BLT: December 2017


Feature Articles

Business & Corporate

Debtors, Fiduciaries, and Directors and Officers Beware: The Limits of D&O Liability Policy Coverage

Sometimes, uncontrollable financial circumstances precipitate a company’s decision to seek the protection of the Bankruptcy Code. Other times, a bankruptcy filing results, at least in part, from poor decisions made by the company’s management. A bankruptcy trustee is duty-bound to scrutinize the decisions of management and determine whether certain errors were made that caused harm to the debtor or its creditors and, if appropriate, commence litigation against the relevant decision makers for the benefit of the bankruptcy estate and its creditors. These suits often involve allegations that directors and officers have breached their fiduciary duties.

Business & Corporate

Recovering Lost Profits for Start-Up Companies

At one time, the New Business Rule generally prevented an injured party from obtaining a damages award for lost profits due to the opposing party if the injured party was a newly established business (R. Dunn, Recovery of Damages for Lost Profits, 3d ed.,1987). Absent a history of past profits, future profits seemed too “uncertain and speculative,” particularly in the progress-oriented atmosphere of the late 1800s when rules defining damages first developed (Hickman v. Coshocton Real Estate Co., 58 Ohio App. 38 (Ohio ct. App. 1936)). In addition to their desire to limit excessive damages, courts often distrusted jurors with the discretion necessary to evaluate the reasonableness of future profit estimates (B. Bollas, New Business Rule and the Denial of Lost Profits, 48 Ohio State L.J. (1987)).

Business & Corporate

“Risky Business”: The Expanding Risk-Oversight Responsibility of Compensation Committees

The listing requirements of both NASDAQ and the New York Stock Exchange mandate that a committee of independent, nonemployee directors must have principal responsibility for the compensation of CEOs and other executive officers. Accordingly, as part of their basic responsibilities, compensation committee members regularly will be engaged in assessing the performance and determining the pay levels of executive officers, the design of the compensation programs applicable to them, and the contractual arrangements governing their employment. The compensation committee members typically also are responsible for formulating share ownership guidelines, compensation clawback policies, insider-trading and anti-hedging policies, and approving compensation-related proxy disclosure.

Business & Corporate

Data: The Fuel Powering Artificial Intelligence and Machine Learning

“Garbage in, garbage out” is a phrase data scientists often use. One can apply it in many contexts, but it arises from the idea that the quality of the output of a computer will only be as good as the quality of its programming. In that simple phrase, there is a central truth often overlooked in discussions surrounding artificial intelligence (AI) and machine learning (ML): no matter how skilled your coders, or how great your algorithms, the quality of the results, signals, insights, and “learnings” these technologies provide will only be as good as the data fed to them.

Business & Corporate

Reflections on the Lawyer’s Duty of Confidence

In my years of practice, I’ve been privileged to occupy a number of different positions, from law firm partner, to the Securities Exchange Commission’s general counsel, to my current role as chief legal officer of a major hedge fund advisor. In all of those roles, I’ve been actively involved with this committee, and particularly with the question of how appropriately to balance the lawyer’s duty of client confidentiality with the ability to perceive, and perhaps to prevent, a course of client conduct that may subsequently be characterized by enforcement authorities—the SEC, the Commodity Futures Trading Commission, the Department of Justice, etc.—as client improprieties. Perhaps obviously, I choose my words carefully. When those authorities do challenge a course of conduct, they are likely to identify it as “fraud,” but it was likely not identified as such by the lawyer at the time, and to so characterize it is to bias the analysis of the lawyer’s obligation. Those questions were surfaced in a number of high-profile SEC cases from the 1970s to the early 1990s.

Business & Corporate

When Merger Review Turns Criminal

Of all the ways that a merger can go wrong, it is hard to think of a worse scenario than the deal falling apart and the parties being subject to a criminal investigation. Lawyers are constantly tracking and negotiating terms in an effort to close the deal. And in this push to finalize the transaction and meet the expectations of clients and various regulatory agencies, practitioners can be faced with potential ramifications far more serious to the business than they ever would have expected (or, at least, had hoped not to expect).

Business & Corporate

Infrastructure Bank: Time for Reconsideration of a U.S. Infrastructure Bank

Over the past decade, several legislative proposals have been made for the establishment of a national infrastructure bank by both Democrats and Republicans. Although President Trump spoke against such a bank during his campaign, more recent indications are that he is inclined to support one. An infrastructure bank will, in fact, be a means to achieve, at least in part, his campaign promise to make major improvements in needed areas of U.S. infrastructure. It will also potentially provide a bi-partisan means of making these improvements.

Business & Corporate

Third Circuit Holds That Automatic Perfection Provisions Are Not So Automatic

Close to 10 years have passed since the filing of the Chapter 11 cases of Tulsa, Oklahoma-based SemCrude L.P. However, the Third Circuit Court of Appeals recently affirmed a 2015 district court ruling that resolved a dispute between oil producers and downstream purchasers over the perfection and priority of interests in oil sold by SemCrude L.P. and its affiliates. The Third Circuit’s holding in In re SemCrude L.P., 864 F.3d 380 (3d Cir. 2017), affirmed the earlier bankruptcy and district court rulings that the downstream purchasers were “buyers for value” and took oil purchased from SemGroup free and clear of the oil producers’ liens. The decision serves as a stark warning for oil producers not to rely on automatic perfection provisions of state law, and take efforts to put subsequent purchasers on actual notice.

Business & Corporate

SEC’s Challenge—Public Company Model Is Unattractive for Many Businesses

Analysis of trends in U.S. capital markets reveals “an undeniable fact that the number of U.S. public companies has declined considerably from the peak of 20 years ago.” Ernst & Young LLP, Foreword, Looking Behind the Declining Number of Public Companies, an Analysis of Trends in US Capital Markets, May 2017 (E&Y Analysis). Listings of public companies in the United States “fell by roughly 50 percent . . . from 1996 through 2016.” Credit Suisse, The Incredible Shrinking Universe of Stocks, the Causes and Consequences of Fewer U.S. Equities, Mar. 22, 2017, at 1 (Credit Suisse Report). The reality is that more companies are choosing to stay private longer, and some public companies voluntarily “go dark” (i.e., deregister their stock from the Securities and Exchange Commission) or are acquired.