Yearly Archives: 2020

COVID-19 and Executive Pay

Posted by Joseph Bachelder, McCarter & English LLP, on
Friday, July 3, 2020
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Joseph E. Bachelder is special counsel at McCarter & English LLP. This post is based on an article by Mr. Bachelder published in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of the article.

COVID-19 has caused many illnesses and deaths worldwide. It also has caused significant economic loss for many business enterprises and this may impact, in turn, on the compensation those enterprises pay their executives. Today’s column discusses the impact COVID-19 may have on executive compensation.

On March 13, 2020, the President of the United States declared a national emergency beginning as of March 1 based on COVID-19. On March 27, 2020, the President signed into law the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”). COVID-19-related decisions include picking the date to separate pre-COVID-19 and post-COVID-19 periods (the “COVID Start Date”) for compensation or other purposes. For most companies, at the present time, such decisions are at the discretion of the individual company. Exceptions may include companies receiving loans from, or loans guaranteed by, the U.S. Treasury Department. Such loans may be contingent upon agreement by the borrowing company to certain conditions, including the date to be treated as the COVID Start Date.

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Weekly Roundup: June 26–July 2, 2020

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, July 3, 2020

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This roundup contains a collection of the posts published on the Forum during the week of June 26–July 2, 2020.

Response to US Critics of the French Securities Regulator Position on Activism

Posted by Alain Pietrancosta (University of Paris) and Alexis Marraud des Grottes (Orrick Herrington & Sutcliffe LLP), on Friday, June 26, 2020
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Testimony by Chairman Clayton before the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee U.S. House Committee on Financial Services

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Friday, June 26, 2020
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Supreme Court Limits SEC Disgorgement Remedy

Posted by John F. Savarese, Wayne M. Carlin, and David B. Anders, Wachtell, Lipton, Rosen & Katz, on Saturday, June 27, 2020
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Asset Manager Perspective: Shareholder Proposals on Sustainability

Posted by Snorre Gjerde, Wilhelm Mohn, and Carine Smith Ihenacho, Norges Bank Investment Management, on  Saturday, June 27, 2020
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Update by Chairman Clayton on the Commission’s Targeted Regulatory Relief to Assist Market Participants Affected by COVID-19 and Ensure the Orderly Function of our Markets

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Saturday, June 27, 2020
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Addressing Climate as a Systemic Risk: A Call to Action for Financial Regulators

Posted by Veena Ramani, Ceres, on Sunday, June 28, 2020
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Time to Rethink the S in ESG

Posted by Jonathan Neilan, Peter Reilly, and Glenn Fitzpatrick, FTI Consulting, on Sunday, June 28, 2020
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Justice Department Updates Its Guidance on Corporate Compliance Programs

Posted by Stephen Cutler, Nicholas Goldin, David Caldwell, Simpson Thacher & Bartlett LLP, on Monday, June 29, 2020
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Director and Officer Duties in Management Buyouts: A Comparative Assessment

Posted by Andrew Tuch (Washington University), on Monday, June 29, 2020
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Going Beyond “Use-Of-Proceeds” to Reach International Sustainability Targets

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Monday, June 29, 2020
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Human Capital Management: The Mission Critical Asset

Posted by Pamela Marcogliese, Elizabeth Bieber and Thomas Lair, Freshfields Bruckhaus Deringer LLP, on Tuesday, June 30, 2020
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MFW Pitfalls: Bypassing the Special Committee and Pursuing Detrimental Alternatives

Posted by Christopher B. Chuff, Joanna J. Cline, and Matthew M. Greenberg, Pepper Hamilton LLP, on Tuesday, June 30, 2020
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SEC Should Mandate Disclosures on COVID-19 Risks and Responses

Posted by Carter Dougherty, Americans for Financial Reform, on Wednesday, July 1, 2020
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The Hostile Bid Is Dead. Long Live the Hostile Bid?

