Posts Tagged ‘Corporate liability’

The Credit Suisse Guilty Plea: Implications for Companies in the Crosshairs

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday June 9, 2014 at 9:23 am
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Editor’s Note: The following post comes to us from Christopher Garcia, partner in the Securities Litigation and White Collar Defense & Investigations practices at Weil, Gotshal & Manges LLP, and is based on a Weil Gotshal alert by Mr. Garcia and Raqel Kellert. The complete publication, including footnotes, is available here.

The announcement of the Credit Suisse guilty plea on May 19, 2014 marks the first time in more than a decade that a large financial institution has been convicted of a financial crime in the United States. For this reason alone, some will herald it a watershed moment in the history of corporate criminal liability. But the government’s well-publicized efforts to mitigate the collateral consequences resulting from the plea will likely limit the plea’s practical significance for companies that find themselves in the unenviable position of negotiating a resolution of criminal allegations with the government. This post will explore the potential implications of the Credit Suisse guilty plea for corporate criminal liability.

…continue reading: The Credit Suisse Guilty Plea: Implications for Companies in the Crosshairs

The Three Justifications for Piercing the Corporate Veil

Posted by Jonathan R. Macey, Yale Law School, on Thursday March 27, 2014 at 9:20 am
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Editor’s Note: Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale University. The following post is based on an article co-authored by Professor Macey and Joshua Mitts of Sullivan & Cromwell LLP. The views in this post are those of Mr. Mitts and not his employer.

The doctrine of piercing the corporate veil is shrouded in misperception and confusion. On the one hand, courts understand the fact that the corporate form is supposed to be a juridical entity with the characteristic of legal “personhood.” As such courts acknowledge that their equitable authority to pierce the corporate veil is to be exercised “reluctantly” and “cautiously.” [1] Similarly, courts also recognize that it is perfectly legitimate to create a corporation or other form of limited liability company business organization such as an LLC “for the very purpose of escaping personal liability” for the debts incurred by the enterprise. [2]

…continue reading: The Three Justifications for Piercing the Corporate Veil

The Alcoa FCPA Settlement: Are We Entering Strict Liability Anti-Bribery Regime?

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 5, 2014 at 9:14 am
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Editor’s Note: The following post comes to us from Gregory M. Williams, partner focusing on complex commercial litigation and arbitration and the Foreign Corrupt Practices Act at Wiley Rein LLP, and is based on a Wiley Rein article by Mr. Williams, Ralph J. Caccia, and Richard W. Smith.

“This Order contains no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme.”

There are several notable aspects of aluminum producer Alcoa, Inc.’s (“Alcoa”) recent FCPA settlement. The $384 million in penalties, forfeitures and disgorgement qualify as the fifth largest FCPA case to date. Further, it is remarkable that such a large monetary sanction was imposed when the criminal charges brought by the U.K. Serious Fraud Office against the consultant central to the alleged bribery scheme were dismissed on the grounds that there was no “realistic prospect of conviction.” Perhaps most striking, however, is the theory of parent corporate liability that the settlement reflects. Although there is no allegation that an Alcoa official participated in, or knew of, the improper payments made by its subsidiaries, the government held the parent corporation liable for FCPA anti-bribery violations under purported “agency” principles. Alcoa serves as an important marker in what appears to be a steady progression toward a strict liability FCPA regime.

…continue reading: The Alcoa FCPA Settlement: Are We Entering Strict Liability Anti-Bribery Regime?

CEO Compensation and Corporate Risk

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday November 7, 2013 at 9:07 am
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Editor’s Note: The following post comes to us from Todd Gormley of the Department of Finance at the University of Pennsylvania, David Matsa of the Department of Finance at Northwestern University, and Todd Milbourn, Professor of Finance at Washington University in St. Louis.

Every firm is exposed to business risks, including the possibilities of large, adverse shocks to cash flows. Potential sources for such shocks abound—examples include disruptive product innovations, the relaxation of international trade barriers, and changes in government regulations. In our paper, CEO Compensation and Corporate Risk: Evidence from a Natural Experiment, forthcoming in the Journal of Accounting and Economics, we examine (1) how boards adjust CEOs’ exposure to their firms’ risk after the risk of such shocks increase and (2) how incentives given by the CEOs’ pre-existing portfolios of stock and options affect their firms’ response to this risk. Specifically, we study what happens when a firm learns that it is exposing workers to carcinogens, which increase the risks of significant corporate legal liability and costly workplace regulations.

