Francis G.X. Pileggi

Top Five Cases from 2011
We begin with the top five cases on corporate and commercial law from Delaware for 2011 and we are glad to see that at least four of them have some support from the bench as these were the cases that four Vice Chancellors highlighted as important decisions in a recent panel presentation that they presented in New York City in early November 2011.  Those cases were the following:  In Re: OPENLANE Shareholders Litigation; In Re: Smurfit Stone Container Corp. Shareholder Litigation; In Re: Southern Peru Copper Corp. Shareholder Litigation and Air Products and Chemicals, Inc. v. Airgas Inc., and Kahn v. Kolberg Kravis Roberts & Co., L.P.

This article originally appeared on the Delaware Corporate & Commercial Litigation Blog.

In Re: OPENLANE Shareholders Litigation. In what many commentators referred to as a “sign and consent” transaction, in which the majority shareholders and the board of directors had sufficient control to provide the statutorily required consent, the Court of Chancery determined that the Revlon standard was satisfied and fiduciary duties were not breached notwithstanding the Omnicare case and even without customary safeguards such as a fairness opinion. See fuller summary here.

Kevin F. Brady

In Re: Smurfit Stone Container Corp. Shareholder Litigation. The Court of Chancery denied a motion for preliminary injunction and determined that the Revlon standard applied to a merger for which the consideration was split roughly evenly between cash and stock. See fuller summary here.

In Re: Southern Peru Copper Corp. Shareholder Litigation. In what may be the largest award granted in the Court of Chancery’s venerable history, a judgment was entered for $1.2 billion (later amended to $1.3 billion) for breach of fiduciary duties in connection with an interested transaction. With interest, the total is expected to be $2 billion.  The Court later awarded attorneys’ fees of 15 percent which amounts to $300 million in this derivative action. See fuller summary here.

Air Products and Chemicals, Inc. v. Airgas Inc. This magnum opus of over 150-pages in length will be the focus of scholarly analysis for many years to come. For purposes of this short blurb, it ended a year long takeover battle between two determined companies, with the Court of Chancery ruling, among other things, that the target company was not required to pull its poison pill when the board determined that the offer for the company was too low. See fuller summary here.

Kahn v. Kolberg Kravis Roberts & Co., L.P.  This Delaware Supreme Court decision reversed and remanded an opinion by the Court of Chancery interpreting “a Brophy claim as explained in Pfeiffer.”  The issue before the Court was whether a stockholder had to show that the company had suffered actual harm before  bringing  abreach of loyalty claim that a fiduciary improperly used the company’s material, non-public information (a Brophy claim).  The Supreme Court rejected that part of the Chancery’s decision in Pfeiffer v. Toll which requires a showing of actual harm to the company.  See fuller summary here.

We also selected the following additional noteworthy cases:

Shareholder Litigation

In Re: John Q. Hammons Hotels, Inc. Shareholder Litigation.  Despite the application of the entire fairness standard, the Court concluded that the merger price was entirely fair, the process leading to the transaction was fair, that there was no breach of fiduciary duty, and therefore no claims for aiding and abetting fiduciary duty.  See fuller summary here.

Reis v. Hazelett Strip-Casting Corp.  The Court applied an entire fairness analysis and held that the attempt to cash out minority shareholders via a reverse split was neither the result of a fair process nor did it involve a fair price.  See fuller summary here.

In re: Del Monte Foods Co. Shareholders Litigation. This first of three rulings enjoined a shareholder vote on a premium LBO transaction and the buyers’ deal protection devices.  The Court also held that the advice that the target board received from a financial advisor (who also did work on the deal for the bidder) was so conflicted as to give rise to a likelihood of a breach of fiduciary duty and the Court indicated that the financial advisory firm could face monetary damages due to aiding and abetting the potential breach.  See fuller summary here.

In re: Massey Energy Company Derivative and Class Action Litigation.  The Court declined to enjoin a proposed merger.  The Court noted that the derivative claims that the plaintiffs argued were not being fairly valued as part of the merger, would become assets of the surviving corporation.  The Court reasoned in part that the shareholders should decide for themselves whether to exchange their status as Massey stockholders for a chance to receive value from a third party in an arms-length merger.  See fuller summary here.

Frank v. Elgamal.  This decision exemplifies the different approach taken by different members of the Court in connection with an application for interim fees in a class action.  (Compare the different approach in the Del Monte case.)  See fuller summary here.

Krieger v. Wesco Financial Corp.  This decision determined that holders of common stock were not entitled to appraisal rights under Section 262 when they had the option of electing to receive consideration in the form of publicly traded shares of the acquiring company.  See fuller summary here.

In re: The Goldman Sachs Group, Inc. Shareholder Litigation.  In this first corporate opinion by Vice Chancellor Glasscock, the Court dismissed a derivative action brought against Goldman’s current and former directors based on a failure to make a pre-suit demand.  At issue was Goldman’s allegedly excessive compensation structure.  See fuller summary here.

Contested Director Elections
Genger v. TR Investors, LLC.  In this opinion, the Delaware Supreme Court addresses electronic discovery issues and contested elections for directors involving DGCL Section 225. See fuller summary here.

Johnston v. Pedersen.  This opinion determined that directors breached their fiduciary duties when issuing additional stock and as a result were not entitled to vote in connection with the removal of the incumbent board and the election of the new directors.  See fuller summary here.

Section 220 Cases
King v. VeriFone Holdings, Inc. This Delaware Supreme Court ruling reversed a Chancery decision that found a lack of proper purpose in a suit by a shareholder seeking books and records pursuant to Section 220.  Delaware’s High Court explained that it remains preferable to file Section 220 suits for books and records prior to filing a derivative suit, but holding that such a chronology is not, per se, a fatal flaw in a Section 220 action.  See fuller summary here.

Espinoza v. Hewlett Packard Co. This affirmance of Chancery’s denial of a §220 claim was based on the requested report to the board being protected by the attorney/client privilege.  (This is one of several decisions in this matter.) See fuller summary here.

Graulich v. Dell., Inc.  This is a Section 220 case in which Chancery denied a request for books and records due to the underlying claims being barred by a previous release and due to the shareholder not owning the shares during the period of time for which he was requesting documents.  See fuller summary here.

Alternative Entity Cases

CML V, LLC v. Bax.  This Delaware Supreme Court decision determined that creditors of an insolvent LLC are not given standing by the Delaware LLC Act to pursue derivative claims unlike the analogous situation in the corporate context.  See fuller summary here.

