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Internal Investigations by Board Committees

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Internal Investigations by Board Committees

Generally Board Committees are delegated to undertake internal investigations when the issues are important to the company , complex, and need to be done by sophisticated people who have no personal stake in the outcome. Other investigations can be undertaken by employees in the legal function or the human resources department. Such investigations may be very important to the organization but lack the need to be done by individuals who have no need to satisfy internal corporate pressures on their decision making. However, given the hierarchical structure of most companies, where an investigation must actually be free of influences from within the company there is a need for truly independent investigators. This can often only be achieved by having critical investigations be under the supervision of the Board or a Board committee such as the audit committee, a risk committee or a special committee appointed by the Board to run the investigation. The key notion to understand is the great importance of their being no conflicts of interest and independence of the investigation so that its work is above reproach and not conflicted. This course will teach among other things, when a board committee investigation is called for, how it should be populated, how to preserve attorney client privilege and how the committee should bring its findings back to the full board.

Transcript

- [Gregory] Good day. My name is Greg Markel. I am a partner at Seyfarth Shaw in the New York office. I'm also co-head of the Securities Litigation Group nationally, and I am head of the litigation department in New York. I'm going to turn this over to my colleague, Sarah Fedner. She'll introduce herself, and then she'll do an introduction to the internal investigation by board committees, which is the topic for today. - [Sarah] Hi, my name is Sarah Fedner. I am a senior associate at Seyfarth Shaw. I also work in the litigation, and am a member of the securities litigation group. Today, Greg and I are talk about internal investigations by board committees, and we're gonna pull from some of our personal experience doing internal investigations, as well as talk about some of the controlling legal. So, I will start off here with talking a little bit about corporate authority. So, the board of directors of a corporation has the ultimate authority to make decisions for a corporation, and in order to make a decision on behalf of the corporation, the board of directors has to act by a majority vote of independent directors, and one of the decision-making powers that the board has is to create an independent committee of the board to investigate certain issues, approve of certain transactions. The board has the authority to delegate these kinds of decisions or investigations to a committee of the board. So, I will turn to some of the situations where this may arise. When is an independent investigation committee required? Very briefly, there are also independent committees that approve of transactions. For purposes of this presentation, we are gonna be focusing on independent committees that are created to investigate some sort of allegation of corporate wrongdoing or potential litigation, actual litigation, but I did wanna note that there are also transactional committees of the board that are used to approve of certain transactions. Maybe some of the board members are interested in the transaction at issue, but again, this is focused on investigation committees, sometimes referred to as special litigation committees. So the need for these committees can arise in several different scenarios. Sometimes they will arise when there's some sort of government investigation, or the government serves a document hold letter on a company, or serves a demand on the company for certain documents. In that scenario, the board may decide that they wanna create an independent committee to investigate the allegations raised by the government at the same time, to assess what type of risk is the company facing, is there any potential merit to what the government may be alleging, and how can the company best respond? Special independent committees may also be needed when there are allegations of wrongdoing raised internally, so these could be allegations raised by any sort of employee, potential whistleblower claims, claims of corporate waste, self-dealing. These claims trickle up to the board, and the company will wanna create an independent group of the board to investigate these allegations. Allegations could also be raised externally, so for example, shareholders may file a derivative demand letter on the board, demanding that the board look into certain problems and take certain actions. Shareholders may also file an actual lawsuit making certain allegations of wrongdoing. In both cases of external allegations of wrongdoing, the company may wanna appoint an independent committee to look into these allegations. - [Gregory] So, just let me mention, before we leave that topic, you may be saying, "Well, I'm familiar with things like internal investigations where employees of some department, human resources or the legal department, may do these." What Sarah has very well described is what happens when there is a situation where there are, where it is a, usually the investigation is of some importance to the company, and it involves either management or it involves the board, and so it is preferable in a lot of situations, which Sarah went through, to, instead of using some employees to do the investigation, you go to a committee that's more protected from privilege waiver and is more experienced with the goals of the board of directors. In connection with appointing a committee, remember, as Sarah said, the board has the ultimate power to create a committee, and the board also has the ultimate power to select its members, that is the members of the committee that the board is creating, and to delegate to those persons the authority that it is giving to the committee. So for example, let's go through some of the considerations that the board should have in constituting