Monthly Archives: June 2020

June 16, 2020

“. . .And It’s Gone!” Bankrupt Hertz Offers $500 Million in Equity

Do you remember that “South Park” episode that aired during the financial crisis in which one of the characters deposits a $100 birthday check from his grandmother into the bank? The banker takes the money, “puts it to work” in a mutual fund and immediately announces “. . . and it’s gone!”  That episode was the first thing that came to mind when I read this risk factor language in Hertz’s pro supp for a $500 million ATM offering launched in the midst of its Chapter 11 bankruptcy proceeding:

Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.

That’s pretty bleak disclosure, and nobody can say they weren’t warned about the perils of this investment. Even so, Hertz’s decision to tap the public equity market – which the bankruptcy court approved last Friday – in its current financial state definitely raises the bar when it comes to corporate chutzpah. On the other hand, can you blame the company for trying to capitalize on the recent speculative frenzy in its stock in order to increase the size of its bankruptcy estate?

If “Davey the Day Trader” & the gang are willing to sign up to buy stock that the company is basically telling them is worthless, then maybe instead of South Park, I ought to cite 1920s speakeasy impresario Texas Guinan, who famously welcomed her customers by exclaiming, “Hello suckers! C’mon in and leave your wallets at the bar!”

IPOs: Virtual Road Shows On the Rise

The grueling, globe-trotting – “if it’s Tuesday this must be Zurich” – road show process has long been a big part of the IPO experience for management teams & their bankers. In the Covid-19 era, however, this PitchBook article says that virtual road shows may become the “new normal”:

Virtual IPO roadshows likely are here to stay after the pandemic, said Andreas Bernstorff, head of equity capital markets at BNP Paribas. BNP was one of the lead bankers for Peet’s €2.25 billion (around $2.55 billion) IPO on Euronext in May. Bernstorff acknowledged that sizing up a founder or its executives can be more difficult through video without making eye contact or reading body language.

Nevertheless, he said, virtual roadshows have exposed inefficiencies in the IPO process.

“The benefits are obviously avoiding traveling around the world, but also the fact that it can be a faster and more efficient way to reach more investors,” Bernstorff said. “It also has a very distinct benefit of being able, up to a degree, to shorten the period in which one needs to be in the market.”

The article says that fully virtual road shows may not make sense for all issuers. Companies with a low profile and those that operate in volatile markets will likely continue to find it necessary to meet in-person with key investors as part of the marketing process.

Will CLOs Turn the Covid-19 Crisis into a Full Blown Financial Crisis?

If you find yourself sleeping too soundly, check out this article from the July issue of The Atlantic.  The article says that collateralized loan obligations, or CLOs, share many similarities with the CDOs that nearly tanked the global financial system a decade ago – and the balance sheets of major banks are full of them.

The problem is that these AAA rated pieces of paper are comprised of a bunch of low-quality corporate debt, and the rash of bankruptcy filings expected in the wake of the pandemic may well upset the applecart when it comes to the default rate assumptions on which those investment grade ratings were based.  What’s the worst “worst case” scenario? According to the article, it’s very, very bad.

John Jenkins

June 15, 2020

Our “Proxy Disclosure” & “Executive Pay” Conferences: Now Three Days! With Bill Hinman!

We’ve just added Bill Hinman – Director of the SEC’s Division of Corporation Finance – as another top-notch speaker at our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – which will now be held entirely virtually, September 21-23rd. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get an “early bird” discount – here’s the registration information. Here are the agendas – 18 panels over three days.

Among the panels are:

– Bill Hinman Speaks: The Latest from the SEC

– The SEC All-Stars: A Frank Pay Disclosure Conversation

– The SEC All-Stars: Q&A

– Pay-for-Performance: What Matters Now

– Pay-for-Performance: Q&A

– Directors in the Crosshairs: Pay, Diversity & More

– Dave & Marty: True or False?

