Monthly Archives: November 2020

Companies’ Response to Delaware Supreme Court Upholding Federal Forum Provisions

John Laide is manager of corporate governance research at Deal Point Data, LLC. This post is based on his Deal Point Data memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

A review of charter and bylaw filings in the six months since the Delaware Supreme Court upheld federal forum provisions (“FFP”) shows that FFPs are becoming standard in the governing documents of IPO companies and among existing companies, an initial spike of adoptions that has steadily leveled off. On March 18, 2020, the Delaware Supreme court ruled in Salzberg v. Sciabacucchi that FFPs are facially valid under Delaware law. Securities Act of 1933 claims arising from public offerings can be brought in state or federal courts. FFPs require the federal courts be the exclusive forum for the resolution of these claims. FFPs can reduce the costs and burdens from facing multi-jurisdictional litigation and provide more predictability regarding the outcome of these disputes. FFPs can also prevent state court forum shopping by plaintiffs.

Recent IPOs

Of the 49 companies in Deal Point Data’s coverage universe (i.e., companies included in major indices) that completed their IPO since the March 18 decision, 84% of the companies have included FFPs in their governing documents, most frequently in the charter (68% in charter or in both charter and bylaws). For the Delaware incorporated IPO companies, 89% have included FFPs.


2020 Top 250 Report

Andrew R. Lash and Joey Choi are consultants and Matt Lum is a principal at FW Cook. This post is based on their FW Cook report. 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).

Overview and Background

Since 1973, FW Cook has published annual reports on long-term incentive grant practices for executives. This report, our 48th edition, presents information on long-term incentives granted to executives at the 250 largest U.S. companies in the S&P 500 Index. It is intended to inform boards of directors and compensation professionals in designing and implementing effective long-term incentive programs that promote long-term success for their companies in supporting strategic objectives and aligning pay delivery with performance.

Definition of Long-Term Incentive

To be considered a long-term incentive for purposes of this report, a grant must reward performance and/or continued service for a period of one year or more and cannot be limited by both scope and frequency:

  • A grant with limited scope is awarded to only one executive or a very small or select group of
  • A grant with limited frequency is an award that is not part of a company’s regular grant For example, a grant made as a hiring incentive, replacement of compensation forfeited from prior employer or promotional award is not considered a long-term incentive for this report.
  • A grant with limited scope but without limited frequency (annual grants of performance shares made only to the CEO) may be considered a long-term incentive, and vice versa (one-time grants made to all executives).


Don’t Go Chasing Waterfalls: Fiduciary Obligations in the Shadow of Trados

Sarath Sanga is Associate Professor at Northwestern University Pritzker School of Law, and at Kellogg School of Management (by courtesy); and Eric L. Talley is the Sulzbacher Professor of Law at Columbia Law School, faculty co-director of the Millstein Center for Global Markets and Corporate Ownership. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here); and Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley by Jesse Fried and Brian Broughman (discussed on the Forum here).

In a newly-released working paper, we tackle a fundamental financial and governance conundrum that nearly every venture capital (VC) backed company faces: when there are multiple classes of stock, how should directors discharge their fiduciary duties?

In a typical VC-backed firm, the founders and other early employees hold common stock while VC investors hold tranches of preferred stock. As preferred stockholders, VC investors enjoy a variety of special rights, which can include, for example, board representation, consent rights, priority payments upon exit, and options to convert preferred shares or redeem them for cash. But this arrangement bakes a shareholder conflict right into the firm’s capital structure: When strategic business decisions implicate preferreds’ special rights, the interests of preferred shareholders inevitably conflict with those of common. In such cases, what should the board of directors do?


ISS Proposes 2021 Benchmark Voting Policy Changes

Betty Moy Huber is counsel and Paula Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

On October 14, 2020, ISS released its proposed voting policy changes for 2021. The changes for the United States focus mainly in these three areas: (1) racial and ethnic board diversity, (2) board oversight of environmental, climate and social risks and (3) exclusive forum provisions.

