JULY/AUGUST 202 1 VOLUME 1 8 / NUMBER 5 TODAYSGENER ALCOUNSEL.COM
Liability Caused By Other Companies’ Products • Perils of Contracting With Offshore Vendors • Data Derived From Contracts
• Transforming a multinational legal department • Keeping reports to the board privileged • Keeping the remote arbitration option open • Complying with background check regulations
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contents 4 EDITOR’S DESK GENERAL COUNSEL INTERVIEW
8 Q&A WITH BRUCE CZACHOR Acquiring mineral rights, obtaining permits and raising capital. LABOR & EMPLOYMENT
10 THINGS YOU SHOULD KNOW ABOUT BACKGROUND CHECKS Rules require nondiscriminatory use of criminal records. By Lester S. Rosen COMPLIANCE
12 PROXY STATEMENT TRENDS Make it readable and systematically organized. By Molly Doran COLUMN: PRIVILEGE PLACE
15 SHARPEN YOUR AXE FOR BOARD MINUTES AND REPORTS Privilege protection for crucial corporate business. By Todd Presnell
JULY/AUGUST 2021 Volume 18 / Number 5
FEATURES 16 INCLUDING REMOTE ARBITRATION CLAUSES IN COMMERCIAL CONTRACTS Drafting tips for maintaining an important option. By Michael R. Huttenlocher and Lisa M. Richman 18 LIABILITY FOR PRODUCTS MANUFACTURED BY OTHER COMPANIES A standard of maritime law applied onshore. By Jessie Ziegler and Sarah Miller 20 DATA MINING YOUR CONTRACTS Actionable insights into the way you do business. By Andrew Banquer 22 RISKS AND ADVANTAGES OF USING OFFSHORE VENDORS Data privacy and jurisdictional concerns. By Christopher Sloan and Andrew Droke 24 TRANSFORMING LEGAL SERVICE DELIVERY Creating a high-performing global team. By Robert Geckle 26 ATTORNEY-CLIENT PRIVILEGE IN COMMUNICATIONS WITH OUTSIDE DIRECTORS Using portals and personal email. By Noah Kressler and Lacey Rochester 28 FRENCH SUPREME COURT REVERSES ON SUCCESSOR LIABILITY Acquired entity no longer equates to a “deceased person.” By Nicolas Brooke
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EDITOR’S DESK
T
he general counsel’s role has steadily expanded over the last three decades, to the point where they are major players in the business operations of the companies they counsel.
Nevertheless, they are still attorneys, and preserving the attorney-client privilege for the advice they offer is more important than ever. In this issue of Today’s General Counsel columnist Todd Presnell discusses a federal case in which in-house attorneys failed so badly in that respect that the judge who ruled on the matter took it upon himself to explain how they could have protected the document in question. The potential for outside directors to waive attorney/client privilege by another avenue, communicating through the wrong medium, is the topic of an article by Noah Kressler and Lacey Rochester. They advise general counsel to pay close attention to a recent Delaware Court of Chancery decision on privilege. Molly Doran examines another corporate communication, proxy statements. Properly organized and designed, they can answer regulators’ questions at the same time they’re guiding stockholders. Jessie Zeigler and Sarah Miller consider a court decision that opens the door to liability for products that the defendant neither made nor controlled, and Christopher Sloan and Andrew Droke discuss the unique risks associated with the engagement of offshore technical and business process vendors. Data protection is the main consideration, but jurisdictional issues that complicate litigation that might arise are important too. Background checks are something that general counsel will almost certainly have to consider sometime. Lester S. Rosen answers questions that come up regarding due diligence, Ban the Box laws, and violations of the Fair Credit Reporting Act, which has become the basis for an increasing number of class actions.
Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com
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General Counsel Interview with Bruce Czachor
B
ruce Czachor is Vice President and General Counsel at Piedmont Lithium Ltd., a publicly traded
lithium business located in North Carolina. He has practiced corporate law for more than 30 years. His experience includes representing companies in mining, energy production and transmission, chemicals, and technology. Piedmont Lithium is positioning itself to be a sustainable provider of lithium hydroxide for the electric vehicle industry. bczachor@piedmontlithium.com
What are the key issues you deal with? Czachor: We’re a relatively young company, but we’re hoping the geographic proximity of our resources, production operations and prospective customers places us on the path to be the most sustainable provider of lithium hydroxide in the world. That should allow Piedmont to play a pivotal role in the move to electrification of transportation and energy storage. We just completed a complicated re-domiciliation transaction from Australia to the United States. As a result, we’re a Delaware public company with common stock listed on Nasdaq and CDIs (equal to 1/100th of a share) listed on the ASX. We are now subject to the rules and regulations of the SEC instead of a foreign private issuer. That switch entails a lot of new compliance requirements for the SEC and Nasdaq, Sarbanes-Oxley accounting, environmental rules, and all the other regulations that apply to emerging growth companies.
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We’ve also been acquiring mineral rights in the North Carolina Tin-Spodumene Belt, obtaining permits, commissioning feasibility studies, conducting drilling programs and raising capital to fund all of it. We have an excellent management team, but we need to expand our support staff. For now, we lean on our outside advisors, including legal, accounting, HR and other resources. Our plan is to bring more of those capabilities in-house as we grow.
Given that there’s always more work than time, how do you prioritize? Czachor: Everyone has their own system. For me, I keep a running list of things I need to do and re-prioritize daily. I use technology for scheduling known events and document management; but there are unexpected demands every day, so I always seem to come back to a written list on my desk. I rely heavily on my experience to know when to prioritize certain matters. We have a great team, and dealing with my internal clients is the easiest part of the job.
What do you look for in lawyers and other personnel when you hire in-house? Czachor: At the moment, I am the only in-house lawyer. As we grow, we will certainly look to bring some legal capabilities in-house. I know from my experience in running smaller offices at large firms that to be successful you need people who are willing to step outside their comfort zone when necessary. It’s great to have expertise in one area, but that does not always translate well in a company. There are a lot of clichés about teamwork, but teamwork is a high priority for me when it comes to hiring someone.
But none of us are complacent. We have the right level of angst about getting it right.
What’s the biggest mistake general counsel make when selecting outside counsel? Czachor: So far I’ve had good experiences with all the outside counsel that we use. Communication is the key. As general counsel, it is my job to communicate clearly to outside counsel what we need and what I expect. Part of that is also effectively communicating information they need to practice effectively and efficiently and provide good service. I was at a large law firm for many years, so I can appreciate what outside counsel are looking for and the type of guidance they need.
