6/13/2012

Selected Ethics Issues in Mergers and Acquisitions Practice

Pennsylvania Bar Institute June 2012

Sue Friedberg Associate General Counsel Buchanan Ingersoll & Rooney PC

2012 Copyright Buchanan Ingersoll & Rooney PC

1 www.bipc.com

Todays Agenda
Review of basics: Representing organizations Conflicts in mergers and acquisitions practice Waivers Current hot button issues: Joint representation Negotiation ethics Clients who get too close to the line Inadvertent disclosure and metadata Ten reminders for managing risk and practicing ethically

Identifying The Client

Transactional practice generally involves representing organizations Organizations have multiple constituents Owners Boards of Directors (or equivalent) Managers Employees Lawyers identify with people rather than abstract entities

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Organization as Client: Rule 1.13:

Client is the organization acting through its duly authorized constituents Lawyer owes a fiduciary obligations of loyalty and confidentiality to organization, not constituents unless the specific circumstances show otherwise (ABA Formal Opinion 91-631) Duty to advise constituent whose interests are adverse to organization that you do not represent that individual and that person should consider separate counsel Duty to report up the ladder if a constituent is likely to cause substantial injury to the organization
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Conflicts in Mergers and Acquisitions:

Dispute between company and constituent (individually represented in other matters) Dispute between jointly represented clients Deal parties want one lawyer to represent both sides Deal is adverse to affiliate of another client New parties become involved in ongoing deal Thrust upon conflict (e.g. adverse party is acquired by current client) Lawyer has other interest in transaction Acquiring company wants to engage sellers counsel after the closing Lawyer (or firm) learns confidential information from one client that is material to another client, but cannot be disclosed
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Conflicts of Interest Current Clients: Rule 1.7

A lawyer may not represent a client if the representation will be directly adverse to another current client, unless:
the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; the representation is not prohibited by law; 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 each affected client gives informed consent, [confirmed in writing]
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Direct Adversity May Exist:

Even if the work for the affected clients is completely unrelated Even if someone else in the firm represents the other client (Rule 1.10 imputed conflict) Even if the adverse matter involves friendly negotiations Even if there is no direct contact between the clients (giving an opinion)

Managing The Waiver Process

Client seeking representation must waive first Client seeking representation must agree to asking adverse party to grant the waiver Client seeking representation must be willing to disclose sufficient information to be confident of informed consent

Effective Conflicts of Interest Waivers

Lawyer must communicate adequate information and explanation about: Material risks Reasonably available alternatives Model Rules and many states require confirmation in writing Writing is best practice even where not required

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Can Advance Waivers Be Effective?

Demonstrate that client understands material risks (foreseeable adverse consequences) and reasonably available alternatives Client is experienced user of legal services who is reasonably informed about the risks Client obtains advice from independent counsel about risks and ramifications of granting a waiver Scope of waiver limited to future conflicts unrelated to the subject of the representation Clients more likely to grant advance waiver for transactions than for litigation
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Joint Representation in Mergers and Acquisitions (a/k/a Whose party is this anyway?)

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Concurrent Representation of Organization and Constituent (Rule 1.13)

Lawyer may represent concurrently the organization and its directors, officers, members, shareholders and employees, subject to the conflict of interest rules [O]rganizations consent to the dual representationshall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders Organization expects attorney to be available for representation adverse to constituent Constituent client expects duty of loyalty from attorney
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Potentially conflicting duties under ABA Rule 1.13:

Attorney must report up the corporate ladder, when it knows that a constituent has violated or intends to violate the law likely to result in substantial injury to the organization Attorney may report out to authorities outside the organization if the highest authorities within the organization fail to act on a violation attorney believes reasonably certain to result in substantial injury to the organization

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Conflicts of Interest Representing Sell-side:

Active (employed) shareholders stock price v. employment terms Passive investors: stock price only Controlling owner: premium for control shares compensation for personal liability for representations and warranties personal liability for indemnification

