Last fall, Broc ran the 2nd Annual “Cute Dog” Contest. Baker Botts earned bragging rights with Jude Dworaczyk’s “Penny the Hair Bow Aficionado” representing the firm. Some members responded asking that we run the contest again and some suggested a future “cute cat” contest, which we will try to get on deck for some time in 2020. So, with all the heavy news lately, let’s take a look at more “cute dog” photos – and one cute rabbit! The poll is at the bottom of the blog.
1. Gibson Dunn’s Lori Zyskowski – Snickers the “Snowdoodle”
2. Norfolk Southern’s Ginny Fog – Barnaby the “Chillin’ Lounger”
3. Covington & Burling’s Reid Hooper – Midnight and Hercules the “Dynamic Duo”
4. Travelers’ Wendy Skjerven – Mulligan the “Prince of Second Chances”
5. Our own John Jenkins – Shadow the “Backseat Driver”
6. Sidley Austin’s Andrea Reed – Peaches the “City Slicker”
Vote Now: “Cutest Dog Contest”
Vote now in this poll – anonymously – for the dog that you think is the cutest:
survey hosting
Cyan Agonistes: Del. Supreme Ct. Upholds Federal Forum Provisions
Sharing a blog entry here that John posted yesterday on DealLawyers.com as it’s of interest to many: In its 2018 Cyan decision, the SCOTUS unanimously held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court. Some corporations responded to Cyan by adopting “federal forum” charter provisions compelling shareholders to bring 1933 Act claims only in federal court. Much to the chagrin of the defense bar, the Delaware Chancery Court struck those provisions down in Sciabacucchi v. Salzberg, (Del. Ch.; 12/18).
Yesterday, the Delaware Supreme Court unanimously reversed the Sciabacucchi decision. In Justice Valihura’s sweeping 53-page opinion, the Court rejected claims that federal forum provisions were contrary to any Delaware law or policy, and read Section 102(b) of the DGCL as a broad enabling statute that provides Delaware corporations with more than enough flexibility to include a federal forum provision in their certificates of incorporation.
Section 102(b)(1) authorizes the certificate to include “any provision for the management of the business and for the conduct of the affairs of the corporation” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders.” While that authority can’t be used to adopt provisions that violate law or public policy, the Court concluded that a federal forum provision, or FFP, didn’t raise either of those concerns:
First, Section 102(b)(1)’s scope is broadly enabling. For example, in Sterling v. Mayflower Hotel Corp., this Court held that Section 102(b)(1) bars only charter provisions that would “achieve a result forbidden by settled rules of public policy.” Accordingly, “the stockholders of a Delaware corporation may by contract embody in the [certificate of incorporation] a provision departing from the rules of the common law, provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself.”
Further, recognizing that corporate charters are contracts among a corporation’s stockholders, stockholder-approved charter amendments are given great respect under our law. In Williams v. Geier, in commenting on the “broad policies underlying the Delaware General Corporation Law,” this Court observed that, “all amendments to certificates of incorporation and mergers require stockholder action,” and that, “Delaware’s legislative policy is to look to the will of the stockholders in these areas.” Williams supports the view that FFPs in stockholder-approved charter amendments should be respected as a matter of policy. At a minimum, they should not be deemed violative of Delaware’s public policy.
The Court rejected claims that the language added to Section 115 of the DGCL in 2015 codifying the Boilermakers decision permitting exclusive forum bylaws represented an implicit recognition that FFP provisions were impermissible. It also rejected the Chancery’s effort to limit Section 102(b)’s reach to matters covered by the “internal affairs” doctrine, and said that the Chancery’s decision took a narrower approach to what constituted “internal affairs” than either applicable federal or Delaware precedent.
On a personal note, I’d like to express my thanks to the Delaware Supreme Court for giving me something to blog about that’s completely unrelated to the Covid-19 pandemic & for allowing me to fulfill my dream of using the word “agonistes” in a blog title. Now, when somebody googles John Milton or Gary Wills, they may stumble across me! That’s the closest thing to literary immortality that a fat guy in pajamas pounding on a keyboard can reasonably hope to achieve. . .
