TheCorporateCounsel.net

April 2, 2020

Securities Offerings Amid Closed Trading Window: Disclosure Considerations

With ongoing economic uncertainty, many companies are thinking about and taking steps to address liquidity and capital resources.   John blogged last week about Corp Fin’s Covid-19 disclosure guidance and this Davis Polk memo takes a look at factors public companies and their underwriters should consider when thinking about a possible securities offering during a blackout period.  Self-imposed blackout periods are in place at many companies due to the rapidly developing COVID-19 pandemic and insider knowledge of potential impacts to a company.  Care must always be taken when thinking about disclosures with a securities offering but in light of current circumstances, disclosure considerations are heightened now.

As noted in the memo, there is no legal prohibition on the sale of securities during a blackout period, but it can be tricky.  Even with a blackout period in place, for companies thinking about a securities offering, the memo says it’s possible to do so when:

– management has enough information about the current (or recently ended) quarter to predict with a fair degree of confidence what the company’s reported results are likely to be

– management has a good track record judging its anticipated results at similar points in the information-gathering and reporting cycle

– management’s expectations for the quarter, and future periods, are either (i) at least in line with “the market’s” expectations as well as with management’s own previously announced guidance (if any) – or (ii) if management’s expectations are not so in line, the company and its underwriters conclude that the deviation is not material or the company is willing to “pre-release” its current expectations prior to the earnings release. In certain circumstances, such as those relating to the impact of the COVID-19 crisis, management may not be able to predict the company’s results beyond the current quarter, with a high degree of confidence. In those scenarios, a company may decide to withdraw previously issued guidance and not issue new guidance. Nevertheless, withdrawing guidance is not a substitute for disclosure of underlying trends and uncertainties that could affect financial and operational performance

– management’s analysis of the going-forward impact on the company’s business of COVID-19 is sufficiently developed that disclosure can be made at the time of the offering that will be in line with what is disclosed when the 10-K, 20-F, 10-Q, 6-K or other filing is made

The memo provides tips on what to say if management’s expectations aren’t in line with market expectations and considerations for updating risks, trends and uncertainties, selective disclosure issues, reputational and legal risks.

Section 16: Temporary Relief from Form ID Notarization Requirement

Here’s something that Alan Dye blogged last week on his “Section16.net Blog“:

The SEC adopted a temporary rule yesterday that should make it easier for compliance personnel to obtain EDGAR codes for new directors and Section 16 officers during the covid-19 pandemic. The rule allows filers to obtain codes by submitting a manually signed authenticating document, without the notarization required by Rule 10(b) of Regulation S-T, so long as the submitted document includes a notation that the filer was unable to obtain the required notarization due to circumstances relating to COVID-19. A filer who receives EDGAR codes under the temporary rule must obtain a notarized, manually signed copy of the Form ID and submit a PDF copy as correspondence, vie EDGAR, within 90 days of receiving the codes. The relief is available through July 1, 2020.

See yesterday’s blog regarding the “manual signature” requirement.

Our April Eminders is Posted!

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– Lynn Jokela

April 1, 2020

Corp Fin Issues 2 New Delayed Filing CDIs

Yesterday, Corp Fin issued 2 new CDIs addressing the interplay of Form 12b-25 and Corp Fin’s modified Covid-19 exemptive order that it issued last week providing SEC filing relief for companies affected by the Covid-19 crisis.  Here they are:

Question 135.12

Question: A registrant expects that due to COVID-19 it will be unable to file a report of the type covered by Rule 12b-5 on timely basis without incurring an unreasonable effort or expense. It is uncertain as to its ability to file the required report within the applicable 12b-25(b)(2)(ii) period. Should the registrant instead furnish a report on Form 8-K or 6-K, as applicable, relying on the COVID-19 Order (Release No. 34-88465 (March 25, 2020))?

Answer: As a condition to its use, the COVID-19 Order requires, among other things, that the registrant furnish certain specified statements by the later of March 16, 2020 or the original due date of the required report. If the registrant only files a Form 12b-25 by the original due date of the required report, it will have not met the condition of the COVID-19 Order to provide the statements called for by the original filing deadline on a furnished Form 8-K or Form 6-K. Unless this condition is met, the 45 day relief period provided in COVID-19 Order will not be available. Registrants unable to rely on the COVID-19 Order are encouraged to contact the staff to discuss collateral consequences of late filings. [March 31, 2020]

Question 135.13

Question: Can a registrant that filed a Form 12b-25 subsequently rely on the COVID-19 Order (Release No. 34-88465 (March 25, 2020)), to extend the filing deadline for the subject report?

Answer: The COVID-19 Order is conditioned on a registrant having furnished a Form 8-K or Form 6-K by the later of March 16, 2020 or the original due date of the report. A Form 12b-25 filing does not extend the original due date of a report. Therefore, unless a registrant that filed a Form 12b-25 also furnished a Form 8-K or Form 6-K by March 16, 2020 or the original due date of the report, it would not be able to rely on the COVID-19 Order.

