In the United States, criminal and regulatory investigations often generate parallel civil proceedings. Such proceedings often take the form of class actions, in which a lead plaintiff seeks to prosecute claims on behalf of a large number of similarly situated plaintiffs who allege damage resulting from the conduct under investigation. Plaintiffs may also attempt to bring suits against alleged wrongdoers, such as corporate officers and directors, derivatively on behalf of a company.
Civil proceedings that are generated in connection with an investigation can precede the investigation, follow on from investigative findings or, frequently, arise during the course of the investigation. Public disclosures by a company about the existence or results of a criminal or regulatory investigation and other similar publicly available corporate announcements frequently give rise to civil claims relating to the conduct at issue. Civil proceedings can also bring about investigations in circumstances, for example, where a civil suit challenges conduct that was unknown to the relevant authorities.
It can be challenging to manage parallel civil proceedings that are governed by their own procedural rules and can interfere with the pacing of an investigation or create other tensions with the investigative process. This chapter addresses issues in parallel proceedings that may arise in connection with complex investigations. Similar considerations may apply when dealing with a criminal investigation and parallel civil enforcement proceedings brought by regulatory agencies such as the Securities and Exchange Commission or the Commodity Futures Trading Commission.
34.2Stay of proceedings
When a company under investigation is also involved in ongoing civil proceedings (before a court or an arbitral tribunal) that relate to the conduct under investigation, a party or the government may seek to stay those proceedings pending the outcome of the investigation. While this is often desirable to avoid tension between a civil litigation and an investigation, it is difficult to achieve. A court’s decision to grant a stay is, as a general matter, entirely discretionary.
While courts in the US are sensitive to the potential prejudice to an individual or entity under investigation that is forced to proceed with civil litigation about the same conduct, and in particular the potential that an individual’s constitutional right against self-incrimination may be compromised, courts are nevertheless hesitant to stay civil cases simply because an investigation is pending. If a stay is granted, a court may impose conditions and limitations, including limitations on length. A stay of civil proceedings will freeze the proceedings until the stay expires or the court issues a further order. A party can apply to have a stay lifted at any time.
In criminal investigations or proceedings, the government may seek a stay to protect the criminal process, including limiting a company’s ability to use civil litigation to obtain broader discovery than is available in a criminal case. For instance, in a parallel civil case, putative or actual defendants in the related criminal proceedings can seek the deposition testimony in the civil case of key witnesses that the government intends to rely on in the criminal case, providing a significant advantage to defendants that would not otherwise exist in the absence of the civil case. Courts have discretion to impose full or partial stays of the civil proceedings.
In the United States, class actions are a centrepiece of complex civil litigation, particularly in securities and antitrust litigation, as the misconduct alleged often impacts large markets and large numbers of entities and individuals. More often than not, a complex criminal or regulatory investigation will generate class action litigation.
In the United States, class actions may be brought on behalf of similarly situated claimants. There are many scenarios in which class actions may be certified, but class actions typically involve cases where there are a significant number of claimants and common legal issues predominate over any individualised issues, so that the litigation can fairly be prosecuted on a representative basis. A class action is litigated similarly to an individual action, except that the plaintiff must file a motion asking the court to certify the class, and there may be litigation about which plaintiff will be lead plaintiff in the action. The defendant may oppose class certification on many grounds, including that too many individualised issues exist. Motions for class certification are moving to the later stage of cases, and, unless the motion for class certification is denied, the case will proceed on a class basis, with a representative plaintiff leading.
34.3.2Class actions following release of reports, findings, etc.
In the United States, class actions against a company arise frequently following the release of internal investigation reports, regulatory findings or entry into a deferred prosecution agreement with the government, as these documents can provide a road map for a civil plaintiff’s claims and are frequently cited in class action complaints as support for the plaintiff’s allegations. When such documents become available publicly, the risk is quite high that one or more civil class actions will follow. If a class action survives a motion to dismiss based on threshold legal infirmities or pleading deficiencies and proceeds to discovery, a class action plaintiff will frequently demand that the company produce all materials that have been provided to the government, in addition to other disclosure requests under broad US discovery requirements.
The release of such internal investigation reports, regulatory findings or a deferred prosecution or plea agreement may also cause potential class action plaintiffs to seek documents a company has provided to the government in connection with an investigation directly from the government through a Freedom of Information Act (FOIA) request. Indeed, a FOIA claim could be pursued even before internal investigation reports, regulatory findings or a deferred prosecution agreement become public, provided a claimant has a basis to make a request.
