Delaware recently enacted significant amendments (the 2022 Amendments) to the General Corporation Law of the State of Delaware (the DGCL), enhancing Delaware’s corporate governance regime for directors and officers, while also expanding stockholder rights. However, one of the most significant changes to the DGCL—the authorization of exculpatory charter provisions for officers—has been the subject of litigation in recent cases involving public companies with dual classes of common stock. In addition, the major proxy advisory firms have begun issuing policy guidelines, signaling that management will need to make a strong case for the adoption of the proposals by stockholders to garner institutional stockholder support in some cases. Nevertheless, there are several reasons for public companies to remain optimistic about officer exculpation and the other changes to the DGCL effected by the 2022 Amendments. Beyond authorizing exculpatory charter provisions for officers, the 2022 Amendments have important implications for stock issuances and option grants, stockholder meetings, appraisal rights, and the conversion or domestication of Delaware corporations to other entities. 

Exculpatory Provisions for Officers

Section 102(b)(7) of the DGCL (Section 102(b)(7)) now permits Delaware corporations to include exculpatory provisions in their certificates of incorporation to limit or eliminate the personal liability of executive officers of the corporation for monetary damages for breaches of the fiduciary duty of care in direct but not derivative proceedings. Under the 2022 Amendments, a Section 102(b)(7) provision may exculpate as an “officer” any person who (i) is the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer, and officers performing similar functions; (ii) is or was identified in the corporation’s public filings with the United States Securities and Exchange Commission as one of the corporation’s most highly compensated executive officers; or (iii) has consented to service of process in Delaware by written agreement. Like directors, officers may not be exculpated for breaches of the duty of loyalty; actions or omissions in bad faith; knowing violations of law; and in connection with transactions from which any such officer derived an improper personal benefit. However, unlike directors, officers may not be exculpated for monetary damages incurred in derivative proceedings.

The amendments to Section 102(b)(7) respond to an increase in litigation asserting violations of the fiduciary duty of care against an officer of a corporation as a means to avoid a dismissal of the complaint at the motion to dismiss stage by reason of the application of a Section 102(b)(7) exculpatory provision to the corporation’s director defendants.
 
Because exculpatory provisions for officers must be included in a corporation’s certificate of incorporation, board and stockholder approval will be required to expand Section 102(b)(7) coverage to officers. Many public companies have protected their director exculpatory provisions with supermajority provisions, raising issues for counsel as to whether a supermajority vote is necessary to revise the provisions to cover officers. However, in many cases, a Section 102(b)(7) exculpatory charter provision covering officers can be added to a certificate of incorporation with a simple majority vote.

While many issuers have already successfully adopted amendments to their certificates of incorporation that add exculpatory provisions for officers with the support of the proxy advisory firms, recent policy guidelines issued by Institutional Shareholder Services (ISS) and Glass Lewis signal that management will need to provide a compelling rationale for the adoption of such provisions to their stockholders to garner institutional investor support in the future. The ISS and Glass Lewis guidance states that management proposals to adopt officer exculpation provisions will be reviewed on a case-by-case basis by such firms, with ISS suggesting that it would focus on whether the proposals purport to eliminate monetary liability for breaches of fiduciary duty other than the fiduciary duty of care. Glass Lewis’s guidelines take a more negative stance, stating that the firm would generally recommend voting against officer exculpation proposals.^[1] It remains to be seen how these policy guidelines will impact exculpatory officer provisions submitted for stockholder action during proxy season in the spring. Key institutional investors, such as BlackRock and State Street Global Advisors, have not yet adopted voting policies specifically addressing exculpation proposals.

Public companies with dual classes of common stock also need to be careful about the votes sought from stockholders to implement such proposals given claims by stockholders holding a class of non-voting common stock that the implementation of the proposals requires a class vote under Section 242(b)(2) of the DGCL (Section 242(b)(2)). Section 242(b)(2) affords stockholders of a class with a separate class vote on charter amendments that alter or change “the powers, preferences, or special rights of the shares of such class so as to affect them adversely” even if such stockholders hold non-voting stock. Stockholders holding non-voting, public company stock are taking the position in various lawsuits^[2] that the elimination of their ability to bring direct actions for breach of fiduciary duty against officers alters or changes “the powers, preferences, or special rights of the shares of such class so as to affect them adversely” and therefore their approval is required to implement officer exculpation.^[3] While existing case law provides strong arguments that the position taken by the plaintiffs in the actions is without merit, public companies with multiple classes of common stock should consider either waiting to adopt Section 102(b)(7) provisions until after the litigation has been resolved or subjecting the approval of any such proposals to a separate class vote of each outstanding class of common stock.

Stock, Options, and Other Rights to Purchase Stock

Sections 152, 153, and 157 of the DGCL have been amended to harmonize the rules governing the board’s ability to delegate to persons or bodies other than a board committee (such as officers or a sales or placement agent) the authority to issue stock under Section 152 of the DGCL and to make grants of rights or options to purchase stock under Section 157 of the DGCL. 

Specifically, the 2022 Amendments to Section 157 of the DGCL expand the board’s power to delegate the authority to issue options or other rights to purchase stock using the framework that applies to the delegation of issuance of stock under Section 152 of the DGCL. 

With respect to grants of rights or options to purchase stock, the board resolutions must establish (i) the maximum number of rights or options that may be granted, and the maximum number of shares issuable upon exercise thereof, (ii) a time period during which such rights or options, and during which the shares issuable upon exercise thereof, may be issued, and (iii) a minimum amount of consideration (if any) for which such rights or options may be issued and a minimum amount of consideration for the shares issuable upon exercise thereof. Assuming the board sets these broad parameters, the board may delegate to any person or body the authority to determine the precise timing of the grants, the exercise price, and the number of options or rights to be granted, as well as the other terms of the grants, such as the vesting schedule or expiration date. Under the prior version of Section 157 of the DGCL, the board could not delegate to any officer the authority to determine any of the terms of the grants other than the total number of options or rights to be awarded to officers and employees other than such officer subject to a cap set by the board. 

In addition, the consideration paid for options or rights to purchase stock may be set by reference to a formula provided in the board resolution, such as by reference to the trading price of the company’s stock. Amended Section 157 of the DGCL also eliminates the requirement that the terms of a right or option be set forth or incorporated by reference in a written instrument, paving the way for electronic forms of rights and options.

The DGCL limitations on a corporation’s ability to delegate the power to grant rights and options to officers and others do not apply to board committees. Properly empowered board committees may exercise the full power and authority of the board to make grants of rights and options to purchase stock. It was common practice prior to the 2022 Amendments for the board to constitute the chief executive officer as a one-person board committee (provided such person was also a director) for the purposes of making grants under equity compensation plans. Given the complexity of the new delegation rules under amended Section 157 of the DGCL, many corporations are continuing the practice of delegating the authority to make grants of equity awards to a one-person board committee.

Stockholder Meetings and Notices

The 2022 Amendments effect a number of changes that facilitate stockholder meetings, including by eliminating some impediments to virtual meetings. During the pandemic, many public corporations held their meetings virtually but found it difficult to comply with Section 219 of the DGCL, which required that the stockholder list be available on the virtual meeting platform or at the corporation’s principal place of business for a period of at least ten days prior to the meeting, as well as during the whole time of the meeting. The 2022 Amendments eliminate the requirement that a corporation make the list of stockholders available for inspection during the stockholders’ meeting.

The 2022 Amendments also clarify that a notice of a meeting of stockholders may be given in any manner permitted by Section 232 of the DGCL, which specifies that notice of a meeting may be given by electronic transmission, including by e-mail, and generally deems such notice to be given when directed to a stockholder’s electronic mail address. Other amendments to Section 222 of the DGCL facilitate the adjournment of a meeting due to a technical failure such as a crash of the virtual meeting platform. In such event, the meeting may be adjourned to another time and virtual space not only by oral announcement during the meeting but also by virtual display on the meeting platform or in advance, as specified in the original meeting notice.

Appraisal Rights

The 2022 Amendments to the DGCL modify Section 262 of the DGCL in a number of important respects. Under the 2022 Amendments, (1) beneficial owners may demand appraisal rights in their own names without having to cause the record owner (i.e., Cede & Co., in most cases) to demand appraisal rights on their behalf, (2) stockholders will now be able to exercise appraisal rights in connection with the conversion of the corporation to another entity or a foreign corporation unless the market-out exception applies (which generally denies appraisal rights for holders of public company stock in certain all-stock mergers), and (3) domestications under Section 388 of the DGCL no longer give rise to appraisal rights. The decision to make appraisal rights available in connection with the conversion of Delaware corporations to other entities was made in tandem with amendments to reduce the voting threshold necessary to effect such a conversion from unanimous to majority stockholder approval.

Corporations may now include in a notice of appraisal rights information directing stockholders to a publicly available electronic copy of Section 262 of the DGCL, including the website maintained on behalf of the State of Delaware, in lieu of including a copy of Section 262 of the DGCL. The revisions are intended to help reduce the unintentional inclusion of outdated versions of the appraisal statute in notices of appraisal rights. If a corporation mistakenly includes an outdated copy of Section 262 of the DGCL in a notice of appraisal rights, stockholders have the right to bring a breach of fiduciary duty claim against the corporation’s directors and are generally entitled to quasi-appraisal rights as a remedy for breach of such fiduciary duty. The 2022 Amendments will help to eliminate these risks.

SPACs

In response to the increased popularity of special purpose acquisition companies (SPACs) as a vehicle to take a private company public through a business combination with a public shell company, amendments have been made to the dissolution provisions of the DGCL. A SPAC typically includes in its certificates of incorporation a provision authorized by Section 102(b)(5) of the DGCL, limiting the corporation’s existence to a specific period during which the SPAC seeks to effect an initial business combination. However, prior to the 2022 Amendments, the DGCL did not require a SPAC to file any document with the secretary of state of the State of Delaware confirming that its existence had ceased. Under new Section 275(f) of the DGCL, the SPAC must file a certificate of dissolution with the secretary of state within ninety days of the date on which the corporation’s existence ceased. However, a SPAC’s failure to file a certificate of dissolution does not operate to extend the corporation’s existence.

