Today's General Counsel, June/July 2024

JUNE/JULY 2024

VOLUME 21/NUMBER 3

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Rethinking Shareholders’ Agreements in M&A

How to deal with workplace romances What you need to know about noncompete clauses The latest on AI developments in legal Why you need to take micromanagement seriously

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EDITOR’S DESK

H

appy Summer! The weather isn’t the only thing heating up.

There are several hot topics making the rounds of the legal world, from the Federal Trade Commision’s ban on noncompetes to discussions

about the most effective and responsible ways to deploy AI (artificial intelligence) in workflows. We are thrilled to bring you insights from thought leaders on these topics and more in our summer issue.

Our cover story discusses what general counsel need to know about shareholders’ agreements in M&A transactions in light of the The Delaware Court of Chancery’s opinion in Chordia v. Lee. Diving into the twists and turns of this case, Davis Mello and Margaret Dodson of Bass, Berry & Sims explain why this example serves as a cautionary tale and how dealmakers need to think carefully about how they negotiate stockholder or operating agreements.

Jay Ferguson of Randstad and Nathan Chapman of Kabat Chapman & Ozmer have provides an in-depth explainer on the FTC ban on noncompete agreements and its wide-ranging impact. Read about how this decision could potentially upend how companies do business and protect their interests.

Unsurprisingly, AI continues to be a major talking point for GCs and legal departments. We’re lucky we got a chance to talk to KLDiscovery’s Eric Mandel about the evolving role of AI is playing in IG (information governance) and legal operations. In another story, Jonathan J. Brown of Pearlman, Brown & Wax hones in on AI deployment in employment practices and advises on the best way to mitigate the risk of bias and discrimination in hiring.

Speaking of risk, relationships between co-workers can be dicey propositions. Leah M. Stiegler and Emily Kendall Chowhan of Woods Rogers explain what GCs need to know about “love contracts,” which have become a popular tool for some employers to mitigate the risk of workplace romances-both during the relationship and after it ends.

Another important story in this issue comes via our new platform Today’s Managing Partner, which serves the law firm community. TMP columnist Tracy LaLonde writes about engagement and career development topics. In the latest installment of her column, she examines the damaging effects of micromanagement in the workplace and issues a stark warning for all us. It’s vital that we take this issue seriously.

Whether you are reading this on the beach or sweating it out in the city, remember that each issue of this magazine represents a relatively small selection of the content we are publishing every day on our site. Be sure to check todaysgeneralcounsel.com regularly for a wide range of thought leadership pieces on everything from legal technology to career development.

Don’t forget to follow us on LinkedIn and X to stay informed-especially when you are on the go this summer!

Thanks for reading, Amanda Kaiser Editor-In-Chief

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JUN/JULY 2024 Volume 21/Number 3

LABOR & EMPLOYMENT

8 “Love Contracts” Protect Employers When Workplace Romance Arises

By Leah M. Stiegler and Emily Kendall Chowhan

Read about the benefits of “love contracts” or “consensual relationship agreements” and how the documents mitigate the risk of workplace romance.

10 AI in Employment Practices: How to Mitigate the Risk of Bias and Discrimination

By Jonathan J. Brown

PAGE 16

The use of AI in employment practices has prompted concerns over potential biases and discrimination.

Learn what steps your company should take to protect itself.

COVER STORY M&A

16 Rethinking Shareholders’ Agreements in M&A After Chordia v. Lee

By Davis Mello and Margaret Dodson

Dealmakers should be cautious about how they negotiate stockholder or operating agreements and conduct themselves under the agreements post-closing.

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PAGE 10

INTERVIEW

COLUMN

12 KLDiscovery’s Eric Mandel Talks AI in Information Governance and Legal Operations KLDiscovery’s Eric Mandel discusses the Role of AI in Information Governance and Legal Operations in an exclusive interview with Today's General Counsel.

THE ENGAGEMENT EDGE WITH TRACY LALONDE

14 Lack of Autonomy: A Surprising Silent Killer in the Workplace PAGE 12

Eric Mandel, KLDiscovery

COMPLIANCE

18 FTC’s Ban on Noncompete Agreements Has Far-Reaching Impact

By Jay Ferguson and Nathan D. Chapman

The FTC rule not only bans most employers from requiring noncompete agreements but also invalidates existing noncompete agreements for non-executive employees.

PAGE 2 0

Tracy LaLonde

Learn more about a hidden peril beneath the veneer of achievements and accolades that can affect members of a legal team: the lack of autonomy.

RISK MANAGEMENT

20 How In-House Counsel Should Address Risk When Deploying New AI Tools

By David J. Oberly

Artificial intelligence (AI) governance is paramount for inhouse counsel. They must address risk when deploying new tools and navigating evolving regulations.

22 How General Counsel Should Balance Legal and Reputational Risk

By Warren Cooper

It’s a challenge navigating the risks that can arise from companies’ aggressive, sometimes even zealous, legal strategy.

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CONTRIBUTING EDITORS AND WRITERS Jonathan J. Brown Eric Mandel Nathan D. Chapman Davis Mello Emily Kendall Chowhan Tracy LaLonde Warren Cooper David J. Oberly Margaret Dodson Leah M. Stiegler Jay Ferguson

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Empowering boards in uncertain times.

Those who can see ahead, stay ahead.

NACD equips boards to anticipate governance challenges amid an uncertain future.

Governance is Evolving.