Posted by Aaron Atkinson, Mathieu Taschereau, and Shane Freedman, Davies Ward Phillips & Vineberg LLP, on Wednesday, July 1, 2020
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Key Takeaways and Best Practices from Virtual Shareholders Meetings in 2020

Posted by Douglas K. Chia, Soundboard Governance LLC, on Thursday, July 2, 2020
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Some Thoughts for Boards of Directors in 2020: A Mid-Year Update

Posted by Martin Lipton, Steven A. Rosenblum, and William Savitt, Wachtell, Lipton, Rosen & Katz, on Thursday, July 2, 2020
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Some Thoughts for Boards of Directors in 2020: A Mid-Year Update

Posted by Martin Lipton, Steven A. Rosenblum, and William Savitt, Wachtell, Lipton, Rosen & Katz, on
Thursday, July 2, 2020
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Martin Lipton is a founding partner, and Steven A. Rosenblum, William Savitt are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Rosenblum, Mr. Savitt, Karessa L. Cain, Hannah Clark, and Bita Assad. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The past six months have been marked by a profound upheaval that has accelerated the growing focus on both the purpose of the corporation and the role of the board in overseeing and leading the corporation in ways that promote sustainable business success. For a number of years, there has been a growing sense of urgency around issues such as climate change, environmental degradation, globalization, workplace inequality and the need to keep pace with rapidly evolving technologies. Then, in recent months, the COVID-19 pandemic prompted a systemic shock, which has been accompanied by a long overdue awakening regarding endemic racial injustice. The convergence of these events has accelerated the focus on environmental, social and governance (ESG) issues and stakeholder capitalism as operational and strategic imperatives that are core to corporations’ abilities to compete and succeed. The well-being of employees and other stakeholders, and the ability to engage in more sustainable ways of doing business, are not a nice-to-have luxury or a branding exercise, but rather a basic building block of corporate value. There is an essential nexus between “value” and “values.”

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Key Takeaways and Best Practices from Virtual Shareholders Meetings in 2020

Posted by Douglas K. Chia, Soundboard Governance LLC, on
Thursday, July 2, 2020
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Douglas K. Chia is the President of Soundboard Governance LLC. This post is based on his Soundboard Governance memorandum.

In 2009, Broadridge Financial Services launched its virtual shareholders meeting platform, pitching it to companies as a convenient and economical alternative to traditional in-person annual meetings and a way to increase shareholder participation. Four companies used the platform that first year, with only one using it completely in lieu of an in-person meeting (now commonly referred to as “virtual-only”). After 2009, uptake was slow, with the number of companies adopting the virtual-only shareholders meeting (“VoSM”) format not breaking 100 until 2016. [1] The pace of VoSM adoption picked up, but only to 212 in 2017 and 300 in 2019. [2] A committee of interested constituents was convened in 2018 to develop a set of “best practices” for virtual annual meetings. [3] However, the sample size the group had to study was small—236 total, both virtual-only and in-person supplemented with virtual (now commonly referred to as “hybrid”).

As we have witnessed, the COVID-19 pandemic forced companies with annual meetings scheduled during the months of March through June 2020 (i.e., almost all December fiscal year-end companies) to seek alternatives to their already-planned in-person meetings, with VoSMs being the most obvious solution. [4] And they did what was necessary to make the switch happen quickly and en masse. By May 1st, 65 percent of S&P 500 companies had held or announced plans to hold VoSMs, with almost 90 percent of those companies adopting it for the first time. [5]

Soundboard Governance produced the following analysis based on attendance at a sampling of ten [6] VoSMs during the spring 2020 annual meeting season.

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The Hostile Bid Is Dead. Long Live the Hostile Bid?

Posted by Aaron Atkinson, Mathieu Taschereau, and Shane Freedman, Davies Ward Phillips & Vineberg LLP, on
Wednesday, July 1, 2020
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Aaron Atkinson is a partner and Mathieu Taschereau and Shane Freedman are associates at Davies Ward Phillips & Vineberg LLP. This post is based on their Davies memorandum. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

With much of the world focused on the immediacy of the COVID-19 pandemic, including its heavy human and economic toll, we have cast our eyes optimistically on the (near, we hope) future when companies regain sufficient confidence to re-enter the public M&A market in large numbers. Although attention has largely centred on businesses that are in a struggle for survival, certain businesses will emerge stronger owing to factors such as shifts in consumer needs and preferences or more durable balance sheets. As a result, the post-pandemic corporate landscape may be ripe for consolidation, with relatively larger and better-capitalized issuers seizing the opportunity to acquire their weakened competitors. It is also possible that in certain capital-intensive industries, such as mining, competitors may be more inclined to cast aside their differences and consolidate their balance sheets, a trend that is already showing some momentum.

