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11/11/20 [UPDATED] Fiduciary Duties

NEW:  Don’t Go Chasing Waterfalls: Fiduciary Obligations in the Shadow of Trados discusses In re Trados, Inc. Shareholder Litigation, C.A. No. 1512-VCL (consol.), opinion (Del. Ch. Aug. 16, 2013), and its implications for directors’ discharge of fiduciary duty in venture capital backed companies that have preferred and common classes of stock.

Skadden provides an overview of fiduciary duties applicable to corporate directors under Delaware law in Directors’ Fiduciary Duties: Back to Delaware Law Basics.

The Three Fiduciaries of Delaware Corporate Law — and Eisenberg’s Error discusses variations of the duties of care and loyalty and beneficiaries of the duties owed by officers, directors, and controlling shareholders.

11/04/20 [UPDATED] Institutional Investors

NEW:  Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance examines the means by which large index fund managers in promote Environmental, Social, and Governance issues at major companies, presenting evidence that contrary to perceptions of index funds as remaining silent corporate governance issues, fund managers aggressively press companies to address ESG concerns, especially board diversity and climate change by withholding votes from directors in uncontested elections.

Former Chief Justice of the Delaware Supreme Court Leo E. Strine, Jr. offers policy recommendations intended to align the responsibilities of institutional investors with the best interests of investors and stakeholders in sustainable wealth creation and environmental responsibility in The Central Role of Institutional Investor Regulation in Restoring a Fair and Sustainable American Economy.

Corporate Governance Through Exit and Voice presents empirical evidence from the private engagements of a large active UK asset manager suggesting that asset manager derived benefits from monitoring portfolio companies and investment in stewardship, contrary to academic arguments that index funds have little incentive to monitor and engage with portfolio companies.

Reversing the Fortunes of Active Funds observes that passive funds recently surpassed active funds in total assets under management, noting that active funds participate in and bear the costs of monitoring portfolio companies but passive funds to not, the trend will tend to reduce monitoring, and proposes the use of tax mechanisms to help defray active funds’ monitoring costs.

BlackRock founder Barbara Novick spoke at the Harvard Law School Program on Corporate Governance on index fund managers’ corporate stewardship, responding to academic arguments that funds exert too much or too little influence over portfolio companies. Video of Barbara Novick Keynote Presentation.

Tulane’s professor Ann Lipton discusses current academic disputes regarding index funds’ incentives to participate in the governance of their portfolio companies, and consequences of concentrated stock ownership by mutual funds in Index Funds in Corporate Governance: Once More Unto the Breach.

Asset Management, Index Funds, and Theories of Corporate Control challenges recent academic articles that argue index funds exert too much, or, conversely, too little, but in either case, socially sub-optimal influence over portfolio companies, as ungrounded in the realities of the asset management business.

Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy examines how index fund managers monitor, vote, and engage with portfolio companies, and expected impact of concentrated index fund ownership on corporate governance and performance, and the economy.

10/30/20 [UPDATED] D&O Insurance

NEW:  Rolnick Kramer Sadighi discusses the Delaware Supreme Court’s decision in In re Solera Insurance Coverage Appeals, Nos. 413, 418, 2019, opinion (Del. Oct. 23, 2020), holding that that a statutory appraisal proceeding was not covered by a D&O insurance policy under terms that limited coverage to alleged “violations” of law, in Appraisal Action Leads to Insurance Action: D&O Doesn’t Cover Appraisal.

D&O Diary’s Kevin LaCroix discusses the Delaware Supreme Court’s decision in In re Solera Insurance Coverage Appeals, Nos. 413, 418, 2019, opinion (Del. Oct. 23, 2020), holding that that a statutory appraisal proceeding was not covered by a D&O insurance policy under terms that limited coverage to alleged “violations” of law, in Delaware Supreme Court: Appraisal Action Not a “Securities Claim” and Therefore Not Covered by D&O Insurance.

