Monthly Archives: May 2020

On the Purpose of the Corporation

Posted by Martin Lipton, William Savitt, and Karessa L. Cain, Wachtell, Lipton, Rosen & Katz, on

Wednesday, May 27, 2020

Boards of Directors, Corporate Social Responsibility, COVID-19, ESG, International governance, Long-Term value, Profitability, Shareholder value, Stakeholders, Sustainability
More from: Karessa Cain, Martin Lipton, Steven Rosenblum, William Savitt, Wachtell Lipton

Martin Lipton is a founding partner, and William Savitt and Karessa L. Cain are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Savitt, Ms. Cain, and Steven A. Rosenblum. 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 Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The growing view that corporations should take into account environmental, social and governance (ESG) issues in running their businesses, and resistance from those who believe that companies should be managed solely to maximize share price, has intensified the focus on the more fundamental question of corporate governance: what is the purpose of the corporation?

The question has elicited an immense range of proposed answers. The British Academy’s Future of the Corporation Project, led by Colin Mayer, suggests that the purpose of the corporation is to provide profitable solutions to problems of people and planet, while not causing harm. The Business Roundtable has articulated a fundamental commitment of corporations to deliver value to all stakeholders, each of whom is essential to the corporation’s success. Each of the major US-based index funds has also expressed their views about the purpose of the corporations in which they invest, which, considered collectively, can be summarized as the pursuit of sustainable business strategies that take into account ESG factors in order to drive long-term value creation. On the other hand, the Council of Institutional Investors, some leading economists and law professors, and some activist hedge funds and other active investors continue to advocate a narrow scope of corporate purpose that is focused exclusively on maximizing shareholder value. The Covid-19 pandemic has brought into sharp focus the inequality in our society that, in considerable measure, is attributable to maximizing shareholder value at the expense of employees and communities.

Three Is Not A Trend: Another Caremark Claim Survives A Motion To Dismiss, But Does Not Reflect A Change In The Law

Posted by Nicholas D. Mozal and David A. Seal, Potter Anderson & Corroon LLP, on

Wednesday, May 27, 2020

Accounting, Audit committee, Boards of Directors, Books and records, Caremark, Delaware cases, Delaware law, Disclosure, Discovery, Merger litigation, Mergers & acquisitions
More from: David Seal, Nicholas Mozal, Potter Anderson & Corroon

Nicholas D. Mozal is counsel and David Seal is an associate at Potter Anderson & Corroon LLP. This post is based on their Potter Anderson 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 Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

The Delaware Court of Chancery recently denied another motion to dismiss a Caremark claim in Hughes v. Hu. [1] Under In re Caremark International Inc. Derivative Litigation, [2] directors have a duty to exercise oversight and monitor a corporation’s operational viability, legal compliance, and financial performance and reporting. Hughes is now the second decision, after In re Clovis Oncology, Inc. Derivative Litigation, [3] to allow a Caremark claim to proceed beyond the pleadings stage since the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a Caremark claim in Marchand v. Barnhill. [4] It would be a mistake, however, to read Hughes as an extension of those decisions and only in that context. Indeed, Hughes understandably does not even cite Clovis. The better reading is that Hughes, like the Court of Chancery’s 2013 decisions in Rich v. Yu Kwai Chong [5] and In re China Agritech, Inc. Shareholder Derivative Litigation, [6] reflects the particular accounting and oversight difficulties witnessed in certain Chinese businesses that have gained access to the United States capital markets through a reverse merger. In short, the actions of the audit committee in Hughes are in no way analogous to how the vast majority of audit committees and their advisors operate to ensure a board fulfills its Caremark duties by exercising appropriate oversight. Nevertheless, Hughes reiterates the reasons why it is important for boards and committees to continue adhering to those best practices. In addition, Hughes addresses the importance of maintaining proper records and indicates how those records may be useful in responding to stockholder demands for books and records pursuant to 8 Del. C. § 220.

Board Oversight in Light of COVID-19 and Recent Delaware Decisions

Posted by Holly J. Gregory, Thomas A. Cole and Claire Holland, Sidley Austin LLP, on

Tuesday, May 26, 2020

Board oversight, Caremark, Compliance and disclosure interpretation, COVID-19, Delaware cases, Delaware law, Director liability, Fiduciary duties, Liability standards, Securities litigation
More from: Claire Holland, Holly Gregory, Sara Brody, Sharon Flanagan, Thomas Cole, Sidley Austin

Holly J. Gregory is partner, Thomas A. Cole is senior counsel, and Claire H. Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Mr. Cole, Ms. Holland, Sharon R. Flanagan, Sara B. Brody. 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).

