This article is related to a Showcase CLE program that took place at the ABA Business Law Section’s Hybrid Spring Meeting on Thursday, April 27, 2023. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.

On March 10, 2023, Silicon Valley Bank (SVB) was put into FDIC receivership, and at that time it was unclear exactly what process the regulators would follow.

Over the course of the weekend, we learned that the FDIC had created the Deposit Insurance National Bank of Santa Clara and transferred to it all insured deposits of SVB. On March 12, Treasury Secretary Janet Yellen, after consulting with President Joseph Biden, granted a “systemic risk exception” that allows for all depositors—both insured and uninsured—to be protected. The FDIC approved the “systemic risk exception” for SVB and announced that it was transferring all deposits, both insured and uninsured (notably, the systemic risk exception does not protect unsecured creditors or shareholders of SVB), and substantially all assets of SVB to a newly created “bridge bank.” (A bridge bank is used by the federal regulators to run a failed or insolvent bank until it can be sold or liquidated.) The FDIC engaged former Fannie Mae CEO Tim Mayopoulos to lead the FDIC-created SVB bridge bank.

Also on March 12, the Bank Term Funding Program (BTFP), which is a broad-based lending program, was announced. The Federal Reserve’s website explains that under the BTFP it will make available additional funding to banks “to help assure banks have the ability to meet the needs of all their depositors.” The BTFP will offer loans of up to one year in length to banks pledging qualifying assets as collateral. These assets will be valued at par. The BTFP is designed to be an additional source of liquidity against high-quality securities, which means that a bank will not need quickly to sell those securities in times of stress.

There are provisions of the Federal Deposit Insurance Act that do not require parties to consent to the transfer of assets to a bridge bank; rather, it is done by operation of law. A bridge bank follows a “business as usual” approach, and the FDIC expects all contracts entered into with SVB to be performed by counterparties. The complex receivership framework can impact a particular contractual relationship, but clearly there is the authority under the FDI Act and an expectation that SVB’s business will continue in the SVB bridge bank. Not every receivership will involve a bridge bank, but SVB’s receivership does.

Some of the counterparties who will encounter the bridge bank will be lenders under SVB credit agreements. The specific language of each of those credit agreements will need to be examined, but the LSTA’s form of Defaulting Lender Language (DLL), which is included in the LSTA’s Model Credit Agreement Provisions (MCAPs), is typical. The LSTA’s DLL defines a “defaulting lender” as follows:

“Defaulting Lender” means, subject to Section 6.02, any Lender that… (d) has… (ii) had appointed for it a receiver… including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity.

Article 6 of the MCAPs then sets out the “Defaulting Lender Adjustments” and “Waterfall.” Under the LSTA’s DLL, the trigger for SVB becoming a “defaulting lender” was met when SVB went into receivership; however, the FDI Act has displacing provisions that work to ensure that the ipso facto consequences set out in a credit agreement, which would otherwise apply, are ineffective. The mere appointment of the receiver and the assignment and transfer of loans and commitments to the SVB bridge bank thus do not give rise to enforceable rights unless the SVB bridge bank fails to perform in a different manner. The mere fact of the establishment of the SVB bridge bank does not make it a defaulting lender; the SVB bridge bank is not, itself, in receivership.

The MCAPs provide mechanics for handling the interests of a defaulting lender under a credit agreement. For example, they provide a detailed reallocation of participations in a defaulting lender’s letter of credit obligations as follows:

Reallocation of Participations to Reduce Fronting Exposure. All or any part of such Defaulting Lender’s participation in L/C Obligations and Swingline Loans shall be reallocated among the Revolving Lenders that are Non-Defaulting Lenders in accordance with their respective Applicable Percentages (calculated without regard to such Defaulting Lender’s Revolving Commitment) but only to the extent that such reallocation does not cause the aggregate Revolving Credit Exposure of any such Non-Defaulting Lender to exceed such Non-Defaulting Lender’s Revolving Commitment. Subject to Section [Acknowledgment and Consent to Bail-in of Affected Institutions], no reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Revolving Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lender’s increased exposure following such reallocation.

Thus, for example, if SVB is a participant in a letter of credit, the LSTA’s DLL requires reallocation among the other revolving lenders of the defaulting lender’s share; however, that will now not apply in this situation with SVB—reallocation should not arise. The MCAPs do not discuss a receivership situation where a bridge bank has been set up, and that is typical of credit agreements; they would not go into that type of detail.

No one knows what process the FDIC would have chosen to follow had they more time to prepare. They may have opted for a 2008 Washington Mutual–type of sale like that which took place during the Global Financial Crisis—but the bridge bank is what they were able to put in place on such short notice. Thus, while there are parallels to situations that arose during the Global Financial Crisis, no situation is identical or uniform.

This article is related to a Showcase CLE program that took place at the ABA Business Law Section’s Hybrid Spring Meeting on Thursday, April 27, 2023. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.

In the late 2010s and early 2020s, ESG—a wide-capturing acronym standing for “environmental, social and governance”—roared into action, emerging both domestically and abroad as one of the defining trends in investing, regulation, finance, and corporate governance.

