Adversity in business is a frequent occurrence; disagreements arise, personalities clash, and goals diverge as companies grow and change over time.  Sometimes that adversity leads to a need to winddown or separate business interests, which can be a thorny subject for lawyers and their clients.

These so-called “business divorces” typically involve complex legal and personal issues—many of which have not been anticipated by the people involved—that may or may not be the subject of any written agreements between the business partners.  An average business divorce case can include a myriad of issues that touch on subjects like corporate governance, fiduciary duties (and the attendant responsibilities), contractual obligations, fluctuating and varied expectations of owners (particularly in a family environment), employment law issues, trade secrets and sensitive information, non-compete law, business valuation and a variety of tax issues.

As if that were not enough, this whirlpool of issues is often agitated by varied state statutes governing dissolution or buy-outs, which may offer additional remedies (or, in some cases, restrictions) to an allegedly aggrieved shareholder.  Given this complexity, it is often the case that parties facing such a dispute will be well-served by at least attempting to mediate as an alternative to lengthy, expensive—and, frankly, risky—litigation.  Mediation allows parties to craft outcomes that are acceptable, certain, and advantageous in terms of cost and time, and its informal processes permits the use of independent experts, customized resolution of small and large issues (in a less adversarial environment, no less), and potential repair to damaged relationships.  While almost always complex, using the tools of mediation (or other ADR formats) provides attorneys with unique ways to advise their clients in the winddown or separation of closely-held businesses, which in turn allows all parties to the dispute to move on with—and into the next chapter of—their lives and control their future without involvement of a court.

Beyond the usefulness of mediation in general, it is important to remember that is also likely the cheaper option for clients.  As in most business disputes, each side of the case wants to maximize the value of their business interest; in doing so, however, many fail to consider the impact of the cost of litigation (particularly where claims that give rise to indemnification obligations are involved), or the impact of that cost on a potential sales transaction or other business transactions.  By considering those costs—and recognizing that resolution may maintain the value of the business for all parties—the use of alternative dispute resolution methods such as mediation in business divorces can save all parties a lot of time, money, and headaches.

The variety of issues that can arise in a mediated business divorce is impossible to catalog completely.  However, several key considerations (particularly during a global pandemic) are important to keep in mind whenever advising clients in a mediated winddown or business divorce.

1. The personalities of the parties—emotional and family barriers to resolution.

While “big” personalities can exist in other areas of the law, nowhere is that truer than in closely-held business disputes.  Many closely-held businesses were founded by a single individual with sole ownership, or by close friends or family members who shared ownership (sometimes equally, sometimes not).

These individuals often have intense personalities and emotional investment in the dispute (for many, it’s a business they’ve spent their lives working in or around), which means that disputes regarding their closely-held businesses often have an emotionally-charged backdrop to battle.  Siblings may disagree as to who should take over a family business, what ownership interests should be, and who should take over which role in an enterprise that may have been handed down through a family for generations.  Similarly, friends may have a falling out—sometimes over the business, sometimes over other things—and begin to dislike each other.  This, in turn, can impose serious ramifications on the business operations—and even the long-term value—of the business.

One party may feel they deserve a larger share of the business (or higher compensation) or more control to compensate for their involvement in the day-to-day activities of the business, while another may believe their longer-term ownership and contributions of capital entitle them to a majority position or veto rights, despite a lack of day-to-day involvement.  One owner may want to sell the business, while the other may not; one may want to sell off certain divisions or lines of business, while the other may want to take an all-or-nothing approach.  Given the personalities—and intense emotions—that can permeate a closely-held business dispute, any good attorney advising their clients in such a dispute must master not only the facts of the dispute itself, but the character and nature of the personalities in play, all while constantly considering each parties’ goals and desires.

Resolution may only be accomplished if each party feels heard, respected, or at least acknowledged, and understands that in order to resolve a case, emotions must be set aside, and a business deal must be reached.

2. Earn-out and valuation date disputes in a changing world.

In a mediated settlement—particularly one that has only been reached in principle—changing world circumstances may cause the implosion of an otherwise solid deal.  Recently, the COVID-19 pandemic has provided an unprecedented example of just how much can change in a short period of time: in a matter of months, the world’s economy ground to a halt as the virus raged around the planet. New variants continue to pop up, and it is unclear exactly how long the pandemic will have a major effect on the world economy.  The effect such a change can have on a mediated settlement in principle cannot be understated. For example:

• The parties may have agreed on a particular valuation date or method to use in valuing company interests for the purposes of a buy-out. A massive change like a viral pandemic could necessarily alter the parties’ desires surrounding what valuation date to use; for those selling, the use of a date that results in a higher return on investment is obviously appealing, but for those buying, a date that reflects changes in the true value of the ownership interests they are purchasing is necessarily more attractive.  Of course, the precise industry in which the business sits also plays a role in these kinds of negotiations: is there potential upside because of the pandemic (i.e., a closely-held biological testing business may have a more profitable valuation date during and after the pandemic than it did before), or has an eviscerated business suddenly made a turnaround by capitalizing on a sudden return by the workforce back to an office environment such that an earlier valuation date is still acceptable?  Compromise may be the only method by which such a change can be evaluated and weathered.
• The financial data informing a business divorce will likely have changed during a pandemic: sales may dry up, assets may need to be sold, and a business might have to restructure itself to avoid significant (or even fatal) losses, depending on the industry. At the same time, some business enterprises may greatly benefit from a pandemic; a buy-out of a restaurant in a pandemic is going to look a lot different than a buy-out of a streaming service.  Moreover, future plans for capital expenditures, expansions, or changes to the company’s financial forecast will necessarily alter the parties’ expectations surrounding a buy-out; a pandemic is no exception and will likely exacerbate those issues.  Acknowledging the need to adjust expectations as the world changes is critical to ensuring a mediated settlement for a buy-out in principle survives.
• The structure of any buy-out—i.e., will it be a lump sum payment or payments spread out over time, the mechanics of the share transfer, whether earn-outs will exist, and the text of the agreements themselves—must take into account changing world circumstances. Some businesses (see, e.g., movie theaters) likely could not afford to provide a lump sum payment for a buy-out of ownership interests during a pandemic.  A shipping logistics company, on the other hand, might have just had its best year ever, and a lump sum payment would actually be the preferable route to take (where it may not have been before a pandemic).

3. Special considerations depending on which side you represent.

When representing a minority owner in a business divorce, it is important to keep several key factors in mind, including when a mediation is threatened by changing business circumstances.

• Always remember the purpose behind governing state statutes and common law: to protect and provide adequate remedies to minority shareholders. These statutes often focus on concepts of fairness, reasonableness, and equity, which become even more apparent in the context of changing global circumstances.
• A changing world means changing goals; you should also remember that the goal of reaching a mediated settlement (or keeping a settlement in principle alive) is to balance the need for a permanent resolution/separation of business interests against continuation of a viable business for the remaining owners. Why pay the lawyers to litigate the separation when you can use those same funds to fund the business divorce?
• As previously noted, the emotions of minority owners may run high, particularly where a majority owner has acted in a way that either is or could be perceived to be unfair towards the minority owner. Resolution will often depend on removing emotion from the terms of a deal—at least in part—and a good lawyer must also remember to keep their client from getting greedy or overreaching in their demands of a controlling shareholder—i.e., revenge is not usually a financially sound objective.

Representing a majority owner in the same dispute comes with a host of separate, but equally valid and important considerations.

