BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

US Securities and Corporate Governance

Corporate Governance

Main Content

As SPACs’ Popularity Explodes, Liability Risks Rise As Well

One driver of the popularity of SPACs is the perception that they have lower liability risks than a traditional IPO.  But a closer look at SPAC transactions suggests that the liability risks are not as low as some believe, and SPAC sponsors and directors and officers of SPAC companies should act to protect themselves against potential claims from both the private plaintiffs’ bar and the government.  Click here to read the alert in full.

Latest Twists in Long and Winding Road to Board Diversity Disclosure

The House Committee on Financial Services met virtually on April 20, 2021 to consider legislation that, among other things, would require public companies to annually disclose the voluntarily, self-identified gender, race, ethnicity and veteran status of their board directors. The Committee cited a 2017 board diversity survey finding that increased board diversity improves companies’ ability to innovate and enhances overall business performance.

In the meantime, the wait continues for an SEC decision on Nasdaq’s proposed “comply or explain why not” mandate that would require public disclosure of board diversity statistics for most Nasdaq-listed companies, initially proposed in December 2020.   The SEC most recently acted on these rules on March 10, 2021, when it issued an “Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes, as Modified by Amendment No. 1” (the “Order”).  The Order postponed the date, which had already been extended, by which the SEC is required to make its decision regarding the proposed rules, as amended, until possibly as late as August 2021. 

Some speculated that the delay was, at least in part, to allow time for Gary Gensler to be named SEC Chair.  The Senate confirmed Gensler’s nomination on April 14, 2021, and he was sworn in as a member of the SEC on April 17, 2021, so many expect movement on the Order this summer.  Comments continue to trickle in to the SEC website, and the SEC Office of the Investor Advocate continues to meet by telephone

UK Government proposals to reform corporate reporting and governance

The UK Government published yesterday the long-awaited White Paper consulting on proposals to significantly shake up the UK corporate governance framework, including a package of measures aimed at improving the UK’s audit, corporate reporting and corporate governance systems in the wake of recent accounting and corporate governance scandals. Under the proposals, the regulator would have new powers to hold directors of large businesses to account, directors’ remuneration could be withheld and/or recovered in the event of serious director failings and the laws around the payment of dividends would be strengthened.

Whilst they didn’t take things as far as Sarbanes-Oxley standards in the US when it comes to directors’ liability and personal attestation of financial accounts (which many had been speculating about in the press over recent weeks and was largely thought to be the reason it was delayed by No. 10), the proposals do seek to make a number of significant proposals which we outline in the note below and, importantly, increase the scope of companies to which they would apply to now include large private companies.

The proposals are likely to be welcomed by many industry bodies and regulators including the Financial Reporting Council, Competition and Markets Authority and Sir John Kingman, all of whom published independent reviews which contributed to these proposals.

The full briefing can be found here

New ISS 2021 Factors for Governance QualityScore Address Investor Hot Topics

ISS recently released updated methodology for its Governance QualityScore (GQS) rating system for institutional investors.  The new factors relate to areas of emerging concern to investors, with 11 of the 17 new factors addressing information security risk and oversight.  Other new factors relate to board matters, such as diversity, inclusion, practices and composition, and to compensation matters, such as whether and the extent to which special grants have been made to executive officers.  ISS also extended to the U.S. market certain factors regarding the number of boards on which directors serve and shareholder voting rights.  ISS further indicated that the updated methodology reflects the rebalancing of certain existing factors in the categories of Board Commitments and Litigation Rights.

ISS reviews its methodology annually to ensure that its approach remains closely aligned with ISS’ benchmark voting policies and reflects developments in regulatory and market practices.  Key updates to ISS’ benchmark voting policies for the 2021 proxy season are summarized in our December 11, 2020 post. The new factors and factors newly applied to the U.S. market include:

New Factors as of January 29, 2021:

Audit (Information Security Risk Oversight)

  • What percentage of the committee responsible for information security risk is independent? (Q403)
  • How often does senior leadership brief the board on information security matters? (Q404)
  • How many directors with information security experience are on the board? (Q405)

Audit (Information Security Risk Management)

  • Does the company disclose an approach on identifying and mitigating information security risks? (Q402)

Apple adds ESG bonus component to executive compensation program

In its recently filed proxy statement, Apple Inc. announced that beginning in 2021, the Compensation Committee will incorporate an environmental, social and governance modifier into the annual cash incentive program.  The Compensation Committee will use the modifier to determine whether to increase or decrease bonus payouts by up to 10% based on the Compensation Committee’s evaluation of executives’ performance with respect to “Apple Values” and other key community initiatives during 2021.