ESG’s proponents have long sought a unified framework through which to describe interrelated standards of environmental sustainability and human rights, and bring them into greater alignment with the private sector’s traditional profit-seeking goals. This change in approach arguably gained in prominence after the Business Roundtable’s 2019 declaration on the purpose of the corporation, endorsing a vision of corporations being led for the benefit of all stakeholders, not just shareholders. Though many question the sincerity and commitment of the Roundtable, the ESG movement was super-charged, and it achieved mainstream status during the 2020 protests for racial justice, which spurred companies to integrate new goals for diversity, equity, inclusion, and racial justice into their broader ESG policies. Over the course of the last eighteen months, public company boards have been sued for breaches of fiduciary duty based on alleged failures to react to ESG factor “red flags.”

In the past two years, however, a reaction against ESG has become more concerted and prominent, led by detractors who are ambivalent, skeptical, or outright hostile to ESG investing and the social agenda undergirding it.

Some of the more salient examples, of many, include:

• In 2022, at least forty-four bills or new laws in seventeen conservative-led states targeted company policies taking stances on gun control, climate change, diversity, and other social issues, compared with roughly a dozen such measures in 2021, according to a Reuters analysis of state legislative agendas, public documents, and statements.
• On November 3, 2022, five US senators, including Senators Tom Cotton and Charles Grassley, sent a letter to dozens of top law firms warning them to “fully inform clients of the risks they incur by participating in climate cartels and other ill-advised ESG schemes.” The senators suggested that there would be upcoming investigations into allegedly collusive agreements aimed at curtailing the use of coal, oil, and gas as unlawfully anticompetitive.
• In January 2023, Republican attorneys general from 21 states challenged leading proxy advisors ISS and Glass Lewis over the firms’ ESG-related policies and practices.
• The Biden Administration published a labor rule permitting retirement plan managers to incorporate ESG factors into their investment decisions, prompting litigation by Republican attorneys general. In the latest development, Congress passed legislation that would repeal the rule. Although Biden issued his first-ever veto to keep the regulation intact, a few centrist Democrats facing tough reelection prospects voted in favor of the repeal of the DOL rule based on the argument that ESG standards could jeopardize the retirement returns of middle-class workers.
• Democrats have also provided Republicans with support in constraining other ESG-related actions, with dozens of House and Senate lawmakers voting to block the local Washington, DC, government’s overhaul of its criminal code. Bipartisan opposition to major criminal law reform could place companies that strongly promoted such reform and other racial justice objectives in uncomfortable policy positions.
• At the more local level, a number of state governments have passed rules barring their public pension funds from considering ESG factors, while also loudly divesting from large asset managers and even banks perceived to be in favor of ESG analysis.
• Rules proposed by the Securities and Exchange Commission that would require greater disclosures related to climate change by public companies received extensive comment and attention, and when the rules are adopted, litigation challenging them is inevitable.
• Vivek Ramaswamy has centered opposition to ESG in his hedge fund Strive Asset Management as well as his nascent presidential campaign.

The dispute as to the appropriateness of ESG factors in board and management decision-making in academic and legal circles significantly precedes the current political tension over ESG, generally informed by the long-running academic debate over “shareholder primacy” versus “stakeholder primacy” understandings of the role of the corporation. In recent years, the significant concentration in voting power in so-called universal owners such as index fund providers has provided a new real-world relevance to this debate, while recent criticism of ESG has often made use of the language of shareholder primacy.

On April 27, a panel presenting to the Business Law Section of the ABA will tackle “The ESG Backlash: Politics and Shareholder Primacy” during the BLS’s Spring Meeting. The program will explore the ESG backlash from several different dimensions in an attempt to provide some guidance to lawyers that advise corporate boards struggling to navigate new ESG waters. Michael L. Arnold of Cravath, Swaine and Moore LLP—who currently serves as co‑chair of the American Bar Association’s ESG Subcommittee, a joint subcommittee of the Corporate Governance Committee and Federal Regulation of Securities Committee in the Section of Business Law, and served as co‑chair of the drafting committee for the Federal Regulation of Securities Committee in their comment letter on the SEC’s climate change disclosure rulemaking proposal—will be the moderator of the discussion with Gillian L. Andrews, Paul S. Atkins, and Isa Mirza. Ms. Andrews is an associate attorney at Heyman Enerio Gattuso & Hirzel LLP who practices in the areas of corporate and commercial litigation in the Delaware Court of Chancery. Mr. Atkins is founder and CEO of Patomak Global Partners LLC, which provides consulting services regarding financial services industry matters, including regulatory compliance, risk and crisis management, public affairs, independent reviews, litigation support, and strategy. He was a commissioner of the US Securities and Exchange Commission from July 29, 2002, until his term’s completion in August 2008 and in December 2016 joined a business forum assembled by then President-Elect Trump to provide strategic and policy advice on economic issues. Mr. Mirza is a Senior Advisor in the Global Business and Human Rights practice at the Washington, DC, office of Foley Hoag and has extensive experience advising a wide range of clients on the corporate responsibility to respect rights under international frameworks including the UN Guiding Principles on Business and Human Rights and the Declaration on the Rights of Indigenous Peoples.

First, the panelists will consider the ESG backlash and its relationship to evolving domestic and international legislation requiring, among other things, public disclosure of diversity, equity, and inclusion goals; greenhouse gas emissions and reduction targets; and efforts to by companies to respect internationally recognized human rights principles—including the steps they take to remediate or mitigate harms to rights-holders affected by their operations.

