Richard M. Leisner

After many decades of law practice, legal veteran Richard M. Leisner, a Senior Member in the Trenam law firm in Tampa, found that increasingly he has been called upon to be a sounding board and resource on proposed corporate transactions. In the following guest post, which is the third installment in a three-part series, Richie recounts a number of “open door encounters” – that is, occasions when colleagues came to his office to discuss pending matters. There are a number of important lessons from the tales described below. A version of this article previously was published in Trenam Law News & Insights, available at I would like to thank Richie for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Richie’s article.




Inspired by remembering and missing the benefits of personal interaction lost to the Covid-19 pandemic, this is the third installment of “hypothetical” fact situations illustrating the multiple legal disciplines that comprise corporate governance and the benefits of “thinking it through” before embarking on a solution. As in the first two groups of hypos, these in Part 3 are based upon “open door” encounters in my practice and expert witness work. Again, names and facts have been changed to protect client confidentiality and clarify practice pointers.[i] Part 1 is available here. Part 2 is available here.


One “bad apple” spoils all the exemptions

Facts:  Disruptive Solutions was a new shale oil fracking company formed as a Florida corporation in late 2019 by serial entrepreneur Jack Speed. For more than a decade, Speed promoted himself as the genius behind a string of successful fracking businesses, Disruptive Solutions being the latest. Speed made several social media posts about his plans to raise $25 million and then begin fracking operations in Q1 or Q2 of 2020. Speed had little difficulty raising $25 million. Approximately $23 million of the $25 million came from 20 wealthy individual investors and family investment funds, each of whom had invested in Speed’s previous successes. The remaining $2 million came from 50 new investors who contacted Speed after seeing Speed’s social media posts about Disruptive Solutions’ plans for the new fracking operation.

Speed decided there was no need to hire lawyers to represent Disruptive for this latest capital raise. As he had for his last two successful deals, Speed edited the private placement documents our firm had provided to him several years earlier for use in a prior Speed fracking deal. Our firm learned about Speed’s $25 million private offering from newspaper stories and Speed’s social media posts. Speed used other counsel to advise him for the oil and gas operations matters in the company’s fracking businesses.

In the late winter and early spring of 2020, the once rosy outlook for oil and gas fracking companies turned decidedly darker as the Covid-19 pandemic gripped the nation. As demand for fuel dropped, so did oil prices. Questions were raised about the ability of fracking companies (such as Disruptive) to survive prolonged lower energy use and prices.

Issues: Frank Jones, one of Speed’s frequent investors, demanded Speed return the $4 million Jones invested in December 2019. Speed encouraged Jones to be patient but did not return the funds. Jones sued Disruptive and Speed. Jones’ suit alleged, among other things, that the December 2019 offering failed to comply with the securities registration exemption provisions of Florida and federal law. Such noncompliance, Jones alleged, entitled him to a return of the $4 million plus interest and attorneys’ fees.

Speed engaged our firm to defend the litigation. Robert Star, a partner in the litigation practice group, is heading up Speed’s defense.

Although Star had never structured a private placement to comply with applicable securities registration exemptions, he prides himself as being both a brilliant trial attorney and a fast study. Star asks to meet with me to review what he believes is a winning strategy.

Leaning against the jamb in my office doorway, Star proudly announces that Jones’ lawyer must not know very much about the securities laws as Star explains how the offer and sale to Jones met all the requirements of Rule 506(b) of SEC Regulation D: [ii]

  • Accredited Investors. Jones signed the subscription agreement Speed had prepared; it stated that the offering was open only to “Accredited Investors” as defined in Regulation D. An investor whose net worth (excluding residence) exceeded $1 million met one of several criteria for “Accredited Investor” status. There’s no doubt that Jones, a well-known multi-millionaire, is an “Accredited Investor.”
  • No advertising or general solicitation. Rule 506(b) prohibits the use of “general advertising or general solicitation.” No compliance issue: Jones and Speed were old friends and Jones had invested in other deals. Jones learned of this deal in face-to-face discussions with Speed.
  • Restricted securities. As required by Regulation D, the subscription agreement clearly stated Disruptive stock could not be resold publicly unless the stock was registered with the SEC and applicable state regulators, or the sale complied with available securities registration exemptions.
  • Information and Questions. Speed did not provide much information about his past deals or the new Disruptive deal, certainly far less than would be made available to investors in an offering registered with the SEC. If all investors in a Regulation D offering are “Accredited Investors,” there is no exemption compliance requirement to provide issuer financial or narrative information.[iii] Regulation D does require telling prospective investors they are (i) receiving “restricted securities” and (ii) free to ask questions or request additional information (both of which were clearly stated in the subscription agreement).

Smiling as he concludes his analysis (above), Star says, “This will be an easy victory for me.”

Sally Smart, the author of the old private offering documents Speed marked up for this deal, joined Star on his visit to my office. Smart, shaking her head, asks Star, “What about Reg D compliance for the 50 investors who found out about Disruptive on Facebook and LinkedIn?”

