Re-Imagining the Business Trust as a Sustainable Business Form

An important debate has emerged in the United States about how business should encapsulate more fully the sustainability-conscious management paradigm. At issue is the proper role of business in society, and the trend is to consider more than just shareholder profits. In the United States, companies like Amazon and Alphabet are incorporating sustainability practices and corporate social responsibility (CSR) into their business models. However, the traditional corporate management paradigm –  shareholder primacy – requires corporate boards of directors to place shareholder interests, principally shareholder profits, above all else in corporate decision-making. This model conflicts with the increasingly common sustainability management … Read more

Key Governance Lessons from the New Association of Corporate Counsel Survey

The newly released Chief Legal Officers survey (“Survey”) from the Association of Corporate Counsel (“ACC”)[1] is an important governance development to the extent that it supports a board’s ability to exercise oversight of its company’s legal department. Overall, the ACC findings underscore the organizational value of a CLO hierarchically positioned to influence corporate strategy.

A board’s ability to evaluate the Survey results depends on the board’s appreciation of its specific fiduciary obligation to monitor the legal affairs of the organization. This responsibility is most directly satisfied through oversight of the department of legal affairs and extends to satisfaction of … Read more

Wachtell Lipton Discusses the Coming Impact of ESG on M&A

Recent months have seen institutional investors and other stakeholders, notably BlackRock and State Street, stressing the importance of comparable and decision-useful ESG disclosures by their portfolio companies.  Such calls follow in the wake of growing interest among investors and other stakeholders in understanding and assessing the performance of companies based on ESG metrics.  While the exact system by which companies will report on ESG issues remains to be determined by the market, it is clear that beginning in 2020, and in the years to follow, companies will be disclosing significant amounts of quantifiable information on a basis that will … Read more

Managerial Optimism and Debt Covenants

The allocation of control rights between entrepreneurs and capital providers plays a central role in financial contracting and corporate governance. Debt contracts typically include accounting-based covenants that transfer control rights to lenders when accounting numbers (such as earnings) fall below certain thresholds. A tighter covenant (i.e., a higher threshold) increases the likelihood that the lender gains control, permitting the lender to take actions against the entrepreneur’s will, such as liquidating projects.

One key characteristic of entrepreneurs is that they tend to be overly optimistic about the chances of success of their own projects.[1] After all, individuals who forego other … Read more

Are CEOs Encouraged to Take Too Much Risk?

CEO compensation typically consists of cash and long-term equity. While the benefits of cash are to some extent fixed, the value of equity-based compensation depends on the market value of the firm. The latter is the key mechanism for motivating managers to act in the best interest of shareholders’ long-term wealth.

In order to maximize the incentives provided by the equity component of their compensation, executives should take risks to maximize their firm’s market value. How they do so can, of course, vary. The most desirable approach would be to engage in more risky projects that would bring long-term returns. … Read more

The Results Are in: Global Investor-Director Survey on Climate Risk Management

Institutional investors are increasingly focused on “extra-financial performance” as a predictor of long-term success of companies. Topics like climate change, CO2 emissions reduction, respect for the environment, labour rights, and diversity are more and more factored into investment decisions.

Investors, directors and company management need to work together to leverage the new regulatory environment, address unprecedented environmental and social challenges, and promote disruptive technological innovation to strengthen business models and improve performance.

About the Survey

This global survey, conducted by a team of academics from the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School and Environmental, … Read more

Corporate Law Professors on Public Company Boards

Since passage of the Sarbanes-Oxley Act of 2002, public companies have been more enthusiastic than ever about appointing independent directors with specific expertise. They have often reached into the academy to recruit university professors, where expertise and independent thought thrive. The number of professors on public company boards has tripled since 2002, and the number with law degrees has nearly doubled. Today, nearly one in eight public company directors is a professor and nearly half of all public companies have an academic on the board. The results have been positive, as evidence discussed below shows that these groups are associated … Read more

Sullivan & Cromwell Discusses Delaware Chancery Ruling in “Panera” Appraisal Case

The Delaware Court of Chancery ruled in In re Appraisal of Panera Bread Company,[1] following a six-day trial, in a 130-page decision issued on January 31, 2020, that the petitioners received more than fair value for each share of Panera Bread Company (“Panera”) in connection with its 2017 acquisition by JAB Holdings B.V. (“JAB”), with the Court relying on the deal price, minus synergies value, as the metric of fair value for the case.  Because Panera had paid the appraisal petitioners the full merger price as permitted by Delaware law, it sought a refund of the amount of … Read more

How Shareholder Rights Affect Firms’ Financing Decisions

Several decades of research have found that capital structure and financing decisions are influenced not only by market frictions such as taxes and bankruptcy costs but also by conflicts between managers and shareholders. In a new paper, we test whether and to what extent limited rights for shareholders to file derivative lawsuits influence firms’ capital structure and financing decisions.

To examine changes in firms’ capital structure and financing decisions, we exploit the staggered passage of Universal Demand (UD) laws by 23 U.S. states. These laws limit shareholders’ ability to file a derivative lawsuit on behalf of a firm by forcing … Read more

CEO Networks and Shareholder Litigation

Academics, notably in sociology and economics, have long understood that social settings are primary drivers of information transmission and economic outcomes, from hiring decisions to product adoption to resource allocation. However, only recently has there been large-sample empirical evidence to support the intuition that social settings around individuals – networks comprised of connections among people – are important for firm and market outcomes. Our recent paper, “CEO Networks and Shareholder Litigation,” investigates whether executive networks are important in the context of securities class action (SCA) lawsuits.

