As the COVID-19 pandemic continues to spread in the U.S. and abroad, public companies are grappling with the ramifications (real or potential) of a senior executive(s) contracting the virus.  Together with senior management, boards of directors should be actively reviewing their emergency preparedness plans, including their emergency succession plans for key executives.  Boards also need to proactively address the possibility that one or more directors become sick, including by reviewing the board’s contingency plans to ensure the board will be able to continue to perform its duties.

In advising clients, we have identified ten key questions that directors and senior managers may want to consider in reviewing and preparing emergency succession plans.

  1. Is there an emergency—as opposed to long-term—succession plan in place?
    • A long-term succession plan developed pre-COVID-19 may not be responsive to the company’s immediate virus-related needs, and the board should be discussing with senior management whether and how to update the company’s succession plans or implement a more flexible emergency plan responsive to the current circumstances.  As part of this process, the board should review the company’s by-law and other governance documents to determine what, if anything, they provide for in respect of succession.
  1. What roles should an emergency succession plan cover?
    • A company’s succession plans should in any circumstance cover its most senior executives (e.g., CEO, CCO and CFO). However, other executives in a broader range of departments (including those outside of the C-suite) may be critical to a company’s management of the current crisis (e.g., IT, health and safety task force, business continuity).
    • Additionally, are there succession plans for directors? This may be particularly relevant where investors, especially large institutional shareholders, view director succession generally or a specific non-executive director as particularly important (e.g., a former CEO who has only recently transitioned out of the role, a lead director where there is a joint CEO/Chairman or a board chair brought in to help steady investor confidence in response to a crisis).[1]
  1. Have appropriate successors been identified in light of the circumstances, and do they know who they are?
    • Companies are dealing with a drastically different business landscape, including a likely period of prolonged market volatility, and this may have shifted the key skills and knowledge a company’s executives will need now or in the future. For example, have the company’s key priorities shifted (e.g., a particular business line may have expanded or receded in importance) or are there different current and long-term needs?  Is there a likelihood that the company will benefit from particular skills in the crisis or after (e.g., ability to negotiate capital infusions from new equity partners or a restructuring of all or a part of the business)?  Where there is a temporary, emergency need, an internal candidate might be most suitable, despite the fact that a company might additionally consider external candidates for longer-term succession planning or after a temporary appointment.
    • Management and boards should ensure that potential successors know who they are, and are up to speed on the company’s situation, as well as the company’s emergency succession plan, as they may need to step in quickly.
  1. How many successors to a particular position should be identified?
    • While often the case for long-term succession planning, identifying a sole successor to a particular position may be a concern during a pandemic due to the broad risk of infection.
  1. What is the plan for multiple incapacities in the C-suite?
    • Effective long-term succession planning often takes into account a relatively stable senior management team who can help ease any transition-related disruptions. However, in a pandemic multiple executives may develop symptoms simultaneously, especially if senior executives and/or board members are unable to abide by social distancing policies.  In this case, the board may need the authority to implement emergency, temporary appointments (which may include members of the board itself), and should be prepared in advance as to the potential candidates and what the terms of any such appointment may be.
  1. What other measures should the board consider when developing an emergency succession plan?
    • The board should work with senior management and its outside advisors to identify particular measures that can be taken to mitigate the risk of a member of management becoming incapacitated and incorporate those measures into its emergency preparedness plans. In the current environment, these would include measures like ensuring senior executives are able to seamlessly and effectively transition to remote working,  adopting senior management social distancing and separation plans that can be implemented swiftly and effectively, and analyzing the current duties and responsibilities, as well as geographic concentration, of key executives and whether existing allocations pose a particular risk and may warrant adjustments.
  1. Is the Board prepared to act quickly?
    • The board should be ready to quickly act on a succession plan. The board may want to consider whether an existing or ad hoc committee should be authorized to make decisions and act on interim appointments.  A small nimble committee will alleviate the necessity of convening a full board meeting or requiring the board to act by unanimous written consent when speed is needed and action may be difficult (if a director is suffering illness or for other reasons).  An existing nominating and governance committee, risk committee, executive committee or a subcommittee thereof could be considered for this task.