“This change is intended to further motivate Apple’s executive team to meet exceptionally high standards of values-driven leadership in addition to delivering strong financial results,” according to the proxy statement disclosure.

The proxy statement did not include specific ESG targets or initiatives for the modifier, although the introduction to the proxy statement listed the Apple Values shown below, noting they “reflect our commitment to leave the world better than we found it and to create powerful tools for others to do the same.”

Education

apple.com/education

For more than 40 years, Apple has worked alongside educators to inspire the next generation of learners. From primary through post-secondary school, teachers and students are using Apple products to express their creativity and to teach and learn the skills needed to succeed in a rapidly changing world. Through our Community Education Initiatives, such as ConnectED, our products, services, and support have reached learners of all ages in underserved communities that need them the most.

   

Environment

apple.com/environment

Apple has dedicated our resources and best thinking to considering the environment in everything

2021 Annual Shareholder Meetings – Avoiding a Super Spreader Event

As COVID-19 rages on, companies are again flocking to virtual annual meetings for the 2021 proxy season, but with one important difference:  the luxury of time.  Many companies are already exploring retention of virtual annual meeting providers and alternatives for video and real-time Q&A, as well as drafting fulsome disclosure about meeting logistics in their proxy materials to address concerns raised by investors, the SEC and others with respect to some pitfalls during the 2020 proxy season.

Service Providers and Technology.  For 2021, an issuer will have additional time to select an appropriate provider of a virtual meeting platform.  The most widely used vendor for hosting virtual meetings is Broadridge Financial Solutions, Inc., which reported that it hosted 1,494 virtual shareholder meetings during the first six months of 2020.  Other service providers, such as stock transfer agents, also provide such services.  A few companies have even arranged to facilitate the virtual component of an annual meeting via Zoom.

In 2020, some companies were caught off-guard by technology glitches.  For 2021, issuers should be in a position to anticipate technology issues and to put contingency plans in place to address them.  Issuers can follow best practices for virtual meetings by, for example, putting in place technical support lines for the duration of their meetings.

Format and Rules of Conduct (including Q&A).  Companies need to decide whether a meeting will be virtual-only, physical-only or a hybrid.  For any virtual component, they need to decide whether the access will be audio-only or

Kodak Releases Special Committee Report – Details Failures in Corporate Governance Practices

We previously blogged about the myriad issues arising in connection with the botched announcement by Kodak of a potential $765 million loan from the federal government as part of its coronavirus response measures, as well as insider stock transactions preceding and immediately following the announcement.  Kodak’s board formed a special committee to conduct an internal investigation.  Akin Gump, retained by the special committee to conduct the investigation, last week delivered its report of over 70 pages of factual findings and legal analysis, concluding that there were no violations of law or company policy, but identifying corporate governance issues requiring attention and remediation.  The company has posted the report on its website.

As we previously blogged, on July 27 the internal public relations team at Kodak released an alert to local media that Kodak would be making a big announcement the following day concerning a major initiative between Kodak and the federal government.  Stories immediately started circulating on social media and the websites of local network affiliates. Kodak then contacted the recipients of the advisory to tell them it was meant only as background and was not intended for publication.  The formal announcement followed before the market open on July 28 when Kodak and the U.S. International Development Finance Corp (DFC) jointly announced a ”letter of interest” contemplating a $765 million loan to Kodak to launch a new pharmaceutical business. Although the press release made clear that this was only a letter of interest and the loan was subject

Lawsuits challenge alleged false proxy statements about commitment to diversity

A well-known plaintiffs’ law firm recently filed derivative lawsuits against four prominent companies, alleging false proxy disclosures and breaches of fiduciary duties.  The allegations focus on the absence of Black directors and executive leadership, and in some cases other persons of color, and very few Black employees, and purported false statements about the companies’ commitment to diversity.

