It has now been over a year since the U.S. Department of Justice released the so-called Yates Memo, in which the agency stated its policy focused on individual accountability for corporate wrongdoing. As attorneys from the McDermott, Will & Emery firm noted in an October 11, 2016 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog (here), since the Yates Memo went into effect, observers have been watching for “telltale signs of whether the Yates Memo is really changing the way federal enforcement does business.” According to the blog post, two recent False Claims Act settlements that required corporate executives to make substantial monetary contributions to resolve civil enforcement actions filed against them may suggest that the anticipated Yates Memo-related change has arrived.
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Book Review: An Updated Global Guide to Directors’ Liability and Indemnification
In an increasingly global economy, questions arising from cross-border activities are an increasingly common part of day-to-day business activities. Among other things, these circumstances mean that companies frequently must contend with the legal requirements in multiple jurisdictions and deal with the associated legal exposures as well. The potential liability issues in turn raise sometimes difficult questions about indemnification and insurance. For those of us in the insurance industry, these cross-border liability, indemnification, and insurance issues can be challenging.
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What to Watch Now in the World of D&O
Every year just after Labor Day, I take a step back and survey the most important current trends and developments in the world of Directors’ and Officers’ liability and D&O insurance. This year’s survey is set out below. Once again, there are a host of things worth watching in the world of D&O.
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Heavy Use of Non-GAAP Financial Metrics Represents an Accounting “Red Flag”
Investors, analysts, D&O insurance underwriters, and others responsible for identifying risks among public companies may want to pay close attention to the ways that companies report their financial results. According to a recent analysis, companies that make heavy use of non-GAAP reporting – such as tailored figures like “adjusted net income” and “adjusted operating income” – are more likely to encounter some kinds of accounting problems, such a restatements, than companies that stick to standard accounting measures. The research, by consulting firm Audit Analytics, is discussed in an August 3, 2016 Wall Street Journal article (here), and in an August 4, 2016 post on the Cooley law firm’s PubCo blog (here).
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Cornerstone Research: Since Trulia, Merger Objection Lawsuit Filings Have Plunged
One of the most distinctive recent developments in the litigation environment has been the rise of merger objection litigation, in which nearly every merger attracted at least one lawsuit challenging the transaction. Many of these cases settled quickly based on the defendants’ agreement to make additional transaction-related disclosures and to pay the plaintiffs’ attorneys’ fees. However, in a series of rulings culminating in the January 2016 ruling in the Trulia case, the Delaware Court of Chancery has shown its disapproval of the disclosure-only settlement model. It now appears that as a result of the Chancery Court developments that fewer mergers are attracting lawsuits and fewer lawsuits overall are being filed.
As detailed in an August 2, 2016 report from Cornerstone Research entitled “Shareholder Litigation Involving Acquisition of Public Companies: Review of 2015 and 1H 2016 M&A Litigation” (here), the percentage of merger transactions attracting litigation began to fall to the lowest levels in years during the second half of 2015, and the litigation dropped even further in the first half of 2016, as detailed further below. Cornerstone Research’s August 2, 2016 press release about the report can be found here.
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D&O Liability Exposures: Developments in the US and Globally
The following post previously appeared as an article in a recent issue of the Munich Re publication, Schadenspiegel. The article also appeared as a post on the Munich Re website, Topics Online. The article is reprinted here with the permission of Munich Re.
The liability arena for corporate directors and officers has long been characterized by a dynamic claims environment. In the past, the highest-profile developments in this arena have taken place primarily in the United States, due to long-standing patterns of litigiousness there. However, in the last few years changes in applicable laws and in the regulatory environment, as well as a series of high-profile scandals, have increased the significance of D&O insurance across the world.
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Will the Yates Memo’s Emphasis on Individual Prosecution Have A Counterproductive Impact?
In a September 9, 2015 memo from Deputy Attorney General Sally Yates, the U.S. Department of Justice described a new policy focused on individual accountability for corporate wrongdoing. The keystone of the policy embodied in the Yates memo is that for companies to receive any cooperation credit, they must completely disclosure “all relevant facts about individual misconduct.” According to an interesting May 26, 2016 memo from the U.S. Chamber of Commerce’s Institute for Legal Reform entitled “DOJ’s New Threshold for Cooperation” (here), the agency’s new threshold for cooperation credit is “likely to have a number of unintended consequences.” Among other things, the report notes, the new policy risks alienating personnel whose cooperation is essential to the investigation, and indeed may motivate individuals to seek individual counsel. These and other potential unintended consequences may mean that the agency’s new policy may have a counterproductive impact on corporate cooperation.
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Social Activist CEOs and Their Duties to Shareholders
I am sure many readers saw Monica Langley’s front page Wall Street Journal article earlier this week about Salesforce CEO Marc Benioff and how he uses his position to advance social causes he favors, including most recently, his efforts to combat state legislation concerning transgender bathroom use. The Journal article suggests that Benioff has launched a “new era of corporate social activism.” As the article details, Benioff’s efforts have drawn praise in some quarters, criticism in others. In a May 3, 2016 post on his eponymous blog (here), UCLA Law Professor Stephen Bainbridge raises some interesting questions about the compatibility of Benioff’s activities with traditional notions of corporate officers’ duties to shareholders.
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The Yates Memo: What Impact So Far?
It has now been seven months since the U.S. Department of Justice announced — in the form of a September 9, 2015 memo from Deputy Attorney General Sally Yates — that it was adopting a policy focused on individual accountability for corporate wrongdoing. The keystone of the policy embodied in the Yates memo is that for companies to receive cooperation credit, they must completely disclosure “all relevant facts about individual misconduct.” As discussed below, the Yates memo is having an impact in a number of ways. However, according to an April 22, 2016 publication from the Clifford Chance law firm (here), the Yates memo may be having unintended consequences – it may actually be deterring companies from divulging information.
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The Yates Memo and the Potential Liabilities of Corporate Directors
Last September, amidst considerable fanfare, the U.S. Department of Justice released a new directive – now universally known as the Yates Memo – in which it restated and reinforced the agency’s commitment to targeting corporate executives in cases of corporate wrongdoing. The cornerstone of the agency’s new policies is the specification that in order for a company to qualify for any cooperation credit in connection with a DoJ investigation, the company must provide the agency with all relevant facts about the individuals involved in the misconduct. This same focus on individuals has been echoed by top SEC officials, including the SEC’s current chair. With several months’ of experience now under the new directive, it seems worth asking how the SEC renewed focus on individuals has translated into practice and what the implications are for corporate directors.
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