The speakers will also explore how the backlash to ESG is both related to and also transcends partisan clashes over the modern corporation’s responsibilities. In addition, the panelists will discuss how the ESG backlash may or may not affect the long-term efforts of companies to implement ESG-related programs, such as the commitments companies have already been making for years to credible human rights due diligence and meaningful engagement with vulnerable communities and other rights-holders as part of the human rights due diligence process.

Second, the program will consider how the ESG backlash relates to board fiduciary duties and other litigation topics. Recent complaints against directors and officers allege breach of fiduciary duties for corporate decisions ignoring national and international ESG risks. These suits are predicated on the evolving role of the corporate directors in compliance expectations, especially given the rise of index funds seeking to manage risk across their portfolios. The panelists will discuss how competing theories of shareholder primacy and stakeholder governance may contribute both to the rise of the ESG movement and the backlash against it, and will also give thought to key challenges corporate boards are likely to face in balancing their traditional business interests with the conflicting demands being pushed by both movements.

Finally, the panel will give attention to the role of ESG and its backlash in shaping the corporate disclosure landscape and proxy process. In this vein, the panelists will consider the SEC’s rulemaking in climate change–related disclosure; potential rule proposals related to corporate board diversity and human capital management; California laws related to board diversity; and related efforts by Nasdaq and in the private sector. The panelists also plan on discussing other ESG topics related to SEC disclosure (such as the definition of materiality) and the evolving shareholder proposal space (including “anti-ESG” shareholder proposals and pending Commission rulemaking on standards for the exclusion of shareholder proposals).

The panelists’ remarks will be followed by a Q&A session, focused on addressing challenges from corporate counsel, risk managers, and compliance managers, as they consider ways to effectively manage the evolving ESG framework and its emerging discontents.

Sometimes a plan doesn’t work out quite how you expected – and you still end up giving your learners exactly what they need.

That’s what happened for Craig Menden and his colleagues at Willkie Farr & Gallagher when they put together a remote training program for associates. The pandemic had paused in-person training. So, Menden, who is co-chair of the firm’s Technology Transactions Group, wanted to offer an engaging virtual training program. “The associates were concerned they weren’t getting the same training they would if they were in the office,” Menden says.

Come as you are

“We wanted to cover a lot of ground when we were all together on a call, so we assigned Hotshot videos as prework,” Menden explains. “The videos are a quick and engaging way for associates get up to speed before the session.” The plan was for the presenters to build on the prework with “war stories” and the firm’s specific approach to the issues.

Craig Menden, partner at Willkie Farr & Gallagher.

But the remote training programs for associates were scheduled when the firm was also breaking records for monthly billable hours. “Everyone was so busy that very few had time to watch them ahead of time,” Menden says. Registrations were strong, but Menden and his colleagues were afraid they would lose people who felt awkward coming to a session they hadn’t prepared for. “We had to change the way we presented it,” he says.

Rather than assuming everyone was coming in with a baseline of knowledge and then digging into the nuances, the presenters showed portions of the videos during the session and then had those discussions. In an hour-long session, they could cover two topics, with each topic including ten minute of video introduction and 20 minutes of discussion led by three partners of different experience levels.

Even though the pivot meant they could cover only two topics per session—instead of three—the tradeoff was worth it. “We were able to reach far more people without sacrificing the intent of the program,” Menden says.

Training overview

• Length: One hour
• Topic: The session covered two advanced M&A topics: materiality scrapes and indemnifiable losses
• Format: Zoom call that featured snippets of video content and a panel of partners discussing the issues
• Audience: All corporate associates and partners were invited, with messaging that it would be most relevant to mid-level and senior associates. There were participants at all experience levels.
• Preparation: Menden says he spent about a couple of hours preparing for each session – selecting video clips and making outlines for the other presenters. The other panelists spent about an hour, including attending a short pre-call and compiling their own war stories to share. “The resources from Hotshot made it easy to reduce prep time,” he says.

Putting the learning to work

Menden knows that these remote training programs for associates don’t close the gap on the coaching and development that associates are asking for, but they do help. “The thing that gets missed when you’re not in person is the informal debrief after a call or meeting,” he says. “In person, partners will answer questions and explain why things went the way they did. When you’re remote, no one picks up the phone to debrief. When the associate does call it’s about a specific question, and it’s brief.”

Although it’s not delivered exactly at the point of need like that, Menden says the content in the videos is as good or better than some of that informal learning. “It’s a succinct and well-thought-out version of the teaching we try to do in the moment,” he says.

Associates at Willkie agree. “The training sessions are a helpful avenue for learning to be a skilled attorney,” says Robert Yu, an associate at the firm. Yu went on to say, “I find having a framework that explains a legal concept supplemented by real-life anecdotes of how such concepts are applied to be very effective. Trainees can quickly identify the parts of the training that has the most relevance and also make important indirect connections to other legal concepts. Often a war story will contain additional information and context around why and how the legal concept was used, which makes the concept easier to understand and more digestible.”

Looking ahead

Willkie’s offices have reopened, and many people are choosing to work onsite. Partners are in the office three days a week. “We encourage people to come in when we’re here, so associates can sit in on calls and take up that informal learning again,” Menden says. Even now though, he still uses other Hotshot videos to provide context for some of his responses to on-the-fly questions from associates.

