Monthly Archives: April 2020

Federal Forum Provision Possible Impact on D&O Insurance

Boris Feldman is a partner at Wilson Sonsini Goodrich & Rosati. 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 Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

Since the Cyan decision in 2018, plaintiffs have gone hog-wild over state court Section 11 suits. The victory last week in the Delaware Supreme Court in the Sciabacucchi case (pronounced “Sha Ba Cookie”) provides a hopeful path forward for the issuer community. Here are some thoughts on how the decision may impact the D&O insurance world.

What is This All About?

Shareholder claims involving a public offering (of equity or debt) can be brought pursuant to Section 11 of the Securities Act of 1933. A U.S. Supreme Court decision in 2018 confirmed that Section 11 claims may be brought in Federal or state court. Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018). State court is generally a favorable forum for plaintiffs. Historically, state judges have been reluctant to toss out meritless Section 11 claims that would not have survived scrutiny in Federal court.

In response to Cyan, many companies began to include a Federal Forum Provision (“FFP”) in their Articles of Incorporation. The Provision specified that a shareholder could only bring a Section 11 claim in Federal court. (Professor Joseph Grundfest of Stanford Law School was the principal proponent of such provisions. If you are interested in more detail about them, look at his article.)

No such provision is required for after-market shareholder class actions, brought under Section 10(b) of the Securities Exchange Act of 1934. By statute, those claims can only be brought in Federal court.

Plaintiffs sued in the Delaware Court of Chancery to invalidate the Provisions. Plaintiffs prevailed in the trial court, but lost on appeal. The decision—in which my firm, Wilson Sonsini, represented the prevailing parties—is here.


Long-Term Incentive Compensation and Achieving Corporate Purpose

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. 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); and The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

Today’s post discusses the meaning of “corporate purpose” for a business corporation and the role long-term incentive compensation plays in achieving that purpose. (Each business enterprise, of course, will have its own goals and strategies to attain its corporate purpose in its own specific business or businesses.)

The dominant purpose of a business corporation is to create long-term value for its shareholders. Recent commentators have sought to reconcile this corporate purpose with the needs of other “stakeholders”—the corporation’s employees, its suppliers, its customers, its environment and the communities in which it exists. The problem with many of these commentaries is that they confuse the need for good corporate behavior with the fundamental purpose of the business corporation to provide long-term value to its shareholders. Members of a community—whether individuals or entities—are expected to be good citizens of that community. A business corporation is obligated to constituencies of that community based on employment, business and other relationships. But these obligations to such constituencies should not be confused with the fundamental purpose of a business corporation: to provide sustained growth in value for its shareholders.


Postponing/Adjourning Annual Meetings Following COVID-19

Sandra Flow and Francesca Odell are partners and Mary Alcock is Counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Flow, Ms. Odell, Ms. Alcock, and Michael Albano.

In light of the growing concern about COVID-19 (“coronavirus”) in the United States and globally, the U.S. Centers for Disease Control and Prevention (“CDC”) and other public health officials have recommended cancelling large, in-person gatherings for the next several weeks. [1] As a result, some companies may be considering, or may in the coming weeks need to consider, postponing the date of their shareholder meeting. While moving to a virtual or hybrid meeting, as discussed in our Forum post, Virtual Annual Meetings and Coronavirus, may be a good solution for certain companies, other companies may determine (or due to a lack of vendor capacity may be forced to determine) that the better course of action for them is to postpone or adjourn their annual meetings.

Key Considerations

In determining whether to postpone/adjourn an annual meeting in response to the coronavirus threat, a company should carefully consider each of the following questions:

  1. If the annual meeting is to be postponed/adjourned, what are the legal restrictions, if any, for the length of time by which it may be postponed/adjourned?
  2. When and how should a company notify its shareholders of the postponement/adjournment?
  3. What is the impact of the postponement/adjournment on the company’s record date?

In the U.S., state law generally governs the postponement/adjournment of annual meetings, including in respect of the timing for the new meeting date, what notice is required to be provided to shareholders (if any) and the impact (if any) on the company’s record date. Company bylaws may also limit flexibility in postponing or adjourning annual meetings and, in light of the rapid pace of change and uncertainty related to coronavirus, some companies may also consider an emergency amendment to their bylaws to provide for more flexibility. Finally, companies determining whether to postpone/adjourn an annual meeting will need to consider compliance with applicable SEC and stock exchange requirements.