Any thoughts on legal technology, the tech you’ve adopted, and what, if any, you’ve rejected? Czachor: We’re still in our infancy with respect to adopting technology. I’m taking a go-slow approach, spending considerable time learning about different product offerings and identifying our needs. I expect that we will be using technology in contract management, compensation including stock awards, and tracking, accounting, HR and Sarbanes-Oxley. And we’ll be adopting technical software for our project teams on the mining and chemical processing side of our business. We will be bringing a chief technology officer on board who will be responsible for acquiring, developing and integrating all of that. Good luck to the CTO!
What’s the most problematic compliance area for you right now? Czachor: The SEC, Nasdaq and other rules and regulations — that’s my number one priority. I don’t think we have anything problematic, but we do need to establish compliance systems and protocols. A new COO and CFO recently joined the team, and we’re all working to put systems and protocols in place. We’re developing comprehensive environmental, social and governance policies that will become a core pillar of Piedmont Lithium’s goals. It’s an excellent team, and I’m confident we’ll achieve our goals. BACK TO CONTENTS
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L ABOR & EMPLOYMENT
Things You Should Know About Background Checks By LESTER S. ROSEN
I
f you are a general counsel, the topic of background checks may cross your desk. This can occur when an employer contracts with a background screening provider, also called a Consumer Reporting Agency (CRA). You may be asked to review the agreement and forms. You may also be asked to audit a screening and hiring program for legal compliance, as well as whether it affords sufficient due diligence. You may need to deal with an issue immediately, such as a candidate with a criminal record, an act of dishonesty or violence, or even a threatened lawsuit for negligent hiring.
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Background screening is subject to legislation, litigation and regulation. Here are 15 things general counsel need to know about background checks: • When counsel reviews an agreement between an employer and a CRA, there will typically be boilerplate about background checks and the responsibilities of the parties under the Fair Credit Reporting Act (FCRA). Counsel should communicate with the CRA to review which language is considered mandatory under the FCRA before suggesting changes.
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• Class action lawsuits against employers for alleged violations of the FCRA have skyrocketed, many based upon allegations of technical violations of the forms used to initiate a background report. For example, the FCRA requires that an applicant receive a “standalone” disclosure form that a background check will be run. You should make sure the forms are “standalone.” • Although background checks have a high rate of accuracy, the process can never be perfect. Information obtained by a CRA comes from third parties, and a CRA cannot agree to terms making them responsible for the accuracy of data. The FCRA requires a CRA to use “reasonable procedures for maximum possible accuracy.” • You may be tempted to broaden the liability language in the event a new hire turns out to be a bad decision. However, a CRA does not make hiring decisions, and a background check occurs after the employer has made the decision to hire. Any attempt to impose strict liability, consequential damage or punitive damages is not likely to be accepted by a bona fide screening firm. • Most employers want the hiring process to proceed swiftly. You may request a Service Level BACK TO CONTENTS
Agreement requiring a specific turnaround time for a service. The problem is that turnaround times can depend on third parties. The only realistic agreement a CRA can provide is that its own internal processes will not delay a result. • You should require a CRA to be accredited by the Professional Background Screening Association to demonstrate that it adheres to best practices and undergoes a rigorous onsite audit. There are also advantages to CRAs having a nationally accepted data privacy certification. • There are federal, state and local rules regulating legal and non-discriminatory use
•
•
by third parties. For example, credit bureaus will not provide employment credit reports without an onsite inspection for the business. You should ensure that the hiring process is legally compliant and promotes due diligence. By using best practices before the background check, employers can minimize the risk of hiring an applicant who is unqualified, dishonest or dangerous. In the event an employer is sued for negligent hiring, a plaintiff’s attorney will examine the employer’s entire hiring practices. One of the most critical areas for a general counsel to review is data and privacy protection. Well-publicized data breaches and new privacy legislation make it imperative that an employer be protected when it comes to using a CRA that has access to the personally identifiable information of subjects. A CRA must comply with strict data and privacy protection standards. General counsel should review international background checks if that is an issue. In 2018, the General Data Protection Regulation (GDPR) took effect in the EU, and domestic CRAs must therefore incorporate fully compliant GDPR policies, procedures and technologies to help U.S. employers screen EU residents. A great deal of expertise is needed since the rest of the world is different than the U.S. Although “continuous screening” or periodic re-screening sounds good in theory, you should ask questions to ensure the program is effective, fair and legal.
A Consumer Reporting Agency cannot agree to terms and conditions making them responsible for the accuracy of data. of criminal records, and “Ban the Box” (or Fair Chance) laws prohibiting premature queries about criminal history. Fair Chance hiring laws and the 2012 EEOC Guidance affirm that the automatic use of criminal records without further inquiry can create a disparate discriminatory impact. • You should consider whether a CRA understands legal regulations associated with various searches. For example, several states have enacted laws on the use of employment credit reports or social media. A CRA cannot give legal advice but should understand generally accepted industry practices. • Certain aspects of screening client agreements are required BACK TO CONTENTS
•
•
This tool may contribute to due diligence, but make sure the program does not create more problems than it solves. • Another issue is how to treat workers who are on-premises or being supervised but are paid by a third party, such as a staffing firm. Many companies require third-party workers to be screened the same as full-time employees. It is also important to ensure FCRA and EEOC obligations are fulfilled. Background screening rules, laws and regulations are always changing. Many CRAs will need to make changes in real time. General counsel should be prepared to agree that a CRA can rapidly adopt those changes without formal notice under any agreement, since these changes do not impact business terms and conditions.
Lester S. Rosen is founder and CEO of Employment Screening Resources®, a global background screening company. He is the author of The Safe Hiring Manual (3rd ed., 2017), served as the chairperson of the steering committee that founded the Professional Background Screening Association and was its first co-chair. lsr@esrcheck.com
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COMPLIANCE
Proxy Statement Trends By MOLLY DORAN
P
ublic companies recognize the importance of the proxy statement, using it to communicate with shareholders, big and small. But how do you successfully accommodate a diverse readership? The key is transparency. Although standards of best practice and regulations evolve,
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the demand for transparency is consistently strong. And with investor activism on the rise, so is heightened scrutiny of companies’ messages from ever larger audiences. Clear and transparent disclosure is key to establishing investor confidence in your company, management and the board. Maverick, Labrador’s corporate
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information research laboratory, recently conducted a benchmark study of the proxy statements filed by companies in the S&P 250, closely examining both content and design. The findings provide insight into how companies approach their proxy filings and how they can increase transparency. BACK TO CONTENTS
A proxy statement should be organized systematically and follow a logical flow, allowing information to build sequentially. You can avoid repetition by grouping related information together and using navigational clues such as prominent headers to help readers find what they need. Whenever possible, the reader
plain language. One way to address demands from investors and the SEC for understandable and transparent disclosure is to offer an easy-to-read proxy summary at the beginning of your document. Proxy statements contain a multitude of decision-useful information. A proxy summary provides an initial road map for the readers who want detail, and a general overview for more casual readers. In 2020, 79 percent of the S&P 250 proxy statements contained a proxy summary. Most summaries included both governance and compensation highlights, but there are differing views about what other information should be included. For example, only 20 percent included strategic or company highlights, which may be a missed opportunity to provide context for compensation decisions. We generally recommend highlighting changes to the pay program, management or the board, and summarizing the company’s response to extraordinary situations such as a global pandemic. Further in the document, it pays to consider shareholders’ specific information needs. For example, calls for human capital management (HCM) information have become increasingly pronounced. Investors want to know about hiring practices, safety, diversity and inclusion, training, pay equity, corporate culture and the board’s role in overseeing those matters. Companies are beginning to share HCM highlights in their proxy statements, using the opportunity to drive traffic to their more detailed sustainability or corporate social responsibility reports.
