As chairs of the American Bar Association’s Private Target Mergers & Acquisitions Deal Points Study (the Private Target Deal Points Study), we are pleased to announce that we published the latest iteration of the study to the ABA’s website on December 30, 2021.
Congratulations! But Wait. What Exactly Is This Private Target Deal Points Study, Anyway?
The Private Target Deal Points Study is a publication of the Market Trends Subcommittee of the Business Law Section’s M&A Committee. It examines the prevalence of certain provisions in publicly available private target mergers and acquisitions transactions during a specified time period. The Private Target Deal Points Study is the preeminent study of M&A transactions, widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.
The 2021 iteration of the Private Target Deal Points Study analyzes publicly available definitive acquisition agreements for transactions executed and/or completed either during calendar year 2020 or during the first quarter of calendar year 2021. In each case, the transaction involved a private target acquired by a public buyer, with the acquisition material enough to that public buyer for the Securities and Exchange Commission to require public disclosure of the applicable definitive acquisition agreement.
The final sample examined by the 2021 Private Target Deal Points Study is made up of 123 definitive acquisition agreements and excludes agreements for transactions in which the target was in bankruptcy, reverse mergers, divisional sales, and transactions otherwise deemed inappropriate for inclusion.
Although the deals in the 2021 Private Target Deal Points Study reflect a broad array of industries, the health care and technology sectors together made up nearly one-third of the deals. Asset deals comprised 18.7% of the study sample, with the remainder either equity purchases or mergers.
Of the 2021 Private Target Deal Points Study sample, 22 deals signed and closed simultaneously, whereas the remaining 101 deals had a deferred closing some time after execution of the definitive purchase agreement.
The transactions analyzed in the 2021 Private Target Deal Points Study were in the “middle market,” with purchase prices ranging between $30 million and $750 million; purchase prices for most deals in the data pool were below $200 million.
The Private Target Deal Points Study Sounds Great! How Can I Get a Copy?
All members of the M&A Committee of the Business Law Section received an e-mail alert from Jessica Pearlman with a link when the study was published. If you are not currently a member of the M&A Committee but don’t want to miss future e-mail alerts, committee membership is free to Business Law Section members, and you can sign up on the M&A Committee’s homepage.
ABA members who are not currently members of the Business Law Section can sign up to join on the Section’s membership webpage.
The published 2021 Private Target Deal Points Study is available for download by M&A Committee members from the Market Trends Subcommittee’s Deal Points Studies page on the ABA’s website. Also available at that link are the most recently published versions of the other studies published by the Market Trends Subcommittee, including the Canadian Public Target M&A Deal Points Study, Carveout Transactions M&A Deal Points Study, and Strategic Buyer/Public Target M&A Deal Points Study.
How Does the 2021 Private Target Deal Points Study Differ from the Prior Version?
The 2021 version of the Private Target Deal Points Study has a number of features that differentiate it from prior iterations.
Data in the 2021 version of the Private Target Deal Points Study is more current. The 2021 version of the Private Target Deal Points Study includes not only 2020 transactions, but also transactions from the first quarter of 2021.
The 2021 version of the Private Target Deal Points Study contains many new data points.
Termination Fees. For the first time ever, the 2021 version of the Private Target Deal Points Study provides a unique look at termination fees in the private target context.
COVID-19 Data. Also, understandably, for the first time ever, the study includes data on COVID-19, including how an exception to the ordinary course covenant for responses to the pandemic grew over time.
OtherNew Data. There are other new data points scattered throughout the study with “new data” flags (like the sample shown below) to make them easy to spot:
RWI Data. The use of representations and warranties insurance (“RWI”) continued to expand, and the study reflects the big jump from 52% in the prior study to 65% in this study. We’ve also added a data point on covenants to maintain the RWI policy (look for the new data flag in that section).
Please join us in extending a hearty thank you to everyone who worked so hard on this study, from leadership to advisors to issue group leaders to the working groups, all of whom are listed in the credits pages.
For more information, there will be an In the Know webinar with the Chairs and Issue Group Leaders providing analysis and key takeaways from the results of the Private Target M&A Deal Points Study—details on time/date to follow.
If depositions are part of your legal practice, remote depositions are something you are likely used to at this point. As the whole world went into lockdown for the pandemic and travel ground to a halt, remote depositions became the only viable solution if we wanted litigation to proceed.
What originally served as simply a Band-Aid, however, quickly became the norm. Now, even as restrictions ease and more in-person activities are beginning to take place again, remote depositions are expected to remain the norm for both court reporters and attorneys. In fact, 83% of attorneys surveyed said that they expect at least one party in every proceeding going forward to participate remotely.
Remote depositions not only offer a number of benefits and advantages—they also help ensure that you can get the reporter coverage you need to capture the record and create a transcript in light of a workforce shortage.
The Continued Relevance of Remote Proceedings in a Post-Pandemic World
In the past year, we’ve become very comfortable working remotely. Once it was proven that many jobs could be performed as efficiently and effectively remotely as they could in person—if not more so—many people became reluctant to go back to the old way of doing things, particularly when the risks of the pandemic are still very real. In the world of depositions, this is true for attorneys, witnesses, and court reporters.
In addition to convenience, cost savings, and other benefits, remote depositions have come to play a significant role in offsetting the current court reporter shortage. When you opt for a remote deposition rather than requesting an in-person proceeding, you increase your likelihood of securing the coverage you need and that your case will proceed on your desired timeline.
The Benefits of Remote Depositions
Remote depositions offer a number of concrete advantages over in-person depositions, from cost savings to better productivity.
Given the current court reporter shortage in our country (discussed more fully in the next section) and pandemic-related health concerns with in-person meetings and events, getting coverage for an in-person deposition exactly when you want it is no longer a guarantee. Opting for remote depositions greatly improves the chances that you’ll be able to secure court reporter coverage and will reduce the likelihood of delays and unavailability.
In terms of costs, the savings you’ll see when you participate remotely are significant. Remote depositions eliminate costly travel, whether that’s plane tickets or taxis across town. At a time when clients are analyzing spend more than ever and pushing back on bills, anything you can do to keep costs down will improve your client relationships and set you apart from your competition.
Many attorneys went into the pandemic fearing that remote depositions would make it more difficult to maintain control over the deposition room, but the opposite has proven to be true. Speaker view and spotlight functions actually make it easier to place the focus solely on the witness during testimony and eliminate other distractions. Additionally, attorneys are including language in their admonitions that describes the behaviors expected of all participants. In many instances the etiquette and behavior in a remote setting are also written into case and trial orders, setting the tone of civility, with a reminder of our ethical obligations. All this goes to say that remote depositions are truly the new normal.
Remote depositions also make it possible for lawyers to use their time more efficiently, because more work can be done in a single day. When everything was in person, it was common for litigators to conduct depositions around the country or spend hours commuting across cities and back to get to deposition locations. Remote depositions can be handled from anywhere, which gives you all that lost time back to be more productive, take on more business, and better serve your clients.
It’s also important to not ignore the quality-of-life issues that remote depositions raise. As many attorneys have adjusted to working from home in the past year and a half, we’ve gotten used to having a better work-life balance. Most of us will be reluctant to give that up in the future, and remote depositions make it more possible to maintain it.
