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 we last checked in on the litigation over the SEC’s climate disclosure rule, the SEC had indicated that, if the rule survives litigation, it would provide a new implementation period for companies to come into compliance. Now things are heating up on the docket, with both sides submitting their briefs (along with many “intervenors”). Based on the calendar, most briefs should be in by now, with the petitioners’ response due mid-September.
This blog from Cooley’s Cydney Posner recaps the SEC’s key arguments in support of its authority to adopt the rule. Here’s an excerpt:
The SEC maintains that its “approach to climate-related information has been consistent with its longstanding interpretation of its statutory authority: the Securities Act and the Exchange Act authorize the Commission to mandate disclosures that protect investors by facilitating informed investment and voting decisions.” Each disclosure requirement in the rules is designed to elicit information with that goal and is therefore “necessary or appropriate in the public interest or for the protection of investors.” For example, the requirements to disclose Scope 1 and Scope 2 GHG emissions are a central measure of exposure to transition risk, one of the business and financial risks facing companies. Consequently, the SEC argues, the information is elicited is “necessary or appropriate in the public interest or for the protection of investors” and within the SEC’s authority.
Petitioners’ arguments, the SEC contends, set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” Contrary to petitioners’ arguments, the rules were adopted “to advance traditional securities-law objectives of facilitating informed investment and voting decisions,” not to “influence companies’ approaches to climate-related risks or to protect the environment.” As reflected in the extensive factual record, the rules respond to “changed facts, including subsequent market and regulatory developments,” such as the current importance of climate-related risk information to investor decision-making and investor interest in detailed, consistent and comparable information. In adopting the rules, the SEC emphasized that they “do not ‘determine national environmental policy or dictate corporate policy,’” and emphasized that it “is ‘agnostic as to whether and how issuers manage climate-related risks so long as they appropriately inform investors of material risks.’” In addition, the rules “do not ‘prescribe any particular tools, strategies, or practices with respect to climate-related risk.’”
The blog also summarizes the Commission’s response to challenges under the Administrative Procedure Act and the First Amendment. As I mentioned, there are a lot of amicus briefs on both sides – here is one from 17 First Amendment scholars that defends the rule. Here’s a summary of their arguments:
The Knight Institute’s amicus brief, filed in support of the rule, makes four arguments. First, securities disclosure requirements that inform and protect investors do not ordinarily raise First Amendment concerns. Second, the climate disclosure rule falls within this longstanding tradition of securities disclosure requirements. Third, at most, the rule should be evaluated under the framework that the Supreme Court established in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985). Finally, the rule survives Zauderer’s scrutiny.
It’s anyone’s guess what will happen to this rule, but there’s a chance that the court’s decision will be a mixed bag. The SEC acknowledges that possibility in its brief. Cydney notes:
While the SEC urged the court to agree with its conclusions that all of petitioners’ challenges fail, if the court were to determine otherwise, the SEC requests the court to remand, not vacate, and to sever any provision that the court determines to be unlawful.
In a decisive move that it previewed earlier this year, the California State Teachers’ Retirement System recently announced that it voted against the boards of directors at a record 2,258 companies this past proxy season – which is up from a then-record of 2,035 companies in 2023. This is out of about 10,000 meetings globally.
Although many companies have paused (or at least not accelerated) efforts on climate disclosure while we wait out litigation over the SEC’s rule, CalSTRS’ voting policies continue to matter because it is one of the largest pension funds in the world, with over $341 billion in assets. The pension fund articulates its expectations as follows:
CalSTRS expects all portfolio companies to accomplish the following, to help effectively manage the risks and opportunities associated with climate change:
– Publish a report on sustainability-related disclosures that aligns with the International Financial Reporting Standards, which took over the monitoring of companies’ progress on climate-related disclosures from the Task Force on Climate-related Financial Disclosure (TCFD).
– Disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions. Scope 1 emissions come from a company’s operations and Scope 2 emissions are from the generation of power a company uses.
In addition to the above disclosures, CalSTRS expects the highest global emitting companies on the Climate Action 100+ focus list and other high-emitting companies to also set appropriate targets to reduce GHG emissions, as this is an important step to reach a net zero portfolio by 2050 or sooner.
The press release says there has been improvement in methane emissions reporting over the past year, and that 10 companies have joined the Oil and Gas Methane Partnership 2.0 (OGMP 2.0), a United Nations-led framework committed to the measurement, reporting and mitigation of methane emissions, as a result of CalSTRS-led engagements.
Thanks to everyone who has reached out with well-wishes since I shared in April that I was going under the knife. It has always meant a lot to me to be part of this community and get to be connected on a personal level with so many of our readers and members, and this latest experience only underscored what a thoughtful community it really is. It’s been great to return to the blog this week!
As I shared a few months ago, I had some reservations about taking a medical leave. I still have several months ahead of me on this recovery journey – but the hardest part is behind me, and I’m very happy about that! And I have to say, the cardio improvements are even better than I’d imagined.
While this endeavor has renewed my gratitude for the everyday routines that we all sometimes take for granted, I am still definitely in learning mode when it comes to handling setbacks with grace and patience. And the biggest lesson for me – by far – has been the reminder that we are all connected (and that’s a good thing). I have had to depend on people in new ways and I’m happier than ever to lend a hand to others who are going through challenging times.
Thank you again to *everyone* who supported me during my leave, and to all of you for welcoming me back. I’m looking forward to catching up with you in the months to come and hopefully seeing many of you in San Francisco!