1. Glass Lewis, 2023 Policy Guidelines — United States. Institutional Shareholder Services, United States Proxy Voting Guidelines. ↑

2. See, e.g., Dembrowski v. Snap, Inc., C.A. No. 2022-1042. (Del. Ch. Nov. 17, 2022); Karen Sbroglio v. Snap, Inc., C.A. No. 2022-1032 (Del. Ch. Nov. 16, 2022); Electrical Workers Pension Fund, Local 103, IBEW v. Fox Corp., C.A. No. 2022-1007 (Del. Ch. Nov. 4, 2022). ↑

3. See 8 Del. C. § 242(b)(2). ↑

Exemptions from registration have long been a cornerstone of the U.S. federal securities laws that have helped facilitate capital formation among private companies. The line drawing required to effectuate these exemptions has evolved over time and requires a delicate balance of the tensions between investor protection and capital formation. In the last decade, significant legislative and regulatory developments have expanded access to capital for private companies, particularly early stage businesses.

Significantly, the Jumpstart Our Business Startups Act (JOBS Act), enacted April 5, 2012, effected profound changes to U.S. federal securities laws and ushered in sweeping changes for the conduct of IPOs, in addition to other accommodations for private and public companies. Under the JOBS Act, the Securities and Exchange Commission (SEC) allowed for general solicitation and general advertising in private placements conducted pursuant to Rule 506 under Regulation D (provided that all purchasers are “accredited investors”) and in Rule 144A placements (provided that all purchasers are qualified institutional buyers).

The JOBS Act also increased the number of record holders of a class of equity securities that triggers an issuer’s obligation to register and become a reporting company under the Securities Exchange Act of 1934 from 500 holders to either 2,000 persons or 500 persons who are not accredited investors (with some meaningful exclusions from these calculations, including certain recipients of employee equity grants). The JOBS Act also expanded the maximum size of Regulation A offerings (i.e., Reg A+) and created a new exemption from registration for “crowdfunding” by private U.S. companies. Collectively, these developments have significantly expanded access to capital, particularly for early stage private companies, through means not requiring a formal IPO registration process.

The impact of the JOBS Act extends beyond exempt offerings. Moving along the company lifecycle, the JOBS Act also created an “IPO on-ramp” that affords several accommodations for emerging growth companies, or “EGCs” (generally defined as companies with total annual gross revenues of less than $1.07 billion—increased from $1 billion in April 2017, and subject to further adjustment for inflation every five years), in the process of going public. These include accommodations for reduced financial statement, MD&A, and executive compensation disclosure.

More recently, in 2020, the SEC adopted a host of rule amendments designed “to harmonize, simplify, and improve the multilayer and overly complex exempt offering framework.” Those amendments acknowledged that “[f]or many small and medium-sized business[es], our exempt offering framework is the only viable channel for raising capital.” To that end, these amendments increased the offering limits for Regulation A+, Regulation Crowdfunding, and Rule 504 offerings. They also modified the definition of “accredited investor” to expand those eligible for inclusion in this investor status and established a new framework to make it easier for companies to make integration determinations when conducting private offerings in parallel or close in time.

Notwithstanding the evolution of the exemption framework, challenges remain, and the debate continues as to whether additional modifications are necessary to further enhance the current exemption framework. Some contend that navigating the myriad of available exemptions with differing requirements remains unduly challenging. Others have focused more on the funding sources available to entrepreneurs to take advantage of the existing exemption frameworks. For example, when considering trends in capital raising and access to capital, disparity between rural and urban locales is just one topic under discussion. Changes among state regulations of securities are also relevant considerations to this ecosystem and any future adjustments thereto at the federal level. Relatedly, as retail investors come ever into the fore of investing and the types of offered securities become more complex, some have expressed concern about the need for additional protections for these investors, including whether further modifications to the accredited investor definition, or other or different regulatory requirements, are merited.

Much has been done over the years to protect Main Street investors, and enforcement actions and commentary from the SEC have kept them a priority. Nevertheless, there are indeed risks, including those arising from “bad actors,” illustrating the need for continued enforcement in the private offering contexts, which includes its own challenges. In that same vein, the role of gatekeepers remains of critical importance and significant policy interest at the SEC and more broadly in Washington. Recent enforcement actions underscore this point.

Looking forward, these and other questions in the ever-changing environment for private companies will contribute to the evolving discussion around the federal regulation of securities and the future of the SEC and the exempt offering framework. Continued input from all stakeholders will be critically important to supporting the evolution of the exempt offering framework while preserving the core principles upon which it is grounded.

This article is based on a CLE program that took place during the ABA Business Law Section’s 2022 Hybrid Annual Meeting. To learn more about this topic, view the program as on-demand CLE, free for members, or watch the related video.

This article is excerpted from Say the Right Thing: How to Talk About Identity, Diversity, and Justice (Atria Books), released on February 7, 2023. Kenji Yoshino and David Glasgow co-founded NYU School of Law’s Meltzer Center for Diversity, Inclusion, and Belonging, and have years of experience working with attorneys and other business and cultural leaders on these topics. Their book offers seven research-backed chapters about how to tackle tough topics with neighbors, friends, family members, co-workers, and anyone else you care about. Say the Right Thing will help readers have better conversations that lead to deeper understanding and a fairer society. Learn more about Say the Right Thing.

The children’s book The Magical Yet addresses a child who can’t get the hang of riding a bike and gives up trying. In the book’s illustrations, the child walks along a bike path sulking until she happens upon a glowing pink orb in the bushes known as The Magical Yet. With the Yet’s help, the child learns to persist whenever she makes a mistake, whether it involves playing a musical instrument, learning a language, or riding a skateboard. “No matter how big (or old) you may get,” the book observes, “you’ll never outgrow—you’ll never forget—you can always believe in the magic of Yet.”

The Magical Yet tracks psychologist Carol Dweck’s celebrated argument that people should move from a “fixed mindset” to a “growth mindset.” Individuals with a fixed mindset believe their basic qualities—their intelligence, personality, talents, and moral character—are basically unchangeable. If they’re not good at something, they probably never will be and should give up trying. Individuals with a growth mindset, in contrast, believe they can cultivate their qualities through effort. Across a variety of fields, from relationships to sports to business leadership, Dweck shows that a growth mindset leads to greater success. It prevents people from treating every setback as a verdict on their innate competence and moral worth.

This simple and crucial concept has taken over institutions from corporations to preschools, helping people recover from mistakes and improve their skills. Yet as our NYU colleague and social psychologist Dolly Chugh points out, the concept is glaringly absent from discussions of identity. She explains that people get mired in a fixed mindset on identity issues because the costs of making a mistake seem catastrophic. If you make a mistake when learning a musical instrument, you probably won’t be traumatized. Yet if you make a mistake on an identity issue, you haven’t just made an error—you’ve become a racist, a sexist, or a homophobe. Something you did comes to describe who you are. The perceived threat is so huge it’s no wonder you’re panicked. But that terror means you won’t even try to learn. Imagine if we began a class by saying: “Our one requirement for the semester is that you not make any mistakes.”

As Chugh argues, you won’t make progress until you let go of the fixed-mindset outlook that you’re either a good or bad person and embrace the growth-mindset idea that you’re a “good-ish” person. If you insist you’re a good person, you’re likely to react with overwhelming discomfort when you make a mistake that would reveal your imperfections. If, by contrast, you acknowledge you’re a “good-ish” person who falters like everybody else, you’re less likely to see mistakes as judgments of your character. You can then respond by treating mistakes as opportunities to learn.

Social science research backs up the idea that a fixed mindset derails identity conversations. In a series of experiments, Dweck and her colleagues found that participants with the fixed-mindset view that prejudice was unchangeable were less interested in having cross-racial interactions or learning about bias than people who believed prejudice could change through effort. In one experiment, white participants were put in a room and told they were about to speak with either a Black or white partner. When they expected a Black partner, those with a fixed mindset tended to place their seats farther away from the other person and expressed a desire for shorter interactions than those with a growth mindset. In another experiment, white participants with a fixed mindset made less eye contact, smiled less, and had a faster heart rate in cross-racial interactions. These findings held true even when controlling for the participants’ racial attitudes.

A fixed mindset might also trip you up in a sneakier way. In a separate study, Dweck and her colleague gave college students who did poorly on a test the opportunity to look at the completed tests of other students. Students with a fixed mindset tended to look at the tests of students who performed worse than they did. They didn’t think they could do better, so they settled for easing their discomfort. Students with a growth mindset tended to look at the tests of students who performed better than they did. Because they knew they could improve, they eagerly explored how to do so. A telltale sign of a fixed mindset in identity conversations is the urge to compare yourself to people more biased or gaffe-prone than you. In a growth mindset, you compare yourself to people who display the most inclusive behavior, not the least. Next time you’re at a family dinner and you mess up, watch out for those downward comparisons: “At least I’m not as bad as Aunt Edith!” Try to inspire yourself with role models instead: “What would Aunt Nell say to make this right?”

When you slip into a fixed mindset, we recommend two techniques. The first is to summon The Magical Yet from the bushes and add the word “yet” to the end of negative self-talk. It’s not: “I’m not good at talking about race.” It’s: “I’m not good at talking about race yet.” Educators use this technique a lot. Kenji’s children are not allowed to utter the words “I’m not good at math” at school. Their teachers insist they say: “I’m not good at math yet.”

The second technique is to do a self-comparison. Instead of “My younger colleagues find it so much easier to talk about mental health than I do,” you might say, “I find it easier to talk about mental health than I did a year ago.” We realize this recommendation sits in tension with our other recommendation to engage in upward comparisons to others. But here—and in general—our strategies aren’t mutually exclusive. Take whichever one works for you. If you find it inspiring to compare yourself to role models, do so. If you find it stressful or demoralizing, make self-comparisons instead. Regardless of the technique, the goal is to catch yourself when you’re feeling fatalistic and substitute thinking that’s both more honest and more compassionate.

When she visited our center, civil rights lawyer Chai Feldblum discussed her own struggles with this mindset shift. Feldblum is an iconic figure in American law and a principal author of the Americans with Disabilities Act. Despite her credentials, she told us during an event how she used to dread making mistakes in identity conversations. Whenever she made an error in the past, she said, “all I would do is berate myself.” Yet over a period of years, she learned to focus on growing from the mistake instead of letting it define her.

Feldblum asked us to imagine saying something inadvertently hurtful to a person with a disability. “If you’re not in the disability culture,” she said, “I assure you, you may not know that something you said just did not feel good to that person.” She then shared her recommended form of self-talk in response to that mistake: “Wow, I guess I just wasn’t ever taught that or thought about that.” This shift—from “I’m a terrible human being” to “I just wasn’t ever taught that”—offers you the gift of redemption. Just as importantly, as Feldblum noted, it grants you the opportunity to behave differently next time. If you didn’t learn it before, you can learn it now.

