Monthly Archives: May 2020

The Corporation as a Nexus for Regulation

Mariana Pargendler is Professor of Law at Fundação Getulio Vargas School of Law in São Paulo and Global Professor of Law at New York University School of Law. This post is based on her recent paper, forthcoming in the University of Pennsylvania Law Review.

As a legal person or entity, a corporation is the repository of rights and duties in its own name. It is legally separate from its shareholders and managers. Current legal and economic scholarship views asset partitioning—the separation between the assets of the corporation and those of its shareholders—as the essential economic role performed by legal personality. The law also recognizes exceptions to asset partitioning and provides for “departitioning remedies,” of which veil piercing is the most prominent. Through veil piercing, courts overcome the attribute of limited liability to hold shareholders liable for corporate debts in certain circumstances.

This view, however, is incomplete, as I show in a paper entitled Veil Peeking: The Corporation as a Nexus for Regulation, which is forthcoming in the University of Pennsylvania Law Review. First, I identify the provision of regulatory partitioning (the separation between the regulatory spheres of the corporation and its shareholders) as another fundamental function of the corporate form. Second, I show that regulatory partitioning is not absolute. In various areas of law and for different purposes, the law “peeks”—or looks behind the corporate veil—to ascribe legal rights or detriments of shareholders to the corporation.


Blood in the Water: COVID-19 M&A Implications

Rodolfo Araujo is Senior Managing Director and Head of the Corporate Governance & Activism Practice; Paul Massoud is Senior Managing Director of Corporate Governance & Activism; and Kosmas Papadopoulos is Senior Director at the Corporate Governance & Activism practice at FTI Consulting. This post is based on an FTI memorandum by Mr. Araujo, Mr. Massoud, Mr. Papadopoulos, and Rasmus Gerdeman.

The COVID-19 pandemic is having a profound economic impact across the globe. Entire industries have ground to a halt and unemployment claims reached record highs, as demand has disappeared due to government-mandated restrictions. Not surprisingly, equity markets are pricing in this turmoil, with the S&P 500 index losing one third of its value from February 19 to March 23. As of April 15, the S&P continues to be down by 18% from its February 19 peak. As the global public health and economic crises continue to unfold, companies should consider more than just the impact on operations. Valuations have declined significantly across the board, and the resulting market dislocation will likely bring a rise in contentious situations in mergers and acquisitions (M&A). This raises new challenges for boards and executive teams as companies are more vulnerable to potential attacks as compared to normal market conditions.

This is Different but Also the Same

While every major economic crisis is unique, there are also common characteristics that often repeat. Similar to 2008, the current downturn is characterized by a severe slowdown in economic activity, elevated unemployment, and financial market declines. Governments and central banks are attempting to offset the economic impacts through fiscal stimulus and monetary easing, but due to the ongoing global pandemic driving the downturn, there remains great uncertainty about the duration and the severity of the crisis.


COVID-19 and Capital Allocation

George S. Dallas is Policy Director at International Corporate Governance Network (ICGN). This post is based on an ICGN memorandum by Mr. Dallas. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here) and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

In July 2019 ICGN published a Viewpoint report on capital allocation, focusing on this issue from a corporate governance and investor stewardship perspective. [1] The report provided a framework to guide investors on what to look for and engage upon to promote responsible capital allocation practices supporting a company’s sustainable value creation. Clearly this 2019 Viewpoint did not anticipate the COVID-19 crisis or its subsequent impact on societies, economies and individual businesses. However, COVID-19 has since heightened the visibility of capital allocation as a critical governance issue, particularly as it is creating severe pressures on companies and forcing important and difficult capital-related decisions.

Some of these pressures were identified in a March 2020 ICGN Viewpoint looking at the COVID-19 as a systemic risk for investors. [2] The report spoke to the need for companies to strike an acceptable balance between the needs and sustainability of the company itself, its providers of capital (both shareholders and creditors) and other key stakeholders. This raises important questions of capital allocation.