One way to address demands from the SEC for understandable and transparent disclosure is an easy-to-read proxy summary. should be able to understand a single idea without having to look elsewhere in the proxy statement for supporting information. Document structure and design influence the reader’s perception of the company’s message. Simple design tools such as secondary colors and page guides show readers what to read and where they are in the document. The study found that 88 percent of the S&P 250 used at least one color in their proxy, and 72 percent include descriptive page footers. Although these are small additions, the impact is significant. For example, when investors are reviewing multiple proxies at once, footers quickly tell them what company’s document they are looking at. Color makes a document more attractive, emphasizes key information and — when used strategically — reinforces brand identity.
TRANSPARENT DISCLOSURE In addition to strong document structure, the best proxies emphasize clear content and jargon-free BACK TO CONTENTS
This is a topic that is evolving. Even though HCM is mentioned in 52 percent of the S&P 250 proxies, companies vary in what they discuss. Among the companies that mention HCM, 31 percent address it as a company risk or board responsibility, and 19 percent include it as a board area of expertise. Proxy statement disclosure has advanced over the past decade, but there are still ways to improve. As you strive to cater to a broad audience, use transparency-driven methods to bolster your communication about everything from governance to compensation.
Molly Doran is Director of Advisory and Design Services at Labrador. She works with compensation consultants, attorneys, corporate secretaries, and the HR and accounting departments of corporations, producing innovative and transparent stakeholder disclosure documents. She is often a speaker at conferences, such as the Society for Corporate Governance. doran.m@labrador-company.com
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PRIVILEGE PL ACE
Sharpen Your Axe for Board Minutes and Reports By TODD PRESNELL
T
he great frontier lawyer Abraham Lincoln once made the thought-provoking statement that if asked to chop down a tree in six hours, he would spend the first four hours sharpening his axe. The message was that long, disciplined preparation was essential to accomplishing a task. In-house lawyers should consider Lincoln’s adage when confronted with the task of maintaining privilege protection for board reports and the legal advice portions of the board meeting minutes. Consider this familiar scenario. For the upcoming quarterly board
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meeting, the company’s general counsel prepares a report discussing the liability risks of pending litigation and potential exposure related to an anticipated corporate transaction. The general counsel distributes the report to the members for their pre-meeting review, the board conducts the meeting, and the minutes reflect the discussion between the members and the lawyer regarding the report. Six months later, an event occurs that sparks litigation, which is filed one year later. Discovery ensues over the next six months, culminating in a
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motion to compel production of the general counsel’s board report and the board’s meeting minutes. Your company produces both documents in camera to the judge for review of the company’s privilege objection. Will the judge, reviewing the documents two years after their creation, rule that the attorney-client privilege protects the report and the minutes from production? While contemplating that question, let’s review the legal foundation upon which the judge will decide the issues. The corporate attorney-client privilege protects from discovery confidential communications between the company and its lawyers made for legal advice purposes. Judges often hold that, with or without evidence, in-house lawyers engage in business and legal roles in their day-to-day duties. For this reason, courts generally apply heightened scrutiny to the legal advice requirement when the company’s communicating counsel is an in-house lawyer. They often require in-house counsel to clearly show, with evidentiary support, that the communication is primarily related to legal advice or the assessment of a legal issue. Based on this legal framework, the judge will evaluate your company’s privilege objection to producing the general counsel’s BACK TO CONTENTS
report and the board minutes by deciphering whether they pertain to legal advice, business issues or some combination of both. She will assess whether the report and the minutes were confidential when created and remained confidential thereafter. The question is whether the report and minutes’ contents, bolstered by the in-house lawyer’s sworn declaration, persuade the judge of the company’s privilege position. One federal case illustrates how your judge may view the issue. A company’s executive vice presi-
The court ordered the plan’s production in full. Although noting that the plan necessarily contained some legal advice, the judge found that the plan’s contents predominately pertained to business issues and provided several gratuitous comments regarding how the company and its lawyers could have protected the document from an adversary’s eyes. He suggested that the in-house lawyers could have blocked the legal advice portions of the plan into separate paragraphs or pages rather than
The in-house lawyers could have blocked the legal advice portions of the plan into separate paragraphs or pages. dent requested that a business team draft a global, long-term strategic plan and obtain input from the legal department as necessary. The business team created the initial draft and sent it to the legal department for review from a legal perspective. In-house lawyers commented on existing language but also drafted additional sections addressing legal risk issues. In a subsequent lawsuit, where an adverse party requested the strategic plan, the company objected to producing the sections reviewed or drafted by the in-house lawyers on the basis of privilege. An in-house lawyer submitted an affidavit stating that she reviewed the draft plan to provide legal advice and that the sections drafted by the lawyers contained legal advice. However, one wouldn’t know this by simply looking at the plan: It contained no confidential notations, was disseminated widely within the company, and had no remarks affirming that it contained legal advice. BACK TO CONTENTS
interspersing them in various sections. Or the drafters could have put the legal advice sections in a confidential addendum to the plan or even in a separate memorandum. The court stated that the law related to dual-purpose corporate communications is not new, and that the in-house lawyers should have better prepared the business team to draft the plan and maintain privilege protection. In other words, the judge told the lawyers that they should have sharpened their privilege axe prior to chopping down the strategic plan tree. Even though the strategic plan is not the same as a board report or the board meeting minutes, the same concepts apply. To increase the chances that the judge reviewing the report and minutes in camera finds them privileged, the in-house lawyer should consider marking the report as “privileged and confidential” in the header and footer; including “confidential” in the report’s title; and opening the
report with instructions that the report contains legal advice, is confidential, and that board members should not disseminate it to anyone without the lawyer’s authorization. The board minutes present a more complex concern because they almost certainly contain business and legal issues. The in-house lawyer can increase the chances of success by segregating the legal advice portions from the remainder of the document. The general counsel could include the advice-related discussion in separate paragraphs marked with the subheadings “privileged and confidential, contains legal advice,” or some similar language; putting the legal advice portion in a separate document and attaching as an addendum; or creating a separate set of minutes dedicated solely to the legal advice discussions. Taking these measures requires thoughtful discipline and planning. So sharpen your privilege axe before creating that board report or drafting (or advising on drafting) those board minutes. Lincoln would approve — and the judge probably will, too.
