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Perils and Pointers: Issues in Mergers and Acquisitions

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Perils and Pointers: Issues in Mergers and Acquisitions

Transactional attorneys need to understand, appreciate, and actively assess their risks to prevent ethical violations and malpractice suits. In this presentation, we will address a broad range of ethical issues relevant to transactional practice. Particular emphasis will be on ethical perils in the M&A context, including mistakes, conflicts of interest, attorney-client privilege, candor in negotiations, and cybersecurity and technological competence. Each peril will be paired with a helpful list of pointers to help the M&A attorney prevent it.

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Jason Potter: Welcome to Perils and Pointers: Issues in Mergers and Acquisitions by Quimbee. My name is Jason Potter and I'm a staff presenter at Quimbee. We have some interesting written materials for you today, including slide handouts and some course materials. So you can download them and follow along, or just sit back and enjoy this delightful introduction to the ethical dimensions of M&A work.

   COVID-19 has been a black knight to the legal profession, mounting a hostile takeover of the entire legal industry, including M&A practice, no killer bees, no poison pills during times of rapid change and upheaval like this. It can be easy to lose sight of, or be willfully blind to the ethical obligations you have as attorneys, but M&A attorneys would be better served by taking a page from the playbook of Mr. Takeover, the late Joe Flom.

   In a tribute to Mr. Flom, a name partner at Skadden, Arps, Slate, Meagher and Flom, one Skadden attorney recalled, "It wasn't accidental that our firm went through all the craziness of the 80's, smack in the center of the action with demanding clients and questionable proposals abounding without a single mark against our name. Joe's ethics were absolutely beyond reproach." Well, nonetheless, many attorneys practicing business law do not pay attention to the ethics rules affecting M&A transactions, besides the well known rule that attorney shouldn't contact a principal on the other side if they know the person is represented by council.

   Okay, to ensure long term success during these uncertain times though, business attorneys should just be more like Joe and maintain an unswerving commitment to ethical practice. Even without COVID-19, practicing business law today is much more complex than it once was. This is another reason why an unswerving commitment to ethics is needed.

   For example, new rules in the Sarbanes-Oxley Act of 2002 and an expanded ABA Model Rule of Professional Conduct, Rule 1.6, necessitate greater oversight over a client's conduct. So as a result, the deal lawyer's role has expanded. Lawyers should consider the ethical implications of this expansion on the practice of law.

   The stakes for lawyers are high. Transactional lawyers are particularly vulnerable to malpractice claims due to the time, pressure and the overall frenzy in closing the deal, a general lack of understanding of the professional liability risks involved, and a lack of perspective about those risks. The feeling of, things have always worked out before. Transactional attorneys though, need to understand, appreciate and actively assess their risks to prevent ethical violations and malpractice suits. So in this presentation, we'll cover some important ethical perils in M&A practice from conflicts to confidentiality, to candor and we'll land on the hot topic of the ethical implications of COVID-19 in M&A practice.

   So let's get down to business. And remember, Joe is looking over our shoulders. M&A is a practice area, absolutely dogged by litigation, including litigation against attorneys. And some of these reasons include that M&A transactions are existential events for corporations. Buying and selling them often involve serious risks, high stakes, many uncertainties, far reaching implications, and a lot of attorney understaffing.

   There's also a significant failure rate in as much as deals frequently fail to live up to the expected financial gains. Malpractice claims against business attorneys are common today. In a 2019 poll by the insurance broker Ames & Gough of 11 lawyers' professional responsibility insurance companies covering 80% of Am law 100 firms, a majority of the companies polled indicated that they had a claim out of over $150 million. According to the poll, the biggest sources of claims for these insurance companies were all transactional areas, including business transaction, which 63% of insurers cited, trusts and estates, which 55% of insurers cited, corporate and securities, 45% of insurers cited and real estate, another 45% of insurers cited that practice area. Conflicts of interests were cited as the biggest malpractice error. And we're going to get to that in a moment.

   The role of legal advisors in the M&A process can be described in different ways, of course, but generally speaking, M&A advisors responsibility include providing a true legal risk assessment, creating value through deal structuring and developing new governance processes, drawing upon numerous practice areas of disciplines, providing all these services in a seamless way and on a cost effective basis and navigating multi-jurisdictional, even global settings. And given all these responsibilities and the pressures and time constraints involved, sometimes things go wrong or the client thinks something has gone wrong. From these, malpractice suits and disciplinary actions can arise. But why do clients sue their lawyers in the first place?

