HP, the SEC, and Reliance on Counsel
May 24, 2007 | Filed Under Litigation, Compliance, Governance
The SEC confirmed yesterday that HP would not face sanctions over a failure to explain why director Thomas Perkins left during last year’s Dunn-director investigation saga.
“From the whole hubbub that erupted last summer, this is it” in terms of SEC enforcement, said Marc Fagel, associate regional director for the SEC in San Francisco. “We view the issue as a narrow one, which is, what is a company’s responsibility when a director resigns.”
It is unusual, in my experience, for a regulator to use the word “hubbub.” Sort of hard to press charges over hubbubs.
The SEC’s decision was explained thusly:
“It was a new rule and (HP) relied on their attorneys,” Fagel said. “They got legal advice from inside and outside counsel that they did not need to make the disclosure. You need to be careful how you sanction a company that relied on its counsel.”
“You need to be careful how you sanction a company that relied on its counsel.”
Ah, music to the ears of SEC partners everywhere. And a standard that regulators of various stripes should consider.
That said, will inside counsel make such a call in the future without an outside opinion? Are they covered (insurance, indemnity or otherwise) if they do and they are wrong?
While HP still faces related shareholder litigation, this is definitely a positive development for new HP GC Michael Holston.
The World Bank Ex-GC Speaks
May 21, 2007 | Filed Under Investigations, Governance, In the News
Corporate Counsel’s David Hechler offers a fascinating glimpse into a GC’s view of events in the news. Mr. Hechler reports on the legal maneuverings behind Paul Wolfowitz’s fall from grace at the World Bank, with insights from Roberto Dañino, the bank’s former GC. This account provides a welcome counterpoint to some opinion pieces, such as this one from the Wall Street Journal.
Mr. Wolfowitz, as Wired GC readers undoubtedly know, resigned last week as president of the World Bank over concerns about his handling of the transfer of his girlfriend from the bank to the State Department. As the president of anything, you normally don’t want any personal ethical problem in the news, let alone one that involves your “girlfriend.”
Anyway, at various times in the review of this delicate situation, Mr. Wolfowitz reportedly consulted Mr. Dañino, utilized personal counsel, and then went to outside counsel when Mr. Dañino was “conflicted.” These actions didn’t make sense to the then-GC:
Dañino says he’s baffled by this decision. “How [could Wolfowitz] make a call about conflicting out the lawyer of the bank, who happened to have also given advice that he didn’t like?” Also, he adds, the rationale in the adviser’s memo made no sense. Not only was Wolfowitz represented by his own lawyers, “the general counsel is not the personal lawyer of the president,” Dañino says. “The general counsel is the lawyer for the institution.”
Mr. Dañino was allegedly not shown the terms of the employment contract for Mr. Wolfowitz’s girlfriend that may have contained terms more generous than those approved by the bank’s ethics committee. Experienced GCs know that outcomes can sometimes be “managed” by corporate personnel based upon the extent of disclosure of key documents and whether direct contact is allowed with key actors in real time.
My favorite remark from Mr. Dañino:
“I tell my children all the time: When you make a mistake, it’s not so much the mistake you make [that counts], but how you react to your mistake…”
General Counsel rarely speak with the press; rarer still are comments about the inside doings of events in the public spotlight. Two cheers for Mr. Dañino for allowing a look behind the veil; three cheers for Mr. Hechler for going well beneath the surface in his excellent and timely reporting.
Apple and its Options
April 23, 2007 | Filed Under Investigations, Governance
One of the clearest explanations yet of the Apple options backdating inquiry comes from the San Jose Mercury News. In a story that concludes that Apple CEO Steve Jobs is unlikely to face charges, writers Howard Mintz and Troy Wolverton explain the involvement of Apple’s legal department.