Remote depositions allow everyone to be nimbler, which is crucial in a world where our day-to-day realities continue to shift. If we carry on doing things the way we’ve successfully done them for the past year, litigation will be able to go forward even if participants fall ill or the pandemic situation changes again. Of the very few depositions that are booked in person these days, a significant number of them of them cancel at the last moment because someone gets ill or has a concern around COVID-19, leaving everyone to scramble to arrange a remote alternative. These last-minute changes bring a layer of stress that few welcome in these times and is a strain on resources as alternate solutions are set in place.
If there’s truly a compelling reason for a deposition to take place in person, hybrid depositions are also an option. Hybrid depositions are where some, but not all, of the participants are remote. While these can be challenging from a technical perspective if they are not set up correctly, a few simple planning steps with your deposition provider can put that to right. A key step to success is knowing where everyone will be and what equipment they need, as well as working with a provider experienced in hybrid proceedings who has the knowledge to support and advise on best practices. The hybrid approach can also help address the challenges of getting a court reporter scheduled because, if necessary, they can be remote.
The Court Reporter Shortage
The court reporting industry is experiencing a shortage of reporters, and that’s not likely to correct itself anytime soon. The National Court Reporters Association predicted a critical shortfall of nearly 5,500 court reporting positions by 2018, and today, we’re seeing those predictions were accurate.
The court reporter shortage is mathematically certain to increase in the coming years. In March 2021, the National Court Reporters Association issued statistics saying the average age of a court reporter is 55, and according to the Speech to Text Institute, there are 1,120 stenographers leaving the field every year compared to only 200 entering.
Attorneys returning to work and expecting to have all their depositions in person may find it challenging to obtain reporter coverage. Remote depositions greatly improved the capacity of court reporters in the last year, and the same availability simply won’t exist once you start factoring in travel time and the other realities of in-person depositions. Remote depositions are a great option when looking to offset that shortage and get the deposition coverage you need, when you need it.
Moreover, for many court reporters approaching retirement, in-person depositions are far more physically demanding than most attorneys may realize. In addition to the transcribing part of the job that you witness, in-person depositions often involve lengthy commutes, hours spent at night preparing rough drafts, lugging mountains of physical exhibits, waiting in line to ship them back to the office, and other such tasks.
Remote depositions have changed all that for the better. Court reporters no longer have to invest hours in commuting, and digital exhibit sharing has eliminated the need for them to physically handle and label exhibits. Simply put, remote depositions are far less taxing on hardworking court reporters, enabling them to take multiple assignments each day as no time is wasted traveling from location to location. If they can continue to work remotely rather than returning to the demands of in-person reporting, it’s possible that many would be more inclined to continue working past the time they might otherwise have elected to retire, helping to stem the current reporter shortage. Pandemic-related health concerns only serve to further support many court reporters’ desires to continue working remotely rather than return to in-person work.
How you choose to schedule your remote depositions can also increase your likelihood of getting coverage despite the shortage. While certain depositions will always be full-day affairs, many are not. If you’re looking at a series of two-hour depositions, you might consider scheduling them back-to-back on the same day. The golden rules for scheduling are applicable now more than ever: first, schedule your proceeding as far in advance as possible, and second, make use of the available remote technologies that are designed to assist when all parties can’t be present for a deposition.
With all the uncertainties of COVID-19 and the remote work environment we are in, it’s unrealistic to think that things will completely go back to normal any time soon. Remote depositions are the new norm, and you should embrace all the advantages they offer.
Adversity in business is a frequent occurrence; disagreements arise, personalities clash, and goals diverge as companies grow and change over time. Sometimes that adversity leads to a need to winddown or separate business interests, which can be a thorny subject for lawyers and their clients.
These so-called “business divorces” typically involve complex legal and personal issues—many of which have not been anticipated by the people involved—that may or may not be the subject of any written agreements between the business partners. An average business divorce case can include a myriad of issues that touch on subjects like corporate governance, fiduciary duties (and the attendant responsibilities), contractual obligations, fluctuating and varied expectations of owners (particularly in a family environment), employment law issues, trade secrets and sensitive information, non-compete law, business valuation and a variety of tax issues.
As if that were not enough, this whirlpool of issues is often agitated by varied state statutes governing dissolution or buy-outs, which may offer additional remedies (or, in some cases, restrictions) to an allegedly aggrieved shareholder. Given this complexity, it is often the case that parties facing such a dispute will be well-served by at least attempting to mediate as an alternative to lengthy, expensive—and, frankly, risky—litigation. Mediation allows parties to craft outcomes that are acceptable, certain, and advantageous in terms of cost and time, and its informal processes permits the use of independent experts, customized resolution of small and large issues (in a less adversarial environment, no less), and potential repair to damaged relationships. While almost always complex, using the tools of mediation (or other ADR formats) provides attorneys with unique ways to advise their clients in the winddown or separation of closely-held businesses, which in turn allows all parties to the dispute to move on with—and into the next chapter of—their lives and control their future without involvement of a court.
Beyond the usefulness of mediation in general, it is important to remember that is also likely the cheaper option for clients. As in most business disputes, each side of the case wants to maximize the value of their business interest; in doing so, however, many fail to consider the impact of the cost of litigation (particularly where claims that give rise to indemnification obligations are involved), or the impact of that cost on a potential sales transaction or other business transactions. By considering those costs—and recognizing that resolution may maintain the value of the business for all parties—the use of alternative dispute resolution methods such as mediation in business divorces can save all parties a lot of time, money, and headaches.
The variety of issues that can arise in a mediated business divorce is impossible to catalog completely. However, several key considerations (particularly during a global pandemic) are important to keep in mind whenever advising clients in a mediated winddown or business divorce.
1. The personalities of the parties—emotional and family barriers to resolution.
While “big” personalities can exist in other areas of the law, nowhere is that truer than in closely-held business disputes. Many closely-held businesses were founded by a single individual with sole ownership, or by close friends or family members who shared ownership (sometimes equally, sometimes not).
These individuals often have intense personalities and emotional investment in the dispute (for many, it’s a business they’ve spent their lives working in or around), which means that disputes regarding their closely-held businesses often have an emotionally-charged backdrop to battle. Siblings may disagree as to who should take over a family business, what ownership interests should be, and who should take over which role in an enterprise that may have been handed down through a family for generations. Similarly, friends may have a falling out—sometimes over the business, sometimes over other things—and begin to dislike each other. This, in turn, can impose serious ramifications on the business operations—and even the long-term value—of the business.
One party may feel they deserve a larger share of the business (or higher compensation) or more control to compensate for their involvement in the day-to-day activities of the business, while another may believe their longer-term ownership and contributions of capital entitle them to a majority position or veto rights, despite a lack of day-to-day involvement. One owner may want to sell the business, while the other may not; one may want to sell off certain divisions or lines of business, while the other may want to take an all-or-nothing approach. Given the personalities—and intense emotions—that can permeate a closely-held business dispute, any good attorney advising their clients in such a dispute must master not only the facts of the dispute itself, but the character and nature of the personalities in play, all while constantly considering each parties’ goals and desires.
Resolution may only be accomplished if each party feels heard, respected, or at least acknowledged, and understands that in order to resolve a case, emotions must be set aside, and a business deal must be reached.
