WWW.MINNLAWYER.COM Supplement to Minnesota Lawyer December 2014

General counsel: ‘person who sparks the conversation’Fighting stereotypes is part of the jobBy Karin CianoSpecial to Minnesota Lawyer

Asked what she likes most about her work as gener-al counsel for a division of Lockheed Martin, DaniDeering doesn’t hesitate: “the variety.” A self-described“curious person by nature” who loves to learn, Deeringenjoys participating in the company’s business andstrategy, and in a world of increasing legal specializa-tion, remains an enthusiastic generalist.

Deering grew up in Des Moines, Iowa. Her motherwas a teacher who shared her sense of curiosity andlove of learning. Law was not Deering’s obvious firstcareer choice. Intrigued by medicine, she began hercareer working at a hospital. During her last year ofcollege she took a position as a project manager fora nonprofit health care center, and while thereobtained her master’s degree in public administra-tion. Thinking about what to do next, she applied toHamline University School of Law and was accept-ed. A new job opportunity became available and shethen moved to Principal Financial Group to becomean underwriter, putting law school on hold. Sheliked the work, and the company liked her, but shewas not convinced it made sense to wait for thelong timeline to advancement. The thought oflaw school seemed like the right next step andshe enrolled at Hamline University School ofLaw.

While in law school, Deering began tothink about becoming a businesslawyer as she clerked in both in-house positions and at a law firm.As a student with significantwork and leadership experi-ence, she didn’t embrace thetraditional model of joining alaw firm and spending yearson a partnership track.Instead, she wanted to lead— and to have direct accessto business clients.

After receiving her J.D.from Hamline in 1995, Deeringclerked with Judges EdwardParker and Edward Toussaint at theMinnesota Court of Appeals. The expo-sure to a breadth of cases fed her curiosity.“The best experience ever was clerking at theCourt of Appeals,” she recalls. “You get to lookacross all areas of the law, from both sides.”After her clerkship she worked for the lawfirm Kennedy & Graven.

And in 2000, Deering landed her first cor-porate legal position at Canadian PacificRailway. There, as one half of the two-person U.S. legal team, she began toexperience “one of the benefits tobeing in-house — a chance to doabsolutely everything,” she noted.She loved it. She also embracedthe challenges of working in adense, established, heavily regu-lated industry, which prepared

STAFF PHOTO: BILL KLOTZ

When it comes to confronting bias in the workplace, Lockheed Martin general counsel Dani Deering insists on being heard and respected. “A lot of the time, I’m theonly person in the room who looks like me, the only woman,” she says. “You can’t be a shrinking violet.”

DEERING TO PAGE S-7

Build bridges duringthe good timesBy Dan HeilmanSpecial to Minnesota Lawyer

In your role as corporate counsel,how often do you have to deal withshareholders? If it’s often at all, youknow that it involves an ever-changingmenu of issues to deal with, includingrisk management, shareholder ac-tivism and others.

At Dorsey & Whitney’s recent Cor-

porate Counsel Symposium, a panelconsisting of Dorsey attorneys and cor-porate counsel from companies includ-ing Xcel Energy and UnitedHealthGroup discussed those and other is-sues. After the symposium, we askedits moderator, Dorsey partner RobertA. Rosenbaum, to expand on some ofthe issues discussed there.

Q: Do corporate boards of directorstend to keep up on legal matters re-lated to things like risk management,or do they rely on their counsel?

A: When it comes to shareholder en-

gagement, different boards have differ-ent philosophies. The trend amonglarger-cap companies and larger mid-cap companies is to have regular en-gagement outreach programs thatmanagement usually handles, then toupdate the board. When shareholdershave specific problems and they wantto speak with directors, then directorswill get involved — after they’ve beencarefully prepped by management.Certain topics are off-limits, and cer-tain topics they’re willing to engage in.

Broadly described, risk manage-ment is one of the core functions of theboard from an oversight perspective.They need to understand where man-agement thinks the biggest risks are,and what management’s plans and pro-grams are for mitigating those risks.Are the processes good? Does theboard have confidence that manage-ment is doing what it needs to do tostay on top of those risks?

Q: Good operating results and goodgovernance processes go some way to-ward combating shareholder activism,but it might not be enough. Why not?

A: There’s a clear demarcation in theworld of activism between people whoare using shareholder proposals andtrying to shake up the governance, andtrying to force a sale or a dramaticsplit-up of the company or major capi-tal allocation. That kind of M&A ac-tivism isn’t really what our panel wastalking about. It was focused more onthe governance arena.

With that as a backdrop, sharehold-ers are much more restive than theyused to be. They want to know thatwhen they’ve got concerns, the com-pany is listening to them and respond-ing to them. The best defense againstany activism, really, is great operatingresults.

Beyond that, good governance isnecessary but not sufficient. If you’renot fully reaching out to shareholders— either by meeting with them or call-ing them or even explaining in yourproxy statement what you do and howwell you do it — they won’t necessarilyassume the worst, but they also won’tassume that you’re doing everythingright. Engagement is a way hopefullyto build bridges in good times so thatwhen the bad times inevitably come,you have a base of support that in-cludes people who know and under-stand you.

Q: Are data breaches the biggestworry for most corporations when itcomes to electronic risk management?

A: Certainly they are for consumer-facing retail companies, health carecompanies, financial services compa-nies — companies that receive, com-pile, hold large databases of personalinformation about third parties. That’sa huge risk from an IT perspective.

Companies that are more business-to-business, that don’t get the personaldata of individuals, I’m sure it’s still aconcern, but not at the same level ofconcern.

