evidence that emerges from this vast literature is not only surprisingly mixed, but also largely neglects consideration of the contractual incentives of employees lower in the organizational hierarchy. This is a particularly conspicuous oversight since many of these subordinates (e.g., financial accountants, cost accountants, internal auditors, and other accounting and finance employees) have more direct access to, and … Read more

Universal Proxy Cards and the 67 Percent Solution

The upcoming Universal Proxy Card (UPC) presents activist investors with only one potentially significant new burden: solicit two-thirds of the shares in a proxy contest at a portfolio company. Everything else in the new rule, including the new proxy card format and contents and the notice schedule, is largely immaterial to investors.

A close read of the rule and the supporting economic analysis suggests activists can handle this new requirement easily. Almost all proxy contests already hit the 67% level, probably because it means soliciting a surprisingly small number of shareholders. And an activist with an appetite for pushing legal … Read more

The ALI’s Restatement of the Corporate Objective Is Flawed

Almost 30 years after the American Law Institute published the Principles of Corporate Governance, it has launched an effort covering similar ground, this time promising a Restatement of the Law of Corporate Governance.

The difference between the Principles and the new Restatement, according to the ALI’s director, Professor Richard Revesz, is that the Restatement will be “grounded in the sources of positive law” while the Principles presents “best practices for the affected institutions.”  In addition, the Restatement will aim to capture the evolution of corporate law prompted by institutional investors’ increasing share of stock ownership, the rise … Read more

Wachtell Lipton Discusses Emerging Issues in Decentralized Governance and the Lessons of Corporate Governance

While recent gyrations in cryptoasset markets have focused attention on the future contours of stablecoins, market-making, and impending regulation, another feature of the blockchain landscape is also confronting noteworthy challenges.  Specifically, a new breed of business organization has emerged that is defined by its rejection of the centralized, traditional governance structures at the heart of our modern corporations.  These decentralized blockchain-based organizations are conducting a substantial, growing volume of business activity, and many are encountering a variety of governance challenges.  Some of these challenges are novel, but many others strikingly resemble those that corporations have confronted for decades.  We … Read more

How Boards Use Auditor-Provided, Non-Public Information in Overseeing Management

To what extent do directors care about financial reporting? Prior research provides some evidence that financial reporting quality is important to boards and that financial misreporting influences their executive retention decisions. For example, the public revelation of past financial reporting errors or intentional misstatements increases the likelihood that the board will dismiss the CEO or CFO. However, restatement announcements, financial-statement fraud, and other publicly revealed attempts to misstate earnings reflect poorly on both management and the board, creating an incentive for directors to deflect responsibility from themselves. Thus, it is not necessarily clear whether directors respond to financial misreporting because … Read more

Assistant AG for National Security Speaks on Cybersecurity

Good afternoon. I’m Matt Olsen and I am the Assistant Attorney General for National Security at the United States Department of Justice.

I’m very pleased to be here at CyCon. Thank you to Lucas for moderating this panel, to my esteemed fellow panelists, and to the NATO Cooperative Cyber Defense Center of Excellence for hosting this important conference.

This is a crucially important moment for us to gather together, as NATO allies and our partners beyond the alliance. I know for all of us the crisis in Ukraine is front of mind, in particular the inspiring bravery of the Ukrainian

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Mission Critical ESG and the Scope of Director Oversight Duties

How can shareholders hold directors accountable for paying insufficient attention to the broader interests of society? In the past few years, several ESG issues have become a source of major risk for companies and their shareholders. Even if the behavior in question is not punishable by law, failure to address critical ESG concerns could harm a company’s reputation and ability to attract and retain talent, access capital, or sell products. The ESG literature has mostly focused on classic corporate governance mechanisms for shareholders to hold directors accountable, from voting with their feet by investing based on ESG criteria to voting … Read more

In Search of Good Corporate Governance

What is the right governance framework for a public company? This question sits at the core of decades of empirical and theoretical research, and yet we still lack consensus on an answer. In particular, agency-cost essentialists support governance structures that maximize accountability to the company’s shareholders, while proponents of board-centered models, as well as stakeholder governance advocates, prefer arrangements that insulate management from shareholder influence. Still others contend that there is no “one-size-fits-all” governance arrangement. Despite this range of views, agency-cost essentialists have mostly won the day. In both academic and professional circles, “good governance” is generally defined as the … Read more

Skadden Discusses the Growing Complexity of Commercial Rights Issues In NFTs

Although it has only been a little over a year since nonfungible tokens came into the mainstream, the industry has taken a number of twists and turns, not the least of which is the granting of certain commercial exploitation rights in the digital works associated with an NFT.

However, this trend has uncovered an inherent issue with attaching contractual rights to NFTs. It is an issue for which there is not yet a definitive solution, which is creating potential issues for rights holders, NFT issuers and NFT owners.

In order to understand this issue, one needs to keep in mind … Read more

Decentralized Finance, Crypto Funds, and Value Creation in Tokenized Firms

Decentralized Finance (DeFi) employs blockchain technology and smart contracts with the goal of enabling perfectly disintermediated financial markets. Despite the far-reaching ambition, DeFi markets are experiencing increasing intermediation recently, as a new type of intermediary, so-called Crypto Funds (henceforth, CFs), reintroduces centralized market structures. In fact, the number of newly established active CFs has substantially grown over the last four years to more than 850 at the end of 2021, with a surge in total assets under management from $8.3 billion in mid-2018 to $57.5 billion in 2021. In a new article, we address the question of why CFs find … Read more

ISS Discusses Growing Disapproval of CEO Pay Proposals

For many companies, 2021 signaled a return to normal business after the COVID-19 pandemic upended the economy and significantly disrupted financial forecasts established at the beginning of 2020. Given the difficulty in meeting financial targets set under short- and long-term incentive plans, CEO pay levels remained essentially flat in FY2020 for both S&P 500 and Russell 3000 (excl. S&P 500) companies. Despite the lack of pay increases, investors rejected compensation proposals in Say-on-Pay votes at a historic rate during the 2021 proxy season, with a record 20 companies in the S&P 500 failing to secure majority support for their proposals.

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A Lawyer’s Guide to Empirical Corporate Governance

Debates about corporate governance ultimately rest on empirical studies that evaluate whether a particular type of governance enhances shareholder value. In recent years, lawyers have increasingly engaged with these studies, by either criticizing or praising them, and given them greater publicity. Likewise, judges in cases involving corporate governance matters such as anti-takeover devices and fiduciary duties have cited those studies when assessing the consequences of different governance mechanisms for firm value. The challenges for lawyers are that, first, many of them are not trained in statistical methods and econometrics and, second, many empirical studies reach conflicting results. Accordingly, it is … Read more

SEC Chair Gensler on ESG Disclosures Proposal

Today [May 25], the Commission is considering a proposal to improve disclosures by certain investment advisers and funds that purport to take Environmental, Social, and Governance (ESG) factors into consideration when making investing decisions. I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus.

It is important that investors have consistent and comparable disclosures about asset managers’ ESG strategies so they can understand what data underlies funds’ claims and choose the right investments for them.

When I think about this topic, I’m reminded

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SEC Commissioner Peirce on ESG Disclosures Proposal

Thank you, Mr. Chair. A key impetus for today’s [May 25’s] rulemaking[1] is a legitimate concern about the practice of greenwashing by investment advisers and investment companies. This concern is real because advisers can mint money by calling their products and services “green” without doing anything special to justify that label. Only days ago, we settled an enforcement proceeding in which we alleged that an adviser said one thing about ESG and did another.[2] Yet while enforcement proceedings of this sort illustrate the problem, they also show that we already have a solution: when we see advisers that

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Meme Investors and Retail Risk

Dramatic trading in GameStop, AMC, and other “meme stocks” has reignited debates about the efficiency of the stock market, its purposes, and whose interests it should serve. The changing role of retail investors and meme investors, a subset of retail investors involved in recent stock rallies fueled by social media, has raised urgent questions around the need for regulatory agencies to protect them.

In a recent article, I discuss the evolving role of retail investors in price discovery and the stock market. Calls for regulation usually misunderstand the role of retail investors, either dismissing them as victims of suspect … Read more

Katten Discusses Shareholder Litigation Risk in an Unstable Geopolitical Environment

Over the past two years, U.S. public companies faced an unpredictable risk environment.  Two geopolitical crises – the Covid-19 pandemic, and the Russian invasion of Ukraine – strained international supply chains and destabilized financial markets.

It is tempting to view these events as temporary departures from the stable climate for international commerce of the past 75 years.  There are reasonable grounds for that position.  After all, Covid-19 was the first global pandemic since 1919, and the conflict in Ukraine marks the first large-scale conventional conflict in Europe since World War II.  However, geopolitical instability may be the new normal, and … Read more

Predicting the Unpredictable: What Will Musk Do Next?

What did business journalists do before the arrival of Elon Musk? In those by-gone days, their page in the newspaper was gray, dull, and strewn with statistics. Now, it is filled with a continuing soap opera, as exciting as the sports page because it has drama, intrigue, and high emotion. The trash-talking that one hears in the NBA playoffs pales in comparison with Musk’s daily name-calling.

Currently, it appears that Musk wants to re-negotiate his $54.20 share price for Twitter because he offered a price well over Twitter’s peak value in an overheated market. That market is no longer overheated … Read more

Sullivan & Cromwell Discusses Recent Rulings’ Effects on SEC Use of Administrative Forum

Two cases—one recently accepted for review by the Supreme Court, and another recently decided by the Court of Appeals for the Fifth Circuit—could change the manner in which the SEC brings enforcement actions against those accused of violating federal securities laws.