the committee that it is approving be created. First of all, the number of members. As a practical matter, the most useful size of a committee would be three members. It's most useful because you don't have the likelihood, or the same likelihood, of a stalemate that you would have with an even number of members, so having an odd number of members is preferred for, among other reasons, perhaps, so that it's less likely that you'll have a one-to-one vote a one versus one vote or a two versus two vote, and three members makes that quite unlikely that you're gonna have a stalemate. It's also important, and Sarah will be covering this shortly in more depth, but that the board members be independent, and Sarah will cover what it means to be independent, although to some extent it is independent of conflict of interest. That is important here. Another factor, and this may seem surprising, but another factor that is also important is the willingness and ability of each member to make a significant time commitment. Depending on the situation, and often you can predict this in advance, but frequently, actually, in investigations, which are significant enough that they do go to a committee, they are very time consuming. Sarah and I have worked on several for significant companies and large banks. The length of time it takes to do those can vary, but there's a lot going on when you are in this midst of doing an investigation, both as a committee member and as counsel to the committee, so if you're retained as counsel to the committee, it is a lot of work and will take a lot of your time. If you're a committee member, and one who is committed to the work that they've agreed to do, they will find that there's a lot of reading to do outside of meetings. There can be a lot of meetings. Sarah and I were in one investigation not too long ago where there were 32 meetings that we had, 32 in-person meetings that we had with members of the special committee, and they had to read materials in preparation for a number of those meetings, and so it takes up a lot of time, and there are people on boards who just don't have that available time. There are four board committees that do rely on expertise on the committee. It can be hard to find expertise on exactly what you need, but on some technical issues like cyber, if there's somebody on the board or another board committee who has that kind of expertise, it can be useful, although it's not required, to have that person, if they'll agree to do the work, sit on the investigations committee. It's useful, in our experience, that if people who have experience in being on board committees sit on this kind of committee, there is a lot of process that's necessary to understand. We certainly can educate the committee members if they haven't been on a committee beforehand, but experience, as in so many things in life, experience on being on a board committee is useful. The board, the independent members of the board who would deal with selecting members would make judgment, their own judgments about the ability of the members that they select to make difficult decisions, to have good judgment on how to do that. Because they know them, they sit on the board with them. The ability to testify as a witness in a deposition or a trial is a factor. Special committee members do occasionally have their deposition taken. They may have to testify at a trial if the underlying issue is something that leads to litigation, and for now, I will not get into various issues relating to privilege, but we will talk about that before we finish today. And again, at the end, we're really, of this slide, we're talking about the lack of personal income, excuse me, the lack of personal interest in the outcome of a relevant issue, and the absence of other arguable issues that might affect the independence of the person who is being considered as a member of a committee. This is in some ways the most important of the characteristics of a possible member. They must not have a personal interest in the outcome of a relevant issue. There's virtually no point in creating a special committee for investigations if they have a personal interest in the outcome of that investigation, and so it's absolutely essential in making the selection that that be considered. And with that, I will turn it back to Sarah for the next stage of this discussion. - [Sarah] Yeah, as Greg mentioned, independence is really the most important factor in identifying who should be on the committee, and this is for several reasons. The main one is because of a theory called the business judgment rule, and under the business judgment rule, courts have found that they are generally not in the business of managing corporations, that the management and board of a company have a better understanding of the company's business, that they are in a better position to make decisions about the business, so under the business judgment rule, courts will generally defer to a reasonable decision made by an independent group of the corporation in good faith, and the business judgment rule, when it's applied, it presumes that the decision of the company was correct. However, if there is evidence that the decision was made by, in this case committee members who were not independent, then the deference of the business judgment rule is not applied, and in that case, if the court finds that certain committee members were not independent, the court will then go in and do its own fact finding and its own assessment of whether or not the decision was fair and reasonable given the circumstances, so in other words, when you have the business judgment deference, when the court is applying the business judgment rule and deferring to the decision made by a special committee, you are more likely to get a favorable decision. This is especially true early on, for example at the motion to dismiss phase. If a company is served with a demand, a special committee is appointed, the committee is independent, they reject the demand and the company say there was a subsequent lawsuit filed by the shareholders related to the derivative demand, they say that the demand should not have been rejected by the independent committee, the company would then move to dismiss this lawsuit, and