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 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 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

March 19, 2020

Our New “Social Media Handbook”

Brand new! By popular demand, this comprehensive “Social Media Handbook” covers the entire terrain – from Reg FD, to proxy solicitation rules, to communications during offerings and business combinations, to reputational risks & opportunities. This one is a real gem – 95 pages of practical guidance – and it’s posted in our “Social Media” Practice Area.

COVID-19: Should You Update Earnings Guidance?

A lot of internal discussions are underway about whether to update earnings guidance about the effect COVID-19 might have on a company’s business or financial outlook.  A recent blog from communications firm Clermont Partners says so far, few companies have actually issued updated guidance about the expected financial impact from the health pandemic but they expect pre-announcements or guidance updates to accelerate.

For those debating about whether to update guidance, the blog provides considerations to think about before doing so, here are a few:

– Timing – when it’s time to communicate, tell investors what you know about near-term impacts and longer-term impacts

– Let investors know when they can expect to receive additional updates

– Severity – decide how much of an alarm bell you want to ring – once markets calm down it might be hard to reign expectations back

Another report from PwC looked at what finance leaders are focused on amidst the COVID-19 pandemic.  The report was based on a survey of 50 finance leaders.  It found most CFOs say their companies are impacted although the full extent remains unknown – the survey then takes a look at actions companies are taking.  Here’s some of what it found:

– More than half of survey respondents said they are considering taking cost containment measures

– Approximately 44% are considering adjusting earnings guidance

– When asked about plans to change disclosures, 48% say they’re planning changes as a result of COVID-19 and 8% said the changes would be “significant”

– In terms of the extent of disclosure changes as a result of COVID-19 – 40% said somewhat and another 38% said it’s currently difficult to assess

For more info on this topic, tune in today to our webcast – “The Coronavirus: What Should Your Company Do Now?

CCPA: More Proposed Changes

A couple of weeks ago, I blogged about managing data privacy compliance and noted that California’s AG had proposed two rounds of amendments to the California Consumer Privacy Act in February.  We’ll see if the third time’s a charm because last week, California’s AG issued another round of revisions – comments are due by March 27th.

California’s AG can enforce the CCPA as of July 1, 2020 whether final regulations are in place before then or not.  A recent Gibson Dunn memo provides a summary of the primary changes included in the latest round, which cover:

– Deletion of guidance on definition of “personal information”

– Change in definition of “financial incentive”

– Removal of the optional “opt out” button

– Relaxation of notice requirement for companies not selling consumer data

– Additional requirements for privacy policies

– Responding to requests to know and requests to delete

This recent blog from BakerHostetler says a 6-month delay in the enforcement of the CCPA has been requested to allow time for companies to focus on COVID-19 related issues.

– Lynn Jokela

March 18, 2020

Annual Meetings: Attendance Considerations

This year, another aspect to annual shareholder meetings to think about is whether your directors, officers and other employees should attend the annual meeting – presuming that it’s not a virtual-only meeting.   A Hunton Andrews memo discusses that question and notes the following considerations:

– Proxy statement disclosure – SEC rules require proxy statement disclosure describing a company’s policy, if any, about director attendance at annual shareholder meetings – and next year, a company will need to disclose in their proxy statement the number of directors who attended the prior year’s annual meeting

– What does “attendance” mean?  SEC rules don’t define what constitutes “attendance” for purposes of SEC rules; however, many state laws say its okay for a director to participate in meetings remotely – such as by telephone – provided the director can hear and speak with other directors

– Companies holding in-person or hybrid shareholder meetings should review any director attendance policies they might have to determine if the policy requires “in-person” or “physical” attendance

The memo also provides considerations for companies that are planning to hold an in-person meeting while potentially allowing directors or other senior officers to participate remotely – it says be aware of potential criticism from shareholders and notes that a hybrid meeting format might help alleviate potential criticism.

“Tomorrow’s Webcast: “The Coronavirus: What Should Your Company Do Now?”

Tune in tomorrow for the webcast – “The Coronavirus: What Should Your Company Do Now?” to hear Davis Polk’s Ning Chiu, Wilmer Hale’s Meredith Cross, Uber’s Keir Gumbs and our own Dave Lynn discuss securities law compliance and corporate governance issues arising from the coronavirus outbreak that are confronting public companies & their lawyers.

Tomorrow’s Webcast: “The Top Compensation Consultants Speak”

And, tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay and Deloitte’s Mike Kesner discuss what compensation committees should be learning about and considering today.  Discussion will cover the impact of the COVID-19 pandemic on executive compensation and incentive practices, including goals, timing and incentive plan share usage amid this rapidly changing environment with continued uncertainty.  Don’t miss it!

