May 14, 2020

Due Diligence

Due Diligence

Legal Opinions in California Real Estate Transactions
      Joint Committee of the Real Property Law Section of the State Bar of California and the Real Property Section of the Los Angeles County Bar Association , 42(4): 1139–1205 (Aug. 1987)
This Report discusses the legal issues and due diligence obligations often arising with respect to the issuance of legal opinions in real estate transactions. Although the primary focus of the Report is on loan transactions secured by California real property, other transactions and issues are also discussed, and a substantial portion of the analysis and conclusions should apply to real estate transactions generally.

Special Joint Committee on Lawyers' Opinions in Commercial Transactions
      Special Joint Committee of the Maryland State Bar Association, Inc., and the Bar Association of Baltimore City , 45(2): 705–818 (Feb. 1990)
This Report analyzes the various parts of legal opinions that are typically given in commercial and real estate transactions and includes a discussion of the due diligence that is required to be performed before each of the opinions can be rendered. It includes sections on purposes of opinion letters, ethical considerations in rendering them, general procedures that should be followed, and liability that may result. The Report includes an illustrative commercial loan opinion letter, an illustrative real estate loan opinion letter, and forms of borrowers' certificates to support that opinion.

Report on Standards for Opinions of Florida Counsel of the Special Committee on Opinion Standards of the Florida Bar Business Law Section
      Special Committee on Opinion Standards, 46(4): 1407–48 (Aug. 1991)
The Report is a significant contribution to the continuing national debate on legal opinion standards. The Report is intended for practitioners at all levels and sets forth the standard opinions to be given (and accepted) by Florida counsel in most commercial transactions. The Report prescribes standards for due diligence in rendering the opinions to which the Report relates. The standards adopted in the Report reflect the results of a cost benefit analysis between the needs of opinion recipients and the costs of giving particular opinions in varying circumstances. The Report also establishes a uniform understanding among Florida counsel on the meaning of terms used in opinions. By adopting a " normative" approach, the Report seeks to reduce the frictions that can arise in negotiating opinions. Like the ABA Accord promulgated by the Section of Business Law, the Report adopts the concept of incorporating by reference the Report into opinions given thereunder in an effort to simplify opinions given in accordance with the Report.

Report of the Task Force on Sellers' Due Diligence and Similar Defenses Under the Federal Securities Laws
      Committee on Federal Regulation of Securities, 48(3): 1185–1241 (May 1993)
This Report considers the changes over the past twenty years in how reporting issuers offer their securities to the public and the impact of these changes on the ability of underwriters and other sellers of securities to establish the "due diligence" defenses available to them under the federal securities laws. The Report also offers its conclusions on relevant aspects of liability under section 12(2) of the Securities Act and urges the SEC to take action in accordance with the Report's recommendations.

Purchasing the Stock of a Privately Held Company: The Legal Effect of an Acquisition Review
      Committee on Negotiated Acquisitions, 51(2): 479–509 (Feb. 1996)
The acquisition review (more commonly known as a due diligence investigation) has become a routine practice in business acquisitions. The Article addresses the legal implications of this review in the context of the purchase of all the stock of a closely held business. Its focus is from the perspective of the purchaser and generally differentiates between the rights of the purchaser in connection with misrepresentations of the seller discovered by the purchaser at two junctures in the acquisition process: first, after execution of an acquisition agreement but before closing and second, those discovered after closing. The Article also discusses several recent cases in the first situation dealing with the right of a purchaser to "close and sue" for misrepresentations that include consideration of whether the purchaser's decision to close with knowledge of the misrepresentation amounts to a waiver of that right.

How to Stop Arguing About 10b-5 Opinions in Exempt Offerings
      Robert F. Quaintance, Jr., 51(3): 703–19 (May 1996)
This Article proposes guidelines for use by practitioners and financial intermediaries in determining the need for "10b-5 opinions" (also known as negative assurance letters) in exempt securities offerings. The Article explores the case law (including Gustafson v. Alloyd Co ., 513 U.S. 561 (1995)), statutes, legislative history, and ethical considerations relevant to 10b-5 opinions and concludes generally that 10b-5 opinions can and should be obtained in "public-style" exempt offerings in which the relationship of the issuer, the intermediary, and the investors, the nature of the disclosure document, and the extent of the due diligence investigation resemble those present in a registered public offering, but that 10b-5 opinions need not be obtained in the traditional private placement in which the intermediary plays a lesser role and the disclosure documents and the intermediary's due diligence investigation are more abbreviated.

Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
     Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.

In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.

This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

Independent Directors as Securities Monitors
     Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.

Contracting to Avoid Extra-Contractual Liability—Can Your Contractual Deal Ever Really Be the "Entire" Deal?
      Glenn D. West and W. Benton Lewis, Jr., 64(4): 999–1038 (August 2009)
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.

Trademark Licensing in the Shadow of Bankruptcy
     James M. Wilton and Andrew G. Devore, 68(3): 739-780 (July 2013)
When a business licenses a trademark, transactional lawyers regularly advise that if the trademark licensor files for bankruptcy, the licensee could be left without a right to use the mark and with only a bankruptcy claim for money damages against the licensor. Indeed, the ability of a trademark licensor to reject a trademark license and to limit a licensee’s remedies to a dischargeable claim for money damages has been a significant risk for licensees for twenty-five years based on the Fourth Circuit case, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. This result is grounded in the Bankruptcy Code prohibition on remedies of specific performance for non-debtor parties to rejected contracts and is in accord with Bankruptcy Code policy of affording debtors an opportunity to reorganize free of burdensome contracts. In the summer of 2012, however, the Seventh Circuit, in its decision Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, held that a non-debtor trademark licensee retains rights to use licensed trademarks following rejection of the contract by the debtor-licensor. The decision, derived from a pre-Bankruptcy Code paradigm for understanding the rights of non-debtors under rejected executory contracts that convey interests in property, creates a circuit split over the implications of trademark license rejection. This article asserts that the Sunbeam Products case misconstrues the rights of a trademark licensee as a vested property right and is therefore incorrect under both the holding of the Lubrizol case and the pre-Bankruptcy Code paradigm on which the Sunbeam Products case relies.

The Promise of Unfavorable Research: Ramifications of Regulations Separating Research and Investment Banking for IPO Issuers and Investors
     Benjamin J. Catalano; 72(1): 31-60 (Winter 2016/2017)
The trend in Securities and Exchange Commission and Financial Industry Regulatory Authority rulemaking and enforcement to insulate research from investment banking influence has led to the removal of research analysts from the underwriting process with adverse consequences for new issuers and their investors. The approach conflicts with the congressional objective under the Jumpstart Our Business Startups (JOBS) Act to incorporate research fully in public offerings for emerging growth companies, which now comprise the vast majority of IPO issuers. Faced with these competing objectives, broker-dealers should have written policies and procedures that are carefully crafted to service their underwriting and investor clients appropriately and to take advantage of the JOBS Act privileges with respect to research.