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Ethical Considerations in Employee Benefits & Executive Compensation

December 3, 2014

Presenters:

Andrew L. Oringer, Dechert LLP

Martha N. Steinman, Hogan Lovells

Marc Trevino, Sullivan & Cromwell

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Introduction

• Ethics involves many rules

• Don’t need to know the citation but do need to know the rules

exist

• Our goal: become familiar with concepts so that you will

remember them when you need them

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Introduction (cont’d)

• Certain Practical Considerations

– Attorney as advisor; attorney as advocate

– To whom advice is owed

– Providing options, not telling the client what to do

– When interests are adverse or differ

– Referring matters to higher authorities in general

• Inside the organization/outside the organization

– Attorney-Client privilege

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Sources of Rules

• State Law

– ABA Model Rules

• Note, in particular: California

• Federal and State Courts

– Disqualification proceedings

– Evidentiary rulings

– Legal malpractice liability decisions

• Restatement of the Law Governing Lawyers

• Rules of practice before the IRS, SEC and other agencies

– Recent developments regarding IRS “Circular 230”

– Recent SEC developments relating to advice to Boards of

Directors

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Resources

• ABA Center for Professional Responsibility

– http://www.americanbar.org/groups/professional_responsibility.html

• Model rules/state rules

• ETHICSearch

– General Counsel

– Outside counsel

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Who is the Client?

• Identify the client

– Sounds simple, but often it is not

– Critical to understand from the outset who you represent

• Engagement letters

– Within an organization, people wear many hats

• E.g., officer, director, individual

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Who is the Client? (cont’d)

• Model Rule 1.13: Organization as Client

(a): A lawyer employed or retained by an organization represents

the organization acting through its duly authorized constituents.

(f): In dealing with an organization’s directors, officers, employees,

members, shareholders or other constituents, a lawyer shall explain

the identity of the client when the lawyer knows or reasonably

should know that the organization’s interests are adverse to those of

the constituents with whom the lawyer is dealing.

(g): A lawyer representing an organization may also represent any

of its directors, officers, employees, members, shareholders or other

constituents, subject to the provisions of Rule 1.7. If the

organization’s consent to the dual representation is required by Rule

1.7, the consent shall be given by an appropriate official of the

organization other than the individual who is to be represented, or

by the shareholders.

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Who is the Client? (cont’d)

• Who are “constituents”?

– Corporate officers

– Employees

– Shareholders

– Directors

– Trustees

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Who is the Client? (cont’d)

• Keeping the Parties Informed

– Make sure that the parties know who you represent and who you

do not represent

– Affirmative obligations to clarify misconceptions and

misunderstandings

– Model Rule 4.3

• In dealing on behalf of a client with a person who is not represented by

counsel, a lawyer shall not state or imply that the lawyer is

disinterested. When the lawyer knows or reasonably should know that

the unrepresented person misunderstands the lawyer’s role in the

matter, the lawyer shall make reasonable efforts to correct the

misunderstanding.

• The lawyer shall not give legal advice to an unrepresented person,

other than the advice to secure counsel, if the lawyer knows or

reasonably should know that the interests of such a person are or have

a reasonable possibility of being in conflict with the interests of the

client.

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Who is the Client? (cont’d)

• Internal Investigations

– Interest of company and other constituents are often opposed in

connection with internal investigations.

– U.S. v. William Ruehle (9th Circ. 2009) – Broadcom’s audit committee

engaged a law firm with longstanding ties to the company to conduct an

internal investigation on possible stock option back dating issues.

Defendant Ruehle (the company’s CFO) participated in many discussions

with the law firm on the issue. Later, when Ruehle was indicted on related

criminal charges, he argued that he had an attorney-client relationship

with the law firm. He also claimed to receive no warning containing notice

that the law firm acted for the audit committee (although this was disputed

by the law firm).

• District court found, among other things, that Ruehle reasonably believed that the

law firm was representing him personally. The court referred the law firm to the

California State Bar for possible discipline for violating rules of professional

conduct.

• Decision was overruled by the 9th Circuit based on other grounds, but the case is

a good illustration of the dangers of being unclear to constituents as to the

identify of the client when engaged by a board committee for an internal

investigation.

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Fact Pattern 1: Representing Controlled Group Members

• You are working on a transaction where Parent, a German corporation, is selling its US Sub. Your firm has historically advised Parent, and its US subsidiary. You have good working relationships with Parent’s global head of HR and US Sub’s head of HR, having worked on a number of different projects for Parent and US Sub over the years.

• You worked with Parent’s global head of HR in Germany to put together a purchase agreement sent to Buyer. Parent’s HR head informed you that Parent does not want to push very hard on employee protections and provided for a maintenance of benefits covenant, with benefits substantially comparable in the aggregate to US Sub’s pre-closing benefits (which includes subsidized OPEB). Parent’s HR head has told you it would be willing to accept benefits comparable to Purchaser’s plans instead (and specifically giving up OPEB).

