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Should companies disclose if their CEO catches coronavirus?

Laurie Hays and Serena Saitto offer an analysis of that issue at the Harvard Forum, which is focused on best practice and not the legal issues. They offer a 10-point list of factors for boards to consider with three leaping out as especially pertinent:

• Prioritize employees: Unlike conventional corporate announcements, the first audience to prioritize for a COVID-19 case should be employees, to reassure them about the health and safety of their leader and the steps the company is taking to assure the health and safety of the team, as well as the continuity of business as usual.
• Personal tone, rather than business: A COVID-19 email is first and foremost a personal update about an individual, their family, and what they are doing to stay safe. A personal note from the CEO is the best way to set a tone for calmness and continuity and assure all that proper measures have been taken.
• Admitting to testing positive: Removes the stigma and promotes togetherness in the fight.

I discussed the legal issues back in 2009 in connection with Steve Jobs' health:

There are two distinct issues here that we need to avoid getting bollixed up. First, was Jobs' health material? Under the prevailing standard, we need to ask whether there is a substantial likelihood that the reasonable investor would consider the information to be important in deciding to buy or sell Apple stock (or vote on a proxy or whatever). Assuming that Jobs' health was uncertain and the effects of treatment speculative, we would need to use the Basic v. Levinson test of whether the magnitude of the event (Jobs' death or retirement for health reasons) and the probability of it happening are high enough that the information becomes material under the foregoing standard. 

 

At first blush, you might say that Jobs is so important to Apple that a reasonable investor obviously would consider the information to be important. Yet, there are a number of doctrines in the materiality context that might lead to a finding of immateriality here. For example, as I explain in my Corporation Law and Economicstreatise, information about director misconduct frequently is deemed immaterial:

The biographical information required of director candidates by the proxy rules includes such matters as bankruptcies, pending criminal charges and prior convictions, securities violations, and the like. To what extent must a director disclose other personal peccadilloes? Actual or potential conflicts of interest generally must be disclosed. But what about matters that go not to the loyalty and honesty of the directors, but rather to simple mismanagement?

Where plaintiff complains of noncriminal conduct allegedly constituting mismanagement, courts have been unwilling to require disclosure. In Amalgamated Clothing and Textile Workers Union, AFL-CIO v. J. P. Stevens & Co., for example, plaintiffs argued that the board of directors had either knowingly violated the labor laws or, at least, failed to prevent management from doing so. According to plaintiffs, this alleged misconduct had harmed the corporation’s reputation and exposed it to liability. The failure to disclose these purported facts in connection with the election of the directors allegedly constituted an omission of material facts. In rejecting plaintiff’s argument, the court distinguished conflicts of interest from allegedly illegal conduct intended to benefit the corporation. Only the former need be disclosed, as it would be “silly” to “require management to accuse itself of antisocial or illegal policies.”

A similar standard was set forth in Gaines v. Haughton. Defendants were directors of Lockheed Corporation, a major aerospace and defense firm, who failed to disclose in their proxy solicitation materials that Lockheed had made over $30 million in foreign corrupt payments. Paying bribes to foreign officials so that the corporation can get contracts may be immoral or even illegal, the court opined, but such allegations are not material absent charges of self-dealing. In addition, the court stressed the lack of a causal nexus between the alleged misconduct and the matter put to the shareholders for a vote. Because the shareholders were asked only to elect the board, not to approve the allegedly improper bribes, the bribes did not need to be disclosed.

As these cases suggest, there is a second issue here; namely, whether the corporation has a duty to disclose the information. The Basic case makes clear that withholding material information from investors is not illegal unless the company had an affirmative duty to disclose. Just as courts have been reluctant to deem personal information about directors material, so they have also been reluctant to deem it a subject as to which a duty of affirmative disclosure exists.

A relevant example of how these doctrines might impact the Jobs situation is provided by U.S. v. Heron, 525 F.Supp.2d 729 (E.D.Pa.,2007), rev'd on other grounds, the court rejected the Government's position that information is material simply because investors would want to know it: "Under that expansive standard, information as trivial and potentially invasive as the health of the CEO's marriage would become material since reasonable investors might “want to know” if he or she is so distracted." If the health of the CEO's marriage is immaterial as a matter of law, perhaps his health would also be immaterial.

 

Neither the misconduct nor the marriage cases are on all fours with the Jobs case, of course. Neither the SEC nor the courts have provided clear guidance as to when disclosure obligations trump personal privacy in this areas. Given the social--and even constitutional--emphasis on personal privacy, surely it would be “silly” to “require management to accuse itself of [being ill].” 