Rewriting the Poison Pill Prescription: Consider Active Defenses During COVID-19

Paul Shim and James Langston are partners and Charles Allen is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. 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.

Amidst a market-wide sell-off of public equities in the face of coronavirus uncertainty, companies across nearly every industry have seen significant declines in stock prices over the past several weeks. With the timeline for recovery of financial markets and the broader global economy increasingly unclear, in many cases stock prices no longer reflect the intrinsic value of the business and have instead become increasingly correlated with each day’s (often negative) news reports and indiscriminate selling across investment portfolios.

The current crisis has created a risk that well-capitalized activist investors or acquirers will seek to take advantage of the situation by acquiring significant stakes in companies at depressed prices. In the midst of a sell-off, an aggressive buyer can amass beneficial ownership of a significant percentage of voting securities of a target company without making public disclosure, particularly in light of its ability to continue buying during the 10-day window after the 5% ownership threshold is crossed but before an initial Schedule 13D is required to be filed with the SEC. This risk is even more acute for small-capitalization companies, for whom the mandatory filing and waiting period regime of the Hart-Scott-Rodino Antitrust Improvements Act may provide little protection, since it does not apply to acquisitions of shares resulting in aggregate ownership of voting securities valued at less than $94 million. Moreover, in light of the dismantling of takeover defenses at most companies over the last decade (including the forced elimination of classified boards and supermajority voting provisions as well as bestowing upon stockholders the ability to act by written consent and call special meetings), there are fewer tools in the toolkit for responding to hostile attacks. Unwary companies may awaken one morning to find that they have a new active shareholder with a large ownership percentage—a stake acquired at a price not reflective of the company’s long-term value, but one that will persist into an eventual recovery. Opportunistic buyers may also use equity derivatives to increase even further their economic investment in the target company.


The Atmosphere for Climate-Change Disclosure

Jennifer Burns is Audit & Assurance Partner; Christine Robinson is Senior Manager; and Kristen Sullivan is an Audit & Assurance partner at Deloitte & Touche LLP. This post is based on a Deloitte memorandum by Ms. Burns, Ms. Robinson, Ms. Sullivan, Deb DeHaas, Maureen Bujno, and Debbie McCormack.

Discussions and  debates regarding the importance of environmental, social, and  governance (ESG) disclosure have continued their fast-paced trajectory over the past several months. In January 2020, the CEO of the world’s largest asset manager stated, “ . . . we will be increasingly disposed to vote against management and board directors when  companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” Specifically, BlackRock is asking the companies they invest in on behalf of their clients to:

  • Provide disclosure in line with industry-specific Sustainability Accounting Standards Board (SASB) guidelines, or equivalent standard, by year-end
  • Disclose climate-related risks in line with the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.

Adding to BlackRock’s ask of companies, State Street Global Advisors has stated that “Beginning this proxy season, we will take appropriate voting action against board members at companies in the S&P 500 . . . that are laggards based on their R-Factor scores and that cannot articulate how they plan to improve their score.“


Filling the Sponsor PIPE-line

Daniel E. Wolf is a partner at Kirkland & Ellis LLP. This post is based on his Kirkland & Ellis memorandum.

During periods of volatility, companies and investors often seek alternative financing structures that are impacted less by rapidly changing market conditions. With companies needing financing for operations or acquisitions or facing limitations on the availability of refinancing to pay off maturing or expensive debt, a PIPE (a private investment in public equity) by an existing or new financial investor offers a potential alternative source of liquidity while representing an attractive opportunity for sponsors looking to put capital to work in a choppy M&A market.

A PIPE involves a private, non-registered issuance of securities in a public company. Sponsor PIPEs raise a number of key financial, governance and process issues that should be addressed by the parties at the outset in order to facilitate an efficient route to a desired outcome, especially since speed of execution is one of the primary benefits of a PIPE transaction.

In current market conditions, sponsor PIPE investments offer a potential alternative source of liquidity for issuers and an attractive outlet for financial investors to put capital to work.

Below we summarize some of those key considerations:


Federal Forum Selection Bylaws for Securities Act Claims

Andrew Clubok, Blair Connelly, and Matt Rawlinson are partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Clubok, Mr. Connelly, Mr. Rawlinson, Michele Johnson, Gavin Masuda, and Colleen Smith. 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 The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill; Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani; and Delaware Law as Lingua Franca: Evidence from VC-Backed Startups by Jesse Fried, Brian J. Broughman, and Darian M. Ibrahim (discussed on the Forum here).