– Pay Ratio: Latest Developments

– 162(m): Where Things Stand

– Clawbacks: What to Do Now

– Dealing with the Complexities of Perks

– How to Handle Negative Proxy Advisor Recommendations

– Human Capital: The Compensation Committee’s Role

– The Big Kahuna: Your Burning Questions Answered

– The SEC All-Stars: The Bleeding Edge

– The Top Compensation Consultants Speak

– Navigating ISS & Glass Lewis

– Hot Topics: 50 Practical Nuggets in 60 Minutes

PPP Loans: Media Giants Seek to Compel Disclosure of Borrowers

A lawsuit filed last week by The Washington Post, Bloomberg, The New York Times, Dow Jones and Pro Publica in a D.C. federal court seeks an order compelling the SBA to produce that information pursuant to outstanding FOIA requests submitted by the companies. The SBA has been slow-walking these requests, and Treasury Secretary Steve Mnuchin recently said that the identities of PPP borrowers won’t be disclosed. He appears to be hanging his hat on Exemption 4 from FOIA.

I guess we’ll see. I’m no FOIA expert, but if the question is whether information about the identity of a private borrower & loan amount are required to be disclosed under a FOIA request, the answer that I’ve seen from lawyers who’ve looked at the issue is yes, that information must be disclosed.

Transcript: “Politcal Spending – What Now?”

We have posted the transcript for our recent webcast: “Political Spending – What Now?”

John Jenkins

June 12, 2020

“Offboarding” to Achieve Optimal Board Composition

Rather than thinking about how to refresh the board when directors approach mandatory retirement ages or term limits, a recent opinion piece in Forbes suggests “offboarding” as an alternative method to change board composition.  Some might think “offboarding” is a nice way of saying “removal” but here’s what the author says about it:

For many reasons, it is critical for the board’s governance committee to take a closer look at what “offboarding” might achieve as a governance tool. Director offboarding is a focused board process to achieve a structured separation from certain directors without prompting controversy or ill will. It’s intended to allow the board to achieve necessary turnover more quickly and expansively than through term limits or mandatory retirement age, and more gently than through removal.

As defined by NACD and others, “offboarding” processes are grounded in a shared understanding amongst all directors of why an individual was appointed, and of the board’s expectations of performance. From the beginning of board service, directors are ideally made aware of the potential that they may be asked to leave the board before their term has formally concluded. It also involves an ongoing evaluation by the governance committee of the skillsets needed by the board, and conversations on whether individual director backgrounds continue to meet those needs.

The author attributes several factors as leading to more interest in offboarding, the first being that board composition doesn’t change all that fast and governance matters relating to how companies have responded to the Covid-19 pandemic, economic disruption and social unrest are leading to increased focus on board composition.

One effect of the Covid-19 pandemic has been increased concern with director bandwidth.  Earlier this year, State Street was the latest asset manager to update its director “overboarding” policy – here’s Sidley’s memo about that.  Maybe some directors will scale back board commitments and focus their efforts elsewhere. That’s what Reddit’s co-founder Alexis Ohanian did when he announced he was stepping down from Reddit’s board – he took things a bit further by asking the company to replace him with a black board member – and this week the company did by appointing Michael Seibel, CEO of Silicon Valley startup accelerator Y Combinator.

Aside from concerns about overboarding, the author says many companies will emerge from the pandemic with different competitive footprints and economic models. Although Reddit’s Ohanian may not start a trend and traditional board refreshment methods will certainly persist, maybe increased focus on board composition as a result of current events will lead more boards to consider offboarding as an option for bringing new ideas and perspectives to the boardroom.

Tips for Moving Forward with ESG Reporting & Disclosures

A recent Covington memo provides 7 “what to do” and “what not to do” tips for companies starting down the path of voluntary ESG reporting and disclosures.  As investor focus on ESG disclosures sharpens, if companies haven’t already done so, the memo suggests companies start charting a path forward for these disclosures.  Covington’s memo notes that despite investor interest, there’s risk courts could find voluntary ESG disclosure materially false or misleading.   The recommendations are a good source of helpful tips, here’s what it says about bringing a “securities lawyer eye” to the effort:

– Include forward-looking statement disclaimers and/or other hedging language to clarify that the standards or goals described in the ESG disclosures are not guarantees or promises, as well as the factors that could cause material deviations from these standards or goals

– Frame ESG goals in aspirational language, using words such as “seek,” “expect” or “strive” and avoid making unqualified commitments, using words such as “shall” or “will”

– Challenge comparative and qualitative statements regarding ESG performance such as “best,” “most,” “largest” or “first” and assure that the company has adequate back-up for such statements

– Define in plain English any jargon or terms that lack well-understood definitions that are associated with ESG disclosures

– Cross check the company’s SEC filings against ESG reports to avoid inconsistencies in facts or degrees of emphasis

Resource Explaining ESG Jargon

Keeping up with the latest ESG terminology is nearly impossible as a lot of jargon can be industry specific.  That’s why it’s nice to see Latham & Watkins “ESG Book of Jargon” explaining many current ESG-related terms and acronyms.  If you’re wondering what something might be referencing, check it out – it’s 151 pages and covers lots of terms and phrases.

