To advise on whether an internal investigation is needed, you don’t just need to understand the applicable legal issues – you also need to exercise judgment and be familiar with the process. Sometimes, though, it can be challenging in the moment to recognize whether or not an issue is pointing towards an investigation.

This Faegre Drinker memo provides a helpful framework to identify common triggers for internal investigations and execute an effective, privilege-protected investigative process. The memo flags these stockholder demand triggers and summarizes the applicable Delaware law:

– Books and records demands

– Appraisal demands

– Derivative demands

Other triggers that the memo covers include white collar and government notices and internal misconduct. The memo explains that an internal investigation may be appropriate where:

– There are credible allegations of misconduct, and this includes gatekeeping reviews to determine credibility.

– A regulator has indicated, through formal or informal means, that there is potential misconduct.

– The issue could affect:

* Financial reporting or disclosures

* A pending or contemplated transaction

* Regulatory compliance or enforcement exposure

– The company must respond to stockholders, auditors, or regulators.

– The board is required to make a formal decision, such as responding to a derivative demand.

In these circumstances, engaging experienced counsel — often outside counsel — can help ensure that the investigation is conducted effectively and with appropriate independence.

The memo then walks through the steps of the investigative process and how to preserve privilege and independence and outlines key considerations for an external communications strategy during and after the investigation. Of course, practice makes perfect, and the Faegre Drinker team notes that for companies facing significant risk, tabletop exercises can be a valuable tool. Here’s an excerpt:

These exercises simulate scenarios such as:

– Receipt of a subpoena or search warrant

– Parallel civil and criminal investigations

– Media or market disclosures

The memo concludes with these best practices and pitfalls:

– Respond promptly and in good faith to all stockholder and government demands — delay or intransigence can result in adverse inferences, fee-shifting, or reputational harm. 

– Maintain a clear record of the board’s oversight and involvement; this is critical protection if the investigation is later scrutinized by a court or regulator.

– Carefully consider privilege risks when communicating with auditors, business partners, or third parties.

– If criminal or regulatory action is possible, coordinate closely with outside counsel to avoid interfering with government investigations and to manage parallel proceedings. 

– Use investigation findings as an opportunity to strengthen compliance, remediate issues, and update company policies or training as needed.

Programming Note: Our blogs will be off tomorrow in honor of Juneteenth. We will return on Monday, June 22nd.

– Liz Dunshee