if the committee was independent, the court is going to defer to that decision of the independent committee to reject the demand, and a motion to dismiss is more likely to be granted in favor of the company. However, if that company was not independent or is gonna go back and do its own assessment of whether not the demand was rejected, so again, if you lose that business judgment deference, you're less likely to get a favorable decision, especially at the motion to dismiss phase. Another reason why independence is important is more of just a common sense theme. If the committee members are interested in the transaction or stand to benefit, excuse me, not the transaction, the allegations of wrongdoing or stand to benefit from the decision made by the committee, they lose all credibility, really, so if you're trying to negotiate with the government or plaintiff's counsel and the committee has reached some sort of conclusion and proposes some sort of settlement, the other party is less likely to believe the conclusion or rely upon the conclusion if there's members who are interested in the outcome, so if there are non-independent members, it could hurt your ability to negotiate with other parties and ultimately settle the issue in a favorable manner. The question of whether or not someone is independent on a committee, it's twofold under the case law, so first it's an analysis of whether that individual director is independent, and second, whether that director is under the control of someone who may have some sort of substantial interest in the outcome of the investigation, so the test is whether or not that director personally benefited from the misconduct at issue, or faces a substantial likelihood of liability on any of the potential issues, or whether that director is under the control of someone who personally benefited from the misconduct at issue or under the control of someone who faces substantial likelihood of liability, so you wanna look not just at whether that person, the committee member independently benefited, but also who are they under the control of, and there's a lot of case law analyzing when is someone under the control of another party to the point where they may lack their independence. Independence is important not just in appointing the committee. It's important throughout the entirety of the investigation. You wanna maintain that independence to make sure you especially don't lose the business judgment deference, and in order to maintain independence, it's really important for the committee members to try to refrain as much as possible from communicating with people outside of the special committee. Especially, the committee members wanna avoid speaking with anyone who was involved in the underlying wrongdoing. If the special committee members feel that it's absolutely necessary to communicate with those outside of the investigation, there could be many reasons for that, the special committee member should consult with counsel and try to figure out, how do we communicate while still maintaining independence? And just a side note, under the case law, a committee member is not deemed to have lost independence just because they're named as a defendant in the lawsuit of whatever wrongdoing they're alleging, or excuse me, that they're investigating, so a lot of times in a derivative lawsuit, a shareholder is gonna name every single board member just because of their title as a board member. This does not mean that the entire board lacks independence and cannot be put on a special committee to investigate the wrongdoing underlying the derivative complaint. Instead, you wanna look into the detailed allegations of the wrongdoing, and whether there are allegations that particular board members had some sort of meaningful involvement in that wrongdoing, but the fact that they're named as a defendant alone is not enough to show that they lack independence, and there is case law showing that. And with that, Greg, I'll turn it back over to you about the scope of a committee's authority. - [Greg] Thanks, Sarah. So, it sounds like something that's routine, that is the board resolutions creating a committee, and at first blush that people may just think, okay, this is something the board does all the time, they pass all sorts of resolutions, not a big deal. Well, in this circumstance, where the board is delegating authority to someone other than themselves, and here a committee to do an investigation, the resolution actually turns out to be extremely important very frequently, so why is that? The delegation of authority has to be clearly defined so that not only the committee knows what authority it has, but also if, later on, if there's some question about what the committee did, it may very well turn on whether or not the board gave to the committee, in its delegation, authority to do X or Y or Z, and so the resolution needs to be thought through carefully, and the board has to understand what authority they are giving to the committee, and there can be a fair number of factors and we'll go through some of them, but that may affect what authority the board gives them, but it is extremely important that it be clear, and it be clear for the committee members, and it be clear for the rest of the board, and it be clear for third parties who bring lawsuits, because, and we'll get into a little bit into the question of whether or not the resolution is privileged or not, but in any case, that resolution may become something that reads on an issue in a lawsuit later on, and so for all of those reasons, the resolution is important, and it has to be clear and well thought through as to what the board is giving in a way of its delegation of authority to the committee, and so there are many different aspects, and we're gonna go through some of them right now, that can be included in that delegation of authority, but one primary aspect in which the types of authority are different is the difference between delegating the authority to make a decision versus the authority to make a recommendation, so in both of those instances, it's assumed that the board committee will in fact do an investigation, and Sarah will talk about how to do the investigation itself a little bit later, but at this point it's