– Lynn Jokela

June 11, 2020

Cyber Breach Disclosure Trends

Last year, Liz blogged about how disclosure related to a cyber breach presents a tricky issue because disclosure requirements vary quite a bit for companies based on state-specific laws, industry rules, varying international laws and then of course, SEC requirements.  Audit Analytics recently issued a report analyzing cyber breach disclosure trends from 2011 – 2019.  A chart on the first page of the report shows a dramatic increase in the number of breaches since 2011, with an increase of 54% in the last two years.  In terms of disclosure detail, here’s some of what the report found:

– 43% of firms that reported a cyber breach since 2011 didn’t disclose the type of attack – meaning whether it resulted from malware, phishing, unauthorized access, etc.

– For companies disclosing a data breach, since 2011, Audit Analytics found that it took an average of 108 days before companies discovered the breach – with a maximum of 1,625 days and a median of 30 days

– But, it took companies on average another 49 days before disclosing the breach – with a maximum of 456 days and a median of 30 days

– The report mentions, as most already know, that delays in discovering data breaches may raise red flags about internal controls and disclosure delays could lead to SEC action as was the case involving Yahoo! several years ago

– Shedding light on factors that may lead to delays in discovering data breaches and longer disclosure time, the report found companies in certain industries, the type of attack and type of information all impact time to discover a breach and delays in disclosure – the blog provides specifics on these findings

Cyber Breach Disclosure & Insider Trading Risk

The risk of insider trading with cyber breaches originates from several factors – one being delays in disclosure.  Based on the average 7-week disclosure delay reported by Audit Analytics, it’s important to keep insider trading risk top of mind now as many have warned about growing prevalence of Covid-19-related cyberattacks –a Baker Hostetler blog discusses those warnings.

In terms of what to do about cyber breach disclosure and risk of insider trading, a recent Greenberg Traurig blog provides a refresher of the issues.  Besides investing in IT and security infrastructure and employee compliance training programs, the blog also offers these suggestions about clarifying company policies:

An area where many organizations could focus attention is in clarifying certain policies, in particular, in relation to data breaches.  For instance, clarification or heightened emphasis can be given to trading blackout periods.  This clarification or heightened emphasis could be included within an incident response plan or other company protocols in the event of a suspected data breach.  Such policies must provide specificity as to how such a blackout period will be determined and communicated. Other considerations for incident response plans include limiting who has access to information about an incident, storing incident documentation in access-controlled locations, and implementing a review and approval process for selling stock post-incident.

Also, here’s a reminder to participate in our survey about Insider Trading Policies and Covid-19 Adjustments.

More on “Change: One Asset Manager’s Call for Companies to do More”

On Tuesday, I blogged about one asset manager calling on companies to take concrete “anti-racism” steps and wondered whether other investors would start using this moment to push for change. Later that day, CII published this “call to action” – noting that many of its investor members have pushed for years for greater diversity & fair workplace treatment, and that we all must do more.

Based on a recent blog in IR Magazine, it sounds like more investors may be stepping up pressure on companies to do more too:

The Interfaith Center on Corporate Responsibility, which represents more than 300 institutional investors with more than $500 billion in assets under management, has a small group of investors working on a formal position about racial equality.  ICCR said racial equality has been a prominent talking point since the start of Covid-19 when concerns were raised about the disproportionate effect Covid-19 was having on black Americans. The blog also says that Ceres, which has an investor network that includes over 175 institutional investors with more than $29 trillion in assets under management, is reviewing all policies and practices to achieve a ‘just and sustainable future for all people.’

In terms of what this might mean for shareholder proposals, the blog discusses how some proponents are watching which companies follow through on anti-racism statements.  As You Sow is maintaining a database of companies that have published statements on Black Lives Matter and racial equality and it’s interested in which companies follow through on their statements. The blog quotes As You Sow’s CEO as saying ‘veracity and honesty are the most powerful commodities a person and a company can have’ and it plans to use the information gathered in its database to hold companies accountable.