2. Earn-out and valuation date disputes in a changing world.
In a mediated settlement—particularly one that has only been reached in principle—changing world circumstances may cause the implosion of an otherwise solid deal. Recently, the COVID-19 pandemic has provided an unprecedented example of just how much can change in a short period of time: in a matter of months, the world’s economy ground to a halt as the virus raged around the planet. New variants continue to pop up, and it is unclear exactly how long the pandemic will have a major effect on the world economy. The effect such a change can have on a mediated settlement in principle cannot be understated. For example:
The parties may have agreed on a particular valuation date or method to use in valuing company interests for the purposes of a buy-out. A massive change like a viral pandemic could necessarily alter the parties’ desires surrounding what valuation date to use; for those selling, the use of a date that results in a higher return on investment is obviously appealing, but for those buying, a date that reflects changes in the true value of the ownership interests they are purchasing is necessarily more attractive. Of course, the precise industry in which the business sits also plays a role in these kinds of negotiations: is there potential upsidebecause of the pandemic (i.e., a closely-held biological testing business may have a more profitable valuation date during and after the pandemic than it did before), or has an eviscerated business suddenly made a turnaround by capitalizing on a sudden return by the workforce back to an office environment such that an earlier valuation date is still acceptable? Compromise may be the only method by which such a change can be evaluated and weathered.
The financial data informing a business divorce will likely have changed during a pandemic: sales may dry up, assets may need to be sold, and a business might have to restructure itself to avoid significant (or even fatal) losses, depending on the industry. At the same time, some business enterprises may greatly benefit from a pandemic; a buy-out of a restaurant in a pandemic is going to look a lot different than a buy-out of a streaming service. Moreover, future plans for capital expenditures, expansions, or changes to the company’s financial forecast will necessarily alter the parties’ expectations surrounding a buy-out; a pandemic is no exception and will likely exacerbate those issues. Acknowledging the need to adjust expectations as the world changes is critical to ensuring a mediated settlement for a buy-out in principle survives.
The structure of any buy-out—i.e., will it be a lump sum payment or payments spread out over time, the mechanics of the share transfer, whether earn-outs will exist, and the text of the agreements themselves—must take into account changing world circumstances. Some businesses (see, e.g., movie theaters) likely could not afford to provide a lump sum payment for a buy-out of ownership interests during a pandemic. A shipping logistics company, on the other hand, might have just had its best year ever, and a lump sum payment would actually be the preferable route to take (where it may not have been before a pandemic).
3. Special considerations depending on which side you represent.
When representing a minority owner in a business divorce, it is important to keep several key factors in mind, including when a mediation is threatened by changing business circumstances.
Always remember the purpose behind governing state statutes and common law: to protect and provide adequate remedies to minority shareholders. These statutes often focus on concepts of fairness, reasonableness, and equity, which become even more apparent in the context of changing global circumstances.
A changing world means changing goals; you should also remember that the goal of reaching a mediated settlement (or keeping a settlement in principle alive) is to balance the need for a permanent resolution/separation of business interests against continuation of a viable business for the remaining owners. Why pay the lawyers to litigate the separation when you can use those same funds to fund the business divorce?
As previously noted, the emotions of minority owners may run high, particularly where a majority owner has acted in a way that either is or could be perceived to be unfair towards the minority owner. Resolution will often depend on removing emotion from the terms of a deal—at least in part—and a good lawyer must also remember to keep their client from getting greedy or overreaching in their demands of a controlling shareholder—i.e., revenge is not usually a financially sound objective.
Representing a majority owner in the same dispute comes with a host of separate, but equally valid and important considerations.
Controlling owners will need clear, expansive, rock-solid written agreements that set forth expectations of the parties moving through a mediated deal. This principle is even more important when global events shift economic considerations in a short period of time; the need for certainty in a time of change is often critical to advising an owner that will continue to own and operate a closely-held business after a separation event. This certainty needs to be present in valuation decisions, as well as decisions on the precise structure—and reasons for the structure—of the deal.
In salvaging a potential deal from a mediation that has been impacted by changes to the world economy, remember that the majority owner is attempting to maximize business interests. This requires consideration of methods to ensure as much of a return on investment as possible, while accounting for the need to avoid making lowball offers or using unfair negotiating tactics with the minority owner. A changing world economy impacts everyone; remembering that point—and helping an otherwise headstrong client understand it—could be the difference in whether a deal succeeds or collapses.
Like minority owners, the emotions of a majority owner may also run high. The individuals involved could view minority owners as seeking to fleece the company (particularly where some owners are involved in day-to-day operations and others are not). It is equally critical to work with a controlling owner to set emotions aside as best they can to reach a business deal.
Ultimately, mediation is an excellent medium through which parties can resolve emotionally charged, legally complex wind-down or business divorce disputes, particularly in the context of a rapidly changing world. Careful consideration of the parties’ emotions, the history of the parties’ relationship, and the subject business’s position in a changing economy all play a part in helping guide parties to an effective resolution. Moreover, the lens through which a party views a dispute can also change based on whether they are a majority or minority owner; savvy counsel will take the time to help a client focus on the business or practical interests involved, instead of letting emotional weight lead to unreasonable demands, overreaching, or baseless stubbornness. By considering these issues, a good lawyer can help their client (and, in fact, all parties to a dispute) reach a cost-effective mediated resolution of a business divorce in a changing global economy.
Ask a group of female attorneys about their experience with the fabled “glass ceiling,” and you will likely hear many stories. The glass ceiling describes the barrier that women in numerous professions bump up against when trying to climb the ladder in their respective careers. Women have made tremendous strides in the working world, yet the glass ceiling remains stubbornly in place in many businesses.
Unequal Partners
Today, women make up more than 50% of entrants into law school, equity that was built over decades of struggle and work. Although a similar number of men and women are studying to become lawyers, this has not translated into an equal number of women becoming partners in law firms: Partnerships still primarily belong to men. The latest statistics, according to Law.com, place partnerships for women at 31% overall. This is an increase over smaller numbers from the past 20 years, but there is still much room for improvement.
Barriers persist for female lawyers who seek to reach higher levels in their careers. Men generally hold higher seniority in law firms, with some notable exceptions, and also typically outearn their female counterparts. Per Law.com, the numbers for women holding equity partnership in firms have experienced growth since studies conducted in 2012. However, even with an improvement in the number of women reaching equity partner status, the growth has been slower than expected.
When I moved to New York City in the mid-1980s to join a private practice, I worked with a number of female attorneys, but the partners were all male. I have definitely seen a major increase in women partners, and law firms have brought more women into management, including managing partner roles. For women entering law, there are more mentors than ever. However, there has been slower progress in terms of women being brought into client development, especially with key clients. The upper echelon of law careers remains, largely, a boy’s club.
The Motherhood Dilemma
In “firm life,” there is a strong emphasis on billable hours. Women may take time off or go part-time to start families. That, to some degree, has led some women attorneys to choose in-house opportunities. Amassing billable hours is difficult when you’re bearing children, taking care of infants and family obligations.
Some firms are beginning to make concerted efforts to give credit for billable hours even when lawyers are on family or maternity leave. These efforts allow women, as well as men, to take desired breaks to build their families without risking their partnership track.
However, because of the many additional pressures and expectations women face around raising and bearing children, female lawyers need extra support, and firms must be thoughtful and break from tradition to promote a path to partnership.