Is Your Board Ready? nacdonline.org

LABOR & EMPLOYMENT

“Love Contracts” Protect Employers When Workplace Romance Arises

By LEAH M. STIEGLER AND EMILY KENDALL CHOWHAN a harassment claim. Consider these possible scenarios:

S

ingle and ready to mingle?

Consider heading into the office, where you might find a workplace romance and be asked to sign a “love contract.”

Just over 40% of people have married someone they met at work, according to a survey by Forbes Advisor. What constitutes a workplace romance is different for everyone. A 2023 survey by the Society for Human Resource Management (SHRM) found that 40% of employees report flirting with someone in their workplace, 24% have gone on a date with a work

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colleague, and 17% of employees have been in an official relationship with someone from work.

Given the frequency of workplace relationships, most modern employees are comfortable with coworkers dating each other. But, as employers and managers know, workplace dating can be problematic. Most office romances begin and/or end without impacting work relationships. Others can damage careers.

When a breakup occurs, the employer may deal with reduced productivity, hurt feelings, or (worse)

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• Two workers of the same rank and seniority, Joe and Adrienne, begin a relationship. Eventually, the relationship ends, but Joe does not want to move on. He persists in trying to win Adrienne back, despite multiple statements from Adrienne that she no longer wants to date Joe. Joe tries to convince Adrienne to take him back, and she submits a harassment complaint to the human resources (HR) department.

• A subordinate, Jim, begins dating his supervisor, Molly.

Jim and Molly are happy, but other employees are not. Jim’s coworkers, Molly’s other subordinates, question whether Molly is giving Jim favorable assignments, and they worry that she is overlooking their accomplishments.

Morale declines as time goes on, which affects productivity.

A subordinate female employee submits a complaint that Molly is giving Jim preferential treatment.

• Robin and Kendra are colleagues who have been in a long-term relationship together. Robin recently notified HR that she and Kendra broke up months ago and BACK TO CONTENTS

that Kendra has been sexually harassing her ever since then.

Robin produces romantic text messages, some even explicit, but the text messages could be construed as consensual. Kendra tells HR that she and Robin did not break up months ago, but they did recently have a fight, and Robin was so angry after the fight that she made up a story about Kendra harassing her.

“LOVE CONTRACTS” Due to situations like these, “love contracts” (also called “consensual relationship agreements”) have become popular with employers to mitigate some of the risks associated with workplace romances. In reality, a love contract functions as a disclaimer and agreement regarding how the employees will conduct themselves while in the relationship and even after it ends.

If the employees are co-equal, a consensual relationship agreement helps employers set expectations and boundaries to maintain the

Although a relationship between a superior and a direct report is not per se unlawful under Title VII and most state laws, it is problematic. integrity of the work environment.

If the relationship is between a superior and a subordinate, a consensual relationship agreement can reduce later liability for the employer.

Although a relationship between a BACK TO CONTENTS

superior and a direct report is not per se unlawful under Title VII and most state laws, it is problematic.

Suppose the direct report asserts that the supervisor was harassing them or was engaging in quid pro quo. A relationship agreement can constitute proof that the relationship was consensual. Conversely, if the relationship started as consensual but turned into one-sided harassment, as with Joe and Adrienne, a consensual relationship agreement may limit damages for the employer.

A relationship agreement should reinforce and complement formal company policies on relationships, sexual harassment, complaint procedures, ethical conduct, and general civility. It should clearly state that the relationship is consensual and was entered into freely and voluntarily. The agreement should include the employer’s right to change employees’ reporting structure or work assignments if the relationship creates a conflict of interest. It should set expectations regarding professionalism and instruct the parties to refrain from public displays of affection while at work.

Prefer to read this online? Click here. on social media — can still constitute actionable harassment.

Workplace relationships should also be addressed in the employee handbook. Routine employee and managerial training to review company policy and educate employees on preventing harassment and discrimination is highly recommended.

As the saying goes, an ounce of prevention is worth a pound of cure, and a consensual relationship agreement is a worthwhile preventative.

Leah M. Stiegler is a principal, and Emily Kendall Chowhan is an associate in the Labor & Employment practice at Woods Rogers PLC in Richmond, Virginia.

They advise company leaders and their human resources departments on compliance with employment laws.

They host the biweekly video series “What’s the Tea in L&E,” available on YouTube.

BREAKUP PRECAUTIONS Additionally, the agreement should contain a provision requiring the employees to inform management or HR if the relationship ends. Employees should agree that if a breakup occurs, they will not engage in inappropriate or unprofessional conduct towards each other in the workplace and will not make any inappropriate or harassing attempts to “win the other back.”

The agreement should include a clear disclaimer that employee-toemployee behavior outside of the workplace — for example, at a bar or JUNE/JULY 2024

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LABOR & EMPLOYMENT

AI in Employment Practices: How to Mitigate the Risk of Bias and Discrimination

By JONATHAN J. BROWN

T

he legal landscape surrounding artificial intelligence (AI) in employment practices is evolving rapidly as more and more employers, including the vast majority of Fortune 500 companies, adopt the technology.

While the widespread integration of AI into recruitment and management tasks has promised enhanced efficiency and objectivity, there are concerns over potential biases and discrimination. Lawmakers and regulators are responding with updated guidelines and new standards to address these emerging challenges.

