Recent global trends related to corporate governance include increased emphasis on the social and environmental responsibilities of businesses. As a result, the environmental and social affairs of a corporation are now a topic of great interest to all stakeholders of the corporation, including its lenders and shareholders.
Due to growing interest in the environmental and social impacts of business, the Equator Principles were formulated in June 2003 to establish a framework for managing these risks and impacts when financing projects. The Equator Principles have been periodically updated, with the most recent version—EP4—taking effect as of October 1, 2020. Under EP4, borrowers could potentially be subject to more stringent requirements with respect to environmental and social risk management compared to what is typically required under applicable laws.
The Equator Principles: What are they?
The Equator Principles apply globally to all industry sectors and are a risk management framework for identifying, assessing and managing environmental and social risks in development projects. Their primary purpose is to provide a minimum standard for due diligence and monitoring, and to support responsible risk decision-making.
Financial institutions (EPFIs) voluntarily adopt the Equator Principles and commit to implementing them through their internal policies, procedures and standards. By adopting this regime, adhering EPFIs agree they will not finance projects that do not comply with its requirements. Each EPFI is responsible for developing and implementing its own environmental and social policies and approach to implementing the Equator Principles.
The EPFIs will categorize projects based on the project’s potential environmental and social risks and impacts. Different requirements will apply depending on a project’s category. The most stringent are applied to Category A projects, which are projects typically with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible, or unprecedented. At the other end of the range, less stringent requirements are applied to Category C projects, which are projects with minimal or no adverse environmental and social risks and/or impacts. For instance, EPFIs may require borrowers to: (a) develop and maintain an environmental and social management system to identify, assess and manage risks related to the project on an ongoing basis, (b) create an action plan to minimize or offset any potential risks of a project, or (c) demonstrate ongoing engagement with local communities affected by the project.
EP4
EP4 includes significant changes from its predecessor, including new requirements related to assessing human rights and climate change impacts of a project, and enhanced requirements for projects affecting Indigenous Peoples. For instance, Free, Prior and Informed Consent from Indigenous Peoples—a specific right recognized in the United Nations Declaration on the Rights of Indigenous Peoples—may be required in certain projects, which goes beyond current United States and Canadian legal requirements to consult.
As mentioned, EP4 introduces new requirements related to climate change risks. As part of Principle 2 of EP4, EPFIs will require borrowers to conduct an assessment on the potential environmental and social risks and impacts of a proposed project in its area of influence. EP4 makes specific reference to the 2015 Paris Climate Change Agreement, so the assessment documentation for a project may now include requirements derived from the agreement. Some borrowers may be further required to conduct a climate change risk assessment, with the depth and nature of such assessment depending on the type of project and the nature of risks. This assessment is required for two sets of projects:
All Category A and, as appropriate, Category B projects. The assessment will include consideration of relevant physical risks resulting from climate change, which involve event-driven risks (e.g., hurricanes, floods) or longer-term (e.g., sustained higher temperatures) shifts in climate patterns.
All projects where greenhouse gas emissions from both (i) the facilities within the project boundary and (ii) the offsite production from the project combined are expected to be more than 100,000 tonnes of CO2 annually. Consideration must be given to transition risks, which arise from the process of adjusting to a lower-carbon economy (e.g., imposition of carbon tax). An alternatives analysis evaluating lower greenhouse gas intensive alternatives must be completed. EPFIs must also require borrowers to report publicly, on an annual basis, on greenhouse gas emission levels and provide a greenhouse gas efficiency ratio where appropriate.
Another significant change in EP4 is the possible requirement for EPFIs to assess projects located in “Designated Countries”—countries deemed to have robust environmental and social governance and legislation systems in place, which includes, among others, the United States, Canada, the U.K., and Australia. Prior to EP4, projects in Designated Countries were deemed to be in automatic compliance with certain Equator Principles and were not subject to any evaluation separate from that of the relevant host country laws. With the development of EP4, that is no longer the case. EPFIs will evaluate specific risks of certain projects in Designated Countries to determine whether one or more of the International Financial Corporation Performance Standards should be used as guidance to address those risks in addition to the host country’s laws.
A survey of the loan documents for projects that have been financed by EPFIs since EP4 came into effect on October 1, 2020, reveals that the Equator Principles are typically referenced and form part of the environmental and social laws and standards governing the project. There may be reporting requirements in connection with EP4 and covenants for borrowers to comply with such standards. Non-compliance with EP4 could constitute as a material adverse effect or event of default under the loan agreement.
What should you do as a company?
As a consequence of the new requirements in EP4, the Equator Principles will play a larger role in domestic project finance transactions for projects in the United States and Canada and for American and Canadian borrowers and sponsors than previously. Borrowers should become familiar with EP4, and the standards and requirements that may apply to them when seeking financing. In some circumstances, EPFIs will decline to finance projects if they believe that risks cannot be adequately addressed.
As EP4 brings considerable new changes to project financings, there are several steps that borrowers can take to prepare themselves for upcoming projects that may be subject to the Equator Principles, such as:
Borrowers should start the conversation with EPFIs early and ask important questions to ensure that expectations are clear at the outset.
Borrowers should review and, if necessary, update their environmental and social governance regimes and proactively manage environmental and social risks and impacts in light of the revised standards under EP4.
Borrowers should review and ensure that they are aligned with the UN Guiding Principles on Business and Human Rights.
Borrowers should become familiar with the requirements under EP4 and review policies, procedures and standards of EPFIs that may act as lenders for their projects.
Borrowers lacking internal expertise in these matters should consider seeking guidance from external experts with experience with the requirements under EP4.
EP4 reflects a global trend towards increased focus on environmental and social governance and interest in sustainable development. Ultimately, compliance with the Equator Principles in connection with project finance and updated environmental and social governance regimes will not only assist borrowers in securing financing with EPFIs but will also have a positive impact on the overall reputation of the borrower in today’s market toward sustainable economic growth.
The Telephone Consumer Protection Act creates a seemingly endless list of compliance challenges and other headaches for companies determined to mitigate the financial cost and resource burden of TCPA litigation. This year brought welcome good news from the U.S. Supreme Court, with its unanimous decision in Facebook, Inc. v. Duguid establishing a narrow “autodialer” standard, applicable nationwide. We are on the cusp of another positive development with respect to TCPA compliance. On October 1, 2021, the Federal Communications Commission announced its interim fee structure for the new reassigned numbers database, which launched on November 1, 2021.
The TCPA compliance problem created by accidental calls to reassigned numbers began in 2015. At that time, the FCC issued formal guidance explaining that the consent required by the TCPA must come from the person actually called, not the person the caller intended to reach. The FCC conceded that this created a compliance complexity in the case of reassigned numbers. Specifically, a caller may have had valid consent to call a particular consumer at a particular phone number but, unbeknownst to the caller, the consumer had surrendered the number, which was subsequently reassigned to an unrelated third party. If the caller used an autodialer or a prerecorded message to reach the intended call recipient using a number that had been reassigned, that call would violate the TCPA: the caller would not have consent from the person actually called.