   The first reason is attorney negligence, actual mistakes made during the representation, like, failing to record a real estate transaction or giving incorrect advice on the meaning of a contractual provision. But there are some other reasons that operate under the surface. Let's call them the three resentments. The three resentments are; the perception of disloyalty. When the lawyer becomes part of the problem and there's some expectations that weren't met, that's unmet expectations. The third is, poor communication, when something about the attorney's communication raises an issue of attorney negligence.

   These three resentments are often the baselines for dissatisfied clients and are their subjective rationales for filing ethics complaints. And if these are the major resentments, we could call them sore spots, underlying the malpractice suits, then these are important to remember and work to prevent at every stage of the deal. M&A attorneys are subject to the same ethics rules, governing attorneys in other areas. And in the first part of this presentation, we'll cover some of the ethics rules applicable to all business lawyers. And after that, we'll move to some specific perils for M&A attorneys, mistakes, attorney-client privilege, conflicts of interest, candor and technological competence, and will pair them with practical pointers to help you prevent them.

   Some of the sources of ethics rules governing business attorneys include well, the ABA Model Rules of Professional Conduct, the commentary and the ABA informal and formal ethics opinions. So the ABA sets forth the model rules of professional responsibility. And these are the models for the ethics rules in most jurisdictions. In addition to the rules themselves, the ABA issues comments on the rules. According to the preamble, comments do not add obligations to the rules, but provide guidance for practicing in compliance with the rules. Also, the comments explain and illustrate the meaning and purpose of the rules. Also, the ABA standing committee on ethics and professional responsibility issues non-binding formal and informal ethics opinions.

   The model rules lack the force of law and have no legal impact unless the controlling jurisdiction has adopted them. In this presentation any discussion of ethics rules refers to the model rules, not state rules, but it's important to check your state's rules in case there are any differences.

   Every jurisdiction except California has adopted some form of the model rules. California has developed its own ethics rules, and you'll want to be really careful in jurisdictions that don't adopt the model rules, because ethical duties can be quite distinct. States may also issue opinions that address ethical issues arising in their own state's ethical rules, but we won't be covering any of these today.

   In addition, corporate codes of business conduct and ethics, securities laws and SOXs, as well as other laws, rules and regulations may also create ethical boundaries for business lawyers. But these are also beyond the scope of today's presentation. Drafters of the model rules did not have business in mind when drafting, in fact, many rules applicable to business lawyers are hard to find because most appear to apply only in the business context, and we'll talk about that in a moment. But some model rules apply by analogy to the areas of client communication and monitoring, counseling and transaction management.

   So we're now going to review a selection of ethical duties that apply regardless of the practice area within business law. So you have a duty to act competently in client representations, under Model Rule 1.1. This requires business lawyers to have the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. The proficiency needed is usually that of a general practitioner, but it depends on the circumstances.

   In one comment explicitly pertaining to business lawyers, the ABA advises, the requested action and preparation are determined in part by what is at stake. Complex transactions ordinarily require extensive treatment, more extensive treatment than matters of lesser complexity and consequence. You also have a duty to act with reasonable diligence and promptness. According to Rule 1.3, a lawyer shall act with reasonable diligence and promptness in representing a client. So this requires the lawyer to be mindful of procrastination and to return client communications with reasonable promptness.

   If the client has unreasonable expectations about how long the transaction will take, remember one of those three resentments. It's the lawyer's ethical duty to manage those expectations up front, and if possible, reach agreement as to the appropriate deadline. If a lawyer's representation is limited to a specific matter, that relationship will end when the matter has been resolved. And if there's any doubt about whether a transaction is concluded and the relationship has ended, it's on the lawyer to make that clear.

   You also have a duty to communicate with the client under Rule 1.4. This includes reasonably consulting with the client about the means by which the client's objectives are to be accomplished, to keep the client reasonably informed about the status of a negotiation or a transaction, or matter, to promptly comply with reasonable due diligence requests, to align expectations with a client who thinks the lawyer can act in a way that the rules prohibit and to provide explanations about the matter so the client can make informed decisions about it.

   The lawyer also has a duty to make reasonable efforts to prevent missteps with disclosure under Rule 1.6(c). This includes to take reasonable efforts to prevent inadvertent or unauthorized disclosure or unauthorized access to information relating to a client representation. And in the business context, this rule often extends so far as to not reveal that the corporation is actually a client of the firm.

