The fiduciary duties of directors of a Delaware corporation are frequently summarized as follows: “[T]he fiduciary relationship requires that the directors act prudently, loyally, and in good faith to maximize the value of the corporation over the long-term.”^[1] Embedded within that formulation is a temporal element: the duty is tied to the deliberately amorphous “long term” rather than any target sooner in time.

This core tenet of Delaware corporate law—often called the “standard of conduct” because it conveys what is expected of directors—is often invoked glancingly without further explanation. But in 2013, in In re Trados Inc. Shareholder Litigation,^[2] the Delaware Court of Chancery explained in detail the underpinnings of the temporal element—namely, that both the corporation and its equity capital are presumptively perpetual pursuant to the structure of the Delaware General Corporation Law (“DGCL”), which provides by default that corporations have unlimited life and that equity investments (which, unlike debt, do not have a fixed maturity) in the corporation constitute permanent capital. Due to this structure, the court reasoned, fiduciary duties oblige directors to act to maximize long-term value so that the corporation’s common stockholders (or “residual claimants”) will benefit from profits and earnings, in the form of dividends, if declared, during the life of the corporation and will be paid a theoretical maximum value upon an end-of-life scenario, such as a cash-out merger or dissolution (which involves winding up the business, liquidating, and distributing assets).

This article explores whether there is, or should be, a shift in the directors’ standard of conduct when a critical premise of Trados—presumptive perpetual existence—is missing by virtue of a provision of the corporation’s certificate of incorporation (or “charter”) that effectively imposes a deadline on the corporation’s existence, thereby creating what we refer to as a “limited-life” corporation. We first explain the logic of Trados and then apply that logic to limited-life corporations—including, for example, special purpose acquisition companies, or “SPACs,”^[3] whose directors have become frequent targets of fiduciary litigation.^[4] We conclude that directors of limited-life corporations, like SPACs, owe the same fiduciary duties of care and loyalty as directors of traditional corporations. But, as the Delaware courts have noted, the proper discharge of fiduciary duties is context-specific.^[5] In the context of a limited-life corporation, the directors’ context-specific duties require them to maximize value not over the long term but instead within the corporation’s known life span. For that reason, if Trados is to be followed, directors of a limited-life corporation should bear in mind the shorter horizon for value maximization when determining the best interests of the corporation and its stockholders generally.

The Logic of Trados

In Trados, a venture-backed company issued preferred stock with a liquidation preference to members of management and its venture capital investors. When the company was ultimately sold, 100 percent of the merger consideration was paid to preferred stockholders in satisfaction of their contractual preference, leaving nothing for the company’s common stockholders, who challenged the merger as a breach of fiduciary duty that enriched preferred holders at the common stockholders’ expense. The Trados plaintiffs initially defeated a motion to dismiss by arguing that four of the seven directors were affiliated with funds that believed their investment in the company was heading sideways and approved the merger for the sole purpose of securing the return of their liquidation preferences (despite the fact that the common stockholders would receive no consideration) rather than continuing to operate the company (and keeping their capital at risk) in an effort to maximize value for all stockholders, including the common stockholders.^[6]

In its post-trial opinion, the Trados court explained that fiduciary duties run to stockholders in their capacity as residual claimants of corporate assets, not in their capacity as holders of special contract rights (under, for example, a preferred stock instrument).^[7] The court noted that this principle flows from two foundational premises of Delaware law: (1) fiduciary duties oblige directors to maximize long-term corporate value for the benefit of the corporation’s residual claimants,^[8] and (2) directors are not obligated to cater to the particular preferences of any single stockholder or group of stockholders, but rather to the stockholders as a collective by maximizing the value of the corporation as a whole.^[9] In light of these two premises, the court explained, “the standard of conduct for directors requires that they strive in good faith and on an informed basis to maximize the value of the corporation for the benefit of its residual claimants, the ultimate beneficiaries of the firm’s value, not for the benefit of its contractual claimants.”^[10]

The first premise listed above, addressing why the standard of conduct obliges directors to maximize value over the long term, is the focus of this article. On this particular point, the court explained:

A Delaware corporation, by default, has a perpetual existence. 8 Del. C. §§ 102(b)(5), 122(1). Equity capital, by default, is permanent capital. In terms of the standard of conduct, the duty of loyalty therefore mandates that directors maximize the value of the corporation over the long-term for the benefit of the providers of equity capital, as warranted for an entity with perpetual life in which the residual claimants have locked in their investment.^[11]

In a sense, this logic keys the temporal aspect of the standard of conduct to a single question: When will the corporation “cash out”^[12] (so to speak) all of its stockholders? The Trados court reasoned that, by statutory default, the answer is “never” due to the structure of the DGCL, which provides by default that corporations have perpetual existence and will never face a midstream obligation to redeem or repurchase all of their capital stock.^[13] Accordingly, reasoned the court, directors are obliged by default to manage the corporation in a way that strives to achieve the corporation’s maximum value asymptotically forever. With that said, the court has made clear that this is not an obligation to maintain the corporation’s existence for eternity, as directors can, and often do, conclude that the entity can grow no more and, at that point, opt to sell or dissolve the company consistent with their fiduciary duties.^[14]

This is an eminently sensible way to define directors’ standard of conduct. Delaware conceives of the purpose of the corporation as maximizing firm value.^[15] Firm value is tied to the amount that stockholders must receive in an end-of-life scenario because the shares of a target’s stockholders are typically converted into the right to receive consideration in mergers and Delaware’s dissolution statute requires stockholders to receive any assets remaining after the satisfaction of the corporation’s debts and other liabilities.^[16] For that reason, firm value and the amount due to residual claimants are linked such that increasing the latter will generally increase the former.^[17] In short, tying fiduciary duties to the value owed to residual claimants harmonizes the standard of conduct with the purpose of the corporation itself.

Applying the Logic of Trados to Limited-Life Corporations

General Theory

The foregoing discussion raises the following question: What happens to the temporal element of the standard of conduct if the premise of perpetual life is no longer present? As a practical matter, that premise routinely falls away because corporate existence can and does end in various ways, including by merger, dissolution, or expiration of an end-of-life date in a corporation’s charter.^[18] How does the temporal element of the standard of conduct change (if at all) in these circumstances, and in particular for limited-life corporations?

Under the logic of Trados, directors should focus on the moment in time at which residual claimants must be paid the corporation’s residual value. The temporal target therefore shifts from value maximization “over the long term” to “as of the corporation’s known end date.” Although the core duty to maximize value remains the same, the standard of conduct obliges directors to strive to do so before the proverbial bell tolls. Why? Because that is the course that will maximize value for residual claimants at the fixed deadline.

This conclusion finds support in the merger context under legal principles set forth in both Trados itself and in the so-called Revlon context, where the directors’ duties shift, in a sale of control, to maximizing value in the short term. The Trados court observed: “When deciding whether to pursue a strategic alternative that would end or fundamentally alter the stockholders’ ongoing investment in the corporation, the loyalty-based standard of conduct requires that the alternative yield value exceeding what the corporation otherwise would generate for stockholders over the long-term.”^[19] Relatedly, past cases provide that “it is clear that under Delaware law, directors are under no obligation to act so as to maximize the immediate value of the corporation or its shares, except in the special case in which the corporation is in a ‘Revlon mode.’”^[20] Considered together, these two principles of law suggest that the temporal element of the standard of conduct is in some sense bifurcated, providing, respectively, that (1) directors must always seek to maximize the long-term (i.e., terminal) value of the corporation regardless of the circumstance, but (2) while directors have eternity to do so by default, they must do so on a more urgent basis in an end-of-life scenario. The first factor asks “what” (value that directors must strive to achieve) and the second asks “when” (directors must achieve it). The “what” is invariable, but the “when” (which is the focus of this article) changes in merger scenarios.

The “when” should change in other end-of-life scenarios aside from mergers.^[21] Under the foregoing precedents, the directors of limited-life corporations arguably owe fiduciary duties to maximize the terminal value of the corporation for the benefit of its residual claimants during the corporation’s known life span. Again, the “what” remains the same, but the “when” changes: while directors of limited-life corporations must strive to deliver what they believe to be the corporation’s terminal value, they must strive to do so before the termination date arrives rather than under the freedom of a perpetual time horizon.

The court’s opinion in New Enterprise Associates 14, L.P. v. Rich^[22] provides additional support for this conclusion. In that case, the court explained that parties can “tailor” the fiduciary standard of conduct applicable to directors by appropriate provision in the corporation’s certificate of incorporation.^[23] The court began by observing that general corporation laws like the DGCL delegate (at least in a sense) sovereign power to the citizenry:

The creation of a body corporate through the issuance of a charter constitutes an exercise of state authority, equivalent in its efficacy to the enactment of a statute (notwithstanding the now longstanding practice of the state approving charters under a general incorporation law). Through the issuance of a charter, the state creates an otherwise impossible being—an artificial person—capable of exercising the powers conferred by the state and with the limitations that the state wishes to impose. To use the charter to modify the duties attendant to that state-created relationship, parties should need express authority from the state.^[24]

The court reasoned that the Delaware General Assembly has in fact exercised such “express authority” in multiple DGCL provisions^[25]—including, perhaps most relevant here, section 102(a)(3) of the DGCL, which requires the certificate of incorporation to set forth “[t]he nature of the business or purposes to be conducted or promoted.”^[26] Purpose clauses can be drafted in broad and general terms, authorizing, for example, the corporation to conduct any lawful act or activity,^[27] or they may be drafted narrowly, in a manner that circumscribes the corporation’s objects and purposes, directing it, for example, to pursue specific lines of business or objectives (and, by implication, imposing the risk that acts outside those specific lines or not in furtherance of those objectives will be ultra vires). Along those lines, in New Enterprise Associates, while directors of corporations with general purpose clauses and perpetual existence owe fiduciary duties to maximize the entity’s long-term value,^[28] directors managing an entity with a limited purpose and duration are duty bound not to pursue profit maximization over the long term if doing so subverts the purpose identified. This is but one example of a DGCL provision held to enable corporate planners to reorient fiduciary focus.^[29]

The DGCL’s limited-life provision (section 102(b)(5))^[30] operates in a similar fashion, constraining the corporation in a way that necessarily affects the contextual duties of its fiduciaries. While the New Enterprise Associates court did not specifically identify section 102(b)(5) as a means of fiduciary tailoring, any limitation on duration, like a limitation on the corporation’s objects and purposes, will alter the default standard of conduct pursuant to which directors are guided to pursue profit maximization in the long-term best interests of the stockholders. Accordingly, limited-duration provisions necessarily (and permissibly) have the effect of tailoring the fiduciary standard of conduct in the manner described above.

Practical Application: SPACs

This precept has important implications for directors of limited-life corporations, including SPACs, which typically must dissolve within eighteen to twenty-four months after the corporation’s initial public offering.^[31] Because the SPAC itself generally has no business operations and exists for the limited purpose of identifying acquisition targets and effecting a business combination, typically as an alternate means of taking a private company public, directors’ overarching value-maximization duty obliges them to seek out a business combination that will yield greater value to the SPAC’s stockholders than the fixed amount they would otherwise receive in a redemption scenario, as (if a target whose value exceeds per-share redemption value exists) that is the course that will deliver the most value to residual claimants at the time at which they otherwise must be paid in a mass cash-out upon the occurrence of the charter-imposed termination date.^[32]

For that reason, although “rushing” is often used as a pejorative by stockholder plaintiffs challenging directors’ consideration of a merger,^[33] acting with appropriate speed may often be precisely what SPAC directors’ fiduciary duties require of them. As established above, proper discharge of fiduciary duties depends on context such that different value-maximizing steps may be appropriate depending on what the situation requires. Thus, in the SPAC context, there is neither a general “duty to rush” nor a general duty to turn over every stone by expending the SPAC’s entire eighteen- to twenty-four-month life span searching for a suitable target. Rather, variable factual circumstances can and should influence directors’ approach to, and degree of alacrity in, locating a target such that proper adherence to the standard of conduct will depend on the unique factual nuances at play.