• Controlling owners will need clear, expansive, rock-solid written agreements that set forth expectations of the parties moving through a mediated deal. This principle is even more important when global events shift economic considerations in a short period of time; the need for certainty in a time of change is often critical to advising an owner that will continue to own and operate a closely-held business after a separation event.  This certainty needs to be present in valuation decisions, as well as decisions on the precise structure—and reasons for the structure—of the deal.
• In salvaging a potential deal from a mediation that has been impacted by changes to the world economy, remember that the majority owner is attempting to maximize business interests. This requires consideration of methods to ensure as much of a return on investment as possible, while accounting for the need to avoid making lowball offers or using unfair negotiating tactics with the minority owner.  A changing world economy impacts everyone; remembering that point—and helping an otherwise headstrong client understand it—could be the difference in whether a deal succeeds or collapses.
• Like minority owners, the emotions of a majority owner may also run high. The individuals involved could view minority owners as seeking to fleece the company (particularly where some owners are involved in day-to-day operations and others are not). It is equally critical to work with a controlling owner to set emotions aside as best they can to reach a business deal.

Ultimately, mediation is an excellent medium through which parties can resolve emotionally charged, legally complex wind-down or business divorce disputes, particularly in the context of a rapidly changing world.  Careful consideration of the parties’ emotions, the history of the parties’ relationship, and the subject business’s position in a changing economy all play a part in helping guide parties to an effective resolution.  Moreover, the lens through which a party views a dispute can also change based on whether they are a majority or minority owner; savvy counsel will take the time to help a client focus on the business or practical interests involved, instead of letting emotional weight lead to unreasonable demands, overreaching, or baseless stubbornness.  By considering these issues, a good lawyer can help their client (and, in fact, all parties to a dispute) reach a cost-effective mediated resolution of a business divorce in a changing global economy.

Ask a group of female attorneys about their experience with the fabled “glass ceiling,” and you will likely hear many stories. The glass ceiling describes the barrier that women in numerous professions bump up against when trying to climb the ladder in their respective careers. Women have made tremendous strides in the working world, yet the glass ceiling remains stubbornly in place in many businesses.

Unequal Partners

Today, women make up more than 50% of entrants into law school, equity that was built over decades of struggle and work. Although a similar number of men and women are studying to become lawyers, this has not translated into an equal number of women becoming partners in law firms: Partnerships still primarily belong to men. The latest statistics, according to Law.com, place partnerships for women at 31% overall. This is an increase over smaller numbers from the past 20 years, but there is still much room for improvement.

Barriers persist for female lawyers who seek to reach higher levels in their careers. Men generally hold higher seniority in law firms, with some notable exceptions, and also typically outearn their female counterparts. Per Law.com, the numbers for women holding equity partnership in firms have experienced growth since studies conducted in 2012. However, even with an improvement in the number of women reaching equity partner status, the growth has been slower than expected.

When I moved to New York City in the mid-1980s to join a private practice, I worked with a number of female attorneys, but the partners were all male. I have definitely seen a major increase in women partners, and law firms have brought more women into management, including managing partner roles. For women entering law, there are more mentors than ever. However, there has been slower progress in terms of women being brought into client development, especially with key clients. The upper echelon of law careers remains, largely, a boy’s club.

The Motherhood Dilemma

In “firm life,” there is a strong emphasis on billable hours. Women may take time off or go part-time to start families. That, to some degree, has led some women attorneys to choose in-house opportunities. Amassing billable hours is difficult when you’re bearing children, taking care of infants and family obligations.

Some firms are beginning to make concerted efforts to give credit for billable hours even when lawyers are on family or maternity leave. These efforts allow women, as well as men, to take desired breaks to build their families without risking their partnership track.

However, because of the many additional pressures and expectations women face around raising and bearing children, female lawyers need extra support, and firms must be thoughtful and break from tradition to promote a path to partnership.

Breaking Through

How should female lawyers confront the reality of the glass ceiling and chisel away at it until they can break through to the other side?

In addition to the larger changes needed in the industry, several individual approaches to the glass ceiling can help lessen its impact and contribute to, someday, eliminating it all together.

• Female lawyers should have actionable goals and a plan for the trajectory of their career.
• Mentors are important to female lawyers—someone to help them navigate the law firm environment and teach them valuable skills like business development.
• Be patient, but not stagnant. Focus not only on building skills, but also on building client relationships and business.
• Do not be afraid to ask for business. Be fearless and consider the fact that you are actually helping your clients avoid problems and deal with complicated business issues.
• Do not be afraid of change. If you see a unique or exceptional opportunity, go for it. Those who are afraid of change often stagnate.

For over a decade, Chinese insurers have supported Belt and Road Initiative (BRI) project development in Latin America, with state-run insurer Sinosure among the first to insure major Chinese infrastructure projects in and exports to Latin America. While Chinese companies remain focused on backing the BRI in the LATAM region, there is early indication of growing interest in life and other non-life insurance markets, as China’s insurance giants have begun to appreciate the market opportunity.

In 2007, China Life began providing insurance business services to companies in Latin America and to Chinese tourists visiting Latin America.[i] Others, including People’s Insurance Company of China (PICC), began insuring employees of Chinese companies, and China Reinsurance Corporation (China Re) reinsured risks ceded by LATAM insurers.

In recent years, Chinese insurance investment appetite in Latin America has increased. Portuguese insurance company Fidelidade Mundial, majority-owned by Chinese tech firm Fosun International, announced it would sell insurance in Chile through a series of partnership agreements.[ii] In 2019, Fidelidade Mundial’s Peruvian unit, FID Peru, acquired a 51% stake in Peru’s La Positiva Seguros y Reaseguros, providing health, accident, home, and mandatory vehicle insurance; and an approximate 24% stake in Bolivia’s Alianza Compañía de Seguros y Reaseguros.[iii] Fosun International also purchased the Brazil operations of Caixa Seguros, Portugal’s largest insurance group.

The Latin American insurance market might also prove attractive to Ping An, a Chinese financial services conglomerate, as interest in the company’s long-term life policies diminishes among aging Chinese consumers. Ping An’s heavy investment in technology and global competitiveness should facilitate its entry into the life market.

China’s interest in expanding into overseas insurance markets could be dampened, however, by a growing focus on domestic market development and an apparent growing sensitivity to risk among China’s financial giants. In this regard, the China Banking and Insurance Regulatory Commission recently issued regulations enhancing supervision of, and regulating investments by, Chinese insurers to ensure solvency and minimize systemic risk. China’s policies and most recent Five-Year Plan (2021–2025) nevertheless promote a continued focus on not only “bringing in” (i.e., attracting) foreign capital in China’s insurance industry, but also on “going out” (i.e., investing abroad).

Also evident in China is a growing focus on providing risk analysis for Chinese companies operating in Latin America and other regions. Jiangtai International Cooperation Alliance, a Chinese insurance intermediary, has provided risk analysis and rescue services for companies in more than 170 countries. Jiangtai chairman Shen Kaitao noted at a June 2021 conference, “[w]here the foreign investment enterprises go, the risk prevention and control services will extend.”[iv]

Beyond infrastructure risk management, expansion by Chinese insurers into P&C, life, health and other insurance lines in Latin America would also seem inevitable. The life insurance industry in Latin America was performing well even before Covid-19, having grown by 5.1% in 2019, boosted by favorable interest rates. In 2019, total insurance premiums in Latin America and the Caribbean amounted to US$153.05 billion, of which 54% came from non-life insurance and the remaining 46% from life insurance.[v] Indeed, amid the pandemic and related uncertainties, interest in life insurance and other protection products has surged among Latin American consumers.[vi]

As Chinese insurers continue to “go out,” life and non-life products will no doubt feature more prominently in their overseas offerings. These developments sound a cautionary note for U.S. insurance companies seeking to compete in the region while also heralding opportunity.

[i] Yan, Yu. “China Life intends to enter the Latin American capital market” (“中人寿拟进军拉美资本市场”). China Business News, June 6, 2007, https://finance.sina.com.cn/money/insurance/bxdt/20070606/02053663752.shtml.

