Last week’s departure of Chipotle CEO Brian Niccol to assume the CEO role at Starbucks is a high-profile example of how CEO transitions can come at you fast. It also illustrates the need for corporate succession plans to address the possibility of unexpected transitions. Meridian Compensation Partners recently published an article outlining its views on the three keys to successful CEO transition planning. This excerpt discusses the unexpected resignation scenario and the key components that should be incorporated into a succession plan to address it:
Resignation (or Medical Emergency): This scenario often comes with little warning. This is the area where the company’s emergency succession plan should come into effect immediately. This plan should address:
― Communication: Appropriate internal and external messaging.
― Interim CEO: Appointment of interim leadership (sometimes a qualified board member, an executive who can be a steady hand during a CEO search, but who does not aspire to the CEO role and in those rare ideal cases, an internal, ready now candidate).
― Open Incentive Cycles: Treatment of open cycles can be impacted by the circumstances that gave rise to the resignation balancing formal provisions with judgments around whether conservatism or magnanimity are best suited.
― Search Process: This should be based on both pre-existing internal candidates’ development plans and an “evergreen” list of external candidates.
The article also points out the need to address the retention risk among disappointed CEO candidates associated with selecting a new CEO through an internal promotion or an external hire, as well as the need for boards to understand market compensation and other key employment terms in advance of an external search or an internal promotion.
I’m excited to announce the launch of “Understanding Activism with John & J.T.” – a new podcast series available to members of TheCorporateCounsel.net and DealLawyers.com. Orrick’s J.T. Ho will be my co-host for these podcasts. Together with our guests, we’ll focus on key issues in shareholder activism and seek out insights from both the activist and management perspectives.
Our inaugural podcast features a discussion with Kyle Pinder of Morris Nichols on recent activist challenges to advance notice bylaws and the implications of the Delaware Supreme Court’s decision in Kellner v. AIM Immunotech. Check it out & stay tuned for future podcasts in the series!
I was sorry to see that Peter Marshall passed away last week at the ripe old age of 98. To me, he was sort of an avatar of the “Zoom Age”, since that now indispensable remote communications tool is basically an online version of his 1970s “Hollywood Squares” with all the fun removed. Speaking of Zoom, in this month’s issue of The Boardroom Insider, Ralph Ward offers some tips on how to improve online board sessions. Here’s an excerpt with a few of his suggestions:
– Online meeting platforms and board portals have been steadily adding to their suite of tech tools, and smart boards are making use of them for improved governance. The use of visuals in meetings opens up fresh ideas to communicate better. Example – most platforms allow real-time annotation and editing of documents… but are you fully using this? Consider the long-time headache of a board resolution that gets turned inside-out during discussion. Rather than a later surprise (or the secretary having to call a point of order) how about revising the text onscreen during discussion?
– Here’s another clever way meeting and reading can be combined with online gizmos. Everyone on the call has different audio tech, which means miking and speaker volume may not be the best. Also, as we’ve gently noted in the past, some older board members might not be hearing as well as they once did. Zoom and most other video meeting platforms offer real-time captioning of what’s being said. OK, the transcript may not be perfect — but how handy would it be to watch directors’ words at the bottom of the screen while they speak?
– Boards are experimenting with other online visual tools and aids as well. Too often, sharing of visuals has been one-way… look at this boardroom presentation or white board everybody. But remote members can also use screen sharing at their end to show items or info on their screens, or to draw or annotate on what’s being displayed (no doodling funny moustaches on a speaker, please).
Lots of good ideas in here, although in the spirit of bringing the Zoom experience closer to the Hollywood Squares experience, I respectfully dissent from Ralph’s “no doodling funny mustaches on a speaker” recommendation.
– A total of 112 new federal securities class action suits were filed in the first half of 2024. The bulk of these (106 cases) were standard cases containing alleged violations of Rule 10b-5, Section 11, and/or Section 12. If this pace continues, 2024 will see approximately 224 cases, roughly in line with 2023 levels.