The Supreme Court Accepts Cochran v. SEC

Congress has empowered the SEC to bring civil enforcement actions seeking a variety of sanctions, including monetary penalties, in either a federal court or in agency proceedings before administrative law judges (ALJs) at the SEC.  On May 16, 2022, the Supreme Court agreed to hear a case about when and where the … Read more

How Mandatory Corporate CSR Disclosures Affect Investors

Investment in companies that engage in sustainable corporate practices is growing rapidly, with those companies receiving approximately $17 trillion from investors so far in the United States alone. As a result, the majority of public companies now voluntarily disclose environmental, social, and governance (ESG) information, touting plans to, for example, be “net zero” by a certain date. However, regulators generally allow companies to create socially responsible images without holding them accountable for the ESG goals they profess to have. This has led many stakeholders to accuse companies of “greenwashing:”  portraying a green image while not taking meaningful steps to achieve … Read more

Skadden Discusses Aggressive Antitrust Enforcement and Novel Theories

From April 5 through April 8, 2022, the Antitrust Section of the American Bar Association held its annual Spring Meeting in Washington, D.C. A prominent theme throughout the week was the role of the antitrust laws in the lives of the American public. Carol Sipperly, Acting Deputy Assistant Attorney General at the Department of Justice’s (DOJ) Antitrust Division, said that the DOJ wants to create merger guidelines that can be picked up, read, and understood by anyone, while the Chair’s Showcase began by asking the panelists whether antitrust can repair the world. Between these expressions of antitrust policy’s infiltration beyond … Read more

Poison Pills in a World of Activism and ESG

Since the creation of the poison pill in the 1980s as a response to hostile takeovers, the corporate world has seen the rise of stakeholder governance, ESG, and stockholder activism and a host of other dramatic developments. The stock market decline following the outbreak of COVID-19 prompted a resurgence of pills, and with the recent Williams decision, the structure and strength of pills have changed in meaningful ways. In a new paper, we examine modern poison pills and propose some new ground rules for pills. These rules, we believe, would effectively balance, on the one hand, a board’s interest in … Read more

Sullivan & Cromwell Discusses Changes to UK Takeover Code

On May 5, 2022, the U.K.’s Panel on Takeovers and Mergers (the “Panel”) published the results of a consultation that started in December 2021 to review the City Code on Takeovers and Mergers (the “Code”), together with proposed amendments to the Code.  The amendments cover a broad range of topics, a number of which are of particular significance for prospective bidders.

In summary, the amendments:

  • require bidders to disclose in possible offer announcements whether they are obliged under the Code to offer a minimum level, or particular form, of consideration;
  • prevent bidders who have made a

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Machine Learning and the Future of Tax Valuation

The tax law handles many computational issues with extraordinary efficiency. Need to compute employment taxes? The Internal Revenue Code (“Code”) lays out the rate for doing so. Need to ascertain the dollar amount deductible for business mileage expenses? Treasury regulations provide a formula based upon the number of miles driven.

But the same computational efficiencies do not routinely extend to asset valuations. As we discuss in in a recent article, administration of the tax law in this realm is plagued with problems. Admittedly, the problem is not universal; for example, it does not extend to (i) items that are bought … Read more

Skadden Discusses Court Decision Striking Down Women on Boards Law

On May 13, 2022, a judge of the Los Angeles County Superior Court ruled in Crest v. Padilla, Case No. 19STCV27561, that California’s statute requiring California-based public companies to have one to three women on their boards of directors (S.B. 826), depending on their board size, violated the equal protection clause of the state constitution. Although the decision, which following a bench trial, does not specifically address the related requirement in S.B. 826 that companies disclose board member information to the secretary of state, the court’s decision enjoins enforcement of the entire law.

After determining that the taxpayer plaintiffs could … Read more

Voting for Socially Responsible Corporate Policies

Voting is important in the modern public corporation.  Shareholders often vote on corporate referendums, they vote to elect directors, and the directors vote on major corporate policies.  Yet, despite the significance of voting, there has been little research exploring whether it’s effective in different situations, such as when a company is considering environmental and social objectives.

In a recent paper, my coauthors and I examine voting on corporate policies when investors care about both maximizing firm value and achieving one or more social objectives.  We find that the push towards socially responsible corporate policies may lead to worse corporate … Read more

SEC Chair Gensler Testifies Before U.S. House Financial Services Subcommittee

Good morning, Chairman Quigley, Ranking Member Womack, and members of the Subcommittee. I’m honored to appear before you for the second time as Chair of the Securities and Exchange Commission. It is good to be here alongside Federal Trade Commission Chair Khan. As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

The Gold Standard of Capital Markets

I’d like to open by discussing two key years in economic policymaking: 1933 and 1934.

We were in the midst of the Great Depression.

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Does the Threat of Securities Class Actions Add Value for Shareholders? Evidence from China

Securities class actions (SCA) are an important governance mechanism in the U.S. securities market, but there is a significant debate about their costs and benefits to investors. SCA are intended to serve two key functions in investor protection: disciplining and deterring fraud and compensating aggrieved investors. On the one hand, SCA are more efficient and powerful than individual securities suits and, thus, can enhance investor protection. As for deterrence, there is growing evidence that lowering directors’ and officers’ (D&Os) liability risk using corporate charter provisions, D&O insurance coverage, or liability law changes can exacerbate agency problems by reducing managerial vigilance … Read more

Wachtell Lipton Discusses Addressing Market Volatility and Risk in M&A Agreements

Significant volatility continues to disrupt the equity markets, with the major stock indexes swinging multiple percentage points often on a daily basis.  Inflation, rising interest rates, the Ukraine crisis, continuing effects of Covid-19, lasting supply chain issues, a difficult regulatory environment, and uncertainty regarding the global and U.S. economies have had an undeniable impact on the pace of M&A activity so far in 2022.  While the opening months of 2022 have witnessed a number of significant transactions despite these headwinds, most have been all-cash deals, with only a handful of large stock or cash and stock mergers announced to date, … Read more

The Causes and Consequences of Repurchasing Shares

Corporate payouts have reached record levels. Over the past half-century, publicly-held U.S. firms have more than tripled inflation-adjusted dividends, while real share repurchase values have ballooned from $5 billion in 1971 to almost $1 trillion in 2018 and become the dominant form of payout. Given the magnitude of these distributions, it is not surprising that they have garnered the attention of researchers and the skepticism of politicians, who have suggested that buybacks are used in ways that are contrary to the health of the economy and workers. In fact, Democrats recently proposed a 1 percent excise tax on stock buybacks … Read more

SEC Enforcement Chief Speaks on Delays of Defense Counsel

Ordinarily at an event like this one, I’d speak about all the ways in which we are working to protect investors, including our increased focus on the private fund space, the additional resources we’ve committed to our Crypto Assets and Cyber Unit, and other enforcement priorities. And I’d likely close by reassuring each of you in the defense bar that we’re not doing away with the White Paper and Wells processes, but rather streamlining them. But I’d like to take a different approach today given some recent experiences and observations. As is customary, my remarks today express my views, and … Read more

Purpose Proposals 

The shareholder proposal has long been an effective tool for shareholders to bring emerging corporate governance issues to the attention of a company’s board of directors, its managers, and their fellow shareholders. Over time, shareholder proposals have driven a variety of governance reforms, from eliminating staggered boards to adopting majority voting in director elections. Although the subjects of shareholder proposals vary substantially, and some fade quickly into obscurity, others gradually build sufficient support leading not only to their implementation but to their incorporation into future standards of good governance.

At the same time, shareholder proposals are controversial. Critics argue that … Read more

Debevoise & Plimpton Discusses SEC Guidance on Ukraine Disclosure Obligations

On May 3, 2022, the Division of Corporation Finance (“CorpFin”) of the U.S. Securities and Exchange Commission (“SEC”) provided guidance to companies of their disclosure obligations with respect to the direct or indirect impact that Russia’s invasion of Ukraine and the international response have had or may have on their business (the “Guidance”).[1]  As on other occasions, the SEC accompanied the Guidance with a sample letter outlining the questions the SEC may ask an issuer regarding its disclosure of relevant implications arising from Russia’s invasion of Ukraine and the sanctions and export controls imposed in response by various jurisdictions.… Read more

Public Corporations’ Bylaws as Standard Form Contracts

Vast corporate growth over more than a century has weakened shareholder voting rights, as highlighted by, among other things, the rise of dual-voting stock IPOs. The extent of that growth, and the lack of people’s power to negotiate with corporations, provide legal justification for the possible application of standard contracts law to corporate law in general, and especially to the laws regulating publicly-trade corporations.

Applying standard contracts law to corporate bylaws was first recognized in Israel in 1997 by the Israeli Supreme Court and applied to cooperative corporations (and in later opinions to other types of corporations). In this … Read more

Davis Polk Discusses CFPB “Dormant” Authority to Examine Wide Range of Companies

The CFPB plans to use its authority to examine any company providing consumer financial products or services that the CFPB has “reasonable cause” to believe poses risks to consumers.

The CFPB has announced its intention to invoke its “dormant” statutory authority to examine any company providing consumer financial products or services that it has “reasonable cause” to believe poses risks to consumers.1 The authority the CFPB is referring to is a catch-all provision in Title X of the Dodd-Frank Act that can capture a wide range of companies that offer consumer financial products or services to individuals as well … Read more

The Connection Between a Firm’s Investor Base and Media Coverage

The financial media provide information to investors by monitoring firms for fraud, excessive CEO pay, and other questionable behavior, as well as mundane activities such as periodic earnings announcements. However, it is unclear why certain firms get extensive media coverage, along with the resulting benefits, while most do not. We examine the extent to which media coverage varies with firms’ investor base. Specifically, we study in our paper whether and to what extent different types of debt and equity investors, who all vary in their reliance on publicly available information, influence media coverage.

Why Should the Media Care About

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SEC Chair Gensler Talks Security-Based Swaps Market to ISDA

Thank you for the kind introduction. It’s good to be back with the International Swaps and Derivatives Association (ISDA) again.

As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

Swaps emerged in the 1980s to provide producers and merchants with a way to lock in the price of commodities, interest rates, and currency rates. Our economy benefits from a well-functioning swaps market, as it’s essential that companies have the ability to manage their risks.

When I first appeared before this group, as Chair of the Commodity Futures Trading

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Does Going Private Affect Peer Firms’ Disclosures?

Disclosure by publicly listed companies provides critical information to the capital markets and benefits not only firms’ stakeholders but also the overall economy (e.g., Badertscher et al. 2013; Shroff et al. 2017; Barrios et al. 2021). However, the number of U.S. public companies has decreased steadily over the past 25 years. Compared with many other developed markets, the U.S. has few public firms, and this “listing gap” has drawn much attention from market participants, legislators, and regulators. In an influential study, Doidge, Karolyi, and Stulz (2017) conclude that a high number of public companies exiting the public equity market explains … Read more

Sullivan & Cromwell Discusses California Governor’s Executive Order on Blockchain

On May 4, California Governor Gavin Newson signed an executive order that is intended “to foster responsible innovation, bolster California’s innovation economy, and protect consumers” and “create a transparent regulatory and business environment for web3 companies which harmonizes federal and California approaches, balances the benefits and risks to consumers, and incorporates California values such as equity, inclusivity, and environmental protection.”[1]  The executive order outlines several priorities to advance these aims.  The executive order indicates that supporting blockchain technologies and crypto-related assets, in connection with other policy concerns, such as consumer protection, and aligning with the federal government’s approach to … Read more

Dual Class Shares in the Age of Common Ownership

Mark Zuckerberg has virtually all his personal wealth invested in Meta Platforms (formerly Facebook). His incentives as controller of Meta are thus clear: Maximize firm value and private benefits of control, irrespective of the effect that might have on other firms. Meanwhile, BlackRock manages $10 trillion invested in thousands of corporations. Its incentives are equally clear: Maximize the value of its portfolio, irrespective of what happens to any given firm therein. Modern day corporations are thus dominated by two kinds of shareholders with drastically different objectives: Firm value maximizing (FVM) shareholders à la Zuckerberg and portfolio value maximizing (PVM) shareholders … Read more

Davis Polk Discusses DOJ’s Focus on Corporate Crimes of Evading Sanctions, Export Controls

At a recent New York City Bar Association event, Deputy Attorney General Lisa Monaco emphasized the Department of Justice’s focus on sanctions evasion and export control violations as key to its work to combat corporate crime.

