Monthly Archives: May 2020

Human Capital, Front and Center

Robert Main is COO, Marc Lindsay is Director of Research, and Amy Hernandez is Associate Director of Research at Sustainable Governance Partners. This post is based on a SGP memorandum by Mr. Main, Mr. Lindsay, Ms. Hernandez, and Jessica Strine. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

A familiar refrain has emerged as the COVID-19 pandemic continues: companies will be judged for years based on the actions they take today. Perhaps no other issue will generate such long-lasting implications—to a company’s reputation, brand, and resiliency—as how a company treats its people during these trying weeks and months.

It would be naïve to suggest that there is a single right path to manage workforce size, employee health and safety, and the many other human capital issues amplified by the crisis; there are simply too many sector-and company-specific variables. What is clear, however, is the need for companies to proactively communicate their chosen path forward to their stakeholders, and to do so in a transparent, context-rich manner that goes beyond what is disclosed in calmer times. Indeed, the dialogues that companies have today with their investors will impact those relationships—for good and bad—in years to come.


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

J. Timothy Mast is a partner at Troutman Sanders LLP; Pamela S. Palmer and Robert L. Hickok are partners at Pepper Hamilton LLP. This post is based on a joint Pepper Hamilton and Troutman Sanders memorandum by Mr. Mast, Mr. Palmer, Mr. Hickok, David I. Meyers, Alexandra S. Peurach, and Douglas D. Herrmann.

The COVID-19 pandemic has introduced new corporate disclosure issues and increased the attendant risk of securities fraud actions, as evidenced by plaintiffs’ initial filings across the country in the past few weeks. This article discusses the significance of those initial suits to public reporting companies and how companies can tailor and update their disclosures to lessen the risk of future lawsuits. We also explore potential D&O liability risk arising in the context of the pandemic, including risk in the context of insolvency that is facing many companies for the first time.

Ultimately, public companies’ best defense is to be thoughtful and diligent in updating their risk disclosures and any earnings guidance—and possibly to withdraw guidance altogether at this time—as well as to ensure close collaboration with their accountants and auditors on the accuracy of estimates, reserves, asset valuations, and other impacted financial reporting matters. Internally, companies should take steps to make sure their internal controls are sufficient to manage heightened and new risks. Risk avoidance is the last bastion in the battle for corporate health and longevity during this tumultuous time in history and in the stock markets.


Reinventing Depositions

Boris Feldman is a partner at Wilson Sonsini Goodrich & Rosati. This post reflects only his views, not those of his law firm or clients.

The Covid Crisis will affect every aspect of litigation. Growing familiarity with video-conferenced hearings likely will lead to the elimination of wasteful status-conference calendars, in which scores of lawyers sit around a courtroom for hours waiting for a 10-minute appearance to update the court on developments in a particular case. Courtroom automation, largely limited thus far to fancier projectors and displays, will adopt efficient technologies used in everyday business interactions.

This is the right time for the legal profession—and the business community more broadly—to reinvent depositions. Like many of the discovery rules adopted in the 1930’s and ’40’s, depositions had a noble objective: to eliminate trial by surprise. The theory was: give both sides full information, and the case will either be settled earlier or be tried more efficiently.

Like so many well-intentioned reforms, this one failed miserably. Depositions are one of the few forms of punishment not regulated under the Eighth Amendment. The entire structure and incentives are Goldbergian (Rube, not Arthur): lawyers on both sides are paid by the minute; there is no neutral present to prevent abuse or waste of time; surprise and wearing-down are the names of the game. Review a random sampling of depo transcripts, and your reaction will not be pride in our profession.


Board Leadership and Performance in a Crisis

Rusty O’Kelley III is co-leader of Board and CEO Advisory Partners for the Americas; Constantine Alexandrakis leads the Americas region; and Justus O’Brien is co-leader of the Board & CEO Advisory Partners at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum.

