Monthly Archives: March 2020

COVID-19 and Shareholder Activism—The Impact

Ele Klein and Aneliya S. Crawford are partners at Schulte Roth & Zabel LLP. This post is based on their Schulte Roth memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

No area is immune from the effects of the current COVID-19 crisis, including shareholder activism. For shareholders contemplating or already conducting an activist type campaign at a company, COVID-19 leads to logistical impediments and shifts in timing and strategy, but, importantly, also creates opportunities for savvy investors.

Practical Impediments in Director Nominations

At this time of the proxy season, many investors are submitting director nominations for election to the boards of directors of target companies. Currently, shareholders are experiencing practical impediments, mostly stemming from brokers and banks operating at reduced capacity. For example, some of the nation’s largest brokers are warning that transferring shares from a brokerage account into record name to be eligible to nominate a director may take a number of weeks. Alternative processes that we have used in the past to avoid these problems are also expected to take at least as long. (For context, these logistical steps ordinarily take 2 to 3 business days in regular markets.)

In addition to share ownership issues, director nominees themselves are often working remotely and requiring more time to complete relevant documentation. These delays can be further compounded, where nominees must secure approvals from other companies or their employers in order to be a nominee.


COVID-19: What Compensation Committees Should Be Thinking About Today

Jeannemarie O’Brien, David E. Kahan, and Michael J. Schobel are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

The COVID-19 pandemic has in a matter of weeks upended life in America, including in American business. Public companies have witnessed dramatic decreases in market value and business challenges that were largely unexpected weeks ago. Executive compensation programs must adjust to the new reality and continue to motivate leadership and performance. While every company will face its own challenges, and no solution will be one-size-fits-all, certain common concerns are emerging. Sound responses will need to balance effective incentives with sensitivity to investor, public and political perception.

2020 Annual Incentive Programs. For many companies, the most immediate compensation issue presented by COVID-19 relates to 2020 annual incentive programs. Most companies had already approved, or were on the verge of finalizing, their 2020 incentive programs before the advent of the market turmoil. In many cases, the original 2020 projections are no longer realistic; what made sense in January is no longer appropriate. Companies should consider revising their metrics to attainable levels, or implementing additional metrics that are aligned with current priorities, to ensure that management is appropriately incentivized, while being sensitive to the pain being inflicted on shareholders by declining stock prices. An additional challenge is that the current level of uncertainty may make it premature to re-design business plans and incentive goals. For some companies, it may make sense to defer revising goals until there is more stability, or to rely upon discretion to create flexibility. In any event, reserving the right to make adjustments for unexpected events and expenses related to COVID-19 should be considered. The 2017 elimination of the performance-based exception to Section 162(m) of the Internal Revenue Code allows companies to modify plan design and to preserve flexibility without a tax penalty, although companies must be mindful of shareholder and proxy advisory firm reaction to, and public and political perception of, such actions.


“Stop, Look and Listen”—Improving the SEC’s Proposed Rules on Proxy Advisors

Frank M. Placenti is partner at Squire Patton Boggs LLP. This post is based on his Squire Patton Boggs memorandum.

Executive Summary

The publication of a “Stop, Look and Listen” communication is explicitly embraced in the SEC’s tender offer rules as a method for alerting shareholders that more information will soon be available that could influence their decision to tender or retain their shares. Such communications ask investors to pause until the target of the tender offer publishes its side of the story before making their tender decision.

An analogous mechanism should be employed in the SEC’s proposed rules relating to the proxy advisory firms (“Proposed Rules”) in those instances where the registrant provides a written response to the voting recommendation of a proxy advisor.

The current draft of the Proposed Rules takes a step in that direction by mandating that registrants receive a proxy advisor’s final recommendation two days before its publication. This two-day period is intended to allow the registrant time to prepare a response to be included by hyperlink in the proxy advisor’s report when it is delivered to institutional investors.

In theory, the inclusion of the registrant’s response would provide investors with the opportunity to consider both sides of the story before voting. In practice, this is not likely to be generally effective due to the practice of electronic default voting used by some proxy advisors, including the nation’s largest.


Can a Public Company Effectively Opt Out of Rule 14a-8?