As a practical matter, callers had no way to avoid these inadvertent TCPA violations. The FCC responded to this difficulty by offering a series of unserious options purportedly available to companies to avoid these calls. These included periodically contacting customers to ask if their numbers had changed and contractually obligating customers to notify the company when their number changes. (Presumably, companies could sue their customers for breach of contract if they failed to provide this notice.) However, the FCC also acknowledged that companies needed a more effective solution on this issue, so it established a limited, one-call safe harbor. Companies who inadvertently called a reassigned number automatically used up this safe harbor in that one call, no matter the result. Every subsequent call to that reassigned number using an autodialer or prerecorded message would violate the TCPA.
In 2018, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FCC’s one-call reassigned number safe harbor as arbitrary and also vacated the FCC’s interpretation imposing TCPA liability for calls to reassigned numbers generally. In the wake of that decision, the FCC launched a new proceeding to create a reassigned numbers database, which would enable callers to verify whether a telephone number had been reassigned before calling that number.
Three years later, the FCC is ready to launch this comprehensive database containing reassigned number information from participating providers. After completing a beta test, the FCC opened access for paid subscribers on November 1. The FCC released an interim fee schedule for users ahead of the announced debut. The FCC explained that the current fee schedule is subject to change because it lacked an adequate record to determine on a more permanent basis how much it would need to collect from users to offset the cost of maintaining the database.
The interim fee schedule creates six categories of users, based on the number of database queries per subscription period, ranging from extra small to jumbo. Extra small companies can submit up to 1,000 queries per month; jumbo companies can submit up to 30,000,000 monthly queries. The fee schedule also includes three available subscription periods: one month, three months, and six months. The greater the volume of queries, the lower the per-query cost. Extra small users would pay $10 per month; jumbo users would pay $35,100 per month. The FCC’s interim fee structure also presents options for companies who use up their allotted number queries and want additional database access.
Notably, the FCC’s approach allows companies to work with a “caller agent,” who would access the database on behalf of one or more companies. This would allow smaller companies to work in cooperation with a vendor to qualify for the discounts available to larger-sized subscribers. This is in contrast to how the national do-not-call list’s fee structure works. The FTC expressly prohibits sellers from partnering with a vendor who accesses the do-not-call list on behalf of multiple companies. Here, extra small companies would pay one cent per query. Jumbo companies would pay about one-ninth as much. Small companies who want to take advantage of the reassigned numbers database to avoid inadvertent, and heretofore unavoidable, TCPA violations could see significant cost savings by working with a caller agent.
For more information, view the official webinar and slide presentation that accompanied the public launch of the FCC’s new reassigned number database on November 1, 2021.
In May 2020, just after George Floyd’s murder and as many across our nation were protesting social injustice and racial inequity, a large group of law firm leaders in Charlotte, North Carolina were thinking the same thing at the same time: what can we do to help with the resources we have? How can we drive the change that we want to see?
Two dozen of us gathered to brainstorm on how we could pool our strengths and resources to make a true difference. We discussed what we were doing within our own firms and how we could work together to do something even more meaningful. Those conversations eventually led to our forming the Carolinas Social Impact Initiative, an effort to foster a more inclusive community and reduce systemic barriers to social and economic mobility in the Carolinas.
More than a year later we are still going strong. With our joint efforts picking up steam, we are on our way to harnessing our collective resources to facilitate lasting change in our community.
As with many efforts such as ours, establishing a core mission is a crucial first step. We took that step by listening to community leaders. Many in Charlotte have been working to improve economic mobility in our minority communities in the wake of a 2014 study that ranked the city last in upward mobility among the 50 largest U.S. cities. Our county at large and many others across North and South Carolina also rank poorly in offering children the best chance to rise out of poverty. We decided we would align our strengths and address mobility and inclusiveness by establishing four separate focus areas:
Supporting minority-owned businesses and entrepreneurs
Advancing educational opportunities
Supporting family stability and social justice
Improving access to social capital and career opportunities
We selected these priorities because we felt they were a good match for our skill set as lawyers, and because we believe they give us the best chance to make a difference and assist with long-term solutions to long-standing challenges. Our goal is to make a generational difference that will benefit our community and citizens well into the future.
“Tackling issues of race and equity is not easy but certainly necessary, especially after the events of last year and the continued impacts of the pandemic,” said Sherri Chisholm, executive director of Leading on Opportunity. Her organization is focused on improving economic mobility in the Charlotte area, and we have benefitted greatly from Ms. Chisolm’s guidance and the work of Leading on Opportunity in our organization and planning.
“The members of the Carolinas Social Impact Initiative have been intentional about their work in the community, speaking directly with community members and leaders to determine the best approach for their unique skills and network,” Ms. Chisolm said. “Leading on Opportunity is thankful to walk alongside the Initiative on this journey and looks forward to the lasting impact it will make on Charlotte for years to come.”
We were especially excited to launch the coalition’s first program in summer 2021: the Charlotte Legal Initiative to Mobilize Businesses (CLIMB), through which volunteer lawyers provide pro bono business legal services to low-income entrepreneurs in the Charlotte area.
CLIMB is an example of how the coalition firms are aligned and can combine resources to make a greater impact together. Both Moore & Van Allen and Robinson Bradshaw were independently brainstorming in the summer of 2020 about providing pro bono legal services to entrepreneurs in our historically under-resourced communities. Through the Carolinas Social Impact Initiative, the two firms combined their separate ideas to create a more meaningful, lasting, scalable program. The result is CLIMB, through which coalition firms apply our unique skills as lawyers to help entrepreneurs and small businesses. By volunteering those skills, we hope to help broaden economic opportunities and stability.
“The CLIMB model is one that will benefit our small businesses that often struggle to afford the legal protection and support needed to succeed in this economy,” said Charlotte Mayor Vi Lyles. “We are grateful to the Carolinas Social Impact Initiative—and Robinson Bradshaw and Moore & Van Allen in particular—for bringing this equity-based resource to our city and investing in the success of our business community.”
CLIMB has been up and running as a pilot program since June of this year. During the pilot phase, volunteer lawyers from Robinson Bradshaw and Moore & Van Allen coordinated the program and provided legal services. In the coming months, we expect a broad range of coalition lawyers—as well as lawyers from other firms and legal employers—to join this effort.
In the near future, the Carolinas Social Impact Initiative plans to expand CLIMB and launch additional programs to advance our other three focus areas. Planning is well underway, as are our conversations with community leaders. We will also work to expand our impact beyond the Charlotte region.
We are so proud of the community spirit exhibited by all of our law firm leaders and are thrilled that the Carolinas Social Impact Initiative remains a true team effort. The member firms are: Alexander Ricks; Alston & Bird; Bradley; Cadwalader, Wickersham and Taft; Hamilton Stephens Steel + Martin; Hedrick Gardner; Holland & Knight; Hunton Andrews Kurth; James McElroy & Diehl; Johnston, Allison & Hord; Katten Muchin Rosenman; King & Spalding; K&L Gates; Mayer Brown; McGuireWoods; Moore & Van Allen; Nelson Mullins; Offit Kurman; Parker Poe; Robinson Bradshaw; Shumaker; Troutman Pepper; Winston & Strawn; and Womble Bond Dickinson.
We would love for more firms and legal professionals to join and help us drive needed change in our communities.
