A recent Bryan Cave blog says that 20 years after its collapse, WorldCom still has plenty of lessons to offer internal and outside counsel, and one of those lessons relates to the application of the attorney-client privilege. The blog draws from reports issued by former US Attorney General Richard Thornburgh, who served as the bankruptcy court examiner overseeing the case. This excerpt notes how the examiner was able to access virtually all documents that he sought, even those that were privileged:
As a threshold matter, it’s worth noting that virtually all documents sought by the Examiner had to be produced for review, including detailed notes taken by internal counsel and other privileged communications. With the consent of the Company (under the supervision of the bankruptcy trustee), the Examiner obtained a court order providing that the delivery of such documents and other information, including emails, would not constitute a waiver of the attorney-client or other privilege. As a result, all communications with or notes recorded by counsel became available for review by the Examiner.
Counsel should remain mindful that ultimately, the attorney-client privilege belongs to the client and may be waived by the client. A company may consent to production of privileged communications, even without a non-waiver order as was entered in WorldCom. When a company files for bankruptcy, management of the company may shift from its prior executives to a bankruptcy trustee, who may view the waiver issue differently than prior management. In such situations, privileged communications may end up being produced to the government or private plaintiffs.
In other words, the attorney-client privilege belongs to the corporate client, and there may be an entirely new cast of decisionmakers when it comes to decisions about that privilege once a company enters bankruptcy.
The blog also addresses some of the factors identified in the examiner’s reports as leading to the governance breakdown at WorldCom. These include the fragmented reporting lines in the company’s law department and the failure to provide the board with appropriate advice concerning its fiduciary duties for material transactions.
While many organizations are slowly returning to in-person meetings, digital events continue to grow and will likely continue to be a big part of the landscape in the post-pandemic era. This recent Q4 blog offers up some thoughts on best practices for digital “Investor Days” or “Capital Markets Days” (CMDs), including things like the use of pre-recorded messaging, and entertainment and production values.
All those topics are familiar ones to most companies after more than two years of virtual events, but the blog also had some interesting things to say about the content of presentations. Here’s an excerpt reminding companies of the need to distinguish the content presented at a CMD from the more short-term focused content typically presented in an earnings call:
Presentation is key, though content is still very much king. With so much information readily available and so much misleading noise about, directly providing investors with the most relevant and accurate story from the source is critical to underpin a successful CMD. Because the CMD is not always an annual event, the content needs to be relevant and resonate with investors for an extended period of time. Remember that this event is unlike results day, where you update information every quarter. Rather, the CMD is the stage for communicating both the short and mid-long term investment value of the organisation.
Last week, Dave blogged about whether companies are likely to ask stockholders to approve officer exculpation charter amendments & how stockholders will react if they do. If you’re thinking about proposing such an amendment at your next annual meeting, this Freshfields blog offers up some sample language for such an amendment and, in this excerpt, raises some important points to consider when gauging the likely reaction of institutional investors & proxy advisors:
One open question is how institutional shareholders and proxy advisory firms will react to proposals to amend the charter in this manner. The answer, in the case of listed companies, may depend on:
– the other elements of the corporation’s governance profile and the extent to which there may already be tension with shareholders over governance;
– the extent to which the corporation otherwise engages in best practices relating to its executive officers, including their compensation, diversity, and skillsets;
– the relationship between management and the shareholders, including the extent of shareholders’ confidence in management’s stand-alone plan and their assessment of recent performance;
– management’s approach to shareholder engagement and its ability to articulate effectively in off-cycle meetings with shareholders in the coming months the rationale for putting forward this proposed charter amendment at the next annual meeting; and
– the effectiveness of the articulation of the rationale for this charter amendment in the proxy statement for the meeting at which the amendment will be voted on and in related solicitation conversations.
The blog says that there’s a strong policy rationale for these charter amendments and that it makes sense for institutional investors & proxy advisors to support them, but it also acknowledges that getting these constituencies to sign-off on such an amendment will require “thoughtful and deliberate” efforts on the part of companies when engaging with stockholders.
