Global Crisis Management Series: This post is part 10 in a series concerning topics further elaborated on in Cleary Gottlieb's Global Crisis Management Handbook—a desk reference for spotting issues and avoiding common mistakes when faced with a crisis. The current version is available here.
In an increasingly global, regulated, and litigious environment, companies face unanticipated and potentially destabilizing events that often play out in the public eye. Frequently, the issues organizations face during large-scale, often public, crises require more than exclusively legal skills, but also communications skills. Below we discuss three key steps in the process for handling the public relations aspects of any crisis: (1) assembling a crisis-response team, (2) deciding whether or not to make a public statement, and (3) crafting the public message.
Assembling a Crisis-Response Team
Even before a crisis arises, it is important to assemble a crisis-response team. While there is no "one size fits all" approach that works for every situation, we discuss two main considerations when deciding who to include on the crisis-response team: (1) internal stakeholders and (2) external assistance.
1. Internal Stakeholders.
The first members of the crisis-response team should represent a cross-section of the organization—including senior management, the general counsel's office, compliance, and senior members of the marketing, public relations and investor relations groups. This group will ensure that the company's messaging is consistent across the organization, and that every potential audience (including governmental authorities, the public, and other employees at the company) is taken into account. Team members should also reflect considerations specific to each crisis. For example, if one subsidiary is prominently involved in a crisis, the response team should include senior members from that subsidiary, which will promote consistent messaging company-wide.
In some situations, especially those implicating senior management or involving certain types of conduct, it may make sense to have an audit committee or potentially a special board committee that can act as an independent entity to oversee the investigation and manage the crisis.
2. External Assistance.
Once a crisis hits, the next decision is whether to retain outside legal counsel and public relations consultants to help handle the public response. For example, simple matters, such as possible violations caused by rogue, low-level employees caught early by internal compliance, may not ever require a public response. Ultimately, like the decision to retain outside counsel generally in an investigation, the decision turns on factors such as the complexity of the issues and nature of the exposure, including additional potential consequences. Of course, if a situation calls for outside assistance, the quicker they are involved, the sooner they can help with messaging.
When hiring public relations consultants, it is important to consider issues related to privilege. Under the Kovel doctrine, in many circumstances, communications with the agents of attorneys are as protected as communications with attorneys themselves.1 This applies when attorneys retain a public relations firm to assist specifically with managing issues related to litigation.2 Therefore, in order to protect privilege to the fullest extent possible, a company should consider having outside counsel directly retain any public relations firm.
Deciding Whether to Make a Public Statement
When a company is facing a large-scale crisis, another early step is to determine what to say and when to say it. These considerations should encompass both legal and practical concerns. For example, in certain circumstances, business considerations to rebuild trust in a community or within a consumer base in the present might outweigh concerns about the possibility of follow-on lawsuits or investigations in the future. We address three important considerations when deciding whether and when to make a public statement: (1) the way in which the crisis arose, (2) the status of the investigation and information available, and (3) the legal disclosure duties that apply.
1. How did the crisis arise?
The manner in which a crisis arises can influence the optimal response—a Wells Notice, for example, may lead to a careful, more deliberate disclosure of an investigation than an investigation arising from a high-profile public incident or indictment.
When an investigation stems from a highly-publicized event, one strategy is to quickly make strong assurances that the issue is being addressed, instead of letting bad news trickle out over time. Such a strategy helps the company shape the narrative and express appropriate concern about the matter.
But, keep in mind: this strategy is harder to execute if an organization lacks information and the investigation is still in its early stages. Under those circumstances, a generic statement acknowledging the situation but avoiding comment on the facts may be more appropriate. For example, days after the Deepwater Horizon oil spill, BP made the first of multiple statements regarding the flow rate of the leak.3 When BP eventually settled with the SEC, the settlement noted that BP failed to update the initial flow rate disclosure despite data indicating that the flow rate was many times higher than BP initially specified.4 A delay until the investigation concluded or an update after obtaining additional information could have prevented this scenario.