Q: Part of the Dodd-Frank Act callsfor rules requiring disclosure of theratio of a CEO’s annual total compen-sation to the median annual total com-pensation of all employees. Those rulesare still not out. What’s the delay?

S-2 | December 15, 2014 minnlawyer.com

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minnlawyer.com December 15, 2014 | S-3

An ethics primer for in-house counselDiscipline anddisqualificationmay happenBy Cari K. TwitchellSpecial to Minnesota Lawyer

The absence ofbillable hour andrainmaking require-ments has long beck-oned attorneys to therole of in-housecounsel. Generalcounsel positionsalso offer — benefitssuch as fewer 60-hour workweeks andan increased work-life balance. There isone often-toutedbenefit, however,that does not exist inreality — the nonex-istence of legal mal-practice claims.

Attorneys Ken-neth Jorgensen andTheresa Bevilacqua of Dorsey & Whit-ney LLP recently gave a presentationon the topic of ethical challenges thatin-house counsel often face. The pres-entation, entitled “The 3Ds: How andWhy In-House Counsel Gets Disci-plined, Disqualified and Denied BarAdmission,” occurred at Dorsey &Whitney’s 25th Annual CorporateCounsel Symposium on October 15.The panel presentation also includedEileen Lach, general counsel of IEEE,and Christopher Lenhart, generalcounsel of U.S. Bank. With Jor-gensen’s permission, this article sum-marizes the key ethical takeawaysfrom that presentation.

Rule references are to the ABAModel Rules of Professional Responsi-bility or applicable state rules.

Soliciting non-client employeesIn accordance with Rule 7.3, a New

York State court decided that in-housecounsel may not solicit non-clientemployees for the sole purpose ofretaining those employees as clients.A New York County ethics opinion fur-ther clarified this, stating that in-house counsel may contact non-clientemployees for the purpose of gather-ing relevant information. If the lawyerlearns that the employee would bene-fit from representation during thisconversation, the lawyer may thenoffer his or her services. The reason-ing: the lawyer is now competentlyrepresenting its employer by assistingpast employees who may need help.

Changing sidesA comment to Rule 1.9 states that a

lawyer can face disciplinary hearingsfor representing a new client in a mat-ter materially adverse to the interestsof a former client, to the extent thatthe representation “can be justlyregarded as a changing of sides in thematter in question.” In support of therule, Jorgensen cited Oracle v. ITD,

LLC, 2940313 (N.D. Cal. 2011).In Oracle, the in-house counsel

moved from Oracle to ITD after Ora-cle acquired ITD. A dispute arosebetween the two parties over anagreement that the counsel hadflagged for review while at Oracle.

The in-house counsel, along with out-side counsel, showed up to a settle-ment conference. Oracle moved todisqualify both parties.

The court did not disqualify eithercounsel, but did provide some take-aways. Specifically a court may: dis-qualify in-house counsel based uponits movement from one company tothe other; treat in-house counsel asco-counsel instead of as a member ofan outside law firm; and, disqualifyoutside counsel if the disqualified in-house counsel provided confidentialinformation about the in-house coun-sel’s former client to the outside coun-sel. And, as Bevilacqua explained,“Don’t show up at a settlement nega-tion and sit across the table from a for-mer client.”

Representing employer and employee

Rule 1.9 also requires that a lawyerobtain informed consent from itsclients when a clear conflict arises.This rule applies to in-house counselwhen the counsel represents both heremployer and another employee. Thepanel gave Yanez v. Plummer, a 2013case from the California Court ofAppeals, as an example.

In Yanez, the in-house counsel rep-resented another employee in an on-the-job injury deposition. The lawyerassured the employee he would notlose his job if he provided truthful tes-timony. The employer later fired theemployee for making inconsistentstatements. The employee sued thelawyer for malpractice and lost, whichthe Court of Appeals reversed.

Settling ethics complaintsCourts and ethics boards have

repeatedly disciplined in-house coun-sel for improperly handling settle-ments with individuals seeking to fileethics complaints. In Kentucky Bar v.

Unnamed Attorney, in-house counselhad a complainant sign a settlementagreement that provided that the com-plainant “agrees to the extent permit-ted by law, to refuse to voluntarilyassist or provide information to” theKentucky Bar without a subpoena orcourt order. The Supreme Court ofKentucky found this agreement violat-ed Rule 3.4, which states that a lawyershall not “request a person other thana client to refrain from voluntarily giv-ing relevant information to anotherparty.”

Additionally, in-house counsel maynot engage in conduct that is prejudi-cial to the administration of justice, asRule 8.4 requires. Potentially prejudi-cial conduct includes improperlyinfluencing complainants who havethreatened a complaint, or even thosewho haven’t yet mentioned filing acomplaint. This type of conduct mayalso include asking a complainantwho has filed a complaint to withdrawthe complaint or state to the bar thatfurther investigation is not necessary.

Practicing law illegallyNo court or bar looks keenly upon a

lawyer pursuing the unauthorizedpractice of law. How does an in-housecounsel do this? Oftentimes, it is dueto simple mistakes such as forgettingto pay bar dues. Other times it is dueto failing to comply with CLE require-

ments. And in some situations, itcomes down to handling legal mattersfor their employers in states otherthan the ones in which they holdactive licenses.

Suspension in one state can havethe effect of denial of admission inother states. The best way to avoidsuspension is to stay on top of yourgeneral practice requirements. Get inyour CLEs and make your dues pay-ments on time. And seek admission bymotion into other states as soon asyou know you have a matter to han-dle, Jorgensen advised. An attorneymay apply on motion if he or she hasengaged in licensed practice of law forfive of the past seven years, or mayrequest a house counsel limitedlicense, which often has a less oner-ous requirement (e.g., practice forthree of the past five years).

