Monthly Archives: June 2020

The Problem with Foreign Issuers

Alissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico.

A common denominator

What is the common denominator between a Chinese company listed in the United States and an Emirati company listed in the United Kingdom? Both are foreign issuers currently embroiled in massive governance scandals, the details of which are creating fascinating corporate dramas, spilling all over front pages of financial media. Both companies are presently in the process of being delisted, following a whistleblower campaign initiated by Muddy Watters, an American investment research firm, as it announced its short positions.

The parallels between Luckin Coffee, a Chinese company listed on NASDAQ, and NMC Health, an Emirati company listed on the London Stock Exchange are, indeed, remarkable. Both were founded by reputed, established entrepreneurs, backed by prominent sovereign and private investors and creditors, and held leading positions in their respective industries. Fast-forward to today, both are subject to investigations of flagrant fraud: in the case of Luckin Coffee, of $310 million of fictitious sales, and in the case of NMC of over $4 billion of undisclosed debt.


Coronavirus: 15 Emerging Themes for Boards and Executive Teams

Cindy Levy, Jean-Christophe Mieszala, and Hamid Samandari are senior partners at McKinsey & Company. This post is based on a McKinsey memorandum by Ms. Levy, Mr. Mieszala, Mr. Samandari, and Mihir Mysore.

As Winston Churchill said, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” We are seeing some faint signs of progress in the struggle to contain the pandemic. But the risk of resurgence is real, and if the virus does prove to be seasonal, the effect will probably be muted. It is likely never more important than now for boards of directors and executive management teams to tackle the right questions and jointly guide their organizations toward the next normal.

Recently, we spoke with a group of leading nonexecutive chairs and directors at companies around the world who serve on the McKinsey Resilience Advisory Council, a group of external advisers that acts as a sounding board and inspiration for our latest thinking on risk and resilience. They generously shared the personal insights and experiences gained from their organizations’ efforts to manage through the crisis and resume work. The 15 themes that emerged offer a guide to boards and executive teams everywhere. Together, they can debate these issues and set an effective context for the difficult decisions now coming up as companies plan their return to full activity.


A Hierarchy of Stakeholder Needs

Sarah Keohane Williamson is the Chief Executive Officer of FCLTGlobal. This post is based on her FCLTGlobal memorandum. 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).

Amid unforeseen circumstances, how do companies prioritize their stakeholders?

In his 1943 paper “A Theory of Human Motivation”, Abraham Maslow put forward his seminal theory on the “Hierarchy of Needs.” The theory describes how we as humans must fulfill certain basic needs before we can progress to higher levels of needs and desires. For example, humans need to eat so they are willing to forego safety if they can’t fulfill the need for food. Both of these basic needs precede psychological needs, such as relationships, friendships, and feelings of accomplishment. Maslow did not consider these needs to be direct trade-offs, but rather as a foundation for the level that follows. READ MORE »

The Rise of Standardized ESG Disclosure Frameworks in the United States

Catherine M. Clarkin and Melissa Sawyer are partners and Joshua L. Levin is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Clarkin, Ms. Sawyer, Mr. Levin, June M. Hu, and Susan M. Lindsay.

Over the last several years, U.S. public companies have faced increasing pressure from investors and other stakeholders to disclose their environmental, social and governance (“ESG”) risks, practices and impacts. In the last few years, with more U.S. public companies publishing sustainability reports [1] and other ESG disclosures, some investors have expressed concern that the lack of a standardized ESG disclosure framework, which makes it difficult for investors to meaningfully evaluate and compare companies’ ESG practices and risks, reduces the value of such disclosures.

Although a number of ESG disclosure standards have been developed and some have been incorporated into mandatory reporting regimes by non-U.S. regulators, any implementation by a U.S. company of an ESG disclosure framework remains voluntary at this time. Despite several proposals in 2019 from U.S. federal lawmakers on ESG disclosure requirements (which have not been adopted to date), the Securities and Exchange Commission’s (“SEC”) January 2020 proposed amendments to the MD&A rules did not include requirements for specific ESG or climate-related disclosures. SEC Chairman Jay Clayton and Commissioner Hester Peirce issued statements reaffirming the existing principles-based, materiality-focused approach the Commission adopted in its 2010 guidance, [2] and highlighted threshold issues that pose challenges to imposing a standardized ESG disclosure regime, including the complex landscape surrounding ESG disclosures and the forward-looking nature of climate-related ESG disclosure. [3] However, public companies are facing mounting pressure from investors—including influential institutional investors such as BlackRock, Vanguard and State Street, which have indicated in public statements in the past year that they are in support of companies making ESG disclosures aligned with both the Sustainability Accounting Standards Board (“SASB”) and Task Force on Climate-Related Financial Disclosures (“TCFD”) frameworks [4]—to voluntarily adopt certain ESG disclosure standards, especially the SASB and the TCFD frameworks, which have gained particular traction in the United States. In light of the increased investor attention and the lack of a mandatory framework, it is important for U.S. issuers to closely monitor developments in this area, and consider whether the voluntary adoption of an ESG disclosure standard makes sense in light of the issuer’s specific circumstances—e.g., the views of its investors, the costs and benefits of implementation and feasibility of establishing adequate internal controls over any such disclosure—before implementing any such framework.


