International Developments

How the Rise of Corporate Debt in Emerging Economies Affects Corporate Investment

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In recent years the corporate debt landscape in emerging markets has changed substantially. Debt in emerging economies climbed to a record high of $55 trillion in 2018, illustrating the largest and fastest surge in the last five decades. In addition, according to the International Monetary Fund (IMF) 2015 report, the mean ratio of corporate debt to GDP grew by 26 percent. These recent developments are important and have raised broad concerns because emerging economies account for 60 percent of the global GDP.

High levels of leverage could either constrain or accelerate firm growth. In addition, high corporate debt … Read more

Remedies for M&A Breach of Contract – The Cineplex Case

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A remorseful acquirer wants to get out of a merger or acquisition agreement. It concocts a thin justification, which a court wisely rejects, finding unlawful breach. What is the appropriate remedy for harm done to the target?

While attention has focused on the controversy surrounding Elon Musk’s proposed acquisition of Twitter, this question arose in the recent Canadian decision of Cineplex v. Cineworld.[1] The Cineplex court rejected specific performance and instead, in a case of first impression, awarded the target CAD $1.24 billion in expectation damages for loss of anticipated synergies.

Our forthcoming paper takes a close look … Read more

Finance Without Law: The Case of China

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In a new article. I investigate how two financial markets of trillions of dollars each have developed extralegally in the past two decades, creating risks of regulatory enforcement actions and contract defaults. More specifically, I examine (1) how Chinese internet companies from Sina to Alibaba have adopted the structure of a variable interest entity (“VIE”) both to circumvent the Chinese government’s ban on foreign capital in high-tech industries and to get listed on overseas stock markets, and (2) how Chinese entities and foreign investors contract out of China’s stringent regulations on the issuance of international bonds, focusing on one of … Read more

SEC Accounting Chief Warns Chinese Companies About Risks of Changing Auditors

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One of the recent central themes of the Office of the Chief Accountant[1] has been that high-quality audits are foundational to the trust that underlies capital markets.[2] High-quality audits protect investors, instill shareholder confidence in the quality of the financial information, and enable public companies to raise capital efficiently.[3] The investor protection afforded by high-quality audits is as important to U.S. investors in foreign companies that participate in the U.S. capital markets as it is for investors in domestic companies. In fact, it could be argued that the additional information barriers that may exist when investing in … Read more

ISS Discusses Five Non-U.S. Class Actions Investors Should Pay Attention To

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As institutional investors know, a vast majority of shareholder related class actions take place in the United States. This is accurate in terms of both newly filed cases and settlements.

However, non-North American shareholder litigation is significantly important to investors looking to recoup lost assets, while at the same time keeping companies accountable for violations of local securities laws. In fact, the largest non-North American settlement of all-time was resolved earlier in 2022… a €1.4 billion settlement with Steinhoff International.

Here is a look at five current non-North American cases investors should keep their eye on:

The A2 Milk

… Read more

Corporate Governance and International Law

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Why should corporate managers comply with international law?  International agreements, customary international law, and non-binding recommendations are sources of norms that, if adopted, could address many of the harms that corporations create for society and the planet.

Corporations are increasingly exposed to a variety of reputational, legal, regulatory, and other risks when they operate in a manner inconsistent with society’s expectations.  Environmental, social, and governance (ESG) issues are priorities at many corporations, but managers struggle with how to implement them. Fortunately, many international laws offer the blueprint for ESG strategies.  For example, the United Nations Guiding Principles recognize the “corporate … Read more

Argentina’s Cliffhanger Negotiations on a New Loan Deal with the IMF   

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In late March, Argentina and the IMF agreed on a new arrangement that would enable Argentina to avoid falling into arrears on the IMF’s 2018 loan. However, the agreement was reached only after protracted and tortuous negotiations that dragged on for at least 18 months and concluded only at the last minute before a de facto March deadline.

In a new two-part article, I discuss the many twists and turns of the process and review the major substantive policy differences between Argentina and the IMF as well as the political considerations involved in the negotiations.

