The transition from the Sarbanes-Oxley era to the age of Dodd- Frank has ushered in yet another massive expansion of director roles and responsibilities. Today, directors need to be engaged in the full gamut of issues that affect corporate reputation and, ultimately, shareholder value. New regulations dramatically escalate personal liability and introduce exposures that boards must be prepared to successfully protect.
To help directors fulfill their fiduciary and reputational obligations, eight leading attorneys offer perspectives on issues ranging from M&As and IPOs to data loss and theft. These attorney interviews provide insight and tips on how companies and directors can best communicate their steadfast commitment to compliance, value and responsible oversight. To that end, our own suggestions for best communications practices are appended to each interview. Additionally, William D. Anderson, a managing partner in Goldman Sachs’ M&A Group, explains what qualities make for a great director.
Civil and Criminal Litigation & Investigations
White & Case
Little is a trial lawyer who counsels clients on successfully avoiding, resolving and winning litigation. He has broad commercial litigation experience, with an emphasis on SEC enforcement actions, securities litigation, and product liability. In addition to leading high-stakes corporate litigation strategy and serving as national coordinating counsel for Fortune 10 companies, Little has been lead trial counsel in over 45 trials in state and federal courts nationwide.
How is the implementation of Dodd-Frank most dramatically affecting director liability?
There are many provisions in Dodd-Frank that impact director liability. The provision that has the most potential impact is the SEC whistleblower bounty program. This program authorizes the SEC to pay monetary awards to whistleblowers who provide information that relates to violation of the federal securities laws and results in sanctions exceeding $1 million. The monetary awards are significant and can range from ten to 30 percent of the total amount of sanctions recovered. The whistleblower bounty program has been described by the SEC as a “game changer.” That description could prove to be an understatement. At its peak, the SEC has announced it was receiving 7-9 tips per day. That number likely will increase dramatically once payments have actually been made and publicized.
What do directors need to know about SEC enforcement trends?
There are several trends that stand out in the area of SEC enforcement that could directly impact directors. In the past several years, the SEC has been involved in a number of high-profile insider trading cases. Many of the allegations involved evidence of directors of public companies providing material nonpublic information to friends and business associates. Insider trading cases, of course, have been around for years. However, recent cases have demonstrated that the SEC is working more closely with the Department of Justice and taking full advantage of the DOJ’s ability to bring criminal actions and seek enhanced investigatory powers like wiretaps and informants.
At the other end of the spectrum, the SEC has also announced a willingness to pursue civil cases in which defendants are accused of negligence only. Traditionally, the SEC pursued individuals engaged in intentional misconduct leading to investor losses. By pursuing negligence-based claims, the SEC will increase the number of potential targets to include those who had no intent to deceive investors but simply did not act in a reasonable manner. If a business decision results in significant shareholder loss, there may be a tendency to view all actions and disclosures surrounding that decision as unreasonable. The bottom line is the SEC will potentially be bringing more claims with a significantly reduced burden of proof. This new focus will reinforce the need for robust compliance programs.
How can boards best serve a company in the midst of a civil or criminal investigation?
In most investigations, there are three distinct phases that require three distinct approaches. In the beginning stages of the investigation, every effort should be made to demonstrate to investigators that the company intends to be part of the solution – not part of the problem. Whether it is the SEC, the DOJ, or a state attorney general, regulators and prosecutors are very quick to make a determination as to whether your company is truly committed to solving a perceived problem or perpetuating it.
If the investigation proceeds to the second stage where the regulators and/or prosecutors believe a problem exists, the company should make an objective assessment as to whether that is the case and, if so, demonstrate why that problem is an aberration in an otherwise strong compliance program. If the board concludes that the regulators and/or prosecutors are wrong about whether the problem exists, the company should work closely with them to explain why the conclusion is erroneous.
Finally, if the regulators/prosecutors are apparently committed to moving forward with an enforcement action, the company must be prepared to show it is committed to winning in court. Even if the company ultimately decides to resolve the dispute, the willingness and ability to pose a vigorous defense will enhance the negotiating posture of the company.
Best Communications Practices:
1. New whistleblower rules have changed the game. Boards must ensure that all employees know every channel by which they can report compliance issues internally, before they turn to the government.