COVID-19: First Securities Lawsuits Filed
With all the market turmoil, one more unfortunate outcome from COVID-19 is possible securities lawsuits – and it didn’t take long. A memo from Jenner & Block says stock drop class actions have been filed against two companies. First, there’s a suit against a cruise line operator alleging the company misrepresented the impact of COVID-19 by minimizing the likely impact on its operations.
Another suit has been filed against a pharmaceutical company. In this case, the suit alleges the company misrepresented its progress on a COVID-19 vaccine. Hopefully these cases aren’t indicative of a coming trend. Bottom line as noted in the memo – it’s hard to say whether these cases will be successful but companies should take extra care when making any public statements about the potential impact of COVID-19 on their business.
Brand new! By popular demand, this comprehensive “Social Media Handbook” covers the entire terrain – from Reg FD, to proxy solicitation rules, to communications during offerings and business combinations, to reputational risks & opportunities. This one is a real gem – 95 pages of practical guidance – and it’s posted in our “Social Media” Practice Area.
COVID-19: Should You Update Earnings Guidance?
A lot of internal discussions are underway about whether to update earnings guidance about the effect COVID-19 might have on a company’s business or financial outlook. A recent blog from communications firm Clermont Partners says so far, few companies have actually issued updated guidance about the expected financial impact from the health pandemic but they expect pre-announcements or guidance updates to accelerate.
For those debating about whether to update guidance, the blog provides considerations to think about before doing so, here are a few:
– Timing – when it’s time to communicate, tell investors what you know about near-term impacts and longer-term impacts
– Let investors know when they can expect to receive additional updates
– Severity – decide how much of an alarm bell you want to ring – once markets calm down it might be hard to reign expectations back
Another report from PwC looked at what finance leaders are focused on amidst the COVID-19 pandemic. The report was based on a survey of 50 finance leaders. It found most CFOs say their companies are impacted although the full extent remains unknown – the survey then takes a look at actions companies are taking. Here’s some of what it found:
– More than half of survey respondents said they are considering taking cost containment measures
– Approximately 44% are considering adjusting earnings guidance
– When asked about plans to change disclosures, 48% say they’re planning changes as a result of COVID-19 and 8% said the changes would be “significant”
– In terms of the extent of disclosure changes as a result of COVID-19 – 40% said somewhat and another 38% said it’s currently difficult to assess
A couple of weeks ago, I blogged about managing data privacy compliance and noted that California’s AG had proposed two rounds of amendments to the California Consumer Privacy Act in February. We’ll see if the third time’s a charm because last week, California’s AG issued another round of revisions – comments are due by March 27th.
California’s AG can enforce the CCPA as of July 1, 2020 whether final regulations are in place before then or not. A recent Gibson Dunn memo provides a summary of the primary changes included in the latest round, which cover:
– Deletion of guidance on definition of “personal information”
– Change in definition of “financial incentive”
– Removal of the optional “opt out” button
– Relaxation of notice requirement for companies not selling consumer data
– Additional requirements for privacy policies
– Responding to requests to know and requests to delete
This recent blog from BakerHostetler says a 6-month delay in the enforcement of the CCPA has been requested to allow time for companies to focus on COVID-19 related issues.
This year, another aspect to annual shareholder meetings to think about is whether your directors, officers and other employees should attend the annual meeting – presuming that it’s not a virtual-only meeting. A Hunton Andrews memo discusses that question and notes the following considerations:
– Proxy statement disclosure – SEC rules require proxy statement disclosure describing a company’s policy, if any, about director attendance at annual shareholder meetings – and next year, a company will need to disclose in their proxy statement the number of directors who attended the prior year’s annual meeting
– What does “attendance” mean? SEC rules don’t define what constitutes “attendance” for purposes of SEC rules; however, many state laws say its okay for a director to participate in meetings remotely – such as by telephone – provided the director can hear and speak with other directors
– Companies holding in-person or hybrid shareholder meetings should review any director attendance policies they might have to determine if the policy requires “in-person” or “physical” attendance
The memo also provides considerations for companies that are planning to hold an in-person meeting while potentially allowing directors or other senior officers to participate remotely – it says be aware of potential criticism from shareholders and notes that a hybrid meeting format might help alleviate potential criticism.
“Tomorrow’s Webcast: “The Coronavirus: What Should Your Company Do Now?”
