Monthly Archives: April 2020

Congressional Securities Trading

Gregory H. Shill is an Associate Professor of Law at the University of Iowa College of Law. This post is based on his recent paper, forthcoming in the Indiana Law Journal. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

In March 2020, as millions of Americans—a record number of them newly jobless—locked themselves indoors to help fight an accelerating pandemic, they learned that two U.S. Senators had been warned about COVID-19 in a secret briefing and then proceeded to cash in their shares in the nick of time. The stocks Sens. Richard Burr and Kelly Loeffler traded included companies, like hotel chains, that were especially sensitive to the coronavirus. This scandal sparked renewed interest in congressional insider trading—and exposed gaps in current law and leading reform proposals alike. In a new Essay, Congressional Securities Trading, I use the occasion of the pandemic trades to offer a fresh perspective on this evergreen topic.

The Essay addresses a basic tension: Members of Congress are perpetually in possession of material nonpublic information (“MNPI”), yet for various reasons need to trade securities from time to time. This framing, which reflects a securities regulation orientation rather than litigation and enforcement, is new to scholarship on the issue and works in tandem with adversarial measures. It borrows from a related context—public company regulation—which has largely been overlooked. And it offers a way to both prevent dubious trades in general and disgorge the profits that result from those that slip through.


What to Say on Your Next Earnings Call in the Time of COVID-19: Providing Insights, Disclosing Scenarios and Managing Risks

Mark Gordon, Igor Kirman, and Sabastian Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Messrs. Gordon, Kirman, and Niles, Wayne M. Carlin, David B. Anders, and Lauren M. Kofke.

Upcoming first quarter earnings calls may be the most scrutinized in modern corporate history. How to handle these calls in light of the unprecedented social and economic impacts of COVID-19 is a question confronting every company that has not yet announced. Investors, the SEC and other stakeholders are clamoring for insight into what this extraordinary pandemic means for individual businesses, the private sector and the Nation at large. We believe that these upcoming earnings calls provide an opportunity for companies to show leadership and purpose by providing the critical insights that will help investors, analysts and other stakeholders grasp where the company stands today and what the future may hold for the business and the industry.

We previously discussed the groundbreaking April 8th statement made by the Chairman of the Securities and Exchange Commission and the Director of the SEC’s Division of Corporation Finance, which urged companies to be more forthcoming about the impact of COVID-19, actions taken in response and future plans. But for the upcoming earnings season, public companies are being asked to speak at a moment of maximal uncertainty—no one can predict with any certainty the scale or length of disruption from COVID-19 or how deep and severe the economic and health impacts will be. The many unknowns include the scope and effect of further governmental, regulatory, fiscal, monetary and public health responses. The crisis has also brought to the fore critical incident and systemic risk management concerns, including traditional ESG concerns such as human capital issues, business model and supply chain resilience, and consumer welfare and social impact.


Bebchuk & Hirst Article on Index Funds Selected as One of 2019’s Best Corporate and Securities Articles

Tami Groswald Ozery is a co-Editor of the Forum and Fellow at the Harvard Law School Program on Corporate Governance.

Related research from the Program on Corporate Governance includes Index Fund and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the Forum here) by Lucian Bebchuk and Scott Hirst.

According to an announcement by Georgetown Professor Robert Thompson, a Program on Corporate Governance study by Lucian Bebchuk and Scott Hirst, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy, was selected in the annual poll of corporate and securities law professors as one of the ten best corporate and securities articles of 2019.

The Bebchuk & Hirst article, which was published in the December 2020 issue of the *Columbia Law Review, was earlier the recipient of three prizes:

  • The Jaime Fernández de Araoz Award on Corporate Finance, which carries with it a prize of 10,000 EUR (see the award announcement here);
  • the IRRC Institute prize, which carries with it a cash award of $10,000 (see the prize announcement here); and
  • the European Corporate Governance Institute’s Cleary Gottlieb Steen Hamilton Prize, which carries with it a EUR 5,000 award (see the prize announcement here).

The article is the thirteenth article authored or co-authored by Lucian Bebchuk that has been selected as one of the best corporate and securities articles during the years in which the annual poll was conducted.

The Bebchuk & Hirst article is part of the Corporate Governance Program’s larger ongoing project on stewardship by index funds and other institutional investors. The article builds on an analytical framework for understanding the monitoring and engagement decisions made by index funds put forward in a 2017 study, The Agency Problems of Institutional Investors, by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here). The analysis in the article is supplemented by a recent empirical study by Lucian Bebchuk and Scott Hirst, The Specter of the Giant Three (discussed on the Forum here), which examines the substantial and continuing growth of the so-called Big Three index fund managers.