Aiding and Abetting Claims Against Board Advisors and Buyer

Paul J. Shim, Roger Cooper,and Mark McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In an important decision for M&A professionals and other board advisors, the Delaware Court of Chancery addressed a stockholder plaintiff’s claims that the target board’s financial advisor and law firm, as well as the private equity buyer, aided and abetted a breach of fiduciary duty by the target board in connection with a take-private merger. See Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. June 1, 2020). While the claim against the financial advisor was allowed to proceed, the claims against the law firm and buyer were dismissed. These diverging results provide early guidance as to when the Delaware courts will (and when they will not) dismiss aiding and abetting claims. In many cases, the determining factor will be whether the complaint pleads facts raising a reasonably conceivable inference that the advisor, buyer, or other third party knew the board was engaging in a breach of its fiduciary duty. This has important implications for the way board advisors and M&A buyers should approach a situation in which they become aware that the board of a target company is unaware of some material fact that could conceivably affect its ability to fulfill its fiduciary duties.


This case concerns a two-step going-private transaction in which an affiliate of a private equity sponsor (“Buyer”) acquired The Fresh Market (“Fresh Market” or “the Company”), a specialty grocery chain. In July 2015, Buyer reached out to Ray Berry, chairman of Fresh Market’s board and a significant minority stockholder, indicating Buyer’s interest in taking Fresh Market private. After further communications in which Berry reached an oral agreement to roll over his equity in a transaction with Buyer, which he did not disclose to the Company’s board, the board instituted a public bidding process. During this process, Fresh Market’s financial advisor allegedly provided “inside information” about the bidding process to Buyer, which allegedly was a large client of the financial advisor. The complaint alleged that these communications may have impacted the bidding process, but were not disclosed to the Fresh Market board. Although there were multiple expressions of interest, the bidding process yielded only one definitive bid—from Buyer, on March 8, 2016, for $27.25 per share. After the board determined the same day that the offer was insufficient, Buyer submitted a revised offer of $28.50 per share on March 9. On March 11, the board accepted the offer and approved the merger. On March 25, Fresh Market publicly filed its solicitation/recommendation statement on Schedule 14D-9 (“14D-9”), which omitted certain facts about Buyer’s discussions with Berry and the Company’s financial advisor. The two-step merger closed on April 22, 2016.


Second Circuit Opinion on Corporate Scienter in Securities Fraud Class Actions

Victor Hou, Roger CooperJared Gerber are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Hou, Mr. Cooper, Mr. Gerber, and Julia Bradley.

It is well-settled under the PSLRA’s heightened pleading standards that a securities fraud plaintiff must allege particularized facts giving rise to a strong inference of scienter. However, courts have occasionally struggled to set forth clear standards for how this burden can be met with respect to a corporation (as opposed to an individual defendant). In a per curiam opinion issued last week, the Second Circuit provided important guidance on the standards for pleading corporate scienter, holding that—in all but “exceedingly rare instances”—the plaintiff must plead particularized facts connecting employees with knowledge of the underlying issues to the challenged misstatements. Further, the Second Circuit also declined to adopt the so-called “core operations” doctrine, under which a plaintiff asks a court to assume that a company would be aware of all issues involving its key product, holding that “[s]uch a naked assertion, without more, is plainly insufficient to raise a strong inference of collective corporate scienter.” And, the Second Circuit also rejected the suggestion that a jury verdict finding that a company intentionally misled consumers in violation of consumer protection laws necessarily established scienter in the context of a securities fraud action.

Taken together, these holdings provide powerful tools for defendants to argue that a securities fraud plaintiff has not adequately pleaded corporate scienter in the absence of particularized factual allegations that the employees responsible for the challenged statements, or other senior officers or directors, possessed scienter.


DOJ Updates Guidance on the Evaluation of Corporate Compliance Programs

Aisling O’Shea,and Nicolas Bourtin are partners and Anthony Lewis is special counsel at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. O’Shea, Mr. Bourtin, Mr. Lewis, John Liolos, and Alexander Willscher.