Wachtell discusses the California Superior Court’s ruling in Onyx Pharmaceuticals Inc. v. Old Republic Insurance Co., et al., C.A. No. 538248, order (Cal. Super. Oct. 1, 2020), finding that a D&O insurance policy’s “bump-up” exclusion permitted excess carriers to disclaim coverage for sums paid to settle a class action against a merger target’s directors challenging the consideration paid stockholders as inadequate in “Bump-Up Exclusion” Bars Coverage of Settlement of Deal Litigation Claims.

D&O Diary’s Kevin LaCroix discusses dynamics of the D&O insurance marketplace and challenges that frustrate insurers’ ability to engage in active loss prevention in Mandating D&O Insurer Rotation? A Critique.

Changing the Guard: Improving Corporate Governance with D&O Insurer Rotations discusses proposes mandatory rotation of D&O insurers as a means of alleviating agency costs and relational contracting that result in D&O insurers’ failure to engage in active loss prevention and contribute to moral hazard.

10/16/20 [UPDATED] Limited Liability Companies

NEW: Patton Sullivan Brodehl discusses “buyout” provisions in LLC operating agreements that allow the LLC or its remaining members to buy the membership interest of a departing member, and case law addressing points of unclarity in such provisions in About That LLC Buyout . . . .

LLC Default Rules Are Hazardous to Member Liquidity discusses a shift in default LLC rules from partnership law toward corporate law, arguing that removal of liquidity rights and limitations on member remedies have led entrepreneurs to unintentionally lock themselves into perpetual entities and imposed costly obstacles to enforcing their rights.

The Kentucky Business Entity Law blog and Creighton University’s Professor Joshua Fershée spar over a proposed “overt disclosure” requirement for eliminating the fiduciary duty of loyalty in an LLC Agreement in Respectfully, I Dissent: Dean Fershee and Elimination of Fiduciary Duties; Dissent Duly Noted: LLCs, Private Ordering, and Ample Notice; and Agreeing to Disagree.

An Overt Disclosure Requirement for Eliminating the Fiduciary Duty of Loyalty discusses a statutory requirement that the modification or elimination of fiduciary duties in an LLC agreement must be express so all parties to the agreement are informed of the modification or elimination and the extent of such changes.

NEW: Farrell Fritz discusses a New York appellate court decision affirming dismissal of one member’s petition to dissolve a New York LLC, where the LLC Agreement allowed a deceased member’s interest to pass to a family member without the other members’ written consent in LLC Survives Member’s Death. Dissolution Petition Doesn’t.

Farrel Fritz discusses disputes arising between Members and Managers attempting to effect a buy-out of one Member’s interest in an LLC under New York law in Operating Agreement Spawns Multiple Disputes Between 50/50 Members of Realty Holding LLC.

10/15/20 [UPDATED] ESG

NEW:  Cooley reports that the World Economic Forum’s International Business Council, in cooperation with the Big Four accounting firms, released the results of a previously-announced initiative to develop common metrics to track environmental and social responsibility — the IBC Stakeholder Capitalism Metrics, presented in Measuring Stakeholder Capitalism – Towards Common Metrics and Consistent Reporting of Sustainable Value Creation — in World Economic Forum and Big Four present new framework for stakeholder capitalism metrics.

Cooley discusses the issuance of a Government Accountability Office study on investor demand for Environmental, Social, & Governance-related disclosure, current company disclosure practices, and policy implications in GAO finds lack of consistency in ESG disclosure — how will the SEC respond?

Caremark and ESG discusses Employee, Environmental, Social, & Governance concerns as related to the duty of corporations and directors to implement and monitor compliance programs and the requirement that corporations operate lawfully, noting that by adopting EESG standards that require more than the legal minimum required to benefit employees, its consumers, the environment, and society, companies ensure compliance with minimum requirements.

Wachtell discusses proposed Department of Labor rules that would limit Employee Retirement Income Security Act-governed investment based on Environmental, Social, & Governance factors rather than solely on stockholder returns, noting that ESG funds have demonstrated superior performance, and speculating that the proposed rules would increase demand for ESG-related data to support investment decisions in DOL Proposes New Rules Regulating ESG Investments.