The announcement of the results of the annual poll of corporate and securities law professors is available here. The Bebchuk & Hirst article is available here, is discussed on the Forum here, and PowerPoint slides summarizing its analysis are available here.

Temporary Basis NYSE Modifications to Certain Stockholder Approval Requirements

Richard Truesdell, Joseph Hall, and Byron Rooney are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Messrs. Truesdell, Hall, Rooney, Michael Kaplan, Marcel Fausten and Sarah Solum.

Temporary waivers of related-party and 20% rules granted in light of COVID-19-related financing needs

Recognizing that many companies will have “urgent liquidity needs” in the coming months as a result of economic and market conditions related to the spread of COVID-19, on Monday the New York Stock Exchange announced temporary waivers to some of its stockholder-approval requirements for stock issuances. Importantly, however, the general requirement that stockholders of domestic companies approve any issuance of more than 20% of the outstanding stock in a private placement below the current market price will remain in place.

The waivers are effective immediately and will remain in place through June 30, 2020.

Modified Stockholder Approval Rules

The waivers apply to the stockholder approval requirements for certain stock issuances pursuant to Section 312.03 of NYSE’s Listed Company Manual.


Leadership Resiliency in an Emergency

Holly J. Gregory and Thomas J. Kim are partners and Rebecca Grapsas is counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Mr. Kim, Ms. Grapsas, John P. Kelsh.

Business continuity planning during the COVID-19 pandemic requires that boards of directors and senior management teams confront the unthinkable: How will the business continue to function if key leaders and decision-makers are incapacitated? Boards, senior management and corporate counsel should consider whether the company has in place appropriate leadership resiliency plans, both with respect to senior executive emergency succession and board emergency procedures. While it has been a common practice for at least the past decade for boards of large public companies to have an emergency CEO plan in place, our recent review of the bylaws of Fortune 100 companies reveals that only 20% have adopted specific emergency bylaw provisions to support board decision-making should a number of directors become incapacitated. Such planning is prudent given that most directors are of an age associated with increased susceptibility to complications from COVID-19.

This post provides an overview of options and considerations for bolstering leadership resiliency and discusses related disclosures that may be required or advisable.

Board Resiliency

Action by a board of directors requires either (i) that a vote be held at a duly noticed meeting at which a quorum is present or (ii) unanimous written consent. As the pandemic continues, boards face some risk that it may be difficult to meet notice and quorum requirements — for example, if directors are locked down in a location without connectivity or become incapacitated. Boards have several options to ensure continuity when regular notice and quorum requirements cannot be met due to an emergency.


Considerations for 2020 Incentive Compensation Programs

Kyoko Takahashi Lin and Edmund FitzGerald are partners and David Mollo-Christensen is counsel at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Considerations for Companies That Have Already Established Their 2020 Incentive Compensation Programs

The coronavirus (COVID-19) pandemic and the ensuing market uncertainty as well as recently enacted legislation, have upended the compensation and benefit programs of many companies. We are preparing a series of client memoranda regarding how companies may wish to consider their programs in this context.

Focusing on incentive-based compensation might not be at the top of the priority list for many companies as they focus on company-wide crisis leadership and workforce stabilization as a whole. When companies do turn to an assessment of their incentive-based compensation, there are a number of complexities and sensitivities in the current environment, and this section discusses some ways that companies can address their short- and long-term incentive programs, particularly for companies that have already granted their incentive compensation awards for 2020.


Key ESG Considerations in the Crisis

David M. SilkDavid A. Katz, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Silk, Mr. Katz, Mr. Niles, David B. Anders, David E. Kahan, and Lauren M. Kofke.

The social and economic turmoil unleashed by the global spread of COVID-19 and the collapse in the price of crude oil has brought to the fore a number of critical incident and systemic risk management concerns, including traditional ESG concerns such as human capital issues, business model and supply chain resilience, and consumer welfare and social impact. As governments across the globe implement assistance packages for affected companies and industries and their employees, attention has also turned to certain governance matters, notably, executive compensation, dividend payouts and stock buybacks. At the same time, while crisis management remains the first priority, influential institutional investors have signaled their continued focus on environmental matters and ESG disclosures.

