(Actual image used will be more applicable to the webinar subject matter) Ethical Considerations in Employee Benefits & Executive Compensation December 3, 2014 Presenters: Andrew L. Oringer, Dechert LLP Martha N. Steinman, Hogan Lovells Marc Trevino, Sullivan & Cromwell
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Transcript
(Actual image used will be more
applicable to the webinar subject matter)
Ethical Considerations in Employee Benefits & Executive Compensation
December 3, 2014
Presenters:
Andrew L. Oringer, Dechert LLP
Martha N. Steinman, Hogan Lovells
Marc Trevino, Sullivan & Cromwell
2
Introduction
• Ethics involves many rules
• Don’t need to know the citation but do need to know the rules
exist
• Our goal: become familiar with concepts so that you will
remember them when you need them
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Introduction (cont’d)
• Certain Practical Considerations
– Attorney as advisor; attorney as advocate
– To whom advice is owed
– Providing options, not telling the client what to do
– When interests are adverse or differ
– Referring matters to higher authorities in general
• Inside the organization/outside the organization
– Attorney-Client privilege
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Sources of Rules
• State Law
– ABA Model Rules
• Note, in particular: California
• Federal and State Courts
– Disqualification proceedings
– Evidentiary rulings
– Legal malpractice liability decisions
• Restatement of the Law Governing Lawyers
• Rules of practice before the IRS, SEC and other agencies
– Critical to understand from the outset who you represent
• Engagement letters
– Within an organization, people wear many hats
• E.g., officer, director, individual
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Who is the Client? (cont’d)
• Model Rule 1.13: Organization as Client
(a): A lawyer employed or retained by an organization represents
the organization acting through its duly authorized constituents.
(f): In dealing with an organization’s directors, officers, employees,
members, shareholders or other constituents, a lawyer shall explain
the identity of the client when the lawyer knows or reasonably
should know that the organization’s interests are adverse to those of
the constituents with whom the lawyer is dealing.
(g): A lawyer representing an organization may also represent any
of its directors, officers, employees, members, shareholders or other
constituents, subject to the provisions of Rule 1.7. If the
organization’s consent to the dual representation is required by Rule
1.7, the consent shall be given by an appropriate official of the
organization other than the individual who is to be represented, or
by the shareholders.
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Who is the Client? (cont’d)
• Who are “constituents”?
– Corporate officers
– Employees
– Shareholders
– Directors
– Trustees
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Who is the Client? (cont’d)
• Keeping the Parties Informed
– Make sure that the parties know who you represent and who you
do not represent
– Affirmative obligations to clarify misconceptions and
misunderstandings
– Model Rule 4.3
• In dealing on behalf of a client with a person who is not represented by
counsel, a lawyer shall not state or imply that the lawyer is
disinterested. When the lawyer knows or reasonably should know that
the unrepresented person misunderstands the lawyer’s role in the
matter, the lawyer shall make reasonable efforts to correct the
misunderstanding.
• The lawyer shall not give legal advice to an unrepresented person,
other than the advice to secure counsel, if the lawyer knows or
reasonably should know that the interests of such a person are or have
a reasonable possibility of being in conflict with the interests of the
client.
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Who is the Client? (cont’d)
• Internal Investigations
– Interest of company and other constituents are often opposed in
connection with internal investigations.
– U.S. v. William Ruehle (9th Circ. 2009) – Broadcom’s audit committee
engaged a law firm with longstanding ties to the company to conduct an
internal investigation on possible stock option back dating issues.
Defendant Ruehle (the company’s CFO) participated in many discussions
with the law firm on the issue. Later, when Ruehle was indicted on related
criminal charges, he argued that he had an attorney-client relationship
with the law firm. He also claimed to receive no warning containing notice
that the law firm acted for the audit committee (although this was disputed
by the law firm).
• District court found, among other things, that Ruehle reasonably believed that the
law firm was representing him personally. The court referred the law firm to the
California State Bar for possible discipline for violating rules of professional
conduct.
• Decision was overruled by the 9th Circuit based on other grounds, but the case is
a good illustration of the dangers of being unclear to constituents as to the
identify of the client when engaged by a board committee for an internal
investigation.