With that said, SPAC directors oftentimes must act with deliberate speed due to the nature of the entity they helm. SPACs are formed with the specific purpose of acquiring a private company that meets the criteria set forth in its charter (which commonly requires the target’s fair value to meet or exceed 80 percent of the cash held in the SPAC’s trust account) within eighteen to twenty-four months, and locating and consummating a transaction can take a long time. SPAC directors must, among other things, retain advisors, collect information on potential targets, conduct diligence on targets’ business models and operations, conduct diligence on targets’ financials (a project often complicated by private targets’ lack of public company financial reporting conventions), negotiate a term sheet, negotiate a merger agreement, negotiate ancillary agreements, approve and adopt the transaction documents, convene a stockholder meeting to approve the transaction, allow any necessary government approval processes to conclude, and close the transaction. Each of these steps takes time, which in turn imposes an important practical constraint on SPAC boards: they cannot, within eighteen to twenty-four months, conduct an exhaustive review of an essentially limitless group of potential targets. Rather, both SPAC boards and SPAC stockholders understand that the board’s practical charge is to make rational judgments to narrow the field of potential targets to an actionable number that in turn enables a transaction to close within the SPAC’s life span.

Because SPAC investors understand these practical realities, challenges to SPAC mergers on grounds that the board acted quickly reflect internal logical tension: stockholders who seemingly signed up for a fast acquisition process by investing in the SPAC in the first instance challenge a transaction on grounds that it proceeded at precisely the pace they expected. For example, in Richards v. QuantumScape Corp.,^[34] a stockholder challenged a SPAC merger in part on grounds that the SPAC’s board was “highly motivated to acquire a company on a quick timeframe.” Similarly, a stockholder-plaintiff in Polisher v. Lottery.com, Inc. impugned a SPAC board for “push[ing] through the [transaction] at lightning-fast speed.”^[35] It is not reasonable to infer from these sorts of bald rushing allegations that directors acted carelessly in violation of the standard of conduct. Not only do foundational precepts of Delaware law suggest that moving with alacrity is appropriate in this context, but rushing allegations ignore that the plaintiffs, by investing in a limited-life corporation, signed up for a twenty-four-month race to maximize the value of their shares the moment that they bought them. The better inference, based on both the SPAC’s certificate of incorporation and the practical realities of mergers and acquisitions (M&A) practice, is that acting with suitable speed evidences proper discharge of directors’ fiduciary duties.

This intuition has an important implication in M&A litigation: courts deciding pleading-stage dispositive motions generally should not infer fiduciary misconduct from a bald allegation that directors rushed to complete a transaction. Although the procedural standard applicable to resolving motions to dismiss is plaintiff-friendly under Delaware law, it only requires the court to give the plaintiff the benefit of reasonable inferences.^[36] For reasons described above, it is not reasonable to infer fiduciary misconduct from fast action per se.

Three recent decisions from the Delaware Court of Chancery provide a useful template to illustrate how this precept might operate in M&A litigation. In each of In re MultiPlan Corp. Stockholders Litigation, Delman v. GigAcquisitions3, LLC,^[37] and Laidlaw v. GigAcquisitions2, LLC,^[38] a stockholder-plaintiff sued SPAC directors for approving an acquisition that, according to the plaintiff, overvalued the target company. In each case, the Court of Chancery held at the pleading stage that the entire fairness standard of review applied,^[39] thereby requiring the court to assess (1) whether the complaint stated a claim that the transaction was not entirely fair by virtue of the price that each SPAC paid and the process that each SPAC’s board employed before consummating it^[40] and (2) whether the complaint pled nonexculpated fiduciary misconduct by each director-defendant sufficient to keep them in the lawsuit.^[41] To support these two points, the plaintiffs in these three cases did not argue that the board rushed—but plaintiffs in cases like QuantumScape and Lottery.com did, and plaintiffs in similar future suits might. So, the argument goes, rushing supports point (1) on grounds that it evidences an unfair process and point (2) on grounds that it suggests directors breached their fiduciary duties. But, as we have explained, neither inference is reasonable without more because the standard of conduct obliges SPAC directors to maximize value as of the SPAC’s known termination date, which oftentimes may require fast action to find and acquire a suitable target in time.

Conclusion

The logic of Trados creates substantial arguments that the fiduciary standard of conduct required of directors of limited-life corporations differs from that of directors managing perpetual ones. Trados ties the temporal element of fiduciary duties to the moment in time at which residual claimants must be paid. By default, that moment will never arrive, and thus the temporal element will be the unreachable “long term” in most cases. But for corporations with a known termination date, like SPACs, the temporal element should advance in kind both by logical extension and under the New Enterprise Associates precept that certain charter provisions necessarily (and permissibly) reorient fiduciary focus. In our view, bald allegations that directors of a limited-life corporation “rushed” through a sale process, in and of itself, should not give rise to a reasonable inference that the process was flawed. Rather, because the duty is to maximize value within a specified time horizon, the reasonable inference from fast action should be that directors observed the context-specific duties imposed on them. Reframing of the standard of conduct in this manner should help to eliminate noise in cases involving limited-life corporations where plaintiffs attempt to assert process-based challenges that might arguably apply in the default setting but do not operate similarly in limited-life contexts.

John Mark Zeberkiewicz is a director and Brian T.M. Mammarella is an associate of Richards, Layton & Finger, P.A. Their practice focuses on transactional matters involving Delaware corporations, including mergers and acquisitions, corporate governance, and corporate finance. The views expressed in this article are those of the authors and not necessarily those of Richards, Layton & Finger, P.A., or its clients.

1. Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *18 (Del. Ch. Apr. 14, 2017). ↑

2. 73 A.3d 17 (Del. Ch. 2013). ↑

3. The Delaware Court of Chancery has summarized the nature and organizing purpose of SPACs as follows:

   A SPAC—also called a blank check company—is a publicly traded company that raises capital through an initial public offering to realize a single goal: merge with a private company and take it public. Unlike most companies that go public, a SPAC has no operations and its assets are effectively limited to its IPO proceeds. SPACs are often formed and controlled by an individual or management group, referred to as the SPAC’s “sponsor.” The sponsor’s primary job is to identify a target for a “de-SPAC” merger.

   In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 793 (Del. Ch. 2022) (footnotes omitted). ↑

4. E.g., Laidlaw v. GigAcquisitions2, LLC, 2023 WL 2292488 (Del. Ch. Mar. 1, 2023) (opinion addressing plenary action against SPAC directors for breach of fiduciary duty); Delman v. GigAcquisitions3, LLC, 288 A.3d 692 (Del. Ch. 2023) (same); In re MultiPlan Corp. S’holders Litig., 268 A.3d 784 (same); Complaint, Farzad v. Gores Sponsor IV LLC, No. 2023-0386 (Del. Ch. Mar. 31, 2023) (complaint asserting plenary claims for breach of fiduciary duties against SPAC directors); Complaint, Delman v. Gores Sponsor IV LLC, No. 2023-0284-LWW (Del. Ch. Mar. 10, 2023) (same); Complaint, Delman v. Riley, No. 2023-0293-LWW (Del. Ch. Mar. 13, 2023) (same); Complaint, McKnight v. All. Ent. Holdings Corp., No. 2023-0383-LWW (Del. Ch. Mar. 31, 2023) (same); Complaint, Weisheipl v. Rosenberg, No. 2023-0395-MTZ (Del. Ch. Apr. 3, 2023) (same); Complaint, Solak v. Mountain Crest Cap. LLC, No. 2023-0469-SG (Del. Ch. Apr. 28, 2023) (same); Complaint, Kilari v. TS Innovation Acquisitions Sponsor LLC, No. 2023-0509-LWW (Del. Ch. May 9, 2023) (same); Complaint, Subramanian v. TS Innovation Acquisitions Sponsor LLC, No. 2023-0514-LWW (Del. Ch. May 10, 2023) (same); Complaint, Newman v. Sports Ent. Acquisition Holdings LLC, No. 2023-00538-LWW (Del. Ch. May 18, 2023) (same); Complaint, Lindsey v. Quiroga, No. 2023-0674-PAF (Del. Ch. June 30, 2023) (same); Complaint, Bushansky v. GigAcquisitions4 LLC, No. 2023-0685-LWW (Del. Ch. July 5, 2023) (same); Complaint, Murray v. Moglia, No. 2023-0737-PAF (Del. Ch. July 20, 2023) (same); Complaint, Ihle v. Brombach, No. 2023-0759-LWW (Del. Ch. July 25, 2023) (same); Complaint, Offringa v. dMY Sponsor II LLC, No. 2023-0929 (Del. Ch. Sept. 12, 2023) (same); Complaint, Gatto v. Volta Inc., No. 2023-0378 (Del. Ch. Mar. 30, 2023) (seeking to inspect a former SPAC’s books and records to investigate wrongdoing in connection with the SPAC’s business combination transaction); Complaint, Richards v. QuantumScape Corp., No. 2022-0394-JTL (Del. Ch. May 5, 2022) (same); Complaint, Polisher v. Lottery.com, Inc., No. 2023-0242 (Del. Ch. Feb. 24, 2023) (same); Complaint, Gomez v. Berkshire Grey Inc., No. 2023-0724 (Del. Ch. July 18, 2023) (same); Complaint, Serven v. Greenlight Bioscis. Holdings PBC, No. 2023-0728 (July 18, 2023) (same); Complaint, Bryant v. MoneyLion Inc., No. 2023-0739-BWD (Del. Ch. July 20, 2023) (same). ↑

5. Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) (“Although the fiduciary duty of a Delaware director is unremitting, the exact course of conduct that must be charted to properly discharge that responsibility will change in the specific context of the action the director is taking with regard to either the corporation or its shareholders.”); accord In re McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343, 369 (Del. Ch. 2023) (same). ↑

6. In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *1 (Del. Ch. July 24, 2009) (“[P]laintiff has alleged facts sufficient, at this preliminary stage, to demonstrate that at least a majority of the members of Trados’ seven member board were unable to exercise independent and disinterested business judgment in deciding whether to approve the merger.”). Notably, the plaintiffs also challenged the board’s adoption of a management carve-out plan that effectively allocated proceeds of the merger to management, thus providing them an incentive to complete the transaction favored by the preferred stockholders. Id. ↑

7. LC Cap. Master Fund, Ltd. v. James, 990 A.2d 435, 448–49 (Del. Ch. 2010) (“When, by contract, the rights of the preferred in a particular transactional context are articulated, it is those rights that the board must honor. To the extent that the board does so, it need not go further and extend some unspecified fiduciary beneficence on the preferred at the expense of the common. When, however, . . . there is no objective contractual basis for treatment of the preferred, then the board must act as a gap-filling agency and do its best to fairly reconcile the competing interests of the common and preferred.”). ↑

8. In re Trados Inc. S’holder Litig., 73 A.3d 17, 37 (Del. Ch. 2013). ↑

9. See Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *17 (Del. Ch. Apr. 14, 2017) (“[U]nder Delaware law, for directors to act loyally to advance the best interests of the corporation means that they must seek ‘to promote the value of the corporation for the benefit of its stockholders.’ In a world with many types of stock . . . the question naturally arises: which stockholders? The answer is the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights.” (footnotes omitted)); J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70 Bus. Law. 33, 49 (2015) (“At their core, a director’s fiduciary duties require that the director act prudently and in good faith ‘to promote the value of the corporation for the benefit of its stockholders.’ The reference to ‘stockholders’ means all of the corporation’s stockholders as a collective. It means the stockholders as a whole, without reference to any of their special contractual rights, which is what academics refer to as the ‘single owner standard.’” (footnotes omitted)). ↑