Today’s complex litigation landscape increasingly engages multijurisdictional and cross-border issues that in-house and external counsel need to consider early on to best contain and manage company risk. Defendants are wise to identify the differences in the applicable legal regimes of the various at-issue jurisdictions, with an eye to document and data preservation and collection, limitation periods, assumption of jurisdiction, certification criteria, requirements to prove liability, damages caps, and the recognition and enforcement of foreign orders.

Issues giving rise to class action and mass tort litigation, in particular, require early intervention and coordination among the client, company counsel, and external counsel in affected jurisdictions. Client and counsel must manage the intersection of internal investigations, regulatory compliance and response, legal liability, and public relations. Cases with cross-border components add a dimension of jurisdictional complexity to these already high-stakes cases.

The Parallel Proceeding’s Impact on Managing Complex Litigation

American companies with operations or customers in Canada are likely to see Canadian copycat or parallel actions to complaints filed in the United States. In U.S. and Canadian parallel proceedings, defendants are faced with a number of tactical decisions on each side of the border that may affect the counterpart proceeding.

For example, in Canadian class actions, precertification decisions include whether to attorn to the jurisdiction and/or whether to challenge the court’s adoption of jurisdiction over the defendant or subject matter of the dispute, whether (or when) to file a pleading prior to the motion for certification, and whether to include an evidentiary record in defense of certification. Regardless of whether the matter is a class action, mass tort, or other complex case, litigants should consider the impact of differing discovery regimes on the life cycle and timing of the case, as U.S. courts typically provide litigants with broader discovery rights than most Canadian jurisdictions. And when considering settlement, litigants should also maintain a coordinated focus to ensure that a settlement reached in one jurisdiction will be recognized and enforced in another, so as not to undermine the certainty of decision-making.

While the parallel proceeding is simply one dimension of a multidimensional problem, questions impacting the proceeding need to be considered and acted upon in their appropriate context. For example, at all stages of the proceeding, defendants need to make themselves aware of—and cautiously tread—regulatory minefields that may exist in the counterpart jurisdiction that will get tripped by a position taken in the main case.

Asking the Right Jurisdictional Questions

The jurisdictional questions that Canadian class action defendants need to ask include:

• Should I attorn to the jurisdiction?
• If there are extra-provincial class members, does the court have jurisdiction over them?
• If the claim involves absent out-of-country claimants, does the court have jurisdiction over out-of-country foreign claimants?^[1]

While counsel will be guided by the scope of the claim, these questions generally need to be asked in secondary market securities claims involving purchasers of securities on U.S. or foreign exchanges, competition (or antitrust) claims on behalf of indirect purchasers of goods and services, and product liability claims.

In the United States, national class actions tend to be in federal court pursuant to statute, so there is somewhat less concern about jurisdiction, though choice-of-law issues on pendent state law claims remain.

Considering the Interplay Between Preliminary Motions (and Class Action Certification) in Competing Jurisdictions

While a motion to dismiss is often the first motion to be heard in a U.S. class action, in Canada, unless the defendant brings an early jurisdiction motion, the first motion to be heard is typically the certification motion. Unlike motions to dismiss, contested certification motions usually involve evidentiary records.

In some class actions in Canada, defendants may choose whether to file a response pleading in advance of the motion for certification. This decision, like any made in a parallel or multijurisdictional proceeding, will bear on the overlapping cases proceeding in other jurisdictions. Filing a response pleading provides an early opportunity for the defendant to deny allegations and advance a narrative, but it will also precipitate discovery obligations, which could lead to evidence being filed in court on the motion for certification and made publicly available for use in another jurisdiction. Similarly, a decision to lead evidence in response to the motion for certification may (a) make the evidence publicly available to be put to use in another jurisdiction and (b) provide one set of class counsel an early opportunity to cross-examine the defendant.

As a result of amendments to class action legislation in Ontario in October 2020, which more closely aligned certification criteria with Federal Rule 23, some discernible shifts have begun to take shape in class counsel’s approach to certain types of cases. For example, defendants are seeing plaintiffs turn to jurisdictions other than Ontario—deemed more “plaintiff friendly” for a variety of reasons—to file cases. Another discernible shift is that product liability cases are being filed as mass tort cases rather than as class actions.

The End Game

For parallel actions that proceed beyond preliminary motions and certification, defendants need to develop a coordinated settlement or trial strategy that considers each jurisdiction’s laws governing recognition and enforcement. Bearing in mind that it is unlikely that competing jurisdictions will maintain the same pace of litigation, there are steps that defendants can take on either side of the border to reduce the likelihood of having to defend against already-settled claims with respect to certain class members, and increase the likelihood that a settlement achieved in one jurisdiction will be recognized and enforced in the other.

Claims with multijurisdictional and cross-border components require defendants to implement a forward-thinking and highly coordinated approach early in the case. Not only do they require the expertise of local counsel in multiple jurisdictions, they demand communication and coordination among all counsel—and a well-informed, in-house quarterback.

This article is based on a CLE program that took place during the ABA Business Law Section’s 2022 Hybrid Annual Meeting. To learn more about this topic, view the program as on-demand CLE, free for members.

1. McCarthy Tetrault LLP, Defending Class Actions in Canada: A Guide for Defendants 203 (LexisNexis 5th ed. 2020). ↑

The Netflix series Madoff: The Monster of Wall Street is a compelling and largely accurate portrayal of Bernie Madoff’s Ponzi scheme. Unlike some other depictions of the fraud, it discusses how Madoff created the image of a statesman for himself to distract regulators. Unfortunately, it glosses over some things and is incorrect about some other parts of the story.

To its credit, the series does not focus exclusively on how Madoff enticed investors and institutions to entrust their money with him. It discusses his role in fulfilling his market-making responsibilities during the 1987 stock market crash. The series explains that when other market makers were not answering their phones, Madoff continued to buy stock at a loss. That earned him credibility on Wall Street and in Washington. Episode 1 (38:43).

Unfortunately, the series does not explain how Madoff’s legitimate broker-dealer and his advice to the Securities and Exchange Commission (SEC or Commission) helped the Commission meet a major challenge to modernize stock trading. The series makes a passing reference to Madoff’s role in helping computerize the over-the-counter market for stocks. Madoff’s firm helped drive the illiquid and opaque “pink sheet” market to become the liquid and transparent Nasdaq Stock Market. Episode 1 (25:18). But Madoff played a much bigger role in reshaping the structure of American securities markets.

In 1975, Congress enacted legislation granting the SEC new authority to facilitate the establishment of a national market system for securities.^[1] Among the legislation’s goals was to link securities markets to foster efficiency, enhance competition, and contribute to best execution of customer orders.^[2] Congress left the details up to the SEC. This mandate was fraught with political and technical challenges. Of course, Madoff furthered his own economic interests with the advice he gave to the SEC. Nonetheless, he provided meaningful input to help the agency achieve its goals.^[3]

There are some other elements in the series with which I disagree. I discuss those below:

1. Madoff was not running a purported hedge fund.

Speakers in the series frequently refer to Madoff as a hedge fund. To the best of my knowledge, it was not a hedge fund.^[4] Here’s why:

A hedge fund is a pooled investment vehicle, similar to a mutual fund. If you invest in a hedge fund, you own shares in the fund, not in the portfolio companies that the fund owns. In Episode 2 (46:48) an investor wants to see trading records to prove that he has shares in the stocks that Madoff said he was buying. If Madoff had been running a legitimate hedge fund, the investors would not have had an account with individual positions.

Furthermore, Depository Trust Company (DTC) (discussed below) does not hold positions for individual customers. A broker-dealer that is a participant in DTC will hold all of its positions together. The broker-dealer will have records showing how many shares each customer owns. For example, if XYZ broker-dealer holds 10,000 shares of ABC stock, DTC’s records will show only the 10,000 shares. XYZ broker-dealer’s records will show that Customer 1 owns 5,000 shares, Customer 2 owns 3,000 shares, and Customer 3 owns 2,000 shares. The episode implies that an investor would have been able to see his own positions at DTC. DTC records only would show an aggregate position.

Madoff was running a Ponzi scheme purporting to be an unregistered investment adviser. The irony is that had Madoff been running a real hedge fund, he would not have had to register with the SEC as an investment adviser under the Investment Advisers Act of 1940 (the Advisers Act).

At that time, the Advisers Act had a de minimis exemption from registration. It provided an exemption for “any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under [the Investment Company Act of 1940]….” A money manager’s client is the fund, not the investors in the fund. If a money manager only managed a single fund, it would have qualified for the de minimis exemption. Legitimate hedge fund managers relied on this exemption and did not have to register with the SEC.^[5]

The SEC tried to circumvent the de minimis exemption by adopting a rule requiring the adviser to count the investors in the fund as clients, rather than the fund itself. That change would have required most hedge fund managers to register with the SEC. In Goldstein v. SEC, the Court of Appeals for the District of Columbia Circuit said that the SEC rule was “arbitrary” and vacated it. 451 F.3d 873 (2006).

Congress addressed this issue when it enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.^[6] Section 403 of Dodd-Frank amended Section 203(b) of the Investment Advisers Act to require managers of hedge funds to register with the SEC as investment advisers.^[7]

Some of the investors in Madoff’s fraud probably were hedge funds—pooled investment vehicles.^[8] The fact that funds invested in Madoff did not make Madoff a hedge fund. More importantly, even if Madoff did not have to register as an investment adviser, it would not have shielded him from civil and criminal fraud charges.

2. DTC is not a regulator.

At the end of Episode 2 (46:05), Erin Arvedland refers to the Depository Trust Company as a “regulator.” It is not. It is a clearing agency registered under Section 17A of the Securities Exchange Act of 1934 (the Exchange Act).^[9] A clearing agency is a self-regulatory organization (SRO), meaning that it has some quasi-governmental authority.^[10] SROs are not government agencies and are not full-fledged regulators.

Unlike other SROs, the Exchange Act does not require a clearing agency to enforce its participants’ compliance with the Exchange Act. As a condition of registration as a clearing agency, Section 17A(b)(3)(A) of the Exchange Act requires a clearing agency “to enforce … compliance by its participants with the rules of the clearing agency….” By comparison, a registered securities association, such as FINRA, must have the capacity to enforce compliance by its members and persons associated with its members, with the provisions of this title, the rules and regulations thereunder, the rules of the Municipal Securities Rulemaking Board, and the rules of the association.^[11] “With the provisions of this title” means that a registered securities association must enforce the Exchange Act with respect to its members. That language is conspicuous by its absence in the clearing agency provision. Accordingly, a clearing agency, such as DTC, is not a regulator and its self-regulatory authorities are less extensive than other types of SROs.

