Yesterday, Judge Kaplan of the US District Court of Southern New York handed down this opinion in U.S. v. Stein (for background on this case, see this blog). Keith Bishop notes: This is a stunning defeat for the Department of Justice. Judge Kaplan found that the government violated the Fifth and Sixth amendments to the U.S. Constitution by causing KPMG to cut off payment of legal fees and other defense costs upon indictment. Now, it seems that KPMG (with the government’s acquiescence) will be under considerable pressure to advance defense costs. Judge Kaplan did not dismiss the indictment, but he left open that possibility if KPMG decides not to advance legal fees.
Judge Kaplan’s lengthy 88-page opinion is thoughtful and scholarly – full of the language of liberty and individual rights. Among other things, the Judge’s opinion states that “[t]he imposition of economic punishment by prosecutors, before anyone has been found guilty of anything, is not a legitimate governmental interest – it is an abuse of power.”
A lot of happy companies out there. For example, the Association of Corporate Counsel had joined in an amicus brief in this case – and now has issued this press release trumpeting the decision. We have posted a copy of the Stein opinion in our “Advancing Legal Fees” Practice Area – and check out the commentary regarding Judge Kaplan’s opinion in WSJ’s “Law Blog.”
On the other hand, the practical consequences could be limited. Here is an excerpt from the “D&O Diary Blog“:
“While Judge Kaplan’s ruling is unquestionably a significant event that will impact pending prosecutions across the country, the specific practical consequences outside the KPMG tax shelters case will remain to be seen. His ruling is based on a detailed record of the particular facts and circumstances of that specific case. In addition, as the opinion of a U.S. District Court Judge, the decision has persuasive but not precedential authority. Nevertheless, Judge Kaplan’s opinion is important and will have ramifications, and raises a host of potentially interesting questions in connection with the indictment of the Milberg Weiss law firm, among many other pending cases.”
As an aside, Keith points out Monday’s U.S. Supreme Court’s decision in U.S. v. Gonzalez-Lopez. That case also involved the Sixth Amendment’s right to counsel. In the Stein case, Judge Kaplan found that the Thompson Memorandum – and the government’s implementation of it – violated the defendants’ right to counsel under the Sixth Amendment. More analysis of this case is available on the SCOTUS Blog.
The Evolving Relationship Between Lawyers and Auditors
We have posted the transcript from the recent webcast: “The Evolving Relationship Between Lawyers and Auditors.”
Executive Compensation in the News
Heading out today to moderate a panel on executive compensation for the Society of Corporate Secretaries’ Annual Conference and thought I would point out these two recent interesting articles:
– NY Times’ “The Winding Road to Grasso’ s Huge Payday” gives a detailed and fascinating account of the behind-the-scenes machinations (including some juicy e-mails) leading up the lawsuit that was filed three years ago – which already has cost the NYSE more than $40 million in legal fees!
– WSJ’s “As Workers’ Pensions Wither, Those for Executives Flourish” is a detailed article illustrating how much relative pay in this country has gotten out of whack, as executive officer pensions – covering just a few hundred employees in a large company – can stack up fairly nicely against the pension obligations for a workforce well exceeding 100,000. Includes some interesting stats on how executive pensions is a drag on earnings – and most of us already knew about the lack of disclosure of all this, as pointed out in the article…
CA Decides to Include Mandatory By-Law Amendment Proposal In Its Proxy Statement
Following up on yesterday’s blog regarding VC Lamb’s decision to dismiss Professor Bebchuk’s lawsuit against CA without prejudice – because the issue wasn’t “ripe” – Kaja Whitehouse of Dow Jones wrote an article noting that the company has decided to include Bebchuk’s mandatory shareholder proposal that seeks to change the company’s by-laws.
CA shareholders will now get to vote on this shareholder proposed by-law amendment at the company’s annual meeting in August – and the rest of us will have to wait for another case to “ripen” before we find out what the Delaware courts decide in this important area. The floodgates for mandatory by-law proposals may soon open.
Here is an excerpt from the Dow Jones article:
“The company originally denied a request to add the proposal to its upcoming proxy statement, claiming the proposal was a violation of Delaware law. The rejection resulted in a court challenge by the drafter of the resolution, Harvard professor and shareholder rights activist Lucian Bebchuk.
A ruling by the court would have shed light on the currently murky issue of whether shareholders have the power to decide bylaw issues, which are normally governed by directors. A company’s bylaws are the official rules that govern its management.
Shareholder proposals are typically advisory, meaning management has the option to adopt or ignore the recommended action. As part of a growing effort by shareholders to gain more control over how public companies are governed, more shareholders are looking to submit proposals that would require companies to adopt their plans if approved by a majority of shareholders.
The CA case has broader legal and governance consequences for corporations. For one, companies may be more reluctant to reject proposals that seek to change the bylaws. Companies can reject shareholder proposals for a number of reasons, including concern that a resolution would interfere with internal affairs.
Before definitively rejecting a proposal, however, corporations tend to seek the blessing of the Securities and Exchange Commission in the form of a “no-action” letter.
Before Bebchuk brought the case to court, CA sought a no-action letter from the SEC to test whether its rejection would pass muster. The SEC refused to issue a letter in this case, citing the pending ruling.
Without a clear answer from the Delaware courts on the legality of this issue, the SEC may not feel comfortable issuing no-action letters for similar requests, said Michael Barry, of Grant & Eisenhofer, the Wilmington, Del., law firm that filed the lawsuit on behalf of Bebchuk.
“They’re hesitant to opine on matters of unsettled state law,” said Barry, adding, “It would put then in an awkward position.”
SEC officials declined to comment on the matter, said spokesman John Heine. Agency staff will make its position known when the issue comes up again, said Heine.
A lack of clarity from the court system, which indicates that Delaware judiciaries feel shareholders could have a right to change a company’s bylaws, prompted CA’s change of heart about the proposal.
“The Delaware Court has ruled that it should not decide the legality of the by-law [issue] until our stockholders have first voted on it,” said Jennifer Hallahan, a spokeswoman for the company.”