10. Trados, 73 A.3d at 40–41. The court went on to reason that preferred holders are only owed fiduciary duties in their capacity as holders of undifferentiated equity, not in their capacity as holders of special, unique contract rights set forth in a preferred instrument not shared generally with stockholders. Id.; see supra note 7 and accompanying text. ↑

11. Trados, 73 A.3d at 37–38 (emphasis added). This reasoning has been both endorsed by the Delaware Supreme Court and applied to Delaware limited liability companies. United Food & Com. Workers Union v. Zuckerberg, 2021 WL 4344361, at *19 n.193 (Del. Sept. 23, 2021) (citing with approval the notion that “the fiduciary relationship requires that the directors act prudently, loyally, and in good faith to maximize the value of the corporation over the long-term for the benefit of the providers of presumptively permanent equity capital, as warranted for an entity with a presumptively perpetual life in which the residual claimants have locked in their investment”); Glidepath Ltd. v. Beumer Corp., 2019 WL 855660, at *19 (Del. Ch. Feb. 21, 2019) (“By default, a Delaware LLC exists perpetually—from formation until cancellation. Consequently, unless their fiduciary duties are eliminated or modified, the fiduciaries who control a Delaware LLC must strive to maximize the value of the LLC over a long-term horizon, as warranted for an entity with a presumptively perpetual life.”). ↑

12. We use the phrase cash out for convenience, but it is intended to capture a wider array of liquidity events that deliver value in various forms, as the Trados court explicitly acknowledged: “Value, of course, does not just mean cash. It could mean an ownership interest in an entity, a package of other securities, or some combination, with or without cash, that will deliver greater value over the anticipated investment horizon.” Trados, 73 A.3d at 38–39. ↑

13. Indeed, section 151(b) of the DGCL forbids corporations from completing redemptions that would wipe out all voting stock (subject to exceptions). Del. Code Ann. tit. 8, § 151(b). But see 2 David A. Drexler et al., Delaware Corporation Law and Practice § 17.01[2] (2022) (observing that “transfer restrictions authorized by [Del. Code Ann. tit. 8, § 202] may be, in effect, indistinguishable from the grant of a right of redemption to the holders of the common stock”). ↑

14. ODN, 2017 WL 1437308, at *19 (“[A] duty to maximize long-term value does not always mean acting to ensure the corporation’s perpetual existence.”). ↑

15. E.g., id. at *17 (“Delaware case law is clear that the board of directors of a for-profit corporation . . . must, within the limits of its legal discretion, treat stockholder welfare as the only end, considering other interests only to the extent that doing so is rationally related to stockholder welfare.” (quoting Leo E. Strine Jr., A Job Is Not a Hobby: The Judicial Revival of Corporate Paternalism and Its Problematic Implications, 41 J. Corp. L. 71, 107 (2015))). ↑

16. See Del. Code Ann. tit. 8, §§ 251(b)(5), 281. Delaware law provides that the only other conceivable end-of-life event, conversion, neither requires payment to stockholders nor ends the company’s existence. Id. § 266(h). Other end-of-life events, such as revocation of a delinquent corporation’s charter by the secretary of state and subsequent termination proceedings, are not relevant for present purposes because they do not involve director action. Id. §§ 509, 511. ↑

17. ODN, 2017 WL 1437308, at *17 (“Decisions [that produce greater profits over the long term] benefit the corporation as a whole, and by increasing the value of the corporation, the directors increase the quantum of value available for the residual claimants.”). We acknowledge that increasing firm value may not increase amounts paid to stockholders in some dissolution scenarios, including where amounts due to creditors would swallow the amount of the increase. ↑

18. See supra note 16. Note that corporate existence does not end upon dissolution or expiration of an end-of-life date, both of which instead trigger a period of at least three years during which the corporation continues to exist for the purpose of winding up its affairs and liquidating and distributing its assets. Only after the windup expires does the corporation cease to exist (subject to limited exceptions). See Del. Code Ann. tit. 8, §§ 278, 280, 281; cf. In re Krafft-Murphy Co., Inc., 82 A.3d 696, 705–07 (Del. 2013) (holding that “the expiration of [the windup period] does not extinguish the dissolved corporation’s liability” to claimants who sue after the corporation has ceased to exist because although the DGCL’s safe-harbor provisions protect directors and stockholders from certain claims and time-bar other types of claims, the DGCL does not purport to eliminate liability of the corporation itself). ↑

19. In re Trados Inc. S’holder Litig., 73 A.3d 17, 37 (Del. Ch. 2013) (emphasis added). ↑

20. Paramount Commc’ns Inc. v. Time Inc., 1989 WL 79880, at *19 (Del. Ch. July 14, 1989) (Allen, C.), aff’d, 571 A.2d 1140 (Del. 1989) (emphasis added). “[A]bsent a limited set of circumstances as defined under Revlon, a board of directors, while always required to act in an informed manner, is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover.” Paramount Commc’ns Inc., 571 A.2d at 1150. ↑

21. The fact that Revlon does not apply to a board’s decision to dissolve does not change this analysis because Revlon is a standard of review, not a standard of conduct. Energy Fund v. Gershen, 2016 WL 5462958 (Del. Ch. Sept. 29, 2016) (holding that Revlon does not apply to a board’s decision to dissolve); In re USG Corp. S’holder Litig., 2020 WL 5126671, at *28 (Del. Ch. Aug. 31, 2020) (“Describing the duties of directors in way of a control transaction as ‘Revlon duties,’ to my mind, is something of a misnomer; the fiduciary duties are loyalty and care, in any situation—the specific situation, however, dictates the actions required for fulfilment of those duties.”). See generally J. Travis Laster, Revlon Is a Standard of Review: Why It’s True and What It Means, 19 Fordham J. Corp. & Fin. L. 5 (2013). That is because directors must always strive to maximize the corporation’s value, and Revlon only asks whether directors acted reasonably in striving to do so in change-of-control scenarios. Simply put, Revlon does not dictate the standard of conduct. ↑

22. 295 A.3d 520 (Del. Ch. 2023). ↑

23. Id. at 529 (recognizing that “fiduciary duties can be tailored”). ↑

24. Id. at 543 (emphasis added). ↑

25. Id. at 553–54; see also id. at 542 (“[I]f the General Assembly has authorized provisions in the constitutive documents of an entity that eliminate or modify the fiduciary duty regime, then a court will enforce them. Otherwise, practitioners cannot use the constitutive documents of an entity for that purpose.”). ↑

26. Id. at 554 (“[A] limited purpose clause effectively modifies the orientation of the directors’ fiduciary duties.”). ↑

27. Section 102(a)(3) expressly authorizes the charter to provide a provision of this sort:

    It shall be sufficient to state, either alone or with other businesses or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any.

    Del. Code Ann. tit. 8, § 102(a)(3). ↑

28. 295 A.3d at 544 (“Absent a narrow purpose clause, corporate directors have an obligation to seek to maximize the long-term value of the corporation for the benefit of its stockholders.”). ↑

29. See id. at 549–61 (discussing six other DGCL provisions that permit fiduciary tailoring); cf. In re McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343, 369 (Del. Ch. 2023) (observing that fiduciary duties are flexible and responsive to the specific context surrounding each decision that fiduciaries make). ↑

30. Del. Code Ann. tit. 8, § 102(b)(5). ↑

31. A sample limited-life provision in a SPAC charter reads as follows:

    In the event that the Corporation has not consummated an [sic] Business Combination within the Completion Window, the Corporation shall (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter subject to lawfully available funds therefor, redeem 100% of the Offering Shares in consideration of a per share price, payable in cash, equal to [consideration formula], and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining stockholders and the Board in accordance with applicable law, dissolve and liquidate, subject in each case to the Corporation’s obligations under the DGCL to provide for claims of creditors and other requirements of applicable law.

    N. Mountain Merger Corp., Amended and Restated Certificate of Incorporation (Sept. 21, 2020) (ex. 3.1 to current report (Form 8-K)). ↑

32. Section 102(b)(5) of the DGCL provides that the charter may contain “[a] provision limiting the duration of the corporation’s existence to a specified date.” Del. Code Ann. tit. 8, § 102(b)(5). We acknowledge that SPAC charters do not purport to limit the corporation’s existence to a “specific date” but rather oblige the corporation to dissolve as promptly as reasonably possible after expiration of the above-referenced completion window and the mandatory redemption of public shares occurs. E.g., supra note 31 and accompanying text. We further acknowledge that the charter can be amended to extend the completion window at any time as long as both the directors and the stockholders consent. See Del. Code Ann. tit. 8, § 242. Nonetheless, mandatory, time-triggered dissolution provisions in SPAC charters should animate the same standard-of-conduct analysis as traditional limited-life provisions because both alter the default of perpetual existence by providing a target beyond which the corporation may no longer conduct the business that the corporation was formed to pursue. Further, the possibility of charter amendments should not alter the analysis for several reasons. First, the standard of conduct focuses on director action, and directors cannot unilaterally amend the charter (subject to exceptions not relevant here). Id. § 242(b). Moreover, Trados keyed the temporal element of the standard of conduct to the corporation’s contemporaneously prevailing (there, the DGCL default) life span, not hypothetical alternative life spans. As we have argued, the temporal element of the standard of conduct should be responsive to any new condition affecting corporate life—be it an imminent merger, imminent dissolution, or a known termination date—when it manifests and not before. ↑

33. See infra notes 34–35 and accompanying text; see also Complaint ¶ 74, Ihle v. Brombach, No. 2023-0759-LWW (Del. Ch. July 25, 2023) (“Upon information and belief, Plaintiff alleges that the Proxy overstates the extent of the Company’s evaluation of potential targets other than Legacy Core Scientific, as Defendants quickly identified Core Scientific as the Company’s preferred target.”); Complaint ¶¶ 39–41, Murray v. Moglia, No. 2023-0737-PAF (Del. Ch. July 20, 2023) (alleging that “defendants quickly approv[ed] the merger” at issue and highlighting that “[d]efendants were ready to move quickly”); Complaint ¶ 51, Bushansky v. GigAcquisitions4 LLC, No. 2023-0685-LWW (Del. Ch. July 5, 2023) (“Following the IPO, the Board had to complete a business combination within 24 months, or Gig4 would be forced to liquidate the trust account and return the trust funds to Gig4’s public stockholders. Unsurprisingly, Gig4 moved swiftly to negotiations with a target that the Controller Defendants’ had preselected.”); Complaint ¶ 50, Lindsey v. Quiroga, No. 2023-0674-PAF (Del. Ch. June 30, 2023) (“Due to the SRAC Individual Defendants’ ownership interests in SRAC and the terms and financial structure of SRAC as a SPAC, the SRAC Individual Defendants possessed strong financial incentives to complete a qualifying transaction by the May 13, 2021 deadline. The SRAC Individual Defendants faced pressure to complete a transaction irrespective of the merits of that transaction for SRAC’s public stockholders.”). ↑

34. Complaint ¶ 11, No. 2022-0394-JTL (Del. Ch. May 5, 2022). ↑

35. Complaint ¶ 5, No. 2023-0242 (Del. Ch. Feb. 24, 2023). ↑

36. E.g., In re Zale Corp. S’holders Litig., 2015 WL 5853693, at *16 (Del. Ch. Oct. 1, 2015) (“Although I must draw all inferences in favor of Plaintiffs on Defendants’ motion to dismiss, those inferences still must be reasonable.”). ↑

37. 288 A.3d 692 (Del. Ch. 2023). ↑

38. 2023 WL 2292488 (Del. Ch. Mar. 1, 2023). ↑

39. In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 809 (Del. Ch. 2022); GigAcquisitions3, 288 A.3d at 713–22; GigAcquisitions2, 2023 WL 2292488, at *7–9. ↑

40. E.g., Multiplan, 268 A.3d at 815 (“When entire fairness applies, the defendant fiduciaries have the burden ‘to demonstrate that the challenged act or transaction was entirely fair to the corporation and its stockholders.’ The two aspects of that test—fair price and fair dealing—‘must be examined as a whole since the question is one of entire fairness.’” (footnotes omitted)). ↑

41. In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1175–76 (Del. 2015) (“A plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct—be it Revlon, Unocal, the entire fairness standard, or the business judgment rule.” (footnotes omitted)). ↑

The January 6, 2021, sacking of the U.S. Capitol was a warning shot across America’s proverbial bow, telling even the most optimistic amongst us that our beloved democracy is at great risk. Many of those involved in denying the outcome of the 2020 elections have continued their assault on our democracy, and the 2024 presidential election may very well end up determining whether our 247-year-old form of government can survive.