The results presented in this paper suggest that corporate boards respond quickly to changes in their firms’ business risk by adjusting the structure of CEOs’ compensation, but that the changes only slowly impact the overall portfolio incentives CEOs face. After the unexpected increase in left-tail risk, corporate boards reduce CEOs exposure to their firms’ risk; the sensitivities of the flow of managers’ annual compensation to stock price movements and to return volatility decrease. Various factors likely contribute to the board’s decision, including CEOs’ reduced willingness to accept a large exposure to their firms’ risk and the decline in shareholders’ desired investment after left-tail risk increases. Indeed, managers act to further reduce their exposure to the firm’s risk by exercising more options than do managers of unexposed firms. These changes, however, only slowly move CEOs’ overall exposure to their firm’s risk because the magnitude of their pre-existing portfolios continues to influence their financial exposure to the firm.

…continue reading: CEO Compensation and Corporate Risk

Clarifying Aiding and Abetting under the Commodities Exchange Act

Posted by Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Sunday October 20, 2013 at 8:48 am
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Editor’s Note: Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Eric GoldsteinMark Pomerantz, and Daniel J. Toal.

On September 23, 2013, the United States Court of Appeals for the Second Circuit issued a decision clarifying the standard for aiding and abetting liability under the Commodities Exchange Act (“CEA”). The decision, in In re Amaranth Natural Gas Commodities Litigation, No. 12-2075-cv (2d Cir. Sept. 23, 2013), affirmed a judgment of the United States District Court for the Southern District of New York, which dismissed a putative class action filed by purchasers of natural gas futures contracts against J.P. Morgan Chase & Co., J.P. Morgan Chase Bank, Inc. and J.P. Morgan Futures, Inc. (“JPMorgan”). The purchaser plaintiffs claimed that Amaranth, a hedge fund for which JPMorgan provided clearing broker services, manipulated natural gas futures prices on the NYMEX commodities exchange, and that JPMorgan aided and abetted Amaranth’s manipulation.

…continue reading: Clarifying Aiding and Abetting under the Commodities Exchange Act

Court Curtails Territorial Reach of Criminal Liability Under Section 10(b)

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 11, 2013 at 8:56 am
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Editor’s Note: The following post comes to us from Jonathan R. Tuttle, partner in the litigation department at Debevoise & Plimpton LLP, and is based on a Debevoise & Plimpton client update.

On August 30, 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.” Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v. National Australian Bank Ltd., [1] the Second Circuit’s significant decision in United States v. Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud “in connection with” a security listed on a United States exchange or a security “purchased or sold” in the United States. In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that “[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”

…continue reading: Court Curtails Territorial Reach of Criminal Liability Under Section 10(b)

Assumption of Liabilities in Carve-out Transactions

Posted by Barbara Becker and Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on Wednesday August 14, 2013 at 9:03 am
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Editor’s Note: Barbara L. Becker is partner and co-chair of the Mergers and Acquisitions Practice Group at Gibson, Dunn & Crutcher LLP, and Eduardo Gallardo is a partner focusing on mergers and acquisitions, also at Gibson Dunn. The following post is based on a Gibson Dunn M&A report excerpt by Todd E. Truitt and Taylor Hathaway-Zepeda. The full publication is available here.

One of the most difficult, and therefore most heavily negotiated, issues in carve-out transactions is the division of liabilities between the parent and the carved-out business. Typically, the division of liabilities will follow the business: liabilities attributable to the parent’s business will be retained by the parent, and liabilities attributable to the subsidiary or division’s business will be assigned to the subsidiary or division. As explained below, in the case of an M&A transaction, this application can vary depending on whether the transaction is a stock sale or an asset sale. [1]

  • Stock Sale. In a stock sale, liabilities of the carved-out entity typically pass to the buyer by operation of law. The carved-out entity is acquired “as is” with all of its existing liabilities. However, to the extent the parent is creditworthy, the buyer may be able to obtain protection from certain liabilities through indemnification.
  • Asset Sale. In an asset sale, by contrast, the buyer is contractually responsible only for those liabilities that it specifically assumes as part of the negotiated asset purchase agreement. This flexibility allows the parties to choose from any number of liability arrangements, from “all liabilities resulting from the ownership and operation of the carved-out division” to only specifically enumerated liabilities in a schedule, with the parent typically providing unlimited indemnification for all other liabilities. However, even where the buyer does not expressly agree to assume any liabilities, the buyer should be aware that it may nonetheless be subject to certain successor liabilities arising out of the asset purchase. [2]
  • Applicable Law. No matter what the transaction structure, both parties should be aware that under applicable state, federal or international law, certain environmental, product and employee liabilities may pass to the buyer or be retained by the parent even if the parties have contractually provided for another allocation.