Star fires back, “Sally dear, office lawyers like you really don’t know much about litigation. None of the 50 investors have sued. The only Reg D compliance issues for litigating this case are those that relate to plaintiff Jones.”

“I’ve just shown you that there was full Reg D compliance for Mr. Jones. Like I said, this one is an easy victory for me. Right?”

Solutions:  Smart and I calmly answer as one voice. “No Bob, that’s not how securities registration exemptions work.”

Smart and I explain to Star how securities registration exemptions really work in evaluating exemption compliance for the Disruptive offering.

  • The party claiming an exemption bears the burden of proof. Once the plaintiff shows that the Disruptive stock was not registered with the SEC and applicable states, Disruptive and Speed have the burden of proving the offering complied with applicable securities registration exemptions of applicable federal and state securities laws. Disruptive and Speed will lose (likely on summary judgement) if they fail to prove exemption compliance.[iv]
  • Exemption compliance must be proven for every offer and every sale in the offering. Securities registration exemption compliance, including Regulation D compliance, scrutinizes the entire “offering.” [v] This means compliance must be shown not only for plaintiff Jones but also for every offer and every sale in the “offering.”[vi]
  • Non-compliance as to any offer or sale in an “offering” gives every purchaser (including Mr. Jones) the right to rescind his investment. Because exemptions are available for “offerings,” any significant failure to comply with exemption requirements makes the exemption unavailable for the entire offering. Federal and most state securities laws (including Florida’s Chapter 517) afford purchasers in non-exempt offerings the right to rescind their purchases and receive a return of their investments (often with interest and attorneys’ fees).
  • Estoppel is seldom a successful defense if the “offering” is defective. When faced with a “one bad apple” gives every investor a rescission right, defense counsel frequently interpose “estoppel” or similar equitable defenses. Stated conversationally, estoppel the “it’s not fair to reward the investor as to whom there was complete exemption compliance” defense. Regardless of how described, such defenses are usually unsuccessful, as courts prefer to support the public policy of securities compliance even if an “undeserving” investor benefits with a financial windfall from Recession.[vii]
  • Compliance with Regulation D does not assure compliance with applicable state securities laws.

Having adjusted Star’s temporarily triumphant defensive perspective, Smart then alerts Star to a serious Rule 506(b) noncompliance issue: Speed’s social media posts. The social media posts violated the Rule 506(b) prohibition against “general solicitation.” That Jones did not respond to any of the social media posts, doesn’t save the “offering” from failing to satisfy Rule 506(b).

Disappointed, Star reluctantly agrees that Speed’s social media posts are the “one bad apple” that forever spoils Speed’s ability to successfully establish Rule 506(b) compliance.[viii]

Then, Smart begins to tell Star about other Rule 506(b) possible noncompliance issues, starting with “Accredited Investor” issues. Star interrupts Smart, “I’ve heard enough.” As Star packs up to leave, he concedes, “There’s no way to prove Disruptive’s offering was exempt under Rule 506(b).” Muttering something about calling Speed to talk settlement, Star heads back to his office.

Lessons: Securities law compliance is complicated. Some of the multiple issues and concepts are unique to this area of the law. The lessons here start with client Sam Speed but also extend to litigation partner Bob Star.

The problems for Sam Speed began when he chose to be his own securities lawyer. From earlier deals, Speed thought he knew what he needed to do to comply with Regulation D, and he did begin his efforts with a very good set of private offering documents. Without regard to Regulation D compliance, however, Speed’s prior offerings benefitted most from compliance with “Regulation GD,” the “good deal” exemption.[ix] So long as Speed’s fracking deals were successful, there was scant likelihood of any challenge to Speed’s Regulation D compliance. When such compliance was challenged, the results were sub-optimal.

Speed didn’t keep Sally Smart “in the loop” about his deals, and Smart could have done a better job following up with an established client. Given Disruptive’s string of successes before 2020, it is far from certain that more persistent follow up by Smart would have moved Speed to engage Smart to assist him in structuring his $25 million offering.

The lesson for Bob Star is clearer: When entering into a new area of substantive law, even the most talented trial attorney is well advised to enlist the assistance of colleagues with substantive expertise – even if they are “office lawyers.” Star did not understand how securities registration exemptions worked; he was fortunate, indeed, to have enlisted Smart’s aid before forging ahead with a defense strategy sure to embarrass both Star and our firm.


Did outside counsel “personally participate” in sale of securities (under Chapter 517)?

Facts:  Hopeful Enterprises, Inc. is a privately owned computer network maintenance and consulting company based in Jacksonville, Florida. Robert Hope is the principal shareholder and CEO. Attorney Larry Local is a partner is a seven-lawyer general practice firm in Jacksonville. Local incorporated Hopeful in Florida in 2014 and since then has provided legal services to the company from time-to-time, when requested to do so.