We will be tracking activity levels to assess whether the foregoing theories prove correct; however, our analysis of Canadian public M&A activity (both friendly and hostile) from 2012 to the end of 2019 suggests that expectations of significant consolidation activity should be tempered, at least insofar as it involves acquisitions of Canadian-listed issuers. In particular, we found that hostile bids declined by 50% after May 9, 2016, the date on which Canadian securities regulators implemented fundamental changes to the takeover bid rules, which were designed to “rebalance” the prevailing bid dynamics and place more power in the hands of target boards.[1] Digging deeper into the data, we found that financial buyers—who would already be expected to shy away from the potentially significant costs and uncertainty of launching a hostile bid—vacated the field entirely after the new rules were adopted. As a result, every hostile bid under the new regime has been commenced by a strategic purchaser. We found a similar downward trend in friendly acquisitions of Canadian-listed issuers, with such transactions declining by 24% in the same four-year period. In fact, this statistic masks a more significant 30% decline in the number of friendly acquisitions by strategic purchasers since the start of 2016.

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SEC Should Mandate Disclosures on COVID-19 Risks and Responses

Posted by Carter Dougherty, Americans for Financial Reform, on
Wednesday, July 1, 2020
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Carter Dougherty is Communications Director at Americans for Financial Reform. This post is based on a joint letter to the U.S. Securities and Exchange Commission from 98 investors, state treasurers, public interest groups, labor unions, asset managers and securities law experts.

June 16, 2020

The Honorable Jay Clayton Chairman
U.S. Securities and Exchange Commission 100 F Street, NE
Washington, DC 20549

Re: Comprehensive disclosure requirements to allow investors and the public to analyze companies during the COVID-19 pandemic.

Dear Chairman Clayton,

Investors and the general public are struggling to understand how the COVID-19 pandemic is impacting the economy and the financial markets. At the same time, the federal government is distributing trillions of dollars in financial support to mitigate the economic impact of the pandemic. We urge the Securities and Exchange Commission to institute new disclosure requirements to allow investors and the public to analyze how companies are acting to protect workers, prevent the spread of the virus, and responsibly use any federal aid they receive.

Companies who sell their stock to the public must register with the SEC and fulfill periodic disclosure obligations, as defined by the Commission. These disclosures are available to investors and the general public and help contribute to the public understanding of a company’s financial performance and the risks and opportunities that might go along with investing in that company.

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MFW Pitfalls: Bypassing the Special Committee and Pursuing Detrimental Alternatives

Posted by Christopher B. Chuff, Joanna J. Cline, and Matthew M. Greenberg, Pepper Hamilton LLP, on
Tuesday, June 30, 2020
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Christopher B. Chuff is an associate and Joanna Cline and Matthew Greenberg are partners at Pepper Hamilton LLP. This post is based on a recent Pepper memorandum by Mr. Chuff, Ms. Cline, Mr. Greenberg, and Taylor Bartholomew. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

On June 11, the Delaware Court of Chancery issued important guidance [1] to boards of directors of Delaware corporations and their controlling stockholders seeking to utilize the dual protections of MFW [2]—a special committee and a majority of the minority vote—to insulate themselves from fiduciary liability in connection with various corporate transactions.

First, the court held that when a corporation’s board or the corporation’s controller bypasses the special committee and negotiates directly with the corporation’s minority stockholders, MFW cleansing and the resulting application of business judgment review will be unavailable.

Second, the court held that when a corporation and its controller empower a special committee to consider and “say no” to various transaction alternatives, but retain the authority to pursue an alternative that is detrimental to the minority, any resulting special committee and stockholder approval of the transactions submitted for their approval will be found to be tainted by coercion, such that MFW cleansing will be unobtainable.