As a general matter, FOIA allows members of the public to access records from any federal agency. Most states have equivalent laws. FOIA is subject to a number of exemptions, which should be considered any time a FOIA request is directed to company information in the government’s possession. These exemptions, while narrowly construed, include certain exemptions for records or information compiled for law enforcement purposes as well as exemptions for documents relating to reports prepared by, on behalf of or for the use of agencies that regulate financial institutions. It is therefore rare for FOIA requests to be granted during an investigation. Production of documents to government entities typically is accompanied by a request for FOIA exemption. In practice, prosecuting an FOIA claim can be a slow and cumbersome process.
Federal class actions are governed by Rule 23 of the Federal Rules of Civil Procedure. Before a judgment in a class action can issue, a class must be certified. Because of the high standard for class certification and the evidentiary support required, class certification motions are typically filed at the conclusion of the discovery phase. Class certification is often hotly contested. To achieve certification, the proponent of class status must show that the class is so numerous that joinder of all members is impracticable, there are common questions of law or fact, the claims of the proposed representative of the class are typical of the claims of the class as a whole and the proposed representative will adequately represent the interests of the class.
Once these criteria are satisfied, the action must fit into one of three categories: (1) suits where separate actions might cause a risk of inconsistent judgments or where assets available to pay claims are limited; (2) suits seeking injunctive relief where any monetary remedy would be only incidental to the injunctive relief; and (3) suits seeking money damages. Most cases fall within the third category. For these cases, in addition to the criteria set forth above, the proponent of class status must show that the common questions of fact or law predominate, and that class treatment is the superior method for adjudication.
Other than the certification phase, the case proceeds as would an ordinary civil litigation. Typically, this will involve a motion to dismiss at the pleadings stage seeking to end the case based on legal infirmities or at least narrow the claims and issues in dispute. If any claims survive, the parties will proceed to discovery, which involves the exchange of typically voluminous documents and the deposition testimony of witnesses under oath. Witnesses who may be implicated in misconduct may refuse to testify on the grounds that doing so would infringe their constitutional right against self-incrimination.
Discovery is typically followed by motions for summary judgment based on a lack of material facts in dispute. If the motion for summary judgment fails, the case proceeds to trial. Settlement of federal class actions must be approved by the court, and must be on notice to all potential class members, who are given the opportunity to opt out of the settlement. If a class was not certified prior to settlement, a streamlined class certification motion is filed in connection with seeking approval of the settlement. Settlement agreements often provide a settling defendant the right to back out if too many class members opt out of the class.
34.3.4Class Action Fairness Act of 2005
The Class Action Fairness Act of 2005 (CAFA) greatly expanded the federal courts’ jurisdiction over class actions by relaxing the requirements for federal subject matter jurisdiction. This allows defendants to remove class actions from state courts to federal courts, and to consolidate multiple state proceedings into a single federal court class action. As federal courts generally have more experience of administering class actions than state courts, this outcome is often seen as desirable.
CAFA requires courts to scrutinise class action settlements involving corporations more closely. CAFA also requires notice of settlements to be provided to state attorneys general so they may intervene to protect citizens who are class members.
34.3.5Securities class actions: PSLRA & SLUSA
There are two statutory schemes applicable in securities class actions aimed at curtailing frivolous securities lawsuits: the Private Securities Litigation Reform Act of 1995 (PSLRA) and the Securities Litigation Uniform Standards Act of 1998 (SLUSA).
Among other changes to the securities litigation landscape, the PSLRA makes it more difficult for a plaintiff to plead securities fraud by requiring the plaintiff to plead false statements with particularity, establish a strong inference that each defendant knew the statements alleged were false when made, and allege loss causation. In addition, and importantly from a defendant’s perspective, the PSLRA stays discovery until the court has determined, usually following a motion to dismiss, whether a claim for securities fraud has been adequately stated.
SLUSA was enacted to combat efforts by plaintiffs to avoid the strictures of the PSLRA by pursuing state law claims, such as common law fraud, through class actions in state courts. Broadly speaking, SLUSA bars claims, whether filed in state or federal court, that allege fraud under state law in connection with the purchase or sale of securities from being pursued in a class action. SLUSA can be a powerful tool in limiting the scope of claims in a securities class action at the outset.
