Contributed by: Leo Groothuis (Partner), Paul van der Bijl (Partner), NautaDutilh (The Netherlands). Dutch cooling-off period in face of shareholder activism or hostile take-over On December 7, 2018, the Dutch government published draft legislation ...

International Institute for the Study of Cross-Border Investment and M&A

DUTCH UPDATE – Dutch cooling-off period in face of shareholder activism or hostile take-over

Editor’s Note: Leo Groothuis advises clients on public M&A and on a wide variety of other domestic and cross-border transactions, as well as take-over defenses and shareholder activism. Paul van der Bijl focuses on IPOs, follow-on offerings, public M&A, anti-takeover defenses, corporate governance and complex cross-border transactions

Dutch cooling-off period in face of shareholder activism or hostile take-over

On December 7, 2018, the Dutch government published draft legislation aimed at promoting a careful decision-making process in case of shareholder activism or a hostile takeover. If enacted in its current form, the proposal would introduce a statutory cooling-off period of up to 250 days during which the shareholders meeting would not be able to dismiss, suspend or appoint board members of a listed Dutch company under attack.

Scope

The legislation would apply to companies organized under Dutch law whose shares (or depository receipts for shares) are listed on a regulated market or multilateral trading facility operating in the European Economic Area, or on any similar stock exchange operating outside the European Economic Area, including Nasdaq and NYSE.

Conditions to invoke the cooling-off period

The board of a listed Dutch company under attack may invoke a cooling-off period of up to 250 days in case:

  1. shareholders, using either their shareholder proposal right or their right to request an extraordinary shareholders meeting[1], propose an agenda item for the shareholders meeting relating to the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters); or
  2. a public offer for the company is made or announced without the company’s support, provided, in each case, that such proposal or offer materially conflicts with the interests of the company and its business, as determined by the board.

The cooling-off period ends at occurrence of the earliest of the following events:

  1. the expiration of 250 days following the date of the relevant shareholder proposal or hostile offer;
  2. the hostile offer being declared unconditional (after the expiration of the initial acceptance period); or
  3. the board (voluntarily) terminating the cooling-off period.

Effects of the cooling-off period

During the cooling-off period, the shareholders meeting cannot validly resolve on the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters), unless proposed by the board itself.

Judiciary review

Shareholders representing 3% or more of the issued share capital may request the Enterprise Chamber of the Amsterdam Court of Appeal for early termination of the cooling-off period. The Enterprise Chamber must deny the request if the board, in view of the circumstances at the time the cooling-off period was invoked, could reasonably have come to the conclusion that the relevant shareholder proposal or hostile offer constituted a material conflict with the interests of the company and its business.

Consultation and transparency

During the cooling-off period, the board must gather all relevant information necessary for a careful decision-making process. In this context, the board must also consult with relevant stakeholders, including shareholders representing 3% or more of the issued share capital. Formal statements expressed by these stakeholders during such consultations must be shared with other stakeholders who are consulted by the board. Ultimately at the end of the cooling-off period, the board must publish a report in respect of its policy and conduct of affairs during the cooling-off period. This report should be tabled for discussion at the next shareholders meeting.

Combination with protective measures and/or existing response period

In an explanatory note, the Government indicates that it is opposed to accumulation of the cooling-off period with protective measures and/or the existing response period under the Dutch Corporate Governance Code. However, the draft legislation does not provide any specific restrictions in this respect. The rules in respect of potential combination or successive application of the various measures available to companies organized under Dutch law should be developed in market practice and case law.

There are a number of interesting differences between the existing response period under the Dutch Corporate Governance Code and the new proposed statutory cooling-off period, which are summarized in the table below.

Existing response period

Proposed cooling-off period

Follows from the Dutch Corporate Governance Code and is considered part of the general principles of reasonableness and fairness which should be observed by all stakeholders (including shareholders).

Mandatory Dutch law (once enacted), binding upon all shareholders.
Up to 180 days.Up to 250 days.
Can be invoked if shareholders propose an agenda item which could result in a change to the company’s strategy, including (but not necessarily limited to) the dismissal of board members.Can be invoked if shareholders propose the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters), or in case of a hostile offer
Allows the board to postpone a shareholder proposal during the response period (both as a discussion and as a voting item)

Allows the discussion of a shareholder proposal during the cooling-off period, but prevents a valid resolution in respect of the dismissal, suspension or appointment of a board member (or an amendment of any provision in the company’s articles dealing with those matters).