Tune in tomorrow for the webcast – “The Coronavirus: What Should Your Company Do Now?” to hear Davis Polk’s Ning Chiu, Wilmer Hale’s Meredith Cross, Uber’s Keir Gumbs and our own Dave Lynn discuss securities law compliance and corporate governance issues arising from the coronavirus outbreak that are confronting public companies & their lawyers.
Tomorrow’s Webcast: “The Top Compensation Consultants Speak”
And, tune in tomorrow for the CompensationStandards.com webcast – “The Top Compensation Consultants Speak” – to hear Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay and Deloitte’s Mike Kesner discuss what compensation committees should be learning about and considering today. Discussion will cover the impact of the COVID-19 pandemic on executive compensation and incentive practices, including goals, timing and incentive plan share usage amid this rapidly changing environment with continued uncertainty. Don’t miss it!
John blogged last week about stock buybacks in response to market turmoil and various news outlets reported that several large banks have suspended their stock buybacks due to the COVID-19 pandemic. For those looking for information about conducting a buyback through a Rule 10b5-1 plan, this Morrison Foerster memo discusses questions about adopting a plan and potential modification given current events. It walks through – and reiterates – best practices in spite of current market conditions.
The memo points out that Rule 10b5-1 plan best practices are not bright line rules and any company should weigh the pros and cons when deciding whether to adopt a plan, including how adoption of such a plan during the COVID-19 outbreak might be viewed in hindsight by the public, outside investors, or law enforcement agencies.
Frequency of COVID-19 Board Updates
How often to brief the board is a question many are asking as we deal with COVID-19 related issues. A recent blog from Financial Executives International provides information about how often some are providing updates based on information gathered from a survey of corporate risk professionals.
The survey said most survey respondents are briefing their boards “as needed only,” while 25% haven’t made a decision yet or don’t currently have executive-level briefings. Another 8% are updating their boards weekly.
As for topics, this Sidley memo discusses ten concerns for boards during the COVID-19 pandemic – it’s a thorough list and helpful if you are preparing for a board update meeting. One of the topics covered is business continuity and, among other things, it says the plan should be continually re-evaluated and that you should consider whether contingencies are in place if a board quorum isn’t available.
Undoubtedly, the decision about updating the board varies from company-to-company and company specific facts and circumstances will guide the decision. To not over-burden management by holding one-on-one director briefings, the blog cites the head of KPMG’s Board Leadership as suggesting independent chairs and lead directors interface with management and then brief directors.
Board-Level Oversight of Sustainability Disclosures
Board-level oversight of sustainability initiatives and disclosure is up for grabs at many companies. This PwC memo discusses reasons audit committees might be best positioned to take on oversight responsibilities for sustainability disclosures. Granted, some companies have established a board-level sustainability committee, here’s a committee charter from Ford and another from Bunge. Audit committees always seem to have a full plate and with more attention focused on sustainability reporting, PwC suggests they take on even more. Here’s an excerpt from PwC’s memo:
Public disclosure of ESG metrics requires appropriate policies, controls and governance, similar to other elective financial metrics, such as non-GAAP metrics. Companies should have processes and controls around the development of those disclosures to support the accuracy of the data.
The audit committee has deep skills in overseeing internal controls, policies and procedures, and reporting. Audit committees can play a role by understanding the methodologies and policies used to develop the metrics, as well as the internal controls in place to ensure accuracy, reliability, and consistency of the metrics period over period.
The memo references the SEC’s interpretive guidance issued in February regarding key performance indicators in the MD&A saying “we encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.”
Not long ago, John blogged about how the SEC’s MD&A guidance heightens the stakes for ESG disclosures.
Friday afternoon, to accommodate companies and shareholders who are changing their annual meeting plans in response to COVID-19, the SEC announced that Corp Fin was providing Staff guidance about compliance with federal proxy rules for upcoming annual shareholder meetings – this includes guidance about virtual shareholder meetings. Here’s an excerpt from the press release:
The staff guidance provides regulatory flexibility to companies seeking to change the date and location of the meetings and use new technologies, such as “virtual” shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.
Under the guidance, the affected parties can announce in filings made with the SEC the changes in the meeting date or location or the use of “virtual” meetings without incurring the cost of additional physical mailing of proxy materials.
