Editor: Would you share with us your general reaction to the hypothetical on page 3?
Thompson: Three things come to mind. The first is that general counsel should not permit himself to be driven by someone else's last minute deadline. The sense of urgency that the reporter injects into the process serves to derail in-house counsel here. The second is the extreme importance of never saying anything publicly in the absence of absolute certainty. The third is need for every public company to have a plan in place that will provide it with at least some chance of responding effectively to unexpected events, and one which countenances working with governmental and regulatory agencies, rather than reacting against them.
Today every public company must expect to be sued, whether fairly or unfairly, and class action law suits without any merit whatsoever are common. The larger the company, the more important it is that they be prepared to deal with these exigencies on a periodic and ongoing basis. We advise our clients to have a plan of action in place so that they are not trying to address, in the first instance, the kinds of issue you raise in your hypothetical as and when they arise. In the absence of a plan, it is simply impossible to come up with an immediate response to this type of fast-breaking crisis that accounts for all possible contingencies. Such a plan should incorporate input from the company's investor relations staff, from public relations and from outside counsel as well as from the company's legal department. In addition, and as part of the plan, it is important for counsel to understand that, in today's climate, regulators routinely regard the public statements of public companies as a form of sales pitch. In the hypothetical, a statement made early on and without much thought leads to certain complications. Nothing said is actually incorrect, but the statement is made on the spur of the moment and without the benefit of having read the complaint. The better practice is to say nothing that you are not absolutely sure of and can prove as true. Under these circumstances, the appropriate statement should have been something like, "We have just been made aware of the complaint, but we have not seen it. The allegations appear to be somewhat far-fetched, but we have to review the complaint. When we have done so, we will have a response in due course." A categorical denial, without the benefit of an internal investigation, can come back to haunt you. In a large enterprise, in particular, there are always people - in remote locations or embedded in their own undertakings - doing things of which general counsel has no knowledge.
Editor: In the past, it was automatic to deny the merits of such allegations immediately. Today this could be absolutely the worst thing to do.
Thompson: When the denial turns out to be mistaken, or even just a little imprecise, the company is on the defensive from that point forward. The potential for a public relations disaster is serious because the company is damaged - perceived as unreliable - in the eyes of every constituency it hopes to please: the general public, potential investors and the regulators.
There are circumstances when the filing of a class action lawsuit can have a significant impact on the company's stock price. Our experience, however, is that this is the exception, not the rule. Typically, there is no need for an immediate reaction to such a filing. The market is good at evaluating the materiality of a class action lawsuit, and stock prices usually recover fairly quickly from the initial announcement of such a suit. A public denial on the part of the company is rarely a matter of urgency and always benefits from a careful investigation and careful wording.
The other thing that strikes me about the hypothetical is the need to take a strong proactive line with government and the regulators in the event of allegations of wrongdoing of any kind. Here it is a class action lawsuit, but it might just as well be a whistleblower alleging a non-disclosure in a securities context or improper trading. It is of paramount importance that the company share information on a voluntary basis and do everything possible to cooperate short of damaging its own position in the pending lawsuit.
Editor: How does corporate counsel go about taking a proactive line with the regulators?
Thompson: Corporate counsel must identify those regulators who need to be addressed and, where appropriate, bring in outside counsel best suited to help deal with them. In confronting an allegation of wrongdoing, corporate counsel must realize that today the regulators routinely request disclosure of attorney work product. One of the most effective ways of dealing with this is to be there as early as possible, sharing information, making the regulators believe they can trust you, and working with them to avoid undermining your position in the suit.
Editor: Are there ways of sharing such information with regulators without giving it to the plaintiff?
Thompson: Yes. By working with regulators as soon as an issue arises, and by anticipating their demands and thereby creating goodwill, corporate counsel can establish a relationship in which the regulators are sensitive to a corporation's need to maintain confidentiality. This can result in maintenance of a strong record upon which to base a claim of no waiver of privilege or other protection with respect to particularly sensitive matters. In addition, some regulators have shown an increasing willingness to enter into confidentiality agreements. While such agreements are by no means airtight, they can be of assistance down the road when confronting an argument that privilege has been waived.
Published July 1, 2005.