I don't think that the law has changed in the intervening period.

More on the possibility of Zooming through the fall

As we draw ever closer to the end of what has been the most unusual and challenging semester of my academic career, my thoughts increasingly turn to the Fall 2020 semester. In particular, will I still be teaching online? Still participating in online meetings? Still paying for parking and the Faculty Center I'm not using?

The UCLA Faculty Association reports that Berkeley is considering moving to a hybrid system for the Fall semester:

It appears that campus discussions at Berkeley are leaning toward a "hybrid" system of some online and some in-person courses. Note that because Berkeley is on a semester system and its fall semester starts earlier than campuses using quarters, the decision has to come sooner.

From the San Francisco Chronicle: [excerpt]

As UC Berkeley lurches into the final four weeks of a spring semester upended by the coronavirus pandemic, another quandary looms on the not-so-distant horizon: fall semester. School officials have not yet made a decision about the fall, but students and faculty are bracing for online instruction extending into the new academic year. That would allow for social distancing but raise a variety of other issues. The financial stakes are high. Chancellor Carol Christ, in an email Friday to faculty and staff, estimated the budget impact of COVID-19 on the school “in the range of $200 million,” thanks to a combination of lost revenue and increased expenses.

 

...Fall plans are spinning in doubt, as [UC-Berkeley] campus leaders try to balance public health concerns and a profound economic crunch. That’s one reason Panos Papadopoulos, a longtime mechanical engineering professor at Cal and former chair of the Academic Senate, expects school officials to try to implement a “hybrid system” for the fall semester. In this scenario, large-enrollment lecture courses would be taught online and smaller courses, lab sessions and discussion sections would take place in person, while following social-distancing guidelines.

 

UCLA undergraduate and most graduate programs are on the quarter system. The Fall 2020 quarter starts sometime in September. UCLAW, however, is on the semester system and we start around the third week of August. Our situation will thus be a lot closer to that of Berkeley than that of our home campus. Presumably, the campus administration will take that into account when deciding on opening the campus-related issues. (One hopes.)

Of course, I have no inside information. Nor am I am epidemiologist or statistician or anything else that might be useful in making predictions. With all of those caveats in mind, my guess right now is that we'll still be Zooming come the fall. I'm not convinced it'll be safe to end social distancing by August. OTOH, there will be enormous financial pressure on the campus to reopen, which may be very hard for the top campus administrators to resist.

Interestingly, a law school might be well suited to a hybrid approach. Big lecture (a.k.a. "Socratic") courses like Business Associations could be taught online, while smaller courses like clinics, simulations, and other experiential classes perhaps could be conducted using social distancing guidelines. (I confess that my views on that possibility may well be skewed by the fact that all of my classes would probably be taught online!)

Will I still be Zooming to Class in the Fall?

From the UCLA Faculty Association:

From the San Diego Union-Tribune: UC San Diego Chancellor Pradeep Khosla said Thursday that the school might stick with online courses for the fall quarter due to the coronavirus, but that he doesn’t see it becoming a permanent arrangement. He said the University of California system is considering the option for its undergraduate campuses and that UC executives will make the final decision.

{Note from yours truly: Does the phrase "UC executives" mean UCOP?}

“I think (staying with online) is completely within the realm of possibility,” said Khosla, whose school has nearly 39,000 students. “We have not made a decision about the fall quarter yet. We are looking at multiple models and have activated a continuity of education task force, a continuity of research task force and are also working with public health experts to help inform such a decision in concert with the UC system.” ...

That sounds worrisome, but it also may be necessary if the second wave people keep talking about materializes in late summer or early fall.

Relatedly, the Daily Bruin is reporting that preliminary orientation programs for the Fall Quarter will be held online:

All UCLA orientation programs will be held online this summer in light of the novel coronavirus outbreak. 

UCLA New Student & Transition Programs announced Monday that New Student Orientation, New Parent & Family Orientation and the College Summer Institute will be conducted remotely.

The implications are more than a bit staggering. Tuition refunds. Shrinking enrollments. Cancelled classes. Budget cuts. Hiring freezes. Massive endowment losses. The list goes on and on. 

This will be my fourth higher education recession: GHWB in 1990-91, the tech bubble and 9/11 in 2001, the financial crisis in 2007-08, and now what I guess they're calling the Great Lockdown. This one is already the scariest of the four for a lot of reasons but the prospect of it dragging on into the Fall is especially concerning because of the four this one has most directly impacted how I do my job on a daily basis. In the other three, teaching and research went on much as usual. Not this time.