2. Companies are naturally reticent to communicate aggressively on compliance. But the more they do, the more they condition the marketplace, investors and regulators to give them the benefit of the doubt should trouble arise.
3. When it becomes clear that an investigation will result in charges, boards must ensure that companies articulate their willingness to aggressively defend against dubious allegations. At the very least, they strengthen their position at the bargaining table by doing so.
Schulte Roth & Zabel
Weingarten, a partner in the New York office of Schulte Roth & Zabel, is chair of the Business Transactions Group and a member of the Investment Management Group. His practice focuses on mergers & acquisitions, leveraged buyouts, corporate governance, securities law and investment partnerships.
Who are the activists and what do they want?
There are two worlds of activists operating in the corporate sector. The first are issue activists – mostly pension funds, academics, and other special interest groups. The pension funds and academics generally are interested in corporate governance issues, such as say-on-pay, proxy access, de-staggering boards, shareholder rights to call special meetings, and redeeming poison pills. The special interest groups tend to focus more on social responsibility issues, such as board diversity and socially responsible investment.
The more intimidating side of the coin is financial activism – generally carried out by hedge funds and others that push companies to “maximize” shareholder value. Their actions typically are targeted at the balance sheet, and look to stock buybacks or dividends, sale of the company, spin-off or sale of lines of business, and leveraged recaps. Fewer financial activists, but some of the largest, focus more on the income statement side, looking to improve operations, increase revenue, and reduce expenses. This sometimes includes pressing for board representation via a proxy fight.
What are the reasons behind increased incidents of shareholder activism?
The principal reason is the increased willingness of major shareholders, both institutional investors and pension funds, to support activists. Historically, they simply “voted with their feet” and sold out. But they’ve become so big that now they really own the market, and rather than selling and having to look to reinvest somewhere else, they join the activists in pressing for improvements.
When markets are down, investors are unhappy and will turn to activists for help. Several of the most successful financial activists now have several billion dollars in assets, and can target even the largest-cap companies. Given activists’ success rate in recent years, many more hedge funds that are not typically “activist” are now trying out the strategy on their poor-performing positions.
What are some of the most common mistakes that boards make when faced with pressure from activist investors?
The most common mistake is for a board to refuse to give the activist a hearing. It’s fine to evaluate your defenses, but stiff-arming or fighting the activist from the start and refusing to engage is generally not well-received by the other stockholders.
Another common mistake is to attack the activist as merely a short-term opportunist looking for a quick pop in the stock price at the expense of long-term value creation. Shareholders will be happy to take any gains they can get, even if short-term. As such, a company under attack needs to put itself in the mindset of its shareholders and come up with responses that explain prior performance and realistically support a more promising future.
To avoid becoming targets in the first place, boards should regularly evaluate their strategic alternatives. No idea that a financial activist proposes should come as a surprise. The board should already have considered and rejected it, and be fully prepared to justify the decision. It should also have a strategic plan that has been thoughtfully vetted and challenged; not just perfunctorily accepted as dictated by management.
Best Communications Practices:
1. In the age of transparency, boards need to direct their investor relations and communications team to focus on more than just the analysts. The democratization of the market is underway, investors are newly empowered, and companies need to think differently about how they engage potential activist threats.
2. Don’t let the shuttering of Moxy Vote fool you—the activists are online, and they use the Web to drum up support. Boards need to direct their teams to better understand how WikiInvest, Seeking Alpha, and other social and digital media have an impact on their value.
3. Companies that clearly and consistently articulate their value force activists to swim upstream against the dominant perception. There is no peacetime. Boards need to know what is being said about them beyond just their marketplace and ensure that companies communicate value aggressively, whether activists are currently looming or not.
Bankruptcy & Restructuring
Nurnberg is a partner in Kaye Scholer’s bankruptcy & restructuring group and managing partner of the firm’s Chicago office. He represents troubled companies in restructurings throughout the U.S. He also advises lenders, funds, institutional investors, and private equity sponsors on restructuring matters.
How has the bankruptcy and restructuring landscape changed in the wake of the global financial crisis?