Capital allocation is where corporate governance meets corporate finance. It is the process of distributing a company’s financial resources with a purpose of enhancing the firm’s long-term financial stability and value creation—while providing fair returns to providers of risk capital and showing proper regard to the needs of employees, customers, suppliers and other stakeholders. From an investor perspective, the challenge for companies is to develop—and communicate—a sustainable capital allocation framework to support long-term company success.


Anticipated Securities Litigation in Response to the Pandemic

Jason Halper and Nathan Bull are partners and Matthew Karlan is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Bull, Mr. Karlan, Hyungjoo Han, James Orth, and Victor Celis.

As COVID-19 has continued to spread globally, U.S. and foreign markets have been dramatically impacted, leading to the largest declines in stock prices since the 2008 credit crisis. Given the extreme market volatility associated with the ongoing COVID-19 pandemic, a significant rise in stock-drop securities litigation seems likely. This is particularly so given the pre-existing trend of increased securities class action filings, even before the onset of COVID-19. Indeed, investors already have filed at least two civil suits alleging that a public company violated the federal securities laws by making misleading public statements concerning COVID-19. Others almost surely will follow.

This post provides an overview of event-driven securities litigation, including the tools employed by the plaintiffs’ bar in response to previous crises, and offers guidance for mitigating the risk of COVID-19-based securities litigation, including key defensive strategies for dismissing event-driven securities litigation at the pleading stage.

Background: Event-Driven Securities Litigation Based on Allegations of Material Misrepresentations or Omissions

While the circumstances presented by COVID-19 are unprecedented, the plaintiffs’ bar is likely to draw on the same tools employed in prior crises. Under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, a plaintiff may seek damages from a company and its directors and officers for a material misrepresentation or omission in connection with the purchase or sale of a security. Additionally, under Section 20(a) of the Exchange Act, a plaintiff may bring suit against an entity or individual that controls the primary securities violator. A plaintiff may also bring suit against an issuer under Sections 11 and 12 of the Securities Act of 1933 (the “Securities Act”) for materially misleading misstatements or omissions in a registration statement or prospectus, claims that, unlike 10b-5 claims, do not require the plaintiff to prove “scienter,” or fraudulent intent. In support of such claims, plaintiffs may also allege noncompliance with Item 303 of Regulation S-K, which requires the disclosure of “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations,” although the viability of a private right of action under Item 303 remains the subject of a circuit split.


Institutional Investors Signal: A Mix of Tougher Standards and Heightened Flexibility for the 2020 Proxy Season

Andrew R. Brownstein and Sabastian V. Niles are partners and Justin C. Nowell is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton publication. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

As companies brace for a “new normal” shaped by the global coronavirus pandemic, the 2020 proxy season is anything but routine. Large institutional investors continue to uphold high expectations with respect to corporate governance and stewardship, as many companies shift to virtual annual meetings and other accommodations to meet stakeholder needs. However, companies may in some instances receive welcome reprieve, as updated engagement priorities and voting expectations released by Vanguard, State Street and other large institutional investors may signal heightened flexibility in voting decisions. Overall, 2020 guidance provided by large institutional investors suggests a continued trend of stringent standards coupled with an expanded willingness to make informed voting decisions on a case-by-case basis and diverge from proxy advisory firm recommendations if companies appropriately explain their rationale and other relevant factors for their actions. Such explanations may be included in a company’s initial proxy statement, in supplemental proxy materials or presentations, or addressed in live engagements with investors. Accordingly, companies may be able to focus their engagements and tailor their disclosures on company-specific facts and circumstances to limit negative voting action (i.e., “Withhold” or “Against” votes).


Stock Option Repricing Considerations During the Pandemic

Ali U. Nardali is a partner at K&L Gates LLP. This post is based on his K&L Gates memorandum.


Companies—public and private—have suffered steep declines in value in the wake of the COVID-19 pandemic. The declines have caused many employee stock options to become “underwater”—in some cases, significantly so. As a result, companies are forced to take accounting charges and deplete equity plan reserves for underwater stock options that no longer incentivize or retain employees. As in the Great Recession, companies are encouraged to consider mitigating these undesirable consequences through stock option repricings.