[ii] “Fosun-owned insurer Fidelidade Mundial enters Chilean market.” Permanent Secretariat of Forum for Economic and Trade Cooperation between China and Portuguese Speaking Countries, October 12, 2019, https://www.forumchinaplp.org.mo/fosun-owned-insurer-fidelidade-mundial-enters-chilean-market/.

[iii] “Fosun-owned insurer Fidelidade Mundial enters Chilean market.” Permanent Secretariat of Forum for Economic and Trade Cooperation between China and Portuguese Speaking Countries, October 12, 2019, https://www.forumchinaplp.org.mo/fosun-owned-insurer-fidelidade-mundial-enters-chilean-market/.

[iv] “Alliance Chairman: Shen Kaitao.” Jt-ia.com, 2016, www.jt-ia.com/introduction/speech.shtml.

[v] “The Latin American Insurance Market in 2019.” Fundación Mapfre, September 2020, https://www.economiayseguromapfre.com/number-6/the-latin-american-insurance-market-in-2019/?lang=en.

[vi] “The impact of Covid-19 on insurance market leadership in Latin America.” Russell Reynolds, December 11, 2020, https://www.russellreynolds.com/newsroom/the-impact-of-covid-19-on-insurance-market-leadership-in-latin-america.

Introduction: The Expansion of ABS

Alternative business structures (ABS) is a generic term used in the legal ethics arena to refer to any form of business model for provision of legal services that is different from traditional law practice models (sole proprietorship and various types of partnerships).  ABS can include the possibility of equity ownership by non-lawyers, including even publicly traded law firms (as has been seen in Australia, where ABS is known as “incorporated legal practices”) and business or consulting entities with non-lawyer equity owners that provide both legal and non-legal services.

Besides Australia, ABS has been permitted for many years in England and Wales (since the Legal Services Act of 2007) and, here in the United States, in the District of Columbia.^[1]  The D.C. liberalization of its Rules of Professional Conduct did not yield a significant amount of law-firm affiliated ABS.  Part of this may have been due to uncertainty about whether D.C.-licensed lawyers, many of whom are also licensed in one or more other U.S. jurisdictions (e.g., Maryland, Virginia), would run afoul of the rules of professional conduct in the other jurisdictions, which did not permit ABS.^[2]  More recently, however, Arizona and Utah have modified their respective versions of Model Rule 5.4^[3] to permit business structures that allow nonlawyer ownership of law firms and the sharing of legal fees with nonlawyers. 

Model Rule 5.4

Under ABA Model Rule 5.4, which has been adopted essentially unchanged in nearly all other U.S. jurisdictions, lawyers are prohibited from sharing legal fees^[4] with a nonlawyer or practicing in a law firm in which a nonlawyer owns any interest or serves as an officer or director.  The original purpose of this prohibition, which a number of lawyers deem anachronistic, was to preserve the professional independence of lawyers. 

Starting in the latter part of the twentieth century, however, it became clear that lawyers no longer had—assuming they ever had—a monopoly on the provision of legal and law-related services.  Accountants and other tax professionals had for many years offered tax-related services to the general public in a manner that frequently blurred any distinction between legal and non-legal services.  Other providers made available document discovery and a broad array of low-cost, high-volume legal-related services to both businesses and individuals.  

The success of many of these initiatives attests to the societal problem posed by the high cost of lawyers’ services.  The author has frequently remarked (only partially in jest) that, were he in need of a lawyer, he couldn’t afford himself.  The issue does not call for levity, however.  In a nation that widely regards itself as a leading exponent of the rule of law, the World Justice Project 2020 Rule of Law Index ranked the United States as only twenty-first out of a total of 128 countries, but—more tellingly in terms of peer group analysis—fifteenth out of twenty-four on a regional basis and twenty-first out of thirty-seven based on population income level.  

Affordability of legal services is a large component of arguments advanced in support of repeal or revision of Model Rule 5.4.  The revisions in Utah and Arizona in 2020 and 2021, respectively, have already been mentioned.  In February 2020, the ABA recognized that “more than 80% of people below the poverty line and the many middle-income Americans who lack meaningful access to effective civil legal services.”^[5]  Accordingly, the House of Delegates passed Resolution 115 calling for “regulatory innovations that have the potential to improve the accessibility, affordability, and quality of civil legal services.”

In an era in which lawyers and law firms routinely practice on a multistate basis, piecemeal adoption of such changes raises an obvious question:  May a lawyer practicing in a jurisdiction that adheres to the current text of Model Rule 5.4 invest in an ABS in a jurisdiction that allows it, and if so, what ethical limitations (if any) apply to that investment? 

Formal Opinion 499

In September 2021, the Standing Committee on Ethics and Professional Responsibility (the “Ethics Committee”) addressed that question in Formal Opinion 499.  It interpreted Model Rule 5.4 to allow a lawyer “passively [to] invest in a law firm that includes nonlawyer owners . . . operating in a jurisdiction that permits ABS entities, even if the lawyer is admitted to practice law in a jurisdiction that does not authorize nonlawyer ownership of law firms.”  “Passive” investment,^[6] for this purpose, means investment in an ABS with the sole aim of receiving a return on capital based on the efforts its employees, without any personal participation by the investor in the ABS’s work or management—in short, wholly unrelated to the investor’s law practice. 

As a corollary, the opinion further refined its definition of “passive investment” as negating access by the investing lawyer to confidential information protected by Model Rule 1.6 without the informed consent of the ABS’s client.  This sounds fairly straightforward, but it is actually somewhat complex, because, as the Ethics Committee acknowledges, it may often be difficult to anticipate what kinds of information about the ABS a potential investor might reasonably request, and therefore “it is unrealistic to assume that there will be no investor requests for information about the ABS operations or revenue. The issue of disclosure of confidential information by an ABS is a developing area of the law and beyond the scope of this opinion.”  No extraordinarily useful guidance there, to be sure, but until this area is fleshed out further, conservative ethics advice (which the Ethics Committee, to its credit, offers) is this:  If considering investment in an ABS, a lawyer “should exercise due care to avoid exposure to confidential client information held by the ABS or other associations that could result in a determination that the . . . [investing] lawyer is part of the ABS ‘firm.’”

More helpful, by way of guidance, is the rejection by Formal Op. 499 of any notion that this kind of investment could create a conflict of interest per se.  “A passive investment does not create an ‘of counsel’ relationship where conflicts are imputed to other lawyers. Nothing about a passive investment necessarily creates the ‘close, regular and personal relationship’ characteristic of ‘of counsel’ arrangements.”  To make appearance double sure, however, the opinion insists that investing lawyer make sure that the ABS does not in any way imply that the investor is a lawyer for the ABS or is otherwise associated with the ABS.  Furthermore, the mere fact of a lawyer’s passive investment in an ABS in a Model Rule 5.4 jurisdiction does not require imputation of conflicts under Model Rule 1.10 between the investing lawyer (or that lawyer’s firm) and the ABS. 

While conflicts at the time of investment are rare, they are not impossible, however.  Formal Op. 499 cautions that if the investor when making the investment also represented a client with interests adverse to a client of the ABS, a concurrent conflict under Model Rule l.7(a)(2) might exist.  Such a conflict could arise equally where the investor is an advocate for a client adverse to one of the ABS’s clients or a business lawyer representing a client involved in a transaction with one of the ABS’s clients.  This is so, the opinion concludes, because the investing lawyer’s interest in the ABS could “create a significant risk” that the investor’s representation of the client would be “materially limited” by the investment in the ABS. 

The attentive reader will have noted that the Ethics Committee’s conflict of interest analysis applies only at the point of investment.  The opinion subsequently underscores this point: “The fact that a conflict might arise in the future between the . . . [investing lawyer’s] practice and the ABS firm’s work for its clients does not mean that the . . . [investor] cannot make a passive investment in the ABS.” 

