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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