It’s no secret that the legal industry is stressful. Tight deadlines, substantial workloads, and difficult cases all combine to create a culture that is often detrimental to the mental well-being of attorneys and firm administrators. Recent lawyer suicides have brought even more light to this serious issue.
According to Reuters, which cites a 2023 Krill Strategies and University of Minnesota study, lawyers are twice as likely as the average adult to contemplate suicide, and attorneys who considered their jobs high-stress were twenty-two times more prone to considering suicide than those who called their jobs low-stress.[1] Despite the increased research and heightened awareness, the mental health crisis in the legal industry hasn’t shown many signs of abating.
Association of Legal Administrators (“ALA”) members—and law firm leaders as a whole—have often been tasked with finding solutions to one of the industry’s more intractable issues. Here are five strategies firm leaders can use to help promote employee well-being and, as a result, increase retention, productivity, and profitability.
No. 1: Look at Billing Requirements
One of the main pressure points in the legal industry is meeting billable-hour requirements. Attorneys often work late, early, and on weekends or holidays to log their necessary hours. While many have accepted this as “the way things work,” leaders of the modern law firm should ask themselves whether this kind of overwork should still be inherent to the practice of law. Except in the most urgent cases, what work is accomplished at 10 p.m. that can’t wait until the next morning?
There is often the presumption that clients expect 24/7, 365-days-a-year service from their attorneys. However, as long as quality work is done during the day, clients tend to appreciate a firm’s commitment to the well-being of their employees. Of course, communication is key in this regard, as firms should be up-front about the expectations that clients should have when working with their attorneys.
A frequent counterargument to reducing billable hour requirements is that it would hurt firm profitability. In many cases, that may be true in the short term. But a longer-term view shows that decreased pressure to produce creates better-quality work, happier employees, and increased client satisfaction. Considering that word of mouth holds significant weight in the legal industry, lawyers who enjoy the firm at which they work are more likely to pitch their firm to high-value laterals or promising young associates.
Firm leaders may also want to consider changing their billing method entirely. Fixed fees and value-based pricing are two ways that firms can de-emphasize the billable hour while providing consistency for their clients and ensuring that the work done best serves the clients’ needs. This kind of change is not easy but can be a concrete way for a firm to demonstrate its commitment to reducing the stress of an already demanding job.
No. 2: Embrace Diversity and Inclusion
In any workplace, mental health can suffer when employees do not feel accepted or included by their employer or coworkers. The legal industry has historically been known as having a higher barrier to entry for women, people of color, and other minority groups. But in recent years, firms have put more effort into promoting diversity, equity, inclusion, and accessibility (“DEIA”)—to much positive acclaim.
What makes a DEIA program effective differs from firm to firm, but the most successful often include events centered around cultural celebrations (such as Pride Month and African American History Month); awareness campaigns surrounding microaggressions and other problematic behaviors; and employee resource groups that consist of like-minded attorneys and staff who can support, mentor, and advise each other on a regular basis.
The topic of DEIA is especially crucial today as many large organizations have begun to roll back their diversity initiatives amid the current political environment or for other reasons, such as a lack of buy-in or financial support from those in charge. However, many clients still want their firms to show progress on advancing diversity, so it behooves firms to continue making DEIA a priority in their strategic planning.
From a wellness perspective, a demonstrated commitment toward supporting employees no matter their backgrounds goes a long way in making them feel comfortable being their true selves at work.
No. 3: Utilize Employee Benefits
Today, many benefit programs offer mental health support, whether through insurance allowances for therapy and other mental health treatment, or through Employee Assistance Programs (“EAPs”). Hopefully, your firm is already making these options available to your employees. If not, now is the time to assess what you’ll want to include in your next benefit package.
EAPs can be a particularly crucial resource, as they allow employees and their families to seek help during different types of crises—including mental health—without encountering the (unfortunate) stigma that often accompanies such admissions in the workplace. It’s important for attorneys and staff to know to whom they can turn when struggling with their mental wellness.
No. 4: Explore New Technologies
While there has been much trepidation about the use of artificial intelligence (“AI”) in the legal industry—understandably so—there is one way in which it undoubtedly helps: efficiency. So much of the practice of law involves time-consuming tasks, such as extensive research and drafting myriad legal briefs. Though they must be used with caution, the AI tools available are cutting down the time it takes to complete those tasks, which in turn can help reduce burnout and job dissatisfaction.
No. 5: Engage the Legal Community
The issue of suicide hit close to home for ALA in 2023, when a member of our Middle Tennessee Chapter tragically took her own life. Those in the legal administration community wanted to make sure lessons were learned from such a devastating loss. Members from the chapter created a Mental Health Task Force to increase dialogue and bring awareness and education to help prevent a similar tragedy from happening in their community again. They also reached out to the Tennessee Lawyers Assistance Program, which supports lawyers and judges in need. While the program hasn’t extended to legal administrative professionals, the chapter is currently working to make that happen.
While resources may differ between states, the Middle Tennessee Chapter has offered a shining example of how the legal community can band together to make positive change when it comes to mental health awareness and support. Perhaps it starts within a firm or a town before extending to a group of firms or a larger locality.
Burnout and other overwhelming feelings of stress are real, and it is incumbent on all law firm leaders to address them before they turn into a crisis or, even worse, a suicide. The statistics are alarming, but the community’s response can alleviate this situation. With these strategies in hand, firms can be well prepared to ease some of the stress on attorneys and staff and make mental well-being a strong priority.
If you or someone you care about is struggling, confidential help is available for free by calling or texting 988 or going to the 988 Lifeline.[2]
Duke Law School was crowned “champion” of the MAC Cup II law student negotiation competition at the M&A Committee Meeting of the ABA Business Law Section in Laguna Beach, California, on January 31. Teams from Duke, Missouri Law School, Cardozo Law School, and Georgetown Law School achieved “Final Four” status after months of intense rounds of negotiations that began in October 2024 with sixty-four teams from forty-six law schools across the U.S. and Canada.
Jimmy Scoville and Kiran Singh of Duke Law School won the second MAC Cup hosted by the ABA BLS M&A Committee, triumphing over sixty-three other teams. Photo by Sarah Sebring.
“The M&A Committee started the MAC Cup to give law students opportunities to learn about and apply M&A negotiation skills,” said Rita-Anne O’Neill of Sullivan & Cromwell, chair of the M&A Committee. “The students get to advocate on behalf of a buyer or a seller while seeking a mutually agreeable deal.”
Students Jimmy Scoville and Kiran Singh from Duke Law School, who were self-coached, achieved first place; and students Liz Eastlund and Austin Siener from Missouri Law School, coached by Aaron Pawlitz (Lewis Rice) came in second. In the final negotiation round, Duke represented the seller’s counsel and Missouri represented the buyer’s counsel.
M&A Committee Chair Rita-Anne O’Neill welcomes attendees to the MAC Cup II championship awards presentation at the Committee’s Laguna Beach meeting. Photo by Sarah Sebring.
An Opportunity to Learn Negotiation Strategies
“The students’ performance was inspiring. Many judges noted the students’ ability to engage in constructive discussions on complex issues, and their evident preparation and thoughtfulness,” said Mike O’Bryan of Morrison Foerster, immediate past chair of the M&A Committee.
The MAC Cup is a mock M&A negotiation tournament; students are given a fact pattern and assigned to be buyer’s or seller’s counsel. They then prepare and negotiate with their counterpart counsel team the issues they deem most significant and a mark-up of a draft acquisition agreement.
According to O’Bryan, students learn about negotiating strategies and how to get to a deal, as well as substantive M&A issues. They receive access to professional M&A learning resources.
“Many teams have coaches from the M&A Committee, and others work with other practicing lawyers or professors. Students also get opportunities to network with M&A Committee members and other students interested in M&A issues,” said O’Bryan. “And, of course, the opportunity to be recognized for writing and negotiating skills and to compete for prizes including travel to Laguna and scholarships.”
Students Undaunted by Fierce Competition
“Beyond the basic research on sample provisions and legal issues, we spent a lot of time developing questions to guide each negotiation,” said Jimmy Scoville of Duke. “We would also prepare various ‘creative solutions’ that we could integrate or modify as we learned more about what our opponents cared about.”
According to Scoville, he and his colleagues found the competition helpful because of the exposure to so many different methods of negotiating.
“I appreciated all of the time the judges took to give individualized feedback and really enjoyed seeing myself progress in the competition as I applied their advice,’ said Scoville. “That was really satisfying. I also enjoyed getting to know our competitors in the semifinal and final rounds. All of the competitors were fantastic and incredibly smart people.”
And what qualities enabled Duke to come out on top?
“The Duke team showcased great poise in all of their matches and were one of the best teams that were able to not only present their arguments in a thoughtful fashion but also listen and adjust to their counterparties,” said Thaddeus Chase of McDermott Will & Emery. “They were collegial in all their matches and seemingly had a great mastery of the materials (even with the curveball for the Final).”
In addition to the MAC Cup trophy for the winning team, the winning and runner-up teams receive scholarship awards.
Members and students celebrate the MAC Cup II winners. The winning and runner-up teams receive scholarship awards. Photo by Sarah Sebring.
The Path to MAC Cup III
The success of MAC Cup II has already created enthusiasm for next year’s competition among students, law schools, and the M&A Committee.
Wilson Chu of McDermott Will & Emery, who was chair of the M&A Committee from 2018 to 2021, was instrumental in building the competition from the ground up and has witnessed its enhanced reputation.
“We wanted to build a more robust pipeline of future business lawyers by flipping the law school experience to encourage students with a taste of real-world M&A,” said Chu. “MAC Cup II was more successful than planned with almost one hundred applicant teams from around fifty schools, with sixty-four teams competing in the main draw. Law schools are buzzing about MAC Cup III, especially the oversized, gaudy champions’ belt!”
The competition also benefits the M&A Committee’s leadership and members.
“The competition enables our members to give back to their alma maters and have a hand in guiding the next generation of M&A practitioners,” said Chase. “It also allows current members to see that young associates have the ability to grasp complex matters and actually negotiate.”
The recognition received by the student teams and the law schools also has strengthened the M&A Committee’s reputation as experts in negotiation who possess the practical knowledge required of M&A legal professionals.
“We’re already gearing up for MAC Cup III,” said O’Bryan. “Students can sign up for information at our MAC Cup website. With the resources and support that the MAC Cup offers, even students who haven’t taken an M&A course or worked for an M&A law firm can compete effectively.”
This is the second installment in the Year in Governance Series from the In-House Subcommittee of the ABA Business Law Section’s Corporate Governance Committee. Each month, the series will share key tips on a different corporate governance topic. To get involved in the Corporate Governance Committee, please visit the committee’s webpage.
A message from Kathy Jaffari: “As Chair of the Corporate Governance Committee, I would like to extend my sincere appreciation to the authors for this publication. The Corporate Governance Committee has ongoing opportunities for writing and volunteering with various projects, whether it’s an article you want to publish or a CLE that you want to present. Our Committee is dedicated to helping you promote informative resources for corporate governance practitioners. You may contact me at [email protected] to get involved.”
Director orientation and onboarding are two complementary but distinct processes that provide the foundation a newly appointed director needs for success. Orientation is a one-time event that introduces the director to the company, while onboarding, which typically lasts three to six months, helps the director dive deeper into critical topics and become more integrated into the business. Together, orientation and onboarding ensure new directors have a foundation for satisfying their fiduciary duties and the knowledge they need to become valuable contributors on the board.
Governance Requirements: Requirements for referencing director orientation in your organizational materials depend on stock exchange listing rules. The New York Stock Exchange requires director orientation to be included in the company’s corporate governance guidelines. Nasdaq does not. Regardless of requirements, it’s common for a company’s nominating committee to be responsible for ensuring adequate director orientation and onboarding as prescribed in the committee charter.