As an aside, messages about hope, justice and change have sprung up around Minneapolis through street art on plywood that businesses used as they boarded up in response to unrest – here’s one photo with a message that seems on point – it’s of a local, boarded up Minneapolis movie theater…

– Lynn Jokela

June 10, 2020

Survey: Board Evaluations

We’ve wrapped up our latest survey on practices relating to board evaluations.  Here are the results:

1. When is your company’s board evaluation typically conducted:
– During the fiscal year in which board performance is evaluated – 48%
– Following the fiscal year, but before the proxy statement is filed – 48%
– Between the filing of the proxy statement and the annual meeting of shareholders – 2%
– We do not perform annual board evaluations – 2%

2. In conducting board evaluations, some boards use written questionnaires and some use oral interviews (or both).  At our company, we use:
– Written questionnaires only – 39%
– Oral interviews only – 29%
– Both written questionnaires and oral interviews – 32%

3. If written questionnaires are used in the board evaluation process, are copies retained:
– Yes – 39%
– No – 61%

4. Who manages the board evaluation process:
– Non-executive board chair or lead director – 11%
– Chair of governance/nominating committee – 25%
– All members of the governance/nominating committee – 7%
– General counsel/other in-house counsel – 34%
– Outside counsel/consultant – 21%
– CEO – 0%
– Other – 2%

5. Is a written report produced based upon the results of the board evaluation:
– Yes – 51%
– No – 49%

6. How do the minutes reflect the board evaluation results:
– Brief summary of results, without including conclusions – 41%
– Brief summary of results, including conclusions – 16%
– In-depth detail of results – 0%
– Minutes do not reflect results – 43%

Please take a moment to participate anonymously in these surveys:


Insider Trading Policies – COVID-19 Adjustments

Compliance Programs: DOJ Updates Evaluation Guidance

Last week, the DOJ issued updated guidance on Evaluation of Corporate Compliance Programs.  The updated guidance gives some insight into the DOJ’s expectations for corporate compliance programs and it can be used as a guide when reviewing and updating a company’s compliance program.  We’re posting memos on the latest guidance in our “White Collar Crime” Practice Area.

Benchmarking Compliance Reporting

For those taking on responsibility for reviewing a company’s compliance program, along with using the DOJ’s updated guidance, NAVEX Global recently issued its Risk & Compliance Hotline Benchmark Report – providing another resource to help see how a company’s risk and compliance program stacks up. The report includes data gathered from over 3,200 of NAVEX’s customers and looks at data using median or midpoint rather than averages to reduce impact from outliers.  It’s a 60-page report so it’s chalk full of data, here’s some high-level data points:

– Median hotline/incident reports per 100 employees remained steady at 1.4 – but 19% received 5 or more reports per 100 employees

– Case closure time increased from 40 to 45 days, a 13% increase – the report says best practice average case closure time should be 30-32 days – about 20% of customers take 100 days or more to close cases

– Extended time to close cases may indicate organizations aren’t prioritizing reports or they may not have enough resources to resolve them – the report advises companies to address both potential issues to boost credibility of the compliance program

– Analysis showed that 31% of reporters speak up in 9 days or less after an incident occurs – but 20% of reports come in 60 days or more after an incident occurs

– Delays in reporting incidents could be due to fear of retaliation, lack of awareness or availability of reporting systems and the report advises companies to identify possible causes because delays make it more difficult to close an investigation

– Lynn Jokela

June 9, 2020

Change: One Asset Manager’s Call for Companies to do More

As a lifelong Minnesota resident, I was jolted by the killing of George Floyd and the protests and unrest that followed, which are bringing a slew of other historical & current incidents to light.  Many CEOs were also moved by these events and quickly issued “anti-racism” statements.  But there are already calls for companies to follow those statements with more tangible steps. A recent blog post with a call to action from John Streur, President and CEO of Calvert Research and Management, says Calvert will start holding companies accountable for inaction – so at least some asset managers are using this moment to push for more change.  Streur’s post says Calvert will call on companies to do the following:

– Publicly provide the information required to accurately assess racial diversity – Calvert acknowledges that companies aren’t required by law or regulation to disclose publicly the racial makeup of their board and management, but says companies generally have this information to the extent employees have self-identified, and companies should make the information public

– Disclose pay equity information across race and gender

– Make clear to local, state and federal governments that they must address police brutality against black people

– Publicly state what they are doing to combat racism and police brutality

– Take action to address systemic failures in our education system

The blog post concludes by saying that Calvert will take more action to push for changes needed to eliminate racism and police brutality in America.  It also says investors need to do a better job of differentiating companies based on where they stand on these issues and hold them accountable for inaction.