Phillip Goldstein is the co-founder of Bulldog Investors.

For almost eighty years Rule 14a-8 has been an integral part of the regulatory landscape, serving as a widely used means of communication between securityholders and the companies in which they invest. While the rule has been not been without controversy and has been tweaked from time to time, its fundamental objective, i.e., subject to certain specified conditions, the obligation of an issuer of publicly traded securities to include in its proxy materials a proposal submitted by a shareholder, has never faced a serious challenge—until now.

I recognize that companies are concerned about Rule 14a-8 being abused by those seeking to advance (usually left-wing) ideologies. In part, that concern prompted the Securities and Exchange Commission to issue Release No. 87458 proposing certain modifications to Rule 14a-8. Yet, while the Commission has been pre-occupied with the finer points of Rule 14a-8 and investors and companies duel it out in comment letters, law firms, led by Skadden Arps, Slate, Meagher & Flom LLP, are quietly promoting a scheme to permit issuers to effectively opt out of the rule entirely.


Q4 2019 Equilar Gender Diversity Index

Daniella Gama-Diaz is Associate Editor at Equilar, Inc. This post is based on an Equilar memorandum by Ms. Gama-Diaz, Zeynep Akca, Jacob Doty, Louisa Lan, and Paul Richardson.

For the ninth consecutive quarter, the Equilar Gender Diversity Index (GDI) has increased. With the percentage of women on the boards of Russell 3000 companies increasing from 20.9% in Q3 2019 to 21.5% in Q4 2019, the GDI is now 0.43, where 1.0 represents parity among men and women. The continuous upward trend of women on boards has pushed the GDI to the highest point it has ever been.

While the past few years have represented progress, 2019 saw the most significant growth for women on corporate boards. Q2 2019 was the first time the percentage of women on Russell 3000 boards exceeded 20%, while Q3 further pushed this statistic to 20.9% and Q4 rounded out the decade at 21.5%. With over 21% of Russell 3000 board seats belonging to women, 114 companies have boards with between 40% and 50% women. When Equilar began tracking the GDI in January 2017, only 15% of board seats in the Russell 3000 were held by women.


The “Market Exception” in Appraisal Statutes

Gil Matthews is Chairman and Senior Managing Director of Sutter Securities, Inc. This post is based on his Sutter Securities memorandum, and 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Introduction: Public Shareholders and Appraisal Rights

Appraisal is a right and a remedy. Available by statute in all states, appraisal provides dissenting shareholders the right to require the corporation to pay them the ‘fair value’ of their shares upon some mergers or other fundamental changes. Appraisal statutes provide procedures for dissenting shareholders to receive a judicial hearing in which the court appraises the value of their interests. A primary purpose of appraisal statues is to protect minority shareholders. The intent of appraisal valuations by courts is to compensate dissenting minority shareholders equitably for the unwanted change in their investments. Therefore, in appraisals, courts in most states employ a valuation standard called “fair value,” which is considered to be a fuller measure of value that can result in an assessment higher than market price.

Appraisal rights and fair value assessments are broadly available for shareholders of private companies. However, 38 states now restrict the appraisal rights of shareholders of public companies through a provision in their appraisal statutes called a “market exception” (also called a “market-out” or a “market-out exception”). With varying specifics, these statutes deny shareholders of publicly traded companies the right to the court-awarded assessment to which similarly-situated private company shareholders are entitled.


Ten Considerations for Boards of Directors

Holly J. Gregory is partner, Rebecca Grapsas is counsel and Claire Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum authored by Ms. Gregory, Ms. Grapsas, Ms. Holland, John Kelsh, Kai Liekefett, and Kevin Lewis.

The 2019 novel coronavirus (COVID-19) pandemic presents complex issues for corporations and their boards of directors to navigate. This briefing is intended to provide a high-level overview of the types of issues that boards of directors of both public and private companies may find relevant to focus on in the current environment.

Corporate management bears the day-to-day responsibility for managing the corporation’s response to the pandemic. The board’s role is one of oversight, which requires monitoring management activity, assessing whether management is taking appropriate action and providing additional guidance and direction to the extent that the board determines is prudent. Staying well-informed of developments within the corporation as well as the rapidly changing situation provides the foundation for board effectiveness.

