Officers Share Director Duties: Corporate Governance "Below the Board"

In a recent case (Gantler v Stephens, Delaware Supreme Court, January 27, 2009) the Delaware Supreme Court issued a major decision where they clarified that officers have the same fiduciary duties as directors (at least in Delaware corporations).

From the Delaware Corporate and Commercial Litigation Blog (Francis G.X. Pileggi)

Importantly, in this decision, the Delaware Supreme Court for the first time explicitly holds, what has been implicitly stated previously and has been also acknowledged by the Delaware Chancery Court, and that is: “officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and the fiduciary duties of officers are the same of directors.” (See footnote 36, but also note footnote 37 which acknowledges that DGCL Section 102(b)(7) does not exculpate officers from liability for breaches of their duty of care in the current statutory provision.)

On the issue of whether a delay in the due diligence process was a breach of the fiduciary duty of the directors, the Supreme Court disagreed with the trial court. The Supreme Court explained that on a motion to dismiss, the trial court is “not free to disregard that reasonable inference, or to discount it by weighing it against other, perhaps contrary inferences that might also be drawn,” making reference to the decision of the trial court that a delay of a couple of weeks could not be the basis for a breach of fiduciary duties.

Pre-Trial Agreement (DPA / NPA) Follow-Up

We received a number of great reviews and articles about the DPA/NPA research.

Richard Cassin, editor of the high-profile FCPA Blog, interviewed Larry.

Ryan and Larry summarized the research on the Securities Docket blog.

Compliance Week noted our research in a recent article.

Corporate Crime Reporter covered the article.

Thanks everyone for helping to spread the word.

Compliance or Defiance: Analysis of Pre-Trial Agreements

Lawrence D. Finder (Haynes & Boone LLP). Ryan D. McConnell (United States Attorney's Office) and I recently published a paper entitled "Betting the Corporation: Compliance or Defiance?" that analyzes pre-trial agreements (including deferred prosecution agreements (DPA) and non-prosecution agreements(NPA) but excluding plea deals) and their impact on compliance programs.

The paper contains a bunch of charts and analysis. Enjoy.

Abstract:

In 2008, the U.S. Department of Justice (DOJ) entered into sixteen corporate pre-trial agreements (collectively deferred prosecution agreements (DPA) and non-prosecution agreements (NPA)). This was a sixty percent decline from the forty agreements we saw in 2007. This brings to one hundred and twelve the number of agreements we have found from 1993-2008.

Violations of the Foreign Corrupt Practices Act (FCPA) remained the predominant subject matter addressed by corporate pre-trial agreements with seven of the sixteen agreements resolving FCPA violations. In 2007, roughly a third of the agreements involved FCPA violations. In addition, we saw the first corporate pre-trial agreements resolving immigration work-site enforcement investigations into corporate targets. There were three work-site related corporate pre-trial agreements in 2008.

In 2008, every agreement contained some sort of corporate compliance reform provision-continuing a trend we have seen over the last few years. This trend is the focus of this update. Aside from building on prior observations, this piece attempts to draw empirical observations about the types of compliance programs that come out of corporate pre-trial agreements. The authors recognize there is no one-size fits all template for corporate compliance programs. But by examining compliance programs in the context of DPAs and NPAs, the authors strive to provide a picture of what types of compliance measures are negotiated by the DOJ and corporate targets to resolve internal control and other business deficiencies that resulted in criminal wrongdoing. We hope that this will provide some guidance for attorneys and other professionals who deal with compliance issues.

New SEC Chair Will Change How Ratings Agencies Work

In the September 2008 issue of Directorship Magazine, I illustrated the "Governance Ecosystem" and showed all of the connections between market participants. By far, the most common feedback that I received about the piece was this odd connection between companies and ratings agencies -- the ratings agency gets paid by the company to rate the company. A clear, though some say unavoidable, conflict.

And, this is not just about equity ratings. Companies pay to get debt rated and even to have their governance structures rated.

The Washington Post reported that Mary Shapiro, Obama's pick to lead the SEC, said that she is looking for ways to revamp how securities are rated.

..she is exploring ways to revamp how securities are rated, calling the current system of companies paying directly for credit ratings a conflict of interest that must be addressed.

...

Speaking at her confirmation hearing, she said a better system might be for financial firms to contribute to a pot of money that would be used to pay for ratings. In the years leading up to the financial crisis, credit-rating firms failed to judge the risk of many complex securities that turned out to be ticking bombs on the balance sheets of banks.

It will be interesting to see some of the options that the SEC will consider. Stay tuned.

Our friends over at XPLANE put together this interesting video entitled "Did You Know?: The 2009 Inauguration Edition" described as a:

Fun, fast-paced video by XPLANE that visually explores 23 factoids surrounding the upcoming historic inauguration of Barack Obama as well as past inaugurations. One minute 30 seconds in length, the video seems much shorter with its catchy music and wealth of interesting information. Watch and learn something new!