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The CEO tells you that he expects to receive a premium for his control shares and a lucrative employment agreement
What are your responsibilities if the CEOs personal interests are, or could become, directly adverse to the interests of the other shareholders? Are you permitted to continue to represent all the selling shareholders? What information should you get before proceeding any further in order to decide who you may and may not represent? What precautions should you take before communicating directly with any of the other shareholders

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Conflicts: of Interest Representing Buy-side: Joint venture acquirer Single purpose entity Teaming/ clubbing arrangements Unknown limits of authority (foreign deals, parent subsidiary, internal disputes on buy-side)

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Joint Representation Basics:

Inherent conflicts always require waiver Whether conflict may be waived depends on the circumstances May not be waived if parties interests are fundamentally antagonistic May be waived if parties interest are generally aligned (even if some differences exist) Permissible to seek to establish or adjust a relationship between clients on an amicable and mutually advantageous basis

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Default Outcomes in Undocumented Joint Representations

All information related to the matter must be shared with all co-clients If actual conflict develops must withdraw from all affected co-clients Confidential information disclosed cannot be recalled if a conflict arises

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Avoiding Default Outcomes in Joint Representations

Identify sources of possible conflict Specify limitations on sharing confidential information Describe risks: Divided loyalty Attorney-client privilege May need to withdraw May need to engage separate counsel Explain reasonably available alternatives: Separate counsel

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Negotiation Ethics (a/k/a What do you do if your client tries to push you too close to or over the line?)

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The associate working on the disclosure schedules for the agreement tells you that the CFO deleted the disclosure about a cease and desist letter received from an inventor asserting that one of the Company's best selling products infringes his patent. The CFO is insisting that because that inventor has not filed a lawsuit, the inventors assertion of patent infringement does not need to be listed on the schedule. The associate is concerned that, in fact, the matter should be disclosed to the Buyer as a "threatened" material adverse event. Also, in face to face negotiations with the Buyer and Buyer's lawyer, the CEO stated unequivocally that the Company had never been sued or even threatened with a serious lawsuit and that the Company's patents are "unassailable."

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Do you have a duty to correct or require the client to correct the misinformation given to the adverse party? Are you obligated or permitted to withdraw if the client persists in a course of action that you believe is unethical? Could you be liable to the Buyer if the misinformation is not corrected, the deal closes, and an infringement action is brought by the inventor? Does the analysis change if you are giving a "no material misrepresentation" opinion? Is the associate protected under the Rules of Professional Responsibility if he follows your instruction not to disclose the cease and desist letter?
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Ethics in Negotiations
Four directly relevant rules: MRPC 1.2(d) MRPC 1.4 MRPC 4.1 MRPC 8.4(c)(c) Curiously, more case law (including disciplinary cases) involving negotiating the settlement of cases than transactional lawyers

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Possible consequences for lawyer whose conduct violates or is alleged to violate these rules: Disciplinary action Judicial sanctions (public scolding---fines) Civil liability for fraud, negligent misrepresentation, or aiding and abetting the client's fraud or breach of fiduciary duty

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Ethics in Negotiations
Rule 4.1. Truthfulness in statements to others In the course of representing a client a lawyer shall not knowingly: Make false statement of material fact or law to a third person; or Fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6

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Ethics in Negotiations: Rule 4.1 Comments:

Misrepresentations can also occur by partially true but misleading statements or omissions that are the equivalent of affirmative false statements. Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a partys intentions as to an acceptable settlement of a claim are ordinarily in this category

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Ethics in Negotiations
Reliance in fact, or causation, in fact, not technically required to violate 4.1(a) (if reliance would have been reasonable, then whether the counterparty in fact relied is irrelevant) "knowingly" defined in Rule 1.0(f) to mean actual knowledge, not bad intention, but case law suggests that reckless disregard can meet the knowledge requirement certain circumstances. Under 4.1(b), a lawyer cannot sit idly by when a client dissembles if the clients conduct amounts to fraud or a criminal act

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Generally acceptable negotiating conventions (ABA Comm. on Ethics & Professional Responsibility, Formal Opinion 06-439) Understating the client's willingness to make concessions Exaggerating strengths and minimizing weaknesses. Estimating price or value. Not disclosing the existence of a principal (except when nondisclosure would constitute fraud). Failing to correct the other party's misunderstanding, based on information from third parties, about the client's finances.