The Ethics Committee considered the conflict of law issue that arises when (as often will be the case, at least at present) the investor is admitted to practice in a jurisdiction that retains Model Rule 5.4.  That issue is addressed by Model Rule 8.5(b)(2).  Formal Op. 499 concluded that the law of the jurisdiction in which the ABS is authorized to operate should apply “because under Rule 8.5(b)(2), the predominant effect of . . . [the] passive investment in an ABS would be in the jurisdiction(s) where the ABS would be permitted.” 

To recapitulate, then, the gist of Formal Op. 499, a lawyer admitted to practice in a jurisdiction that has adopted (or substantially adopted) Model Rule 5.4 may invest in an ABS entity with nonlawyer equity owners that is permissible under the ethics rules of another jurisdiction if:

1. the investment is solely for obtaining a return on capital;
2. the investing lawyer does not practice law with the ABS;
3. the investing lawyer ensures that the ABS does not in any manner hold out the investing lawyer as practicing at or working at the ABS;
4. the investing lawyer, prior to making the investment in an ABS, ascertains that none of his or her existing clients are adverse (within the meaning of Model Rule 1.7(a)(2)) to any of the ABS’s clients;
5. the investing lawyer does not enjoy access to confidential information protected by Model Rule 1.6 absent
   1. the informed consent of affected clients; or
   2. compliance with an applicable exception in the ABS jurisdiction’s version of Rule 1.6.

Beyond Formal Opinion 499

There are, however, some important ethics principles related to lawyer investment in ABS that are not addressed in detail by Formal Op. 499 and that may pose potential snares for unwary lawyer investors.  First, the opinion observes, “[T]he mere fact of a passive investment by a Model Rules Lawyer in an ABS does not require imputation of conflicts under Model Rule 1.10 between the . . . [investing] Lawyer (or that lawyer’s firm) and the ABS.”  This is correct but could benefit from further elaboration.  Where the ABS is itself a client of the investing lawyer or where the investing lawyer asks a client also to invest in the ABS, Model Rule 1.8(a) imposes several requirements before a lawyer may enter into a business transaction with a client.^[7]  Under that rule, a lawyer cannot enter into a transaction with the client unless (i) the transaction and its terms are fair and reasonable and fully disclosed in writing to the client in a manner that the client can reasonably understand; (ii) the client is notified and given a reasonable opportunity to seek an independent lawyer’s advice; and (iii) the client gives informed consent, in a writing signed by the client, both to the essential terms of the transaction and to the lawyer’s role therein (including whether the lawyer is representing the client in the transaction).  While discipline for transgressing this rule can be severe,^[8] unlike other conflict of interest limitations in the Model Rules, these are not imputed to affiliated lawyers under Model Rule 1.10(a)^[9] (though they may be under the Restatement’s approach).^[10] 

Furthermore, the mere fact that there is no per se conflict at the time the investing lawyer makes the investment in the ABS does not mean that conflicts will not arise in the future.  Therefore, the investing lawyer’s continuous monitoring is required for concurrent conflicts, such as where the lawyer is engaged to represent a client whose interests are adverse to a client of the ABS.  In that scenario, the investing lawyer’s representation of the client could be “materially limited” by the investment interest (assuming it is not de minimis) in the ABS; other lawyers in the investing lawyer’s firm might, however, be able to take on that representation. 

Another lurking issue is presented where the investing lawyer’s interest in an ABS, either individually or in concert with others, is a controlling interest.  This may implicate the rarely invoked Model Rule 5.7, which applies the strictures of the Model Rules in connection with the provision of “law-related services.”  This term is defined in Model Rule 5.7(b) in such a way as to be quite relevant to an ABS: “services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.”  The rule applies to:

1. the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients; or
2. in other circumstances an entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services are not legal services and that the protections of the client-lawyer relationship do not exist.  (Emphasis added).

Unfortunately, the key term “control”—a concept familiar to business lawyers in a variety of statutory contexts—is defined neither by the rule nor by the Terminology section of the Model Rules.  The only guidance offered is somewhat vague and is found in Comment 4 to Model Rule 5.7:

[4] Law-related services also may be provided through an entity that is distinct from that through which the lawyer provides legal services. If the lawyer individually or with others has control of such an entity’s operations, the Rule requires the lawyer to take reasonable measures to assure that each person using the services of the entity knows that the services provided by the entity are not legal services and that the Rules of Professional Conduct that relate to the client-lawyer relationship do not apply. A lawyer’s control of an entity extends to the ability to direct its operation. Whether a lawyer has such control will depend upon the circumstances of the particular case. 

Short of actually exercising dominion over the quotidian business operations of the ABS, what constitutes control for this purpose remains murky.  The best way for a lawyer investing in an ABS to be sure of not running afoul of this provision would seem to be contenting oneself with a modest, minority investment and avoiding any possibility of being viewed as acting in concert with other investors who, in the aggregate, might be deemed to exercise control. 

Conclusion

Formal Opinion 499 raises the curtain on a sensible approach to ABS as innovation in the provision of legal services and related services becomes more widespread.  As is evident from the opinion, this is an area in which further refinement of lawyers’ ethical responsibilities can be anticipated.  For now, passivity is the watchword:  Make passive investments, act passively and not as a lawyer for the ABS, and be on the lookout for lurking conflicts issues. 

[1]   D.C. Rule 5.4(b) permits individual nonlawyers, in certain circumstances, to be partners in law firms, as long as they do not provide legal advice but provide different professional services that assist the firm in delivering legal services.  The firm must have as its sole purpose providing legal services to clients.  The District does not, however, permit passive investment in law firms.

[2]   That is precisely the issue that is considered in the recent ABA ethics opinion discussed in this article.

[3]   In Arizona, the provisions are now a part of ER 5.3.

[4]   Note, the Model Rules of Professional Conduct nowhere define the term “fees.”  That potentially gives rise to an argument about the source of law firm revenues that could, even under the Model Rule, be shared with nonlawyers, but this article will not consider that issue.

[5]   ABA, Res. 115, Revised Resolution and Report at 1 (Feb. 2020)

[6]   Formal Op. 499 is limited to passive investment in an ABS and does not address issues implicated by a lawyer practicing in an ABS.

[7]   It is possible, albeit unlikely, that the factual settings alluded to here might constitute the investing lawyer “acquir[ing] an ownership, possessory, security or other pecuniary interest adverse to a client.”  If that acquisition is “knowing,” that is another basis upon which Model Rule 1.8(a) would come into play.   

[8]   See, e.g., In re Davis, 740 N.E.2d 855 (Ind. 2001) (suspending lawyer for 18 months); State ex rel. Oklahoma Bar Ass’n v. Perry, 936 P.2d 897 (Okla. 1997) (disbarment for this and other rules violations).

[9]   Standing alone, passive investment does not give the investing lawyer “access to information protected by Model Rule 1.6 without the ABS client’s informed consent” and does not create the sort of relationship with the ABS that would normally require imputation of conflicts.

[10]   Under the RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 126, the rules governing a lawyer’s business transactions with clients are imputed to affiliated lawyers under § 123.  See id. § 126, cmt. A. 

LeBron James. Zlatan Ibrahimović. Mike Tyson. What is the common factor? Aside from achieving success at the highest level of their respective sports, they are also the bearers of numerous and distinctive tattoos. Tattoos on celebrities—and particularly athletes—have become increasingly ubiquitous, with some gaining significant media attention. For example, Raheem Sterling, a striker for the English Premier League side Manchester City and England national team, has a tattoo of a gun on his right leg that received extensive press coverage[1] in 2018.

Further, it is not uncommon for brand campaigns to feature athletes with visible tattoos. This article will discuss a number of recent legal cases that demonstrate several issues that may arise when those tattoos are visible in the advertisement. Typically, the tattoo artist will argue that they own the copyright in the tattoos they created and should therefore receive a share of the proceeds from commercialization of images featuring the tattoo. This can result in legal action against both the bearer of the tattoo (the athlete) and the third-party brand using the athlete’s image. This article examines recent American case law on the issue and the position under English law.