The causes of our current crisis are undoubtedly complex but must be determined and quickly addressed if we are to uphold the legacy more than twelve generations of Americans fought for and passed down to us. The efforts to overturn the 2020 election could very well have succeeded but for our tripartite system of government and the intervention by the judicial branch, including, importantly, its lawyers. Among all Americans, the legal profession has a unique fiduciary duty under its contract with society to defend the Constitution and uphold its principles of democracy. That duty continues to this day to be under intense pressure, as can be seen by reading any newspaper or listening to any newscast.

Our current situation and the unique role that lawyers play in a democracy is what led me to form the American Bar Association (ABA) Task Force for American Democracy—bringing together thirty leading Americans from across the political spectrum, ranging from retired judges to election law experts and law school deans, experts on national security to former presidential candidates from both parties. The Task Force is focused on the two critical objectives that are essential to protecting, and hopefully enhancing, our democracy: (i) assuring elections are conducted under principles of democracy, including being administered in a safe and apolitical manner; and (ii) creating a national culture that is educated on the basics of civics and has not only an understanding of but also a passion for democracy and the rule of law.

Global surveys have shown that there is an alarming trend not only in the United States but also abroad of increasing pressures to replace traditional notions of the rule of law and democratic processes with autocratic forms of government. A growing number of adults and young Americans do not believe that a democratic form of government is necessary or even crucial to their lives and wellbeing, placing our democracy in great peril. Such alarming shifts are confirmed by a 2023 survey by the Associated Press-NORC Center for Public Affairs Research that found that just 10 percent of American adults view the health of our nation’s democracy positively. A staggering 50 percent believe our democracy is not functioning effectively, underscoring a bipartisan disillusionment that cuts across the American political landscape. About half of the respondents expressed disapproval towards key democratic institutions like the Presidency, Congress, and the Supreme Court in their roles of upholding democratic values.

As a country, we don’t fare any better on the world stage. The World Justice Project’s 2023 Rule of Law Index, which ranks nations based on factors such as constraints on government powers, absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice, and criminal justice, showed that our ranking—twenty-sixth out of 142 countries and jurisdictions—reflects a drop from 2020, with our recent declines on par with nations like Hungary and Myanmar.

Clearly, our American democracy is not as strong as we once thought. The time for answers and engagement is now, and our nation’s lawyers need to be at the front of the action.

Just as lawyers played a special role in the founding of our nation, American lawyers have an equally special role to play today in ensuring our democracy not only survives but thrives for generations to come. Every lawyer in America takes an oath to uphold and support our Constitution and the rule of law. Indeed, it was lawyers and the judicial system that arguably saved our democracy when more than sixty different judicial decisions, after reviewing all the evidence presented, held that there was “no steal” of the 2020 presidential election.

As the nation’s leading organization of American lawyers, the ABA is uniquely positioned to be a national leader on preserving and enhancing our democracy, with its ability to engage local communities not only through its lawyer members but also through the ABA’s partnerships with law schools, state and local bar associations, the judiciary, and other democracy NGOs. Lawyers of all stripes—retired general counsels, private practitioners, law school professors, and others—have reached out to the Task Force to ask how they can help, heeding our call to action. They intuitively know the stakes are high and that the endeavor to preserve and enhance our democracy will require many hearts, minds, and hands to be successful.

Co-chaired by former Federal Judge J. Michael Luttig and ex-Homeland Security Secretary Jeh Charles Johnson, the Task Force’s overarching goal is to ensure “an enduring American democracy.” It will drive a better understanding of and a sense of ownership of American democracy into everyday life, as well as promote the rule of law and the sanctity of elections to ensure American democracy thrives for generations to come. From August 2023 through January 2025, the Task Force—in cooperation with local bar associations, law schools, volunteer lawyers, civic and business leaders, and democracy-focused NGOs—will work to:

• Inspire and mobilize America’s uniquely positioned legal profession to fulfill its fiduciary duty to actively support and defend American democracy, the Constitution, and the rule of law.
• Ensure that lawyers are educated and accountable to their professional obligations to support and defend the Constitution, the rule of law, and our democracy.
• Leverage the legal profession to educate the public on the reasons for, and the need to, actively support democracy and the rule of law.
• Restore voter confidence in the integrity of our elections.
• Assure the nonpartisan administration of elections.
• Ensure the safety of election workers and officials and others responsible for the administration of elections.
• Promote civil political discourse and debate, denounce and disincentivize extremist and violent political rhetoric in American politics, and seek to prevent the use of violence to replace democratic practices or to influence or overturn elections.
• Assure citizen participation in democracy and the democratic process.
• Identify and recommend democratic solutions to the antidemocratic weaknesses in our election processes.
• Identify and promote the positive role cyberspace can play in the American democratic process while protecting against misuse of technology and the internet to corrupt the democratic process.

To accomplish its objectives, the Task Force will undertake the following actions:

1. Working Papers. Created in cooperation with leading national experts, these documents will seek to analyze the key challenges facing our democracy as well as propose possible solutions to be considered by the American people. Topics to be addressed include decreasing political polarization in the U.S., addressing the use of deepfakes and misinformation in connection with elections, depoliticizing the administration of elections, assuring an independent justice system and a continued separation of powers, and improving civics education in all levels of American society.
2. Listening Tours. In collaboration with local partners, the Task Force will host community listening forums in Arizona, Georgia, Michigan, North Carolina, Pennsylvania, Wisconsin, and perhaps other states focused on addressing the key issues facing our democracy, such as trust in elections, election worker safety, improving public dialogue, and reducing polarization. We will intentionally limit the size of our convenings to encourage meaningful dialogue amongst community leaders committed to democracy. We are nonpartisan and seek collaboration across the political spectrum. Based on these initial Listening Tours, the Task Force will also create “Listening Tour Toolkits” to be provided to bar associations, institutions of higher education, and community groups around the United States such that they can host similar events in their communities and then report back to the Task Force on the outcomes of those sessions.
3. Rapid Response Teams. The Task Force will create two types of Rapid Response Teams: (a) a national team comprised of Task Force members; and (b) local teams potentially in all fifty states comprised of lawyers, retired judges, retired district attorneys, law school deans, and community leaders. The Rapid Response Teams will provide real-time public responses to emerging or potential threats to American democracy, to concerns related to free and fair elections, and to issues related to the rule of law as they arise on both national and local levels during the lead-up to the counting of electoral college votes on January 6, 2025.
4. Strategic Communications. Leveraging the prominence and bipartisan credentials of the Co-Chairs and Task Force Members and working in collaboration with third-party democracy NGOs, the Task Force will seek to inform and educate the public on (a) the importance of American democracy, (b) the centrality of elections to the successful exercise of democratic principles, (c) the imperative of the rule of law in a democracy, and (d) the corrosive effects of extreme rhetoric and misinformation on political discourse.
5. Report and Recommendations. In August 2024, the Task Force will convene a Democracy Summit at the ABA Annual Meeting in Chicago. The summit will be based on the findings of a published Interim Task Force Report setting forth its activities, learnings, findings, conclusions, and recommendations regarding key issues such as failures to embrace and support democratic principles, threats to the rule of law, election integrity, election worker safety, extreme and violent political rhetoric, political polarization, the urgency for return to civil political discourse, and the need for civics education at all levels of public and private education.

While a great deal of work lies in front of us, we can collectively rekindle our national faith in the foundational principles that have long defined our democracy. By championing transparency, judicial independence, and steadfast adherence to the rule of law, we can forge the foundation for a restored national trust, and rebuild the public’s belief in our democratic institutions, ensuring that the principles of our republic again resonate with the voices of its people.

“Working to Ensure an Enduring American Democracy” by Mary L. Smith, President of the American Bar Association, is part of a series on the rule of law and its importance for business lawyers, created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.

Last updated on November 1, 2024.

This is a summary of the Hotshot course “Indemnifiable Losses: Market Trends,” which features ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman discussing market trends in how loss is defined in private M&A deals, drawing on data from the ABA M&A Committee’s Private Target M&A Deal Points Study. View the course here.

• The treatment of indemnifiable losses in publicly filed acquisition agreements was looked at in the 2023 ABA M&A Committee’s Private Target Deal Points Study.
  • The study reviewed how loss is defined and looked at the types of damages included.
• The data shows that losses are rarely limited to out-of-pocket damages—only 11% of the time in 2022 to 2023.
• Most deals were silent on diminution in value—74% in the 2023 study.
  • There was a slight increase in the number of deals that expressly excluded diminution in value. It was expressly excluded from:
    • 15% of deals in the 2021 study; and
    • 17% of deals in the 2023 study.
• 80% of deals in 2022 and 2023 were also silent on incidental damages.
  • This was an increase of 19 percentage points from the 2021 study.
  • 17% of deals expressly excluded incidental damages.
• Punitive damages are routinely excluded.
  • 73% of the deals in the 2023 study expressly excluded punitive damages, with 24% silent.
• With consequential damages, there was a slight decrease in the number of deals that were silent, from 58% in the 2021 study to 57% in 2023.
  • 39% expressly excluded consequential damages, a figure that was up to over 50% at the beginning of the 2010s.
• The 2019 study was the first time that the deal points study analyzed the number of agreements that included recovery for lost profits and the number of agreements that allowed damages to be calculated based on a multiple.
  • Since then, the study has shown that the majority of deals were silent on both these issues.
• One note about the percentages of deals that exclude consequential, incidental and punitive damages, and lost profits:
  • The Deal Points studies do not analyze the number of deals that contain a common exception to that exclusion, which is that those types of damages are recoverable if they’re included in a third-party claim that’s covered by the indemnification provisions of the agreement.

The rest of the course includes interviews with ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman Walther Wittmann.

Download a copy of this summary here.

This is a summary of the Hotshot course “Indemnifiable Losses: Drafting,” a look at how loss is defined in acquisition agreements, including a discussion of buyer and seller perspectives and negotiating positions. View the course here.

Drafting the Definition of “Loss”

Buyer’s Draft

• This is a typical buyer-friendly definition of “loss” that would be included in a private acquisition agreement:
  

  “Loss” means any cost, loss, liability, obligation, claim, cause of action, damage, deficiency, expense (including costs of investigation and defense and reasonable attorneys’ fees and expenses), fine, penalty, judgment, award, assessment, or diminution of value.

• It’s a comprehensive list of potential costs and expenses: “cost,” “loss,” “liability,” “obligation,” and so on.
• Some of the terms, like “claim,” “cause of action,” “fine,” “penalty,” “judgment,” “award,” and “assessment” are references to third-party claims by private parties or governmental authorities.
  • Since it’s a buyer-friendly draft, it doesn’t limit these types of expenses to third-party claims only.
• It specifically includes “costs of investigation and defense and reasonable attorneys’ fees and expenses.”
  • This is typically included in a buyer’s draft because the buyer wouldn’t be made whole unless the seller is required to pay these types of expenses.
  • For example, if the buyer had to pay $100,000 in attorneys’ fees to defend a tax audit which resulted in the assessment of $10,000 in additional taxes, and the seller only paid the taxes based on the indemnification provisions of the acquisition agreement, then the buyer would suffer a $100,000 unindemnified loss.
• Two other terms worth mentioning are “deficiency” and “diminution of value.”
  • These terms have broad meanings which could be applied in a wide variety of situations where the buyer feels that the value of the target company or the assets is not what the buyer bargained for, and this deficiency or diminution of value can be tied to a breached rep or warranty.
  • “Diminution of value” is seen as particularly beneficial to the buyer.
    • It lets the buyer claim that any indemnified losses should be multiplied by the same multiple of earnings that was used in the calculation of the purchase price for the target company.