assumed that there will be interviews and documents that are presented to the committee. What are they supposed to do with that? Is it enough that they reach a conclusion as to what they're gonna recommend to the independent members of the board who are not on the committee so that the board can vote on what to do about a given investigation and what to do about any people who are being investigated? Or is the board, in its wisdom, are they saying you can make the decision, committee, you decide whether to fire this person, you decide whether to demote the person, you decide that, or not, not to fire them or cut their salary? Those are things that the committee can decide, and so those two types, again, are, you can have a committee which recommends, or you can have a committee which makes decisions, and the board gets, the independent members of the board, again, going back to the very beginning here, is who makes that decision of what's being delegated to the committee. The resolution also oughta have other things in it. It ought to have at least some indication of what the reason is for doing the investigation. As you'll see in the PowerPoint, we don't think it's a good idea to put tons of detail in there. It's kind of a trap for the unwary later if they get too aggressive about saying what the facts are before they've done the investigation, and so the discussion of why the investigation is being done should be some sort of brief overview of the reasons, as opposed to every detail that people can cram into the resolution. Also, I've already mentioned, also I've already mentioned this I think, but the scope of what issues are to be investigated has to be in the resolution, and that goes to what I was saying before about knowing what the authority of the committee is. They need to know what is being investigated under their authority from the board, and it's very important that that be observed going forward. If a committee gets off track and does things other than what is being delegated, they're wasting time and may create problems. It is the case though that if the investigation is focused on what it was authorized to do, but they do come across behavior that is problematic or wrong, that is different by, I'll say by accident rather than because the committee went off the reservation, they learn of these things, they should go back to the board and report that behavior to the board. They don't have authority to decide what to recommend with respect to that behavior, but they haven't come across it. They should report it back to the board and let the board decide what next steps are. The resolution should mention the names of the committee members, at least the initial committee members. There are a lot of other things related to carrying on an internal investigation by a board that need to be kept in mind. One is who's going to pay for various things? Does the committee have the authority to put in place document holds? Do they have the authority to review documents? Is there any restriction on what employees they can interview? Can they spend money on retaining experts and advisors? All of those things, all of those things, if the board is being given authority to do something, or budget to do something, should be in the resolution. So the resolution is complicated, there's a fair amount of work putting it together that's necessary. Certainly a lot of thought is necessary, but it's important. Let me go on to the next section, which is compensation for the committee. As many of you probably know, most boards are compensated, particularly at larger companies, or even smaller or mid-size companies. The amount of compensation received by the board members is not immaterial, and so the question often will come up if it isn't raised by the company or the board, can come from the committee members of whether or not they're going to be compensated for working on this project, and I won't repeat myself in detail, but as we said before, there can be a lot of work involved in work serving on one of these committees, and it can be very time consuming, and so it is quite common, most of the time, there is some compensation paid to members of an internal investigation committee, unless it is a very, very short life investigation, a very small investigation. It is important though, in setting that amount, and that amount, it would be set by the board, not by the committee itself, it's important that the compensation be reasonable, that it not be unusually large. It should be in line with what is paid to people on other committees of the board, and it should be ideally determined what the compensation is gonna be before the committee begins work, and the reason for that is there could be, down the line, someone calling into question the good faith of the committee members if either they're paid too much or if they are paid more after the point in time where they've already begun work, and the board is trying, which should not be doing that, could be perceived to be trying to influence the committee by giving them a payment for their work or increased payment for their work, so ideally, again, it's not inevitably the case, but ideally you determine the pay before they start. If the investigation involves more work than originally expected, it is okay to increase that compensation, but preferably only after the completion of the investigation. So now I'm going to turn it back to Sarah, talking about what is this, what investigation is done or should be done. So the first item in the investigation would be independent experts, so let me deal with that. Independent experts can be very valuable. Sometimes they're necessary. Sometimes they're not necessary. The more technical the underlying issue that is being investigated, or the behavior of the people being investigated by the committee, the more likely it is that an expert would be valuable. I can say, before we get to some of those experts, you do want, in every committee, I think, it should be the case that counsel, outside counsel who do not have any relationship to the people, either currently, people on the committee, either currently or in the future, are likely to have a relationship with them that they can be perceived to be influenced by, those in-house