34.3.6Other considerations: class action waivers in arbitration agreements
In recent years, the United States Supreme Court has held that class action waivers in arbitration agreements are enforceable under the Federal Arbitration Act (FAA). Thus, companies should consider subjecting claims by counterparties, customers or employees to arbitration and should include class action waivers in the arbitration agreement. Arbitration agreements typically provide that proceedings will be confidential, and in the absence of access to the class action device, a claimant with meritless claims or claims with low monetary value may be less inclined to pursue them.
34.4.1Law and procedure
In general, under state law, members or shareholders of a company can bring a derivative claim alleging harm to a company and seeking relief on its behalf. Before bringing a claim, a plaintiff must generally show that it has made a demand on the company to bring the claim in its own name and the company has refused to do so, or that making such a demand would be futile. The plaintiff must name the company as a nominal defendant in the suit, and the company will thereby have the right to participate. Recovery in a derivative action flows to the company.
34.4.2Practical considerations: indemnification of officers and directors
Typically derivative claims are brought by minority shareholders against majority shareholders or corporate officers and directors. Corporate officers and directors are often entitled to indemnification by the company for such suits pursuant to a company’s by-laws, subject to any requirements or restrictions that may be imposed by state law, and this is therefore an important consideration at the outset of any derivative suit. Ordinarily, officers and directors cannot claim indemnification for bad faith conduct, so where a company’s board of directors determines that bad faith conduct has occurred – which determination is highly likely if criminal acts or regulatory misconduct are admitted by officers and directors, such as through a guilty plea – the question of indemnification becomes complicated and often requires careful parsing of whether the amounts claimed are subject to indemnification notwithstanding admission of unlawful acts. The outcome will depend both on the statutory scheme in the state whose laws govern the relationship between the director or officer and the company, as well as the breadth of corporate reimbursement provisions of the relevant insurance policy. Where a determination of whether the conduct at issue rose to the level of bad faith has not yet been reached, officers and directors often have the right to have their legal costs advanced by the company, pending such determination.
34.5Other private litigation
Individuals who may be class members in a class action may opt out of participation in the class and pursue claims individually, which can result in a company having to litigate duplicative claims in multiple jurisdictions. To avoid a significant number of opt-outs, a company can attempt to achieve a class action settlement with terms attractive to class members.
Purchasers of securities of a company under investigation may, once the investigation comes to light, claim that they were defrauded into purchasing securities by material misstatements made by the company while it knew the investigation was pending. Such claims can be brought on an individual or class basis, subject to the limitations of the PSLRA and SLUSA.
34.5.3Negative impact on contract enforcement rights
Conduct that is illegal or contrary to public policy (and which may, therefore, also be the subject of an investigation or litigation) may render related contracts entered into by a company void or voidable.
The common law doctrine of illegality prevents a party to a contract from enforcing its contractual rights and remedies in certain circumstances, where the contract is tainted by conduct that is illegal, or contrary to public policy (some contracts may also be rendered unenforceable by statute). The law in this area is highly dependent on facts and circumstances, and courts weigh a variety of factors in determining whether to enforce the provisions of an illegal contract.
34.5.4Specific provisions in commercial contracts
Parties often include specific provisions in their commercial contracts (including finance documents) aimed at preventing, or providing contractual protection in relation to, illegal behaviour (e.g., corruption) involving a party to the agreement. Accordingly, the fact of an investigation (or related proceedings), or conduct that is the subject of an investigation, may have adverse contractual consequences for a company. Such consequences will depend on both the investigation and the specific conduct under investigation, as well as the contractual provisions. Such provisions may include:
- to comply with certain applicable laws and regulations;
- to have in place and comply with specified policies (such as anti-bribery and corruption policies);
- to maintain accurate records of payments made in relation to the contract;
- in relation to subcontractors (for instance, to ensure that subcontractors comply with requirements equivalent to those imposed on the company), and that may impose responsibility on the company for any non-compliance by a subcontractor with such requirements;
- to report generally on compliance to counterparties on an ongoing basis, which could include requiring the provision of a confirmation signed by an officer of the company or audit rights; and
- to report the occurrence of certain events to counterparties. These could include dealing with a public official in connection with the performance of the contract, receiving a request for a payment (or other advantage) in connection with the performance of the contract, or the commencement (or threat) of an investigation into the activities of the company;
- representations (given by the company, and which may be repeated) that it has not been investigated for or convicted of certain offences (and that no proceedings or investigations are pending or threatened), or which relate to the accuracy and completeness of information provided to contractual counterparties;
- termination rights for counterparties if the company breaches (or, potentially, if the counterparty reasonably suspects a breach of) certain obligations, or if the company makes a false representation or is convicted of certain offences; and
- indemnities (for the benefit of counterparties) in respect of loss suffered as a result of a certain breaches of the contract by the company.