Apparently negotiations over a revised options grant to Mr. Jobs had gone on for a number of months in 2001. Although technically approved in August, other aspects of the deal were reviewed by the compensation committee in October. The legal department was notified in December that the grant was approved with an October effective date. By December the price of Apple stock had increased:
The board sent out an e-mail to the company’s legal department saying the deal was done and that Jobs’ options should carry the October grant date. At the time, Apple backdated options as a matter of course, the company revealed last December in SEC filings. Backdating Jobs’ grant wouldn’t have been seen as extraordinary, the lawyers say.
That’s where the fictitious meeting minutes come in. There is no evidence the board, or Jobs, knew that the grant would be documented through false minutes of a board meeting that didn’t occur. But that is what happened.
Wendy Howell, an in-house lawyer at Apple who typically wrote up meeting minutes related to options grants, drafted the minutes for Jobs’ grant. General Counsel Nancy Heinen signed them. Whether Howell was acting on her own or at the behest of Heinen when she falsified the minutes is a point in dispute between the former Apple employees.
But nothing points to Jobs ordering the October date, or knowing about the false meeting minutes, lawyers familiar with the matter say. A CEO would not typically review board minutes.
It is an unfortunate situation; there are ways of accurately documenting board action (such as by consent) that should not be construed later to involve a “fictitious meeting.”
We are in an era where observing corporate formality is more than just good housekeeping. It is about how things look, often many years after the fact.
Update: Bloomberg reports (as does the Mercury News) that Apple’s former GC may face SEC charges as early as this week. The New York Times notes that the former CFO may have settled with the SEC.
Harvard Goes Corporate
March 27, 2007 | Filed Under Legal Ed, Governance
One of the things this corporate lawyer feels is that law school did not prepare me very well for a career in commercial law (except for a business planning class taught by this esteemed professor).
Harvard Law School shows some savvy in a recent issue of their alumni bulletin by detailing the work of eleven members of their faculty in the area of corporate governance.
One caught my eye:
Finally, the newest member of the corporate law faculty has been delving into the world of innovation—specifically, how parties to contracts can be more creative in designing their deals. Since joining the HLS faculty this academic year from the University of Virginia School of Law, Professor George Triantis, an expert on corporate finance and commercial law, has been focused on the ways that lawyers and clients produce novel and creative contractual terms. In a yearlong seminar, he has been looking at some of the factors that promote or impede innovation, including the impact of judicial, legislative and regulatory action, and in a recent article, he examined ways of anticipating litigation in contract design.
While we would never want to commercialize the ivory tower, I applaud HLS for taking a bit of a realistic look at some of the issues corporate lawyers face.
On the other hand, law school does allow me to wax poetic about Shaffer v. Heitner!
SarbOx, Buffett-Style
March 14, 2007 | Filed Under Regulation, Governance
At yesterday’s Capital Markets Competitiveness conference hosted by U.S. Treasury Secretary Henry Paulson, there was a chance for many to speak, including the Oracle from Omaha.
The Toronto Star summarized some of the proceedings, including these remarks from Warren Buffett:
Buffett, one of the world’s richest men, said corporate America did not shine during the 1990s and is now working through the regulatory crackdown that followed. “It has no choice but to digest what’s being served up.” One result is that managers and directors are increasingly consumed by regulatory process, said Buffett, who is chairman of Berkshire Hathaway Inc.
“We are doing a lot of things that I regard as unnecessary,” he said. “It has changed the complexion of things that go on in our boardroom … Hours and hours get spent on process.
“The process that’s gone through detracts from more important issues that a board should be looking at.”
One benefit of being an oracle is that you can say what many people are thinking. Here’s the full panel that included Mr. Buffett:
Framing the Issues: Markets Perspectives
Moderators:
Treasury Secretary Henry Paulson
SEC Chairman Christopher CoxPanelists:
Warren E. Buffett, Berkshire Hathaway
James Dimon, JPMorgan Chase & Co
Jeffrey R. Immelt, General Electric
Charles R. Schwab, Charles Schwab Corp
John A. Thain, NYSE Group
Ann Yerger, Council of Institutional Investors
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