Another Caremark claim survives dismissal
Are the allegations in Hughes v. Hu an example of the SEC/PCAOB’s recent cautionary Statement on emerging market risks come to life? (See this PubCo post.) The case involves a Caremark claim against the audit committee and various executives of Kandi Technologies, a publicly traded Delaware company listed on the Nasdaq Global Select Market and based in an emerging market country. The complaint alleged that they consciously failed “to establish a board-level system of oversight for the Company’s financial statements and related-party transactions, choosing instead to rely blindly on management while devoting patently inadequate time to the necessary tasks.” You might recall that, in Marchand v. Barnhill (June 18, 2019), then-Chief Justice Strine, writing for the Delaware Supreme Court, started out his analysis with the recognition that “Caremark claims are difficult to plead and ultimately to prove out,” and constitute “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” (See this PubCo post.) Although Caremark presented a high hurdle, the complaint in Marchand was able to clear that bar and survive a motion to dismiss. In the view of the Delaware Chancery Court, Hughes proved to be comparable—the Court denied two motions to dismiss, holding that the allegations in the complaint were sufficient to support “a reasonable pleading-stage inference of a bad faith failure of oversight by the named director defendants.” Is clearing the Caremark bar becoming a thing?
House Subcommittee insists certain public companies return PPP loans
As discussed in this PubCo post, in April, the Treasury Department issued a series of FAQs related to loans made under the Paycheck Protection Program provisions of the CARES Act, one of which was addressed to borrowers that are large companies and, particularly, public companies. The FAQ provides that, to be eligible for a PPP loan, a borrower must certify, in good faith, that the loan is necessary to support continuing operations. According to the FAQ, that may be difficult in some cases, contending that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith….” The FAQ provided a safe harbor, under which the SBA would deem the borrower to have made the required certification in good faith if the funds were repaid in full by May 14 (as extended in question 43). As reported here, Treasury Secretary Steven Mnuchin has warned that companies receiving loans over $2 million would be audited and could have potential criminal liability if their certifications were untrue. Now, a House oversight subcommittee has demanded that certain public companies return the funds.
Proposal to amend the DGCL to provide relief regarding stockholders’ meetings
On April 6, the Governor of Delaware signed an emergency order applicable to public reporting companies addressing the urgent need of many companies, in light of COVID-19, to change their annual meetings from physical locations to virtual-only formats, including at different dates. The order allowed companies to provide notice of the change by issuing and filing with the SEC a press release instead of complying with the Delaware requirement to send a formal written notice to stockholders or convening the meeting to adjourn, which could be extremely difficult under the current circumstances. (See this PubCo post.) However, the order provided relief only to companies that had already sent out, as of the date of the order, notice of a meeting of stockholders that indicated a physical location. What about companies that sent out their notices after April 6, but still needed to make a change? The relief under the Delaware order was apparently not available to them. Now, the Corporate Law Section of the Delaware State Bar has approved a proposal to amend the DGCL to address this issue. Will the Delaware legislature provide the necessary relief? And if so, when? [Update: this bill was signed into law on July 16.]
Heartbreak at Broadridge
When I first saw this temporary relief from the NYSE, I dismissed it as relief designed to help an overwhelmed Broadridge. The relief temporarily allowed discretionary voting on routine matters even if the proxy materials were transmitted to beneficial owners only 10 days in advance of shareholders’ meetings instead of the required 15 days. I had no idea there might be a tragedy underlying it.
Nasdaq provides temporary exception to certain shareholder approval requirements
The SEC has declared immediately effective new Nasdaq Rule 5636T, which will provide a temporary exception, through June 30, 2020, from the shareholder approval requirements for certain issuances of 20% or more of the outstanding shares (Rule 5635(d)) and for a narrow subset of capital-raising issuances that could be considered equity compensation (Rule 5635(c)). Given that stay-at-home orders in effect in many communities have wreaked havoc on the revenue streams of many businesses, companies may have urgent needs to raise capital. Nasdaq believes that this temporary exception “will permit companies to raise capital quickly to continue running their businesses and address the immediate health crisis caused by the COVID-19 pandemic, including its impact on their employees, customers, and communities.”
Corp Fin posts four FAQs related to COVID-19
Corp Fin has posted four new COVID-19-related FAQs, most of which concern the interaction of Form S-3 and the SEC’s COVID-19 Order. As you know, in the COVID-19 Order, the SEC provided public companies that are unable to file timely “due to circumstances related to COVID-19” with conditional 45-day extensions to file or furnish specified SEC various reports, schedules and forms that would otherwise have been due between March 1 and July 1, 2020, provided they comply with certain requirements (see this PubCo post). If a company does not file a required report on the original due date in reliance on the COVID-19 Order, what does that mean for its use of Form S-3?
SEC’s Investor Advisory Committee discusses impact of COVID-19 on company disclosures
At a meeting today of the SEC’s Investor Advisory Committee, the committee discussed disclosure considerations arising in the context of COVID-19. In addition to relentlessly complimenting the SEC for its efforts during the pandemic, the committee members offered a number of valuable insights, particularly related to human capital disclosure (which one committee member characterized as “as important a mission as the SEC has ever faced”) and other stakeholder disclosures, as well as accounting, controls and liability issues. Many of the committee also seemed to be pleased with nature of the disclosure that companies were providing, even offering in-quarter information in some cases. There was also a brief discussion of virtual shareholder meetings.
The sorry state of C-suite diversity
A lot of worthwhile energy in the last few years has been concentrated on increasing diversity in corporate leadership—especially board gender diversity— but how much progress is being made at the level of the C-suite? This paper from the Rock Center for Corporate Governance at the Stanford Graduate School of Business addresses the sorry state of the C-suite as a whole when it comes to diversity of any kind. According to the paper, notwithstanding numerous efforts launched by asset managers, institutional investors and companies to increase diversity in board and senior leadership, these efforts “have not contributed to tangible progress in increasing the prevalence of diverse executives in corporate leadership positions.” Why have these efforts not been more successful? The paper looks at C-suite (CEO and direct reports) demographics to get a better handle on the “actual pipeline, as it stands today, for next year’s newly appointed CEOs and future board members.”
A “speed bump” for proxy advisory firms instead of company pre-review?
The FT is reporting that the SEC is abandoning a key component of its proposal to add new disclosure and engagement requirements for proxy advisory firms, such as ISS and Glass Lewis. (See this PubCo post.) According to the report, the SEC has “scrapped the portion of the proposal that would have forced proxy advisers—led by Institutional Shareholder Services and Glass Lewis—to submit their voting recommendations to companies for checking before distributing them to investors in advance of shareholder meetings.” The proposal had received substantial pushback, including from the Council of Institutional Investors and even the SEC’s own Investor Advisory Committee. However, the FT appears to point the finger, or attribute the victory, depending on your point of view, primarily to hedge fund activists “who court proxy advisers’ support when fighting for board seats.”
World Economic Forum offers stakeholder principles for the COVID-19 era
Several leaders of the World Economic Forum have published Stakeholder Principles in the COVID Era, characterizing the “business community’s contribution” as “to be leaders of responsiveness and stewards of resilience.” Nice cadence—I like it. But what does it mean in practice?
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