Monthly Archives: May 2020

The First Outside Director

David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on their recent paper.


We recently published a paper on SSRN, The First Outside Director, that examines the individual chosen by private and public companies as their first outside director.

Little is known about the process by which pre-IPO companies select independent, outside board members—directors unaffiliated with the founder or investor groups. Private companies are not required to disclose their selection criteria or process. They are also not subject to public listing requirements that stipulate independence standards or impose specific monitoring obligations through committees and executive sessions. Instead, board choices are driven largely by company insiders (such as the founder, management, and investors) in consultation with advisors and affiliates to address specific strategic, leadership, or operational issues facing the company. Even the timing of when to invite an external director to the board tends to be discretionary. The result is that a startup company goes from having a closely controlled board comprised entirely of shareholder representatives, to one with unaffiliated outside directors who have equal and independent voting rights, with no standard road map for making this transition.

Here, we look at when, why, and how private companies add their first independent, outside director to the board.


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

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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 has sustained another Caremark claim, pointing to the absence of documents produced in response to a stockholder’s inspection demand as evidence that the directors “face a substantial likelihood of liability” for “failing to act in good faith to maintain a board-level system for monitoring the Company’s financial reporting.” Hughes v. Hu, C.A. No. 2019-0112-JTL (Del. Ch. Apr. 27, 2020).

The case involved Kandi Technologies, a Delaware corporation headquartered in China that sells automobile parts. Kandi had a long history of inadequate internal controls, including improper insider transactions and a 2017 restatement of earnings. The stockholder plaintiff complained that the board failed to implement responsible auditing protocols notwithstanding these clear red flags.


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

Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post relates to a report co-authored by Mr. Tonello with Mark Emanuel, Kathryn Neel, and Todd Sirras and published by The Conference Board, Semler Brossy, and ESG data analytics firm ESGAUGE Analytics. 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 CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

As many businesses discharge, furlough, or drastically reduce pay to large shares of their workforces, some compensation committees are announcing their decision to cut base salaries and annual bonuses for C-suite executives as well as board cash retainers.

The Conference Board, in collaboration with Semler Brossy’s research team and ESGAUGE Analytics, is keeping track of SEC Form 8-K filings by Russell 3000 companies announcing these reductions. For the live database and some helpful visualizations of key trends across business sectors and company size groups, click here.

The following are some key observations from disclosures made since March 1, 2020. (Note: The commentary below refers to disclosure made as of April 24, but the database is updated weekly; please review the database and visualizations for the most current information).


Courts Cut Shareholders Slack on Section 11 Claims

Laurie Smilan is Senior Of Counsel and Nicki Locker is a Partner at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum.

In the past several years, the number of claims filed against newly public companies under Section 11 of the Securities Act of 1933 has increased exponentially. [1] Unfortunately, Section 11 packs quite a punch. Unlike fraud claims under the securities laws which require proof of reckless or intentional misconduct, Section 11 imposes strict liability against the issuer for innocent or merely negligent misstatements in a registration statement and permits recovery for any decline below the stock’s initial offering price. [2] Individual defendants can escape liability only by proving their good faith—a factual inquiry rarely resolved at the pleading stage. The one factor counterbalancing Section 11’s low liability standards and harsh penalties is that standing to bring such claims is strictly limited. Under the statute, only those who purchased stock registered in the offering can assert a Section 11 claim. However, last week’s decision in Slack, together with a few other recent cases, suggest that at least some courts may be willing to cut shareholder plaintiffs some slack by loosening this heretofore strictly construed standing requirement, thereby expanding potential Section 11 liability.


Purpose With Meaning: A Practical Way Forward

Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School, and a Senior Advisor to the Boston Consulting Group; Leo E. Strine, Jr., the former Chief Justice of the Delaware Supreme Court, is the Austin Wakeman Scott Lecturer in Law and Senior Fellow at the Harvard Law School Program on Corporate Governance, as well as Of Counsel at Wachtell, Lipton, Rosen & Katz; and Timothy Youmans is Lead-North America, EOS at Federated Hermes. This post is based on their article published in the Harvard Business Review. 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).

When leading money managers embrace the need for corporations to be socially responsible and the Business Roundtable (BRT) declares that the purpose of a corporation is “to create value for all stakeholders,” it is safe to say that purpose has gone mainstream in the corporate narrative. A consensus is emerging that society and diversified investors are best served by companies that focus on sustainable value creation and respect the legitimate interests of all stakeholders, not just stockholders. But how can these high ideals be put into practice? That corporate employees and host communities have borne the brunt of the economic effects of the current pandemic only underscores the deepening sense that our corporate governance system’s empowerment of the stock market has undermined the fairness of our economy.

If companies and institutional investors are serious about responsible, sustainable wealth creation in a manner fair to all corporate stakeholders, then they must match high-minded rhetoric about purpose with accountability. This will require a new governance form that makes a company’s obligations to fulfill its purpose enforceable.


Remarks by SEC Chairman Clayton to the Financial Stability Oversight Council

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the Financial Stability Oversight Council. 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.

