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View from the Valley

Six thoughts on diversity, IPOs and director compensation

In the second of a series of regular updates from our team in northern California, Boris Feldman, Sarah Solum, Maj Vaseghi, John Fisher and Doru Gavril take a look at the hottest issues in the tech and life sciences sectors. You can listen to their conversation in our View from the Valley podcast here – or read a summary below.

Diversity and inclusion issues have been front and center for Valley companies for years.

Many have sophisticated programs in place to address under-representation, from requiring at least one diverse candidate to be considered for every vacancy to auditing their decision-making around promotions. Others study how peers review one another and hold calibration sessions to check those performance evaluations are free from bias. In recent years we have also seen a big drive in tech to increase the number of black, Latino and Hispanic employees.

Watch Maj Vaseghi on strategies to improve diversity:

California’s board gender diversity law is making a difference on the ground.

We’ve seen businesses that have had all-male boards for decades add two women in the past year. The legislation has been criticized as unconstitutional and even the people who wrote it acknowledged it would be challenged. But businesses are overwhelmingly in favor. The law requires that all corporates listed on major US exchanges with principal executive offices in California have one female board member by January 1, 2020. Our clients have met that requirement but the next hurdle – to have at least two or three female directors, depending on the size of their board, by December 31, 2021 – will be harder to cross. Many women who are already directors have positions with multiple companies and can’t add another without becoming overboarded. Boards are therefore expanding their search processes to tap into a larger talent pool.

There has been a recent run of shareholder derivative lawsuits accusing directors of breaches of their fiduciary duties for failing to implement greater diversity in the boardroom.

While everyone would agree that greater diversity is desirable, these cases can be seen as cynical – stockholders already have a number of ways to effect change and shareholder derivative suits are not the right vehicle for such allegations. A shareholder derivative lawsuit would have to demonstrate that a majority of the board willfully, knowingly – and possibly with animus – pursued a strategy to diminish diversity. That would be very difficult to prove, especially given corporate moves to increase it.

Watch Doru Gavril on diversity-related shareholder derivative lawsuits:

Tech founders looking at exits are keeping their options open.

Any business pursuing a listing in the current environment – whether they’re running a formal dual track process or not – will be thinking about an M&A sale. The big tech companies are always studying the filings of founder-led business to work out whether it’s cheaper to buy than build, and whether to strike before a flotation puts the target out of reach. Direct listings were hot before COVID and may still be an option for some, while special purpose acquisition companies – which are a hybrid of an M&A deal and an IPO – are also growing in popularity. Life science startups have more options in the shape of collaborations, licensing arrangements, JVs and option deals with big pharma companies, which give them access to data, expertise and funding to develop their products before progressing to a sale further down the line.

Watch Sarah Solum on the exit options for tech founders:

CFIUS is likely to be a bigger barrier to life sciences and healthcare deals from now on.

Five years ago, CFIUS risk analysis might have looked at obvious things such whether the target had security clearances or government contracts, whether its products could be weaponized and whether the business had facilities near a military base. Now there’s a much broader view of what it means for a life sciences startup to be of national importance, so that analysis would need to consider issues such as its position in the supply chain and access to potentially sensitive personal data, among other things.

Watch John Fisher on the influence of CFIUS on M&A:

Director compensation has become a hot topic in the Delaware courts.

The procedures and processes boards follow are changing as a result, but compensation levels aren’t about to fall. Instead we’re likely to see fewer anomalies and more boards using independent consultants to review their compensation decisions to ensure any increases are still ‘market’ within their peer group. If they do that, they’ll be able to describe the rationale in their proxy statements without getting into any trouble.

Watch Maj Vaseghi on how companies are managing director compensation:

Listen to the full View from the Valley podcast here.