On the other hand, a registrant that relies on the COVID Order for a report will be considered to have a due date 45 days after the original filing deadline for the report. As such, the registrant would be permitted to subsequently rely on Rule 12b-25 if it is unable to file the report on or before the extended due date. Registrants unable to rely on the COVID-19 Order are encouraged to contact the staff to discuss collateral consequences of late filings. [March 31, 2020]

Heightened Insider Trading Risk

With the ongoing Covid-19 pandemic, there is heightened risk for insider trading as more people might have access to material non-public information (MNPI).  We’ve blogged before about the need to maintain confidentiality of MNPI and with nearly everyone working remotely, this seems especially important now.  The SEC has made clear that it’s focused on securities fraud during the current crisis.  Last week, the Co-Directors of the SEC’s Division of Enforcement issued a statement about the impact of Covid-19 on market integrity.  Here’s an excerpt:

In these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access – including, for example, directors, officers, employees, and consultants and other outside professionals – should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading.

In this interview transcript on CNBC, SEC Chairman Clayton reiterated this message saying “anyone who is privy to private information about a company or about markets needs to be cautious about how they use that private information. That’s sort of fundamental to our securities laws and that applies to government employees, public officials, etc.  And the STOCK Act codifies that.”

These recent statements come on the heels of reports about Congressional trades right before the market downturn, which are now reportedly being investigated by the DOJ and SEC.  But if companies haven’t already done so, now would be a good time to review who has access to inside information and compliance procedures to see whether extra steps are necessary to minimize insider trading risk.

Transcript: “The Coronavirus: What Should Your Company Do Now?”

We have posted the transcript from our recent webcast: “The Coronavirus: What Should Your Company Do Now?”

Lynn Jokela

March 31, 2020

Making Use of ESG Ratings

As is often said – beauty is in the eye of the beholder – some might say the same about ESG ratings, then again maybe not – it wasn’t too long ago that Liz blogged about how ESG ratings and funds were causing so much confusion – and frustration.  The idea of a rating sounds great – evaluate a bunch of company-specific factors and calculate a rating so investors can evaluate companies based on their particular ESG interests and areas of focus.  But, it’s not that simple because, among other things, we don’t have standard disclosure and reporting frameworks in place, raters use varying methodologies, investors use them differently, etc.

A recent BNY Mellon report based on a survey of 335 investor relations professionals says that only a small percentage of survey respondents agree with ESG rating providers’ analyses of their company.  In 2019, slightly over half of survey respondents had communicated with an ESG rating provider in the past 12 months, which was up from 34% in 2017.

BNY Mellon’s report says that IR departments are increasingly monitoring their company’s ESG ratings, even more so at companies with higher market caps as they presumably have more staff.  One reason companies might want to monitor ESG ratings is that investors often raise ESG questions during engagement meetings so it’s helpful to know which ratings your investors track and understand those raters’ methodologies.  The BNY Mellon report summarizes the increase in investor ESG questions by topic and industry sector so you can see the types of questions you might hear this year.

I’ve heard suggestions that one way ESG ratings might be more useful would be if the ratings assessed the evolution of a company over time and its trajectory toward sustainability rather than comparing firms, even in the same industry.

For now, the usefulness of ESG ratings as stand-alone information seems questionable as one rater might rate a company high and another might rate the same company low.  If anything, companies can find usefulness in the ratings to prepare for investor engagement meetings by understanding which ratings investors are tracking and the related rating methodologies.

Glass Lewis Approach to Governance During Pandemic

Not long ago, I blogged over on our “Proxy Season Blog” about Glass Lewis’s updated policy on virtual-only shareholder meetings.  Glass Lewis recently posted another blog – this one about its approach to governance during the coronavirus pandemic. In its governance blog, Glass Lewis touches on compensation and balance sheets – which is the area where it expects to see most near term concerns and issues, board composition and effectiveness, activism and M&A, oil & gas, shareholder proposals & ESG, how Glass Lewis uses discretion and how a company’s disclosure can impact Glass Lewis’s use of discretion.  Here’s some of the proxy advisor’s commentary on board composition amid the pandemic:

For boards, we see particular risk in the lack of age and gender diversity among company directors.

Much like shareholder concerns with overcommitment this lack of diversity presents a systematic risk to portfolios, given directors typically sit on several boards and one sick or deceased director can have a compound effect on the capacity of other directors at those companies, which then spreads to the other companies those directors sit on, and so on.

Ultimately, the ability of boards and management to successfully navigate the crisis and outperform their competitors will highlight the stark differences in the effectiveness of boards, directors and their governance structures. In our experience during past crises, well governed companies who made the right decisions during the good times are well prepared and durable during a crisis, and far better positioned to deliver shareholder returns afterwards.

Transcript: “Conduct of the Annual Meeting”

We have posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”

– Lynn Jokela

March 30, 2020

CARES Act – Nearly Everything but the Kitchen Sink

It came together quickly, some might say not fast enough but last Friday, the Coronavirus Aid, Relief and Economic Security (CARES) Act became law.  It is believed to be the largest emergency stimulus package in U.S. history and it will have a significant impact on businesses and employees.  There’s a lot in it – for those looking for a shorter version (the bill is 880 pages), here’s a section-by-section summary and this Skadden memo provides an overview. This Cleary memo summarizes 10 key aspects to the bill:

1. Assistance for affected industries – $500 billion in loans, loan guarantees and other investments for industries affected by COVID-19, $454 billion for eligible businesses, states and municipalities and $46 billion for aviation businesses and national security-critical businesses

For aviation businesses and national security-critical businesses, Treasury must receive warrants, equity or senior debt from the borrower. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions apply. Airlines can be required to continue service of existing routes to the extent reasonable and practicable.

