Hot Issues in Executive Compensation 2021

Hot Issues in Executive Compensation 2021

Ethical Considerations When

Counseling Boards, Compensation

Committees, Companies and

Executives

Practicing Law Institute

October 14, 2021

Erin R. Miner Jennifer S. ConwayMartha N. Steinman

2

Introduction

◼ Recent developments have heightened the focus on the discharge of

fiduciary and ethical responsibilities by principals and attorneys

◼ This focus has resulted in scrutiny by Congress, regulators and the

judiciary

◼ Legislative and regulatory activity has focused on a number of

factors, including

● Independence

● Transparency

◼ These developments may raise special concerns for compensation

attorneys

3

Certain Basic Principles

◼ Ethical underpinnings of the attorney-client relationship

● Conflicts of interest, generally

● The ABA Model Rules of Professional Conduct and equivalent rules in each state and D.C.

● Related ethics opinions, case law, judiciary rules and treatises

◼ Who is the client?

● Duty of confidentiality; privilege

● Representing multiple clients

● Representing an organization, and dealing with its employees and agents

◼ Distinguish - who pays the bills?

● But be careful about confidential information in third-party bills

4

Certain Basic Principles

◼ Scope of engagement

◼ Consent

● Waivers from adverse parties

● Waivers from jointly or simultaneously represented clients

◼ Sometimes, independent counsel may really be needed

◼ Non-waiver (“political”) issues

● Intake issues

● Is this a thicket into which you want to go? (Is it worth it?)

Who Is the Client?

◼ Identify the client

• Sounds simple, but often it is not

• Critical to understand from the outset who you represent

– Engagement letters

• Within an organization, people wear many hats

– E.g., officer, director, individual

5

Who Is the Client?Model Rule 1.13

◼ Model Rule 1.13: Organization as Client

(a): A lawyer employed or retained by an organization represents the

organization acting through its duly authorized constituents.

(f): In dealing with an organization’s directors, officers, employees,

members, shareholders or other constituents, a lawyer shall explain the

identity of the client when the lawyer knows or reasonably should know that

the organization’s interests are adverse to those of the constituents with

whom the lawyer is dealing.

(g): A lawyer representing an organization may also represent any of its

directors, officers, employees, members, shareholders or other constituents,

subject to the provisions of Model Rule 1.7. If the organization’s consent to

the dual representation is required by Model Rule 1.7, the consent shall be

given by an appropriate official of the organization other than the individual

who is to be represented, or by the shareholders.

6

Who Is the Client? Constituents

◼ Who are “constituents”?

● Corporate officers

● Employees

● Shareholders

● Directors

● Trustees

7

Who Is the Client? Obligation to Inform

◼ Keeping the parties informed

• Make sure that the parties know who you represent and who you do

not represent

• Affirmative obligations to clarify misconceptions and

misunderstandings - Model Rule 4.3:

• “In dealing on behalf of a client with a person who is not represented by

counsel, a lawyer shall not state or imply that the lawyer is disinterested.

When the lawyer knows or reasonably should know that the

unrepresented person misunderstands the lawyer’s role in the matter,

the lawyer shall make reasonable efforts to correct the

misunderstanding. The lawyer shall not give legal advice to an

unrepresented person, other than the advice to secure counsel, if the

lawyer knows or reasonably should know that the interests of such a

person are or have a reasonable possibility of being in conflict with the

interests of the client.”

8

Who Is the Client? Internal Investigations

◼ Internal Investigations

• Interest of the company and other constituents are often opposed in

the case of internal investigations

• U.S. v. Ruehle (9th Circ. 2009) (holding that the CFO was precluded

from asserting attorney-client privilege in respect of statements he

made to outside counsel hired by his employer to conduct an internal

investigation, even in the absence of an Upjohn warning, which is a

warning that the lawyer does not represent the individual employee,

a/k/a a “Corporate Miranda Warning”)

9

Representation of Multiple Parties/Conflicts◼ Can you represent multiple constituents?

● Maybe

◼ Model Rule 1.7 – Conflict of Interest: Current Clients

(a) Except as provided in paragraph (b), a lawyer shall not represent a

client if the representation involves a concurrent conflict of interest. A

concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another

client; or

(2) there is significant risk that the representation of one or more

clients will be materially limited by the lawyer’s responsibilities to

another client, a former client or a third person by a personal

interest of the lawyer.