For those wondering: Yes, your roleas in-house counsel does count as theactive practice of law. That is, as longas it was your “principle occupation”during the required time frame.

ConclusionWhile there are numerous benefits

to moving in house, protection frommalpractice claims is not one of them.Some complaints and mishapslawyers can avoid by simply beingmindful of CLE reporting deadlines.Others require a more nuanced under-standing of the ethics rules and opin-ions. Regardless, attorneys can pro-tect themselves from most ethicscomplaints by continuously upholdingthe Rules of Professional Conduct.

TheresaBevilacqua

Ken Jorgensen

S-4 | December 15, 2014 minnlawyer.com

Employment laws protect unauthorized workersBy Brian D. Carlson and Julie A. GalvinSpecial to Minnesota Lawyer

Employers should be aware that peo-ple who lack authorization to work in theUnited States are nonetheless protectedunder most employment laws, includingdiscrimination and wage-and-hourstatutes.

A recent court decision in Californiaillustrates this. In Salas v. Sierra Chem-

ical Co., the California Supreme Courtruled that an employer could be held li-able for back wages in connection witha former employee’s claims of disabilitydiscrimination and retaliation, eventhough the employee had not beenlegally authorized to work.

The court relied on a Californiastatute that explicitly extends employ-ment protections to all workers, irre-spective of immigration status, andconcluded that the state law was not pre-empted by the federal Immigration Re-form and Control Act of 1986, or IRCA,which prohibits employers from employ-ing unauthorized workers.

State and federal courts have likewisepermitted unauthorized workers to as-sert claims under various employmentstatutes. Thus, employers should takeappropriate steps to protect themselvesfrom potential liability for such claims.

BackgroundThe plaintiff, Vicente Salas, was a sea-

sonal production line worker for SierraChemical Co., which produces chemi-cals for treating water, including waterin swimming pools. Because customerdemand for Sierra’s products varies sig-nificantly based on the season, Salas andother production line employees wereperiodically laid off and then recalled towork.

In 2006, Salas twice injured his backwhile on the job. Following the secondof the incidents, Salas filed a workers’compensation claim and, upon returningto work, performed modified duties. Hethen was laid off in December 2006, aspart of Sierra’s usual seasonal workforcereductions.

In March 2007, Salas spoke withSierra’s production manager about theprospect of being rehired. According toSalas, the manager told him that hecould not return to work for Sierra un-less he had fully recovered from his backinjuries and was no longer seeing a doc-tor for them.

Subsequently, Sierra sent Salas a letternotifying him that it was recalling laid-offemployees and requesting that he pro-vide a doctor’s release certifying his abil-ity to return to full duty.

Salas, however, never returned towork for Sierra. Instead, in August 2007,he sued Sierra, alleging that the companyhad violated the California Fair Employ-ment and Housing Act — FEHA — byfailing to provide reasonable accommo-dations for a disability and by retaliatingagainst him for filing a workers’ compen-sation claim.

In the course of the litigation, Sierralearned that Salas had used another per-son’s Social Security number to obtainemployment with Sierra. On that basis,Sierra moved for summary judgment, ar-guing that Salas’ presentation of fraudu-lent employment authorizationdocuments precluded his claims.

The trial court denied Sierra’s motion,but an intermediate state appellate courtreversed that denial, holding that be-cause Salas had violated the IRCA by

presenting false employment authoriza-tion documents to Sierra, he could notrecover under California’s FEHA.

Salas then filed a petition for reviewwith the California Supreme Court,which agreed to hear the case.

California Supreme Court’s decision

The California Supreme Court re-versed the lower appellate court, holdingthat Salas’ presentation of fraudulentemployment authorization documents toSierra did not preclude his claims underFEHA.

In support of its holding, the courtcited a California statute that specificallyextends state law employment protec-tions to all workers “regardless of immi-gration status.”

The court also ob-served that refusingto extend protectionsto unauthorizedworkers would inap-propriately incen-tivize employers tohire such people, asemployers would beable to discriminateagainst unauthorizedworkers without fearof potential liability.

Further, the courtheld that the IRCAdid not preempt Cali-fornia law insofar asSalas sought to re-cover back pay forthe time period be-fore Sierra learned ofhis unauthorized status.

The court reasoned that, to that ex-tent, the IRCA did not conflict with Cali-fornia law, since the IRCA does notpreclude an employer from payingwages to a worker for so long as it re-mains unaware of the worker’s unautho-rized status.

However, the court ruled that theIRCA did preempt California law to theextent that Salas sought back pay for theperiod after Sierra’s discovery of his sub-

mission of fraudulent employment au-thorization documents, since Sierracould not lawfully have paid him wagesafter that point.

Rulings by other courtsThe Salas ruling is in line with other

court decisions that have allowed unau-thorized workers to assert employmentclaims, thereby extending employmentprotections to all workers, regardless ofimmigration status.

For instance, federal courts have heldthat unauthorized workers may assertclaims for unpaid wages under the FairLabor Standards Act. See, e.g., Lin v.

Chinatown Restaurant Corp., 771 F.Supp. 2d 185 (D. Mass. 2011); Campos v.

Zopounidis, No. 3:09-CV-1138 (VLB),2011 WL 4852491 (D. Conn. Oct. 13,

2011); Patel v. Qual-

ity Inn So., 846 F.2d700 (11th Cir. 1988);Zheng Liu v. Donna

Karan Int’l, Inc., 207F. Supp. 2d 191(S.D.N.Y. 2002).