Bob Cochran on Law and Lawyering

The final version of my contribution to the Pepperdine Law Review festschrift for Bob Cochran is now available:

Bainbridge, Stephen Mark, Bob Cochran on Law and Lawyering: A Catholic Perspective. 47 Pepperdine Law Review 371 (2020); UCLA School of Law, Public Law Research Paper No. 19-21 (2019). Available at SSRN: https://ssrn.com/abstract=3421790 

Abstract: This essay is a contribution to a festschrift honoring Pepperdine law professor Robert Cochran. In addition to his many other professional accomplishments, Professor Cochran is a leading figure in the study of Law and Christianity.

One strain of Law and Christianity scholarship focuses on normative critiques of substantive legal issues based on Christian theology. In other words, it seeks to make the civil law more moral; i.e., to conform Man’s Law to God’s Law. A second strain seeks to help lawyers deal with the difficulties inherent in being a Christian and a lawyer. As Cochran has put it, one might ask “whether there is a connection between religious faith and what ordinary lawyers do in ordinary law offices on ordinary Wednesday afternoons.”

Cochran’s work has intersected both possibilities. In Part I of this Article, I tackle his analysis of the extent to which we should strive to harmonize God’s and Man’s Law. In Part II, I turn to Cochran’s analysis of the Christian lawyer’s vocation. In both parts, I come at his work from the perspective of a Roman Catholic called upon to give religious assent to both Christian scripture and, where I differ from Cochran, the Church’s Magisterium.

I'm a very lucky man

A friend posted something on Facebook that got me to thinking about my experience with the coronavirus lockdown:

None of my responsibilities has vanished with the lockdown, many have been added, and all have been made more difficult to fulfill.

I totally get that I am doubtless an outlier here, but my experience has been quite different. Setting aside the unpleasantness of which you know, which was my fault entirely, work has been fine. And, of course, I don't have to worry about losing my job. The appointments committee has run down at last. I only have one class this semester and it only meets twice a week. I'm a longstanding lecturer, so adapting to Zoom wasn't hard. We get 6 dinners a week from Home Chef and Hello Fresh and that makes grocery shopping less of a worry (although I admit our toilet paper situation is moving from the green into the yellow zone). No kids, of course, and the dogs are happy just playing in the back yard. I've had more time to spend on prayer and meditation, as well as time for amazing talks with Helen.

Getting off Twitter turned out to free up a huge amount of time! I miss my closest Twitter friends and wish they were on Facebook, but I don't miss Twitter. It's gotten pretty toxic and I fear I all too often contributed to the toxicity.

I do miss going to confession. I usually go about every 4-6 weeks, whether I need to or not (sadly, I almost always need to). But now I haven’t been since early January and while one seeks to make an act of perfect contrition when necessary, I miss the whole process of examining one’s conscience, anticipating the sacrament, participating in the sacrament, and doing penance. It and going to Mass are about the only things I really miss during this period of lockdown and they’re the first things I’m going to do when it lifts.

As I say, I realize I am very blessed and that most folks are struggling. My thoughts and prayers are with them. It nonetheless seemed appropriate to count my blessings and acknowledge them.

It’s also important that those of us who can do so share our blessings. Besides my wonderful local parish, Good Shepherd Church, which has been doing great work with the poor and homeless of our area, I’ve also been supporting some other great groups and encourage you to do so if you can:

Catholic Charities of Los Angeles

Catholic Charities USA

Catholic Relief Services

Los Angeles Food Bank

Los Angeles Mission

UCLA Dean Mnookin's Response

In response to a series of incidents at UCLAW this year, which regrettably included my insensitive tweets re the coronavirus and Asian students, UCLA Dean Jennifer Mnookin issued a statement to the law school community, which reads in part:

Unfortunately, last week, a UCLA Law faculty member tweeted out remarks that mirrored xenophobic speculation that has been directed at Asian and Asian-American communities.  The faculty member, Stephen Bainbridge, stated that he had been ill recently, and wondered if one of the Chinese students in his class might have brought coronavirus to campus. These tweets were offensive and harmful, particularly given the widespread hostility that has been directed at Asian and Asian-American communities as a result of this pandemic. I recognize that these tweets harmed and deeply pained many members of our community and most particularly our Chinese LL.M. students, a number of whom are in his class this semester and who could well have felt singled out and unwelcome because of his tweet.  As members of the Asian Pacific Islander Law Students Association pointed out in their thoughtful letter addressed to me and others, “Language has a viral quality—it can pollute, infect, and distort our perception of the world and each other.” Additionally, I appreciate that our students issued their letter “with an eye towards community healing, closure, and engagement.”