counsel or human resources people, could be perceived as being influenced by the senior executives that are involved in the subject matter of the investigation, or others, and so the best solution is to have outside counsel advise the internal investigation committee on doing the investigation, and in that context they can be treated much like other experts are treated. They're going to be doing a few different things, helping do some of the work necessary to complete the investigation, but also, they are very familiar with the processes that are necessary as part of starting and doing and then completing the investigation and what you do when you complete it, so getting experienced outside counsel to advise an investigation committee is extremely important, and they should be considered as similar to an expert witness of other kinds. Just a few examples of experts depending on the subject matter of the investigation would be accountants, economists, engineers, cybersecurity experts. The list can go on and on, but where there is some technical aspect to what is being investigated, and it is not generally familiar to the people on the committee, and it's not within the realm of legal counsel's expertise, it frequently is very valuable to have the committee retain an expert with one of those specialties. Of course, any experts, including outside counsel, need to be independent from those involved in the allegations, and also they need to be independent of the people on the board and management, and so it really is preferable that experts that have not performed recent or regular work for the company avoid future or current conflicts. I wanna talk a little bit more on this topic about law firms. It is generally the case where someone decides or board decides that there's necessity for an independent investigation into a matter that you do not hire as a regular outside counsel for the company, so it may seem a little odd at first blush because it is thought that people who are the regular outside counsel are gonna be more familiar with the company, and that's true. They probably are more familiar with the company, but the goal on this advice is, the most important thing in these investigations is, once again, remaining independent and not having conflicts of interest, and it's very difficult for regular outside counsel to completely block out the fact that they know the inside lawyers, they know some of the executives, they have been hired by either inside counsel or by executives for various other assignments, and while they may not necessarily, they may not consciously do anything that is improper, there's going to be a tendency for them to come into an investigation of this type with some preconceived notions about the people that they've worked with or encountered in prior assignments, and so in order to maintain the perception that the counsel and the committee are independent, it is usually best to hire a counsel, and other experts, but counsel is how this usually comes up, who don't have an existing close relationship or a major past relationship with the company. Let's see. So now let's turn to Sarah and talk about some of the things that get done in the process of the investigation itself. - [Sarah] Thanks, Greg. So I'm gonna walk through what happens after the committee has retained its own independent counsel to start performing the investigation. So the first thing that the committee, through its counsel, is going to wanna do is identify what are the relevant documents underlying the alleged wrongdoing or whatever's being investigated, and a good place to start to identify documents is to speak with whoever raised the concerns that gave rise to the investigation, so if it was in-house counsel who the concerns filtered up through, that's a good person to speak with. If the investigation is arising from a shareholder's demand letter or the filing of a lawsuit, you wanna look at what are the allegations contained in that letter or lawsuit and who are some of the individuals that are identified. Those are probably some people you can speak to to identify documents. In some cases the complaint or the demand letter may actually identify specific documents that are relevant, so you wanna first speak with those people that are involved in the allegations, talk about what kind of documents are relevant. In some cases, by the time a committee is created, the company will have already engaged in some sort of document collection and review of documents, and in order to save cost, the special committee can rely on the document collection and review of the corporation. They don't have to completely repeat it and redo it, but the committee does wanna look into, were the prior efforts by the company to identify and review documents reasonable and appropriate, or should it have been broader? Should it have included more documents? The committee wants to identify if they need any additional information that may require the collection of more documents from more custodians, and the committee may want to identify if there's a big document database, some additional search terms that perhaps the corporation hadn't done on its own. Greg and I, on one of our larger investigations, we represented the special committee of a board, but the corporation had its own counsel who had engaged in substantial document collection, so hundreds of thousands of documents had been collected by the company's counsel. They had performed very intensive searches and document reviews and they had pulled a lot of relevant documents that they found. In that case, in order to save costs, especially given the extremely large volume of documents, we did rely on company's counsel to do that initial document review to flag relevant documents, and then we thought about, on behalf of the committee, what issues should we look into further, are there particular people we're interested in, is there a time period we're interested in, and then we went in and did our own searches and document review, but we didn't have to create the wheel in order to save time, resources, and money for the company. In addition to document reviews, witness interviews will be conducted in the investigation. The timing of when witness interviews are happening in document