 

A common feature of the existing response period and the proposed cooling-off period is the postponement of a shareholder vote during a standstill period invoked by the board. This distinguishes them from more traditional protective measures under Dutch law, such as the issuance of preference shares or priority shares, which (i) are typically activated by an independent foundation and (ii) are focussed on the outcome of the vote, rather than the timing thereof.

Compliance with European rules

Based on advice from the Dutch Council of State (which has also been published), the Government is of the opinion that the proposed legislation does not violate European rules. Relevant rules include in this respect:

  1. the European Takeover Directive: the proposed legislation does not interfere with the course of any public take-over itself; merely with the adoption of certain shareholders resolutions during the offer period;
  2. the European Shareholders Rights Directive: the Government makes a distinction between the convocation of shareholders meetings and the inclusion of items on the agenda of the meeting, and the valid adoption of shareholders resolutions in respect of such items (only the former, and not the latter being subject to the European Directive);
  3. the European freedoms: the Government acknowledges that the proposed legislation could have a restrictive effect on European freedoms, but is of the opinion that such restrictive effect is justified by the public interest of a careful decision making process and proportionality.

Next steps

The general public is invited to submit comments on the draft legislative proposal before February 7, 2019. Following review of the comments and potential revision of the proposal, the legislative proposal may be submitted to Dutch parliament.

[1] The statutory thresholds for shareholders to make use of those rights are 3% and 10%, respectively, unless the company’s articles provide for a lower threshold.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.
     
 
Categories: Shareholder Activism | Governance | The Netherlands | M&A (General)

CHINA UPDATE – China is Taking Solid Steps to Open its Banking Sector

Editors’ Note: Chen Yun is a partner specializing in banking, finance and foreign exchange law. Wang Rong and Liang Yixuan also contributed to this article.

After the promulgation of the State Council’s Decision on Amending the Regulations of the People’s Republic of China (“PRC”) on the Administration of Foreign Funded  Banks (Consultation Paper) (the “Administrative Regulations Consultation Paper”) in late October 2018, the China Banking and Insurance Regulatory Commission (“CBIRC”) released the Decision on Amending the Implementation Rules of the Regulations of the PRC on the Administration of Foreign Funded Banks (Consultation Paper) (the “Implementation Rules Consultation Paper”, together with the Administrative Regulations Consultation Paper, the “Consultation Papers”) on 28 November 2018 to solicit public opinions.

The main purposes of amending these two legislations, which are of ultimate importance to the supervision of foreign funded banks (“FF Banks”) are to put into practice the country’s opening-up policies in the banking sector, to make law to implement the opening-up measures in the banking sector, which have been repeatedly referred to by senior government officials in various summits and public speeches, and to further liberalize the foreign investment in China’s banking sector.

The amendments made by the Consultation Papers focus on the following aspects:

  • Allowing foreign banks to maintain PRC branches (“FB Branches”) and locally incorporated banks in China (“FB LIBs”) at the same time
  • Lifting the restrictions on the conducting of the RMB business by FB Branches and FB LIBs
  • Broadening the business scope of FB Branches and FB LIBs
  • Relaxing the operating funds requirements for FB Branches

Ⅰ. Institutions Subject to the Regulation of the Consultation Papers

As early as 17 August 2018, CBIRC abolished the Administrative Measures on Equity Investment by Foreign Funded Financial Institutions in Chinese Funded Financial Institutions, and removed the 25% ceiling of foreign shareholding in a Chinese funded commercial bank by amending the Implementation Measures of the Administrative Licensing Items for Chinese Funded Commercial Banks.  It is also stipulated that a commercial bank will be regulated as the category of the bank as the one when and into which the foreign investment is made.

Therefore, foreign banks may set up from scratch joint-venture FB LIBs (“JV Banks”) or wholly foreign owned FB LIBs (“WFOBs”) regulated as FF Banks, or may otherwise become, by way of making investments into Chinese funded commercial banks, the shareholders of joint-venture banks with more than 25% foreign ownership or wholly foreign owned banks, which are converted from and regulated as Chinese funded commercial banks.