• During negotiations, because of the time difference, Parent’s global HR head is never on the calls with Purchaser and its counsel, but the US Sub’s HR head is. On a call with Purchaser and Purchaser’s counsel, Purchaser is willing to concede a major point in exchange for changing the maintenance of benefits provision to Purchaser’s plans. The US HR head insists that this is a “non-starter” and that the only way this would be acceptable is if 12 months of subsidized OPEB continuation is included. Purchaser refuses and a very heated discussion commences.

• What do you do?

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Fact Pattern 2: Management CIC Severance Agreements

• Your firm represents Muchodinero.com (MDC), a private Delaware corporation with its headquarters in New York. MDC is considering commencing an auction process to sell the company.

• You have been working with MDC executives on proposed new CIC severance agreements. Management’s recommendations to the Compensation Committee are based on advice from management’s compensation consultant, which has advised management that the vast majority of severance agreements include in the severance calculation an LTIP component and the highest bonus paid within the last 10 years and also include a full 280G gross-up.

• Based on your experience and independent research, you think management’s recommendations are significantly above market.

• You don’t know the Committee members, but you work daily with the executives making the recommendations. You have already told management and the compensation consultant that you think this is clearly not market, but consultant disagrees and management likes what they are hearing from the compensation consultant and insists on making their presentation. The Committee is slated to act on the recommendation at its meeting this afternoon. You will be present at the meeting.

• What do you do?

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Fact Pattern 3: The Represented Executive

• You represent the acquiror in an M&A transaction that needs to be signed in one hour in order to make an announcement prior to opening of markets in Europe. You have been negotiating the target CEO’s employment agreement for weeks with target CEO’s own counsel (not target counsel) and the agreement is finalized and will be signed at the same time as the merger agreement.

• Your client’s CEO calls you up (one hour before signing) to say that they need to change the term of the target CEO’s employment agreement from three years to two years.

• You immediately call the target CEO’s counsel only to find out that he is on an airplane and will land in Stockholm three hours after the deal is set to be announced.

• After allowing yourself to panic for five seconds, what do you do?

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Representation of Multiple Parties/Conflicts

• Can you represent multiple constituents?

− Maybe

• Model Rule 1.7

– (a) Except as provided in paragraph (b), a lawyer shall not

represent a client if the representation involves a concurrent

conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another

client; or

(2) there is significant risk that the representation of one or more clients

will be materially limited by the lawyer’s responsibilities to another

client, a former client or a third person by a personal interest of the

lawyer.

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Representation of Multiple Parties/Conflicts (cont’d)

• Model Rule 1.7 (cont’d)

– (b) Notwithstanding the existence of a concurrent conflict of

interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide a

competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one

client against another client represented by the lawyer in the same

litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.

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Special Considerations for Executive Compensation and Public Companies

• Functioning in an environment where any and all actions will

be second guessed

• Face risk of:

– Liability

– Shareholder backlash

– Negative publicity

• Liability – fiduciary duties

– Duty of care

– Duty of loyalty

– Business Judgment Rule

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Special Considerations for Executive Compensation and Public Companies (cont’d)

• Sarbanes-Oxley Requirements – “Reporting Up”

– SOX requires lawyers appearing before the SEC in the representation of

an issuer to report “material violations” to the issuer’s chief legal officer

(CLO) or both its CLO and chief executive officer (CEO). The issuer’s

CLO must then cause an appropriate inquiry and notify the lawyer of his or

her findings.

– Unless the lawyer believes the CLO or CEO has provided an appropriate

and timely response, the lawyer must report to the audit committee.

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Special Considerations for Executive Compensation and Public Companies (cont’d)

• Sarbanes-Oxley Requirements – “Reporting Up” (cont’d)

– If the lawyer does not believe the issuer has provided an appropriate and

timely response, the lawyer must explain his or her reasoning to the CLO,

the CEO, and the directors to whom he or she reported.

– The lawyer may then reveal confidential information to the SEC under

certain circumstances.

– SOX also created alternative reporting procedures when the issuer has

established a qualified legal compliance committee.

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Special Considerations for Executive Compensation and Public Companies (cont’d)

• Dodd-Frank Adviser Independence Rules

– Section 952 of the Dodd-Frank Act added Section 10C to the ’34 Act.

– Rule 10C-1 required exchanges to adopt listing standards for

compensation committees to consider adviser independence.

– NYSE (and NASDAQ) adviser independence rules required compliance by

July 1, 2013.

– Compensation Committee must consider adviser independence prior to

receiving advice.

• When is the Compensation Committee receiving advice?