Regulation surrounding AI in employment is multifaceted, with initiatives spanning federal, state, and international levels. Federally, significant developments include updated guidelines from the Equal Employment Opportunity Commission (EEOC), a White House executive order establishing new AI safety and security standards, and the formation of the U.S. AI Safety Institute Consortium (AISIC).

Meanwhile, states like California are spearheading their own AI lawrelated initiatives, with numerous legislative efforts underway. The European Union has also taken strides by approving a comprehensive AI legal framework. Most

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recently, on April 29, 2024, the Department of Labor (DOL) issued guidance in the form of a Field Assistance Bulletin, which not only addresses bias and discrimination but also delves into other employment law issues such as wage and hour regulations and the Family and Medical Leave Act (FMLA).

Recent discrimination lawsuits serve as cautionary tales for companies deploying AI in their hiring and decisionmaking processes.

LAWSUITS LOOM LARGE Recent discrimination lawsuits serve as cautionary tales for companies deploying AI in their hiring and decision-making processes. In what has been coined as the first-of-its-kind AI discrimination suit, iTutorGroup settled with the EEOC and agreed to pay $365,000 to resolve allegations of age and gender discrimination.

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Similarly, a pending class-action lawsuit against Workday highlights the potential risks associated with automated screening platforms.

Plaintiff Derek Mobley’s allegations of systematic discrimination based on race, age, and disability raise fundamental questions about accountability and liability in the AI discrimination space. As companies increasingly rely on AI for hiring decisions, the need for clear guidelines and legal frameworks becomes paramount to protect against discriminatory practices.

VENDORS, LIABILITY ARE PRIME CONCERNS The question of liability in AI discrimination cases is complex and multifaceted. While companies like Workday argue that their products are adaptable and customizable by customers, the extent of control delegated to AI vendors remains contentious. Under most discrimination statutes, including Title VII of the Civil Rights Act of 1964, covered employers are liable for the discriminatory actions of their agents. As AI systems play an increasingly significant role in the hiring process, the line between AI vendors, employers, and their agents becomes blurred, raising challenges for determining liability.

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The widespread adoption of AI in business and employment presents both opportunities and challenges.

While AI offers the potential to streamline processes and enhance decision-making, the risks of bias and discrimination cannot be overlooked.

To navigate the evolving legal landscape and mitigate the risks of bias and discrimination, employers should prioritize several key measures:

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Ensure contracts with AI vendors outline responsibilities regarding antidiscrimination laws and bias prevention.

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Carefully vet AI vendors and products, and demand transparency regarding algorithms and data used in AI systems.

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Conduct regular audits of hiring processes and AI tools to monitor for bias and ensure fairness.

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Provide training for employees involved in the hiring process to recognize and address AI bias effectively.

Stay informed about legal developments and seek guidance from legal counsel to navigate the complex legal landscape surrounding AI.

Prefer to read this online? Click here.

Implementing these proactive measures will help employers minimize the risks associated with AI-related discrimination and ensure fair and equitable hiring practices.

Jonathan J. Brown, a Senior Associate Attorney at Pearlman, Brown & Wax, LLP, represents employers in all areas of employment law including wrongful discharge, discrimination, harassment, retaliation, accommodation, interactive process, and wage and hour claims.

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INTERVIEW

KLDiscovery’s Eric Mandel Talks AI in Information Governance and Legal Operations In this interview, KLDiscovery’s Eric Mandel discusses the role of AI in Information Governance and Legal Operations with Today’s General Counsel.

Eric Mandel is a Chambers-ranked attorney and technologist who works with clients in the United States and internationally to address complex issues at the intersection of law and technology. His expertise includes eDiscovery, information governance, data privacy and data protection, regulatory data compliance, and artificial intelligence.

Q: Information governance (IG) brings together a lot of stakeholders: IT, legal, risk and compliance, data security, etc. What are some of the challenges these teams face when implementing an IG program and how might AI help with that?

A: Information governance is a holistic approach bringing in all these different stakeholders (the IGRM Version 4 does a nice job of showing who all the stakeholders are) and they’re facing a massive volume of information, an

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incredible variety of information, and the velocity of change is shocking.

The core challenges are listening, working together, understanding, and making reasoned rational decisions about finding a holistic, optimized balance between those responsible for reducing and managing the risks of the enterprise, and those whose job it is to extract as much value as possible from the enterprise’s data.

How can AI help with these competing forces? At its core, AI can help identify what information they have. We live in this world of, “I don’t know what data I have, I don’t know where it is, and I don’t know who has access to it.”

Governance is all about creating a unified approach and having AI provide insights to summarize and synthesize these vast volumes of information allowing stakeholders to take more reasoned, stepped, and logical approaches toward achieving the ultimate balance of information governance.

Q: A key element of legal ops is data analytics, not just with eDiscovery and internal investigations, but also looking at the larger business functions related to that data. How can AI help make this task more streamlined and intuitive?

A: The legal field has been using machine learning focused on classification for a while. Three years ago, no one knew the term GenAI unless you were in data science. Now it’s everywhere and we are trying to achieve results in a different way. Instead of saying, “Sort all this stuff into buckets,” I’m saying, “I want to know about X, teach me. Give me materials, summarize this, synthesize that, organize the next thing, and give it to me in a way where it’s in a report, it’s in a function, or it’s something I can read so that it’s the equivalent of research output.”

I want to start to use it for decision-making purposes.

