Corporate Governance in the Time of COVID-19

As the COVID-19 novel Coronavirus has created unprecedented uncertainty in every category from health to government to business to national security, public companies are scrambling to try to protect their employees, their customers, their investors, and their revenues.

Some highlights:

From the SEC: The Importance of Disclosure For Investors, Markets and Our Fight Against COVID-19

Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.

Providing detailed information regarding future operating conditions and resource needs is challenging, including because our response strategies are in their incipient stages (and are likely to change), but it is important on many levels. Updating and refining these estimates should become less difficult over time.

High quality disclosure will not only provide benefits to investors and companies, it also will enhance valuable communication and coordination across our economy—including between the public and private sectors—as together we pursue the fight against COVID-19.

This transparency can foster confidence in countless specific instances, for example, between a supplier and a manufacturer as well as between an investor and a company, which in combination will benefit all.

We encourage companies that respond to our call for forward-looking disclosure to avail themselves of the safe-harbors for such statements and also note that we would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC.

Protecting Investors in a Time of Crisis: A Response to Those Who Would Utilize COVID-19 to Eviscerate Investor Protection Paralleling the conflict between those who want to suspend other rules, from civil rights to environmental standards to address the urgent needs of the public health and economic crises and those who insist that we cannot allow an emergency to undermine fundamental democratic and Constitutional principles, we see competing arguments for relaxing the rules that apply to public companies and arguments that those rules are even more important to protect investors.

As members of a leading firm fighting to help investors protect their rights, we wholeheartedly recognize that the world is living through difficult times and that discretion must be brought to decisions concerning the need to seek relief from the Courts during the current Covid-19 crisis. However, any suggestion that the judicial system should become closed to genuinely aggrieved investors, even during a time of crisis, strikes us as misplaced, and even dangerous. We respectfully disagree that the crisis renders investor protection “non-essential” or that the pursuit of claims on behalf of investors is “unethical” now—or at any other time. When the defenders of the status quo anoint themselves as being above compliance with “deadlines created by litigation of this sort,” they put at risk the system that has served to help ensure the integrity of our markets and to encourage effective attention by corporate leaders to their fiduciary responsibilities.

Indeed, to suggest that investor rights should be marginalized generally reveals a view fundamentally at odds with the central role our justice system plays in democratic society. When fraud and self-interested conduct by corporate fiduciaries takes a holiday (whatever the reason), so too will the need for investor protection. In our view, however, greed and self-interested motives can override legal compliance and fiduciary duties whether or not the world faces a crisis. Indeed, whether the wrongdoing rears its ugly head in the form of illegal inside trading, market manipulation, or opportunistic misappropriation of corporate value, the background of markets in crisis may well offer more opportunity for misconduct than is typical.

For example, the drop in stock prices has already lead to renewed interest in poison pills.

“Will Institutional Shareholder Services (“ISS”) and Glass Lewis recommend against us if we adopt a poison pill?” This is among the most common questions directors ask outside advisors as boards across corporate America ponder whether a shareholder rights plan (a/k/a “poison pill”) is a prudent measure for their companies to adopt during extreme market volatility amidst the COVID-19 pandemic.

Our view: It is understandable that companies may wish to adopt some protection against hostile takeovers. But all pills should be put to a shareholder vote and should be “chewable” (rescindable by shareholder vote).

Considerations for Annual Shareholder Meetings in the Time of COVID-19 One of the most immediate concerns for many public companies is the upcoming shareholder meeting, which can no longer be held in person. Sidley Austin lists some of the considerations in switching to a virtual meeting. An excerpt:

A company that has already mailed and filed its definitive proxy materials can notify shareholders of any such change without mailing additional soliciting materials or amending its proxy materials if the company:
Announces the change in a press release;

Files the announcement as definitive additional soliciting material on EDGAR and includes, if the meeting will be virtual or a hybrid, how shareholders can remotely access, participate in and vote at such meeting; and
Takes all reasonable steps necessary to inform other intermediaries in the proxy process (such as any proxy service provider) and other relevant market participants (such as the appropriate national securities exchanges) of such change.

The SEC Staff expects companies to take these actions promptly after making a decision to change the date or location of the meeting and sufficiently in advance of the meeting so the market is alerted to the change in a timely manner.

A company that has yet to mail and file its definitive proxy materials should consider including disclosures regarding the possibility that the date, time or location of the annual meeting will change due to COVID-19, including any possible switch to a virtual or hybrid meeting to the extent that such switch has not been decided, or that the company may adopt additional screening procedures for admission to an in-person meeting. Such determination should be made based on each company’s particular facts and circumstances and the reasonable likelihood of such a change. If a company plans to conduct a virtual or hybrid meeting, the SEC Staff expects the company to notify its shareholders and intermediaries in the proxy process of such plans in a timely manner and disclose in the proxy statement the logistical details of the meeting, including information about how shareholders can remotely access, participate in and vote at such meeting.

Bloomberg Law looked at the impact of the legislation on CEO pay:

The U.S. stimulus package signed into law last month limits total compensation to $3 million plus half of anything over that amount for CEOs and other top executives at companies taking government money. The $3 million threshold would likely cover most of the S&P 500 index, Bloomberg data show.

For a typical CEO, the median pay cut could total $4 million, according to an analysis of Bloomberg data for 2018, the most recent year for which totals are available.

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