collection, they can overlap. Sometimes you will engage in some initial document collection sufficient to begin witness interviews and ask witnesses about some of these documents. Then a lot of times during interviews, a witness may explain that there's other relevant documents that you should look at, so if this document collection and witness interview process is happening at the same time, you may interview some witnesses early on but then have to come back to those witness to ask them about documents that you may find later in the investigation, but initial witnesses can be identified similarly to how initial documents are identified, by looking at, if the allegations are raised externally, whether they reference any specific people, or if the allegations are raised internally, speaking to in-house counsel who perhaps may have looked into the allegations initially and may know who was involved or who may have relevant knowledge, or for example, if it is a whistleblower, perhaps speaking to them about who else was involved in the wrongdoing, just as a general cursory interview, not an extensive interview, to identify witnesses can be helpful. Committee counsel is generally responsible for conducting all witness interviews. There is no requirement that the committee members have to attend the interviews, but there may be some interviews with some especially important witnesses that they do wanna attend. So this investigation Greg and I had, we conducted about 150 interviews, and the special committee members did not attend most of them, but there were a few really important witnesses that they were focused on, and the special committee members did choose to attend those witness interviews, and during the interviews that the special committee members attended, Greg and I led the interviews, but the special committee may have had some follow up questions that they asked that they were particularly interested in. Again, this is not required, but it is helpful to show that the committee members were engaged and apprised of the details of the investigation. When you're conducting a witness interview, the most important thing to start with is an Upjohn warning. It's kind of like a criminal being given their Miranda rights. If you do not provide an Upjohn warning to whoever you are interviewing, then it's possible that the information that you obtained through that interview cannot be used at all later on, so first thing you wanna do before asking the witness any questions is provide the Upjohn interview, or the Upjohn warning, which consists of telling the employee that you as the lawyer represent the committee, you do not represent the employee, and that if the employee would like counsel, they would need to obtain their own independent counsel. After you provide that explanation, you wanna ask if they have any follow up questions and ensure that they understand. Again, this needs to be done before anything else to make sure that you can use any information that you obtain thereafter. You should have somebody in the room who's actively taking notes. Preferably it's somebody who's familiar with the facts of the case, so a paralegal, an associate attorney. You wanna make sure that whatever is discussed is recorded so you can report back to the special committee and so you can have a record of it later on when you're reaching conclusions in the investigation. It's helpful to establish a rapport with the witness. Internal investigation interviews are different than a deposition. It's less confrontational. It's more of a fact-finding exercise. You want the witness to feel comfortable with you so that they are willing to give you the information that you need, and at the same time you wanna make them feel comfortable, you establish this rapport, you also wanna be performing an assessment of their credibility and what kind of witness they may make in the future. It's possible in a lot of situations that these people you are interviewing may later become a witness in a government investigation, or they may be deposed in a lawsuit, so in addition to their credibility, whether or not you think they're telling you the truth, and you can rely on what you're being told, you wanna think about what kind of witness will they look like to the government or to a plaintiff's counsel. You wanna start off with some questions about the employee's general role and responsibilities, how long they've worked at the company, and then get into their knowledge of the issues you're investigating. Depending on the timing of the witness interview, you may have already collected some documents that you wanna ask the witness about. Several times this is emails or letters that they were personally included on, or it could be a document that you think they reviewed or approved of. A lot of times you're gonna wanna show them that particular document, ask them questions about it, and then at the end you may wanna ask some questions about whether or not there are other witnesses who have pertinent knowledge, or whether or not the witness is aware of some additional documents that perhaps you didn't show them and that they think are really important to the investigation. Following the witness interview, whoever has taken the notes should review and finalize their notes, and then you can decide whether or not you also wanna draft a formal investigation interview. Again, formal investigation interview is not required, but in some cases it reads better and is clear later on than short form notes are to reflect what was discussed during the investigation. Any notes or interview memos should expressly state that they're protected by the attorney-client privilege and work product. Again, throughout this entire process, you wanna be cognizant of maintaining the privilege. You also wanna include a note in the notes or the interview memos that the document is not intended to be a verbatim recitation of the interview. This, again, goes to the privilege issue. If a document is just a verbatim transcript of what was discussed, arguably that doesn't contain impressions of counsel and therefore it wouldn't be privileged, so you wanna make sure that there's a note in there that says it is not a verbatim recitation of the interview. And then finally, you