– The electronic technology and technology services and the health technology and services sectors accounted for 54% of filings. However, suits in the finance sector declined by more than one-third to 11%.
– The most active jurisdictions were the Second and Ninth Circuits, which together accounted for approximately 60% of filings.
– A significant number of standard case filings included allegations related to missed earnings guidance (38%) and allegations related to misled future performance (32%). Cases with allegations related to accounting issues declined to 12%.
– AI-related suits have increased, while crypto- and SPAC-related filings have continued to decline.
– The first half of 2024 saw 100 cases resolved, split between 52 dismissals and 48 settlements. If this rate continues, the number of resolved cases in 2024 would exceed the 190 seen in 2023.
– Excluding settlements of $1 billion or more, average settlement values saw a decline by approximately 25% in 2024 H1 from 2023 to $26 million. Similarly, the median settlement value declined by 40% to $9 million.
Over on “The D&O Diary” blog, Kevin LaCroix has posted a deep dive on the NERA report. This excerpt notes that the aggregate value of settlements projects to a lower total than last year, but also points out some big-ticket settlements that may be finalized during the second half of 2024:
The aggregate settlement amount for the first six months of 2024 was $1.2 billion, which projects to a year-end total well below the inflation adjusted aggregate total of $4.0 billion for the full year 2023. However, the report notes that there are several large previously announced pending settlements for which settlement-approval hearings are scheduled in the second half of 2024, including Under Armour ($434 million), Alphabet ($350 million), Zoom Video Communications ($150 million), and Perrigo Company plc ($97 million). The report comments that “the aggregate settlement value in the second half of 2024 would be expected to exceed the $1.2 billion seen in the first half of 2024.”
We’ve posted the transcript for the recent DealLawyers.com webcast – “2024 DGCL Amendments: Implications & Unanswered Questions.” Our panelists – Hunton Andrews Kurth’s Steven Haas, Gibson Dunn’s Julia Lapitskaya & Morris Nichols’ Eric Klinger-Wilensky – provided their insights into this year’s controversial DGCL amendments. Topics addressed included the amendments’ implications for governance and acquisition agreements, the interplay between fiduciary duties and contractual obligations, and unanswered questions resulting from the amendments.
Here’s a snippet from Steve Haas’s thoughts on how the ability to include provisions for lost premium damages in merger may influence the drafting of specific performance language:
“Next drafting point, the final one under this ConEd, or Crispo category, is the issue of specific performance. Surely parties will continue to prefer specific performance as a remedy in a busted deal over monetary damages. The synopsis says that the statute is not intended to exclude any remedies that are otherwise available. With that said, merger agreements may want to expressly say that notwithstanding the company does have the right to seek loss premium damages, the parties still agree that monetary damages will be inadequate, and that the parties are entitled to seek specific performance. Maybe that’s a drafting nuance, but I wouldn’t be surprised to see more agreements acknowledge the damages section, but still saying very specifically that the parties are agreeing that specific performance is the chosen remedy.”
Members of DealLawyers.com can access the transcript of this program. If you are not a member of DealLawyers.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
When Reg FD was adopted almost 25 years ago, its objective was to level the playing field among all investors and eliminate the problem of companies providing preferential access to material information to favored investors. A recent post on “The CLS Blue Sky Blog” says that Reg FD isn’t working very well when it comes to private investor meetings, and suggests that the only viable solution to the problem may be to ban those meetings:
The blog identifies three possible solutions to the preferential disclosure problem that have been suggested. The first, and most extreme, is an SEC ban on private meetings. The second involves reliance on updates to NIRI’s standards of practice & ethical standards that require companies to provide fair and equal access to all investors and that would essentially end private meetings. The third alternative involves enhanced efforts to ensure that MNPI is not shared during private meetings. It says that the results of a new study evaluating each of these alternatives suggest that a ban on private meetings may turn out to be the only solution that will prevent preferential disclosure:
Should the SEC prohibit private meetings altogether? Data from our study alone cannot conclusively answer this question. However, our results show that the current flexibility in Reg FD allows IROs to disclose different information to preferred investors, suggesting that Reg FD is not fully meeting its stated goals. Further, the SEC’s focus on materiality consideration does not appear to be an effective solution. When taken in conjunction with prior research that documents informational advantages from private meetings, our results suggest that regulators consider eliminating private meetings if they wish to eliminate preferential disclosure and truly create a level playing field as was initially intended with Reg FD.