“Frequently someone asks me a question about something that is covered in a video,” he says. “I give them a short answer and then send them to the video. Every time I’ve done that they come back and say ‘Wow, I learned so much from that video. I can’t believe that I have been practicing all these years and didn’t know that.”

As for more formal learning programs, Menden says that given how many offices the firm has, the video and hybrid approaches are here to stay. As the PD team continues to offer monthly learning opportunities, Menden hopes he and the other partners will offer up similar content to engage associates and help them develop.

Meanwhile, Yu and his colleagues are all working to find the right mix of in-person and remote work that suits them. Yu offers this advice to other associates faced with a choice: “It is important to have a sense of what type of professional you are and what environment is most effective for you. If you are the type of associate who needs face time to learn concepts, make an effort to come into the office to try to catch partners or senior associates for informal mentoring moments.” On the other hand, “If you are fully comfortable working remote, don’t be afraid to pick up the phone to ask questions about a legal concept. I have found that folks in this industry very much value attentiveness and a desire to learn, and they are always willing to mentor and nurture those who express those values.”

Partners and PD partnering

While Menden brought this idea to his Professional Development (PD) colleagues, he believes that PD teams at other firms could easily sell the idea to their partners. “The Hotshot videos we used were presented by partners who are considered leaders in corporate law,” Menden says. “If you share those videos and let them know they can simply tell their stories – rather than having to formally instruct – it should be an easy sell.”

Using video for the formal instruction helps focus the session on exactly what participants need to know – rather than them having to rely on getting it from partners in small pieces over the course of many post-negotiation debriefs. “The videos are a much more focused download,” Menden says. “Otherwise, it might take multiple calls with multiple partners to get what they need to be effective. And focusing on specific stories and examples is more enjoyable for the presenters as well.”

Menden intends to offer similar sessions again soon. This time around, he’ll go into it knowing that a mix of video and discussion helps keep everyone on the same page and relieves the pressure of having to do prework before showing up. “We don’t want to scare anyone off,” Menden says. “Most of a lawyer’s learning is done in the moment anyway – it makes total sense to approach this in the same way.”

Hotshot can work with your firm to implement a remote training program for associates. We can also brainstorm other ways to engage and educate your associates. Contact us to learn more or check out our topics, learning tracks, and training guides.

“When I started practice, materiality scrapes didn’t exist and there was no basket,” says Nate Cartmell, senior partner in Pillsbury Winthrop Shaw Pittman’s Corporate practice group. “Over the course of 40 years transactional practice has really changed.”

Cartmell and his contemporaries learned the ropes of complex corporate transactions as the practice area developed – helping shape the way deals get done as they went. They brought along new associates with on-the-job-training over long negotiations and debriefing sessions.

Still, Cartmell has long worried that these informal learning opportunities were never really happening as often or consistently as they should be. And that was even more of a concern when it came to nuanced provisions like materiality scrapes, sandbagging, and indemnification.

Then, with more work happening remotely, opportunities for informal lessons and deep dives on provisions became less and less frequent. So, as educating associates and partners got even more difficult during the remote-working days of the pandemic, Cartmell started looking for new ways to support their learning.

He worked with Anna Bankey and Rebecca Augustine in the firm’s Professional department to create a new program. They crafted a low-preparation, high-impact format to level set on the provisions covered in the ABA M&A Committee’s Private Target Deal Points Study. Working with Hotshot, the team developed an engaging training program he could deliver over video conference with limited preparation on his part.

Training overview

Cartmell’s new training program involved 12 one-hour sessions offered every two weeks for about six months. The sessions were available to anyone in a transactional practice, including associates and partners. And each session covered a discrete issue in M&A agreements like materiality scrapes, sandbagging, non-reliance, and fraud exceptions.

Nate Cartmell, senior counsel at Pillsbury Winthrop Shaw Pittman.

For some of his sessions, Cartmell used videos in Hotshot’s M&A Provisions topic, which Hotshot created in collaboration with the ABA M&A Committee. In addition to definitions, drafting tips, and buyer and seller perspectives, these courses also cover market trends for complex provisions tracked by the study. Each video also features members of the M&A Committee (who are partners at major U.S. law firms) explaining the concepts and discussing how they think about them in a negotiation.

Cartmell explains that he’d start by introducing the audience to the topic: “What is a materiality scrape? Where did it come from? What should you watch for?” Then he’d cut to video of the partners—like Rita-Anne O’Neill from Sullivan & Cromwell LLP and Craig Menden from Willkie Farr & Gallagher LLP, who delivered the materiality scrapes content. And he’d end by taking questions to wrap up.

“I could talk for 20–30 minutes without getting really detailed, knowing that the videos would reinforce my explanation of the provision and add nuance to help participants think about how to apply what they had learned.”

Relevant for all levels of lawyers

Because Cartmell had invited lawyers at all levels and across transactional practice areas, he was keen to be sure everyone could learn something: “We would start off just setting the table: What is indemnification? Why include a standalone indemnification section when an aggrieved party already has a remedy for contractual breach?” He explained how “that was a good level set, as new lawyers hadn’t been exposed to all the different considerations being addressed, and more seasoned practitioners might not have the nuances top of mind,” and how it allowed them to then get into “how it works and what limitations and variations there might be.”

