Law firm lawyers wouldn’t dream of practicing law without having a malpractice policy in place, but those policies are far from ubiquitous among in-house lawyers. This Woodruff Sawyer blog takes a look at whether in-house lawyers should consider malpractice insurance. The blog says that the good news is that if you’re worried about your employer suing you, that’s unlikely. (Of course, getting fired is a whole other kettle of fish). However, this excerpt says that there still may be some situations in which “employed lawyers insurance” may make sense:
So, when is employed lawyers insurance useful? Here are a few scenarios:
Someone Other Than the Employer Perceives an Attorney-Client Relationship with You. Say, for example, during your day-to-day dealings with other employees, someone casually asks a question about whether he should exercise his options, or about a speeding ticket or an apartment eviction. If this person now perceives that you are his lawyer because of that exchange, it’s possible that he could sue you for malpractice.
Employed lawyers insurance gives an extra layer of protection here, but it’s certainly better to avoid casually giving advice to folks who are not your clients. Your best practice is to be deliberate about refraining from giving legal advice to those with whom you do not want to have an attorney-client relationship.
If you’re in a work environment where, as a cultural matter, you feel obligated to answer these types of questions, employed lawyers insurance is something you might consider. The same is true if part of your job is to give advice to third parties that are not technically the same as your employer, for example the charitable trust “arm” of your employer.
You Are Moonlighting. Employers sometimes encourage their employees to moonlight on a pro bono basis. Employed lawyers insurance responds if you are sued for malpractice as a result of these activities. The insurance will also typically provide your defense costs should you find yourself the subject of a hearing in front of the California Bar.
You Are Concerned That Your Employer Won’t Indemnify You. You may work for an employer whom you perceive will not defend you if a third party (a vendor or customer, for example) decides to sue you for legal malpractice for whatever reason, or you are worried that your company might be insolvent (and thus can’t indemnify you) at the time of the suit.
The blog reviews how these policies work and their typical exclusions, and also addresses alternatives, including personal indemnification agreements and, in some cases, D&O insurance.
This recent article by Bloomberg Law’s Preston Brewer analyzes the results of a survey of in-house & outside securities and capital markets lawyers concerning allocation of drafting responsibilities. The survey suggests that in-house and outside counsel are usually on the same page when it comes to who should take the lead role in drafting documents, but this excerpt says that there are also some interesting areas of divergence:
Law firm attorneys overwhelmingly see due diligence request lists (68%) and term sheets (68%) as duties within their purview, while 62% of in-house respondents said they would keep due diligence lists in-house—and a full 75% of them view preparation of term sheets as a task for in-house counsel.
Less dramatically, substantially more outside counsel said they would assign themselves securities offering documents (a margin of 15 percentage points for SEC Form S-1 registration statements and private placement memoranda). For closing checklists, an astounding 100% of law firm attorney respondents would give the work to themselves versus 82% of in-house counsel choosing to assign that work to outside attorneys.
I don’t know about you folks, but speaking for myself, if an in-house colleague offered to take drafting responsibility for due diligence requests & term sheets for deals that we were working on, they would immediately move into the LARGE holiday gift basket category.
The survey found that 41% of respondents said they expect more work to go to outside counsel over the next five years, while 20% expected more work to go to inside counsel & 39% expected the mix to remain the same. That number surprises me, given the high & ever-increasing level of expertise among corporate law departments – although it may be a bit skewed by the fact that 28 of the 47 survey respondents were law firm lawyers.
The survey has a bunch of other interesting material in it involving both private and public companies, and one of the biggest takeaways is that both outside and in-house securities lawyers are pretty optimistic about the future of their practice. Attorneys feel strongly that corporate practice and securities law is a growth industry for both law firms and in-house counsel. The survey says that 70% expect increased activity in private company work, and more than half expect growth in private equity and public company representations.
