Private Equity and Litigation

January 8, 2008 | Filed Under Litigation 

The rise of private equity equity has been a boon to law firms. Especially deal lawyers. When deals go awry, the PE crowd doesn’t doesn’t hesitate to move from the boardroom to the courtroom. The recent fast track litigation between Cerberus and United Rental demonstrates that.

But with private equity, there is always the discipline of calculation. The recent settlement of the proposed Blackstone-PHH acquistion shows clients with a lot of money still don’t like paying lawyers if the return isn’t right.

The Financial Times has more here (reg req $$), explaining why PHH’s changed fortunes (owing to market conditions and available financing) made it a no-go. The FT has a trenchant observation which captures how savvy business clients look at major litigation:

Blackstone’s decision means that there will not be a long drawn out legal battle with all the uncertainty and expense that entails.

I bet there will be more settlements like this. I termed this phenomenon “Litigation is Revealed as a Failure, not a Strategy.” It’s #3 in “The Wired GC Legal Top 10 for 2008.”

I promise to stop flogging that report if you subscribe here so I can send you a copy.

Dust Off That D&O Policy

November 28, 2007 | Filed Under Litigation, Governance 

Whenever the business press writes about D&O insurance, I could always count on getting a call from a covered person. Or one who thought they were.

An example is this article from the Globe & Mail in Canada. While the focus is on lawsuits brought by the former Nortel Networks CEO and CFO, who are seeking coverage for defense from civil enforcement actions, there is also mention of lower-level officers who are struggling against mounting legal bills.

Consider former Nortel assistant controller MaryAnne Poland, who had her defense cost coverage terminated 10 months after leaving Nortel in 2005:

According to a motion filed by Ms. Poland in a New York district court earlier this month, Nortel was allegedly urged by its U.S. adviser to cut off legal payments to its ousted officials as a gesture of co-operation with the Washington-based staff of the SEC. Weeks after Ms. Poland dismissed her lawyer, her motion says, she and her three children and husband were detained by U.S. customs officials for an hour and a half before boarding a flight for a Florida holiday.

More officers are going to read these stories closely and start asking questions. While nearly all company bylaws require the purchase of D&O insurance to cover officers and directors against defined legal costs and liability, the reality of growing pressure from regulators pursuing enforcement actions makes it expedient for the “new regime” at the company to turn off the faucet before a determination of liability outside the scope of coverage.

One result? Individual D&O policies, according to Barry Reiter, a partner with Bennett Jones LLP:

As a result of the uncertainty, a growing number of executives are demanding individual D&O insurance contracts with their employers. Mr. Reiter estimates that today about 50 per cent of public company officials are protected by individual contracts.

A prudent practice for the public-company GC would involve seeking counsel on D&O coverage issues from experts other than the policy broker. They are sometimes known for explaining coverage broadly before policy inception or renewal.

But when the government knocks on the door, the same broker is not always so good about returning calls.

For Want of a Good Lawyer

August 12, 2007 | Filed Under Litigation, In the News 

The Sunday New York Times profiles the litigation against Facebook founder Mark Zuckerberg by the founders of ConnectU, another social networking site. Mr. Zuckerberg allegedly did some work for ConnectU at prior to starting Facebook. Brothers Tyler and Cameron Winkelvoss claim Facebook as their own, while ConnectU founders (in the other sense of the term).

Unfortunately, the Brothers Winklevoss didn’t exactly put their ducks in a row at the time:

Here are the facts that are not disputed: In 2002, when the Winklevoss brothers were juniors at Harvard, they conceived what was initially called the HarvardConnection, which was to be a social network for the college. In November 2003, they asked Mr. Zuckerberg, who was studying computer science at Harvard, to develop the site’s software and database, promising to compensate him later if the venture prospered.

The brothers contend that Mr. Zuckerberg “procrastinated” about finishing up coding to “gain a competitive advantage.” The judge is not amused:

At a hearing on July 25, he scolded John F. Hornick, ConnectU’s lawyer, over what the judge saw as his inability to provide documentary evidence, saying, “Dorm-room chitchat does not make a contract.” He gave ConnectU two weeks to prepare a better case.

One wonders if the situation was reversed, and ConnectU wildly successful, would the Brothers Winklevoss cut Mr. Zuckerberg into the venture absent an agreement to do so?

I have seen time and time again otherwise bright entrepreneurs feel like they can do their own legal work with forms off the InterWeb. They either pick the wrong form, don’t respect it in any event, and then wonder why things don’t work out when they start to get some traction.

The worst part is when they give equity with no rhyme or reason, handing out shares like potato chips at a frat house kegger.

Lawyers who know how to counsel start-ups can be expensive. Wannabe entrepreneurs who skip this step in the process can learn that that the alternative to a few legal bills is way more expensive.

Check out ConnectU, by the way. Looks like the brothers didn’t spend much on a web designer, either.

Flight Capitol

June 26, 2007 | Filed Under Litigation, International, Regulation 

The attraction of an NYSE listing may be under increasing pressure, according ($sub req’d) to the Financial Times.

Concerns about litigation are cited in a new survey that points to a rise in the international nature of capital markets. London and Hong Kong are cited as growing at the expense of the NYSE:

Nearly 60 per cent of respondents to the survey of attorneys specialising in initial public offerings said the risk of securities litigation, coupled with the cost of developing infrastructure for a public company and meeting accounting standards, discouraged companies from going public in the US, according to Gavin Anderson, the US financial communications company. Richard Truesdell, of Davis Polk and Wardwell, said that, while US exchanges continued to capture a strong share of international offerings, their position was at risk.

“Overseas markets have developed attractive regulatory frameworks and they are getting better at marketing and providing liquidity to support IPOs,” he said.

The Gavin Anderson firm interviewed attorneys from 20 US firms representing issuers on almost $11 billion of US IPOs last year.

While it is true that law firms can benefit from the work created by increased regulation (like Sarbanes-Oxley), this survey shows that long-term it may be more of a mixed blessing if more securities work is headed offshore.

The NYSE, of course, is not sitting still, the parent company is now called NYSE Euronext.

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.

Next Page »