    • Internal reporting chains need to be maintained so that the board is kept abreast of any and all relevant developments, even in instances where delegation of authority is given to a committee. Companies should have in place formal emergency contact procedures for any potential trigger to a succession plan (e.g., a relevant executive reporting symptoms), including a list of who is contacted and when, who is responsible for initiating such contact (including backups) and up-to-date contact information for senior management and board members.
    • Advance consideration should also be given to whether a company’s bylaws permit emergency meetings of the whole board and any required notice provisions in the event action by unanimous consent is not possible due to illness of a director.
    • Boards should also familiarize themselves in advance with the potential legal ramifications of emergency succession on the business. For example, are there any “key man” provisions tied to senior executives that could trigger liabilities or obligations?  What is the potential impact of succession on executive employment agreements?  Are there other legal or regulatory considerations to take into account?
  1. How will developments be communicated internally?
    • Effective communication strategies remain paramount during challenging times, and companies should be prepared to timely communicate any changes in leadership, ensure internal stakeholders are informed and emphasize the company’s confidence in any new leadership.
    • Prior to public disclosure, any information relating to senior executive illness may be considered material non-public information and confidentiality should be stressed at all times. Boards and senior management should consider whether to close any trading windows until the information is disclosed or the executive has recovered.  For more on this topic, see our discussion of the SEC’s recent statement on the matter here.
  1. What about externally?
    • Once an emergency succession plan is triggered, public disclosure requirements, such as Form 8-K for U.S. public companies, may apply depending upon the role of the replaced executive. Regardless of regulatory requirements, a press release or other official announcement may be warranted.
    • However, when an executive first reports symptoms of, or is diagnosed with, a COVID-19 related illness, the company ultimately has a fair amount of leeway in deciding whether to publicly disclose such a development.[2] While public companies have already begun disclosing instances of C-suite executives contracting COVID-19, companies may well reasonably conclude that an executive testing positive or experiencing milder symptoms is not a material event justifying disclosure—a self-isolating executive may be able to continue his or her duties without serious interruption.
    • Any disclosure should aim for accuracy and transparency, as well as a demonstration that the board and the company are in control of the situation. While there are legitimate concerns around the depth of disclosure, saying too little can exacerbate the situation.
    • As always, if an illness is considered material but not immediately publicly disclosed, boards and senior management of public companies must also pay attention to selective disclosure prohibitions. This is particularly important where communications with shareholders and other external stakeholders may be more frequent in light of current circumstances.
  1. How will current events inform future behavior?
    • Areas of succession and emergency preparedness are likely to be topics ripe for investor focus in next year’s proxy season. Taking actions now to address any issues raised in a company’s COVID-19 response can help to manage those developments.  Companies should be aware that:
      • The SEC has recognized CEO succession planning as a significant governance policy issue that potentially transcends the day-to-day business of managing employees and workforce. Shareholder proposals relating to CEO succession planning and disclosure cannot typically be excluded from annual meeting proxies on the basis that they deal with a matter relating to the company’s ordinary business operations.[3]
      • ISS and Glass Lewis both advocate for disclosure of appropriate and pertinent details of a succession plan. ISS will recommend in favor of proposals seeking disclosure of a CEO succession planning policy, but consider the reasonableness/scope of the request and the company’s existing disclosure.  Glass Lewis’s voting guidelines take a similarly balanced approach to CEO succession and provide that they may consider recommending support for well-crafted proposals requesting companies adopt policies or provide shareholders with more information regarding CEO succession planning, however will generally not recommend supporting such proposal if the rigidity of the proposed requirements could unduly hinder the board’s ability to approach CEO succession in the way it deems appropriate.
      • Major institutional investors expect boards to address emergency succession plans outside times of crisis as part of the succession planning process and to disclose aspects of the plan or planning process in order to give investors comfort (without undermining the plan’s effectiveness).[4]
    • Boards should add annual review of emergency succession plans to their agenda, and should assess the readiness and effectiveness of the company’s overall emergency preparedness plans (e.g., emergency succession, communicable disease policies and business continuity plans). Any emergency preparedness plans should be flexible and adaptable to changing circumstances, as well as rapidly evolving best practices and prior lessons learned.