Europe is still very much in the midst of a financial crisis and the effects are multifaceted. Notably, we have seen an increase in the number of cross-border insolvency cases, which is a trend we fully expect to continue. In particular, there has been a rise in cases filed under Chapter 15 of the Bankruptcy Code, which provides a framework for multinational companies to have foreign insolvency proceedings recognized in the U.S. The laws governing these cases are still being developed, and courts are struggling with how much weight to give foreign insolvency laws when they conflict with U.S. law.
We have also witnessed growth in the number of foreign companies looking to file under Chapter 11 of the Bankruptcy Code. The rules on eligibility for a foreign company to file bankruptcy here are lenient, and our bankruptcy laws are biased towards rehabilitating a troubled company to preserve its “going concern” value — as opposed to most foreign insolvency regimes, where the focus is on liquidating a troubled company’s assets quickly and distributing the proceeds to creditors.
How can directors best serve a company during bankruptcy or restructuring?
A board will want practical outside advice early in the process on how to fulfill its fiduciary duties, and how those duties may change when the company is insolvent or approaches insolvency. The board will want to maintain a proper supervisory role and not exercise undue influence over day-to-day operations. Prior to filing bankruptcy, the board and its advisors should also assess the adequacy of the D&O insurance policies. Also, directors should be alerted to the discrete areas where they could potentially be liable personally for the bankrupt company’s debts. Every case is different, but these pitfalls can include personal liability for “responsible persons” when a company fails to pay wages or segregate certain taxes, or for knowingly permitting the company to incur debts beyond its ability to pay.
Once a company files bankruptcy, the board should appreciate that the decision-making process becomes much more transparent. In general, the company can operate as usual but will need prior court approval for “non-ordinary course” transactions such as sales, financings and the like. A question that frequently gets asked is whether a director should resign once the company files bankruptcy — there are exceptions but in most cases, the answer is “no,” the director is better off staying on the board and guiding the company to conclusion of the bankruptcy process.
What can a company do to position itself for post-bankruptcy operations?
The company should determine its exit strategy before it files bankruptcy wherever possible, and view the process as an opportunity to fix both financial and operational problems. Get as much negotiated in advance of filing as possible. There has been an increase in the number of “prepackaged” or “pre-negotiated” cases in recent years and we see that trend continuing. Filing with an exit plan already negotiated enables the company to shorten the time it spends in bankruptcy, maintain control over the process and reduce restructuring costs.
Another piece of practical advice is for the company to get the right managers and financial advisors in place, and develop a plan to “right-size” the employees, before it files bankruptcy. The benefits of getting this done before filing can include greater flexibility in developing an incentive bonus plan for the company and avoiding potential liability for premature layoffs.
Lastly, the board needs to stay focused on the business plan during the bankruptcy. While external factors may have contributed to the need to file, larger underlying problems with the business model or the balance sheet likely drove the decision. Those issues need to be resolved for the company to emerge as a viable business and, while bankruptcy can be a powerful tool, it is not a panacea for the problems that led the company to file bankruptcy in the first place.
Best Communications Practices:
1. Boards must ensure that exit strategies and future growth are the hallmarks of communications during bankruptcy, beginning with the initial announcement. When companies control the “new day” narrative, internally and externally, they keep stakeholders focused on future success, not past mistakes.
2. Every ruling, decision, and development in the restructuring process is an opportunity to communicate the new day message. Adversaries will use these milestones to disseminate their own messages. Don’t let them operate in a vacuum.
3. Boards must understand the power of social and digital media to disclose. Teams need to be ready to respond publicly from the very moment a company begins to seriously consider restructuring—in other words, go on the offense so you don’t have to play defense.
Mergers & Acquisitions
White & Case
Wynne represents principals in major corporate transactions and financings, mergers and acquisitions, international corporate debt restructurings, and public and private securities offerings. As lead counsel for principals in mergers and acquisitions transactions, Mr. Wynne is involved in all aspects of structuring, negotiating, and documenting deals.
How can boards best serve a company seeking to make itself attractive to potential buyers?
The fastest way to derail a sale process is to have a compliance problem “discovered” in the course of a buyer’s due diligence. Given the ever-increasing size of the penalties being extracted by governments, even routine compliance issues take on a disproportionate dimension. A board contemplating a sale process is well advised to update its compliance review and have well-prepared answers to any questions that may be uncovered.