Further as noted above, DTC keeps records of its participants’ positions, not the individual positions of the participant’s customers. The SEC’s Office of Investigations Report (“OIR”) on Madoff explains that Madoff’s total positions at DTC were substantially less than the amount that a single customer thought it had. The OIR notes:

We reviewed a January 2005 statement for one Madoff feeder fund account, which alone indicated that it held approximately $2.5 billion of S&P 100 equities as of January 31, 2005. On the contrary, on January 31, 2005, DTC records show that Madoff held less than $18 million worth of S&P 100 equities in his DTC account.^[12]

3. Congress did not cut the SEC’s budget.

Diana B. Henriques says in Episode 3 (19:43) that the SEC budgets had been “cut and cut again.” At the same time, the episode shows a clip of Ronald Reagan saying that “government is the problem.” There also are voiceovers of scenes from the aftermath of 9/11, stating that the SEC was not a priority. I do not agree with this portrayal of events.

The record as to when Madoff began his fraud is not clear, but it stretched for decades. The court records and press accounts are either vague or cite inconsistencies as to when Madoff or others said they began the Ponzi scheme.^[13] The SEC’s Office of Investigations Report noted that investors first complained to the SEC about Avellino & Bienes, a feeder fund, in June 1992.^[14] The SEC received complaints about Madoff during multiple chairmanships across several presidencies.^[15] President Reagan’s last day in office was January 20, 1989. Following the tradition of former presidents, he largely stayed out the political fray and retired to his California ranch.^[16] After a battle with dementia, President Reagan died on June 5, 2004. Showing a film clip of President Reagan sheds no light on the SEC’s failure to investigate Madoff. In my view, the film clip simply invokes a stereotype to inflame the audience.

President Reagan appointed John Shad, a former investment banker, as SEC chairman.^[17] Chairman Shad famously said that he was going to “come down on insider trading with hobnail boots.”^[18] During his tenure, the SEC brought landmark insider trading cases against Dennis Levine and Ivan Boesky.^[19]

The Reagan Administration did not cut the SEC’s budget. According to the New York Times, during Shad’s tenure, by 1986 “the [SEC’s] budget ha[d] grown a modest 35%.”^[20] An increase is not a cut.

Initially, Shad did not favor increasing the SEC’s budget significantly, a position consistent with the Reagan Administration’s views. After the Levine and Boesky cases, Shad said he would seek a major increase in SEC funding from Congress.^[21] Republican members of the Committee on Energy & Commerce of the U.S. House of Representatives supported an increase. The SEC’s 1988 Budget Request urged Congress to increase the SEC’s budget by 27% over the 1987 appropriation. The request sought additional increases for two subsequent years.^[22]

Congress increased the SEC’s budget every year between FY 1983 and 2021, with the exception of three years when the budget was essentially flat. In FY 2002, i.e., after the 9/11 terrorist attack damaged the SEC’s New York Regional Office, Congress added $20.7 million for disaster recovery. For the FYs 1983 to 1994, the median increase in funding was 12.9%, and the average increase was 10.78%. For the FYs 1995 to 2021, the median increase in Budget Authority was 6.09%, and the median increase in Actual Obligations was 7.34%.^[23]

There is no question that after 9/11, the country focused new attention on terrorism and devoted substantial resources to that effort. But there is no evidence to show that Congress cut the SEC’s budget to help pay for those antiterrorism efforts.

I also disagree with Henriques’s statement “that the laws that they [presumably the SEC] could rely on to pursue investigations had been tightened.” Episode 3 (20:03). I do not know which laws she has in mind.

President Reagan did sign into law two tough insider trading bills:

• Insider Trading Sanctions Act of 1984 (P. L. 98-376, Aug. 10, 1984)—among other things, the legislation authorized the SEC to seek a civil penalty against insider traders for as much as three times the profit gained or loss avoided; and
• Insider Trading and Securities Fraud Enforcement Act of 1988 (P.L. 100-704, Nov. 19, 1988)^[24]—among other things, the legislation:
  • allowed the SEC to impose a similar penalty against a person who controlled the insider trader;
  • authorized the SEC to award bounties to informants; and
  • required broker-dealers and investment advisers to have policies and procedures reasonably designed to prevent insider trading.

There is plenty of blame to go around for the SEC’s failure to uncover Madoff sooner. Did Congress give the SEC all the money that it wanted? Of course not. Congress almost never gives any agency the full amount of funding that it seeks. The SEC has to compete for resources with all other agencies. Nonetheless, Congress materially increased the SEC’s funding regardless of which party controlled the White House or Congress.

4. SEC staff do not wear metal badges.

I have never seen an SEC staffer with a metal badge. Episode 3 (43:15). They had laminated identification cards that many wore with chains around their necks. In my day, SEC lawyers kept their IDs handy in their purses or wallets, but avoided wearing them on chains.

*****

Bernie Madoff’s crimes were hideous. He caused suffering to many people around the world. This series is a useful reminder of Madoff’s horrific acts; there is no need to bend the truth for dramatic effect.

© 2023 Stuart J. Kaswell, Esq., who has granted permission to the ABA to publish this article in accordance with the ABA’s Single Title Publication Agreement, which is incorporated by reference.

1. The Securities Acts Amendments of 1975 (1975 Acts Amendments), among other things, amended the Securities Exchange Act of 1934 by adding Section 11A(a)(2), Pub. L. 94-29, 89 Stat. 112 (June 4, 1975). ↑

2. Id. at Section 11A(a)(1)(D). ↑

3. Kaswell, Stuart J. The Bernie Madoff I Knew: How He Gained the Confidence of Regulators and Legislators, Business Law Today, American Bar Association, June 30, 2021. (Explains how Madoff cultivated regulators with respect to the National Market System.) ↑

4. It is wrong to say that a crooked scheme is a hedge fund, even if it claims to be one. It’s fraud. Calling a crooked scheme a hedge fund is like saying that a person who practices medicine without a medical license is engaging in medical malpractice. That person simply is committing a crime. ↑

5. For the reasons noted above, I do not agree with SEC Inspector General H. David Kotz’s description of the registration requirements for hedge fund managers at the time of the Madoff fraud. Episode 3 (16:14).

   The series portrays Kotz sitting adjacent to an SEC logo, which might lead some viewers to assume that he was a member of the SEC staff at the time that that the producers filmed that segment. Kotz resigned his position as inspector general at the end of January 2012. SEC Inspector General David H. Kotz to leave Commission, SEC Press Release 2012-9. ↑

6. P.L. No. 111-203, July 21, 2010. ↑

7. Section 203 of the Investment Advisers Act of 1940 currently provides (deletions; additions):

   (a) Necessity of registration

   Except as provided in subsection (b) and section 203A of this title, it shall be unlawful for any investment adviser, unless registered under this section, to make use of the mails or any means or instrumentality of interstate commerce in connection with his or its business as an investment adviser.

   (b) Investment advisers who need not be registered

   The provisions of subsection (a) shall not apply to-

   (1) any investment adviser, other than an investment adviser who acts as an investment adviser to any private fund, all of whose clients are residents of the State within which such investment adviser maintains his or its principal office and place of business, and who does not furnish advice or issue analyses or reports with respect to securities listed or admitted to unlisted trading privileges on any national securities exchange;

   (2) [no change]

   (3) which read as follows: “any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under subchapter I of this chapter, or a company which has elected to be a business development company pursuant to section 80a–53 of this title and has not withdrawn its election. For purposes of determining the number of clients of an investment adviser under this paragraph, no shareholder, partner, or beneficial owner of a business development company, as defined in this subchapter, shall be deemed to be a client of such investment adviser unless such person is a client of such investment adviser separate and apart from his status as a shareholder, partner, or beneficial owner;”.

   (3) any investment adviser that is a foreign private adviser;

   ↑

8. At one point, Diana B. Henriques quotes Madoff, who says, “I’m not running a hedge fund. I do trades for hedge funds, as I have explained over and over.” Episode 3 (42:28). If the quote is accurate, it may be one of the few times Madoff was truthful when describing his business. ↑

9. The 1975 Acts Amendments also added Section 17A of the Exchange Act. ↑

10. Section 3(a)(26) of the Exchange Act defines a “self-regulatory organization” as, among other things, “any national securities exchange, registered securities association, or registered clearing agency….” ↑

11. Section 15A(b)(2) of the Exchange Act [emphasis added]. ↑

12. “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme,” Public Version, Office of Investigations, U.S Securities and Exchange Commission., August 31, 2009, Report No. OIG-509, at 20. ↑

13. Court records and press accounts note that it is unclear when Madoff began the fraud. The OIR does not specify a time and only indicates when the SEC received complaints, as discussed below.

    The Department of Justice alleged that it began “at least as early as the 1980s.” Transcript of Guilty Plea, U.S. v. Bernard L. Madoff, 09 CR 213(DC), S.D.N.Y March 12, 2009, at 32. The government alleged that “at the end [of the scheme], Madoff told his clients that he was holding nearly $65 billion in securities on behalf of those clients. In fact, he had only a small fraction of that amount.” Id. at 33-34.

    According to a CNBC report:

    It isn’t clear exactly when Madoff started crossing the ethical line, particularly because honesty was not his currency. He pegged the start of his scheme to 1987, but he later claimed that it was 1992. Madoff’s account manager, Frank DiPascali Jr., who began working for him in 1975, testified that the illegalities had been going on “as long as I remember.”

    Bernie Madoff, mastermind of largest Ponzi scheme in history, dies at 82, CNBC, April 14, 2021. ↑

14. OIR, at 42 et seq. ↑

15. The following chart indicates when investors or others complained to the SEC and identifies the president and SEC chair at that time.

    Complaints to the SEC	President	SEC Chairman
    June 1992	George H.W. Bush	Richard C. Breeden
    May 2000	William J. Clinton	Arthur Levitt
    March 2001	George W. Bush	Laura Unger (Acting)
    May 2003	George W. Bush	William H. Donaldson
    April 2004	George W. Bush	William H. Donaldson
    October 2005	George W. Bush	William H. Donaldson
    December 2008	George W. Bush	Christopher Cox

    Sources: OIR Report at 20-22; SEC Summary. ↑

16. President Reagan’s gave a farewell address to the nation on January 11, 1989, nine days before the end of his term. The last sentence of his remarks state “and so goodbye, God bless you, and God bless the United States of America”. Saying “goodbye” was unusual and a clear signal that Reagan was finished with public life. President Reagan’s last public speech was on February 3, 1994, on the occasion of his eighty-third birthday. On November 5, 1994, President Reagan released a handwritten letter announcing his Alzheimer’s diagnosis. ↑

17. SEC website. ↑

18. Sloane, John S. R. Shad Dies at 71, S.E.C. Chairman in the 80s, New York Times, July 9, 1994. ↑

19. Id. The SEC noted:

    On November 14, 1986, the Commission instituted the largest insider trading case in its history against arbitrageur Ivan F. Boesky. The Commission alleged that Boesky caused certain affiliated entities to trade in securities while in possession of material nonpublic information concerning tender offers, mergers, and other extraordinary corporate transactions. Boesky was alleged to have obtained this information from investment banker Dennis B. Levine, who previously had been enjoined in a Commission action brought in May 1986.