Notwithstanding the above, the institutions subject to the regulation of the Consultation Papers remain those regulated as FF Banks, namely WFOBs, JV Banks, FB Branches and PRC representative offices of foreign banks. As far as joint-venture banks or wholly foreign owned banks converted from and regulated as Chinese funded commercial banks as the result of the investment by foreign banks are concerned, the Consultation Papers do not apply.

Ⅱ. Allowing Foreign Banks to Maintain FB Branches and FB LIBs at the Same Time

One of the most appealing changes made by the Consultation Papers is that foreign banks would be allowed to maintain both FB LIBs (i.e. WFOBs and JV Banks regulated as FF Banks) and FB Branches) at the same time. As a result, foreign banks would no longer be forced to make a hard choice between local incorporation and keeping FB Branches.

Back in late 2006, when converting their FB Branches into WFOBs, foreign banks were allowed to retain an FB Branch to carry on their foreign exchange (“FX”) wholesale business for a certain period of time (i.e. a transition period), in order to facilitate the to-be-established WFOBs to meet the relevant regulatory indicators requirements and to facilitate the retained branch to phase out the outstanding FX wholesale business, only that such retained branch shall be closed upon the expiry of the transition period.

However, in the Implementation Rules of the Regulations of the PRC on the Administration of Foreign Funded Banks which was promulgated on 1 July 2015 and took effect on 1September of the same year, the relevant provisions on the retention of an FX wholesale business branch upon local incorporation of foreign banks were deleted, thus made such approach no longer workable.  In practice, CBIRC (then the China Banking Regulatory Commission) also rejected the application from any foreign bank for retaining an FX wholesale business branch when converting its FB Branches into a WFOB.

This policy change directly led to the delay in the local incorporation process of some foreign banks since, without the FX wholesale business branch retained, their to-be-established WFOBs may not meet the specific regulatory indicators requirements.

Now, the change made by the Consultation Papers allowing foreign banks to maintain both FB LIBs and FB Branches (although the Consultation Papers require that in such circumstances, the FB Branches would only be allowed to conduct the wholesale business, with a substantial breakthrough being that such wholesale business covers not only FX business but also RMB business) at the same time would make it easier for foreign banks to enter into the China market.

It is worth mentioning that the Consultation Papers also set out prohibitions or restrictions on the independence and the risk isolation mechanism of the management, personnel, business, information and related party transactions of FB LIBs and FB Branches.

Ⅲ. Lifting the Restrictions on the Conducting of the RMB Business

With regard to the RMB business, the following material changes are made by the Consultation Papers:

  • The “waiting period” (i.e. a period of time for which an FB LIB or an FB Branch shall open business before applying for conducting the RMB business) for the RMB business of FB LIBs and FB Branches is cancelled;
  • The minimum amount required for FB Branches to accept the fixed term deposit from Chinese citizens is lowered from RMB 1 million to RMB 0.5 million;
  • FB LIBs or FB Branches are allowed to conduct the preparatory work for the RMB business simultaneously with that for setting up FB LIBs or FB Branches, and to submit the application for the opening of the RMB business simultaneously with that for the business opening of FB LIBs and FB Branches. Thus, the RMB business may be opened Day One when FB LIBs and FB Branches open their businesses; and
  • In the case of multiple FB Branches, the managing FB Branch may authorize other FB Branches to conduct the RMB business as long as the managing FB Branch itself has obtained the RMB business license.

Ⅳ. Broadening the Business Scope

The Administrative Regulations Consultation Paper includes “acting as the issuance agent, payment agent and/or underwriter of Chinese government bonds” into the business scope of FB LIBs and FB Branches. Thus, the business scope of an FB LIB is substantially the same as that of a Chinese funded commercial bank.