What steps can boards take to convince shareholders that they got the best deal in the wake of a major transaction?
The board must be seen to have asserted itself to control the transaction process. If the board is seen to have been reactive, activist shareholders are more likely to question and challenge the transaction. Shareholders, and indeed the general public, are questioning management’s motives more aggressively. There is also growing malaise about corporate governance. Again, it is imperative that the board be seen to take charge. That means forming a committee of independent directors; participating in the retention of financial and legal advisors; and requiring periodic updates on the transaction process.
What should boards do to effectively prepare for inadequate hostile takeover bids?
Boards should periodically review their companies’ structural defenses to an unsolicited offer: a staggered board, ability of shareholders to act by written consent, poison pills, etc. Just as important, however, is being comfortable with the transaction process and not panicking upon receipt of a hostile offer. A team of advisors that has the board’s confidence should be immediately available. This team should not just include bankers and lawyers, but public relations professionals and proxy solicitors as well.
Boards should also review what similar companies in their space have done in response to hostile transactions. This will let directors know what to expect and allow them to learn from their competitors’ successful tactics and missteps.
Finally, maintaining good relationships with major shareholders is always good business; but it pays particular dividends once a hostile offer is made. A shareholder who is familiar with management’s strategy and aware of the board’s involvement in setting that strategy will be much more receptive and supportive than the shareholder who only hears from the board once the hostile offer has arrived.
What’s next with regard to M&A law? Are there issues or opportunities on the horizon of which all public companies need to be aware?
Merger-related litigation has reached epic proportions. In 2007, 53 percent of mergers valued at $500 million or greater attracted litigation. In 2011, 96 percent of those deals attracted litigation. The reality is that parties to a merger will get sued and need to be prepared.
Process is paramount. Boards should hold meetings to discuss and decide all material issues, and careful minutes should be taken. Courts will hesitate to overturn board decisions if there is a solid record. In particular, boards need to be acutely aware of conflicts of interest, and should record deliberations over the pros and cons of each potential conflict in the context of how the proposed relationship will bring value to the shareholders in spite of the conflict. Without evidence that the board has considered such conflicts, exposure to shareholder litigation increases significantly.
Best Communications Practices:
1. Boards need to ensure that every employee understands the confidential nature of M&A transactions – and that they know what can and cannot be said, especially in the social media (and then be certain aggressive monitoring is in place to detect even a hint of a leak).
2. Boards that are seen as in control of the transaction process are best positioned to deflect criticism and defend against the inevitable litigation.
3. Directors that demand strong investor relations in peacetime will build a trust bank among stakeholders that will serve the company well, especially if a hostile offer is made.
Initial Public Offerings
Lynch is a partner in Weil Gotshal’s Capital Markets practice. He focuses on the representation of companies, particularly technology, healthcare, financial services, and other growth enterprises, as well as leading investment banks and private equity firms. He has extensive experience in equity capital markets transactions, with a particular focus on initial public offerings. He also advises boards on securities and corporate governance matters.
What is to be learned from the less than stellar IPOs issued by Groupon and Facebook in recent months? What are the lessons for companies outside the technology sector?
The primary lessons from the Groupon and Facebook IPOs are not only applicable to technology companies but are applicable to all companies looking to complete an IPO.
First, listen to your advisors. IPO companies should retain advisors who are experienced in the IPO process and can help it avoid the many pitfalls. One of the most common pitfalls is gun-jumping or marketing the IPO outside of the typical registration process. Gun-jumping can delay your offering, result in liability, and produce bad press during the roadshow. Many of the gun-jumping issues in the Groupon IPO could have been avoided if the standard advice regarding publicity had been followed.
Second, when setting the valuation of the IPO, leave some room for the stock to appreciate and be mindful of who is being allocated stock. Facebook priced its IPO at a rich valuation and increased the number of shares sold in the offering. IPO companies need to balance between trying to maximize the price and the size of the offering and selecting the right type of IPO investors and letting those new investors enjoy some success. A rich valuation and large deal size can reduce the demand for the stock in the market after an IPO. In addition, allocating IPO shares to hedge funds and individual investors rather than long-only mutual funds can result in increased selling pressure if things don’t go well. Remember, an IPO is not the last time to the market.