In August 2020, Argentina restructured … Read more

Davis Polk Discusses Key Takeaways for Banks of Basel Climate Report

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Here are the key takeaways from the Basel Committee’s final Principles for the Effective Management and Supervision of Climate-Related Financial Risks (the “Basel Principles”).

  1. The core elements of the Basel Principles align closely with proposed principles from the OCC and FDIC

    • The Basel Principles1 align closely with the climate-related risk management principles proposed by the Office of the Comptroller of the Currency (the “OCC Proposal”)2 and the Federal Deposit Insurance Company (the “FDIC Proposal”).3
    • The Basel Principles are part of the Basel Committee on Banking Supervision’s (the BCBS or the “Basel Committee”) work of assessing how the

… Read more

Sullivan & Cromwell Discusses EU’s Corporate Sustainability Reporting Requirements

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European Union leaders have reached a provisional political agreement on a revised Corporate Sustainability Reporting Directive (“CSRD”) that would introduce more detailed sustainability reporting requirements for all “large” EU companies and companies with securities (including low denomination debt securities or depositary receipts) listed on a regulated EU market. “Large” companies are those that meet at least two of the following: (i) total balance sheet exceeding €20 million, (ii) annual net turnover exceeding €40 million and/or (iii) average number of employees exceeding 250. Under the revised text published on June 30, 2022, non-EU companies would also be required to … Read more

Sovereign Debt Restructuring for Emerging Economies in Turbulent Times

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In a new article, I discuss the impact of the currently turbulent global economic environment on the prospect for sovereign debt defaults and restructurings in emerging economies.  I also review three types of emerging markets sovereigns that may be at risk of such defaults and restructurings: countries adversely affected by the economic fallout from the war in Ukraine (e.g., Egypt), countries weighted down by debt incurred in connection with China’s Belt and Road Initiative (BRI) (e.g., Sri Lanka), and countries that have had ongoing sovereign debt problems (e.g., Argentina and Venezuela).

First, it is important to put recent global economic … Read more

ISS Discusses Securities Class-Action Settlements in First Half of 2022

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The value of U.S. shareholder class action settlements in the first half of 2022 totaled $2.32 billion, the exact amount as the same period in 2021. However, the quantity of settlements in the first six months of the year increased by 23.7%, from 59 in 2021 to 73 in 2022. The average value of settlements in 2022 was $31.8 million (or 19.1% less than the $39.3 million average in 2021).

The largest settlement so far in 2022 was with Teva Pharmaceutical Industries at $420 million, accounting for 18% of the total value of settlements. Interestingly, the largest settlement from the

… Read more

What the Language of Shareholder Stewardship Can Teach Us

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Stewardship has, along with sustainability, social equality, biodiversity, and climate risk management, emerged in recent years as a favorite buzzword in corporate governance and investment management circles. But the language used by investors to express stewardship objectives and practices varies significantly. For some, stewardship is nearly synonymous with voting: it is a matter of shareholder engagement with company management and is aimed at maximizing long-term value. Others expand the long-lamented notion of shareholder ownership to include active ownership and responsible investing. For still others, stewardship is about “building stronger portfolios,” both active and passive.

To complicate matters further, stewardship … Read more

Paul Hastings Discusses Japanese Poison Pills Without Shareholders’ Blessing

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In many jurisdictions, poison pills are devised and implemented by the board of directors without shareholders being involved. Since the 2007 Supreme Court case[1] (in re Bulldog Sauce) in Japan, however, courts have largely relied on the voice of shareholders in reviewing the legality of pills. This raises several issues: how realistic it is to rely on shareholders’ resolution as a matter of corporate governance, and whether it is practically appropriate to seek shareholders’ approval when in-market purchases can be achieved in Japan in a short period of time in large quantities. We discussed a similar issue … Read more

ISS Discusses Global Crackdown on ESG Greenwashing

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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

… Read more

Does Mandatory Board Gender Balancing Reduce Firm Value?

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

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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

Sullivan & Cromwell Discusses Changes to UK Takeover Code

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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

… Read more

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

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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

ISS Discusses Japanese Board Independence and Diversity

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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

… Read more

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

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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