Tulane Law’s Professor Ann Lipton notes that the Department of Labor approved inclusion of private equity investments in 401(k) plans and proposed new rules that discourage Employee Retirement Income Security Act-regulated retirement plan investment based on Environmental, Social, & Governance factors by requiring that investments be based “solely on pecuniary factors that have a material effect on the return and risk of an investment” in Private Equity In, ESG Out.

FTI Consulting reports, based on communications with companies and investors, that attempts to address “Social” considerations under an Environmental, Social, & Governance framework have contributed to business risk and caused reputational damage in Time to Rethink the S in ESG.

The New York Times reports that the Department of Labor has proposed rules governing investments under the Employee Retirement Income Security Act preventing investments based on Environmental, Social, & Governance factors that “subordinate return or increase risk for the purpose of nonfinancial objectives” in Labor Dept. seeks to Restrict Social Goals in Retirement Investing.

Davis Polk discusses a proposed Department of Labor rule proposed rule governing investments under the Employee Retirement Income Security Act requiring that only “pecuniary factors” be used to evaluate investments, to the exclusion of Environmental, Social, & Governance factors that sacrifice return or increase costs or risk in Department of Labor Proposes Investment Duties Rule Affecting ESG Investments.

The Need for Employee Buy-in for ESG to Work examines the relationship between Environmental, Social, & Governance considerations, employee satisfaction, and financial value, finding that neither ESG practices nor employee satisfaction alone improve financial value, but the combination of ESG practices and employee satisfaction had a large effect on financial value.

Wachtell’s Kirby Smith and Leo E. Strine, Jr. propose the use of compensation committees having responsibility for a company’s entire workforce rather than just senior management, tasked with ensuring that workers are fairly compensate in How A Reconceived Compensation Committee Can Help Tackle Inequality.

The Board Director Training Institute of Japan’s Nicholas Benes discusses possible means of effecting sustainability-oriented corporate governance, noting potential limitations of Environmental, Social, & Governance as insufficiently tied to incentives, and proposing inventive-based reforms in Redesigning Corporations: Incentives Matter.

Wachtell discusses how corporate directors should incorporate Environmental, Social, & Governance and stakeholder-oriented considerations into board decision-making processes in A Framework for Management and Board of Directors – Consideration of ESG and Stakeholder Governance.

Is Stakeholderism Bad for Stakeholders? responds to recent academic arguments that corporate focus on stakeholder interests will harm stakeholders and that shareholder value maximization remains the proper purpose of the corporation, asserting that objections are not inherently harmful to stakeholders, and depend on proper implementation of stakeholder-oriented reforms.

How Corporate and Securities Laws Affect Social Responsibility and Corporate Purpose discusses the role of state corporate law and federal securities regulation in promoting the role of corporates social responsibility and environmental, social, and governance concerns, and advocates for ways in which the law can better accommodate corporate promotion of such concerns.

UCLA’s Professor Stephen Bainbridge discusses research in Environmental & Social Voting at Index Funds, which supports the conclusion that passively managed index funds, despite touting commitments to Environmental, Social, and Governance objectives, do not meaningfully participate in ESG activism in ESG Voting by Index Funds.

How Committed Are Active-Investment Managers to ESG? examines active fund managers’ commitments to Environmental, Social, and Governance principles based on compliance with voluntary commitments to the United Nations 2006 Principles for Responsible Investment, concluding that only certain funds improve ESG while many others use their commitment to the Principles for Responsible Investment to attract capital without notable changes to ESG, and suggest the need of metrics to assess compliance, greater investor oversight of investment managers, and greater transparency by investment managers.

Wachtell discusses Environmental, Social, and Governance-related scenario analysis disclosures and the need to take precautions to ensure that such disclosures are not misleading, providing examples of such disclosures in ESG Disclosures and Litigation Concerns.

Schulte Roth & Zabel discusses the EU regulation on Sustainability-Related Disclosures, scheduled to take effect in March 2021, and related legislation that establishes a framework for classifying financial products as “sustainable investments,” in New ESG Disclosure Obligations.