What are the responsibilities of boards of directors in the IPO process?
Directors have a number of unique responsibilities in the IPO process. First and foremost, directors have personal liability for material misstatements and omissions in the registration statement and prospectus. Directors also personally sign the registration statement. As a result, it is critical for directors to give themselves the time necessary to read and review the registration statement carefully in advance of the initial filing and throughout the process. They should then compare the disclosure to what they know about the business and alert the IPO company’s advisors of any disclosure issues.
Second, focus on accounting issues. Is the IPO company ready to report on a quarterly basis? Can it produce financial statements on a timely basis? Are there any accounting policies that need to be reconsidered? Do you have any material weaknesses or significant deficiencies? If so, how are they being remediated and will they be remediated in advance of the IPO?
And third, make sure the IPO company is ready to be public by asking the tough questions. Do you have the right management team in place? Why is the IPO company going public? Is the business model mature enough to withstand investor scrutiny? If you don’t have the right answers to these questions, the IPO company is likely not ready to be public.
How should boards of directors prepare themselves for the transition from private to public ownership?
Remember, IPOs are the beginning, not the end. An IPO will not be the last time the IPO company accesses the market. Preparation for life as a public company is critical for success. Also, a well-executed IPO provides a substantial amount of goodwill and positive publicity, while a poorly executed IPO can damage the company’s reputation for a long time. Accordingly, preparation by the board is critical.
Be honest in your assessment of the IPO company’s readiness to be a public company. Make sure you have the right management team in place. Confirm that you have the right accountants and attorneys. Assess the challenges faced by the IPO company and ensure that they are manageable. Make any necessary changes to the business, management or advisors before the IPO process to avoid having to make these changes during the IPO when public scrutiny is most intense.
In connection with considering an IPO, I advise boards and management teams to act like they run a public company before being public.
Best Communications Practices:
1. The price at which you set your IPO communicates a lot about your value proposition. What happens to that price after the offering communicates even more. Boards need to maintain investor confidence by allowing room for the share price to grow.
2. The IPO is the beginning, not the end. It is not only a financial event, but also a corporate branding opportunity. Boards need to ensure that newly public companies communicate their value just as aggressively post-IPO as they do in the critical months leading up to it.
3. Boards need to be ready for circumstances in which high IPO trading volume creates glitches in the system that cost investors’ money and has a negative impact on trust in the system. Companies need to be ready with statements that can forestall chaos and confusion under all anticipated contingencies.
Data Loss & Theft
Kobus is national co-leader of the privacy, security and social media team at Baker Hostetler. He focuses his practice in the areas of privacy, data breaches, social media and intellectual property, and advises clients, trade groups, and organizations regarding data security and privacy risk management.
What are the most common mistakes companies make in data loss situations?
Too many companies fail to understand that data security events are not your typical legal problem. While complying with legal requirements is critical, companies cannot forget the impact these events have on employees, customers, the public, and regulators. Appropriately protecting the people affected by the incident will protect the brand and the company’s most valued relationships.
Second, too many companies see data security as an IT issue rather than a C-Suite and board issue. Customers and regulators expect that the C-Suite will be involved in not only responding to these events, but helping to prevent them through education, a culture of compliance, and adherence to strict policies and procedures. The companies that are most successful in preventing data loss are those that condition the corporate culture by setting the right “tone at the top.”
And third, companies fail to understand that messaging is more important than the speed of notification. There are several laws that require notification within a certain time frame. At the same time, people who are impacted by a data security event expect that notification will take place immediately. Unfortunately, notification typically cannot, and should not, be made just to get the notice out the door. If a company isn’t ready to provide answers as to what happened, how it happened, what’s being done to protect impacted parties, and what’s being done to prevent future breaches, then it isn’t ready to notify its stakeholders.
How can boards best serve a company that is embroiled in a data loss situation?
The most important thing to remember is that each incident presents a different set of circumstances. As such, the board has to rely on the company’s incident response team, which hopefully knows the facts better than anyone. Directors should start to worry if they sense panic or disorganization. Some questions to ask of the team include:
- Is there any insurance to help offset the costs of the breach response? If not, how much is it going to cost the organization to respond?
- Is this event so large that our employees will be concerned? If so, what resources will be made available to answer their questions?