The guidance also encourages companies to provide shareholder proponents with alternative means, such as by telephone, to present their proposals at the annual meetings in light of the difficulties that shareholder proponents face due to COVID-19.
Many have been wrangling with all the considerations of holding virtual-only or hybrid shareholder meetings during this time of “social distancing.” This Perkins Coie memo provides considerations from the West coast and this blog from Bass, Berry Sims does a nice job discussing practical considerations, including considering views of institutional investors and proxy advisors. We reached out to Amy Borrus from the Council of Institutional Investors and she kindly provided this statement about CII’s position on virtual-only shareholder meetings:
“CII generally has opposed virtual-only shareholder meetings, in favor of a hybrid approach. Given coronavirus concerns, it is reasonable that some companies will go to virtual-only this spring. But we hope they will make it clear that this decision was one-off, and that they follow best practices for making any virtual meeting participatory.”
Meanwhile, this NYT DealBook article includes a statement from NYC Comptroller Scott Stringer:
The funds he oversees ‘will not take action against boards holding virtual-only annual meetings due to the coronavirus that disclose their rationale and affirm their commitment to holding in-person meetings in the future.’
State laws and company organizational documents may prevent some companies from holding a virtual-only shareholder meeting. But legal issues aside, virtual meetings aren’t without criticism. Among other things, some investors say the meetings don’t allow shareholders to interact with management and directors and there are concerns that shareholders might not be able to get all questions answered, etc. This criticism has led some investors to vote against directors at companies that hold a virtual-only shareholder meeting.
Due to these concerns (and others), it’s understandable why companies might be hesitant to shift to a virtual-only meeting format – so the statements from CII and the NYC Comptroller may help some companies who’ve been wrestling with the decision about what to do.
What about ISS & Glass Lewis? At least for this year, they’re relaxing their policies. This Cleary memo covering virtual meeting considerations includes the updated guidance from ISS and Glass Lewis released by Kingsdale Advisors. Glass Lewis also has a memo on its website – here’s an excerpt from Cleary’s memo:
– Glass Lewis: Consistent with its current 2020 proxy voting guidelines, Glass Lewis has indicated that it will continue to review an issuer’s proxy materials regarding virtual shareholder meetings. Pursuant to its 2020 guidelines, Glass Lewis will generally recommend voting against governance committee members where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclosure in their proxy statement assuring shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. The memo includes examples of what Glass Lewis considers “effective disclosure”.
Glass Lewis stated that, in context of coronavirus, companies that have already filed their proxy statements and provided information for an in-person meeting but are moving to a virtual-only meeting should provide public disclosure explaining the rationale. Such disclosure should specifically state that the change is due to the coronavirus outbreak, include complete information about accessing the meeting and confirm shareholders will have the same opportunities to participate – as they would have had at an in-person meeting.
– ISS: Though it has not previously adopted a formal policy on virtual shareholder meetings, ISS stated that in light of the coronavirus outbreak and the rapidly changing environment, ISS expects that institutional investors will likely be more accommodating of virtual meetings this year.
Like Glass Lewis, ISS stated that it will require companies to provide comprehensive disclosure affirming that a virtual meeting will provide full opportunities for shareholders to participate, ask questions, provide feedback to the company and present shareholder proposals. ISS also indicated that it anticipates the way in which companies manage virtual meetings this year will impact its future position on virtual shareholder meetings.
Virtual Annual Meetings: Sample Disclosures
John blogged last week about resources addressing the various legal considerations on “going virtual” for this year’s shareholder meetings. For those looking for sample disclosures, here are a few that might help.
BNY Mellon’s 2020 proxy statement provides a sample of a company planning to hold an in-person shareholder meeting but also contains the following precautionary statement:
As part of our precautions regarding the coronavirus or COVID-19, we are planning for the possibility that the annual meeting may be held solely by means of remote communication. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be available at https://www.bnymellon.com/proxy.
Examples of companies that have held virtual-only or hybrid meetings that some investors might view as being run well include Intel, Ford and ConocoPhillips. I found the following information after taking a look at each of the companies’ 2019 proxy statements. Perhaps some investors would find similar meeting formats and information transparency somewhat more acceptable, especially this year.