Responsibilities: Director orientation and onboarding processes are typically the responsibility of the Corporate Secretary’s office. The Corporate Secretary, while working with other internal leaders, is best positioned to build out orientation and onboarding materials while also serving as a liaison between the new director and the leadership team. Orientation and onboarding materials are often previewed with the CEO and/or the nominating committee, depending on governance requirements and leadership preference.
Orientation Timing: Director orientation should ideally be provided before a new director’s first board meeting and should be scheduled as soon as possible following appointment to the board. Providing materials and resources prior to the first board meeting helps ensure the director is well prepared and “oriented” to the company’s business and leadership.
Onboarding Timing: Director onboarding generally occurs over the course of the first few months following appointment to the board as the new director becomes more familiar with the company and its business. When developing an onboarding schedule, keep the board and committee calendar in mind to ensure that onboarding sessions complement upcoming topics on board and committee agendas.
Orientation Key Deliverables: Core orientation materials include a broad overview of the business, financial performance, forecasts and industry trends, and key governance and risk-related topics. New directors can benefit from a binder with foundational documents including charters, bylaws, board and committee schedules, corporate governance guidelines, company filings, organizational chart, code of conduct, and other important policies and governance documents.
Onboarding Key Deliverables: Core onboarding materials include meetings and presentations from key senior executives, materials related to committee assignments, tours of corporate headquarters or site visits, and meetings with individual directors. Encourage new directors to provide feedback on the areas of the business they are interested in learning more about to enhance planning and engagement.
Customization: A director’s experience varies; some are on multiple boards, and for some, this is their first board appointment. Understand the needs of your director and customize an orientation and onboarding program to fit their background. For example, providing an overview of director fiduciary duties will take less time for a well-seasoned director, while a first-time director would benefit from a robust presentation.
Relationship Building: Throughout both orientation and onboarding processes, plan introductions to the leadership team, key employees, and other board members. Provide insight into the current relationship dynamics between management and the board, as well as the dynamics of the board and each board committee. It’s helpful to set up meetings with each committee chair as well, even if the new director has not been appointed to a board committee.
Meetings with Outside Advisors: As part of onboarding, a new director will benefit from meeting with certain outside advisors. Depending on standard committee appointments, meetings with the company’s independent auditor or independent compensation consultant can be informative. If the board has specialized committees (e.g., sustainability, cybersecurity, risk), connect the new director with key external advisors to provide a deeper understanding of these areas.
Planning for Director Education: Request feedback during the orientation and onboarding process, and pay attention to a new director’s understanding and engagement. Recognizing what topics your new director was comfortable with, or not comfortable with, will help inform what topics they need more education on in the future.
The views expressed in this article are solely those of the authors and not their respective employers, firms or clients.
Despite legal and ethical concerns, many business leaders are still bullish on generative artificial intelligence (AI), and the industry is accelerating at a rapid pace. In fact, according to a UBS study, ChatGPT reached over 100 million monthly active users in the two months following its initial launch—making it the fastest-growing consumer application in history.
Unfortunately, as the use of generative AI surges, so too have the legal questions surrounding it. Copyright and trademark disputes regarding AI-generated material are on the rise—thrusting intellectual property (IP) law into uncharted territory. The cases being decided today, barely two years into the generative AI boom, may establish legal precedent that shapes the future of law for decades to come.
In the past several months, several high-profile legal cases have tested the boundaries of IP in the age of artificial intelligence, highlighting key issues.
Copyright Infringement When Using Content Created by AI
In Alcon Entertainment, LLC v. Tesla, Inc., Alcon Entertainment, the exclusive rights holder of the 2017 film Blade Runner 2049, has accused Tesla and Warner Bros. Discovery of using AI-generated imagery that closely mimics an iconic image from its film without prior permission. The image—depicting a man next to a futuristic-looking vehicle—was used at Elon Musk’s Cybercab launch event.
The suit claims that Tesla initially requested to use an actual image from the film. When Alcon Entertainment denied the request, the suit alleges Tesla and Musk used generative AI to create similar visuals, using Blade Runner images as a close reference.
Interestingly enough, whether a work is generated by AI or created by humans is irrelevant in this case. The question of fact will remain the same irrespective of how the image was created: Does this work infringe on Alcon Entertainment’s intellectual property?
But this case still provides attorneys with a valuable lesson. We will likely see these types of cases grow exponentially. AI tools can now produce images or written works in seconds, much more quickly than a human could. However, the images are not created from the “mind” of the AI; they are based on the information the AI has been exposed to already. Therefore, the “new” content the AI is creating is, most of the time, based on a human’s work.
Many day-to-day users of generative AI platforms are unaware of the potential risks associated with how these tools are trained. They may believe that the work they have asked generative AI to create is truly “original.” In many instances, individuals may not realize that their generated content mirrors copyrighted material until it’s too late.
For this reason, IP attorneys must continue to educate their clients about the risks involved in using generative AI and encourage them to rely on original, human-created content when possible. While AI can certainly aid the creative process, it should not be relied on as the primary source for public-facing materials. Of course, any AI-generated works should be reviewed by legal experts with scrutiny, as any prudent attorney would with work created by a human.
Copyright Infringement When Using Content to Train AI
The rapid adoption of generative AI has given rise to legal disputes not only about the output of these tools, but also concerning how these tools are trained.
For example, in Toronto Star Newspapers Ltd. v. OpenAI, Inc., more than five of Canada’s most prominent news outlets, including the Toronto Star newspaper, have filed a suit against OpenAI, alleging that OpenAI “scraped” content from their websites to train ChatGPT without their consent. The plaintiffs argue that this constitutes copyright infringement.
Similarly, in another landmark case filed this June, UMG Recordings, Inc. v. Uncharted Labs, Inc., several major record labels have teamed up to file a suit against Uncharted Labs for copyright infringement. The plaintiffs allege that the company’s AI model, Udio, illegally copies digital sound recordings to train its system. The tech then generates music that imitates the qualities of genuine, human-made recordings.
One potential outcome of both of these cases could be the establishment of licensing agreements. In the early days of music streaming platforms, similar legal battles ensued. The result? Licensing agreements that compensated artists for their music. Such license agreements laid the foundation for today’s major streaming platforms like Spotify, Apple Music, and Pandora. Today’s legal battles could similarly shape how generative AI companies acquire legal consent to use content generated by human artists in their training models.
For example, newspapers could provide AI companies with a license to scrape their news articles so long as the company pays a fee for the content and links back to the newspapers’ original article to credit the source of the answer or new material created. OpenAI has already announced licensing deals with The Associated Press and News Corp, among others.
Likewise, owners of music could potentially provide an AI platform with a license to train on their songs and create new music so long as a royalty is paid for using the music and users are notified that using any “new” music is subject to the copyright rights of the original owners.
When it comes to generative AI, Pandora’s box has been opened. Like it or not, this technology is here to stay. For this reason, attorneys should continue to closely monitor the ongoing cases surrounding generative AI to keep abreast of the rapidly evolving legal landscape. As the legal framework solidifies, those who stay informed will be best positioned to serve their clients.
This article provides a comparative analysis of two prominent business structures: the limited liability company (“LLC”) in the United States, with a focus on Florida and Delaware, and the Sociedad de Responsabilidad Limitada (“SRL”) in Bolivia. This analysis aims to delve into the fundamental similarities and distinctions that exist between two prominent legal systems: common law and civil, or continental, law. By examining these entities, we seek to uncover how they function within their respective frameworks and the implications of those differences. However, it is important to note that this exploration is not exhaustive,[1] as the scope of this article is inherently limited. Thus, the aspects discussed here relate to the structural elements and characteristics of these types of business entities within their unique legal systems.
Legal Framework
The basis of the U.S. legal system is a combination of foundational principles and key legal documents. At its core is the U.S. Constitution, the supreme law that establishes the framework of the federal government, its relationship with the states, and the rights of its citizens. Rooted in English common law, it relies on judicial precedents to guide decisions. Statutes enacted by legislative bodies and regulations issued by administrative agencies provide specific rules across various domains. These laws are interpreted by courts, whose decisions contribute to case law, further shaping the legal landscape. Together, these elements create a comprehensive and dynamic legal system that governs the United States.
The Constitution does not directly govern LLCs in the United States but derives their existence and regulation from state laws, reflecting the decentralized nature of U.S. governance. The Tenth Amendment[2] reserves to the states the power to regulate LLCs, resulting in diverse frameworks like the Delaware Limited Liability Company Act (“DLLCA”)[3] and the Florida Revised Limited Liability Company Act (“FRLLCA”).[4] However, federal constitutional principles indirectly shape LLC operations. The Commerce Clause[5] allows Congress to regulate interstate business activities, affecting LLCs with cross-state operations. The Contracts Clause[6] protects LLC operating agreements from retroactive state interference, while the Fourteenth Amendment[7] ensures fair treatment under state laws. Additionally, LLCs benefit from First Amendment[8] protections for commercial speech, such as advertising,[9] though regulations must meet the criteria established in the U.S. Supreme Court’s Central Hudson Test.[10] These constitutional influences underscore the balance between state-level autonomy and federal oversight in the regulation of LLCs.
Bolivia’s legal system is grounded in the civil law system, which draws its influence from the Roman Corpus Juris Civilis. Bolivia’s legal framework operates under the principles of civil law, which it inherited from Spanish and Napoleonic legal traditions. The civil law system emphasizes codified statutes, and legal decisions are often guided by applying these codes rather than judicial precedents.
Bolivia’s legal framework establishes a strong foundation for economic activity and business organization, emphasizing both individual and collective rights. The Bolivian Constitution[11] ensures the right to engage in commerce, industry, or lawful economic activities, provided they do not harm the public good. It also guarantees freedom of business association, recognizing the legal status of such entities and supporting democratic business structures aligned with their statutes.[12] Complementing this, the Commercial Code[13] governs relationships arising from commercial activities, offering a broad definition that includes both the nature of activities and the individuals or entities conducting them.[14]
Nature and Characteristics
In the United States, each state has its own laws governing the formation of LLCs. The first statute authorizing LLCs was adopted in Wyoming in 1977, and as late as 1988, only Florida had followed suit.[15]
An LLC is a popular business structure in the United States that combines the liability protection of a corporation with the tax benefits and operational flexibility of a partnership or sole proprietorship.[16] LLCs are hybrid business entities with a unique combination of favorable legal, business, and tax attributes that do not exist in any other single entity.[17] In short, the LLC is an eclectic mixture of features drawn from several different traditional business forms that create an attractive package for many enterprises.[18]
In Bolivia, the SRL is a relatively modern business entity, originating in nineteenth-century Germany with the Reich’s special law of 1892.[19] From there, it spread to other jurisdictions, including Portugal in 1901, Austria in 1906, and England in 1907,[20] eventually gaining global recognition.
The SRL occupies a hybrid position between capitalist and personalist corporate models. Like corporations, the SRL offers limited liability tied to members’ capital contributions but differs in not issuing freely transferable shares. Instead, it emphasizes the intuitu personae principle,[21] prioritizing trust and personal relationships among members, as seen in the restricted transferability of quotas. This dual nature allows the SRL to combine the financial security of a corporation (Sociedad Anónima) with the personalized dynamics of a partnership (Sociedad Colectiva), making it a versatile and unique business entity.
Similarities
Limited Liability of Its Members
In the United States, one of the most appealing aspects of the LLC is the limited liability afforded to its owners and operators. For instance, in both Florida[22] and Delaware,[23] no member or manager is liable personally for any debt, obligation, or liability of an LLC solely by virtue of such party’s status as a member or manager. Furthermore, the individual assets of LLC members may not be used to satisfy the LLC’s debts and obligations; hence, a member’s risk of loss is limited to the amount of capital invested in the business.