- Is a media release being issued? If so, is the timing of the call center establishment, website posting, notification letter mailing, and notice to any regulators all coordinated?
- Is the notification letter easy to read? Does it clearly explain what happened and what the organization is doing to help protect the affected parties?
- Have you considered where all of the affected people reside and have you complied with all state and local laws?
What’s next on the data loss landscape?
Notification laws will continue to evolve. Perhaps we will even see a federal breach notification law. However, the trend we see most is that the regulators, and particularly the attorneys general, increasingly want to know when these events occur and how organizations are responding.
Moreover, regulators are asking for information beyond what policies and procedures and education programs are in place. They are seeking information about whether the company has recognized its risks – and the evolution of those risks – through appropriate updating of policies, procedures, and data security technology.
Best Communications Practices:
1. Boards must understand that stakeholders want answers in data breach situations. If the company isn’t prepared to answer all of the questions, then it isn’t ready to disclose the breach publicly.
2. Data loss is a topic that thrives in the tech-savvy digital media. That means boards must ensure that any response strategy emphasizes bloggers and social media to truly control the narrative.
3. Boards need to understand that state and federal notification laws are subject to constant change. Just because the company was ready to communicate about yesterday’s breach doesn’t mean it is prepared to do so tomorrow.
Labor & Employment Issues
Weber is leader of Pillsbury’s Employment & Labor practice. She focuses on complex employment litigation, supplemented by compliance advice and counseling on employment issues for large institutional employers and smaller companies. She has trial experience in state and federal court, including being lead counsel for a wage and hour class action trial and trials in defamation, breach of contract, sex discrimination, race discrimination, and termination in violation of public policy cases.
What is your take on the Supreme Decision in Dukes v. Walmart? Was it the game changer that some attorneys believe it to be?
Not really. SCOTUS’s decision in Dukes brought the law back to where most of us thought it was before the Ninth Circuit’s decision made it easier to certify class actions by allowing certification of what was essentially a damages action under the certification standards applicable for cases primarily involving injunctive relief. Thus, the biggest impact of SCOTUS’s reversal of the Ninth Circuit is that judges will be more cautious when certifying future class actions – for the simple fact that Dukes lays the groundwork for the decision to be more easily overturned.
If you’re looking for a real game-changer, AT&T v. Concepcion is the more likely case. There, the Supreme Court struck down a law that invalidated mandatory arbitration agreements with class action waivers in commercial litigation cases. Given that the same theories apply, many the labor and employment practitioners saw that ruling as an affirmation of the legality of class action waivers that mandate employees resolve grievances through individual arbitration. A subsequent NLRB [National Labor Relations Board] decision refuted that view by ruling that mandatory pre-dispute arbitration constitutes an unfair labor practice under the National Labor Relations Act.
That matter remains unsettled, with some courts refusing to follow the NLRB’s ruling. Depending upon how it plays out, we could see far fewer labor and employment class actions in the future as employers adopt arbitration agreements with class action waivers.
How should boards deal with a discrimination scandal or union battle at their companies?
Once litigation or some other form of labor unrest arises, the board has a specific oversight role to ensure that management has the proper legal counsel and that the costs and risks are being appropriately weighed. The board also has a responsibility to see that any bad actors are held accountable for their misdeeds.
Of course, it’s always preferable that the board be involved long before labor and employment issues evolve into full-blown scandals. Directors need to ensure that employees are always treated fairly and with dignity and respect. They need to identify ways to ensure employee satisfaction, perhaps by tying management compensation to human resources-specific metrics, such as ensuring that diversity is an element of the selection process. When it comes to labor and employment matters, it is always better for the board to be proactive. If it isn’t, it’s too easy for adversaries to force the company into a defensive position.
What’s next when it comes to labor and employment issues?
We will continue to see a number of wage and hour matters and a lot of litigation pertaining to workers that are classified as independent contractors as opposed to employees.
One area where we are likely to see the biggest increase in labor and employment litigation is disability. Even though it is difficult to bring collective actions on disability discrimination claims because of the individualized nature of the cases, directors need to know that accommodation requirements of those with disabilities is a hot issue for the federal and state anti-discrimination agencies. Federal regulations underwent a major overhaul a few years ago, and this has resulted in many more workers being deemed disabled and protected by the Americans with Disabilities Act. As a result— and because the law remains quite ambiguous as to what accommodations are required for employees with disabilities—we can expect the government and the plaintiffs’ bar to be more aggressive in asserting claims.