Seller’s Response

• A seller will usually respond to a draft like this by saying that the buyer’s definition is too broad.
• They’d delete “[costs of] investigation” to avoid having to pay for the buyer’s voluntary investigations to make a case against the seller.
• They’d often delete “claim” and “cause of action” because this language could be read to give the buyer the right to recover losses solely based on a third-party claim being made, regardless of the underlying merit of the claim.
  • This issue is commonly referred to as the “claims if true” concept.
• A seller’s deletion of “cost of defense” and “reasonable attorneys’ fees and expenses” would usually be coupled with an agreement by the seller to pay those costs in connection with the defense of an indemnifiable third-party action against the buyer.
  • This is usually dealt with in detail in the indemnification provisions of the acquisition agreement.
• A related issue is whether the buyer can recover the legal fees it incurred in enforcing its indemnification rights under the agreement.
  • When a seller disputes an indemnification claim and the buyer incurs legal and other fees enforcing its right to indemnification, and the buyer is ultimately successful, the buyer should be entitled to recover the legal and other fees it incurred enforcing its indemnification right.
  • While this concept is sometimes included in the definition of “loss”, it’s usually dealt with in the indemnification provisions.
• The seller will probably object to including “deficiency” and “diminution of value” in the definition to preclude a multiple-of-earnings theory.
  • The seller may argue:
    • That it has no control over or insight into how a buyer actually made its determination of the purchase price; and
    • That any post-closing reduction in the target company’s value should be the buyer’s risk, because the buyer, not the seller, will receive the benefit of post-closing increases in the target company’s value.
• The seller may try to reduce the indemnifiable loss by any tax benefit to the buyer.
  • This argument is based on the fact that sometimes the buyer can deduct the costs that it seeks to be reimbursed by the seller in an indemnification claim.
    • The seller argues that amounts to an unfair double recovery to the buyer in the amount of the tax benefit.
  • Although this argument sounds reasonable, the amount and timing of any tax benefit is dependent on the buyer’s particular tax status and circumstances.
    • This can lead to a very complex drafting exercise to document a tax benefit provision accurately.
  • Because of this complexity, the offset for tax benefits is often left out of the definition.
• Similarly, the seller may argue that indemnifiable damages should be net of any insurance proceeds received by buyers.
  • While not as complex to draft as the tax provision, buyers often object.
    • Usually based on timing issues, since insurance payments are often delayed and subject to disputes with insurance carriers.
    • They also object on the theory that premiums will be raised after receiving an insurance payment and the buyer will bear the cost of those increased premiums.
  • If the indemnifiable loss does end up being calculated net of insurance proceeds, the acquisition agreement often also includes an affirmative obligation on the indemnified party to use commercially reasonable efforts to seek a recovery under any insurance policy covering the loss.
• Sellers often add exceptions for consequential, incidental, and punitive damages.
  • Their position is that compensatory or actual damages are sufficient, and other damages are too speculative and remote and could encourage conflict between the parties.
  • Buyers will respond that excluding consequential damages could preclude the buyer from collecting damages that are the reasonably foreseeable result of a breach.
    • An example of this is lost profits, which the seller tries to exclude by adding the consequential damages exception.
    • Sometimes sellers and buyers negotiate this issue directly, and “lost profits” is either specifically included in or excluded from the definition of Loss.
• It’s worth noting that in deals in which the buyer’s right to recover on a post-closing indemnification claim is limited to representation and warranty insurance, there’s typically much less negotiation around these issues.
  • This is because recoverable losses will be defined by the policy.

This course also includes interviews with ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman Walther Wittmann.

Download a copy of this summary here.

This is a summary of the Hotshot course “Indemnifiable Losses,” an explanation of how loss is defined in acquisition agreements, including the types of losses typically included (and excluded) from the definition. View the course here.

Defining Loss

• In a typical private company acquisition agreement, the seller is required to indemnify the buyer for losses resulting from breaches of or inaccuracies in the representations, warranties, and covenants made by the seller.
• The scope of the seller’s indemnification obligations is often one of the most heavily negotiated elements of the acquisition agreement.
  • The parties negotiate a range of issues that impact:
    • Whether the seller has to pay an indemnification claim; and
    • The types of costs the seller has to pay.
• The negotiations over the types of costs the seller has to pay center on the definition of loss.
  • Nearly every private company acquisition agreement includes “Loss” or “Damages” as a defined term.
  • The term is a critical component in determining the seller’s post-closing obligations.
• Buyers generally try to include a broad list of items in the definition.
  • Their perspective is that they negotiated a purchase price based on a certain understanding about the business, and if there’s a claim that reduces the value of the business, they want to be compensated for that.
• Sellers want to protect the negotiated purchase price, and therefore argue for a narrow definition.
  • They believe that buyers shouldn’t have any post-closing right to recapture any of the purchase price at all.
    • This is consistent with the approach accepted by buyers in public-company acquisitions.
• The main types of losses that are typically included are out-of-pocket amounts the buyer or target company has to pay to a third party that are related to pre-closing obligations of the target company.
  • These could be:
    • Contractual obligations;
    • Tort obligations; or
    • Obligations owed to a governmental authority (such as the IRS).
• Buyers also usually try to include damages ancillary to the loss itself, including concepts like:
  • The payment of costs of investigation;
  • Attorneys’ fees; and
  • Interest.
• In addition to these types of damages, buyers look to include matters that reduce the value of the acquired company, even if no third-party payment is made.
  • This is the concept of “diminution of value.”
• Diminution of value.
  • It allows buyers to seek payment over and above any actual damage or out-of-pocket expense paid by the buyer, if the loss can be related to an item that affects the value of the target company.
  • When the purchase price is based on a multiple of earnings, this language may allow the buyer to make a post-closing indemnification claim based on a multiple of lost earnings. For example:
    • Assume a buyer agrees on a purchase price of $100 million, which is five times the target’s earnings of $20 million for the prior year.
    • The buyer discovers after closing that the earnings in the financial statements, which the seller represented and warranted were true and accurate, were in fact only $15 million, an overstatement of $5 million.
    • The buyer would argue that a payment of $5 million would not make it whole because the 5x multiple it used when coming up with its valuation for the target now suggests a valuation of $75 million.
    • Instead, they’d seek to recover $25 million, because the “diminution in value” of the target is five times the earnings overstatement.
• Other types of damages that frequently come up in the negotiations over the definition of loss are consequential, punitive, and incidental damages.
  • Sellers will try to specifically exclude these damages from the definition on the basis that compensatory or actual damages are sufficient, and that other types of damages are too speculative and remote.
  • This is often negotiated between the parties.
• In deals in which the buyer’s right to recover on a post-closing indemnification claim is limited to representation and warranty insurance, the issues around the definition of loss are largely moot.
• This is because recoverable losses will be defined by the policy.

This course also includes interviews with ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman Walther Wittmann.

Download a copy of this summary here.

Artificial Intelligence: A Popular—and Fuzzy—Label

What isn’t branded “AI” these days? The past year has seen an explosion of companies, products, and services touting their ties to artificial intelligence (AI) technology. If they’re not “AI-powered,” they’re “AI-driven” or “AI-enabled.” In fact, so many organizations are itching to add “.ai” to their web addresses that Anguilla—the island controlling the domain name—is set to reap millions in domain registration fees this year. Nor is it just new market entrants adopting the term. When the company once known as Twitter announced its rebrand in July, its CEO declared that X too would be “[p]owered by AI.”

The term has jumped into the business world’s vocabulary with a swiftness that should feel familiar. Last year “metaverse” was rolling off executives’ tongues, with the word suddenly a fixture on corporate earnings calls. “Blockchain” experienced a similar phenomenon a few years earlier, with use of the term in company press releases growing more than twentyfold in the course of a year.

Driving this most recent marketing shift is AI’s enormous perceived economic potential. A June 2023 McKinsey report predicts that in the coming years generative AI—artificial intelligence that can generate original content—will add trillions in value to the global economy. Microsoft, too, is bullish on the technology, staking billions on OpenAI and its popular chatbot ChatGPT. With its promise of bounty and investor allure, “AI” is a label that every company wants to wear.

But commercial benefits alone don’t explain the speed or scale of industry’s marketing repositioning around AI. Countless businesses have been able to quickly trumpet their AI capabilities because . . . no one can say exactly what “AI” means.

“Artificial intelligence” is “an ambiguous term with many possible definitions,” the Federal Trade Commission (FTC) observed in guidance earlier this year. The two words sweep in a host of different technologies that serve different ends—from generative AI tools that artists prompt to create fantastic imagery, to machine-learning programs that financial companies can use to predict loan risk.

As Theodore Claypoole, a partner of Womble Bond Dickinson’s Intellectual Property Practice Group, notes in a September 2023 Business Law Today article, this “lumping together of disparate functionalities into a single unmanageable term” presents a challenge for those designing rules for the technologies. Yet for a company’s marketing team, the term’s broadness and flexibility may seem a grand thing. As AI investment swells, businesses whose products involve any of these various technologies may see only upside in raising their hand and saying: “Artificial intelligence? We do that, too!”

They should pause a moment before doing so. Others—just as interested in AI as the business world is—are watching whose hands are up.

The Marketing Concern: Truth in Advertising Laws

For companies planning to market their AI skills and tools, one immediate consideration isn’t unique to AI: It’s those darn truth in advertising laws. In February the FTC reminded businesses that laws around product claims apply to today’s advanced tech just as they do to traditional goods and services. If an advertiser claims that its product is “AI-enabled,” then it needs to be; merely using AI in the product development process won’t cut it. Similarly, advertisers must substantiate performance claims and comparative claims about automated technologies, and the claims must accurately reflect the technologies’ limitations. The FTC is coupling this guidance with action. In August the agency sued Automators AI for falsely and misleadingly promising consumers financial gains from using AI.

Companies selling assets made by AI also need to consider whether the AI-generated nature of their content warrants additional disclosures. The FTC has been clear that deceptively peddling AI-generated lookalikes and sound-alikes as the work of real artists or musicians violates the law. At the state level, the California Bolstering Online Transparency Act (BOT) similarly prohibits using a bot to deceive people in a sales- or election-related context. And the FTC has even suggested that companies offering generative AI products may need to disclose to what extent their training data includes copyrighted or protected materials.

Despite the FTC’s flurry of new guidance on the topic, the agency acknowledges that “artificial intelligence” remains a nebulous phrase. And the varied and vague meanings of the term may still allow many companies to claim—lawfully—that they’re indeed AI-driven.

The Bigger Worry: A Growing Web of Laws and Regulations

With guidance from their lawyers, companies should be able to ensure that their marketing claims about AI are truthful and evidence based. But false advertising laws shouldn’t be the only considerations for organizations deciding whether to tread into the new territory. Businesses rushing toward AI’s gold-laden hills should realize that lawmakers, regulators, and others are heading to the same place.

For these other parties, the definitional fuzziness of the term “AI” isn’t a marketing opportunity; it’s a broad target. Take federal agencies, for example. In April, weeks after Bill Gates proclaimed that “[t]he Age of AI has begun,” the FTC and three other agencies—the Consumer Financial Protection Bureau, the Justice Department’s Civil Rights Division, and the Equal Employment Opportunity Commission—jointly pledged to “vigorously use our collective authorities” to monitor the emerging tech. The four agencies see their authority as extending over not just the already-expansive category of AI but across all “automated systems”—a term they use “broadly” to encompass any “software and algorithmic processes . . . used to automate workflows and help people complete tasks or make decisions.” Bottom line: If you’re doing anything involving AI or adjacent to AI, you’re on these regulators’ radar.