If you have any questions or would like to discuss this, or other topics relating to the coronavirus outbreak, further, please do not hesitate to reach out to your regular contacts at the firm or contact our COVID-19 task force directly by clicking here.[5]

[1] See, e.g., CalPERS’s Governance & Sustainability Principles (Sept. 2019) (recommending that boards engage in routine director succession planning).

[2] There is no specific rule requiring such disclosure, so the disclosure obligation is governed by Rule 10b-5, the antifraud provision of the Securities Exchange Act of 1934.  However note that a company cannot recklessly or knowingly make a material misstatement of fact or omit a material fact essential to making the company’s statements not misleading (i.e., no half-truths) which may, depending upon other disclosures being made, result in a determination that disclosure of an executive illness is warranted.

[3] See, Securities and Exchange Commission Staff Legal Bulletin No. 14E (October 27, 2009).

[4] See, e.g., CalPERS’s Governance & Sustainability Principles (Sept. 2019) (recommending a CEO succession plan also encompass “short-term perspective to address crisis management in the event of death, incapacitation or untimely departure of the CEO,” and that the plan be “disclosed to shareowners on an annual basis and in a manner that would not jeopardize the implementation of an effective and timely CEO succession plan”).

[5] This article was prepared with the assistance of Graham Richard Bannon.

On April 2, 2020, Glass Lewis announced the global expansion of its Report Feedback Statement (“RFS”) service.[1] This service operates separately from the process for companies reporting factual errors or omissions in a research report and instead focuses on differences of opinion, allowing companies and shareholder proposal proponents to respond directly to Glass Lewis’s research and recommendations.[2] Continue Reading Glass Lewis Expands Report Feedback Statement Service

Last week, the Delaware Court of Chancery upheld the terms of an agreement requiring The Chemours Company to arbitrate a challenge to its spin-off from DuPont. In doing so, Vice Chancellor Glasscock rejected Chemours’ claims that the process DuPont followed in structuring and executing the spin-off rendered the terms of the spin-off unconscionable and thus Chemours’ consent to arbitration ineffective.[1]  The Chemours decision is important as it recognizes that parent companies rely on the parent-subsidiary relationship in structuring spin-offs and in doing so need not follow an arm’s length process with its subsidiary as would apply to a transaction with an unrelated third party. Continue Reading Don’t Bite the Hand that Feeds You: Delaware Court of Chancery Holds Spin-Offs Are Not Unconscionable

On March 30, 2019, Paul Shim and Jim Langston joined Patrick Ramsey, Global Head of M&A at BofA Securities, and Amy Lissauer, Global Head of Activism and Raid Defense at BofA Securities, on a conference call panel titled “The Impact of COVID-19 on Shareholder Activism and Hostile M&A.”

The panelists shared their views on the state of activism and hostile attacks in the current environment, how the activism playbook may evolve, when and how the next wave of activism and hostile attacks is likely to emerge, and what companies can do today to prepare for the storm.

Dial-in Details to the Call Below:
U.S. toll-free: 888 203 1112
International: +1 719 457 0820
Passcode: 1219818

The replay will be available from Monday, March 30, 2020, at 4:00 p.m. through Wednesday, April 29, 2020, at 2:00 p.m. Eastern.

Continue Reading The Impact of COVID-19 on Activism and Hostile Attacks: Key Takeaways

On March 25, 2020, due to the continuing impact of COVID-19, the SEC issued an order extending its previously-issued conditional relief from certain Exchange Act reporting requirements and proxy delivery requirements.