If you’re thinking about an officer exculpation amendment, then you’re probably also thinking about what your proxy disclosure and the text of that amendment might look like. Thanks to Daniel Rubin’s Twitter feed, we’ve found an example. Nasdaq-listed SWK Holdings filed a definitive proxy statement on July 18th asking its stockholders to, among other things, amend its certificate of incorporation to exculpate officers to the fullest extent permitted by law. Here’s an excerpt describing the reasons for the proposal:
As part of its continuing review of the elements of our corporate governance standards and practices, the Governance and Nominating Committee concluded that the current exculpation and indemnification provisions in Article VIII of our Certificate of Incorporation should be updated to, among other things, reflect developing law. Legislation has been proposed that, if enacted, would enable a corporation to include in its certificate of incorporation a provision exculpating certain officers from liability for breach of the duty of care in certain actions.
Such a provision would not exculpate such officers from liability for breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or any transaction in which the officer derived an improper personal benefit. Nor would such a provision exculpate such officers from liability for claims brought by or in the right of the corporation, such as derivative claims.
Taking into account the narrow class and type of claims that such officers would be exculpated from liability for, and the benefits the Governance and Nominating Committee believed would accrue to the corporation from providing such exculpation, the Governance and Nominating Committee recommended to the Board of Directors an amendment to the Certificate of Incorporation to provide such exculpation to the fullest extent permitted by law.
According to the company’s August 10th Form 8-K (which includes the text of the amendment). its stockholders overwhelmingly approved the proposed amendment. Steve Haas also pointed us in the direction of this Form 8-K filing from Snap, which includes the text of an officer exculpation charter amendment that its Class C stockholders approved by written consent. Snap didn’t solicit consents from public stockholders, so there’s no sample disclosure to go along with this.
I wouldn’t draw a lot of conclusions about stockholder support at other public companies from either SWK or Snap’s action. Two investment funds control nearly 80% of SWK’s stock, while voting control of Snap rests in the hands of its founders who hold the Class C stock.
Last week, the SEC issued its first fee rate advisory for fiscal 2023. Although the last several years have seen significant decreases in the filing fees for registration statements & certain other transactions, the advisory says those fees will increase next year from $92.70 per million to $110.20 per million – or nearly 19%. As always, the new rate will apply effective October 1, 2022, which is when the SEC’s new fiscal year begins.
On Friday, the SEC announced that it had adopted two amendments to the rules governing its whistleblower program. Here’s the 46-page adopting release and the two-page fact sheet. This excerpt from the SEC’s press release summarizes the changes:
Specifically, the SEC amended Rule 21F-3 to allow the Commission to pay whistleblower awards for certain actions brought by other entities, including designated federal agencies, in cases where those awards might otherwise be paid under the other entity’s whistleblower program. The amendments allow for such awards when the other entity’s program is not comparable to the Commission’s own program or if the maximum award that the Commission could pay on the related action would not exceed $5 million.
Further, the amendments affirm the Commission’s authority under Rule 21F-6 to consider the dollar amount of a potential award for the limited purpose of increasing the award amount, and it would eliminate the Commission’s authority to consider the dollar amount of a potential award for the purpose of decreasing an award.
The amendments prompted much rejoicing from the whistleblower bar but left the two dissenting Republican commissioners scratching their heads about why the SEC felt the need to do this. Frankly, I find myself doing the same. Here’s an excerpt from Commissioner Uyeda’s dissenting statement, which picks up on some recent criticism concerning the program’s lack of transparency:
High-quality tips from whistleblowers represent an important tool in the Commission’s enforcement program. To the extent that the Commission seeks to improve the Whistleblower Program and its rules, it should perhaps consider promoting greater visibility into its claims and award determinations, and increasing the number of high-quality tips from unrepresented persons. Such a review could also evaluate the role played by lawyers representing whistleblowers on a contingency fee basis and how they present tips to the Commission.