The Antitrust Division of the U.S. Department of Justice (DOJ) and several state Attorneys General are challenging the American Airlines Group Inc. (“American”) collaboration with a competitor, JetBlue Airways Corp. (“JetBlue”). Both sides of the dispute accuse the other of harming competition amongst airlines. On September 21, 2021, the DOJ and its state attorney general partners filed suit in Massachusetts federal court to block a series of agreements between the airlines called the “Northeast Alliance.” The plaintiffs argue this Alliance will reduce competition between American and Jet Blue to the detriment of consumers. On the other hand, American and JetBlue say that the Alliance allows them to better compete with other major airlines.
Background
The attorneys general of Arizona, California, Florida, Massachusetts, Pennsylvania, Virginia, and the District of Columbia have signed on to the DOJ’s suit. American is the world’s largest airline. In 2019, it flew approximately 215 million passengers and took in roughly $45 billion in revenues. JetBlue is a low-cost airline founded in 1998. In 2019, JetBlue flew over 42 million passengers and took in approximately $8 billion in revenues.
On July 15, 2020, American and JetBlue entered into a collaboration, memorialized in a series of agreements, including an umbrella agreement titled the “Northeast Alliance Agreement.” That agreement commits the companies to pool revenues and coordinate network planning at Boston Logan, JFK, LaGuardia, and Newark Liberty, including deciding together which routes to fly, when to fly them, who will fly them, and what size planes to use. The companies also committed to pool and apportion revenues earned on flights.
The Lawsuit
The lawsuit argues that consolidation, which the government contends negatively impacts consumers, has occurred rapidly in the U.S. airline industry. In 2000, the four largest airline companies controlled 55% of the market. Today, they allegedly control 81%. One of the ways the government claims consolidation harms consumers is that it allows airlines to reduce capacity—the industry’s term for the number of available seats—which inextricably raises prices.
The agencies’ complaint describes Jet Blue as a disruptive force in the marketplace, including acting as downward pressure on the prices of American and other airlines. The agencies also assert that the alliance operates as if the two airlines merged. The lawsuit argues that even though each airline is permitted to set its own prices, the Northeast Alliance will allow American and Jet Blue to coordinate important strategic decisions that will cost American consumers hundreds of millions of dollars in higher airfares and reduced travel options. “In an industry where just four airlines control more than 80% of domestic air travel, American Airlines’ ‘alliance’ with JetBlue is, in fact, an unprecedented maneuver to further consolidate the industry. It would result in higher fares, fewer choices, and lower quality service if allowed to continue,” Attorney General Merrick Garland said.
The complaint asserts a single claim under Section 1 of the Sherman Act, the federal antitrust law prohibiting unreasonable restraints of trade. To succeed under Section 1, the plaintiffs will have to show that the “Northeast Alliance Agreement” unreasonably restrains trade. Courts analyze agreements under either the “Per Se Rule” or the “Rule of Reason.” Under the Per Se Rule, agreements that always or almost always tend to restrict competition and decrease output are considered automatically illegal and condemned without further examination. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2283. The plaintiffs do not appear to be arguing that here. When using a Rule of Reason analysis, the factfinder weighs all the circumstances in the case to determine if the challenged restraint substantially suppresses or destroys competition. Am. Express Co., 138 S. Ct. at 2284. The goal is to distinguish between restraints with anticompetitive effects harmful to the consumer and restraints stimulating competition in the consumer’s best interest. Courts have developed a burden-shifting test where the plaintiff may show harm using either (1) direct evidence, like increased prices or reduced output, or (2) indirect evidence, like demonstrating the challenged restraint substantially harmed competition in a defined market in which the defendant has market power. If the plaintiff carries that burden, the defendant then must come forward with evidence of the restraint’s procompetitive effects, and the plaintiff must then show that any legitimate objectives can be achieved in a substantially less restrictive manner.
American and JetBlue’s Response
American and JetBlue seem undeterred. American Chairman and CEO Doug Parker argued the Northeast Alliance would increase, rather than harm, competition because the Alliance allows American and JetBlue to better compete with other airlines that currently dominate the New York airports. “Ironically, the Department of Justice’s lawsuit seeks to take away consumer choice and inhibit competition, not encourage it,” Parker said. “This is not a merger: American and JetBlue are—and will remain—independent airlines. We look forward to vigorously rebutting the DOJ’s claims and proving the many benefits the Northeast Alliance brings to consumers.” JetBlue CEO Robin Hayes similarly said JetBlue’s “commitment to competition and low fares remains as strong as ever. This is not at all like a merger with American—we have two different business models and are not working together on pricing.”
Takeaways
This matter raises a few interesting questions. If American and JetBlue stick to their guns and litigate this matter, how will the court resolve the parties’ conflicting claims of effect on competition? What role, if any, will post-Northeast Alliance price changes play? Of course, the agencies will view any price decreases with great skepticism, while the airlines will argue that they are one of the benefits of the alliance. Is this a one-off case, or does the DOJ intend to bring antitrust actions against other large competitors that form strategic partnerships with smaller competitors to better compete against larger competitors that enjoy the largest market share?
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 contract provisions in publicly available, private target M&A transactions during a specified time period. The Private Target Deal Points Study is the preeminent study of M&A transactions and is widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.
WHAT TIME PERIOD WILL BE COVERED BY THE STUDY?
The 2021 iteration of the Private Target Deal Points Study will analyze publicly available definitive acquisition agreements for transactions executed and/or completed either during calendar year 2020 or during the first quarter of 2021.
WHAT INDUSTRIES WILL BE COVERED BY THE STUDY?
The deals in the Private Target Deal Points Study reflect a broad array of industries. The healthcare, technology and industrial goods and services sectors together make up approximately 41% of the deals in this year’s study.
WHAT IS THE SIZE OF THE TRANSACTIONS OF THE STUDY?
The transactions analyzed in the 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.
WHERE ARE YOU IN THE PROCESS OF RELEASING THE STUDY?
Given the busier-than-ever M&A environment this year, our working group members had less than the usual amount of time to dedicate to their work on the study. The vast majority of our 10 issue groups have turned in their data, and the members are processing and analyzing it, and finalizing the slides.
CAN YOU SHARE ANY SNEAK PREVIEW DATA?
We shared a couple of sneak preview data points with attendees at the meeting of the Market Trends Subcommittee at the ABA’s M&A Committee meeting in September and encourage you to sign up for the M&A Committee and its various subcommittees if you haven’t already—at the following link on the ABA’s website.
We can give you a similar peek ahead (understand, however, that our process is still ongoing and thus these data points may not be final):
The sneak peek: For obvious reasons, measuring representations related to COVID-19 is a new data point for the 2021 version of the Private Target Deal Points Study. What we learned is that the global pandemic impacted representations and warranties in our selected data set,[1] but not in a consistent way. Nearly one-third of our selected data set contained a representation related to COVID-19. However, these representations varied dramatically, covering matters such as the Paycheck Protection Program, furloughs, and supply chain matters.
What to watch for: Given the broad range of approaches to representations related to COVID-19 in our selected data set, we will publish an addendum containing the specific representations when we release the 2021 version of the Private Target Deal Points Study.
More RWI deals
The sneak peek: Representations and warranties insurance (RWI) has been a huge game changer in M&A deals. We measure whether a deal in our study pool utilized RWI by the closest proxy we can access: whether the purchase agreement references RWI. (Of course, RWI may have been obtained without such a reference in the purchase agreement.) The 2017 version of the Private Target Deal Points Study showed RWI references in less than one-third of the deals. The 2019 version of the Private Target Deal Points Study marked the first time a majority of the deals referenced representations and warranties insurance (RWI). The 2021 version of the Private Target Deal Points Study shows even more growth, to nearly two-thirds of the deals referencing RWI.