Okay, a few years ago, I blogged about research suggesting that the much-maligned staggered board was actually good for shareholders. That renaissance lasted about two days, at which point it became painfully obvious that investors were having none of it. Now, I’m again peeking out of my shell to highlight another study that says staggered boards may be beneficial. Here’s the abstract:
Staggered boards (SBs) are one of the most potent common entrenchment devices, and their value effects are considerably debated. We study SBs’ effects on firm value, managerial behavior, and investor composition using a quasi-experimental setting: a 1990 law that imposed an SB on all Massachusetts-incorporated firms. The law led to an increase in Tobin’s Q, investment in CAPEX and R&D, patents, higher-quality patented innovations, and resulted in higher profitability. These effects are concentrated in innovating firms, especially those facing greater Wall Street scrutiny. An increase in institutional and dedicated investors also accompanied the imposition of SBs, facilitating a longer-term orientation. The evidence suggests SBs can benefit early-life-cycle firms facing high information asymmetries by allowing their managers to focus on long-term investments and innovations.
No, I’m not exactly sure what “Tobin’s Q” is either. You know who does know though? Cooley’s Cydney Posner, who has taken a deep dive into the study and its conclusions over on her blog. To me, the big takeaway from all of this is that while we’re all in favor of good corporate governance, the evidence continues to suggest that nobody really knows exactly what that is.
The folks at Bass Berry recently held a webcast on the new universal proxy rules and have posted this blog summarizing the key takeaways from the program. Among other things, the blog includes a chart that briefly comparing the differences between the typical proxy access bylaw and the universal proxy rules. As you know, I can’t resist quick reference materials that I can quickly glance at and use to fake my way through a conference call, and this chart clearly makes the cut. Check it out!
Targets of SEC enforcement proceedings and advocacy groups have long complained about “regulation by enforcement.” Crypto evangelists have been particularly vocal with regulation by enforcement claims in recent years, but it looks like at least one of them may have effectively figured out how to use regulation by enforcement to its advantage, Check out Matt Levine’s take on the SEC’s recent enforcement action against BlockFi:
If a crypto startup went to the U.S. Securities and Exchange Commission and said “we want regulatory clarity about what we need to do to run crypto lending programs, so you should write some rules about it,” the SEC would say “sure, we’ll give that some thought in like 2036.” If it went to 50 different U.S. states and asked them for clarity it would get even more confused. If it went to the SEC and said “look, to speed this process along, why don’t we pay you $50 million to prioritize writing these rules,” that would be a very bad crime and it would go to prison. But BlockFi will give the SEC $50 million, and it will give some states another $50 million, and now it has clarity about crypto lending programs.
That’s a classic example of being handed a lemon and turning it into a very expensive glass of lemonade, and it’s also a unique twist on the problem of “regulation by enforcement.” BlockFi had the resources to use regulation by enforcement to its advantage, but that’s not typically the case.
Now, here’s where I should note that the current director of the SEC’s Division of Enforcement says that regulation by enforcement is a problem that doesn’t exist. That’s a view that he shares with many of his predecessors, but it’s one that’s not always shared by SEC commissioners or the courts. Here’s an excerpt from the 2nd Circuit’s 1996 opinion in SEC v. Upton:
Due process requires that “laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited.” Grayned v. City of Rockford, 408 U.S. 104, 108 (1972). Although the Commission’s construction of its own regulations is entitled to “substantial deference,” Lyng v. Payne, 476 U.S. 926, 939 (1986), we cannot defer to the Commission’s interpretation of its rules if doing so would penalize an individual who has not received fair notice of a regulatory violation. See United States v. Matthews, 787 F.2d 38, 49 (2d Cir.1986). This principle applies, albeit less forcefully, even if the rule in question carries only civil rather than criminal penalties.
In the current environment, it seems fair to say that regulation by enforcement concerns are by no means limited to issues surrounding digital assets. The SEC is under enormous pressure to move forward on its current regulatory agenda, and enforcement actions may be seen as an attractive shortcut in some areas. As I’ll explain with a couple of examples below, the risk of regulation by enforcement is heightened by the increasing influence on the SEC and other regulators of novel academic interpretations of what the securities laws require – interpretations that run counter to longstanding and well-known business practices.
