The Business Lawyer - August 2009, Volume 64, Number 4 ARTICLES Disclosure Obligations Under the Federal Securities Laws in Government Investigations David M. Stuart and David A. Wilson With the prevalence of government investigations into corporate conduct, public companies frequently face decisions about whether, when, how, and where to disclose to investors the existence of such investigations and the facts learned in the course of, or as a result of, those investigations. While the federal securities laws (and the rules and regulations promulgated thereunder) require disclosure of specific events that may arise during an investigation, neither those laws nor the courts that have interpreted them provide clear guidance for many of the disclosure decisions that must be made over the course of an investigation. As a result, counsel must carefully analyze numerous facts and circumstances, understand the company's previous disclosures, make "materiality" assessments, and determine whether to make disclosure in a current report or wait until the next periodic filing. This Article seeks to present, through an analysis of precedent disclosures, caselaw, rules, and practical ramifications, the considerations counsel must take into account in evaluating disclosure decisions in the context of an investigation. These considerations can help counsel avoid having a disclosure decision worsen the already difficult circumstances posed by the investigation itself. Contracting to Avoid Extra-Contractual Liability—Can Your Contractual Deal Ever Really Be the "Entire" Deal? Glenn D. West and W. Benton Lewis, Jr. Although business lawyers frequently incorporate well-defined liability limitations in the written agreements that they negotiate and draft on behalf of their corporate clients, contracting parties that are dissatisfied with the deal embodied in that written agreement often attempt to circumvent those limitations by premising tort-based fraud and negligent misrepresentation claims on the alleged inaccuracy of both purported pre-contractual representations and express, contractual warranties. The mere threat of a fraud or negligent misrepresentation claim can be used as a bargaining chip by a counterparty attempting to avoid the contractual deal that it made. Indeed, fraud and negligent misrepresentation claims have proven to be tough to define, easy to allege, hard to dismiss on a pre-discovery motion, difficult to disprove without expensive and lengthy litigation, and highly susceptible to the erroneous conclusions of judges and juries. This Article traces the historical relationship between contract law and tort law in the context of commercial transactions, outlines the sources, risks, and consequences of extra-contractual liability for transacting parties today, and surveys the approaches that various jurisdictions have adopted regarding the ability of contracting parties to limit their exposure to liability for common law fraud and misrepresentation. In light of the foregoing, the authors propose a series of defensive strategies that business lawyers can employ to try to limit their clients' exposure to tort liability arising from contractual obligations. Business Successors and the Transpositional Attorney-Client Relationship Henry Sill Bryans This Article focuses on the potential right of a business successor to assert various elements of a predecessor's attorney-client relationship and the implications to practitioners of a successor's ability to do so. An attorney-client relationship that the courts permit to be asserted by a business successor is referred to in the Article as a "transpositional" relationship. The Article examines in what context a successor may (1) enforce the duty of confidentiality of the predecessor's counsel; (2) assert the predecessor's attorney-client privilege; (3) disqualify the predecessor's counsel under the principles of Model Rule 1.9, or its equivalent, on the ground that such counsel should be viewed as the successor's former counsel for purposes of the Rule; and (4) assert a malpractice claim against the predecessor's counsel based exclusively on services provided to the predecessor. The Article concludes with some general observations about the decisions examined, the need of transactional lawyers to be familiar with the principles that courts have relied on, and transaction provisions that might be used to blunt the surprising, and arguably unfair, results that this line of decisions can sometimes produce. Gheewalla and the Director's Dilemma Sabin Willett Did North American Catholic Education Programming Foundation, Inc. v. Gheewalla change anything? The Delaware Supreme Court ruled in 2007 that corporate directors owe no direct fiduciary duty to creditors in insolvency, but the bar seems to have met the case with a collective shrug, concluding that the preservation of a creditor's right to pursue derivatively on behalf of a distressed corporation a claim for breach of fiduciary duty leaves intact the "fiduciary duty to the corporate enterprise" theory that informed pre-Gheewalla advice. This Article posits that this general view is wrong. In the vicinity of insolvency, two oft-cited principles—that a board should strive to maximize enterprise value, and that it should protect the shareholders—sometimes are in conflict. In a period where insolvency deepens, a discounted sale may maximize enterprise value, even as it cuts off a less likely, but real prospect of an equity-preserving restructure. This Article argues that "duty to the enterprise" theory is incoherent and ignores the reality of business valuation, which is that all prospects are uncertain. The necessary consequence of Gheewalla, construed in light of other relevant authorities, is that where any business strategy may generate a return for equity holders, the board must favor that strategy and reject alternatives, even if in the board's business judgment the strategy is unlikely to succeed, and alternatives, on a risk-adjusted basis, would maximize the enterprise value. Are Corporate Officers Advised About Fiduciary Duties? Lyman Johnson and Dennis Garvis This Article reports the results of an empirical study of whether and how in-house corporate counsel advise corporate officers about fiduciary duties. The fiduciary duties of officers long have been neglected by courts, scholars, and lawyers, even though executives play a central role in corporate success and failure. The study's findings, organized by type of company (public or private), size, and attorney position, show several interesting patterns in advice-giving practices. For example, fewer than half of all respondents provided advice to officers below the senior-most rank. The results raise the possibility that, unlike directors who may overestimate their liability exposure, certain shortcomings in giving advice to officers may cause them to underestimate personal liability exposure and engage in more risky behavior than is desirable for the company itself. The Article also offers recommendations for improved practices in advising officers about their duties. REPORTS Changes in the Model Business Corporation Act—Proposed Amendments to Incorporate Electronic Technology Amendments Committee on Corporate Laws, ABA Section of Business Law Changes in the Model Business Corporation Act—Proposed Shareholder Proxy Access Amendments to Chapters 2 and 10 Committee on Corporate Laws, ABA Section of Business Law SURVEY—UNIFORM COMMERCIAL CODE: 2008 DEVELOPMENTS The Uniform Commercial Code Survey: Introduction Russell A. Hakes, Stephen L. Sepinuck, and Robyn L. Meadows Sales Jennifer S. Martin and Robyn L. Meadows Leases Teresa D. Davidson, Barry A. Graynor, Ruthanne C. Hammett, Edwin E. Huddleson, III, Robert W. Ihne, and Stephen T. Whelan Payments Stephen C. Veltri and Greg Cavanagh Letters of Credit James G. Barnes and James E. Byrne Documents of Title Anthony B. Schutz Investment Securities Howard Darmstadter Personal Property Secured Transactions Steven O. Weise International Commercial Law Sandra M. Rocks and Kate A. Sawyer International Sale of Goods Gregory M. Duhl