Todd Presnell is a trial lawyer in Bradley’s Nashville office. He is the creator and author of the legal blog Presnell on Privileges, presnellonprivileges. com, and provides internal investigation and privilege consulting services to in-house legal departments. tpresnell@bradley.com
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FEATURE
Including Remote Arbitration Clauses in Commercial Contracts By MICHAEL R. HUTTENLOCHER AND LISA M. RICHMAN
T
he pandemic forced many businesses to adapt to remote work. For arbitration practitioners, that meant using videoconferencing technology to conduct arbitration hearings. Although remote arbitration has long been a feature of international arbitration, domestic arbitration practitioners had to use it, too. With vaccine distribution moving apace, many practitioners are eager to get back to the comfort of in-person hearings. Others, however, have found that remote
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arbitration is a viable alternative for resolving disputes and has benefits of witness convenience, decreased travel and decreased costs. As the pandemic ends, contracting parties should consider affirmatively including remote arbitration as an option for resolving disputes and, in some cases, requiring its use.
MAJOR BODIES PERMIT REMOTE ARBITRATION At its simplest, parties can require that the arbitration be administered by an entity that explicitly
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permits the use of remote arbitration hearings. Many major arbitration administrative bodies — such as the American Arbitration Association, International Chamber of Commerce and London Court of International Arbitration — permit arbitrators and parties to conduct hearings via video conference. If parties want to take a more affirmative approach, then the option should be explicitly mentioned in the arbitration clause. It can be as simple as including the following sentence: “The arbitration hearing(s) may be conducted in-person or remotely via appropriate videoconferencing technology.” By including this sentence, the contracting parties tell future interpreters of the contract that they considered using remote arbitration to resolve disputes. This may comfort arbitrators who want to order a remote hearing down the road. Parties have further options to consider. One is to have an affirmative opt-in requirement in the arbitration clause, with such language as the following: “The party demanding arbitration must indicate in its demand whether the arbitration will be conducted in-person or remotely using appropriate videoconferencing technology. If the party seeking arbitration chooses remote arbitration, the responding party shall indicate in its response whether BACK TO CONTENTS
it accepts this selection. If the responding party does not accept the selection of remote arbitration, then the arbitration shall be conducted in-person.” This ensures early consideration of whether remote arbitration might be appropriate for the dispute. Alternatively, the parties can structure the arbitration clause as an opt-out, for example, “The arbitration hearing shall be conducted through the use of videoconferencing technology unless both parties agree that an in-person hearing is appropriate given the nature of the dispute.” The remote arbitration then becomes the default option. The parties would later have to determine whether the dispute warrants holding a full in-person arbitration. One additional alternative structure that parties should consider is setting a monetary threshold in which all disputes below the threshold shall be arbitrated remotely, while disputes above the monetary threshold shall be conducted in-person, absent extenuating circumstances (such as a global pandemic). Reduced costs are sorely needed when legitimate disputes with low monetary stakes arise. Parties could use the following language in their arbitration clause: “For any claim to be resolved by arbitration less than [an agreed upon monetary threshold], the parties shall conduct the arbitration remotely using secure videoconferencing in which all parties, counsel, witnesses and arbitrator(s) shall appear remotely for the arbitration proceedings.” Key to any of these approaches are the parties reaching agreement on the structure of the arbitration and ensuring sufficient flexibility if a remote hearing BACK TO CONTENTS
become necessary. Arbitration derives its power from the parties’ agreement, and these procedural choices are no different.
ADDITIONAL ELEMENTS If parties do utilize remote arbitration, there are additional considerations for ensuring a smooth experience. First, they should agree that no party will argue that using remote arbitration is a basis for objecting to any arbitration award. Although it is doubtful that a court would vacate an award simply because the hearing was done remotely (at least in the United States), it is better to take that option off the table instead of later having an expensive award confirmation fight. The following language should suffice: “In the event remote videoconferencing is used for all or part of the arbitration, the parties agree that the use of videoconferencing technology shall not serve as a basis for any objection or challenge to the award in any action in a state or federal court of competent jurisdiction.” Second, parties should discuss whether exhibits will be provided to witnesses in advance of an examination — for instance, by sending paper copies of exhibits in advance with an “e-bundle” of exhibits sent as a back-up. Navigating exhibits can be challenging while examining a witness remotely. Under appropriate circumstances, it may make sense for witnesses to have a paper set of exhibits to use during their examination. Third, given the proliferation of various videoconferencing platforms, it is best for the parties to have a set of minimum standards for the platform to be used for arbitration. We suggest the following language to ensure appropriate functionality and
security: “Any remote arbitration proceeding shall utilize appropriate videoconferencing software with sufficient security settings to protect the confidentiality of the arbitration and the ability to share the computer screen so that exhibits and other documents may be displayed.” Parties agreeing to contracts should ensure that remote arbitration remains an option for resolving their disputes to help control costs. Using the arbitration clause to shape how that remote arbitration is going to be conducted is critical to avoiding unnecessary disputes down the road. The drafting tips included here will help parties accomplish that goal.
Michael R. Huttenlocher is a partner in the New York office of McDermott Will & Emery. He focuses his practice on all aspects of complex commercial litigation and international arbitration, including contract disputes, business torts, merger and acquisitions, shareholder appraisal actions, the federal securities laws and white-collar criminal matters. MHuttenlocher@mwe.com Lisa M. Richman is a partner at McDermott Will & Emery, head of the Washington, D.C. office and Global Co-Chair of the firm’s International Arbitration & Dispute Resolution Practice Group. She focuses her practice on international and domestic dispute resolution matters, with a particular emphasis on international commercial arbitration and public international law. LRichman@mwe.com
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FEATURE
Liability for Products Manufactured by Other Companies By JESSIE ZEIGLER AND SARAH MILLER
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2019 Supreme Court ruling in a case dealing with liability related to asbestos has been cited as introducing new liability to manufacturers for dangers posed by products later added to theirs — even when they did not create or add the new product, and when asbestos had nothing to do with the claim. Some courts have drawn draconian lines of liability in asbestos litigation, including finding manufacturers liable for injury caused by asbestos-containing products made by others. The language of these opinions is concerning beyond asbestos litigation. It’s
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been a long time since companies stopped using asbestos commercially, and the major manufacturers of asbestos-containing products have declared bankruptcy. Plaintiffs’ counsel in asbestos cases have found new theories of liability and other defendants. Among them are manufacturers of products that do not contain asbestos, but arguably could have foreseen that their products would be used with asbestos manufactured by others. In March 2019, in a maritime case, the U.S. Supreme Court rejected the so-called “bare metal defense” that protected
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manufacturers from being liable for harm caused by products they did not make, sell or distribute, but were used with other manufacturers’ asbestos-containing products. The Supreme Court ruled in Air & Liquid Sys. Corp. v. DeVries that in some circumstances manufacturers have a duty to warn of the dangers of products that were later added to theirs. The Court expressly limited this rule to the maritime context, which requires “special solicitude for the welfare” of sailors, but state courts have not uniformly recognized this limitation. Significantly, the Court did BACK TO CONTENTS
not limit its holding to the asbestos context. It extended it to cover all manufacturers whose products require incorporation of a part from another company, if the manufacturer has reason to know that the other company’s product is likely to present a danger that users might not recognize.