   These are some of the major duties that apply regardless of the area of business law practiced. So with this context, we'll now turn to some of the special ethical issues that M&A attorneys often face. So these ones that we're going to cover are mistakes, conflicts of interest, attorney-client privilege, candor in negotiations and technical competence.

   So moving first to mistakes. Overseeing a complex project with multiple interested parties and stakeholders, be it across borders or across time zones, under time and staffing pressure, can be really challenging. It requires calm, it requires tools, it requires skills and techniques and calm again. Ask the researcher overseeing the COVID-19 vaccine trials. That's some calm under pressure or the single mother working remotely during lockdown, calm under pressure, or ask the M&A lawyer.

   Good M&A lawyers have a scrupulous attention to detail. And when they lack scrupulous attention to detail, mistakes often occur. Good M&A attorneys are willing to learn about diverse industries and how they operate. And when they aren't informed about them, mistakes can occur. Good M&A attorneys are strong project managers. They close deals efficiently using workflow and manage various groups of people involved effectively. And when they don't, mistakes can occur. Good M&A attorneys maintain calm under pressure, and when they lack it, mistakes can occur. And finally, good M&A attorneys manage client expectations to be sure that they can meet them in a way that doesn't compromise quality. And when they can't manage those expectations, mistakes can occur.

   So a deficiency in any one of the areas that make good M&A attorneys can lead to mistakes. And two areas where mistakes are often made in the transactional context are government filing errors and drafting errors. And it's lack of scrupulous attention to detail that in my estimation engenders the most mistakes.

   Moving to government filing errors. Sometimes filing errors are rooted in misunderstandings between who is responsible for doing it, the lawyer, the accountant, or someone else. In the case of Barnes versus Turner, an attorney neglected to advise the client in writing that the client would file UCC continuation statements post-closing, which led to a filing error. In this case, the court found that the attorney couldn't delegate this duty to the client anyway, violating his duty to act with ordinary care, skill and diligence. To avoid these types of errors, the attorney can make clear in writing, who is responsible for completing which tasks, both pre and post closing, being sure not to delegate any tasks, the attorney has the duty to complete themselves.

   Also mistakes occur when drafting. Only occasionally are drafting errors the product of a failure to actually understand the substantive legal doctrine or contract term. More often, it comes from haste and errors in proofing. In the 2016 appeal of Thorsen versus Richmond Society For The Prevention of Cruelty To Animals, an attorney erroneously drafted a will that left only a tangible estate, not real estate to an organization, which led to a lesser bequest than intended. The attorney brought suit as executor asking the court to correct his scrivener's error. And that court found that the contract language was unambiguous. So the organization then sued the attorney for negligent drafting and that trial court ordered the attorney to pay $603,000. And the Supreme Court of Virginia affirmed the malpractice judgment.

   In a 2017 case in the First Circuit, the court considered the meaning of the canning, processing, preserving, freezing, drying, marketing, storing packing for shipment or distribution of. Did packing for shipment or distribution refer to two types of packing or were packing and distribution two different elements on the list? One comma, the missing comma was very expensive. A common source of errors in M&A deals arises from the use of precedents documents from prior deals or from using documents and failing to align the terms to the transaction at hand. This can be particularly problematic when attorneys are not aware of whether the terms from the precedent are negotiated terms and hence the product of compromise. When using these documents as a starting point, it's important to focus on the differences between the precedent and the transaction at hand.

   So some pointers for avoiding mistakes. Avoiding mistakes in transactions takes an aggressive process, but it's not a time to slow down and lose confidence in your abilities as a drafter, and it's not a time to speed up and fail to leverage those abilities. In the words of singer song writer, Josh Ritter, the editorial phase of drafting is a time to stick up for your talents by taking the time to make sure that everyone can understand what you're trying to say. Some ways to do this are, choosing the right person to review the document. So M&A deals often involve many lawyers in different parts of the transactions. So choose someone to review the documents who's familiar with all aspects of the deal so they can catch any inconsistencies, duplicities and redundancies. Also read the boilerplate. Even if the text is from your own form, review contract language that's not subject to a lot of negotiation. Because our eyes automatically skip over that content. Consider it in the context of your deal. Also talk it, print it, PDF it.

   Reflecting on his approach to editing humorous David Sedaris, advocates for a read aloud approach. He says, "When I hear myself reading out aloud, I hear things I don't hear when I read silently to myself. When I read aloud, I always have a pencil in hand. If I feel I'm trying too hard or being repetitive, or there's something otherwise wrong, I make a mark." In addition to reading aloud for flow and persuasiveness or continuity, read for grammatical errors. Try printing the document as well. Working from a printed version can help achieve the detachment needed to see the document from the reader's point of view. And then you can catch lots of errors.