In addition, the Implementation Measures Consultation Paper restates that the following types of business of FB LIBs and FB Branches are subject to the afterwards reporting requirement only, which was provided in the Circular on the Conducting of Certain Businesses by Foreign Funded Banks (the “Circular”) issued by the General Office of CBIRC on March 10, 2017 and now documented into a regulation by CBIRC: (1) acting as the issuance agent, payment agent and underwriter of Chinese government bonds; (2) providing custody, escrow and guardianship services; (3) providing consultancy services such as financial advisory services; (4) providing overseas wealth management services for and on behalf of the clients; and (5) such other businesses as CBIRC may deem to be subject to the afterwards reporting requirement.

Furthermore, the Implementation Measures Consultation Paper restates the regulations of the Circular allowing the intra-group cooperation (namely, allowing FB LIBs and FB Branches to cooperate with their parent bank groups to provide comprehensive financial services to Chinese enterprises in offshore bond issuance, listing, acquisition, financing and the like by taking the advantages of their global service networks.

Ⅴ. Relaxing the Operating Funds Requirements for FB Branches

In respect of the operating funds requirements of FB Branches, the Consultation Papers have made the following adjustments as well:

Ⅵ. Other Changes and Our Observations

Apart from the above significant changes, the Consultation Papers also make certain changes in the areas such as the outsourcing activities conducted by FB LIBs and FB Braches and their termination and liquidation.

Although the Consultation Papers are subject to the solicitation of public opinions before finalization, one can be assured that China is on the track of more opening-ups in its banking sector.

With abundant experience of assisting foreign funded financial institutions in setting up their PRC presences, carrying on their business in compliance with the law, exploring new business boundaries and seeking business cooperation, King & Wood Mallesons is right here standing by to hold your hands crossing the jungle!

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.
     
 
Categories: China | Legal Regimes | Financial | Regulatory Matters | Foreign Investment

Spotlight on Boards

Editor’s Note: This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

December 3, 2018

Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:

  • Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy from global, political, social, and technological developments;
  • Determine the board’s response to proposed legislation like Senator Elizabeth Warren’s bill, Accountable Capitalism Act, which would federalize all companies with annual revenues of $1,000,000,000, preempt state corporation law and mandate board fiduciary duty to all stakeholders, not just shareholders, and require not less than 40% of the directors be elected by employees;
  • Be aware that ESG and sustainability have become major, mainstream governance topics that encompass a wide range of issues, such as climate change and other environmental risks, systemic financial stability, labor standards, employee training, and consumer and product safety;
  • Recognize the current focus of investors on “purpose” and an expanded notion of stakeholder interests that includes employees, customers, communities, and the economy and society as a whole and work with management to develop metrics to enable the company to demonstrate their long-term value to shareholders, society and the economy;
  • Set the “tone at the top” to create a corporate culture that gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing both operating and strategic goals;
  • Choose the CEO, monitor the CEO’s and management’s performance and develop and keep current a succession plan;
  • Have a lead independent director or a non-executive chair of the board who can facilitate the functioning of the board and assist management in engaging with investors;
  • Together with the lead independent director or the non-executive chair, determine the agendas for board and committee meetings and work with management to ensure that appropriate information and sufficient time are available for full consideration of all matters;
  • Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;
  • Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;
  • Oversee and understand the corporation’s risk management and compliance efforts and how risk is taken into account in the corporation’s business decision-making; respond to red flags if and when they arise;
  • Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate corporate governance proposals, and work with management to anticipate possible takeover attempts and activist attacks in order to be able to address them more effectively, if they should occur;
  • Meet at least annually with the team of company executives and outside advisors that will advise the company in the event of a takeover proposal or an activist attack;
  • Be open to management inviting an activist to meet with the board to present the activist’s opinion of the strategy and management of the company;
  • Evaluate the board’s and committees’ performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;
  • Review corporate governance guidelines and committee charters and tailor them to promote effective board and committee functioning;
  • Be prepared to deal with crises; and
  • Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.

To meet these expectations, major public companies should seek to:

  • Have a sufficient number of directors to staff the requisite standing and special committees and to meet investor expectations for experience, expertise, diversity, and periodic refreshment;
  • Compensate directors commensurate with the time and effort that they are required to devote and the responsibility that they assume;
  • Have directors who have knowledge of, and experience with, the company’s businesses, even if this results in the board having more than one director who is not “independent”;
  • Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings and engaging with investors;
  • Provide the directors with the data that is critical to making sound decisions on strategy, compensation and capital allocation;
  • Provide the directors with regular tutorials by internal and external experts as part of expanded director education and to assure that in complicated, multi-industry and new-technology companies the directors have the information and expertise they need to evaluate strategy; and
  • Maintain a truly collegial relationship among and between the company’s senior executives and the members of the board that facilitates frank and vigorous discussion and enhances the board’s role as strategic partner, evaluator, and monitor.