The SEC’s surprise adoption of the pay for performance disclosure rules didn’t leave Dave room to address the universal proxy CDIs that the SEC issued last Thursday. Here’s what I had to say about them over on the DealLawyers.com Blog:
With the universal proxy compliance date less than a week away, the SEC yesterday issued three new Proxy Rules and Schedules 14A/14C CDIs addressing issues arising under Rule 14a-19. Unfortunately, the SEC didn’t include links to the individual CDIs, so you’ll need to scroll down to the new Section 139 in order to find them. Here’s a brief summary of the issues they address:
CDI #139.01 addresses the ability of a dissident shareholder to change its slate of nominees after the Rule 14a-19(b) notice deadline due to a nominee’s decision to withdraw or a change in the number of director seats up for election.
CDI #139.02 deals with the registrant’s obligation to comply with Rule 14a-19(b)’s notice requirements in the case of a contested election in which more than one dissident shareholder intends to present a slate of director nominees.
CDI #139.03 addresses the registrant’s obligation under Rule 14a-5 to disclose in its proxy materials Rule 14a-19(b)(1)’s requirement that a dissident provide notice of its nominees at least 60 calendar days before the anniversary of the prior year’s annual meeting in situations where the registrant’s advance notice bylaw provides for an earlier notification date.
On Friday, the PCAOB announced that it had reached an agreement with the China Securities Regulatory Commission and the PRC’s Ministry of Finance to permit the PCAOB to fully inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB announced that the deal, which is embodied in a “Statement of Protocol,” is just a first step, and this excerpt from the comments of PCAOB Chair Erica Williams suggest a healthy degree of skepticism about whether China’s regulators will honor the accord in practice:
“On paper, the agreement signed today grants the PCAOB complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions. But the real test will be whether the words agreed to on paper translate into complete access in practice.
Today, I directed the PCAOB inspection team to finalize their preparations to be on the ground by mid-September so we can put this agreement to the test. The Statement of Protocol grants the PCAOB complete access in three important ways:
– The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates – without consultation with, nor input from, Chinese authorities.
– Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed.
– The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
Now we will find out whether those promises hold up.”
As Liz recently blogged, the tentative accord comes on the heels of increased activity surrounding the implementation of the Holding Foreign Companies Accountable Act, which could ultimately result in the wholesale delisting of China-based companies unless the PCAOB is provided with the kind of access to audit materials & personnel contemplated by the deal.
I see from recent media reports that meme stocks are back, which I guess means that people feel they didn’t lose enough money in crypto this year. Anyway, it’s Friday and it’s a slow news week at the SEC, so the resurgence of meme stocks gives me an excuse to recount the ongoing wild ride of a meme stock known as Vinco Ventures.
Vinco Ventures commercializes digital media and content technologies, and over the past month, it’s been the subject of some very bizarre boardroom shenanigans. They began with the filing of this Form 8-K announcing that the board had appointed Theodore Farnsworth to serve as Co-CEO alongside the company’s current CEO, Lisa King. But according to a subsequent press release, that’s not what happened. That press release – which you really need to read in its entirety – announced that Farnsworth & King had been terminated, and included this nugget:
On July 14, 2022, Ms. King authorized the filing of a Current Report on Form 8-K that incorrectly stated Mr. Farnsworth had been appointed as the Company’s Co-CEO despite being advised that the information contained in the Form 8-K was incorrect and based on an invalid Board meeting (the “First Incorrect 8-K”). The Company attempted to file a Current Report on Form 8-K by the end of the day on July 14, 2022 to correct the First Incorrect 8-K, but this attempted Securities and Exchange Commission (“SEC”) filing was blocked by certain members of the Farnsworth Group, even though Mr. Farnsworth was not legally appointed as the Company’s Co-CEO at the time.
The press release goes on to recount management reshufflings that occurred at two subsequent board meetings. When the dust settled, the press release says that Farnsworth remained a Co-CEO, but King was moved to another position and a new Co-CEO, John Colucci, was appointed to serve with him. The board purportedly directed the Co-CEOs to file a corrective 8-K, but the press release says that didn’t happen. Instead, the release claims that this happened:
On July 22, 2022, without informing anyone at the Company or the Board, the Company believes that certain members [of the] Farnsworth Group authorized the filing of a Current Report on Form 8-K signed by Mr. Farnsworth that, once again, materially misrepresented the facts and chain of events (the “Second Incorrect Form 8-K”).