What to watch for: Use of RWI in a deal impacts a variety of the negotiated provisions, as evidenced by our prior study data correlations. We are correlating even more data points with RWI references in the 2021 version of the Private Target Deal Points Study, so watch for those.
Please keep an eye out for our study and for an In the Know webinar to be scheduled, during which the chairs and issue group leaders will provide analysis and key takeaways from the results of the 2021 Private Target M&A Deal Points Study.
[1] We recognize that it is not helpful to include in our denominator deals that were negotiated before the effects of the pandemic were understood in the United States. Thus, because our data set includes deals from 2020 and the first quarter of 2021, we excluded deals from this data point if the agreement was signed before March 11, 2020, which is the date the World Health Organization declared a global pandemic.
The 2020 election brought many changes to Washington, DC, with the Democrats taking control of the White House and the United States Senate and continuing control of the House of Representatives. For businesses, the new political alignment in Washington provides policy opportunities and risks. Democratic control of Washington also creates new Congressional investigation risks for some businesses. It is imperative that an organization have a proactive governmental affairs strategy and implement best practices to establish an effective and compliant governmental affairs program.
As with any election, and particularly with elections where political power shifts from one political party to the other, there are policy implications for businesses. Proactive businesses should evaluate those policy risks and opportunities so they can develop an effective engagement strategy with the federal government. Businesses should also take the following initial steps to ensure their engagement is effective:
Assess opportunities and risks
Identify key stakeholders, including government officials, potential allies and opponents
Identify the key opportunities to influence policy, including the nominations process and through legislation and regulations
When it comes time to interact with government officials and staff, there are best practices to keep in mind:
Ensure compliance with lobbying requirements before engagement
Establish internal compliance systems
Engage early and do not wait for a crisis
Do not assume they know your business and its issues
Know your audience
Engage constituents where possible
Develop a concise presentation and leave behind documents
Make a clear request for action
Ensure no one is blindsided
Thank them appropriately
Overview of the Federal Lobbying Disclosure Act
The federal Lobbying Disclosure Act of 1995 (“LDA”), as amended by the Honest Leadership and Open Government Act of 2007, is a federal lobbying statute administered by Congress that applies to legislative and executive branch contacts. The LDA does not cover state or local lobbying. State and local jurisdictions have their own lobby registration and reporting requirements.
The LDA requires entities employing in-house lobbyists, lobbying firms, and self-employed lobbyists to register and report certain lobbying activities—including matters lobbied, lobbyists, and lobbying expenses—with the Clerk of the US House of Representatives and the Secretary of the US Senate.
Registrations and quarterly reports are submitted by registrants (i.e., the registered entity), not individual lobbyists. In addition, the LDA requires that semi-annual reports and certifications are submitted by both registered entities and individual lobbyists.
Whether an organization must register depends on whether the entity employs any individual who meets the LDA’s definition of lobbyist. Under the LDA, a lobbyist is an individual who, for compensation, makes more than one lobbying contact and spends 20% or more of his or her time during a quarter on federal lobbying activities, as defined.
The LDA is important for any entity whose employees contact federal officials regarding covered matters. Understanding these requirements, best practices surrounding federal lobby compliance, and potential pitfalls is imperative for any organization that interacts with the federal government.
Necessity of Effective and Compliant Governmental Affairs Program
Any company or organization that is active in the political or public policy arenas should have a robust governance structure that includes an effective compliance management system created specifically to address these activities. Just as companies have compliance policies and processes to address laws designed to prevent bribery, discrimination, and privacy violations, a company that engages with government officials or advocates on political or public policy issues must build a political law compliance system designed to address the unique legal and reputational risks that may arise from such engagements. There is no one-size-fits-all approach, but each company that participates in the political or public policy process should carefully consider what foundational principles, policies, and processes are necessary for the company, not only to engage in a legal and responsible manner, but also to ensure a good governance structure for its decisions.
There are four key components of a political law compliance program. First, the detailed corporate policies should govern a company’s activities in the public policy and political arena. These policies need to be clear and concise. Second, the company must have strong, robust, internal processes and structures, including approval procedures for political contributions, gifts, and lobbying activities, as well as recordkeeping requirements. Next, a comprehensive compliance program needs to focus on what is communicated to both employees and the public. This includes an interactive training and communications program to ensure employees are aware of the requirements that govern their behavior. Additionally, the company should consider what elements of its compliance program it communicates to the public via its corporate website. Finally, a company must build audit and oversight mechanisms into its compliance program to detect potential wrongdoing and to determine whether the program is operating effectively and efficiently.
In this memorandum opinion and following trial on a paper record, the Delaware Court of Chancery denied plaintiffs’ request for a mandatory injunction to compel CytoDyn Inc. (the “Company”) to allow plaintiffs’ dissident slate of directors to stand for election to the board at the Company’s October 28, 2021, annual meeting. The Court concluded that plaintiffs’ nomination notice, which was submitted on the eve of the notice deadline specified in the Company’s bylaws, was deficient and the board was justified in rejecting it, despite a nearly month-long delay in responding to the notice.
Plaintiffs, who had launched a proxy contest in July 2021 to replace five of six incumbent directors at the Company’s 2021 annual meeting, argued that the board wrongfully rejected the nomination notice, triggering enhanced scrutiny under Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988). Defendants argued in the alternative that the Court’s legal analysis should be “purely contractual,” with any fiduciary considerations analyzed under the deferential business judgment rule. The Court declined to invoke Blasius review after concluding that the board did not act for the sole or primary purpose of thwarting the effectiveness of a stockholder vote. The Court further concluded that the board’s failure to respond to the activist group in order to give plaintiffs an opportunity to cure “materially deficient disclosures” contained in the notice was not manipulative conduct.
Although Blasius did not apply, the Court recognized that board members tasked with enforcing bylaws against stockholders confront a “structural and situational conflict,” and the Court is empowered to address the inequitable application or enforcement of an advance notice bylaw. In this instance, the Court found there was no inequitable conduct on the part of the board, which, upon receiving the deficient notice on the eve of the deadline specified in the Company’s bylaws, did not afford plaintiffs an opportunity to cure the notice defect. Importantly, the Company’s advance notice bylaw did not impose an express duty on the board to reach out to stockholders to cure deficiencies or otherwise to provide a process to cure a deficient notice.
The Court noted that plaintiffs could have made a stronger case of manipulative conduct had they submitted their nomination notice “well in advance of the deadline,” as the board would have had more difficulty justifying its nearly month-long silence in light of its fiduciary duties if “ample time remained before the arrival of the notice deadline.” On the record presented, however, the Court concluded that plaintiffs were required to submit a compliant notice given the last-minute nature of their submission, and their decision to submit the nomination notice on the eve of the deadline left no room for the Court to invoke equitable principles to override the decision made by the Company’s board.
Importantly, the CytoDyn opinion represents the first ruling on the merits by a Delaware court analyzing a board’s rejection of a nomination notice for disclosure deficiencies relating to information required by an advance notice bylaw. As noted by the Court, “[w]here Plaintiffs ultimately went wrong here is by playing fast and loose in their responses to key inquiries embedded in the advance notice bylaw….”
