Monthly Archives: April 2020

Executive Compensation Programs & COVID-19

Ryan Resch is Managing Director; Becky Huddleston is Senior Director; and Andy Goldstein is Managing Director at Willis Towers Watson. This post is based on a WTW memorandum authored by Mr. Resch, Ms. Huddleston, Mr. Goldstein, and Don Delves. 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).

COVID-19 (coronavirus) has thrust the global community into a health and financial crisis that changes daily. We have seen marked stock market declines, an unraveling of crude oil inventory controls and a significant drop in oil prices amid increasing supply and decreasing demand. The economic outlook has changed considerably since the beginning of the year as markets weigh the increasing probability of global recession and a credit crunch. Among the questions that arise is how will COVID-19 affect executive compensation programs.

To answer that question, we first take a look back.

Comparing the 2008 financial crisis to the COVID-19 upheaval

We can better understand the current market environment by comparing it to the 2007/2009 financial downturn:

2007/2009 2020
  • Peak to trough in S&P 500 was -57% over 17 months
  • Started in October 2007 and went through 2008, ending in March 2009, and impacting multiple fiscal years to differing degrees
  • Oil prices started at $61 at the beginning of 2007, increased to $140 in July 2008 and ended at $90 at the end of 2009
  • Broader credit issues drove recession
  • Fortune 500 CEO bonus pay-outs were approximately 120% of target in 2007, 80% in 2008 (almost 25% of companies paid a zero bonus) and 100% in 2009
  • The U.S. stock market already officially corrected and continues to experience deep one-day declines with no sign of a market bottom as of this writing
  • Oil fell from a high of $61 and has already fallen to less than $32 a barrel.
  • Demand-side shock is likely to drive a move into a recessionary economy
  • Rebound could be relatively quick once the effects of COVID-19 stabilize, but this is still unknown


SEC–Exempt Offerings

Jonathan Adler, Stacey Song, and Jessica Forbes are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum authored by Mr. Adler, Ms. Song, Ms. Forbes, and Joanna Rosenberg.

On March 4, 2020, the Securities and Exchange Commission (the “SEC”) proposed amendments to certain rules under the Securities Act of 1933, as amended (“Securities Act”) that are intended to, among other things, address gaps and complexities in the exempt offering framework that may impede access to investment opportunities for investors and capital for issuers. The proposed amendments would impact numerous types of exempt offerings, including offerings conducted under Regulation D and Regulation S. We highlight below the amendments that may be of particular interest to our clients that regularly conduct offerings under those exemptions. Comments to the proposal are due within 60 days of publication of the Proposing Release in the Federal Register.


Regulation D is a series of rules that provides three exemptions from the registration requirements of the Securities Act. Rule 506(b) of Regulation D is a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act pursuant to which an issuer may offer and sell an unlimited amount of securities, provided that offers are made without the use of general solicitation or general advertising and sales are made only to accredited investors and up to 35 non-accredited investors who meet an investment sophistication standard. A second non-exclusive safe harbor, Rule 506(c) of Regulation D, is substantially the same as Rule 506(b) except that (1) offers may be made through general solicitation or general advertising and (2) all purchasers in the offering must be accredited investors and the issuer must take reasonable steps to verify their accredited investor status. Rule 506(c) provides a principles-based method for verification of accredited investor status, as well as a non-exclusive list of verification methods that issuers may use, but are not required to use, when seeking to satisfy the verification requirement with respect to natural persons. Offerings under both Rule 506(b) and Rule 506(c) must satisfy a number of other terms and conditions set forth in Regulation D, including the requirements in Rule 502(a) regarding integration (discussed below).


Weekly Roundup: March 27–April 2, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 27–April 2, 2020

The Impact of COVID-19 on Executive Compensation

Can Investors Time Their Exposure to Private Equity?

The Crisis and the Activists and Raiders

Closing the Gender Pay Gap

M&A in Times of COVID-19

Ten Considerations for Boards of Directors

Q4 2019 Equilar Gender Diversity Index

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

COVID-19 and Shareholder Activism—The Impact

Lessons from 2008 for Management and the Board

Activists Will Show Their True Colors in COVID-19 Pandemic

COVID19 Legal Issues: Company Obligations and Risk

Annual Shareholders Meeting in the Time of COVID-19

Buyback Critics Are Not Letting the COVID-19 Crisis Go to Waste

Buyback Critics Are Not Letting the COVID-19 Crisis Go to Waste

Jesse Fried is the Dane Professor of Law at Harvard Law School and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration. This post was authored by Professor Fried and Professor Wang. Related research from the Program on Corporate Governance includes Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right by Jesse Fried and Charles Wang (discussed on the Forum here)

Critics of stock buybacks, heeding Rahm Emanuel, are not letting a serious crisis go to waste. They found a way to blame repurchases for COVID-19’s economic fallout, and are exploiting COVID-19 to try to curb their use. But critics’ claims are faulty, and proposed buyback restrictions may well exacerbate COVID-19’s ill effects.