Here’s that Form 8-K. In any event, the press release said that the board subsequently terminated Farnsworth and his pals & promised an 8-K filing. The only problem was that “[t]he Company’s SEC codes and SEC filings by the Company have been blocked by the Farnsworth Group,” so that Form 8-K couldn’t filed until those issues were resolved.
Apparently, they still haven’t been completely resolved, because the only 8-K filed after this press release relates to an announcement that the company’s shareholder meeting was being postponed. However, on Wednesday, the company announced that a Nevada court had entered a TRO barring the Farnsworth Group from, among other things, “holding themselves out internally or externally as employed by the Company or acting on its behalf in any capacity.” The court also ordered the Farnsworth Group to turn over the company’s SEC codes.
In its press release, the company claimed that it had “thwarted a hostile takeover attempt for no consideration by the Farnsworth Group.” Over the years, I’ve seen a lot of people try to take control of a lot of public companies in a lot of different ways, but allegedly swiping EDGAR codes as a hostile takeover strategy is a new one on me. If you find all of this very confusing, you’re not alone. I do too, and apparently, so does Nasdaq, which halted trading in the stock a week ago. The meme stock apes, however, continue to have faith that this particular stonk is “goin’ to the moon!”
We’ve blogged quite a bit over the past several years about the Delaware courts’ increasingly sympathetic approach to Caremark claims and their increasingly demanding view of what’s necessary for directors to fulfill their oversight responsibilities. This Wachtell memo addresses the implications of recent Caremark decisions. This excerpt discusses the role that books & records requests play in Caremark litigation and the resulting importance of properly structuring and documenting the board’s oversight efforts:
The increasing use of books and records demands by plaintiffs to plead their claims has been illustrated. Because the Delaware courts have long made clear—including inMarchandand Boeing—that Caremark requires a good faith effort by the board, not perfection, and that the board will only face liability if the evidence demonstrates that a board has not made a good faith effort to fulfill its duties, plaintiffs have sought books and records to sustain their difficult burden to plead a viable claim. When these books and records do not reflect that a company had in place a board structure that attended to core business and legal risks, the plaintiffs cite to that lack of effort in an effort to plead a complaint that cannot be dismissed on motion.
For these reasons, we have urged that companies ensure that their board-level committee structures address all mission critical risks and that the board’s efforts in holding meetings and receiving information in aid of its monitoring responsibilities are well documented. Taking these steps are beneficial on several levels. Most important, tone and involvement at the top on important compliance matters helps companies best position themselves to function safely and lawfully.
Because managing complex business entities invariably involves risks, these actions are also helpful in the event that something goes wrong despite the company’s good faith efforts at prevention. A documented board-level compliance system makes it much more difficult for a plaintiff to plead a viable Caremark claim. With increased attention to these subjects, two-thirds of the Caremark cases filed after Marchand have been dismissed on motion.
The blog goes on to discuss the role that proper structuring & documentation of the board’s oversight of mission critical played in Chancellor McCormick’s dismissal of Caremark claims in City of Detroit Police & Fire Retirement System v. Hamrock, (Del. Ch.; 6/22). It concludes by observing that Hamrock underscores the conclusion that directors face a very limited risk of personal liability if they “use their business judgment and work with management to put in place and attend in good faith to a sound compliance structure that addresses the company’s central risks, and documents its efforts in doing so.”
Wachtell Lipton will be well represented at our upcoming “Proxy Disclosure & 19th Annual Executive Compensation Conferences.” Former Delaware Chief Justice Leo Strine, who is currently Of Counsel at Wachtell, will participate in our “ESG Disclosures: Staying Out of Hot Water” panel & Wachtell Partner Sabastian Niles will participate in our “Next-Gen Activism: Are You Prepared?” panel. You won’t want to miss these or the other informative topics on our agenda, so be sure to sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
