A bill before the U.S. Congress may make companies reconsider how they recover legal fees from their officers and directors swept up in government investigations, at least in some instances.
When a corporation finds itself under civil or criminal regulatory investigation, it normally begins an internal investigation, overseen by outside lawyers, so that the company can keep the inquiry’s results confidential by invoking attorney-client privilege. For such companies, legal fees – including the cost of legal fees for any officers or directors accused of wrongdoing – can quickly run into the hundreds of millions of dollars. A March 5 article in the New York Times’ DealBook feature, by Professor Peter J. Henning of Wayne State University Law School, describes this process.
As examples of how much these investigations can cost, Henning cites Avon Products, which spent nearly $250 million, from 2009 to 2011, on internal investigations of possible violations of the Foreign Corrupt Practices Act; News Corporation, which spent more than $100 million on legal services in the second half of 2011, in the wake of telephone hacking and corrupt payment scandals in Britain; and Fannie Mae which paid nearly $100 million in legal fees for three former executives between 2004 and September 2011, according to a report by the inspector general of the Federal Housing Finance Agency.
The indemnification provision in the corporate articles of publicly traded companies requires that an officer or director repay any advances, such as for legal fees, if the person is found liable “for breaching a fiduciary duty or engaging in conduct designed to harm the corporation.” Henning, however, notes that while insurance can cover some of the cost of the legal fees, the “commitment [to repay the legal fees] is often not worth much once large legal fees have been dispensed because the person may not have the resources to repay the company.”
While it is very difficult to recover such fees, a bill before the U.S. Congress might serve as a model for publicly traded companies seeking to do so. In July 2011, Representative Randy Neugebauer (R-TX) introduced the GSE Legal Fee Reduction Act (H.R. 2428), which would require any employee of Fannie Mae or Freddie Mac accused of “fraud, moral turpitude, or breach of fiduciary duty” to “post collateral, security, bonding, or other assurances of repayment” in order to be advanced legal fees.
Although the bill applies only to Fannie Mae and Freddie Mac, if it becomes law, many corporations can be expected to look for any lessons that might be learned from its implementation. However, according to Henning, most companies will be reluctant to endorse any similar mandatory mechanism – even one designed to help them reduce their legal costs – which may place an additional financial burden on their own officers and directors.
Posted by Marianne Purzycki