As management and boards of directors focus on addressing the immediate-term challenges of the crisis, ESG factors will be critical elements of both short-term strategic decisions and longer-term strategic planning. Many companies will face questions from their investors, employees, consumers, local communities and other stakeholders over their handling of COVID-19 as well as their preparedness for similar future shocks. We discuss below ESG issues that are likely to be of particular concern to key stakeholders:


A Special Committee to Oversee the Corporation’s Response to the Pandemic

Steven M. Haas is a partner and Allen C. Goolsby is special counsel at Hunton Andrews Kurth LLP. This post is based on their Hunton Andrews Kurth memorandum.

In recent years, discussions of corporate governance best practices have included the pros and cons of having a separate Risk Committee of the Board of Directors. While there has been increased focused on the Board’s oversight of the corporation’s assessment and control of risks, it is not always clear that a Risk Committee is the best approach for non-financial institutions. Often, the assessment and control of multiple types of risks is handled better if spread among several existing committees instead of being assigned to a newly created Risk Committee. Dividing responsibility among multiple committees can make better use of the expertise of all Board members in the oversight of the wide variety of risks facing the corporation. For example, financial and accounting risks fit naturally in the Audit Committee while oversight of governance and reputation risks should fit well with the Nominating and Governance Committee and compensation and other employee benefit related risks are the natural province of the Compensation Committee. Creating a separate Risk Committee also increases the scheduling challenges that Boards would face by adding another Board committee, noting the time constraints that many Boards, and especially Boards with a small number of directors, already encounter with their existing committee structure.


The Paradox of Corporate Globalization: Disembedding and Reembedding Governing Norms

John Gerard Ruggie is the Berthold Beitz Research Professor in Human Rights and International Affairs at Harvard Kennedy School. This post is based on his recent paper. 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).

Corporate globalization has been the most transformative geoeconomic development of the past half century, and shareholder primacy its force multiplier. Their combination brought great benefits to people and countries well positioned to seize the new opportunities. But that their unfettered expansion would also disrupt social fabrics and overtax natural capital was not only predictable; it was predicted. In a seminal keynote address to the January 1999 Davos gathering, then UN Secretary-General Kofi Annan warned that unless globalization develops stronger social and environmental pillars it will remain vulnerable—“vulnerable to backlash from all the ‘isms’ of our post-cold-war world: protectionism; populism; nationalism; ethnic chauvinism; fanaticism; and terrorism.”

Today, corporate globalization and shareholder primacy are under duress. The former plateaued even before the COVID-19 crisis. The latter has been subject to intense criticism by growing numbers of “stakeholder capitalism” advocates. The debate intensified after the August 2019 U.S. Business Roundtable statement committing signatory CEOs “to lead their companies for the benefit of all stakeholders—customers, employees, suppliers, communities and shareholders.” But the terms of the debate have not changed fundamentally since the days of Milton Friedman, Michael Jensen, and R. Edward Freeman in the 1970s and 1980s. Those writers may be excused for conceptualizing their analysis and advocacy as though the United States economy existed in a bubble, largely independent of the rest of the world; their current counterparts cannot.


COVID-19 Impact: Potential Risks and Problems in Signed M&A Deals

Mara H. Rogers is a partner, Amelia Xu is a senior associate, and Geetika Jerath is an associate at Norton Rose Fulbright US LLP. This post is based on their Norton Rose 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) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

As COVID-19 continues to rapidly permeate our society and the financial markets struggle to maintain stability, companies engaged in M&A transactions must overcome increased risk and uncertainties. For now, while there are some publicly-announced deals being pulled or being re-evaluated, we have not yet seen a spike in announced signed-deal terminations due to COVID-19. We expect, however, that parties of those deals that signed pre-COVID-19 are re-evaluating their transaction terms and that after the delirious symptoms subside, we may see a wave of deal renegotiations or terminations, while some deals will still proceed as planned or on a delayed basis. We anticipate the path of pending signed M&A transactions (both public and private ) will vary, as parties determine whether or not to proceed, and if so, on what terms and when, as the pandemic continues to impact different industries and geographic regions.

Some buyers who have entered into M&A transactions at pre-COVID-19 valuations may wish to terminate transactions or renegotiate the purchase price prior to closing and will be looking for ways to do so without incurring liability. Sellers, on the other hand, may wish to proceed to closing and look for ways to force buyers to close. For those deals in negotiation or new deals, the parties will have the opportunity to adjust and/or set deal terms to take into account COVID-19 and the related market and economic impacts and risks. Not so for signed M&A transactions. Where the target company has been materially impacted by the COVID-19 outbreak, the parties to signed deals will need to analyze their purchase agreement to determine their preferred path and potential liability—focusing on conditions to closing, termination rights and fees, indemnification provisions, the impacts of a delayed regulatory or other closing process, and the continued availability of acquisition financing and representation and warranty insurance.


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