The study’s authors suggest that one way to implement a ban on private meetings would be to require all investor meetings to be publicly webcast, which is a practice that some companies already follow.
On July 31, 2024, the requirement for large accelerated filers to submit filing fee data in Inline XBRL (iXBRL) format went into effect. Unfortunately, we’ve heard from some of our members that it’s been a bit of a bumpy ride for some filers. Here’s what one member had to say:
Just want to alert you that things did not go as smoothly as the SEC expected for the first day of mandated iXBRL tagging of filing fee data for Large Accelerated Filers. While many fee-bearing filings containing iXBRL tagging of filing fee data went through successfully, some were – and still are – inexplicably still stuck “in progress” and have neither been accepted NOR disseminated on the SEC’s public website. A software fix was supposed to be in place late yesterday but we know of filings still stuck in limbo.
We received this communication yesterday morning. There isn’t anything up on the SEC’s website about this issue, so hopefully it’s been ironed out by now – but please let us know if you’re continuing to experience problems.
By the way, before everybody panics, the new tagging requirement applies only to large accelerated filers for now. Other filers will be phased in beginning on July 31, 2025.
General counsels spend a lot of time in the board room, and many of them – and a lot of other lawyers who advise boards – would like to serve on corporate boards themselves. If you’re one of those people, then this Barker Gilmore blog has some advice for you about how to stand out from the crowd of potential candidates for board seats. I mentioned in a prior blog that the Barker Gilmore folks are from my hometown of Fairport, NY, which reminds me that if you’re interested in finding out how to make the transition from lawyer to public company director & CEO, there’s another Fairport native you could speak with – my brother Jim.
Members of DealLawyers.com may recall that Jim was my first guest on our “Deal Lawyers Download” podcast series, where we discussed, among other things, how he transitioned from law firm partner to GC & Chief Development Officer at a NYSE-listed company. Well, fast forward a couple of years, and Nasdaq’s pumping this video message into Times Square:
Yeah, the guy somehow ended up being appointed Chairman, President & CEO of a public company. This is very typical – I’m the oldest of three brothers, and we’ve always been very competitive with each other, so one-upmanship is a family tradition. For example, when we played high school football, I was All-League, Jim was All-Region, and my youngest brother, Jason, was All-State. So, naturally, when Liz opted to head back to Fredrikson full time & I became managing editor because I was the only full-time editor left, Jim just had to one up me. What about Jason? Well, he’s been the COO of a large private company for several years, so he one-upped me long ago, and I’m sure he has his sights set on Jim. Jason was All-Ivy League in college, so I like his odds.
I guess the dog days of August have officially arrived when the news is so slow that I find myself blogging about Non-Fungible Tokens, or NFTs. But here we are. Anyway, a recent complaint filed in the Eastern District of Louisiana challenges the SEC’s efforts to classify NFTs as securities. The plaintiffs allege that two SEC enforcement actions targeting NFTs on the basis that they are securities under the Howey test put the agency in the business of “determining when art needs to be registered with the federal government before it can be sold.”
The plaintiffs contend that the SEC is all wet when it tries to apply Howey to NFTs. This paragraph of the complaint provides the gist of their argument:
The relationship between a creator of digital artwork and a NFT holder is not meaningfully different from the relationship between any other type of artist and art owner. By acquiring artwork in the form of NFTs, the purchaser does not automatically (or typically) enter any ongoing contractual relationship with the seller or creator of the asset.