Sanders v. Ohmite Holding, LLC.  This decision clarified the rights of a member of an LLC that demanded books and records of an LLC.  The Court determined that pursuant to Section 18-305 of the Delaware LLC Act a member may seek records for a period prior to becoming a member of the LLC.  See fuller summary here.

Achaian, Inc. v. Leemon Family LLC.  This opinion addressed the transferability of interests of a member of an LLC and specifically whether one member of a Delaware LLC may assign its entire membership interests, including voting rights, to another existing member, notwithstanding the provision in an agreement that requires the consent of all members upon the admission of a new member.  See fuller summary here.

Jurisdictional or Procedural Issues
Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC.  In this decision, a Delaware Supreme Court determined that Delaware would not follow the standards for a motion to dismiss under Rule 12(b)(6) announced by the U.S. Supreme Court in the Twombly or Iqbal opinions.  See fuller summary here.

Hamilton Partners, LP v. Englard.  This decision addressed the issue of personal jurisdiction over directors and interlocking entities, as well as demand futility in the context of a double derivative shareholders suit.  (Although this was decided at the end of 2010, it was important enough to include in this list as it was issued after our deadline for our compilation last year). See fuller summary here.

Encite LLC v. Soni.  This decision rejected a request for an extension of a deadline for submitting expert reports because the Court did not approve an amendment to the Scheduling Order.  See fuller summary here.

Whittington v. Dragon Group.  In this latest iteration of multiple decisions in this long-running saga, the Court examines the doctrine of claim preclusion, issue preclusion and judicial estoppel.  See fuller summary here.

In re: K-Sea Transportation Partners, L.P. Unitholders Litigation.  This decision provides a useful recitation of the standard used in Chancery for deciding whether to grant a motion to expedite proceedings, and it also reviews language in a limited partnership agreement which arguably was an effective waiver of traditional fiduciary duties as allowed by the LP statute.  See fuller summary here.

Sagarra Inversiones, S.L. v. Cemento Portland Valderrivas, S.A.  This ruling determined that the standard of “irreparable harm” granting injunctive relief was not satisfied based on the financial condition of the defendant which was “not poor enough” to convince the Court that a money judgment would not make the plaintiff whole.  (This is one of several decisions in this matter.) See fuller summary here.

ASDC Holdings LLC v. The Richard J. Malauf 2008 All Smiles Grantor Retained Annuity Trust.  This decision discussed the enforceability of forum selection clauses and in particular when those clauses will be enforced despite a related case being filed first in another forum.  See fuller summary here.

Gerber v. ECE Holdings LLC.  This decision discusses the difference between a motion to supplement and a motion to amend a complaint.  See fuller summary here.

Advancement
Fuhlendorf v. Isilon Systems, Inc.  This decision addresses the advancement of fees incurred by officers and directors sued in connection with their corporate roles.  The specific issue in this case was whether the corporation should pay for all of the costs of a Special Master appointed to review the interim application for fees.  The case also discusses the common procedure employed to review disputed monthly legal bills in advancement cases.  See fuller summary here.

Receiver or Dissolution
Pope Investments LLC v. Benda Pharmaceutical Inc.  This decision rejected the application for the appointment of a receiver on the grounds that while the plaintiff demonstrated that the defendant was insolvent, the plaintiff failed to show that “special circumstances existed which would warrant the appointment of a receiver.”  See fuller summary here.

Stephen Mizel Roth IRA v. Laurus U.S. Fund, L.P.  This decision rejected a request to dissolve a limited partnership and refused to appoint a receiver in the context of an investment fund that was in liquidation mode but was not dissolved, nor was it winding-up as that term is used in the statute.  See fuller summary here.

Legal Ethics
BAE Systems Information and Electronics Systems Integration, Inc. v. Lockheed Martin Corp.  This opinion addresses Delaware Lawyers’ Rule of Professional Conduct 3.4(b) and discusses those situations in which a fact witness may be compensated for the “lost time” away from his “day job” suffered while testifying.  See fuller summary here.

Judy v. Preferred Communications Systems, Inc.  This decision addresses the issue of legal ethics involved in determining whether an attorney may assert a retaining lien over the documents of a former or delinquent client.   See fuller summary here.

Common Law v. Statutory Claims
Overdrive, Inc. v. Baker & Taylor, Inc.  In this last formal decision  by Chancellor Chandler, the Court discussed how the Delaware Uniform Trade Secrets Act displaces conflicting tort and other common law claims that are grounded in the same facts which would support the statutory misappropriation of trade secret claims.  See fuller summary here.

Damages for Breach of Agreement to Negotiate in Good Faith
PharmAthene, Inc. v. SIGA Technologies, Inc.. This Court of Chancery decision awarded damages for breach of a contractual obligation to negotiate in good faith and fashioned an equitable remedy that required the sharing of profits from the production of a product that the defendant failed to negotiate the license of in good faith. There are several decisions involving contract law by the Court of Chancery in this matter, the most recent ruling denying a motion for reargument. See fuller summary of the most recent decision here.

Postscript
On a final note, the last week of 2011 saw the sudden and sad passing of one of the nation’s foremost experts on alternative entities, Professor Larry Ribstein, who was often cited in opinions of the Delaware Courts. He coined the word “uncorporations” to refer to alternative entities and was the author of many treatises, law review articles and other publications on uncorporations, jurisdictional competition, the business of law firms and related topics involving the intersections of law and business. He was an iconic figure in the law, and the legal profession is better because of his many contributions.

“Our investigation reveals that there were few lines the executives were willing to cross to win the contract,” said SEC Enforcement Director Robert Khuzami in a conference call on the charges this morning, noting that Siemens executives allegedly approved up to $100 million in illegal bribes.

Recipients of those bribes allegedly included two presidents and cabinet ministers in two Argentinian administrations between 1996 to 2007. Of the funds used in the bribery scheme, approximately $31.3 million were made after March 2001, when Siemens became a U.S. issuer.

“One of the most critical functions of law enforcement is to communicate that businesses are not fools or dupes for obeying the law, we want to reward those companies that refuse to pay bribes. The best way to do that is to root out their competitors that are,” said Khuzami. “Business should flow to the company with the best product and the best price, not the best bribe. Corruption erodes public trust and the transparency of our commercial markets, and undermines corporate governance.”

Siemens, as a company, previously faced similar charges and paid $1.6 billion to resolve them with the SEC, U.S. Department of Justice and the Office of the Prosecutor General in Munich. Lanny A. Breuer, U.S. Department of Justice assistant attorney general for the DoJ’s criminal division, noted the value of Siemens’ assistance in bringing charges against the individual former executives. “It absolutely should be said that Siemens was remarkably cooperative and helpful throughout our investigation,” said Breuer. “Foreign bribery and corruption undermine fair market competition and create instability.”