– See John’s blog from Friday for a nuance of the stock buybacks provision relating to airline companies

For borrowers receiving relief from the $454 billion bucket, the Federal Reserve may make loans or purchase obligations or other interests directly from issuers or in the secondary market. Restrictions on share repurchases, capital distributions on common stock and executive compensation apply to direct loans to eligible businesses, unless waived by Treasury, and workforce reduction restrictions apply with respect to the mid-sized business program.

2. Airline grants to support aviation workers – $32 billion, Treasury may make direct grants to the aviation industry that must be exclusively used for wages, salaries and benefits

Again, Treasury has authority to require warrants, equity or debt. Restrictions on share repurchases, capital distributions on common stock, executive compensation and workforce reductions, and airline service requirements, apply.

3. SBA assistance for small businesses – $349 billion Paycheck Protection Program – SBA will provide guarantees for loans to small businesses generally less than 500 employees, aimed at covering payroll and necessities like rent and utilities and include loan forgiveness provisions that are available if certain conditions are met

4. Financial sector liability guarantees – among other things, this includes a guarantee program for the U.S. money market mutual fund industry and bank debt guarantee authority

5. Financial institution regulatory relief –among other things, this includes lending limit waivers, community bank relief, regulatory capital relief for SBA lending and accounting relief for financial institutions

6. Tax relief – among other things, this includes an employee retention tax credit, deferral of certain employer payroll taxes, increased ability to deduct net operating losses, an increase in the business interest allowable deduction from 30% of adjusted taxable income to up to 50%

– Also tucked in this section is a waiver of the federal excise tax on any distilled spirits used for making hand sanitizer – doubtful we’ll hear complaints about this business tax break

7. Mortgage & real estate related relief – among other things, this includes foreclosure moratorium and forbearance of multifamily residential mortgage loan payments on federally backed loans

8. Potential relief for the hotel & restaurant industry

9. Employee benefits & tax-qualified retirement savings plans – among other things, this includes ability for individual withdrawals on a tax favorable basis from eligible retirement plans and an increase in dollar cap on loans from qualified employer plans

10. Family & medical leave – revisions to the Families First Coronavirus Response Act

The CARES Act also includes targeted funding for the health care system and other important provisions like unemployment -this McDermott memo delves into provisions related to the health care sector.

With the COVID-19 crisis unfolding daily, the measures taken by Congress, albeit imperfect, will hopefully stem some of the economic effects.  There will likely be several rounds of “fix-it” sessions as constituents representing both sides of the aisle have particular wish lists that can be taken up moving forward because as many have noted, if the crisis persists for even longer, there may be calls for additional economic relief.

To help you find resources addressing various CARES Act provisions, we’re posting memos specifically related to the CARES Act in our “COVID-19” Practice Area.

CECL Delayed Effectiveness

The FASB standard for current expected credit losses (CECL) took a double-blow on Friday and is delayed after all.   The CECL standard was supposed to take effect in January 2020, but as this Compliance Week blog reports, it’s delayed.

The CARES Act wedged CECL in on page 543 and allows banks to delay compliance until the earlier of December 31, 2020 or the date the coronavirus national emergency ends.

At the same time, the FDIC and Office of the Comptroller of the Currency issued a joint statement allowing banking organizations to mitigate the effects of CECL in their regulatory capital for up to two years. The interim final rule, which takes immediate effect but is not mandatory for banks wishing to stay the course, applies to organizations required to adopt CECL by its Jan. 1 effective date this year and is an addition to a three-year transition period already in place.

Rationale for slipping this provision in the CARES Act seems to be that since the standard requires banks to look forward while taking into consideration past experience and current conditions to predict which loans will be losers, given the current economic climate, that might prove problematic. As noted in this Accounting Today blog, this is likely welcome news to some banks as it eliminates a difficult task and reduces additional volatility – although some banks will likely comply with CECL anyway since they’ve been preparing for it over the last year.  Critics will likely make some noise about this CARES Act provision since the FASB drafted the standard in the aftermath of the 2008 financial crisis to help illuminate impending losses and given current economic conditions, this is something many likely want to see now.

Importance of Board Culture

An opinion piece in Bank Director discusses board culture and how it’s often an underappreciated factor in determining board effectiveness. Asserting that board culture is more enduring than personality, some of the values the author mentions that shape the board’s culture include:

– Independence: do board members feel empowered to ask questions, probe and examine?

– Transparency: is all relevant information being shared with the board?  Boards and management need to be reviewing the same information to facilitate effective oversight

– Access to information: boards need access to any information that is essential for their oversight responsibilities

– Alignment around objectives: all directors need to be aligned in their understanding and support of a company’s objectives and be focused on achieving them

One way boards can help ensure effectiveness is by evaluating their own culture in addition to the company’s culture. This report from Anti-Fraud Collaboration includes questions boards can use to help assess culture. The report also suggests steps the board can take improve oversight of company culture and it includes an outline of suggested oversight responsibilities for the board and each committee. The report suggests creating a culture dashboard and it lists metrics from different corporate functional areas that can help companies monitor trends.