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Fact Pattern 1: Representing Controlled Group Members
• You are working on a transaction where Parent, a German corporation, is selling its US Sub. Your firm has historically advised Parent, and its US subsidiary. You have good working relationships with Parent’s global head of HR and US Sub’s head of HR, having worked on a number of different projects for Parent and US Sub over the years.
• You worked with Parent’s global head of HR in Germany to put together a purchase agreement sent to Buyer. Parent’s HR head informed you that Parent does not want to push very hard on employee protections and provided for a maintenance of benefits covenant, with benefits substantially comparable in the aggregate to US Sub’s pre-closing benefits (which includes subsidized OPEB). Parent’s HR head has told you it would be willing to accept benefits comparable to Purchaser’s plans instead (and specifically giving up OPEB).
• During negotiations, because of the time difference, Parent’s global HR head is never on the calls with Purchaser and its counsel, but the US Sub’s HR head is. On a call with Purchaser and Purchaser’s counsel, Purchaser is willing to concede a major point in exchange for changing the maintenance of benefits provision to Purchaser’s plans. The US HR head insists that this is a “non-starter” and that the only way this would be acceptable is if 12 months of subsidized OPEB continuation is included. Purchaser refuses and a very heated discussion commences.
• Your firm represents Muchodinero.com (MDC), a private Delaware corporation with its headquarters in New York. MDC is considering commencing an auction process to sell the company.
• You have been working with MDC executives on proposed new CIC severance agreements. Management’s recommendations to the Compensation Committee are based on advice from management’s compensation consultant, which has advised management that the vast majority of severance agreements include in the severance calculation an LTIP component and the highest bonus paid within the last 10 years and also include a full 280G gross-up.
• Based on your experience and independent research, you think management’s recommendations are significantly above market.
• You don’t know the Committee members, but you work daily with the executives making the recommendations. You have already told management and the compensation consultant that you think this is clearly not market, but consultant disagrees and management likes what they are hearing from the compensation consultant and insists on making their presentation. The Committee is slated to act on the recommendation at its meeting this afternoon. You will be present at the meeting.
• What do you do?
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Fact Pattern 3: The Represented Executive
• You represent the acquiror in an M&A transaction that needs to be signed in one hour in order to make an announcement prior to opening of markets in Europe. You have been negotiating the target CEO’s employment agreement for weeks with target CEO’s own counsel (not target counsel) and the agreement is finalized and will be signed at the same time as the merger agreement.
• Your client’s CEO calls you up (one hour before signing) to say that they need to change the term of the target CEO’s employment agreement from three years to two years.
• You immediately call the target CEO’s counsel only to find out that he is on an airplane and will land in Stockholm three hours after the deal is set to be announced.
• After allowing yourself to panic for five seconds, what do you do?
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Representation of Multiple Parties/Conflicts
• Can you represent multiple constituents?
− Maybe
• Model Rule 1.7
– (a) Except as provided in paragraph (b), a lawyer shall not
represent a client if the representation involves a concurrent
conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another
client; or
(2) there is significant risk that the representation of one or more clients
will be materially limited by the lawyer’s responsibilities to another
client, a former client or a third person by a personal interest of the
lawyer.
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Representation of Multiple Parties/Conflicts (cont’d)
• Model Rule 1.7 (cont’d)
– (b) Notwithstanding the existence of a concurrent conflict of
interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide a
competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one
client against another client represented by the lawyer in the same
litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
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Special Considerations for Executive Compensation and Public Companies
• Functioning in an environment where any and all actions will
be second guessed
• Face risk of:
– Liability
– Shareholder backlash
– Negative publicity
• Liability – fiduciary duties
– Duty of care
– Duty of loyalty
– Business Judgment Rule
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Special Considerations for Executive Compensation and Public Companies (cont’d)
• Sarbanes-Oxley Requirements – “Reporting Up”
– SOX requires lawyers appearing before the SEC in the representation of
an issuer to report “material violations” to the issuer’s chief legal officer
(CLO) or both its CLO and chief executive officer (CEO). The issuer’s
CLO must then cause an appropriate inquiry and notify the lawyer of his or
her findings.
– Unless the lawyer believes the CLO or CEO has provided an appropriate
and timely response, the lawyer must report to the audit committee.
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Special Considerations for Executive Compensation and Public Companies (cont’d)