   Also, chances are you're more willing to make big changes on paper than you will be on the screen. So if you are editing electronically, try reviewing the document as PDF or on another computer. These slight changes in document presentation, the appearance of the text on the page, can create the necessary level of detachment here.

   Make time before closing to review old and new changes. Before execution, try to get the time to review changes made at the beginning of the negotiation that you may not have carefully reviewed since as well as double check last minute changes in the documents. And finally, lean in on LPM tools. Use dedicated tools to manage M&A transactions like checklists, form letters, agendas, drafting guides, online workflows. You don't have to reinvent the wheel here. In fact, there is an ABA LPM task force that has developed an array of M&A focused checklist guides and templates.

   Our next peril, confidentiality and attorney-client privilege. Attorney-client privileged in the M&A context have been decided in a large number of cases. The lawyer's duty of confidentiality of information derives from Rule 1.6. And under that rule, a lawyer can't reveal information pertaining to the representation of a client unless the client gives informed consent, or the disclosure is impliedly authorized to carry out the representation, or it's permitted according to several narrow categories, dealing with preventing harm and in certain malpractice or adversarial scenarios, which we're not really going to cover, and I summarize like that.

   So our first issue is, can parties to a potential merger share privileged documents without waving the privilege? We're going to do a hypo, Nature's Cure-All, the buyer, insists on discussing the legal exposure of the target Snake Oil Inc., maker of Covivality. The exposure has arisen due to threatened litigation and potential regulatory action by the FDA regarding Covivality. Nature's Cure-All has requested that Snake Oil include legal documentation pertaining to that exposure in its due diligence submission. Snake Oil's disclosure of the privileged information to Nature's Cure-All may waive any legal claim of attorney-client privilege it has with respect to those documents. Snake Oil's in-house attorney is concerned rightly so that this could waive privileged in the documents should Nature's Cure-All seek production in future litigation. So how does Snake Oil deal with this potential waiver issue?

   The general waiver rule is that the disclosure of the privileged information will mean that any privilege in those documents in the future is waived, but there's an exception, courts have found that in certain circumstances, parties to a transaction share a common interest, and the common interest doctrine operates as an exception to the general waiver rule. And it will preserve the privilege if it applies. Most courts agree that parties to a merger or sale of assets must share legal rather than a purely commercial common interest at the time the information is shared in order for no waiver of the privilege to take place. However, there is broad disagreement on what constitutes a shared legal interest and the extent to which it must be shared by the parties.

   Courts have found that the timing of the disclosure of the privileged information and the certainty of the transaction will impact a determination of whether the common interest doctrine preserves privileged or not. Lack of a signed merger agreement or the existence of multiple potential suitors will likely weigh heavily against a finding that disclosure of privileged information did result in a waiver. And in some cases, courts have required a signed merger agreement before finding the party's interests, sufficiently common for the doctrine to apply.

   Issue two, how will the acquired company communications and documents be handled post-closing? In Commodity Futures Trading Commission versus Weintraub, the US Supreme court recognized the general rule that when control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well. Since this decision, courts haven't taken such a black and white approach. A New York takes one approach, while the seller does a transfer, its privilege to the buy on most subjects. It retains control of pre-merger privileged communications that relate to the merger and the negotiations. And Delaware takes its own approach. That state is hesitant to acknowledge a full transfer of control over privileged communications. A sale of all or substantially all of the company's assets will do. Also, as a result of this decision sellers are including terms where the seller reserves control of the privileged post-closing, at least for communications involving the transaction itself.

   So some pointers on attorney-client privilege. Zero in on the law that would govern a potential dispute over privilege. Different jurisdictions will treat the issue differently. Assume that communications made before execution of the merger agreement, communications directly to the other side, without any attorneys involved and communications that make their way to the other side's investment banker won't be privileged. Legal documentation shouldn't be sent until after the merger agreement is signed, if possible, and it certainly shouldn't before there's a reasonable amount of certainty that the deal will close. And finally, get an agreement in writing if possible of who will hold privilege for certain documents post-closing.

   Conflicts of interests. According to one elementary school's training material on bullying, if you are experiencing a conflict, you can ignore it. People tease for attention and if you ignore it, they may lose interest and stop. You can make a joke, it shows you're not bothered by the teasing and they may lose interest and stop, or you can confront the conflict. Let the teaser know how you feel usually in private, and they may understand.