– Lynn Jokela

March 27, 2020

CARES Act: Want Federal Money? Forget About Buybacks

Late Wednesday, the Senate unanimously passed the Coronavirus Aid, Relief and Economic Security (CARES) Act.  This Tax Foundation blog provides a detailed summary of the Senate bill, which is scheduled to go to the House for a final vote this morning. It’s expected to pass overwhelmingly, but passage might be delayed because one member is apparently asking the question, “what would Ayn Rand do?”

Although I suppose it’s conceivable that the House might try to tinker with the bill at the last minute, it seems unlikely that, with a Democratic majority, it would mess with one of the key conditions that the Senate bill imposes on companies seeking federal aid.  As this excerpt from the blog points out, if a company wants taxpayer money, it can forget about doing stock buybacks for a while:

The bill provides $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund. Additionally, this includes $25 billion in lending for airlines, $4 billion in lending for air cargo firms, and $17 billion in lending for firms deemed critical to U.S. national security. Firms taking loans must not engage in stock buybacks for the duration of the loan plus one year and must retain at least 90 percent of its employment level as of March 24, 2020.

In case you’re wondering, dividends are also off the table for these companies for that same period of time. The loans also impose not terribly onerous limits on compensation and severance pay, and will be subject to oversight by Congress & a special inspector general.

Buybacks:  Are Airlines Supposed to be Treated Differently?

Nobody is likely to shed any crocodile tears over companies receiving yet another federal bailout being prohibited from this type of financial engineering, but as I read through the bill, I noticed something interesting. Airlines have been the poster children for the buyback ban, and whether or not that’s the rationale, the language of the buyback restriction that applies to airlines & related entities is different than the language of the restriction that applies to companies getting money under the Treasury-backed Fed program.

Here’s the language of Section 4003(c)(3)(A)(ii)(I) (page 518) that applies to recipients of the Fed’s largesse. It requires them to agree that:

Until the date 12 months after the date on which the direct loan is no longer outstanding, not to repurchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business while the direct loan is outstanding, except to the extent required under a contractual obligation that is in effect as of the date of enactment of this Act;

Here’s the language of Section 4003(c)(2)(E) of the bill (page 516) that applies to the airlines. It requires them to agree that:

Until the date 12 months after the date the loan or loan guarantee is no longer outstanding, neither the eligible business nor any affiliate of the eligible business may purchase an equity security that is listed on a national securities exchange of the eligible business or any parent company of the eligible business, except to the extent required under a contractual obligation in effect as of the date of enactment of this Act

Similar language appears in Section 4114 of the bill, which deals with payroll support for air carrier employees. I took a quick look, and it appears that while the term “affiliate” is defined for at least one part of the CARES Act, it’s undefined in this particular part.  So, it seems that without further clarification, the highlighted language might well be construed to prohibit airline officers and directors from purchasing shares of their own company’s stock. As I mentioned, there are limits on comp that apply to recipients of the bailout (Section 4004), but is that what is intended?

Since it’s so sweeping & came together so fast, I’m sure that the CARES Act is full of little interpretive grenades like this one – which means that Congress hasn’t forgotten to take care of America’s lawyers as it prepares to fire its cash bazooka.

That reminds me of an old adage that I once saw on a coffee mug: “Every business has its own best season. That is why they say that June is the best month of the year for preachers. Lawyers have the other eleven.”

Undisclosed SEC Investigations & Company Performance

Francine McKenna recently posted an article on her website that discusses some SEC investigations that weren’t disclosed for quite some time after they were initiated. Although she acknowledges that companies aren’t generally obligated to disclose investigations, she cites some new research that says there’s a negative correlation between undisclosed investigations and company performance, and notes that the researchers suggest that could give insiders a trading advantage:

Undisclosed investigations, if investors knew about them, could help explain the subsequent economically meaningful declines in firm performance and increased share price volatility the researchers say occurs. Because the investigations are secret, the performance declines are slow and gradual, and are not quickly reflected in share prices. That suggests, the researchers write, that insiders who know the details of the investigation have a substantial information edge.

My own experience with SEC investigations has been that when companies are subject to them and opt not to make public disclosure, they usually close the trading window for those in the loop at some point fairly early in the process (usually when an informal investigation becomes formal, if not sooner). The research Francine cites suggests that it would prudent for any company that’s the subject of an SEC investigation that it hasn’t disclosed to take the same approach.

John Jenkins

March 26, 2020

Covid-19 Disclosures: Guidance From Corp Fin

Yesterday, Corp Fin issued CF Disclosure Guidance Topic No. 9, which addresses disclosure & other securities law obligations relating to the Covid-19 crisis. The guidance provides a helpful list of illustrative questions that companies should ask themselves when preparing disclosure documents. Here are some questions Corp Fin thinks companies should consider when thinking about the pandemic’s impact on their liquidity & capital resources:

How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?

Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?