In early 2018, Hopeful raised $3 million in new capital through the private sale of 1 million shares of Hopeful common stock for $3.00 per share. One of the lead investors, Brian Brash, was CEO of a key Hopeful customer and one of Hope’s best friends. In December 2018, both Robert Hope and Brian Brash died when Brash’s private jet crashed into the Atlantic Ocean. Hopeful found itself struggling to stay in business.

In March 2019, Brash’s estate sued Hopeful, Hope’s estate and Local, jointly and severally, alleging, among other things, that the sale of Hopeful’s stock involved violations of the antifraud provisions of Chapter 517, Florida’s securities law.

Our firm has been engaged to represent Local. Marvin Great, a thoughtful senior partner and firm founder, heads the team. Great taps Sofia Special, a well-regarded young partner in the litigation practice group, to assist. Although she doesn’t’ specialize in securities cases, Special quickly learns that Florida’s securities law make corporate officers jointly and severally personally liable for rescission only if the corporate officers “personally participated” in the sale.[x]

Not surprisingly, the complaint is filled with conclusory statements about Local’s “personal participation” in the sale of stock to Brash. It falls to Sofia Special to respond to these troubling assertions with facts derived from primary source materials and applicable case law.

Issues:  After Special reviews both sides’ discovery materials and checks other facts with Local and his paralegal, she confirms the following: (i) Local has been the Secretary of Hopeful Enterprises throughout its existence; (ii) Local had possession of and maintained Hopeful’s minute books, stock transfer records and book of stock certificates; (iii) although he was not a director, Local attended most Board meetings and prepared the minutes for such meetings; (iv) Local prepared each stock certificate for the private offering and counter-signed each certificate as Secretary of the corporation; (v) Local exchanged drafts of the stock purchase agreement with counsel for the customer-investors and negotiated some of the agreement’s terms; and (vi) Local prepared the final form of stock purchase agreement and was present in the room when Brash and a few of the other investors signed the stock purchase agreement.

Both sides file motions for summary judgment and agree to a bench trial. In preparation for trial, Marvin Great summons Special and me to his corner office. Great begins by asking, “Based on the complaint and discovery facts Special has assembled, it looks like a successful defense of our client Larry Local is going to be a very heavy lift. I’m considering making a serious settlement offer to the Brash estate.”

After a long pause, Great asks, “What do you think, Ms. Special? Did Larry Local “personally participate” in the sale? Should we recommend that Local settle?”

Solutions:  “Well,” Special begins, “I recommend against making a settlement offer. We have a strong defense for Mr. Local.” Taking a deep breath, Sofia Special holds forth, nonstop, for several minutes:

First, most of Local’s connections to Hopeful and the stock sale to Brash were ministerial, the kind of tasks lawyers undertake rendering customary legal services to corporate clients. Making conclusory assertions these activities were “personal participation” in the “sale” of securities cannot change the actual nature of these activities – they were not “selling” activities.

The substantive elements of the “sale” of securities to Brash occurred when there was a meeting of the minds – when Brash and Hope reached agreement on dollar amount of securities to be sold, the per share purchase price, the percentage of the company’s equity securities represented by the sale and the additional covenants and agreements that protected the rights of the investors in the deal.

Although no one can testify with certainty about what went on between Hope and Brash, there is every reason to believe the substantive deal points were negotiated face-to-face by the two longtime friends and business colleagues.

Local will testify he never negotiated any substantive deal points with Brash or Brash’s counsel. The record is devoid of any communications evidencing Local negotiating substantive deal terms. Local will testify the substantive deal points were provided to him as a fait-accompli, with instructions to document “the deal” in a stock purchase agreement.

In addition, there is controlling case law that support my analysis (above). For several decades, Florida courts have relied on federal interpretations of Section 12(2) of the Securities Act of 1933 in cases concerning the scope of liability for secondary participants[xi] in securities sales under Section 517.211(1).[xii] A secondary participant will be seen as “personally participating” in the sale only if the participant actually “solicited” the sale. Behavior that can be shown as a “substantial factor” in making the sale is insufficient. In addition, Florida courts have specifically declined to treat customary legal services as “personal participation” sufficient to impose joint and several liability. [xiii]

Finally, if our defense is successful, we may be entitled to attorneys’ fees and costs under Section 517.211(6).

As Special concludes her presentation she hands out copies of the cases whose holdings she summarized.

Great asks how Special came to base her defense on a group of cases decided more than 30 years ago. Special responds, “Westlaw’s annotated statutes were not that helpful. I found the analysis and rationale on which my defense is based by searching the firm’s document management system for “personal participation.” Turing to face me, Special continues “They were in an old CLE outline of yours. It caught my eye that the cases were from the U.S. and Florida Supreme Courts. If I hadn’t found the detailed analysis in your outline, I might have ignored these cases because of their age and dubious quality of the Westlaw headnotes.”

Not known for lavishing praise, Marvin Great smiles and quietly says, “Nice work, Sofia.”