The individuals charged in this case, according to an SEC press release, are:

• Uriel Sharef  – A former managing board member at Siemens from July 2000 to December 2007. He met in the United States with payment intermediaries and agreed to pay $27 million in bribes to Argentine officials in connection with the DNI contract.
• Ulrich Bock – Former commercial head of major projects for Siemens Business Services (SBS) from October 1995 to 2001. As the officer responsible for the DNI contract, he authorized bribe payments to Argentine government officials.
• Stephan Signer – Replaced Bock as commercial head of major projects for SBS and later became head of business operations and finance at Siemens IT Solutions and Services. He authorized the payment of bribes to government officials in Argentina.
• Herbert Steffen – CEO of Siemens Argentina from 1983 to 1989 and again in 1991, and group president of Siemens Transportation Systems from 1996 to 2003. Due to his longstanding connections in Argentina and Latin America, Steffen was recruited by Sharef and met directly with Argentine officials and offered bribe payments on behalf of Siemens.
• Andres Truppel – CFO of Siemens Argentina from 1996 to 2002. He regularly communicated with Argentine government officials regarding illicit bribe payments and participated in U.S.-based meetings where bribes were negotiated and promised.
• Carlos Sergi – A former board member of Siemens Argentina and a business consultant for Siemens Argentina. His primary role was to serve as a payment intermediary between Siemens and Argentine government officials in connection with the DNI contract.
• Bernd Regendantz – CFO of SBS from February 2002 to 2004. He authorized two bribe payments totaling approximately $10 million on Siemens’ behalf.

Harry Cendrowski (l) and Walter McGrail (r).

Whistleblowers often face significant pressure to remain quiet rather than report unlawful actions.  Though many whistleblower laws including Dodd-Frank contain anti-retaliation protection, evidence demonstrates that whistleblowers risk, in the words of the Senate Banking Committee, “committing ‘career suicide.’” Recent studies, including those highlighted in testimony before the House Financial Services Subcommittee on Capital Markets, indicate between 82 percent and 90 percent of whistleblowers are fired, quit under duress, or are demoted. For individuals working in a geographical area with few employers, or in an industry with little competition, the effects of whistleblowing can be substantial.  Whistleblowers may find themselves ostracized by local, regional, and national businesses for their actions. They may also face adverse social consequences.

In light of these consequences, whistleblowers often desire retaliation protection and anonymity.  Whistleblower provisions of Dodd-Frank provide for anti-retaliation protection and state that the SEC will protect the identity of the whistleblower to the largest extent possible; however, a whistleblower must satisfy numerous conditions to receive these benefits.  For example, a recent court ruling, Egan v. TradingScreen, Inc., found that a whistleblower must provide information regarding unlawful actions to the SEC in order to state a retaliation claim.  Whistleblowers reporting information solely to boards of directors and executives of their employing organization may not necessarily receive retaliation protection in spite of Dodd-Frank’s encouragement of such actions.

Additional conditions imposed by Dodd-Frank effectively incentivize individuals to report unlawful, tax-related actions to the IRS as opposed to the Commission.  For example, according to the SEC:

“…[Dodd-Frank] would authorize disclosure of information that could reasonably be expected to reveal the identity of a whistleblower…For example, in a related action brought as a criminal prosecution by the Department of Justice, disclosure of a whistleblower’s identity may be required, in light of the requirement of the Sixth Amendment of the Constitution that a criminal defendant have the right to be confronted with witnesses against him.”

Other Dodd-Frank provisions seemingly protect the confidentiality of whistleblowers in civil actions brought by the SEC or related government body.  However, because numerous exceptions exist to these confidentiality provisions, a whistleblower would likely assume he would eventually be exposed.  In contrast, the IRS can initiate an audit of tax records without likely subjecting the whistleblower to the Sixth Amendment.  Audits occur in the normal course of business and, barring appeal, do not require legal action or disclosure of a whistleblower’s identity.  As such, a whistleblower with knowledge of unlawful tax-related actions would likely select to report the issue to the IRS as the Service may be better able to protect his identity.  For example, the IRS recently paid a whistleblower $4.5 million for providing a tip that netted the IRS $20 million in taxes and interest.  The identity of the whistleblower, who worked for a Fortune 500 professional services firm, remains anonymous.

In addition to anonymity concerns, whistleblowers are monetarily incentivized to report unlawful actions to the IRS.  Under Dodd-Frank whistleblower provisions, the SEC must pay an award of between 10 and 30 percent of the amount recovered to eligible whistleblowers.  Section 7623 of the Internal Revenue Code, however, “mandates a whistleblower award of between 15 and 30 percent of the amount recovered” by the IRS.  While the upper bound of the potential bounty received by a whistleblower is 30 percent in both instances, the IRS is required to minimally pay a 50 percent larger award than the SEC for information resulting in successful enforcement of unlawful actions.

Whistleblowers may also turn to the IRS over the SEC due to the concept of materiality.  In enforcing securities laws (including the Sarbanes-Oxley Act of 2002), the SEC is largely concerned with matters that are material to financial statements, as these matters may change, according to the Financial Accounting Standards Board, “the judgment of a reasonable person” relying upon them.  The concept of materiality thus constrains the SEC’s actions:  if the SEC feels an item is immaterial, the Commission may forego investigation of the issue, and the whistleblower will not receive a monetary reward.  The concept of materiality, however, largely does not apply to tax assessments.  Thus, a whistleblower with knowledge of tax issues is incentivized to report the issue to the IRS as the Service is unconstrained by the concept of the materiality; the IRS may elect to investigate an issue that the SEC would otherwise not investigate.

Lastly, the IRS’s organizational structure, with its separate whistleblower office, may incentivize potential whistleblowers to report their concerns to the Service as opposed to the Commission. Currently, the SEC lacks an independent whistleblower office to handle tips.  While Sean McKessy was recently tapped to head the SEC’s whistleblower office, the office remains under the direct supervision of Robert Khuzami’s Division of Enforcement:  McKessy does not report directly to SEC Chairman Mary Schapiro.  On the contrary, the IRS has a separate, independent whistleblower office, which serves as the central repository for all whistleblower claims.  The director of this independent office reports to the IRS Commissioner, decreasing the possibility that a claim remains uninvestigated by lower-level IRS managers.  This difference in structure between the SEC’s whistleblower office with that of the IRS was highlighted in a May 10, 2011 letter by Sen. Charles Grassley to Mary Schapiro.  Sen. Grassley is the author of numerous whistleblower protection statutes, including the 2006 amendments to the IRS whistleblower program and Sarbanes-Oxley whistleblower protections for employees of publicly traded companies.