The DAG’s discussion

At a recent New York City Bar Association event, Deputy Attorney General Lisa Monaco emphasized the centrality of national security to the Department of Justice’s white collar enforcement efforts. In particular, Monaco pointed to the enforcement of sanctions evasion and export control violations as key to the Department’s work to combat corporate crime. “One way to think about this is as … Read more

Do Venture Capital Funds Overstate Their Performance? The Effects of FOIA

Venture capital (VC) has become an increasingly important asset class for institutional investors such as endowments, pension funds, insurance companies, and sovereign wealth funds, as well as for wealthy individuals. A large amount of money is involved: U.S. VC-backed companies raised nearly $300 billion in 2021. Moreover, there is a great deal of hype related to the potential benefits of VC. Everyone is aware of examples of phenomenally successful VC investments, including in Amazon, Facebook, and Tesla. And a quick Google search reveals many sources touting VC returns of 15 to 30 percent (and sometimes much higher).

The appeal of … Read more

SEC Chair Gensler Speaks at Conference on Financial Market Regulation

The field of economic research is central to our work at the SEC. It helps shape every aspect of our policymaking, from the early design phase to the proposing releases to the consideration of public comments to the adopting releases. It helps us determine the size of fines for enforcement actions. It provides important context for every one of our meetings. I look forward to hearing more about the presentations from today’s conference.

As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

I want

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Does Stakeholder Outrage Affect Executive Compensation?

One-third of S&P 1500 CEOs reduced their base salary in 2020 as the onset of the coronavirus pandemic caused widespread economic disruption. These pay cuts were often accompanied by press releases that emphasized notions of CEOs “leading from the front,” “being all in this together,” and “sharing the pain” of the pandemic with employees. In a new article, we document that a more complex adjustment to CEO pay occurred during this time.  In a controlled analysis of executive compensation, we find that, while many CEO base salaries declined during 2020, the total compensation for all CEOs increased by nearly … Read more

Hedge Funds Versus Private Equity in Hostile Restructurings

July 31, 2020, was an ill-fated day for financier Dan Kamensky. It began on a bright note, as his billion-dollar hedge fund stood to profit from a possible settlement in Neiman Marcus’ bankruptcy.[1] Not only had the Official Committee of Unsecured Creditors on which he served reached a tentative settlement from which they would receive shares in one of Neiman’s valuable subsidiaries, but it looked like Kamensky’s hedge fund could be in the exclusive position to purchase discounted shares from other unsecured creditors who wanted to cash out right away. That is, until 3:15 P.M. that day, when he … Read more

The Twitter Board Bears Personal Responsibility for a Bad Outcome in the Twitter Sale

Let’s be clear about this: The Twitter board was under no legal compulsion to accept Elon Musk’s offer for the company and, from a corporate governance structural point of view, was in an unassailable position until the 2024 shareholders meeting.  The single motivating factor in its decision, apparently, was that the deal was a good one for Twitter shareholders, without apparent regard for how Musk might run the company and the consequence for the social media infrastructure that Twitter had created, much less the public welfare.  In my opinion, the board’s conduct was shockingly near-sighted, and the predictable adverse consequences … Read more

Arnold & Porter Discusses Attacks on Board Diversity Initiatives

Nasdaq’s Board Diversity Rule, approved by the Securities and Exchange Commission (SEC) in August 2021, is the subject of an ongoing, high stakes court battle in the United States Court of Appeals for the Fifth Circuit. The attorneys general of 17 “red” states have faced off against the SEC, the ACLU, an “Ad Hoc Coalition of Nasdaq-Listed Companies,” and a group of “Investors and Investment Advisers.” In an amicus filing, the attorneys general argue that the rule violates the Equal Protection Clause of the Constitution, undermines traditional state authority in the area of corporate governance, and forces companies to … Read more

Do IPOs of Companies with an Innovative “Up-C” Structure Harm Public Shareholders?

The umbrella partnership corporation (“Up-C”) IPO structure allows an entity taxed as a partnership to go public by creating a shell corporation that sits above, and whose sole asset is units of, the historic partnership.  Unlike a traditional IPO where all owners hold shares of the public corporation, in an Up-C structure, shares of the public shell corporation are sold to the public while the pre-IPO owners continue to own their economic interests directly in the historic partnership (see Shobe 2017, Supercharged IPOs and the Up-C, for an overview).  A primary benefit of the Up-C IPO structure is that, … Read more

The Rise of ESG and the Role of Inside Counsel

ESG, sustainability, and stakeholder capitalism are at the center of the global dialogue on the future of the corporation. They are being driven by an evolving legal and regulatory landscape, market dynamics, and societal expectations. In particular, ESG is increasingly perceived by investors, lenders, employees, local communities, suppliers, and customers as an integral part of a company’s business model and an organic element of value creation. In this post, we explore the role that legal, compliance, and governance[1] professionals – whom we refer to, collectively, as inside counsel – play in respect of ESG.

Inside counsel are increasingly taking … Read more

Too Much Information? Increasing Firms’ Information Advantages in the IPO Process

Traditionally, high-growth private firms in the United States have used the public equity markets as their primary source of external financing to fund innovation and expansion. For this reason, well-functioning capital markets have been instrumental to the U.S. economy, supporting job creation and economic growth. In recent decades, however, there has been a decreasing number of U.S. companies going and staying public, attracting significant concern from regulators. In particular, the U.S. Securities and Exchange Commission (SEC) is concerned that firms using private rather than public sources of financing limits investment opportunities for ‘Main Street’ investors and reduces the availability of … Read more

Skadden Discusses What Regulatory Focus on Consolidation May Mean for Private Equity Buyers

Merger control authorities in many jurisdictions are taking a more aggressive and expansive approach when reviewing industry-consolidating transactions, and some are using the merger clearance process to advance policy objectives involving areas far beyond those of traditional competition. In addition, more than 50 countries have implemented regimes giving antitrust regulators discretion to review any transaction, regardless of minimum revenue or asset thresholds. As a result, companies need to provide for the possibility that their deals will draw regulators’ attention, even when the targets have little or no revenue.

In the U.S., the Biden administration and congressional leaders are exerting influence … Read more

How Takeovers Affect  Firms’ Voluntary Disclosure

How does the possibility of being taken over affect the disclosure of information by the management of the target firm? This has been a question of considerable interest in the accounting and finance literature because transparency is very important for a well-functioning takeover market. Whereas some argue that a target firm’s management will withhold information to increase the acquirer’s uncertainty about firm value and deter the takeover, others argue that the management will increase disclosures to inform existing shareholders about the firm’s fair value and prevent value-decreasing or opportunistic takeovers. The empirical evidence is mixed. In my recent article, I … Read more

Debevoise & Plimpton Discusses SEC’s Proposed SPAC Rules and Investment Banks

The new rules relating to special purpose acquisition companies proposed by the Securities and Exchange Commission on March 30, 2022, would, if adopted, have far-reaching effects on investment banks involved in business combination transactions involving SPACs. The proposed rules aim to remove perceived disparities in disclosures and investor protections as between traditional initial public offerings and de-SPAC transactions.[1] In this update, we focus on how the proposed rules may impact investment banks involved in SPAC IPOs, de-SPAC transactions or financings for de‑SPAC transactions.

Investment banks often play multiple roles, and have multiple interests, in connection with de-SPAC transactions. The … Read more

Deep Learning Mutual-Fund Risk Assessment and Performance

The ripple effects of the COVID-19 pandemic have increased market volatility and even caused markets to close in some countries. These fluctuations substantially affected mutual funds, leading to fire sales of their assets and SEC scrutiny of their risk management. Investors responded quickly and withdrew more than $40 billion from mutual funds in the first two months of the pandemic. With nearly half of the households in the United States having their pension plans and life savings invested in mutual funds, understanding the risk-taking behavior of mutual funds is thus of prime importance for investors.

For fund managers, the ability … Read more

SEC Commissioner Speaks on IPOs and the Rise of SPACs

Thank you Hal [Scott] for that kind introduction and for inviting me to speak today. I am honored to precede such an esteemed panel of practitioners and academics. As always, I must give my standard disclaimer that my remarks are my own and do not necessarily represent the views of the Commission or its staff.

I cannot emphasize enough how important discussions such as today’s are – thinking through some of the most pressing questions in our markets. And, one of those areas is Special Purpose Acquisition Companies, or SPACs. Now, of course, this was an issue that we were

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What Does CEO Turnover Data Tell Us About Succession Planning?

Over the past several decades, researchers have taken a serious look at the quality of CEO succession planning at publicly traded corporations. The results have not been encouraging. The evidence suggests that many companies are slow to terminate an under-performing CEO, are caught flat-footed in the event of a sudden CEO departure, and are often unprepared to identify a viable or permanent successor.

The research, however, is not without its shortcomings. A central challenge facing researchers is that it is very difficult for outside observers to determine whether the board in fact terminated the CEO. Rarely does a board explicitly … Read more

ISS Discusses Japanese Board Independence and Diversity

A recent ISS analysis of Japanese board composition finds a marked uptick in board independence and female board representation. At the close of Japan’s March 2022 “mini-season”, ISS found a 13percentage point jump in companies with at least a one-third independent board (based on the Tokyo Stock Exchange (TSE) classification), and a 12-percentage point increase in boards with at least one female director for companies listed on TSE’s Prime (the former First) listing section, compared with the same time in 2021 March.

Based on the 200+ companies listed on the TSE’s Prime listing section that held their 2022 AGMs during

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How Disclosure and Information Intermediaries Strengthen the Credibility of Initial Coin Offerings

The crypto-tokens market has recently emerged as an alternative source of financing for entrepreneurial ventures, with approximately $27 billion raised globally through March 2022.[1] These ventures issue blockchain-based digital “crypto-tokens” to raise external capital through an initial coin offering (“ICO”). In return, a token provides holders with various benefits, such as “utility” value through access to the venture’s current or future product (or service), potential participation in future profit distributions, and the ability to trade the token on crypto-exchanges (e.g., Binance and Coinbase).