Recent US Case Law

One of the most famous cases in which a tattoo artist asserted claims based on the unauthorized use of their work is Victor Whitmill v Warner Brothers.[2] In this 2011 case, the tattoo artist (Mr. Whitmill) sued Warner Brothers for its use of Mike Tyson’s facial tattoo in its promotion of the film The Hangover Part II. Mr. Whitmill argued that he owned the copyright in the tattoo and produced an agreement signed by Mr. Tyson confirming that Mr. Whitmill owned all the rights in the tattoo. The parties subsequently settled the matter.

Two more recent cases have provided contrasting outcomes. First, in Solid Oak Sketches, LLC v. 2K Games, Inc. and Take-Two Interactive Software, Inc.,[3] Solid Oak Sketches (“SOS”), a tattoo artist company, sued video game publisher Take-Two Interactive (“TTI”) over TTI’s reproduction of LeBron James’ tattoos—which SOS’s artists had designed—on its NBA 2K videogame series. In March 2020, Judge Laura Swain of the U.S. District Court for the Southern District of New York ruled in TTI’s favor.[4] Judge Swain held that although SOS owned the copyright in the tattoos, it had granted James an implied license to include his tattoos as part of his likeness when commercializing his image, and also that TTI’s use of the tattoos in the videogame constituted fair use (an exception to copyright infringement under US law).

However, another court reached a different outcome in a separate case with strikingly similar facts. In Alexander v. Take-Two Interactive Software, Inc.,[5] a case filed in the Southern District of Illinois, tattoo artist Catherine Alexander filed suit against TTI for its reproduction of wrestler Randy Orton’s tattoos in its WWE 2K videogame. There, on a summary judgment motion, the court ruled in favor of Ms. Alexander,[6] holding that it was not clear on the evidence submitted that Ms. Alexander had granted Mr. Orton a license to commercialize the tattoos she had designed, that such license should not be implied, and therefore whether such license had been granted should be tried. The court also held that TTI’s use of the tattoos did not unambiguously constitute fair use and so was an issue to be decided at trial. At the time of writing, the case remains awaiting trial.

As these conflicting decisions demonstrate, it is not yet clear whether athletes are granted implied licenses to commercialize their tattoos after creation and installation (as it were). Indeed, it is possible in the short-term that the answer may depend upon the jurisdiction in which the athlete was tattooed. Nor is it clear at the moment whether a third party’s display of an athlete’s tattoos constitutes fair use under federal copyright law.

The Position at English Law

English law provides that copyright subsists in original artistic works, including tattoos, from creation until 70 years after the death of the artist. Ownership of the works belongs to the creator of the work (or the employer of the creator, if the work was created in the course of employment) unless and until ownership is assigned to a third party. Unlike the US, the UK does not maintain a copyright registration system, so documentation proving chain of title is needed to prove copyright ownership.

Therefore, in the absence of an assignment from a tattoo artist to the recipient of a tattoo, the copyright in that tattoo would normally be owned by the artist (or his/her employer). The UK does have a fair dealing doctrine which may protect third parties, whose use of athletes’ tattoos may be innocent or purely incidental. It is questionable, however, whether that doctrine would protect an athlete who had inadvertently granted the rights in his or her tattoo to a third party without first obtaining an assignment or license from the tattoo artist.

Further issues may arise with respect to the artistic work itself when the tattoo reproduces an image, logo or song lyrics previously created by another third party. For example, Manchester United and England footballer Jadon Sancho has a prominent tattoo on his arm featuring characters from The Simpsons animated sitcom, in respect of which third party rights almost certainly exist. Were Sancho’s image, featuring the tattoo, to be commercialized, it is possible that entities with rights in The Simpsons IP[7] could assert claims against Sancho and any entity to whom he had granted a right to display the image.

In light of the uncertainty surrounding these complex issues, it has become increasingly common for brands to include express clauses dealing with tattoo ownership when negotiating image rights agreements with athletes.

Likewise, it is important for athletes with tattoos and their business partners to consider the issues that might arise from commercializing the athlete’s image and likeness, including his or her tattoos.

Considerations for Athletes

1. Due diligence: Prior to getting a tattoo, athletes should consider whether the tattoo is an original work, a common design that is not particularly distinct, or a reproduction of potentially copyrighted work (song lyrics, e.g.). If the tattoo is a common design, then the artist is less likely to have a copyright in the work. If the tattoo contains work possibly copyrighted by someone other than the tattoo artist, this can complicate things even further for the athlete and his or her business partners. Likewise, the more unique the design, the more likely the tattoo will be considered original, in which case it will be more important for the athlete to address copyright and license issues with the artist. Additionally, an athlete may want to consider the law of the jurisdiction in which he or she is planning to get tattooed.
2. Assignment / license agreement: Athletes may want to negotiate an agreement with the tattoo artist (or their employer) whereby it is agreed that copyright in the tattoo will be assigned to the individual athlete (or his/her image rights company) immediately upon creation. Athletes may also seek representations and warranties regarding the origin of the design, and indemnification from the artist, so as to avoid liability to any unknown third party who may later claim to have created the design. Alternatively, the athlete may consider seeking a license to commercialize and sublicense the copyright in the tattoo.
3. Retrospective action: In the case of already-existing tattoos, athletes still may consider negotiating an assignment or license from the artist. Of course, athletes should give thought before approaching artists, as this may bring an issue to the artist’s attention of which he or she was not previously aware.

Considerations for brands

1. Express warranties: Brand endorsement contracts should include express provisions addressing body art/tattoos. Brands should seek representations and warranties that the athlete has all necessary rights to grant licenses to commercially exploit images featuring the body art/tattoos, and indemnification if such representations and warranties are false or inaccurate. 
2. Due diligence: It may also be prudent for brands to request that the athlete identify the artist who created any tattoo that is likely to be displayed in a commercial venture, and where the tattoo was received. Brands should review any agreements or licenses that the athlete obtained from the artist.
3. Editing out: If there is doubt surrounding the right to display an athlete’s tattoos in a commercial enterprise, the brand may consider covering up or digitally editing out such tattoos.

Conclusions

Given the increasing ubiquity of tattoos and corresponding assertion of copyright rights, it is almost certain that this will become a more common area of dispute in the future. Tattoo artists will understandably wish to benefit from rights that they may have under the law, and individuals and organizations who have entered into agreements to use those individuals’ images will want to avoid costly and lengthy litigation. As a result, it is important for athletes to be aware of these issues before getting tattooed, and brands before entering into commercial ventures with athletes who have tattoos.

[1] See, e.g., https://www.bbc.com/news/uk-44285455 and https://www.theguardian.com/football/2018/may/29/footballer-raheem-sterling-defends-gun-tattoo.

[2] 1-cv-00752 (E.D. Mo. April 28, 2011).

[3] 449 F. Supp. 3d 333 (S.D.N.Y. 2020)

[4] Full text of the Opinion is available at: https://casetext.com/case/solid-oak-sketches-llc-v-2k-games-inc-2017.

[5] 489 F. Supp. 3d 812 (S.D. Ill. 2020).

[6] Full text of the Opinion is available at: https://casetext.com/case/alexander-v-take-two-interactive-software-inc-4.

[7] For instance, creator Matt Groening, or the current owner FX Networks, LLC, a subsidiary of the Disney General Entertainment unit of The Walt Disney Company.

For lenders dealing with troubled loans, a loan workout agreement is often a great first step to address a tricky situation. A loan workout agreement may be a simple short-term standstill agreement, a mechanism to implement a long-term solution to the borrower’s woes, or a path toward a palatable exit strategy to the relationship. Loan workout agreements, which often take the form of a loan modification agreement or forbearance agreement, may include, among other things, modifications to payment terms, forbearance from exercising certain rights and remedies, pledges of additional collateral, or an agreement to liquidate existing collateral.