For more than thirty years, one of the most prevalent strategies for insider trading has gone undetected and unaddressed. This Article uncovers the techniques by which executives and directors sell overvalued stock worth more than $100 billion per year, shifting losses to ordinary investors. The basic idea is that insiders conceal their suspicious trades by publicly reporting them (as they are required to do) in ways that confuse or discourage investigators.
We develop a taxonomy of concealment strategies, complete with suggestive examples. We then empirically test our taxonomy using a database of essentially all stock trades since 1992. We find that insiders who trade using the subterfuges we describe outperform the market by up to 20% on average.
Worse yet, we find evidence that this simple subterfuge works. Essentially no one has ever been prosecuted for undertaking one of these suspicious trades. Nor do journalists or scholars seem to appreciate them. Accordingly, we call for scholars and prosecutors to cast a wider net in their studies and market surveillance, then discuss implications for the design of insider-trading reporting requirements and related legal rules.
That’s the abstract from “Insider Trading by Other Means,” a new 66-page research paper by Sureyya Burcu Avci, Cindy A. Schipani, H. Nejat Seyhun and Andrew Verstein, which is published in the Harvard Business Law Review. This Bloomberg article points out that this paper isn’t the group’s first foray into insider trading analytics: their earlierresearch on “insider giving” was cited in the SEC’s 2022 rule changes on insider trading and Rule 10b5-1 plans and supported the Commission’s decision to require insiders to report gifts on Form 4 within 2 business days.
Now, the authors are taking aim at Form 4 transaction codes. Specifically, “J codes” that are used to report transactions that don’t fall into any other transaction code category. They are calling for action – and it’s fair to think the SEC Enforcement Division will listen, given its focus on insider trading and fondness for data analytics (and according to a 2004 blog from Alan on Section16.net, they’ve investigated transaction codes before). Here’s an excerpt:
[I]nvestigators have been unduly passive with respect to insider trading proxies. Code J is a strong signal that insider trading may be underway. Investigators should, at the very least, treat suspicious J transactions as worthy of inquiry. Indeed, they should probably go further and prioritize J-coded transactions more aggressively than ordinary S transactions.
This recommendation is even stronger where the filing bears other worrying marks. J transactions are required to include an explanatory footnote. Filings that lack an explanation, or which use the wrong transaction code, are out of compliance with the law. Transactions with the issuer, or distributions from investment funds, may appear to be benign, but our tests indicate that these are especially likely to be suspiciously timed. Accordingly, investigators should take these keywords to be informative proxies.
Most centrally of all, investigators should take late-filed J-coded transactions to be highly suspicious. Our findings indicated intense abnormal returns with J-coded transactions are reported long after the transaction took place. In most cases, these transactions are already improper, and worthy of investigation for that reason. But even if delayed filing is sometimes justified, the overall trend remains strong. Investigators should scrutinize even lawfully delayed J-coded transactions because such transactions are strongly associated with abnormal profits.
Likewise, investigators should examine more closely the transactions between insiders and their corporations. We found that J-coded transactions discussing SEC Rule 16b-3 were suspiciously well timed, despite the SEC’s view that these transactions are often benign. Plainly, the story is more complicated.
When scrutiny unearths false or deceptive Form 4 filings, prosecutors should take aggressive action.
Despite the findings, my own experience is that the vast majority of folks are truly attempting to correctly report transactions under a complex Section 16 regulatory regime. So, how do we stay out of the crosshairs? The authors note that this is an area where “the law abides partially in the craft wisdom about what is commonplace and acceptable” – but they mention a great resource:
Romeo and Dye’s two-volume handbook offers more than 1000 pages of practical guidance, focused just on the details of how to fill out the one-page Form-4 and its peers. Romeo and Dye also publish a treatise on Section 16 law, more generally.
Forgive me for including a shameless plug, but I have to admit I would struggle in my day job if I didn’t have access to Peter and Alan’s vast array of accumulated wisdom. If you aren’t already a member of Section16.net, you should sign up. And more urgently, make sure to catch the star himself, Alan Dye, at our “Proxy Disclosure & 21st Annual Executive Compensation Conferences,” October 14th and 15th! We have an awesome agenda filled with expert practitioners who will share their insights. Alan, Dave, John, Meredith and I love this community and we are very eager to see as many folks as possible in person in San Francisco! Register and book your hotel room today, if you haven’t already done so. Virtual attendance is also still an option if you’re not able to join the party in person!
Earlier this year, I shared on our Proxy Season Blog that Glass Lewis and at least one big asset manager are considering “director commitment policies” as part of their review and voting recommendations/decisions. A blog from Stefan Padfield of the National Center for Public Policy Research recaps the proponent perspective on this topic, with a novel proposal submitted to several companies this past season that requested directors to:
“disclose their expected allocation of hours among all formal commitments set forth in the director’s official bio, with allocation being permissible “on a weekly, monthly, or annual basis.”
The Corp Fin Staff agreed with several companies that this proposal could be excluded from the proxy statement on the basis of micromanagement. Another company did not seek no-action relief, submitting the proposal to a vote by stockholders, where it received support from about 3% of the voting power. But Stefan says the NCPPR is undeterred:
Given the ever-increasing responsibilities of corporate directors, as well as generally increasing demands on their time, limiting oversight of overboarding to counting board seats and CEO spots is unsustainable. Accordingly, we will likely be submitting a similar proposal next season and urging the SEC staff to reconsider its conclusion in Johnson & Johnson. Asking prospective directors how they intend to allocate their hours among their often numerous commitments should not be viewed as improper micromanagement but rather basic accountability fully within the ambit of shareholders to request.
Be on the lookout for more on this topic as we head into 2025…