The “ICO” designation is inspired by initial public offering (“IPO”) whereby private firms list shares on … Read more

SEC Chair Gensler Speaks on U.S. Bond Market

Thank you. It’s good to be with City Week again. 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.

Since we are in London (at least virtually), I wanted to note that this year marks the 60th anniversary of the first James Bond film. I know there are various commemorations of this storied franchise going on in the U.K., but I want to focus my remarks on the lead character’s name.

Bond. James Bond.

Ian Fleming, the author of the spy novels,

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Why We Should Keep Teaching Dodge v. Ford Motor Co.

The question of corporate purpose has been much in the news of late, triggering renewed attention by legal scholars to corporate social responsibility, ESG, and shareholder value maximization. Many of these scholars have been strongly influenced by the late Lynn Stout’s work on the topic. Ten years ago, Stout published her book, The Shareholder Value Myth, [1] which built on her earlier article, Why We Should Stop Teaching Dodge v. Ford.[2] As the latter title suggests, Stout’s principal doctrinal foil was the Dodge case.[3]

Stout’s focus on Dodge was well chosen, since the case and “its statement … Read more

Debevoise & Plimpton Discusses SEC Enforcement Action Highlighting Whistleblower-Related Rules

On April 12, the Securities and Exchange Commission (the “SEC” or the “Commission”) announced settled charges against David Hansen, the co-founder and former Chief Information Officer of a Las Vegas technology company, for violations of Rule 21F-17(a). In settling the charges, Hansen agreed to pay a civil penalty of $97,523. The action, which garnered a spirited dissent from Commissioner Hester Peirce, offers a few important takeaways for companies hoping to avoid running afoul of Rule 21F-17(a) should an employee share concerns about conduct that potentially violates the securities laws.

Rule 21F-17(a). Rule 21F-17(a) prohibits “any action to impede an … Read more

Why Corporate America Should Pay Attention to the Proposed EU Directive on Corporate Sustainability Due Diligence

On February 23, 2022, the European Commission issued its long-awaited proposal for a Directive on Corporate Sustainability Due Diligence (the Proposed Directive). Under the Proposed Directive, large companies operating in the EU market must identify, prevent, and mitigate any actual or potential adverse human rights and environmental impact in their own operations, in their subsidiaries, and at the level of their established direct or indirect business relationships in their value chain. Adverse human rights and environmental impacts are keyed to violations of a long list of human rights and environmental obligations laid out in international conventions and declarations, irrespective of … Read more

Skadden Discusses Antitrust Enforcers’ Supply Chain Initiative

On February 17th, the Department of Justice (DOJ) announced an initiative to protect supply chains from anticompetitive behavior amid global disruptions and persistent inflation. The initiative is yet another example of the Biden Administration’s aggressive approach to antitrust enforcement since inauguration. From the Administration’s “whole-of-government” approach to policing anticompetitive conduct, to abandoning the Vertical Merger Guidelines and recently challenging several mergers, now to the new supply chain initiative, the new Administration has muddled the antitrust landscape and made enforcement less predictable. Despite the altered environment and new initiative, however, certain basic principles of antitrust law have not changed—simply passing costs … Read more

Do Investors Prefer Women CEOs at Firms Targeted by Activists?

Shareholder activism is playing a larger role than ever in companies’ decisions about their operations and reporting, with over 4,600 firms targeted worldwide from 2013 to 2018. Shareholder activists can have several motives for going after a company, from trying to improve its corporate governance by increasing efficiencies and dropping unprofitable segments to trying to improve the company’s reputation by making its practices more ethical and ecologically sound. Recent trends show that investment funds are making it easier for more investors to become involved in activism, which has led to regulatory concerns about the power of these activists and their … Read more

Sullivan & Cromwell Discusses the Implications for Financial Institutions of Proposed SEC Climate Disclosure Rules

On March 21, 2022, the Securities and Exchange Commission proposed, in a 510-page release, climate-related disclosure rules for public companies. Although the proposed rules do not impose industry-specific requirements, in certain areas they would have a particularly significantly impact on companies in the financial sector. In particular, the disclosure of Scope 3 greenhouse gas emissions (which capture financed emissions) and climate scenario analysis will likely be mandatory for many financial institutions. Voluntary climate-related transition plans, targets and goals, which many financial institutions have adopted or set, would also need to be disclosed under the proposed rules. In addition, financial … Read more

Congress Should Grant the SEC Oversight of Digital Asset Spot Markets

The Commodity Futures Trading Commission (CFTC) has classified Bitcoin and Ether – and by extension other cryptocurrencies that are similarly structured – as commodities (courts have also upheld this classification). While the CFTC regulates commodity derivatives, they do not regulate commodity spot markets, although they do have enforcement authority for fraud and manipulation in commodity spot markets. The practical effect of this structure is that cryptocurrency exchanges in the U.S. are not regulated at the federal level (they are required to register with the Financial Crimes Enforcement Network (FinCEN) and obtain state money transmitter licenses). This glaring weakness in digital … Read more

Wachtell Lipton Puts Spotlight on Boards: Spring 2022 Update

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.

The war in Ukraine and broader geopolitical implications, the coronavirus pandemic and ongoing efforts to return to a “new normal,” as well as other trends and technologies which have been accelerating the pace of disruption, are raising a host of … Read more

The Importance of Independent Internal Investigations

Internal investigations have become a necessity in today’s increasingly complex legal environment. They are now considered standard practice for businesses responding to serious allegations of financial misconduct and, when properly conducted, play a critical role in determining the credibility of the allegations, the identity of the responsible parties, and the impact of the fraud on the company’s financial statements. Many have argued that internal investigations will minimize the risk of regulatory enforcement after financial misconduct. This presumption is not just wishful thinking on the part of business leaders or attorneys, as regulators themselves promote internal investigations as a means through … Read more

Skadden Discusses Proposed 2022 Amendments to Delaware Corporation Law

On April 12, 2022, the Corporation Law Section of the Delaware State Bar Association (DSBA) approved proposed amendments to the Delaware General Corporation Law (DGCL) that include provisions that, if enacted, would authorize exculpation clauses limiting or eliminating the monetary liability of certain officers, make appraisal rights available to beneficial owners of stock and facilitate domestications of non-U.S. entities and consummations of other corporate transactions related to domestications.

Exculpation of Senior Officers

Since its adoption in 1986, Section 102(b)(7) has authorized a corporation’s certificate of incorporation to contain an exculpation clause that limits or eliminates the personal liability of its … Read more

The Innovation and Reporting Consequences of Financial Regulation for Young Life-Cycle Firms

Over the last several decades, financial regulators have increaAdd Newsed governance and reporting requirements for publicly listed firms, frequently with the goal of improving the reliability of financial information available to investors. The implicit assumption in such regulation is that the benefits of improved financial reporting to financial statement users exceed the direct and indirect costs borne by the implementing firms. Former SEC Chair Mary Jo White articulated this trade-off in a 2016 speech at the SEC-Rock Center’s Silicon Valley Initiative: “[P]art of the SEC’s mission is to facilitate capital formation, so it is important that our rules … Read more

Davis Polk Discusses Robust Antitrust Agenda of DOJ and FTC

At a recent Enforcers Summit, leaders of various U.S. and international antitrust enforcement agencies set forth their enforcement priorities. The new heads of the U.S. antitrust agencies emphasized that the agencies are primed to litigate more cases, challenge more mergers, and use all enforcement tools at their disposal. Both U.S. and global enforcement agencies also emphasized their belief that antitrust law must evolve to police anticompetitive conduct in digital and labor markets.

Enforcers emphasized trials, criminal antitrust penalties, and using all the tools at their disposal to combat anticompetitive conduct

The U.S. Department of Justice’s (DOJ’s) Assistant Attorney General for … Read more

Moonshots

In the last half-century, technological progress has stagnated. The century from 1870 to 1970 brought electricity, running water, telephones, television, automobiles, and airplanes. Life expectancy at birth rose from 45 to 72. But since the early 1970s, progress has been incremental. Innovation has become synonymous with computers and smartphones because there have been so few transformative technologies in other fields.

Some economists believe that the economy has simply picked the low-hanging fruit. But there are plenty of emerging technologies with the potential to reignite productivity growth – including artificial intelligence, renewable energy, and nanotechnology. The problem is that each of … Read more

Cleary Gottlieb Discusses the LIBOR Act, State Law, and Litigation Risks

On March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act  (the “LIBOR Law”).[1] The objectives of the legislation are to facilitate the transition of legacy LIBOR contracts that either (a) lack LIBOR fallback provisions entirely or (b) contain inadequate LIBOR fallback provisions and to avoid related “disruptive litigation”.[2]

When Does the LIBOR Law Apply?

The LIBOR Law applies to contracts that use, as a Benchmark rate, the one-month, three-month, six-month and twelve-month tenors of U.S. Dollar LIBOR as of the applicable LIBOR Replacement Date (each, a “LIBOR Contract”).[3]Read more

Business Risks Stemming from Socio-Economic Inequality

Socio-economic inequality has risen over the last 40 years in almost every part of the world and has been exacerbated by the COVID-19 pandemic. Inequality does not only affect societies – it can also have a significant impact on the success of business. We analyze the ways that socio-economic inequality creates material risks to business and how, despite these risks, there are very few ways for companies to consistently and effectively disclose them to investors. To address this challenge, we look for guidance to another systemic risk facing business: climate change.

Sources of Inequality and Risks to Business

On a … Read more

Cleary Gottlieb Discusses SEC’s Proposed Climate-Change Disclosure Rules: The Climate Note to Audited Financial Statements

On March 21, 2022, the U.S. Securities and Exchange Commission issued for public comment a rule proposal that, if adopted, would require reporting companies to provide certain climate-related information in their registration statements and annual reports filed with the SEC. This memorandum addresses part of the proposal — the proposed amendments to Regulation S-X to require a new footnote in audited financial statements – and concludes with some general takeaways and possible issues for inclusion in comment letters on the proposal. Please see the other two memoranda in this series for a discussion of the GHG emissions and attestation report Read more

Why Delaware and England Win the Global Corporate Law Race

What makes the corporate laws of some jurisdictions more attractive for entrepreneurs and investors than others in the global arena? Within the United States, the competition among state laws is a popular explanation for Delaware’s corporate law prominence. However, interjurisdictional competition over corporate law is not limited by U.S. borders. In recent decades, an international market for corporate law has emerged; consequently, foreign countries compete with Delaware to supply corporate law.