Stock option repricings take many forms and entail many issues and considerations, including:

  • Shareholder approval requirements under exchange listing rules;
  • Guidelines from institutional investors and proxy advisory firms;
  • Incremental accounting charges under Accounting Standard Certification (“ASC”) Topic 718;
  • Self-tender offer rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”);
  • Registration and exemption rules under the Securities Act of 1933, as amended (the “Securities Act);
  • Tax implications under the Internal Revenue Code of 1986, as amended (the “Code”); and
  • Analogous state laws.

This post briefly highlights some of these issues and considerations. Companies are encouraged to contact us with questions or for more guidance.


A New Era For Activist Defense: Going Beyond the Relics of the 80s

Jim Woolery, Keith Townsend, and Cal Smith are partners at King & Spalding LLP. This post is based on their King & Spalding 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.

After years of tremendous economic growth, COVID-19 has unleashed unprecedented market volatility and extreme value dislocations for U.S. public companies. Senior management and directors are facing existential business model, strategic, and human resource challenges that are generational in scope. Some law firms and other corporate advisors have responded to the pandemic with a focus on implementing shareholder rights plans or “poison pills” and other traditional defensive measures as a principal corporate response to the pandemic, [1] which has caught the eye of governance experts and media pundits. [2]

Updating a “shelf” poison pill may be prudent depending on circumstances, but traditional defensive prescriptions alone are insufficient as a strategy [3] and may distract senior management and directors from addressing the real issues arising from the COVID-19 crisis. A comprehensive corporate strategy addressing the company-specific business model, industry, human resources, stakeholders, and other enterprise risk is far superior to one that places undue emphasis on poison pills. The best poison pill, in our view, is one that gathers dust on the shelf because a company’s proactive corporate strategy makes the pill unnecessary.


Key Considerations for U.S. Public Company Compensation Committees in Light of COVID-19

Lynda Galligan and Alexandra Denniston are partners at Goodwin Procter LLP. This post is based on a Goodwin Procter memorandum by Ms. Galligan, Ms. Denniston, Brittany McCants, and Elizabeth Doyon.

As the COVID-19 pandemic continues to unfold, U.S. public company compensation committees face unique challenges as they focus on retaining and appropriately incentivizing employees while evaluating the impact of the pandemic on the company. This post provides a high-level overview of some key issues that compensation committees should be focusing on in this environment.

1. Performance Metrics for Bonus Plans and Equity Grants

Delaying Metric Setting

Given the uncertainty in the market as a result of the COVID-19 pandemic, many companies are reevaluating their operating plans and business projections. This can make it challenging for some companies to set reasonable performance metrics for compensation purposes.

Many calendar year-end companies have already set performance metrics and targets for 2020. For any companies that have not, compensation committees should consider whether it would be preferable to delay setting performance metrics until later in the year, or at least until after the company has determined the likely impact of the pandemic on the company’s business. Some performance plans mandate that metrics be set within the first 90 days of a performance cycle—this is a provision that was required under legacy Internal Revenue Code (“Code”) Section 162(m) rules that are no longer applicable in most cases. However, the 90-day requirement remains in many plans. If the performance plan does not have a 90-day requirement, or if there is an alternative way to award performance bonuses or equity grants, a delay would be more feasible.


Weekly Roundup: April 24–30, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 24-30, 2020.

A Look at the Data Behind Recent Poison Pill Adoptions

The Rise of the Aggressive Poison Pill

Federal District Court Dismissal of Challenge to Board Diversity Statute

U.K. and EU Regulators Move Ahead on ESG Disclosures and Benchmarks

ISS and Glass Lewis Guidances on Poison Pills during COVID-19 Pandemic

Is Financial Globalization in Reverse after the 2008 Global Financial Crisis? Evidence from Corporate Valuations

COVID-19 and Corporate Governance: Key Issues for Public Company Directors

Stakeholder Principles in the COVID Era

Executive Compensation Considerations in PIPE Transactions

Institutional Investors’ Overboarding Policies for Directors

The Executive Pay Dilemma

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