VARYING INTERPRETATIONS In the last two years, 40 cases have cited the Air & Liquid Sys. Corp. opinion. States that have never picked a side on the debate of whether a manufacturer is liable for products that are used with theirs have looked to the Supreme Court opinion to inform that determination. Courts in both Tennessee and Georgia found that the opinion did not apply outside of the maritime context. New Jersey, however, created a liability rule similar to the Supreme Court’s, but applied it to all asbestos cases. In Davis v. John Crane, Inc., the Georgia Court of Appeals expressly adopted the “bare-metal defense,” finding Air & Liquid Sys. Corp. did not apply to non-maritime cases. But the Tennessee case, Coffman v. Armstrong, in which the authors represented one of the manufacturer defendants, had a longer path to ultimate resolution. The Tennessee Court of Appeals examined the U.S. Supreme Court opinion, and initially adopted an even more severe rule. It compounded the result of another opinion in the context of “takehome” asbestos exposure to hold that manufacturer defendants were now liable for the dangers of any product that could “foreseeably” be used with their products — even if the products did not require those additions to function. With respect to at least one of the defendants, the opinion BACK TO CONTENTS
could have forced it to go to trial without any evidence that it even had a product at the work site. This rule was even stricter than the U.S. Supreme Court’s and was expressly rejected by the Supreme Court, even in the more protective maritime context. The Tennessee Supreme Court overturned the Court of Appeals decision, and held that the Tennessee Products Liability Act, which required that the product
In states like New Jersey, and the not-insignificant number of states that previously incorporated similar rules, manufacturers now may be held liable for injuries caused by a wide variety of other products over which they have no control. Manufacturers could be forced to investigate what other products are being used with theirs by purchasers, investigate the dangers of those products, and consider costly modifications or
The Supreme Court ruled that in some circumstances manufacturers have a duty to warn of the dangers of products that were later added to theirs. in question be “either defective or unreasonably dangerous . . . at the time it left the control of the manufacturer or seller,” foreclosed the defendants’ liability for the products of another manufacturer. By contrast, the Supreme Court of New Jersey applied Air & Liquid Sys. Corp. in creating general rules of liability for the products of others. In Whelan v. Armstrong Int’l Inc., the Supreme Court of New Jersey relied in part on Air & Liquid Sys. Corp. in creating a rule that manufacturers are liable for injuries caused by asbestos-containing component products or replacement products in a non-maritime case. Although Air & Liquid Sys. Corp. has not yet been applied outside asbestos litigation, the willingness of the New Jersey Supreme Court and the Tennessee Court of Appeals to apply it beyond the maritime context, despite the Court’s express limitation, suggests that some state courts may apply this case to hold other manufacturers liable for other companies’ products in the future.
expansive warnings. In the end, companies will risk being sued for defects and products over which they had no control. Manufacturers should stay on top of these issues and consider filing amicus briefs to oppose any attempts at expanding liability beyond the products a company manufactures.
Jessalyn H. Zeigler is a member at Bass, Berry & Sims PLC. She serves as chair of the Products Liability & Torts Practice and works closely with clients facing claims related to product liability, crisis management, environmental, health and safety, and business disputes. jzeigler@bassberry.com Sarah B. Miller is a member at Bass, Berry & Sims PLC. She counsels clients in high-stakes civil litigation, including mass torts, class action claims and other complex business litigation matters. smiller@bassberry.com
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FEATURE
Data Mining Your Contracts By ANDREW BANQUER
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f you had to name the one most valuable aspect of a contract, what would that be? Responses to that question vary, but responders typically think about a single contract and its impact on the parties, rather than the contract’s impact on a company’s contracting as a whole. But what if the most important part of a contract is the data it generates? If you aggregate, organize and analyze all the data included in every contract, then you will have critical insights into the overall effectiveness of your contracting process and the way you transact business. From that analysis, you can determine how to be more effective. Contracting analytics is the secret sauce that allows you to make data-informed changes to your operating model and improve those objectives that matter most — whether that’s revenue growth, cost-savings, risk management or longer-lasting relationships with your contracting partners. It can also provide objective justification for organizational or behavioral change.
DATA THAT CAN BE DERIVED A single contract negotiation can provide a rich source of data, including total cycle time from initiation to signature, individual cycle time elements, amount of back and forth between parties, deviations from acceptable
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standards, number of escalations to resolves open issues, which party’s paper was used, total cost of legal support and initiation process compliance. The list can easily expand to include more granular data by business or function, agreement type, country, industry, urgency or strategic value. It can be further expanded after signing to see if intended results were achieved, if there were disputes, and if the parties renewed or built on the relationship. The amount of data can be mind-boggling. Fortunately, technology is designed to facilitate the contracting process and capture data along the way. To understand what data to capture, ask yourself what you are trying to accomplish. Start with your strategic goals and what success should look like. Next, map out actions and initiatives you believe will have a positive impact. Then, look at metrics — specific measures of success within established time frames. Finally, think about what data is needed to measure your progress toward your goals. Many companies grab data via their contract life cycle management (CLM) platform, which facilitates contract support requests, routing, approvals, signatures and recording. Some CLM tools include other functionality, such as contract building, third-party term review and collaborative drafting. These make it even easier to capture negotiation issues, cycle times, escalations and resolutions. If your CLM is not configured to capture all the data you need, you can integrate one of the many workflow tools that collect and store data during contracting. AI tools that review third-party content can BACK TO CONTENTS
also supplement your CLM or workflow tool and facilitate data capture. Other ways to gather data are through contract summaries created post-closing or by conducting postmortems, at least for complex deals.