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Special Considerations for Executive Compensation and Public Companies (cont’d)

• Dodd-Frank Adviser Independence Rules (cont’d)

– Six factors must be considered:

• the provision of other services to the Company by the person that employs the

compensation consultant, legal counsel or other adviser;

• the amount of fees received from the Company by the person that employs the

compensation consultant, legal counsel or other adviser, as a percentage of the

total revenue of such person;

• the policies and procedures of the person that employs the compensation

consultant, legal counsel or other adviser that are designed to prevent conflicts of

interest;

• any business or personal relationship of the compensation consultant, legal

counsel or other adviser with a member of the compensation committee;

• any stock of the Company owned by the compensation consultant, legal counsel

or other adviser; and

• any business or personal relationship of the compensation consultant, legal

counsel, other adviser or the person employing the adviser with an executive

officer of the Company.

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Special Considerations for Executive Compensation and Public Companies (cont’d)

• Dodd-Frank Adviser Independence Rules (cont’d)

– Assessment process:

• Committee should perform consultant/adviser independence

assessment once a year as part of annual compliance process (unless

a new engagement or material change warrants an interim

assessment).

• Committee can retain any compensation adviser they prefer (including

non-independent ones), but must perform the independence

assessment and document that the assessment was performed in its

minutes. Committee meeting minutes need not disclose conclusions of

the assessment.

• Law firms have procedures for providing information needed for the

assessment.

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The Role of Counsel to the Compensation Committee

• Compensation Committees need counsel (as well as

consultants) to help them live up to their responsibilities in

today’s challenging and rapidly changing environment

• Counsel to Compensation Committees must face:

– Ethical duties

– Business and practical realities

• Lawyer as counselor

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Representing the Compensation Committee –Who is the Client?

• When engaged to represent the Compensation Committee, is

the client:

– the full committee?

– the individual members of the committee?

– the full board of directors?

– the company?

• When representing the Compensation Committee, the client is

NOT the individual members of management

– Easier said than done

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Dual Representation Involving the Compensation Committee

• Can you be the Compensation Committee’s lawyer and the

Company’s lawyer?

– Ethical duties

– Business and practical realities

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Dual Representation Involving the Compensation Committee (cont’d)

• Pros and cons of engaging separate lawyers for company and for

independent board committees

• Engagement letters

• Impact on privilege

• Conflict issues

– Legal conflict

– Business conflict

– Need for waivers

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Business and Practical Realities

• Dealing with management and the Compensation Committee

– how do you do your job without risking losing your job?

• Pros and cons of having separate counsel for the

Compensation Committee

– Is the committee better served by a lawyer who has worked with

management and has greater knowledge of the company’s

compensation program and philosophy?

– Special situations

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Employee Benefit Plans

• Form 5500 - signed under penalty of perjury

• Prohibited transactions

• Other breaches of fiduciary duties

• Department of Labor audits and voluntary internal audits

• Other varying contexts (general, M&A, financial products, etc.)

• Issues implicate DOL and IRS rules as well as administrative

and judicial precedents

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Sarbanes-Oxley and ERISA Fiduciary Duties

• Sarbanes-Oxley § 307, redux

– Reporting up for certain fiduciary breaches

– Final rules narrow the definition from the proposed rules (“any

breach of fiduciary duty recognized at common law”) to “any

breach of fiduciary or similar duty to the issuer”

– ERISA fiduciary duties generally run in favor of plan participants

and beneficiaries

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Fact Pattern 4: Plan Compliance

• A client calls with a technical compliance issue under a tax-qualified

plan, and wants to proceed without regulatory involvement.

• Now assume that the problem is substantial and substantive.

• Now assume that the problem is under a plan subject to Section

409A, rather than under a tax-qualified plan.

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Attorney-Client Privilege

• Again – who is the client?

• Communication (i) made between privileged persons (ii) in

confidence (iii) for the purpose of obtaining or providing legal

assistance for the client

• Varying contexts

– Executive compensation

– Employee benefits

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Privilege and the Fiduciary Exception

• ERISA - fiduciary exception

– Plan participants and beneficiaries may have the right to obtain

information pertaining to their own benefit entitlements as well as

information regarding the operation of the plans in which they

participate

– Application to participation in a proceeding by the Department of

Labor

• Courts have recognized that there are situations where the

fiduciary exception is inapplicable

– E.g., settlor functions, advice regarding personal liability, advice

and attorney work product regarding disputes with adverse

participants

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Audit Response Letter

• Yet again, who is the client?

• Privilege-related considerations

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About the SpeakersAndrew L. Oringer, Partner, Dechert

Andrew L. Oringer is a partner and the co-chair of the Employee Benefits and Executive Compensation

Group at Dechert LLP, where he advises on a wide variety of matters relating to employee benefits,

fiduciary issues and executive compensation.