Every industry across the globe has faced a crisis at some point in time. While most large companies survive, many struggle for years following a period of severe adversity. Others prevail and become stronger than before. How companies address crises has changed over time, as has the role of the board.

Amid COVID-19’s rapid spread across the globe, boards are moving fast to oversee the deployment or refreshment of crisis management protocols. The pandemic’s impact will be felt differently by every company, and boards will have to ramp up or dial back their responses depending on their unique circumstances.

That said, irrespective of industry, a crisis of this magnitude acts as a true pressure test for boards, uncovering new fault lines that directors must navigate. Much has been written about how boards should generally behave during a crisis, but few if any directors have experienced something as dire as a pandemic. COVID-19 will require both directors and management to have an open and flexible learning mindset. Directors especially will need to display courage, decisiveness, and a calming demeanor. In an ever-evolving crisis such as this one, they will need to be constantly pausing, assessing, anticipating, acting, and reassessing.


Born Out of Necessity: A Debt Standstill for COVID-19

Mitu Gulati is Professor of Law at Duke University School of Law. This post is based on a recent paper by Professor Gulati; Patrick Bolton (Columbia Business School); Lee Buchheit (University of Edinburgh); Pierre-Olivier Gourinchas (University of California, Berkeley); Chang-Tai Hsieh (University of Chicago Booth School of Business); Ugo Panizza (Graduate Institute Geneva), and Beatrice Weder di Mauro (Graduate Institute Geneva).


Rich and poor countries alike are facing an unprecedented economic crisis as they attempt to contain the impact of the COVID-19 pandemic. A downturn of this magnitude can cause tremendous long-term damage, with critical economic linkages between employees, businesses, and banks at risk of disappearing forever. Scores of firms will close permanently unless urgent action is taken. The threat is even more significant for emerging economies, where the economic costs of social distancing are likely to be higher, and where vulnerable small and medium sized enterprises with low cash reserves account for a much larger share of the economy than in rich countries, which moreover can rely on extensive social and economic safety nets. Poor countries, moreover, have far more precarious health-care systems. The funds required to support vulnerable workers and businesses, and to care for COVID-19 patients, could be as high as 10% of their GDP. As a comparison, in the US the rescue measures passed in the last month alone account for at least 10% of GDP, and are likely to increase even more. (The $2.3 trillion dollar rescue package in the US is 10.6% of US GDP in 2019; here). A number of European countries have commited loans, equity injections and guarantees up to 35% of GDP. (IMF 2020, Fiscal Monitor April 2020, Figure 1.1).

The COVID-19 crisis has led to a sudden collapse in capital flows to emerging and developing countries. According to estimates by the Institute of International Finance, non-resident portfolio outflows from emerging market countries amounted to nearly $100 billion over a period of 45 days starting in late February 2020. For comparison, in the three months that followed the explosion of the 2008 global financial crisis, outflows were less than $20 billion. (here).


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

Adam O. Emmerich is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Emmerich and Robin Panovka.

Many REIT boards are now broadening their focus beyond the immediate firestorms unleashed by COVID-19, to longer-term risk-management and strategic planning issues that take account of the radically changed environment. Following is a list of 15 key issues to be considered with a 3-, 6- and 12-month lens, and beyond. Many boards have already considered these issues in crisis-mode, but it is essential to also reflect on them more broadly as we move into the next phase of response and as expectations for the recovery adjust to take account of the realities on the ground. Of course, the analysis around each of these issues will differ by sector, sub-sector and company, and there are unfortunately no one-size-fits-all answers:


States are Leading the Charge to Corporate Boards: Diversify!

Michael Hatcher and Weldon Latham are Principals at Jackson Lewis P.C. This post is based on their Jackson Lewis memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

While the federal government is considering statutes and regulations that mandate gender and racial diversity on corporate boards of directors, the states have already begun to take action. Already a dozen states have enacted or are poised to enact requirements to enhance diversity on boards. The statutes are grounded on a large body of empirical evidence that board diversity contributes significantly to “good governance” and improved financial performance. Businesses must focus on enhancing the diversity of their boards to both comply with the new statutory requirements and secure the underlying benefits to their performance.