Two weeks later, armed with the products of Sofia Special’s efforts, Marvin Great cruises to a summary judgment dismissal with prejudice. Special’s motion for legal fees and costs is granted.

Lessons:  A lawyer whose legal research consisted of scanning Westlaw headnote precis could easily overlook the crucially important logic, rationale and holdings in Pinter and Hutton.[xiv] Such truncated research would have limited the defense effort to nitpicking Local’s behaviors and arguing they were not “personal participation.” Armed with case law and supporting rationale, Marvin Great was able to shift the burden to the plaintiff to marshal facts to show Local “solicited the sale” (i.e., was involved in the process by which the meeting of the minds occurred). Fortunately for Larry Local, the facts did not support such a characterization, and the firm achieved a great result for the client.

When you litigate in a new or unfamiliar area of the law, your transactions practice colleagues may be of invaluable assistance at the start of the case. They may significantly shorten your legal research by giving you a superior starting place. Occasionally, they may already know the key legal principles and decisional case law.


Discovery production – sometimes attention to details matters

Facts:  Diane Arbeiter was Vice President-Finance with Perfect Pool Enterprises, Inc. (PPE), an industry-leading pool design, construction and services company. PPE is a privately-owned Florida corporation whose business is limited to West Florida. Tom Perfect is the company’s founder and principal shareholder. Arbeiter’s PPE employment agreement includes very broad two-year post-employment no-compete and non-solicitation covenants. Compliance with the covenants would keep Arbeiter completely out of the pool business anywhere in the Southeast United States for two years.

About six-months ago, Arbeiter accepted a new job as head of sales with AquaTech Corporation, one of PPE’s principal competitors in the West Florida market. AquaTech’s service area includes West Florida but extends to Central and Northeastern Florida as well. Before Arbeiter settled into her new job, PPE’s lawyers, citing the terms of Arbeiter’s employment agreement, sent a “cease and desist” demand letter to both Arbeiter and AquaTech. A week after the demand letter, PPE sued both Arbeiter and AquaTech, among other things, alleging Arbeiter’s work for her new employer violated her restrictive covenants, and AquaTech’s employment of Arbeiter was tortious interference with PPE’s advantageous business relationships under that agreement.

Our firm is representing both AquaTech and Arbeiter. Will Brilliant, a young litigation partner, leads the defense team. Brilliant asks the firm’s leading expert on restrictive covenants, Stanley Ivy, to review Arbeiter’s employment agreement. Ivy’s preliminary evaluation is that, under current Florida law, the restrictive covenants may totally unenforceable or at least subject to substantial reduction in scope and coverage. Ivy says the defense case is improved by several facts: While employed by PPE, Arbeiter had no contact with any PPE customers. PPE never provided Arbeiter with any specialized training and it appears there was nothing in PPE’s business operations worthy of protection as trade secrets. Finally, Arbeiter has yet to call on any PPE customers.

Brilliant stops by my office brag about his new case and casually mentions the articles of incorporation, bylaws and stacks of corporate documents he received in response to his first discovery production request. “There wasn’t much of interest to us in all the dry corporate stuff,” he says, giving me the impression that he and the litigation paralegals have completed their review of this production. I ask and Brilliant reluctantly agrees that someone in the transactions practice group can make a quick review of the corporate materials. That task is assigned to a third-year transactions attorney, Jack Eager.

Two days later, Eager arrives at my office waiving PPE’s bylaws above his head. “You’re never going to believe what’s in Article VII,” Eager exclaims.

Eager then leads me through the substantive provisions Article VII germane to Arbeiter’s case: (i) the company must indemnify any current or former officer, director or employee involved in litigation both during and after employment that relates to or arises out of service to the company (which would extend to the post-employment restrictive covenants in Arbeiter’s employment agreement); (ii) there are no “carve outs” any kind, for example, for actions brought by the company against a current or former officer or employee; (iii) “indemnification” is defined to include all expenses of the indemnified party incurred in preparation for and in any litigation, including legal fees and costs of counsel for the indemnified party (which counsel may be selected by the indemnified party); (iv) expenses of the indemnified party must be paid promptly as incurred; and (v) indemnification and expenses must be paid without regard to the indemnified party’s success in the actual or threatened litigation.

Such employee favorable provisions are not what you would typically find in bylaws for a private company with a single dominant shareholder. Most often, indemnification would be permissive, with the Board of Directors retaining discretion over how to handle each situation.[xv] PPE has been around for more than 40 years, our firm did not incorporate the business, and the bylaws have never been amended. So, we don’t know the provenance of Article VII.

Issue:  We invite Brilliant to visit with us and share with him our analysis of the operative provisions of Article VII, in particular, PPE’s current obligation to pay Arbeiter’s litigation expenses (our bills to Arbeiter).

There is a long pause before Brilliant says, “I reviewed these bylaws. But Article VII was more than two single-spaced pages. Maybe, I missed it, or I may have been “reading” what I expected to see, not what was there. You guys made a great catch. This means we can ask PPE pay for Arbeiter’s defense costs.”