While numerous politicians and practitioners have applauded the whistleblower provisions of Dodd-Frank, these provisions are less attractive to potential whistleblowers than those already existing in the Internal Revenue Code.  With respect to tax-related issues, a whistleblower is likely incentivized to report issues to the Service rather than the Commission due to greater perceived anonymity and monetary rewards; a lower materiality threshold for tax assessments than financial statements; and the administrative structure of the IRS and SEC’s whistleblower programs.  Unless these provisions are substantially modified, Dodd-Frank represents at best an incremental step in incentivizing whistleblower activity for tax-related issues.

Harry Cendrowski is a founding member and Walter McGrail is a senior manager of Cendrowski Corporate Advisors.

Chancellor William B. Chandler III

“I want to pursue new and exciting opportunities and challenges that are available to me,” said Chandler. “I also believe now is the time for me to seek greater financial rewards in the interest of my family.”

In the cover story in the December/January issue of NACD Directorship, Chandler spoke of his legacy as chancellor. “To me, the most important case I have worked on is the one I’m working on right now. Whether it’s Disney or the dissolution of a failed start-up company—all of my cases are equally important. Some of the smaller disputes involving micro-cap companies frequently generate some of the most important principles and ideas in our jurisprudence. I will have to leave it to others to assess which cases define my legacy.”

Chandler’s resignation—described as a surprise by the Delaware News-Journal, which broke the story—creates a vacancy that will be filled.

According to the Delaware News-Journal, Chandler is being aggressively wooed by several top-tier international law firms. Among the contenders to succeed Chandler is Vice Chancellor Leo W.  Strine Jr., according to Charles Elson. The director of the University of Delaware’s Weinberg Center for Corporate Governance told Bloomberg that Strine, appointed in 1998, is now the court’s most senior judge. Any successor must be nominated by Markell, a Democrat, and approved by state legislators. Strine served as counsel to former Delaware Gov. Thomas R. Carper, who is now one of Delaware’s two senators.

Lord Peter Goldsmith

The Act is not going to go away. Of this Goldsmith is certain. Many business leaders both here in the U.S. and overseas have seen the delay in its release as an opportunity to lobby the government to change or scrap the rule. They fear its broad scope will significantly damage the ability of companies to do business and exposes directors and management to undue risks. “The legislation will not be changed,” he says. “That is not going to happen. It would take too long to do. The guidance is plainly in draft already—we know that.”

When will final guidance be released? Goldsmith expects the government to act this spring followed by a three- or four-month grace period. The delay is, in his eyes, understandable: “The legislation took a long time to build and certain elements, mainly the new provision making it a corporate offense to prevent bribery, were controversial. It was partially sold on the grounds that the government would provide adequate procedures and guidance but when they got into it the guidance was a lot tougher to write than anyone thought. So they are rightly taking their time with it.”

The focus of complaints from business leaders is that the rule is too broad. Unlike the Foreign Corrupt Practices Act (FCPA), which applies specifically to payments made to government officials, the U.K. Bribery Act applies to any individual or group and to almost any type of payment made to encourage someone to conduct business with a company.

The problem, according to opponents, is that there are many legitimate business payments and activities that could fall under the rule. When the rule first emerged, many companies completely ceased the practice of corporate hospitality. Is that a legitimate concern? While sensitive to the concern, Goldsmith does not believe so. He cites the example of a U.K. company that, in the natural course of doing business, brings a potential investor or partner to the U.K. to visit a production facility in the Midlands. The company provides airfare, lodging, food and other related expenses for the duration of the visit. “This would probably not be a problem,” he says. But if the company was to bring the entire family and put them up in a fancy, five-star, no-expenses-spared luxury London hotel, “Well, that will not work,” he says. The obvious problem is that there is so much in between. And, it is exactly this “in between” that managers are concerned about.

“I can understand the concern because the guidance is not there. What is being said is that reasonable and proportionate hospitality is fine but what does reasonable and proportionate mean? That is one of the big issues that the guidance has to deal with and I think it is going to be quite difficult for them [the U.K. government] to deal with it.”

Given the very real likelihood the official guidance will be at best vague on this issue, Goldsmith suggests some simple tests to apply to corporate entertaining expenses:

Be reasonable – would a reasonable person question the size or type of spending? Is it the sort of thing that your auditor will pass without raising an eyebrow? Is it something you could justify easily in public?

While companies are very worried about the potential impact of the Act, Goldsmith points out that perhaps the most important precaution for a company, and especially its board of directors, to mitigate the risk of falling afoul of new laws is to formalize a compliance program. “In short, it is about preparation,” he explains.

Richard Alderman, director of the U.K.’s Serious Fraud Office, has told companies that “if we can see a company that has thought about this and has produced a policy that is internally consistent and that they actually apply then we are very unlikely to criticize them for what they are doing.”

Goldsmith agrees: “Preparation of a robust compliance program is going to be the best defense against all of this”

This is good news for U.S.-based companies that are used to dealing with the FCPA as many of them already have robust compliance and fraud detection programs in place. That takes them a long way down the road to full compliance with the U.K. law. What might be even more important is that, unlike in the U.S. where a compliance plan is not a defense but may garner leniency at sentencing, the mere existence of a compliance program could well be an affirmative defense in the U.K.

Howard Goldstein

The NACD biannual General Counsel Advisory Board meeting, co-chaired by Fried Frank, offered an opportunity to preview the regulatory environment and provide recommendations for what should be on the working agenda of every public company director when meeting with general counsel. The consensus was that growing cooperation among enforcement agencies—including the Department of Justice, Securities and Exchange Commission and the Federal Bureau of Investigation, along with their regulatory and enforcement counterparts overseas— is likely to perpetuate the increase in enforcement and prosecution activity under both the FCPA and Britain’s soon-to-be implemented Bribery Act.

“At the end of the day, it’s all about prevention and how we are going to position ourselves within our respective organizations,” said Joseph Polizzotto, managing director and general counsel for the Americas at Deutsche Bank. “I would rather prevent the problems in the first place. This is a good moment in time for general counsel to be assertive.”