In times of crisis, the risk of shareholder derivative litigation rises as boards of directors face heightened scrutiny of their actions. While business judgment protection applies to good faith board efforts to navigate a crisis, boards and their advisors should be mindful of guidance that the Delaware courts have issued in the past year, including in a Delaware Chancery Court case decided on April 27, regarding the circumstances in which a claim can move forward seeking to hold directors personally liable for a failure of oversight.

The 1996 Delaware Chancery Court decision in In re Caremark Int’l Inc. Deriv. Litig. clarified that directors are responsible for overseeing that the company has in place information and reporting systems reasonably designed to provide the board and senior management with timely, accurate information sufficient to support informed judgments about compliance risk. [1] Since then, shareholder plaintiffs have tried to hold directors liable for a variety of corporate missteps on the basis that directors failed in their oversight role. These claims—known as Caremark claims—have until recently typically been dismissed in early pleading stages (before discovery) for failure to state a claim. Indeed, these types of claims are regarded as among the most difficult on which to establish director liability (although Caremark claims survived motions to dismiss in a few rare cases prior to 2019). [2] Nonetheless they are attractive to plaintiffs because an oversight failure sufficient for a Caremark claim constitutes a breach of the duty of loyalty and good faith which cannot be exculpated under Delaware law. Because most Delaware corporations provide in their charters that directors will not be held personally liable for breaches of the duty of care, this is one of the few remaining avenues to seek monetary damages from directors personally absent a conflict of interest situation.

The Blue Bell Dairy CEO Indictment and its Implications for Executive Liability

Posted by Michael W. Peregrine and David S. Rosenbloom, McDermott Will & Emery, on

Tuesday, May 26, 2020

Boards of Directors, Compliance and disclosure interpretation, Corporate crime, Corporate fraud, Corporate liability, Corporate Social Responsibility, Management, Securities litigation, Transparency
More from: David Rosenbloom, Michael Peregrine, McDermott Will & Emery

Michael W. Peregrine and David S. Rosenbloom are partners at McDermott Will & Emery LLP. This post is based on their McDermott Will & Emery memorandum.

The May 1, 2020 federal felony indictment [1] of former Blue Bell Creameries LLP CEO Paul W. Kruse provides an important lesson to governing boards and their senior executives on the regulatory risks associated with communications during times of corporate crisis, especially communications with public health and safety implications.

Company executives and public relations consultants often debate about what is too little or too much to say in a time of crisis. The Kruse prosecution is a reminder that there can be criminal implications to those debates, and sometimes there can be more risk in what a company does not say than in what it does say. The case also provides a cautionary note about the broad scope of anti-fraud enforcement authority available to the federal government. Together, these are risks that corporate leadership should discuss with their general counsel and the compliance officer, especially given the ongoing pandemic.

The most immediate of these lessons are the critical need (a) for corporate leaders to be extraordinarily careful with the transparency and accuracy of crisis communications, especially those relating to acute impact on consumers created by the company’s products or services; and (b) to confirm that the company’s compliance program adequately alerts the board to the presence of such risks.

Recent Delaware Court of Chancery Decision Sustains Another Caremark Claim at the Pleading Stage

Posted by Meredith Kotler, Pamela Marcogliese, and Marques Tracy, Freshfields Bruckhaus Deringer LLP, on

Monday, May 25, 2020

Audit committee, Board oversight, Boards of Directors, Caremark, Delaware cases, Delaware law, Director liability, Liability standards, Oversight, Securities litigation, Shareholder suits
More from: Marques Tracy, Meredith Kotler, Pamela Marcogliese, Freshfields

Meredith Kotler and Pamela Marcogliese are partners and Marques Tracy 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 Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

After decades of routinely dismissing such claims, Vice Chancellor Laster’s recent 41-page decision in Hughes v. Hu represents the third time since the Delaware Supreme Court’s decision last year in Marchand v. Barnhill that the Court of Chancery has sustained a Caremark duty of oversight claim at the pleading stage. It remains unlikely that these recent decisions signal some change in the law, but rather reflect allegations of unique or extreme examples of certain corporate behavior. That said, these cases serve as a reminder of the importance of active, engaged board oversight of “mission critical” risk and compliance issues, and boards should take proactive steps to ensure that directors do not face personal liability for a failure of oversight.