Likewise, federalcourts have held thatunauthorized work-ers may assert claimsand recover back payunder Title VII, thefederal anti-discrimi-nation statute. See,e.g., EEOC v. City of

Joliet, 239 F.R.D. 490(N.D. Ill. 2006); EEOC

v. Tortilleria “La

Mejor,” 758 F. Supp.585 (E.D. Cal. 1991).

The Equal Employment OpportunityCommission, the federal agency that en-forces Title VII, also has endorsed thatposition, stating in an online enforce-ment guidance that Title VII “protect[s]all employees in this country who workfor an employer with 15 or more employ-ees, including those who are not author-ized to work.” (See www.eeoc.gov/policy/docs/qanda-undoc.html.)

While federal courts in New Englandappear to have had little occasion to con-

sider this issue, it seems likely that theysimilarly would find that Title VII permitsclaims by, and back pay awards to, unau-thorized workers. (Note, however, thatas a result of the IRCA, certain additionalremedies provided for under Title VII —such as reinstatement and front pay —may not be available to plaintiffs whoseunauthorized work status has becomeapparent.)

Finally, as in the Salas decision, courtshave likewise permitted unauthorizedworkers to assert employment claimsunder state laws.

For instance, the ConnecticutSupreme Court has held that workers’compensation benefits may be awardedto unauthorized aliens. Dowling v. Slot-

nik, 244 Conn. 781 (1998). Similarly, theTennessee Court of Appeals recentlyheld that an unauthorized worker couldmaintain a claim alleging unlawful retal-iation for filing a workers’ compensationclaim. Torres v. Precision Indus., Inc.,No. W2014-00032-COA-R3-CV (Tenn. Ct.App. Aug. 5, 2014).

Like the California Supreme Court,the Connecticut and Tennessee courtsreasoned that depriving unauthorizedworkers of the ability to bring suchclaims would inappropriately incentivizeemployers to hire workers illegally.

Recommendations for employersAs a result of these court decisions,

there are a number of steps employersshould take.

First, employers should audit theiremployment policies and practices inconsultation with experienced employ-ment counsel to ensure that their poli-cies and practices are in compliancewith all applicable state and federallaws. A plaintiff’s unauthorized workstatus likely will not preclude him orher from filing suit on a discrimination,wage or other employment-relatedclaim.

Second, in hiring new employees,employers should take care to complystrictly with IRCA’s paperwork require-ments, including by completing valid I-9 forms for all new hires and retainingcopies of related documentation.

Potential monetary sanctions for dis-regarding I-9 documentation require-ments or knowingly hiring orcontinuing to employ unauthorizedworkers are severe, reaching as high as$16,000 per unauthorized worker de-pending on the number of past of-fenses.

In addition, criminal penalties maybe pursued if U.S. Immigration andCustoms Enforcement finds that anemployer has engaged in a pattern orpractice of knowingly hiring unautho-rized workers.

Finally, upon discovering that an em-ployee appears not to have valid em-ployment authorization, an employershould immediately contact experi-enced employment counsel to deter-mine how best to proceed. While anemployer is not permitted to continueto employ an individual who it knowslacks proper work authorization, anemployer can subject itself to potentialliability for discrimination if it does notproceed with care upon learning of aworker’s possible unauthorized status.

Brian D. Carlson and Julie A. Galvin are attor-neys at Schwartz Hannum in Andover, Massa-chusetts, which represents management inlabor and employment law matters.

The Salas ruling is inline with other court decisions that have allowedunauthorized workers to assert employmentclaims, thereby extendingemployment protections to all workers, regardlessof immigration status.

minnlawyer.com December 15, 2014 | S-5

New going concern rules: Are your clients ready? By Michael W. Phillips and Jesse J. GillettSpecial to Minnesota Lawyer

In recent years, the investment com-munity has grown increasingly con-cerned about perceived inadequacies ingoing concern disclosures in financialstatements and audit opinions.

In an attempt to address some ofthose concerns, in August the account-ing standard setters at the Financial Ac-counting Standards Board, or FASB,issued new rules related to going con-cern disclosures that introduce new re-sponsibilities for management.

Counsel focusing on corporate andsecurities law, as well as company ex-ecutives, need to be aware of the im-pact of these new rules, which areeffective beginning in 2016. The respon-sibility for the adequacy of going con-cern disclosures will no longer solelyrest with financial statements auditors.Instead, along with possible relatedlegal liability risks, the responsibilitywill be shared with management.

Investor concerns with existing rules

Under current auditing standards,auditors need to evaluate informationthat contradicts an entity’s ability tocontinue to meet its obligations as theybecome due without taking significantactions outside the ordinary course ofbusiness (such as a debt restructuringor disposition of assets).

Specifically, auditors have the re-sponsibility to evaluate whether thereis substantial doubt about an entity’sability to continue as a going concernfor a reasonable period of time (not toexceed one year from the date of thefinancial statements). The auditormakes that determination after per-forming the audit procedures designedto test management’s assertions in thefinancial statements.

Should substantial doubt exist, theauditor assesses the adequacy of finan-cial statement disclosures regardingsuch concerns, and includes an ex-planatory paragraph in the audit opin-ion.

Investors view these “going con-cern” opinions from auditors as a redflag and a potential indicator of pend-ing bankruptcies. However, many inthe investment community have grownwary of the ability of auditors to accu-rately assess going concern issues, es-pecially given that few largecompanies that filed for bankruptcyduring the financial downturn had re-ceived a “going concern” opinion.