Intel’s 2019 proxy statement included instructions with links that helped shareholders submit questions in advance and also during the meeting. The proxy statement also said the company would make a replay available on its Investor Relations website and Intel’s Investor Relations website also includes answers to investors’ questions from the 2019 meeting.
Ford’s 2019 proxy statement includes a full-page of instructions for last year’s virtual-only meeting. The instructions provided information for shareholders to submit questions in advance and during the meeting, and provided a toll-free telephone number for someone to call if they ran into technical difficulties.
ConocoPhillips held a hybrid meeting and its 2019 proxy statement included instructions for attending in person or for viewing a live video webcast of the meeting. The proxy statement also provided information allowing shareholders to submit questions in advance of the meeting. The company has a link on its Investor Presentations website to access a replay and a transcript from last year’s meeting.
And, for anyone interested in following Warren Buffet’s lead, he announced last Friday that Berkshire Hathaway’s annual meeting will be streamed online by Yahoo Finance without shareholders present – here’s the story from CNBC.
Yesterday, the SEC adopted amendments to the definitions of “Accelerated Filer” and “Large Accelerated Filer.” Here’s the 210-page adopting release. The most notable result of this action is that smaller reporting companies with less than $100 million in revenues will no longer have to provide auditor attestations of their Sarbanes-Oxley Section 404 reports. This excerpt from the SEC’s press release summarizing the changes says that the amendments will:
– Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Business development companies will be excluded in analogous circumstances.
– Increase the transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million;
– Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status; and
– Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.
The need for relief from SOX 404 was a controversial topic, and as usual these days, the vote was along partisan lines. Republican Chair Jay Clayton and Commissioner Hester Peirce submitted statements in support of the rule, while Democratic Commissioner Allison Herren Lee filed a statement in dissent.
Two commissioners also provided some colorful social media commentary on the vote. Allison Lee tweeted: “There must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.” For some reason, Hester Peirce tweeted a photo of a cherry cobbler with “404” baked into it (your guess is as good as mine, folks).
Disclosure: What If Your CEO Is Diagnosed With the Coronavirus?
The COVID-19 outbreak creates plenty of disclosure issues about its potential impact on a company’s business and financial condition. But there’s another one lurking in the background – what if the CEO becomes ill? Unfortunately, based on what we know about the virus, that doesn’t seem to be an unlikely outcome for at least a few companies, so it probably makes sense to start thinking about that particular issue now.
If you’re inclined to do that, check out this recent blog from UCLA’s Stephen Bainbridge on this topic. The blog acknowledges that it may be prudent for the CEO to disclose this information to the board and shareholders, but says that the existence of a legal obligation to do is another matter. A lot may depend on what you’ve previously said – for example, have you singled out the potential loss of the CEO as a risk factor in prior disclosure? This excerpt says that in the absence of this or another disclosure trigger, there may not be a legal obligation to disclose the illness:
Even if the CEO’s health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, “[s]ilence, absent a duty to disclose, is not misleading ….” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO’s health, it would have a duty to correct that statement. But simply remaining silent about the CEO’s health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.
Having said all that, there are some academics who think there should be such a duty, although they recognize that the law has not yet imposed such a duty.
Prof. Bainbridge cites the academic literature supporting the imposition of a duty to disclose a CEO’s significant health problem, but as someone who wasn’t on law review, I take great pleasure in omitting the citations from my blog. After all, it’s been a tough week, and – to quote Kevin Bacon’s character in the movie Diner – “it’s a smile.”
Thinking About a Buyback? Here’s Some Reassurance
If your board is thinking about stock buybacks in response to the ongoing market turmoil, this brief Davis Polk memo has some words of reassurance for your directors. The memo walks through a number of complex issues about buybacks that boards are currently dealing with.
While these issues aren’t amenable to short answers, the memo notes that in making decisions about them, “a Board that acts without any conflict, is well-informed, and goes through a proper process in deliberating to reach a decision, will be protected by the business judgment rule.” If your company is thinking about a buyback, be sure to check out our “Stock Buybacks Handbook” and the other resources in our “Stock Repurchases” Practice Area.
For many companies, annual meetings are just around the corner, and the COVID-19 pandemic has raised all sorts of questions about what they should do and whether a virtual meeting is a viable alternative.