Improving Board Oversight of Human Capital Management

As Covid-19 has brought increased focus to workplace safety, employee pay and other human capital issues, a recent EY white paper provides insight from directors to assist with improved board oversight of human capital.  The report’s findings are based on a director survey about governance of human capital.  Although the report says most boards spend more time on talent strategy than they did just five years ago, it also identifies areas of opportunity for boards, including:

– Making, or reaffirming, oversight of human capital and culture as a strategic priority as 30% of directors indicated that they are either unsure or unable to articulate their company’s cultural strengths and weaknesses

– Enhancing board knowledge and understanding through more regular interactions with and reporting from the CHRO – nearly half of directors surveyed said the CHRO doesn’t regularly report on human capital to the board

– Beyond hearing from the CHRO, bringing an outside perspective into the boardroom is crucial to keeping a pulse on external trends, challenging internal bias, identifying blind spots and bringing an objective viewpoint and new ideas to the strategic planning process

– Regularly incorporating a more comprehensive set of culture and talent-related metrics will make those discussions more robust and productive, and assigning explicit responsibilities at the full board or committee level will provide greater visibility and foster accountability

May-June Issue of “The Corporate Counsel”

We’ve wrapped up the May-June issue of “The Corporate Counsel” print newsletter – and will be mailing it soon (try a no-risk trial). The topics include:

– A Word From Our Founder — What We Each Can Be Doing Now

– Forward-Looking COVID-19 Disclosure: Watch Your Step!

– Corp Fin CDIs and FAQs on COVID-19 Exemptive Order

– Planning for Continuity of Board Operations During the COVID-19 “Emergency”

– Lynn Jokela

June 8, 2020

Perks Disclosure SEC Enforcement Action

It’s been a couple of years since we’ve seen a SEC Enforcement action related to improper disclosure of perks but last week, the SEC settled a case.  In this most recent case against Argo Group International Holdings, the SEC’s press release says the company failed to disclose over $5.3 million that it paid in connection to perks for the company’s then CEO.  Here’s an excerpt:

The SEC’s order finds that in its proxy statements for 2014 through 2018, Argo disclosed that it had provided a total of approximately $1.2 million in perquisites and personal benefits, chiefly retirement and financial planning benefits, to its then CEO.  According to the order, Argo failed to disclose over $5.3 million it had paid on the CEO’s behalf, including in filings for 2018 after a shareholder issued a press release alleging undisclosed perks to the CEO.  The order finds that the perks Argo paid for, but did not disclose, included personal use of corporate aircraft, helicopter trips and other personal travel, housing costs, transportation for family members, personal services, club memberships, and tickets and transportation to entertainment events.  The order finds that, as a result, Argo understated perks and personal benefits paid to the CEO over this period by more than $1 million per year, or 400%.

The SEC’s order provides more color about the company’s disclosure issues, which sound like in large part stemmed from failure to maintain internal accounting controls.  The company settled the action without admitting or denying the SEC’s findings and it will pay a $900,000 civil penalty.  Based on information in the SEC’s order, the company took quite a few remedial actions that likely didn’t come cheap while also leading to quite a bit of upheaval at the company.

To help guard against this type of action, Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise” has a 97-page chapter on Perks & Other Personal Benefits – it’s also available on

We also have a panel about perk disclosures as part of our “Proxy Disclosure” conference – which is coming up in September via Nationwide Video Webcast.  This is our big annual conference and it will cover all sorts of disclosure issues.  Register now to receive the special Early Bird Rate!

First PPP-Related Securities Class Action

The Paycheck Protection Program has created plenty of blogging material and last week, Kevin LaCroix’s blog post reported on what is believed to be the first PPP-related securities class action lawsuit.  What’s somewhat surprising about this case, as the blog notes, is that it involves a lender.  Most would’ve thought these PPP D&O claims would involve PPP borrowers because as we’ve blogged, there has been concern about good faith need certifications PPP borrowers had to make.