Large Language Models (LLMs) require a vast amount BACK TO CONTENTS

of information for training. We are starting to see some GenAI tools focused on legal, but specialized tools will take time to train, and it’s not going to be cheap. To be on the leading edge, you have to invest in the technology and people who develop processes. This isn’t going to happen overnight, but I do think we’ll see more innovations coming.

Q: We’ve been talking about exponential data growth for the better part of a decade, and how finding relevant ESI within these large data sets is no longer tenable for human review alone. How can AI level the playing field against large data volumes with an ongoing IG program operating whether or not there’s ongoing litigation and then move over to discovery or investigation should there be a triggering event?

A: I do think LLMs, particularly once they’re trained, are going to be a real game changer in terms of investigation and compliance functionality. Right now, most enterprises with a compliance program are doing random pulls of data and searching those random sets, and there are challenges with that. A random pull of data might lead an investigator to say, “I unrolled this one haystack and there were no needles in it.” But there are 5,000 haystacks out there.

With investigations, we’ll have a greater ability to locate specific types of information as we get better at training these models and with our prompts. We’ll be able to To be on the cut through these larger volleading edge, umes more efficiently with less hassle. you have to But when it comes to proinvest in the ducing documents, where’s technology the line going to be on a and people production-side review of materials with an obligation who develop to find all non-duplicative processes. information within the scope of discovery? With an investigation, you just need to have an understanding of what’s going on with the data. But when I have a production obligation under the federal rules or local state equivalent to producing everything that’s responsive to the discovery request, will I actually be able to use an LLM to sort this stuff out and put it into buckets when that’s not the function of the algorithm?

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Prefer to read this online?

Click here.

I understand the desire for an easy button, but I don’t think we’re going to get it on the production side, at least not anytime soon. I do think GenAI will be a help in organizing datasets, in getting some early understanding, in creating searches, and in training a classifier for active learning functions. There may be workflows where LLMs are used to generate information that can be used to train a classifier. But, for now, you’re going to have to manually move between the LLM and an active learning system.

Q: One last question to finish things up. The mantra for in-house legal teams is “do more with less,” and everyone is talking about how AI will empower legal ops to do just that. What are some specific ways you’re seeing or anticipate seeing AI help?

A: I think once we start applying LLMs within an enterprise environment, they’re going to start helping us identify patterns that would be completely dark without doing some massive data science exercise. We’ll find cost savings, process efficiencies, and see which attorneys do better than others. We’ll find where our legal spend is going with eDiscovery, and we’ll have the data to back it up instead of just assuming. The ability to synthesize large volumes of information will be valuable and could drastically change the spend for legal, freeing up capital to be applied to other places within the enterprise.

To hear more from Mandel on this topic, register for this Today’s General Counsel panel discussion.

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COLUMN

THE ENGAGEMENT EDGE WITH TRACY LALONDE

Lack of Autonomy: A Surprising Silent Killer in the Workplace

By TRACY LALONDE

B

eneath the veneer of professional achievements and workplace accolades, a hidden peril rivals the stress of highstakes projects and tight deadlines: the absence of autonomy in shaping the workday. Surprisingly, it’s a lack of autonomy in the workplace that poses a significant threat to your health and, startlingly, one’s survival. Autonomy, or the opportunity to influence one’s work and work life, be it through choosing assignments, making decisions, setting deadlines, or deciding when and where to work,

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isn’t just a nice-to-have option. It’s essential for longevity.

To put it simply, it has been shown that a lack of autonomy in one’s job can lead to death.

Yes, death.

The evidence is compelling and spans decades, showing an undeniable link between autonomy at work and mortality rates. For instance, the Whitehall Studies of the 1970s in the UK revealed that civil servants at the bottom of the pecking order, with the least control over their work, were three times more

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likely to die than their high-ranking counterparts.

Fast forward to 2007, a study across 72 diverse organizations in the northeastern U.S. found that workers with more job control exhibited significantly lower levels of anxiety and depression. The study, involving 700 people, highlighted the protective effects of autonomy against common workplace stressors.

In 2016, a startling revelation came from Indiana University, where a study with 2,363 Wisconsin residents over seven years found that BACK TO CONTENTS

individuals in low-control jobs had a 15% higher risk of death compared to those in high-control jobs, who enjoyed a 34% lower risk of death.

Perhaps most compelling, a 2019 study from Australia involving 18,000 participants linked low job control to a 39% increase in the risk of all forms of death. As job control increased, the risk significantly fell, underscoring the critical need for autonomy in sustaining not just productivity but life itself.

The message from these findings is clear and a bit alarming: lowcontrol jobs can kill, particularly when one is tethered to a desk, devoid of any control or say in work life. While this may read as a doomsday warning, it’s actually a wake-up call to leaders and law firms everywhere.

It’s time to loosen the reins and cultivate a culture of trust. The traditional approach of top-down decision-making, mandatory in-office attendance, and “do as I say” delegation styles is not only demotivating; it’s dangerous. Encouraging autonomy isn’t about letting chaos reign and losing all control, but rather enabling team members to make valuable contributions to their daily work and work life, thereby increasing engagement and longevity.

3 TECHNIQUES TO EMPOWER AUTONOMY Foster Decision-Making As a manager of people, one of your roles is to empower your team members, enabling them to make decisions that align with their roles.