A company may face parallel litigation brought by its contractual counterparties in reliance on such provisions. A company may also be able to invoke such provisions against its counterparties, although where a company is under investigation, it may be barred from taking the position in civil proceedings that its counterparty has engaged in illegal activity if the company is also exposed for its counterparty’s conduct, as the company would be in pari delicto or, in other words, equally guilty such that the court will refuse to intercede in a dispute between them.
34.5.5Mergers, acquisitions and investments
Mergers, acquisitions and investments can present particular risks for companies. Illegal behaviour in the target company (or its subsidiaries, or other related companies and persons) may have various negative consequences for an acquiring entity, which can include financial consequences (for example, the target may have been overvalued); legal consequences (both civil and criminal) for the target, the acquiring entity and relevant individuals (including officers of both entities), along with associated legal costs; and other practical consequences (for example, reputational damage, which may have a consequent effect on business).
As a result, acquiring entities will often take precautions to minimise these risks. Typically, these include conducting proportionate pre- and post-acquisition due diligence of the target and its business, including without limitation review of all of the target’s business dealings and third-party contracts, implementing compliance programmes and including appropriate protections in the relevant contractual documentation.
In relation to the latter, warranties, representations and indemnities designed to provide such protection are frequently included in share purchase agreements. The scope of protection will depend on the particular provisions negotiated, but they can be widely drafted, such that they encompass the conduct of, for example:
- the target and its subsidiaries;
- directors, officers, employees, significant shareholders, affiliates, agents, and distributors of the target and its subsidiaries;
- those associated with or acting on behalf of the target and its subsidiaries; and
- those who perform services for or on behalf of the target and its subsidiaries,
and may cover areas such as:
- compliance with laws generally;
- compliance with anti-money laundering laws and standards;
- compliance with anti-bribery and corruption laws and standards;
- debarment from public contracts;
- sanctions (including whether such persons are, have been, or are likely to become, subject to sanctions); and
- whether such persons are (or have been) subject to an investigation or any proceedings, or whether an investigation or any proceedings in respect of such persons are pending, threatened, contemplated or even likely.
Accordingly, the fact of an investigation (or related proceedings), or conduct which is the subject of an investigation, may give the acquiring entity contractual rights it can seek to enforce (including through litigation or arbitration). The acquiring entity should, therefore, review all of the target’s business dealings and third-party contracts for potential exposure, which may include consideration of the target’s in-house and external legal advice relating to such dealings and contracts. Again, however, care may need to be taken in doing so for the reasons given at Section 34.5.4.
34.5.6Employment law, defamation and whistleblowing
Investigations can have employment law consequences for a company. Employees may seek to bring claims against their employers arising out of the subject matter of an investigation, or how the investigation is handled; conversely, an employer may wish to take action against an employee implicated in the conduct under investigation. Employees may also pursue claims for defamation based on statements a company may make about their conduct either internally or to the government.
In addition, to the extent that allegations have been made by whistleblowers, companies under investigation or conducting investigations should be careful to respect whistleblower rights to avoid claims for breach of the protections afforded to whistleblowers.
34.6.1Reliance by the court on statements of facts in authority findings
Parties will often seek to rely on findings made by the government as the result of an investigation in subsequent civil litigation. To the extent facts are admitted in, for example, a deferred prosecution agreement or a guilty plea, those facts will generally be admitted into evidence as party admissions under US evidentiary rules. Deferred prosecution agreements may also specifically prohibit a company from denying certain facts. In addition, to the extent a party discloses otherwise privileged information to the government in connection with a deferred prosecution or plea agreement, there may be a privilege waiver by that party in any related civil litigation.
