May 2021 Update
Effective January 1, 2021, Corp C §§301.4 and 2115.6 require publicly held corporations with a principal executive office located in California to have a minimum number of directors from underrepresented communities on their board of directors. A publicly held corporation may report compliance with these statutory board diversity requirements on its annual Corporate Disclosure Statement. A “publicly held corporation” is defined as a “corporation with outstanding shares listed on a major United States stock exchange.” Corp C §§301.3, 2115.5. Corporations that are publicly traded but not publicly held are not required to meet the statutory board diversity requirements. However, publicly traded corporations are required to file an annual Corporate Disclosure Statement. For further information, see https://www.sos.ca.gov/business-programs/diversity-boards. See §§1.114, 10.1, 10.16A.
In light of the COVID-19 pandemic that began in 2020, directors should keep abreast of the company’s responses to the ongoing conditions of the pandemic, including modification of company business operations to address mask-wearing and social distancing guidance issued by government agencies, and also planning for future pandemics. Directors should also keep abreast of other public health events whose effects may be limited to particular industries that are relevant to the company, such as listeria or other foodborne illness outbreaks that may affect companies in food-related industries. See §2.47.
In November 2020, the SEC amended the procedural rules in 17 CFR §240.14a–8 concerning shareholder proposals, as follows: (1) the share ownership requirements were amended to incorporate a tiered approach that provides three options for demonstrating a sufficient ownership stake in a company—through a combination of amount of securities owned and length of time held—to be eligible to submit a proposal; (2) certain documentation is required to be provided when a proposal is submitted on behalf of a shareholder-proponent; (3) shareholder-proponents are required to identify specific dates and times they can meet with the company in person or via teleconference to engage with the company with respect to the proposal; and (4) a person may submit no more than one proposal, directly or indirectly, for the same shareholders’ meeting. In addition, the resubmission thresholds were revised to change the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholders’ meetings from 3, 6, and 10 percent to 5, 15, and 25 percent, respectively. See 85 Fed Reg 70240, 70294 (Nov. 4, 2020). See §2.75.
A company may establish one or more board committees to monitor critical risks to which the company’s operations are subject. In Marchand v Barnhill (Del 2019) 212 A3d 805, the Delaware Supreme Court ruled that the directors of Blue Bell Creameries USA, Inc., could be liable for a breach of their duty of loyalty because they failed to “make a good faith effort to put in place a reasonable system of monitoring and reporting on the corporation’s central compliance risks.” The “central compliance risk” at issue in Marchand was food safety related to Blue Bell’s production of ice cream. The Delaware Supreme Court mentioned that one means of monitoring and reporting on critical risks is creating a committee dedicated to such monitoring and reporting. Cases in the Delaware Court of Chancery following Marchand illustrate the importance of directors establishing robust systems for monitoring “mission critical” risks. See In re Lendingclub Corp. Derivative Litig. (Del Ch, Oct. 31, 2019, No. 12984) 2019 Del Ch Lexis 1347; In re Clovis Oncology, Inc. Derivative Litig. (Del Ch, Oct. 1, 2019, No. 2017–0222) 2019 Del Ch Lexis 1293. The Delaware Court of Chancery opinion in Lendingclub indicates that board committees with a majority or more of independent directors may be better suited to monitor “mission critical” risks. See §2.97.
Delaware courts have taken the lead in formulating the legal standards for directors’ fiduciary duties. In addition to the duties of loyalty and care, directors must also implement and monitor compliance programs toward assuring that the corporation conducts lawful business through lawful means. Recent cases indicate that directors may be liable for failing to exercise appropriate oversight over business risks. The U.S. Department of Justice reinforced directors’ duties to implement compliance programs in its recently updated guidance on effective compliance programs. See https://www.justice.gov/criminal-fraud/page/file/937501/download. See §4.1.
The COVID-19 global pandemic has altered the way internal investigations are conducted. Counsel should take into consideration potential delays for the company and counsel evidence-gathering processes, particularly with regard to physical document collections. Additionally, interviews that would usually have been conducted in person are now being conducted virtually, creating technological challenges and potentially impacting counsel’s ability to assess witness credibility. Counsel should familiarize themselves with any video and document presentation technology well in advance of witness interviews to avoid technological issues that could interfere with the investigation. See §4.9.
In May 2020, the U.S. Department of Justice created a new special matters unit that will focus on and specialize in privilege-related issues in fraud and white collar crime cases. See §4.33.
In October 2020, the Securities and Exchange Commission (SEC) awarded $114 million to a whistleblower (the largest whistleblower award to date under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) (Pub L 111–203, 124 Stat 1376)), and in June 2020, the SEC issued the second highest whistleblower award of $50 million. In total, as of November 2020, the SEC issued more than $562 million in awards since the program was established in August 2011. Details of these awards can be found on the SEC’s website at https://www.sec.gov/whistleblower. The SEC’s recent amendments to the whistleblower program in September 2020 grant the SEC the discretion to apply upward adjustments to awards of $5 million or less in an attempt to encourage whistleblowers to report claims. See §4.40.
Beginning on January 1, 2022, the Statement of Information filed with the Secretary of State must contain a statement indicating whether any officer or any director, or, in the case of a limited liability company, any member or any manager, has an outstanding final judgment issued by the Division of Labor Standards Enforcement or a court of law, for which no appeal therefrom is pending, for the violation of any wage order or provision of the Labor Code. Corp C §1502(a)(10). See §5.8.