2. What is the status of the investigation, and how much remains unknown?
Even when a crisis does not arise in a public way, getting out in front of the story with a forceful statement or even a more limited disclosure can help. Early messaging can allow a company to control the story, mitigate the impact of later bad news, and "creat[e] a climate in which prosecutors and regulators might feel freer to act in ways less antagonistic."5
In deciding whether to play offense with a preemptive statement, an organization should consider the status of the investigation and the availability of information. If a company makes a premature disclosure early in an investigation, the disclosure could add political and public fuel to an investigation that otherwise would have run its course. Making a statement when the underlying facts and the outcome are uncertain could also exacerbate the situation. Early statements based on incomplete information could expose the company to potential liability for misleading statements, or create a potential future duty to disclose or update.
3. What, if any, legal disclosure duties apply?
The decision whether to make a disclosure may also depend on which regulatory regimes apply. After identifying the applicable rules, an organization should plan a response in light of the potential duties by which it is bound.
Issues about disclosure often arise with respect to government investigations. The fact of an investigation may not require disclosure, and in many instances, the investigating authority may demand or request that a company not do so.6 Of course, it is critical to consult with experienced counsel about potential disclosure obligations.
In certain circumstances, public companies have a duty to disclose material information about investigations. For companies subject to the SEC's jurisdiction, the SEC has promulgated various reporting requirements for public companies to follow in their filings. Below is a brief summary of the most pertinent Regulation S-K items that relate specifically to disclosing material information about regulatory investigations.
- Regulation S-K Item 103 requires a company to "[d]escribe briefly any material pending legal proceedings . . . known to be contemplated by governmental authorities."7 However, this standard only requires the disclosure of imminent There is no duty to disclose litigation that is not "substantially certain to occur."8 For example, receiving a subpoena or a Wells Notice about an SEC investigation does not necessarily trigger a disclosure requirement—that is, the fact of an investigation does not need to be disclosed.9
- Regulation S-K Item 401(f) requires that in identifying and describing the background of its directors, registrants must describe certain events that are "material to an evaluation of the ability or integrity of any director, person nominated to become a director or executive officer of the registrant."10 Included in the definition of such events is whether the person is "a named subject of a pending criminal proceeding."11
- Regulation S-K Item 503(c)12 applies to prospectuses in securities offerings and is incorporated into periodic filings by Item 1A of the instructions to Forms 10-K and 10-Q. It requires a discussion of the most significant risk factors a company faces. Regulation S-K Item 30313 is a similarly broad regulation which also imposes a duty to "[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations."14 As such, in one instance, a court permitted claims to go forward for a failure to disclose ongoing criminal and civil investigations impacting a company's operations and financials.15
Beyond formal regulations, case law in the United States has created additional requirements for public companies to correct or update prior communications in certain situations. A duty to correct previous communications may arise when the issuer of the statement discovers that the statement was inaccurate or misleading when made.16 Similarly, even if a company's statements are accurate when made, a duty to update explicit or implicit forward-looking statements may arise if the circumstances change and the statements become inaccurate or misleading. Companies should be cautious when making early statements to avoid the need to provide updates later once additional facts come to light.
Crafting the Public Message
If an organization facing a crisis decides to issue a public statement, the next step is to consider how to craft the message, keeping in mind certain legal and practical considerations. Below are do's and don'ts when crafting a public message.
- Deliver a Consistent Message. While nuance and tone may shape the delivery and content of each message for the corresponding audience, the messages must remain consistent.
- Focus on Past and Present Policies. Explain how new policies will prevent similar occurrences in the future, and how the company has always been committed to avoiding such instances.
- Tailor to Applicable Legal Requirements. Statements should be carefully evaluated by counsel before they are made public. As noted above, if a public company subject to U.S. securities laws makes "misleading" statements, even if those statements are technically true or express only opinions regarding the company's compliance with laws, those statements can form the basis of separate legal action.
