The Yale Law Journal


Executives Do Not Need Waivers and Companies Should Not Offer Them: A Response to Mark Kressel

07 Feb 2007

Although Mark Kressel’s proposal is novel, provocative, and even enticing, it is ultimately unnecessary and unworkable to suggest that a corporation and its high-level executives should agree, at the very commencement of their relationship, to waive the corporation’s attorney-client privilege when reliance on corporate counsel’s work is necessary to defend the executive against allegations of wrongdoing. Mr. Kressel’s proposal is unnecessary because corporate directors and officers rarely, if ever, need to rely on a defense of advice of counsel when the company does not. The proposal is unworkable because it borders on reckless to agree to delegate to a third party the right to effect even limited waivers of the privilege if the impact of those waivers on the fortunes of the company, its shareholders, and other employees cannot be evaluated properly.

Mr. Kressel’s novel proposal is premised in part on the idea that corporate executives and shareholders will embrace ex ante contractual waivers because they will reduce agency costs by realigning the interests of corporate executives with those of shareholders. According to Kressel, an ex ante agreement to waive the privilege will reduce the executive’s risk of personal liability to the lower level of liability that the corporation faces and, thus, encourage the executive to take the risks that shareholders expect and desire. He also posits that ex ante contractual waivers will reduce litigation costs and uncertainty.

Mr. Kressel’s proposal is unnecessary. It is difficult to imagine how an ex ante contractual waiver could provide a meaningful incentive to corporate executives. First, the advice of counsel defense is extremely difficult to prove. The defense only can succeed if the director convinces the jury that she: (1) sought the advice of counsel in good faith, (2) made complete disclosure to counsel of all the relevant facts she knew, and (3) reasonably relied upon and followed counsel’s opinion based on those facts. Given the difficulties inherent in the defense, a contractual waiver of the corporation’s privilege is of marginal value to the executive.

Second, the likelihood that a corporation would refuse to waive the privilege if one of its executives were to interpose a valid advice of counsel defense is remote because a viable defense also redounds to the company’s benefit. The law of vicarious liability, which requires the company to account for the wrongdoing of its employees and agents, sweeps indiscriminately and broadly. Waiver, where appropriate, helps the company avoid liability. Knowing this, executives need not negotiate an ex ante waiver in their employment contracts.

Third, Mr. Kressel’s proposal is unnecessary because executives already have ample financial incentive to take bold actions for the corporation’s benefit, undeterred by potential personal liability. Most high-level executives in public companies are paid generously and their compensation is often tied to the results they achieve for the corporation. Moreover, directors and officers generally are indemnified for all legal expenses in defending against actions arising out of the good-faith performance of their duties on behalf of the corporation. Under the laws of some states, executives are even entitled to advancement of their legal expenses—a formidable right that, when triggered, is virtually bulletproof, at least in Delaware and New York. If anything, some of these incentives, which are designed to realign the interests of executives and shareholders, have been criticized for “going too far” to protect management at shareholder expense.

Perhaps because of those generous pay agreements, some high-profile executives have acted recently in ways that are too bold—rather than in the risk-averse manner that Mr. Kressel posits as a problem. Personal liability for executives can be a good thing—it serves as a necessary and appropriate check against wrongdoing. Although bad behavior may sometimes benefit the corporation’s shareholders in the short term, wrongdoing like fraudulent financial reporting harms both the shareholders and the company, often catastrophically.

Mr. Kressel’s proposal is unworkable. The very act of binding the company ex ante to waive its privilege may be a breach of fiduciary duty to its shareholders. Waiver is improper if it furthers the executive’s interest at the expense of the company and to the detriment of shareholders.

Even if an ex ante contract is not a breach of fiduciary duty, the waiver agreement may engender as much uncertainty as it resolves. For example, what would trigger the corporation’s obligation to waive the privilege? What will be the scope of the waiver? Will a court construe the scope of the waiver more or less broadly than the parties had intended when they entered into the contract? What if the waiver threatens to lead to significant liability to the company? Mr. Kressel suggests that these issues can be negotiated before execution of the contract, but an informed decision to waive the attorney-client privilege requires careful consideration of the specific facts and possible consequences before such a decision is made.

The best and perhaps only truly viable way to deal with the problem of the rare but unfortunate executive who wants to waive a privilege that belongs to his company is to leave the determination to the courts. Our judiciary is adept at accommodating conflicting rights in ways that do not sacrifice the fundamental principles that undergird them. The court can balance those competing interests based on evidence presented at a hearing in limine. If the defense is truly viable, the court may conclude that the executive’s Sixth Amendment rights override the corporation’s rightsin maintaining the privilege, and can impose an appropriate remedy to minimize the harm to the corporation. If there is no basis for permitting the jury to hear evidence regarding the defense, the court will maintain the privilege. These decisions can only be made with knowledge of all of the facts and circumstances. An ex post solution may be imperfect, but it seems to be the best of all alternatives in this imperfect world.

Victor J. Rocco is a Shareholder at Heller Ehrman LLP, the former president of the New York Council of Defense Lawyers, and the former Chief of the Criminal Division of the United States Attorney’s Office for the Eastern District of New York.

Preferred Citation: Victor J. Rocco, Executives Do Not Need Waivers and Companies Should Not Offer Them: A Response to Mark Kressel, 116 Yale L.J. Pocket Part 262 (2007),