   Conflicts of interest are a significant source of trouble for attorneys. Ignoring or joking them away will do nothing to prevent or mitigate this potential ethical quagmire. So in the law, confronting conflicts is the only way forward. Conflicts of interests are a breach of an attorney's duty of loyalty to a client. Most ethical issues in M&A happen when the lawyer is representing a seller. For example, multiple owners with various financial interests, the owner and employees who carry over after the deal or an owner that has third parties interested in a significant asset like real property. When a client is the sole owner of a business and the sole employee, resolving a conflict here is an easy case, but deals are often more complex than this. And in more complex deals, it's critical to identify who the client is so you can avoid conflicts of interest. When there are multiple constituencies in the deal, the issue of joint representations often arises, and joint representations go hand in hand with conflicts issues. So our focus will be on joint representations.

   Joint representation are a big risk area for conflicts in the transactional context. They often lead to concurrent conflicts of interest, and I'd like to explore how joint representations arise. Here's an example. Nine months ago, Purall Products, Sneeze Stopper, and Chalky Glove Company formed a joint venture to launch YouPrepCo. YouPrep is a highly successful preparedness service, delivering monthly Prepper Packs to members. The three owners of YouPrepCo are selling their company to Appall Mart. The owners of the joint venture approached Attorney Barb, and as Barb to represent all of them. They believe it's more efficient from both a cost and transactional perspective for a single attorney to represent all parties on the seller side. Purall, Sneeze and Chalky, all have different interests in YouPrep, and they may receive different considerations in the sale.

   Also Purall may have an ongoing involvement with Prep after the sale because its liquid gold hand sanitizer is indispensable to the Prepper Pack product. So if Attorney Barb decides to proceed, then a joint representation arises and this can involve conflicts treachery. Given that the constituents on the seller side seem to have different interests and different levels of involvement after the deal, it should be a warning to Attorney Barb to proceed with caution. With joint representations, it's a best practice to proceed according to Murphy's Law, everything that can go wrong will go wrong. In these deals, just assume that everything that can go wrong will go wrong. In fact, incidentally Murphy's Law has been used for many years in the treacherous sport of mountaineering. So Attorney Barb should be like the Mountaineer as she considers whether a joint representation is possible.

   The general rule about concurrent conflicts of interest is Rule 1.7. In figuring out where there's a conflict, comment two gives a roadmap for attorneys looking to figure out whether a conflict exists and how to navigate it. The lawyer has to clearly identify the clients, determine if there's a conflict, decide if the attorney can represent the clients despite the conflict. And if so, consult the client and receive written informed consent. So we'll use this as our framework for working through concurrent conflict scenarios.

   So who is the client? Well, sometimes it's difficult to figure out who the client is in the first place. So consider this scenario. Max is an in-house attorney representing Acme Masks. The shareholders owning Acme Masks want to sell their stock in a stock sale. The Big Sneeze requires Acme Masks, which is owned by its selling shareholders to execute employment agreements with Acme's senior management team, as a condition of the closing. Some other on that team are selling shareholders. So Max's task is to draft packs between Acme Masks and managers.

   In this scenario who is Max representing? Well, Max could be representing Big Sneeze and Acme shareholders. Max would need to parse out the various interest to figure out if representation of all of these parties in a joint representation is possible. If it is, Max would need to make the nature of the joint representation crystal clear in a written conflicts waiver or engagement letter, and Max would have to monitor the situation during the transaction to see if there's any possible change that makes the joint representation impossible.

   So let's take a look at another scenario, the buyer side. Attorney Mod represents Pricey Paper, a manufacturer of paper towels and toilet paper. Pricey Papers' shareholding management team wants to purchase the Pricey Paper shares of other shareholders. Can Mod represent the management team and other shareholders of Pricey Paper, the corporation she represents? Is there a conflict here? Well, Mod's representation of one would be directly adverse to the other. If representing a seller with multiple constituencies, the attorney has to identify those constituents and assess the interests and roles of each constituent. These are part of determining whether there would be a conflict.

   So is there a conflict? Next issue. ABA model rules give some general guidance on concurrent conflicts of interest, but the rules themselves aren't super helpful in the context of transactional work. Rule 1.7(a)(1)-(2) bar an attorney from taking on a representation where there's a concurrent conflict of interest, unless certain criteria are met.