In addition to the onset of enforcement under the Bribery Act and stepped-up FCPA activity, at least two provisions of the Dodd-Frank Act are also likely to increase investigations, according to Fried Frank Partner William F. Johnson. The SEC is now studying whether broker-dealers should be subject to a federal fiduciary duty and has recently promulgated regulations that could provide sizable payments to whistleblowers in successful prosecutions. Johnson noted that “continued political pressure for investigations in capital markets will continue to ramp up the pace of investigations as shown by the recent uptick in cases related to subprime and CDO exposures.”

William Johnson

A regulatory provision that would allow money to be paid to individuals whose whistleblowing results in a successful prosecution is a purely American phenomenon. There are no such rewards for whistleblowing in the U.K., said James Kitching, who practices in Fried Frank’s London office, adding, “The emerging consensus is that the introduction of a reward would be seen as a retrograde step for the U.K.”

Howard W. Goldstein, a litigation partner at Fried Frank since 1990, was serving as an assistant U.S. attorney in the Southern District of New York when the FCPA was passed by Congress in 1977. For years, there was little if any enforcement, but two months before the close of 2010, there were some 40 FCPA-related cases pending.

Moreover, FCPA settlements continue to set records, and Goldstein predicts that cases “will continue to grow bigger and bigger.” Companies settling FCPArelated charges in 2010 paid a record $1.8 billion in financial penalties to the DOJ and SEC, according to the FCPA website. That compares with $641 million in 2009 and $890 million in 2008, the year of Siemens’ $800-million settlement, still the largest ever.

Referring to a recent FCPA case in which the company’s general counsel played a key role in investigating and preventing a fraud scheme, Johnson said that the GC’s actions could prove useful to others who might need help convincing their boards or CEOs that compliance programs should be improved or expanded: “The fact that the general counsel got some credit for stopping this scheme is something companies should want. It’s definitely something that makes both the company and the general counsel look good.”

Joseph Polizzotto

FCPA investigators could begin to use wiretaps, Goldstein said, given the predilection of the courts to allow conversations gleaned from professional eavesdropping into evidence as witnessed in the ongoing insider-trading case now underway against Galleon Group executives and employees.

Johnson, who worked at the SEC and was chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office for the Southern District of New York prior to joining Fried Frank in 2009, said that many banks have strong internal compliance programs, but that non-financial services companies also need to address this area too: “The SEC is under no obligation to alert a company if a problem arises, so companies need to be proactive about ensuring their compliance programs adhere to high standards.”

The assembled GCs were also advised to be aware of the Bevill Test, adopted by the Ninth Circuit Court in US v. Graf, which sought to clarify the standard on whether a corporate employee has a special privilege with inside counsel. “In-house counsel should clearly state to any employee that you represent the entity and not the individual,” Johnson said.

The outcome of the global Innospec case, settled for $40 million, was also significant because it raised questions about London’s Serious Fraud Office (SFO)—the independent government department that investigates and prosecutes complex cases of fraud and corruption—and its adoption of more American-style strategies such as plea bargaining, settlements and protection from prosecution. Multinational companies are also likely to place greater emphasis on achieving global settlements, though it is unclear to what extent that will be achievable in light of the decision of the U.K. Court in Innospec.

Goldstein anticipates a major shift once the Bribery Act goes into effect, with greater cross-border cooperation in the investigation and enforcement of corruption offenses. A striking example of this new cooperation, he pointed out, occurred last year when a sting operation at a conference in Las Vegas involving the FBI, DOJ and City of London Police resulted in the arrests of 22 executives on bribery charges under the FCPA.

The upper limit of sanctions for bribery offenses in the U.K. will also be much more severe than under the FCPA. In the United States, settlements are more common. Under the Bribery Act, Kitching points out, “Maximum penalties are ten years imprisonment and unlimited fines.”

Other penalties upon conviction can include disbarment from public procurement contracts and disqualification from acting as a company director. “Notably, the sentencing judge in the Innospec case observed that corruption is much more serious in terms of both culpability and harm in cartel-type offenses,” Kitching said, “where the level of fines imposed is now very substantial and measured in tens of million of pounds.”

Participants:
Matthew Biben – Chief Administrative Officer, Senior Vice President, General Counsel; Next Jump

Chris Clark – Publisher, NACD Directorship

Paul Golding – General Counsel, Citi Infrastructure Investors

Howard W. Goldstein- Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, New York

William F. Johnson – Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, New York

James Kitching – Litigation Partner, Fried, Frank, Harris, Shriver, and Jacobson, London

David Maryles – Director, Legal, BlackRock

Robert Masters – SVP, Chief Compliance Officer, Secretary, General Counsel; Acadia Realty Trust

Jason Ment – Chief Compliance Officer, General Counsel; StepStone

Joseph Polizzotto – Managing Director, General Counsel; Deutsche Bank

Scott Posner – Assistant General Counsel, Terex Corp.

Alexander Simpson – Vice President, Corporate Secretary, General Counsel; Reis

Will Terrill – Vice President, U.S. Flag Services, Intermarine, LLC

Judy Warner – Managing Editor, NACD Directorship and directorship.com

ADDITIONAL STORIES IN THE DIRECTOR’S GUIDE TO LIABILITY:
Risks Rising
Litigation 101: You’ve Been Sued. Now What?
The Ultimate Insurance Check List
Avoiding the “F” Word: How Your External Auditor Can Help You Avoid Fraud

Nose coverage: Claims-made liability policies typically include a retroactive date, and the policy will not cover claims arising from covered occurrences, acts, or omissions committed prior to that date. The period between the inception date and retroactive date. It gets its name from its attachment to the “front” of the policy term, as opposed to its “tail.”

Policyholder surplus: The difference between an insurer’s admitted assets and liabilities, i.e., its net worth. This figure is used in determining the insurer’s financial strength and capacity.

Reservation of rights: An insurer’s notification to an insured that coverage for a claim may not apply. Such notification allows an insurer to investigate (or even defend) a claim to determine if coverage applies (in whole or in part) without waiving its right to later deny coverage based on information revealed by the investigation. Although a reservation of rights protects an insurer’s interests, it also alerts an insured to the fact that some elements of a claim may not be covered, thereby allowing the insured to take necessary steps to protect its potentially uninsured interests.

Runoff: A provision in a reinsurance contract stating that the reinsurer remains liable for losses under reinsured policies in force on the termination date, that result from occurrences taking place after the termination date.