The guidance also addresses insider trading concerns, as well as considerations for earnings releases. When it comes to earnings disclosure, Corp Fin touches on several issues, one of which is non-GAAP financial data.  While reminding companies of their obligations under Reg G & Item 10 of Reg S-K, the guidance also indicates some flexibility to the Staff’s approach under current conditions:

We understand that there may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In these situations, the Division would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.

As an example, the guidance references the case of a company that intends to disclose EBITDA information on an earnings call. The Staff’s position would permit the company to reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The guidance says that if a provisional amount or range is used, it should reflect a reasonable estimate of Covid-19 related charges not yet finalized, such as impairment charges.

SEC Modifies Covid-19 Exemptive Order

Yesterday, the SEC also issued a modified exemptive order extending the time period during which, subject to certain conditions, companies with operations affected by the Covid-19 crisis may delay their SEC filings by up to 45 days from the original due date. The SEC’s original order applied to certain disclosure filings that would’ve otherwise been due between March 1 and April 30, 2020. The modified order extends that period through July 1, 2020.

The SEC’s press release accompanying the modified order also indicates that, for purposes of determining Form S-3 eligibility & WKSI status, a company relying on the exemptive order will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report. The same approach will apply to a company’s eligibility to file an S-8 & for purposes of determining whether it is current in its reports for purposes of Rule 144(c).

RIP Judge Stanley Sporkin

Judge Stanley Sporkin, who passed away on Monday, was one of the truly towering figures in securities regulation during the latter half of the 20th Century. Here is a statement on his passing from SEC Chair Jay Clayton, and another one from the current co-directors of the SEC’s Division of Enforcement, which Sporkin built almost from scratch into an enforcement powerhouse during his tenure there in the 1970s. We offer our condolences to Judge Sporkin’s friends and family.

John Jenkins 

March 25, 2020

Executive Health: Covid-19 Illness Disclosures

I recently blogged about potential disclosure issues surrounding a corporate executive’s Covid-19 diagnosis.  Regrettably, this is no longer a hypothetical issue. For example, Altria Group recently filed a Form 8-K announcing that its Chairman & CEO had contracted the virus and was taking a leave of absence, and Baxter International recently filed a Form 8-K disclosing that the company’s CFO & a member of its board of directors had tested positive for the virus.

We don’t know what prompted Altria and Baxter’s decisions to make public disclosure, but this recent Sullivan & Cromwell memo lays out a number of reasons why companies may opt to go public with this kind of information in the context of the Covid-19 crisis. As discussed in this excerpt, one reason to voluntarily make this disclosure is the high risk of a leak due to the public health response to the pandemic:

Due to the nature of COVID-19, including the recommended public health measures for containing its spread, there is a significant likelihood that a senior executive’s actual or presumed positive COVID-19 diagnosis will leak. Under the current public health recommendations, and pursuant to the COVID-19 related policies adopted by many companies, if an individual tests positive for the virus (or is presenting serious symptoms or has been in contact with someone who is diagnosed), the number of people both within and outside the company who will be aware of an executive’s actual or suspected illness is likely to be much higher than for another type of illness. Combined with the current public interest relating to COVID19 infections, the likelihood of public dissemination is meaningfully increased.

The memo points out that voluntary disclosure when a leak is likely will give the company an opportunity “to present its assessment of the impact of an executive’s illness and plans in place for mitigating such impact, including implementation of any interim officer roles or succession planning and the potential impact on the rest of the company’s executive team and its board of directors.”

Reg S-T: SEC Staff Cuts Signatories Some Slack

If you read the headline of this blog and were hoping to read that the SEC finally joined the rest of the world and permitted electronic signatures for filings, I’m afraid you’re going to be disappointed.  No, the agency has just cut people some slack on the document retention requirement contained in Rule 302(b) of S-T.  That rule requires every signatory to an electronic filing to manually sign the filing or an authenticating document, and requires the filer to retain it for five years and produce it upon request to the SEC.

In light of the Covid-19 crisis, the Staff of Corp Fin, IM and Trading & Markets issued a statement yesterday to the effect that, while they continue to expect everyone subject to Rule 302(b) to comply with it to the fullest extent practicable, they will not recommend enforcement action if:

– a signatory retains a manually signed signature page or other document authenticating, acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic filing and provides such document, as promptly as reasonably practicable, to the filer for retention in the ordinary course pursuant to Rule 302(b);

– such document indicates the date and time when the signature was executed; and

– the filer establishes and maintains policies and procedures governing this process.

The statement also says that a signatory may also provide to the filer an electronic record (such as a photograph or pdf) of such document when it is signed. I know it isn’t what you were hoping for, but take what you can get. Check out this Cydney Posner blog for more details.

The 3rd Annual “Cute Dog” Contest is Decadent & Depraved

Well, it’s pretty apparent that most of you are unlikely to be short-listed for any judging vacancies that may arise at the Westminster Kennel Club. Under what bizarre alignment of planets is my dog Shadow currently in last place in the cute dog contest? Obviously, she should be winning in a landslide – and for your information, Andrea Reed’s dog “Peaches” is actually a bunny rabbit. As my mother – and probably yours – would say, “I do and I do and I do for you – and THIS is how you thank me?”