Start by mapping out which decisions fall squarely within their purview— this should constitute about 90% of their day-to-day choices. Then, BACK TO CONTENTS

clarify which areas require your input and which situations necessitate escalating the decision. By identifying these zones proactively, you’re not only setting your team members free to work independently but you’re also instilling confidence in their capability to lead their assignments effectively.

Collaborate on Deadlines Involve your team members in the deadline-setting process. Solicit their input on the feasibility of proposed timelines, securing the resources they might require to achieve these goals. If a deadline seems unreasonable, be open to discussing adjustments or counterproposals. In instances where deadlines can’t budge, work collaboratively to devise a plan that meets these fixed targets, rather than defaulting to a “just get it done” attitude. This approach not only respects their insight and capabilities but also reinforces a team-centric approach to problem-solving.

Make it Okay to Say ‘No’ Encourage an environment where it’s professionally acceptable for team members to say ‘no’ to assignments when they’re genuinely at capacity.

Yes, the ‘no’ needs to be delivered professionally and used judiciously, but the goal is to ensure quality over quantity. Overloading team members leads to increased stress levels, subpar work, and missed deadlines.

By valuing honest communication and setting realistic expectations, you’re cultivating a workplace where team members feel valued and heard.

Prefer to read this online? Click here. creativity and dampening morale; it’s literally a matter of life and death.

As a leader, you’re standing at a pivotal crossroads. You can either continue down the path of rigid control, risking not just the wellbeing of your teams but their lives, or you can choose a healthier, more sustainable route that champions autonomy. It’s time to rethink how people in your firm work, loosen the grip of micromanagement and foster an environment where autonomy isn’t just encouraged—it’s embedded in the very fabric of your law firm’s culture.

Lives quite literally depend on it.

Tracy LaLonde helps managing partners and law firm leaders generate better engagement through effective people management. With over 30 years of experience in training, consulting, and professional development, Tracy is on a mission to change how law firms engage with their teams. She may be reached at info@joychiever.com.

This story was originally published in Today’s Managing Partner, our content platform serving the law firm community.

You can subscribe to the weekly Today’s Managing Partner newsletter here.

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The clock is ticking, and the evidence is crystal clear: the lack of autonomy in the workplace is not just stifling JUNE/JULY 2024

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M& A

Rethinking Shareholders’ Agreements in M&A After Chordia v. Lee

By DAVIS MELLO AND MARGARET DODSON

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he Delaware Court of Chancery’s opinion in Chordia v. Lee provides a cautionary tale for dealmakers in negotiating shareholders’ agreements in M&A (mergers and acquisitions) and performing under those transaction agreements post-closing.

The underlying transaction in Chordia follows a common fact pattern. The founders and sellers (key holders) of target company Alphonso, Inc. agreed to cede control of the company to a buyer in exchange for a sizeable upfront payment and certain limited liquidity and minority governance rights. These rights included board representation rights, which were conditioned on the continuing employment of at least one key holder. These terms were set forth in a stockholders’ agreement that went into effect at closing.

Following the closing, the story took a more unusual turn. In response to an ongoing pattern of problematic conduct by certain principal key holders, the company’s new majority owner eventually terminated all key holder employees. Their dismissal resulted in the key holders losing their board representation rights under

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the stockholders’ agreement and permitted the majority owner to remove all key holders from the board.

The key holders sued, and the court ultimately reinstated their board designation rights, holding that the company’s termination of certain key holder employees had violated an “efforts clause” in the stockholders’ agreement.

KEY PROVISIONS IN THE STOCKHOLDERS’ AGREEMENT The Chordia opinion turned on the company’s conduct post-closing in connection with these key provisions in the stockholders’ agreement: • Director Designation. The key holders were entitled to designate a minority number of directors on the company’s board, subject to two conditions: (i) the key holders’ company stock ownership had to meet a certain threshold and (ii) at least one key holder had to be an employee or officer of the company.

• Efforts Clause. The company agreed “to use its reasonable efforts . . . to ensure that the rights

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granted under [the stockholders’ agreement] are effective and that the Parties enjoy the benefits of [the stockholders’ agreement].”

The company was specifically obligated under this provision to use its reasonable efforts “to cause the nomination and election of the directors as provided in [the stockholders’ agreement].”

• Employment of Executive Officers. The board maintained the exclusive right to fire executive officers of the company but was not empowered to otherwise terminate employees.

Following the transaction’s closing, the relationship between the company founders and the company’s new majority owner soured. Certain founders acted unprofessionally, defied directives from the board and new majority owner, and were often disruptive in meetings. As a result, the new majority owner decided to terminate the employment of all key holders, which at the time included BACK TO CONTENTS

five executive officers and two non-executive employees, so that the new owner could remove the key holder-designated board members.

The board was vested with the “exclusive right” under the stockholders’ agreement to terminate the five executive officers, but not the two non-executive employees. The board therefore appointed a new chief executive officer (CEO) to terminate the employment of the two non-executive key holders, both of whom continued to make valuable contributions to the company.

THE COURT’S SURPRISE MOVE The Court of Chancery found that the CEO’s termination of the nonexecutive key holders’ employment breached the efforts clause in the stockholders’ agreement. While the court recognized that this holding impacted other contractual rights of the company, the court ultimately held that, in terminating the non-executive key holder employees without cause and for the board’s express purpose of eliminating the key holders’ director designation rights, the company failed to use its reasonable efforts “to ensure that the rights granted [to the key holders] under the [stockholders’] agreement are effective … .”