    U.S. Securities and Exchange Commission, Annual Report, 53d, 1987, at 10 (citations omitted). ↑

20. Sterngold, Shad Seeks SEC Expansion, New York Times, Dec. 6, 1986. John Shad stepped down as chairman on June 18, 1987. SEC Historical Summary of Chairmen and Commissioners (“SEC Summary”). ↑

21. Id., stating:

    John S. R. Shad, the chairman of the Securities and Exchange Commission, said here today that he would be seeking a “substantial increase” in the commission’s budget and staff for the coming fiscal year, the first such major expansion in five years.

    Mr. Shad refused to detail how much funding he was seeking for the year that begins next Oct. 1, but he said that most of the growth would be in the agency’s enforcement division.

    The comments were made to Wall Street executives assembled for the annual convention here of the Securities Industry Association. ↑

22. The SEC’s authorization request was:

    Fiscal Year	SEC Authorization Request
    1988	$153.9 million
    1989	$169.0 million
    1990	$181.1 million

    The request included a proposed 30% increase in budget for enforcement operations. Statement of John Shad, Chairman of the Securities and Exchange Commission, Before the Senate Subcommittee on Securities, Concerning the Commission’s Authorization Request for Fiscal Years 1988-1990, May 13, 1987, at 3. It is important to note that the authorization request is just the first step in a long appropriations process. ↑

23. According to the SEC:

    SEC Total Funding Level

    Line	Fiscal Year	Money $(000)	% Change
    1	1983	$ 88,690
    2	1984	$ 94,000	5.99%
    3	1985	$ 106,382	13.17%
    4	1986	$ 106,323	-0.06%
    5	1987	$ 114,500	7.69%
    6	1988	$ 135,221	18.10%
    7	1989	$ 142,640	5.49%
    8	1990	$ 166,633	16.82%
    9	1991	$ 189,083	13.47%
    10	1992	$ 225,792	19.41%
    11	1993	$ 253,325	12.19%
    12	1994	$ 269,150	6.25%
    Median			12.19%
    Average			10.78%

     

    Sources:
    Lines 1-7	SEC Annual Report 1989, Table 25, Page 162
    Lines 8-12	SEC Annual Report 1995, Table 25, Page 157

    *****

    SEC Budget FY 1995 – 2021 ($ in 000s)
    Fiscal Year	Budget Authority	% Change	Actual Obligations	% Change
    1995	$ 300,437		$ 284,755
    1996	$ 300,921	0.16%	$ 296,533	4.14%
    1997	$ 311,100	3.38%	$ 308,591	4.07%
    1998	$ 315,000	1.25%	$ 311,143	0.83%
    1999	$ 341,574	8.44%	$ 338,887	8.92%
    2000	$ 377,000	10.37%	$ 369,825	9.13%
    2001	$ 422,800	12.15%	$ 412,618	11.57%
    2002	$ 513,989A	21.57%	$ 487,345	18.11%
    2003	$ 716,350	39.37%	$ 619,321	27.08%
    2004	$ 811,500	13.28%	$ 755,012	21.91%
    2005B	$ 913,000	12.51%	$ 887,227	17.51%
    2006	$ 888,117	-2.73%	$ 877,278	-1.12%
    2007	$ 881,560	-0.74%	$ 875,456	-0.21%
    2008	$ 906,000	2.77%	$ 905,313	3.41%
    2009C	$ 953,000	5.19%	$ 960,189	6.06%
    2010	$ 1,111,000	16.58%	$ 1,101,547	14.72%
    2011	$ 1,185,000	6.66%	$ 1,212,859	10.11%
    2012	$ 1,321,000	11.48%	$ 1,289,675	6.33%
    2013D	$ 1,321,000	0.00%	$ 1,276,158	-1.05%
    2014	$ 1,350,000	2.20%	$ 1,415,814	10.94%
    2015	$ 1,500,000	11.11%	$ 1,550,548	9.52%
    2016	$ 1,605,000	7.00%	$ 1,681,882	8.47%
    2017	$ 1,605,000	0.00%	$ 1,651,317	-1.82%
    2018	$ 1,652,000	2.93%	$ 1,687,390	2.18%
    2019	$ 1,674,902	1.39%	$ 1,695,905	0.50%
    2020	$ 1,825,525	8.99%	$ 1,826,552	7.70%
    2021	$ 1,926,162	5.51%	$ 1,954,006	6.98%
    Median		6.09%		7.34%
    Average		7.72%		7.92%

    [SEC] Notes:

    Budget Authority figures above do not include carryover or recoveries

    A. Includes $20,705 for Disaster Recovery, $24,820 carryover for Pay Parity, $30,900 for 2nd Supplemental, & $336 rescission.

    B. Enacted at $913,000, but SEC was required to leave $25,000 unobligated to apply towards FY 2006.

    C. FY09 authority includes $10,000 Supplemental and does NOT include $17,000 reprogramming.

    D. FY13 authority does not include $66,050 sequestration reduction.

    Author’s Note: Information from the SEC appears in columns with a white background. I have calculated the year-to year percentage changes, median change, and average change using Excel. I highlighted those columns in grey. I did not combine these charts because the first set of data did not contrast Budget Authority with Actual Obligations and only identified the figures as “Money.” ↑

24. Kaswell, An Insider’s View of the Insider Trading and Securities Law Enforcement Act of 1988, Securities Law, Administration, Litigation, and Enforcement, Section of Business Law, American Bar Association, Vol. III (1991) at 252. ↑

Investors and stakeholders increasingly understand that long-term success is directly affected by how a company and its Board of Directors (the “Board”) manage environmental, social, and governance (“ESG”) factors. Best practices require that a Board establish and implement a framework for managing ESG concerns to avoid potential issues that may negatively impact the company or its stakeholders. For example, the failure of a Board to adequately address an ESG issue may result in poor market performance, a decline in company share price, and regulatory or legal action. A Board needs to ensure that its company stays up-to-date on mandatory ESG-related disclosure requirements. Regulatory authorities such as the U.S. Securities and Exchange Commission, European Commission, and Canadian Securities Administrators, including the Ontario Securities Commission, are frequently publishing updates and notices of changes to the disclosure regime.^[1] When tackling ESG concerns such as climate change impacts and Board diversity, how can a corporate director avoid facing peril?

ESG Risk Oversight

This article will outline the director’s obligations concerning ESG oversight and provide a framework that Boards can utilize to identify and evaluate ESG risks.

ESG Risk Management Framework

To effectively address ESG, a Board must have mechanisms in place to ensure that it understands how ESG issues may impact the company. This does not mean that directors and Boards must be involved in day-to-day risk management, but rather that directors must fulfill their role in risk oversight. Proper risk oversight of a company requires directors to be accustomed to the company’s ESG risk management policies and procedures. If directors do not disclose material ESG risk and maintain proper oversight, they may face discontent among shareholders, potential litigation, damage to their reputation, or regulatory investigation.

In developing ESG risk management policies and procedures, the company and the Board should establish an appropriate governance structure and allocate the roles and responsibilities of directors and different Board committees. The designation of specific roles ensures that each party knows who is responsible for certain tasks. To determine if ESG risk oversight should be allocated to the full Board or a committee, the Board should consider the nature of the ESG issues, the level of expertise required, the time commitments to achieve meaningful oversight, and the mandates of existing Board committees, if any.

A robust ESG risk management framework within a company is integral to the overall culture and success of business operations. ESG procedures and policies will look different for each company depending on its industry and the type of business, but generally, an ESG risk management system should:

1. identify material ESG risks promptly;
2. implement appropriate ESG risk management strategies that align with the company’s business strategies and ESG risk profile;
3. integrate ESG risk and risk management into corporate strategy and business decision-making; and
4. properly document and communicate necessary information on ESG risks to applicable parties such as employees, shareholders, and senior executives.

To properly manage ESG risk, the risk must first be identified; to identify risks, companies must develop reporting procedures to gather high-quality ESG data. To maintain consistency among different data sets, companies should aim to have a standard process and create central repositories or reference sets for recording ESG data. Ideally, having automatic processes to record data as opposed to manually adding data would minimize errors in data sets.

Given the wide-ranging nature of ESG, a Board should focus on risks and opportunities that are material to its business. Companies may consult an established ESG framework to ensure that all ESG risks are identified or consider whether their stakeholders have a preference for a specific disclosure regime. A Board should also know what is expected of the company in terms of ESG disclosure based on the standards specific to its industry.

Once ESG risks are identified and risk management strategies are implemented, these should be integrated into the company’s corporate strategy and business decision-making. The ESG risks should be assessed and evaluated by the proper parties to determine which actions would best address or mitigate potential issues. Boards should look to establish ESG metrics and targets to track progress and measure and improve their companies’ ESG performance. When establishing ESG metrics, Boards should not only leverage metrics established by various governmental bodies and industry associations but also establish ESG metrics that are specific to the operations of the business and the industry in which it operates.

Once the ESG policies and procedures, including setting ESG metrics and targets, are established and implemented, directors should then ensure that they are functioning in the way the Board and executives intended. To be effective, employees of the company must not only be aware of the ESG policies and procedures, but they must also follow the framework to properly recognize and appropriately escalate ESG risks. The Board must be aware of and align the company’s ESG risk profile and the principal ESG risks on an ongoing basis. To achieve this, the Board should continuously engage in discussions with management regarding potential ESG risks. The Board should also consider incentivizing senior management to meet the company’s ESG targets through ESG metrics in their executive compensation plans. ESG policies should also include procedures designed to ensure that any information required to be disclosed by the company, whether in its annual filings or other reports, is communicated to senior management as appropriate to allow timely decisions regarding disclosure. For public companies, certain ESG disclosure obligations may be dictated by regulatory authorities that have established mandatory ESG reporting requirements. In addition, stakeholders of the company, such as shareholders or lenders, may require the company to provide non-regulatory reports on ESG matters. The Board must be aware of what is required to be disclosed in each instance and whether an ESG concern meets the materiality threshold that means it must be disclosed. Determining materiality in ESG can be complex; public companies can engage third parties to assist with materiality assessments to assist in determining whether a matter should be included in an ESG disclosure the company may make.