Last week, Lynn blogged about Davis Polk’s memo on planning for coronavirus-related annual meeting developments. Since then, we’ve received memos addressing similar topics – including adding a virtual meeting component or going entirely to a virtual annual meeting – from Freshfields, DLA Piper, Hunton Andrews Kurth, Pepper Hamilton and Dechert. Also check out this Cleary Gottlieb blog. These resources address the relevant securities and corporate law issues, as well as investor relations and logistical considerations.
This Sidley memo says that one of the consequences of the coronavirus outbreak may be a decline in proxy contests during the current season. As this excerpt points out, the reason is that given current market volatility, activists may be unwilling to commit to the kind of long-term hold that a successful proxy fight would necessitate:
It is important to understand that if an activist launches a proxy contest to replace directors, an activist must be prepared to remain in the stock for the foreseeable future – at least until the annual shareholder meeting and, if successful in obtaining board seats, at least 6-12 months beyond that. While there are no legal restrictions to the contrary, as a practical matter, an activist cannot initiate a proxy contest and sell or reduce its position shortly afterward.
An activist who does this stands to lose credibility with long-term institutional investors and becomes more susceptible to being portrayed as a “short term” investor in future activism campaigns. It is even more difficult for an activist to exit a stock if an employee of the activist fund, rather than candidates that are at least nominally independent, takes a board seat. Material nonpublic information received by the activist employee in the board room is imputed to the activist fund, thereby restricting the fund’s ability to trade in the stock.
The memo cautions that once the crisis passes, companies should expect activists to return to proxy contests with a vengeance. It notes that 130 proxy contests were launched in 2009, after the financial crisis, and many companies that can hide during a bull market have their vulnerabilities laid bare during a downturn.
Antitakeover: Dual Class & Staggered Boards are Alive & Well in Silicon Valley
Fenwick & West just came out with its annual comparative survey of governance practices among Silicon Valley companies and the S&P 100. One of the things that jumps out at you is that while antitakeover charter provisions may be on the decline in most of corporate America, they’re thriving out west:
– Historically, dual-class capital structures were more prevalent among the S&P 100 companies than they were among the SV 150, but the number of tech companies that have them has risen from 10.9% of the SV 150 in 2017 to 12.7% in 2019), while the percentage of S&P 100 companies with dual class structures has remained steady at about 9% during that same period.
– Staggered boards are also much more common among the tech set than among S&P 100 companies. Classified boards increased from 50.7% of SV 150 companies in 2018 to 52.7% in the 2019 proxy season. That percentage reflects the large number of Silicon Valley IPOs in recent years, but the percentage of companies with staggered boards among the more mature top 15 SV 150 companies increased to 13.3% in the 2019 proxy season, after holding steady at 6.7% for the preceding 4 years. In contrast, only 5% of the S&P 100 had staggered boards in 2019.
Obviously, IPOs that are skewing the Silicon Valley numbers somewhat, but another factor in the greater extent of unfashionable antitakeover provisions in SV 150 charters may also have something to do with the amount of voting power sitting in their boardrooms. The survey reports that directors & officers of SV 150 companies own an average of 9.0% of the equity in their companies, while their counterparts at S&P 100 companies own an average of only 3.5%.
With apologies to “The Scarlet Pimpernel“, this blog’s title is a fair summary of the results of Morrow Sodali’s annual institutional investor survey. More than 40 global institutional investors with a combined $26 trillion in assets under management participated in the survey, which was conducted in January. Among its other highlights, the survey found that:
– All respondents state that ESG risks and opportunities played a greater role in their investment decisions during the last 12 months, with climate change being top of investors’ list (86%).
– Climate change (91%) and human capital management (64%) are cited as the top sustainability topics that investors will focus on when engaging with boards in 2020.
– Notably, investors now prioritize presence of ESG risks (32%) before a credible activist business strategy when deciding whether to support ESG activists.
– Overwhelmingly 91% of respondents expect companies to demonstrate a link between financial risks, opportunities and outcomes with climate-related disclosures. A total of 68% respondents believe that greater detail around the process to identify these risks and opportunities would significantly improve companies’ climate related disclosures.