After hearing from students and on his own accord, Professor Bainbridge delivered apologies to the students who contacted him, on Twitter and on his blog.  He acknowledged, “There are unquestionably far too many strains of xenophobia in this country right now, especially taking the form of anti-Asian and anti-Asian American sentiment.  In this context, my tweets were thoughtless and unfortunate. Put bluntly, they were stupid and insensitive,” he wrote.  I appreciate his apology, and I am deeply sorry for the harm caused by his tweets. 

I fully accept Dean Mnookin's reprimand and share her sorrow. I appreciate her recognition that I continue to take full ownership of the pain caused to our students. I hope this will be the last thing I say publicly about this matter, but rest assured that I continue to give careful and prayerful thought to learning from this experience.

An apology

As some of you may know, a controversy erupted over a tweet I wrote about the coronavirus that offended some of UCLA’s Asian and Asian-American students (among others) and drew a formal complaint from the UCLA APILSA student organization. I have apologized both via email to the leaders of the organization and publicly on Twitter. I do so again here unreservedly.

I very much regret having given offense and contributed—albeit unintentionally and inadvertently-to a challenging time.   There are unquestionably far too many strains of xenophobia in this country right now, especially taking the form of anti-Asian and anti-Asian American sentiment.  In this context, my tweets were thoughtless and unfortunate. Put bluntly, they were stupid and insensitive.

Unfortunately, this is not the first time one of my tweets have offended some of our students. If I were a professional pundit, such controversies would be grist to my mill. But I am not.

I am educator and, more important, an educator who stands as a witness for Christ in a very secular place.  I have had students of every race and ethnicity, and from many nations around the globe and I certainly want all of my students of all races to feel welcome in my class and at UCLA Law in general.  I failed, especially with respect to my Asian and Asian-American students. Sadly, the legitimate criticism of the recent tweet has driven home that my participation in Twitter has impeded my ability to educate and to act as a witness for Christ. Accordingly, this morning I deleted my account. 

As a colleague of mine likes to say, thanks for listening.

P.S.: I remind you of my longstanding blog policy:

This blog is a personal, extracurricular activity. The blog is not affiliated in any way with the UCLA law school or university. The blog receives no support--financial or otherwise--from the UCLA law school or university.

The opinions expressed herein are mine alone and do not represent the opinions of the law school or university administration, faculty, students, or alumni. They should not be attributed thereto.

The same was true of my Twitter feed.

Update: I have dipped a toe back into Twitter, but at this point almost exclusively as a feed for my blog posts. (See this announcement.) I remain am very aware that my previous participation in Twitter impeded my ability to educate and to act as a witness for Christ. It is my hope and intent not to let that happen again.

Zoom Hit with Privacy Lawsuit

Except it's not a consumer lawsuit, but rather a securities class action suit "based on allegations that the surge in usage following the coronavirus outbreak allegedly revealed allegedly undisclosed weaknesses in company’s security, and alleged privacy and security weaknesses contrary to the company’s alleged representations." Kevin LaCroix explains:

The complaint, a copy of which can be found here, purports to be filed on behalf of a class of persons who purchased the company’s securities between April 18, 2019 (the date of Zoom’s IPO) and April 6, 2020. ... [Note: a second complaint was filed against Zoom and the individual defendants on April 8, 2020.]

... the complaint alleges that the defendants misrepresented or failed to disclose that “(i) Zoom had inadequate data privacy and security measures; (ii) contrary to Zoom’s assertions, the Company’s video communications services was not end-to-end- encrypted; (iii) as a result of all the foregoing, users of Zoom’s communications services were at increased risk of having their personal information access by unauthorized parties, including Facebook; (iv) usage of the Company’s video communications services was foreseeably likely to decline when the forgoing facts came to light; and (v) as a result, the Company’s public statements were materially false and misleading at all relevant times.”

The complaint alleges that after Zoom's alleged problems came to light in march and April of this year, "the Company’s stock price plummeted, damaging investors." Given that the stock market was tanking during the same period, it'll be interesting see how they prove loss causation.

Anyway, the post offers LaCroix's usual detailed and thoughtful commentary on privacy concern "event driven" litigation.

Is Senator Richard Burr in particular jeopardy for insider trading?