Is Managerial Entrenchment Always Bad and Corporate Social Responsibility Always Good? examines simultaneous adoption of managerial entrenchment and corporate social responsibility governance provisions, finding evidence that in the absence of entrenchment provisions, market discipline reduces managers’ incentives to invest in long-term relationships with stakeholders and increases incentives to spend company resources generously on symbolic CSR activities.

ShareAction explores the role and influence of proxy advisors, analyzing their recommendations on Environmental, Social, & Governance shareholder resolutions compared to asset managers’ voting decisions in Another Link in the Chain: Uncovering the Role of Proxy Advisors in Investor ESG Voting.

Wachtell responds to The Illusory Promise of Stakeholder Governance — a critical analysis of stakeholder primacy proposed in the Business Roundtable’s 2019 Statement that questions its efficacy and warns against its adoption — in Professor Bebchuk’s Errant Attack on Stakeholder Governance.

Cooley discusses a recent report by Morningstar — Proxy Voting by 50 U.S. Fund Families — on institutional investor voting on Environmental, Social, and Governance-related proposals, noting that support has increased over a five-year period but the largest funds have consistently voted against such proposals in How do the largest fund families vote on shareholder proposals related to ESG?

The Illusory Promise of Stakeholder Governance critically examines stakeholder primacy proposed in the Business Roundtable’s 2019 Statement, distinguishing between two versions of “stakeholderism” — “enlightened shareholder value” and “pluralistic” — and conducts economic and empirical analyses of their expected consequences, concluding that stakeholderism will not benefit stakeholders, but would impose substantial costs on shareholders, stakeholders, and society (disagreeing with academics signatories of the Corporate Governance for Sustainability Statement).

NEW: Wachtell discusses board legal obligations, and adjustment to board functions, communications, and engagement in response to increasing investor concern over Environmental, Social, & Governance, stakeholder interests, and sustainable long-term investment strategies in Spotlight on Boards.

NEW: FTI Consulting discusses issues of likely importance to companies in connection with anticipated adoption of Environmental, Social, & Governance-related practices in Top 10 ESG Trends for the New Decade.

Wachtell discusses the relevance of corporate income tax to Environmental, Social, and Governance disclosure, noting the likelihood of tax arbitrage — shifting profit among jurisdictions — as a focus, and possible governance risks that may arise in response to aggressive tax planning in Tax and ESG.

Morrow Sodali’s John Wilcox discusses approaches to defining corporate purpose and corporate culture in the evolving governance environment that increasingly emphasizes Environmental, Social, and Governance, sustainability, and stakeholder interests in Corporate Purpose and Culture.

Wachtell suggests that Environmental, Social, and Governance considerations will increasingly impact M&A activity, discussing their relevance to due diligence and communications regarding transactions, as well as differential concerns between acquirer and target concerns, and the relationship between ESG performance and cost of capital in The Coming Impact of ESG on M&A.

Stewardship and Collective Action: The Australian Experience discusses collective action of investors in promoting corporate stewardship utilizing Australian stewardship codes, and suggests considerations for development of policy guiding investor participation in corporate governance in other jurisdictions.

Eric Scheiner and Jennifer Quinn Broda of Kennedys discuss risks that companies may assume in efforts to satisfy or failure to meet corporate social responsibility objectives having potential implications for D&O insurers and policyholders in Potential D&O Risks Arising from Corporate Social Responsibility.

Wachtell discusses BlackRock’s recent announcements regarding its commitment to sustainability as a key focus of its investment strategy in Sustainability in the Spotlight.

The CFA Institute discusses the results of surveys addressing how finance professionals and investors believe investments can support environmental, social, and governance objectives without undermining their monetary value in Sustainable Value for Money: How to reconnect finance with the needs of society.

McKinsey discusses socioeconomic risks attributable to climate change, and considerations for companies and governments Integrating climate risk into decision-making in Climate risk and response: Physical hazards and socioeconomic impacts.

Cooley discusses a McKinsey study of the economic effects of climate change as a possible impetus supporting increased focus of financial investors on issues of sustainability in McKinsey looks at socioeconomic impact of climate risk.

BlackRock discusses the ways in which it is accelerating integration of sustainability into technology, risk management, and investment in Sustainability as New Standard for Investing.