PUTTING DATA TO USE Organizations often gather contract data and publish reports that include facts and figures on agreement types or categories. That’s good, but it’s just data until you put it to use. If a strategic goal is to increase market share in a core product or service line, success
Not meeting a goal isn’t necessarily a bad result if you can assess why. indicators may include reduced contracting cycle time, or an increase in number of contracts closed per quarter, or number of renewals. Assume you set a goal to shrink sales cycle times by 25 percent over a 90-day period. To facilitate that goal, you’ve added more pre-approved alternatives, required deal registration, managed routing using a workflow tool, and established follow-up procedures to spur responses from designated approvers. If your organization doesn’t already capture cycle time data, you will need to establish a baseline that allows you to compare results after you’ve rolled out your improved tools and processes. If the average time to close a standard enterprise sales agreement is 12 weeks and, after implementing new processes, the new average is 10 weeks at the 90-day mark, you may not declare
success. But not meeting a goal isn’t necessarily a bad result if you can assess why. That root cause analysis should lead to modifications to address identified gaps or weaknesses. In this case, perhaps initial review time shrank sufficiently, but escalations to subject matter experts continued to run too long. This part of the process needs attention. You might add more pre-approved alternatives or set an escalation response time goal and track results. You may also re-communicate why this is a priority, what the data is showing and what needs to change. The point is, you have the data to understand what needs further improvement; and you can use it to identify, motivate and measure important changes. Gathering, aggregating and analyzing contract data provides insights that lead to strategies and actions to improve a team’s chance of success. The teams that make use of the information at their fingertips have a competitive advantage. Organizations responsible for contracting can give themselves a similar competitive advantage by embracing this unheralded asset.
Andrew Banquer is Vice President, Corporate Solutions at QuisLex, a legal services provider. He has done extensive work with general counsel, commercial practice and legal ops to turn strategic objectives into actionable projects and activities. andrew.banquer@quislex.com
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FEATURE
Risks and Advantages of Using Offshore Vendors By CHRISTOPHER SLOAN AND ANDREW DROKE
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or years now, engaging vendors in other countries to provide business process or technical services has been a potentially useful way for U.S.based companies to obtain skilled work at a reduced cost. However, as remote work has become more ubiquitous, many organizations that have not previously done so are assessing how to best leverage the opportunities presented by offshore vendors. From developers and engineers to fully outsourced IT capabilities, these international resources can
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deliver expertise and increase productivity. These opportunities, however, also present unique risks and considerations for U.S.-based organizations. Although many companies have robust vendor management programs, there are several unique issues associated with offshore vendors. Below are some of the important legal and risk issues to be reviewed when considering an offshore vendor.
SHARING DATA Both contractual and regulatory obligations can restrict a
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company’s ability to transfer, store and process certain data outside of the United States. Thus, a critical first step is to determine whether the organization is permitted to send information abroad and, if so, what contractual and regulatory requirements apply. For example, many customer contracts and data privacy or security agreements specifically restrict the use of offshore vendors or storage of personal information outside of the United States, or require obtaining the consent of the other party. BACK TO CONTENTS
In addition, certain sector-specific laws restrict the offshoring of data. For example, in healthcare, several state Medicaid programs prohibit the offshoring of patient information. With respect to protected health information, HIPAA requires the offshoring of health data to be addressed as a part of the required security risk analysis. Although HIPAA does not prohibit the use of offshore vendors, the particular security risks must be considered.
LAWS THAT APPLY TO THE VENDOR It is important to remember that offshore vendors may not be subject to U.S. laws. In certain instances, this may not be a concern. Although some jurisdictions, such as the European Union, have robust privacy and security frameworks, other jurisdictions do not require companies to implement any protections with respect to personal or other sensitive data. As a result, organizations should determine which legal frameworks will apply to the vendor. This will provide some insight with respect to baseline legal expectations. Potential gaps could be addressed in a contract. Organizations may also determine that vendors with operations in certain jurisdictions should not be considered due to the general risks associated with offshoring data in those locales.
PROTECTING YOUR DATA Privacy and security are top of mind for many organizations, as the risks to trade secrets, confidential corporate information and personal information continue to evolve. Because vendor-based data breaches are, by definition, outside of the direct control of the customer, the diligence process BACK TO CONTENTS
for offshore vendors should be robust, particularly regarding privacy and security considerations. The security assessment should evaluate the administrative, physical and technical safeguards in place, as well as the vendor’s processes for vetting its staff. Similarly,
Offshore vendors may not be subject to U.S. laws. it is important to identify whether the vendor has subcontractors that process data in other jurisdictions. Further, in addition to pre-contracting diligence, companies should impose minimum standards via the contracting process, including periodic audits, security risk assessments, and even penetration testing in appropriate circumstances. Data security agreements are now common practice, and these agreements help to ensure a minimum level of protection and demonstrate that the organization has taken reasonable steps to protect the data being sent offshore.
SUING AN OFFSHORE VENDOR Finally, while most businesses do not enter into a new relationship expecting a dispute, it should be a consideration. Contractual obligations with a vendor that has no corporate ties here can be difficult to enforce. International service of process is complex, and the vendor may contest jurisdiction in the United States. Because of this, there is a material difference between using a U.S.-based vendor that will store data in another country and using a vendor that only operates outside of the United States. Vendors that do not have any physical presence in the United
States require a careful approach to maximize the customer’s ability to enforce the contract and obtain a meaningful remedy. The specific approach will vary according to the country in question. In many jurisdictions, an arbitration clause may be the preferred approach because most countries are party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (more commonly called the New York Convention), which allows for easier enforcement of arbitration awards in member countries. Ultimately, when reviewing and selecting offshore vendors, it is important to have an informed decision-making process that helps determine the overall risks and benefits, and an appropriate contract that is tailored to the particular risks.
Christopher Sloan is a shareholder at Baker Donelson and Chair of the firm’s Emerging Companies Group. He focuses his practice on start-ups and other emerging businesses, and handles complex software and other IT transactions. csloan@bakerdonelson.com Andrew Droke is a senior associate at Baker Donelson and co-leader of the firm’s GDPR team. He counsels clients on a broad range of data protection, privacy and cybersecurity matters. adroke@bakerdonelson.com
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FEATURE
Transforming Legal Service Delivery By ROBERT GECKLE
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n 2018 and 2019, the Airbus Legal and Compliance Agile Commercial Team (ACT) launched an initiative to transform its legal service delivery model to bring more value to Airbus and its customers. At that time, this large segment of the legal department focused on Airbus’s global industrial operations, including lawyers in North America, Europe and China. The company had recently undertaken a complex business reorganization that resulted in ACT integrating legal teams that were not previously included. The challenge was to create a high-performing, integrated global team while simultaneously confronting the “do more with less” challenge
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facing many multinational legal departments. Airbus outlined five primary expectations for ACT as they underwent this transformation: • Be more business-minded and timely in delivering legal services. • Improve anticipation of risks and mitigation. • Be an active contributor to complex business decisions and design of new business models. • Be more consistent in advice across regions and business areas. • Leverage digital tools. The initiative focused on introducing new digital tools to improve
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workflow management and deploying a new “Ways of Working” program to ensure enhanced service delivery models focused on the company’s strategic issues. “ACT was a key part of our broader legal transformation efforts, which aimed at innovating our department to better serve our customers while making our employees’ lives easier,” said John Harrison, Airbus general counsel. As part of the project’s kick off, a forensic review of work performed around the world was conducted. This included customer surveys, interviews and peer benchmarking. With offices in over 25 countries, the ACT team of 65 legal professionals received anywhere from 250 to 450 legal service requests per month. Prior to September 2019, there was no central intake hub to manage these requests or evaluate the relative priority and impact of the legal work. Nor was there any formal mechanism to track requests, which came to the team through many channels. There was no easy way to categorize, prioritize, assign and track the work. This unstructured process caused unnecessary work, a lack of transparency into legal service requests, inconsistent advice, duplication of effort and no actionable insights.