“Global Rule of Law Trends Pose Challenges for ESG Movement” is the fourth article in a series on intersections between business law and the rule of law, and their importance for business lawyers, created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.
Growing investor concern for Environmental, Social, and Governance (ESG) issues has business lawyers scrambling to advise clients on an ever-expanding list of norms, best practices, and regulatory and reporting requirements. This advice tends to focus on the immediate ESG dimensions and impacts of a given client’s business activity, but the broader rule of law context in which companies hire, buy, manufacture, and sell has significant ESG implications that business lawyers need to incorporate into their advice.
The 2021 Rule of Law Index® from the World Justice Project (an American Bar Association spinoff for which I work) shows rule of law declining globally and underscores the challenges these trends pose to the private sector ESG movement. The data reveal persistent widespread corruption, growing discrimination, and failing justice systems, among other rule of law issues confounding ESG compliance. Businesses looking to make meaningful and sustainable ESG progress need strategies that not only protect them against these rule of law realities but also help reverse the negative trends and strengthen the rule of law over the long term.
The Rule of Law Context for ESG Advice
The mushrooming field of ESG compliance encompasses everything from recruiting and supporting a diverse workforce to minimizing environmental impact and safeguarding against corruption and human rights abuses. Business lawyers advising on these issues tend to focus on the direct ESG impacts of and risks to their clients’ operations, but the state of rule of law in the broader society provides important context for this advice. Where the rule of law and governance are strong, the private sector benefits from state action on a wide range of fronts, from combating discrimination and corruption to protecting rights, maintaining security, and enforcing environmental regulations. Good governance of this nature complements and reinforces corporate best practices and internal controls. By contrast, contexts in which rule of law is weak present significant ESG challenges to which even the best compliance program is vulnerable. For this reason, comprehensive ESG advice incorporates a strong understanding of the broader rule of law context for business operations and provides specific strategies for addressing risks that context presents.
New data from the World Justice Project provide a valuable—and concerning—input to such ESG advice. For the fourth year in a row, the recently published 2021 WJP Rule of Law Index® shows the rule of law declining in a majority (74.2%) of the 139 countries studied. The Index reflects the views of 138,000 households and 4,200 legal practitioners surveyed about how the rule of law works in practice. The study scores and ranks jurisdictions on the following eight factors of the rule of law: constraints on government powers, absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice, and criminal justice. The Index is widely regarded as the leading source of original rule of law data, relied upon by a range of governments, intergovernmental organizations, corporations, scholars, civil society, and the media. An interactive Rule of Law Index data site enables users to probe the data for particular jurisdictions, identify comparative weaknesses in specific dimensions of the rule of law, and observe trends over time.
Since the last Index was published in March 2020, a majority of countries studied declined in all factors except “order and security.” The negative trends hold in all regions of the world and in both developed and developing countries. Of particular concern to business lawyers is the decline in the Index measures of open government, regulatory enforcement, and civil justice, areas in which we had seen modest improvements in recent years.
From an ESG perspective, the persistent, broad, and deep deterioration in Index measures of constraints on government powers, corruption, and respect for rights is a wake-up call. While businesses have in recent years made important strides to improve governance, compliance, and accountability in their boardrooms, factory floors, and supply chains, powerful negative rule of law forces have been pulling in the opposite direction and risk undermining private sector ESG gains. Business lawyers advising clients on ESG matters should be helping them develop strategies for contending with these broader negative rule of law developments.
Proactive Strategies for Addressing Rule of Law Issues
Specific strategies for mitigating rule of law-related ESG risk depend on the context, the nature of the relevant governance weaknesses in the business operating environment, and the vulnerabilities of the particular business operation. Companies and the lawyers who advise them generally prioritize prophylactic measures, putting in place training, safeguarding, assessments, controls, and other policies and practices to protect their operations from the risks posed by the operating environment. While such approaches are important, they do little to address the underlying rule of law conditions generating ESG risk. Too often, such approaches amount to a privatization of governance, letting governments off the hook for failing to uphold the rule of law. Over the long term, even the best compliance programs leave businesses susceptible to risks posed by an operating environment characterized by weak rule of law. As the data outlined above underscore, that risk is only growing. For that reason, a business lawyer’s advice on ESG matters should not just entail defensive strategies to ensure compliance in a client’s operations but also include proactive approaches to strengthen the rule of law more broadly in society.
A proactive business strategy for advancing the rule of law can have many different elements. Company leaders can signal publicly and privately that the rule of law matters, that they track government performance on rule of law metrics such as the WJP Rule of Law Index®, and that this performance affects business decisions. When private sector leaders say that the rule of law matters to their business—as Microsoft President Brad Smith did on the occasion of the Index launch—it creates powerful incentives for government actors to embrace reform. It can be challenging for an individual business to take on what can be politically sensitive rule of law issues. But businesses can make the point effectively through trade and professional associations and networks, such as the US Chamber of Commerce Rule of Law Coalition or the Corporate Alliance for the Rule of Law. In this regard, the American Bar Association Business Law Section’s Rule of Law Working Group is developing a valuable new initiative to encourage its lawyers to join with business organizations and clients in crafting strategies and engaging in direct action to strengthen the rule of law.
Beyond broadly signaling concern about the rule of law, businesses can engage government counterparts to address specific governance issues that affect the operating environment. This can entail supporting and promoting research on international standards, best practices, and model reforms and advocating their uptake by governments. Again, this can be done by individual companies or in association with others. Transnational businesses can also engage their home government to address rule of law issues in its bilateral and multilateral dialogue with other countries. Finally, businesses can provide financial and in-kind support to organizations working to address rule of law weaknesses. The World Justice Project’s World Justice Challenge competition identifies hundreds of such change-makers working across a wide range of issues of concern to the private sector.
The new Rule of Law Index® data underscore the urgency of these kinds of proactive strategies to strengthen the rule of law as a critical bulwark for ESG progress. Without such strategies, ESG efforts provide little more than a flimsy shelter against a growing, powerful storm. Private sector action to take on the negative rule of law trends and work to reverse them promises sunnier days and sustainable ESG progress.
As the M&A market breaks records, the pandemic wears on, and new market trends emerge, deal lawyers are likely to continue to confront a host of drafting challenges and reassess routine provisions in mergers and acquisitions contracts. From buzzwords to vaccines, here are some thoughts on what deal agreements might look like in 2022.
Pandemic Year Three
2022 will be the third year of the Covid-19 pandemic. Deal lawyers have adjusted quickly to the crisis, both in how they have conducted the deal process (see, for example, the discussion below on remote closings) and how they have addressed the complex collection of evolving pandemic-related issues that impact businesses and transactions in the body of their agreements.
As the pandemic continues to evolve, contract provisions will continue to do the same. One of the newer issues, which has only recently begun to show up in publicly available agreements, is Covid-19 vaccines. With government and corporate vaccine mandates increasing in prevalence, and the administration of Covid-19 booster shots just getting underway, agreements will increasingly need to address the vaccines—potentially in a wide range of provisions from representations and warranties to post-closing covenants. (By way of example, the definition of “fully vaccinated” could at some future time include the notion of booster shots or new health measures that protect workers against future variants, potentially impacting a variety of representations, covenants, and other provisions.)