In Kao v Joy Holiday (2020) 58 CA5th 199, finding alter ego, the court did not rely solely on the shareholders’ stock ownership and management decisions as evidence of unity of interest and ownership but also found commingling and unauthorized use of corporate assets to pay personal expenses. These factors provided sufficient proof that the corporate entity should be disregarded. There was no evidence that the corporation was undercapitalized or that the corporation was a mere shell or conduit for the owners’ business, but that did not preclude application of the alter ego doctrine. See §5.82.
In Butler Am., LLC v Aviation Assur. Co., LLC (2020) 55 CA5th 136, 146, the court highlighted the following factors: “identical equitable ownership, commingling of funds, use of the same offices, disregard of formalities, … use of one entity as a mere shell for the affairs of another … [, and] that a corporate entity is so undercapitalized that it is likely to have no sufficient assets to meet its debts.” In Butler Am., there was overwhelming evidence that the principal owned and controlled all the entities at issue, and that the judgment debtor was nothing but a shell. It conducted no substantial business activities and had no income with which to pay its debts; its only function was to act as a shield for its principal to hide behind and avoid paying the judgment creditor. See §5.82.
In Salzberg v Sciabacucchi (Del 2020) 227 A3d 102, the Delaware Supreme Court held that federal forum selection provisions adopted in the charters of Delaware corporations, which required stockholders to file actions arising under the Securities Act of 1933 (15 USC §§77a–77aa) in federal court and not state court, are facially valid. See §6.21.
In Swipe Acquisition Corp. v Krauss (Del Ch, Jan. 28, 2021, No. 2019-0509-PAF) 2021 Del Ch Lexis 14, the Delaware Court of Chancery refused to enforce a Delaware choice of law clause with respect to a fraud claim under the California state securities laws (Corp C §25401) on grounds that doing so would diminish the appellant’s unwaivable statutory rights. See §6.22.
In Marchand v Barnhill (Del 2019) 212 A3d 805, the Delaware Supreme Court provided additional guidance on when corporate directors may be subject to a Caremark claim for failing to provide adequate oversight of a corporation’s “central compliance risks.” 212 A3d at 824. The court allowed a Caremark claim to proceed against the directors of Blue Bell Creameries USA, Inc., for failing to adequately monitor Blue Bell’s compliance with food safety laws in connection with a listeria outbreak traced to Blue Bell ice cream products. According to the court, “to satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it.” 212 A3d at 821. The plaintiff’s allegations that supported an inference that the Blue Bell directors failed to implement and monitor an oversight system for compliance with food safety laws (which compliance was critical to Blue Bell’s operations) included that (1) there was no board committee that addressed food safety, (2) there was no regular process or procedure by which management was required to keep the board informed of food safety compliance practices or risks, and (3) there was no suggestion that the board regularly discussed food safety issues. See §9.7.
In Vazquez v Jan-Pro Franchising Int’l, Inc. (2021) ___ C5th ___, the California Supreme Court ruled that Dynamex Operations W., Inc. v Superior Court (2018) 4 C5th 903 applies retroactively to all cases not yet final as of the date that the decision in Dynamex became final. See §9.18.
Labor Code §§6325, 6432, and 6409.6, effective January 1, 2021, require any public or private employer or a representative of the employer that receives a notice of potential exposure to COVID-19 to provide specified notifications to all of its employees within 1 business day of the notice of potential exposure. The law also requires notice to all employers of any subcontracted employees who were on the premises at the same worksite within the infectious period, as defined. The required notice must include certain information regarding COVID-19-related benefits and options and information regarding the disinfection and safety plan that the employer plans to implement and complete in accordance with federal guidelines. The employer must maintain records of notifications for at least 3 years, and there are civil penalties for violation of the notification requirements. If there is a COVID-19 outbreak, as defined, the employer must also report prescribed information to the applicable local public health agency within 48 hours and continue to provide the agency with information regarding additional COVID-19 cases at the worksite. See §9.20C.
The new administration led by President Biden can be expected to bring notable changes on corporate governance. The Biden administration is likely to be supportive of corporate social responsibility concepts and shift its focus to implementing broad social policy goals through regulation of public companies and new disclosure requirements. See §10.1.
In December 2020, the SEC issued an order approving a proposal from the NYSE that will allow companies going public to raise capital through a primary direct listing. Exchange Act Release No. 90768 (Dec. 22, 2020). NASDAQ has also submitted its own rule change proposal to the SEC. Once these changes are effective, they will provide an alternative to traditional underwritten initial public offerings. See §§10.4, 10.13.
In September 2020, Governor Newsom signed AB 2143, amending CCP §1002.5, which allows an employer to include a no-rehire clause in a settlement agreement with a worker who filed an official complaint in good faith if, before the worker filed the complaint, the employer made and documented a good faith determination that the worker engaged in sexual harassment, sexual assault, or any criminal conduct. See §10.8.
In 2020, a number of shareholder derivative lawsuits were filed in federal court against certain major companies (including Oracle, Facebook, Qualcomm, the Gap, NortonLifeLock, Cisco, and Monster Beverage), alleging breaches of fiduciary duty as a result of failures of directors and officers to uphold their commitments to diversity. The claims also include violations of §14(e) (15 USC §78n(e)) of the Securities Exchange Act of 1934 (15 USC §§78a–78pp), alleging that the companies’ boards authorized material misstatements in their annual proxy statements, which discuss the companies’ commitments to fostering diversity and inclusion among company leadership, while the companies failed to fulfill those commitments. See §10.16A.
Companies are facing unprecedented challenges in the midst of the COVID-19 pandemic. Good corporate governance is critical in helping leadership navigate such challenges and uncertainties. In addition to ensuring and prioritizing the safety and well-being of the company’s employees, as well as continuing business operations, private company boards should consider proper process in implementing a governance framework tailored to the particular issues the company is facing. See §10.29A.