Solutions:  Brilliant emails Article VII to opposing counsel Daniel Squire along with our invoices for services and a demand that PPE pay Arbeiter’s bills. At first, Squire says his client Tom Perfect has advised Squire that the bylaws produced were not the “real” PPE bylaws and that Perfect promises to produce the “real” bylaws. Brilliant checks the production and finds several other copies of PPE’s bylaws in various discovery produced materials; each has an Article VII identical to the one Eager found. Squire never produces the promised “real” set of bylaws.

PPE pays our invoices. The litigation is settled after PPE releases Arbeiter from the restrictive covenants and dismisses its case with prejudice. Arbeiter continues as AquaTech VP-Sales.

Lessons:  Everyone makes mistakes and most lawyers have experienced near (or actual) disasters resulting from their own errant behaviors. When highly experienced trial lawyers venture into unfamiliar territory, they should consider enlisting “office lawyer” colleagues early in the case. The office lawyer colleague may not be able to litigate her way out of a paper bag but her substantive expertise may help shape efficient litigation strategy. And, as shown in this case, such participation decreases the likelihood that a “brilliant trial lawyer” will fail to appreciate what is (and is not) important in discovery. In this case, we will never know if attorney Brilliant never actually reviewed the bylaws (and Article VII) or if he reviewed the bylaws and Article VII but failed to understand the content.


How to be in the room where it happens[xvi] – when there is no “room”

Facts:  Penn Private Partners Inc. (Penn) is a large and successful private equity company with billions invested in approximately 20 portfolio companies. Although incorporated as a Delaware corporation, Penn is headquartered in Philadelphia. In 2006, for a purchase price of $600 million, Penn acquired 100% of Deutsche Residential Builders GmbH (DRB), one of Europe’s largest and most successful privately owned residential builders. Penn kept approximately 80% of DRB’s stock as a portfolio investment and distributed the balance to members of Penn’s senior management and DRB senior management members who stayed on to run the acquired company.[xvii]

One of the most attractive features of DRB as an acquisition target was the company’s 40% equity interest in Australian Builders S.A. (Australian Builders), a Sydney-based residential retirement community developer with growing presence on the Asian continent. DRB had no operations in Australia or Asia and no desire to develop either market.

In making the DRB acquisition, Penn announced its plans to sell DRB’s interest in Australian Builders for cash and distribute some or all of the cash proceeds to Penn and DRB’s minority owners. After finding a buyer willing to pay $150 million for the Australian Builders stock, Penn and DRB then negotiated loan terms with DRB’s lenders and bondholders’ trustee to permit the immediate distribution from DRB to Penn and other DRB owners of up to $100 million of the cash from the Australian Builders stock sale (the “Subsidiary Sale Dividend”).

Payment of such a large cash dividend triggers a waterfall of statutory and common law corporate governance concerns: (i) under the Delaware Corporation Law (DGCL), dividends may be paid only out of “surplus,” (ii) the DGCL defines “surplus” as the amount by which assets exceed liabilities, (iii) after payment of the dividend, the business of the company must be able to pay its debts as they are anticipated to come due in the ordinary course of business, and (iv) after payment of the dividend, there must be sufficient capital to be able to carry on the company’s business.[xviii]

Penn is the owner of 80% of DRB’s stock and its nominees control the DRB Board. Nevertheless, the DRB Board of Directors has the power and fiduciary responsibility to decide if the required criteria are satisfied and, if they are, whether to take formal action to approve the Subsidiary Sale Dividend.

At the time of the DRB acquisition, total assets on DRB’s regular financial statement balance sheet (carried at the lower of cost or market) exceeded liabilities by only $30 million, not nearly enough to cover the desired $100 million Subsidiary Sale Dividend. Without sufficient surplus from which to pay the Subsidiary Sale Dividend, there can be no dividend and the other criteria need not be considered.

The DGCL does not specify how a company should value its assets in determining surplus for dividend availability purposes. Penn engaged Locust Walk Capital, a medium-sized Philadelphia investment banking firm, to prepare a report regarding the current net value of DRB’s assets and whether, with revalued assets, DRB would be able to satisfy the surplus and other preconditions to valid declaration and payment of the Subsidiary Sale Dividend (the “Dividend Revaluation Report”).

The Locust Walk Dividend Revaluation Report team is headed by Charles “Trey” Carruthers, III. Mark Wellmet, the relationship partner at Penn’s regular outside counsel, Hamilton & Hart, has been lead counsel for Penn on several similar dividend transactions. This the first time Locust Walk has prepared a Dividend Revaluation Report. Mark Wellmet and Trey Carruthers were old friends, having been roommates at an exclusive New England prep school. Just before Memorial Day 2007, Locust Walk began working on the Dividend Revaluation Report: accountants “crunched the numbers” in financial statements, budgets and projections; real estate experts checked current values for DRB’s European land inventory; and, the most experienced analysts critically interviewed members of the DRB management team.