34.6.2Reliance by the authority on findings of a court
Conversely, facts discovered during the course of civil litigation may draw the attention of the government, and the government may rely on the findings in a civil case as grounds for opening an investigation or taking some other enforcement action. Accordingly, these risks may be relevant considerations for a company when considering and implementing its litigation strategy in civil proceedings. In addition, conflicted representation and privilege issues may arise if the interests of the company and its employees are not aligned. For example, company counsel may represent a key employee witness at deposition in a civil case, but in the context of a subsequent criminal investigation may be conflicted from continuing the representation should the employee’s interests diverge from the company’s interests, such as where the company wishes to disclose misconduct to the government but the employee wishes to invoke his or her Fifth Amendment privilege against self-incrimination.
34.6.3Collateral use of disclosed documents
In the United States, the scope of discovery in civil cases is very broad, and parties in federal civil litigation must typically disclose all potentially relevant non-privileged evidence. Confidentiality of a relevant document is not a justification for refusing to disclose it, though confidential documents are often protected from public disclosure by protective orders.
As a result, a company involved in civil proceedings may be required to disclose sensitive documents to an opponent, including documents relevant to an investigation or even unprivileged investigation material. Where an adversary is aware of an investigation, it will typically demand production of any document that has been given to the government, and in practice, apart from privileged documents, such documents are produced. In making a production to an adversary, a company should seek a protective order that requires the adversary to maintain the information as confidential, refrain from using the information for any purpose other than litigation, seek to have the information filed under seal when reference to the information is made in court filings, and destroy the information at the conclusion of litigation.
34.7.1Coordination with internal investigations team
It is important that those within the company responsible for managing parallel civil litigation are in constant communication with the internal team responsible for dealing with investigations, to ensure that:
- a clear, holistic strategy is developed for managing the investigations and parallel civil proceedings, and anticipating areas of potential risk (e.g., civil claims that may arise, but have not yet been commenced);
- both teams understand, and evaluate the risks of, new developments in both the criminal and civil context; and
- any proposed action by the company or associated persons, in the civil or criminal context, is carefully analysed to determine the potential repercussions for all other proceedings and investigations.
Issues can arise, for instance, where:
- factual admissions are made in civil proceedings (such as in an answer or in interrogatory responses) that may undermine the defence of the criminal case;
- an authority seeks disclosure of privileged documents from the company in circumstances where the company may wish to assert privilege over those documents in subsequent civil proceedings;
- witnesses, whose testimony may be important for the company’s case in civil proceedings, are under investigation, or have been classified as suspects, by the authorities, and have concerns about self-incrimination. Depending on the circumstances, employment proceedings may also be ongoing in respect of such individuals;
- pleading possible defences (such as illegality) in civil proceedings, which may strengthen the company’s case in those proceedings but would undermine the position it has taken in relation to an investigation; or
- as part of deferred prosecution agreement negotiations, there is a risk that matters an authority seeks to include in an agreed statement of facts could be relied on against the company in parallel civil proceedings.
In particular, close coordination is necessary between the company’s criminal and civil legal advisers to ensure consistency of approach.
34.7.2Privilege waiver and disclosure obligations
During an investigation, documents entitled to privilege or work-product protection may be shown or provided to relevant authorities, often to demonstrate co-operation. These include not only privileged communications between attorney and client but also documents, such as witness interview notes, generated by external counsel. Depending on the applicable privilege law, which can vary widely from state to state and even among the federal circuit courts of appeal, sharing such information will not necessarily constitute a general privilege waiver for the purposes of subsequent civil proceedings (particularly if it is made clear that this is done on a limited basis), although it may lead to adverse consequences, as the company will lose a degree of control over the information in the documents. In cases involving multiple jurisdictions, it is critical for a company to obtain advice on all potentially applicable privilege laws prior to showing potentially privileged documents to the government, as the effect of showing or providing a potentially privileged document to the authorities may vary depending on which law governs questions of privilege.
Difficult issues can arise for companies when attempting to negotiate settlement of global investigations, which can involve a variety of regulatory and prosecuting authorities across a range of different jurisdictions. Parallel existing (or potential) civil litigation or arbitration adds a further layer of complexity to the analysis.
During settlement negotiations with the authorities, companies should be aware of the risk that a settlement, as well as any associated press coverage or documents (such as a statement of facts in a deferred prosecution agreement), may raise awareness of potential civil claims, and in the class action context will likely be relied on to support claims. Documents pertaining to the negotiation of a settlement, including communications with the relevant authority and drafts of the settlement, may be discoverable by plaintiffs in any such civil action. Accordingly, and to the extent possible, companies should avoid admitting liability as part of any negotiated settlement with the government; and, if an admission of liability is required, they should ensure that it is narrowly circumscribed. Companies should further consider what they convey during the course of settlement discussions and how they communicate such information.