Cooley discusses BlackRock’s recent announcements regarding its commitment to sustainability as a key focus of its investment strategy in BlackRock puts sustainability at the center of investment strategy, expects more transparency in sustainability disclosure.

BlackRock discusses the economic consequences of climate change and its commitment to making sustainability the center of its investment strategy in A Fundamental Reshaping of Finance.

The Role of ESG in the Financial Performance of Banks finds a positive correlation between the return on assets and Environmental, Social, & Governance performance for European banks.

ISS discusses the link between Environmental, Social, & Governance performance and financial performance, presenting evidence that firms with favorable ESG performance ratings are more profitable, less volatile, good allocators of capital, and less cyclical, in ESG Matters.

Morningstar discusses “encouraging” findings from proxy votes of large asset managers in 2019 demonstrating support for shareholder-proposed sustainability resolutions, while noting that the largest fund providers were significantly less supportive of such resolutions, in How Can Fund Providers Protect the Future for Worker-Investors?

State Street discusses the results of a global survey of Environmental, Social, & Governance investing, noting factors affecting adoption and barriers to adoption of ESG factors by institutional investors Into the Mainstream: ESG at the Tipping Point.

10/05/20 [UPDATED] Board Governance

NEW:  The president and members of the Board of Advisors of H.S. Grace & Co. discuss board use of an “executive committee” specialized in matters requiring monitoring and attention between scheduled board meetings to assist company management, the board, and corporate counsel to carry out effective corporate governance in Why a Company Should Consider Using an Executive Committee of Its Board of Directors.

Boards in Information Governance discusses the monitoring board model as poorly-matched with modern businesses, and proposes evolution toward a pro-active “information governance” board model in which directors participate more directly in strategic management and use of information.

Cooley discusses considerations regarding whether CEOs should continue to serve on corporate boards after they step down from their chief executive positions in From “Who’s Who to who’s he” — should a former CEO stay on the board?

Monitoring the Monitor: Distracted Institutional Investors and Board Governance examines whether monitoring by institutional investors affects director behavior, finding evidence that institutional investor monitoring on a regular basis significantly improves director incentives to monitor management.

Ernst & Young discusses insights from its Strategy and Innovation Board Summit the summit for directors in Leading Boards Rethinking Strategy and Enabling Innovation.

NEW: Weil Gotshal discusses a framework for board self-assessment in Strengthening the Board’s Effectiveness in 2020: A Framework for Board Evaluations.

NEW: The National Association of Corporate Directors provides an overview of overview of business and governance issues likely to demand board focus in the coming year in 2020 Governance Outlook: Projections On Emerging Board Matters.

Wachtell discusses principles that guide directors’ responsibilities in view of a corporate governance environment that has begun to emphasize stakeholder interests, Environmental, Social and Governance factors, and corporate sustainability, in Foundational Principles in an Evolving Governance Environment.

The National Association of Corporate Directors discusses current governance trends abd topics that may confront corporate boards in 2019-2020 NACD Public Company Board Governance Survey.

Deloitte discusses matters issues expected to occupy board attention in 2020 in The 2020 Boardroom Agenda.

Russel Reynolds observes that environmental and social issues are taking precedence as matters of interest to investors on a global basis, and that corporate boards will be expected to strengthen their oversight and knowledge of such issues in 2020 Global and Regional Corporate Governance Trends.

Akin Gump discusses its choices for top 10 topics for corporate directors in 2020 in Top 10 Topics for Directors in 2020.

Ernst & Young discusses economic, geopolitical, technology and social challenges corporate directors are likely to confront during the coming year in Eight Priorities for Boards in 2020.

Cleary Gottlieb discusses significant and emerging issues in view of changing political, legal, and social climates, including environmental, social and governance concerns; pressure from institutional investors and social activists in addition to “traditional” activists; technological disruption; and antitrust, among more conventional financial, regulatory, and compliance concerns, in Selected Issues for Boards of Directors in 2020.