Breaking Through
How should female lawyers confront the reality of the glass ceiling and chisel away at it until they can break through to the other side?
In addition to the larger changes needed in the industry, several individual approaches to the glass ceiling can help lessen its impact and contribute to, someday, eliminating it all together.
Female lawyers should have actionable goals and a plan for the trajectory of their career.
Mentors are important to female lawyers—someone to help them navigate the law firm environment and teach them valuable skills like business development.
Be patient, but not stagnant. Focus not only on building skills, but also on building client relationships and business.
Do not be afraid to ask for business. Be fearless and consider the fact that you are actually helping your clients avoid problems and deal with complicated business issues.
Do not be afraid of change. If you see a unique or exceptional opportunity, go for it. Those who are afraid of change often stagnate.
For over a decade, Chinese insurers have supported Belt and Road Initiative (BRI) project development in Latin America, with state-run insurer Sinosure among the first to insure major Chinese infrastructure projects in and exports to Latin America. While Chinese companies remain focused on backing the BRI in the LATAM region, there is early indication of growing interest in life and other non-life insurance markets, as China’s insurance giants have begun to appreciate the market opportunity.
In 2007, China Life began providing insurance business services to companies in Latin America and to Chinese tourists visiting Latin America.[i] Others, including People’s Insurance Company of China (PICC), began insuring employees of Chinese companies, and China Reinsurance Corporation (China Re) reinsured risks ceded by LATAM insurers.
In recent years, Chinese insurance investment appetite in Latin America has increased. Portuguese insurance company Fidelidade Mundial, majority-owned by Chinese tech firm Fosun International, announced it would sell insurance in Chile through a series of partnership agreements.[ii] In 2019, Fidelidade Mundial’s Peruvian unit, FID Peru, acquired a 51% stake in Peru’s La Positiva Seguros y Reaseguros, providing health, accident, home, and mandatory vehicle insurance; and an approximate 24% stake in Bolivia’s Alianza Compañía de Seguros y Reaseguros.[iii] Fosun International also purchased the Brazil operations of Caixa Seguros, Portugal’s largest insurance group.
The Latin American insurance market might also prove attractive to Ping An, a Chinese financial services conglomerate, as interest in the company’s long-term life policies diminishes among aging Chinese consumers. Ping An’s heavy investment in technology and global competitiveness should facilitate its entry into the life market.
China’s interest in expanding into overseas insurance markets could be dampened, however, by a growing focus on domestic market development and an apparent growing sensitivity to risk among China’s financial giants. In this regard, the China Banking and Insurance Regulatory Commission recently issued regulations enhancing supervision of, and regulating investments by, Chinese insurers to ensure solvency and minimize systemic risk. China’s policies and most recent Five-Year Plan (2021–2025) nevertheless promote a continued focus on not only “bringing in” (i.e., attracting) foreign capital in China’s insurance industry, but also on “going out” (i.e., investing abroad).
Also evident in China is a growing focus on providing risk analysis for Chinese companies operating in Latin America and other regions. Jiangtai International Cooperation Alliance, a Chinese insurance intermediary, has provided risk analysis and rescue services for companies in more than 170 countries. Jiangtai chairman Shen Kaitao noted at a June 2021 conference, “[w]here the foreign investment enterprises go, the risk prevention and control services will extend.”[iv]
Beyond infrastructure risk management, expansion by Chinese insurers into P&C, life, health and other insurance lines in Latin America would also seem inevitable. The life insurance industry in Latin America was performing well even before Covid-19, having grown by 5.1% in 2019, boosted by favorable interest rates. In 2019, total insurance premiums in Latin America and the Caribbean amounted to US$153.05 billion, of which 54% came from non-life insurance and the remaining 46% from life insurance.[v] Indeed, amid the pandemic and related uncertainties, interest in life insurance and other protection products has surged among Latin American consumers.[vi]
As Chinese insurers continue to “go out,” life and non-life products will no doubt feature more prominently in their overseas offerings. These developments sound a cautionary note for U.S. insurance companies seeking to compete in the region while also heralding opportunity.
Alternative business structures (ABS) is a generic term used in the legal ethics arena to refer to any form of business model for provision of legal services that is different from traditional law practice models (sole proprietorship and various types of partnerships). ABS can include the possibility of equity ownership by non-lawyers, including even publicly traded law firms (as has been seen in Australia, where ABS is known as “incorporated legal practices”) and business or consulting entities with non-lawyer equity owners that provide both legal and non-legal services.
Besides Australia, ABS has been permitted for many years in England and Wales (since the Legal Services Act of 2007) and, here in the United States, in the District of Columbia.[1] The D.C. liberalization of its Rules of Professional Conduct did not yield a significant amount of law-firm affiliated ABS. Part of this may have been due to uncertainty about whether D.C.-licensed lawyers, many of whom are also licensed in one or more other U.S. jurisdictions (e.g., Maryland, Virginia), would run afoul of the rules of professional conduct in the other jurisdictions, which did not permit ABS.[2] More recently, however, Arizona and Utah have modified their respective versions of Model Rule 5.4[3] to permit business structures that allow nonlawyer ownership of law firms and the sharing of legal fees with nonlawyers.
Model Rule 5.4
Under ABA Model Rule 5.4, which has been adopted essentially unchanged in nearly all other U.S. jurisdictions, lawyers are prohibited from sharing legal fees[4] with a nonlawyer or practicing in a law firm in which a nonlawyer owns any interest or serves as an officer or director. The original purpose of this prohibition, which a number of lawyers deem anachronistic, was to preserve the professional independence of lawyers.
Starting in the latter part of the twentieth century, however, it became clear that lawyers no longer had—assuming they ever had—a monopoly on the provision of legal and law-related services. Accountants and other tax professionals had for many years offered tax-related services to the general public in a manner that frequently blurred any distinction between legal and non-legal services. Other providers made available document discovery and a broad array of low-cost, high-volume legal-related services to both businesses and individuals.
The success of many of these initiatives attests to the societal problem posed by the high cost of lawyers’ services. The author has frequently remarked (only partially in jest) that, were he in need of a lawyer, he couldn’t afford himself. The issue does not call for levity, however. In a nation that widely regards itself as a leading exponent of the rule of law, the World Justice Project 2020 Rule of Law Index ranked the United States as only twenty-first out of a total of 128 countries, but—more tellingly in terms of peer group analysis—fifteenth out of twenty-four on a regional basis and twenty-first out of thirty-seven based on population income level.
Affordability of legal services is a large component of arguments advanced in support of repeal or revision of Model Rule 5.4. The revisions in Utah and Arizona in 2020 and 2021, respectively, have already been mentioned. In February 2020, the ABA recognized that “more than 80% of people below the poverty line and the many middle-income Americans who lack meaningful access to effective civil legal services.”[5] Accordingly, the House of Delegates passed Resolution 115 calling for “regulatory innovations that have the potential to improve the accessibility, affordability, and quality of civil legal services.”
In an era in which lawyers and law firms routinely practice on a multistate basis, piecemeal adoption of such changes raises an obvious question: May a lawyer practicing in a jurisdiction that adheres to the current text of Model Rule 5.4 invest in an ABS in a jurisdiction that allows it, and if so, what ethical limitations (if any) apply to that investment?