Marchand, Clovis, and Inter-Marketing Group

Caremark claims, which allege failures of board oversight, have long been regarded by Delaware courts as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” To plead and prove a Caremark claim, a stockholder plaintiff must show that the board either (i) “utterly failed to implement any reporting information restrictions or controls”; or (ii) having implemented them, “consciously failed to monitor or oversee their operations, thus disabling themselves from being informed of risks or problems requiring their attention.” Not surprisingly, these claims routinely fail at the pleading stage.

Human Capital: Key Findings from a Survey of Public Company Directors

Posted by Stephen Klemash, Jennifer Lee, and Jamie Smith, EY Center for Board Matters, on

Sunday, May 24, 2020

Boards of Directors, Corporate culture, ESG, Human capital, Labor markets, Long-Term value, Management, Surveys
More from: Jamie Smith, Jennifer Lee, Steve Klemash, EY

Steve W. Klemash is Americas Leader, Jennifer Lee is Audit and Risk Specialist, and Jamie Smith is Investor Outreach and Corporate Governance Specialist, all at the EY Americas Center for Board Matters. This post is based on their EY memorandum.

The focus on human capital and talent in corporate governance is intensifying, as more stakeholders—led by large institutional investors—seek to understand how companies are integrating human capital considerations into the overarching strategy to create long-term value. After all, a company’s intangible assets, which include human capital and culture, are now estimated to comprise a significant portion of a company’s market value.

Many influential groups, including the Global Reporting Initiative, the Embankment Project for Inclusive Capitalism, the Business Roundtable and the Sustainability Accounting Standards Board (SASB), have identified human capital as a key driver of long-term value. Recent developments reflect a clear and growing market appetite to understand how companies are managing and measuring human capital. This includes influential investors making human capital an engagement priority with directors, as well as comment letters from various stakeholders to the U.S. Securities and
Exchange Commission supporting greater human capital disclosure and asserting the importance of human capital management in assessing the potential value and performance of a company over the long term.

At the same time, there is an ongoing cultural shift brought about by new generations of workers, digitization, automation and other megatrends related to the future of work. In this new era, it is critical for management teams and boards to keep pace with this transformation and consider redefining long-term value and corporate purpose. Creating value for multiple stakeholders, including employees, will ultimately help build and sustain shareholder value over the long term. To better understand where companies are on this journey, Corporate Board Member, in partnership with the EY Center for Board Matters, surveyed 378 U.S. public company board members in the fall of 2019.

This post presents our findings.

Whataday for Special Committees: Committee Formation Requirements in Non-MFW Scenarios

Posted by Barbara Borden and Caitlin Gibson, Cooley LLP, on

Saturday, May 23, 2020

Boards of Directors, Books and records, Conflicts of interest, Controlling shareholders, Corwin, Delaware cases, Financial advisers, Going private, Merger litigation, Mergers & acquisitions, Securities litigation
More from: Barbara Borden, Caitlin Gibson, Koji Fukumura, Peter Adams, Cooley

Barbara Borden is a partner and Caitlin Gibson is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Borden. Ms. Gibson, Koji Fukumura, and Peter Adams. 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).

In late February as the COVID-19 pandemic was accelerating, the Delaware Chancery Court issued an important decision that is likely to impact transactions during the expected recession. In Salladay v. Lev, C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020) (“Salladay”), the court held that a conflicted transaction—not involving a controlling shareholder—could only be cleansed through the use of a special committee under Trados II [1] if the special committee was constituted ab initio (i.e., from the outset). Salladay is the first time that a Delaware court has held that the ab initio requirement established by Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) and its progeny applies in a non-MFW scenario (i.e., in a transaction without a conflicted controlling shareholder). Accordingly, a conflicted transaction without a controlling stockholder, can be “cleansed” under Trados II and become eligible for review under the business judgment rule if an empowered special committee of independent directors is constituted at the outset before any substantive economic discussions occur and the other MFW standards relating to special committees are met. [2] However, if the special committee is not established ab initio, and there are disputed questions of fact about whether the conflicted transaction was properly cleansed under Corwin [3], then the director defendants will have the burden to prove that the transaction was entirely fair.