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Bottom line price

Okay to dissemble and not reveal bottom line or limits of authority Usually okay, but may not assert value where there is none or if there is serious disparity in sophistication or access to information Usually okay, unless nondisclosure would be fraudulent Unethical to claim if not true

Value

Undisclosed principal Fictional other offer

Downturn before closing, closing certificates required as to no MAE Drafting error

Failure to reveal would be fraud, attorneys noisy withdrawal or even disclosure required ABA 86-1518, counsel may correct without consulting with client; if client wanted to take advantage of error, lawyer could be assisting in a fraud

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Ethics in Negotiations
Rule 1.2. Scope of Representation .. A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.

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Ethics in Negotiations
Rule 1.4. Communication (a) A lawyer shall:
(5) Consult with the client about any relevant limitation on the lawyers conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.

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Ethics in Negotiations

Rule 8.4. Misconduct It is professional misconduct for a lawyer to: engage in conduct involving dishonesty, fraud, deceit or misrepresentation;

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What do you do when a client who wants to push you too close to or over the line?

Get tough Get help Report up the ladder Disaffirm opinion or other documents Get going: Withdraw

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Ethics in Negotiations
From Douglas R. Richmond, Lawyers Professional Responsibilities And Liabilities In Negotiations, 22 Geo. J. Legal Ethics 249 (2009) Most problems are rooted in allegations of dishonesty by lawyers in communications with third persons Lawyers can generally avoid professional catastrophe if they remember some simple precepts: If lawyers speak on material issues of fact or law, they must do so honestly Whether a particular statement of fact or law is material generally requires case-specific inquiry [T]he ethics rules as applied to negotiation are relatively straightforward
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Inadvertent disclosure and metadata (a/k/a Perils of Doing deals in the Digital Age)

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Although the reference to the inventor's cease and desist letter was deleted from the schedule, you did not use the metadata scrubber before emailing the litigation disclosure schedule to Buyer's counsel. A tech savvy lawyer on the other side might search the metadata and discover the deleted item.
Is Buyer's counsel permitted to search the metadata? Would the result be different if Seller's lawyer sent the wrong version inadvertently? Did you breach your duty of confidentiality by not removing the metadata?

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Inadvertent disclosure of confidential information:

Comment [16] to Rule 1.6:
A lawyer must act competently to safeguard information relating to the representation of a client against inadvertent or unauthorized disclosure

Comment [17] to Rule 1.6:

When transmitting a communication that includes information relating to the representation of a client, the lawyer must take reasonable precautions to prevent the information from coming into the hands of unintended recipients.

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Receipt of inadvertently disclosed information:

Rule 4.4 Respect For Rights Of Third Persons .(b) A lawyer who receives a document relating to the representation of the lawyer's client and knows or reasonably should know that the document was inadvertently sent shall promptly notify the sender.

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Can the recipient mine the metadata? Split among State Bar ethics authorities as to whether metadata may be searched and used ABA Comm. on Ethics & Professional Responsibility, Formal Op. 06-422 (August 5, 2006): Rule 4.4(b) does not apply to metadata PAduty to avoid sending metadata that would harm client and recipient may search and use metadata (PA Formal Opinion 2009-100) ABA position likely to prevail

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No Contact Rule (a/k/a So you think youd rather be a scriptwriter)

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CEO complains that he is not getting what he wants from Buyer and he thinks that Buyer's attorney is "making trouble." You suggest that maybe he should contact Buyer's President directly to work something out.
Are you required to stop your client from communicating with the Buyer? Are you permitted to assist the CEO in planning what to say to the Buyer?