Cartmell says these provisions can be tricky, and people don’t always fully appreciate what they’re agreeing to. “It only becomes a problem once in a while,” he says. “But when it does, it’s a real problem.” He notes that a real estate partner was facing a materiality scrape demand in a contract right after the training, and the timing of the program helped him address the issue.

By starting off with the basics, Cartmell found that newer lawyers were less likely to get lost. “They might not totally understand it, but at least they’re hearing it and can start to apply it in future matters.” He also found that “for those more experienced, you get into things where they have questions or don’t quite understand it.” He appreciates being able to address those questions because “no matter how well you already know the topic, you always walk away with something you haven’t thought about before.”

Cartmell also felt that the benefit of him presenting the program goes beyond the material delivered in the session. “Now people in the firm know I’m here and that I can help,” he says. “I’ve had people referred to me based on my knowledge of these issues – people who otherwise wouldn’t have known I was a resource.”

Having video helped reduce preparation time for Cartmell and, he says, made the sessions more engaging for the audience. “The videos relieved me of having to go through all those things myself, lessening preparation time.” He also found that the videos “offered a different mode of delivery and helped recapture interest when it was waning.”

The somewhat subjective nature of the topics helped create an environment for discussion from participants: “Partners used the chat function to share their own perspectives on the provisions and how they handled them. It was a great interactive discussion that happened organically.”

Future of the training program

The format worked so well for attendees and presenters that Pillsbury is bringing it to more corporate lawyers. This year, Bankey and Augustine are working with another partner in the practice to develop a more basic program for summer and new associates. They are offering Hotshot videos to presenters to simplify the presentation portion of the session. “These videos are a great resource for everyone,” Bankey says. “If the presenters want to do what Nate did and show the video during the session, that can really take the pressure off them to present live. If they prefer to deliver the material themselves, the videos serve as a great resource before or after the session. We love how they can help the people learn in a different way.”

Hotshot can work with your firm to implement many of the ideas above. We can also brainstorm other ways to engage and educate your associates. Contact us to learn more or check out our topics, learning tracks, and training guides.

For the past few years, the ABA M&A Committee and Hotshot (a video-based learning platform for lawyers) have worked together to give ABA Business Law Section members access to market-leading, bite-sized videos on a range of M&A provisions. Now, they’ve expanded that collaboration to make these videos available for free on the website of the Section’s digital publication Business Law Today to help train and educate even more lawyers. The videos and related resources can be found here.

This collaboration started with an idea by Wilson Chu, who at the time was chair of the M&A Committee. He wanted to keep the committee on the cutting edge of training and education, add even more value for members, and appeal to the new generation of lawyers and law students. What resulted was an innovative collaboration between the committee, the Business Law Section, and Hotshot.

Together, they created the collection of videos on a range of M&A topics. The videos help lawyers learn about and keep current on important M&A trends, provisions, and concepts, and firms use them to run innovative training programs. The videos also provide insights on data from the M&A Committee’s renowned Private Target M&A Deal Points Study.

“These videos let the committee share practical thought leadership with tens of thousands of business lawyers and, via Hotshot’s platform, untold numbers of future members,” Chu said.

More and more people are turning to short videos to learn what they need to know, when they need to know it. “Powered by Hotshot, we’re delighted to be delivering our content to them at the office, at home, on the beach, or anywhere in the world they happen to be working,” said Chu.

“Bottom line, the best firms in the country trust Hotshot to provide content to train their lawyers, so working with them on this project was a no-brainer,” he added.

In addition, the collaboration was supported by U.S. Bank—a longtime supporter of the M&A Committee and its members. “We’re thrilled to be part of this collaboration and help lawyers get access to this great content,” said Lars Anderson, SVP and National Sales Manager at U.S. Bank.

After positive feedback on the videos from section members, the Business Law Section has expanded this collaboration to give free access to the videos for a limited time to anyone who visits Business Law Today. In addition, all Business Law Section members continue to receive free access as part of their membership.

Every two months for the next year, a different series of videos will be featured on the Business Law Today site for free. These series cover topics such as fraud carve-outs, materiality scrapes, and sandbagging, to name just a few.

The videos explain concepts and provisions, provide tips and strategies for drafting and negotiating, share buyer and seller perspectives, and analyze current market trends from the Deal Points Study.

The videos can be used to support on-the-job learning, and they also come with printable summaries as well as training guides to help firms run engaging group training programs.

A good example of how the videos can be used to help train lawyers comes from Craig Menden, former Chair of the Market Trends Subcommittee of the M&A Committee and Partner at Willkie Farr & Gallagher, who co-created a series of videos on Materiality Scrapes.

“We wanted to cover a lot of ground when we were all together on a call, so we assigned the Hotshot videos as prework,” Menden explains. “The videos are a quick and engaging way for associates to get up to speed before the session.” The plan was for the presenters to build on the prework with “war stories” and the firm’s specific approach to the issues.

You can read a case study about this here.