Best Communications Practices:
1. With the prospect of more class action litigation looming, directors need to ensure open lines of communication between management and employees by which potential issues can be addressed before they become systemic problems.
2. The post-verdict or settlement phase of labor and employment litigation represents a critical opportunity for companies to share messages about fair and equitable labor practices with a captive audience of investors, regulators and employees.
3. With regulators focusing more attention on disability issues, boards need to ensure that companies articulate –internally and externally – the ways in which they go the extra mile to accommodate employees with special needs.
Keyko’s practice focuses on major complex litigation, often involving multiple parties. He has defended clients in matters involving securities allegations and various types of fraud, antitrust violations, ethics issues, trusts and estates issues, and government probes.
What are the hot issues in corporate litigation that most acutely impact directors?
It is commonplace for derivative litigation to be commenced against directors when a major lawsuit is filed against the company. Ensuring that the company has appropriate controls is important to limit claims and to establish that, if problems do arise, the board has engaged in proper oversight.
Audit committees, in particular, play an important role in overseeing corporations’ financial reporting. Accounting firms tend to be very skittish when any issues come up that might reflect negatively upon the accuracy of financial reports—and investigating such issues can be very expensive. The audit committee needs to ensure that financial reporting and projections are appropriately conservative. And the board needs to ensure that there is a proper “tone at the top.”
An issue that continues to plague companies operating in the international arena is foreign corrupt practices – in particular, allegations of bribery. This has been compounded by the whistleblower rules, which incentivize employees to disclose issues to the government rather than internally.
How can boards best serve a company embroiled in high-profile litigation?
It is usually the job of the company’s general counsel and senior management to oversee litigation involving the company. Unless the board lacks confidence in the management and general counsel, it is usually best to allow them to manage major cases on a day-to-day basis. However, the board should receive regular updates on major litigation, which include a description of the company’s strategy. If the board is not satisfied that the strategy makes sense, they should ask for more information and may suggest that the strategy be reconsidered.
What are the most common circumstances under which directors find themselves the targets of lawsuits?
Again, derivative claims against directors are now regularly made when a major lawsuit is filed against the company. The allegation in the derivative lawsuits is that the directors failed to take steps to ensure that the company’s actions were proper or that they approved improper activity.
To limit their exposure, directors should:
- Ensure that the company has appropriate financial controls in place, that the audit committee regularly meets, and that the directors receive regular reports about the company activities, in particular significant actions being taken by the company (this can be used to demonstrate that the directors have engaged in appropriate oversight);
- Ensure that the bylaws limit directors’ liability to intentional misconduct and fraud (this will require any shareholder filing a lawsuit to allege with particularity the intentional misconduct or fraud in which the director has purportedly engaged – a heavy burden);
- To the extent directors are asked to make decisions that are likely to be controversial, they should be sure that the issues are discussed in the manner required by the bylaws and that they receive the advice of an expert on the issues, as well as document that such actions and such advice have been taken in the board minutes (a director will want to rely on the business judgment rule, but to do so proper procedures must have been followed and due consideration given; furthermore, a director may rely on the advice of an expert); and
- Ensure that the company maintains an appropriate level of D&O insurance.
Best Communications Practices:
1. Social and digital media monitoring provides companies with early warning of issues that might drive future litigation. Boards need to see detailed analytics reports on what’s being said about their top risks or a developing issue—and who’s saying it— to ensure the company is ready for what lies ahead.
2. Companies need to own their risk terms on the search engines in order to ensure that their narratives and messages are the ones seen and heard first on the Web, rather than those disseminated by potential courtroom adversaries.
3. With the dramatic increases in director liability, boards need to think – not only about what the company communicates in crisis – but what the directors themselves are articulating about their responsible oversight.
Richard Levick, Esq., is president and CEO of Levick, which represents countries and companies in the highest-stakes global communications matters from the Wall Street crisis and the Gulf oil spill to Guantanamo Bay and the Catholic Church.