   Current conflicts of interest can occur where representing one client in a deal will be directly adverse to another client or where there's a significant risk that the representation of one client or the personal of the lawyer will materially limit the representation of another client, a former client or a third person, or by the interest of the lawyer themselves. But there's an exception to all this. If a lawyer reasonably believes they can competently and diligently represent each affected client and the representation is not prohibited by law and the representation doesn't involve the assertion of a claim by one client against another client represented by the lawyer in the same or other proceeding before a tribunal and each client gives informed, written consent, then the lawyer can take on the representation. As you can see clearly part or all of these rules were written with litigators in mind, tribunal, but some of the comments to Rule 1.7, make clear that concurrent conflicts of interest in that rule also apply to transactional representations like M&A deals. For example, comment seven expressly acknowledges that directly adverse conflicts can arise in transactional matters.

   Here's another hypo. Assume that Attorney Martha represents Breathe Well in a stock sale. In an unrelated matter, Breathe Well is interested in acquiring Resperatorium. Attorney Martha is also asked to represent Resperatorium in the deal. Could Martha represent both Breathe Well and Resperatorium in the acquisition deal? Well, according to comment seven, Attorney Martha could not take on the representation without getting the informed consent of each client.

   But concurrent conflicts can also occur even where there's no direct adverseness. Concurrent conflicts also exist if there's a significant risk of a material limitation. And this can play out in the transactional context. Let's revisit Purall, Face Shield, Chalky Glove. Let's go back in time. The companies haven't started working together yet. Assume that Purall Products, Face Shield and Chalky Glove are looking to start a joint venture, a venture to launch YouPrepare Attorney Judy is asked to represent all three companies. Can Judy take on the representation?

   According to comment eight, by presenting multiple parties to this joint venture Attorney Judy's ability to recommend or advocate all the possible positions that each client could take will likely be materially limited because of Judy's duty of loyalty to the others. It would foreclose alternatives that would otherwise be available to the client. However, the mere possibility of subsequent harm does not itself require disclosure and consent. So we need to investigate the likelihood that difference in interests will arise and if it does, would that materially interfere with the lawyer's ability to give independent advice about alternatives or curtail possible courses of action that reasonably should be pursued?

   To determine whether there a material limitation, comment 26 to the rules, establishes a number of factors that hone in on the proximity and degree of things. First, the duration and intimacy of the lawyer's relationship with the client involved needs to be considered. Also the function performed by the lawyer and the likelihood that disagreements will arise. And finally, any prejudice to the clients from the conflict. So if there's no concurrent conflict of interest arising from either a directly adverse representation or where there's a significant risk of representation, the representation of one client will materially limit the representation of another, then there's no problem.

   Let's look at an example of this. Attorney Una is a longtime attorney for Velma Voyeur and her company. Velma and Vic Ogle own 65% and 35% percent respectively in Vroom Video Conferencing. Bomber Bots and Company is seeking to buy Vroom and Velma and Vic enter into non-compete agreements with Bomber Bots. Neither Velma nor Vic will participate in the business after closing. Velma and Vic want Attorney Una to represent both of them in the sale of Vroom. Can it happen? Well because the interests of Velma and Vic are generally aligned in the transaction here, Attorney Una could represent both of them. Even though there's no concurrent conflict of interest, Attorney Una should have Velma and Vic sign an engagement letter containing language about joint representations.

   But note that conflicts can occur with respect to some parts of the transaction. So you're not just looking at the transaction as a whole. Let's consider the same facts as before, assume that Velma will receive 95% and Vic will receive 5%, but Vic will also receive a 10% interest in Bomber Bots, as well as a term contract with non-compete provisions. Here, Una's representation of Vic for the employment contract and ownership interest may be adverse to Velma's interest in the overall transaction. In this case, Attorney Una couldn't proceed unless there's some way around it. And this is a great segue to our next question.

   Can the attorney represent the client despite the conflict? If there is a concurrent conflict of interest, the lawyer must assess whether they can nonetheless proceed according to the exception. Again, the exception is, if the lawyer reasonably believes they can competently and diligently represent each affected client, the representation is not prohibited by law, the representation doesn't involve one client's assertion of a claim against another client represented by the lawyer in the same or other proceeding before the tribunal. And each client gives informed, written consent. The lawyer can take on the representation.

   Back to the previous example. Assuming the representation isn't prohibited by law, if Attorney Una believes she can offer a competent and diligent representation of both Velma and Vic, and both are willing to consent in writing, then she could proceed by carefully advising the clients about the joint representation and having them sign a waiver.