From a systemic risk point of view, the SEC’s primary responsibilities [1] in this period of stress are three-fold:

  1. Market function. Using our authority, expertise and experience to help ensure the continuing, orderly and fair function of the securities markets—including equities, fixed income securities, funds and other products.
  2. Market monitoring. Monitoring market prices and price movements, flows of capital and availability of credit to assess functionality and resiliency of the capital markets—and taking action, including providing regulatory relief and guidance, as appropriate.
  3. Corporate and other issuer disclosure. Monitoring and providing guidance concerning, and emphasizing, timely and accurate issuer and other disclosures, recognizing that transparency and broad disclosure of material information are fundamental to market function and resiliency.

Before I give a few specifics on each of these three areas, and at the risk of repeating prior public comments, I will make a few general observations on our capital markets.


Remaining Attuned to Internal Whistleblower Reports

John F. Savarese, Ralph M. Levene, and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

The SEC’s whistleblower program has long been a centerpiece of its enforcement efforts. Over the past seven weeks alone, the Commission has announced eight whistleblower awards totaling more than $56 million, including a single award on April 16 of $27 million, the largest of the year and the sixth largest award overall since the inception of the program. Because the coronavirus pandemic has understandably dominated the news over that same period, this striking accumulation of whistleblower awards has received little press attention.  But we think these recent awards provide a telling and significant reminder of the critical importance, even in the current challenging environment, of keeping employee hotlines open and of responding to internal compliance reports promptly and effectively.

All companies wishing—sensibly and appropriately—to avoid becoming enmeshed in a whistleblower-inspired SEC investigation should promptly take two important steps:


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

Rob Carlson is a partner and Jake Funk is an associate at Sidley Austin LLP. This post is based on a Sidley Austin memorandum by Mr. Carlson, Mr. Funk, Hank Barry, and Sandi Knox. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups (discussed on the Forum here), and Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley, (discussed on the Forum here) both by Jesse Fried and Brian Broughman.

We live in ever-changing times with the presence of COVID-19 affecting every aspect of our business and personal lives. The world of venture capital is not exempt. The outbreak has effectively curtailed, in record time, what had been a steadily growing market opportunity for venture-backed companies and investors. Over just a few weeks, venture-backed companies have shifted from seeking new paths to growth, to seeking new paths to merely survive.

Likewise, companies must decide whether to raise money now or delay fundraising plans. Companies must make these decisions, and investors must make their investment decision, without significant time for deliberation and must consider the company’s current funding needs, any actual or potential market liquidity constraints, extended sales and payment cycles, and the economic outlook postpandemic. To assist companies and investors evaluating funding decisions in the era of COVID-19, this article addresses how investors might seek to protect their investments, as well as what terms new investors in a company may expect (or even demand) as a condition to investing, if private financing markets do not return to their activity and/or valuation levels prior to the pandemic. [1] We use the term “venture” in this article to encompass both earlier-stage venture investments and later-stage investments, which are sometimes referred to as “growth” investments. Some of the potential changes to investment terms discussed in this article are more applicable to later-stage growth investments than those in early-stage companies.


Open Up the PIPEs: Current Market Considerations

Stephen Amdur and Davina Kaile are partners and Brian McKenna is special counsel at Pillsbury Winthrop Shaw Pittman LLP. This post is based on their Pillsbury memorandum.

Private investments in public equity are likely to become more popular as investors and public companies utilize PIPEs to navigate market turbulence.


  • In the face of tremendous market uncertainty, PIPE transactions offer companies and investors an opportunity to bridge valuation gaps and bolster balance sheets. Accordingly, and as seen in 2007-2009, we anticipate a significant uptick in PIPEs in light of the turmoil created by the COVID-19 crisis.
  • PIPEs offer public companies a quick, discrete and flexible source of financing and liquidity.
  • PIPEs enable issuers and investors to tailor the terms of investment, including financial and governance features, to the goals of the parties.

In periods of market stress and volatility, a company may find itself with an acute need for additional sources of financing and liquidity. Whether to finance existing operations or acquisitions, to refinance existing debt or to build a cushion of available cash in periods of uncertainty, a PIPE (private investment in public equity) transaction offers public companies an attractive source of capital.


Weekly Roundup: May 8–14, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 8–14, 2020.

Director Oversight Duties Amidst COVID-19

Stewardship and Shareholder Engagement in Germany

Lessons From the Future—The First Contested Virtual Annual Meeting

COVID-19 and Executive Pay: Initial Reactions and Responses

Boards and the Virus: Seven Perspectives on the Day After

Seven Considerations for Stock Buyback Programs in the Era of COVID-19

First Quarter 2020 Class Actions

Carbon Premium around the World

World Economic Forum Pledges to Stand By Stakeholders in the COVID-19 Era

Navigating Down-Round Financings

Power and Statistical Significance in Securities Fraud Litigation

States are Leading the Charge to Corporate Boards: Diversify!

REITs and COVID-19: 15 Key Issues for Boards as they Chart the Course Forward

Board Leadership and Performance in a Crisis

Reinventing Depositions

Operating in a Pandemic: Securities Litigation Risk and Navigating Disclosure Concerns

Human Capital, Front and Center

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