Securities attorney and pundit Dan McLaughlin opines:

Kelly Loeffler and David Perdue appear to have been unfairly targeted by national and Atlanta media. Dianne Feinstein and Jim Inhofe likewise have reasonable explanations for their reported stock sales, as does Vermont representative Peter Welch. Senator Richard Burr, however, has some serious questions to answer, and has yet to offer a particularly persuasive defense. ...

Congress in 2012 passed the STOCK Act, clarifying that when members of Congress receive confidential nonpublic information that could affect the price of a stock, they are treated as if they were company insiders. That’s important, because insider-trading laws generally only ban people from trading on company secrets if they work for the company or have a relationship that causes them to owe a legal duty to it. While the SEC is typically hesitant to admit it, a random bystander on the street who accidentally overhears a CEO spilling inside information and buys or sells stock as a result is probably not breaking the law. Those in Congress, however, frequently learn market-moving information because they work in government, rather than the companies that information pertains to. The STOCK Act aimed to close that perceived loophole by declaring that members of Congress have their own duty not to trade on what they learn. ...

A key question in insider-trading cases is proving that the person who bought or sold stock actually knew about the inside information, and traded on that basis. Where the insider-trading charge breaks down here is that all of the senators other than Burr say that their stock trades were made by their financial advisers without their input.

It's a good read.

COVID19 and mergers cratering left and right

Bloomberg reports:

The number of lawsuits asking courts to keep mergers on track is likely to grow as the coronavirus scrambles business deals worldwide and acquirers balk at the uncertainty, experts say. ...

The prospects of merger plaintiffs like Bed Bath will likely turn on provisions that assign risk, particularly “material adverse change” (MAC) and “material adverse event” (MAE) clauses, Tyler said.

There's been a lot of discussion of this issue over on Twitter, of which the following is a sample:

The #COVID19 outbreak has sent shockwaves through global financial markets. In this new alert, #TeamSPB London's Peter Crossley, Max Rockall and Maria Davies take a closer look at material adverse change clauses amid the #coronavirus outbreak. https://t.co/YkrzFo4AlU pic.twitter.com/q3IkDQGbNi

— Squire Patton Boggs (@SPB_Global) April 9, 2020

"Regarding the handful of terminated deals for which publicly filed agreements are available, none excluded outbreak of disease, epidemics, or the like from the scope of their material adverse effect (MAE) provisions—an exclusion that could have kept buyers on the hook." https://t.co/LYfeY5aNrV

— Ann Lipton (@AnnMLipton) April 8, 2020

Shots Fired: Recent Claims to Terminate M&A Deals Over COVID-19 Material Adverse Effects. #covid19 #coronavirus #troutmanpepper #mergersandacquisitions https://t.co/8iqCBpGWho

— Troutman Sanders (@tstweets) April 9, 2020

For prior coverage of MACs here at PB.com, see

The MAC is Back: Material Adverse Change Provisions After 'Akorn'

New article by a pair of Wachtell, Lipton lawyers sheds useful light on the status of material adverse change clauses: On December 7, 2018, the Delaware Supreme Court upheld the Delaware Court of Chancery’s October 1, 2018 decision wh...

Posted at 12:17 PM in Mergers and Takeovers | Permalink

New article by a pair of Wachtell, Lipton lawyers sheds useful light on the status of material adverse change clauses: On December 7, 2018, the Delaware Supreme Court upheld the Delaware Court of Chancery’s October 1, 2018 decision wh...

Conducting the Annual Shareholder Meeting during the COVID19 Pandemic

The season for annual shareholder meetings is now well underway, but many states have stay-at-home mandates or suggestions limiting the size of public meetings. So how will corporations safely and legally conduct a shareholder meeting during the pandemic? And what will the changes made this year bode for the future?

In 2000, Delaware amended the General Corporation Law to permit virtual shareholder meetings. Section 211(a)(1) thus provides that:

Meetings of stockholders may be held at such place, either within or without this State as may be designated by or in the manner provided in the certificate of incorporation or bylaws, or if not so designated, as determined by the board of directors. If, pursuant to this paragraph or the certificate of incorporation or the bylaws of the corporation, the board of directors is authorized to determine the place of a meeting of stockholders, the board of directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by paragraph (a)(2) of this section.