   In the case of Attorney Una, she should explain the nature of the joint representation to Velma and Vic and lay out a written engagement or conflict waiver. So the terms of that engagement conflict waiver. Well, it should describe the party's relationship, the implications of the joint venture, joint representation and require acknowledgements from both parties. It should explain that no member of this client group shall be favored and that there's no secrets in a joint representation. And then if disputes developed between the client group, the attorney could not represent any of them. One should get acknowledgements for each member of the client group. And even if all of this does occur, Attorney Una should still consider declining the representation. But if she proceeds, she'll need to be on the lookout during the negotiation of the transaction to any changed circumstances that could alter the analysis about whether a joint representation is possible.

   So some pointers for avoiding conflicts of interest. Identify who your client is, fastidiously run conflicts checks, identify clients, affiliates, constituents, and others. If any potential for misunderstandings exists, advise non-clients that they're not represented. Also, before agreeing to represent parties, realistically consider the likelihood of a conflict in a joint representation, always being on the lookout for divergent client interests and provide adequate informed consent to conflicts by disclosing the nature of the conflict material risks and reasonably available alternatives. Don't treat non-clients like your clients, and that includes not giving legal advice to non-clients, and finally put processes in place to ensure during the craziness of it all, during closing, your client avoids an inadvertent waiver of the privilege regarding confidential information.

   The peril of lack of candor in negotiations. So M&A attorneys stand at the intersection of their obligations to get the best results and their obligation to deal honestly with the opposing side. And the model rules aren't exactly clear on the duty of candor and transactional attorneys. The duty of candor derives from Rule 3.3, The Candor Towards a Tribunal, but this rule is crafted with litigators in mind. Non-tribunal forms of alternative dispute resolution are negotiation and mediation, which brings us to Rule 4.1, Truthfulness in Statements to Others.

   So in representing a client, a lawyer shall not knowingly make a false statement of material fact or law to a third person or fail to disclose a material fact with third person when disclosure is necessary to avoid assisting in criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6, which is disclosure in cases of client misconduct.

   So what is knowingly here? Well, according to Model Rule 1.0(f) definition, knowingly requires actual knowledge of the fact in question, which may be inferred from the circumstances. This is not a should have known standard, and the case law tends to agree. What's material? Annotations state that a statement is material for the purpose of Rule 4.1(a) if it could have influenced the hearer. So as an example, if the buyer says, "OMG, I can't disclose that, it will kill the deal." That fact is probably material. What's a fact? Well, it depends on the circumstances. Under generally accepted conventions, certain types of statements ordinarily aren't statements of material fact, like estimates of price or value placed on a subject of a transaction and a party's intentions as to what an acceptable settlement of a claim would be.

   Some other commentary, well, comment one states, a lawyer is required to be truthful when dealing with others on a client's behalf, but, generally has no affirmative duty to inform the opposing party of relevant facts.

   So let's look at an example. Attorney Sal represents the seller, Stop and Shot Company. Sal has posted all requested documents, including material contracts into a secure electronic space for retrieval by Kroaker. Kroaker is placing a high value on these contracts and these contracts are between Stop and Shot and the three biggest toilet paper manufacturers in the country. But one of these contracts has a provision allowing either party to cancel with three weeks notice and Stop and Shot is worried that Kroaker will demand a purchase price reduction, or just walk away from the deal altogether. Kroaker reviews all the documents in a secure space and makes no mention of the issue. Does Sal need to tell Kroaker about the issue?

   Well, Sal does not have a duty to inform the other side about relevant facts. If Kroaker's representative asked him about it, Attorney Sal could not lie. Yes. But assuming the contract has been made available, Attorney Sal is under no obligation to help Kroaker council sift through and decipher those documents. That's their job. And there's nothing to indicate that Stop and Shot is committing fraud or a crime here. So this isn't a failure to disclose a material fact.

   Let's take a look at another example. In negotiations, Stop and Shot tells Attorney Sal, "Dag-nab-it, we practically control every roll of toilet paper in the country. We won't take less than 300 million." Now Attorney Sal turns to Kroaker's council and says, "My client won't take anything less than 350 million." Is that acceptable? Generally, yes. The model rule commentary make clear that the negotiating lawyer can misrepresent estimations of price or value and can exaggerate settlement amounts his client finds acceptable. This is puffery, which is generally an accepted practice.