Martin Lipton

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 

     
 
Categories: United States | Shareholder Activism | Trends & Statistics | Governance | M&A (General)

DUTCH UPDATE – Shareholders’ Rights Directive implementation bill now before Parliament

Editor’s Note: Leo Groothuis advises clients on public M&A and on a wide variety of other domestic and cross-border transactions, as well as take-over defenses and shareholder activism. Geert Raaijmakers specializes in corporate governance, corporate structuring and joint ventures and on pension fund governance.  Maarten Buma and Suzanne Rutten specialize in corporate law. 

Shareholders’ Rights Directive implementation bill now before Parliament

On 16 October 2018, the bill for the implementation in Dutch law of the revised Shareholders’ Rights Directive (EU 2017/828) was submitted to the lower house of the Dutch parliament (Tweede Kamer). In this newsletter, we will describe the changes in the bill compared to the earlier consultation version published on 27 February 2018, which was the subject of our newsletter dated 9 March 2018.

RENUMERATION POLICY

The consultation version of the bill contained a new provision on the remuneration policy of listed companies. This gave rise to confusion, because the Dutch Civil Code (“DCC”) already contains a provision on the subject. Under the bill as submitted to Parliament, it has now been clarified that listed companies will be subject only to the new provision, which will become section 2:135a(5) DCC. This sets out the information that must be given in the company’s remuneration policy, some of which is already required. New items of information that will be required include:

  • an explanation of the way in which the policy contributes to the company’s business strategy, long-term interests and sustainability;
  • an explanation of the decision-making process followed for the policy’s determination, review and implementation; and
  • in the event that the policy is revised, a description and explanation of how it takes into account the votes and views of shareholders on the policy and remuneration reports since the most recent vote on the policy by the general meeting of shareholders.

In the case of the remuneration report it has likewise been clarified that listed companies will be subject only to the new section 2:135b DCC, which sets out a number of new requirements in addition to existing ones. It should be noted, however, that pursuant to section 2:135b the current requirements in sections 2:383c-e DCC will continue to apply. One of the new items of information that will be required is an explanation of how the total remuneration complies with the remuneration policy and how it contributes to the company’s long-term performance. All information must be given in respect of each individual management board member.

TRANSACTIONS WITH RELATED PARTIES

The bill introduces the term “material transactions” (unlike the consultation version, which referred to “significant transactions”) and sets out a definition in which price sensitivity is taken as the point of departure. A transaction will be material if it meets both of the following two criteria:

  1. the information about the transaction constitutes inside information under the Market Abuse Regulation (Regulation (EU) 596/2014); and
  2. the transaction is concluded between the company and a related party (as defined under the International Accounting Standards). Related parties in any event include:
    • one or more shareholders who individually or collectively represent at least 10% of the company’s issued share capital (“stichting administratiekantoor” foundations and foundations holding preference shares can fall within this category);
    • members of the company’s management board; and
    • members of the company’s supervisory board.

A provision has been added prohibiting a management board member or supervisory board member from participating in the decision making on a related party transaction in which that board member is involved. Lastly, the period over which non-material transactions with the same related party must be aggregated, potentially resulting in an obligation to disclose those transactions, has been changed from 12 months to “the same financial year”.

TRANSPARENCY REGARDING LONG-TERM SHAREHOLDER ENGAGEMENT

The definition of “asset manager” has been amended to clarify that it refers to those providing asset management services to institutional investors. The term “proxy advisor” has been replaced with “voting advisor” (stemadviseur), as this is more in line with the terminology commonly used in the Netherlands, including in the Dutch Corporate Governance Code. In addition the obligation on the part of institutional investors and asset managers to disclose and explain “the most significant votes”, and the possibility of excluding “insignificant votes” in this regard, have been elaborated upon.

