Monthly Archives: April 2020

Succession Planning in a Time of Crisis

Richard Alsop, John J. Cannon III, and Doreen E. Lilienfeld are partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling memorandum by Mr. Alsop, Mr. Cannon, Ms. Lilienfeld, Gillian Emmett Moldowan, Lona Nallengara, and Linda Rappaport

Planning for an unexpected absence or loss of a key person is an important component of enterprise risk management. In the present environment, boards are meeting regularly in real time to address absences of key persons–both temporary and sustained–to ensure that their existing succession plans are withstanding the current test. Another added challenge for some companies has been the need to address multiple absences occurring at the same time. This post briefly discusses best practices and key considerations for companies and their boards as they confront these possibilities in light of the COVID-19 pandemic.

Identifying an Immediate Successor or Interim Replacement

An unexpected absence or loss of a key person can adversely impact a company’s ongoing operations, stock price, employee morale and overall short-term stability. Therefore, effective risk management requires identifying the individuals within the organization who have the skills and experience to immediately and effectively fill any gaps. Potential successors must also be perceived by the market as having the necessary experience to fill the role.


Navigating Strategic Alternatives in Distressed Scenarios: Takeaways for Boards

Paul Tiger is a partner and Kelsey MacElroy is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

As the economy continues to experience daily turmoil in the wake of the COVID-19 crisis, it becomes increasingly likely that some companies will feel the need to enter into dilutive financings and downside exits.

This new reality poses heightened challenges for boards and increases the likelihood of litigation, as has occurred in past downturns.

For those not looking to repeat history, here’s a look-back at some of the mis-steps that boards of financially distressed companies have made when seeking financing or considering downside exits while in distress, together with some lessons learned about how boards can get it right during these difficult circumstances.

In each of these situations, insiders came to the rescue of a struggling company. At the time, these insiders thought they were stretching to provide support where no one else would tread.

These insiders viewed themselves as courageously taking on risk to save a bad situation from getting worse. But in hindsight, after the turnarounds had occurred, all that the other equity holders and the courts were able to see were flawed board processes.


Governance Litigation and the COVID-19 Pandemic

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

The pandemic has created massive business disruption, and weeks or months of further market dislocation and volatility seem certain. Equally certain is that stockholder lawsuits will appear as (or perhaps even before) the disruption begins to resolve. Delaware’s Caremark doctrine—which requires directors to monitor the corporation’s compliance with the law and to address indications of non-compliance—has become a preferred vehicle for stockholder plaintiffs seeking to bring representative litigation in response to corporate trauma. We accordingly expect an increase in Caremark litigation this year, with plaintiffs blaming a failure of board oversight for corporate losses resulting from the pandemic.


Going Private Transactions

Warren S. de Wied, Philip Richter, and Robert C. Schwenkel are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum. 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); The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here); and Fixing Freezeouts by Guhan Subramanian.

The stock market downturn in the midst of the Coronavirus pandemic has generated increased interest in taking public companies private. Many boards of directors may not be receptive to these transactions in the near term, anticipating that their companies should recover when the crisis passes, and recognizing that the financing market creates risk and uncertainty. But going private may be an attractive option for some, and companies can expect to receive overtures from major stockholders and financial sponsors, despite potential financing challenges. Hence, a reminder of the legal fundamentals of these transactions seems timely.


The terms “take private” and “going private” transaction (for convenience, in this memorandum , we use the term “going private”) are both used to describe an acquisition of a public company by a controlling stockholder or other affiliate, or a transaction by a financial or other buyer that raises the specter of potential conflicts of interest on the part of members of senior management or the board of the target. The general framework under federal and state law that applies to any acquisition or sale of a public company applies to going private transactions. In addition, these transactions are subject to state law principles governing conflict of interest transactions, and may be subject to Rule 13e-3 under the Exchange Act.


Delaware Emergency Order: Remote Shareholder Communication Meetings

Andrew Freedman, Ron Berenblat, and Adrienne Ward are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Freedman, Mr. Berenblat, Ms. Ward, and Steve Wolosky, and is part of the Delaware law series; links to other posts in the series are available here.

In a client alert issued by Olshan’s Shareholder Activism Group last week, we reported that certain factions within the Delaware State Bar Association (“DSBA”) were attempting to fast track an amendment to Section 110 of the Delaware General Corporation Law (“DGCL”) that would allow Delaware corporations to postpone their annual meetings of stockholders in light of the COVID-19 pandemic. We expressed serious concerns that the proposed amendment could be abused by corporations looking to postpone their annual meetings and disenfranchise stockholders under the pretense that such a delay is required due to COVID-19.


Is a Replacement for Your Short-Term Incentive Plan Right for You?

Steve Pakela is a Managing Partner and Brian Scheiring is a Partner at Pay Governance LLC. This post is based on their Pay Governance 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).

When it comes to 2020 incentive arrangements for calendar-year-end companies, COVID-19’s arrival in the United States could not have come at a worse time. The vast majority of these incentive plans were approved by compensation committees in February, prior to many businesses being thrust into financial and public-market turmoil. When these plans were approved, it was generally business as usual for most companies, and shareholders were enjoying stock price peaks. Performance goals were based on company budgets established during the fourth quarter of 2019, back when the prospects for 2020 were much different than they are today. Within short-term incentive arrangements, performance metrics, and individual performance objectives reflected the desire to pursue business strategies that would bring the success of the past several years to new heights. Now, at the beginning of April, so much has changed in so many ways that everything should be put on the table” concerning executive compensation design and practice.

