In my former days on the carrier side, our D&O insurance group advocated for our policyholders a program of securities litigation loss prevention, on the theory that there are steps companies can take to make themselves less likely to be a securities suit target or better able to defend themselves if they are hit with a suit. The concept of securities litigation loss prevention remains a worthy idea although not always as frequently discussed as perhaps it should be.
Because of my past interest in this topic, I was particularly pleased to see the recent memo from the Latham & Watkins law firm entitled “Giving Good Guidance: What Every Public Company Should Know” (here). The memo provides a good overview of the issues public companies should consider in developing their approach to earnings guidance, and it also sets out practical steps companies can take to try to reduce the possibility of guidance-related liability.
The memo begins with a review of the legal context, noting with respect to earnings guidance that “the legal landscape should be carefully understood before management takes the plunge.” The memo provides a cautionary note with the observation that it is possible “to make critical mistakes that can have significant economic consequences under the federal securities laws and in the financial markets.” At the same time, however, “it is possible to give guidance in a deliberate and careful way without incurring undue liability.”
After reviewing the basic liability landscape, as well as critical considerations arising from the statutory safe harbor provisions and regulatory provisions such as Regulation FD, the memo reviews two basic questions – that is, how far to go and what to say in giving guidance – and provides critical guidelines. In particular, the memo emphasizes the importance of having a carefully considered company-specific plan for giving guidance that takes advantage of opportunities to accompany disclosure with meaningful cautionary statements.
In a particularly useful section, the memo lays out ten rules for “giving good guidance,” all of which are built around having a controlled process involving designated spokespersons delivering carefully considered message accompanied by meaningful cautionary statements. The memo concludes with an appendix of frequently asked questions.
I am pleased to be able to link to the law firm’s memo here and to recommend it for company management interested in taking steps to try to reduce the securities litigation exposures arising from providing earnings guidance. It is a favored indoor pastime these days to bemoan the fact that we have a hyperactive litigation system that can impose enormous costs on operating companies. But the fact is that there are steps companies can take to reduce their risk of becoming involved in a securities suit. While there may be much to lament about our litigious system, there are steps companies can take to try to do something about it, and that is a much more positive and practical way for companies to deal with the litigation threat.
In an earlier post (here), I discussed the question of the role of D&O insurers in the securities litigation loss prevention process. To see a recent post discussing M&A-related litigation loss prevention, refer here.
The SEC’s New Policy to Require Liability Admissions in Certain Cases: Following on Judge Jed Rakoff’s concerns in the Citigroup SEC enforcement action in connection with the proposed settlement that the company had neither admitted nor denied wrongdoing, the SEC, under new leadership, has reconsidered its longstanding policy and now will no longer allow defendants to settle cases without also admitting liability.
Though the new policy has yet to be applied in a specific case, commentators have already raised a number of concerns with the SEC’s proposed new approach. In a July 2, 2013 New York Times Deal Book column (here), Wharton School professor David Zaring raises the concern that the new approach could prove very costly for the SEC, as defendant companies will be very reluctant to make admissions that could be used against them in related civil litigation. These disincentives will make it that much harder for the SEC to resolve cases and in the end require the agency to take more cases to trial, a prospect that could drain the agency’s already strained resources.
In addition to the concern that admissions could be used against them in related civil litigation, the companies face yet another problem with the possibility of admissions. That is, the admissions could potentially serve as a basis for a company’s D&O insurer to deny coverage based on the policy’s misconduct exclusion. The possibility that an admission might cost the company its D&O insurance protection would provide yet another deterrent for companies from entering into admissions as part of an SEC enforcement action settlement.
Can the Countrywide Derivative Suit Survive the BofA Acquisition?: When does a derivative lawsuit survive a merger? That was the question before the Delaware Supreme Court earlier this week in connection with the derivative suit filed against the management of Countrywide Mortgage prior to the company’s acquisition by Bank of America. The case came to Delaware’s highest court by way of a certified question from the Ninth Circuit, which had asked whether under Delaware law the shareholder plaintiffs could maintain the suit notwithstanding the merger in light of the “fraud exception” to Delaware principles about post-merger shareholder standing.
In a July 3, 2013 post on her Reuters blog (here), Alison Frankel has an interesting summary of the issues as well as of the parties’ arguments. As Frankel explains, under Delaware law, derivative suit plaintiffs lose their standing to pursue claims on behalf of the company when they lose their ownership interest as a result of a merger. The one exception is when the merger was a itself a fraud intended only to protect the board, which the BofA acquisition was not. The question was whether the Delaware Supreme Court might recognize other circumstances, such as those involved here, where the derivative suit might survive the merger, given Countrywide’s alleged misconduct. The plaintiffs’ arguments in that regard relied heavily on various statements the Delaware Supreme Court had made in prior cases about Countrywide’s conduct.
Frankel’s column summarizes the parties’ arguments on these issues and the question of whether or not the court would have to recognize a new exception to the general rules in order to recognize the right of the plaintiffs to pursue their claims. This will be very interesting case to watch — it will be interesting to see what the Delaware Supreme Court does.