Formal Opinion 499
In September 2021, the Standing Committee on Ethics and Professional Responsibility (the “Ethics Committee”) addressed that question in Formal Opinion 499. It interpreted Model Rule 5.4 to allow a lawyer “passively [to] invest in a law firm that includes nonlawyer owners . . . operating in a jurisdiction that permits ABS entities, even if the lawyer is admitted to practice law in a jurisdiction that does not authorize nonlawyer ownership of law firms.” “Passive” investment,[6] for this purpose, means investment in an ABS with the sole aim of receiving a return on capital based on the efforts its employees, without any personal participation by the investor in the ABS’s work or management—in short, wholly unrelated to the investor’s law practice.
As a corollary, the opinion further refined its definition of “passive investment” as negating access by the investing lawyer to confidential information protected by Model Rule 1.6 without the informed consent of the ABS’s client. This sounds fairly straightforward, but it is actually somewhat complex, because, as the Ethics Committee acknowledges, it may often be difficult to anticipate what kinds of information about the ABS a potential investor might reasonably request, and therefore “it is unrealistic to assume that there will be no investor requests for information about the ABS operations or revenue. The issue of disclosure of confidential information by an ABS is a developing area of the law and beyond the scope of this opinion.” No extraordinarily useful guidance there, to be sure, but until this area is fleshed out further, conservative ethics advice (which the Ethics Committee, to its credit, offers) is this: If considering investment in an ABS, a lawyer “should exercise due care to avoid exposure to confidential client information held by the ABS or other associations that could result in a determination that the . . . [investing] lawyer is part of the ABS ‘firm.’”
More helpful, by way of guidance, is the rejection by Formal Op. 499 of any notion that this kind of investment could create a conflict of interest per se. “A passive investment does not create an ‘of counsel’ relationship where conflicts are imputed to other lawyers. Nothing about a passive investment necessarily creates the ‘close, regular and personal relationship’ characteristic of ‘of counsel’ arrangements.” To make appearance double sure, however, the opinion insists that investing lawyer make sure that the ABS does not in any way imply that the investor is a lawyer for the ABS or is otherwise associated with the ABS. Furthermore, the mere fact of a lawyer’s passive investment in an ABS in a Model Rule 5.4 jurisdiction does not require imputation of conflicts under Model Rule 1.10 between the investing lawyer (or that lawyer’s firm) and the ABS.
While conflicts at the time of investment are rare, they are not impossible, however. Formal Op. 499 cautions that if the investor when making the investment also represented a client with interests adverse to a client of the ABS, a concurrent conflict under Model Rule l.7(a)(2) might exist. Such a conflict could arise equally where the investor is an advocate for a client adverse to one of the ABS’s clients or a business lawyer representing a client involved in a transaction with one of the ABS’s clients. This is so, the opinion concludes, because the investing lawyer’s interest in the ABS could “create a significant risk” that the investor’s representation of the client would be “materially limited” by the investment in the ABS.
The attentive reader will have noted that the Ethics Committee’s conflict of interest analysis applies only at the point of investment. The opinion subsequently underscores this point: “The fact that a conflict might arise in the future between the . . . [investing lawyer’s] practice and the ABS firm’s work for its clients does not mean that the . . . [investor] cannot make a passive investment in the ABS.”
The Ethics Committee considered the conflict of law issue that arises when (as often will be the case, at least at present) the investor is admitted to practice in a jurisdiction that retains Model Rule 5.4. That issue is addressed by Model Rule 8.5(b)(2). Formal Op. 499 concluded that the law of the jurisdiction in which the ABS is authorized to operate should apply “because under Rule 8.5(b)(2), the predominant effect of . . . [the] passive investment in an ABS would be in the jurisdiction(s) where the ABS would be permitted.”
To recapitulate, then, the gist of Formal Op. 499, a lawyer admitted to practice in a jurisdiction that has adopted (or substantially adopted) Model Rule 5.4 may invest in an ABS entity with nonlawyer equity owners that is permissible under the ethics rules of another jurisdiction if:
the investment is solely for obtaining a return on capital;
the investing lawyer does not practice law with the ABS;
the investing lawyer ensures that the ABS does not in any manner hold out the investing lawyer as practicing at or working at the ABS;
the investing lawyer, prior to making the investment in an ABS, ascertains that none of his or her existing clients are adverse (within the meaning of Model Rule 1.7(a)(2)) to any of the ABS’s clients;
the investing lawyer does not enjoy access to confidential information protected by Model Rule 1.6 absent
the informed consent of affected clients; or
compliance with an applicable exception in the ABS jurisdiction’s version of Rule 1.6.
Beyond Formal Opinion 499
There are, however, some important ethics principles related to lawyer investment in ABS that are not addressed in detail by Formal Op. 499 and that may pose potential snares for unwary lawyer investors. First, the opinion observes, “[T]he mere fact of a passive investment by a Model Rules Lawyer in an ABS does not require imputation of conflicts under Model Rule 1.10 between the . . . [investing] Lawyer (or that lawyer’s firm) and the ABS.” This is correct but could benefit from further elaboration. Where the ABS is itself a client of the investing lawyer or where the investing lawyer asks a client also to invest in the ABS, Model Rule 1.8(a) imposes several requirements before a lawyer may enter into a business transaction with a client.[7] Under that rule, a lawyer cannot enter into a transaction with the client unless (i) the transaction and its terms are fair and reasonable and fully disclosed in writing to the client in a manner that the client can reasonably understand; (ii) the client is notified and given a reasonable opportunity to seek an independent lawyer’s advice; and (iii) the client gives informed consent, in a writing signed by the client, both to the essential terms of the transaction and to the lawyer’s role therein (including whether the lawyer is representing the client in the transaction). While discipline for transgressing this rule can be severe,[8] unlike other conflict of interest limitations in the Model Rules, these are not imputed to affiliated lawyers under Model Rule 1.10(a)[9] (though they may be under the Restatement’s approach).[10]
Furthermore, the mere fact that there is no per se conflict at the time the investing lawyer makes the investment in the ABS does not mean that conflicts will not arise in the future. Therefore, the investing lawyer’s continuous monitoring is required for concurrent conflicts, such as where the lawyer is engaged to represent a client whose interests are adverse to a client of the ABS. In that scenario, the investing lawyer’s representation of the client could be “materially limited” by the investment interest (assuming it is not de minimis) in the ABS; other lawyers in the investing lawyer’s firm might, however, be able to take on that representation.
Another lurking issue is presented where the investing lawyer’s interest in an ABS, either individually or in concert with others, is a controlling interest. This may implicate the rarely invoked Model Rule 5.7, which applies the strictures of the Model Rules in connection with the provision of “law-related services.” This term is defined in Model Rule 5.7(b) in such a way as to be quite relevant to an ABS: “services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.” The rule applies to:
the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients; or
in other circumstances an entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services are not legal services and that the protections of the client-lawyer relationship do not exist. (Emphasis added).
Unfortunately, the key term “control”—a concept familiar to business lawyers in a variety of statutory contexts—is defined neither by the rule nor by the Terminology section of the Model Rules. The only guidance offered is somewhat vague and is found in Comment 4 to Model Rule 5.7:
[4] Law-related services also may be provided through an entity that is distinct from that through which the lawyer provides legal services. If the lawyer individually or with others has control of such an entity’s operations, the Rule requires the lawyer to take reasonable measures to assure that each person using the services of the entity knows that the services provided by the entity are not legal services and that the Rules of Professional Conduct that relate to the client-lawyer relationship do not apply. A lawyer’s control of an entity extends to the ability to direct its operation. Whether a lawyer has such control will depend upon the circumstances of the particular case.