A study by Audit Analytics revealedthat, from 2000 to 2010, approximately40 percent of companies that filed forbankruptcy were not given a “goingconcern” audit opinion by their audi-tors prior to the filing.

Importantly, prior to issuance of theFASB’s new rules discussed below, au-ditors were solely responsible forgoing concern assessments under gen-erally accepted auditing standards, orGAAS, while generally accepted ac-counting principles — GAAP — lackedany such requirement of management.

Although auditors may have re-quired management to address goingconcern issues in management repre-sentation letters, GAAP did not includeany such requirements. Many high-pro-file investors have been candid in theirassessment of the audit industry’s abil-

ity to successfully identify going con-cern issues, including a senior portfo-lio manager with the California PublicEmployees’ Retirement System, whowas quoted in the Wall Street Journalas saying, “You have to be dangling offa cliff, hanging on by your fingernailsbefore the auditor blows the whistle.”

Shifting responsibilitiesMany also questioned whether man-

agement, and not the auditors, wasmore suited to perform its own goingconcern analysis.

The FASB was concerned whetherthe lack of specificity in GAAP regard-ing management’s responsibility forgoing concern assessments resulted indiversity in practice for these impor-tant disclosures.

In fact, in 2008 theFASB issued an expo-sure draft with the in-tent of introducinggoing concern as-sessment require-ments into GAAP.While the 2008 expo-sure draft did notmake it through tofinal guidance, theFASB tried again andissued a similar expo-sure draft in 2013.

Normally, attemptsby the FASB to intro-duce new accountingguidance are met bythe accounting indus-try with a level ofskepticism and substantial debateabout the merits of the proposedchanges. However, not surprisingly, theaccounting industry, including the Big4 public accounting firms, overwhelm-ing supported an opportunity to shareresponsibility for going concern as-sessments and welcomed the FASB’sproposed changes with open arms.

Although there are those skepticalof the efficacy of the new rules giveninherent management bias, effective

with the implementation of the FASB’snew guidance 2016, the responsibilityfor going concern assessments and dis-closures will no longer be limited toauditors, as those requirements willalso become part of GAAP and by ex-tension will become management’s re-sponsibility.

The new rulesBoth public registrants (SEC filers)

and private companies will need to ad-here to the new rules. The guidancewill require management, at each an-nual and interim reporting period, toevaluate conditions or events that raisesubstantial doubt about the company’sability to continue as a going concern.

Substantial doubt exists when it isprobable that an en-tity will be unableto meet its obliga-tions for the 12-month period fromthe date the finan-cial statementswere issued oravailable to be is-sued.

Events or condi-tions to consider in-clude internalmatters such asnegative financialtrends related to op-erating losses ornegative cash flows,loan defaults, orwork stoppages andother labor chal-

lenges. It’s also important to considerexternal factors such as legal mattersor legislation that may result in a sig-nificant loss of business.

If those types of events and condi-tions are identified and raise substan-tial doubt about an entity’s ability tocontinue as a going concern, manage-ment will be required to disclose thefollowing in the financial statements:

■ The nature of the principal condi-tions or events that raise substantial

doubt. ■ Management’s evaluation of the

significance of those conditions andevents.

■ Information regarding manage-ment’s plans that have alleviated sub-stantial doubt, or if it’s not probablethat management’s plans will be effec-tive in alleviating substantial doubt, in-formation regarding plans to mitigatethe conditions or events and an affir-mative statement that there is substan-tial doubt about the company’s abilityto continue as a going concern.

As companies prepare for the imple-mentation of the new requirements,there are many questions that manage-ment and counsel should be consider-ing:

■ Do they have the in-house expert-ise, qualifications and tools to ade-quately perform the analyses?

■ Do they need to implementchanges in the company’s internal con-trols over financial reporting to ad-dress the new GAAP requirements?

■ How do the new disclosures inter-act with other liquidity and risk factordisclosures already required in a Form10-K filing?

■ How does management balancethe new requirements with the disclo-sure of potentially sensitive informa-tion that could put them at acompetitive disadvantage?

Increased legal risk for management?

Inherently, any analysis related toan entity’s future financial perform-ance and liquidity position is a com-plex and judgmental endeavor, and foryears auditors have been balancingthe risks related to “going concern”audit opinions.

A failure to identify going concernissues and include a related disclosurein the audit opinion could open audi-tors up to significant criticism or legalliability. Conversely, audit clients areunderstandably resistant to “goingconcern” audit opinions, which couldlead to a damaged client relationship.

Management will now be facing asimilar dilemma. The disclosure ofgoing concern issues could become aself-fulfilling prophecy if the companyis then challenged with resulting creditdowngrades, a loss of customers, ortightening restrictions from vendors.

However, the failure to properlypredict and disclose these issues couldalso have significant consequences.The lack of adequate disclosure fol-lowed by significant financial difficul-ties or a bankruptcy filing could solicitallegations of fraud in the context ofSEC Rule 10b-5 (Employment of Ma-nipulative or Deceptive Practices), po-tentially leading to costly SECinvestigations or civil litigation ac-tions.

Although the new rules will be ef-fective for financial reporting periodsbeginning in 2016, counsel and theirclients should begin to assess the im-pact of the new guidance and considerplans for initial implementation andmitigation of any increased legal risks.

Michael W. Phillips, CPA, CFF, and Jesse J.Gillett, CPA/ABV, CFE, are with Floyd Advi-sory, a consulting firm providing financial andaccounting expertise in business strategy,valuation, SEC reporting and transactionanalysis.

“The responsibility for the

adequacy of going concerndisclosures will no longersolely rest with financialstatements auditors. Instead,along with possible relatedlegal liability risks, the responsibility will be sharedwith management.