ISS requests feedback on the proposed changes. Market participants can submit comments via email to [email protected] through 5:00 PM ET on Monday, October 26, 2020. ISS expects to release its final voting policies in the first half of November 2020.

Over the summer, ISS administered its annual benchmarking voting policy survey to market participants. It plans to use the survey results, which we discussed here, to inform its benchmarking policies. Two of the three topics covered by the proposed changes, diversity and board accountability for climate risk, were included in ISS’s survey. The proposed policies, however, do not update the following topics covered by the survey: ISS’s COVID-19-adjusted policies, independent board chair, and auditors and audit committees.


SEC Extends Its Focus on MNPI Clearance Procedures

Stephen Cutler, Brad Goldberg and Nicholas Goldin are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Cutler, Mr. Goldberg, Mr. Goldin, Brooke Cucinella, Michael Osnato and Josh Levine. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

[On October 15, 2020], the SEC announced a settled enforcement action against a public company in connection with the company’s initiation of a stock buyback program while in possession of material, nonpublic information (“MNPI”). [1] The Commission charged the company with violating Section 13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed, and access to company assets is permitted, only in accordance with management’s authorizations.

Specifically, the SEC found that the company’s decision–approved by its legal department–to enter into a Rule 10b5-1 trading plan to repurchase the company’s shares on the same day that the company resumed previously suspended, CEO-to-CEO merger discussions violated the company’s own securities trading policy, and therefore fell outside the board’s repurchase authorization. Without admitting or denying the SEC’s findings, the company agreed to the entry of a cease and desist order and to pay a $20 million penalty to settle the action.

The SEC’s order highlights a number of important matters for public companies:


The Return on Purpose: Before and During a Crisis

Gregory V. Milano is founder and CEO of Fortuna Advisors. This post is based on a recent paper authored by Mr. Milano; Brian Tomlinson, Director of Research of the CEO Investor Forum at Chief Executives for Corporate Purpose (CECP); Riley Whately, Fortuna Advisors; and Alexa Yiğit, Sustainable Finance Lead at the CECP CEO Investor Forum. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Executive Summary

The role of the corporation in society is under review. The paradigm that corporations are run solely in the interests of shareholders, which has defined a generation of management practice, is being contested. The emerging paradigm references “stakeholders” as the broader group that managers should consider in decision-making. Such a transition is full of complexities for chief executives, investors and policy makers.

In this paper, we seek to highlight a few implications of corporate purpose—in its stakeholder aspect. We look at whether a clear corporate purpose can impact the valuation of listed equities and how that relationship to value may arise. As part of that, we explore a corporate purpose measurement framework developed by BERA Brand Management. Drawing on a CEO survey, we look at examples of corporations that have deployed their stated corporate purpose to guide them through crisis induced decision-making. [1]


Rising Threat of Securities Liability for SPAC Sponsors

Adam Brenneman, Nicolas Grabar, and Jared Gerber are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

Special purpose acquisition companies or “SPACs” are an increasingly popular way for an existing private company to become publicly traded without undergoing a traditional initial public offering, and for investors in public markets to invest in growth-stage companies. There can be generous returns for SPAC sponsors, but they should be aware of the liability risk in connection with their role. Indeed, litigation arising from several recent SPAC acquisitions, most prominently against Nikola Corporation, underscores the risks for SPAC sponsors. They therefore should be mindful of steps they can take to mitigate these risks in the reverse merger process.

Key Takeaways

  • In the “de-SPAC” transaction, when a SPAC acquires its target, the SPAC and its sponsors are potentially liable under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 for misleading statements included in a proxy statement or in other public statements. The SPAC and its sponsors may also be liable under Section 11 of the Securities Act of 1933 if that de-SPAC transaction includes a registered offering.
  • Investors have sought to hold SPACs and their sponsors liable for a variety of alleged misstatements, including about the financial outlook of the target companies and the level of due diligence performed by the SPAC.
  • The best ways for a SPAC sponsor to mitigate these risks are to perform sufficient due diligence on the target and to be cautious with language in the proxy statement.