Short of actually exercising dominion over the quotidian business operations of the ABS, what constitutes control for this purpose remains murky. The best way for a lawyer investing in an ABS to be sure of not running afoul of this provision would seem to be contenting oneself with a modest, minority investment and avoiding any possibility of being viewed as acting in concert with other investors who, in the aggregate, might be deemed to exercise control.
Conclusion
Formal Opinion 499 raises the curtain on a sensible approach to ABS as innovation in the provision of legal services and related services becomes more widespread. As is evident from the opinion, this is an area in which further refinement of lawyers’ ethical responsibilities can be anticipated. For now, passivity is the watchword: Make passive investments, act passively and not as a lawyer for the ABS, and be on the lookout for lurking conflicts issues.
[1] D.C. Rule 5.4(b) permits individual nonlawyers, in certain circumstances, to be partners in law firms, as long as they do not provide legal advice but provide different professional services that assist the firm in delivering legal services. The firm must have as its sole purpose providing legal services to clients. The District does not, however, permit passive investment in law firms.
[2] That is precisely the issue that is considered in the recent ABA ethics opinion discussed in this article.
[3] In Arizona, the provisions are now a part of ER 5.3.
[4] Note, the Model Rules of Professional Conduct nowhere define the term “fees.” That potentially gives rise to an argument about the source of law firm revenues that could, even under the Model Rule, be shared with nonlawyers, but this article will not consider that issue.
[6] Formal Op. 499 is limited to passive investment in an ABS and does not address issues implicated by a lawyer practicing in an ABS.
[7] It is possible, albeit unlikely, that the factual settings alluded to here might constitute the investing lawyer “acquir[ing] an ownership, possessory, security or other pecuniary interest adverse to a client.” If that acquisition is “knowing,” that is another basis upon which Model Rule 1.8(a) would come into play.
[8]See, e.g., In re Davis, 740 N.E.2d 855 (Ind. 2001) (suspending lawyer for 18 months); State ex rel. Oklahoma Bar Ass’n v. Perry, 936 P.2d 897 (Okla. 1997) (disbarment for this and other rules violations).
[9] Standing alone, passive investment does not give the investing lawyer “access to information protected by Model Rule 1.6 without the ABS client’s informed consent” and does not create the sort of relationship with the ABS that would normally require imputation of conflicts.
[10] Under the RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 126, the rules governing a lawyer’s business transactions with clients are imputed to affiliated lawyers under § 123. See id. § 126, cmt. A.
LeBron James. Zlatan Ibrahimović. Mike Tyson. What is the common factor? Aside from achieving success at the highest level of their respective sports, they are also the bearers of numerous and distinctive tattoos. Tattoos on celebrities—and particularly athletes—have become increasingly ubiquitous, with some gaining significant media attention. For example, Raheem Sterling, a striker for the English Premier League side Manchester City and England national team, has a tattoo of a gun on his right leg that received extensive press coverage[1] in 2018.
Further, it is not uncommon for brand campaigns to feature athletes with visible tattoos. This article will discuss a number of recent legal cases that demonstrate several issues that may arise when those tattoos are visible in the advertisement. Typically, the tattoo artist will argue that they own the copyright in the tattoos they created and should therefore receive a share of the proceeds from commercialization of images featuring the tattoo. This can result in legal action against both the bearer of the tattoo (the athlete) and the third-party brand using the athlete’s image. This article examines recent American case law on the issue and the position under English law.
Recent US Case Law
One of the most famous cases in which a tattoo artist asserted claims based on the unauthorized use of their work is Victor Whitmill v Warner Brothers.[2] In this 2011 case, the tattoo artist (Mr. Whitmill) sued Warner Brothers for its use of Mike Tyson’s facial tattoo in its promotion of the film The Hangover Part II. Mr. Whitmill argued that he owned the copyright in the tattoo and produced an agreement signed by Mr. Tyson confirming that Mr. Whitmill owned all the rights in the tattoo. The parties subsequently settled the matter.
Two more recent cases have provided contrasting outcomes. First, in Solid Oak Sketches, LLC v. 2K Games, Inc. and Take-Two Interactive Software, Inc.,[3] Solid Oak Sketches (“SOS”), a tattoo artist company, sued video game publisher Take-Two Interactive (“TTI”) over TTI’s reproduction of LeBron James’ tattoos—which SOS’s artists had designed—on its NBA 2K videogame series. In March 2020, Judge Laura Swain of the U.S. District Court for the Southern District of New York ruled in TTI’s favor.[4] Judge Swain held that although SOS owned the copyright in the tattoos, it had granted James an implied license to include his tattoos as part of his likeness when commercializing his image, and also that TTI’s use of the tattoos in the videogame constituted fair use (an exception to copyright infringement under US law).
However, another court reached a different outcome in a separate case with strikingly similar facts. In Alexander v. Take-Two Interactive Software, Inc.,[5] a case filed in the Southern District of Illinois, tattoo artist Catherine Alexander filed suit against TTI for its reproduction of wrestler Randy Orton’s tattoos in its WWE 2K videogame. There, on a summary judgment motion, the court ruled in favor of Ms. Alexander,[6] holding that it was not clear on the evidence submitted that Ms. Alexander had granted Mr. Orton a license to commercialize the tattoos she had designed, that such license should not be implied, and therefore whether such license had been granted should be tried. The court also held that TTI’s use of the tattoos did not unambiguously constitute fair use and so was an issue to be decided at trial. At the time of writing, the case remains awaiting trial.
As these conflicting decisions demonstrate, it is not yet clear whether athletes are granted implied licenses to commercialize their tattoos after creation and installation (as it were). Indeed, it is possible in the short-term that the answer may depend upon the jurisdiction in which the athlete was tattooed. Nor is it clear at the moment whether a third party’s display of an athlete’s tattoos constitutes fair use under federal copyright law.
The Position at English Law
English law provides that copyright subsists in original artistic works, including tattoos, from creation until 70 years after the death of the artist. Ownership of the works belongs to the creator of the work (or the employer of the creator, if the work was created in the course of employment) unless and until ownership is assigned to a third party. Unlike the US, the UK does not maintain a copyright registration system, so documentation proving chain of title is needed to prove copyright ownership.
Therefore, in the absence of an assignment from a tattoo artist to the recipient of a tattoo, the copyright in that tattoo would normally be owned by the artist (or his/her employer). The UK does have a fair dealing doctrine which may protect third parties, whose use of athletes’ tattoos may be innocent or purely incidental. It is questionable, however, whether that doctrine would protect an athlete who had inadvertently granted the rights in his or her tattoo to a third party without first obtaining an assignment or license from the tattoo artist.
Further issues may arise with respect to the artistic work itself when the tattoo reproduces an image, logo or song lyrics previously created by another third party. For example, Manchester United and England footballer Jadon Sancho has a prominent tattoo on his arm featuring characters from The Simpsons animated sitcom, in respect of which third party rights almost certainly exist. Were Sancho’s image, featuring the tattoo, to be commercialized, it is possible that entities with rights in The Simpsons IP[7] could assert claims against Sancho and any entity to whom he had granted a right to display the image.