In Bolivia, the SRL also provides limited liability to its members. According to Article 195 of the Commercial Code, members are liable only up to the amount of their contributions. This ensures that each partner’s personal assets remain protected, even if the company needs to cover debts or suffers losses during a given management period.[24]
Separate Legal Entity
Under most LLC statutes, including under the DLLCA[25] and the FRLLCA,[26] an LLC is explicitly characterized as a separate legal entity whose identity is distinct from that of its members. As a separate “legal person,” an LLC can exercise rights and powers in its own name. Consequently, parties doing business with an LLC must look to the company, and not to the LLC’s members or managers, to satisfy any obligations owed to them.
Likewise, in Bolivia, SRLs are recognized as distinct legal entities from their members, meaning that they can enter into contracts, sue, and be sued independently from the individuals involved in ownership or management.
Flexible Management Structure
In the United States, LLCs can be member-managed or manager-managed, offering more flexibility for structuring control, especially for larger or multistate LLCs. The operating agreement typically sets the management terms. Most LLC statutes default to a member-managed structure, such as under the DLLCA[27] and the FRLLCA,[28] where all members have management rights, similar to a general partnership.[29] Some statutes, however, default to a manager-managed structure, where management is centralized in a smaller group of managers, akin to a corporation.[30] Both member-managed and manager-managed structures can be elected, regardless of the jurisdiction’s default rule.[31]
In Bolivia, the management of an SRL may consist of one or more managers, who can be either one or more of the members, similar to a member-managed LLC, or third parties who are nonmembers,[32] similar to a manager-managed LLC. In any case, there must be a management structure, as it is the body that constitutes the “typical representation of that company.”[33]
Differences
Perpetual Existence
LLCs often have perpetual existence and do not dissolve with member exit unless specified in the operating agreement.[34] For instance, the DLLCA presumes a perpetual life.[35] Likewise, under the FRLLCA,[36] an LLC is presumed to have perpetual duration unless otherwise stated in its articles of organization or operating agreement.
In Bolivia, SRLs do not have an indefinite duration and are never presumed to have perpetual life; rather, its articles of formation must specify a lifespan in years. In practice, SRLs generally specify a ninety-nine-year duration, which may be renewed before its lifespan terminates.
Cap on Membership
In both Florida and Delaware, there are no minimum or maximum limits on the number of members an LLC can have. In both states, LLCs can have a single member or multiple members. There is no limit on the number of members in an LLC unless the LLC opts to be taxed as an S corporation, which has a maximum of one hundred members.
Membership limits are significantly different in Bolivia, where an SRL must have at least two members and no more than twenty-five members.[37] This stems from the conception that defines a business entity (sociedad comercial) as a contractual agreement between two or more individuals to contribute resources toward a common goal. Consequently, it is inconceivable to have a business entity with only one member; thus, under Bolivian law, the legal minimum for forming such an entity is two members. On the other hand, the cap on the number of members of an SRL responds to its closely held nature, with both capitalist and personalist elements.
Operating Agreements
The governance of an LLC is outlined in a nonpublic document known as the “operating agreement” or “limited liability company agreement,” which, like a partnership agreement or corporate bylaws, is not filed with any state official.[38] This document specifies the rights, duties, and obligations of members and managers and serves as the framework for the LLC’s operations. LLC members have considerable flexibility to tailor the operating agreement to their unique needs, often superseding default statutory provisions.[39] Thus, the operating agreement controls relationships between members and between members and the company.[40]
Contrary to the LLC, an SRL only requires one solemn document (testimonio de constitución) specifying the rights, duties, and obligations of members and managers and serving as the framework for the SRL’s operations, and it is made public through the Commercial Registry. Hence, an operating agreement is not required. However, on rare occasions, members of an SRL may choose to have a parasocial agreement (acuerdo parasocial),[41] essentially a private contract among the members that provides specific terms and conditions governing the relationships between those members. A parasocial agreement differs from an operating agreement in that the former is very specific and limited to the laws and regulations that govern SRLs.
Taxation
By default, Florida[42] and Delaware[43] LLCs are taxed as pass-through entities, meaning that they do not pay income taxes themselves. Instead, their owners or members pay personal income tax on the LLC’s revenue after it passes through the business to members. This is advantageous because it avoids double taxation, which occurs when both the entity and the owners are taxed.
The tax regime in Bolivia is regulated by the Tax Code[44] and Law No. 843.[45] The SRL, which is governed by Bolivian tax law, does not support pass-through taxation for SRLs, so they are typically taxed as separate entities.
Conclusion
In comparing LLCs in Florida and Delaware with SRLs in Bolivia, several similarities and differences emerge, shaped by the distinct legal frameworks and business environments of these regions.
One of the key similarities between LLCs and SRLs is the concept of limited liability, which protects the personal assets of members or owners from the debts and obligations of the entity. Both business structures are also recognized as separate legal entities, capable of entering into contracts and engaging in litigation independently of their members. Additionally, both LLCs and SRLs offer flexibility in management structure, allowing for member-managed or manager-managed options, depending on the specific needs of the business.
However, notable differences exist between the two. LLCs in Florida and Delaware typically enjoy perpetual existence unless otherwise stated in their operating agreements, whereas SRLs in Bolivia must specify a finite duration in their formation documents. Another major difference is the membership structure: LLCs can have a single member or an unlimited number of members, while Bolivian SRLs are limited to a minimum of two and a maximum of twenty-five members. Furthermore, LLCs benefit from pass-through taxation, which avoids double taxation, while SRLs in Bolivia are taxed as separate entities, subject to different tax rules under Bolivian law.
The contrasting legal traditions in which these structures exist—common law in the United States and civil law in Bolivia—play a significant role in shaping these differences. While LLCs have a high degree of flexibility and autonomy, particularly in their internal governance through operating agreements, SRLs rely more on codified laws and public documentation, such as the testimonio de constitución. These structural and legal contrasts reflect the broader distinctions between the decentralized, case-law-driven approach of the United States and the codified, statute-based framework of Bolivia.
Thus, while LLCs and SRLs share common features like limited liability and separate legal status, the differences in membership, governance, duration, and taxation highlight how each entity is adapted to the legal and economic systems in which it operates. These distinctions can significantly influence the decision-making process for entrepreneurs and investors when choosing between these two business structures.
The author intentionally focuses on seven aspects to distinguish the similarities and differences between LLCs and SRLs: limited liability, separate entity status, management structure, perpetual existence, cap on members, operating agreements, and taxation. ↑
The Supreme Court developed a four-part test, also known as “The Central Hudson Test,” in Central Hudson Gas & Electric Corp. v. Public Service Commission of New York to evaluate the constitutionality of regulations on commercial speech. 447 U.S. 557 (1980). ↑
Constitución Política del Estado (2009) (Bolivia). ↑
Article 47(I) states that all have the right to engage in commerce, industry, or any lawful economic activity, under conditions that do not harm the collective good. Id. art. 47(I). Likewise, Article 52(I) acknowledges and protects the right to freedom of business association. Id. art. 52(I). Additionally, Article 52(II) states that the State shall guarantee recognition of the legal personality of business associations, as well as democratic forms of business organizations, according to their own statutes. Id. art. 52(II). ↑
Código de Comercio (promulgado por Decreto Ley No. 14379 de 25 de Febrero de 1977) (Commercial Code (promulgated by Decree Law No. 14379 of Feb. 25, 1977)) (Bolivia) [hereinafter Code Com.]. ↑
Robert W. Hamilton & Richard A. Booth, Business Basics for Law Students: Essential Concepts and Applications 263 (Aspen L. & Bus., 3d ed. 2002). ↑
K. Wieland, La Sociedad de Responsabilidad Limitada, 19 Revista de Derecho Puertorriqueño 241 (1932). ↑
Raul Anibal Etcheverry, The Mercosur: Business Enterprise Organization and Joint Ventures, 39 St. Louis L.J. 979, 992 (1995). ↑
Intuitu personae refers to contracts or obligations that are entered into with specific consideration of the personal qualities, skills, or trustworthiness of the individual involved. ↑
Code Com. art. 195 (Characteristics). In SRLs, the partners are liable only up to the amount of their contributions. The common fund is divided into capital shares that, in no case, may be represented by stocks or securities. ↑
Code Com. art. 203 (Management of the Company). The management of the SRL shall be entrusted to one or more managers or administrators, whether they are partners or not, appointed for a fixed or indefinite term. ↑
Richard E. Hugo & Muiño O. Manuel, Derecho Societario 370 (Astrea, Buenos Aires, 2002). ↑
Lee Harris, Mastering Corporations and Other Business Entities 96 (Carolina Acad. Press 2009). ↑
The Uniform Special Deposits Act (“USDA” or the “Act”) is a product of the Uniform Law Commission and was approved at its 2023 Annual Meeting. After consideration and deliberation by the Uniform Law Commission’s Special Deposits Committee, the Uniform Special Deposits Act was drafted to provide clarity on an area of law that has been subject to uncertainty for a number of years.
Special deposits, as the name suggests, are a “special” type of deposit that has different characteristics than other deposits, such as checking or savings deposits. Unlike deposits that are payable on a customer’s order, special deposits are established for a particular purpose, and a beneficiary becomes entitled to payment after a determination is made that a specified contingency has occurred. Special deposits play an important role in commerce and industry and ensure that funds deposited will be available to the person entitled to them in the future once their established purpose has been satisfied. They can serve a variety of parties in a range of contexts, but their use has been diminished by a small number of legal uncertainties, the collective significance of which is large. For example, in the past, case law has described special deposits or special accounts as akin to trust, bailment, or custody arrangements, but they are not used that way in practice.
The USDA establishes a framework under state laws for interested parties to utilize special deposits with a greater understanding of how such deposits will be treated under various circumstances. The Act was drafted utilizing a “minimalist” philosophy, and the drafters sought only to address specific uncertainties that exist under current law. As a result, the Act does not disrupt existing law but rather builds on it, and it leaves matters not addressed by the Act to be governed by general laws already governing deposits or contractual arrangements.
Importantly, the USDA is an “opt-in” statute, which means that parties intending to enter into a special deposit must specify in the agreement establishing the special deposit that they intend to be covered by the USDA as enacted in a particular state. This feature of the Act permits existing relationships to continue undisturbed, and permits parties to choose to utilize the protections provided by the USDA when they wish, so parties can choose to utilize the protections for certain deposit products and not others. Parties are also permitted to amend existing agreements to be covered by the USDA after enactment if they satisfy the criteria to establish a special deposit under the Act.
There are four key legal uncertainties that the USDA is designed to remedy by establishing rules to eliminate those uncertainties without interfering with other aspects of laws governing deposits.
First, the “opt-in” characteristic performs a kind of double duty in the USDA. As described above, it enables freedom of contract—the parties establishing the special deposit decide whether the arrangement will be governed by contract law or by the USDA. In addition, the “opt-in” is the mechanism identifying the deposit as “special” and subject to the select set of rules set out in the USDA. A deposit designated as “special” and subject to the USDA must satisfy the objective criteria in Section 5 of the Act, which include that it be (i) designated as “special” in an account agreement governing the deposit at a bank, (ii) for the benefit of at least two beneficiaries (one or more of which may be a depositor, which also has a specific definition in the Act that could include a person who establishes the special deposit even without funding it), (iii) denominated in money (defined in the Act as “a medium of exchange that is currently authorized or adopted by a domestic or foreign government,” which is borrowed from the Uniform Commercial Code), (iv) for a permissible purpose identified in the account agreement, and (v) subject to a contingency specified in the account agreement that is not certain to occur, but if it does occur, creates the bank’s obligation to pay a beneficiary.
The permissible purpose requirement is an important feature of the USDA that prevents the special deposit from being used inappropriately for fraudulent or abusive purposes—for example, to defraud creditors. A permissible purpose is defined in Section 2 as “a governmental, regulatory, commercial, charitable, or testamentary objective of the parties stated in the account agreement.” A special deposit must serve a permissible purpose from creation until termination. In addition, a deposit or transfer that is fraudulent would not be for a permissible purpose, and the voidability of the deposit under other law would not be affected by the USDA.
