Author Archives: Emma Grover

Caremark Exposure – And What to Do About It

William Savitt

2022 set another record for lawsuits faulting boards of directors for failing to adequately oversee corporate operations, a third consecutive year of acceleration. Mounting evidence suggests the trend is here to stay. But here’s some good news: there is much boards and managers can do to anticipate and thereby de-risk this exposure.

Corporate litigation when things go wrong is of course nothing new. When manufactured products prove to be harmful, or services prove defective, or customers are injured, the class action bar has always responded, demanding payment for alleged tort victims. And so after a 2015 listeria outbreak linked to Blue Bell Creameries’ ice cream was linked to three deaths and infections in four states, substantial tort litigation ensued, successfully seeking compensation for the victims from Blue Bell.

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Thoughts for Boards: Key Issues in Corporate Governance for 2023

by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, and Hannah Clark

From left to right, Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, and Hannah Clark

While the world recovers from the worst of the pandemic, the economic, political and social repercussions will continue to play out in ways that, while unpredictable, are in some respects characterized by observable patterns of cause-and-effect and cyclicality. The pendulum has been swinging back as, for example, the Federal Reserve has been ratcheting up interest rates and tightening liquidity, activist activity is once again on the rise, Republicans have taken control of the House, and back-to-office policies have been eased into effect. In this environment, stasis is the exception rather than the norm, and boards must continue to be nimble and open-minded in navigating the pitfalls and opportunities of this systemic recalibration.

Importantly, the infrastructure of corporate governance – namely, the structure and allocation of responsibilities and decision-making authority, and related principles, policies and information flows to facilitate such functioning – continues to serve as the anchoring framework for the board’s oversight of dynamic business conditions. Despite the complexity and range of issues that boards today must grapple with, the basic principles of governance continue to provide the best guideposts: engaged oversight, informed decision-making, conflict-free business judgments, and balancing of competing interests to promote the overall best interests of the business and sustainable long-term growth in value.

Below are the key trends and developments that boards should bear in mind in the coming year:
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Theft of Federal Funds Highlights Expanding Cyber Threat from Foreign Actors

by John P. Carlin, Jeh Charles Johnson, Jeannie S. Rhee, Steven C. Herzog, and David Kessler

From Left to Right: John P. Carlin, Jeh Charles Johnson, Jeannie S. Rhee, Steven C. Herzog, and David Kessler

The Secret Service has reported that APT41, a hacking organization, stole roughly $20 million in federal COVID-19 relief funds by obtaining access to the computer systems of a number of U.S. states beginning in mid-2020.[1] According to the Secret Service, APT41 is a “Chinese state-sponsored, cyberthreat group that is highly adept at conducting espionage missions and financial crimes for personal gain.”[2] While experts are uncertain regarding whether the breach by APT41 was ordered by the PRC government or merely tolerated, the Secret Service announcement marks the first public confirmation by a federal agency of a state-affiliated hacking group breaching U.S. cyber defenses to steal federal funds. According to the government, the hackers obtained unemployment insurance funds and Small Business Administration loans from more than a dozen states.[3] The true scope of the breach remains unclear, with officials speculating that government networks in all 50 states were likely targeted.[4] The Secret Service has further linked the APT41 intrusion to the organization’s broader efforts to access and interrogate state networks.[5]

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FTX Bankruptcy—What Could Be Next for the Industry?

by Yoon-Young Lee, Tiffany J. Smith, Matthew B. Kulkin, Michael Held, Susan Schroeder and Eliza Gonzalez.

One of the world’s largest cryptocurrency exchanges—FTX Trading Ltd.—and many of its affiliates filed for bankruptcy earlier this month. [1] While the full impact of the FTX bankruptcy is not yet clear, various responses from the executive branch and federal and state regulators indicate that, in the short term, agencies will continue to use their existing authorities to seek information about the practices of crypto market participants and to enforce existing rules to protect customers and avoid further market contagion. [2] The following statements may indicate what market participants should expect.
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Understanding the Role of ESG and Stakeholder Governance Within the Framework of Fiduciary Duties

by Martin Lipton, Adam O. Emmerich, Kevin S. Schwartz, Sabastian V. Niles, and Anna M. D’Ginto.

Over the past decade, investors, companies, and commentators have increasingly accepted and adopted stakeholder governance as the way to pursue the proper purpose of the corporation and have embraced consideration of environmental, social and governance (ESG) issues in corporate decision-making toward that end. But an emerging movement opposed to any consideration, at all, of ESG factors threatens to erase the gains that have been made over the past ten years and revert to the outdated view that the purpose of a company is solely to maximize short-term shareholder profits.

This debate is playing out very publicly, with politicians at the highest levels of state and federal government publicly staking out positions on ESG and the extent to which it should (or should not) be considered by asset managers; through regulation and law; and in boardrooms across the country and around the world. At one extreme, critics of ESG are dismissing any consideration of the long-term impact of environmental or social risk on a company as “woke” capitalism, to be condemned, if not outlawed. (See Bloomberg, Populist House Republicans Picking a Fight With US Business Over ‘Woke Capitalism’ (Nov. 27, 2022).) At the same time, attacks from the other end of the spectrum condemn board consideration of ESG in a stakeholder governance model as insufficiently prescriptive. Yet neither view, attempting to politicize the role of companies and their boards, grapples adequately with the real meaning of ESG and stakeholder governance and the role of these concepts in the decision-making process of corporate boards and management.
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Initial Observations on the FTX Debacle

by Kevin S. Schwartz, Rosemary Spaziani, David M. Adlerstein, and Samantha M. Altschuler.

The dust has not yet settled from the remarkable fall to earth of cryptoasset exchange FTX, associated hedge fund Alameda, and their Icarus-like founder, as revelations and conjecture continue to be disseminated at least daily about what happened and the collateral damage. While there are sure to be many important lessons from this situation as the facts and their effects become clear, some initial observations bear mentioning:
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Compliance and Enforcement