We highlight below some key areas of focus for boards as this unprecedented public health crisis and its impact on the business and economic environment rapidly evolves.


M&A in Times of COVID-19

Stephen Amdur is a partner and Brian McKenna is special counsel at Pillsbury Winthrop Shaw Pittman LLP. This post is based on their Pillsbury memorandum. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

  1. COVID-19 may cause buyers and sellers to reassess valuations, adjust pricing mechanisms and implement new methodologies for interim operations and crisis response management at a target.
  2. Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines caused by the virus.
  3. Parties should think through risk allocation—including the MAC clause—and how a target’s risk profile may change over time as the outbreak itself develops.

As novel coronavirus (COVID-19)—characterized by the World Health Organization on March 11, 2020 as a pandemic—continues to spread across the globe, companies and transaction participants are grappling with increased risk and uncertainty posed by the virus. This note identifies a few ways in which the developing outbreak may present challenges, both fundamental and practical, to the deal-making process and timelines. It also offers an analysis of how the virus may impact negotiations around that mainstay of M&A lawyering, the “material adverse change” (MAC) clause.


Non-U.S. Issuers Targeted in Securities Class Action Lawsuits Filed in the United States

David H. KistenbrokerJoni S. Jacobsen, and Angela M. Liu are partners at Dechert LLP. This post is based on their Dechert memorandum.


Companies headquartered or with principal places of business outside the United States (“non-U.S. issuers”) continue to be targets of securities class actions filed in the United States. Indeed, 2019 continued to see an uptick in the number of securities class action lawsuits brought against non-U.S. issuers from the previous year, consistent with the general trend of filings trending upwards over the last decade. It is therefore imperative that multinational companies not only pay attention to recent filing trends in the United States, but that they also take proactive measures to mitigate any potential risks.

In 2019, plaintiffs filed a total of 64 securities class action lawsuits (as compared to 54 in 2018) against non-U.S. issuers through a total of 83 securities class action complaints filed before consolidation:

  • The Second Circuit continued to be the jurisdiction of choice for plaintiffs, with the next most popular circuit as the Third Circuit.
  • Of the 64 non-U.S. issuers against whom securities class action complaints were filed in 2019, 18 have a headquarters and/or principal place of business in the People’s Republic of China (“China”), 12 in the United Kingdom, and nine have corporate headquarters and/or principal places of business in Canada.
  • The biotechnology and drugs industry was the industry with the largest number of class action lawsuits brought against non-U.S. issuers with 18 filed in 2019.
  • The Rosen Law Firm P.A. continued to be the most active law firm in this space, leading the way with respect to first-in-court filings against non-U.S. issuers in 2019 and with respect to the number of cases in which it was appointed as lead counsel.


Public Statement by Chairman Jay Clayton for FSOC Open Meeting

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement at an Open Meeting of the Financial Stability Oversight Council. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

The women and men of the SEC are focused on two overriding issues: (1) we are facing a national challenge—an unprecedented health and safety crisis that requires all Americans, for the sake of all Americans, to significantly change our daily behavior, including behavior at our banks, broker-dealers, investment advisers and other market participants; and (2) the reality that the continuing orderly operation of our credit and other capital markets is an essential factor in driving an effective health and safety response to COVID-19—our health care, pharmaceutical, transportation, manufacturing, food services and many other industries all depend upon the continuing provision and receipt of capital and credit and the flow of capital more generally.

With these two issues front of mind, the Commission has focused its resources on the continued orderly functioning of our securities markets—equities, fixed income securities, funds and other products—consistent with evolving health and safety directives. [1] These efforts have centered on the continued operation of physical infrastructure, including information technology systems, and, predominantly from remote locations, continued human engagement, all the while keeping health and safety as the primary concern. More specifically, we have worked with a broad array of market participants to ensure that their business continuity plans are consistent and compatible with (1) state and local health and safety directives and other measures, (2) the continued orderly operation of our securities markets and (3) regulatory safeguards, including our steadfast commitment to investor protection. [2] We greatly appreciate our relationships with, and the cooperation of, federal, state and local authorities in the United States and abroad in these efforts, including the notably universal recognition of the importance of the continuing operation of our capital markets. [3]


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