He is the Emerging Issues Coordinator of the Employee Benefits Committee of the American Bar

Association’s Section of Taxation, and former co-chair of the Employee Benefits Committee of the Tax

Section of the New York State Bar Association, and is a primary author of numerous bar comments covering

a broad array of issues. He also is a member of the New York State Bar Association’s Committee on

Attorney Professionalism.

He is a Fellow of the American College of Employee Benefits Counsel, and a Senior Fellow from Practice

for the Regulatory Compliance Association. Mr. Oringer is an adjunct professor at the Maurice A. Deane

Law School at Hofstra University, where he is also on the Executive Board of the Alumni Association and a

co-chair of its Career Services Alumni Committee.

Mr. Oringer is a frequent writer and speaker on matters relating to employee benefits and executive

compensation, and is a charter member of the Practical Law Executive Compensation and Employee

Benefits Advisory Board. He also serves on the Advisory Boards of the Bloomberg BNA Pension & Benefits

Reporter and the Tax Management Compensation Planning Journal. Mr. Oringer has authored chapters in

the leading treatises on ERISA's fiduciary provisions and the taxation of nonqualified deferred

compensation. He chairs a leading two-day introductory seminar and was the founding chair of a full-day

seminar on ERISA litigation.

Mr. Oringer is highly rated by a number of ranking organizations, and is included in a widely disseminated

list of the top 100 lawyers in New York City across all practice areas.

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About the SpeakersMartha N. Steinman, Partner, Hogan Lovells

Martha N. Steinman is Co-Head of the Executive Compensation, Employee Benefits and Share Incentives

practice of Hogan Lovells and has experience in executive compensation, employee benefits, qualified and

non-qualified plans, and welfare plans. A significant portion of her practice is dedicated to advising publicly

held companies and their boards of directors on the impact of the Dodd-Frank Act, the Sarbanes-Oxley Act

and corporate governance issues, on their executive compensation and other employee benefit

arrangements. She works closely with publicly held companies on proxy statements and other required

disclosures relating to executive compensation. Ms. Steinman has extensive experience in the area of

equity compensation. She advises clients on the design and implementation of executive compensation

arrangements and employee benefit plans, with an emphasis on tax and securities law considerations. Ms.

Steinman works with clients to address employee benefit issues in the context of mergers and acquisitions

(M&A). She also counsels clients regarding the use of captives to reinsure employee benefit arrangements

and in securing exemptions from the U.S. Department of Labor. Additionally, she works with compensation

committees and other clients to negotiate employment and severance agreements, design compensation

packages, and on retirement planning.

Ms. Steinman is President of the New York/New Jersey Chapter of the National Association of Stock Plan

Professionals, Chair of the American Bar Association Joint Committee on Employee Benefits, Vice-Chair of

the American Bar Association Section of Business Law Employee Benefits and Executive Compensation

Committee Executive Compensation Subcommittee and Co-Vice-Chair of the American Bar Association

Section of Taxation Employee Benefits Committee Federal Securities Laws Subcommittee. She is a fellow

of the American College of Employee Benefits Counsel.

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About the SpeakersMarc Trevino, Partner, Sullivan & Cromwell

Marc Trevino is a partner in Sullivan & Cromwell’s General Practice/Corporate Law Group. He joined the

Firm in 1993 after

graduating summa cum laude from Princeton University (A.B., Phi Beta Kappa, 1990) and from Yale Law

School (J.D., 1993).

Mr. Trevino is now one of the few recognized leaders in structuring multidisciplinary solutions to, and

counseling senior executives and boards in, significant matters involving reputation, overlapping regulatory

regimes, fiduciary conflicts and multiple jurisdictions, with a particular emphasis on matters involving

financial institutions and personnel actions. Mr. Trevino is the co-head of the Firm’s corporate practice, the

managing partner of its executive compensation and benefits group and a member of the Firm’s managing

partner committee. Mr. Trevino is also a co-author of The Public Company Deskbook (2009, The

Practising Law Institute), a comprehensive, three-volume treatise on governance and disclosure reforms for

legal and accounting professionals hailed as “the bible for securities lawyers” by Fortune.

For almost twenty years Mr. Trevino has represented prominent institutions and individuals in their most

public and challenging transactions. His clients have included AIG, Bank of New York Mellon, Barclays,

BNSF Railway, Chrysler, ConocoPhillips, D.E. Shaw Group, eBay, Fortress, Goldman Sachs, HCA,

ISS, JPMorgan Chase, Kodak, Merrill Lynch, Microsoft, New York Bankers Association, New York

City Bar Association, New York Stock Exchange, Procter & Gamble, Time Warner and UBS. Many of

his most important matters are resolved without public attention.