Recent literature presents evidence that executive networks enable more efficient information flows, … Read more

Shifting Contours of Directors’ Fiduciary Duties and Norms in Comparative Corporate Governance

The problems in global financial markets are often similar, even though the capital market structure across jurisdictions differs significantly. The beginning of the 21st century was marked by a spate of international corporate scandals, and the 2007-2009 global financial crisis reflected the global interconnectedness of contemporary international capital markets.

These corporate crises prompted major financial market reforms around the world. Discerning the causes of the crises was no easy feat, yet framing of the underlying problems was critical to the regulatory responses. In relation to the global financial crisis, for example, opinion continues to be divided across different jurisdictions … Read more

Cleary Gottlieb Discusses Developments in Brexit and Corporate Governance

In 2020, businesses operating in the UK will need to grapple with the continued uncertainty caused by Brexit and will need to closely monitor a number of important corporate governance and reporting developments expected in the coming year.

Continued Uncertainty Caused by Brexit

When we first wrote about Brexit-related risks in our 2017 memo, “The Change in Administration in the United States and Brexit and Political Uncertainty in the United Kingdom and Europe,” few would have predicted that the ensuing political uncertainty would remain at the top of the UK corporate agenda three years later.

2019 saw businesses continue to … Read more

Wachtell Lipton Discusses Tectonic Forces to Watch in Corporate Litigation

Corporate litigation in Delaware continues to reflect the judicial trend toward honoring the decisions of informed stockholders and independent directors, thus limiting those decisions from costly after-the-fact legal attack.  While the boundaries of stockholder ratification and director independence continue to be refined on a case-by-case basis, the broader conceptual trend—to give the last word on corporate action to independent directors and the stockholders who elect them—has taken firm root.  Novel issues now rumbling under and through the judicial system implicate a different set of relationships—not between stockholders and directors, but between corporations and society at large.  To meet these … Read more

The Potentially Toxic Combination of Management Culture and Modern Surveillance

In my forthcoming article, Management Culture & Surveillance, I argue that we should be worried about management overreach in the use of workplace surveillance. Based on new evidence of modern management’s roots in the slave plantations of the U.S. South and West Indies, we should be particularly concerned about management arguments for surveillance based on a business’ perceived need for increased productivity and enterprise control.

In their 2017 landmark article, Limitless Worker Surveillance, professors Ajunwa, Crawford, and Schultz detail the ineffectiveness of U.S. privacy laws to prevent invasive workplace surveillance, and they note that “technologies, Read more

ISS Offers 2019 Hong Kong Proxy Season Review

In early 2019, the government of Hong Kong proposed a bill that would allow for the transfer of criminal suspects to jurisdictions with which it does not have an extradition agreement, including Mainland China. The proposed extradition bill triggered an intense public backlash as opponents believed the bill would expose Hong Kong to China’s legal system, jeopardizing the city’s autonomy and status as a financial hub. Millions of demonstrators took to the streets in June, clashing with law enforcement and demanding withdrawal of the extradition bill. The ongoing protests have taken a heavy toll on Hong Kong’s economy. Industries, including … Read more

Freshfields Discusses Trends in Stockholder Activism

While activist campaigns were down slightly year-on-year in 2019, stockholder activism remained a prominent tactic. Looking ahead to 2020, there is no reason to suspect a further decline. Activists notched some big wins over the year, notably Elliott in its campaign at AT&T, which saw the telecoms conglomerate announce it would conduct a full review of its portfolio, not make any further major acquisitions, add two new directors and separate the CEO/chair roles after the current CEO retires.

While each situation is different, several themes emerged during the year.

Increasing activity at large-caps

Elliott was able to effect change at … Read more

Cleary Gottlieb Discusses Shareholder Engagement Trends and Considerations

Shareholder engagement continues to be an important consideration for companies in communicating their long-term strategy and deepening relationships with their investors, and boards are becoming ever more involved in the process.

In PwC’s 2019 “Annual Corporate Directors Survey,” 51% of the directors reported that a member of their board, apart from the CEO, engaged directly with a shareholder in the past year.[1] One third of more than 300 directors, senior executives and legal advisors surveyed by KPMG in June 2019 reported more significant board engagement with shareholders over the last two to three years than in the past.[2]Read more

The Three Fiduciaries of Delaware Corporate Law — and Eisenberg’s Error

Delaware corporate law differs from other areas where fiduciary obligations apply – such as agency, LLCs, partnerships, and trusts.  Three distinct actors owe fiduciary duties – executive officers, directors, and controlling shareholders – and numerous aspects of their duties greatly differ.  But Delaware corporate law is not unique in the way many believe.  Conventional wisdom holds that, uniquely, corporate law’s standards of conduct (fiduciary duties) diverge from judicial standards of review, the latter being more deferential.  Yet, the two sets of standards often converge and are identical.  The supposed distinction is not uniformly accurate, and unenforceable standards of conduct may … Read more