Second, the USDA provides clarity on the treatment of a special deposit in the event of the bankruptcy of a depositor. Under current law, there may be uncertainty as to whether funds deposited into a special deposit could be “swept” into the bankruptcy estate of the person who deposited them. A special deposit under the USDA is “bankruptcy remote” because Section 8 provides that neither a depositor nor a beneficiary has a property interest in a special deposit. The only property interest that may arise with respect to a special deposit is in the right to receive payment from the bank after the occurrence of a contingency. The USDA protects the special deposit, but not the accrued “payable” to a beneficiary after the contingency is determined.
Third, the Act provides clarity on the applicability of creditor process to a special deposit. Currently, the uncertainty as to whether a creditor can “freeze” a special deposit pending an adjudication by a court undermines the utility of the special deposit, because it could interfere with the purpose that the special deposit is designed to achieve. At the time the special deposit is established, the identity of the ultimate beneficiary has not yet been determined because the contingency has not yet occurred. Section 9 of the USDA provides that creditor process is not enforceable against the bank holding the special deposit, except in limited circumstances. Instead, creditor process may be enforceable against the bank holding a special deposit with respect to any amount that it must pay after the determination of a contingency, but not on the special deposit itself. Section 10 provides a similar limitation on using an injunction or temporary restraining order to achieve the same or a similar outcome. Like the provisions dealing with bankruptcy, the provisions dealing with creditor process protect the special deposit, but not an accrued payable to a beneficiary after the contingency is determined.
Fourth, the USDA provides clarity on the legality of the bank exercising a set off or right of recoupment against a special deposit that is unrelated to any payment to a beneficiary or the special deposit itself. Section 11 prohibits set off or recoupment except in limited circumstances. And, as with the provisions dealing with bankruptcy and creditor process, the provisions dealing with setoff protect the special deposit but not an accrued payable to a beneficiary after the contingency is determined.
The USDA creates a mechanism for parties to a commercial transaction to obtain a low-cost and safe return of earnest money and provides protection to parties seeking to deposit funds for particular purpose to be determined at a future point in time. The USDA also provides clarity to other aspects of a special deposit relationship that have been muddled in the case law, for example, by expressly providing that the relationship between the bank and a beneficiary is a debtor-creditor relationship and that a bank does not have a fiduciary duty to any person in connection with a special deposit. Section 12 of the Act includes additional clarifications on the scope of a bank’s duties and liabilities, and to provide incentives such that banks will offer a special deposit product.
The four uncertainties described here require statutory solutions because they relate to third parties’ interactions with a special deposit and cannot easily or effectively be addressed by contractual agreements between the parties. The USDA is narrowly tailored to cure these four mischiefs and eliminate uncertainty so that parties can utilize special deposits with greater confidence that their expectations will be met. In addition, creating clear rules should reduce litigation risks and expenses for the parties and banks.
The Act is intended to provide needed benefits to depositors, beneficiaries, and banks, and also to be fair to other creditors of the participants in the arrangement. The drafters considered a wide range of potential arrangements where a special deposit governed by the Act may be useful, and the statute was drafted to allow flexibility for the parties to create an account agreement reflecting the circumstances of their particular transaction. The USDA includes a list of sample permissible purposes that highlights some of the use cases for special deposits, and for the avoidance of doubt as to the permissibility of those use cases. But it is not an exclusive list, and in the time since the USDA was approved by the Uniform Law Commission, additional potential uses have been raised as well.
Canadian courts are set to make another ruling on the legality of using artificial intelligence (“AI”) technology to scrape data from websites. Data scraping is the practice of automatically extracting data from online sources using software. While Canadian courts have previously determined that scraping data without permission is not permissible, the rise of AI and its growing accessibility have led to continued commercial use of AI technology to illegally obtain data and train AI systems.
OpenAI, Inc. Litigation
On November 29, 2024, a precedent-setting claim was brought forward in the Ontario Superior Court of Justice by several Canadian news companies (“Plaintiffs”) against OpenAI, Inc. and its related companies—including OpenAI GP, LLC; OpenAI, LLC; OpenAI Startup Fund I, LP; OpenAI Startup Fund GP I, LLC; OpenAI Startup Fund Management, LLC; OpenAI Global, LLC; OpenAI OpCo, LLC; OAI Corporation; and OpenAI Holdings, LCC—that work to develop, commercialize, and fund OpenAI’s AI products (collectively, “Defendants”) for allegedly data scraping copyrighted content.[1] The Plaintiffs represent Canada’s leading news outlets that are responsible for publishing journalistic content and media across various platforms, including the Toronto Star, the Vancouver Province, the Calgary Sun, the Calgary Herald, the Daily Herald, the Edmonton Journal, the Edmonton Sun, the London Free Press, the National Post, the Ottawa Citizen, the Ottawa Sun, the Daily Observer, the Daily Press, the Winnipeg Sun, the Globe and Mail, the Canadian Press, and CBC.
The Plaintiffs, all well-known players in the Canadian media landscape, argue that the works that each Plaintiff has produced are highly valuable and a product of significant creative efforts and monetary investment. These works are widely distributed across Canada, including on websites, on mobile apps, and through print media. Together, the Plaintiffs host millions of works across various platforms, both owned and licensed by the Plaintiffs.
The Plaintiffs allege that the Defendants have used their intellectual property without proper authorization as a means of building a commercially successful business that has generated enormous profits through the sale of AI-powered products and services. The legal basis of the Plaintiffs’ claim is rooted in copyright infringement and breach of contract, specifically alleging that the Defendants’ use of the Plaintiffs’ works violates Canadian copyright law and amounts to a breach of the Plaintiffs’ applicable terms and conditions governing the use of each respective work.
In the claim, the Plaintiffs allege that the Defendants are liable for the following: (a) the alleged unauthorized use of the Plaintiffs’ copyrighted works by the Defendants in violation of sections 3 and 27 of the Copyright Act;[2] (b) the alleged circumvention of protection measures by the Defendants used by the Plaintiffs to prevent unauthorized copying and access of its works, specifically in violation of sections 41 and 41.1 of the Copyright Act;[3] (c) the Defendants’ breach of the Plaintiffs’ online terms and conditions governing their respective websites; and (d) the unjust enrichment received by the Defendants for the misappropriation of the Plaintiffs’ intellectual property.
The Plaintiffs have deployed myriad technical measures to restrict access to their copyrighted works on their websites, including the robot exclusion protocol used to prevent automated scraping of data. Despite this, the Plaintiffs allege, the Defendants have subverted these technical protection measures to gain access to their works and exploit them for commercial purposes.
Additionally, each of the Plaintiffs has endeavored to control how users could interact with and use their works by means of various legal terms and conditions. When accessing the Plaintiffs’ works online, users must accept the applicable terms and conditions, which specify that the use of the works is for personal, non-commercial use only and specifically prohibit the reproduction or distribution of the works without express authorization of the Plaintiffs. By allegedly using the Plaintiffs’ works for profit through the commercialization of products like ChatGPT Plus and ChatGPT Enterprise, the Plaintiffs assert, the Defendants have breached the Plaintiffs’ applicable terms and conditions.
The Plaintiffs further contend that the Defendants have been, and continue to be, unjustly enriched by using the works of the Plaintiffs without their knowledge, consent, or appropriate license. The Defendants have generated billions of dollars in annual revenue through the sale of their products and services: As of October 2024, the Defendants have been valued at a staggering $157 billion. The Plaintiffs allege that they have been deprived of significant potential revenue generated by their works.
The Plaintiffs are seeking substantial compensation from the Defendants. The order for compensation requested by the Plaintiffs includes a portion of the profits earned by the Defendants from the alleged infringement of the Plaintiffs’ copyright works and circumventing protections; statutory damages set at CAD 20,000 per work; damages for unjust enrichment; and, further, punitive damages for the Defendants’ willful misconduct. In addition to the damages sought, the Plaintiffs are requesting both prejudgment and post judgment interest, along with the costs of the legal proceedings.
The Defendants have released public statements stating that, based on the principle of fair use, it is fair or in the public interest to use publicly available information to train and improve its AI systems.[4] The “fair use” of public content remains a highly debated practice in the Canadian technology sector.
In a joint statement released by a subset of the Plaintiffs, including Torstar, Postmedia, the Globe and Mail, the Canadian Press, and CBC, the news media companies indicated that while they “welcome technological innovations,” the act of data scraping of journalistic content for commercial gain is illegal and not in the public’s best interest.[5] The Plaintiffs maintained that this case is about upholding Canadian journalism and protecting the substantial investments made by organizations across the country to produce fact-checked, sourced, reliable, and trusted news and information by, for, and about Canadians. The rapid spread of unverified content has eroded public trust, making it essential for credible outlets to uphold rigorous standards of fact-checking, transparency, and accountability. In an era where anyone can publish content, with or without assistance from an AI system, the role of professional journalists in verifying facts and maintaining ethical standards has never been more vital.
Other Data Scraping Litigation
This is not the first instance of a claim being brought forward through the Canadian legal system addressing the legality of data scraping. In 2019, the Federal Court of Canada ruled on the legality of data scraping in Toronto Real Estate Board v. Mongohouse.com, where it found that web scraping activities of the defendant were unlawful and upheld the plaintiff’s copyright in website content.[6]
On November 4, 2024, the Canadian Legal Information Institute (“CanLII”) filed a notice of claim with the Supreme Court of British Columbia against 1345750 B.C. Ltd., Clearway Management Ltd., Alistair Vigier doing business as Caseway AI Legal, Caseway AI Legal Limited, and John Doe Corporation.[7] The claim alleges that the defendants violated CanLII’s terms of use, which prohibited bulk downloading and scraping of the CanLII website without express permission or a license. CanLII is also seeking an injunction against Caseway AI Legal to prohibit the use of any material obtained from its website without authorization.
Conclusion
The allegations contained in the claim brought forward by the Plaintiffs have not been proven in Court, and the Defendants have not yet filed their defense to the allegations made. It is fair to say that the claim brought forward by these Canadian news companies against OpenAI, Inc. among others, has generated considerable public interest in Canada, and we await further guidance from the Ontario Superior Court of Justice regarding the legality of mass data scraping by AI systems.
Section 3 of the Copyright Act deems that copyright, “in relation to a work, means the sole right to produce or reproduce the work or any substantial part thereof in any material form” and the right to authorize such acts. Copyright Act, R.S.C. 1985, c C-42, § 3 (Can.). Section 27 of the Copyright Act deals with copyright infringement generally and secondary infringement. “It is an infringement of copyright for any person to do, without the consent of the owner of the copyright, anything that by [the Copyright Act] only the owner of the copyright has the right to do.” Id. § 27(1). It is considered secondary copyright infringement for any person to:
(a) sell or rent out, (b) distribute to such an extent as to affect prejudicially the owner of the copyright, (c) by way of trade distribute, expose or offer for sale or rental, or exhibit in public, (d) possess for the purpose of doing anything referred to in paragraphs (a) to (c),or (e) import into Canada for the purpose of doing anything referred to in paragraphs(a) to (c), a copy of a work . . . that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it. Id. § 27(2). ↑
Sections 41 and 41.1 of the Copyright Act prohibit the circumvention of technological protection measures and deem that the owner of a copyright in a work subject to the Copyright Act is “entitled to all remedies—by way of injunction, damages, accounts, delivery up and otherwise—that . . . may be conferred by law for the infringement of copyright against the person” that has circumvented technological protection measures. Id. §§ 41–41.1(2). ↑
In In re Mindbody, Inc.,[1] the Delaware Supreme Court (“Supreme Court”) affirmed in part and reversed in part a posttrial decision by the Delaware Court of Chancery (“Court of Chancery”),[2] which had garnered significant attention. The Supreme Court affirmed the Court of Chancery’s rulings that a CEO breached his fiduciary duties of loyalty (by tilting the sale process in a specific buyer’s favor out of his own self-interest) and disclosure (by failing to disclose material aspects of his participation in, and his motivations for, the sale). The Supreme Court reversed, however, the Court of Chancery’s ruling that the private equity acquirer had aided and abetted the CEO’s disclosure breach, disagreeing with the Court of Chancery that the acquirer’s contractual right to review U.S. Securities and Exchange Commission (“SEC”) filings provided a sufficient basis to conclude that the acquirer had substantially participated in the breach. In doing so, the Supreme Court provided guidance for the first time as to the applicability of the Restatement (Second) of Torts (“Restatement”) factors in examining the “substantial assistance” portion of an aiding and abetting analysis.