– Lynn Jokela

March 17, 2020

COVID-19: Buybacks & Rule 10b5-1 Plans

John blogged last week about stock buybacks in response to market turmoil and various news outlets reported that several large banks have suspended their stock buybacks due to the COVID-19 pandemic.  For those looking for information about conducting a buyback through a Rule 10b5-1 plan, this Morrison Foerster memo discusses questions about adopting a plan and potential modification given current events.  It walks through – and reiterates – best practices in spite of current market conditions.

The memo points out that Rule 10b5-1 plan best practices are not bright line rules and any company should weigh the pros and cons when deciding whether to adopt a plan, including how adoption of such a plan during the COVID-19 outbreak might be viewed in hindsight by the public, outside investors, or law enforcement agencies.

Frequency of COVID-19 Board Updates

How often to brief the board is a question many are asking as we deal with COVID-19 related issues.  A recent blog from Financial Executives International provides information about how often some are providing updates based on information gathered from a survey of corporate risk professionals.

The survey said most survey respondents are briefing their boards “as needed only,” while 25% haven’t made a decision yet or don’t currently have executive-level briefings.  Another 8% are updating their boards weekly.

As for topics, this Sidley memo discusses ten concerns for boards during the COVID-19 pandemic – it’s a thorough list and helpful if you are preparing for a board update meeting.  One of the topics covered is business continuity and, among other things, it says the plan should be continually re-evaluated and that you should consider whether contingencies are in place if a board quorum isn’t available.

Undoubtedly, the decision about updating the board varies from company-to-company and company specific facts and circumstances will guide the decision.  To not over-burden management by holding one-on-one director briefings, the blog cites the head of KPMG’s Board Leadership as suggesting independent chairs and lead directors interface with management and then brief directors.

Board-Level Oversight of Sustainability Disclosures

Board-level oversight of sustainability initiatives and disclosure is up for grabs at many companies.  This PwC memo discusses reasons audit committees might be best positioned to take on oversight responsibilities for sustainability disclosures.  Granted, some companies have established a board-level sustainability committee, here’s a committee charter from Ford and another from Bunge.  Audit committees always seem to have a full plate and with more attention focused on sustainability reporting, PwC suggests they take on even more.  Here’s an excerpt from PwC’s memo:

Public disclosure of ESG metrics requires appropriate policies, controls and governance, similar to other elective financial metrics, such as non-GAAP metrics.  Companies should have processes and controls around the development of those disclosures to support the accuracy of the data.

The audit committee has deep skills in overseeing internal controls, policies and procedures, and reporting.  Audit committees can play a role by understanding the methodologies and policies used to develop the metrics, as well as the internal controls in place to ensure accuracy, reliability, and consistency of the metrics period over period.

The memo references the SEC’s interpretive guidance issued in February regarding key performance indicators in the MD&A saying “we encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.”

Not long ago, John blogged about how the SEC’s MD&A guidance heightens the stakes for ESG disclosures.

– Lynn Jokela

March 16, 2020

Annual Meetings: Corp Fin Issues “Covid-19” Guidance

Friday afternoon, to accommodate companies and shareholders who are changing their annual meeting plans in response to COVID-19, the SEC announced that Corp Fin was providing Staff guidance about compliance with federal proxy rules for upcoming annual shareholder meetings – this includes guidance about virtual shareholder meetings.  Here’s an excerpt from the press release:

The staff guidance provides regulatory flexibility to companies seeking to change the date and location of the meetings and use new technologies, such as “virtual” shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.

Under the guidance, the affected parties can announce in filings made with the SEC the changes in the meeting date or location or the use of “virtual” meetings without incurring the cost of additional physical mailing of proxy materials.

The guidance also encourages companies to provide shareholder proponents with alternative means, such as by telephone, to present their proposals at the annual meetings in light of the difficulties that shareholder proponents face due to COVID-19.

Virtual Shareholder Meetings: CII & Proxy Advisor Positions

Many have been wrangling with all the considerations of holding virtual-only or hybrid shareholder meetings during this time of “social distancing.” This Perkins Coie memo provides considerations from the West coast and this blog from Bass, Berry Sims does a nice job discussing practical considerations, including considering views of institutional investors and proxy advisors.  We reached out to Amy Borrus from the Council of Institutional Investors and she kindly provided this statement about CII’s position on virtual-only shareholder meetings:

“CII generally has opposed virtual-only shareholder meetings, in favor of a hybrid approach. Given coronavirus concerns, it is reasonable that some companies will go to virtual-only this spring. But we hope they will make it clear that this decision was one-off, and that they follow best practices for making any virtual meeting participatory.”