Section 211(a)(2) provides an alternative, pursuant to which the board may authorize shareholders who are not present at a physical meeting of the shareholders to participate in such a meeting by "remote communication." Until recently, this sort of hybrid meeting was far more common than a purely virtual meeting. But there was a trend towards virtual meetings: "Broadridge Financial Solutions, Inc. (Broadridge), has reported a dramatic increase in the prevalence of virtual-only meetings, going from hosting just one virtual-only meeting in 2009, to 53 meetings in 2014, and then increasing to 90 and 155 meetings in 2015 and 2016, respectively." Lisa A. Fontenot, Public Company Virtual-Only Annual Meetings, 73 Bus. Law. 35, 35–36 (2018). And, as noted, the novel coronavirus may change all of that.

Delaware Governor John Carney yesterday (4/6/2020) issued an emergeny order intended to substantially facilitate the use of virtual shareholder meetings. The order notes that:

WHEREAS, § 222(c) of Title 8 of the Delaware Code allows for adjournments of stockholder meetings, but does not address the method of adjournment of a meeting noticed for a physical location in the case of a public health threat and concomitant restrictions on personal mobility and travel; and

WHEREAS, § 232 of Title 8 of the Delaware Code provides that notice of stockholder meetings may be given by mail, courier service or electronic mail, but also suggests that there may be other means by which notice may be given effectively to stockholders; and

WHEREAS, during the COVID-19 pandemic, the Securities and Exchange Commission is allowing reporting companies to provide certain notices to stockholders via the companies’ required public filings and a press release.

The order then provides that:

With respect to a corporation subject to the reporting requirements of § 13(a) or § 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder:

i. if, as a result of the public health threat caused by the COVID-19 pandemic or the COVID-19 outbreak in the United States, the board of directors wishes to change a meeting currently noticed for a physical location to a meeting conducted solely by remote communication, it may notify stockholders of the change solely by a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of such Act and a press release, which shall be promptly posted on the corporation’s website after release; and

ii. if it is impracticable to convene a currently noticed meeting of stockholders at the physical location for which it has been noticed due to the public health threat caused by the COVID-19 pandemic or the COVID- 19 outbreak in the United States, such corporation may adjourn such meeting to another date or time, to be held by remote communication, by providing notice of the date and time and the means of remote communication in a document filed by the corporation with the Securities and Exchange Commission pursuant to § 13, § 14 or § 15(d) of such Act and a press release, which shall be promptly posted on the corporation’s website after release.

As K&L Gates observes, a corporation wishing to take advantage of this option must:

• Implement reasonable measures to verify that each person deemed present and permitted to vote at the virtual meeting is a stockholder or proxyholder;
• Implement reasonable measures to provide stockholders and proxyholders a reasonable opportunity to participate in the virtual meeting and vote on matters, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and
• Maintain a record of a stockholder or proxyholder’s vote or other action taken at such meeting.

K&L Gates also notes that:

• If the corporation has already mailed the notice of meeting, and the corporation has sufficient time to give its stockholders 10 days’ notice of the virtual meeting, a new notice ordinarily must be distributed to stockholders by a physical mailing or by e-mail [1]. However, pursuant to the Order, any Delaware corporation that is subject to the reporting requirements of §13(a) or §15(d) of the Exchange Act may notify stockholders of the change of the format of the meeting solely by filing a document with the SEC and issuing a press release, which shall be promptly posted on the corporation’s website after release. The notice should contain the information required for a notice of a virtual meeting described above.
• If the corporation has mailed the notice of the annual meeting and there are fewer than 10 days’ before the meeting or it is otherwise impracticable to convene a currently noticed meeting, the meeting could be held but adjourned to another place (i.e., a virtual location). Ordinarily, notice of an adjourned meeting is not required so long as the date, time and place or means of remote communications by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken and the adjournment is for no more than 30 days. Pursuant to the Order, a public company also may adjourn the meeting by providing notice of the date and time of the virtual meeting and the means of remote communication by which stockholders may participate in the meeting solely by filing a document with the SEC and issuing a press release, which shall be promptly posted on the corporation’s website after release.
• Where there is insufficient time to send out a new notice and/or it is impracticable to adjourn or postpone the meeting, another option for corporations is to simply hold the physical meeting as planned, but to stream the meeting over the internet so that stockholders have the opportunity to hear or view the meeting remotely. Because the meeting is considered a meeting held at a physical place, stockholders, who do not come to the physical meeting but participate in the webcast, must submit their proxies in advance of the meeting according to the instructions set forth in the original proxy materials in order to have their votes count for quorum and voting purposes.

The SEC guidance referred to above is available here.