With some pandemic issues, what we have seen is less evolution and more vacillation: the easing, then tightening, then easing again of health measures like masking and social distancing due to a variety of reasons, including the availability of new data and the emergence of new virus variants. Also, businesses are navigating a patchwork of conflicting guidance and best practices. This continuing state of change will undoubtedly impact how provisions, such as those regarding the ordinary course of business vis-à-vis Covid-19 and Covid-related exceptions to access-to-information covenants, are drafted. It could also impact how reasonableness is interpreted, as well as which, if any, reasonableness requirements parties elect to include in their references to Covid-19 responses.
On a related issue, will we get to a point where we are so deep into the pandemic that parties don’t feel the need to make qualifications to the definition of the ordinary course of business anymore, because pandemic ordinary course has already been in place for years?
There’s also a potential scenario none of us wants to consider, but given the events of the past year, it’s hard not to: What if, goodness forbid, the pandemic unexpectedly gets worse (again)? What if it gets really really bad? Right now, the pandemic market standard is to exclude pandemics generally, with it being very common to also explicitly exclude the current pandemic from the scope of the definition of “Material Adverse Effect” (MAE). Many of these exclusions go as far as to also exclude “worsening” and “future waves” of the pandemic. So with respect to these deals that exclude the pandemic from the MAE scope, especially those also explicitly excluding the worsening thereof, the answer would be that in such a doomsday scenario, those deal parties will most likely still be on the hook to close the deal, depending on the specifics of the agreement.
The pandemic has already caused legal scholars to take a more critical look at MAE definitions and MAE-related provisions. On one hand, changes in the severity of the pandemic could imaginably lead to shifts in the current MAE-exclusion trends. On the other hand, the legal scholarship and practitioner discourse that has been sparked by Covid-19 could introduce some new innovative approaches to MAEs with the potential to solve problems with the standard framework that long predate the pandemic.
The Future Arriving
In the the world of M&A, everything is up this year. So are references in M&A agreements to certain emerging issues and trending market topics that make it feel like, in some areas, the future is already arriving. “Future words” feels like an appropriate label for these, though some might call them “buzzwords.”
According to Bloomberg Law Precedent Search, which is an advanced search of M&A agreements filed with the SEC via EDGAR, references to “remote work” in publicly available agreements first appeared in 2017. But the numbers clearly reflect that it didn’t become a thing until last year. Only one agreement containing the phrase appeared in 2017, and we found zero in 2018. References to “remote work” have jumped from only one agreement containing the exact phrase in 2019 to 13 agreements in 2020, and 24 agreements in 2021 thus far. Considering the slow pace of return to the office, we expect to continue to see “remote work” show up in deal agreements in 2022.
As discussed above, the issue of Covid-19 vaccines is an emerging one, and while our search yielded only three agreements containing a reference to Covid vaccines in 2020, we have found seven such agreements in 2021 as of October 26.
Corporate and market interest in cryptocurrency and blockchain are on the rise, and so are the number of agreements containing these exact phrases. “Crypto”—which, according to our search, has never appeared in more than five publicly available agreements in any prior year—has appeared in 12 M&A agreements this year, marking a significant leap in presence.
Corporations are incorporating sustainability, diversity, human rights, and other corporate social responsibilities (CSRs) into their contracts. Thus far, in M&A, references to “ESG” or “environmental, social, governance” are still found in very few publicly available agreements. Based on our search, 2020 and 2021 have had the highest number of agreements referencing ESG yet, and we expect to see more in 2022, especially if ESG is incorporated into regulatory frameworks and financial systems. Potentially a related indicator for ESG is “climate change,” which had a consistent level of references in agreements over the past decade before reaching an all-time high in 2021.
Remote Closings
According to our search of publicly available M&A agreements, which was crafted to capture agreements that allow for “remote” or “virtual” closings, the number of agreements explicitly allowing this type of closing has surged this year.
In 2021, we found 506 agreements allowing for remote closings. This number is way up from 279 agreements in 2020 and 200 in 2019. Some are saying virtual dealmaking is here to stay, and these numbers make that stance hard to ignore.
PE Deal Drafting
There has been a massive amount of private equity M&A activity this year. When recently asked about the drafting trends he has been seeing in PE M&A deals, Andrew Nussbaum, corporate partner of Wachtell, Lipton, Rosen & Katz, noted that PE deals, both on the buy side and the sell side, “look more and more like a public company M&A transaction.” Nussbaum also noted that when the pandemic caused some deals to be renegotiated or terminated, it reminded sellers that “the boilerplate never matters until it does.” (The full discussion from August 2021 can be accessed here.) More public-style deal terms and closer attention to the boilerplate are trends to watch in PE deals into 2022.
This article was originally published on Bloomberg Law as “ANALYSIS: Predicting M&A Drafting Innovations in 2022” on Nov. 1, 2021.
Reproduced with permission. Bloomberg Law, Copyright 2021 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bloombergindustry.com
Project Chair: Matthew R. Kittay, Fox Rothschild LLP Key Contributors: Haley Altman, Litera; Anne McNulty, Agiloft; David Wang, Wilson Sonsini Goodrich & Rosati Peer Reviewer: David Albin, Finn Dixon & Herling LLP Committee Chair: Wilson Chu, McDermott Will & Emery LLP Subcommittee Chair: Daniel Rosenberg, Charles Russell Speechlys LLP
“We’re often and in fact almost always way behind the curve on what is actually happening in the market. As a result, we’re backing into the regulation of the market by observing what is actually happening in the market.” — David Wang, Chief Innovation Officer, Wilson Sonsini Goodrich & Rosati
Goal. The goal of this guidance is to review the ethical implications of the use of legal technologies by M&A lawyers. While the group that developed this guidance understands that negotiating changes to contracts with many popular service providers is impractical in most scenarios, we believe that there are safe, productive and client-focused steps that can and should be taken by all attorneys to improve their workflows and their clients’ legal product. Faced with the fact that most readers probably will accept this general premise, this guidance focuses on how to effectively counsel clients and provides items for action and consideration by attorneys, for example when clients (or lawyers on the other side of a transaction) ask to use a particular technology on a transaction.
Although the examples given in this guidance refer to M&A, much of this will be of wider implication including the concise list of key issues set out in Appendix A.
Key questions addressed include:
What ethical duties must lawyers discharge when engaging these technologies?
What are the ethical and practical considerations regarding “automation” and the “unauthorized practice of law”?
Where is data that lawyers upload onto technology platforms hosted, and what are the data sovereignty implications?
What rights (IP and other) do the technology platforms take over the data that lawyers upload?
What level of security/confidentiality should lawyers require from technologies that we use?
How can lawyers effectively evaluate software?
1.0. Framework.
In order to provide guidance and some best practices to consider in leveraging technology in an M&A practice, we must start with the key ethical frameworks that underlie the use of technology and may encourage or require its usage in certain contexts. The American Bar Association’s Model Rules of Professional Conduct (the “Model Rules”), case law, and statutes help define the lawyer’s professional responsibility for utilizing technology in the practice of law, as well as the risks that must be addressed when certain technology is leveraged in the practice.
1.1. ABA Model Rules of Professional Conduct.
The specific Model Rules which govern or implicate requirements to use technology include: Rule 1.1 Duty of Technological Competence; Rule 1.5 Obligation not to collect unreasonable fees; and Rule 1.6 Duty of Confidentiality.
