Monthly Archives: April 2020

Accounting Class Action Filings and Settlements: 2019 Review and Analysis

Laura E. Simmons is Senior Advisor, Elaine M. Harwood is Vice President, and Frank T. Mascari is a Principal at Cornerstone Research. This post is based on their Cornerstone memorandum.

Executive Summary

Securities class action filings involving accounting allegations reached a record level as the overall trend of core filings against larger defendant firms continued.

While the total value of accounting class action settlements declined, the median accounting case settlement amount rose in 2019.

  • There were 169 securities class actions involving accounting allegations (accounting case filings) during 2019, nearly double the historical average.
  • Accounting class actions as a percentage of total class action filings reached the highest level since 2011.
  • Merger and acquisition (M&A) accounting cases alleging failure to reconcile a non-GAAP measure to a GAAP measure increased 29 percent.
  • Market capitalization losses for core accounting case filings 3 were 58 percent higher than the historical average as the trend of filings against larger defendant firms continued.
  • In 2019, 19 percent of core accounting filings involved allegations of improper revenue recognition.
  • The number and proportion of securities class action settlements involving accounting allegations (accounting case settlements) continued to decline, with the proportion of accounting settlements relative to all case settlements at the lowest level over the past decade.
  • The median settlement for accounting cases increased over 2018, reflecting a shift in the size of the typical case.
  • The total value of accounting case settlements can fluctuate substantially from year to year due to the presence or absence of very large settlements. In 2019, the total value declined, reflecting a lack of any settlements exceeding $500 million, as well as only two mega settlements (settlements above $100 million) involving accounting allegations.


Proactively Adopting a Poison Pill in Response to the COVID-19 Crisis

Mark D. Gerstein is a partner, Tiffany F. Campion is a senior attorney, and Joshua C. Reisman is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Gerstein, Ms. Campion, Mr. Reisman, Christopher R. DrewryJoshua M. Dubofsky, and Ryan J. Maierson. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here); and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

Key Points:

  • Hostile takeover activity and stockholder activism often correspond with or follow periods of extreme market volatility and investor uncertainty. In the current environment, a significant uptick in adoptions of stockholder rights plans (so-called “poison pills”) is expected as companies confront a sharp decline in stock prices and face public valuations that may not be reflective of long-term intrinsic value.
  • The terms of the rights plan—specifically duration, triggering thresholds, and timing of stockholder approval of the rights plan (if any)—should be tailored to the circumstances the board cites to justify the adoption of the rights plan.
  • A narrowly tailored rights plan coupled with disclosure as to the specific threats the board is seeking to address should be sufficient to address the customary concerns of proxy advisory firms, governance advisory groups, and leading institutional investors, whose policies traditionally disfavor proactive adoption of rights plans.
  • Companies impacted by significant stock price declines should proactively consider preparing rights plan materials, reviewing the rights plan with the board, and either adopting or putting the rights plan “on the shelf.”

The Impact of COVID-19 on Company Vulnerability

Over the last month, global financial markets have experienced unprecedented volatility in connection with the coronavirus pandemic (COVID-19). Investor concern about the impact of COVID-19 has led to market-wide sell-offs, resulting in companies across nearly every sector experiencing sharp stock price declines. Current market conditions are prime for hostile takeover activity and shareholder activism, and as such, a significant uptick in rights plan adoptions is expected as companies face sharp declines in stock prices and public valuations that may not be reflective of long-term intrinsic value. Indeed, a record-setting 11 public companies adopted poison pills between March 12 and 25 across a variety of industries. As boards grapple with the immediate and long-term implications of COVID-19, they should consider whether to implement defensive measures to attempt to proactively combat near-term coercive or abusive takeover and control practices.


Purchasing Portfolio Company Debt—Threshold Issues for Private Equity Sponsors

William Chudd, Sartaj Gill, and David Schnabel are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Chudd, Mr. Gill, Mr. Schnabel, Oliver Smith, Michael Hong, and Marshall Huebner.