Settlement of civil claims can also carry risks for a company under investigation, in particular class action settlements, which are public. Companies should avoid admitting liability as part of any negotiated civil settlement. In addition, the government may perceive certain types of civil settlements (particularly settlements with potential witnesses for substantial sums) as suspect.
1 Eugene Ingoglia and Anthony M Mansfield are partners at Allen & Overy LLP.
2 See Twenty First Century Corp. v. LaBianca, 801 F. Supp. 1007, 1010 (E.D.N.Y. 1992) (citing Kashi v. Gratsos, 790 F.2d 1050, 1057 (2d Cir. 1986)). Courts balance a number of factors in determining whether to grant a stay, including ‘(1) the private interest of the plaintiffs in proceeding expeditiously with the civil litigation as balanced against the prejudice to the plaintiffs if delayed; (2) the private interests of and burden on the defendant; (3) the convenience to the courts; (4) the interest of persons not parties to the civil litigation; and (5) the public interest.’ Id. (internal quotations and citation omitted).
3 Corporations do not enjoy the constitutional privilege against self-incrimination.
4 Fed. R. Civ. P. 23(c).
5 FOIA, which is codified at 5 U.S.C. § 552, is a law that allows members of the public to seek access to information in the possession of the government.
6 ‘State law’ in this chapter refers to New York law unless otherwise noted. This chapter does not purport to address the potential variances in the laws of all 50 US states.
7 See 17 C.F.R. § 200.83 for a description of confidential treatment procedures under FOIA.
8 Designation of information as confidential under FOIA does not necessarily render the information unavailable for purposes of discovery in civil litigation. See, e.g., Friedman v. Bache Halsey Stuart Shields, Inc., 738 F.2d 1336, 1344 (D.C. Cir. 2009) (‘[I]nformation unavailable under the FOIA is not necessarily unavailable through discovery.’); see also In re Subpoena Duces Tecum, 439 F.3d 740, 753-54 (D.C. Cir. 2006). (‘FOIA’s exceptions to disclosure limit only the right to information conveyed pursuant to that statute and other limitations on the Commission’s authority to publish information . . . do not alter the Commission’s duty to comply with lawful subpoenas after notice to the party whose information is sought.’) (Citations omitted.)
9 Fed. R. Civ. P. 23(a).
10 Fed. R. Civ. P. 23(b).
12 U.S. Const. amend. V.
13 Fed. R. Civ. P. 56(a). (‘The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’)
14 28 U.S.C. §§ 1332(d) et seq.
15 15 U.S.C. §§ 78u-4, 78u-5 et seq.
16 15 U.S.C. §§ 77p, 78bb et seq.
17 There is an important exception to this general rule. The United States Supreme Court recently held that SLUSA does not prohibit state court class actions arising from a company’s initial public offering, which is governed by the 1933 Securities Act, as distinct from a company’s subsequent offerings, which are governed by the 1934 Securities and Exchange Act, and are covered by SLUSA. See Cyan Inc. v. Beaver Cnty. Employees Retirement Fund, 138 S. Ct. 1061 (2018).
18 See DirecTV v. Imburgia, 136 S. Ct. 463 (2015); see also AT&T Mobility v. Concepcion, 563 U.S. 333 (2011). See also Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018) (holding that arbitration agreements providing for individualised employee proceedings against employers must be enforced, notwithstanding provisions in statutory schemes to promote collective employment actions by employees). The Federal Arbitration Act is codified at 9 U.S.C. §§ 1 et seq.
19 See, e.g., N.Y. Bus. Corp. L. § 626 (authorising shareholder derivative suits).
20 When such a demand is made, companies sometimes form a ‘special litigation committee’ or ‘demand review committee’ consisting of disinterested and independent directors to determine whether pursuing the claim proposed by the shareholder is in the company’s best interests. A special litigation committee’s determination that such a claim should not be brought can provide a strong defence to defendants in a shareholder derivative action.
21 See, e.g., N.Y. Bus. Corp. L. § 722 (authorising indemnification of corporate officers and directors); 8 Del. C. § 145 (same).