A NEW TOOL To address these challenges, Airbus, in partnership with UnitedLex, implemented a digital BACK TO CONTENTS
workflow tool for legal service requests, called Ask Legal. In less than a month, the team built and deployed the centralized platform. Components of the tool included business-focused request forms and centralized intake, risk-based triage, file collaboration, and automated routing and notifications. The team developed training materials, hosted live training sessions and designed robust data analytics dashboards. The overall objective was to move legal resources towards support of what was most critical as viewed by the internal clients, and find ways to commoditize and/or train clients on how to handle lower-value and repeat matters. There are barriers to acceptance of such tools and ways of
• Proactive risk management. Airbus benefits from using risk criteria to ensure that matters are assigned to the right resource and aligned with the company’s risk tolerance strategy. • Higher value contribution. ROI increased across the team. • Actionable Insights. Airbus gained better metrics from data that the team uses to define dynamic resource strategy, identify training needs, measure timeliness of legal service and uncover additional opportunities for efficiencies.
NEW WAYS OF WORKING A key pillar of the ACT transformation was the “Ways of Working” program. It was designed to enable ACT to be nimble, innovative and solutions-oriented, and to ensure adoption of the enhanced service delivery model, including Ask Legal. The program was also geared to foster onboarding of new lawyers and allow lawyers who may have historically focused on a specific set of transactions to transition to a wider range of legal support. This Ways of Working program included seven core components:
The overall objective was to move legal resources towards support of what was most critical as viewed by the internal clients. working. Platforms can be viewed as administrative hassles, gimmicks or attempts to monitor employee efficiency. Each business unit and country has its own dynamics. Airbus quickly learned how important it was to communicate the “why” and to explain that it would enhance legal support and efficiency. In some cases, local labor union or works council approval was required. Active use was demonstrated by more than 3,300 requests and 4,700 users since the system went into effect in September 2019. Key outcomes included: • Speed and accountability. Airbus’s legal department works faster and more reliably. BACK TO CONTENTS
• Redefinition of the ACT mission and values. • Rollout of a new organizational structure with accompanying roles and responsibilities. • A cultural change ambassador network. • Streamlined client service processes and intake triage criteria as part of the enhanced delivery model. • Learning, development and mentorship program.
• HR partnership program to support recruiting, training and onboarding processes. • Continuous improvement and feedback model. The Ways of Working program, in alignment with the service delivery strategy, was designed in direct response to feedback from over 500 ACT team members and clients, and was co-created in close partnership with the leadership team. This co-creation process facilitated buy-in, organically creating change champions across all levels of the team. That was critical to the success of the program. Airbus’s steps would prove vital in short order. In March 2020, the Covid-19 global pandemic shut down travel. It was one of the most difficult years for the airline industry in history. Airbus’s legal team was able to react nimbly. “When it comes to legal transformation,” says Daniel Hendy, Executive Vice President, Corporate and Commercial Solutions at UnitedLex, “it pays dividends to invest in the digital world before a crisis strikes.”
Robert A. Geckle, Jr is Senior Vice President, COO and general counsel at Airbus U.S. Space & Defense, Inc. He is responsible for the business operations and general counsel responsibilities for the U.S. government-facing business of Airbus. Prior to joining the company, he was an attorney at Hogan & Hartson. robert.geckle@airbusus.com
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FEATURE
Attorney-Client Privilege in Communications with Outside Directors By NOAH KRESSLER AND LACEY ROCHESTER
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orporate counsel should pay close attention to a recent Delaware Court of Chancery decision that addresses the potential for outside directors to waive attorney-client privilege. They do so by communicating through third-party email addresses that do not entitle them to a reasonable expectation of privacy. The decision arose within the context of a discovery dispute related to litigation commenced by the We Company (WeWork). To resolve its liquidity crisis, WeWork and its majority shareholder entered into a Master Transaction Agreement with Softbank Group (SBG), which
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obligated SBG to use its reasonable best efforts to consummate a tender offer with WeWork. At the time, SBG was the majority owner of Sprint, Inc., a third party not involved in the WeWork litigation, and several SBG employees wore multiple hats at SBG and Sprint. For example, SBG’s chief operating officer was chairman at both Sprint and WeWork, and was assisted by Sprint’s CEO on WeWork-related matters. Two additional Sprint employees were seconded to SBG to serve as chief of staff for the COO and staff operations director. After SBG failed to complete the tender offer, a special committee of the company’s board sued SBG
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and sought to discover communications that Sprint’s CEO and chief of staff exchanged with SBG’s internal and external counsel regarding WeWork. In response, SBG sought to retain or redact the email communications on the basis that they were confidential attorney-client communications under Delaware law. Critically, the WeWork-related emails were sent to or from the SBG employees’ Sprint email accounts despite the fact that the employees had access to nonSprint email accounts, which they could have used for SBG-related matters. At the heart of the dispute over the documents’ privilege or lack BACK TO CONTENTS
thereof lay the threshold issue of whether the Sprint employees had a reasonable expectation of privacy when employing their Sprint email accounts for SBGrelated purposes. The Delaware Court of Chancery answered in the negative after analyzing a four-factor test: (1) does the corporation
The Court’s analysis regarding the third factor, which it held also weighed against a reasonable expectation of privacy, is significant because it provides a road map for corporate counsel to avoid the same result as SBG. The Court noted that SBG failed to demonstrate that the relevant employees took any “significant
a work email address if their employer has a right to monitor such emails. Instead, the transmission of attorney-client or other confidential communications should occur through means that maintain a reasonable expectation of privacy. For example, provide company email addresses to outside board members or directors,
Outside directors who employ their company emails to exchange confidential communications run the risk of destroying any reasonable expectation of privacy. maintain a policy banning personal or other objectionable use; (2) does the company monitor the use of the employee’s computer or email; (3) do third parties have a right of access to the computer’s emails; and (4) did the corporation notify the employee, or was the employee aware, of the use and monitoring policies. The first factor did not bode well for SBG because the Sprint conduct code explicitly provided that its employees should have no expectation of privacy in information they send or receive and further reserved Sprint’s right to review workplace communications and emails. The court determined that the second factor weighed against a reasonable expectation of privacy because SBG failed to provide evidence that Sprint did not monitor the employee’s emails at issue and, moreover, because Sprint had previously reserved its right to monitor such emails. The Court easily concluded that the fourth factor supported a waiver of the attorney-client privilege because the record was replete with evidence that the employees knew or should have known of the Sprint email policy given their positions. BACK TO CONTENTS
and meaningful” steps to prevent Sprint from accessing the SBG-related emails sent from their Sprint email addresses. The Court opined that switching to a different webmail account or encrypting their messages would have constituted appropriate steps to prevent access and likely would have resulted in a different outcome. The WeWork decision is important for businesses that seek to maintain the confidentiality of their privileged communications. It counsels that outside directors who employ their company emails to exchange confidential communications run the risk of destroying any reasonable expectation of privacy. Failure to maintain attorney-client privilege renders confidential communications susceptible to discovery in future litigation. In the wake of the WeWork decision, the best practice for companies is to closely scrutinize the communication practices of outside directors or board members who send or receive confidential communications. Outside board members or directors should not regularly send or receive confidential communications through
communicate through portals, or otherwise encourage the use of personal email accounts that are not subject to monitoring from employers or other third parties.