In particular, the March 25 order provides U.S. public companies with a 45-day extension to file or furnish certain filings otherwise due between March 1 and July 1, 2020.

Also on March 25, the SEC Division of Corporation Finance (Corp Fin) issued Disclosure Guidance Topic No. 9, Coronavirus (COVID-19), offering the Corp Fin staff’s current views on disclosure considerations, trading on material non-public information (MNPI) and reporting earnings and financial results (including non-GAAP measures) in light of COVID-19.

The order provides relief for companies who may have difficulty preparing their financial statements or other aspects of their periodic reports during this uncertain time, while the guidance provides valuable insight into how companies should be thinking about upcoming disclosures, particularly in light of the SEC’s continuing focus on a principles-based reporting regime.

The SEC has also provided guidance on signature and retention requirements as well as on relief from the notarization requirements for Form ID, which is required to make filings on EDGAR.  The Form ID relief extends through July 1, subject to certain conditions.

Please click here to read the full alert memorandum.

On March 20, 2020, news outlets reported that four U.S. Senators sold millions of dollars in stock following classified briefings to the Senate on the threat of a COVID-19 outbreak.  Three days later, the Co-Directors of the Securities and Exchange Commission’s (“SEC”) Division of Enforcement, Stephanie Avakian and Steven Peikin, issued a statement reminding market participants of their obligations with respect to material non-public information (“MNPI”) and of the SEC’s commitment to protecting investors from fraud and ensuring market integrity.[1] Continue Reading Insider Trading Risk During the COVID-19 Outbreak

Glass Lewis recently announced an update of its guidelines, which temporarily relaxes its standard policy against virtual meetings in light of COVID-19. The update provides that “[f]or companies opting to hold a virtual-only shareholder meeting during the 2020 proxy season (March 1, 2020 through June 30, 2020), [Glass Lewis] will generally refrain from recommending to vote against members of the governance committee on this basis, provided that the company discloses, at a minimum, its rationale for doing so, including citing COVID-19.”[1]  This formal update of Glass-Lewis’s guidelines comes on the heels of statements by both Glass-Lewis and ISS indicating openness to relax their positions on virtual meetings, which we discussed here. Continue Reading Glass Lewis Revised Guideline Regarding Virtual Meetings for 2020 Proxy Season

This is an updated version of our prior post to address a new guideline issued by Glass Lewis.

With rising concerns around the spread of COVID-19 (“coronavirus”) in the United States and globally, in order to mitigate health risks, many public companies may consider adding a virtual component to the format of their annual shareholder meetings.  In the United States, state law generally governs the availability of a virtual meeting format.  At the federal level, the SEC regulates the filing and mailing of proxy solicitation materials.  While we have not seen direct guidance from state legislatures on virtual or hybrid meetings in the context of the coronavirus pandemic, on March 13, 2020, the SEC released guidance (“SEC Coronavirus Guidance”) addressing annual shareholder meetings[1] in light of recommendations by the Centers for Disease Control and Prevention (“CDC”) and other public health officials to cancel, or explicitly state policies that prohibit, large, in-person gatherings[2] in an effort to prevent the spread of coronavirus.[3]  Set forth below are various considerations that a company should take into account when determining whether to move from an in-person to a virtual or hybrid[4] annual meeting Continue Reading UPDATE: Coronavirus & Virtual Annual Meetings

Although the main focus of Governor Cuomo’s executive orders over the past few days has been to cease operation of all non-essential businesses in New York state, the March 20th executive order provided temporary relief in a few additional respects, including with respect to shareholder meetings of New York corporations.  This relief is an example of the kind of flexibility various state governments and courts are adopting in an effort to address the needs of companies in this challenging environment.[1] Continue Reading Cuomo Executive Order Gives New York Corporations Relief on Physical Annual Meetings