ESG Expertise of Board Members

According to PwC’s 2021 Annual Corporate Director Survey, when directors and executives were both asked how well their Board understood ESG matters, 80% of directors felt that their Board understood ESG matters very or somewhat well.^[2] In contrast, when executives were asked the same question, only 47% of executives felt that their Board had a good handle on ESG matters. A Board and the company’s directors should perform ongoing evaluations of whether its members possess the requisite expertise to understand and advise the company on ESG issues. This includes understanding best practices and nuances specific to their market and assessing performance standards when comparing their company to similar companies in the same industry. Therefore, determining the expertise of each board member with respect to ESG matters is essential when assigning roles and assessing ESG risk. As ESG is continuously evolving, directors should consider ongoing training to ensure they have the knowledge to address complex issues relating to ESG.

Conclusion

As a best practice, directors should ensure that the company has an ESG risk management policy that is aligned with the company’s values and is observed by all of its employees and suppliers. Once ESG risks are identified and communicated, directors must then evaluate the ESG risk and implement an appropriate strategy to address the risk. The chosen strategy should then be monitored, reviewed, and appropriately then documented and communicated.

1. Ontario Securities Commission (OSC), CSA Staff Notice 51-364 – Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2022 and March 31, 2021, November 3, 2022; OSC, Canadian securities regulators consider impact of international developments on proposed climate-related disclosure rule, October 12, 2022. ↑

2. PwC, Board effectiveness: A survey of the C-suite, November 2021. ↑

Last year, the Internal Revenue Service (IRS) revised a question regarding digital assets that appears at the top of certain 2022 income tax returns. Now, in IR-2023-12, the IRS has provided guidance on how to answer that question. The question, revised to update terminology by replacing “virtual currencies” with “digital assets,” appears at the top of Forms 1040, U.S. Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return.

The Question

For the 2022 taxable year, the question asks:

At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

The guidance describes a digital asset as a digital representation of value that is recorded on a cryptographically secured, distributed ledger. It lists as common digital assets:

• convertible virtual currency and cryptocurrency,
• stablecoins, and
• non-fungible tokens (NFTs).

Every taxpayer filing Form 1040, Form 1040-SR, or Form 1040-NR must check either the “Yes” or “No” box. Do not leave this question unanswered.

Should I Answer “Yes” or “No”?

To help taxpayers understand how to answer the question, the IRS provides examples of when the “Yes” box should be checked and when the “No” box should be checked. Normally, taxpayers should answer “Yes” if they:

• received digital assets as payment for property or services provided;
• transferred digital assets for free (without receiving any consideration) as a bona fide gift;
• received digital assets resulting from a reward or award;
• received new digital assets resulting from mining, staking, and similar activities;
• received digital assets resulting from a hard fork (a branching of a cryptocurrency’s blockchain that splits a single cryptocurrency into two);
• disposed of digital assets in exchange for property or services;
• disposed of a digital asset in exchange or trade for another digital asset;
• sold a digital asset; or
• otherwise disposed of any other financial interest in a digital asset.

A key point for taxpayers to remember is that using digital assets to purchase a good or pay for a service during the taxable year requires the “Yes” box to be checked. While taxpayers generally will know when they have engaged in a transaction that involves a digital asset, it may not be obvious (or may be easy to overlook) when they receive a digital asset as an award under a loyalty program. For example, a taxpayer may use an online financial services product, such as a credit card, that awards digital assets for using the service. If digital assets are awarded during the taxable year, the taxpayer should check the “Yes” box.

Possibly the most helpful guidance provided by the IRS is when to check the “No” box. Taxpayers who own digital assets during the taxable year but who do not engage in any transactions involving digital assets should check the “No” box. Taxpayers also can check the “No” box if their activities were limited to one or more of the following:

• holding digital assets in a wallet or account;
• transferring digital assets from one wallet or account they own or control to another wallet or account they own or control; or
• purchasing digital assets using U.S. or other real currency, including through electronic platforms such as PayPal and Venmo.

While purchasing digital assets with U.S. or other real currency allows the “No” box to be checked, as noted above, using digital assets to purchase a good or service requires the “Yes” box to be checked.

How Do I Report Digital Asset Income?

Digital Asset Held as a Capital Asset. If a taxpayer holds a digital asset as a capital asset and sells, exchanges, or transfers it during the taxable year, the taxpayer must use IRS Form 8949, Sales and Other Dispositions of Capital Assets, to calculate the gain or loss on the transaction, and then report that gain or loss on Schedule D (Form 1040), Capital Gains and Losses, or Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, in the case of a gift.

Digital Asset Received as Compensation. If an employee is paid with digital assets, the employee must report the value of assets received as wages. The employer should provide this value on the Form W-2 furnished to the employee. If an individual works as an independent contractor and is paid with digital assets, the independent contractor must report the value of the digital asset as income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). It would appear that the value of the digital asset at the time it is received is the amount of income that must be reported, even if the value of the digital asset is higher or lower at the time the income tax return for the individual is filed. Schedule C also is used by anyone who sold, exchanged, or transferred digital assets to customers in connection with a trade or business.

Additional Information

In addition to the recently released guidance, more information is provided on page 15 of the Tax Year 2022 1040 (and 1040-SR) Instructions. The IRS also has a set of frequently asked questions and other details on its webpage on Digital Assets.

While the utility of digital assets is much debated, there is little debate over whether engaging in transactions with digital assets creates challenging tax compliance issues for taxpayers.

On February 1, 2023, the Centers for Medicare and Medicaid Services (“CMS”) will issue its final rule on the method for conducting Medicare Advantage audits and calculating overpayments. As part of its 2023 final rule, CMS will eliminate the application of a fee-for-service adjuster (“FFSA”), which reduced the amount of the extrapolated overpayments determined to be owed in risk adjustment data validation (“RADV”) audits, and replace it with a retroactive method of determining extrapolated overpayments.^[1]

The Medicare Advantage RADV final rule raises serious issues as to whether it falls within the narrow circumstances under which retroactive rulemaking applies—that is, whether CMS’s corrective adjustment of costs “is necessary to comply with statutory requirements” or whether “failure to apply the change retroactively would be contrary to the public interest.”^[2] The implications for the Medicare Advantage program as a whole are significant. Pricing uncertainties affecting the Medicare Advantage bid process, and the potential negative effect on Medicare Advantage plans’ financial reporting treatment of liabilities, may affect the availability or the cost of plan benefits—and could even potentially affect the decision of insurers to remain in the Medicare Advantage market.

The New Standard: Retroactive Rulemaking

In its prior final rule in 2012, CMS recognized the need to use the FFSA to account “for the fact that the documentation standard used in RADV audits to determine a contract’s payment error (medical records) is different from the documentation standard used to develop the Part C risk-adjustment model (FFS claims).”^[3] The FFSA was intended to ensure that the amount due in a RADV audit took into account the difference between audit review standards and the errors resulting from unsupported fee-for-service diagnostic codes, creating a permissible level of payment errors and limiting RADV audit recovery to payment errors above the set level.^[4]

In the 2023 final rule, instead of using the FFSA, CMS, through its rulemaking authority, will be using a new substantive standard for the extrapolation of overpayments: authorizing the audit of earlier payment periods extending as far back as the 2011 plan year to recoup amounts paid to insurers in those earlier periods.^[5] Thus, the audit methodology imposes retroactive rulemaking,^[6] despite the fact that courts have recognized that there is a presumption against statutory retroactivity: “[t]he legal effect of conduct should ordinarily be assessed under the law existing at the time that the conduct took place.“^[7]

It remains to be seen whether the 2023 Medicare Advantage rule will meet the narrow circumstances under which retroactive rulemaking is permitted.^[8] CMS did not cite any prior regulation or statute as a basis for its retroactive method of extrapolating overpayments in RADV audits. In its final rule, it simply stated that “based on longstanding case law and best practices from HHS [Health and Human Services] and other federal agencies,” it had a right to change the extrapolation methods that are “historically a normal part of auditing practice throughout the Medicare program.”^[9]

Effects of New Rule

The retroactive RADV rule will change the standard under which earlier payments were made, creating new financial obligations in the current periods.^[10] Due to the elimination of the FFSA factor that offset extrapolated amounts and the resulting increased audit recoveries, the change will create uncertainty in the market in two ways. First, it will affect the plan bid process, as plans will be required to estimate potential rebates or premiums based on increased audit recoveries arising from the retroactive application of a different audit methodology. Second, it will affect the financial reporting treatment associated with higher risk-adjusted liabilities.^[11]

Rebate Payments to Plan Enrollees

To the extent the calculation of overpayments under the new standard causes the plan’s medical loss ratio to be out of formula with the Affordable Care Act’s 85/15% requirement, plans would be required to pay unexpected increased rebates to enrollees.^[12] The amount of the additional rebate would be calculated using a methodology that was not in place during the audited year, relating to a patient population with different actuarial risks than the current one. The pricing distortions and financial risk triggered by noncompliance with medical loss ratios will be magnified due to the lack of a set timetable for resolving RADV audit disputes and the limited scope of appellate challenges permitted.^[13] Although there are deadlines by which the insurers must file requests for appeal or reconsideration of hearing officers’ decisions, the hearing officials’ decisions are not subject to any deadlines, and the final review by the CMS administrator is discretionary and unappealable.^[14] It is unlikely that appeals of RADV audits would be exhausted before bids were due for subsequent years or a plan’s medical loss reports were due.

Compounding the uncertainty is the inconsistency between two CMS rules pertaining to RADV audit liabilities. Under the 2023 RADV rule, auditors can recover overpayments from the audit of plan years extending back to 2011. However, the financial reporting side of the RADV audit process limits plan liability. The rule pertaining to the reporting of medical loss ratios—the ratio that moves upward or downward based on RADV audit results—limits adjustments to the period from 2017 forward.^[15]

Increased Premiums

If the due date for submitting bids to CMS for the next year’s Medicare Advantage contract and the RADV repayment date fall within the same time frame, the insurer would have no choice but to shift the financial risk of the RADV audit results to Medicare Advantage enrollees in the form of increased premiums. In other words, plan enrollees in 2023 could potentially be required to pay a higher premium based on an obligation relating to a patient pool with different actuarial risks.^[16] This practice will result in competitive disadvantages and increased volatility in the marketplace. The obvious impact will be that insurers not audited will be able to submit lower Medicare Advantage bids and will be able to charge enrollees lower premiums, leading to a shift in enrollee participation in plans.