1.1.1. Model Rule 1.1 — Duty of Technological Competence (Comment 8):
“Tomaintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.”
The profession has increasingly recognized a two-fold duty with respect to the use of technology. Namely, these are the obligations to assess technology and determine whether the technology improves the services and benefits to a client, and also to understand the technology and ensure its use does not jeopardize the confidentiality of client information.
1.1.2. Model Rule 1.5(a) — Obligation not to collect unreasonable fees:
“A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses…”
For example, if a client needs exactly the same agreement duplicated, except with altered party names, dates, and contact information, a lawyer must consider what are reasonable fees to collect for the work.
1.1.3. Model Rule 1.6 — Confidentiality of Information:
(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).
(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary [as listed[1]];
(c) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.
When applying this Model Rule, the information may require additional security measures, and potentially could prohibit the use of technology depending on criteria including: the sensitivity of the information; the likelihood of disclosure if additional safeguards are not employed; the cost of employing additional safeguards; the difficulty of implementing the safeguards; and the extent to which the safeguards adversely affect the lawyer’s ability to represent clients (e.g., by making a device or important piece of software excessively difficult to use).
Furthermore, when considering Model Rule 1.6, attorneys should consider obligations of confidentiality with respect to client data specific to the platform in question, taking into consideration, for example:
that technology platforms take different intellectual property rights over the data uploaded;
Opinion Number 477, which evaluates data breaches and possible ethical considerations;[2]
and in addition to ethical obligations with respect to the data:
contractual obligations, regulatory and compliance obligations, IP rights, training, diligence of the vendors and client expectations and other business considerations.
Practically speaking, this means attorneys should, at a minimum, know where the data is; know that they protected client data; know that they own it, and maintain the ability to remove it from systems in a secure manner. By way of example, using cloud service could violate non-disclosure agreements and potentially result in heavy fines and a loss of trust among clients, as discussed immediately below in Section 1.2.[3]
1.2. Laws and Regulations.
In addition to the ethical obligations imposed by the Model Rules, there are several key legislative acts and case law decisions which lawyers need to consider.
1.2.1. Stored Communications Act (SCA).
The Stored Communications Act (SCA), 18 U.S.C. §§ 2701 et seq., governs the disclosure of electronic communications stored with technology providers. Passed in 1986 as part of the Electronic Communications Privacy Act (ECPA), the SCA remains relevant to address issues regarding the privacy and disclosure of emails and other electronic communications.
As a privacy statute, diverse circumstances can give rise to SCA issues:
Direct liability. The SCA limits the ability of certain technology providers to disclose information. It also limits third parties’ ability to access electronic communications without sufficient authorization.
Civil subpoena limitations. Because of the SCA’s restrictions on disclosure, technology providers and litigants often invoke the SCA when seeking to quash civil subpoenas to technology providers for electronic communications.
Government investigations. The SCA provides a detailed framework governing law enforcement requests for electronic communications. SCA issues often arise in motions to suppress and related criminal litigation. For example, a growing number of courts have found that the SCA is unconstitutional to the extent that it allows the government to obtain emails from an internet service provider without a warrant in violation of the Fourth Amendment. See S. v. Warshak, 631 F.3d 266 (6th Cir. 2010).
1.2.2. Microsoft Case.
Microsoft had data hosted in one of its Ireland data centers. Microsoft was sued by a US government entity, and the prosecutors wanted to pull data from the Microsoft servers in Ireland. The case affirmed that the US government cannot access data in a foreign country. See S. v. Microsoft Corp., 584 US ___, 138 S. Ct. 1186 (2018).
1.2.3. The CLOUD Act.
The Clarifying Lawful Overseas Use of Data Act (CLOUD Act) was passed in March 2018 in response to the Microsoft Case, and clarified related data sovereignty issues, confirming that a company can determine data residency by designating where information must be stored or resides as part of contract and company policies. This legislation added to the complexity of the data sovereignty laws (the laws to which a company’s data is subject) for multinational companies that store data in different regions, as it can conflict with US, UK (GDPR), EU, and Chinese data storage regulations.
1.2.4. Consumer Data Protections.
There are of course also consumer protection laws and regulations protecting data and determining ownership. These regulations limit disclosure of information and protect people’s data. The General Data Protection Regulation (GDPR) is an excellent precedent for the tension between surging forward with automation of legal processes, and protecting against legal ethics and malpractice concerns. GDPR’s purpose is to give personal control of data back to the individual through uniform regulation of data and export control.
1.2.5. Global Problems for Global Law Firms.
For law firms with offices in different regions and with different carriers, each office may be subject to different data storage rules applicable to a particular office. This requires law firms consider data sovereignty rules in connection with their cloud services providers and the related data licenses for global entities.
2.0. Taxonomy of Data.
For any particular technology, lawyers need to take a step back and consider several issues, including: what is it actually trying to accomplish; what is the business goal of that technology; what is your goal in the representation; and how do those things interact. The professional responsibilities and consequences implicated will differ depending the technology and the type of interaction.
2.1. Automation.
There is no practice too complex to be at least partially automated; it is a matter of cost. It’s not impossible for technology to solve many of the inefficiencies involved in drafting documents; it’s a matter of costs and the costs are decreasing over time. Drafting a complex, well-functioning and technically coherent merger agreement, for example, may be very hard and beyond the limits of technology even theoretically. But it is not a requirement for automation that the automation must “fully” automate everything about a process before the technology fundamentally disrupts the status quo. If even 50% of a merger agreement became automatable, it will change how these agreements are done and how the business of mergers are priced.
2.2. Ethical Issues Arising from Structured Data.
2.2.1. Process elements, workflow management, due diligence software—all create deal process efficiencies but also have ethical implications. Often, a lawyer can invite collaborators—which can involve confidentiality breaches as well as eliminate attorney-client privilege. And closing automation tools require the data to be structured to automate the closing process, which requires the software to store facts about the specific transaction to close the deal. Likewise, transaction technology for populating contracts must process data of how a document is assembled and then incorporate some rules in its system. Initial data storage, active management during the deal, data retention and ultimately data destruction all need to be considered.
2.2.2.Examples of Implications for “Reasonable” Fees and the “Unauthorized Practice of Law” — Automated Cap Tables and NDAs. Cap tables’ inputs, outputs and procedures used in a transaction are largely the same as what computer programs and programmers use in data. There exists now working software that manages cap tables for private companies, public companies, and the individuals at these companies. A CEO or HR manager of a startup can access information directly, live at any time and handle transactions on the platform themselves if they choose. There are rules that go into the system and then there are processes—data inputs in a digitalized transaction to automatically populate form documents, check automatically whether a company is complying with limitations such as available shares in the plan, generate consents directly, and go back into the cap table automatically and update it. Other software, for example, undertakes automatic reviews of an NDA. The non-lawyer client or lawyer uploads the NDA, and the software will mark up the document, spot all the issues, produce an issues list by comparing it against the company’s playbook, and recommend edits to strengthen the client’s position.