Background
Neither party challenged the trial court’s factual findings. As a result, the Supreme Court adopted the posttrial opinion’s factual recitation practically verbatim.
In 2018, three years after going public, Mindbody, Inc. (“Mindbody” or “Company”) endured numerous failed initiatives, which, coupled with the need of Richard Stollmeyer (the CEO and founder of Mindbody) for liquidity and a board-represented venture capital (“VC”) firm’s desire for a near-term sale, caused Stollmeyer to shop the Company.
By August of 2018, Stollmeyer commenced an informal sale process without the board’s consent or knowledge, which the trial court found ultimately allowed Vista Equity Partners Management, LLC (“Vista”) to obtain a competitive advantage over other potential acquirers. For example, Stollmeyer engaged an investment banker to set up a meeting with a Vista principal and a senior vice president, where Stollmeyer informed the two of his desire to “find a good home for his company,” information that he did not have authorization to disclose.[3] Shortly after that meeting, Stollmeyer advised the board of his conversation but failed to mention any discussion of a potential sale. At the request of the Vista representatives, Stollmeyer attended Vista’s CXO Summit. During a one-on-one meeting with Vista’s founder at the Summit, Stollmeyer stated his intent to explore a sale of Mindbody, something he admitted to not having board authorization to say and information that was not otherwise available to the market.
Based on Stollmeyer’s statements, Vista commenced its acquisition process, requesting a market study from Bain & Co. nearly one month before Mindbody contacted other potential acquirers. Ultimately, Vista provided an oral expression of intent to Stollmeyer by stating that it “would pay a substantial premium to Mindbody’s recent trading price.”[4] Stollmeyer then waited two days before informing his management team and another eight days before notifying the entire board.
By the end of October, the board appointed a transaction committee—with the VC firm’s designee serving as chair—to interview financial advisers and to make a recommendation. Notably, the committee adopted guidelines that required management to obtain authorization before communicating with strategic partners or financial advisers.
In November, the Company lowered guidance for Q4 earnings during an earnings call, which Stollmeyer acknowledged would affect a potential acquirer’s desire to purchase the Company. Vista viewed the downgrade as an opportunity for a lower deal price and higher exit profit. After the earnings call, Stollmeyer’s investment banker told Vista’s representative that Stollmeyer wanted a $40 per share minimum. Vista was then able to run that number into its financial models. By mid-November, Stollmeyer informed Vista of the upcoming sales process. A few days later, Mindbody formally hired the investment banker that Stollmeyer had been using during the informal deal process. They planned to solicit strategic bidders on November 29 and financial sponsors on November 30. Yet, the investment banker “formally” contacted Vista on November 30 but waited until December 3 and 4 to contact other financial sponsors.[5] With this leg up, Vista received its final market study two days before other financial sponsors had access to Mindbody’s data room. At this point, Stollmeyer still had not informed the board of key information regarding the process: the VC firm’s desire to sell, Vista viewing Mindbody’s stock downturn as a buying opportunity, Vista’s intent to make an offer on a premium over its trading price, the fact that Stollmeyer had already met with Vista more than once, Stollmeyer’s conversation with a Vista portfolio company CEO, and Stollmeyer’s plan to step down in two or three years.
Vista submitted an offer to acquire Mindbody for $35 per share, with a twenty-four-hour deadline, three days after the data room opened to the remaining bidders on December 18. However, the other bidders were further behind in diligence and unprepared to make an offer. Two days later, Mindbody made a counteroffer of $40 per share, and Vista countered with a $36.50 best and final. With all other bidders out, the entire board convened and directed management to accept the bid. Following the merger agreement, Stollmeyer bragged that Vista was “able to conduct all of our outside-in work before the process launched[.]”[6]
The merger agreement provided for a thirty-day go-shop and gave Vista the contractual right to review Mindbody’s proxy materials. Under the merger agreement, if Vista became aware of material facts that were omitted from the proxy information, Vista had an obligation to inform Mindbody. That obligation was a key component of the Court of Chancery’s conclusion that Vista provided substantial assistance and thus aided and abetted the CEO’s disclosure breaches.
On January 4, 2019, Mindbody determined it had beaten Wall Street consensus estimates for Q4 revenue. It did not include that information in its January 9 preliminary proxy related to the deal. After discussing whether to disclose the Q4 earnings while stockholders deliberated over approving the deal, Mindbody’s audit committee voted against disclosure. Mindbody’s initial proxy also omitted references to some of Stollmeyer’s meetings with Vista and Vista’s expression of interest in mid-October. The definitive proxy and supplemental disclosures told stockholders about Stollmeyer’s additional meetings with Vista representatives and attendance at the summit but failed to include the substance of his conversations.
Litigation ensued. After trial, the Court of Chancery found Stollmeyer liable for damages of $1 per share for breaching his duty of loyalty under Revlon.[7] Also, it awarded damages of $1 per share against Vista and Stollmeyer jointly and severally for the disclosure violations.
Defendants’ Appeal
On appeal, the defendants challenged the Court of Chancery’s (1) holding that Stollmeyer breached his fiduciary duty of loyalty under Revlon, (2) holding that Stollmeyer breached his fiduciary duty of disclosure, (3) holding that Vista aided and abetted Stollmeyer’s disclosure breach, (4) award of $1 per share in damages for Stollmeyer’s Revlon breach, and (5) refusal to apply a settlement credit under the Delaware Uniform Contribution Among Tortfeasors Act (“DUCATA”).
Duties of Loyalty and Disclosure
Regarding the first and second arguments concerning Stollmeyer’s liability, and the resulting damages, the Supreme Court affirmed the chancellor’s holdings that he breached his duties of loyalty and disclosure and owed $1 per share in damages. As to loyalty, the “paradigmatic” Revlon claim entails a “conflicted fiduciary who is insufficiently checked by the board and who tilts the sale process toward his own personal interests in ways inconsistent with maximizing stockholder value.”[8] The trial court’s factual findings supported that Stollmeyer’s subjective intent surrounding his financial position, favoritism for Vista, and desire to sell fast resulted in disabling conflicts. The same was true as to the disclosure violations, with the Supreme Court agreeing that his omissions, in aggregate, were material, with the strongest claims concerning his tips to Vista regarding pricing and process timing that violated transaction committee guidelines. The Supreme Court believed any reasonable stockholder would find those tips favoring one potential acquirer “indicative of a potentially flawed sale process” and “important in considering whether to vote to approve the merger.”[9] Because such material information was withheld, the Supreme Court agreed with the chancellor that the Corwin cleansing defense was unavailable.[10] The evidence also supported the $1 per share in damages for Stollmeyer’s duty of loyalty breach. And the Supreme Court agreed that the defendants waived their right to seek settlement credit under DUCATA by failing to adequately apprise the plaintiffs pretrial that they intended to pursue a settlement credit.
Aiding and Abetting
The Supreme Court then analyzed the various novel issues implicated by the chancellor’s holding that Vista aided and abetted Stollmeyer’s disclosure breach, noting “how thin the case law” was on the issues.[11] That included when the Supreme Court can hold third-party buyers liable for aiding and abetting fiduciary breaches (which the Supreme Court explained it had never done), whether contractual duties in a merger agreement could create for third parties fiduciary duties to the target’s stockholders, and whether a passive failure to act may give rise to liability. In total, for the reasons discussed below, the Supreme Court concluded that Vista had not substantially assisted the disclosure breaches to warrant aiding and abetting liability.
Focusing on the disputed “knowing participation” element, the Supreme Court reaffirmed that the knowledge (scienter) prong contains two distinct concepts: the plaintiff must prove that the aider and abettor knew that “the primary party’s conduct constitute[d] a breach” and “that its own conduct regarding the breach was legally improper,” which is distinct from knowledge of the primary party’s conduct.[12]
The Supreme Court began its discussion by acknowledging that “participation should be the most difficult to prove” against a potential acquirer who negotiated at arm’s length.[13] Such an acquirer is protected in its attempt to reduce the sale price through arm’s-length negotiations as long as it is not exploiting conflicts, and the court noted that a different rule might deter third parties from deals altogether.
Turning to the aiding and abetting analysis, the Supreme Court adopted the Restatement § 876(b) factors to determine whether conduct amounts to “substantial assistance.” Under those factors, one must actively participate in the breach, rather than have “mere passive awareness.”[14] In reviewing the Restatement factors, the Supreme Court held that Stollmeyer’s November tips supported the trial court’s conclusion that Vista likely knew that Stollmeyer’s conduct constituted a breach but reversed the chancellor’s finding that Vista knew of the wrongfulness of its own conduct. Considering Vista’s awareness of its own misconduct, the Supreme Court stated that the chancellor’s finding that Vista participated in the drafting of the proxy materials was not supported by the record evidence, and the trial court did not find that Vista actively contributed to drafting or editing the proxy materials. The Supreme Court held that passive awareness of a fiduciary’s disclosure breach that would come from reviewing draft proxy materials did not amount to taking actions to facilitate or assist Stollmeyer’s breach. Rather, Vista stood by passively while Stollmeyer breached his own duty of disclosure.
As part of this analysis, the Supreme Court took on perhaps the most interesting portion of the Court of Chancery’s ruling: what obligations did Vista undertake by negotiating for a contractual obligation in the merger agreement to review and comment on public disclosures for the deal? It was here that the Supreme Court parted company with the Court of Chancery on both a factual issue and a legal conclusion. Factually, the Supreme Court concluded the finding that Vista had participated in drafting the proxy was not supported by record evidence. Legally, the contractual obligation in the merger agreement did not impose on Vista an independent duty of disclosure to Mindbody’s stockholders. That meant there was no basis for the trial court’s ruling that Vista had “withheld information from the stockholders.”[15] One of the bases for this conclusion was “compelling public policy reasons” of not collapsing the arm’s-length distance between the third-party buyer and target to make the buyer consider duties to target stockholders, meaning that the third-party buyer could potentially have to “second-guess the materiality determinations and legal judgment of the target’s board, which already owes fiduciary duties to its stockholders.”[16]
Finally, the Supreme Court analyzed the Restatement’s “state of mind” factor and the evidence that the Court of Chancery had evaluated below.[17] To the Supreme Court, the evidence pointed to below—scrubbing of “incriminating” information from investment committee materials that related to communications with the CEO—was insufficient given the timing of when it occurred (almost a month before the drafting of the proxy); and it pointed to the fact that the primary violator may have violated his Revlon duties, not his disclosure duties.[18] Given that the aiding and abetting claim focused on the disclosure breaches, the plaintiffs needed to show that Vista knew its own conduct was wrongfully assisting the CEO in those specific breaches, and the evidence did not do so.
Together, the record analyzed through the Restatement’s factor did “not sufficiently support a determination that Vista’s conduct [rose] to the level of ‘substantial assistance’ or ‘participation’ in” the CEO’s breach.[19] That warranted reversing the holding below that Vista aided and abetted Stollmeyer’s disclosure violation. Because the plaintiffs were only entitled to one recovery of $1 per share, and with the Revlon damages award affirmed, the ruling also meant that the Supreme Court did not need to analyze damages for the disclosure violation.
Conclusion
The Supreme Court’s opinion covers both old and new ground. It reminds sell-side fiduciaries and advisers about the importance of both disclosing and aligning the interests of executives/founders under Revlon in change-of-control situations, and the pitfalls associated with failing to do so. And it provides fresh guidance concerning (1) how Delaware courts should evaluate the Restatement factors in an aiding and abetting analysis, and (2) the scope of an acquirer’s obligations under contractual provisions to review deal-related disclosures—all of which indicates a reluctance to impose aiding and abetting liability on a third-party acquirer negotiating at arm’s length.