Financial Reporting Issues due to Unexpected Charges to Plan Capital Accounts

Where a RADV obligation is calculated under the new standard and falls due in the middle of a plan year, outside of the bid process, the increased liability cannot be shifted as a cost to enrollees in the form of increased premiums. The plans would have no choice but to account for the increased obligation as an additional charge assessed against plan capital accounts.^[17]

The financial obligation arising from overpayments determined as part of the audit process could create unexpected consequences at the state level. Recording those additional liabilities may result in the insurer not maintaining its adjusted state statutory capital and surplus levels within state-defined limits,^[18] as set out in the National Association of Insurance Commissioners health risk-based capital report.^[19] This could potentially trigger regulatory action resulting from questions about the insurer’s financial solvency.^[20]

Conclusion

The Medicare Advantage RADV final rule most certainly will be challenged as retroactive rulemaking. Its significant impact on plan pricing and financial reporting will affect both insurer and plan enrollee decision-making.

1. Medicare and Medicaid Programs; Policy and Technical Changes to the Medicare Advantage, Medicare Prescription Drug Benefit, Program of All-Inclusive Care for the Elderly (PACE), Medicaid Fee-For-Service, and Medicaid Managed Care Programs for Years 2020 and 2021; Extension of Timeline to Finalize a Rulemaking, 87 Fed. Reg. 65,723 (Nov. 1, 2022). RADV refers to risk adjustment data validation, which is the process of verifying diagnosis codes submitted for payment by Medicare Advantage insurers to provide clinical support for the diagnoses. The fee-for-service model reimburses providers by procedures performed. The Medicare Advantage and Medicare fee-for-service models differ in that Medicare Advantage risk adjusts a capitated rate to allow plans that accept patient populations with chronic conditions, requiring the expenditure of more health care resources. Reimbursement under the Medicare Advantage model is diagnosis driven. ↑

2. Social Security Act, 42 U.S.C. § 1395hh, sec. 1871(e)(1)A). ↑

3. Ctrs. for Medicare & Medicaid Servs., Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation Contract-Level Audits 4–5 (2012). ↑

4. Id. at 4. ↑

5. 83 Fed. Reg. No. 54,982, 54,984, 54,987 (Nov. 1, 2018). ↑

6. Contra Azar v. Allina Health Servs., 139 S. Ct. 1804, 1811 (2019) (rulemaking only applied prospectively); Regions Hosp. v. Shalala, 522 US 448 (1998) (rule adjusting base-year cost for inflation was limited to affecting reimbursement for future years and for those cost-reporting periods within the three-year window for auditing cost reports—no new reimbursement principles were applied to prior periods); Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988) (recoupment of amounts previously paid to hospitals applying new rule retroactively is impermissible). ↑

7. Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994). ↑

8. Azar, 139 S. Ct. 1804; Shalala, 522 U.S. 448; Bowen, 488 U.S. 204. ↑

9. 83 Fed. Reg. at 54, 984, 55,048. ↑

10. Letter from Am. Acad. of Actuaries to the Ctrs. for Medicare & Medicaid Servs. (CMS) and the Dep’t of Health & Hum. Servs. 1–2 (Oct. 3, 2019), https://www.actuary.org/sites/default/files/2019-10/RADV_Timing_Comments_100319.pdf [hereinafter 2019 Actuaries Letter]. ↑

11. Id. at 1–3. ↑

12. Ctrs. for Medicare & Medicaid Servs., Medical Loss Ratio, https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Medical-Loss-Ratio (last visited Jan. 19, 2023). “The Affordable Care Act requires health insurance issuers to submit data on the proportion of premium revenues spent on clinical services and quality improvement, also known as the Medical Loss Ratio (MLR). . . . The Affordable Care Act requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the rate review provisions imposing tighter limits on health insurance rate increases.” To the extent that a plan’s administrative costs exceed the 15 percent ratio, it must pay a rebate to its customers. ↑

13. Insurers may not appeal the Health and Human Services (“HHS”) secretary’s medical record review methodology or RADV payment methodology. 45 C.F.R. § 422.311 (c)(3). ↑

14. The insurer must file a written request with CMS for an appeal of the RADV audit report (the medical record review determination or the payment error calculation) within sixty days of its issuance; there is no deadline for the issuance of a written report by the reconsideration officer. The insurer must file a written request for a RADV hearing within sixty days after the reconsideration officer’s report; however, there is no deadline for the holding of the hearing or issuance of any decision. The hearing officer’s decision is subject to a discretionary review by a CMS administrator. If the administrator elects to review the hearing decision, the decision by the CMS administrator must be made within sixty days of acknowledging the decision to review the hearing officer’s decision. The decision of the CMS administrator is final and not subject to appeal. 42 C.F.R. § 422.311. ↑

15. Ctrs. for Medicare & Medicaid Servs., Medical Loss Ratio (MLR) Annual Reporting Form: Filing Instructions for the 2021 MLR Reporting Year 28–29, https://www.cms.gov/files/document/2021-mlr-form-instructions.pdf (last visited Jan. 19, 2023). Line 1.10 states that HHS-RADV adjustments and other RADV charges do not include any estimates of the 2021 benefit year or of any years prior to 2017. This is contrary to the CMS rule relating to RADV recoupment of overpayments extrapolated under the new standard for plan years dating back to 2011. ↑

16. 2019 Actuaries Letter, supra note 9, at 2. ↑

17. 2019 Actuaries Letter, supra note 9, at 2–3. ↑

18. 2019 Actuaries Letter, supra note 9, at 1. ↑

19. U.S. Health Insurance Industry Analysis Report, 2021 Annual Results, National Association of Insurance Commissioners, https://content.naic.org/sites/default/files/2021-Annual-Health-Insurance-Industry-Analysis-Report.pdf (last visited Jan. 27, 2023). ↑

20. See, e.g., 28 Tex. Admin. Code § 7.402(g)(7) (Dec. 23, 2022) (risk-based capital and surplus requirements for insurers and HMOs). ↑

The world has moved online, and if your law firm doesn’t have an online presence, you’re going to get left behind. You don’t have to create profiles for every social media platform or create advertising for search engine results pages, but the transformation of business enterprise means you at least need a website for your law firm. When potential clients are seeking out a firm to help them, your web pages will display in search engines and direct clients to you.

Creating a law firm website does take some time and dedication, and it’s important to create useful pages that are representative of your business. Knowing what to include can be challenging, especially because different law firm websites may present different information and prioritize different pages. Even so, we have some tips to keep in mind to help make your website as effective as possible.

Why Do I Need a Law Firm Website?

Often, potential clients seek a law firm out for themselves, searching the internet without the guidance of recommendations or referrals. To have a chance of acquiring these new clients, your firm needs a website to direct them to your business and stand out from the competition. This gives potential clients the information they need to know about your firm and encourages them to get in contact with your team to learn about your services.

Your website also provides an opportunity for you to create the first impression of your business, build your brand image, and communicate your values to potential clients. For those who have no awareness of your firm, your landing pages set the tone. Before a potential client speaks to any member of your team, your website already has the chance to communicate your firm’s principles and who you are through the content you include.

Source: Pexels.

What to Include in Your Law Firm Website

Homepage

In any website design or redesign, you need to pay attention to your homepage, as this is the landing page most clients will arrive at. This needs to establish your law firm name and any essential information that potential clients need to know. From here, it should be easy to navigate to other pages on your website with clearly displayed links or buttons. Your homepage should also give clients an impression of your brand through your logo, images, and color scheme.

About Us

Clients navigating to this page of your website want to know more about your firm and the people within it. Generally, “about us” pages give an overview of a business’s history leading to what you do today. You may also want to use this page to introduce key staff at your firm, including job titles or a short description of their roles. This helps clients to feel more familiar with your firm as they gain some background knowledge, helping to build their trust.

Services

Law firms can cover a range of areas of practice, so including a page or pages on your website laying out your specialties can help direct the right clients to you. Your services could be covered with one page, briefly explaining what each of these includes. Alternatively, if you want to go into more detail, it may be useful to have a page for each separate service or area of expertise available.

Resources

An optional page to include is your resources. This could include templates or reports, showing your expertise and a sample of what your firm does. If you’re interested in starting a blog, this could also be located within your resource pages to provide helpful information for clients and keep your website relevant. Regularly uploading blog posts shows your website is updated and can help your pages to show up in more search engine results.

Source: Pixabay.

Reviews

It’s important to show previous client reviews and testimonials. Reading these can be influential for potential clients deciding whether to use your firm or not. You may want to display reviews on your homepage, so viewers can immediately see what the experience with your business is like. Testimonials can also be included on your about us page, presenting how clients view your firm and the services they have used, or on pages for individual attorneys.

Contact Information

If you want potential clients to become actual clients, they need a way of contacting you. This page should be easy to find on your website, as ultimately your aim is to generate new leads. Typically, contact information should include your firm’s main email address and phone number, and the location of your offices. You can also include links to your social media profiles or enable potential clients to set up an online meeting with a member of your team using cloud communication solutions.

Terms and Conditions

Regulations about how you use and store the data from your website will depend on where your firm is based. Having terms and conditions on your website allows clients to be clear on how you use their information and what they agree to by browsing your pages. You can also provide a privacy policy here, setting out how you use the information and data gathered from your website. This shows your transparency and professionalism.

Other Tips to Keep in Mind for Your Law Firm Website

After you’ve built a basic website for your law firm, you should review your pages to ensure they’re designed to a high standard. This can help to improve the user experience, leaving potential clients with a positive impression of your firm and making them more likely to use your services. You may want to keep the following tips in mind to help you design professional and effective web pages for your law firm’s website.

Source: Pexels.

Create a Brand Image

Having the same color scheme, fonts, and presentation style across your pages helps your website to appear professional and unified. Communicate your brand image to web designers, such as by using a graphic design proposal from PandaDoc, to ensure this is tied into images and visuals on your website. Your brand image can go beyond your pages, using the same palettes and styles for social media posts, files, and presentations to make your firm easily recognizable.

Keep It Simple

It can be tempting to keep adding to your website, but this can make it confusing and convoluted. The purpose of your website isn’t to give clients all the information they could need, but to direct them to your firm and encourage them to get in touch. Having this focus can help your website design prioritize the essentials, avoiding overloading clients with information. If they need to know more, they can always call your number or send an email.

Use Intuitive Design

Intuitive design for your website means your pages are structured and presented to be easy for clients to navigate. Group related pages under headings that make sense, and use buttons or marked links to take clients to the pages they want. Creating a sitemap may help in designing your website, listing where each page can be found.