Thus, while the court’s decision confirms that the dual protections of MFW can be effective to protect against fiduciary liability claims, boards of directors and controlling stockholders who wish to maximize the effectiveness of those protections must be sure to avoid these and other pitfalls.

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Human Capital Management: The Mission Critical Asset

Posted by Pamela Marcogliese, Elizabeth Bieber and Thomas Lair, Freshfields Bruckhaus Deringer LLP, on
Tuesday, June 30, 2020
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Pamela L. Marcogliese is a partner, Elizabeth Bieber is counsel, and Thomas Lair is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

Human capital management (HCM) is one of the most significant corporate governance themes emerging in 2020, shining a spotlight on a topic that had already been a growing focus for many stakeholders. HCM sits at the intersection between investors, the workforce and consumers, it tugs at many deep-rooted social and political societal values, and it can be a polarizing issue for regulators and legislators. But as we have moved toward a talent-based economy, human capital is not only a key asset for companies, but rather, it is a “mission critical asset”. [1]

Over the last few months, many companies have had to make very difficult decisions that directly impact their workforce. Against this backdrop, the basis for evaluating company performance with respect to HCM considerations will be a multi-faceted review over a long horizon, where short-term foot faults will reverberate with a company’s stakeholders over the long-term. At a time when there are many critical, competing demands on a company’s time, the temptation to backburner HCM must be resisted. Companies that should take the time to thoughtfully implement and communicate their HCM efforts will be recognized by their stakeholders.

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Going Beyond “Use-Of-Proceeds” to Reach International Sustainability Targets

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Monday, June 29, 2020
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Viola Lutz is Associate Director and Mélanie Comble is an Associate with ISS ESG climate solutions. This post is based on their recent ISS ESG memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

More than a decade after the first Green Bond issuance, the original model of Use-of-Proceeds deals, where proceeds are spent on specifically identified projects, appears insufficient to meet international sustainability targets. The market has seen a number of new structures in the past year alone—from sustainability-linked bonds dedicated to general corporate purposes to transition bonds. As the market grows and continues to innovate, the question is: how can one ensure transparency and trust and what lessons can be drawn from the Green Bond Principles’ success story?

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Director and Officer Duties in Management Buyouts: A Comparative Assessment

Posted by Andrew Tuch (Washington University), on
Monday, June 29, 2020
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Andrew F. Tuch is Professor of Law at Washington University School of Law. This post is based on his recent chapter, forthcoming in the Research Handbook on Comparative Corporate Governance (Edward Elgar Publishing).

The U.S. and U.K. regulatory frameworks diverge in important ways—especially concerning their fiduciary duties. Scholars have therefore found it useful to compare how the two frameworks govern both merger and acquisition (M&A) transactions and self-dealing transactions. But scholars have yet to comparatively assess U.S. and U.K. regulations for the M&A transaction that may pose the greatest risk of self-dealing: the management buyout (MBO).

In a paper that is forthcoming in the Research Handbook on Comparative Corporate Governance (Edward Elgar), I comparatively assess U.S. and U.K. law governing MBOs, focusing on the duties of directors and officers in these systems. The analysis casts doubt on persistent but mistaken perceptions about U.S. and U.K. corporate fiduciary duties for self-dealing. The U.K. no-conflict rule is seen as strict, the U.S. fairness rule as flexible and pragmatic. As the analysis for MBOs demonstrates, these fiduciary rules operate similarly, tasking neutral or disinterested directors with policing self-dealing, enabling commercially sensitive responses to conflict of interest. The analysis also reveals stronger formal private enforcement of corporate law and more robust disclosure rules in the United States. But because the available empirical evidence fails to justify broad claims that corporate fiduciaries’ misconduct is more severe under either regime, the analysis identifies U.K. law-related measures that may serve similar functions to formal enforcement and mandatory disclosure in constraining misconduct by corporate fiduciaries. These include informal enforcement by the U.K. Takeover Panel, stronger shareholder rights, and potentially greater monitoring by institutional investors.

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