10

Representation of Multiple Parties/Conflicts

◼ Model Rule 1.7 (cont’d)

(b) Notwithstanding the existence of a concurrent conflict of interest

under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to

provide a competent and diligent representation to each affected

client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one

client against another client represented by the lawyer in the same

litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.

11

12

Certain Practical Considerations

◼ Attorney as advisor; attorney as advocate

◼ To whom the legal duty is owed

◼ Providing options, not telling the client what to do

● Civil issues vs. criminal issues

◼ Watching for when interests of constituents are adverse or differ

◼ Watching for privilege issues

◼ Navigating thorny issues by building relationships with inside counsel

◼ Engagement letters and other details of engagement

● Outside counsel’s preference is often to narrow the scope of who is

considered the client and receive broad conflict waivers; inside counsel’s

preference is often the opposite

13

Attorney-Client Privilege – In General

◼ Again – who is the client?

◼ Communication (i) made between privileged persons (ii) in confidence

(iii) for the purpose of obtaining or providing legal assistance for the

client

◼ Details can vary with the context

14

◼ Significance of identifying the client

◼ Losing the privilege

● Whose privilege is it?

● How can it be lost?

- Waiving the privilege

- Accidentally losing the privilege

● Who’s at what meeting?

- Practical issues

- Non-privilege perception ramifications

- Preserving privilege of communications with non-lawyer professionals,

such as accountants and compensation consultants, may depend on

specific interactions

Preserving the Privilege

Who is the Client in Mergers & Acquisitions

◼ What duties do the target’s attorneys owe the buyer following the

consummation of the transaction?

● Confidentiality

● Privilege

● Conflicts and disqualification

◼ It may depend on the jurisdiction

15

Who is the Client in Mergers & AcquisitionsNew York

◼ The New York Court of Appeals (Tekni-Plex, Inc. v. Meyner &

Landis, 89 N.Y.2d 123 (N.Y. 1996) found a buyer was considered

the former client of the target’s attorneys because:

● The buyer continued the business of the target (and did not just purchase

discrete assets)

● The merger agreement specified that the buyer possessed all rights and

privileges of the target

● Target’s attorneys were disqualified from representing the selling shareholder

in a dispute with the buyer relating to the sale transaction because of such

attorneys’ ongoing duties to the buyer as a former client

◼ With respect to privilege, however, the Court distinguished

between

● General business communications – privilege passes to the buyer

● Communications relating to the negotiation of the transaction – privilege

remains with the target’s former shareholders

16

Who is the Client in Mergers & AcquisitionsDelaware

◼ In Delaware, in a statutory merger, courts have held that the

target’s privilege transfers to the buyer as a matter of law (see

Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I,

LLLP, 80 A.3d 155 (Del. Ch. 2013))

◼ Parties are free to (and typically do) negotiate a different result

◼ In a recent case, a Delaware court clarified that the default rule

above does not apply to asset sales, which are solely governed

by the parties’ agreement (RE: DLO Enterprises, Inc. v.

Innovative Chem. Prod. Grp., LLC,, No. CV 2019-0276-MTZ,

2020 WL 2844497 (Del. Ch. June 1, 2020))● Other jurisdictions have used the “practical consequences” test, which generally

dictates that attorney-client privilege will transfer to the new owner if the practical

consequences of the transfer result in both the transfer of control of the business

and its continuation under new management

17

Who is the Client in Mergers & AcquisitionsPotential Issues

◼ Advising executives on negotiating new employment, change in

control, retention and similar agreements and enforcing existing

agreements

◼ Must be mindful of the identify of the client, potential conflicts and

the obligation to inform discussed above

◼ Following a transaction, what duties do the target’s attorneys owe

the buyer?

● For example, advising executives of the former target regarding the

enforcement of a change in control agreement

● The attorney may be limited in the ability to advise if doing so could

involve using information the attorney has an obligation to keep

confidential on behalf of the buyer

● See Model Rule 1.9 regarding duties to former clients

18

19

Special Considerations for Executive Compensation and Public Companies

◼ Functioning in an environment where any and all actions will be

second-guessed

◼ Face risk of -

● Liability

● Shareholder backlash

● Negative publicity

◼ Liability and fiduciary duties

● Duty of care

● Duty of loyalty

● Business-judgment rule

- Impact of “say on pay”?