Available Content

There are over 20 short videos that will be featured in the collection, all of which were created by partners from the M&A Committee and Hotshot. Topics cover various M&A provisions and concepts and currently include:

• Materiality Scrapes – featuring Craig Menden from Willkie Farr & Gallagher and Rita O’Neill from Sullivan & Cromwell
• Claims “If True” – featuring Joanna Lin from McDermott Will & Emery and Jessica Pearlman from K&L Gates
• Sandbagging – featuring Nate Cartmell from Pillsbury and Lisa Hedrick from Hirschler
• Fraud Carve-Outs – featuring Tali Sealman from White & Case and Glenn West from Weil, Gotshal & Manges (retired)
• Indemnifiable Losses – featuring Leigh Walton from Bass Berry and Scott Whittaker from Stone Pigman Walther Wittman
• No-Shops – featuring Jenny Hochenberg from Freshfields Bruckhaus Deringer and Igor Kirman of Wachtell, Lipton, Rosen & Katz
• Updating Disclosure Schedules – featuring John Clifford from McMillan and Ann Beth Stebbins from Skadden, Arps, Slate, Meagher & Flom

Jenny Hochenberg, M&A Committee member and partner at Freshfields who is featured in the “No-Shop” video series with Igor Kirman from Wachtell, said, “The videos are a fantastic opportunity to get a primer on the key issues associates will encounter and be called up to negotiate and draft. They are ‘stackable’ content—to use one of my favorite phrases from Peloton—that gives you all the highlights you need to know in a quick and super accessible format.”

Michael O’Bryan, the current Chair of the M&A Committee and partner at Morrison Foerster, said, “In addition to the benefits to viewers, the videos provide opportunities for members of the M&A Committee to share their insights in an engaging format designed to reach a large audience with interest in M&A, including younger lawyers and those who don’t practice full time in M&A. We expect the platform to expand to allow more discussion of current issues and trends as well as the fundamental building blocks for M&A.”

For more information about the videos and how you can use them at your firm or practice, please contact Ian Nelson, Co-Founder of Hotshot, at [email protected]. The videos can be accessed here.

This is a summary of the Hotshot course “Materiality Scrapes: Market Trends,” in which ABA Business Law Section M&A Committee members discuss market trends for materiality scrapes, drawing on data from the ABA M&A Committee’s 2020–21 Private Target M&A Deal Points Study. View the course here.

Market Trends

• The use of materiality scrapes has increased significantly over the last several years.
• According to the ABA M&A Committee’s Private Target Deal Points Study:
  • Only 14% of deals in 2004 included materiality scrape language.
  • In contrast, 92% of deals in 2020 and the first quarter of 2021 included materiality scrape provisions.
    • 88% of those deals included breach scrape language (either alone or together with damages scrape language).

The rest of the video includes interviews with ABA M&A Committee members Rita-Anne O’Neill from Sullivan & Cromwell LLP and Craig Menden from Willkie Farr & Gallagher LLP.

Download a copy of this summary here.

This is a summary of the Hotshot course “Materiality Scrapes: Drafting,” a look at typical materiality scrape provisions, featuring drafting tips and perspectives. View the course here.

Drafting Materiality Scrapes

• An example of a typical double materiality scrape says:

  [For purposes of indemnification], including for determining whether a breach has occurred and for determining Losses, the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect.

  • The language isn’t limited to just the calculation of losses or to determining whether a breach has occurred.
  • It covers both, so it’s a double materiality scrape.
• An example of a typical damages scrape states:

  For the sole purpose of determining Losses (and not for determining whether or not any breaches of representations or warranties have occurred), the representations and warranties of Target shall not be deemed qualified by any references to materiality or to Material Adverse Effect.

  • It’s the words “for the sole purpose of determining Losses” that make it a damages scrape.You may also see the parenthetical, “(and not for determining whether or not any breaches of representations or warranties have occurred),” which reinforces that there’s no breach scrape in the provision.
• Scrape provisions may relate to covenants as well as to reps and warranties, but that’s less common.

The rest of the video includes interviews with ABA M&A Committee members Rita-Anne O’Neill from Sullivan & Cromwell LLP and Craig Menden from Willkie Farr & Gallagher LLP.

Download a copy of this summary here.

This is a summary of the Hotshot course “Materiality Scrapes: Buyer and Seller Perspectives,” a discussion of the perspectives and negotiating positions of buyers and sellers regarding materiality scrapes in acquisition agreements. View the course here.

Buyer and Seller Perspectives

• Buyers and sellers have different perspectives on materiality scrapes.
  • Buyers like them because they reduce the buyer’s financial risk for smaller, or immaterial, matters.
  • Sellers typically dislike them (especially breach scrapes) because they:
    • Create potential liability for immaterial matters; and
    • Increase the amount of information sellers need to include in the disclosure schedules.
• When the buyer gets a rep & warranty insurance policy, the debate over materiality scrapes becomes much less important.
  • The parties often agree to include scrapes with little or no negotiation.

Damages Scrapes

• Damages scrapes usually aren’t heavily negotiated.
• Buyers often want to include them and sellers are usually comfortable with that.
  • Most sellers don’t think the provision increases their liability since a damages scrape doesn’t affect what constitutes a breach.
  • There’s also the issue of “double materiality”, which in this context means the buyer:
    • First must prove that the damages are material to show a breach of the rep.
    • Then must prove that damages caused by the breach exceed the basket or deductible. The basket or deductible acts as a second materiality standard on the size of damages that applies to the seller’s reps.
  • Sellers often choose not to fight to retain the double materiality protection
    provided by a damages scrape.