Buyback critics have long asserted that repurchases starve firms of cash, with little supporting evidence. But COVID-19 seems to provide a perfect poster child for the anti-buyback cause: bailout-seeking airlines. Citing a Bloomberg analysis that 96% of airlines’ total free cash flow over the last decade was spent on repurchases, critics blamed buybacks for the firms’ desperate plight. But this 96% figure is misleading. It does not take into account equity and debt issuances by airlines, which largely offset the cash paid out in buybacks. “Unfunded” payouts to shareholders were much lower.


Rights Plans (“Poison Pills”) in the COVID-19 Environment—“On the Shelf and Ready to Go”?

David A. Katz and Sabastian V. Niles are partner at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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.

The human and business challenges confronting America from the COVID-19 pandemic are unprecedented. These global challenges have also emerged during a time when most companies have unfortunately given up nearly all of the traditional and effective “takeover” defenses like classified boards, have structural profiles that do not deter (and may invite) opportunistic attack and whose non-index fund investors continue to confront tremendous pressure to show short-term performance or face redemption requests. As a number of public companies have seen the value of their common stock decline precipitously, some advisors have suggested to public company directors that such companies should rush to adopt and announce shareholder rights plans, known more colloquially as “poison pills,” solely in response to significant stock price declines. A handful of companies, especially those whose market capitalization have dropped below $1 billion, have implemented pills in recent weeks due to the now-present possibility of building a large stake rapidly and under the disclosure radar. In addition, a number of other companies facing specific threats of disruption, takeover threats, activist attacks, unusual trading activity or the need to preserve value and an announced strategic direction have considered implementing (and in some cases implemented) rights plans.

Our Firm developed the shareholder rights plan in 1982 and after almost four decades, this creation has withstood the test of time. We litigated the legality of the poison pill in the Delaware Supreme Court in 1985 in the Moran v. Household Int’l case, where the court found that the plan’s implementation was a legitimate exercise of business judgment by Household’s board. And over the last four decades, we have regularly modified and adapted the rights plan to meet evolving and current business and market conditions.  Since the Moran case, our Firm has regularly defended the use of rights plans in Delaware and other jurisdictions and established its legality, culminating in the Delaware Airgas decision in 2011. Airgas reaffirmed the primacy of the board of directors in matters of corporate control under bedrock Delaware law and upheld the use of a rights plan to defeat a year-long, opportunistic hostile takeover attempt. We have litigated other favorable court rulings upholding rights plans and other defensive measures in a variety of contexts, including aggressive activism.  Our Firm has adapted our form of rights plan for the COVID-19 crisis. We will use our expertise in designing and using the rights plan to sustain its legality and effectiveness in the current crisis environment and continue to provide judgment as to when and whether to adopt a pill.


Annual Shareholders Meeting in the Time of COVID-19

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

In light of COVID-19, many public companies are considering changes to their upcoming annual shareholder meetings. Several high-profile companies, including Berkshire Hathaway and Starbucks, have announced a switch to virtual-only annual meetings this year, while other companies may consider adding a virtual participation option to an in-person meeting (a “hybrid”). Other companies may consider delaying the annual meeting. Companies with typically well-attended annual meetings should be aware of Centers for Disease Control and Prevention guidance as of March 15, 2020 recommending that for the next 8 weeks, organizers cancel or postpone in-person events that consist of 50 people or more throughout the United States.

Public companies that are considering changing the date, time and/or location of an annual meeting, including a switch from an in-person meeting to a virtual or hybrid meeting, will need to review applicable requirements under state law, stock exchange rules and the company’s charter and bylaws, and should also bear in mind proxy advisory firm viewpoints. These considerations are discussed below.


COVID19 Legal Issues: Company Obligations and Risk

Jonathan Ozner, Bryce Friedman, and Karen Hsu Kelley are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Ozner, Mr. Friedman, Ms. Hsu Kelley, Nick Goldin, Bill Russell and Joseph Kaufman.

As the coronavirus disease 2019 (“COVID-19”) spreads across the globe, we are beginning to see the first major impacts on businesses, financial markets, and international trade and commerce, with analysts increasingly pessimistic about a near-term solution. In this climate, our clients should expect to confront a range of legal issues related to the outbreak and resulting business disruptions—including, for example, questions about disclosure obligations to investors, the scope of commercial insurance coverage for COVID-19-related losses, obligations to maintain a safe workplace, and obligations to perform under contracts entered into under vastly different market conditions. While the impact of the spread on any individual business requires a fact-specific inquiry, the discussion below summarizes relevant legal issues and outlines some suggested considerations.