…continue reading: Assumption of Liabilities in Carve-out Transactions

Court: Private Equity Funds Potentially Liable for Portfolio Company Pensions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 13, 2013 at 9:14 am
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Editor’s Note: The following post comes to us from Brian D. Robbins, Partner and the Head of the Executive Compensation and Employee Benefits Practice Group at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

In December 2012, we published an Alert after a Federal District Court concluded that: (1) a private equity fund was not a “trade or business” for purposes of determining whether the fund could be liable under the Employee Retirement Income Security Act of 1974 (“ERISA”) for the pension obligations of one of its portfolio companies and (2) consequently, the private equity fund could not be liable for its portfolio company’s pension obligations under Title IV of ERISA, even if the fund and the portfolio company were part of the same “controlled group.” Our December Alert, which contains background on the issue and a summary of the state of the law through December 2012, may be found here. This post is to advise that the First Circuit Court of Appeals has reversed the 2012 Federal District Court opinion.

In Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund (No. 12-2312, July 24, 2013), the First Circuit Court of Appeals has concluded that: (a) a private equity fund can be a “trade or business” for purposes of determining “controlled group” joint and several liability under ERISA and (b) as a result, the private equity fund could be held liable for the pension obligations of its portfolio company under Title IV of ERISA, if certain other tests are satisfied. Under ERISA, a “trade or business” within a “controlled group” can be liable for the ERISA Title IV pension obligations (including withdrawal liability for union multiemployer plans) of any other member of the controlled group. This “controlled group” liability represents one of the few situations in which one entity’s liability can be imposed upon another simply because the entities are united by common ownership, but in order for such joint and several liability to be imposed, two tests must be satisfied: (1) the entity on which such liability is to be imposed must be a “trade or business” and (2) a “controlled group” relationship must exist among such entity and the pension plan sponsor or the contributing employer.

…continue reading: Court: Private Equity Funds Potentially Liable for Portfolio Company Pensions

PE Funds Are Not Subject to “Controlled Group” Liability

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday January 4, 2013 at 8:58 am
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Editor’s Note: The following post comes to us from Regina Olshan, partner in the executive compensation and benefits practice at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert.

Private equity funds (PE funds) and their advisors long have been concerned that a fund (or its other portfolio companies) may be liable for unfunded pension plan liabilities of one of its portfolio companies. However, in a decision published last month, the U.S. District Court of Massachusetts held that three PE funds sponsored by Sun Capital were not liable for any portion of the withdrawal liability incurred by a portfolio company in which the funds collectively held a controlling interest. In reaching this decision, the court expressly rejected the analysis contained in a 2007 Pension Benefit Guaranty Corporation (PBGC) Appeals Board opinion, which found that the investment activities of a PE fund constitute a “trade or business” and thus subjected the PE funds to joint and several liability under Title IV of the Employee Retirement Income Security Act (ERISA) for a portfolio company’s unfunded pension liabilities.

Although the Sun Capital Partners case provides a foundation for cautious optimism on the issue of whether PE funds can be held jointly and severally liable for the pension-related liabilities incurred by portfolio companies in which they invest, it remains to be seen whether its analysis will be adopted by other courts and whether the district court’s decision will be upheld on appeal to the First Circuit. PE funds should continue to view control group liability as a potential risk in the acquisition context and, in order to minimize exposure to unfunded pension liabilities, PE funds should consult counsel when encountering these issues.

…continue reading: PE Funds Are Not Subject to “Controlled Group” Liability

Legislative Developments in Delaware’s “Alternative Entities”

Posted by A. Gilchrist Sparks, Morris, Nichols, Arsht & Tunnell LLP, on Thursday September 8, 2011 at 11:07 am
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Editor’s Note: A. Gilchrist Sparks is Of Counsel at Morris, Nichols, Arsht & Tunnell LLP. This post is based on a Morris Nichols update by David A. Harris, Louis G. Hering, and Walter C. Tuthill, and summarizes a survey of changes in Delaware law, available here. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In its latest session, the Delaware legislature enacted several amendments to Delaware’s four “alternative entity” statutes – the Delaware Limited Liability Company Act (“DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), the Delaware Revised Uniform Partnership Act (“DRUPA”) and the Delaware Statutory Trust Act (“DSTA”). [1] Among other things, the amendments (i) provide a statutory default rule for the amendment of LLC agreements which requires the consent of all members; (ii)that a standard “supermajority amendment provision” applies only to supermajority provisions in an LLC agreement or partnership agreement and not to supermajority provisions under the applicable alternative entity statute; and (iii) modify the language relating to action by written consent by members, managers and partners to eliminate the requirement that the written consent set forth the action so taken thereby facilitating action by consent, particularly by electronic means.

…continue reading: Legislative Developments in Delaware’s “Alternative Entities”

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