Nicholas D. Mozal and Ryan M. Crowley are attorneys with Potter Anderson & Corroon LLP in Wilmington, Delaware. The views expressed herein are those of the authors alone and do not necessarily represent the views of their firm or clients.
Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986). Revlon duties, or scrutiny, apply in the context of a change of control, requiring directors to try to maximize the sale value of the company. ↑
Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). Under the Corwin cleansing defense, “the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” Id. at 305–06. ↑
The Responsible Investor Model Clauses (“RIMC”) Task Force of the American Bar Association (“ABA”) Business Law Section’s Corporate Sustainability Law (“CSL”) Committee and the Responsible Contracting Project (“RCP”) out of Rutgers University, School of Law, in collaboration with the UN Principles for Responsible Investing (“PRI”), is launching a consultation to receive feedback on the Zero Draft of the RIMCs, a set of model contract clauses to operationalize human rights and environmental (“HRE”) policies in investment documentation. The RIMCs, which are editable and modular, are intended to provide guidance to members of the investment community on how to integrate HRE performance goals directly into their agreements. While the general audience is diverse, the RIMCs may be of particular use to private equity and venture capital firms, portfolio companies (including public benefit corporations), and the growing number of portfolio managers who seek to distinguish themselves as responsible investors. The RIMCs include provisions for multiple industry-standard capital financing documents between investors and portfolio companies, such as charters, right of first refusal and co-sale agreements, shareholder and voting agreements, investor rights agreements, purchase agreements, and side letters.
The RIMCs are designed to reflect significant legislative developments. The clauses help investors, and their portfolio companies meet evolving global data collection, disclosure, and human rights and environmental due diligence (“HREDD”) obligations. In particular, the RIMCs can assist in addressing legal requirements contained in the EU Corporate Sustainability Reporting Directive (“CSRD”) and the EU Corporate Sustainability Due Diligence Directive (“CSDDD”). The RIMCs are also essential for investors working to integrate soft law principles found in the United Nations Guiding Principles on Business and Human Rights (“UNGPs”), the Organisation for Economic Co-operation and Development (“OECD”) Guidelines for Multinational Enterprises on Responsible Business Conduct (2023), the revised U.S. National Action Plan for Responsible Business Conduct, and other social responsibility principles in their investment portfolios.
Feedback on the Zero Draft is essential to improve the clauses and ensure the first official version is a product of an inclusive, balanced, and legitimate process. Feedback may be submitted via email, an online form, or by participating in one or more of the upcoming consultation sessions noted below. Please email RCP at [email protected] to register or visit the RCP website for more information.
Session 1: February 25, 2025, Noon to 1:30 PM EST: Members of the ABA Business Law Section CSL Committee Task Force and other attorneys.
Session 2: March 19, 2025, 10–11:30 AM EST: Civil society organizations and Business and Human Rights (“BHR”) consultancies.
Session 3: March 24, 2025, 1–2:30 PM EST: Investors who identify as responsible investors, including impact investors, ethical investors, mission-driven, and ESG investors.
Session 4: April 2, 2025, Noon to 1:30 PM EST: Development and public finance institutions (“DFIs”) and their legal advisors.
The consultation period for the RIMCs will conclude in Spring 2025, with the final version set to be published in Summer 2025. Following publication, the RIMCs Working Group will collaborate with members of the ABA Business Law Section CSL Committee Task Force on implementation alongside PRI, a United Nations–supported network of investors that promotes sustainable investment.
Introduction
The Responsible Contracting Project (“RCP”), in conjunction with the Responsible Investor Model Clauses (“RIMCs”) Working Group (“Working Group”), as part of the broader American Bar Association (“ABA”) Business Law Section, has prepared the following model contract clauses to address human rights and environmental (“HRE”) performance issues in investment documentation. Because the intended audience for these clauses is varied, there is no one-size-fits-all list of clauses. Instead, the following clauses are intended to provide guiding principles to members of the investment community, in particular, private equity and venture capital firms, portfolio companies (including public benefit corporations), and the growing number of portfolio managers that seek to implement the guidance on responsible investing released by multilateral and industry-focused organizations, as well as development finance institutions.[1]
The RIMCs include provisions for agreements between investors and portfolio companies (e.g., for inclusion in shareholder agreements, investor rights agreements, purchase agreements, and side letters). Our hope is that the RIMCs can serve as a basis for adapting template investor agreements, such as those developed by the National Venture Capital Association (“NVCA”).
Certain RIMCs, such as those addressing indemnification, are variations of standard contract provisions with slight revisions to reflect human rights and environmental due diligence (“HREDD”) concepts.
These clauses will help investors in connection with their commitment to HREDD.[2] In particular, the RIMCs may be useful to investors (and companies) concerned with meeting evolving legal requirements contained in the EU Corporate Sustainability Reporting Directive and the EU Corporate Sustainability Due Diligence Directive. The RIMCs can also be utilized by investors who are interested in integrating the United Nation Guiding Principles on Business and Human Rights (“UNGPs”) (2011), the Organisation for Economic Co-Operation and Development (“OECD”) Guidelines for Multinational Enterprises on Responsible Business Conduct (2023), and other social responsibility principles in their investment portfolios.
Throughout the RIMCs, references are made to Schedule A and/or Schedule B (collectively, the “Schedules”) as follows:
Schedule A, or the Company Code of Conduct, refers to the code of conduct that sets out the portfolio company’s (“Company’s”) commitments to the Company’s HRE performance and HREDD process expected by a given investor (“Investor”). Schedule A provides a common understanding between the Company and the Investor of the meaning and scope of the agreed-upon HRE performance standards and operational, industry-specific guidance for the HREDD process to meet those standards.
Schedule B, or the Investor Code of Conduct, refers to the code of conduct that sets out the Investor’s commitments to supporting the Company’s HRE performance and HREDD process. We treat the Schedules as separate codes, but an Investor may opt to have a joint code of conduct that combines both its and its portfolio companies’ commitments to upholding HRE standards. In addition to containing commitments pertaining to the post-investment phase of the Investor/Company relationship, Schedule B also may contain commitments by the Investor to carry out pre-investment HREDD to determine whether to make the initial investment, or follow-on investments, in the Company.
The below RIMCs were also drafted with a goal of maintaining alignment with three core principles (or “Rs”) of responsible contracting:
Responsible allocation of risks and obligations: First, the parties should abandon static, one-sided, portfolio company–only promises (“representations & warranties”) of HRE compliance. Such promises are both unrealistic and risk-aggravating, as they incentivize portfolio companies and their suppliers and sub-contractors to hide HRE problems rather than address them. Instead, investors and portfolio companies should make a joint commitment to cooperate in conducting ongoing, risk-based HREDD that can better prevent adverse HRE impacts and, as needed, respond to and remedy such impacts if and when they occur.
Responsible investment and purchasing practices: Second, the investors should agree to responsible investment practices to support their investees’ HRE performance. Likewise, the investee companies should agree to actively manage their own HRE risks and support their suppliers’ HRE performance and, by extension, the HREDD process, by engaging in responsible purchasing practices where relevant.
Remediation first and responsible exit: Third, if an adverse impact occurs, the parties should prioritize victim-centered human rights remediation over traditional contract remedies. Measures should be taken to stop the impact and prevent its recurrence. As a general principle, suspending payments, canceling orders, terminating the contract, or otherwise withdrawing the investment should be pursued only as a last resort, after remediation efforts have failed or it becomes clear that staying engaged will further aggravate HRE risks. Regardless of the reason for exit (e.g., changed market conditions, a force majeure event like a pandemic or a war, a severe human rights violation), the party wanting to exit should do so responsibly, by taking measures to mitigate related adverse HRE impacts for which it is responsible.
The RIMCs advocate a model of shared responsibility and risk prevention that supports robust HREDD processes, promotes cooperation and transparency, and will ultimately lead to better HRE outcomes. Engaging with portfolio companies as recommended here will help equip investors to better adhere to the Principles for Responsible Investment and to other Responsible Business Conduct standards and guidance included in Annex 1.
Finally, a few notes from the authors in reviewing the below RIMCs:
The RIMCs consist of modular and individual provisions that are intended to be selected, adapted, and edited to suit a party’s particular needs in a particular transaction in consultation with internal or external counsel.
[Provision] indicates an optional provision that may be included in a particular RIMC.
[Provision 1][Provision 2] indicates optional provisions that the author may select between for inclusion in a particular RIMC.
[Capitalized Terms] indicate something that will be a defined term in a given agreement; however, the definition of such term will need to be customized to a particular deal/industry category.
[Group of words] indicate instructions for the drafter in how to customize/utilize a particular RIMC.
Responsible Investor Model Clauses
Part 1: The Pre-Investment Phase
1. Pre-Investment HREDD Requirements
1.1 Mutual Pre-Investment Commitments
1.1.1 Disclosure. The Company shall require, and shall cause, each of its [shareholders/partners, officers, directors, employees,] agents and all subcontractors, consultants and any other person under its control to disclose information to the Investor on all matters relevant to the Investor’s HREDD in a timely and accurate fashion as requested by the Investor.
1.1.2 HREDD Plan. Prior to the Investment, the Company will develop an HREDD plan (HREDD Plan), reviewed by and deemed, in writing, to be acceptable to the Investor. The Company shall develop the HREDD Plan in accordance with the criteria and the timelines set out in [Appendix X].
1.1.3 Equivalent Document. Where Investor seeks to employ due diligence measures such as, but not limited to, questionnaires, audits, and scorecards in its HREDD processes, Company may provide Investor with a recent equivalent document (e.g., questionnaires completed for another investor or audit reports prepared by a reputable third-party) provided that the respective document does not contain competitively sensitive information regarding relationships with other investors, and Investor shall accept such equivalent document or a portion of the equivalent document to the extent that it meets the Investor’s minimum standards, unless it reasonably considers that such equivalent document [entirely] fails to satisfy Investor’s minimum standards. At the request of Company, Investor shall, to the extent permissible under competition laws, coordinate with Company and other investors to minimize inconsistencies between various due diligence measures employed. Failure to comply with this Section [X] shall be an HREDD-Related Default.
1.1.4 Investor Review. The Investor shall review the information provided under this Clause and ensure that it is satisfactory prior to moving forward with the investment.
1.2 HREDD Request List. [The Investor to provide customized diligence request list targeting HREDD matters].[3]
Part 2: Measures to Prevent Adverse Impacts
2. HREDD Provisions During Life of Purchase/Investment Agreement[4]
2.1 HREDD-Related Covenants.
2.1.1 Company’s HREDD Process. The Company covenants, in line with the HREDD Plan, to establish and maintain, in cooperation with its direct and indirect business partners (collectively, “Business Partners”) and the Investor, an on-going HREDD process appropriate to its size and circumstances. This process shall be designed to accurately and effectively identify, prevent, mitigate, and account for how the Company addresses the Adverse Impacts[5] of its activities on the individuals affected by its supply chains. Such HREDD shall be consistent with Schedule A, which tracks the HREDD process described in the United Nations Guiding Principles on Business and Human Rights (2011) (“UNGPs”), the Organisation for Economic Co-operation and Development (“OECD”) Due Diligence Guidance for Responsible Business Conduct (2018), the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (2023), and any sector-specific due diligence guidance.
2.1.2 Investor’s HREDD Support. The Investor covenants to carry out its own ongoing due diligence to determine whether the Company can implement effective HREDD measures. The Investor further covenants to support and cooperate with the Company in implementing such measures, [as reasonable and appropriate] [with direct and indirect costs not to exceed X% of the investment]. Such support shall include [performing its obligations under this [Agreement] in line with Schedule B][,] [providing training and other forms of non-financial support, strengthening management systems, and making additional investments to upgrade facilities to ensure that the Company has the resources and capacities necessary to implement effective HREDD measures][,] [and] [participating in a regular process to review and support upgrading the Company’s HREDD processes, as necessary]. The Investor shall designate an officer as its HREDD contact point responsible for HREDD functions [and granted with authority to use resources adequate to regularly perform those functions] (an “HREDD Officer”).