– John Jenkins
Programming note: our blogs will be off Monday for Presidents’ Day, returning on Tuesday.
In recent months, long-time SPAC structures that were spelled out in hundreds of registration statements reviewed by the Staff of Corp Fin have been called into question, most notably in a lawsuit filed by former SEC commissioner & NYU Law School professor Robert Jackson & Yale Law School professor John Morley. That lawsuit challenges Pershing Tontine’s compliance with the Investment Company Act, and calls into question underlying assumptions about the availability of an exemption from that statute that have been relied upon by SPACs for years.
That’s private litigation, not an enforcement proceeding – but its allegations concerning non-compliance with the Investment Company Act have been commented on favorably by current and former senior SEC officials. What’s more, in a recent article, one of those former officials, Harvard Law School professor John Coates, states that the SEC’s past inaction in the face of widespread belief in the availability of the exemption should not be an impediment to future enforcement proceedings:
Does the claim, then, reduce to a claim that a regulatory agency with a limited budget should be held to legally have given up authority if it does not bring an enforcement action when it could, even when the issue has been part of what even its promoters say was until 2020 a “backwater” of the capital markets?
No, I don’t think so. I think the claim reduces to a claim that an enforcement proceeding alleging that the typical SPAC structure violated the Investment Company Act would raise due process issues that could be avoided if the SEC opted to address these newly articulated concerns through rulemaking. I hope that’s the path that the agency will choose to take.
In addition to the SEC, the DOJ may find itself under pressure to use novel academic arguments to support enforcement activities – even in criminal proceedings. As I blogged last year, the DOJ has recently launched a major investigation into the business practices of short sellers. According to a recent NYT DealBook article, the legality of activist short sellers’ longstanding use of “short reports” has been called into question by Joshua Mitts, a professor at Columbia Law School:
Short sellers have long been told by their lawyers that as long as their reports contain no material inaccuracies and are not based on inside information, they have done nothing illegal. In the disclosure accompanying their reports, activist short sellers typically say they are short the stock but may cover at any time. And they add that they are not offering investment advice.
John Courtade, a former senior S.E.C. enforcement litigator who now represents short sellers, has designed some of these disclosures. “Scalping has to involve deception of some sort,” he said. “Just the fact that you’re going to close your position has never been held to be deception. If you look at the cases, they involve situations like not disclosing that you have a position at all.” But Mr. Mitts argues that whether the boilerplate disclosure is sufficient “has not been tested by the courts.”
The article says that the SEC is unlikely to move on a rulemaking petition submitted by Prof. Mitts, but that “it’s an open question as to whether the Justice Department will try to set a precedent by prosecuting short sellers for market manipulation under the scalping theory — or any other one not yet tested.”
I’m not a fan of SPACs or short sellers, but I am a fan of due process – and I think that there’s a legitimate risk that the SEC and the DOJ may cross the line in the upcoming months if they bring enforcement actions or criminal proceedings premised on conduct that has long been engaged in openly, with the advice of experienced counsel, and under the noses of regulators.
We’ve recently passed the 11,000-query mark in our “Q&A Forum.” Of course, as Broc would always point out when he wrote one of these Q&A milestone blogs, the “real” number is much higher since many queries have others piggy-backed upon them. When I first came on board, I never realized how much time I’d spend responding to these questions. Don’t get me wrong – all of my colleagues (and many of our members and advisory board members) have generously pitched in on the Q&A Forum, but everyone on the editorial team has their own set of responsibilities, and the way it turned out, addressing Q&A Forum questions is something that’s usually devolved to me.
I think there’s something in my background that may help explain why I’m usually the editor who responds to questions on the Q&A Forum. For the first 15 years or so of my career, I was essentially an outside in-house counsel for a pretty active regional investment bank. Among other things, that meant responding on a daily basis to multiple questions from investment bankers on securities law, state corporate law, directors’ fiduciary duties, M&A and capital markets deal processing issues, etc.
One banker even called me with a Lemon Law question on a Sunday afternoon when he got buyer’s remorse one hour after buying a new car. Like most bankers, they were a pretty laid-back bunch – in terms of when they wanted an answer, well, yesterday was just fine.