Breach Scrapes

• Breach scrapes are usually heavily negotiated and much more consequential than a damages scrape.
• They’re what buyers and sellers care most about in the context of materiality scrape negotiations.
• Sellers’ perspective:
  • The concern for the seller with a breach scrape provision is that even though the reps in an acquisition agreement were negotiated to include materiality qualifiers or similar concepts, these materiality qualifiers are essentially removed from the reps in the acquisition agreement as a whole for indemnification purposes.
    • This means that the seller can be responsible for indemnifying the buyer for a greater amount of losses with a breach scrape than without one.
  • In addition, when an agreement has a breach scrape, the seller’s lawyers tell the seller to include all exceptions to the reps in the disclosure schedules (however immaterial) to avoid indemnification claims.
• Buyers’ perspective:
  • Buyers like breach scrapes for the reasons sellers oppose them.
    • Buyers want to be able to be made whole as a result of any breach of a rep without having to worry if the breach is material.
    • They’d also like to receive disclosure schedules that are as complete as possible.
  • In other words, they like the liability and disclosure implications of breach scrapes.

Rep and Warranty Insurance

• When the buyer purchases rep & warranty insurance, the debate over materiality scrapes is much less important.
• This is because a rep and warranty insurance policy will generally include a scrape for both breaches and damages as long as the purchase agreement also contains a double materiality scrape.
  • The insurance would then typically cover the liability for breach claims.
  • The seller therefore generally has very little at stake and will usually agree to a double materiality scrape.
• However, the parties don’t always know from the start if the deal will have rep and warranty insurance.
  • Therefore, they often have to negotiate on the assumption that there won’t be.
  • Also, for very large deals, insurance may not be cost effective because:
    • The retention amount could be too high; and
    • The cost of purchasing insurance could be very expensive.

The rest of the video includes interviews with ABA M&A Committee members Rita-Anne O’Neill from Sullivan & Cromwell LLP and Craig Menden from Willkie Farr & Gallagher LLP.

Download a copy of this summary here.

This is a summary of the Hotshot course “Materiality Scrapes,” an introduction to damages scrapes, breach scrapes, and double materiality scrapes. View the course here.

What Are Materiality Scrapes?

• When parties draft and negotiate reps and warranties in acquisition agreements, an important area of focus is the concept of materiality.
• Sellers try to qualify many of their reps and warranties with materiality to:
  • Avoid being liable for immaterial claims or damages; and
  • Reduce their disclosure burden.
• Buyers accept many of these materiality qualifiers, but often want them to be disregarded when it comes to indemnification.
  • The way buyers try to do this is by using materiality scrapes.
• A materiality scrape is a provision in the indemnification section of an acquisition agreement that removes qualifiers like “material” or “material adverse effect” from the reps and warranties for purposes of indemnification.
• There are two concepts that can be included in a materiality scrape provision:
  • A “breach scrape,” which removes materiality when determining if a rep has been breached; and
  • A “damages scrape,” which removes materiality when calculating damages.
• A materiality scrape provision that includes both a breach scrape and a damages scrape is often referred to as a “double materiality scrape.”
• It’s common for a materiality scrape provision to cover damages only (and not breaches), but you typically won’t see it the other way around (a breach scrape on its own).
  • This is because buyers generally ask for both in first drafts of acquisition agreements and the sellers usually push back the strongest on the breach scrape.
  • So when the parties agree on a compromise position that results in only one of the two types of scrapes being removed, it’s almost always the breach scrape that’s removed.

Relation to Other Provisions and Impact on a Deal

• Materiality scrape provisions effect several areas of an acquisition. These include:
  • The seller’s reps and warranties and the indemnification provisions.
    • In addition to removing materiality qualifiers from the reps, scrape provisions also relate to the baskets in the indemnification section.
    • This is because sellers will often agree to materiality scrapes in exchange for increasing the size of the indemnification basket.
  • The disclosure schedules.
    • If an agreement has a breach scrape, the seller’s disclosure burden is greater because they will have to list out every exception to the reps and warranties, without regard to materiality.
    • In other words, they’ll need to include disclosures that would have otherwise been immaterial because in the aggregate those issues may exceed the basket and result in indemnification liability.
  • Rep and warranty insurance.
    • Rep and Warranty insurance is an alternative to indemnification.
      • It protects buyers against breaches of reps and warranties by the seller.
    • When a deal has this insurance policy in place, the debate over scrapes is essentially moot.
      • This is because the seller has no liability for breaches of most reps.
• There can also be scrapes of knowledge qualifiers as well as scrapes of materiality qualifiers in covenants.
  • These are less common though.

Example

• Here’s an example of how the different types of scrape provisions can impact a deal and the financial risk for the parties.
  • Say the seller’s litigation rep in an acquisition agreement for a $500 million company says that there’s “no material litigation outstanding”.
  • When the agreement is signed, the seller has a pending $20,000 claim from an employee to collect a bonus the employee claims was promised.
  • The seller disputes that the bonus was promised, and considers this an immaterial claim, so it’s not included in the disclosure schedule.
  • After the deal, the claim is resolved for $10,000 and the buyer incurs $15,000 in legal fees, for total damages of $25,000.
  • Assume that there’s no rep and warranty insurance in the deal.
• If the acquisition agreement does not contain any materiality scrape language:
  • Then the seller’s litigation rep would be accurate – $20,000 isn’t material for a company worth half a billion dollars.
    • The buyer wouldn’t be able to make an indemnity claim for any of its damages.
• If the acquisition agreement contains both a damages scrape and a breach scrape:
  • Then the materiality qualifier doesn’t apply and the rep would be interpreted to say there is no litigation outstanding at all.
  • The rep therefore is not correct because the seller has this small employee litigation outstanding and didn’t disclose it.
    • If the deductible is otherwise satisfied, the buyer would be entitled to recover for its $25,000 in damages.
• If the acquisition agreement includes a damages scrape only:
  • Then the materiality qualifier applies when determining if there has been a breach.
  • The rep would still be true.
    • The buyer would not be able to make an indemnity claim for any of its damages.