In our recent paper, we used qualitative methods based on interviews with mergers and acquisitions (M&A) practitioners from the United States, United Kingdom, continental Europe, and Israel and … Read more

Arnold & Porter Discusses Today’s SEC Examination Priorities, Tomorrow’s SEC Enforcement Actions

Rounding out a series of quarter-end announcements from the US Securities and Exchange Commission (SEC), the Division of Examinations (Exams) announced its 2022 examination priorities on March 30, 2022. These priorities reflect SEC Chair Gary Gensler’s stated view that the examinations program is crucial to the SEC’s work to protect investors and instill trust in markets. Exams will focus on, among other things, (i) private funds, (ii) broker-dealers, (iii) Environmental, Social, and Governance (ESG) or impact investing, (iv) financial technology (FinTech) and crypto-assets, and (v) information security (InfoSec) and operational resiliency. In addition, a week before the 2022 examination priorities … Read more

A Tokenized Future: Regulatory Lessons from Crowdfunding and Standard Form Contracts

Cryptocurrencies and other digital assets (“crypto”) are surging in popularity.  If cryptos are securities (“investment contracts” under the Howey test), they must be sold in accordance with the federal securities laws.  This likely requires registration with the Securities and Exchange Commission (SEC) and initial and ongoing public filings – the same arduous process that exists for public companies with centralized management teams rather than decentralized autonomous crypto networks.

For those cryptos found to be securities, there is a regulatory scheme in place, as ill-suited to the occasion as it may be.  For cryptos that are not securities, there is substantial … Read more

SEC Chair Gensler Speaks Further on Climate-Risk Disclosure Proposal

Thank you. It’s good to be with Ceres for today’s investor briefing. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

As you all likely know by now, in March, the Commission voted on a proposal to mandate climate-risk disclosures by public companies.

A Long Tradition

Let me put the proposal into the context of our long tradition of disclosures.

The core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and

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Going Private Outside Delaware: Holes in the Director Raincoat and Other Concerns

Meade v. Christie et al., an interlocutory appeal in a shareholder class action challenging a going private merger, is currently pending before the Iowa Supreme Court.[1] The appeal will test the strength of a director-liability shield law patterned on the Model Business Corporation Act template. It also presents questions of corporate law that pertain to going private transactions and are largely unsettled outside of Delaware.

A key question in Meade (and one of first impression in Iowa and other MBCA states) is whether the MBCA director shield exception for “intentional infliction of harm on the corporation or the shareholders”Read more

Skadden on Revisiting Share Repurchases in Volatile Times

In light of the recent increased volatility in the global financial markets,1 a number of companies have raised questions regarding the desirability of repurchasing shares at reduced market prices. This alert addresses questions surrounding share repurchases that companies should consider as they evaluate the advantages, disadvantages, legal implications and strategic considerations of share repurchases in a turbulent market.

Overview

As a preliminary matter, any company contemplating a share repurchase should consider the limitations set forth within the Coronavirus Aid, Relief, and Economic Security Act, passed into law on March 27, 2020; the Consolidated Appropriations Act, 2021, passed into law … Read more

Boardroom Gender-Diversity Reforms and Institutional Monitoring

The past decade has seen an explosion of boardroom gender diversity reforms worldwide. As of 2014, 23 countries have amended governance codes and 14 countries have enacted laws to increase gender diversity on corporate boards. While investors play a critical role in engaging with company boards and are increasingly focused on social equity, the evidence is scant on how these reforms affect investors’ monitoring role. This gap also contrasts with regulators’ reliance on investors to help ensure firms’ faithful implementation of the reforms. In our paper, we assess the change in the association between institutional ownership and female directorships following … Read more

Wachtell Lipton Discusses SEC’s Proposed Climate-Related Disclosure Rules and Audit Committees

The SEC’s proposed amendments to Regulations S‑K and S‑X to require new climate-related disclosures will, if adopted, require an expansion in the scope and responsibilities of audit committees.  As described in our prior memo, the rules contemplate domestic and foreign issuers disclosing, in registration statements, annual reports and audited financial statements, information on board and management climate-related risk oversight and governance, material climate-related risks and opportunities over the short-, medium- and long-term, Scopes 1 and 2 greenhouse gas (GHG) emissions, impact of climate-related events on line items of audited financial statements, and climate-related targets, goals and transition plans (if any).  … Read more

Controlling Tunneling Through Lending Arrangements

In a recent article, I examine how common provisions in lending arrangements (drawing from the LMA and LSTA modal agreements) handle the problem of value diversion in debtor companies. “Tunneling,” which is the expropriation of company value by corporate insiders (Johnson et al. 2000), has been largely considered a problem mainly for (minority) shareholders, as residual claimants. With fixed claims, creditors are typically not concerned with value diversion unless the debtor approaches insolvency. Yet my analysis shows that lending arrangements – including security interests, undertakings, (non-)financial covenants and other restrictions – can nonetheless be effective in monitoring, … Read more

SEC Chair Gensler Talks Registration of Security-Based Swap Execution Facilities

Today [April 6], the Commission is considering a proposal to create a framework for the registration of security-based swap execution facilities (security-based SEFs). I am pleased to support this proposal because, if adopted, it would increase the transparency and integrity of the traditionally opaque over-the-counter security-based swap market, fulfilling a mandate under the Dodd-Frank Act of 2010 to register and regulate the platforms that trade these instruments.

The 2008 financial crisis had many chapters, but a form of security-based swaps — credit default swaps — played a lead role throughout the story. Thus, as part of the Dodd-Frank Act, Congress

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To Call a Donkey a Racehorse: The Fiduciary Duty Misnomer in Corporate and Securities Law

In a new article, I address a subject that has been ignored for too long:  The fiction of meaningful fiduciary standards in the corporate and securities laws contexts. My article explores the standards that legislatures and courts apply to corporate fiduciaries and demonstrates that the commonly-held framework does not reflect the situation that in fact prevails.

Officers and directors as fiduciaries to the corporations they serve is a recurrent theme in corporate law.  Although not as vibrant under the federal securities laws, fiduciary duty concepts also arise there with some frequency (such as in the insider trading context as seen … Read more

SEC Says “Control Deficiency” Gave Enforcement Staff Access to Privileged Documents

The Commission has identified a control deficiency related to the separation of its enforcement and adjudicatory functions within its system for administrative adjudications.  When this deficiency was identified, the Chair immediately notified the other Commissioners and directed the staff to undertake remedial measures and commence a comprehensive internal review to assess the scope and potential impact of the issue.  We are now releasing the findings of that review as it relates to two adjudicatory matters currently in litigation in federal court.  In both matters, the review found that agency enforcement staff had access to certain adjudicatory memoranda, but that this

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The Limits of Enlightened Shareholder Activism

One of the more visible market shifts over the past decade is the rise of what might be called “enlightened shareholder activism” – the use of shareholders’ governance rights to encourage corporations to take action around environmental, social, and governance (“ESG”) concerns.  A prominent example is the successful campaign in 2021 of “Engine No. 1,” an impact-investing hedge fund that put three directors on the board of ExxonMobil.  The 2022 proxy season seems poised to be another where ESG proposals gain strong support from investors.  

Enlightened shareholder activism has been fueled by regulatory and market changes that have strengthened shareholder … Read more

Sullivan & Cromwell Discusses Court Decision Invalidating California Board Diversity Law

On April 1, 2022, in Crest v. Padilla, California Superior Court Judge Terry Green granted summary judgment in favor of plaintiffs who had challenged AB 979, one of California’s two board diversity statutes, as violating the California Constitution.  The complaint in Crest v. Padilla was filed in 2020 by three California taxpayers who sought to enjoin the California Secretary of State from using taxpayer funds in effectuating or ensuring compliance with AB 979.  The California Secretary of State has not yet indicated whether it intends to appeal the Court’s order.  Regardless of the outcome of the challenge to AB … Read more

Climate Change, Corporate Valuation, and the Proposed SEC Disclosure Regulations

On March 21, 2022, the Securities and Exchange Commission (SEC) released its statement on proposed mandatory climate risk disclosure. In the statement, Chairman Gensler said, “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.” Gensler added, “In making decisions about disclosure requirements under the federal securities laws – including decisions about today’s climate-related disclosures – I am guided by the concept of materiality. As the Supreme Court has explained, information is … Read more

SEC Chair Gensler Speaks on Crypto Markets

Thank you. It’s great to be with you all at this event, particularly as the University of Pennsylvania is my alma mater. I was over at Wharton, and what I knew of the law school is that the library stacks were a great place to study. It was so quiet there, though I don’t know if that’s still the case.

As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

Today, you’ve invited me to talk about the roughly $2 trillion crypto markets.

In February,

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Should All Trading While in Possession of Inside Information Be Illegal?

In a new article, I answer in the affirmative the question posed in the title of this post. In the United States, we should replace our current regime of muddled and confused insider trading law with a sweeping prohibition on trading when in possession of inside information, much like the prohibition already in place in the European Union.

Why should insider trading be outlawed? How we answer this question shapes our policy recommendations. One way to answer is to look at how the inside information was obtained. Was it taken in breach of a fiduciary duty? Is the information … Read more

Wachtell Lipton Discusses Board Oversight of ESG and the 2022 Proxy Season

Last year’s proxy season saw investor support for an unprecedented number of ESG proposals, on issues ranging from climate change to human capital management to diversity, equity and inclusion.  Proxy advisory firms increasingly recommended that shareholders vote for such proposals.  We also saw the emergence of ESG-driven withhold campaigns targeting individual directors.  This upcoming 2022 proxy season will likely remain hotly contested as investors, proxy advisors and other stakeholders further scrutinize companies’ ESG credentials.  The Securities and Exchange Commission’s recent guidance limiting exclusion of Rule 14a-8 proposals and proposed new rules on climate-related disclosures, and the new ISS and Glass Read more

When Biden Met Crypto: Thoughts on the President’s Executive Order

On March 9, 2022, President Biden signed an executive order (“the Order”) requiring federal agencies to submit reports on how cryptocurrencies relate to various issues, including money laundering, investor protection, international cooperation, central bank digital currencies (“CBDC”), and systemic risk. Here, we offer some perspective and suggestions on those issues.