Severability of exclusions: A term stating that although an exclusion applies to one (or more) insured(s) under a policy, the exclusion does not necessarily apply, and therefore bar coverage, as respects other insureds. Assume that a directors & officers liability policy excluding coverage for fraudulent and criminal acts also contains a severability provision that applies to the policy’s exclusions. Under these circumstances, the fraudulent actions of one director would not bar coverage for other directors who were not a party to these fraudulent acts (that bar coverage for the director who committed them).

Several liability: Liability that may be assigned or apportioned separately to each of a number of liable parties. Distinguishable from, but often paired with, joint liability.

Side A coverage: The section of coverage under a directors and officers liability insurance policy affording “direct” coverage of an organization’s directors and officers. This portion of the policy provides direct indemnification to the directors and officers for acts that the corporate organization is not legally required to indemnify the directors and officers.

Side A ONLY coverage: A directors and offices liability policy that provides only “direct” coverage of the directors and officers, but does not cover the corporation’s legal obligation to indemnify the directors and officers. Side A-only forms are written on either an excess or umbrella basis over a primary D&O policy. When written on an excess basis, they provide additional limits if a claim exhausts the coverage available under the primary form. When written on an umbrella basis, Side A-only policies afford broader coverage than the underlying, primary D&O policy, as well as additional limits.

Side B coverage: Another term for what is known as the “Corporate Reimbursement Coverage” section of a directors and officers liability policy.

Side C coverage: Another term for what is known as the “Entity Securities Coverage” section of a directors and officers liability policy.

Tail: Claims from workers compensation and liability exposures in a given period can arise for many years thereafter. The aggregate of such incurred but not reported (IBNR) losses is often called tail liability.

Tail coverage: A claims-made liability policy covers claims made prior to the policy’s expiration or cancellation that arise from covered occurrences, acts, or omissions committed on or after their retroactive date, if any.

Source: International Risk Management Association (www.irmi.com)

In the recent Selectica v. Versata decision, the Court reiterated well established law upholding garden-variety poison pills and applied those concepts to a different type of pill that carries a low trigger threshold of 4.99 percent designed to protect a company’s tax net operating loss carry-forwards (NOLs).  Beyond upholding an increasingly popular adaptation of the traditional poison pill, the decision serves as a useful reminder of the issues that every director and advisor should consider in crafting corporate defenses.

In the current environment, anti-takeover protections have received renewed focus from all quarters, as target boards, concerned with depressed stock prices, confront opportunistic buyers, while, at the same time, shareholders and institutions increasingly emphasize good corporate governance and board accountability.  One such anti-takeover tool is the shareholder rights plan, or “poison pill”, which has seen a resurgence of sorts, with new pill adoptions expanding in 2008 for the first time since 2004-2005, according to Shark Repellent.

Poison pills are typically structured as rights issues that, once triggered, allow all stockholders (other than the triggering stockholder) to purchase shares at a dramatic discount to market (this is often called the “flip-in” feature).  The classic poison pill is designed to prevent a bidder from acquiring the corporation without the consent of the target board.  Usually, the rights are triggered by an acquisition of between 15 and 20 percent of the company’s outstanding stock, and, prior to that trigger point, the board retains substantial latitude to modify or eliminate the pill in the context of a friendly transaction.  In a hostile acquisition, an acquirer may always pursue a proxy fight or other route to take control of the board, and, once in that position, remove the pill in order to permit an acquisition to go forward.  When used appropriately, poison pills have generally been upheld by courts, including in Delaware.

As necessity is the mother of invention, some companies with significant tax net operating losses (NOLs) have turned to a pill with a low trigger threshold of 5 percent or less to protect those assets against any limitation on their use under Section 382 of the Internal Revenue Code.  Limitations are generally imposed if there is a more than 50 percent increase in the ownership of a company’s stock by 5 percent shareholders over a three-year period.  While still a minority of overall pill adoptions, instances of these so-called “NOL” or “382 pills” have increased from a mere 5 percent of all pills adopted in 2007 to 30 percent of all pills adopted in 2009, according to Shark Repellent.

Selectica was a company with significant NOLs.  While NOLs are an inherently contingent asset (because they have value only if the company has taxable income to offset), Selectica’s board received expert advice that it had NOLs of over $160 million.  The board engaged experts on several occasions to analyze the NOLs’ value and was acutely intent on avoiding impairment under Section 382.

Trilogy was a competitor with a contentious relationship with Selectica, marked by patent conflicts and unsuccessful attempts to acquire Selectica, that had begun making open market purchases of Selectica’s stock after its acquisition proposals were rejected. When Selectica realized that Trilogy had amassed 5 percent of its shares, the board again retained experts to analyze the likelihood of NOL impairment and was advised of a substantial risk.  Accordingly, the board lowered the trigger threshold for its existing poison pill from 15 percent to 4.99 percent, grandfathering existing 5 percent shareholders.  Further, the board took the additional step of creating an independent committee to review the pill periodically, including the trigger threshold, and determine whether it remained in shareholders’ best interests.

Despite the 4.99 percent threshold, Trilogy continued buying Selectica stock and intentionally triggered the pill.  After considering several options and consulting with its advisors, the Selectica board opted to employ a share exchange feature in the pill, rather than the more dilutive flip-in feature, and then “reloaded” the pill by issuing new rights.  As a result, Trilogy’s ownership was diluted from 6.7 percent to 3.3 percent; far less dilution than it might have suffered under the pill’s flip-in.  Selectica then filed a motion for declaratory judgment that the NOL pill and share exchange were valid, which Trilogy contested.

In upholding Selectica’s actions, the Court applied the analysis established by Unocal v. Mesa Petroleum and its progeny.  Under Unocal, a board’s defensive actions when facing a possible change in control are subject to enhanced scrutiny because of the “omnipresent specter” that the board may have acted in its own interests and not those of its shareholders.  To have the protection of the business judgment rule, a board must establish that it had “reasonable grounds for believing that a danger to corporate policy and effectiveness existed”, which necessarily include elements of good faith and reasonable investigation, and that its actions were reasonable in relation to the threat posed, and neither coercive nor preclusive.

While Selectica does not represent a significant departure from existing Delaware decisions, the Court, in its application of Unocal, provides at least two important reminders for boards of directors.  First, reasonableness must underlie board action, and perfection is not required.  Based upon extensive expert advice and analysis, the Court determined that the board reached a reasonable conclusion that Selectica’s NOLs represented a valuable corporate asset that was worthy of protection.  Having reached that conclusion, the Court held that a board’s response to a threat against those assets need only be proportionate, not the most narrowly or precisely tailored.