John Jenkins

March 24, 2020

The “Nina Flax” Files: Shelter in Place Neuroses

Like many of you, I’ve spent the last week sequestering myself in my home office, trying to be a model social distancer & trying not to wonder how long this will all last and how much damage it will do.  So has our faithful correspondent Nina Flax of Mayer Brown, and she weighs in with her thoughts on the way we live now:

The Bay Area was the first to institute a shelter-in-place, and even days before that, my family was in self-isolation (my son developed a cough, so we went on lock down). In watching American Idol recently (and I should mention that during each episode so far there have been multiple times I have had tears stream down my face – so inspiring and moving), there was great advice from Bobby Bones for Francisco Martin: “I’m going to give you a little advice about these nerves. You can’t will them away. So what I would suggest that you do is just embrace the fact that you’re just a nervous person.” Here is how I am embracing the fact that I can be a neurotic person at times and otherwise coping with the pandemic (for now):

1. Taking This Seriously. We are trying to do anything we can to not be any strain on the system in any way. We have some food already in the house, and as I write this on March 19th, for now have not gone to the supermarkets. I did place a Whole Foods order for toilet paper (since we do not have a hoard of it) and Matzo, Gefilte Fish and horseradish (to try to keep some semblance of normal around Passover). But we are also (i) rationing (to delay having to get food for as long as we can) and (ii) quarantining. For rationing, my husband and I have more fully embraced the parents-are-their-kids-garbage-cans mentality; anything that our son leaves, we eat before we decide what else we will eat. We also are setting aside at the beginning of the day what snacks our son wants that day in a designated box, so that he knows what he can have (and does not eat more). And, finally, trying to calorie restrict ourselves while not giving up on some things that make us happy – like a piece of chocolate. For quarantining, because current indications are that the virus can live on cardboard for 24 hrs and plastic and stainless steel for 2-3 days, we have had designated areas of our fridge and freezer for “older” food (meaning food from a store that has been in our fridge for more than 3 days) and “newer” food (that we place in one area, immediately wash our hands and leave untouched for at least 3 days). Clearly, as we got longer into this, the fridge and freezer areas became unnecessary. But we are also applying this old/new process to any mail that comes (including Amazon boxes). What goes along with taking things seriously is considering your actions that could result in a non-COVID-19 related visit to the doctor or hospital. For example, now is not the time that my son should be learning to ride a bike without training wheels. He likes training wheel riding just fine.

2. Being Considerate of our Friends in Essential Businesses. We need our friends in essential businesses to stay healthy, and part of staying healthy is staying happy. So please don’t complain to any of your friends who are still providing the services we need about cancelled yoga classes (not kidding, when speaking to our pediatrician for over-the-phone advice on our son’s cough (since we could not bring him in just in case), she mentioned how down she was when friends of hers would say things like this). Which is not at all to say you shouldn’t complain. I am a firm believer in needing the complaint-related release some of us get before keeping things in perspective. One thing that seemed to mean a lot to some of our friends is (i) telling them how seriously we are taking things (and letting them know about other friends and family who are being similarly neurotic), and (ii) saying thank you for all that they have always done and are now doing (which is something our family already does whenever we speak to someone in the military – so an easy expansion).

3. Being Grateful. I have touched on this one before, but want to come back to it again. I am grateful (i) to have a roof over my head (many in the Bay Area do not), (ii) have food in my fridge (same comment) and (iii) be in a position to assist others as we can. This ranges from asking our elderly neighbor if there is anything they need that we might have (over text/email, not in person), continuing to pay all of our service providers who we have asked to not come to our house during these times and determining food pantries and animal shelters we can monetarily support.

4. Staying Positive – or #teamhumanity. This is my favorite hashtag so far. Things that we are doing within this category are trying to enjoy the extra time we have with our son, so taking my “lunch” break to get a hug and see the crayon bits he melted into multi-color shaped crayons this morning. Staying in touch with friends through text, calls and especially video calls. Reaching out to a colleague who is in the US from abroad, having just arrived for a secondment two weeks ago. Sending around emails with fun things, like the Shedd Aquarium penguin videos or free opera streams or live virtual concerts. Reminding those with dogs to hug them. All of us who are fortunate to have jobs are juggling how to work under these conditions, but it is not insignificant the amount of time we will spend with our loved ones, human or furry, in person or otherwise. I hope we all come out of this more connected. That is at least my personal objective!

5. Relieving the Stress and Staying Healthy. I am not the best sleeper – but now I am trying to make sure I get at least 8 hrs of sleep each night. I am not the best at prioritizing exercise – but not I am increasing my 2020 goal from exercising once per week to at least twice per week. I am not the best at drinking water – but now I am trying to remember to drink the recommended daily intake each day. And, I am doing the things I know relieve my stress – meditating (which for me is watching really mindless TV), taking a bath and asking my family for hugs.

6. Limiting the News. This relates to item 5 above, but is so important I wanted to call it out separately. I check the news in the morning for 15 minutes and at night for 15 minutes. That’s it. Please do not get sucked in; it is not good for your mental health.