By the last week in June, the Locust Walk Team produced an impressive three-inch spiral-bound collection of financial statements and projections, property appraisals, interview summaries and other documents. The first 12 pages of the binder comprise the formal signed Dividend Revaluation Report, on Locust Walk letterhead, signed in “wet” blue ink. The report’s first six pages[xix] summarize the work performed in preparing the report and ends with its conclusions, which touch all the legal bases necessary to support payment of the Subsidiary Sale Dividend:


  • DRB’s revalued assets exceeded its liabilities by not less than $115 million, resulting in surplus of $115 million (more than enough to pay the $100 million Subsidiary Sale Dividend).
  • After paying a $100 million Subsidiary Sale Dividend, DRB should be able to pay its debts and obligations as they come due in the ordinary course.
  • After paying a $100 million Subsidiary Sale Dividend, DRB will have sufficient capital to carry on its business.


The 12-page Locust Walk Dividend Revaluation Report (but not the three-inch binder of supporting materials) is emailed on June 28, 2007 to all DRB directors and senior officers at Penn together with a three-page single-spaced Board of Directors written consent. Except for an introductory paragraph and signature lines, the written consent consists of multiple resolutions affirmatively addressing the Locust Walk Dividend Revaluation Report and satisfaction of each of the dividend preconditions. Executed signature pages are returned from all directors via email before the end of the day. The Subsidiary Sale Dividend of $100 million is paid out in mid-July.

As everyone reading this article knows, the overheated housing market began to cool in 2006 and 2007 and then fell into a deep freeze in the fall of 2008, marking the start of the Great Recession. DRB’s business did not escape. The slumping housing market made DRB’s debt load too much to bear. In 2009, DRB’s creditors forced the company into bankruptcy.

The bankruptcy trustee soon filed suit against DRB’s officers and directors alleging they had breached their fiduciary duties in paying the Subsidiary Sale Dividend. Joined as defendants in this suit, charged with legal malpractice for their part in the Subsidiary Sale Dividend, were DRB’s principal lawyers, Hamilton & Hart and, individually, relationship partner Mark Wellmet.

Our firm has been engaged to defend the Hamilton & Hart firm and attorney Mark Wellmet. Senior partner Marvin Great heads up our team, and names Sofia Special second in command.

With the perfect vision of 20-20 hindsight, the trustee’s second amended complaint paints an unflattering portrait of past events. For starters, the complaint reads as if everyone in 2007 knew with certainty the housing boom would collapse and bring on the Great Recession. Focusing on DRB, the complaint alleges (i) the directors breached their fiduciary duty of care by combining high leverage with the $100 million Subsidiary Sale Dividend, leaving DRB with insufficient capital to survive a downturn in the industry, (ii) the directors knew or should have known they should not rely on the conclusions in the Locust Walk Dividend Revaluation Report because the favorable opinions were the result of Penn’s senior management bullying an inexperienced Locust Walk to reach unsupported conclusions, and (iii) there is no evidence beyond three pages of inanimate resolutions to establish the DRB directors properly discharged their fiduciary duty of care (i.e., becoming informed and taking time to consider the pros and cons of the transaction). After all, the DRB directors approved the Subsidiary Sale Dividend just a few hours after receiving the written consent and Dividend Revaluation Report.

The amended complaint attaches several email message threads between Locust Walk, Hamilton & Hart and DRB directors who were also members of Penn’s senior management. Upon first reading, they appear to support some of the allegations in the complaint.

Issue: Will the record and the law support a strong defense for Hamilton & Hart and attorney Wellmet?

Solutions: We can make a strong defense, although some of the optics in the record are less than ideal.

First and foremost, a law firm is obligated to assist its client in accomplishing the client’s business objectives. This obligation is foreclosed only by client actions in violation of applicable law or that are known to be reasonably likely to result in serious injury to the client.[xx]

In 2007, Wellmet and the other Hamilton lawyers did not “know” that paying the Subsidiary Sale Dividend made it “reasonably likely” that DRB would suffer “serious injury.” To the contrary, the information in the Dividend Revaluation Report and its supporting materials buttressed the conclusion that is was financially prudent to pursue the client’s business objective of declaring and paying the Subsidiary Sale Dividend.

In addition, DRB’s financial health in June of 2007 was supported by the receipt more than six months after payment of the Subsidiary Sale Dividend of a “clean” audit opinion for the year ended December 31, 2007 from a nationally prominent firm of independent certified public accountants.

Locust Walk’s initial draft of the report had been created by cutting and pasting a different type of opinion. In the process, Locust Walk failed to remove all references to the other deal terms (that had nothing to do with the dividend transaction) or even the name of the entity that was the recipient of the earlier opinion. The draft reports also included typographical errors and grammar so poor it obscured the meaning of at least one of the substantive opinions. In addition, approximately half of changes requested by the Hamilton lawyers were aimed at cutting back on the Locust Walk liability and responsibility disclaimers that occupied much of the last six-pages of the report.