Second, key to establishing reasonableness is a record showing a considered and extensive process, strengthened by expert advice where appropriate.   At each step in the process, the Selectica board built a record that established a basis for ascribing value to the NOLs as a corporate asset, weighed the risk to that asset and showed a measured response to the perceived risk.  Among other things, the Court noted the board’s attempt to find alternative solutions to Trilogy’s triggering of its pill and its adoption of the more moderate share exchange rather than the flip-in.

Notwithstanding the foregoing, we do caution that the Unocal analysis is fact based.  In addition to the facts surrounding the Selectica board’s process and actions, the Court noted that the board was faced not with an amorphous threat of NOL impairment, but with the specific threat of a competitor who sought to use the shareholder franchise to impair corporate assets.  The Court cautioned against companies using NOLs as a “pretext” and warned that NOL pills will continue to be carefully reviewed.  Thus, whether the Court would invalidate an NOL pill or any pill for that matter under different circumstances remains an open question.

Matthew W. Abbott and Steven J. Williams are partners in the corporate department of Paul, Weiss, Rifkind, Wharton & Garrison LLP.  Frances Mi, counsel in the corporate department of the firm, also contributed to the preparation of this article.

What is the risk?
The risk stems from the increasing willingness of the United States Department of Justice (DOJ) to prosecute senior officers and directors for civil and criminal violations under what is known as the Responsible Corporate Officer Doctrine (RCOD).  While it has always been the case that individuals who actively and intentionally participate in criminal activity have the potential to be prosecuted for their actions, law enforcers are now delving even deeper into the boardroom to apply heavy retrospective scrutiny to board members.  Their goal is to determine whether individual board members carried out their oversight responsibilities in a way that could have prevented allegedly illegal acts from occurring in the first place.

The RCOD enables prosecutors to attempt to hold a corporate officer or director vicariously liable for the criminal violation of a subordinate employee of the company under the following conditions (1) the officer occupies a position of responsibility and authority in the corporation, (2) has the power to prevent the violation, and (3) fails to do so.  The RCOD dramatically raises the stakes for directors, in particular, who may view themselves as far removed from the every day operations of the company.  Under the RCOD, senior officers and directors can be found liable for the illegal acts of other corporate agents, without proof that the officer or director directly participated in or authorized the act.

Nor is this personal risk only theoretical as recently demonstrated by the DOJ.  In January 2010, the DOJ announced an unprecedented issuance of indictments and arrests of senior corporate executives from several companies who allegedly engaged in activities prohibited under the Foreign Corrupt Practices Act (FCPA).  After a lengthy undercover operation spearheaded by the Federal Bureau of Investigation, the DOJ disclosed the following in its press release touting the results of its investigative efforts:

“Twenty-two executives and employees of companies in the military and law enforcement products industry have been indicted for engaging in schemes to bribe foreign government officials to obtain and retain business…The indictments stem from an FB undercover operation that focused on allegations of foreign bribery in the military and law enforcement products industry.

The 16 indictments unsealed today represent the largest single investigation and prosecution against individuals in the history of DOJ’s enforcement of the Foreign Corrupt Practices Act (FCPA), a law that prohibits U.S. persons and companies, and foreign persons and companies acting in the United States, from bribing foreign government officials for the purpose of obtaining or retaining business. The indictments unsealed today were returned on Dec. 11, 2009, by a grand jury in Washington, D.C.

In connection with these indictments, approximately 150 FBI agents executed 14 search warrants in locations across the country, including Bull Shoals, Ark.; San Francisco; Miami; Ponte Vedra Beach, Fla.; Sarasota, Fla.; St. Petersburg, Fla.; Sunrise, Fla.; University Park, Fla.; Decatur, Ga.; Stearns, Ky.; Upper Darby, Penn.; and Woodbridge, Va. Additionally, the United Kingdom’s City of London Police executed seven search warrants in connection with their own  investigations into companies involved in the foreign bribery conduct that formed the basis for the indictments.”

The indicted included directors, chief executive officers, senior vice presidents, and managing partners of various companies engaged in the manufacture and sale of military and law enforcement equipment.

According to a series of public comments made by DOJ officials last fall, the DOJ is now applying RCOD theories in civil and criminal anti-fraud enforcement actions across other industries, including the medical device and pharmaceutical manufacturing industries.  Given the federal government’s HEAT initiative and its strong focus on health care fraud and abuse, the DOJ, the Food and Drug Administration, and the Department of Health and Human Services Office of Inspector General may well be inclined to assert the RCOD against the officers and directors of health systems and other health care providers in circumstances involving allegations of substandard care or other False Claims Act scenarios.

The roots of the RCOD can be traced to two U.S. Supreme Court cases:  U.S. v. Dotterweich (1943), and U.S. v. Park (1975).  The RCOD has traditionally been applied in cases involving “public welfare” laws, e.g., food and drug, environmental and, significantly, securities laws.  Indeed, both the Securities Act of 1933 and the Securities Exchange Act of 1934 provide liability on the part of a “person who controls” a violator of the securities laws.  Of course, the Securities and Exchange Commission and the DOJ work closely together on matters that involve corporate fraud, such as that prohibited by the FCPA, and other securities-related violations.

The prosecutions associated with U.S. v. Norian Corp. are a prominent example of the DOJ utilizing the RCOD in the health care context.  In the Norian Corp matter, four corporate officers were indicted under the RCOD based on their involvement in conducting unauthorized clinical trials of a bone cement-oriented medical device for medical indications that were not approved by the FDA also known as “Off Label.”  In July, 2009 two of these executive officers pleaded guilty to a single misdemeanor charge for their involvement in these unauthorized clinical trials of medical devices.  As part of their guilty pleas, the executives stipulated that they were “responsible corporate officers” at the time the disputed clinical trials occurred.

Under egregious circumstances, the DOJ may exercise its prosecutorial discretion to pursue individual directors based on their action or inaction depending on the individual director’s role, on what committee’s the director served, and attendance or lack thereof at key board meetings. In certain regulated industries, officers and directors are obligated to certify the company’s compliance with critical regulatory obligations.  These certifications, of course, create a statutory “paper trail” that can lead directly back to the certifying director if it later turns out that the company was not in compliance with the necessary regulatory standards.  This use of the RCOD arises at the same time that the Delaware Chancery court and other courts are experiencing an increase in litigation asserting breach of fiduciary duty causes of action against corporate officers and directors–including officers who are not board members (e.g., the Supreme Court of the state of Delaware in Gantler v. Stephens reversed the Chancery Court’s dismissal of a shareholder complaint alleging conflict of interest and breach of fiduciary duty).  While much of this litigation has been prompted by the current political and economic environment, a director’s perceived lack of attention to his or her oversight duties can make him or her a target of both an RCOD criminal prosecution or civil breach of fiduciary duty claims.