As a result, the court held that the two improperly terminated nonexecutive key holders retained board designation rights notwithstanding the fact that no key holders remained employed by the company.

KEY TAKEAWAYS REGARDING SHAREHOLDERS’ AGREEMENTS IN M&A: 1. Drafting Efforts Clauses. This decision is notable because it BACK TO CONTENTS

turned on a broad reading of a fairly common provision. Going forward, drafters of efforts clauses primarily intended to secure certain procedural cooperation by a company should ensure that these clauses are narrowly drafted to preclude a broader reading.

2. Post-Closing Conduct. Perhaps the most significant takeaway from this case is the extent to which the Chordia holding was no doubt precipitated by the parties’ post-closing conduct. Even when a buyer expressly negotiates for near-total control of a company post-close, the scope of that control may nevertheless be limited by the manner in which it is exercised. If a buyer blatantly acts to the detriment of a minority owner — for example, as evidenced by the CEO’s testimony that he was blindly following orders in terminating the non-executive key holders — even well-drafted contractual provisions can come under fire.

The court made a point of discussing the various alternatives available to the company instead of moving straight to terminate the non-executive key holder employees, which indicates that the company’s failure to pursue these options further informed the court’s ultimate holding. Transaction documents should always be accompanied by thoughtful and defensible conduct in exercising any rights provided for thereunder.

3. Court of Equity. This case serves as an important reminder that the Court of Chancery is a court of equity. The court appeared

Prefer to read this online? Click here. to find post-closing conduct on both sides of the transaction to be lacking, with one exception — the key holders who were ultimately protected by the court’s holding were valuable contributors to the company. Essentially, artful drafting will not save parties from their own conduct that the court finds to be inequitable or contrary to the purposes of the underlying agreements.

Bass, Berry & Sims attorneys Britt Latham and Emily Connally also contributed to this article.

Davis Mello is a member at Bass, Berry, & Sims PLC where he counsels buyers, sellers, investors, and operators on mergers, acquisitions, divestitures, recapitalizations, growth equity investments, venture capital financings, and other strategic corporate transactions. He also advises clients on corporate governance and other corporate matters. He can be reached at dmello@bassberry.com.

Margaret Dodson is an associate at Bass, Berry, & Sims PLC where she represents clients in complex business disputes, including securities class actions, derivative suits, indemnification disputes, inspection demands, and litigation related to mergers and acquisitions and breach of fiduciary duty. In addition, she advises public and private clients involved in internal investigations and on governance issues. She can be reached at margaret. dodson@bassberry.com.

JUNE/JULY 2024

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COMPLIANCE

FTC’s Ban on Noncompete Agreements Has Far-Reaching Impact

By JAY FERGUSON AND NATHAN D. CHAPMAN

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n April 23, 2024, the U.S. Federal Trade Commission (FTC) voted to issue a rule that not only bans most employers from requiring workers to sign noncompete agreements but also invalidates existing noncompete agreements for non-executive employees. Should the FTC’s rule stand, it will have far-reaching implications for business owners and could potentially upend how companies do business and protect their interests.

FINAL RULE AND RATIONALE According to the FTC, noncompete clauses harm the U.S. labor markets by preventing workers from seeking better employment opportunities, blocking employers from hiring the best available talent, discouraging entrepreneurs from forming businesses, and dissuading employees from voicing new and innovative ideas. This, the agency argues, constitutes an unfair method of competition and violates Section 5 of the Federal Trade Commission Act. To address these purported issues, the FTC’s final rule, which they argue is designed to block what the Commission claims is “a widespread and exploitative practice,” would prohibit employers from

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using noncompete clauses, making it illegal for employers to: • Enter into or attempt to enter into a noncompete agreement with any employee; • Maintain an existing noncompete with a non-executive employee; or • Represent to a non-executive employee that they are subject to a noncompete.

Importantly, the final rule would apply retroactively to employees and independent contractors who have already signed noncompetes with their employers. Upon the rule’s effective date (September 4, 2024), companies will be required to notify their employees and former employees with existing noncompete agreements that they will not enforce the noncompetes.

Critically, however, existing noncompetes with “senior executives” (defined as those earning more than $151,164.00 annually, and who “are at the level of a president, chief executive officer or the equivalent, or in a position that has similar authority to a president or officer and have “final authority to make policy decisions that control significant aspects of a business entity or a common enterprise”) may still be enforced. But

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companies cannot enter into any new noncompetes even with senior executives.

The rule also does not apply to noncompetes entered into as part of a bona fide sale of a business entity.

COUNTERVAILING ARGUMENTS In general, the business community disagrees with the FTC, as noncompetes are often critical to protecting a company’s trade secrets, confidential information, clients, and employees. Indeed, there are many reasons why noncompetes promote economic development and employee well-being. When a company is secure that its interests will be protected, they are more likely to invest in and train its employees and allow employees access to sensitive confidential information and trade secrets. As a result, most common law jurisdictions have enforced noncompetes to some degree for centuries, and, in most states, noncompetes are enforceable by state statute or common law to the extent they protect the legitimate business interests of a company.

This “legitimate business interests” limitation typically requires noncompetes to be reasonable in terms of geography, time, and scope.

These state common law rules and BACK TO CONTENTS

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statutes create a balance that generally protects employees against inappropriate enforcement while still protecting employer interests.

The FTC’s ban is likely to upend this economic balance.