In light of the uncertainty surrounding these complex issues, it has become increasingly common for brands to include express clauses dealing with tattoo ownership when negotiating image rights agreements with athletes.
Likewise, it is important for athletes with tattoos and their business partners to consider the issues that might arise from commercializing the athlete’s image and likeness, including his or her tattoos.
Considerations for Athletes
Due diligence: Prior to getting a tattoo, athletes should consider whether the tattoo is an original work, a common design that is not particularly distinct, or a reproduction of potentially copyrighted work (song lyrics, e.g.). If the tattoo is a common design, then the artist is less likely to have a copyright in the work. If the tattoo contains work possibly copyrighted by someone other than the tattoo artist, this can complicate things even further for the athlete and his or her business partners. Likewise, the more unique the design, the more likely the tattoo will be considered original, in which case it will be more important for the athlete to address copyright and license issues with the artist. Additionally, an athlete may want to consider the law of the jurisdiction in which he or she is planning to get tattooed.
Assignment / license agreement: Athletes may want to negotiate an agreement with the tattoo artist (or their employer) whereby it is agreed that copyright in the tattoo will be assigned to the individual athlete (or his/her image rights company) immediately upon creation. Athletes may also seek representations and warranties regarding the origin of the design, and indemnification from the artist, so as to avoid liability to any unknown third party who may later claim to have created the design. Alternatively, the athlete may consider seeking a license to commercialize and sublicense the copyright in the tattoo.
Retrospective action: In the case of already-existing tattoos, athletes still may consider negotiating an assignment or license from the artist. Of course, athletes should give thought before approaching artists, as this may bring an issue to the artist’s attention of which he or she was not previously aware.
Considerations for brands
Express warranties: Brand endorsement contracts should include express provisions addressing body art/tattoos. Brands should seek representations and warranties that the athlete has all necessary rights to grant licenses to commercially exploit images featuring the body art/tattoos, and indemnification if such representations and warranties are false or inaccurate.
Due diligence: It may also be prudent for brands to request that the athlete identify the artist who created any tattoo that is likely to be displayed in a commercial venture, and where the tattoo was received. Brands should review any agreements or licenses that the athlete obtained from the artist.
Editing out: If there is doubt surrounding the right to display an athlete’s tattoos in a commercial enterprise, the brand may consider covering up or digitally editing out such tattoos.
Conclusions
Given the increasing ubiquity of tattoos and corresponding assertion of copyright rights, it is almost certain that this will become a more common area of dispute in the future. Tattoo artists will understandably wish to benefit from rights that they may have under the law, and individuals and organizations who have entered into agreements to use those individuals’ images will want to avoid costly and lengthy litigation. As a result, it is important for athletes to be aware of these issues before getting tattooed, and brands before entering into commercial ventures with athletes who have tattoos.
[7] For instance, creator Matt Groening, or the current owner FX Networks, LLC, a subsidiary of the Disney General Entertainment unit of The Walt Disney Company.
For lenders dealing with troubled loans, a loan workout agreement is often a great first step to address a tricky situation. A loan workout agreement may be a simple short-term standstill agreement, a mechanism to implement a long-term solution to the borrower’s woes, or a path toward a palatable exit strategy to the relationship. Loan workout agreements, which often take the form of a loan modification agreement or forbearance agreement, may include, among other things, modifications to payment terms, forbearance from exercising certain rights and remedies, pledges of additional collateral, or an agreement to liquidate existing collateral.
Obligors often welcome such an agreement, which can afford them breathing room to get back on the path to compliance. Nonetheless, defaults may nonetheless persist. Two recent decisions from the Tenth and Fifth Circuits illustrate that, even when a workout fails, a well-drafted workout agreement can provide lenders protection against lender liability claims once the relationship turns adversarial.
I. Twiford Enterprises, Inc. v. Rolling Hills Bank & Trust, No. 20-8048, 2021 WL 2879126 (10th Cir. July 9, 2021)
In this case, the borrower operated a cattle ranching business in Wyoming. The borrower refinanced its cattle loans with a new lender, who later convinced the borrower to refinance its real estate loans with the lender the following year.
Thereafter, the lender stopped advancing funds to the borrower on the cattle loans, and those loans went into default. Over the next year, the lender and the borrower entered into several loan modification agreements and forbearance agreements to revise payment terms, extend maturity dates, and provide for additional credit advances. Crucially, all the modification and forbearance agreements contained releases or waiver provisions in which the borrower and the guarantors waived any claims or defenses relating to the loans.
The borrower later filed a Chapter 11 bankruptcy petition, and the guarantors filed an adversary complaint against the lender, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, fraud, and negligent misrepresentation. The guarantors claimed that the lender misrepresented its confidence in the borrower’s business to induce it to refinance its real estate loan and then the lender manufactured a default.
The trial court granted summary judgment in favor of the lender based primarily on the applicable statute of frauds, but it also held that regardless of the statute of frauds, the claims would be barred by the releases contained in the forbearance agreements.
On appeal, the guarantors did not argue that their claims fell outside of the releases’ scope. Instead, the guarantors asserted that the releases were not enforceable because they were wrongfully obtained through economic duress.
The Tenth Circuit affirmed the trial court’s ruling, noting that under applicable state law, an alleged victim of duress may not obtain part of the benefits of an agreement and disavow the rest. Since the guarantors obtained valuable concessions in connection with the forbearance agreements, such as credit advances, the Court held that they could not evade the releases under an economic duress theory.
II. Lockwood International, Inc. v. Wells Fargo Bank, N.A., No. 20-40324, 2021 WL 3624748 (5th Cir. Aug. 16, 2021)
In this case, the borrower companies obtained two sizable lines of credit from their lenders. Within a year, the borrowers breached some of their obligations. Thereafter, the parties agreed to modify the lines of credit. In connection with the modification, the borrowers’ sole owner executed a personal guaranty. Also, at the lenders’ urging, the borrowers hired a chief restructuring officer (CRO).
Despite the loan modification and the appointment of a CRO, the borrowers’ struggles persisted. The lenders grew frustrated, believing that the borrowers and the guarantor did not fully empower the CRO to address the borrowers’ financial issues. The lenders gave the obligors an ultimatum: fully empower the CRO to operate or right-size the business within 48 hours or face an acceleration of the debt. The obligors agreed, but still defaulted on a sizable loan payment. To stave off acceleration, the obligors then executed a forbearance agreement in which they confirmed that the amended loan agreements were valid and enforceable, and waived and released the lenders from all claims. Before this forbearance period expired, the obligors executed a second forbearance agreement, which contained the same confirmation of the debt and releases in favor of the lender.
After the second forbearance agreement expired, the lenders accelerated the debt. This acceleration led to litigation among the parties that eventually was pared down to the lenders’ breach of guaranty claim against the guarantor.
In his defense, the guarantor claimed the lenders engaged in a bait-and-switch scheme to obtain his guaranty and then install the CRO to control the business. Claiming that he only agreed to execute the guaranty and forbearance agreements under intense business pressure, the guarantor asserted affirmative defenses of fraudulent inducement and duress, both of which were rejected by the trial court on summary judgment.
