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— Analysis —
Robert Joffe is adding an unusual coda to a distinguished legal career. After almost 40 years as a litigator at Cravath, Swaine & Moore LLP and eight years as the firm's presiding partner, the 65-year-old Joffe has, in recent years, built a practice in advising boards of directors. In 2004, he began advising the independent directors of Washington-based Fannie Mae and was at their side as the Treasury Department seized Fannie Mae last month. Also in September, he represented the independent directors of Merrill Lynch & Co. in that firm's sale to Bank of America Corp. -- See the M&A Quarterly Review slideshow -- Joffe stepped down as Cravath's presiding partner in January 2007 in favor of Evan Chesler. His calling card in advising boards is his long experience as a litigator with a focus on antitrust work and significant experience with M&A litigation. He started advising the board of Time Warner Inc. in the 1970s as part of his work for the longtime Cravath client and went on to represent the company in court when Paramount Communications Inc. launched a hostile bid for Time Inc. in an effort to break up its merger with Warner Communications Inc. Joffe also helped defend Time Warner against Carl Icahn's 2006 proxy fight and provided antitrust advice to the company in its 2000 merger with America Online Inc. Other clients include the independent directors of General Motors Corp. as well as the audit committee of General Electric Co. in an investigation by the U.S. Securities and Exchange Commission. Joffe talked to The Deal's David Marcus about the genesis of his practice, the challenges of advising boards and the events of the last few months.
The Deal: How did you get involved in board assignments generally and, specifically, those for Merrill Lynch and Fannie Mae? Robert Joffe: Cravath has represented Time Inc. and then Time Warner since the 1920s, and I started doing Time work in the late 1970s. At that time, it was common for counsel who was representing the company to appear before the board, and it was rarely felt that the board needed its own counsel, and so I was advising the board. In those contexts, we always felt our client was the corporation and not management, although we worked closely with management, obviously. Those experiences prepared me for and interested me in board advisory work. And I became a member of two public company boards myself. In 1999 a friend asked me if I would be interested in serving on the board of Fiduciary Trust Co. I did that and after Franklin Resources Inc. acquired Fiduciary, Franklin was looking for board members and, in 2003, chose some of the Fiduciary board members, myself included. So I became interested in board work from the perspective of a director. In December of 2004, the Fannie Mae board began to consider what to do about its CEO, Franklin Raines. One of the board members contacted Samuel Butler [Joffe's predecessor as the presiding partner of Cravath] and asked Sam to advise them in connection with its consideration of those issues. Sam brought me along to the first meeting, and after a few meetings, I took over the representation. I've been representing the Fannie Mae board since. For two years, I went to all the Fannie Mae board meetings and advised them in connection with various regulatory investigations and an internal investigation that was being handled by former Sen. Warren Rudman. In the meantime, two of my corporate partners, first Tom Brome and then Susan Webster, began representing the Fannie Mae board as well and went to all the board meetings and then all the committee meetings. A few years ago, I began advising the independent directors of General Motors. When the Merrill Lynch board in October 2007 became concerned about what to do with [then-CEO] Stanley O'Neal, one of the Merrill directors, who was a GM director and had known me from my GM assignment, recommended me to the Merrill board. [Joffe declined to identify the director.] How does this differ from your work as a litigator and from the work a corporate lawyer would do? Some aspects are similar. In connection with some of the work for some of these boards or board committees, I've appeared in front of regulatory agencies and advocated positions similar to what I would do when I was a litigator representing the company. But, mainly, it's advice work with a litigation approach to the advice. I'm able to advise on regulatory investigations because I've handled regulatory investigations as a litigator. I'm able to advise on other issues involving potential director liability because I've been involved in these issues as a litigator. My career as a litigator has involved a lot of advice work. On complex contract and antitrust matters, I've often been involved in advising clients at the outset of a deal before there was any litigation to avoid or minimize any litigation risk. I also think the fact that I serve as a director on two corporations helps enable me to put myself in the shoes of the directors I'm advising. It helps me better understand the kinds of questions and concerns they may have and what it takes in order to give them the confidence to move ahead. In the last month, how have you advised those boards, and how has the mood in the boardrooms changed? Speaking generally, not just from the clients I've been dealing with, there's been a greater sense of urgency. Change has taken place rapidly. Some companies have collapsed or face collapse in a matter of days or hours as opposed to weeks or months. So everything has to operate a lot faster. The work is very intense. I would just say the regular practice of law almost seems like slow motion compared to what the last month has seen. How would this compare to the litigation between Time and Paramount? Those had a similar sense of urgency. The Time-Paramount litigation involved the life and death of a company, or at least the company's plans. What's unusual about the present situation is that so many companies are going through this all at the same time and many of these companies are interrelated, so everything is heightened, particularly in the financial sector. What challenges did advising the Merrill Lynch board on the sale to Bank of America present? It took place over a weekend. I didn't know until Sunday around 10 a.m. that we would have a board call at noon. I was at my place in the Berkshires. I then got in my car and drove to New York to make it to Merrill's offices for the 6 p.m. board meeting that approved the transaction. It involved shifting gears and focusing on the matter at hand. But then I had some practice at this; the weekend before, I had been in Washington, D.C., advising the Fannie Mae board in connection with the government's takeover. That was also a transaction that took just a weekend. From the perspective of someone who's litigated merger agreements, what sorts of pitfalls should troubled companies be aware of when they're negotiating a sale in a short period of time? Once you've made the decision to sell, you want to ensure that you've considered any feasible alternatives and that you are maximizing shareholder value; that you're getting a fair price; if you're getting the buyer's stock rather than cash, that you've done due diligence on the buyer; and that you have confidence that your lawyers have negotiated the best possible agreement protecting your rights. The latter point is very important. When you're advising a