   How about another example? Imagine Kroaker bailed on the deal, Stop and Shot is searching for another buyer and with no interest from anyone until Semi-Whole Foods comes along into the picture. Attorneys Sal tells Semi's council, "We've got several outstanding offers." Acceptable? No. Attorney Sal is telling a lie. Comment one explains, a lawyer is required to be truthful when dealing with others on the client's behalf. But now imagine that a week before Semi-Whole Foods came to the table, Rotten Foods made an offer. Attorney Sal tells Semi that several other companies have shown interest in Stop and Shot. Acceptable? Probably. There's truth to the statement, Kroaker and Semi-Whole have both shown interest. Whether that amounts to several is likely puffery.

   So some pointers in candor in negotiation. Don't tell a lie and some point exaggeration and puffy become a lie. Just try to avoid exploring where that line is. If it's not a fact, if it's not material, or if it's not done knowingly, then there's less of an issue. And for materiality, the bar is low. If it could have influence on the recipient it's material, for knowledge, it doesn't have to be actual, it can be inferred from the circumstances.

   So moving on to a hot topic, COVID-19. It's mounted a hostile takeover of the entire legal industry, forcing a change to traditional assumptions about legal practice, including practice related technologies. And whereas many in the industry were reticent to accept and incorporate new technologies prior to COVID-19, well, now the industry was given no choice but to do so during the pandemic. Today, the importance of technological competence is really now beyond question. And as of this presentation, M&A activity has largely come to a hard stop worldwide. This is giving M&A attorneys the ability to focus on the effects of the virus on pending deals, done deals and future deals. This should also give M&A attorneys, the opportunity to consider the ethical implications of COVID-19 on M&A practice.

   So security and technological competence. In light of rapid shifts in all sectors of legal practice, issues of security and technological competence have really come to the forefront now. Under Rule 1.1, to act competently, a lawyer must have the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. Recognizing the need to stay abreast of technological advances, comment eight states that to maintain the requisite skill and knowledge, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology. If COVID-19 has highlighted the importance of tech competence, it's also expanded the definition of what technological competence actually is.

   In the pre-COVID paradigm, technological competence basically included knowing about law practice management software, document management software, billing software, email, PDF program with redacting and metadata scrubbing capabilities and MS Office programs. But now after or during COVID-19, technological competence means also being familiar with cyber security, team management software and video and mobile technologies.

   Major challenge with respect to technology in legal practice is cyber security. Under rule 1.6, the lawyer must make reasonable efforts to prevent inadvertent or unauthorized disclosure of information relating to the representation of a client. Cyber security is really on the ABAs radar. ABA formal opinion, 477 in 2017 stated, "Cybersecurity recognizes a world where law enforcement discusses hacking and data loss in terms of when and not if." Law firms are target for hackers for two reasons. First, they store highly sensitive information about clients and that information is of high interest and low volume. Whereas the volume that clients hold of information is much greater. So law firms are easy, soft targets.

   In one case study in SecurityWeek Magazine, a cybersecurity firm was asked to attack a prestigious law firm's computer system. And in less than 48 hours, they had full control of the law firm's network, including all assets and emails. When the same cybersecurity firm was asked to attack a major technology company, it took them three weeks to get access to the network and score data on mergers and acquisitions. The company could have gotten that M&A data within a couple of hours, had it targeted the lawyers.

   So some pointers regarding technological competence. Avoid connecting to public WiFi even if it's with a VPN. In fact, a phone's hotspot and a mobile hotspot that you get from a mobile provider are encrypted and preferable. Install updates on software, apps and devices when they're suggested that you update them. Passwords should be unique and strong and tested. You can go to a website called howsecureismypassword.net to test your passwords. Also, two factor authentication should always be enabled if possible. Develop and maintain security protocols, use secure encrypted client portals to communicate with clients and regularly audit your technology to make sure they continue to meet your needs, to meet ethical requirements and meet the expectations of clients.

   So there's no reason why the M&A lawyer can't or shouldn't be consistently attuned to ethics at every point in the deal. Joe was. Again, in recounting the life of Joe Flom, M&A and Presario of Skadden, Jim Flores said, "There is one professional area where Joe has always been entirely consistent, and that's when a question of ethics is involved. In terms of the 'smell test' that good lawyers apply to complex schemes, Joe has the fastest proboscis in the East." You too can be like Joe.

   Thanks for joining us for this presentation on ethical perils and pointers and mergers and acquisitions. To learn more about the contents of this presentation, you can check out the course materials, which includes the slide handouts and presenter notes. So thank you so much for joining Quimbee for your CLE needs, and we hope you'll join us again soon. Take care.


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On demand
1h 3m 26s

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