– When it comes to the company’s ESG performance and approach, investors recommend SASB (81%) and TCFD (77%) as best standards to communicate their ESG information.
91% of the institutions surveyed said that that board level engagement is the most effective way for investors to influence board policies – and nearly half said they’d consider voting against a director to influence outcomes.
Conflict Minerals: Time for a Fresh Look at Disclosure & Compliance Programs
Remember when everybody thought the Conflict Minerals disclosure requirement was on the way out? Yeah, good times. . . Anyway, this Ropes & Gray memo says that changes in the global regulatory environment and increasing investor demands for information on conflict minerals mean that it’s time for companies to take a fresh look at the way they approach disclosure and compliance. Here’s the intro:
The seventh year of filings under the U.S. Conflict Minerals Rule will be due in slightly under three months. At most companies, conflict minerals reporting and compliance have been more or less static for the last few years. It is time for many companies to take a fresh look at their conflict minerals disclosure and compliance program. In some cases, disclosures have become outdated and compliance programs have not kept pace with market developments.
In addition, over the last few years, the global regulatory landscape has continued to evolve, both with respect to conflict minerals specifically and human rights more broadly, with more changes on the way. Furthermore, investor expectations concerning supply chains – as part of ESG integration by mainstream investors – continue to increase.
The biggest regulatory event on the horizon is EU Conflict Minerals Regulation, which takes effect on January 1, 2021. The EU Regulation generally will require importers of 3TG (tin, tantalum, tungsten and gold) minerals into the EU to establish management systems to support due diligence, conduct due diligence and make disclosures about the 3TG they import into the European Union.
The memo provides an in-depth overview of the EU Regulation, and notes that while only a small number of U.S. Form SD filers will also be subject to the EU Regulation, the conflict minerals compliance programs of a large number of U.S.-based companies will need to address the EU Regulation.
Board Governance: Should You Keep Your Ex-CEO on the Board?
Cooley’s Cydney Posner recently blogged about this Fortune article addressing whether your former CEO should remain on the board after their departure. This excerpt says that many governance experts think that’s a bad idea – particularly if your CEO will assume some sort of “Executive Chair” role:
Some governance gurus cited in the article consider making the transition to executive chair a “bad idea.” According to one governance expert, the position of executive chair really “means you’re CEO….The person with the CEO title is really the chief operating officer.” Another expert observed that a good CEO will see that it’s “not fair to the new person.” Another academic doesn’t hold back, calling it “a stupid idea.
All kinds of psychological factors get in the way. Maybe the new CEO owes his or her job to the predecessor. Or maybe the new CEO can’t stand the previous one. Maybe the old CEO brought all the other directors onto the board, and they feel loyal to him or her. It obstructs the new CEO from doing his or her job.” Another problem highlighted was the difficulty for the new CEO to change course or raise issues about the former CEO’s decisions when the former CEO is still in the room. Awkward, at a minimum.
On the other hand, Cydney says that the authors contend that retaining the CEO on the board or in a consulting capacity for a brief time may provide benefits in terms of continuity. Interestingly, the article also says that in situations where the former CEO isn’t a founder, keeping the CEO on the board “is negatively associated with the firm’s post-turnover financial performance.”
In what may be a sign of things to come for many of us, The Washington Post reports that last night, the SEC asked employees in its DC headquarters to work from home in response to concerns that an employee may have contracted the coronavirus:
The Securities and Exchange Commission on Monday asked employees at its D.C. headquarters to stay away from the office because of a potential coronavirus case, becoming the first major federal employer to turn to telework to avoid the spreading virus.
The announcement from the agency, which is charged with monitoring the financial markets, came after a day of turmoil on Wall Street, with the Dow Jones industrial average falling more than 2,000 points. The agency‘s notice, which was emailed shortly after 8 p.m., required employees working on the ninth floor of its office to stay home and encouraged all others to do the same.
While the SEC may be the first federal agency to ask employees to telecommute, a number of U.S. businesses have also implemented work from home policies for some employees in response to the outbreak. Many others are adopting contingency plans that contemplate doing the same. For instance, last night my law firm sent out an email directing everyone to take their laptop computers home each night, in case the decision was made to implement a work from home policy for personnel at one or more of our offices.