- Be Explicit. To avoid potentially misleading prospective buyers, be explicit in disclosures about existing subpoenas and ongoing investigations.
- Contradict Settlement Agreements. While it may be tempting to issue a statement denying wrongdoing by implying that the company always maintained certain standards and practices, be careful: regulators may force a company to withdraw such strongly-worded post-settlement statements, which undermines the company's credibility. Even a statement after a resolution on a no-admit-or-deny basis as mild as "we have maintained our standards, in market share as well as our reputation, in my view" has come under scrutiny.17
- Unnecessarily Place Blame. In some cases, it may be necessary to explain what happened. But, often, trying to shift blame too blatantly backfires. For example, when Mylan came under scrutiny for its pricing of the EpiPen, its initial strategy of attempting to deflect blame broadly onto the healthcare system stoked the fire before antitrust charges.18
- Make Predictions. A disclosure about an ongoing investigation should not predict its outcome. As noted, even statements regarding potential risks and next steps should only be included with care. If forward-looking statements are included, they should be paired with adequate and meaningful cautionary statements, to obtain protection under the "safe harbor" in the Private Securities Litigation Reform Act.
1. United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).
2. In re Grand Jury Subpoenas, 265 F. Supp. 2d at 332; Haugh v. Schroder Inv. Mgmt. N. Am. Inc., No. 02 Civ. 7955 (DLC), 2003 WL 21998674, at *4-5 (S.D.N.Y. Aug. 25, 2003).
3. Press Release, Sec. Exch. Comm'n., BP to Pay $525 Million Penalty to Settle SEC Charges of Securities Fraud During Deepwater Horizon Oil Spill (Nov. 15, 2012), https://www.sec.gov/news/press-release/2012-2012-231htm.
5. In re Grand Jury Subpoenas Dated March 24, 2003 Directed to (A) Grand Jury Witness Firm and (B) Grand Jury Witness, 265 F. Supp. 2d 321, 326 (S.D.N.Y. 2003).
6. Criminal grand-jury investigations, for example, proceed in secrecy. Fed. R. Crim. P. 6(e)(2)(B).
7. 17 C.F.R. § 229.103.
8. In re Lions Gate Entm't Corp. Sec. Litig., 165 F. Supp. 3d 1, 12 (S.D.N.Y. 2016).
9. Id.; Richman v. Goldman Sachs Grp., Inc., 868 F. Supp. 2d 261, 273-74 (S.D.N.Y. 2012); see also City of Westland Police and Fire Ret. Sys. v. MetLife, Inc., 928 F. Supp. 2d 705, 718 (S.D.N.Y. 2013).
10. 17 C.F.R. § 229.401(f).
12. 17 C.F.R. § 229.503.
14. Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85, 94 (2d Cir. 2016) (citing 17 C.F.R. § 229.303(a)(3)(ii)), cert. granted sub nom. Leidos, Inc. v. Indiana Pub. Ret. Sys., 137 S. Ct. 1395 (2017), cert. dismissed, No. 16-581 (R46-032), 2018 WL 3026583 at *1 (U.S. June 18, 2018).
16. Vacold LLC v. Cerami, 545 F.3d 114, 121 (2d Cir. 2008); Backman v. Polaroid Corp., 910 F.2d 10, 16-17 (1st Cir. 1990) (en banc).
17. Robert Khuzami, Testimony on "Examining the Settlement Practices of U.S. Financial Regulators," Sec. Exch. Comm'n (May 17, 2012), https://www.sec.gov/news/testimony/2012-ts051712rkhtm#P77_13677. See also Floyd Norris, Morgan Stanley Draws S.E.C.'s Ire, N.Y. Times (May 2, 2003), https://www.nytimes.com/2003/05/02/business/morgan-stanley-draws-sec-s-ire.html.
18. Charles Duhigg, Outcry Over EpiPen Prices Hasn't Made Them Lower, N.Y. Times (June 4, 2017), https://www.nytimes.com/2017/06/04/business/angry-about-epipen-prices-executive-dont-care-much.html.
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