The blog provides thoughts around why the lender may be targeted and says while a bank might not seem like the most obvious target to be hit with a coronavirus-related securities suit, there is this thing about banks: They always seem to be getting drawn into the latest securities litigation wave. They were certainly in the center of things in the litigation wave that followed in the wake of the global financial crisis. To be sure, that does not mean that other banks that participated on the PPP program necessarily are at greater risk of involvement in securities class action litigation. Rather, it is simply an observation that the plaintiffs’ lawyers seem ready to try to bring the banks into the litigation fray from the moment the starting gun sounds.

Technical Snafu Sends Double PPP Funds

By now, you’re probably thinking you’ve heard just about everything about the SBA’s Payment Protection Program.  But, the PPP is a blogger’s dream as the stories keep coming. The latest is this Reuters story that says a technical snafu caused many small business owners to receive their loan amounts twice – potentially to the tune of over $100 million.  Many of the duplicate loans have been identified and repaid, although not all.

Another story from NBC News explains more about how the double-payment snafu came about:

The issue stems from the hectic early weeks of the program, when funding ran out quickly and borrowers were not hearing back from their banks, industry sources told NBC News. Although businesses must certify they are only applying for one loan, some small-business owners applied at more than one bank to ensure they could secure a financial lifeline amid the economic shutdown.  After funding ran out, some banks also suggested that customers who still had pending applications in their queue should apply with another bank in the meantime.

We’ll see how this all plays out, but the government will only guarantee one loan per borrower.  The financial institutions obviously want to quickly address the problem and NBC News says borrowers expecting loan forgiveness are reaching out to repay the extra funds so they’re only responsible for one loan.  For anyone not already returning any double PPP loan amounts, obviously it’d be good to do so – and maybe also take a gander at John’s “PPP Loan Enforcement: En Guarde!” blog.

– Lynn Jokela

June 5, 2020

Paycheck Protection Flexibility Act: Congress Cuts PPP Borrowers Some Slack

Late Wednesday, the Senate unanimously passed the House version of the Paycheck Protection Flexibility Act, which President Trump is expected to sign into law. Among other things, the legislation extends the period during which PPP loans may be spent from eight to 24 weeks, and decreases the percentage of the loan that must be spent on payroll from 75% to 60%. This excerpt from a Journal of Accountancy article highlights some of the law’s key provisions:

– Current PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. New PPP borrowers will have a 24-week covered period, but the covered period can’t extend beyond Dec. 31, 2020. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.

– Under the language in the House bill, the payroll expenditure requirement drops to 60% from 75% but is now a cliff, meaning that borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Currently, a borrower is required to reduce the amount eligible for forgiveness if less than 75% of eligible funds are used for payroll costs, but forgiveness isn’t eliminated if the 75% threshold isn’t met. Rep. Chip Roy (Texas), who co-sponsored the bill in the House, said in a House speech that the bill intended the sliding scale to remain in effect at 60%. Senators Marco Rubio and Susan Collins indicated that technical tweaks could be made to the bill to restore the sliding scale.

– Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. This must be done by Dec. 31, a change from the previous deadline of June 30.

– The legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculations employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operations to Feb. 15, 2020, levels due to COVID-19 related operating restrictions.

In addition, existing PPP loans – which originally had two year terms – may be extended to five years if the lender & borrower agree, and new PPP borrowers will have five years to repay their loans. The interest rate on PPP loans remains at 1%. PPP borrowers may also delay payment of their payroll taxes, which the CARES Act prohibited. The deadline to apply for PPP loans remains June 30th.

“Cha-Ching!” Whistleblower Hits for $50 Million

You know who isn’t going to need a PPP loan? The lucky individual who just hit the SEC’s whistleblower jackpot to the tune of nearly $50 million.  This excerpt from the SEC’s press release announcing the award points out that it’s the largest in the whistleblower program’s history:

The Securities and Exchange Commission today announced a nearly $50 million whistleblower award to an individual who provided detailed, firsthand observations of misconduct by a company, which resulted in a successful enforcement action that returned a significant amount of money to harmed investors. This is the largest amount ever awarded to one individual under the SEC’s whistleblower program. The next largest is a $39 million award to an individual in 2018. Two individuals also shared a nearly $50 million whistleblower award that same year.

Here’s the SEC’s award order. As usual, all the good parts have been redacted, but this WSJ article has the details. The order indicates that another claimant sought a cut of the award, but the SEC shot that person’s claim down. Well, I guess we can’t all be winners. Personally, I think somebody like this should at least get some lovely parting gifts – you know, like Rice-a-Roni or a case of Turtle Wax – for playing the whistleblower game.