Some of these unfortunate errors persisted through more than one draft, including one later version distributed not only to the working group but also the DRB directors and Penn senior management.  There were complaints about how long the process was taking. The Penn people and Hamilton attorneys were impatient because Penn had received several favorable dividend revaluation reports for other portfolio companies using other investment banking firms.

The trustee “cherry picked” the Locust Walk email threads for the most unflattering exchanges. True, there is no justification for unprofessional language and profanity. However, the substance of the emails considered in their entirety demonstrates thorough and careful work by both Locust Walk and the Hamilton law firm.

Often, meetings of the Board of Directors to consider major corporate transactions provide excellent opportunities to document how directors discharged their fiduciary duty of care (i.e., informing themselves about the mechanics of the transaction, reviewing the key documents and deal terms with senior management and counsel, hearing from consulting experts, asking questions, and discussing pros and cons before formally considering whether to approve). Already familiar with the complexities of the dividend revaluation process, Penn and the Hamilton were comfortable shortcutting the customary process with only the three-page written consent.

The absence of customary documentation is not dispositive of the issue about DRB’s directors discharging their fiduciary duty of care. Knowing that Penn and other private equity companies keep close tabs on their portfolio companies, attorney Wellmet is confident he can help defense counsel reconstruct director conduct in phone calls, emails and in person meetings more than sufficient to establish the directors discharged their fiduciary duty of care before they took only a few moments to sign the written consent approving the Subsidiary Sale Dividend.

Nevertheless, it is an open question as to whether the facts developed in discovery will be sufficient to support a defense motion for summary judgment. As this point in the litigation, our hypothetical story concludes without a result.

Lessons: My firm’s general counsel, an experienced trial lawyer, has a lexicon of favorite sayings that are well known in our firm. Considering this “hypothetical” case, one of his particular favorites comes to mind: “if it’s not in writing, it didn’t happen.”

Busy transactions lawyers need to be reminded that there is always a chance a transaction will be second guessed in the future with 20-20 hindsight. The fact that they have done similar transactions multiple times will not help their defense if the deal that is the subject of litigation is a poorly documented transaction. If anything, past properly documented similar transactions will contrast unfavorably with later slap-dash efforts.

Emails are invariably subject to production. Often, attorney-client or work product confidentiality will not be available. Before you send an email in anger or with unprofessional language, remember: “There are no jokes in litigation.”[xxi] Remain professional.

In this case, the final results may have been different if the Subsidiary Sale Dividend had been the subject of more formal documentation: two in person Board meetings stretched out over a week, with PowerPoint presentations from Locust Walk bankers, the DRB CFO and outside counsel, preceded by the distribution to each director of a paper copy of the Dividend Revaluation Report, with all exhibits attached, in advance of the first meeting.


* * * *

[i]  As in Parts 1 and 2, unless noted to the contrary, all references to Chapter 607, Florida Statutes, are to provisions of Florida’s corporation law as currently in effect.

[ii]  SEC Regulation D is a private offering “safe-harbor” that provides several exemptions from the securities registration requirements of the Securities Act of 1933. Regulation D is comprised of Rules 501 through 508. Rule 506(b) is the most popular substantive exemption under Regulation D. General information about Regulation D is available from the SEC here. The full text of Regulation D in the Code of Federal Regulations as in effect on September 30, 2020, is available here. Amendments expanding the definitions of “Accredited Investors” will become effective December 8, 2020 and can be found here. Other amendments to Regulation D were approved on November 2, 2020 in Securities Act Release No. 33-10884 and will become effective 60 days after publication in the Federal Register. The complete Release is available here.

[iii]  When sales are made under Rule 506(b) to non-Accredited Investors, Rule 502(b) requires that investors be provided with “the same kind of information” as would be available in a public offering registered with the SEC.  None of the substantial narrative and financial informational requirements of Rule 502(b) apply if all sales are made to “Accredited Investors.”

[iv] This article focuses on compliance with SEC Regulation D. Compliance with applicable federal securities registration exemptions is no assurance of compliance with applicable state securities registration exemptions. Compliance with state securities registration exemptions is beyond the scope of this article.

[v]  Although often crucial to exemption compliance, there is no statutory definition of an “offering” of securities. Most practitioners will agree an “offering” consists of all of the activities comprising a discrete capital raise including all offers and sales. Whether two or more groups of offers and sales are “integrated” and treated as a single “offering” or considered as separate discrete offerings usually depends on the particular facts and circumstances. On November 2, 2020 the SEC adopted Rule 241, which will be effective 60 days after publication in the Federal Register, approving (i) integration safe-harbors, subject to certain limits and conditions, for separating offers and sales occurring more than 30 days before or after other offers and sales and (ii) non-exclusive factors for determining when offerings commenced and terminated. Securities Act Release No. 33-10884 (November 2, 2020) is available at here.