LEGAL CHALLENGES There is a strong case to be made that the FTC does not have the statutory or constitutional authority to enact the proposed rule. The FTC’s statutory mandate from Congress is limited to regulating “unfair or deceptive” trade practices. It is an interpretive stretch of this statutory authority to regulate and ban noncompetes as unfair or deceptive, especially in light of the long history of statutory and judicial approval of noncompetes in most common law jurisdictions. The agency does not have the authority to create laws; that is left to state legislatures and Congress.

Now that the final rule has been issued, business and employment attorneys, chambers of commerce, and state attorneys general will likely seek injunctions, claiming BACK TO CONTENTS

that the FTC does not have the statutory authority to create such a rule. In fact, the United States Chamber of Commerce and several other business groups have already filed lawsuits in Texas federal court seeking an injunction to block the rule. The FTC has moved to transfer one of the lawsuits to the Northern District of Texas where a case filed

by Ryan LLC is pending.

HOW BUSINESS OWNERS CAN PROTECT THEMSELVES

invalidate other restrictive covenants, such as non-solicitation of customers and non-recruitment of employee provisions and confidentiality agreements. Thus, if an employer wishes to impose post-employment restrictions on their employees they will still be able to do so through reasonable non-solicitation and confidentiality provisions.

Therefore, if the ban survives judicial challenge, businesses should thoroughly review and revise all of their restrictive covenants to remove noncompetes and strengthen customer and employee non-solicitation provisions to continue protecting their business interests and employee investments. Employers should be careful not to overreach, however, as non-solicitation provisions that “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends” will be considered non-competition provisions that likely violate the rule.

It’s unclear whether the courts will ultimately enjoin the FTC’s rule. If it is not enjoined, companies will have 120 days after its publication in the Federal Register to comply (September 4, 2024).

In the meantime, employers should stay up to date on this issue and monitor developments closely. If the ban goes into effect, employers should revisit how they protect their business interests, employees, trade secrets, and confidential information, as they will no longer be permitted to use noncompetes to do so.

Importantly, the rule will not JUNE/JULY 2024

Jay Ferguson is Randstad North America’s Chief Legal Officer and is based in Atlanta. Nathan Chapman is an Atlantabased employment and business litigator and member of Kabat Chapman & Ozmer LLP’s employment and class action defense litigation team.

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RISK MANAGEMENT

How In-House Counsel Should Address Risk When Deploying New AI Tools

By DAVID J. OBERLY

I

n 2024, harnessing the immense benefits of artificial intelligence (AI) will remain a top priority for corporate boards and C-suite executives across all industries.

Consequently, in-house legal teams need to be armed with the proper tools for developing and implementing effective AI governance programs that facilitate the deployment of these cutting-edge tools in a legally compliant, responsible, and safe manner.

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LEGAL LANDSCAPE At the federal level, Congress has introduced a number of AI-focused bills in recent years, but none have gained significant traction or support. In the absence of clear guidance from lawmakers in Washington, D.C., federal agencies have stepped up to fill the void. At the forefront of this activity is the nation’s de facto federal privacy regulator, the Federal Trade Commission (FTC), which has been extremely active in pursuing

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investigations and enforcement actions in the AI space over the last 12 months. Moreover, recent FTC guidance has reinforced the agency’s commitment to regulating AI tools— including in the hiring and workplace context.

The Equal Employment Opportunity Commission (EEOC) has also been a key player in scrutinizing and policing the use of AI, including its release of two pieces of guidance detailing the different ways that BACK TO CONTENTS

AI can run afoul of federal equal employment opportunity laws. Last September, the EEOC also settled its first action specifically targeting allegedly discriminatory AI employment practices relating to automated job applicant software.

Illinois and Maryland currently have laws on the books governing the use of AI tools in the hiring context. More recently, New York City enacted Local Law 144, which significantly restricts Big Apple employers from using AI to help with employment decisions.

Moving forward, in-house counsel should anticipate lawmakers and regulators at the federal, state, and local levels to continue their efforts to enact greater regulation over the use of AI technology, especially with respect to addressing the significant bias- and discrimination-related concerns shared by legislators and policymakers at all three levels of government.

KEY CONSIDERATIONS AND PRACTICAL STRATEGIES FOR IN-HOUSE LEGAL TEAMS As technology-focused regulation continues to expand, so too does the desire of more corporate boards and C-suite executives to capitalize on the range of strategic opportunities presented by AI tools. At this critical crossroads, in-house counsel must guide their organizations in deploying AI and assist in charting a path forward that both maximizes potential benefits and manages increasing legal risk. When doing so, corporate legal teams should be mindful of the following issues and consider the below strategies: • Determine applicability: As a starting point, an initial scoping BACK TO CONTENTS

analysis should be completed to evaluate the extent of organizational legal obligations under the patchwork of AI-related regulation. Given the law’s broad definitions of “AI” and “algorithmic decision-making,” a wide range of use cases are likely to trigger compliance.

In-house counsel must guide their organizations in deploying AI and assist in charting a path forward that both maximizes potential benefits and manages increasing legal risk.

• AI governance program frameworks: At a high level, a framework should be mapped out for enterprise-wide AI governance programs, which can provide internal guideposts and direction as organizations evaluate various AI tools for deployment to achieve certain objectives. Key aspects of any AI governance program include (among other things) the principles of fairness, transparency, “explainability,” privacy, and accountability.