Let’s remember Anne Frank, who lived in a secret annex from July 6, 1942 until August 4, 1944. This will be hard, harder for others, and entirely surmountable. We can be amazing – I am already inspired by how others are rising to the occasion – from our preschool teachers who have arranged zoom meetings for the kids to see each other, to our neighbors who are all observing the stay-6-ft-apart concept but still engaging in friendly banter as we cross each other on dog walks from across the street, to clients who were not yet under shelter-in-place orders and offered to send staples to us, to our office leader arranging for video lunches, to my friends who have been also been FaceTiming my parents and keeping their spirits up. I continue to strive to embrace the positive.

New Practice Area: “Covid-19 Issues”

Over the last couple of weeks, we’ve been inundated with law firm memos and other materials covering a wide variety of legal issues raised by the Covid-19 crisis. In an effort to bring some order to those resources, I decided to organize them into a new “Covid-19 Issues” Practice Area. I think the last new practice area that we added was for the Wu Tang Clan. This one’s a lot less fun, but we hope it will make it easier for you to find the resources you need.

Transcript: “Audit Committees in Action – The Latest Developments”

We have posted the transcript for our recent webcast: “Audit Committees in Action: The Latest Developments.”

John Jenkins

March 23, 2020

Drawing Down Your Credit Line? You’ve Got Plenty of Company

As forecasts of the economic impact of the Covid-19 crisis become increasingly dire, it looks like many companies are taking a page from the financial crisis playbook and drawing down their credit lines to provide a liquidity buffer. Here’s an excerpt from this FEI newsletter:

Drawing down credit lines has become the cash-flow salvation for senior-level financial executives that have seen revenues come to an abrupt halt because of the coronavirus outbreak. Over the past week draw downs shot up with both public and private companies joined the line for liquidity. Public Fortune 500 companies like Boeing Co. and casino operator Wynn Resorts are reportedly tapping their credit lines to the tune of $13.8 billion and $850 million, respectively. Private companies are also joining the scrum, with PE firms Blackstone Group and Carlyle Group each urging their portfolio companies to draw down their credit lines to avoid a cash crunch.

The article notes that so far, banks have been accommodating these draw downs with help from the Federal Reserve, which has opened the liquidity spigots – and it says that so long as the Fed continues to provide funding, the banks are likely to continue to lend.

Annual Meetings: NY Temporarily Permits Virtual-Only Meetings

Some states, like Delaware, provide a lot of flexibility to companies that want to hold virtual annual meetings. But there are a number of states that either prohibit virtual meetings, impose impediments to them, or have provisions in their statutes that make the permissibility of such meetings unclear.  New York falls into this latter category, as this excerpt from a recent Sullivan & Cromwell memo points out:

New York’s Business Corporation Law (“NYBCL”) does not expressly provide that a meeting of shareholders may take place solely by remote communication, although Section 602 of the NYBCL allows a board of directors, where authorized, to implement reasonable measures to allow participation and voting at shareholder meetings by electronic communication. (A bill seeking to amend Section 602 of the NYBCL to expressly permit virtual-only meetings is currently pending.) The NYBCL also specifies that a company holding a shareholder meeting by virtual means must provide between 10–60 days’ advance notice, and such notice must include logistical details of how shareholders can participate in the meeting.

Sullivan & Cromwell now reports that late last week, in response to the Covid-19 crisis, NY Gov. Andrew Cuomo signed an executive order temporarily permitting New York corporations to hold virtual annual meetings. This excerpt summarizes the order:

The executive order provides that the Governor temporarily suspends subsection (a) of Section 602 and subsections (a) and (b) of Section 605 of the New York Business Corporation Law (“NYBCL”) “to the extent they require meetings of shareholders to be noticed and held at a physical location.”

Although the executive order suspends certain aspects of the meeting notice requirements under Section 605(a) of the NYBCL relating to a physical meeting location, companies incorporated in New York remain subject to all applicable shareholder notification and disclosure requirements under their governance documents, federal securities laws and stock exchange listing rules.

While the governor’s action will help New York corporations (at least through April 19th), another major jurisdiction with some funky provisions in its statute relating to virtual meetings has yet to provide its corporations with any relief – I’m looking at you, California.

Covid-19 Cash Crunch: Rethinking Dividends

The suddenness of the Covid-19 crisis has left many companies rethinking their liquidity needs. Those that declared a cash dividend before the crisis hit but haven’t yet paid it may be reconsidering whether that dividend is still a good idea. The problem is that there are several Delaware cases holding that once a company declares a dividend, it creates a debtor-creditor relationship between the company & its shareholders.

This recent memo from Morris Nichols, Richards Layton, Potter Anderson & Young Conaway provides some guidance on alternatives that may be available for companies that find themselves in this position. Here’s a suggestion for companies with record dates that haven’t yet passed:

If the record date for determining stockholders entitled to receive the dividend has not yet occurred, the board may determine to defer the record date and payment date for the dividend. The DGCL does not prohibit changing a record date or payment date that has not occurred. Accordingly, subject to any requirements under the certificate of incorporation, such as those relating to required quarterly payments of dividends on preferred stock, where the record date has not occurred, a board could change the record date and payment date for a dividend that has already been declared to a future date, so long as the payment date occurs within 60 days after that new record date.

The memo also points out that, even if the record date for the dividend has passed, there may be constraints prohibiting its payment. If the board is unable to determine that, at the payment date, the corporation has sufficient “surplus” (as defined in the DGCL) available to pay the dividend, or if the board believes payment of the dividend would leave the corporation insolvent, then Delaware law would prohibit the payment of the dividend.