Remarks by Commissioner Peirce at Meeting of the SEC Investor Advisory Committee

Posted by Hester Peirce, U.S. Securities and Exchange Commission, on

Friday, May 22, 2020

Disclosure, Environmental disclosure, ESG, SEC, Securities regulation, Stakeholders, Transparency
More from: Hester Peirce, U.S. Securities and Exchange Commission

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you Anne [Sheehan] and other members of the committee for arranging an impressive list of panelists to share their views and perspectives on the important topics on today’s [Friday, May 21. 2020] agenda. The committee has not let COVID-19 stop it from holding meetings; this is the third such meeting in the last two months. I am appreciative of the committee’s diligence and dedication during this time and believe it is emblematic of the tireless efforts put forth over the years by the members whose terms are expiring in the coming days.

I want to take a moment to thank each of you for volunteering your time, thoughts, and passion to this committee year after year. It was not just the time spent at committee meetings, but also the hours of preparation, research, subcommittee meetings, and recommendation drafting. Thank you to Anne Sheehan, Elisse Walter, Craig Goettsch, John Coates, Stephen Holmes, Barbara Roper, and Damon Silvers. We will miss each of you at these meetings and hope to continue to hear from you.

Statement by Commissioner Lee on Financial Disclosures About Acquired and Disposed Businesses

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on

Friday, May 22, 2020

COVID-19, Disclosure, Financial reporting, Mergers & acquisitions, Reporting regulation, SEC, SEC rulemaking, Securities regulation, Transparency
More from: Allison Herren Lee, U.S. Securities and Exchange Commission

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [Thursday, May 21, 2020] the Commission amends its rules governing disclosures public companies must provide when they buy and sell businesses. Unfortunately, today’s rulemaking does not adequately address the risks of reduced transparency for investors with respect to this activity, nor does it properly examine the potential effects on competition, particularly in the present economic climate where the risks that arise from overly concentrated markets are heightened.

I want to thank the staff for their hard work on this release. [1] I know it is the product of careful analysis, as well as the incorporation of the policy views of a majority of the Commission. While I may not agree with the final rules on balance, [2] I am, as always, appreciative of the diligence and expertise of the staff. I also note that I do not object to the Commission going forward with this rulemaking in the midst of the ongoing economic and social disruption caused by COVID-19. There has been a lengthy opportunity for public comment, at least nine months of which occurred before the COVID-19 crisis began, and any new obligations imposed by the rules will be delayed by several months.

Weekly Roundup: May 15–21, 2020

Posted by the Harvard Law School Forum on Corporate Governance, on

Friday, May 22, 2020

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of May 15–21, 2020.

Open Up the PIPEs: Current Market Considerations

Posted by Steve Amdur, Davina Kaile, and Brian McKenna, Pillsbury Winthrop Shaw Pittman LLP, on Friday, May 15, 2020

Tags: Capital formation, Listing standards, PIPE, Private equity, Public firms, Regulation FD, Regulation M, SEC, Securities regulation, Venture capital firms

COVID-19’s Potential Impact on Venture Capital Investment Terms

Posted by Rob Carlson and Jake Funk, Sidley Austin LLP, on Friday, May 15, 2020

Tags: Capital formation, Capital structure, COVID-19, Dual-class stock, Financing conditions, IPOs, Liquidation, Market conditions, Private equity, Venture capital firms

Remaining Attuned to Internal Whistleblower Reports

Posted by John F. Savarese, Ralph M. Levene, and Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on Saturday, May 16, 2020

Tags: Compliance and disclosure interpretation, Reporting regulation, SEC, SEC enforcement, Securities enforcement, Whistleblowers

Remarks by SEC Chairman Clayton to the Financial Stability Oversight Council

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Saturday, May 16, 2020

Tags: Capital markets, Compliance and disclosure interpretation, COVID-19, Disclosure, Information environment, Investor protection, Market conditions, SEC, Securities regulation, Transparency

Purpose With Meaning: A Practical Way Forward

Posted by Robert G. Eccles (Oxford University), Leo E. Strine (Harvard Law School) and Timothy Youmans (Federated Hermes), on Saturday, May 16, 2020

Tags: Accountability, Benefit corporation, Boards of Directors, Business Roundtable, Corporate Social Responsibility, Delaware cases, Delaware law, Disclosure, Duty of care, ESG, Institutional Investors, Long-Term value, Shareholder value, Stakeholders, Sustainability

Courts Cut Shareholders Slack on Section 11 Claims

Posted by Laurie Smilan and Nicki Locker, Wilson Sonsini Goodrich & Rosati, on Sunday, May 17, 2020

Tags: Capital formation, Class actions, IPOs, Liability standards, Section 11, Securities litigation, Securities regulation, Shareholder suits, Slack, Standing, Tech companies

Executive and Director Compensation Reductions in the COVID-19 Era: An Ongoing Review of Russell 3000 Disclosures