Obligors often welcome such an agreement, which can afford them breathing room to get back on the path to compliance. Nonetheless, defaults may nonetheless persist. Two recent decisions from the Tenth and Fifth Circuits illustrate that, even when a workout fails, a well-drafted workout agreement can provide lenders protection against lender liability claims once the relationship turns adversarial.

I. Twiford Enterprises, Inc. v. Rolling Hills Bank & Trust, No. 20-8048, 2021 WL 2879126 (10^th Cir. July 9, 2021)

In this case, the borrower operated a cattle ranching business in Wyoming. The borrower refinanced its cattle loans with a new lender, who later convinced the borrower to refinance its real estate loans with the lender the following year.

Thereafter, the lender stopped advancing funds to the borrower on the cattle loans, and those loans went into default. Over the next year, the lender and the borrower entered into several loan modification agreements and forbearance agreements to revise payment terms, extend maturity dates, and provide for additional credit advances. Crucially, all the modification and forbearance agreements contained releases or waiver provisions in which the borrower and the guarantors waived any claims or defenses relating to the loans.

The borrower later filed a Chapter 11 bankruptcy petition, and the guarantors filed an adversary complaint against the lender, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, fraud, and negligent misrepresentation. The guarantors claimed that the lender misrepresented its confidence in the borrower’s business to induce it to refinance its real estate loan and then the lender manufactured a default.

The trial court granted summary judgment in favor of the lender based primarily on the applicable statute of frauds, but it also held that regardless of the statute of frauds, the claims would be barred by the releases contained in the forbearance agreements.

On appeal, the guarantors did not argue that their claims fell outside of the releases’ scope. Instead, the guarantors asserted that the releases were not enforceable because they were wrongfully obtained through economic duress. 

The Tenth Circuit affirmed the trial court’s ruling, noting that under applicable state law, an alleged victim of duress may not obtain part of the benefits of an agreement and disavow the rest. Since the guarantors obtained valuable concessions in connection with the forbearance agreements, such as credit advances, the Court held that they could not evade the releases under an economic duress theory.

II. Lockwood International, Inc. v. Wells Fargo Bank, N.A., No. 20-40324, 2021 WL 3624748 (5^th Cir. Aug. 16, 2021)

In this case, the borrower companies obtained two sizable lines of credit from their lenders. Within a year, the borrowers breached some of their obligations. Thereafter, the parties agreed to modify the lines of credit. In connection with the modification, the borrowers’ sole owner executed a personal guaranty. Also, at the lenders’ urging, the borrowers hired a chief restructuring officer (CRO).

Despite the loan modification and the appointment of a CRO, the borrowers’ struggles persisted. The lenders grew frustrated, believing that the borrowers and the guarantor did not fully empower the CRO to address the borrowers’ financial issues. The lenders gave the obligors an ultimatum: fully empower the CRO to operate or right-size the business within 48 hours or face an acceleration of the debt. The obligors agreed, but still defaulted on a sizable loan payment. To stave off acceleration, the obligors then executed a forbearance agreement in which they confirmed that the amended loan agreements were valid and enforceable, and waived and released the lenders from all claims. Before this forbearance period expired, the obligors executed a second forbearance agreement, which contained the same confirmation of the debt and releases in favor of the lender.

After the second forbearance agreement expired, the lenders accelerated the debt. This acceleration led to litigation among the parties that eventually was pared down to the lenders’ breach of guaranty claim against the guarantor.

In his defense, the guarantor claimed the lenders engaged in a bait-and-switch scheme to obtain his guaranty and then install the CRO to control the business. Claiming that he only agreed to execute the guaranty and forbearance agreements under intense business pressure, the guarantor asserted affirmative defenses of fraudulent inducement and duress, both of which were rejected by the trial court on summary judgment.

On appeal, the Fifth Circuit noted that because the guarantor ratified his guaranty in connection with the forbearance agreements, the guarantor would need to invalidate the forbearance agreements before he could escape liability. The court found no basis to support a fraudulent inducement defense since the guarantor signed the first forbearance agreement after he already agreed to cede control over the companies to the CRO.

The Court also held that the guarantor’s duress defense lacked merit. The guarantor argued that he only agreed to relinquish control to the CRO and execute the forbearance agreements because the lenders threatened to accelerate the loans. The court rejected this defense, noting that duress requires a threat of unauthorized action. The lenders were authorized to accelerate the loans and were simply using their leverage to extract a concession that they desired (i.e., installing the CRO). The court further noted that “difficult economic circumstances do not alone give rise to duress.” Indeed, the Court opined that loan modifications would become rare if a borrower could later invalidate the agreement because of the economic pressure that precipitated the modification in the first place.

III. Takeaways

While the crush of loan delinquencies that we feared at the outset of the pandemic has not materialized, many observers believe that defaults and resulting workout volume will increase once government support and intervention wane. Lenders can expect that at least some of their borrowers will assert lender liability claims in the face of enforcement efforts.

To that end, these recent decisions offer a compelling reminder that a well-crafted workout agreement can serve multiple purposes. On the one hand, workout agreements are great opportunities for lenders to develop retention or non-retention strategies for troubled loans. On the other hand, even if the workout strategy fails, these agreements can help mitigate potential exposure to lender liability claims. Moreover, as the Lockwood case illustrates, so long as a lender is acting within the bounds of its loan agreement authority, it may elect to apply its leverage to obtain valuable concessions from a troubled borrower in a workout scenario.

The Boeing Company Derivative Litigation evidences the increased focus on director responsibilities for effective governance. That focus is being driven by investors, other stakeholders, regulators, and—as the Boeing case makes clear—growing litigation risk. In November, Boeing’s board agreed to a $237.5 million settlement in a shareholder lawsuit that alleged board failures in overseeing the company and the safety of its 737 MAX ahead of fatal crashes in 2018 and 2019.  The case emphasizes the need to ensure the existence of substantive checks and balances in board governance and to explore opportunities to create governance structures with a harder edge. Such structures can aid in ensuring proper communication and operational interaction between the board, management and others.

In assessing the Boeing Company Derivative Litigation through this lens, we begin with an examination of Delaware Court of Chancery Vice Chancellor Morgan T. Zurn’s September 7, 2021, memorandum opinion in the litigation and her findings regarding Director failures. We then turn to identifying and addressing these fundamental governance breakdowns.

I. MEMORANDUM OPINION, 9/7/21, VICE CHANCELLOR ZURN

Vice Chancellor Zurn sets out in her opinion:

“The narrow question before this Court today is whether Boeing’s stockholders have alleged that a majority of the Company’s directors face a substantial likelihood of liability for Boeing’s losses. This may be based on the directors’ complete failure to establish a reporting system for airplane safety, or on their turning a blind eye to a red flag representing airplane safety problems. I conclude the stockholders have pled both sources of board liability. The stockholders may pursue the Company’s oversight claim against the board.”

In her opinion, the Vice Chancellor stated, “The Board publicly lied about if and how it monitored the 737 MAX’s safety.” The opinion cites 2019 interviews of the Board’s Lead Director, David Calhoun, who became the CEO of Boeing in January 2020, and certain representations he made regarding the 2018 Lion Air crash and the 2019 Ethiopian Airlines crash. The Vice Chancellor’s opinion states, “Each of Calhoun’s representations was false.”

Shortly after the opinion was issued, Boeing’s CEO and other current and former directors asked the Vice Chancellor to clarify her legal opinion that she found the Board “publicly lied.” Those defendants have now settled the case, pending court approval. The finding that they “publicly lied” will be a continuing cloud to be addressed on multiple fronts within and outside of litigation.