While the seller or creator—like Plaintiffs here—may publicly discuss their intentions to continue creating and marketing their art and may use the profits from the NFT sales to financially support themselves and their artistic endeavors, that does not mean that the seller or creator has any ongoing commitment or obligation to undertake any specific action or to manage any common venture for the purchaser’s benefit. Instead, the purchaser possesses and holds the asset outright, albeit perhaps with a subjective hope or belief that the asset will increase in value. Thus, no investment contract exists under the test established by Howey.
That’s an interesting argument, but since we’re dealing with NFTs, you’d expect to see a touch of goofiness to this lawsuit – and it doesn’t disappoint. Let’s meet our plaintiffs:
– The first is songwriter Jonathan Mann, aka “Song a Day Man.” According to the complaint, he’s in the Guiness Book of World Records for writing a song a day every day since January 1, 2009. He’s even written a song commemorating the filing of this lawsuit. Fittingly, it’s called “I’m Suing the SEC.”
– The second is Brian Frye, a professor at UK Law School. Prof. Frye is a true NFT afficionado, and one of his claims to fame is selling a piece of conceptual art called “SEC No-Action Letter Request” as an NFT. In what may be the most meta move of all time, Frye’s letter asked the SEC to opine on whether his plan to sell NFTs of the no-action request to the public constitutes an offering of a security that must be registered under the Securities Act.
We’ll keep an eye on this one. It has the potential to be more entertaining than the usual cases challenging the SEC.
One of this year’s favorite topics among corporate law pundits has been whether Delaware’s century-old dominance as the preferred jurisdiction of incorporation for public companies has been threatened by the alleged increasing unpredictability of the Chancery Court. We’ve spilled a lot of ink on this topic – and the efforts to amend the DGCL to address it – over on the DealLawyers.com blog. But Delaware’s status is a topic that isn’t relevant only to M&A lawyers, so I thought a recent article by UCLA’s Stephen Bainbridge titled “DExit Drivers: Is Delaware’s Dominance Threatened?” was worth sharing here.
Prof. Bainbridge looks at the recent sound & fury about Delaware and concludes that a mass exodus of corporations is pretty unlikely. Here’s the abstract:
For over a century, Delaware has led the corporate law landscape, though it has not been without competitors. States such as Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Tennessee, and Virginia have attempted to rival Delaware, attracted by its significant tax revenue from incorporations. Today, Nevada emerges as a notable challenger, actively promoting “DExit”-a push for companies to leave Delaware. Consequently, this analysis primarily examines the choice between Delaware and Nevada.
Widespread discussion of the potential for mass DExit was triggered by recent criticisms from business leaders and prominent corporate lawyers. While such complaints have not yet triggered a mass exodus from Delaware, many firms are reportedly considering changing their corporate domicile. But is Delaware’s dominance genuinely at risk? Are these just isolated incidents or signs of a broader trend?
This article provides both an empirical and a qualitative analysis of firms that reincorporated from Delaware to another state between 2012 and 2024. It analyzes these firms based on size, filing status, and new state, along with their stated motivations.
The data suggest two main conclusions. First, almost all reasons given for reincorporation seem implausible. If DExit becomes more frequent, plaintiff lawyers should scrutinize these disclosures, particularly focusing on enhanced liability protections for controllers, directors, and officers, suggesting possible conflicts of interest requiring entire fairness review. Second, the number of reincorporations from Delaware remains minimal compared to the vast number of new incorporations Delaware attracts annually. Given the strong inertia behind the initial incorporation decision and the weak drivers for DExit, it is unlikely to become widespread soon.
One threat that the article doesn’t address is the idea that private equity and venture capital investors might be spooked by recent Delaware case law impinging on their ability to exercise post-IPO control and therefore decide to incorporate startups in jurisdictions perceived to be more friendly to controlling stockholders. However, that argument seems less compelling following the recent DGCL amendments, which become effective today.