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Communicating with Represented Parties:

Rule 4.2 = No contact rule Comment 4: .A lawyer may not make a communication prohibited by this Rule through the acts of another. In ABA Formal Ethics Op. 11-461: Parties to a legal matter have the right to communicate directly with each other. A lawyer may advise a client of that right and may assist the client regarding the substance of any proposed communication. The lawyer's assistance need not be prompted by a request from the client. Such assistance may not, however, result in overreaching but the lawyer. But, compare: Bd. of Professional Responsibility v. Melchior, __ P.3d __, 2012 WL 32354 (Wyo. Jan. 6, 2012) held that attorney had violated Rule 4.2 by drafting and filing a divorce settlement agreement that his client presented to an opposing party without the knowledge of the opposing party's counsel.

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More Conflicts (a/k/a The Empire Strikes Back)

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After working on this deal you discover that another attorney in your firm is representing a "sister affiliate" of the Buyer, owned by the same private equity fund, in an unrelated matter.
Is it a conflict of interest to represent a client if your firm represents a corporate affiliate of the adverse party in an unrelated matter? What do you do if a conflict of interest with the adverse party is discovered after the engagement is well underway? What if the private equity fund acquired your other client mid-way through your SloGro transaction?

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Weighing the Factors in Corporate Family Conflicts

Courts do not apply strict pierce the corporate veil standard ABA Opinion 95-390 (1995) looks to common legal department, same in-house counsel, same facilities, same business personnel Risk of using confidential information to disadvantage of adverse affiliate Some courts use alter ego analysis Some courts will find conflict, but decline disqualification as the remedy

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Practical Considerations in Corporate Family Conflicts

Often no win to take on matter adverse to affiliate of organization client Some courts still treat entire corporate family as the client for conflicts purposes Engagement agreement try to include provision to limit scope of representation Organization client may exercise ultimate self-help remedy fire the lawyer

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Conflicts of Interest - Corporate Family Conflicts

Representation of organization is not automatic bar from representing another client adverse to an affiliate (such as parent or subsidiary of the organization client) ABA Op. 95-390 (1995) Rule 1.7, Comment 34 Is there is an understanding that the lawyer will not handle matters adverse to the clients affiliates? Would adversity to the affiliate create a material limitation conflict for the lawyer?

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Other Interest Conflicts

Law Firms interests: Conflict presented if firm has economic interest (stock for fees) Personal interests of lawyer: Director, officer, owner of client Other clients interests: Conflict presented if lawyer must protect confidential information or interests material to another client

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Confidential Information Conflicts

Formal Opinion 2005-02, The Association Of The Bar Of The City Of New York, Committee On Professional And Judicial Ethics Is the information is so important to another client that the lawyer cannot avoid using that information? Will possession of the confidential information reasonably affect the lawyer's independent judgment in representing the other client?

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Really tricky conflicts: If you represent the Seller, can you also represent the Buyers lender? If you represent the Seller, do you have a conflict of interest if the lender to the Buyer is your firms current client in unrelated matters?

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Conflicts of Interest Post-Closing Conflicts

Problem: Can you represent the selling shareholders adverse to your former client the company they sold? Can sellers counsel continue to represent the acquired company after closing? Solution: Cover post-closing conflicts (and privilege) in the deal documents

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TOP 10 REMINDERS FOR RISK MANAGEMENT AND ETHICAL PRACTICE IN MERGERS AND ACQUISITIONS

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Top Ethics/Risk Management Reminders:

Know and document who your client(s) is/are and is/are not Monitor conflicts throughout the life cycle of the deal; document waivers Understand the transaction and its context; be wary if your client cannot clearly explain the purpose and how it will operate Maintain professional distance and skepticism; be alert for signs of financial distress Negotiate hard, but within ethical boundaries

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Top 10 Reminders (continued):

Guard against information silos with intra-firm procedures to share important client information Avoid time saving drafting conventions that lead to ambiguity (notwithstanding, subject to) and contradictions (different procedures for dispute resolution) in an agreement Maintain client business records/formalities scrupulously; assemble and preserve complete executed copies of closing documents Know the limitations and weaknesses of the technology you rely on to communicate and store confidential information and take compensating measures Learn attorney-client privilege and be proactive in protecting it
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