Tomorrow’s Webcast: “Activist Profiles and Playbooks”

Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from the 2019 activist campaigns, expectations from activists in the 2020 proxy season and how activism differs for large and small cap companies.

John Jenkins

March 20, 2020

3rd Annual “Cute Dog” Contest…

Last fall, Broc ran the 2nd Annual “Cute Dog” Contest. Baker Botts earned bragging rights with Jude Dworaczyk’s “Penny the Hair Bow Aficionado” representing the firm. Some members responded asking that we run the contest again and some suggested a future “cute cat” contest, which we will try to get on deck for some time in 2020. So, with all the heavy news lately, let’s take a look at more “cute dog” photos – and one cute rabbit! The poll is at the bottom of the blog.

1. Gibson Dunn’s Lori Zyskowski – Snickers the “Snowdoodle”

2. Norfolk Southern’s Ginny Fog – Barnaby the “Chillin’ Lounger”

3. Covington & Burling’s Reid Hooper – Midnight and Hercules the “Dynamic Duo”

4. Travelers’ Wendy Skjerven – Mulligan the “Prince of Second Chances”

5. Our own John Jenkins – Shadow the “Backseat Driver”

6. Sidley Austin’s Andrea Reed – Peaches the “City Slicker”

Vote Now: “Cutest Dog Contest”

Vote now in this poll – anonymously – for the dog that you think is the cutest:

survey hosting


Cyan Agonistes: Del. Supreme Ct. Upholds Federal Forum Provisions

Sharing a blog entry here that John posted yesterday on DealLawyers.com as it’s of interest to many:  In its 2018 Cyan decision, the SCOTUS unanimously held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court.  Some corporations responded to Cyan by adopting “federal forum” charter provisions compelling shareholders to bring 1933 Act claims only in federal court.  Much to the chagrin of the defense bar, the Delaware Chancery Court struck those provisions down in Sciabacucchi v. Salzberg, (Del. Ch.; 12/18).

Yesterday, the Delaware Supreme Court unanimously reversed the Sciabacucchi decision.  In Justice Valihura’s sweeping 53-page opinion, the Court rejected claims that federal forum provisions were contrary to any Delaware law or policy, and read Section 102(b) of the DGCL as a broad enabling statute that provides Delaware corporations with more than enough flexibility to include a federal forum provision in their certificates of incorporation.

Section 102(b)(1) authorizes the certificate to include “any provision for the management of the business and for the conduct of the affairs of the corporation” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders.” While that authority can’t be used to adopt provisions that violate law or public policy, the Court concluded that a federal forum provision, or FFP, didn’t raise either of those concerns:

First, Section 102(b)(1)’s scope is broadly enabling. For example, in Sterling v. Mayflower Hotel Corp., this Court held that Section 102(b)(1) bars only charter provisions that would “achieve a result forbidden by settled rules of public policy.” Accordingly, “the stockholders of a Delaware corporation may by contract embody in the [certificate of incorporation] a provision departing from the rules of the common law, provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself.”

Further, recognizing that corporate charters are contracts among a corporation’s stockholders, stockholder-approved charter amendments are given great respect under our law. In Williams v. Geier, in commenting on the “broad policies underlying the Delaware General Corporation Law,” this Court observed that, “all amendments to certificates of incorporation and mergers require stockholder action,” and that, “Delaware’s legislative policy is to look to the will of the stockholders in these areas.” Williams supports the view that FFPs in stockholder-approved charter amendments should be respected as a matter of policy.  At a minimum, they should not be deemed violative of Delaware’s public policy.

The Court rejected claims that the language added to Section 115 of the DGCL in 2015 codifying the Boilermakers decision permitting exclusive forum bylaws represented an implicit recognition that FFP provisions were impermissible. It also rejected the Chancery’s effort to limit Section 102(b)’s reach to matters covered by the “internal affairs” doctrine, and said that the Chancery’s decision took a narrower approach to what constituted “internal affairs” than either applicable federal or Delaware precedent.

On a personal note, I’d like to express my thanks to the Delaware Supreme Court for giving me something to blog about that’s completely unrelated to the Covid-19 pandemic & for allowing me to fulfill my dream of using the word “agonistes” in a blog title.  Now, when somebody googles John Milton or Gary Wills, they may stumble across me! That’s the closest thing to literary immortality that a fat guy in pajamas pounding on a keyboard can reasonably hope to achieve. . .

COVID-19: First Securities Lawsuits Filed

With all the market turmoil, one more unfortunate outcome from COVID-19 is possible securities lawsuits – and it didn’t take long.  A memo from Jenner & Block says stock drop class actions have been filed against two companies.  First, there’s a suit against a cruise line operator alleging the company misrepresented the impact of COVID-19 by minimizing the likely impact on its operations.

Another suit has been filed against a pharmaceutical company. In this case, the suit alleges the company misrepresented its progress on a COVID-19 vaccine.  Hopefully these cases aren’t indicative of a coming trend.  Bottom line as noted in the memo – it’s hard to say whether these cases will be successful but companies should take extra care when making any public statements about the potential impact of COVID-19 on their business.

Lynn Jokela