The Comeback of Hostile Takeovers

Kai Liekefett is partner at Sidley Austin LLP. This post is based on an article originally published in Ethical Boardroom Magazine by Mr. Liekefett, Betsy Atkins, Joele Frank, and David Rosewater. Related research from the Program on Corporate Governance includes  The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk; and Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

A Hostile World (Again)

In the 1980s, they became all the rage: hostile takeovers. Boards lived in fear of “corporate raiders” like Carl Icahn. For example, in 1988, there were no less than 160 unsolicited takeover bids for U.S. companies. The hostile takeover became the defining symbol of U.S. style capitalism, encapsulated in the 1987 movie classic “Wall Street”.

However, after the late 1980s unsolicited takeover bids decreased in number and over the last decade became relatively rare. For example, last year, there were less than 15 hostile takeover offers for U.S. companies. The reasons for this development are manifold. One reason is the board-friendly case law on takeover defenses—particularly the decisions of the Delaware courts in the Airgas case, which upheld a target company’s poison pill even though the bidder’s tender offer had been pending for a year. Antitrust is another, which makes it more difficult for companies with large market shares to acquire competitors without some level of cooperation from the target company. Yet, among them all, one reason in particular stands out: the previous 11-year bull market in the U.S., which until March of this year drove the share prices of public companies every upward, making potential target companies too expensive for their competitors.


SEC Adopts Amendments to Auditor Independence Rules

Charles F. Smith and Brian V. Breheny are partners and Andrew J. Fuchs is counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

The Securities and Exchange Commission (SEC) has issued final rules that significantly modify the framework that public companies and their auditors use to evaluate auditor independence, providing additional clarity for certain particularly difficult and recurring issues.

The final rules, adopted on October 16, 2020, principally focus on complications that arise from auditor independence assessments with respect to affiliates of the audit client. Such issues include situations where the entity under audit is under common control with other entities, which frequently is an issue for operating and portfolio companies, investment companies, and investment advisers and sponsors. In addition to cutting compliance burdens and costs for registrants and auditors, the SEC expects that these proposed amendments will reduce the instances in which auditors are not considered independent. Accordingly, this could expand the pool of auditors available to registrants, which would provide more relevant industry expertise, drive down audit costs and improve the quality of financial reporting. These final rules also change the auditor independence requirements related to initial public offerings (IPOs), M&A activity and similar corporate events, and certain requirements around ordinary course debtor-creditor relationships.


Evolving Compensation Responses to the Global Pandemic

Mike Kesner, Sandra Pace, and John Sinkular are partners at Pay Governance LLC. This post is based on their Pay Governance memorandum.

In this post, we focus on companies that have faced severe impairments due to the pandemic and are grappling with highly volatile stock prices resulting in substantial incentive plan design challenges. This continues our series of pay actions taken or considered among companies impacted by the pandemic.


  • For many of the companies severely harmed by the global pandemic, immediate cost-cutting measures were necessary to protect the business including furloughs, layoffs, suspended 401(k) matching contributions, and base salary reductions for most/all of the workforce.
  • Many of these companies approved their fiscal 2020 annual and long-term incentive (LTI) plans and prior LTI performance awards (i.e., 2018-2020 and 2019-2021 cycles) without any consideration for a global pandemic. These incentives often represent ≥50% of an executive’s annual compensation (≥70% in the case of the CEO), and it is highly likely the performance-contingent incentives are tracking to a zero payout and time-vested restricted stock units (RSUs) have greatly diminished in value.
  • The reduced value of realizable compensation directionally aligns with companies’ pay-for-performance (P4P) philosophies; however, the reductions are largely based on an unprecedented shutdown of the global economy due to health concerns and a reshaping of how many companies will “do business” now and into the future.
  • Severely harmed companies are assessing the near- and long-term implications of the downturn on all stakeholders and determining if changes to annual and long-term incentive programs are appropriate to balance the company’s talent goals with its P4P philosophy.


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