Some companies have hesitated about moving to virtual meetings, because shareholder advisory service Glass Lewis and some large institutional investors opposed virtual-only meetings. However, Glass Lewis has suspended that policy for the duration (2020 WL 1430493):

The firm, which is the second-largest advising institutional investors on proxy votes, said in a blog post that online-only meetings offer "compelling advantages" to both companies and shareholders given the situation regarding COVID-19. Its approval of the option extends to June 30.

"We do not believe discouraging virtual-only meetings during this time serves the interests of shareholders or companies," Glass Lewis said in the post on its website, noting that moving meetings online will offer certainty and continuity in timing, agendas, and voting.

Some investors, including the Council of Institutional Investors, oppose virtual-only shareholder meetings as lacking the same opportunities to hold management accountable and ask questions as in-person gatherings. ...

Glass Lewis's policy update says the firm will take the pandemic into account during the 2020 proxy season when applying its virtual-only meeting policy and generally refrain from voting against governance committee members for this reason as long as the company says it moved the meeting online because of COVID-19 or similar rationale. Reviews will be case-by-case and note whether companies say they'll return to in-person or hybrid meetings in the future. 

The Council of Institutional Investors (CII) has likewise suspended its opposition to virtual only meetings, albeit only for the current proxy season:

“Given coronavirus concerns,” said CII Executive Director Ken Bertsch, “it is entirely reasonable that some companies will go to virtual-only annual meetings.”

Bertsch added that CII hopes that companies “will make it clear that this decision is a one-off, tailored for current circumstances.” He also urged companies to follow best practices “for making virtual meetings participatory, replicating as much as possible the experience of an in-person meeting.” And he said that “companies that do hold in-person meetings should be flexible with shareholder proponents on presentation of shareholder proposals, accommodating travel restrictions that they may face.”

CII generally has opposed virtual-only shareholder meetings, in favor of a hybrid approach.

How will it work? Broadridge is the principal stockholder service company and had been active in both virtual and hybrid meetings for many years. They provide online platforms for conducting a virtual meeting:

They also provide a useful white paper on best practices for conducting a virtual meeting. Some key best practices are also available from CII:

CII’s October 2017 publication, Build a Better Meeting, offers guidance on creating shareholder-oriented meetings, including virtual components. The publication urged that virtual meetings include:

• • A live audio and video feed of all key company representatives in attendance, including, at a minimum, the chair, CEO, any lead/presiding director, chairs of key board committees and the corporate secretary.
  • A continuously updated list of all shareholder questions submitted both before and during the meeting, accompanied by clear indication of any subsequent deletion or re-ordering in the queue.
  • A comprehensive Q&A tool allowing the shareholder to:
    • Submit a question
    • Track its prioritization in the queue
    • Present the question virtually, including through the use of a shareholder-provided webcam or phone
    • Instructions or a link to written responses to unanswered shareholder questions, made available within 72 hours of the meeting’s conclusion.
    • Basic information about the meeting known to the company, which may include a list of attendees, the number of shares represented at the meeting and preliminary vote counts.

One key issue will be the requirement in Rule 14a-8 that proponents of a shareholder proposal must be present at the meeting. David Hooper and Lynne McMahan explain that 

The SEC guidance also provides direction to companies and shareholders regarding the presentation of shareholder proposals at annual meetings for the 2020 proxy season. Under Exchange Act Rule 14a-8(h), shareholders or their representatives are required to appear in person and present their proposals at the annual meeting. In light of the possible difficulties of appearing in person to present their proposals (whether because of COVID-19-related travel concerns or because of a change to a virtual meeting), the SEC encourages companies, to the extent feasible under state law, to provide shareholders or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 proxy season. Companies in this situation should coordinate and communicate in advance with shareholders regarding the means of presenting their proposals and any necessary technical requirements or limitations.

Furthermore, to the extent a shareholder or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the SEC considers this to be “good cause” under Rule 14a-8(h), and therefore, issuers cannot assert a shareholders’ absence as a basis under Rule 14a-8(h)(3) to exclude a proposal submitted by the shareholder for any meetings held in the following two calendar years.

Hooper and McMahon also offer some best practices:

• Companies should engage an experienced remote communication services provider (such as Broadridge or Computershare) to host the virtual or hybrid meeting.

• Companies must ensure that the remote communication method allows shareholders to vote, ask questions and make comments, hear answers to questions, and otherwise exercise all of the rights shareholders have under state law for participation in shareholder meetings.

• Companies should develop protocols for facilitating the process for shareholder proposal proponents to present their proposals.