Disclosure Obligations and Related Issues

The outbreak of COVID-19 raises a number of issues relating to proper disclosure to investors and trading in company securities. A company’s failure to provide adequate disclosure addressing the impact of the outbreak of COVID-19 on the company’s current or prospective financial performance could lead to potential lawsuits by investors or regulatory action by the SEC. Companies should develop a comprehensive communications plan for dealings with their investors, lenders and other constituents to ensure consistent messaging, avoid confusion and manage potential liabilities.


Activists Will Show Their True Colors in COVID-19 Pandemic

David A. Katz and Sabastian V. Niles are partner at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

As a result of the COVID-19 pandemic, a number of public companies have seen their market capitalization and value of their common stock decline precipitously. Fortunately for many companies who are not currently facing an activist attack, director nomination and business matter proposal deadlines for annual meetings have passed for the current proxy season. For those companies, in order for activists to take advantage of depressed stock prices through a proxy fight, the activist will need to focus on the 2021 annual meeting or consider carefully whether running a “withhold the vote” campaign, calling a special meeting of shareholders or taking action by written consent would be well received in the current environment.

However, a number of activist investors continue to over-reach in their private (and public) demands of companies and are seizing the opportunity from reduced valuations to increase their positions in existing targets and build new positions. Recent 13D filings by activists reveal increased accumulations during the past few days and weeks of March as the markets plunged. Many of these activists are out in the market fundraising to have additional firepower in a depressed market. Aggressive buyback demands even continue to be made by activists, and ill-advised attempts to remove key board members and board leaders with the experience and judgment to help the company navigate the current crisis are also underway. In several instances, M&A-related activism has moved to a longer time horizon, with activists seeking to get major private equity funds as well as potential hostile bidders to return their phone calls as they scout future opportunities for a quick sale.


Glass Lewis’ Approach to Governance in Times of the Coronavirus Pandemic

Aaron Bertinetti is Senior Vice President of Research and Engagement at Glass, Lewis & Co. This post is based on his Glass Lewis memorandum.

The Coronavirus (COVID-19) pandemic is expected to continue for up to 18 months. With the extraordinary impact the pandemic is already having on companies and markets around the world today, Glass Lewis has been scenario planning in order to consider how this will impact governance and broader ESG issues in the present and future.

As an immediate response, Glass Lewis updated its virtual meetings policy last week to give the market certainty about our support for such meetings to preserve company and shareholder interests. In addition, we have continued to regularly update our note on changes in markets globally, including the timing and format of shareholder meetings.

While almost no crisis in the last century appears to be in the same realm as what is unfolding today, Glass Lewis has dealt with natural and financial crises at the macro and micro level before. In times of crisis, we have observed that the contagion often spreads to other types of governance issues beyond those of most immediate concern. Glass Lewis has used the last few weeks to tap our internal governance expertise, consider our approach in prior crises and engage with the market more broadly.


Lessons from 2008 for Management and the Board

Mark D. Gerstein and Christopher R. Drewry are partners at Latham & Watkins LLP. This post is based on their Latham memorandum.

This second week of March, company management and boards of directors have been confronted with a tumultuous decline in stock prices reminiscent of the 2008 Great Recession, albeit triggered by very different circumstances.

Although the causes are different, there are lessons and experiences in the context of M&A and activism from the days and months that followed the 2008 market collapse that bear noting in today’s difficult environment:

  • Most businesses already know that stock prices are likely not reflective of most measures of a company’s intrinsic value. The rapid sell-off in shares across all sectors, even those that ought see higher revenues, suggests that share prices are likely more reflective of the societal and market panic than the long-term value of any shares.
  • In an environment in which everyone is uncertain about asset values, it is important to re-anchor the board to a company’s intrinsic value. Reminding the board that the company’s value is not reflective simply of market price trading—a important paradigm shift after this long bull market run—is the foundation for addressing the concerns that we address below.
  • This re-anchoring may require updating or sensitizing current one-year plans and longer term forecasts to demonstrate that the commercial implications of the COVID-19 virus and attendant consequences—while very challenging in the near-term—are not likely to take the intrinsic value of the company down to current market lows.
  • Reminding the board of a company’s value may also require working with bankers to prepare traditional valuation analyses based on those forecasts or sensitivities, and having the company or a company’s bankers present the results to the board to establish new valuation perspectives for directors and help anchor them to intrinsic long-term value rather than fleeting share price.
  • Companies and their counsel are not the only players who understand that a company’s prospects are much stronger than current share prices reflect, even as adjusted for COVID-19 impacts. If the 2009-2010 period is an accurate barometer, private equity will identify the opportunities to acquire companies at attractive values, and activists will seek to take positions at attractive prices as the basis for future activism—this is already happening to some degree this week.  Further, the best capitalized companies in each sector may seek to consolidate at attractive prices.


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