2.1.3 No Waiver. The Investor’s assistance shall not be deemed a waiver by the Investor of any of its rights, claims or defenses under this [Agreement] or under applicable law, provided that the Investor obligations under Part 3 (Comparative Fault) are preserved.
2.1.4 Preparation of Plans. With respect to Adverse Impacts identified by HREDD conducted before the [Effective Date] that have not yet been fully addressed, the Company covenants to prepare (if not already done), implement, and monitor the key performance indicators (“KPIs”) contained in a “Prevention Action Plan” to address identified potential Adverse Impacts and a “Corrective Action Plan” to address identified actual Adverse Impacts within a reasonable time [not exceeding ][X days][Y weeks][Z months] from the date of the [occurrence][discovery] of such Impacts]. Any action plans and progress reports documenting the implementation of such plans shall be shared with the Investor in a timely and accurate fashion.
2.1.5 Performance of Obligations. The Company and the Investor covenant to work together in good faith to achieve [HREDD/Performance Targets], as further set forth herein, including without limitation abiding by policies and procedures governing [Committees] and [using best efforts to perform their respective obligations in line with] the provisions of Schedule A [and Schedule B].
2.1.6 HREDD- Related Default. Failure by either party to comply with this Section shall be an HREDD-Related Default.[6]
3. Company-Level HREDD Obligations
3.1 Performing in Line with Schedule A.
3.1.1 HREDD Implementation Across the Company’s Supply Chain. As part of meeting its HREDD obligations, the Company shall make best efforts to ensure that each of its [Business Partner(s)][Representatives, Suppliers, Sub-suppliers, Agents and Subcontractors] acting in connection with this [Agreement] engages in and supports its HREDD process. The Company shall designate an HREDD Officer to coordinate efforts with its [Business Partner(s)][Representatives, Suppliers, Sub-suppliers, Agents and Subcontractors]. Where appropriate, based on the length and intensity of the commercial relationship and the HREDD-related risks involved, the relationship between the Company and its [Business Partner(s)][Representatives, Suppliers, Sub-suppliers, Agents and Subcontractors] will be formalized in a written contract that includes HREDD obligations appropriate to the size and circumstances of the parties.[7] The Company shall keep records of such written contracts and of any failed attempts to obtain such contracts, making the same available to the Investor upon request.
3.1.2 Company Purchasing Practices. As part of meeting its HREDD obligations, the Company commits to engaging in responsible business conduct as defined in the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct and the OECD Due Diligence Guidance for Responsible Business Conduct. This shall include a review of its purchasing practices to ensure that they are not triggering or contributing to Adverse Impacts.[8]
3.2 Operational-Level Grievance Mechanism.[9] During the term of this [Agreement], the Company [and the Investor] shall [implement and] maintain an adequately funded and governed Operational-Level Grievance Mechanism (“OLGM”) to assist with addressing, preventing, and remedying any Adverse Impacts that may occur in connection with the Company’s operations. The Company [and the Investor] shall ensure that the OLGM is [legitimate, accessible, predictable, equitable, transparent, rights-compatible, a source of continuous learning, and] based on engagement and dialogue with affected individuals or groups potentially or actually affected by an Adverse Impact, such as workers and/or local communities and/or their representatives (e.g., civil society organizations, non-governmental associations, and trade unions) (collectively, “Stakeholders”), including [employees, contractors, consultants, etc.]. The Company [and the Investor] shall [first establish and then] maintain open channels of communication with those individuals or groups of Stakeholders that are likely to suffer Adverse Impacts so that the occurrence or likelihood of Adverse Impacts may be reported without fear of retaliation. The Company’s HREDD Officer shall demonstrate that its OLGM is functioning by providing [monthly] [quarterly] [semi-annual] written reports to the Investor on its OLGM’s activities, describing, at a minimum, the number of grievances received and processed over the reporting period, documentary evidence of consultations with affected Stakeholders, and all actions taken to address and remedy such grievances.
4. In the Case of Actual Adverse Impact
4.1 Corrective Action. The Company shall perform its HREDD-related obligations and maintain its HREDD process to prevent the occurrence of Adverse Impacts. If an actual Adverse Impact nevertheless occurs, the Company shall collaborate with the implicated Business Partner(s) to remedy the issue in the shortest delay possible. Remediation efforts shall be facilitated through the preparation and implementation of a “Corrective Action Plan,” as described below.
4.2 Contents of Corrective Action Plan. The Corrective Action Plan should:
(i) include reasonable steps to ensure that the affected Stakeholders are, to the extent possible, put in the position they would have been in had the actual Adverse Impact not occurred;
(ii) enable remediation that is proportionate to the actual Adverse Impact, noting that such remediation could take the form of apologies, restitution, rehabilitation, and financial or non-financial compensation;
(iii) include reasonable steps to ensure that the actual Adverse Impact in question does not recur and that additional Adverse Impacts are prevented.
4.3 Company Obligations to Support Remediation. Regardless of whether the Company caused or jointly caused the actual Adverse Impact, it shall provide adequate assistance, including expertise, financial, and technical assistance, as appropriate under the circumstances, to ensure that the grievances of adversely impacted Stakeholders are effectively remediated.
4.4 Notification of Investor. If the Company has reason to believe or has actual knowledge of [a material Adverse Impact] [a severe Adverse Impact] [an Adverse Impact], it shall promptly, within no more than seven (7) calendar days, notify the Investor specifying the nature of the incident, accident, or circumstance of the Adverse Impact, and the measures the Company and/or the Company’s [Customer/Supplier] is taking or plans to take to address such impact, including to prevent any future similar event.
4.5 Notification by Investor. If the Investor notifies the Company of its concern that there may be or has been [a material Adverse Impact] [a severe Adverse Impact] [an Adverse Impact] , the Company shall cooperate in good faith with the Investor and the Investor’s HREDD Officer to determine whether such a violation has occurred, and respond promptly and in reasonable detail to any notice from the Investor, with documentary support for such response, upon the Investor’s request. In the event the Company and the Investor are unable to come to a resolution as to whether a violation has occurred, such matter shall be decided by [include specific dispute resolution mechanism] with a view to providing remediation if an Adverse Impact has occurred.[10]
4.6 Right to Cure and Breach. Failure to satisfy an HREDD obligation shall constitute a default of this [Agreement], which must be cured. If the HREDD-Related Default is not cured within [an appropriate period][X days][Y weeks][a period agreed by the parties in this [Agreement]] after receipt of a written notice, such failure to cure shall constitute a breach of this [Agreement]. In such a case, the Investor shall have the right to exercise any remedies, including but not limited to, its own good faith attempt to cure the HREDD-Related Default on behalf of and at the expense of the Company [using a multiple for any reasonable direct or indirect costs of 150% of the initial equity investment], litigation, and/or termination of the [Agreement], subject to Section [*] (Responsible Exit).
Part 3: Indemnification, Disclaimers, and Responsible Exit
5. Investor Indemnification and Comparative Fault
5.1 Indemnification. The Company shall indemnify, defend and hold harmless the Investor and its stockholders, general partners, limited partners, members, officers, directors, employees, agents, affiliates, successors and assigns (each an “Indemnified Party” and collectively, the “Indemnified Parties”) against any and all [direct][11] losses, damages, liabilities, deficiencies, claims, actions, judgments, settlements, interest, penalties, fines, costs or expenses of whatever kind, including, without limitation, audit fees that would not have been incurred but for the Company’s breach of its HREDD obligations, and the costs of enforcing any right under this [Agreement] or applicable law,[12] in each case, that arise out of the violation by the Company or any of its Representatives.
5.2 Comparative Fault Calculation. Notwithstanding Section [*] (Indemnification), the Company’s obligation to indemnify the Investor shall be reduced proportionately to the degree that the Investor caused or contributed to the Company’s breach of its HREDD obligations; in other words, for the avoidance of doubt, damages shall be borne by the Investor directly to the extent the Investor has materially caused or contributed to the breach, as determined by an independent third party mutually agreed to by the Parties. The costs related to such third-party determination shall be shared equally by both Parties.
6.1 Negation of Investor’s Contractual Duties Except as Stated. Notwithstanding any other provision of this [Agreement], the Investor does not assume a duty under this [Agreement] to monitor the Company or its [Representatives], including, without limitation, for compliance with laws or standards regarding working conditions, pay, hours, discrimination, forced labor, child labor, or the like, except as required under applicable law and as stated in Section [*].
6.1.1 No Control. The Investor does not have the authority and disclaims any obligation to control (i) the manner and method of work done by the Company or its [Representatives], (ii) implementation of safety measures by the Company or its [Representatives], or (iii) employment or engagement of employees and contractors or subcontractors by the Company or its [Representatives]. The efforts contemplated by this [Agreement] do not constitute any authority or obligation of control. They are efforts at cooperation that leave the Investor and the Company each responsible for its own policies, decisions, and operations. The Investor and the Company and its [Representatives] remain independent and are independent contractors. They are not joint employers, and they should not be considered as such.
6.1.2 Disclosure. The Investor assumes no duty to disclose the results of any audit, questionnaire, or information gained pursuant to this [Agreement] other than as required by applicable law, except to the extent the Investor must disclose information to the Company as expressly provided in this [Agreement].
7. Provisions Relating to Sale of Investor Equity or Sale of the Company
7.1 Responsible Exit.[14] In any termination of this [Agreement] by the Investor, whether due to a failure by the Company to comply with this [Agreement] or for any other reason (including the occurrence of a force majeure event or any other event that lies beyond the control of the parties), the Investor shall (i) consider the potential Adverse Impacts generated by the termination and employ commercially reasonable efforts to avoid or mitigate them; and (ii) provide reasonable notice to the Company of its intent to terminate this [Agreement]. Termination of this [Agreement] shall be without prejudice to any rights or obligations accrued prior to the date of termination.
Schedule A and Schedule B
Codes of Conduct: The Investor and the Company acknowledge that each endeavor to conduct its business in a legal, moral, and responsible manner at all times, based upon a set of guidelines and values enumerated in Schedule A and Schedule B. The Schedules address, amongst other things, responsible and ethical standards of behavior dealing with environmental protection, human rights, and [include any other applicable subject matter (e.g., living/fair wage, etc.)].[15] To the extent that Schedule A and Schedule B promulgate requirements or standards that are different than those required under applicable law, the Investor and the Company agree to meet the strictest requirements and standards.
Appendix X: Company HREDD Plan
Plan Elements
As part of the HREDD Plan, the Company shall, at a minimum, agree to do the following:
Conduct an initial comprehensive risk assessment that identifies and assesses human rights and environmental (“HRE”) risks and impacts by geographic context, and sector throughout the Company’s own operations (including the activities of the Company’s subsidiaries, if any) and business relationships across the Company’s value chain. Update the risk assessment both periodically and as needed in response to stakeholder feedback and potential changes in the Company’s risk profile.
Design an HRE risk management plan that responds to the initial and ongoing risk assessments and sets out prevention, mitigation, and remediation actions to be taken. It shall consider the severity and likelihood of the identified actual and potential adverse HRE impacts associated with the Company’s operations, as well as the nature of such potential adverse impacts. This risk management plan should include a prioritization procedure that prioritizes responses where a delayed response to an actual or potential adverse impact would make the impact irremediable. Such risk management plan should also incorporate the management of new and emerging adverse risks and impacts.
Put in place measures, including remediation, to address instances where the Company actions have caused or contributed to adverse impacts on people, the environment, or society.
Require the training of senior-level Company management, as well as relevant other functions, which may include legal, procurement, and compliance officers on human rights and environmental risks.