II. IDENTIFYING AND ADDRESSING FUNDAMENTAL GOVERNANCE BREAKDOWNS

The Vice Chancellor’s finding of “the directors’ complete failure to establish a reporting system for airplane safety” and her finding of “their turning a blind eye to a red flag representing airplane safety problems” are indicative of a board operating in a “tone at the top” framework where the board may be dictated to/largely directed by the CEO. As we have previously set out,[1] what is required instead of a “tone at the top” approach is a governance structure that incorporates transparency and substantive “checks and balances.” This is not a new concept; members of the board of advisors of Grace & Co. and other experienced business decision-makers addressed it years ago.[2] Yet, a board’s perception of its role as only that of oversight, and at times limited oversight, persists at many boards, often with the support or dictates of the CEO.

To the contrary, boards can make use of internal resources to ensure the boards have access to that information necessary to address their responsibilities. We have discussed the value of these internal resources to boards[3] and recognize that boards can also call on external resources.

Under the proposed $237.5 million agreement to settle the litigation, Boeing’s board has agreed to add a director with safety experience and has adopted other internal measures, such as creating an ombudsperson program to field certain internal complaints. Boeing has agreed to ensure that at least three directors have safety expertise. It may be that the relationship between those board members, and perhaps other board members, and management will be an ongoing interactive relationship where the company can draw on the talents and experience of those board members.

An example of board members participating in addressing management responsibilities arose when Michael Eisner, the CEO of Walt Disney, utilized the chairman of Disney’s compensation committee and another experienced director to handle the employment negotiations with Michael Ovitz and his advisers.[4] Such an interactive relationship between certain directors and members of management helps ensure the quality of the flow of information to the Board and is demonstrative of the nature of the working relationships/checks and balances between the board and management.

III. THE ECONOMICS OF CORPORATE GOVERNANCE

The economics of organization governance point to the responsibilities of ownership and its agents for the governance, oversight, and management of the organization. The board of directors, as owners or agents for ownership, bear the responsibility for the governance, oversight, and management of the organization. The Boeing litigation evidences the increased focus on these fundamental director responsibilities.

[1] H. Stephen Grace, Jr., S. Lawrence Prendergast, and Susan Koski-Grafer, “Board Oversight and Governance: From Tone at the Top to Substantive Checks and Balances,” Business Law Today, February 2019.

[2] James N. Clark, R. Hartwell Gardner, H. Stephen Grace, Jr., John E. Haupert, and Robert S. Roath, “From ‘Tone at the Top’ to ‘Checks and Balances,’” The CPA Journal, March 2002, p. 63. Paul Volcker and Arthur Levitt, Jr., “In Defense of Sarbanes-Oxley,” Wall Street Journal, June 14, 2004.

[3] H. Stephen Grace, Jr., S. Lawrence Prendergast, and Susan Koski-Grafer, “Corporate Governance and Information Gaps: Importance of Internal Reporting for Board Oversight,” Business Law Today, January 2018.

[4] H. Stephen Grace, Jr., “An Insider Revisits the ‘Disney Case,’” Directors Monthly, August 2008, pp. 1, 3-6. H. Stephen Grace, Jr., “Plaintiff Expert Reports: An Insider Revisits Disney,” New York State Bar Association Journal, July/August 2009, pp. 24-29. H. Stephen Grace, Jr. and John E. Haupert, “Governance Lessons from the Disney Litigation,” Business Law Today, September 2011. H. Stephen Grace, Jr., and John E. Haupert, “Corporate Governance: Lessons From Life and Litigation – With Implications for Corporate Counsel,”  New York State Bar Association Journal, March/April 2013.

*The authors benefit from the thoughts of fellow advisors, in this case, Al Fenichel and Steve Grace.

The ABA Young Leaders in Securitization and Structured Finance is a growing subcommittee of the Business Law Section (BLS) Committee for Securitization and Structured Finance. The committee and the Young Leaders are at the forefront of discussing and tackling new issues in the growing field of structured finance. Most recently, the Young Leaders hosted a discussion exploring some of the opportunities and career paths in securitization and structured finance available for young lawyers.

The discussion, hosted by the Young Leaders and joined by the panelists Claire Hall, Partner in DLA Piper’s Structured Finance Practice; Kira Brereton, Associate General Counsel at S&P Global Ratings; and Joel Kwan, an Associate at Paul Hastings LLP, was a great opportunity for young lawyers to learn about various career paths available to securitization attorneys. The discussion was well attended and provided a resource for new attorneys to develop a career plan in the securitization and structured finance field.

The BLS Committee for Securitization and Structured Finance and the Young Leaders subcommittee are both planning to hold additional events furthering interest and development in the securitization sector. The Young Leaders also hope to continue to host events for young lawyers who are in the sector or are interested in it.

The Young Leaders are also happy to announce that Carla Potter, of Cassels Brock & Blackwell LLP, is joining the Co-Chairs of the subcommittee and will focus on Diversity and Inclusion initiatives, and Myriam Mossi is joining as Director of Events.

Customers, employees and investors are putting increasing pressure on companies to embrace environmental, social and governance (ESG) initiatives. As businesses take stock of their sustainability efforts to meet new market demands, they may not realize just how much ESG can impact their bottom line and their long-term success. Companies that successfully navigate the world of ESG certifications face incredible opportunity to serve as catalysts for environmental and social responsibility and will be well-positioned to help their clients adopt ESG measures of their own.

ESG certification, however, demands increased scrutiny and accountability to ensure businesses are truly walking the walk. As such, lawyers should be involved in ESG efforts from the outset to guide their companies, clients or their own law firms down the right path.

Understanding Legal Requirements

What separates the ESG efforts of today from corporate social responsibility (CSR) efforts of the past are legal requirements that hold companies to their promises to use their businesses to do good. With ESG certifications such as the B Corporation® certification, businesses must include certain language in their operating and formation documents, providing a legal commitment to operate in sustainable ways and further social and environmental causes.

There are broad-reaching impacts related to how these documents are set up and structured. Having a lawyer involved from the start of ESG certification allows businesses to take a wider look at the core certification process, examining activities, documents and more from a companywide perspective. What’s more, legal counsel must ensure all of a company’s documents meet required ESG framework standards without subjecting the company or its directors and officers to liability and risk. The work doesn’t end there; when exploring ESG solutions, lawyers must remain involved in vendor management and vetting programs to ensure all of a company’s efforts are in line with ESG certification requirements and best practices.

ESG certifications can also include industry-specific requirements. In the accounting industry, for example, firms must include a tax statement relating to tax practitioners. These requirements can be complicated and demand detail from the applicant company or firm, with important legal ramifications.

Clients’ Demand for ESG Efforts Creates Opportunities

Our clients’ own ESG initiatives have begun to put pressure on businesses throughout the supply chain. Law firms and accounting firms have noticed an uptick in requests for ESG-related information in RFPs, and this trend will undoubtedly continue as ESG reporting becomes more mainstream (and potentially required).

Offering transparency to stakeholders and clients requires companies to dig deep into their data, figure out where they stand and report that information. ESG is set to raise the bar in this area, as it will require companies to list more detail about their efforts than ever before. For example, “Does your company recycle?” now becomes a question of what types of materials an organization recycles, and it gives suppliers with offices in LEED-certified buildings that have solid numbers to report on their carbon footprints a competitive advantage.

One of the most exciting things about ESG is its often-unanticipated positive impact on a business’s bottom line and how its customers interact with it. Being environmentally or socially thoughtful helps to improve products and services in a way that can result in cost savings, and clients can even benefit from unintended improvements in risk management. As an example, printing management tools can help with environmental concerns, but by ending the days of documents with confidential information sitting on a printer in a well-traveled area, there’s also a significant benefit to a firm’s compliance with its confidentiality obligations to clients.