As you might imagine, this wasn’t my favorite part of the job and I didn’t miss it when it was taken almost entirely in-house after the investment bank was gobbled up by a big commercial bank in the late ’90s. But for better or worse, this experience implanted an almost Pavlovian reflex in me to try to respond promptly to questions. So, when I see a question on the Forum that I can answer, I have a pathological need usually try to respond pretty quickly.
I’m far from perfect, so trying to answer these questions is sometimes a humbling experience. But fortunately, when I’m off base on a response, our members have frequently – and invariably graciously – come to my rescue. So, over the years, we’ve collectively developed quite a resource. Combined with the “Q&A Forums” on our other sites, there have been well over 35,000 individual questions answered – including over 10,000 that Alan Dye’s answered over on Section16.net. No matter how many I answer, I’ll never catch Alan!
You are reminded that we welcome – in fact, we actively encourage – your input into any query you see that you think you can shed some light on for other members of our community. There is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t constitute legal advice.
Don’t miss out on the Q&A Forum or any of our other practical resources – checklists, handbooks, webcasts, members-only blogs and more – which so many securities & corporate lawyers know are critical to practicing in this space. If you’re not yet a subscriber, you can sign up for a membership today by emailing sales@ccrcorp.com or by calling us at 800-737-1271.
Much of the discussion on board diversity issues has focused on race, gender and sexual preference, but this recent “Race to the Bottom” blog says more attention needs to be paid to increasing the representation of people with disabilities on corporate boards. The blog recounts the unsuccessful efforts to persuade Nasdaq to include individuals with disabilities in the Diversity Matrix required by its new diversity rule. The blog says that this has left those individuals at a disadvantage when it comes to increasing their representation on corporate boards, but that their efforts appear to be receiving a more sympathetic reception at the SEC:
Even though Nasdaq did not include people with disabilities in its list of individuals that are considered to be diverse under its new diversity rule requirements, other groups are continuing to push forward and advocate on this front, and it appears that the SEC has heard their call. The SEC is considering its own board diversity rules and Commissioner Lee noted that “there’s merit to counting individuals with disabilities as diverse members of the boards, as women and ethnic minorities often are.” Commissioner Lee further stated that while it may be difficult to analyze this issue, it “does seem to [Commissioner Lee] potentially that disability is a group that makes a lot of sense to include” in SEC’s board diversity requirements. (Lydia Beyoud and Andrew Ramonas, Bloomberg Law).
The blog notes that the SEC has not released its proposed board diversity rules and that it remains to be seen whether persons with disabilities will be included in those rules. However, as I blogged a few months ago, in setting board diversity targets in its own voting policies, BlackRock specifically included individuals with disabilities in the category of “underrepresented groups.”
This Audit Analytics blog reviews the tenure of public company auditors, and notes that for Russell 3000 companies, the average tenure of their outside auditors depends a lot on their size. As of 2021, large accelerated filers in the Russell 3000 retain an outside audit firm for an average of 22 years, with a median of 17 years. Accelerated filers and non-accelerated filers both average about 12 years, but the medians differ pretty dramatically. Accelerated filers retain their audit firms for a median of 8 years, while non-accelerated filers retain their for a median of 3 years.
The more interesting data in the blog addresses the number of companies that have retained the same outside auditor for over 100 years. A total of 18 companies are members of this particular century club. Procter & Gamble leads the way – it has retained Deloitte since 1890. Another Buckeye State company, Goodyear, is right behind P&G. The tire giant has retained PwC since 1898.
In fact, I just noticed this as I was drafting this blog, but Ohio companies really have a thing for long relationships with their auditors. Five of the top ten members of the century club are headquartered in Ohio. In addition to P&G and Goodyear, Cleveland-based Sherwin Williams, Canton-based Timken, & Toledo-based Dana all have had the same auditor for more than a century. I guess I shouldn’t be surprised that my home state is so well represented – Audit Analytics says that 78% of the companies that have retained their auditors for more than 100 years are in manufacturing.