2.2.3. No lawyer is involved in either the cap tables system or NDA review, and these technologies are deployed hundreds of times a day all over the country. There may be a one-time licensing fee or monthly contract for this service, no matter how times it is utilized. How much can a law firm charge? If it’s more than a minimal amount per issuance, is the firm’s fee reasonable and consistent with the Model Rule 1.5(a)? And furthermore, are software developers or the individuals and companies that license the software engaged in the unauthorized practice of law? In reality, clients will likely always want their attorney to scrutinize and augment the output to ensure accurate and excellent legal work, but these questions should still be considered.
3.0. Ownership of Data, IP Rights and Client Rights.
3.1. Types of Data.
When evaluating ownership issues, there are three types of “data” to consider, and the critical and harder questions relate to Mixed Data:
3.1.1. User-Created Data.
For example, a photographer is clearly the owner of a picture they take, and ownership is protected by copyright laws. In the legal-services context, the attorney work product—the documents themselves, any work done on those documents, comments, tags, as well as any record that are generated on the basis of that work—are User-Created data.
3.1.2. Servicer-Created Data.
Data created before uploading into the cloud has clear ownership and intellectual property claims by the creator or someone working on a paid basis for a business or organization, either licensed or sold to the end-user.
3.1.3. Mixed Data.
“Gray areas” that are the result, for example, of data that is modified or processed. In these cases, data that has been created within the cloud could come with some strings attached. It’s incumbent on the end-user to properly claim and protect this data and intellectual property. This is difficult as the legal processes have not kept pace with the developed technology.
3.2. Laws and Lawyers Protecting Data Rights.
3.2.1. Laws and Regulations.
There are of course laws and regulations protecting data and determining data ownership. These regulations limit disclosure of information and protect people’s data (infra, Section 1.2). Relying on laws and regulations, however, is not sufficient for an attorney to discharge their ethical obligations.
3.2.2. Contractual Protection.
Underlying ownership needs to be clarified in license agreements—where that data needs to be located, the privacy that needs to be retained, and how that data can be used. Key concerns include:
protection of the confidential data, particularly if it pertains to client confidential information, and
controlling what technology providers do when they receive a lawyer’s data, including what happens to pieces of information they need to collect and store to provide the contracted service.
To protect confidentiality, privilege and work product, lawyers need to own the derivative works that the technology produces, and therefore usage terms and conditions need to be reviewed very carefully.
3.2.3. Artificial Intelligence (“AI”) Tools.
AI tools are key digital assets for lawyers. But most software, and the software that is most easily accessible, is built for consumers, not lawyers. These tools are typically free, and produce mixed data. Foreign language translation tools (a machine and a human may be doing the translation together to teach the software to be more accurate over time), have presented specific concerns. These “derivative works” often have meaningful, even beneficial, intents. The vendor may want to analyze and use the customer data to provide tailored services to the customer, or process and aggregate the customer data for commercial exploitation by creating new products and services; using the processed data to enhance its internal operations, products or services; or licensing the data to third parties. “Free” tools, however, may collect and use data in ways the end-users did not contemplate when they used the software.[4]
In addition, lawyers often need to review large volumes of contracts (and other documents) in the context of transactions or in regulatory reviews, or for the purpose of producing market intelligence or deal term studies. AI-assisted contract review software can facilitate these processes. When using this kind of software, there are two possibilities: the system can find what the lawyers need it to find out of the box, or the lawyers will need to embed their own knowledge into the platform by “teaching” it to find the information they need it to find. Lawyers can teach AI systems to find custom information by identifying examples of that information in a document set that is representative of the types of documents they will need to review in practice. The software will then study those examples, figure out the pattern, and produce a “model.” This model would then be used to find that information in new documents imported into the software. The process for using AI-assisted contract review software to review contracts is generally straightforward: upload the contracts for review into the software. The platform then automatically extracts information from those contracts (via either pre-built models or custom models built by the lawyer’s organization) for the lawyer to review. If more junior lawyers are doing the initial review, they can flag problematic provisions for second-level review.
In considering the implications of using this kind of software, both rights to the uploaded documents and rights to the custom models must be considered. While in-house lawyers may be comfortable with giving software providers copies of or rights to their documents where contractually permissible to do so, law firm lawyers providing services to their clients likely would not be (at least not without their clients’ consent). Any software provider that serves professional services organizations would have an uphill battle if they attempted to take ownership or have rights to the data that is typically from their customers’ customers. It is also important to consider how the software license agreements deal with any intellectual property created when lawyers embed their own knowledge into the software by creating custom models. Custom models may represent the knowledge of expertly trained lawyers, and those lawyers’ organizations may want to control any use and/or sharing of that knowledge. While the code underlying the model may be retained by the software provider, it is important to confirm that the rights to use and share custom built models match the firm’s expectations around this issue.
To assist in review and negotiation of license agreements, please see attached Appendix A: Issues for Lawyers to Consider in Legal Technology Agreements.
4.0. Conclusion.
There is no “one size fits all” solution to solve for the ethics issues presented when lawyers engage technology. This guidance, however, captures the issues and serves as a framework for evaluating these issues as they continue to develop. By focusing on these issues, law firms and their attorneys can continue to work with their clients and the legal industry, not just in compliance with their ethical obligations, but also as thought leaders at the intersection of law and technology.
APPENDIX A
Issues for Lawyers to Consider in Legal Technology Agreements
Legal technology agreements are not always abundantly clear, but consider addressing the following issues:
Three types of data—original, derived and usage data
How this data can be used, other than for the benefit of the system
What “access rights” non-lawyers have
What can the software provider aggregate and extrapolate from the data?
How data is being delivered between the parties
Where it is being stored to inform compliance with sovereignty requirements and data residency requirements?
Specify how data can be stored for each of your different regions and then the global framework
How does the user access the data across different regions without pulling data inadvertently from one location to other privacy policies and other protocols?
How does the information get into the system?
Storage requirements
Data retention requirements
Removal requirements and controls
Control of data the lawyer inputs
Control of new data and right to remove (complicated by cloud technology from different providers), and as implicated by GDPR
Specific provisions regarding how data can be used, what derivative works can be created, what sort of aggregated de identified data can be leveraged in any sorts of contracts
If the agreement is silent, assume this information can be used in different way
“Derivative Works” provision, critical because part of the benefit of the solution is to provide the lawyer a derivative work, such as a fully compiled PDF version of the document with its appropriate signature pages; this is difficult because the vendor wants to make sure that the lawyer can do everything needed or promised by the technology
Clarify no other uses of the data
Add specific permissions around client confidential information
Data residency requirements that tell the lawyer exactly where the data will be and cannot be shifted between regions
Specify that all “Customer Data” (or “Company Content”) is owned by the customer and define customer data; any exceptions must be clearly spelled out.
[1] (1) to prevent reasonably certain death or substantial bodily harm; (2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services; (3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of which the client has used the lawyer’s services; (4) to secure legal advice about the lawyer’s compliance with these Rules; (5) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer’s representation of the client; (6) to comply with other law or a court order; or (7) to detect and resolve conflicts of interest arising from the lawyer’s change of employment or from changes in the composition or ownership of a firm, but only if the revealed information would not compromise the attorney-client privilege or otherwise prejudice the client.
[2] ABA Formal Opinion 477R: Securing Communication of Protected Client Information.
[3] Note, however, various potential benefits from technology: lower fees for clients; increased client retention; more accurately priced projects and the ability to show the breakdown of such fees; recruitment—associates want technology efficiencies, and they may prefer to perform tasks offsite and/or through automated systems instead of manually.