On appeal, the Fifth Circuit noted that because the guarantor ratified his guaranty in connection with the forbearance agreements, the guarantor would need to invalidate the forbearance agreements before he could escape liability. The court found no basis to support a fraudulent inducement defense since the guarantor signed the first forbearance agreement after he already agreed to cede control over the companies to the CRO.
The Court also held that the guarantor’s duress defense lacked merit. The guarantor argued that he only agreed to relinquish control to the CRO and execute the forbearance agreements because the lenders threatened to accelerate the loans. The court rejected this defense, noting that duress requires a threat of unauthorized action. The lenders were authorized to accelerate the loans and were simply using their leverage to extract a concession that they desired (i.e., installing the CRO). The court further noted that “difficult economic circumstances do not alone give rise to duress.” Indeed, the Court opined that loan modifications would become rare if a borrower could later invalidate the agreement because of the economic pressure that precipitated the modification in the first place.
III. Takeaways
While the crush of loan delinquencies that we feared at the outset of the pandemic has not materialized, many observers believe that defaults and resulting workout volume will increase once government support and intervention wane. Lenders can expect that at least some of their borrowers will assert lender liability claims in the face of enforcement efforts.
To that end, these recent decisions offer a compelling reminder that a well-crafted workout agreement can serve multiple purposes. On the one hand, workout agreements are great opportunities for lenders to develop retention or non-retention strategies for troubled loans. On the other hand, even if the workout strategy fails, these agreements can help mitigate potential exposure to lender liability claims. Moreover, as the Lockwood case illustrates, so long as a lender is acting within the bounds of its loan agreement authority, it may elect to apply its leverage to obtain valuable concessions from a troubled borrower in a workout scenario.
The Boeing Company Derivative Litigation evidences the increased focus on director responsibilities for effective governance. That focus is being driven by investors, other stakeholders, regulators, and—as the Boeing case makes clear—growing litigation risk. In November, Boeing’s board agreed to a $237.5 million settlement in a shareholder lawsuit that alleged board failures in overseeing the company and the safety of its 737 MAX ahead of fatal crashes in 2018 and 2019. The case emphasizes the need to ensure the existence of substantive checks and balances in board governance and to explore opportunities to create governance structures with a harder edge. Such structures can aid in ensuring proper communication and operational interaction between the board, management and others.
In assessing the Boeing Company Derivative Litigation through this lens, we begin with an examination of Delaware Court of Chancery Vice Chancellor Morgan T. Zurn’s September 7, 2021, memorandum opinion in the litigation and her findings regarding Director failures. We then turn to identifying and addressing these fundamental governance breakdowns.
I. MEMORANDUM OPINION, 9/7/21, VICE CHANCELLOR ZURN
Vice Chancellor Zurn sets out in her opinion:
“The narrow question before this Court today is whether Boeing’s stockholders have alleged that a majority of the Company’s directors face a substantial likelihood of liability for Boeing’s losses. This may be based on the directors’ complete failure to establish a reporting system for airplane safety, or on their turning a blind eye to a red flag representing airplane safety problems. I conclude the stockholders have pled both sources of board liability. The stockholders may pursue the Company’s oversight claim against the board.”
In her opinion, the Vice Chancellor stated, “The Board publicly lied about if and how it monitored the 737 MAX’s safety.” The opinion cites 2019 interviews of the Board’s Lead Director, David Calhoun, who became the CEO of Boeing in January 2020, and certain representations he made regarding the 2018 Lion Air crash and the 2019 Ethiopian Airlines crash. The Vice Chancellor’s opinion states, “Each of Calhoun’s representations was false.”
Shortly after the opinion was issued, Boeing’s CEO and other current and former directors asked the Vice Chancellor to clarify her legal opinion that she found the Board “publicly lied.” Those defendants have now settled the case, pending court approval. The finding that they “publicly lied” will be a continuing cloud to be addressed on multiple fronts within and outside of litigation.
II. IDENTIFYING AND ADDRESSING FUNDAMENTAL GOVERNANCE BREAKDOWNS
The Vice Chancellor’s finding of “the directors’ complete failure to establish a reporting system for airplane safety” and her finding of “their turning a blind eye to a red flag representing airplane safety problems” are indicative of a board operating in a “tone at the top” framework where the board may be dictated to/largely directed by the CEO. As we have previously set out,[1] what is required instead of a “tone at the top” approach is a governance structure that incorporates transparency and substantive “checks and balances.” This is not a new concept; members of the board of advisors of Grace & Co. and other experienced business decision-makers addressed it years ago.[2] Yet, a board’s perception of its role as only that of oversight, and at times limited oversight, persists at many boards, often with the support or dictates of the CEO.
To the contrary, boards can make use of internal resources to ensure the boards have access to that information necessary to address their responsibilities. We have discussed the value of these internal resources to boards[3] and recognize that boards can also call on external resources.
Under the proposed $237.5 million agreement to settle the litigation, Boeing’s board has agreed to add a director with safety experience and has adopted other internal measures, such as creating an ombudsperson program to field certain internal complaints. Boeing has agreed to ensure that at least three directors have safety expertise. It may be that the relationship between those board members, and perhaps other board members, and management will be an ongoing interactive relationship where the company can draw on the talents and experience of those board members.
An example of board members participating in addressing management responsibilities arose when Michael Eisner, the CEO of Walt Disney, utilized the chairman of Disney’s compensation committee and another experienced director to handle the employment negotiations with Michael Ovitz and his advisers.[4] Such an interactive relationship between certain directors and members of management helps ensure the quality of the flow of information to the Board and is demonstrative of the nature of the working relationships/checks and balances between the board and management.
III. THE ECONOMICS OF CORPORATE GOVERNANCE
The economics of organization governance point to the responsibilities of ownership and its agents for the governance, oversight, and management of the organization. The board of directors, as owners or agents for ownership, bear the responsibility for the governance, oversight, and management of the organization. The Boeing litigation evidences the increased focus on these fundamental director responsibilities.
The ABA Young Leaders in Securitization and Structured Finance is a growing subcommittee of the Business Law Section (BLS) Committee for Securitization and Structured Finance. The committee and the Young Leaders are at the forefront of discussing and tackling new issues in the growing field of structured finance. Most recently, the Young Leaders hosted a discussion exploring some of the opportunities and career paths in securitization and structured finance available for young lawyers.
The discussion, hosted by the Young Leaders and joined by the panelists Claire Hall, Partner in DLA Piper’s Structured Finance Practice; Kira Brereton, Associate General Counsel at S&P Global Ratings; and Joel Kwan, an Associate at Paul Hastings LLP, was a great opportunity for young lawyers to learn about various career paths available to securitization attorneys. The discussion was well attended and provided a resource for new attorneys to develop a career plan in the securitization and structured finance field.
The BLS Committee for Securitization and Structured Finance and the Young Leaders subcommittee are both planning to hold additional events furthering interest and development in the securitization sector. The Young Leaders also hope to continue to host events for young lawyers who are in the sector or are interested in it.
The Young Leaders are also happy to announce that Carla Potter, of Cassels Brock & Blackwell LLP, is joining the Co-Chairs of the subcommittee and will focus on Diversity and Inclusion initiatives, and Myriam Mossi is joining as Director of Events.
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