On June 1, 2020, the Criminal Division of the U.S. Department of Justice released updated guidance to its prosecutors on how to evaluate the design, implementation, and effective operation of corporate compliance programs in determining whether, and to what extent, the DOJ considers a corporation’s compliance program to have been effective at the time of the offense and to be effective at the time of a charging decision or resolution. [1] The guidance updates a prior version issued on April 30, 2019. [2] The updated 2020 guidance makes several notable changes to the language of its predecessor, but the core structure and content of the guidance remains the same.


DOJ policy and the U.S. Sentencing Guidelines for years have directed federal prosecutors and sentencing judges to evaluate corporate compliance programs. [3] For example, the Justice Manual’s “Principles of Federal Prosecution of Business Organizations” state that prosecutors, in deciding whether to bring criminal charges against a corporation, should consider “the adequacy and effectiveness of the corporation’s compliance program at the time of the offense, as well as at the time of a charging decision” and the corporation’s remedial efforts “to implement an adequate and effective corporate compliance program or to improve an existing one.” [4] Further, in determining potential criminal fines against corporations under the U.S. Sentencing Guidelines, sentencing judges consider whether the corporation had an effective compliance program at the time of the misconduct as a mitigating factor in calculating a corporation’s culpability score. [5]


Making Corporate Purpose Tangible—A Survey of Investors

Edouard Dubois and Ali Saribas are partners at SquareWell Partners Ltd. 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 Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).

Calls for a more responsible capitalism have gone louder in recent years. A major shift happened last August 2019 when the Business Roundtable (BRT) published a ‘Statement on the Purpose of a Corporation’. For the first time, the BRT, an organisation that represents the CEOs of America’s largest companies, embraced the concepts of corporate purpose and stakeholder capitalism. This was followed by the World Economic Forum’s Davos Manifesto which highlighted that a company serves not only its shareholders, but all its stakeholders. Meanwhile, investors are placing greater focus on how companies “create value” for the longer term and what their “purpose” is. They have been progressively integrating environmental, social and governance (ESG) factors in their investment decisions while they have experienced a rise of inflows in their sustainable investing products.

The shift in mindset and in capital allocation have undoubtedly put management teams in a challenging situation whereby they need to balance the market’s demands for financial returns while ensuring that their actions are not detrimental to the interests of other stakeholders. As the coronavirus pandemic is providing an acid test to the sustainability claims of companies and investors, this crisis and its aftermath may accelerate the adoption of a more stakeholder-oriented decision-making process at companies. In the words of the historian Yuval Noah Harari: “That is the nature of emergencies. They fast-forward historical processes. Decisions that in normal times could take years of deliberation are passed in a matter of hours.”


Back to Work: Protect Directors Too

William Regner and Jeffrey Rosen are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Regner, Mr. Rosen, Sarah Jacobson and Chibundu Okwuosa. 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).

As companies refine and implement their return-to-work plans, they must wrestle with complex legal compliance risks posed by the continuing threat of the COVID-19 pandemic. In addition to complying with established laws governing worker safety, accommodation of those with disabilities, and personal privacy, companies will need to ensure that their reopening plans comply with an evolving series of federal, state, and local orders issued in response to the pandemic. While back-to-work plans are necessarily prepared by management taking into account the different needs and regulatory postures of each individual business, the board of directors has an important oversight role.

Any business whose reopening results in sick employees, customers, or suppliers, or which otherwise faces COVID-19 related legal compliance problems, risks claims that attendant corporate losses were the product of failure of oversight—in Delaware, Caremark claims. Caremark claims are named after the Delaware Court of Chancery’s 1996 decision holding that directors are protected by the business judgment rule so long as they have implemented and monitored systems reasonably designed to provide the board and management with sufficient information to facilitate educated decisions about identified legal risks. If directors completely fail to implement any reporting or information system or controls, or, having implemented such controls, fail to monitor or exercise oversight, courts may question whether directors have complied with their duty of loyalty.


Weekly Roundup: June 12–June 18, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 12–June 18, 2020.

A Successful Season for SASB-Based Shareholder Resolutions

SEC Staff Shows New Openness to Closed-End Fund Defenses

Changes to Required Disclosures for Acquisitions and Dispositions

Court Holds that Syndicated Bank Loan Is Not a “Security”

Redesigning Corporations: Incentives Matter

Renewed Interest by Public Companies in NOL Rights Plans

The Forum Attracts Numerous Citations from Courts, Legislators, Regulators, and National Organizations

How A Reconceived Compensation Committee Can Help Tackle Inequality

Unanticipated Costs of Paycheck Protection Program Loans in M&A Transactions

ESG and the Earnings Call

Using ESG Tools to Help Combat Systemic Racism and Injustice

Confronting Climate Risk

Paying by Donating: Corporate Donations Affiliated with Independent Directors

Directors’ Fiduciary Duty in a Pandemic

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