22 See, e.g., Denburg v. Parker Chapin Flattau & Kimpl, 82 N.Y.2d 375, 385 (1993).
23 An indemnity against a criminal liability may, however, be unenforceable for public policy reasons.
24 See Kirschner v. KPMG LLC, 15 N.Y.3d 446 (2010).
25 The Department of Justice (DOJ) recently issued an opinion addressing factors that may be relevant in determining whether and how the DOJ would seek to impose post-acquisition successor liability on an acquirer for pre-acquisition Foreign Corrupt Practices Act (FCPA) violations by its target. See US Department of Justice, Foreign Corrupt Practices Act Review, No. 14-02 (7 November 2014). The DOJ ‘encourages companies engaging in mergers and acquisitions to (1) conduct thorough risk-based FCPA and anti-corruption due diligence; (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable; (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners; (4) conduct an FCPA-specific audit of the acquired entity as quickly as practicable; and (5) disclose to the Department any corrupt payments discovered during the due diligence process.’ Id. at 3-4.
26 Companies should also be aware of the risk that illegal behaviour (for example, bribery) may occur during the merger, acquisition or investment transaction.
27 However, see footnote 23 above in relation to indemnities against criminal liability.
28 An acquiring company should be conscious, however, of the potential for a privilege waiver by the target company if such legal advice is shared outside the context of litigation. The law on this subject varies from state to state, but in New York, for example, pre-closing communications between counsel for a target company and its acquirer are not privileged unless they relate to pending or anticipated litigation. See Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616 (2016).
29 See, e.g., Mott v. Anheuser-Busch, Inc., 910 F. Supp. 868, 874-78 (N.D.N.Y. 1995) (granting summary judgment in favour of employer on employee defamation claim stemming from employer’s investigation and subsequent reporting of employee’s illegal conduct, and finding that the investigation was conducted in a ‘thorough and responsible manner’ because it was initiated immediately following reports of wrongdoing, included interviews with all relevant parties and an extensive review of books and records, and was undertaken by a team including both inside and external counsel).
30 A settlement with a civil regulator may be reached without the company (or the individual) admitting or denying the regulator’s findings set forth in the settlement order. In this circumstance, the regulator’s findings are generally inadmissible in subsequent civil litigation. See, e.g., Wilson v. Parisi, 2009 U.S. Dist. LEXIS 3970, at *6-7 (M.D. Pa. 21 January 2009) (excluding consent decrees under Federal Rule of Evidence 408); see also Bowers v. NCAA, 563 F. Supp. 2d 508, 536 (D.N.J. 2008) (holding Rule 408 ‘plainly applicable’ to the consent decree at issue and refusing to allow the plaintiff to use a consent decree between the defendant and the Department of Justice as evidence of the defendant’s liability for the conduct underlying the plaintiff’s claim); Carpenters Health & Welfare Fund v. Coca-Cola Co., 2008 U.S. Dist. LEXIS 112503, at *22 (N.D. Ga. 23 April 2008) (granting motion to exclude SEC civil consent order from evidence); In re Blech Sec. Litig., 2003 U.S. Dist. LEXIS 4650, at *25-30 (S.D.N.Y. 26 March 2003) (finding SEC consent judgments inadmissible under Rule 408); Safford v. St. Tammany Parish Fire Prot. Dist. No. 1, 2003 U.S. Dist. LEXIS 6513, at *16 (E.D. La. 11 April 2003) (holding that consent decree cannot be used as evidence of prior liability).
31 See, e.g., N.Y. Unified Court System, Rules of Professional Conduct, Rule 1.7(a)(1) (a lawyer cannot concurrently represent two clients with differing interests).
32 Fed. R. Civ. P. 26(b)(1).
33 As a condition for the disclosure of otherwise privileged information, a regulator may stipulate that it will not assert a waiver of applicable privilege in any subsequent enforcement action. However, a stipulation by a regulator does not bind third parties.
34 Federal Rule of Evidence 408 limits the admissibility of evidence pertaining to settlements and their negotiation. It does not, however, speak to the discoverability of such information. Numerous courts have addressed the availability of a ‘settlement privilege’ to limit discovery of settlement related documents, reaching different conclusions. Compare Stockman v. Oakcrest Dental Center P.C., 480 F.3d 791 (6th Cir. 2007) (applying settlement privilege), with Morse/Diesel, Inc. v. Fidelity & Deposit Co. of Maryland, 122 F.R.D. 447, 449 (S.D.N.Y. 1988) (declining to recognise settlement privilege).