Lawyers Can Make an Impact on Governance

Governance is perhaps the least understood piece of the ESG equation, with many frameworks such as B Corporation certification requiring specific language and actions on behalf of companies seeking certification. In addition to including language in organizational documents, good governance efforts must involve lawyers from the start to ensure an organization is meeting this standard from all angles.

Decision-making and policy-making are two parts of good governance that often come into play with ESG efforts. These reflect how a company’s leadership sets an example or even responds to things like disparities in compensation or labor strikes. An insensitive or callous response to these types of issues can put companies in a negative spotlight and potentially a public relations crisis, and it can also put them at risk in terms of ESG certification efforts.

Governance also extends to broad categories, such as how organizations address audits, internal controls and shareholder rights, going beyond corporate structuring or governance on paper to the way an entire organization operates and buys into ESG initiatives.

Whether an organization’s ESG efforts are grassroots, from the bottom up, or influenced from the top down, there must be a meeting in the middle where different perspectives are brought to the table to affect how decisions are made and how a company operates with respect to ESG concerns. As an added benefit, this type of thinking often yields innovation and harmony throughout an organization, another unintended positive consequence of ESG.

How Organizations Can Get Started with ESG

Many business leaders are initially apprehensive about knowing where to start with ESG. Certification processes can seem overwhelming, as they are robust processes that require sound project management and diligence. In reality, these projects are a great fit to be led by legal teams.

A common misconception about ESG certifications is that a company must be selling goods and services that are “green” or explicitly further a social goal to successfully achieve certification. In fact, ESG is a good fit for every organization, and the coming wave of regulations and societal pressure point to ESG as an imperative. Lawyers with broad, in-depth knowledge of an organization can help identify parts of a business’s operations that are a good fit for ESG programs.

Businesses should also know that a successful ESG journey won’t require them to change everything about their products or services, or how they run their company, all at once. Taking incremental steps can help organizations start on the right path, and they often continue to discover opportunities to streamline operations, keep clients happy and add efficiencies that drive revenue and cost savings.

Many companies are interested in how their suppliers are meeting ESG certifications, and often this can spur opportunities for a company to help clients go through the certification process themselves. In the B Corporation community, part of furthering the promise of being a B Corporation is helping other organizations do the same, ensuring they benefit from the shared expertise of others who have gone down this road before. Many certifications also require a periodic evaluation or even recertification, ensuring organizations aren’t resting on their laurels and that they continue to advance ESG efforts and seek continuous improvement.

While the ESG process can be daunting and challenging, it’s important to note that it is incredibly meaningful. Lawyers can help companies take ESG to heart, create opportunities to connect with the issues their clients, people and communities care about most, and hold themselves accountable to do better.

Spotting ethical issues in litigation is usually easy. The direct conflict magnifies tactics on the line between zealous practice and violations of the disciplinary rules, with transgressions quickly raised for the court’s consideration. Corporate transactional practice can also challenge a lawyer’s ethics, but the disciplinary landmines may be hidden in behind-the-scenes struggles for advantage.

Popular fiction, with its extremely stressful situations, can illustrate the lawyer’s dilemma. When the pressure is on, it is easy for professionals to sneak over the ethical line. Only a tiny percentage of novels are built on the intricacies of corporate maneuvering that raise such ethical matters. I hereby offer a tonic for this problem.

This autumn I published my second detective novel, Fistful of Truth, featuring a former lawyer leading a multi-city investigation firm. (Find the novel here.) The action in this book centers around the acquisition of a genetics research company by a huge pharmaceutical corporation. This book is in part an exercise in legal ethics for transactional business lawyers, with a side of mayhem, dirty dealing, and tinkering with the code of life.

The protagonist, Matt Bishop, is conducting a factual investigation of the acquisition target on behalf of the public company prospective purchaser. His client has access to detailed financial records, documentation about secret genetic research and genomics projects, and even computing logs and network records. From the beginning, a transactional attorney wonders, “Why didn’t the lawyers for the target company set limits on this ‘due diligence’ investigation?” In real life, a diligence review under the guise of a potential acquisition may expose the target’s vulnerabilities and secrets whether or not the parties complete the purchase transaction. Then the target is left completely exposed to the former prospective purchaser, often its competitor.

Rule 1.3 of the ABA Model Rules of Ethical Conduct, effectively mirrored in state bar ethics rules, requires an attorney to zealously represent her client. Under this ethical requirement for zealous client representation, the target company’s lawyers should propose limits on what kind of diligence investigations the proposed acquirer may be allowed to conduct, what employees of the target are available to interview and what kind of access investigators can have to the servers of the target. The potentially acquiring company should only be able to review the minimum amount of material needed to confirm its understanding of the target company’s business. It is the job of the target company’s lawyers to enact and maintain those restrictions.

In the book, the investigation itself also raised ethical issues for the lawyers of the acquiring company. Bishop claims he was hired by an outside law firm to conduct this review in order to provide privileged status to the resulting report, yet he never seems to contact the supervising law firm. Under the ethical rules, lawyers are required to closely manage their agents (Ethical Rules 5.1 and 5.3). Failure to do so is not only a violation of disciplinary rules, but can cost the attorney’s client the benefit of attorney-client privilege.

In the recent federal case of In Re Marriott International, Inc. Customer Security Breach Litigation, the court wrote, “For attorney-client privilege to apply, the communication must pertain to legal assistance. Furthermore, the need for legal advice must be a but-for cause of the communication. As such, business advice—such as how Marriott may improve its cybersecurity—is not privileged.” (citations omitted) In the book, Bishop was reporting directly to the pharmaceutical company executives, and not to the lawyers who were supposed to have retained his services. The pharma company lawyers were not exhibiting the required level of competence to maintain a desired privilege and were not directly supervising their non-lawyer agents.

Lack of supervision under Rule 5.3 becomes an even bigger problem for the acquiring company’s outside counsel when their investigating agency acts outside the law and performs hacking activity to find information on behalf of the pharma client. Bishop’s in-house computer forensics team, the Wolf Pack, hacks into business and financial records in the course of pursuing information for the client. Section (c) of Rule 5.3 states that a lawyer is responsible for the conduct of a non-lawyer, if the lawyer supervised or ordered the conduct, or “ratifies” the conduct, or could have prevented or mitigated the effects of the conduct. Clearly, in the book, even if the pharma company’s outside counsel did not order a violation of the Computer Fraud and Abuse Act, it set the investigator loose without closely supervising his activities. The state disciplinary committee could easily impute that violation of law to the lawyers themselves.

A more tenuous case could be made under Rule 4.2 concerning Bishop’s contact with opposing parties that he knows to be represented by counsel. According to the court in the 2020 Minnesota Federal District Court case US vs. Cameron-Ehlen Group, the Rule 4.2 restriction on contact “applies to the conduct of not only attorneys, but also an attorney’s nonlawyer agents, including investigative agents.” So Bishop’s contacts with executives of the target company could be imputed back to his supervising lawyers. One questions whether, as a former private firm lawyer himself, Bishop should have recognized the risks and avoided such contact. In an early scene where Bishop visits the home of the leader of an anti-genetic-manipulation advocacy group, his status as investigative agent for the pharma lawyers should have made him think twice. While the group leader does not state that he is represented by counsel, earlier criminal cases against the advocacy group would imply that he had counsel and Bishop should have known about it.

A corporate acquisition provides a variety of opportunities to run afoul of your state’s attorney disciplinary rules. You may not have the kind of practice that exposes you to this spectrum of ethical issues, so you can keep sharp by issue-spotting in the books you read. Even transactional business lawyers can find books that entertain and help you develop your ethical radar at the same time. Organized crime, government conspiracy, and murder may seem like the gravest misbehavior in Fistful of Truth, but the book demonstrates that even subtle moves by business attorneys can lead to serious consequences.