November 26, 2014
By Dorothy J. Spenner & Daniel A. McLaughlin, Sidley Austin LLP
As litigators who defend lawsuits arising from stock price declines and debt downgrades and defaults, we have seen what can go wrong with securities offerings. Lawsuits can arise from legitimate corporate scandals, but also from industry-wide market events like the 2008 credit crisis. And the ground rules are constantly shifting; a pending Supreme Court case, Omnicare, could hold directors liable for a statement of the company’s opinion (like a valuation or statement about legal compliance) even if they honestly believed it but lacked a reasonable basis. To avoid being blindsided, directors of public companies should heed these lessons from prior lawsuits:
Examine the Incentives
Lawsuits and regulatory actions are often triggered by some real or perceived conflict of interest – for example, suits claimed that sell-side analyst reports were too favorable to investment banking clients, that accounting firms were too favorable regarding companies that employed them as consultants, or that rating agencies were too favorable to securities when the company paid their fees.
Boards also may risk losing important defenses, such as good-faith reliance on the independence of a valuation in a merger, if they rely on a party whose independence seems compromised. If a company is not comfortable fully disclosing a business relationship or payments because it is concerned about how the situation would look, that situation should be scrutinized as a legal risk. Examine Your Assumptions: Every business plan rests on assumptions, such as, for some businesses, pre-housing/credit crisis assumptions that home prices would continue to rise or remain stable. Boards should ask whether disclosures and business plans address the risks that present the largest-sized threats to the business, even when it may not seem all that likely that those risks will come to pass and even if these risks are macro, rather than company-specific risks.
About the Author
Dorothy Spenner is a partner and Dan McLaughlin a counsel in the Securities and Shareholder Litigation Practice at Sidley Austin LLP, a global law firm with 1,900 lawyers in 18 offices around the world. Ms. Spenner and Mr. McLaughlin represent financial institutions and related individuals in securities litigations and regulatory enforcement proceedings, and represent companies from a variety of industries and sectors in all aspects of complex commercial litigation. They can be contacted at [email protected]dley.com or [email protected], respectively.
This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.