By Stephen M. HonigSpecial to Minnesota Lawyer

In the midst of an improving economy,a robust IPO market and a selectiveM&A landscape, the corporate world in2014 leaves us with the usual variety ofyear-end ambiguities.

CEO payOne thing I anticipated addressing

remains unresolved. Perhaps by thetime you read this, the SEC will havedisgorged, several years late, its disclo-sure regulation comparing the salary ofpublic CEOs to the median workforce

salary. This 2010 Dodd-Frank Act require-

ment was congressional reaction toperceived runaway CEO compensa-tion. Other mandatory disclosures andadvisory “Say on Pay” votes had donelittle to halt higher CEO comp.

The ratio of CEO earnings to theearnings of a worldwide workforce,with workers living in emergingeconomies, should be irrelevant to in-vestors. Better to leave analysis of ex-cessive CEO earnings to the proxyadvisory firms.

No wonder the SEC still has not is-sued final regulations.

NASDAQ private market Rule 144 resales of securities are ris-

ing along with increasing numbers of se-curities sold under SEC Rule 506(c)(allowing public offerings of unregis-tered securities to accredited investors).These shares can create a chaotic sec-ondary market. Further, having too manystockholders might trigger unwanted ’34Act registration.

Established private companies withshares becoming available for resalenow can “list” on the NASDAQ “PrivateMarket,” a bulletin board controlled byeach issuer, where buyers and sellers —

each represented by a broker/dealer —can effect resales.

To be eligible, a company must haveachieved a certain level of funding, value,assets, revenues, income or shareholderequity, or sponsorship by recognized fi-nancial investors. No new enterprise willqualify.

But if an issuer maintains modest re-porting to inform the secondary marketthrough annual audits, unaudited quar-terlies, management bios, and businessand capitalization information, then thePrivate Market provides a rationalizedmarket to facilitate resale of restrictedsecurities.

This system is heavily weighted toprotect share price: Periodically, an is-suer can declare a “liquidity window”during which shares held by company-identified sellers become available to se-lected investors. This allows thecompany to impact share price and alsolimit the number of stockholders, whilepermitting orderly resale by early in-vestors and employees.

Bylaw wars Last year, the Delaware Chancery

Court, in its Boilermakers Local 154 de-cision, held it was legal to adopt a bylawrequiring that litigation against the cor-poration or its directors be brought inDelaware, which was the state of incor-poration of the defendant.

The impetus was to control growth ofM&A-inspired multi-forum litigation,which was perceived as wasteful and notin the best interest of shareholders. Pun-dits then speculated that public compa-nies might immediately adopt suchbylaws.

The fact that one could adopt a forum-selection bylaw did not automaticallymean that a corporation invoking thatbylaw (to quash shareholder litigation)would be supported by the courts. If alawsuit was brought outside of the man-dated jurisdiction, that jurisdictionwould decide whether forum choice wasrecognized.

There was even discussion as towhether selecting Delaware as a forumwas wise; perhaps a corporation withclout in its state of its principal opera-tions might fare better in that jurisdiction.

Finally, the Delaware decision by def-inition applies only to Delaware entities.Statutory language must be reviewed ona state by state basis.

After the Delaware Supreme Court up-held Boilermakers last May, exclusiveforum bylaws have been gaining traction.They can be established by boards with-out stockholder approval and, wherestockholder approval has been sought,generally such approval has been granted.

The literature suggests that companiesfearing activist shareholders or a friendly(or unwelcome) acquisition are attractedto the exclusive forum bylaw. InDelaware (as reported in Deal Lawyers),about 75 percent of corporations goingpublic have adopted such provisions.And in California, Illinois and New York,exclusive forum bylaws have been hon-ored through dismissal of claims broughtoutside the specified forum.

Institutional Shareholders Services,proxy consultants, recently released2015 guidelines. ISS continues to analyzeexclusive venue proposals on a case bycase basis. Factors include: Has the com-pany been materially harmed by share-holder litigation; and has the companyfollowed other good governance prac-

Time for a year-end corporate wrap-up

S-6 | December 15, 2014 minnlawyer.com

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A: It took a few years for rules to beproposed, and these rules in particularare a hot button on both sides of theissue. The SEC has gotten well over athousand comment letters, which isvery unusual.

The problem is that for companiesthat have international employees,part-time employees, or who don’thave systems in place to track all thedifferent kinds of information, it’s dif-ficult to compile [the necessary data].Layer on top of that the fact that thereare countries, including in Europe, thathave very strong personal privacy pro-tection laws. That means companiescan’t just take the information theyhave and make use of it. They need to

get employee permission. It’s verycomplex, and the SEC hasn’t yet fig-ured out a rule that will be generallyacceptable.

The latest wordfrom the SEC is thatthey hope to havefinal rules by year’send, but no one’sholding his breath onthat.

Q: So what compa-nies do to prepare forthose rules might de-pend on where theydo business?

A: Certainly wherethey do business,and how sophisti-cated their softwareis. The companies with the most re-sources have probably already figured

out how to collect the raw data theyneed.

But there are probably legal privacyissues around that tostill be tackled. Whatcan companies do toprepare? They canensure their softwarewill capture all therelevant informationfor their employees.But without knowingwhich way the rule isgoing to go, compa-nies might not wantto invest a ton of ef-fort into it. And thereis some hope, at leastin some quarters,that with the Repub-licans taking over

both chambers of commerce, this is anitem that gets repealed.

Q: The SEC has also warned corporatecounsel about drafting whistleblowerdisincentive documents. Is this a bigproblem?