First, consider money laundering. Typically, anti-money-laundering regulation aims to block money received from crime or terrorism from flowing into traditional financial institutions. Cryptocurrencies create concerns because they can be purchased (more or less) anonymously and without intermediaries. That raises two questions: (1) who should regulation target in the absence of … Read more

ISS on Addressing the Looming Water Crisis in Investment Portfolios

Water means life. More than half of our bodies consist of water, and it is an indispensable resource for production of food and other goods. It is fundamental for societies and ecosystems alike. While water covers approximately 70 percent of our planet’s surface, only 0.5 percent is freshwater that is readily available in lakes and river systems. Over the last few decades these freshwater resources have come under increasing pressure due to population growth, climate change, and unsustainable production and consumption patterns.

According to the UN World Water Development Report 2020, global demand for water has been increasing by

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How to Translate Climate Disclosure into Investor Action

Massive investment is required if mankind is to meet, and master, the challenges presented by global climate change.  A recent report by McKinsey & Company posits that capital spending on energy and land-use infrastructure alone will need to exceed $9 trillion annually over the next 30 years if we are to prevent global warming from causing massive and irreversible damage to the planet’s ecosystem.  To put these numbers into perspective, the required yearly investment dwarfs the Gross Domestic Product (GDP) of nearly every country in the world, including economic powerhouses like Japan, Germany, and the United Kingdom.

Understandably, the … Read more

SEC Chair Gensler on SPACs, Shell Companies, and Projections Proposal

Today [March 30], the Commission is considering a proposal to strengthen investor protections in special purpose acquisition companies (SPACs). I am pleased to support this proposal because, if adopted, it would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings (IPOs).

Aristotle captured an overarching principle with his famous maxim: Treat like cases alike.[1]

SPACs present an alternative method to go public from traditional IPOs. I don’t just mean the first stage — when the

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SEC Commissioner Dissents on Shell Companies, Projections, and SPACs Proposal

Thank you, Chair Gensler, Renee [Jones], Charles [Kwon], and Jessica [Wachter] for the presentation. The Commission’s 2022 budget request includes additional resources to address “an unprecedented surge in non-traditional IPOs by special purpose acquisition companies.”[1] If we adopt the rule that we are voting on today, we will not need additional resources to deal with Special Purpose Acquisition Companies (“SPACs”). The proposal—rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported—seems designed to stop SPACs in their tracks. The proposal does not stop there; it also makes a lot of sweeping interpretations of the

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Exequity Discusses Board Committee Oversight of ESG

Over the past two years, Environmental, Social, and Governance (ESG) matters have become an increasingly important issue in the boardroom. This trend is accelerating today as a growing number of investors and stakeholders expect companies to both produce strong stock price returns and demonstrate ESG improvements. Many companies are responding to investor pressures by providing enhanced disclosures on existing ESG practices. In turn, boards are broadening their mandates to add ESG.

To understand how boards are disclosing the scope of their oversight responsibilities, Exequity reviewed the board committee charters[1] of the S&P 100 constituents. Our research reveals the overall … Read more

SEC Investment Management Chief Speaks on Doing Investment Companies Well

Good morning. Thank you, Eric, for your kind introduction. I appreciate the ICI’s invitation and I hope – if you decide ever to renew it – that I’ll be able to join you all in person someday.

Please allow me, if I may, to make clear that my comments today are my own and do not necessarily reflect the views of the Commission, the Commissioners, or the SEC Staff.[1]

As Eric mentioned in his introduction, I am new to this position. Indeed, today marks the end of only my third month on the job. The SEC announced my appointment

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Unpacking the SEC’s Climate-Related Disclosures: A Quick Tour of the Issues

[Editor’s Note: We present this and the following two pieces as a symposium on the U.S. Securities and Exchange Commission’s proposed climate-disclosure rules released on March 21, 2022.]

After a considerable delay, the SEC finally told us last week in SEC Release No. 33-11042[1] where it is going on climate-risk disclosures. The business community’s reaction was predictable and seemingly orchestrated: “We are shocked and dismayed!” “The costs are enormous!” The Wall Street Journal described the SEC as the pawn of the “left-leaning” BlackRock (ignoring that it is hard for radicals to attract the nearly $10 trillion in assets that … Read more

Is Now the Right Time to Mandate Costly Climate Disclosure?

In August 2021, the United Nations Intergovernmental Panel on Climate Change (“IPCC”) found that “unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to [the Paris Agreement’s goal of] 1.5°C or even 2°C [by 2050] will be beyond reach.”[1]  The IPCC’s conclusions, among others, prompted President Biden’s government-wide mandate to advance climate policy, as articulated in a series of executive orders.[2]

The Securities and Exchange Commission (“SEC”) responded with gusto, hiring its first-ever Senior Policy Advisor for Climate and ESG,[3] directing the SEC’s Division of Corporation Finance to enhance its … Read more

Will It Float?: The Legitimacy of the SEC’s Authority for Climate Risk Disclosures

On March 21, 2022, the SEC formally launched one of the most significant initiatives ever taken in its nearly 90-year history: proposals for disclosure of climate-related risks. (SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors. Sec. Act. Rel. No. 11042 (March 21, 2022)). It is a masterpiece of understatement to observe that few firms, public or private, and certainly no investor, will be untouched by forces unleashed by climate change.  Among SEC registrants, the effects of climate change will be many, albeit the magnitude of their impacts on each will vary. Thus, the historical significance of this SEC … Read more

New Department of Labor Investment Rules Could Be Big Win for Everyone but Labor

Few constituencies benefited more from the election of Joe Biden than the socially-responsible investor community, which saw the most-hostile presidential administration replaced by the most supportive.[1] The point is best illustrated by the departure of Labor Secretary Eugene Scalia, who was perceived by labor to be a “union buster,”[2] and the arrival of former Boston Mayor Marty Walsh, the first union member to serve as secretary in decades.[3] New investment rules proposed by Walsh’s Department of Labor governing trillions of dollars in retirement funds are set to undo much of the harm to environmental, social, and governance … Read more

“Shadow Trading” Becomes Insider Trading

On January 14, 2022, the U.S. District Court in San Francisco denied a motion to dismiss charges filed by the Securities and Exchange Commission under an expansive new theory of insider trading liability. In a matter of first impression, the court ruled in SEC v. Panuwat[1] that a defendant with material nonpublic information (“MNPI”) about an issuer may incur insider trading liability by trading in the securities of a different and unrelated issuer that could possibly be affected by public announcement of the first issuer’s MNPI. As discussed below, this new insider trading theory – now being called “shadow … Read more

To Remove or Not To Remove: Is that the Question in 1933 Act Securities Cases?

When the removal provisions of the Securities Act of 1933 (1933 Act) and the Class Action Fairness Act of 2005 (CAFA) conflict, the 1933 Act should prevail. The conflict arises in cases involving initial offerings of noncovered securities when plaintiffs file in state court, seek class treatment, and base their claims solely on alleged violations of the 1933 Act. In these cases, CAFA appears to broadly allow removal to federal courts, while the 1933 Act strictly prohibits it. Courts are currently split on which statute should prevail,[1] but the recent trend appears to be in favor of removal under … Read more

SEC Chair Gensler Speaks on Removal of Credit-Ratings References from Reg M

Today [March 24], the Commission voted to propose removing references of credit ratings from Rules 101 and 102 of Regulation M (Reg M). I was pleased to support today’s proposal because, if adopted, it would fulfill a mandate issued by Congress in the wake of the 2008 financial crisis.

In Section 939A of the Dodd-Frank Act of 2010, Congress directed federal agencies, including the SEC, “to remove any reference to or requirement of reliance on credit ratings” from our rules and to substitute an appropriate standard for credit-worthiness.[1]

The SEC has completed much of this work, and the only

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Does Media Exposure Affect Financial Reporting Quality Through Auditors?

The media play an important role in capital markets. Media coverage can attract the attention of investors and the public at large and affect the decisions of management. As such, the media can have a corporate governance role in disciplining firms and their managers. For example, prior research indicates that, following negative media exposure, weak boards are more likely to take corrective actions such as replacing the CEO and board chair, increasing the proportion of outsiders on the board, and decreasing the use of staggered boards.

In a recent study, we investigate the possibility that, in addition to this direct … Read more

Sullivan & Cromwell Discusses SEC’s Proposed New Cybersecurity Risk-Management Rules for Investment Advisers and Firms

On February 9, 2022, the Securities and Exchange Commission (the “SEC”) voted 3 to 1 (Commissioner Peirce dissenting[1]) to propose cybersecurity risk management rules and amendments for registered investment advisers, registered investment companies and business development companies (the “proposal”).[2]  The proposed rules and amendments are designed to reduce cybersecurity risks to clients and investors and enhance the SEC’s ability to oversee advisers and funds.  As proposed, the rules would require SEC-registered advisers and funds to adopt and implement written policies and procedures reasonably designed to address cybersecurity risks and registered advisers to confidentially report significant cybersecurity incidents … Read more

The SEC’s September Enforcement Spike

The Securities and Exchange Commission (SEC) periodically reports on its performance to the public and Congress, emphasizing metrics such as the number of enforcement actions (“cases”) filed (see, e.g., SEC, 2018, 2020). Former co-directors of the Division of Enforcement acknowledge the potential dangers of focusing on quantitative measurements: “the raw number of cases filed or the total amounts of fines and penalties assessed during an arbitrary time period such as a single fiscal year—cannot adequately measure the effectiveness of an enforcement program…[and] can result in a misalignment of incentives and objectives” (SEC 2018). We examine this concern by testing whether … Read more

Debevoise Discusses New Cyber Incident Reporting for Critical Infrastructure

On March 15, 2022, President Biden signed the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (the “Act”) into law, requiring critical infrastructure entities to report covered cybersecurity incidents to the Cybersecurity and Infrastructure Security Agency (“CISA”) within 72 hours and report ransom payments to CISA within 24 hours of payment. The Act, which was incorporated into the 2022 Consolidated Appropriations Act and does not take immediate effect, requires CISA to undertake rulemaking to define key elements, including what types of entities constitute critical infrastructure, how a cybersecurity incident is defined, and what should be included in reports to … Read more

Corporate Criminal Enforcement as a Defense to Companies’ Political Influence

Countries around the world are reforming their laws governing corporate criminal liability. Jurisdictions and scholars arguing against broad corporate liability, often rely on the claim that corporate civil liability should be as effective because it can impose equally large sanctions on companies. Yet corporate liability is only effective when enforcement officials have the resources and political will to pursue large politically-influential corporations. At the federal level in the U.S., companies need to be subject to both criminal and civil liability for their misconduct. Federal civil enforcement is less effective than criminal enforcement because large companies can more easily leverage their … Read more

SEC Chair Gensler on Proposed Mandatory Climate Risk Disclosures

Today [March 21], the Commission is considering a proposal to mandate climate-risk disclosures by public companies. I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.

Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are

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SEC Commissioner Peirce Criticizes Proposed Mandatory Climate Risk Disclosures

Thank you, Chair Gensler.  Many people have awaited this day with eager anticipation.  I am not one of them.  Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures.  The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures.  We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency.  For that reason, I cannot support the proposal.

The proposal turns the disclosure regime on its head.  Current SEC disclosure mandates

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Max Oversight Duties: How Boeing Signifies a Shift in Corporate Law

In September 2021, the Boeing 737 Max debacle turned into an important moment in corporate law. A Delaware court allowed a derivative lawsuit brought by Boeing shareholders to proceed, based on the theory that Boeing’s directors breached their oversight duties by not doing enough to monitor, prevent, and react to fatal airplane safety issues. In a new essay, I explore what the Boeing decision means for director oversight duties and use it to discuss broader trends in corporate law.

Boeing signifies and puts an exclamation mark on a new era of heightened oversight duties (dubbed Caremark duties, after Delaware’s … Read more

Sullivan & Cromwell Discusses Federal LIBOR Transition Legislation

On March 15, 2022, President Biden signed into law the “Consolidated Appropriations Act, 2022,” which enjoyed significant bipartisan support and contains, as Division U, the “Adjustable Interest Rate (LIBOR) Act” (the “LIBOR Act”).[1]  The LIBOR Act provides a uniform national approach for replacing U.S. dollar LIBOR (“LIBOR”) as a reference interest rate in so-called “tough legacy” contracts (contracts that do not include effective fallback provisions, for example, because they have no provisions for a replacement benchmark or their fallback provisions would require the use of a LIBOR-based rate or a poll to determine a rate) for a time when … Read more

How FinTech Affects Corporate Takeover Markets

Investment in financial technology, or FinTech, has increased dramatically over the past decade – from a total value of $9 billion worldwide in 2010 to well above $100 billion in recent years, with a peak of $215 billion in 2019. In addition to investments from venture capital, private equity, and public equity firms, companies have spent substantial amounts on acquiring disruptive technologies through mergers and acquisitions. For example, digital-payments platform Square, founded by Twitter co-founder Jack Dorsey, acquired the FinTech firm Afterpay in August 2021, resulting in Australia’s biggest-ever takeover. Goldman Sachs acquired FinTech firms United Capital in 2019 and … Read more

Skadden Discusses DOJ’s White Collar Crime Enforcement Priorities

Remarks made by U.S. Department of Justice (DOJ) officials at the March 2022 American Bar Association’s (ABA’s) National Institute on White Collar Crime (the White Collar Conference) reflect the DOJ’s prioritizing white collar criminal enforcement under the Biden administration.1

On March 3, 2022, U.S. Attorney General Merrick Garland and the head of the DOJ’s Criminal Division, Assistant Attorney General Kenneth Polite, announced at the conference the DOJ’s areas of focus for 2022. Unsurprisingly, those themes were topics covered throughout the conference and included: (i) additional resources for investigating and prosecuting corporate crime (including cybercrime and crypto crime, as listed below); … Read more

The SEC’s Proposed Cyber 8-K Disclosure

On March 9, 2022, the SEC proposed rules mandating cybersecurity disclosure, including a new Item 1.05 for Form 8-K, which requires current reporting of cybersecurity incidents deemed by the registrant to be material.

In a 2018 article published in the Harvard Business Law Review, Columbia Law Professor Eric Talley and I identify trading patterns suggestive of informed trading prior to the disclosure of cybersecurity breaches.  We argue that trading of this type raises complex and, in context, unique concerns over price discovery, liquidity, and efficient allocation of resources.  Profits from such trading may increase hackers’ incentives to exploit security vulnerabilities, … Read more

Cleary Gottlieb Discusses SEC’s Proposed Changes to Beneficial Ownership Reporting

On February 10, 2022, the Securities and Exchange Commission (the “SEC”) issued for public comment proposed rules that will, if adopted, significantly affect how investors report their beneficial ownership on Schedules 13D and 13G.[1] The principal changes would:

  • accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports;
  • clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; and
  • expand the definition of beneficial ownership to include certain cash-settled derivative securities.

In this memo, we summarize the proposed changes and the implications for issuers, activists, … Read more

The “S” in ESG: Human Capital Management

Over the past decade, ESG has morphed from a fringe concern into one of the most prominent topics in corporate governance – and a flourishing research area as well.[1] Nevertheless, some notable blindspots remain. Based on a recent survey, the vast majority of legal ESG scholarship limits the analysis to just two ESG factors: (1) climate risk, and (2) corporate diversity. These are hugely important issues, but a close look at developments on the ground reveals that there is a lot more to ESG. As it is practiced today, ESG also covers a wide range of matters related to … Read more

Skadden Discusses Agency Perspectives on the Merger Guidelines Review

On Jan. 18, 2022, the Federal Trade Commission (FTC) and the Department of Justice’s (DOJ) Antitrust Division announced a joint public inquiry related to the federal merger guidelines, with the goal of “strengthening enforcement against illegal mergers.” Members of the public are encouraged to provide comments pursuant to the joint request for information through March 21, 2022. After considering these public comments and other available evidence, including their own research, the agencies are expected to publish revised proposed guidelines for public comment. In announcing the joint inquiry, the agency heads identified and explained some of their concerns with current antitrust … Read more

Time for a Broad Prophylactic against Congressional Insider Trading  

In 2011, Peter Schweizer published a book, Throw Them All Out, exposing some questionable means by which politicians manage to increase their personal wealth 50 percent faster than the average American does.

Schweizer suggested that trading on material nonpublic information is one way members of Congress achieve outsized returns on their investments. He cited one study that found:

  • The average American investor underperforms the market.
  • The average corporate insider, trading his own company’s stock, beats the market by 7 percent a year.
  • The average senator beats the market by 12 percent a year.

Schweitzer’s book was followed by … Read more

ISS Discusses Women on California Boards

Since 1995, US presidents have issued a series of annual proclamations designating March as Women’s History Month to celebrate the contributions women have made to the US and recognize the specific achievements women have made over the course of American history in a variety of fields. In the first of a series of short insights looking at the role of women in corporate America, we focus on women on boards in California.

Key Takeaways:

  • More women joined boards in California than men in 2021
  • Only 2% of boards in California have no women
  • The number of women directors is now

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Reviving Bank Antitrust

Antitrust is back. The Chicago School relegated antitrust policy to obscurity during the latter half of the 20th century, but a new cohort of antimonopoly scholars has recently rekindled concerns about industrial consolidation and corporate “bigness.” This antitrust revival has spurred an unlikely coalition of ideologically diverse policymakers to pursue aggressive merger enforcement and de-concentration strategies in technology, pharmaceuticals, transportation, and healthcare. Harnessing this momentum, President Joe Biden issued an executive order shortly after his inauguration, directing his administration to “combat the excessive concentration of industry” and “promote competition” throughout the economy.

To date, however, the new antitrust movement … Read more

Cleary Gottlieb Discusses End of Mandatory Arbitration for Sexual Misconduct Cases

On March 3, 2022, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act[1] into law.  The law amends the Federal Arbitration Act (“FAA”) to prohibit the use of mandatory arbitration provisions to resolve sexual harassment and sexual assault claims, allowing survivors the option of litigating their claims in court.

Background

The use of mandatory arbitration provisions in employment and other contracts for claims involving sexual harassment and sexual assault has garnered increased public scrutiny in the past few years.  Today, more than 60 million Americans are currently subject to mandatory arbitration clauses, requiring binding … Read more

Stakeholder Capitalism as ESG-Constrained Shareholder Capitalism

Intense debates are alive and well on the nature and meaning of corporate purpose and corporate personhood. In a new paper, I analyze proposals by the U.S. Securities Exchange Commission to require that all reporting companies make periodic, mandatory Environmental, Social, and Governance (ESG) disclosures of comparable, standardized, and quantifiable metrics.

Shareholder capitalism leaves the protection of customers, employees, and other non-shareholder stakeholders to areas of law other than corporate law.  This delegation by shareholder capitalism is problematic because, as Tim Wu has written, it “ignores public choice theory and the obvious incentives of corporations who are told Read more

SEC Chairman Gensler Speaks Before the Investor Advisory Committee

It’s good to be back with the Investor Advisory Committee (IAC) again. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

I’d like to acknowledge the departure of Committee members J.W. Verret and Paul Mahoney. J.W. has served as the Assistant Secretary and Chair of the Market Structure Subcommittee. Paul has served in a number of roles, including IAC Chair during a transitionary period. Both have been active, engaged members of the Committee. Thank you for volunteering your time to make important contributions to

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Power and Pay in the C-Suite

Over the past few decades, chief executive officer (CEO) pay has risen spectacularly, as has debate regarding why this has occurred and whether policy should or can correct it. Yet one glaring fact about the C-Suite eludes much of the corporate governance literature and executive compensation policy reforms and proposals: The C-Suite, particularly the CEO role, has long been and continues to be dominated by men.

Despite making up half the workforce, few women lead companies in corporate America. Only 8 percent of CEOs of Fortune 500 companies are women, and women make up less than a quarter of C-level … Read more

SEC Chairman Gensler Speaks on Proposal for Mandatory Cybersecurity Disclosures

Today [March 9], the Commission is considering a proposal to mandate cybersecurity disclosures by public companies. I am pleased to support this proposal because, if adopted, it would strengthen investors’ ability to evaluate public companies’ cybersecurity practices and incident reporting.

We’ve been requiring disclosure of important information from companies since the Great Depression. The basic bargain is this: Investors get to decide what risks they wish to take. Companies that are raising money from the public have an obligation to share information with investors on a regular basis.

Over the years, our disclosure regime has evolved to reflect evolving risks

Read more

SEC Commissioner Peirce Dissents on Cybersecurity Proposal

Thank you, Renee, Ian, and Jessica. Cybersecurity risk is top of mind for everyone. The Commission’s consideration of this topic—whether for investment advisers, as we did a month ago,[1] or public companies, as we are doing today [March 9]—is, therefore, reasonable. We must approach this topic, of course, through the prism of our mission. We have an important role to play in ensuring that investors get the information they need to understand issuers’ cybersecurity risks if they are material. This proposal, however, flirts with casting us as the nation’s cybersecurity command center, a role Congress did not give us. … Read more

Initial Public Offerings and Optimal Corporate Governance

Do companies adopt optimal governance arrangements when they go public?  This question has been a hotly debated topic in corporate law and governance and one that I examine in a recent paper.