Noah Kressler is a shareholder in Baker Donelson’s New Orleans office and chair of BakerPride, Baker Donelson’s LGBT affinity group. He advises public and private companies on mergers and acquisitions, debt and equity financings, securities law and governance matters. nkressler@bakerdonelson.com Lacey Rochester is an associate in Baker Donelson’s New Orleans office. She focuses on creditors’ rights and regularly represents financial institutions, oil and gas companies, and other secured and unsecured creditors in federal, state and bankruptcy court. lrochester@bakerdonelson.com
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FEATURE
French Supreme Court Reverses on Successor Liability By NICOLAS BROOKE
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n November 25, 2020, the French Court of Cassation, or French Supreme Court, reversed its case law regarding criminal successor liability. The facts are as follows: Company A had been under investigation for accidentally setting fire to private property stored in a warehouse. Before any charging decisions could be made, Company A was taken over by a competitor, Company B. As a result, Company A was dissolved, making its prosecution impossible.
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The matter made its way to the French Supreme Court, which was asked to address three questions: Can Company B be prosecuted for conduct committed before the acquisition? If the Supreme Court rules that the answer to that question is affirmative, thereby reversing what had been the position under French law, should the new precedent apply immediately, or only to mergers occurring after the judgment? How should cases of fraudulent mergers be dealt with? The French Supreme Court
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had previously concluded that the absorption of a company by merger and the death of a natural person were analogous. The absorbed company would be dissolved by the merger and no longer exist as a separate entity. Given that Article 6 of the French Criminal Code provides that a deceased suspect cannot be prosecuted, the absorbed entity could therefore no longer be brought to trial after the merger. For the absorbing entity, the same solution would apply, given that Article 121-2 of the Criminal Code provides that one cannot be pursued for a third party’s misconduct. This line of precedents was at odds, however, with European law. In 2015 the European Court of Justice had held that pursuant to its 1978 Directive, which provides that third-party rights should not be infringed by a merger, an absorbing company was dutybound to pay a fine pronounced after a merger with respect to facts committed by the absorbed company before the merger, because this sanction was part of the absorbed company’s liabilities. Three years later, in 2019, the European Court of Human Rights (ECHR) relied on the “business and operational continuity” between the absorbed company and acquiring entity to hold that the absorbed entity cannot, strictly speaking, be considered a BACK TO CONTENTS
third party vis-à-vis the acquiring entity. As a result, the acquiring entity was held liable to pay a fine for antitrust violations committed before the merger by the absorbed company. It is on account of the ECHR’s 2019 judgment that the French Supreme Court decided to cease adopting what it described as an “anthropomorphic” approach to successor liability in cases of mergers by acquisition, giving the following reasons: Such an
the ruling only appears to concern companies limited by shares. However, it is conceivable that the Supreme Court will progressively extend its new position on successor liability to other types of companies. Therefore, caution should be exercised in this respect. The ruling also relates to a specific type of takeover — mergers by acquisition. To alleviate the risk of prosecution, companies could consider choosing other types of takeovers, for example,
banks, from which a company found guilty of corruption may be excluded simply because it was found guilty of a criminal offence, even in cases of successor liability. Going forward, the French Supreme Court’s change of direction on successor liability enhances the crucial importance for companies contemplating an acquisition (in particular, their shareholders and directors) to conduct enhanced due diligence before doing so.
The French Supreme Court had previously concluded that the absorption of a company by merger and the death of a natural person were analogous. approach ignores the peculiarity of the concept of legal persons that are reorganized and potentially wound up as the result of a merger but without being liquidated. In a sense, this approach turns a blind eye to the business reality that the acquiring company is not distinct from the acquired one. For these reasons, the proper construction of Article 121-2 should allow the prosecution of an acquiring company for offences committed by the acquired entity before the merger. The November 25, 2020, judgment of the French Supreme Court does not change the position regarding mergers that were agreed to with a fraudulent motive, i.e., to escape criminal liability. In such cases, the Supreme Court already considered that the conduct in question could lead to prosecution despite the merger. The Supreme Court’s ruling will have no retroactive impact. Leaving aside fraudulent mergers concluded before the judgment date, it will only apply to companies that took part in mergers after November 25, 2020. Furthermore, BACK TO CONTENTS
an asset purchase deal (where the seller remains in existence and would therefore face prosecution itself rather than the acquiring company) or an acquisition of shares. In the latter example, the acquiring company would suffer indirectly from the prosecution of its newly acquired subsidiary, but the reputational and operational impact of criminal proceedings might be lighter. As for the penalties that can be inflicted by the courts in cases of successor liability, the November 25, 2020, judgment holds that these should be limited to a fine and probable forfeiture of assets. Thus, it appears that the other types of penalties guilty corporations can potentially face pursuant to Article 131-39 of the Criminal Code (in particular, being banned from taking part in calls for tenders for public procurement) would not apply in cases of successor liability. It is important to bear in mind however, that this analysis may not prove correct regarding public works in foreign jurisdictions or projects funded by international development
They should focus on the detection of so-called dissimulated offences such as bribery and corruption, tax fraud and misuses of corporate assets. Such enhanced due diligence was typically conducted in significant transactions before criminal enforcement against bribery and corruption increased substantially about a decade ago, leading to huge fines in a number of cases. It is useful to recall that various government agencies, such as the French Anti-Corruption Agency and the Ministry of Justice, have published guidance in this respect and companies would therefore be well advised to take them into account.
Nicolas Brooke is Global Head of Ethics/ Responsable Mondial Ethique at Crédit Agricole. Previously he was a partner at the Paris office of Signature Litigation.
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