Coronavirus: Will Business Interruption Insurance Pick Up Some of the Tab?
Many companies are looking into whether forced closures resulting from the coronavirus outbreak are covered under their business interruption policies. This Stroock memo delves into that question, and it turns out – as usual when it comes to coverage issues – the answer is pretty complicated. But the bottom line is don’t bet on it. Here’s an excerpt from the intro:
With COVID-19 disrupting global supply chains and sales, businesses are losing income and incurring additional expenses as a result of the disruption. There likely will be an increase in insurance claims against insurance policies offering business interruption and/or contingent business interruption coverage. Whether the claims are covered will depend on the terms and conditions of the insurance policy and the circumstances of the loss.
One of the largest independent claim managers has cautioned that “successful claims under business interruption coverage for infection are not common.” Indeed, there are no reported cases in the United States regarding business interruption coverage in connection with human infectious disease epidemics or pandemics. However, commerce has never been as global as it is today.
The memo does a good job summarizing the various types of policies that provide business interruption insurance and the way in which they’ve been interpreted by the courts. After reading it, I think it’s fair to say that any company that seeks to recover under a business interruption policy should be prepared for a long and uncertain fight.
Auditor Refreshment: Every 87 Years Like Clockwork. . .
A recent Audit Analytics blog noted that Brown Forman recently changed its outside auditors for the first time in 87 years, and also pointed out that since 2018, there were only two other S&P 500 companies to change auditors after a longer tenured engagement. GM parted ways with Deloitte after 100 years, and DuPont de Nemours ended its relationship with that same firm after 113 years.
That raises the larger question of just how long have S&P 500 companies used the same auditors? The blog lays that out too, with a chart showing the frequency distribution of auditor tenure in 10-year increments. While only 38 companies have auditors with tenures exceeding 80 years, 94 companies – or nearly 20% of the S&P 500 – have had the same auditor firm for more than 50 years. More than half of the S&P 500 (265 companies) have had the same auditor for more than 20 years.
I guess we can add earnings calls to the ever-growing list of things that the coronavirus outbreak has thrown a giant monkeywrench into. This recent article from “CFO Dive” says that public company CFOs have been scrambling to explain the potential impact of the outbreak on their company’s bottom line during recent earnings calls. This excerpt provides some examples of what BigTech has been saying:
As of last week, references to coronavirus have been made over 8,000 times across over 1,000 companies on earnings call transcripts, natural language processing company Amenity Analytics found,
Apple led the pack as the first corporate giant to state that it wouldn’t meet its Q1 revenue projections due to the virus, which originated late last year in Wuhan, China. iPhones, which are manufactured in China, have experienced limited production and reduced domestic demand, Apple announced on February 17.
Microsoft soon after followed suit. “Although we see strong demand … the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call,” the company said last week. “As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated.”
The article also features commentary on the outbreak’s earnings impact from companies across a range of industries, including financial services, hospitality, retail, and consumer products. Spoiler alert: the news is not good.
Upcoming Webcast: “The Coronavirus – What Should Your Company Do Now?”
We’ve blogged so much & posted so many memos on the implications of the coronavirus outbreak that I’m starting to think that we should change our name to “TheCoronavirusCounsel.net.” But there’s no getting around the fact that this is a very big deal. In addition to its tragic & rising human cost, the COVID-19 outbreak has disrupted global supply chains, staggered financial markets, and created huge uncertainties for businesses and investors.
Those disruptions & uncertainties have important implications for public companies and those who advise them. That’s why we’ve just calendared a webcast – “The Coronavirus – What Should Your Company Do Now?” – for Thursday, March 19th. The webcast features Davis Polk’s Ning Chiu, WilmerHale’s Meredith Cross, Uber’s Keir Gumbs and our own Dave Lynn. The panelists will tackle some of the key issues confronting public companies & their lawyers as a result of this ongoing international public health emergency.
Tomorrow’s Webcast: Conduct of the Annual Meeting
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear McDonald’s Jennifer Card, Independent Inspector of Elections Carl Hagberg, and GE’s Brandon Smith talk about annual meeting logistics, dealing with the media, preparing officers & directors, rules of conduct, disruptive shareholders, tabulation issues and meeting post-mortems.