The decision is a positive development for Delaware corporations seeking to reduce duplicative state court litigation arising from public securities offerings.

On March 18, 2020, the Delaware Supreme Court issued its long-awaited decision in Salzberg v. Sciabacucchi, holding that federal forum selection bylaws and charter provisions for claims arising under the Securities Act of 1933 are facially valid under Delaware law. Such forum selection provisions were broadly implemented in the wake of the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees’ Retirement Fund, in which the Court held that claims arising under the federal Securities Act of 1933 could be filed either in state or federal court. Through bylaw and charter provisions, many companies sought to avoid the implications of Cyan by requiring Securities Act claims be brought exclusively in federal (not state) courts.

While the Delaware Court of Chancery had rejected the validity of federal forum selection bylaws, the Delaware Supreme Court has now concluded otherwise. This decision is a significant and positive development for Delaware corporations seeking to stem the tide of duplicative state court litigation arising from public securities offerings.


COVID-19 as a Material Adverse Effect (MAC) Under M&A and Financing Agreements

Gail Weinstein is senior counsel, and Warren S. de Wied and Steward Kagan are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. de Wied, Mr. Kagan, Christian Nahr, Emil Buchman, and Mark Hayek.

A critical legal issue that has arisen in recent days is whether the COVID-19 pandemic may constitute a “Material Adverse Change” (or “Material Adverse Effect”–both referred to here as a “MAC”) under existing agreements. We expect that every party to a merger agreement or financing agreement will be reviewing the agreement to determine whether any party has a right to terminate the agreement or not perform certain obligations based on developments relating to the COVID-19 pandemic. Typically, the non-existence of a target company MAC is a condition to closing under a merger agreement; and the non-existence of a MAC on a borrower or its ability to perform under a credit facility is a condition to funds being drawn down. Even when a MAC (or other) provision does not clearly provide a right to terminate or not perform, the potential that a MAC has occurred may create leverage for a renegotiation of terms.


SEC’s Carve-Out from SOX 404(b) for Low-Revenue Companies

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

On March 12, the SEC voted (by a vote of three to one, with Commissioner Allison Lee dissenting) to approve amendments to the accelerated filer and large accelerated filer definitions to provide a narrow carve-out for companies that qualify as smaller reporting companies (SRCs) and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. Most significantly, under the final amendments, companies qualifying for the carve-out will no longer be subject to the SOX 404(b) requirement to have an auditor attestation report on internal control over financial reporting (ICFR), a requirement that applies to accelerated and large accelerated filers. In adopting these amendments, the SEC said that the amendments will “more appropriately tailor the types of issuers that are included in the definitions, thereby reducing unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. The amendments are consistent with the Commission’s and Congress’s historical practice of providing scaled disclosure and other accommodations to reduce unnecessary burdens for new and smaller issuers.” The new rules will become effective 30 days after publication in the Federal Register.

The issue of whether—and how—to address the “accelerated filer” definition has been steeped in controversy for several years. But not, as the designation “accelerated filer” might suggest, because a revision of the definition would allow a new tranche of companies to prepare and file their periodic reports on a more relaxed schedule; that result has been largely disregarded as inconsequential. Rather, the controversy arises out of the potential exemption of these companies from the obligation to obtain a SOX 404(b) auditor attestation on ICFR, a requirement that is viewed as critical investor protection by its advocates, but is anathema to many supporters of deregulation.


Public Statement by SEC Chairman Clayton: Investors Remain Front of Mind at the SEC

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. 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.

Over 57 million American households are invested in our securities markets. The interests of these individuals—our long-term Main Street investors—are the lens through which we evaluate whether we are effectively advancing the SEC’s mission. The 4,500 women and men of the SEC are committed to these investors and the integrity of our markets. The uncertainties caused by COVID-19 have not changed our perspective or commitment.

Approach to Allocation of Resources, Oversight and Rulemaking

In recent weeks, the Commission has been assisting market participants in their efforts to continue business operations, including investor service operations, in the face of various challenges caused by COVID-19. [1] Many of our actions have focused on operational issues, including facilitating the shift to business continuity plans that are consistent with health and safety directives and guidance. For example, we have worked with various market participants to help facilitate the move by securities exchanges to an all-electronic trading environment. [2] Other actions have involved targeted, conditional and temporary relief relating to filing deadlines that could be significantly impacted by COVID-19. [3]


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