November 15, 2006

Notes from PLI’s Securities Law Institute

In our “Conference Notes” Practice Area, we have begun posting notes from some of the panels from the recent PLI’s Securities Law Institute, including the popular Q&A with the Corp Fin Director and “Current Disclosure Issues” panel.

Liability Reserves and Waiver of the Attorney-Client Privilege

A recent decision from the Texas Court of Appeals on a discovery dispute is a good reminder of the need to limit access to the details about liability reserves in order to avoid waiving the attorney-client and work product privileges. (In Re BP Products North American Inc. (10/13/06; 1st District Texas Ct of Appeals).

BP had reported in a Form 6-K filed with the SEC that it established a reserve of $700 million to resolve estimated liability for personal injuries and fatalities from an explosion at a BP refinery. The reserve figure was computed by an in-house attorney at BP. Plaintiffs sought production of documents the attorney reviewed or used to compute the figure and the methodology. Only the $700 million figure had been disclosed.

The trial court ordered production of those documents, and BP objected claiming that the documents were protected by the work-product and/or attorney-client privilege. The appellate court found that BP had not waived the privileges by disclosure of the $700 figure to third parties – i.e., the SEC and the media – because disclosure was limited to the $700 million figure and there had been no disclosure of BP’s methodology outside of BP personnel. The court distinguished an US Fifth Circuit case that found waiver of the privileges where a company had reported the amount set aside for projected tax liabilities to the SEC AND also had disclosed its analysis to its independent auditors who verified the analyses (United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982)). The court in BP found that the company had limited disclosure to the figure itself, and that there had been no disclosure of BP’s methodology outside of BP personnel.

The waiver issue is discussed at the end of the opinion (pages 14-17); the rest of the opinion considers the procedural posture of the case and whether BP had established that the privileges applied to the documents, as opposed to whether BP had waived the privileges. Thanks to Mike Holliday for the info!

Companies Bill Ushers in Key Changes for U.K. Companies

A significant development took place last week in the UK, the adoption of the “Companies Bill,” a topic that I blogged about in March. From the latest “ISS Friday Report”: Some of the most sweeping changes for U.K. companies since passage of the Companies Act of 1985 took effect this week when the Companies Bill became law on Nov. 8. The 696-page bill, considered Britain’s longest piece of legislation, is intended to enhance shareholder engagement and promote a long-term investment culture, among other objectives.

The new law would implement several key changes such as requiring more detailed reports on environmental and social impacts, and calling for shareholders to ratify directors’ acts. The latter is standard practice in several European countries, including Germany, the Netherlands, Austria, and Switzerland.

Other changes include requiring shareholder approval of director severance contracts that allow for awards of more than two-times a director’s annual salary, as well as provisions allowing for auditor indemnification with shareholder approval.

Investors also have focused on measures that ostensibly place greater liability on directors, though some experts believe that the new rules allowing shareholders to sue directors who “don’t promote the success of the company,” will not lead to an up-tick in lawsuits against directors. “I don’t think this act will make a blind bit of difference to my practice,” Edward Sparrow, a partner at London-based Ashurst, told Bloomberg News. Sparrow noted it is more difficult to prove fraud in England than it is in the U.S., and that lawyers had little incentive to take on such cases because the law barred them from receiving a percentage of winnings when working on a contingency basis.

Other experts warn that rules empowering investors to go after directors could be far-reaching but that it is too early to determine their precise impact. The new law also affects rules on mergers and acquisitions. The new Companies Bill codifies European Union rules on takeovers, replacing the City Code on Takeovers. Britain’s Takeover Panel will remain the regulatory authority overseeing such transactions and will receive greater statutory powers. The new law will include squeeze-out and sell-out rights under which a bidder has the right to buy out minority shareholders, and minority shareholders have the right to require a successful bidder to acquire their shares, respectively. Both provisions would come into effect once a bidder has acquired 90 percent of the target firm’s shares.

Meanwhile, companies whose reporting years begin after Nov. 1 must disclose compliance with new provisions of Britain’s Combined Code on Corporate Governance, a set of best practice requirements that govern all London Stock Exchange-listed companies. The code, dubbed Britain’s governance “bible,” was last revised earlier in the year.

The changes will:

– Amend the existing restriction on the company chairman serving on the remuneration committee. The changes would allow the chairman to do so (but recommends against serving as chair of the committee) if the chairman is deemed independent on appointment.

– Provide a “withheld” vote option on proxy appointment forms to enable shareholders to indicate if they have reservations on a resolution but do not wish to vote against. Many listed companies already provide this option. A “withheld” vote is not a vote in law and would not count in the calculation of the proportion of the votes for and against the resolution.

– Enable companies to meet the requirement to make the terms of reference of board committees available by placing them on their Web sites.