“What Then Must We Do?”

There’s a great scene in “The Year of Living Dangerously” in which photographer Billy Kwan takes journalist Guy Hamilton to witness the suffering of the poor in the slums of Jakarta. As they survey the scene, Kwan asks the question raised in St. Luke’s Gospel, “what then must we do?”  Echoing John the Baptist’s response, Kwan’s answer is, “Don’t think about the major issues. You do what you can about the misery in front of you. You add your light to the sum of all light.”

As we end this week, I think many of us are asking Billy Kwan’s question. I thought about that when I read this article that a member passed along from the Yale School of Management about how white managers can respond to anti-black violence. It provides some suggestions about actions we can take in our own businesses to help make them places that aren’t just “non-racist,” but actively “anti-racist.” You may not agree with everything the author has to say, but engaging with these issues on our own turf is the first step in following Billy Kwan’s advice.

John Jenkins

June 4, 2020

Timing of Equity Awards: Bad News is Good News

A recent Univ. of Georgia B-School study says that when it comes to maximizing the value of equity awards, corporate executives seem to never waste a crisis. Here’s an excerpt from a recent article discussing the study:

A recent study from management researchers at the University of Georgia Terry College of Business found a pattern of executives issuing negative press releases about their companies before their scheduled stock option grants. The practice, which is seen as unethical and sometimes illegal, allows the executives to increase their compensation by temporarily driving down the price of the stock when they are given the options.

“We can’t say with certainty that a given CEO is doing this,” said Tim Quigley, who studies CEO behavior and effectiveness at UGA’s Department of Management. “But we can look at the population and say, these trends would be very unlikely if a large number of CEOs were not purposely working to reduce the stock price before their option grants.”

If this sounds familiar, it might be because this is the second study in the last two years to suggest that CEOs may be manipulating the market price of the shares on the award dates in order to maximize the value of those awards. Of course, many companies time awards to occur shortly after the year-end numbers are announced, and if the numbers are bad, the stock price drops (and vice versa). Companies that have a practice of timing awards are required to disclose it in their CD&A discussion, but there isn’t anything illegal about it.

Nevertheless, these studies apparently suggest that there’s some intentionality on the part of senior executives when it comes to depressing stock prices around award dates. Since that’s the case, companies may want to take another look at the timing of their awards, and consider whether there is a pattern that might appear troubling. In that regard, the study suggests that spreading award dates throughout the year might provide a solution.

PPP Loan Certifications: D&O Issues for the Battles to Come

Most people expect the SBA & DOJ to engage in a robust enforcement effort when it comes to the PPP program. This recent D&O Diary guest blog by Pillsbury’s Peter Gillon addresses potential coverage issues under D&O policies that may be implicated by enforcement activities addressing loan certifications.  This excerpt discusses the potential coverage for repayments of PPP loans:

A policyholder facing a PPP investigative or enforcement action might choose or be forced to repay the loan principal and would obviously like to claim this under its D&O policy. An insurer would likely argue that such amounts constituted disgorgement of “ill-gotten gains,” and deny coverage. Depending on applicable state law and the policy language, such an exclusion may or may not apply to preclude coverage for both the repayment of loan principal as well as defense costs.

For example, standard policy language defines covered “Loss” as “damages, judgments, settlements” and the cost of defense, but excludes amounts that are uninsurable as a matter of law. Carriers argue that, although they define the scope of what is covered Loss using broad undefined terms—“damages,” “judgments” and “settlements”—“public policy” prohibits them from indemnifying an insured for payment of restitution or disgorgement of ill-gotten gains. Insurers often assert this defense even when no case or statute declares such payments uninsurable.

However, Courts interpreting Delaware law (which for reasons beyond the scope of this piece generally applies to Delaware corporations) have rejected insurers’ attempts to deny coverage on this basis, holding that an insurer must meet its burden to prove that the personal conduct exclusion applies, including establishing by final adjudication that the gains were ill-gotten, before it can deny coverage on the basis that restitution is “uninsurable.”

Other issues addressed by the blog include those relating to coverage for governmental audits and internal investigations, criminal and civil penalties, entity and individual coverage, and the implications of the presence or absence of scienter on the availability of coverage.

PPP Loan Enforcement: En Garde!