[vi] Fortunately, there are no factual uncertainties in this hypothetical in determining which of Speed’s activities should be included in his “offering.” There were more than six-months without offers or sales of securities before Speed began to promote his $25 million capital raise. The capital raise was followed by an additional six-months free from offers and sales of securities.

[vii]  Henderson v. Hayden, Stone Inc., 461 F.2d 1069 (5th Cir. 1972), cited favorably in the 2020 edition of Thomas Lee Hazen’s securities law treatise (available on Westlaw), Hazen: Law of Securities Regulation § 7:12. Civil Liability for Failure to Comply With 1933 Act Section 5 – Section 12(a)(1)’s Private Remedy – Limited Defenses Available.

[viii]  Speed’s securities compliance problems may multiply if the exemption afforded by Rule 506(b) is not available. Rule 506(b) triggers federal preemption of certain state securities registration exemptions under Section 18 of the Securities Act of 1933. Noncompliance with Rule 506(b) may result in violations of various state securities registration exemption laws. The consequences of such noncompliance are beyond the scope of this article.

[ix] “Regulation GD” is a fanciful term of art. Of course, there is no federal or state statute or rule providing securities registration exemptions for “good deals.”

[x]  Section 517.211 provides in pertinent part:

Every sale made in violation of [the antifraud provisions of Chapter 517] . . . may be rescinded at the election of the purchaser . . . . Each person making the sale and every . . .officer . . . of . . .the seller, if the . . .officer has personally participated or aided in making the sale, is jointly and severally liable to the purchaser in an action for rescission . . . (edited to show only officer liability, emphasis added).

[xi]  For these purposes, a “secondary participant” is anyone who is not in privity with the buyer of securities. In a typical securities purchase from the issuer to a buyer, the issuer stands in privity with the buyer, whereas, a “secondary participant” does not.

[xii]  Pinter v. Dahl, 486 U.S. 622 (1988); E. F. Hutton & Co. v. Rousseff, 537 So.2d 978 (Fla. 1989).

[xiii]  For example, see: Beltrami v. Shackleford, Farrior, Stallings & Evans, 725 F.Supp. 499 (M.D. Fla. 1989).; Bailey v. Trenam, Simmons, Kemker, Scharf, Barkin, Frye & O’Neill, 938 F.Supp. 825 (M.D.Fla.1996), Dillon v. Axxsys Int’l, Inc., 185 Fed. Appx. 823 (11th Cir. 2006); cases decided before Pinter and E. F. Hutton, provide similar results, e.g., Ruden v. Medalie, 294 So.2d 403 (3rd DCA 1974); Nichols v. Yandre, 9 So.2d 157 (Fla. 1942).

[xiv]  When decided, each of Pinter and Hutton was a big deal to corporate and securities transactions attorneys (including me). Pinter and Hutton were part of a trend in securities cases in the late 1980s and 1990s that successively narrowed the scope of liability for secondary participants in securities transactions, including securities lawyers. The rationale and logic of these court decisions were imprinted in the memories of transactions attorneys practicing at that time. Today’s transactions lawyers – not so much. Based on the law today, transactions attorneys are likely to be unfamiliar with Pinter and Rousseff and sleep well at night believing that securities lawyers have always had a relatively modest risk of secondary participant liability.

[xv]  Section 607.0850 through 607.0859 set forth detailed statutory provisions regarding permissible and mandatory indemnification, advancement of expenses and other related matters. These provisions are non-exclusive, allowing corporations freedom in most respects to provide for different and more favorable indemnification provisions than the statutory provisions. Consideration of statutory indemnification provisions is beyond the scope of this article.

[xvi]  “The Room Where it Happens,” Hamilton, Lin-Manuel Miranda.

[xvii]  As is frequently the practice for private equity companies, Penn’s portfolio companies were highly leveraged. Penn burdened the WBRG acquisition with $550 million in debt, consisting of a mix of bank loans and junk bonds.

[xviii]  Sections 154, 170-174, Delaware General Corporation Law.

[xix]  The last six pages of the report consist of what Trey Carruthers describes as “standard boilerplate,” the history of Locust Walk, the terms and conditions of the engagement and several pages of disclaimers and limitations on liability of Locust Walk or its employees to DRB, Penn or any other party.

[xx]  Rule 4-1.3 Organization as Client, Florida Bar Rules of Professional Conduct, available here (last visited October 16, 2020). In pertinent part, comments to rule provide:

When constituents of the organization make decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful. Decisions concerning policy and operations, including ones entailing serious risk, are not as such in the lawyer’s province. However, different considerations arise when the lawyer knows that the organization may be substantially injured by action of a constituent that is in violation of law.

[xxi] Apologies to director Penny Marshall, and actors Tom Hanks and Elenore (Bitty) Schram for paraphrasing their classic exchange from A League of Their Own (1992); video clip available here.