The allegations of proxy statement misstatements, which include breaches of the duty of candor, vary somewhat among the complaints, but generally focus on:

  • Statements touting the board’s consideration of diversity in the nominating process;
  • Statements regarding the importance of diversity and inclusion in the company’s employment practices;
  • The absence of terms limits and the failure to discuss their effect on the nomination of Blacks and minorities; and
  • The failure to consider diversity and inclusion goals in executive compensation decisions and the lack of disclosure of the company’s unlawful discriminatory hiring and pay practices.

The complaints typically cite disclosures in the corporate governance and CD&A sections of the proxy statement, but in some cases also focus on company responses to shareholder proposals that relate to diversity and employment practices.

The allegations of breaches of fiduciary duties focus on directors’ failure to oversee compliance with anti-discrimination laws, citing class action settlements and/or government investigations regarding gender or other discrimination, and failing to ensure the inclusion of diverse candidates as directors, citing board committee charters and proxy disclosures.  Some of the complaints also challenged director and/or executive compensation as excessive or unjust in light

COVID-19 Business Risk Management: Addressing Supply Chain Risks

As public companies continue to manage vulnerabilities attendant to the global pandemic and its widespread economic consequences, counter-party risk assessments and careful management of those risks can be critical.  We previously blogged about a series of ongoing posts from our restructuring and special situations team relating to general and customer counter-party risk management during this time.  Most recently, the team provided its assessment of managing supply chain risks.

Our special situations team explores the need for vigilance with respect to the health and resilience of a company’s supply chain, especially for critical suppliers and those for which replacements are limited or nonexistent.  The team discusses some of the insolvency law issues attendant to suppliers and supply agreements; it also provides several risk mitigation strategies to help ensure continuity of supply and reasonableness of ongoing counter-party terms and conditions.  The team recommends companies engage in a fulsome assessment of all suppliers; consider supply chain diversification; and establish contingency plans for any suppliers who seem at risk.   The importance of knowing a company’s leverage and using it appropriately is discussed, as are practical issues pertaining to supplier possession of a company’s inventory or equipment.

While a company cannot control all of what is happening to its customers and suppliers, it can be fully cognizant of its counter-party risk assessments and implement strategies where appropriate to mitigate those risks.  When it comes time to report results for the quarter and the year, companies who have taken the time to take

Delaware Court of Chancery Again Declines to Dismiss a Caremark Oversight Failure Claim

On April 27, 2020, the Delaware Court of Chancery for the third time in a year denied a motion to dismiss a Caremark claim. The case, Hughes v. Hu, involves a derivative claim against the audit committee and officers of a Delaware corporation, Kandi Technologies Group, Inc., a Nasdaq-traded company based in China that manufactures electric car parts. In denying the motion, Vice Chancellor Laster found that there was a substantial likelihood that the defendants breached their fiduciary duty of loyalty by failing to act in good faith to maintain an adequate board-level oversight.

Two recent Delaware court decisions raised concern that Caremark duties may have expanded: Marchand v. Barnhill (declining to dismiss a Caremark claim against the board of Blue Bell Creamery for failing to make a good-faith effort to implement a system of board-level compliance monitoring and reporting to oversee the food safety of its ice cream production) and In re Clovis Oncology, Inc. Derivative Litigation  (where the board “did nothing” when the company released unsubstantiated reports about cancer treatments in clinical trials).  However, it appears that the Caremark duties remain unchanged, with Delaware courts underscoring the requirement that directors implement board-level oversight of mission-critical areas in good faith to ensure that the systems are working effectively and heed warnings or “red flags” that are discovered. This view of the line of recent Caremark decisions is further reinforced by Hughes, where serious alleged failures in internal processes regarding related-party transactions resulted in the plaintiff’s claim surviving a motion to dismiss.

The Hughes decision chronicles a long history of problematic internal control and monitoring within

The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.