Meanwhile, this NYT DealBook article includes a statement from NYC Comptroller Scott Stringer:

The funds he oversees ‘will not take action against boards holding virtual-only annual meetings due to the coronavirus that disclose their rationale and affirm their commitment to holding in-person meetings in the future.’

State laws and company organizational documents may prevent some companies from holding a virtual-only shareholder meeting.  But legal issues aside, virtual meetings aren’t without criticism.  Among other things, some investors say the meetings don’t allow shareholders to interact with management and directors and there are concerns that shareholders might not be able to get all questions answered, etc.  This criticism has led some investors to vote against directors at companies that hold a virtual-only shareholder meeting.

Due to these concerns (and others), it’s understandable why companies might be hesitant to shift to a virtual-only meeting format – so the statements from CII and the NYC Comptroller may help some companies who’ve been wrestling with the decision about what to do.

What about ISS & Glass Lewis? At least for this year, they’re relaxing their policies.  This Cleary memo covering virtual meeting considerations includes the updated guidance from ISS and Glass Lewis released by Kingsdale Advisors. Glass Lewis also has a memo on its website – here’s an excerpt from Cleary’s memo:

Glass Lewis: Consistent with its current 2020 proxy voting guidelines, Glass Lewis has indicated that it will continue to review an issuer’s proxy materials regarding virtual shareholder meetings. Pursuant to its 2020 guidelines, Glass Lewis will generally recommend voting against governance committee members where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclosure in their proxy statement assuring shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting.  The memo includes examples of what Glass Lewis considers “effective disclosure”.

Glass Lewis stated that, in context of coronavirus, companies that have already filed their proxy statements and provided information for an in-person meeting but are moving to a virtual-only meeting should provide public disclosure explaining the rationale. Such disclosure should specifically state that the change is due to the coronavirus outbreak, include complete information about accessing the meeting and confirm shareholders will have the same opportunities to participate – as they would have had at an in-person meeting.

ISS: Though it has not previously adopted a formal policy on virtual shareholder meetings, ISS stated that in light of the coronavirus outbreak and the rapidly changing environment, ISS expects that institutional investors will likely be more accommodating of virtual meetings this year.

Like Glass Lewis, ISS stated that it will require companies to provide comprehensive disclosure affirming that a virtual meeting will provide full opportunities for shareholders to participate, ask questions, provide feedback to the company and present shareholder proposals.  ISS also indicated that it anticipates the way in which companies manage virtual meetings this year will impact its future position on virtual shareholder meetings.

Virtual Annual Meetings: Sample Disclosures

John blogged last week about resources addressing the various legal considerations on “going virtual” for this year’s shareholder meetings.  For those looking for sample disclosures, here are a few that might help.

BNY Mellon’s 2020 proxy statement provides a sample of a company planning to hold an in-person shareholder meeting but also contains the following precautionary statement:

As part of our precautions regarding the coronavirus or COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of remote communication. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be available at

Other examples of precautionary statements regarding annual meeting plans due to COVID-19 can be found in the 2020 proxy statements (most commonly in the Notice of Annual Meeting page of the filing) from Bank of America (also on its annual meeting microsite), Citigroup (pg. 7), Moody’s Corporation, Northern Trust and Teledyne Technologies.

Examples of companies that have held virtual-only or hybrid meetings that some investors might view as being run well include Intel, Ford and ConocoPhillips.  I found the following information after taking a look at each of the companies’ 2019 proxy statements.  Perhaps some investors would find similar meeting formats and information transparency somewhat more acceptable, especially this year.

Intel’s 2019 proxy statement included instructions with links that helped shareholders submit questions in advance and also during the meeting.  The proxy statement also said the company would make a replay available on its Investor Relations website and Intel’s Investor Relations website also includes answers to investors’ questions from the 2019 meeting.

Ford’s 2019 proxy statement includes a full-page of instructions for last year’s virtual-only meeting.  The instructions provided information for shareholders to submit questions in advance and during the meeting, and provided a toll-free telephone number for someone to call if they ran into technical difficulties.

ConocoPhillips held a hybrid meeting and its 2019 proxy statement included instructions for attending in person or for viewing a live video webcast of the meeting.  The proxy statement also provided information allowing shareholders to submit questions in advance of the meeting.  The company has a link on its Investor Presentations website to access a replay and a transcript from last year’s meeting.

And, for anyone interested in following Warren Buffet’s lead, he announced last Friday that Berkshire Hathaway’s annual meeting will be streamed online by Yahoo Finance without shareholders present – here’s the story from CNBC.

– Lynn Jokela