Posted by Matteo Tonello, The Conference Board, Inc., on Sunday, May 17, 2020

Tags: Boards of Directors, Director compensation, Executive Compensation, Form 8-K, Management, SEC

Citing Thin Board Record: Delaware Court of Chancery Again Sustains Oversight Claim

Posted by William Savitt, Ryan A. McLeod, and Anitha Reddy, Wachtell, Lipton, Rosen & Katz, on Monday, May 18, 2020

Tags: Accounting, Board oversight, Boards of Directors, Books and records, Caremark, Delaware cases, Delaware law, Director liability, Discovery, Financial reporting, Liability standards, Securities litigation

The First Outside Director

Posted by David F. Larcker and Brian Tayan (Stanford University), on Monday, May 18, 2020

Tags: Board composition, Board independence, Board performance, Boards of Directors, Director qualifications, Outside directors

Responsible Executive Compensation During Times of Crisis

Posted by Shai Ganu, Don Delves and Ryan Resch, Willis Towers Watson, on Monday, May 18, 2020

Tags: Accountability, COVID-19, Engagement, ESG, Executive Compensation, Incentives, Management, Pay for performance, Reputation, Shareholder primacy, Shareholder value, Stakeholders

Board Oversight of Human Capital Risk—Is it Time to Appoint a Chief Covid Officer?

Posted by Jen Rubin and Melissa Frayer, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., on Tuesday, May 19, 2020

Tags: Board oversight, Boards of Directors, Compliance and disclosure interpretation, COVID-19, Human capital, Management, Risk, Risk management

Agency Conflicts and Short- vs Long-Termism in Corporate Policies

Posted by Sebastian Gryglewicz (EUR), Simon Mayer (EUR), and Erwan Morellec (EPFL), on Tuesday, May 19, 2020

Tags: Agency costs, Agency model, Incentives, Investor horizons, Long-Term value, Management, Moral hazard, Private benefits of control, Shareholder value, Short-termism

Reopening to a New Normal: Considerations for Boards

Posted by Andrew R. Brownstein, Steven A. Rosenblum, and David M. Silk, Wachtell, Lipton, Rosen & Katz, on Tuesday, May 19, 2020

Tags: Board communication, Board leadership, Board oversight, Boards of Directors, Compliance and disclosure interpretation, Corporate culture, COVID-19, Engagement, ESG, Risk management, Risk oversight, Shareholder activism, Stakeholders, Transparency

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Monthly Archives: May 2020

Three Is Not A Trend: Another Caremark Claim Survives A Motion To Dismiss, But Does Not Reflect A Change In The Law

Board Oversight in Light of COVID-19 and Recent Delaware Decisions

Recent Delaware Court of Chancery Decision Sustains Another Caremark Claim at the Pleading Stage

Marchand, Clovis, and Inter-Marketing Group

Human Capital: Key Findings from a Survey of Public Company Directors

Whataday for Special Committees: Committee Formation Requirements in Non-MFW Scenarios

Remarks by Commissioner Peirce at Meeting of the SEC Investor Advisory Committee

Statement by Commissioner Lee on Financial Disclosures About Acquired and Disposed Businesses

Weekly Roundup: May 15–21, 2020

Open Up the PIPEs: Current Market Considerations

COVID-19’s Potential Impact on Venture Capital Investment Terms

Remaining Attuned to Internal Whistleblower Reports

Remarks by SEC Chairman Clayton to the Financial Stability Oversight Council

Purpose With Meaning: A Practical Way Forward

Courts Cut Shareholders Slack on Section 11 Claims

Executive and Director Compensation Reductions in the COVID-19 Era: An Ongoing Review of Russell 3000 Disclosures

Citing Thin Board Record: Delaware Court of Chancery Again Sustains Oversight Claim

The First Outside Director

Responsible Executive Compensation During Times of Crisis

Board Oversight of Human Capital Risk—Is it Time to Appoint a Chief Covid Officer?

Agency Conflicts and Short- vs Long-Termism in Corporate Policies

Reopening to a New Normal: Considerations for Boards

Standards of Review Applicable to Board Decisions in Delaware M&A Transactions

SeLFIES: A New Pension Bond and Currency for Retirement

The Right Timing for NOL Rights Plan Adoption

An Early Look at Securities Act Litigation Amid COVID-19

Investor Protection and Capital Fragility: Evidence from Hedge Funds Around the World

Strategic Acquisitions of Distressed Companies in the COVID-19 Environment

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