Optimize for Mobile

More and more, clients are using mobile devices to search online and find law firms. Make your website mobile friendly to allow clients to easily find and interact with your pages. This involves ensuring buttons and links are big enough to select on a mobile screen, and adapting your page design to present well. Check how your website looks on mobile and test the various pages, noting where changes need to be made to improve the user experience.

Source: Pexels.

Use SEO

Search engine optimization (SEO) helps ensure that your website appears at the top of search engine results pages. The higher your ranking, the more clients you attract as they don’t have to look hard to find your website. Make sure your pages include keywords in your headings as well as throughout your copy. Particularly on your blog pages, aim to include internal links to your other pages to make them more noticeable to search engines.

Start Designing Your Law Firm’s Website Today

What your law firm website looks like and includes is up to you. The website should accurately depict your business and give potential clients an overview of who you are and what you do, while encouraging them to get in contact with you. How you do this may vary from other law firms, as each business will reach out to potential clients in different ways.

Once your website is live, keep reviewing it and making improvements. What makes a good website changes as the requirements of clients evolve, so look for trends and incorporate them into your website. This could be through adding newer content, refreshing pages with different images, or working on the user experience to attract new clients to your firm.

In the current environment, financing take-private transactions by private equity (PE) sponsors has been uniquely challenging. Volatility, inflation, rising interest rates, and geopolitical instability have all contributed to making equity and debt financing both more difficult to put together and more expensive. As such, typical private equity financing structures are being replaced with novel and more bespoke financing arrangements.

Despite the uncertain macro environment, private equity remains active, and there is significant dry powder available to be deployed. While fundraising has softened and aggregate capital raised declined in 2022, private equity powerhouses still managed to successfully close on big flagship funds. As PE players get accustomed to the new normal, 2023 is poised to see a resurgence in financial sponsor buying, but likely on new terms and utilizing new structures.

Private Equity Sponsors Are Less Willing to Write Large Equity Checks

Financial sponsors are less willing to write large equity checks to finance leveraged buyouts (LBOs). Unlike the beginning of 2022, when sponsors were willing to underwrite the full equity financing, private equity shops are now less likely to speak for the entire equity check and take on the syndication risk themselves. This development has been accentuated by the need for larger equity checks, as capacity for leverage in the market has shrunk dramatically and equity financing often now comprises a larger portion—sometimes north of 50%—of the overall sources and uses for a deal.

Club deals, which reduce individual equity commitments, are becoming more common, especially in sizable LBOs. For example, Hellman & Friedman partnered with Permira in June 2022 to lead a consortium of investors in buying Zendesk for $10.2 billion. In another notable deal in the software space, Datto was acquired by Kaseya for $6.2 billion, with funding from an equity consortium led by Insight Partners, with significant investment from TPG and Temasek.

As such, in large take-private transactions, careful consideration should be given to which private equity players are able to write the equity check necessary to execute the transaction on their own, versus which will need a partner. When running an auction and deciding when and how to pair up potential general partners, target companies and their advisors should be thoughtful about the potential impact of partnering arrangements both on the price a bidding consortium would be willing to pay for the company, as well as on the overall competitive dynamics of the sales process.

Sovereign Wealth Funds and Public Pension Funds Are Increasingly Playing a Key Role in Private Equity Transactions

Sovereign wealth funds (SWFs) have been very active in take-private transactions, and virtually no LBO of a meaningful size can be executed in the current environment without some level of SWF participation. The SWFs of Saudi Arabia, Singapore, Qatar, and the United Arab Emirates are on the list of desired limited partners (LPs)/co-investors of virtually every top-tier financial sponsor looking at a sizable LBO.

Canadian public pension funds have also become some of the world’s largest investors in private equity and are often on the list of requested LPs/co-investors. Many of them focus on investments in the infrastructure space, where they can generate stable returns commensurate with the expected payouts under pension plans.

While SWFs and public pension funds previously participated in private equity transactions passively, through their LP interests in PE funds, they have increasingly been coming in as co-investors alongside private equity firms, in roles with varying degrees of board and other governance rights. For example, in December 2022, Advent International agreed to acquire Maxar Technologies for $6.4 billion, in a transaction financed with $3.1 billion equity commitments from funds advised by Advent and a separate $1 billion minority equity investment by the British Columbia Investment Management Corporation.^[1]

Allocating LPs to bidders in a sell-side process is nowadays equally important as general partner (GP) partnering decisions, as LP access can be particularly relevant to the ability of certain PE sponsors to put forward fully financed bids, especially in mega deals. As such, putting together the right GP/LP investor groups can be essential for the successful outcome of auction processes, and decisions as to when to allow financial sponsors to talk to LPs—and which LPs they can have access to—carry significant weight.

In addition, the identity of LPs, the size of co-investor stakes, and the constellation of governance rights given to co-investors can dictate the scope of governmental clearances needed to close a deal, how long it will take to get them, and whether there is risk that they will not be obtained. This is something that can clearly weigh in the favor of—or, conversely, detract from the attractiveness of—any bid and should be given due diligence and factored in when making key strategic decisions over the course of auction processes.

Currently, Traditional Lending Markets Are Effectively Shut Down for Large LBOs

The syndication of the debt financing for the LBO of Citrix marked a watershed moment in traditional lending markets. For all intents and purposes, the big banks are not currently open for business when it comes to big LBOs.

In January 2022, Vista and Evergreen, an affiliate of Elliott Investment Management, agreed to acquire Citrix in a $16.5 billion LBO—the largest LBO of the year, setting aside Elon Musk’s purchase of Twitter. At the time, Vista and Evergreen had a $15 billion fully committed debt package ($16 billion counting the revolver) underwritten by a group of bulge bracket banks, led by Bank of America, Credit Suisse, and Goldman Sachs.

The debt was priced before the markets started souring and interest rates started rising in steep increments, and the banks had a difficult time offloading the debt. According to news reports, the Citrix bonds and loans were sold at big discounts to face value, and the underwriting banks ended up with more than $600 million in losses (and some junior debt remains unsold). Some commentators went as far as to label the Citrix debt sale “the point of no return” and a “bloodbath.”^[2]

The story of the Twitter acquisition financing is not that different. According to Bloomberg, in November 2022, Wall Street banks were sitting on more than $40 billion of buyout and acquisition debt that they were not able to sell following the dramatic turn in credit conditions earlier in 2022.^[3] Notwithstanding certain sales and block trades at the end of 2022, much of this LBO debt hangover still remains on bank balance sheets—which includes an estimated $12.5 billion of loans tied to the buyout of Twitter, as well as loans in connection with the acquisitions of Nielsen, Brightspeed, and Tenneco—and has significantly reduced banks’ appetite for more LBO financing in the near term.^[4]

Direct Lenders and Private Credit Are Taking the Place of Traditional Underwriters

The void created by big banks sitting on the sidelines of LBOs has been filled by direct lenders and other sources of private capital, particularly in the software and technology sectors. For example, a Blackstone-led group of direct lenders provided a record $5 billion loan for the Zendesk deal,^[5] and a private debt club led by Blue Owl Capital provided a $2.5 billion loan to finance Vista’s $8.4 acquisition of Avalara.^[6] Unlike traditional banks, who seek to place and sell committed acquisition financing to the debt market, direct lenders are in the business of holding the debt and are, unlike traditional banks, not under pressure to sell it.

Historically, direct lenders would often finance transactions on their own or in small groups. In recent deals, however, particularly for the larger LBOs, consortiums of direct lenders may include upwards of fifteen lenders. Direct lenders are credit focused and are known to do a deeper dive in diligence, as they are making the loans with the expectation of carrying them on their balance sheets until maturity. Direct lending debt packages may also be more expensive and contain bespoke features (such as a blend of callable and non-callable debt) designed to deliver lenders their desired returns. As a result, ironing out the details of a debt financing package can be more involved than in a traditional syndicated term facility and/or bridge to bonds. Direct lenders also have flexibility to provide alternative forms of private capital, notably preferred equity (typically combined with a direct lender debt financing or with a financing led by the traditional banks), which can give buyers greater flexibility, especially if rating agencies are willing to assign equity credit to the alternative financing.

Because of this, from the sell-side standpoint, it is important to ensure from the outset that the company has control over potential bidders contacting debt financing sources and that potential buyers cannot lock up debt financing sources in exclusivity arrangements without the company’s consent. In many deals, especially larger ones, competing private equity bidders need to go to the same universe of direct lenders (subject to customary “tree” and information barrier arrangements) to finance their bids, and locking up any debt providers can impede the competitiveness of an auction.

In addition, target companies and their advisors should be thoughtful about when to allow private equity firms to contact debt financing sources. Given the number of parties that would be brought under the tent, the risk of leaks should be considered and balanced against the need of private equity buyers to get perspectives from lenders to put forward firm bids and the need of lenders to have time to do their diligence and go through their investment committee processes to be able to execute binding financing commitments.

Auctions Need to Be Carefully Orchestrated from Beginning to End to Deliver the Best Value for Target Companies

For the reasons described above, from the outset of a sales process, target companies should ensure that they have full control over when potential buyers can contact equity and debt financing sources, who they can join forces with, and the basis on which they can engage with potential co-investors and lenders. These terms are often set at the NDA phase of a process and can set the stage for the entire auction. Some of the most crucial inflection points for the successful outcome of a sell-side process are the decisions regarding partnering, with the when, who, and how carrying significant consequences for the end result of an auction.

We wish to recognize, with immense appreciation, the assistance of Daria Butler.

1. Businesswire, Maxar Technologies To Be Acquired by Advent International for $6.4 Billion, December 16, 2022. ↑

2. Euromoney, After Citrix: Leveraged finance and the point of no return, December 22, 2022; Financial Times, ‘Bloodbath’: Citrix buyout debt sale casts shadow over pending deals, September 24, 2022. ↑

3. Bloomberg, Wall Street’s Hung Debt Swells to $43 Billion as Tenneco Closes, November 17, 2022. This $43 billion figure includes the Citrix debt, which, as noted in the article, was subsequently sold, but at significant discount. ↑

4. Bloomberg, Wall Street’s Lucrative Leveraged-Debt Machine Is Breaking Down, January 12, 2023. ↑

5. Bloomberg, Blackstone-Led Group Provides $5 Billion of Debt for Zendesk, June 24, 2022. ↑

6. Bloomberg, Private Debt Club Lends $2.5 Billion for Vista Equity’s Avalara Buyout (AVLR), August 8, 2022. ↑