The proposed reporting requirements overlap with those imposed under other EU directives and regulations, such as the AIFM, UCITS and MiFID II directives. The explanatory memorandum to the bill clarifies that it will be sufficient if asset managers include the relevant information in their other reports or include references to such information (for example using hyperlinks), provided it is made clear to the relevant institutional investors where the information can be found.

NEXT STEPS

The deadline for the implementation of the Directive in national law is 10 June 2019. It is possible that the bill will be amended as it makes its way through Parliament. We will of course keep you updated on any significant amendments and on the entry into effect of the new legislation. It is also worth mentioning that both the government and the Corporate Governance Code Monitoring Committee are of the opinion that, in connection with the implementation of the Directive, the section of the Code relating to shareholders should be re-examined; we will likewise inform you of any developments on that front.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.
     
 
Categories: Netherlands | Shareholder Activism | Regulatory Matters | Governance | M&A (General)

The Future of the Corporation

Editor’s Note: This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

November 7, 2018

The Future of the Corporation

A project of the British Academy—“The Future of the Corporation” reached a major milestone on November 1, 2018 with the public discussion of a framework and supporting papers.  The project is led by Oxford Prof. Colin Mayer.

In his framework, Prof. Mayer puts forth a radical reinterpretation of the nature of the corporation that focuses on the corporate purpose, its alignment with social purpose, the trustworthiness of companies and the role of corporate culture in promoting purpose and trust.  This view of the corporation rejects shareholder primacy—that the sole social purpose of the business corporation is to maximize shareholder wealth.

Instead, Prof. Mayer “puts forward an alternative approach that emphasizes the role of corporate purpose, commitments, trustworthiness and culture in which companies specify their purposes, clarify their associated commitments and demonstrate how their ownership, governance, performance measurement and management enable them to fulfil their obligations. Corporate and social purposes are aligned in companies and activities of particular social significance but not necessarily elsewhere.”

Prof. Mayer would implement his view of the corporation of the future by:

  • The starting point should be to recognize that the purpose of corporations is not simply to maximize shareholder value.
  • Corporations should specify their corporate purposes.
  • They should clarify the commitments that they make to the different parties to the firm associated with their purposes.
  • They should demonstrate how they can be trusted to uphold their commitments.
  • In particular they should record how their ownership, governance, performance measurements and incentives promote commitments to their purposes.

The ways in which corporations are encouraged to demonstrate commitment to purpose are in Prof. Mayer’s view:

  • Corporate law should require companies to specify their corporate purposes.
  • It should enable companies to adopt structures that are best suited to the delivery of their purposes.
  • It should require companies to demonstrate how their ownership, governance, performance measurements and incentives encourage them to commit to the delivery of their purposes.
  • It should require certain classes of companies that perform particular public and social functions, such as utilities, banks and companies with significant market power to align their corporate with their social purposes.
  • The regulatory system should promote an alignment of corporate with social purposes where required and ensure that companies’ ownership, governance, measurement and incentive systems are appropriate for this.

The foregoing and much more is set forth in a just-published, must-read book by Prof. Mayer, Prosperity.  The Mayer proposal for corporate governance and the policy changes that are necessary to develop it will return corporations to long-term sustainable investment, combine profitable operations with adherence to ESG and CSR principles, and sharply reduce short-termism and activist attacks.

Interestingly, on the same day as the British Academy program, the British Government agreed to amend the law to make it clear that pension plans have a fiduciary duty to protect long-term value by considering environmental risks of the companies in which they invest.  The British Government stated that the new rules “will push consideration of long-term value and environmental risks down the investment chain to investee firms.”

The objectives of the British Academy project parallel those of the World Economic Forum’s The New Paradigm:  A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, the difference being the means by which they are achieved.  The latter by voluntary action by corporations and investors, the former by legislation.  Recent actions by the British Government and proposed legislation such as the Accountable Capitalism Act introduced in August 2018 by Senator Elizabeth Warren show that legislation impacting both corporations and investors is a distinct possibility.  The case for change is compelling.  One way or the other, Prof. Mayer’s concept of the corporation of the future will be achieved.

Martin Lipton

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.
     
 
Categories: Global | Shareholder Activism | Governance

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