wanna make sure that any notes or interview memo include the Upjohn warning provided to the witness, and the witness's response to the Upjohn warning. And I will add, because I didn't mention it before, if you provide a witness an Upjohn warning, you say that they would need their own independent counsel, and they respond that yes, they would like their own independent counsel, the interview should stop there, because again, you cannot use the information that you subsequently obtained from them if they ask for their own counsel to be present, so if they do say, and Greg and I have conducted many, many interviews, in most cases employees say that they understand and that they do not want their own counsel to be present, but if they do say they want their own counsel present, you need to stop there and reschedule the interview at a time where the employee's counsel can be present. Greg, I'll turn it back over to you to get into a little bit more detail about maintaining privilege throughout the process. - [Greg] Sure, thank you. So you've heard us mention several times the issue of maintaining privilege for conversations and for documents, and in general, maintaining attorney-client privilege and also the work product privilege, and usually we don't get too deeply into joint defense privileges in these particular circumstances, but that could be the case too, but I'm gonna focus here on maintaining attorney-client privilege and work product. So the first thing that the attorney has to do is to check into the applicable law in the relevant jurisdictions, and privilege, attorney-client privilege and work product privileges are available in virtually all jurisdictions, but they're interpreted somewhat differently in different jurisdictions, and so be familiar with where you think any lawsuit or challenge to privilege may come up, and you don't have to exhaust all of the jurisdictions, but the most likely jurisdiction or jurisdictions, you oughta just familiarize yourself with any aspects of the privilege rules. One of the things that I found in a lot of ways most interesting about internal investigations, and particularly the massive one that Sarah mentioned a couple of times previously, is that there are a lot of things that one has to think about before making decisions, and one of those decisions is, one of those factors in making decisions in a large internal investigation and a complex one is what effect is any decision that you make or any advice you give to the committee, and-or what you ask about in an interview, et cetera, what effect is that going to have on the privileged status of the advice that you're giving, and the independence, what effect it's gonna have on the independence of the committee, and so it's just a complex, intellectually stimulating exercise to do the normal setting up of interviews, the normal document review, but it makes it more complex and it makes judgments more important, that you want to preserve privilege and you want to preserve the independence of your committee, and you don't wanna do things that might impinge on those aspects. I think it is something that one gets used to thinking about and it becomes second nature, but it's still, the issues can be very complex. The judgements can be very complex. They can be close calls, and some people enjoy the intellectual challenge of going through that process, and I think that probably would be the case for Sarah and I. We had many conversations, the two of us, about how risky is it to do X or Y? Will this create a problem if Z happens? It's fascinating work, as well as being important work. Sarah has mentioned the Upjohn warnings, and the witnesses should get them. In addition, they should be asked to keep the discussions confidential. They are arguably privileged, and the privilege belongs to the company, not to the witness, and so it may not be 100% possible to restrict what a witness is gonna say in the future. It isn't 100% manageable, but requesting that, for example, an employee who's being interviewed not discuss it in the future is likely to have the effect of restricting them somewhat on their discussing the contents, so for those of you who don't deal with privilege issues all the time, you may be wondering why do they keep talking about things like not telling people not to discuss the contents of a conversation? And the reason is one of the ways that is most common in waiving privilege is the turning over of the privileged information advertently or inadvertently to a third party who is not part of the privileged relationship, so you've got the person, in the context of an interview here, who's giving information to counsel. Counsel is taking the interview information, it's using it for its client, which is the special committee or the company, and so if that information gets passed on to somebody either outside the company or somebody inside the company who is not an appropriate person to give it to, and there'd be limited, very limited people who it would be appropriate to pass the information on to even within the company, that can waive the privilege, so as much as you want the discussion you had during an interview with an individual to be privileged information in the hands of counsel for the company, excuse me, for the special committee, you may lose that benefit of that privilege if they tell third parties that information. When documents are prepared which contain privileged information, whether it's going to, and typically that will be information that's going to your client who could be the committee, and probably will be the committee in the circumstances we've been describing today, you should put a legend on the top of each page of documents that you prepare for the memos you prepare for them, the legend that it is attorney-client privilege, if it is, arguably, and work product, if it is arguably work product, and that may be helpful in avoiding inadvertent disclosure of that information to third parties, which would waive the privilege, and it may be helpful if you get into a dispute down the line in litigation over whether it's privileged, the fact that it was intended to be privileged is bolstered somewhat by the fact that you put the legend on the document. What the committee is doing in