◼ Sarbanes-Oxley requirements – “reporting up”

● In January 2003, the SEC adopted the final rule implementing SOX Section

307 (codified at 17 C.F.R. § 205.1-205.7)

● The rule requires lawyers appearing before the SEC in the representation of

an issuer to report “material violations” to the issuer’s chief legal officer

(CLO) or both its CLO and chief executive officer (CEO); the issuer’s CLO

must then cause an appropriate inquiry and notify the lawyer of his or her

findings

● Unless the lawyer believes the CLO or CEO has provided an appropriate

and timely response, the lawyer must report to the audit committee

20


◼ Sarbanes-Oxley requirements – “reporting up” (cont’d)

● If the lawyer does not believe the issuer has provided an appropriate

and timely response, the lawyer must explain his or her reasoning to the

CLO, the CEO, and the directors to whom he or she reported

● The lawyer may then reveal confidential information to the SEC under

certain circumstances

● The rule also created alternative reporting procedures when the issuer

has established a qualified legal-compliance committee

21


• Similar reporting obligations exist under the ABA Model Rules

• ABA Model Rule 1.13(b)-(d) Organization As Client – If a lawyer for an organization

knows that an officer, employee or other person associated with the organization is

engaged in action, intends to act or refuses to act in a matter related to the

representation that is a violation of a legal obligation to the organization, or a violation

of law that reasonably might be imputed to the organization, and that is likely to result

in substantial injury to the organization, then the lawyer shall proceed as is reasonably

necessary in the best interest of the organization

• The Model Rule also provides for “up the ladder” reporting, including, if warranted to

the highest authority that can act on behalf of the organization

• In the case of failure of such authority to act, if the lawyer reasonably believes that the

violation is reasonably certain to result in substantial injury to the organization, the

lawyer may reveal the information outside of the organization (whether or not Model

Rule 1.6 permits such disclosure)

• The discretion to reveal information outside the organization does not apply with

respect to information relating to a lawyer’s representation of the organization in

investigating, or defending the organization or a constituent against, a violation of law

22


◼ Dodd-Frank adviser-independence rules

● Section 952 of the Dodd-Frank Act added Section 10C to the ’34 Act

● Rule 10C-1 (17 C.F.R. § 240.10C-1) required exchanges to adopt listing

standards for compensation committees to consider adviser

independence

● NYSE and NASDAQ adviser-independence rules required compliance

by July 1, 2013

● Compensation Committee must consider adviser independence prior to

receiving advice from a compensation consultant, legal counsel or other

compensation adviser

- When is the Compensation Committee receiving advice?

23


◼ Dodd-Frank adviser-independence rules (cont’d)● Six factors must be considered:

- the provision of other services to the Company by the person that employs the

compensation consultant, legal counsel or other adviser;

- the amount of fees received from the Company by the person that employs the

compensation consultant, legal counsel or other adviser, as a percentage of

the total revenue of such person;

- the policies and procedures of the person that employs the compensation

consultant, legal counsel or other adviser that are designed to prevent conflicts

of interest;

- any business or personal relationship of the compensation consultant, legal

counsel or other adviser with a member of the compensation committee;

- any stock of the Company owned by the compensation consultant, legal

counsel or other adviser; and

- any business or personal relationship of the compensation consultant, legal

counsel, other adviser or the person employing the adviser with an executive

officer of the Company

24


◼ Dodd-Frank adviser-independence rules (cont’d)

● Assessment process:

• Committee should perform consultant/adviser independence assessment

once a year as part of annual compliance process (unless a new

engagement or material change warrants an interim assessment)

• Committee can retain any compensation adviser regardless of

independence, but must perform the independence assessment prior to

selecting the adviser (other than in-house counsel)

• There is no obligation that the Committee reach an affirmative conclusion

about the outcome of the independence assessment or that the

assessment be documented, but it is generally advisable to memorialize

in the Committee minutes that the assessment occurred and to attach

any associated documents

• Law firms have procedures for providing information needed for the

assessment

25

Documents

Hot Issues in Executive Compensation 2021