08/12/20 [UPDATED] Controlling Stockholders

NEW:  Alibaba: A Case Study of Synthetic Control discusses a large corporation’s governance structure in which a partnership appoints a majority of a board’s directors, the partnership is controlled by a partnership committee, and the partnership committee is effectively controlled by an entity that is controlled by a 5% stockholder, giving the 5% stockholder effective control over the large corporation.

Pillsbury Winthrop discusses recent Delaware case law finding that minority stockholders exercised control over corporations in My Brother’s Keeper: When Do Minority Stockholders Risk Being Considered “Controllers” of a Delaware Corporation?

Why Controlling Shareholders Are Not Fiduciaries argues that Delaware corporate law’s imposition of fiduciary duties on majority stockholders is conceptually flawed, and that recognition of a remedy for shareholder oppression would permit more limited, flexible corrective intervention.

Tulane Law’s Professor Ann Lipton discusses the trend in Delaware fiduciary duty case law that increasingly considers corporate control, and increasingly finds that minority stockholders may be controllers, in A study in evolution.

Controlling Shareholders in the Twenty-First Century: Complicating Corporate Governance Beyond Agency Costs discusses a rise in concentration of corporate ownership, which is contrary to predictions of more diverse ownership prevalent twenty years ago.

07/02/20 [UPDATED] Disclosures

NEW:  Cooley discusses recent research regarding company disclosures regarding business impact of the coronavirus pandemic in Study looks at COVID-19 disclosure.

Reuters reports that a study of corporate disclosures on management of social and environmental risk required under the European Union’s 2018 Non-Financial Reporting Directive revealed “big gaps between many companies’ words and action,” in Sustainability disclosures by European companies generally poor: study.

ESG Performance and Disclosure: A Cross-Country Analysis examines the relationship between ESG factors, disclosure, and financial performance across countries with varying policies imposing ESG disclosure requirements, finding correlation between quantity of disclosures and quality of data, and no relationship between ESG and risk-adjusted returns, but a small effect on volatility.

The U.S. Chamber of Commerce discusses proposed guidelines for Environmental, Social & Governance disclosures in ESG Reporting Best Practices.

Ernst & Young discusses corporate disclosures relating to human capital and culture in How and Why Human Capital Disclosures are Evolving.

Davis Polk discusses best practice guidelines for Environmental, Social & Governance disclosures proposed by the U.S. Chamber of Commerce. Chamber of Commerce Releases Best Practices for Voluntary Environmental, Social & Governance (ESG) Disclosure.

06/22/2020 [UPDATED] Corporate Purpose

NEW:  SquareWell Partners  discusses the results of a survey of investors’ views on the relevance of the concept of corporate purpose in Making Corporate Purpose Tangible – A Survey of Investors.

Bernard Sharfman responds to On the Purpose of the Corporation, which proposes a corporate purpose requiring “lawful and ethical conduct” and permitting consideration of stakeholder interests, as ignoring social value created by profitable businesses and relying on a pretextual relationship between institutional investors and management, in A Fuller Sense of Corporate Purpose: A Reply to Martin Lipton’s ‘on the Purpose of the Corporation’.

Skadden responds to On the Purpose of the Corporation, which proposes a corporate purpose requiring “lawful and ethical conduct” and permitting consideration of stakeholder interests, noting that the proposed purpose risks loss of director protection under the business judgment rule in An Alternative Paradigm to “On the Purpose of the Corporation”.

Can a Broader Corporate Purpose Redress Inequality? criticizes current debate on stakeholderism as a distraction from the more important issue of inequality, arguing that corporate directors and officers back stakeholderism because it allows them to retain control, and that regulation, rather than corporate governance, is needed to address inequality.

Should Corporations Have a Purpose? argues that current debate regarding corporate purpose bypasses questions of whether and why corporations should have a purpose, explores theoretical, historical, and practical reasons for corporate purpose, and concludes that corporate purpose should be understood — as a default protecting expectancy interests — as maximizing economic value; but that pursuit of long-term economic value requires managers to consider the effects of corporate operations on stakeholders and society.

More on corporate purpose describes Professor Dalia Tsuk Mitchell’s article From Dodge to eBay: The Elusive Corporate Purpose.