Incorporate into the Company’s existing procurement process principles of responsible contracting for the purchase of goods and include a shared approach between buyers and suppliers.
Establish a process for meaningful identification and engagement of stakeholders, including stakeholders potentially or actually negatively affected by the Company operations, defenders of human rights and the environment, trade unions, and grassroots organizations. Such engagement should include ongoing monitoring and designing of grievance mechanisms.
If necessary, adopt key performance indicators (“KPIs”) to assist in the review and reporting of HREDD objectives.
Timeline
The HREDD Plan shall be implemented in accordance with the following timeline:
Annex 2: Sample Generic HRE Due Diligence Request List
Does the Company have an ESG, corporate responsibility, corporate sustainability, or similar program? If so, please describe the program, including the individuals (e.g., Chief Sustainability Officer, Head of ESG, or similar role) and/or groups (e.g., ESG Committee or similar). If the Company does not have such a program, please describe how the Company manages ESG risks, including legal and regulatory risks.
Does the Company’s board of directors and/or senior management oversee ESG risks, including risks related to potential human rights and/or environmental adverse impacts of the Company’s operations? If so, please provide a description of such oversight, including the cadence of management-level meetings and management reports to the board regarding ESG issues and whether a board committee is specifically tasked with ESG oversight.
Does the company have an ESG, corporate responsibility, corporate sustainability, or similar policy? If so, please provide.
Does the company have a policy on diversity, equity, and inclusion (“DEI”)? If so, please provide.
Does the company produce internal or external ESG or sustainability reports? If so, please provide, and please include any reports that focus just on a single aspect, such as an environmental impact report or a social impact report.
Does the Company gather information about its greenhouse gas emissions? If yes, what Scopes are included?
Does the Company have any policies regarding responsible marketing?
Please describe how the Company conducts third-party risk management and provide any Supplier Codes of Conduct.
Does the Company use employee engagement surveys?
Has the Company experienced any ESG-related incidents, including incidents related to potential or actual human rights and/or environmental adverse impacts of the Company’s operations?
[Additional questions to be included based on the portfolio company’s industry, geography, size, etc.]
There are different definitions of “Responsible Investing” to work with, but the one developed by the World Economic Forum can be used as a point of reference. It states: “Responsible investing is the incorporation of environmental and social factors to achieve one or more of the following objectives: Financial returns, Societal impact, and Values alignment.” Alex Edmans, Here’s How We Can Be More Precise About Responsible Investing, World Econ. F. (Apr. 4, 2024). ↑
HREDD is a dynamic, ongoing process whereby companies must identify, prevent, mitigate, account for and, where appropriate, remediate any potential or actual adverse human rights and environmental impacts in their supply chain. HREDD is a valuable approach to risk management for companies and investors with respect to improving environmental, social, and governance (“ESG”) performance, validation, and data reporting. It allows portfolio companies to articulate and address risks, and it allows investors to evaluate the company’s risk management approach. Large institutional investors are leading the call for decision-useful information on a company’s performance on ESG factors. Robust HREDD processes will help companies respond to the significant ESG disclosure drivers, including evolving legislative and regulatory requirements, such as the EU Corporate Sustainability Reporting Directive and the EU Corporate Sustainability Due Diligence Directive; the continuing integration by mainstream investors of ESG factors into investment decisions, ongoing portfolio monitoring, and engagement; and the proliferation of impact funds, or funds that are formed with the intent of achieving a specific ESG-related impact alongside risk-adjusted financial returns. ↑
See Annex 2 for a sample generic section of an HREDD due diligence request list. ↑
Note that, while not included within each particular RIMC herein, each agreement in which these RIMCs are utilized should include (i) language to encourage notification of issues to counterparties, (ii) an opportunity to cure any such issues, and (iii) a period of time to remediate any such issues on a going-forward basis. ↑
A sample definition of Adverse Impact: it “means a potential or actual human rights harm, including human rights harms resulting from harms to the environment, which one or both parties have either caused, contributed to, or are directly linked to (through their products, services, and business relationships).” ↑
Consideration should be given to including a similar provision in an investor rights agreement (“IRA”) orsimilar agreement governing Investor rights during the life of the investment. ↑
In the event that the Company or one or more of its Business Partners use, engage or hire private or public security to monitor, protect or preserve personnel, property or resources, appropriate policies and resources to train and maintain control over such private security shall be established and maintained. The Good Practice Handbook on the Use of Security Forces: Assessing and Managing Risks and Impacts developed by the International Finance Corporation provides practical, project-level guidance. Int’l Fin. Corp., Good Practice Handbook on the Use of Security Forces: Assessing and Managing Risks and Impacts (Feb. 2017); see also Voluntary Principles on Security and Human Rights(last visited Jan. 30, 2025). ↑
Examples of poor purchasing practices that aggravate human rights risks include: imposing prices that are too low to cover production costs (including labor costs); making last-minute changes to orders; requiring suppliers to assume HRE-related costs without providing additional—technical or financial—assistance; making unfair retroactive modifications to payment terms (e.g., asking for steep discounts after the order has been completed or shipped); inaccurate forecasting of how much of suppliers’ production capacity should be reserved and not paying for unused reserved capacity; short turnaround on delivery of goods, accompanied by steep penalties for delays; and irresponsible exit. Interfaith Centre on Corp. Resp., Investor Guidance on Responsible Contracting (Mar. 2024). ↑
Many OLGMs fail to be used by stakeholders at least in part because of fear of animosity and retaliation which necessitates an alternative line of communication to the Investor’s OLGM/HREDD Officer. ↑
Parties to negotiate how disputes will be adjudicated (e.g., arbitration, etc.). ↑
Scope of losses to be negotiated (e.g., lost profits, punitive damages, etc.). ↑
Alternatively, parties may decide to utilize a customized “losses” definition. ↑
Note that some of the concepts in this section will not be acceptable in certain non-US jurisdictions. ↑
Note that the EU Corporate Sustainability Due Diligence Directive (“CSDDD”) does not allow for zero-tolerance exits and requires exits to be a last resort. ↑
Parties to determine appropriate list, as this may be expanded to include other categories (e.g., sexual orientation, other physical characteristics, etc.) that may not otherwise be included as a protected classification. ↑
Timeline to be established depending on the specific facts and circumstances, including the maturity of the Company’s current processes. ↑
This article is Part V of the Musings on Contracts series by Glenn D. West, which explores the unique contract law issues the author has been contemplating, some focused on the specifics of M&A practice, and some just random.
I have always said that the job of a transactional lawyer is not for the faint of heart. The practice of law involves, as Oliver Wendell Homes, Jr., famously said, the art of “prediction.”[1] For a transactional lawyer, that means that you have to predict how a court will interpret the words you use to convey the client’s objectives in a written agreement intended to evidence a deal; and you have to predict the most important of the likely disputes that may arise that will require that interpretive exercise by a court, and then make choices over what to push to change and what is better left as is.
The objective theory of contract dictates that it does not generally matter what was meant by what was said in a written agreement; it only matters what was actually said.[2] But sometimes deal dynamics do not permit you to obtain the clarity you may desire in all of the words used in a negotiated agreement, and you have to choose which are likely to be the most important. And sometimes deal dynamics require ambiguity rather than clarity. A recent case from the Delaware Court of Chancery, Comcast Cable Communications Management, LLC v. CX360, Inc.,[3] illustrates some of these principles.
Comcast Cable involved a dispute over a Master Services Agreement (“MSA”), whereby CX360, as Vendor, provided interactive voice response (“IVR”) services to Comcast. These IVR services were critical to Comcast’s customer service. The process whereby CX360 became the Vendor providing IVR services to Comcast involved an RFP that included a form MSA prepared by Comcast and which required potential service providers to submit a mark-up showing any requested changes. The RFP discouraged changes to the form, and CX360 was apparently strategic in the few changes it suggested (not dissimilar to the process a buyer in an auction of a private company is required to navigate).
The original form MSA prepared by Comcast gave it the sole right to terminate the MSA at its convenience. Specifically, the form stated:
Comcast may, at its election, terminate this Agreement and/or any [statement of work] without cause on ninety (90) days written notice to the Vendor.
CX360’s mark-up made a simple change to this provision as follows:
ComcastEither party may, at its election, terminate this Agreement and/or any SOW without cause on ninety (90) days written notice to the Vendor.
The final version of the MSA kept this change but capitalized the “p” in Party. “Party” was defined elsewhere in the MSA to be Comcast or CX360.
Absolute clarity for CX360, of course, would have required one additional change—i.e., crossing out “Vendor” and replacing it with “other party.” As written, the provision technically requires CX360, if it is the terminating party, “to notify itself upon [exercising its right of] termination.”[4] And, as was pointed out in the subsequent dispute, “[i]t would be absurd to require CX360 to provide notice to itself rather than to Comcast.”[5] But that change was never made or suggested. Other provisions of the MSA focused solely upon Comcast’s right to terminate for convenience, but not on CX360’s. Most of those provisions dealt with the compensation due CX360 if Comcast exercised its right of termination. And those other provisions make perfect sense when you consider the fact that the original form never contemplated a mutual right of termination for convenience by either party—only Comcast was to have that right as originally envisioned.
Comcast’s internal approval memo for the MSA focused on the provisions giving Comcast a termination for convenience right, and it made no mention of CX360 also having such a right. And apparently, the persons responsible for approving and signing the MSA read only the approval memo, not the actual MSA.
Everything went smoothly from 2014 until the end of 2022. The MSA was otherwise set to expire in 2025. But in December of 2022, a malware attack caused the IVR system to cease functioning for about four days. Thereafter Comcast began looking for alternatives to the existing IVR system. In September of 2023, Comcast launched a new RFP to determine its Vendor for IVR services, to commence when the existing MSA expired in 2025. CX360 was among the companies that submitted responses to Comcast’s new RFP. And while CX360 believed it had convinced Comcast to renew the MSA with CX360, Comcast decided to go in another direction. Comcast then requested a transition arrangement with CX360 to bridge to the new Vendor, but the proposed terms of the transition arrangement were very unfavorable to CX360. To level the playing field, CX360 decided to exercise the ninety-day termination right that CX360 believed it had bargained for in the MSA and thereby pressure Comcast into being more reasonable in the negotiation of a transition arrangement—i.e., CX360 was accelerating the end of the MSA with no transition to the new Vendor. But the parties were unable to agree, and litigation ensued.
Comcast’s position was that CX360 did not actually have a termination right—only Comcast did. And that position was based upon the alleged ambiguity created by the language at the end of the otherwise mutual right to terminate—i.e., the language providing for the right to terminate to be exercised by providing “‘written notice to the Vendor’—i.e., CX360.”[6] But according to Vice Chancellor Will, “sloppy drafting does not necessarily create ambiguity.”[7] The only ambiguity here was to whom notice was due, “not the substantive termination right afforded to ‘[e]ither Party.’” Indeed, according to Vice Chancellor Will, “Comcast’s argument that the ‘notice to the Vendor’ language means only Comcast could terminate for convenience would make CX360’s bargained-for termination right ‘illusory or meaningless.’”[8]
This was clearly the right outcome. Whether CX360 considered making a further clarification when it was marking up the original form MSA, and made a calculated decision that requesting fewer changes was strategically the best course, is not known. This “less was enough” approach certainly worked out for CX360, whether it was intentional or not—and who knows if CX360 would have obtained the mutual right to terminate for convenience had it pursued absolute clarity in the context of bidding for the privilege of providing Comcast’s IVR services and being told that changes to the form would be viewed negatively.
Transactional lawyering is more of an art than a science. But make no mistake, words matter; and sometimes the strategically best choice is fewer words, even if those words lack absolute clarity. Could AI make these judgements for you? Time will tell, of course, but I don’t think so.
See Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457, 457 (1897). ↑
Seeid. at 464 (“the making of a contract depends . . . not on the parties having meant the same thing but on their having said the same thing.”). ↑