• Bias and fairness audits: Another key component of effective AI compliance programs is the auditing of AI tools to evaluate potential discrimination and fairness-related issues—both before initial deployment and

Prefer to read this online? Click here. thereafter at regular intervals — and even where not required to do so by law.

• Third-party risk management: In-house legal teams should also be mindful of the significantly increased risk that exists with respect to the deployment of AI tools developed by outside, thirdparty vendors. The end users of this technology can oftentimes find themselves legally responsible for the discriminatory or otherwise unfair outputs or results involving AI tools—even those that are designed and developed exclusively by an outside, unrelated entity.

In-house attorneys should consider seeking the assistance of experienced outside AI counsel, who can offer practical solutions to the increasing number of complex legal challenges and potential pitfalls companies must navigate when deploying AI tools in today’s highly regulated but fractured legal environment.

David Oberly is Of Counsel in the Washington, D.C. office of Baker Donelson, and leads the firm’s dedicated Biometrics Team. David is also the author of Biometric Data Privacy Compliance & Best Practices. He can be reached at doberly@bakerdonelson.com or followed on X at @DavidJOberly.

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RISK MANAGEMENT

How General Counsel Should Balance Legal and Reputational Risk

By WARREN COOPER

A

mong the most difficult challenges in-house counsel must face is navigating the reputational risks that can arise from their organization’s aggressive, sometimes even zealous, legal strategy.

It’s not uncommon for counsel to diminish or disregard such publicfacing concerns, despite growing evidence that reputational harm can threaten an organization’s short-term balance sheet, employee recruitment, or even its long-term viability.

In many cases, corporate culture inadvertently contributes to the problem, siloing the legal department from other departments and operations. This is often the result of good intentions: to bolster the department’s independence or the necessity of protecting privilege, for example. Unfortunately, it can also foster a legal department that is insufficiently sensitive to the possibility that its work could generate negative media coverage, social media outrage and public calls for the organization to be boycotted or “cancelled.”

Research has shown that public boycotts rarely have a significant impact on sales, but negative media coverage can undermine the brand’s reputation. Publicly traded

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companies can feel the backlash in the form of shareholder disapproval and threats of a selloff. Declining shareholder value — even in the absence of a drop in revenues — can powerfully influence change. In some instances, a reputational hit has led shareholder calls for policy changes in the name of social justice.

An ill-chosen phrase in a complaint or legal filing can have an outsized impact on public opinion when quoted in media coverage.

In others, it’s led Boards to jettison otherwise popular and effective C-Suite personnel.

THE J&J EXAMPLE Consider Johnson & Johnson’s unrelenting assertion during decades-long legal struggles that its baby powder did not contain asbestos, a known carcinogen. When the media reported in 2018 that company officials had knowingly

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lied about it for nearly 50 years, J&J’s stock dropped 10%. It soon announced it would no longer use talc in US products (although stockholders voted to allow the company to continue to market talcum products abroad, leading to further reputational attacks arising from social justice concerns.)

Words matter, especially in publicly available court documents. An ill-chosen phrase in a complaint or legal filing can have an outsized impact on public opinion when quoted in media coverage. For example, one attorney argued in a motion for summary judgment that an employee’s workplace discrimination claims didn’t meet The New Jersey Law Against Discrimination (LAD) standards. The attorney argued that while the employee was a member of a protected class, the plaintiff wasn’t really singled out for harassment since, “all employees were treated that way.” After a reporter quoted the phrase in her coverage, the organization struggled with employee recruitment and retention.

Most attorneys, particularly those in the general counsel’s office, are mindful of the pitfalls of “litigating in the press;” that is, participating in media coverage to influence public BACK TO CONTENTS

opinion, force action by opposing counsel, or one of a dozen other reasons. Most judges frown on it, and the last thing an attorney wants to do is annoy the judge.

But attorneys who blanketly refuse media outreach take that concern too far. If a reporter is writing about you, it’s certain her editor believes the public is interested. You may think you’ve potentially dodged a bullet. But the public’s perception of your organization (and its leadership and brand) is important to the Board and C-Suite. Not participating in the media coverage means you’ve missed an opportunity to bolster the organization’s reputation.

THE ”NO COMMENT” CONUNDRUM In fact, the organization takes a reputational hit every time an attorney, BACK TO CONTENTS

or a spokesperson acting on attorney advice says, “No comment.” The lay person reading the coverage usually isn’t trying to understand why you wouldn’t answer a reporter’s questions. If your reply to questions about allegations of wrongdoing is, “No comment,” the typical person assumes, “They’re guilty!”

There are endless ways to avoid giving comment without actually saying, “No comment.” “That’s one of the questions this case will answer.”

“That’s an important issue that we’ll address in court.” “We’re looking into it.” “This is about principles.”

And, of course, “I hope to be able to share more soon.” Being perceived as engaged (even if not helpfully so) supports your organization’s reputation better than being thought arrogant, aloof, dismissive . . . and guilty.

Prefer to read this online? Click here.

Even during the most fraught, impactful litigation, counsel must fully embrace responsibility to protect the organization from reputational harm. To do so, as the yogis say, “Be mindful.”

Warren Cooper (wcooper@kesslerpr. com) is Senior Director at Kessler PR Group, a public relations firm specializing in crisis communications, reputation management and litigation support. Cooper provides strategic communication counsel and litigation support to clients facing personal or institutional crises.

JUNE/JULY 2024

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UPCOMING

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