board, how much of an understanding of the nuances of the company's financial situation do you need to have to counsel effectively? It depends on the issue, but the more you know, the better. And that's why it's far better for boards who think they may at some point need their own counsel to get those counsel involved when they're not in a crisis. So, one, the counsel can get to understand the business and also know the board members, and, two, the board members can get a sense of their lawyers, and a rapport can be established, so they end up speaking a common language. Knowledge is always a plus. Now there are some times when counsel is brought in in an emergency and hasn't had prior experience with a board, and that's better than no counsel at all, but it's not the best situation. When a board retains its own counsel, at what point does that create tension with the company counsel who may be closer to management? Only very rarely is there an issue if the situation is properly handled. Usually, you can work out any differences of opinion before you walk into the boardroom. It shouldn't be a problem. It's usually the case that the board hasn't brought in counsel because they want different advice. They've brought in counsel because they want to be confident that the advice they've been getting is correct and has been confirmed by counsel that is independent. Usually, you're brought in as a double check, a second set of eyes and ears. I once had a director say to me that the reason he wanted independent counsel was that he wanted someone who woke up in the morning and went to bed at night thinking only of him. He did not want his lawyers to have any other distractions. Does that hold in a situation where you have the board on one side and the CEO on the other? When you're brought in by the board to discuss the role of the CEO, as was done in the case of our representation of Fannie Mae or Merrill, then there's a clear understanding that there is possibly going to be a difference between the board and management. But it isn't between the board and company counsel; it's because you were brought in specifically to advise with respect to the board's deliberations about the CEO. You're prepared for that. It's part of the assignment. Do you think more boards are going to seek their own counsel in the years ahead? Yes. It seems to be the direction in which the trend is going. There's greater and greater pressure on boards, so it's understandable that in these kinds of high-stress situations, the board would want the backstop of having a second set of eyes and ears. But that doesn't mean that, in a normal situation with a normal company board, counsel is going to be anywhere near as involved in the day-to-day affairs of the company as regular company counsel. Did you see that in your own work with Fannie Mae? Fannie Mae was an institution in a long-term crisis. I went to every board meeting for two years because they were in a perpetual state of being under various regulatory investigations on which they needed advice. For several years, they had no public financials. That's an unusual situation that puts special demands on a board. Have you ever seen that sort of institutionalization of crisis anywhere else? The Fannie Mae situation is really unique. Often, you're called in to advise a board in a noncrisis situation. They just want to double-check. The things on which they want a double check are usually narrower. Are there points when you have felt a level of uncertainty or unease among the directors that you have to manage to keep from spiraling? A lot of the advice you can give to boards is calming advice. The rules that they have to follow are pretty simple and basic. What you're largely advising on is process and telling them that if they follow the right process, their business judgment will rarely be second-guessed, but they do have to follow the right process. I think that is itself calming advice. But that's almost easier than a situation in which you're advising a board on a regulatory investigation. There are a lot of situations where the board has a difficult decision and there is no good solution. The decision to settle a piece of litigation is often like that. As they say, the best settlement is the one neither side likes. So a board often is faced with a choice of settling a matter on terms they're not thrilled with or litigating and facing the possibility of even worse terms. All you can do in a situation like that is provide perspective, and a litigator can provide his or her best judgment as to what's likely to happen in the litigation if there is no settlement. This is the kind of expertise that the board can take comfort in relying on when making a decision. In many of these situations there's been significant government involvement. How does that change the tone of a transaction for a board? It's undoubtedly impressive to have the secretary of the Treasury and the head of the Federal Reserve tell you that the national interest requires you to do X. That's not a factor you easily disregard, but in the end the board has to do what's best for the corporation and the shareholders. It's part of the environment, but it isn't the answer. And just occasionally, the government is overbearing, and a board has to know how to deal with that. Is there an instance in your career where you've dealt with an overbearing government entity? Particularly as a litigator, I've dealt with regulatory investigations where I've thought that a particular regulatory agency was being overly aggressive, was looking at the matter as a zealous prosecutor, and some balance had to be injected into the situation. The client had to understand that these were human beings with a mission talking to them and not God Almighty. Have you seen anything in your career that would compare to the last six weeks? No, and I don't think there's anyone alive who has. It's very hard to know exactly what went on in the Great Depression, but I think you'd have to go back to that period to see the kind of things we've seen in the last six weeks or so. There've been individual corporate catastrophes that undoubtedly compare, but what's unusual at the moment is the number of them that are going on at the same time. How does this compare to the recession of the 1970s? You had a grinding recession and you had stagflation, so there were severe economic problems, but there weren't as many urgent crises happening one day after another to many different companies. It was much less intense. What do you find interesting about these assignments? They are particularly challenging because so much is at stake for the institutions and for the people involved. There really is high drama. The intellectual issues are fascinating. The time pressure is intense, so you actually have to come to conclusions and make decisions; you can't just sit and play Hamlet for weeks. You get an insight and understanding into the events that everybody's talking about that you wouldn't get if you weren't involved. And I think there's a particular plus to being involved for multiple institutions because you gain different perspectives on the overall situation. You're not seeing everything out of only one company's eyes. You get a very broad range of issues. Has that insight made you more or less panicked than the average New Yorker over the last month? I'm not panicked, but I am concerned about the economy as a whole. |
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