A: If you listen to the SEC, they’re onhigh alert about it. I haven’t seen that inmy practice. But the SEC has picked upon some examples where companieshave gone over the line. The whistle-blower program is something that’s nearand dear to the SEC’s heart, so they wantto use their bully pulpit to dissuade peo-ple from going down that path.

Note: The handout materials from “Never a DullMoment: Advising Your Board on ShareholderEngagement, Activists, Risk Management andthe Latest Emerging Issues” can be down-loaded at http://www.dorsey.com /files/up-load/Board-Shareholder-Engagement-Activists-Risk-Management-CCS-2014.pdf

minnlawyer.com December 15, 2014 | S-7

CorporateContinued from page S-2

““Shareholders are much

more restive than theyused to be. They want toknow that when they’vegot concerns, the companyis listening to them.”

—Robert A. Rosenbaum of Dorsey & Whitney

her for the transition to the world ofdefense contracting. She joined Lock-heed Martin’s legal department in2002, and for the past eight years hasserved as a general counsel for its17,000-employee Mission Systems &Training (MST) business division.Lockheed Martin employs about140,000 people worldwide.

“There’s a perception that it’s easierthan being in private practice,” Deer-ing notes. “For us, we’re always drink-ing from a fire hose.” Her advice tolawyers interested in finding in-housepositions? “Network and sponsorship.In-house positions are hard to comeby, so you need to be networked in thebar association, and to maintain rela-tionships with colleagues that work infirms.” Deering is a past president ofMinnesota Women Lawyers, for whichshe was named a Minnesota LawyerAttorney of the Year in 2006, and sheremains involved on the organization’sadvisory board. She’s also made apoint of speaking to bar groups andcorporate counsel organizations,something she enjoys.

Asked about the skills necessary forsuccess as a general counsel, Deeringoffers a list. “Flexibility. Keen legalacumen across a lot of disciplines.And being a good leader.” She notesthat a general counsel is a unique rolewithin a business, and believes some-one in that role “can’t be a ‘yes’ person— you’re supposed to be the personwho sparks the conversation.”

What are some of the perks ofworking for Lockheed Martin? She

smiles. “We make some extremelycool things.” Deering mentioned thatthe entire Lockheed legal team wasrecently meeting at the aeronauticsdivision in Texas and “looked at beau-tiful, awesome airplanes.”

Another benefit: Going in-house, lit-erally. For the last three years, Deer-ing has officed exclusively at home.Lockheed Martin closed its MSTEagan office in a larger effort toshrink its footprint, and Deering is oneof a number of employees who went100 percent “virtual.” Even when shehad a brick-and-mortar office, Deeringfound herself on conference calls athome with employees worldwide atall hours of the day. She still does, butnow there’s no need to fight traffic orsplit time between home and work.

“Telecommuting is a perk, from arecruitment perspective,” and Deeringnotes that Lockheed “feels stronglyabout making it available” to allemployees. While some jobs demandphysical presence at a location —”you can’t take a plane home withyou,” she laughs — the company rec-ognizes that lawyers, and many oth-ers, can work wherever there’s aphone and a computer. In Deering’sexperience, flexible scheduling makesfor productive, happy employees. “Ithelps people to be people, and allowsyour employees to be more nimblewhen they can be comfortable, whenthey’re not sitting in traffic two hoursevery day.” But she’s concluded it’sessential to set boundaries—when herworkday ends in her home office,Deering turns off the computer.

Speaking of boundaries, what areDeering’s thoughts on being a womanof color in what has historically beena man’s world?

“Workplaces are just a reflection ofthe world,” says Deering, who is famil-iar with having her authority ques-tioned because of race and genderstereotypes. While large companiesinevitably have employees from “allslices of life” who bring biases andpreconceptions to work, part of a cor-porate counsel’s role is to remind thecompany that such stereotypes haveno place in the workplace. But inap-propriate comments still get made,and lawyers — like all employees —must decide how to respond.

“You cannot fight every battle,” saysDeering, “but in any business setting,you’ve got to be able to championyourself. A lot of the time, I’m the onlyperson in the room who looks like me,the only woman. You can’t be a shrink-ing violet.” She insists on being heardand respected, and is committed toraising issues of bias as they arise.“Silence is conformity,” she observes.“You have to find a way to make peo-ple aware of what happened and thatit’s not acceptable.” Yet she recognizesthat the alternative to silence — beingasked not only to live with bias, butalso to call it out and educate othersabout it — can be exhausting, espe-cially for young lawyers. Once, afterhearing an inappropriate comment,she recalls asking herself, “Was I theonly one that heard this? Why do Ihave to be the one to speak up? Thatshould have been a problem for every-one. And until it’s a problem for every-one, we’re not going to solve it.”

Deering recalls working with theMinnesota State Bar Association’sTask Force on Diversity in the Profes-sion to study recruitment and reten-tion for minority and women employ-ees in the legal profession. The result-

ing studies recognized the power ofimplicit bias — people’s need gravi-tate to those with whom they feelmost comfortable, a trend that disad-vantages underrepresented groups —and proposed a blueprint for legalemployers to follow to achieve greaterdiversity.

While dialogue has increased andmodest improvements have been made,Deering would like to see the needlemove further: “If you’re not deliberateabout diversity, it doesn’t happen. If youonly want to talk about it, that’s notdoing it. If you’re serious about it youhave to do it.” Too often, she believes,talented and qualified diverse candi-dates don’t make the final cut becauseof hiring attorneys’ perceptions abouttheir “soft skills”—perceptions thatmay mask implicit bias. And the fallacythat there are no “qualified” diversecandidates remains surprisingly per-sistent, despite all evidence to the con-trary (including the diversity of in-house legal departments).