But while states are starting to act, many corporations have not.

In September 2018, California Governor Gavin Newsom signed a Bill mandating gender diversity on the boards of directors of publicly traded corporations with their “principal executive office” in the state. According to a March 4, 2020, report from California Secretary of State Alex Padilla, only 330 of 625 covered companies filed the required reports about their boards’ diversity. Of those that filed, 37 reported having zero women on their boards as of Dec. 13, 2019 — a violation of the requirement to have at least one female director by that time.


Power and Statistical Significance in Securities Fraud Litigation

Jonah B. Gelbach is Professor of Law at the University of California, Berkeley and Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School. This post is based on their paper, forthcoming in the Harvard Business Law Review.

The event study—a statistical tool borrowed from financial economics—has become a critical tool in securities fraud litigation. In litigation, event studies are used to measure the extent to which market prices react to the release of new information. Their results are introduced as evidence on the efficiency the market in which the securities trade, the impact of the fraudulent disclosures on market prices, the causal relationship between the fraud and plaintiff’s economic harm, and the appropriate calculation of damages. Courts vary both in the extent to which they require the use of an event study and the degree to which they accept other evidence with respect to these issues, but a properly-conducted event study is often a key factor.

The event study methodology is used to distinguish between normal fluctuations in stock price and returns so large that their magnitude is deemed to be explained by the release of material information. This is done through a process known in statistics as null hypothesis significance testing. An event study analyzes—on the basis of the size of the stock price reaction — whether the price movements in question are within normal limits or are sufficiently unusual that they are likely to have been caused by the disclosure. A stock price movement that is sufficiently unusual that it can be used to infer a causal relationship is termed “statistically significant.”


Navigating Down-Round Financings

Steve Bochner, Amy Simmerman and Becki DeGraw are partners at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum.

Although we all hope for a quick return to stability, the current environment raises the possibility of an increase in down-round financings—private company financings in which the company has a reduced valuation from its prior financing round. In recent weeks, we have observed pressure on valuations and the emergence of more onerous, less company-friendly terms in several, though certainly not all, financing rounds. Down rounds raise a number of delicate and important issues for companies and investors, including impacts on employees and investors; fiduciary duty considerations for the company’s board (and others), along with a heightened risk of stockholder litigation; and oftentimes complex structuring considerations. In this alert, we provide an overview of such issues—to serve as a refresher for those who have been through down rounds in the past and as a primer for those who have not—as well as practical steps and suggestions in navigating a down round. [1] Recognizing these issues in advance can help a company and investors significantly mitigate the risk that can inhere in a down round.


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

Katherine Brennan is Deputy General Counsel and Connor Kuratek is Chief Corporate Counsel at Marsh & McLennan Companies; and Betty Moy Huber is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Brennan, Mr. Kuratek, Ms. Huber, and Paula H. Simpkins. 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).

The novel coronavirus (COVID-19) pandemic has posed unprecedented health risks and has led to global economic disruptions. The World Economic Forum (WEF), an international organization that fosters public-private cooperation on global, regional and industry agendas, released this month the “Stakeholder Principles in the COVID Era” (Stakeholder Principles) as part of its COVID Action Platform and called businesses to action stating that, during this time of crisis, “[t]he business community’s contribution: [is] to be leaders of responsiveness and stewards of resilience.” In January 2020, the WEF made headlines by issuing its Davos Manifesto 2020, challenging companies to incorporate stakeholders into their corporate purpose, as well as issuing, through its International Business Council (IBC) a draft corporate sustainability disclosure framework, “Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” The Stakeholder Principles are newsworthy insofar as they demonstrate the WEF’s continued commitment to encouraging businesses to embrace their corporate social responsibilities by coming together to minimize the pandemic’s impact on public health and limit its potential for further disruption to lives and economies worldwide.


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