President Biden’s October Executive Order (EO) on artificial intelligence will only heighten the regulatory buzzing. The lengthy EO directs several agencies to propose regulations and provide guidance on AI. For instance, the Secretary of Commerce must issue guidelines and best practices for developing “safe, secure, and trustworthy AI systems”—guidance that will likely affect how private industry designs and deploys AI.

Legislators, too, have big plans for the tech. Indeed, some laws regulating AI and similar technology are already on the books. For instance, the California Privacy Rights Act of 2020 (CPRA) charges the California Privacy Protection Agency with issuing regulations on how businesses employ automated decision-making technology. The California Age-Appropriate Design Code Act, passed in 2022, likewise limits how businesses use algorithms in services and products likely to be accessed by minors. East of the Golden State, Colorado adopted a regulation effective in November that seeks to prevent life insurers from using algorithms and predictive models to racially discriminate. And across the Atlantic, the European Union’s General Data Protection Regulation (GDPR) has for years let individuals opt out of certain automated decision-making.

Other legislative changes are coming. On Capitol Hill, a bipartisan group of lawmakers is reportedly developing a “sweeping framework” to regulate AI, including licensing and auditing requirements, rules around data safety and transparency, and liability provisions. State legislatures are a step ahead of Congress, with several AI-focused laws proposed or already passed. And the EU has drafted what it calls “the world’s first rules on AI.” Its AI Act would impose comprehensive requirements—involving security, training, data governance, and transparency—on any company using, developing, or marketing “AI systems” in the EU. And while the European Parliament acknowledges industry groups’ concerns that the term “AI systems” is too wide-reaching, the EU still intends to adopt a “broad definition” to cover both current and future developments in AI technology.

In response to these changes, a new of category of “AI governance” professionals has emerged to shepherd companies through the upcoming law-making and regulation. Such roles may soon become must-haves for companies looking to commercialize AI.

Whatever one’s views on the need for state intervention into this new technology—and expectations for how effective it will be—this governmental pencil-sharpening should make any prudent company think a moment before slapping an “AI” sign on its storefront. Just as a complex and ever-growing regulatory regime governs privacy and personal data, a thicket of statutes and regulations has been sprouting around AI and anything like it. Stepping into that thicket shouldn’t be a hurried marketing move—it needs to be a calculated decision.

To Brand as “AI” or Not to Brand as “AI”

Many commentators foresee AI as the next internet or mobile phone—a revolutionary technology destined to be the bedrock of any modern business. And it may well be. Yet those predictions are made in a temporary Eden of minimal regulation. They fail to consider the horde of governmental actors poised to shake up the landscape.

For some companies, the costs of operating within a complex regulatory regime—and the risks of noncompliance—may outweigh any potential benefits from repositioning their business around AI. These companies may deliberately choose not to get into the AI game.

With the AI frenzy still in full effect, that may sound far-fetched. But it shouldn’t. Regulatory avoidance—that is, structuring one’s business to lawfully avoid laws and regulations—is common today. Many organizations choose not to operate in certain jurisdictions, for instance, or decline to process sensitive data like biometrics or minors’ personal information, so that they can limit their legal obligations and business exposures. While that may mean some lost commercial opportunities, the organizations don’t see the value as justifying the additional regulatory burden.

Conclusion

The AI wave may be inevitable, with every business forced to swim along or else sink. But companies are naive if they think the “AI” tag attracts nothing but customers—governmental bodies around the world see it, too. Before rebranding, then, smart organizations should consider not just the immediate marketing benefits of being “powered by AI” but also its long-term costs and risks.

In a shot across the bow to the digital payments industry, the U.S. Consumer Financial Protection Bureau (“Bureau”) has issued a proposed rule to expand its oversight authority to nonbank providers of consumer payment apps.^[1] These apps include digital wallets, funds transfer services, and peer-to-peer apps—for both U.S. dollar payments and, surprisingly, also bitcoin and other crypto-asset payments. The Bureau anticipates that the proposal would cover about seventeen companies based on data from various sources, including information it has collected from Amazon, Apple, Facebook, and others with respect to their payment offerings.^[2]

Under the proposed rule, if finalized, the Bureau would exercise the full plate of supervisory authority over “larger participants” in this market. On top of its existing rule-writing and enforcement powers, the Bureau would exercise examination powers under the Consumer Financial Protection Act (“CFPA”) over these larger participants, such as conducting on-site examinations, imposing reporting requirements, and conducting periodic monitoring.

These supervisory activities would impose new costs on nonbank providers. The more significant impact to the digital payments industry, however, is the broad line of sight that the Bureau would gain into the activities of leading market participants. Areas of potential scrutiny where the Bureau has strongly signaled interest include the novel ways that consumer financial data and behavior data are used together in “super apps” and in embedding payments within a social media feed.^[3] This proposed rule comes hot on the heels of the Bureau’s proposed rule to accelerate open banking, as the Bureau is laying the groundwork for a greater role at the intersection of digital payments and data.^[4]

Scope of the Proposed Rule

The proposed rule homes in on the “general-use” digital consumer payment apps market, in recognition of its tremendous growth in recent years.^[5] However, the Bureau’s examination authority under the proposed rule would apply to only a subset of nonbank providers in this market—those that are deemed “larger participants.”

The CFPA grants the Bureau broad discretion to choose criteria for assessing whether a nonbank provider is a “larger participant.” Under its proposed criteria, a nonbank provider would be a “larger participant” if it satisfies the following two prongs:

1. Payment transaction volume prong: The nonbank provider and its affiliates, in aggregate, have an annual “consumer payment transaction” volume of at least five million transactions, and
2. Entity size prong: The nonbank entity would not be a small business concern as defined by the Small Business Administration size standards for its primary industry (the likely classification would be “Financial Transactions Processing, Reserve, and Clearinghouse Activities”).^[6]

A key metric in determining whether a nonbank provider would be considered a “larger participant” for purposes of the proposed rule, therefore, is the volume of “consumer payment transactions” that it facilitates. To fall within that definition (and be counted toward the payment transaction volume prong of the proposed “larger participant” criteria), a transaction must be primarily for personal, family, or household purposes; purely commercial or business-to-business payments would be outside the definition.

The following table summarizes additional nuance from the proposed rule on the definition of “consumer payment transactions”:

Examination Authority

Under the proposed rule, the Bureau would examine for compliance with federal consumer financial protection laws, such as the CFPA’s prohibition against unfair, deceptive, and abusive acts and practices; the privacy provisions of the Gramm-Leach-Bliley Act and its implementing Regulation P;^[7] and the Electronic Fund Transfer Act and its implementing Regulation E.^[8] Under the proposed rule, the Bureau would notify a nonbank provider when it intends to undertake supervisory activity, and the provider would then have an opportunity to claim that it is not a larger participant.

The Bureau’s examination authority would coexist with state oversight of money transmission. While holding a state license would not shield from Bureau oversight a money transmitter that also meets the “larger participant” criteria, the proposed rule notes that the Bureau’s prioritization of supervisory activity among nonbank providers would take into account the extent of relevant state oversight and that the Bureau would coordinate with appropriate state regulatory authorities in examining larger participants.

The Bureau is inviting public comment on the proposed rule through January 8, 2024.

1. 88 Fed. Reg. 80,197 (Nov. 17, 2023). ↑

2. Press Release, Consumer Fin. Prot. Bureau, CFPB Orders Tech Giants to Turn Over Information on Their Payment System Plans (Oct. 21, 2021). See also US consumer watchdog proposes rules for Big Tech payments, digital wallets, Reuters (Nov. 7, 2023). ↑

3. Consumer Fin. Prot. Bureau, The Convergence of Payments and Commerce: Implications for Consumers (Aug. 2022). ↑

4. CFPB Announces Proposed Rules to Accelerate Open Banking, Wilson Sonsini (Oct. 24, 2023). ↑

5. The Bureau characterizes “general use” by the absence of significant limitations. For example, a digital app whose payment functionality is used solely to purchase or lease a specific type of services, goods, or property (such as transportation, lodging, food, an automobile, real property, or consumer financial products and services) would not have “general use.” Similarly, a digital app that helps consumers split a bill for a specific type of goods or services (such as a restaurant) would not have “general use” for purposes of the rule. ↑

6. 13 CFR pt. 121. ↑

7. 12 CFR pt. 1016. ↑

8. 12 CFR pt. 1005. ↑

Good communication between a lawyer and their client is paramount. After all, a lawyer cannot do their job if a client hasn’t shared important details. Business lawyers work hard to resolve matters ranging from corporate tax compliance to lawsuits that make national news. There’s no room for error.

Effective lawyer and client communications should be a priority. Without it, you run the risk of:

• Making your client feel ignored or devalued
• Your client forgetting important information
• Relationships between you and your client falling apart
• Less room to negotiate with clients
• Losing out on future work with that client or business

But it’s not as simple as just telling your team to “communicate better.” Effective communication takes time, effort, and learning a unique skill set. Of course you should listen to your client. Of course you should communicate with them regularly. But what does that really mean?

It means more than just being a good listener. Improving client communication means building a framework that standardizes your communication process. Once that framework is in place, you can refer back to it time and time again. And if you review the tools you use each day with that in mind, you can make great communication easier than ever.

In this article, we’ll discuss the best practices for improving client relationships, and how you can start to build them.

Establish clear communication channels

Do you prefer to communicate by email? What about your client? Would they rather you just give them a call?

Establishing clear communication channels takes communication, and different conversations require different channels. An open conversation requires a meeting or call, but a quick update may just need an email or text.

Discuss preferred channels of communication up front, and establish when those channels are appropriate. If you send regular updates by email, make sure your client is happy to receive them, and make sure your team has the tools to streamline that process. Consider software that will let you send updates automatically. If you find your office is overwhelmed by incoming calls, consider contact center AI solutions to get queries and messages to where they need to be.

Practice active listening skills to comprehend client concerns

Source: Pexels.

Being a good listener is easier said than done. Lawyers deal with so many clients that it can often feel like you’ve heard everything. And therein lies the problem. Switching off, making assumptions, or jumping to conclusions is tempting, but every person, client, business, and case is unique. If you don’t make clients the center of your world, you miss a crucial piece of information.

Active listening is a skill set that takes more than just words into consideration. It involves:

• Maintaining good eye contact (even on a video call!)
• Looking for non-verbal cues, like physical signs of anxiety, sadness, or anger, and using those cues to offer appropriate support
• Asking open-ended questions to gain more information and express genuine interest
• Paraphrasing the talker’s words and reflecting them back to demonstrate close attention

Active listening helps you better understand the client’s thoughts and emotions. Being an active listener helps your client feel more comfortable, encouraging them to trust you, open up more, and ultimately help you serve them better.

Simplify complex legal terms for client comprehension

Legal jargon can seem impenetrable, even for seasoned professionals, so think of how your clients feel when you’re spouting complex legal terms at them. Jargon might make communication more efficient between lawyers, but after smiling and nodding through a meeting, clients can leave feeling belittled, confused, and less confident in your genuine desire to help them.

Source: Pexels.

Use simple language to describe legal concepts. Explain legal processes thoroughly in a way your client will understand, and don’t be afraid to ask if they understand something.

Establish a communication schedule for updates

Every client thinks their case or transaction is the most important in the world. To them, it is.

For you, though, their matter is just one of many important responsibilities. Lawyers are busy, and it’s impossible to stay in constant contact with every single client. Creating realistic expectations from the beginning is the key to avoiding resentment down the line.

However, a client might be anxious or impatient. It’s important to have frank discussions up front about what is and is not practical.