The rest of the video includes interviews with ABA M&A Committee members Rita-Anne O’Neill from Sullivan & Cromwell LLP and Craig Menden from Willkie Farr & Gallagher LLP.

Download a copy of this summary here.

As artificial intelligence (AI), such as ChatGPT, continues to evolve and become more commonplace, many trade and professional associations are turning to AI technology to enhance their operations and decision-making processes and benefit their members. However, as with any emerging technology, the use of AI by associations raises a number of important legal issues that must be carefully considered and worked through.

Data Privacy

One of the primary legal issues associated with the use of AI by associations is data privacy. AI systems rely on vast amounts of data to train and improve their algorithms, and associations must ensure that the data they collect is used in accordance with applicable federal, state, and international privacy laws and regulations. Associations must be transparent with their members about how their data will be collected, used, and protected, and they must obtain the necessary member consents to use and share sensitive data. Remember that data (such as confidential membership information) that is inputted into an AI system such as ChatGPT will no longer remain confidential and protected and will be subject to the AI system’s most-current terms of use/service. As such, associations should not allow their staff, volunteer leaders, or other agents to input into an AI system any personal data, data constituting a trade secret, data that is confidential or privileged, or data that may not otherwise be disclosed to third parties.

Intellectual Property

Intellectual property is a key legal issue that associations must consider when using AI. AI systems can generate new works of authorship, such as software programs, artistic works, and articles and white papers; associations must ensure that they have the necessary rights and licenses to use and distribute these works, and that they are transparent about who/what created such works. Take steps to ensure that AI-generated content is not, for instance, registered with the Copyright Office as the association’s own unless it has been sufficiently modified to become a product of human creation and an original work of authorship of the association. Associations also must be mindful of any third-party intellectual property rights that may be implicated by their use of AI, such as copyrights or patents owned by AI vendors, developers, or others, and ensure that they do not infringe any third-party copyright, patent, or trademark rights. Finally, as stated above, be mindful not to permit the inputting into an AI system of any confidential or otherwise-protected content (such as trade secrets or information subject to a nondisclosure obligation or the attorney-client privilege), as such content will no longer be protected and confidential.

Discrimination

Another legal issue to consider is discrimination. AI systems can inadvertently perpetuate bias and discrimination, particularly if they are trained on data that reflects historic biases or inequalities. Associations must ensure that their AI systems do not discriminate on the basis of race, ethnicity, national origin, gender, age, disability, or other legally protected characteristics, and must take steps to identify and address any biases that may be present in their algorithms. For instance, the use by large employers of AI systems to help screen applicant résumés and even analyze recorded job interviews is rapidly growing. If AI penalizes candidates because it cannot understand a person’s accent or speech impediment, for instance, that could potentially lead to illegal employment discrimination. While this will only become a legal issue in certain contexts (such as the workplace), the use of AI has the potential to create discriminatory effects in other association settings (such as membership and volunteer leadership) and needs to be carefully addressed.

Tort Liability

Associations must consider the potential tort liability issues that may arise from their use of AI. If an AI system produces inaccurate, negligent, or biased results that harm members or other end users, the association could potentially be held liable for any resulting damages. Associations must therefore ensure that their AI systems are reliable and accurate, and that all resulting work product (such as industry or professional standards set by an association) is carefully vetted for accuracy, veracity, completeness, and efficacy.

Insurance

Associations need to ensure that they have appropriate insurance coverage in place to protect against potential liability claims in all of these areas of legal risk. Note that traditional nonprofit directors and officers (D&O) liability and commercial general liability insurance policies may be—and likely are—insufficient to fully protect associations in all of these areas. Associations also should explore acquiring an errors and omissions liability/media liability insurance policy to fill those coverage gaps.

* * * * *

In conclusion, while the use of AI by associations presents numerous opportunities and benefits, there are a number of legal issues that need to be carefully considered before going too far down the AI path. Among other things, associations must ensure that they are transparent with their members about the use of their data, obtain necessary intellectual property rights and licenses and avoid infringing others’ rights, address any potential biases in their algorithms, protect themselves against potential tort liability claims, and secure appropriate insurance coverage to protect against these risks.

As the work of associations involves both staff and member leaders, adopting and distributing appropriate policies governing AI usage by staff, officers, directors, and committee members is critical, as is policing compliance with such policies. Similar clauses should be built into employee handbooks and contracts with staff, contractors, and members (including agreements with volunteer speakers, authors, and board and committee members).

With careful planning and attention to these issues, associations can use ever-developing AI technology to enhance their operations, programs, and activities, better serve their members, and further advance their missions.

For more information, contact Mr. Tenenbaum at [email protected].