This McGuire Woods memo says that regulatory agencies are already gearing up for enforcement activities surrounding the PPP loan program, and borrowers must prepare to respond quickly:

Regardless of borrower size or other qualifications, it is vital for companies to proactively document PPP compliance and prepare for effective defense of their eligibility and necessity certifications, as well as loan and forgiveness calculations. Waiting to receive an inquiry to gather supporting documentation may be too late.

Most inquiries provide 5-10 days for response. This is a very short timeframe for a company to research and gather supporting documentation. Applicants should consider seeking competent legal guidance related to collecting supporting materials and holding them in a central repository, contemporaneously as the events occur.

The memo offers tips to help companies prepare for the inevitable knock on the door, including the type of requests for production that they should anticipate receiving during the early stages of the government’s inquiry.

John Jenkins

June 3, 2020

Down on Main Street: Fed Provides More Info on Main Street Lending Program

Last week, the Federal Reserve issued additional guidance on its “Main Street Lending Program” for small & mid-sized businesses.  This Crowell & Moring memo provides an overview of the program, eligibility requirements, and the mechanics of how it will operate.  Here’s an excerpt:

The Program, administered by the Boston Fed, is intended to facilitate lending to small and medium-sized businesses that were financially stable prior to the COVID-19 pandemic so that they may maintain operations and payroll during the COVID-19 pandemic emergency period. The Program operates through three types of loans (the New Loan Facility (“MSNLF ”), the Priority Loan Facility (“MSPLF ”), and the Expanded Loan Facility (“MSELF”)) each offering a 4-year term loan, with an adjustable interest rate based on LIBOR plus 300 basis points, and with principal and interest payments deferred during the first year of the loan. Loans range in size from $500,000 to $200 million, depending upon the loan facility selected.

The lending is conducted through lenders who meet the Program’s eligibility criteria (“Eligible Lenders”). Program loans are secured or unsecured new term loans originated after April 24, 2020 (in the case of MSNLF and MSPLF) or are based upon, and are an upsized tranche of an existing term loan to an ligible Borrower, originated on or before April 24, 2020 (in the case of MSELF).

The loans are full recourse loans, and unlike the SBA’s Paycheck Protection Programs (“PPP”) loans, the Program loans have no forgiveness of debt features. When the Boston Fed announces the opening of the Program, Eligible Lenders that wish to participate in the Program must first register with the Boston Fed. The Program will remain active until September 30, 2020, unless it is extended by the Federal Reserve and the Department of Treasury.

Eligible borrowers may use loan proceeds to maintain their U.S. operations & payroll until conditions normalize. While the new FAQs for the Program indicate that borrowers should undertake good-faith efforts to retain employees & payroll, businesses that have already laid-off or furloughed workers due to COVID-19 are eligible to apply for a loan. Copies of the FAQ and form documents for the Program are available on the Boston Fed’s website.

Reopening Risks: Covid-19 Waivers

For the first time in over three months, my pickup hockey group is going to be allowed to play this Sunday. Naturally, the rink is imposing all sorts of rules – we have to wear masks off the ice, we’re limited to 15 players, there is no locker room access, etc.  Everyone also must sign a waiver that specifically addresses the risk of contracting the Covid-19 virus.

If your client is considering implementing a Covid-19 waiver policy, then you should take a look at this Cleary Gottlieb memo, which reviews the permissible scope of waivers & their enforceability. This excerpt addresses some of the unique issues raised by waivers purporting to address Covid-19 risks:

The primary question a court will likely consider is whether COVID-19 exposure is the kind of risk that can be waived. There is typically no requirement that the risks a customer waives be specifically related to the nature of the business drafting the waiver. Rather, waivers are limited by the common law requirements noted above, namely that the type of risk assumed be specifically enumerated and the presumption against the use of general waivers of all potential liability. It therefore seems that COVID19 waivers could be enforceable, provided that they are sufficiently concrete.

Whether these waivers would be seen as contrary to public policy, however, is a separate issue that courts will have to confront, and may well result in inconsistent outcomes as courts attempt to balance the public’s interests in preventing the spread of COVID-19, maintaining safe public spaces, and providing legal remedies for individuals exposed to COVID-19, against mitigating the chilling effect of legal risk on a reopening economy.

The memo also contains a helpful discussion of practical considerations for companies that are considering the implementation of waivers as part of their reopening strategies.

Transcript: “Capital Raising in Turbulent Times”

We have posted the transcript for our recent webcast: “Capital Raising in Turbulent Times.”

John Jenkins