• Define what counts as an essential update and guarantee contact when said update occurs.
• Create a realistic timeframe for email, call, or message replies. For example, guarantee a reply within one or two business days.
• Schedule regular conversations with clients to set aside time for updates, concerns, or simply touching base.
• Don’t set yourself up for failure by promising clients the world and then disappointing them.

Your clients want to feel kept in the loop, but you don’t want to be inundated. Setting realistic expectations and communication schedules can help avoid clients chasing you for updates.

Maintain detailed records of client communications

Your case is missing a vital piece of information. The client swears they told you over the phone a few weeks ago. You’re sure they didn’t, but now you’re doubting yourself.

Keeping detailed communication records is another thing that sounds like common sense, but it can be overlooked when so much information is flying back and forth.

Record phone and video calls when appropriate, keep email and messaging records, and record or take detailed notes during in-person conversations. There are CRM tools, cloud storage solutions, and virtual assistant tools to help keep everything recorded and stored securely.

If something is overlooked, you can prove to your client that it wasn’t your negligence that caused it and maintain a good level of trust.

Seek feedback from clients

Being receptive to feedback is one of the easiest and most effective ways to improve your skills. After all, most people are happy to give feedback when asked.

Positive feedback can help boost confidence and allow you to stick to the things you’re doing right. Negative feedback is even more valuable, if a little intimidating. Constructive criticism helps us to learn, grow, and improve on our weaknesses.

Asking for feedback is a double win: it shows your clients that you care, and you’ll gain valuable insight into your own work. As a bonus, if you ask for feedback publicly, potential clients looking for a good lawyer will be able to see it.

Improving your firm’s client communications

Lawyers only have so much time and energy. Being a law professional often means long hours and stressful workloads.

Creating clear, realistic, and empathetic lines of communication between yourself and your clients is paramount to easing both your and your clients’ stresses. Improving lawyer and client communication makes your job easier, facilitating honest and open discussion, building trust, and ultimately leading to wins.

As we reflect on the sixtieth anniversary of the assassination of President John F. Kennedy this month, consumer finance lawyers may take interest in a little-noticed bit of history. The assassination delayed Congressional consideration of the Truth in Lending Act (TILA). A Boston field hearing on TILA that fateful day was abruptly halted upon news of the tragedy. The hearing continued two months later, in early 1964, but momentum for the law, which had been increasing over recent years, began to wane dramatically. As the country reeled and new political realities set in, lawmakers’ focus drifted elsewhere. TILA would have to wait another five years until its eventual passage in 1968.

On the morning of November 22, 1963, while the president traveled to Dallas, a Senate Committee on Banking and Currency subcommittee convened in the president’s home state of Massachusetts, in Boston, for the first of what would have been two days of hearings on S. 750, an early version of the legislation that eventually became TILA. The Boston hearing followed similar field hearings that year in New York, Pittsburgh, and Louisville, as well as several other hearings on the legislation dating back to 1960. Senator Paul H. Douglas (D-IL) chaired the hearing, as he did in the other cities. In Boston, just one other senator, Wallace F. Bennett (R-UT), joined him.

The two heard from several proponents of the legislation during the morning session, which began at 10:00 a.m. eastern time. (The president was in Houston then, preparing to fly to Dallas.) The first witness was the governor of Massachusetts, Endicott Peabody, who expressed support for the bill and welcomed a federal solution to the “incongruous hodgepodge of laws” governing consumer credit in Massachusetts and other states. Other witnesses included the state’s commissioner of banks, three state representatives, and several banking and retail industry representatives.

The hearing adjourned at 1:07 p.m. for lunch, with an announced resumption time of 2:30. The president was now in Dallas, where it was 12:07 p.m. central time. He was seventeen minutes into his motorcade route through the city, on his way to a luncheon at the Dallas Trade Mart. While the senators in Boston began their break, Kennedy may have been shaking hands with a supporter or chatting with a nun during one of two impromptu stops along the way. Twenty-three minutes later, at 12:30, the president was shot.

In Boston, Senators Douglas and Bennett were presumably just sitting down for lunch. All three major TV networks dispensed with their normal programming that afternoon, but it was on CBS where Walter Cronkite delivered the command performance that lives on in popular memory. The network initially cut into its daytime programming to cover the shooting at 1:40 p.m. eastern time, with the first report stating only that the president was shot and wounded. The two senators were no doubt informed immediately and may have watched the unfolding broadcast on CBS or elsewhere. Cronkite relayed wire service updates as they were handed to him, each more grim than the prior, culminating in his enduring proclamation: “From Dallas, Texas, the flash apparently official—President Kennedy died at 1 p.m. central standard time, two o’clock eastern standard time, some thirty-eight minutes ago.”

Senator Douglas immediately reconvened the hearing:

“Ladies and gentlemen, the President of the United States is dead. The country and the world has suffered a great loss. The hearings will be adjourned. Those who wish to submit statements will send them to Washington to be filed. I am going to ask that we all stand and observe a minute of silent prayer and then I am going to ask Father McEwen to lead us in prayer.”

Rev. Robert J. McEwen was chair of the Boston College economics department and slated to testify in support of the bill the next day. After a moment of silence was observed, he recited the Lord’s Prayer, which is noted in the record. According to the hearing transcript, the subcommittee adjourned for good at 2:37 p.m. The slight timing difference between Cronkite’s announcement and the hearing’s adjournment may be explained by out-of-sync clocks, or Senator Douglas may have received some reliable confirmation of Kennedy’s death just prior to the Cronkite report (ABC is said to have broken the news just before CBS). In any event, the hearing adjourned, and the senators returned to Washington.

On January 11, 1964, the hearing resumed in Boston. Senators Douglas and Bennett were joined this time by Senator Milward Simpson (R-WY) Chairing the hearing, Senator Douglas acknowledged “the tragic and terrible assassination” and expressed his desire to complete the aborted hearing. Witnesses in favor (including Father McEwen) and against the legislation alternated throughout the morning and afternoon sessions. When the January hearing concluded, it would be the last TILA hearing for more than three years, a marked break from the increasing drumbeat of hearings that had started in 1960 and gained momentum in the following three years.

The assassination permeated and disrupted every aspect of life in the United States that day. It tinged the course of history in countless ways, large and small, including the development of consumer credit regulation. While the sudden cancellation of the Boston field hearing on TILA on November 22, 1963, is a minor historical footnote to a devastating day in America, it’s also a reminder of the unsparing reach of tragedy.

This account was derived primarily from the transcript of the field hearing and other public sources, including the Warren Commission Report.

In the halls of justice and chambers of law, the narrative of women has evolved from whispers to powerful testimonials of achievement and ambition. The legal system, renowned for its rigorous traditions, has historically been a bastion of male dominance. Nevertheless, through perseverance, talent, and a fierce commitment to justice, women have slowly but surely carved out a place of honor and respect within its esteemed corridors. This article aims to trace the journey of women in the legal profession, from trailblazing pioneers of yesteryear to contemporary advocates striving for equal representation and rights. Leveraging insights from prominent legal luminaries—Monika McCarthy, Danielle Hall, Valerie Hletko, Jonice Gray Tucker, and Lynette Hotchkiss—at the panel discussion titled “See Her, Hear Her: Historical Evolution, Advocacy, and the Path Ahead” at the American Bar Association’s Business Law Fall Meeting in Chicago on September 8, 2023, this article explores women’s challenges, milestones, and future prospects in the legal domain, framed against the broader canvas of societal change and the enduring quest for gender parity.

Historical Context

“Women belong in all places where decisions are being made. It shouldn’t be that women are the exception.” —Ruth Bader Ginsburg

The legal profession boasts a rich history marked by pioneering achievements of women. From the 1600s through today, women have consistently forged paths, shattered traditional barriers, and claimed their deserving space in a field once predominantly ruled by men.

Pioneers in the Legal Arena

Margaret Brent stands out as America’s first woman lawyer in 1648. A significant figure in Maryland, her achievements set the stage for more to come. Following in her footsteps was Arabella Mansfield, the first woman to be admitted to a state bar in the United States in 1869. Diversity further expanded with Charlotte E. Ray becoming the first African American woman lawyer and the first woman admitted to the bar in the District of Columbia in 1872. The twentieth century witnessed milestones like Florence E. Allen becoming the first woman to serve on a state supreme court in 1920 and Pauli Murray, known for her invaluable contributions to civil and women’s rights, becoming the first African American recipient of a JSD from Yale Law School in 1965. Fast-forward to recent times: Sandra Day O’Connor became the first female justice to serve on the U.S. Supreme Court, appointed by President Ronald Reagan in 1981, and Paulette Brown stands tall as the first African American woman to ascend to the ABA presidency in 2014.

However, it is essential to zoom out beyond these individual stories of triumph and resilience and examine the broader progression.

The Ebb and Flow of Women in Law: 1951–2022

Data spanning over seven decades paints an intriguing picture for women in law. While the 1950s witnessed a mere trickle of female representation, the percentage of legal practitioners that are women increased to 38 percent by 2022.^[1] The 1970s, in particular, marked a dramatic uptick.^[2] Yet, the last decade’s modest growth suggests that the journey to equality is far from over.^[3]

Women in the Legal Profession: 1951–2022^[4]

Women in the Legal Profession: 2010–2022^[5]

Academia: Progress—with Potholes

Delving into the world of legal academia, the trends are equally riveting. While the turn of the millennium saw more women entering law schools, there is an alarming drop-off in the transition from law school to professional attorney. However, the last two decades have seen a surge in female law school deans, hinting at a changing leadership landscape.

Women as a Percentage of All Law Students: 2000–2021^[6]

Female Law School Deans: 2000–2022^[7]

The Law Firm Labyrinth

But what about the labyrinth of law firms? While women make up 47 percent of associates in law firms, the numbers drastically decrease further up the hierarchy.^[8] Only 22 percent of equity partners and 12 percent of managing partners are women.^[9] And the gender pay gap? It further widens this divide.

However, it is not just about representation in law firms’ highest echelons; delving into firm policy perceptions offers more nuanced insights. For instance, 88 percent of male attorneys believe that their law firm acknowledges gender diversity as a priority, while only 54 percent of their female peers shared this sentiment.^[10] This disparity in perception permeates other areas, from leadership promotions to retention policies.

To truly grasp the dynamics at play, however, one must look beyond these corporate metrics to consider the lived daily experiences of female attorneys. At the panel discussion at the American Bar Association’s Business Law Fall Meeting, panelists McCarthy, Hall, Hletko, Tucker, and Hotchkiss highlighted these day-to-day experiences.

McCarthy shared her initial experiences in a small law firm where she was the only female attorney. From male colleagues not knowing how to act around her to learning about sports to fit in, her narrative painted a picture of the unique challenges faced by women in male-dominated settings. She also highlighted the discomfort of working closely with a partner who smoked cigars in his office, revealing the distinct professional challenges of the time.

Hall emphasized that while her firm had several female partners offering mentorship, there remained an evident disconnect. Casual discussions, often centered on sports, sometimes left her feeling out of the loop, even if broader strides were being made.

Hletko traced the evolution of law firms, spotlighting her time at a firm. She observed an early commitment to gender inclusivity and the presence of influential female partners who shaped the firm’s culture.

Tucker delved into the pressures of managing work and family life and pay equity challenges. Her narrative of working beyond committed hours yet receiving only 80 percent of the salary that her male counterparts received resonated as a stark example of gender disparities in compensation.

Hotchkiss recounted the dual pressures of work and motherhood while practicing in Anchorage, Alaska, in the 1980s. Her stories of gender biases in courtrooms and often being mistaken for a secretary unveiled the subtler, daily challenges that women in law endure.

Day-to-day interactions and experiences, often unseen in broader statistics, can significantly shape an attorney’s sense of self and career direction. From missed assignments and overlooked promotions to demeaning encounters and identity mix-ups, female attorneys face numerous daily challenges.