The coronavirus (COVID-19) emergency has led to the debt of many companies in private equity portfolios trading at a significant discount. As a result, an increasing number of private equity sponsors are strongly considering whether to purchase portfolio company debt in the secondary market as an investment opportunity. At the same time, the portfolio companies themselves are considering repurchasing their own debt to accomplish the twin goals of increasing equity value by retiring debt at a discounted price and reducing leverage during this volatile period in the global financial markets.

This post highlights several legal issues for private equity sponsors and their portfolio companies to consider in evaluating a potential purchase of portfolio company debt.

Key Issues to Consider

Do fund documents permit private equity funds to make this purchase?

Private equity funds’ partnership agreements, side letters or other fund documents may restrict the ability of the private equity fund to purchase portfolio company debt. For example, these documents may contain concentration limits that limit the percentage of total commitments that may be invested in the debt or equity of a single company, limitations on investing in debt where an affiliated investment fund owns equity in the issuer of the debt and restrictions on the types of instruments that may be acquired by the fund. As such, it is critical that fund documents are reviewed when a private equity sponsor is considering a purchase of portfolio company debt.


Director Oversight in the Context of COVID-19

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal.

The challenges facing America during the ongoing COVID-19 pandemic are unprecedented. As directors of public companies work to fulfill their oversight responsibilities during this difficult time, there are a number of considerations that need to be addressed by directors and senior management teams working together.

Though it is the job of management to develop and implement the corporation’s response to the crisis, directors should not hesitate to reach out proactively to request information or ask to schedule a virtual board meeting to receive updates from management as needed under the circumstances. Similarly, management teams may want to consider scheduling regular board updates to keep the board informed of management’s response to the crisis. In its oversight role, the board should do its best to ensure that management is prioritizing the safety and well-being of the company’s employees as well as those who depend upon the company for essential services. Board members must be careful, however, not to usurp or interfere with management’s handling of the day-to-day operations of the company.


Corp Fin Disclosure Guidance: Topic No. 9 Coronavirus

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

[On March 25, 2020], the staff of Corp Fin issued Disclosure Guidance Topic No. 9, which offers the staff’s views regarding disclosure considerations, trading on material inside information and reporting financial results in the context of COVID-19 and related uncertainties. The guidance includes a valuable series of questions designed to help companies assess, and to stimulate effective disclosure regarding, the impact of the coronavirus. As always these days, the guidance makes clear that it represents only the views of the staff, is not binding and has no legal force or effect.

In the guidance, the staff indicates that it is continuing to monitor how companies are reporting the impact of COVID-19 and acknowledges that reporting companies view timely and robust disclosure as “essential to functioning markets and that they want to file periodic and current reports in a timely manner, notwithstanding the available relief.” Nevertheless, the staff recognizes that the uncertainties associated with COVID-19 make its effect on specific companies difficult to predict and, in many circumstances, the impact is beyond a company’s control and knowledge. Still, “the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties can be material to investment and voting decisions.”

Disclosure of COVID-19 risks and effects may be required or appropriate in MD&A, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements or other sections, whether or not in response to a specific line item requirement.


ESG Disclosures and Litigation Concerns

Martin Lipton is a founding partner and David M. Silk and David B. Anders are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

The publication of the World Economic Forum’s (WEF) proposed core metrics and recommended disclosures under the auspices of the International Business Council, while seeking to align mainstream ESG reporting, has prompted concern about litigation risks. One specific area of concern stems from the proposed framework’s recommended disclosure of scenario analysis.

Scenario analysis is a key recommendation of the Task Force on Climate-related Financial Disclosures and is incorporated into the WEF’s proposed framework. The purpose of scenario analysis is to consider and better understand how a business might perform under different future states by evaluating a range of hypothetical outcomes under a variety of plausible future climate-related scenarios. Many companies already conduct scenario analysis and an increasing number of companies already make disclosures concerning such analyses.


Fiduciary Duties During a Time of Volatility

Ethan Klingsberg is a partner and Vinita Sithapathy is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields 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 The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

Relevant to the times in which we find ourselves, the Delaware Court of Chancery, in a newly released transcript ruling in K-Bar Holdings LLC v. Tile Shop Holdings, Inc., found a colorable claim that the board of a publicly traded company had breached its fiduciary duties by allegedly sitting on its hands while a stockholder group (which included three members of the board of directors) took advantage of the corporation’s depressed trading price to increase its ownership from 29 percent to 42 percent.