Her advice to young lawyers con-fronting bias? “You should not attrib-ute it to yourself. You have to be trueto yourself and who you are.” Supportsystems, she finds, empower peopleto speak up. That includes family andfriends, as well as mentors and spon-sors within the company and theindustry — “people who can dothings,” who can understand yourexperiences, and can offer honestadvice. “It’s important to try to havethese relationships with people whomentor and sponsor you to help younavigate these situations,” she says.“You’ve got to be brave, and that’shard for all of us sometimes.” Shepauses, reflecting. “I have a lot of real-ly great friends.”

DeeringContinued from page S-1

S-8 | December 15, 2014 minnlawyer.com

tices. For 2015, ISS has expanded its analy-

sis to cover other types of bylaws “whichhave a material impact on shareholders’litigation rights,” such as bylaws thatmandate fee-shifting or arbitration.

ISS will generally advise votingagainst directors who pass bylaws man-dating fee-shifting whenever plaintiffsare not completely successful on themerits. ISS fears that “a large number ofcompanies are now expected to adoptsuch by-laws,” either through board ac-tion or by putting such revisions to ashareholder vote, and further fears pro-visions mandating arbitration instead oflitigation, or which would “require aplaintiff to demonstrate that his or hercase is supported by a significant num-ber of shareholders.”

Fixing the unfixablePractitioners faced with older corpo-

rations, or acquirors looking at targets,sometimes are dismayed to find thatshares were issued in excess of the num-ber authorized, in violation of charters.

In most jurisdictions, the practical fixhas been to take affidavits from every-one with historical information, amendthe charter to provide the requisite num-ber of authorized shares, and take a di-rector and stockholder vote declaring allshares on an annexed list as duly issued.

In Delaware, this logical approach

long has been understood to be unavail-able. Over-issued shares are void andconsequently cannot be ratified.

The only choice was to issue newshares and to ratify all corporate actionsbased on votes of the voided shares (thismight include naming the board, whichin turn named the officers, which in turnmeant that every vote or contract in thelast 25 years had to be ratified).

In 2004, the Delaware General Corpo-ration Law was amended to permit aretroactively effective fix, provided theboard of directors (and shareholders, ifrequired) adopted a resolution authoriz-ing the issuance of the stock as of itsoriginal issuance date.

A “certificate of validation” also mustbe filed with the Secretary of State’s Of-fice.

What if a corporation were to“stonewall” the fix, intending to freezeout parties who received “void” shares?A new section allows a petition toChancery in such circumstances.

Materiality scrapesThis year there was much discussion

of materiality scrapes in private M&Atransactions.

A materiality scrape eliminates the re-quirement that any misrepresentationmust be “material” when calculatingwhether aggregate misrepresentationsexceeded the “trigger amount” (invokingindemnification from seller to buyer), andwhether the amount of indemnified lossincludes all damages even if individualdamages were not themselves material.

Sellers resist materiality scrapes on

the theory that making exact represen-tations requires undo expense to obtainperfect disclosure. Further, the “scrape”arguably eliminates the benefit of theMAE (Material Adverse Effect) qualifiersthat protect the seller from liability, if anygiven misrepresentation is immaterial.

Every business, sellers claim, has in-herent risks; buyers should not be ableto nickel and dime.

There are a variety of solutions: Usethe scrape to calculate losses but not todetermine whether the indemnity triggerwas reached; increase the size of the in-demnity basket; make the indemnity bas-ket a deductible; sort representationsbetween those that are scraped andthose that are not; and use specific dollaramounts rather than the general stan-dard of “materiality.”

According to the ABA, in 2012 only 28percent of private M&A deals over $17million contained some materialityscrape. Other studies have suggestedgreater frequency. The trend is that ma-teriality scrape provisions are on the rise.

Query whether the pressure from buy-ers to include materiality scrapes isdriven by higher M&A multiples, makingbuyers more wary since they are paying“top dollar.”

Attorney-client privilege in M&AWho owns the attorney-client privi-

lege in an acquisition? Last year’s Great Hill Equity case in

the Delaware Chancery held that, whena merger agreement is silent, 100 percentof the rights possessed by the targetpasses to the survivor, including rights to

assert attorney-client privilege. That means that the buyer gets to see,

and bring suit based on, privileged disclo-sures the seller gave to counsel. The issuewould not arise in asset deals; a list oftransferred assets typically would not in-clude the seller’s attorney-client privilege.

Specific language negating transfer ofthe attorney-client privilege to the surviv-ing merger partner should become stan-dard in well-drafted merger M&As. Thatmay solve the technical problem, butleaves the problem of actual access bythe survivor to the seller’s privileged ma-terials, regardless of contract terms. Howmany sellers are assiduous in removingphysical files that are privileged? Further,as anyone familiar with electronic litiga-tion discovery is aware, purging a com-puter system is easier said than done.

While agreement drafting can assertthat no accidental physical or electronictransfer of privileged information to theacquiror constitutes waiver of the seller’sattorney-client privilege, the embarrass-ment (or worse) to target management,who often end up working for the ac-quiror, remains significant.

There also is a choice of law issue.Not everything is controlled by Delawarelaw, so the law in deal-appropriate juris-dictions must be consulted.

At the end of each year, some issuesin corporate law get resolved, but othersare fuzzed up even further. As ever, thereis no substitute for remaining current.

Stephen M. Honig is a partner at Duane Mor-ris in Boston.

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