Female Equity Partners in Law Firms: 2006–2020^[11]

Women in Law Firm Leadership Roles: 2020^[12]

Women in Law Firms: 2020^[13]

Compensation of Female Lawyers as a Percentage of Compensation of Male Lawyers: 2020^[14]

Gender of the Top-Earning Attorney in the Law Firm: 2005–2020^[15]

How Men and Women View Law Firm Policies (Percent Who Said Yes)^[16]

Job Satisfaction (Percent Extremely or Somewhat Satisfied)^[17]

Everyday Experiences Because of Gender^[18]

From Corporate Legal Departments to Courtrooms: A Mixed Bag

Beyond law firms, the in-house and judiciary landscapes present a mix of progress and stagnation. The promising 67 percent of general counsel roles occupied by women contrasts sharply with the subdued representation in the judiciary, especially at the federal level.^[19]

The surge in women general counsels can be attributed to a couple of factors. Firstly, over the last couple of decades, corporate environments have increasingly recognized diversity’s value at decision-making levels. Companies believe that diverse leadership brings varied perspectives, promoting innovative solutions and better decision-making.^[20] Secondly, corporate mentoring programs and initiatives to foster female talent have become more commonplace. Such programs and initiatives provide women the necessary resources, guidance, and opportunities to ascend to top legal positions within companies.^[21] And, in good news for women, industries are increasingly inclined to hire general counsels with experience: 41 percent of externally hired general counsels in 2020 had experience; since then, that percentage has jumped to 60 percent.^[22]

However, while the corporate world may be progressing, it’s evident that the judiciary still has some catching up to do. The disparity in representation at the federal level can be attributed to various historical, institutional, and societal factors that have traditionally limited opportunities for women in the judiciary.^[23]

Federal Judges by Gender: 2022^[24]

Female State Supreme Court Justices: 2022^[25]

The tale of women in law is a saga of relentless determination, marked triumphs, and persistent challenges. The landmarks are many, but the journey to comprehensive gender parity remains ongoing. It is not just about achieving numerical equality but forging a future that ensures fair work distribution, equitable pay, and an inclusive environment for all.

Advocacy and Activism

“Each time a woman stands up for herself, without knowing it possibly, without claiming it, she stands up for all women.” —Maya Angelou

In the intricate tapestry of the legal profession, the need for gender equality remains pressing. Advocacy, activism, and allyship stand at the forefront of this evolving narrative. This section sheds light on the pivotal role of these pillars, focusing on the strategies that women can employ to advocate for themselves and their counterparts. Furthermore, it emphasizes men’s integral role as allies, advocating for and alongside their female colleagues. By merging the forces of self-advocacy, collective activism, and intentional allyship, we aim to guide the legal community toward a landscape that not only is equitable but also thrives on collective strength and unity.

Allyship

Historically, the legal sphere has been dominated by men. However, women have established their rightful place through consistent advocacy and persistence. Today, it is vital to recognize the crucial role men play as allies, working in tandem with women to cultivate an ethos of mutual respect and collaboration.

For men seeking to be proactive allies, here are some actionable steps:

1. Celebrate Achievements: Actively acknowledge and appreciate the accomplishments of female peers.
2. Promote Equitable Distribution: Move beyond gendered expectations and ensure fair delegation of responsibilities.
3. Champion Safe Spaces: Advocate for settings where open and unbiased dialogues can thrive.
4. Facilitate Networking: Guarantee that female colleagues have equivalent access to pivotal career opportunities.
5. Encourage Feedback: Understand that being an ally is an evolving commitment; remain receptive to change.
6. Invest in Mentorship and Sponsorship: Harness your influence to propel the careers of female colleagues.

This topic was another focal point during the panel discussion at the American Bar Association’s Business Law Fall Meeting. McCarthy emphasized the vital nature of allyship, touching upon persistent biases that women face and urging active countermeasures against such biases. Hletko brought forward the nuanced strategy employed by some male allies of tactfully steering conversations back to their female colleagues when someone attempts to direct questions and comments to the male attorney. Tucker illuminated potential biases that women might harbor against one another, emphasizing that advocacy against gender discrimination should transcend individual perspectives, and noted the intersectional nature of the challenges that many female attorneys face.

Genuine gender parity in the legal domain requires comprehensive allyship. This entails dismantling entrenched biases and fostering a genuinely equitable work environment. As we further delve into the intricacies of women’s experiences in the legal realm, it becomes evident that mentors play a pivotal role in shaping these journeys.

The Transformative Influence of Mentors

Mentorship is a beacon in the maze of professional journeys, guiding and molding individuals’ trajectories. The essence of mentorship transcends mere knowledge transfer; it encapsulates confidence-building and perspective-sharing. A paradigm shift is imperative for meaningful mentorship: firms and senior attorneys must move away from delegating rudimentary tasks to women. The emphasis should be on equipping mentees, especially those from diverse backgrounds, with the requisite tools to navigate specialized fields like law.

Hall candidly shared, “As a first-generation college and law student, I have been blessed with both formal and informal mentorship throughout my journey. One of the biggest game changers is having a mentor who gets where you’re coming from, understand[s] those knowledge gaps, and provid[es] insights without always waiting for you to ask.”

Hotchkiss reflected on her early career, stating, “The term ‘mentor’ wasn’t familiar to me early on. However, in the late eighties, I had the privilege to work with leading banking and consumer finance attorneys across the country. They mentored me in ways they probably weren’t aware of. Most were males, yet they were supportive, encouraging, and accepting. Throughout my career, I’ve been told by many women that they see me as a mentor—often, it was unbeknownst to me. The ABA has offered me numerous opportunities, and I always urge women to engage, especially within the Consumer Financial Services Committee. It’s essential to identify one’s passion, skills, and aptitudes and foster them. Whether it’s organizing, speaking, or writing, everyone has a unique contribution to make. Tailoring mentorship based on individual skills and passions is the most effective way forward.”

Grasping the difference between mentorship and sponsorship is crucial in the legal world. Both offer distinct advantages: mentors provide guidance and share wisdom, while sponsors directly influence an individual’s career. The complex law landscape further highlights the need for mentors and sponsors, particularly as advocates for visibility and representation. The ripple effects of a sponsor or mentor’s visibility and accessibility are profound. Channeling and amplifying one’s strengths under such guidance can shape a lasting legacy. Ultimately, mentorship and sponsorship are not just tools but essential forces, driving representation and advocacy and instilling a responsibility to uplift the coming generation of professionals.

Additionally, in the demanding environment of the legal profession, there is a compelling argument to be made for the significance of professional coaching. McCarthy’s experience serves as a poignant testament to this. She remarked, “Being in-house, I was very blessed in my career to work for a large company and had the privilege of having a professional coach for seven years. While some might raise an eyebrow at the fact that he was an older white male, he proved to be an invaluable coach.” Emphasizing the sheer pace and pressure of juggling various roles, from professional duties to personal responsibilities such as parenting or caregiving, McCarthy said, “In such times, a professional coach becomes indispensable. They guide you, helping outline and stick to your short-term and long-term goals.” McCarthy’s unequivocal endorsement of the coaching approach underscored its transformative potential: “I highly recommend it.”

The dynamics among advocacy, activism, and allyship are crucial for reshaping and refining professional trajectories in the legal profession. As we have delved into the transformative impact of mentorship and sponsorship, it is evident that these instruments are not just about climbing the professional ladder but about building more robust, more inclusive rungs. Both male allies in the legal field and mentors of all genders have the power to redefine industry norms, ensuring that every voice is heard, every accomplishment acknowledged, and every bias actively addressed. In embracing these roles, we challenge the status quo and set a precedent for future generations. The insights shared by respected professionals like McCarthy, Hletko, Tucker, Hall, and Hotchkiss serve as a testament to this evolution. As the legal field continues to evolve, each professional must champion these ideals, fostering an environment where growth is collective and individualized. In doing so, we create a legacy that outlives our careers, pushing the legal profession into a more inclusive and progressive future.

Future of the Legal Profession

“The question isn’t who’s going to let me; it’s who’s going to stop me.” —Ayn Rand

The modern legal landscape is considerably more inclusive than a century ago, yet the work is far from done. The legal profession is undergoing transformative shifts as technology, globalization, and societal values evolve. Women lawyers today are not merely active practitioners but also innovators, thought leaders, and influencers. In exploring the trajectories of women in law, the panelists shared their insights and predictions for the future.

Hall emphasized the importance of recognizing and addressing the distinct experiences of women of color and their white counterparts. In the evolving legal environment, it is imperative to advance, notice, and genuinely understand these nuances, relentlessly propelling women of color forward.

Hletko’s voice added a layer of urgency, raising concerns about potential challenges facing diversity, equity, and inclusion (“DEI”) programs, especially in the wake of specific lawsuits and decisions. Given the indispensable value these programs bring, she noted that there is a critical need for firms to unite in ensuring that DEI initiatives are defended and strengthened.

Tucker’s journey further enriched the discussion. Her discussion of her unexpected appointment as an independent director for a major corporation shed light on the significance of women expanding their horizons and the importance of representation in diverse boards and platforms. Her story underscored the value of mentorship and sponsorship, showcasing how key figures can open unforeseen doors.

Highlighting another facet of the discussion, Hotchkiss drew attention to an alarming inconsistency: the gap between the number of women in law schools and those in active practice. Understanding the reasons behind this disparity is as crucial as developing strategies to eliminate these barriers, she said. Moreover, she pointed to the rise of remote work, catalyzed by COVID-19, as a possible game changer. This shift in how we work offers a renewed perspective on work-life balance, which could significantly reshape women’s roles in the legal realm.

The future of the legal profession, while challenging, holds promise. Guided by mentorship, strengthened by representation, and backed by progressive workplace dynamics, women are poised not just to navigate but to lead tomorrow’s legal world. The journey ahead, while demanding, offers views of unparalleled opportunities and achievements for women in law.

Conclusion

The march of women through the archives of the legal profession is a story of a tenacious battle against established norms, yet it also heralds a promise of a more democratic future. The women chronicled in this article symbolize individual victories and collective strides toward breaking barriers and forging a path paved with equity, respect, and opportunity. As we reflect on history and anticipate the future, it is imperative to recognize the shared responsibility of the entire legal community, irrespective of gender, to ensure that the scales of justice balance the letter of the law and the spirit of inclusivity and fairness. While significant progress has been made, the journey ahead requires continued vigilance, relentless advocacy, and an unwavering commitment to ensuring that every voice within the legal profession is both seen and heard. The stories of these remarkable women serve not just as inspiration but as a clarion call for collective action, urging us to build upon the foundations they have laid and push forward toward a more inclusive legal horizon.

Jaline Fenwick, Esq., serves as vice president and assistant general counsel at JP Morgan Chase Bank, N.A. The views expressed herein are those of the author; they do not reflect the views of JP Morgan Chase Bank, N.A.

1. Am. Bar Ass’n, Profile of the Legal Profession 2022: Women in the Legal Profession (2022). ↑

2. Id. ↑

3. Id. ↑

4. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

5. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

6. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

7. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

8. Id. ↑

9. Id. ↑

10. Id. ↑

11. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

12. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

13. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

14. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

15. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

16. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

17. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

18. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

19. Lyle Moran, Women Eclipsed Men in Fortune 500 GC Appointments Last Year, Legal Dive (Mar. 22, 2023). See also id. ↑

20. Dame Vivan Hunt et al., McKinsey & Co., Delivering Through Diversity (2018) (McKinsey & Co. report). ↑

21. Kristin Barry, Mentors Aren’t Enough: What Women Need to Advance, Gallup (Mar. 8, 2023). ↑

22. Lyle Moran, Women Eclipsed Men in Fortune 500 GC Appointments Last Year, Legal Dive (Mar. 22, 2023). ↑

23. Am. Bar Ass’n, supra note 1. ↑

24. Am. Bar Ass’n, Profile of the Legal Profession 2022: Judges (2022). ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑

25. Id. ©2022 by the American Bar Association (ABA). Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the ABA. ↑