its investigation, it can be hard for people who are interviewed or have some tangential exposure to what is going on in the investigation. It is important to try to get them, as well, not to discuss the investigation with others outside of the committee. There's a lot of risk of privilege waiver in discussing what the committee seems to be focusing on, for example at the water cooler. Somebody says to somebody else, what are they looking for, do you think? That's not a conversation that you want to take place. You may not be able to stop it, but you oughta try to stop that kind of conversation from going on. When you're creating documents, and this is a little different from maintaining the privilege, it's important to keep in mind that there are almost no guarantees in the world of maintaining privilege. It's not 100% likely that anything is going to be able to stay privileged, and so keeping that in mind in the background as you draft a memo or edit a memo or some correspondence with someone else who is within the group that can have access to the privileged documents, be careful what you say in those documents. Be very careful, because they may turn out not to be privileged, and it's a little bit like the rules more generally in litigation. Don't put things in emails that you don't want the world to be able to see. Well, don't put things in documents that you don't want the world to be able to see, and if you can avoid putting those things in the documents. Okay, next is the final report, so we're coming towards the end of this process of an internal investigation. How do you end it? The answer basically is, the special committee or the committee, the internal investigation committee, reports in some fashion to the board or at least the independent members of the board who are not on the committee, and you can't just stop there, particularly if, as we were talking about at the very beginning here, this is a recommendation committee rather than a decision making committee. So if it's a recommendation making committee, and that's fairly frequently the case, you have to go back to the board to deal with the ultimate conclusion of what to do as a result of what was learned in the investigation, and there are several different ways of doing it. You can do a full-blown written report. You can have an oral presentation, oral only at the meeting. In my experience working, which is reasonably extensive, one way that is most popular with outside attorneys who are experienced in this area is to give an oral report, which has a PowerPoint of key points present in the room and distributed to the board at the beginning of the meeting, and that is to make it easier for the board to follow what is being said orally and to perhaps come up with additional questions for counsel, and then take back those documents at the end of the meeting from the board members, and so that what you've made is an oral presentation where there were some visual aids that were temporarily in the possession of the board members. They would be, those PowerPoints would be, again, contain the legend of that they're subject to attorney client privilege, and possibly some aspect of work product, but mainly it's attorney-client privilege material, and it's in the possession of the law firm, that can continue to assert that privilege going forward so that the report to the board has a chance of being found to be protected, to be protected from disclosure to third parties. That doesn't mean it's 100% likely. As I said before, there are very few guarantees at a 100% level of maintenance of the privilege, but there will be arguments that can be made that the material is privileged, that written material is privileged, and unless the reasons for the decision, whatever decision is reached by a board, becomes central to a litigation, the oral discussion should retain a privilege status, unless there's a waiver of privilege, and a broad waiver of privilege at that. The report should have, among other things, an overview of the work done, and that would include the scope of the document review and the number of witness interviews, any key facts discovered, and then the committee counsel's legal and factual analysis and advice about next steps. And now let me turn over to Sarah the microphone, so to speak, to talk about remedial measures that can be taken after the conclusion is reached by the board or the committee on where the report's going. - [Sarah] Thanks, Greg. So as Greg talked about a little bit in the scope of authority section, if and when a special committee is involved in remedial measures depends on the scope of authority they were originally delegated by the board, so there may be some cases where the resolutions creating the special committee just want the committee to make an objective finding of whether or not the wrongdoing occurred without any sort of recommendations about what should be done to fix it. In those cases, the special committee finishes the investigation, reaches a conclusion, and is not involved in any remedial measures. In other cases, the scope of authority given to the special committee may be broader. The scope of authority may include having the special committee make recommendations about what should be done in response to their findings, so for example, improving certain policies or procedures, terminating or punishing those involved in the alleged misconduct, and initiating legal actions, hiring personnel, or compensating an injured party, and whether or not the special committee goes beyond just making a conclusion, again, depends solely on the scope of authority that they were originally granting, and if they just were required to make a conclusion, then their work is done there and the remedial measures are taken out of their hand and normally done by management of the company. So unless Greg has anything else, this is the end of our presentation, and our contact information is here if anyone has follow-up questions for us or has any cases they wanna talk to us about, it is all here. - [Greg] Thank you very much.

Presenter(s)

GM
Gregory Markel
Partner
Seyfarth Shaw LLP
SF
Sarah Fedner
Associate
Seyfarth Shaw LLP

Course materials

Supplementals Handout

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