• Companies must also ensure that the technology platform used to conduct the virtual meeting will accommodate all of the shareholders, board members, members of management, and other persons participating in the meeting.

• Companies also should make shareholders aware of the procedures necessary to access and participate in the virtual meeting.

Finally, blog friend Keith Paul Bishop has a useful discussion of the state of the issue in California.

Brian Cheffins says "Stop Blaming Milton Friedman!"

Cheffins, Brian R., Stop Blaming Milton Friedman! (March 11, 2020). University of Cambridge Faculty of Law Research Paper No. 9/2020. Available at SSRN: https://ssrn.com/abstract=3552950or http://dx.doi.org/10.2139/ssrn.3552950

A 1970 New York Times essay on corporate social responsibility by Milton Friedman is often said to have launched a shareholder-focused reorientation of managerial priorities in America’s public companies. The essay correspondingly is a primary target of those critical of a shareholder-centric approach to corporate governance. This paper argues that it is erroneous to blame (or credit) Milton Friedman for the rise of shareholder primacy in corporate America. In order for Friedman’s views to be as influential as has been assumed, his essay should have constituted a fundamental break from prevailing thinking that changed minds with some alacrity. In fact, what Friedman said was largely familiar to readers in 1970 and his essay did little to change managerial priorities at that point in time. The shareholder-first mentality that would come to dominate in corporate America would only take hold in the mid-1980s. This occurred due to an unprecedented wave of hostile takeovers rather than anything Friedman said and was sustained by a dramatic shift in favor of incentive-laden executive pay. Correspondingly, the time has come to stop blaming him for America’s shareholder-oriented capitalism.

Kevin LaCroix discusses "Cash-Crunched Companies Face Insolvency; Will Directors Face Claims?"

From D&O Diary:

The current disruption to normal business operations across the country means that many businesses will soon be under significant financial pressure, if they are not there already. As their companies edge toward insolvency, directors are going to have to make significant decisions about the companies and their operations. Boards may be concerned, as they make critical and difficult decisions, that creditors or others may later attempt to claim that they violated their legal duties.  This concern in turn leads to the question about exactly what duties directors face as their companies approach insolvency.

In general, directors of solvent companies do not owe creditors fiduciary duties. A solvent company’s duties to its creditors are instead defined in other ways – for example, by the law of contract, bankruptcy laws, general commercial law, and creditors’ rights.

Whether companies take on fiduciary duties to creditors when they approach the “zone of insolvency” is very much a matter of state law. Under the law of Delaware, the state under whose laws many companies are organized, “duties of directors are fundamentally the same whether a corporation is solvent, insolvent, or trending towards insolvency,” according to March 26, 2020 memo from the Stinson law firm entitled “The Director’s Dilemma: An Overview of Director Fiduciary Duties when Insolvency Looms” (here), “ with the goal of pursuing ‘value maximizing strategies for the benefit of the corporation and its ‘residual stakeholders.’”

There's much more, including  when a company becomes insolvent for purposes of Delaware law.

Although it is now somewhat dated, those readers interested in this issue may wish to consult my article on the subject: 

Bainbridge, Stephen Mark, Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency. Journal of Business and Technology Law, Forthcoming; UCLA School of Law, Law-Econ Research Paper No. 05-26. Available at SSRN: https://ssrn.com/abstract=832504

Critics of Corporate Stock Buybacks Leveraging COVID19 Crisis to Advance Policy Goals

Our friend Harvard law professor Jesse Fried posted an essay coauthored with Charles Wang on the titular topic at the Harvard Forum:

Critics of stock buybacks, heeding Rahm Emanuel, are not letting a serious crisis go to waste. They found a way to blame repurchases for COVID-19’s economic fallout, and are exploiting COVID-19 to try to curb their use. But critics’ claims are faulty, and proposed buyback restrictions may well exacerbate COVID-19’s ill effects.

Buyback critics have long asserted that repurchases starve firms of cash, with little supporting evidence. But COVID-19 seems to provide a perfect poster child for the anti-buyback cause: bailout-seeking airlines. Citing a Bloomberg analysis that 96% of airlines’ total free cash flow over the last decade was spent on repurchases, critics blamed buybacks for the firms’ desperate plight. But this 96% figure is misleading. It does not take into account equity and debt issuances by airlines, which largely offset the cash paid out in buybacks. “Unfunded” payouts to shareholders were much lower.

Kindly go read the whole thing.

Comparing the 2008 financial crisis to the COVID-19 market upheaval

From a Willis Towers Watsonpost at the Harvard Forum: