While a crisis at a public company can take many shapes, be it a government investigation, a major lawsuit or allegations of fraud, there are several steps the company board will need to take.

 

Firstly, the company board needs to decide whether or not to enlist outside help in the form of an independent committee of lawyers who can advise on the legal issues and best course of action – including the public response, a litigation defence and how to deal with the relevant regulators.

 

In the US, Francisco Cestero of Cleary Gottlieb Steen & Hamilton LLP says it’s common practice to have an independent investigation. Indeed, Manuel Garciadiaz of Davis Polk & Wardwell LLP says that the practice has developed sufficiently to see groups of lawyers focussing on the area. He says that a US company would either instruct its regular corporate counsel or, in the case of very serious allegations, the special committee handling the crisis would hire an independent group of lawyers.

 

Companies are also likely to seek external advice in Chile, says Cristóbal Eyzaguirre of Claro y Cía. For example, if a listed company has a problem with ramifications abroad it might take advice from a US lawyer, while if the issue relates only to Chile, companies will also look for guidance from local external counsel to have better protection. While it’s a new concept in Brazil, Joaquim José Aceturi de Oliveira of Souza, Cescon, Barrieu e Flesch - Advogados says boards like to enlist outside help to obtain a second opinion to help decide on the best course of action.

 

Garciadiaz says the high number of investigations in the US is driven by companies keen to avoid the regulators coming in and doing their on report. This way, the independent advisors can share the results with the regulator. Meanwhile in Brazil, the likelihood of a regulator relying on a report that is not it’s own is slim, says de Oliveira.

 

Of course, the fact that the independent lawyers’ report could be used by regulators raises questions about the protection of privileges and client confidentiality. As Eyzaguirre notes, dealing in an investigation with a regulator creates an additional burden on the external lawyer who is conducting the investigation, which blurs the line between the fiduciary duty owed to the client and the duty to conduct the investigation independently and thoroughly, and the practice is not commonplace in Chile.

 

In the US, the lawyers on an investigation team are seen as independent counsel whose fiduciary duty is to the fact finding mission. “External counsel has a duty to the audit committee whose interest is getting the facts out and not protecting management,” explains Cestero.

 

To disclose or not to disclose

 

Once a crisis is discovered, the company board needs to decide whether or not to disclose the problem to the market and the regulators. As de Oliveira notes, it depends on how the crisis emerged – was it discovered internally or announced by the regulator?

 

In the case of an internal discovery, “If the government is going to find it anyway then the recommendation is to disclose,” says Garciadiaz. “Generally the outcome is more favourable than if the problem is found out in a different way.” He points to the recent pattern in FCPA investigations, where companies that self report avoid paying fines.

 

In Chile, it depends on the matter in hand. “Ten to 15 years ago if you said lets go to authorities and report a problem of potential breach of Chilean laws the most likely advice would have been not to do it, because the authority would have to apply the most extreme fine according to local regulations,” says Eyzaguirre. Today the situation is different thanks to certain changes in legislation and different approaches of certain authorities.

 

But Eyzaguirre says the question of when to disclose is complicated for public companies in Chile in connection with government investigations as Chile does not have the number of precedents that are found in the US, for example. He says that for this reason, it’s common to look to the US for guidance.

 

In the US, Chile and Brazil, there is the option of simply disclosing material fact, but it’s likely the regulator will request more information. While there is no precedent on this issue in Brazil, de Oliveira thinks a regulator would want more details. Lawyers in all three countries agree that if the crisis at hand has impacted the public company’s financial statements in anyway, then it must be disclosed.

 

As well as keeping a clear head, there is one other golden rule for boards in times of crisis: never destroy documents. As Merino notes, “emails are never, ever deleted forever.”

 

Latin Lawyer's Corporate Finance Conference took place in São Paulo on Tuesday 19 March.

 

(Latin Lawyer)