The Court ordered the stockholder group to cease purchases of stock and stated that, after an evidentiary hearing, the Court would consider ordering divestiture and/or neutering of the recently acquired voting power.


Thoughts for Boards of Directors in the COVID19 Crisis

Peter Atkins, Ken King, and Allison Schneirov are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Atkins, Mr. King, Ms. Schneirov, Stephen F. Arcano, Howard L. Ellin, and Paul T. Schnell.

Although different in some important respects and rapidly evolving, the global pandemic shares many of the characteristics of other broadscale crisis situations that prior boards of directors have confronted and managed through. That said, most current directors, and a majority of boards, have not faced a crisis of this order of magnitude on the company, industry, national and global fronts. COVID-19 will test the oversight skills of boards of directors of literally thousands of companies, of every size, in every business and in every location on the globe. The new normal for an indeterminate period will, for most companies, present a set of difficult issues and serious risks that would have been unimaginable at the turn of the decade.

How can directors cope with this ongoing high-stress, high-threat environment? Begin with the basics: Be calm. Be alert. Be engaged. Be informed. Be advised. Be thoughtful. Be decisive.

And always be human. Corporate America has a poor reputation these days in the minds of many, including large segments of the public and in the halls of government. COVID-19 is causing massive challenges to the safety and well-being of almost everyone—family, friends, colleagues, community members and strangers. When the dust settles—and it will—those people will look back at how key elements of the country acted to combat this major human dislocation. Corporate America has a real opportunity to step up in a variety of ways to protect, cushion and assist people. Directors across the spectrum of companies will serve their companies’ interests by clearly and conscientiously embracing this need.

One of the hallmarks of any corporate crisis situation is the need to communicate rapidly on a coordinated basis across multiple corporate constituencies and to make decisions at a time when critical information is unknown and unknowable.


Accounting, Disclosure, and Internal Control Considerations—COVID19

This post is based on a publication by Deloitte & Touche LLP.


Global responses to the coronavirus disease 2019 (COVID-19) outbreak continue to rapidly evolve. COVID-19 has already had a significant impact on global financial markets, and it may have accounting, disclosure, and internal control implications for many entities. Some of the key impacts include, but are not limited to:

  • Interruptions of production.
  • Supply chain disruptions.
  • Unavailability of personnel.
  • Reductions in sales, earnings, or productivity.
  • Disruptions in or stoppages of nonessential business travel.
  • The closure of facilities and stores.

In addition, entities should consider the increasingly broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets.


This post discusses certain key accounting, disclosure, and internal control considerations related to conditions that may arise as a result of COVID-19. Although the virus was first detected in Wuhan City, Hubei Province, China, [1] it has had more far-reaching ramifications. This post is divided into the following sections:


Stewardship Engagement Guidance to Companies in Response to COVID-19

Cyrus Taraporevala is President and CEO of State Street Global Advisors. This post is based on his letter to board members.

As business leaders, we are all concerned about what the outbreak of COVID-19 and its rapid spread mean for the health of our employees, our customers and our companies, as well as the overall resiliency of economies and society.

Many of you have already taken extraordinary steps to shift your operations to help, from repositioning production lines to create ventilators and protective masks to funneling resources into developing new vaccines and therapies. And many more are continuing to pay workers while operations are shuttered or making contributions supporting food banks and first responders.

In addition to the public health concerns, this crisis has already been a major disruptor to the global economy, which in turn has strained our financial system. As a long-term investor in your company, State Street Global Advisors would like to share some perspectives on our asset stewardship agenda for 2020 in light of these extraordinary circumstances.

In my letter to you in January, we reinforced our ongoing commitment to engaging with you on a wide range of material environmental, social and governance (ESG) issues related to your company. While we remain committed to ensuring that companies in our portfolios address these issues as a matter of good business practice and long-term financial performance, COVID-19 will undoubtedly have near-term implications for companies and their boards.


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