Today, many annual incentive arrangements are “stranded” with performance goals that are no longer achievable and performance metrics that are no longer aligned with short-term objectives. We believe that providing responsible incentives during this time will be critically important for motivating and focusing employees through the crisis and uncertainty that we anticipate over the remainder of the calendar year. This post provides discussion points and ideas for addressing short-term incentive arrangements that are no longer achievable or appropriately aligned. READ MORE »

Inspection of PCAOB-Registered Chinese Auditor

Jeffrey P. Mahoney is General Counsel at the Council of Institutional Investors. This post is based on his CII letter to PCAOB Chairman William D. Duhnke III.

As the leading U.S. voice for effective corporate governance and strong shareholder rights, CII believes that accurate and reliable audited financial statements are critical to investors in making informed decisions, and vital to the overall well-being of our capital markets. [1] Consistent with our policies, we first shared with you our concerns about PCAOB-registered firms located in China in September 2018 in our comment letter in response to PCAOB Draft Strategic Plan 2018-2022. [2] At the time, we respectfully requested that “that the PCAOB consider examining whether some or all of the PCAOB-registered firms located in China (and perhaps other jurisdictions) should be deregistered.” [3] Since that time, we appreciate your efforts working with Securities and Exchange Commission (SEC) Chairman Jay Clayton and members of the SEC staff to discuss with representatives of the largest U.S. audit firms audit quality issues relevant to PCAOB-registered firms located in China. [4]


Weekly Roundup: April 10–16, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 10–16, 2020

Protecting Investors in a Time of Crisis: A Response to Those Who Would Utilize COVID-19 to Eviscerate Investor Protection

The Importance of Disclosure For Investors, Markets and Our Fight Against COVID-19

Government Ownership in the Post Virus World

The Impact of COVID19 on Shareholder Activism

Issuance of Equity to the US Government in Exchange for Aid—Considerations for Boards

Corporate Governance Through Exit and Voice

The Activism Vulnerability Report Q4 2019

Planning for the Possibility that the CEO Tests Positive for COVID-19

Insider Trading Risk During the COVID-19 Outbreak

Politics and Gender in the Executive Suite

Director Fiduciary Duty in Insolvency

Deal Protection Devices

ESG Issues in the Forefront

Trading on Public Trust

SEC Proposal: Improving Access to Capital in Private Markets

SEC Proposal: Improving Access to Capital in Private Markets

Adam Fleisher and Jeffrey Karpf are partners and Leslie Silverman is senior counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Fleisher, Mr. Karpf, Mr. Silverman, David Lopez, Nina Bell, and Courtnie Drigo.

On March 4, 2020, the SEC voted 3-1 to propose amendments to “simplify, harmonize, and improve certain aspects” of the framework for offerings exempt from Securities Act registration. The amendments cover a number of areas, including integration, general solicitation and offering communications, and Rule 506(c) verification requirements. We discuss below selected key aspects of the proposal.

I. Integration


The SEC first articulated the concept of integration in 1933 and has subsequently developed various approaches for determining when multiple offerings should be treated as a single offering. These approaches include:

The well-known five-factor test in Regulation D [1]—whether:

  • the different offerings are part of a single plan of financing;
  • the offerings involve issuance of the same class of security;
  • the offerings are made at or about the same time;
  • the same type of consideration is to be received; and
  • the offerings are made for the same general purpose.

The 2007 guidance for analyzing the integration of simultaneous registered and private offerings: [2]

  • The filing of a registration statement should not be considered general solicitation that undermines the availability of the Section 4(a)(2) exemption for a concurrent private placement if the private placement investors were not solicited by the registration statement.
  • A prospective investor could become interested in the concurrent private placement through a “pre-existing, substantive relationship” with the issuer, or direct contact by the issuer or its agents outside the public offering effort.

The integration framework for concurrent exempt offerings developed as part of promulgating Regulation A and Crowdfunding rules in 2015 and Rule 147 and 147A in 2016 that focused on facts and circumstances, including each offering complying with the requirements of the relevant exemption. [3]


Stop Blaming Milton Friedman!

Brian Cheffins is S. J. Berwin Professor of Corporate Law at the University of Cambridge. This post is based on a recent paper by Professor Cheffins. 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 Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

In a much-cited, much-discussed 1970 article the New York Times entitled “The Social Responsibility of Business is to Increase its Profits” the renowned economist Milton Friedman harshly criticized those in the business community who maintained that private enterprises had a mission to promote desirable social ends. What the Times labelled a “Friedman doctrine” reputedly constituted a major turning point in corporate legal theory and corporate governance. In particular, Friedman’s essay has been credited with—or blamed for—launching a still ongoing era of “shareholder primacy” where corporate executives have assumed their job is to maximize shareholder value. In my working paper Stop Blaming Milton Friedman! I show that the historical evidence does not tally with the hype.

Economists Oliver Hart and Luigi Zingales have argued Friedman’s article can “be seen as providing the intellectual foundation for the ‘shareholder value’ revolution.” (The citation for their paper and for all other sources canvassed in this post are available in my working paper.) A Newsweek columnist suggested in 2019 that “for almost 50 years, American CEOs have loosely followed what is known as the Friedman Doctrine.” Oxford management theorist Colin Mayer, a staunch shareholder primacy critic, has said of this “doctrine” “(f)ew social science ideas are both so significant and misconceived as to threaten our existence.” It strains credulity that an entire school of academic thought could have this sort of impact, let alone a single newspaper essay that was not even 3000 words in length. At the very least, those who ascribe to Milton Friedman substantial responsibility for American companies prioritizing shareholder interests make a series of implicit erroneous assumptions about his essay and subsequent developments.


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