What to do?
The re-emergence of the RCOD and the associated increase in the risk in personal liability should prompt directors to examine closely their own mode of operating as a board member.  We recommend that directors take a more active posture in educating themselves about law enforcement and regulatory initiatives that focus on their particular industry or company so that they will be in a better position to understand whether the company’s senior management is allocating sufficient resources to corporate compliance initiatives.  Board members should focus on how their overall board and board committee roles, such as the audit or compensation committees, create specific oversight responsibilities over key company functions that depend on robust regulatory compliance.

In particular, directors should be motivated to recognize specific “high regulatory compliance risk” situations so that they can evaluate the extent to which they are in a position to influence the actions of corporate subordinates to head off potentially illegal corporate activities.  Where there is a direct nexus, such as when dealing with foreign governments, U.S. government contracts, or U.S. regulatory limitations on product development or marketing activities to the public, directors should advocate that key employees receive proper regulatory compliance education, have their actions closely monitored in “real time” by the legal and compliance departments, and seek and receive executive and legal approval before moving forward.

These compliance initiatives often require the allocation of corporate resources to what are perceived as non-revenue creating activities.  The reality is, however, that many of these initiatives are critical to the development of an economically sustainable business model for the company and, consequently, a more consistently pleasant and rewarding experience for board members. and other measures intended to prevent lower level managers who report to them from engaging in noncompliant behavior.  The likelihood of success in preventing episodes that threaten the existence of the company and pose personal liability to directors is enhanced by insuring that senior management has enabled its employees to have access to regular compliance education and training from qualified internal resources and, where necessary, from the most qualified outside advisors.

T. Reed Stephens is a partner in the Washington, D.C. office of McDermott Will & Emery. He was a Department of Justice trial attorney from 1995 to 2003. Michael Peregrine is a partner with McDermott Will & Emery in the firm’s Chicago office.

On February 23, 2010, in Hertz Corporation v. Friend, the Supreme Court resolved that disagreement, ruling that “principal place of business” means “the place where the corporation’s high-level officers direct, control and coordinate the corporation’s activities,” commonly referred to as the corporation’s “nerve center.”

Background
Hertz operates its rental-car facilities in more than 40 states, with California accounting for the largest percentage of transactions as compared to other states. However, most of Hertz’s executive and administrative functions occur in its corporate headquarters located in New Jersey.

California plaintiffs brought a class action lawsuit in California state court, accusing Hertz of failing to pay overtime to location and branch managers. Hertz removed the case to federal court, claiming it was not a citizen of California, as it was incorporated in Delaware and had its principal place of business in New Jersey. The plaintiffs moved to remand the case back to the California state court, claiming the federal court lacked diversity jurisdiction because (they asserted) Hertz’s principal place of business was California, the state in which Hertz did the most business.

The federal district court in California agreed with the plaintiffs and remanded the case. Hertz took an appeal, which it was entitled to do under the Class Action Fairness Act, but the Ninth Circuit affirmed. The Ninth Circuit held that to determine a corporation’s “principal place of business,” a court must first determine the amount of business the corporation does in each state. If the amount is “significantly larger” or “substantially predominates” in one state, then that state is the principal place of business. If no such state exists, then the corporation’s “nerve center” is the principal place of business. Under this framework, the lower courts determined that Hertz’s principal place of business was California, rather than New Jersey.

The Supreme Court’s Decision
The Supreme Court rejected the Ninth Circuit’s framework.  After analyzing the legislative history, the various tests used by other courts, and other considerations, the Court held that considering the “nerve center” to be the principal place of business was the best option and would best achieve consistency. The Court concluded that this test is relatively easy to apply and does not require courts to weigh corporate functions, assets or revenues. The Court cautioned that should the record reveal attempts at jurisdictional manipulation—such as the “nerve center” being nothing more than a mailbox, a bare office, or the location of the annual executive retreat—the courts should consider the “nerve center” the place of actual direction, control, and coordination of the corporation’s business.

What Hertz Means for Employers
Plaintiffs often sue in state court, while defendant employers usually prefer federal court. The Court’s decision clarifies the test for determining the “citizenship” of corporations so that defendants now can more confidently determine whether the case can be removed to federal court.  Now, if an employer is sued in a state other than its state of incorporation or the location of its “nerve center,” the Hertz decision makes federal court a viable option, even if the employer does a substantial amount of business in the state where the lawsuit was filed (provided that no other defendant is a forum-state citizen and that the amount in controversy exceeds $75,000 in controversy or $5 million for a class action).

Marc Jacobs is a partner at Seyfarth Shaw resident in its Chicago office where he specializes in labor and employment law. This article was adapted from a recent Seyfarth Shaw client alert.

David Kistenbroker responded, citing the Galleon Capital case in which 21 people are accused by the Securities and Exchange Commission of making tens of millions of dollars in illegal profits by trading on nonpublic information. “Wiretaps are pretty tough—everyone is presumed innocent until proven guilty,” said Kistenbroker, noting that Galleon “is going to be broader than what we know of today.”

“I’ve seen the situation where the hedge fund is playing both sides of the aisle—the hedge fund is in on the debt side, helping capitalize and finance the company—and the guy down the hall is placed on the equity side—and they might have coffee or water- cooler talk,” said Kistenbroker as heads in the audience nodded in agreement. “It’s a danger for boards today and you may very well find yourselves calling for internal investigations.”

“All of us have gotten used to being very cautious of what is put in email,” added Stephanie Goldstein. She emphasized the need for corporate executives to utilize this “wake-up call,” reminding directors that anyone privy to non-public information should exercise caution.

“At what point do executive officers need to lawyer up?” asked Coffee. Lorie Almon emphasized the need to be proactive instead of waiting for the government to question a firm’s practices. “Resting on what used to work in the past is probably a very dangerous approach…forward thinking is the best approach a director can take right now.”

To that point, Almon pointed to a disturbing new trend of private plaintiff firms adding individuals to lawsuits in addition to corporations. “I do think there’s a trend, if not in the government, for private plaintiff firms to try to add directors—often you see motions to dismiss, but what we will have left is the ERISA case, the claims by stockholders that they no longer have the value they used to have and they want you [directors] in their lawsuits,” noted Almon.

“Stay informed, ask questions…what is in the pipeline and what the potential hazards [might be],” urged Goldstein.