At the time of an initial public offering (IPO), a company offers a package of governance arrangements to the outside investors.  The arrangements include dual versus single class structure, staggered or un-staggered board, an exclusive forum provision (with respect to either corporate law or federal securities law claims), and robust or narrow shareholder rights with respect to nominating directors, calling special shareholder meetings, or having access to the … Read more

Debevoise Discusses Russia, Sanctions, and Digital Assets

In response to ongoing Russian military action in Ukraine, U.S. authorities have imposed several tranches of new sanctions against Russia, particularly against Russia’s financial industry, including its major banks and the Central Bank of Russia. On February 26, President Biden and leaders of other European countries announced their intention to remove certain Russian banks from the SWIFT financial messaging system, a measure that was enacted by the European Union on March 2, 2022, and applies to seven Russian banks, cutting them off from SWIFT’s secure network for transmitting financial messages between financial institutions (e.g., payment instructions).

As … Read more

SPACs and PIPEs as Efficient Tools for Corporate Growth

A SPAC can be understood as an alternative to an IPO, with investors using a large investor, a PIPE, to find out whether the SPAC founder has really chosen a good target or is simply rushing to get a big payoff before investors must be repaid. The PIPE is an expert that gets paid to certify a SPAC, and it is compensated accordingly.

While many sophisticated observers believe that SPAC shareholders receive a bad bargain because their shares are subject to dilution, there is less of an argument to be made for protecting target management from aggressive sponsors. The relevant … Read more

Davis Polk Offers Update on SEC’s New Investment-Management Rules and Lawsuits

Rules and regulations

SEC proposes expanded cyber oversight after Gensler signals more on the way

The Securities and Exchange Commission (SEC) proposed new cybersecurity rules for investment advisers and investment companies that would require policies and procedures, annual reviews, reporting to the SEC, disclosures to investors, and recordkeeping.  The rules would subject investment advisers and investment companies to increased enforcement risk.  Please see Davis Polk’s client update for further information on the proposal.

SEC proposes new rules and amendments to enhance private fund investor protections

The SEC’s proposed new rules and amendments include new requirements related to quarterly statements, private … Read more

The Most Dangerous Branch: Is the Supreme Court Dismantling the Administrative State?

At first glance, the question posed above may sound slightly paranoid. Still, sometimes a measure of paranoia may be justified. In any event, this column is less a prediction of the future than a review of what is actually happening, particularly over the last month. Consider the following three cases:

Case 1: The press is now focusing on West Virginia v. EPA,[1] which was argued before the Supreme Court last week. West Virginia and the coal industry have appealed a lower court decision that upheld the EPA’s authority under the Clean Air Act to regulate greenhouse gasses … Read more

Cadwalader Discusses the SEC’s Regulatory Posture on Climate Risk

Climate change-related risks to the U.S. financial system are attracting increasing public attention in recent years and are raising questions about how U.S. financial regulators, including the U.S. Securities and Exchange Commission (the “SEC”), will address such risks.  The SEC is on the precipice of issuing a proposed new rule regarding climate risk disclosures by public companies.

Although the attention being given to climate change financial risks is relatively new, the debate over the regulatory approach to climate change financial risks is merely the latest episode in a long-running series:  A reality-TV contest pitting principles-based financial regulation against … Read more

How to Reconcile Corporate Interests with Broader Social Interests

The widely accepted primary purpose of corporations is to maximize profit or value to shareholders, otherwise known as “shareholder primacy.”  Shareholder primacy represents not only the prevalent objective of corporations but also a norm: A seminal case in corporate law, Dodge v. Ford Motor Co., set the cardinal principle that a corporation must serve the interests of shareholders rather than the interests of its employees, customers, or the community.

The court decision has set shareholder primacy as a legal obligation, not just a business objective, and created a distinction between corporate interests and the interests of other stakeholders such … Read more

SEC Investment-Management Chief Speaks at Investment-Adviser Conference

Good morning. Thank you, Karen, for your kind introduction and for inviting me to speak today. I am delighted to join you for my first public address as the Director of the Division of Investment Management.

Let me begin, if I may, by making clear that my remarks today are my own and do not necessarily reflect the views of the Commission, the Commissioners, or the SEC staff.[1]

Just over two months ago, I was both an academic and a student, studying the economic history of post-bellum America, a time when the country emerged from war to confront income

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Learning by Doing in Mergers and Acquisitions

In his classic 1962 paper, “The Economic Implications of Learning by Doing,” Nobel laureate Kenneth J. Arrow argued that firms can gain proficiency through the repetition of activity. Since then, learning by doing, or LBD, has been widely studied across business and economics disciplines. Researchers have come to realize that firms can obtain significant cumulative experience and achieve efficiency in operations, production, and innovations using LBD (e.g., Irwin and Klenow, 1994; Jovanovic and Nyarko, 1996; Beck and Wu, 2006).

In a new study, we revisit the LBD hypothesis in the context of mergers and acquisitions (M&A). We argue that firms … Read more

Skadden Discusses How Biden Administration Has Made Merger Clearance Less Predictable

The Biden administration has demonstrated a clear pro-enforcement approach to antitrust, implementing numerous directives and changes, driven in part by concerns about the power of Big Tech, and by progressives who want antitrust enforcement to further their social goals.

These efforts have brought more uncertainty in the short term as the antitrust agencies and the business community adjust. Whether 2022 brings more dramatic, rather than incremental, changes will depend on whether Congress revises the antitrust laws and if the agencies successfully challenge deals and conduct in court.

Key Players

The main faces of antitrust enforcement in the Biden administration are … Read more

Are CEO Political Donations Linked to the Risk of SEC Enforcement Actions?

The potential for corporate campaign contributions to skew government policy has attracted considerable attention. Empirical studies generally support the notion that firms gain regulatory advantages through their involvement in the political process (e.g., Correia, 2014; Naughton, Rogo and Zheng, 2021). The notion that corporations also benefit financially from political influence has led to demands for making  their lobbying more transparent (e.g., Bebchuk, Jackson, Nelson, and Tallarita, 2020), both to protect shareholders and to uphold the integrity of the U.S. political system. In contrast, individual donations by executives are believed to be relatively benign, seen generally as motivated by ideology rather … Read more

Cleary Gottlieb Discusses SEC’s BlockFi Settlement and Crypto Lending

On February 14, 2022, the Securities and Exchange Commission announced a settled enforcement action charging BlockFi Lending LLC (“BlockFi”) with allegedly failing to register its interest-bearing crypto lending product as a security, failing to register itself as an investment company, and making false statements about its product.  BlockFi agreed to pay a total of $100 million in fines to the SEC and a consortium of states.[1]  As the SEC noted in the settlement Order, BlockFi publicly announced on the same day that it intended to register a new interest-bearing crypto product as a security, and the Commission provided BlockFi … Read more

Environmental Protection and Sovereign Debt Restructuring

Some countries have a compelling argument for why they should not be expected to join the planetary effort to fight climate change. These are countries facing the need to restructure their external debt. By definition, sovereigns that cannot pay what they are already contractually obligated to pay will not have excess cash to devote to environmental conservation or other measures to assist with limiting climate change. As incongruous as it may sound, however, it is precisely this subset of countries undergoing a debt restructuring that may have an alternative avenue for funding these projects.

Background

Most modern sovereign debt restructurings … Read more

Gibson Dunn Offers 2021 Year-End Securities Litigation Update

Federal securities filings continued to slow during the second half of 2021.  The volume of new securities cases filed in 2021 fell by 36% compared to 2020, and 51% compared to 2019.  Nonetheless, federal and state securities laws continue to develop in the courts.  This year-end update summarizes major developments since our last update in August 2021:

  • The second half of 2021 was relatively quiet with regard to noteworthy securities litigation activity from the Supreme Court. We discuss the settlement of a case that would have asked the Court to decide whether the PSLRA’s discovery-stay provision applies in state court,

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The SEC Acts on Short-and-Distort Petition

On February 25, 2022, the Securities and Exchange Commission proposed rules to enhance the transparency of short positions in equity securities.  One proposal would require confidential, monthly reporting of short sellers’ individual positions, which would then be aggregated by security and disclosed to the public.  A second proposal would establish a new buy-to-cover order-marking requirement for broker-dealers.

In its proposing release, the SEC explained that the purpose of these rules is to deter manipulative short selling campaigns:

In determining  the  proposed  reporting  requirements  under  Proposed Rule  13f-2  and  Proposed Form  SHO, the  Commission  is  mindful  of  concerns  that  certain  … Read more

Skadden Discusses New Pressure on Companies to Disclose Political Policies and Contributions

Political activities of corporations are increasingly subject to scrutiny on environmental, social and governance (ESG) grounds. Demands that corporations and their political action committees (PACs) justify their contributions based on candidates’ voting records on ESG issues came to the fore with the North Carolina gender bathroom bill in 2016. This evolved to a more general focus on LGBTQ+ and other ESG issues, such as diversity and climate change, and culminated with the events at the U.S. Capitol on January 6, 2021. That resulted in many companies reevaluating their political-giving programs. Some temporarily paused all political giving, while others suspended contributions … Read more

Do Jobseekers Value Diversity Information?

Recent social movements have generated a renewed emphasis on promoting diverse and inclusive workplaces. For example, institutional investors have increased their investments in firms that demonstrate strong commitments to diversity, and regulators also increasingly require firms to describe the extent to which their culture is diverse and inclusive. Yet, it remains unclear whether employees ultimately value diversity information and whether it factors into their job search. This issue is of particular importance given the scarcity of diversity information available to employees, with 17 percent of public firms disclosing either numerical metrics of gender or racial workforce diversity in their 2020 … Read more

How Firms’ Simultaneous Release of Information Affects Market Feedback

Can managers obtain more useful feedback from capital markets by disclosing pieces of information separately and at different times instead of bundling the information and releasing it at once? It is well known that capital markets’ response to firms’ announcements may reveal useful information for corporate managers, especially if the success of an investment opportunity depends on external factors, such as the position of competitors or expectations about consumer demand. In a recent study, we document that the extent to which managers can extract valuable signals from stock prices may depend on how much information is released simultaneously.

Consider a … Read more

Cravath Discusses Dollar Cost Averaging of Long-Term Incentive Grants

“Dollar cost averaging” is an investment strategy whereby investors spread a desired investment amount into periodic investments over a period of time, which mitigates the price risk inherent in investing the entire amount at an inopportune moment. Virtually all public companies grant equity-based compensation as the most significant portion of their executive compensation program. These awards provide an important link between executive and shareholder interests. Market practice is generally to grant these awards in “one shot” toward the beginning of the fiscal year, and the grants are, therefore, dependent on the share price at that moment in time. From time … Read more