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lawyerVolume 48 – Number 2 September/October 2010

inside...

Advising Boards of Directors on Compliance with Dodd-Frank

Preventing Boilerplate Provisions from Bubbling Over

Corporation or Partnership?

Offshore Drilling: How to Survive in the New Regulatory Environment

BOEMRE in the Aftermath of the Deepwater Horizon

Corporate & Tax Law

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Advising Boards of Directors on Compliance with Dodd-Frank:Focus on Executive Compensation and Corporate Governance Matters By AAron J. Scheffler, JonAthAn B. newton and MAidie ryAn

A Watched Pot Never Boils: Preventing Boilerplate Provisions from Bubbling OverBy liz KlingenSMith and lArry huelBig

Corporation or Partnership? Proposed Federal Tax May Affect Your ChoiceBy BArBArA S. de MArigny

Offshore Drilling in the Gulf of Mexico How to Survive in the New Regulatory Environment

By zAcK A. cleMent and r. Andrew BlAcK

Major Changes to the Minerals Management Service and Off-Shore Drilling Regulation in the Aftermath of the Deepwater Horizon ExplosionBy roBert PAinter

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September/october 2010 Volume 48 number 2

FeAtURes

The Houston Lawyer (ISSN 0439-660X) is published bimonthly by The Houston Bar Association, 1300 First City Tower, 1001 Fannin St., Houston, TX 77002-6715. Periodical postage paid at Houston, Texas. Subscription rate: $12 for members. $25.00 non-members. POSTMASTER: Send address changes to: The Houston Lawyer, 1300 First City Tower, 1001 Fannin, Houston, TX 77002. Telephone: 713-759-1133. All editorial inquiries should be addressed to The Houston Lawyer at the above address. All advertising inquiries should be addressed to: Quantum/SUR, 12818 Willow Centre Dr., Ste. B, Houston, TX 77066, 281-955-2449 ext 16, www.thehouston lawyer.com, e-mail: [email protected] Views expressed in The Houston Lawyer are those of the authors and do not necessarily reflect the views of the editors or the Houston Bar Association. Publishing of an advertisement does not imply endorsement of any product or service offered. For article REPRINTS, please contact Wright’s Reprints: 1-877-652-5295. ©The Houston Bar Association, 2010. All rights reserved.

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from the editorThat Ever-changing Legal EnvironmentBy John S. grAy

committee SpotlightLaw and the Media Committee By Joy SAnderS

Media reviewsNow Playing at a Theater Near You (And Featuring Houston Attorney Charles Foster)

By Keri d. Brown and Joy e. SAnderS

Rainmaking 101 How to Grow Your Client Base & Maximize Your Income reviewed by AngelA l. dixon

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legal trendsMassive Fines and Puni-Cows:“Legal Thuggery” Might Now Affect Exemplary Damages By erin reed

Kagan Confirmation Contentiousness Continues Partisan Trend By edwArd c. dAwSon

off the recordCharting a New Path– at High Speeds By hAnnAh SiBiSKi

At the Bar

A Profile in Professionalism:JUSTICE KEM THOMPSON FROSTFourteenth Court of Appeals

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Join the houston Bar Association’s 100 club The Houston Bar Association 100 Club is a special category of membership that indicates a commitment to the advancement of the legal

profession and the betterment of the community. The following law firms, corporate legal departments, law schools and government agencies with five or more attorneys have become members of the 100 Club by enrolling 100 percent of their attorneys as members of the HBA.

firms of 5-24 Attorneys Abraham, Watkins, Nichols, Sorrels, Agosto & FriendAbrams Scott & Bickley, L.L.P. Adair & Myers PLLC Ahmad, Zavitsanos & Anaipakos, P.C. Ajamie LLP Allen Boone Humphries Robinson LLP Andrews Myers Coulter & Hayes, P.C.Bair Hilty, P.C. The Bale Law Firm, PLLCBarker Lyman, P.C. Bateman/Pugh, PLLC Bell, Ryniker & Letourneau, P.C. Berg & Androphy Bingham, Mann, House & Gibson Brown McCarroll L.L.P. Buck Keenan LLP Burck, Lapidus, Jackson & Chase, P.C. Bush & Ramirez, L.L.C. Butler I Hailey Caddell & Chapman Cage Hill & Niehaus, L.L.P. Campbell & Riggs, P.C. Christian Smith & Jewell, L.L.P. Cochran Baker Williams & Matthiesen LLP Cokinos Bosien & Young Conley Rose P.C. Connelly • Baker • Wotring LLPCooper & Scully, P.C. Cozen O’Connor Crady, Jewett & McCulley, LLP Currin, Wuest, Mielke, Paul & Knapp, PLLCDavid Black & Associates De Lange Hudspeth McConnell & Tibbets LLP Devlin Naylor & Turbyfill PLLC Diamond McCarthy LLPDinkins Kelly Lenox Lamb & Walker, L.L.P. Dobrowski L.L.P. Dow Golub Remels & Beverly, LLP Doyle Restrepo Harvin & Robbins, L.L.P. Drucker, Rutledge & Smith, L.L.P. Ebanks Taylor Horne L.L.P. Ellis, Carstarphen, Dougherty & Griggs P.C. Essmyer, Tritico & Rainey, L.L.P. Fibich Hampton & Leebron, L.L.P. Fisher, Boyd, Brown & Huguenard, LLP Fizer Beck Webster Bentley & Scroggins, P.C.Fleming & Associates L.L.P. Foreman DeGeurin & NugentFrank, Elmore, Lievens, Chesney & Turet, L.L.P. Fullenweider Wilhite PCFunderburk & Funderburk, L.L.P. Galloway Johnson Tompkins Burr & Smith Germer Gertz, L.L.P. Givens & Johnston PLLC

Goldstein, Faucett & Prebeg, L.L.P. Gordon & Rees LLPHagans Burdine Montgomery & Rustay, P.C.Harris, Hilburn & Sherer Harrison, Bettis, Staff, McFarland & Weems, L.L.P.Hays McConn Rice & Pickering, P.C. Hicks Thomas LLP Hirsch & Westheimer, P.C. Hogan Lovells US LLP Holm I Bambace LLP The Hudgins Law Firm Jackson Gilmour & Dobbs, PCJenkins Kamin, L.L.P. Johnson, DeLuca, Kennedy & Kurisky, P.C. Johnson Radcliffe Petrov & Bobbitt PLLC Johnson, Trent, West & Taylor, L.L.P.Jones, Walker, Waechter, Piotvent, Carrere & Denegree, L.L.P.Joyce, McFarland + McFarland LLP Kane Russell Coleman & Logan PC Kasowitz Benson Torres & Friedman LLP Kelly Hart & Hallman, LLP Kelly, Sutter & Kendrick, P.C. Linebarger Goggan Blair & Sampson LLP Liskow & Lewis Lorance & Thompson, PC MacIntyre & McCulloch, LLPManning, Gosda & Arredondo, L.L.P.McGinnis Lochridge & Kilgore LLP McLeod Alexander Powel & Apffel PC MehaffyWeber PC Mills Shirley L.L.P. Morris Lendais Hollrah & Snowden Munsch Hardt Kopf & Harr, P.C.Nathan Sommers Jacobs Nickens Keeton Lawless Farrell & Flack LLP Ogden, Gibson, Broocks, Longoria & Hall, LLP Ogletree, Deakins, Nash, Smoak & Stewart, P.C. Pagel Davis & Hill PC Perdue Brandon Fielder Collins & Mott Phelps Dunbar LLP Phillips & Akers, P.C.Pillsbury Winthrop Shaw Pittman LLP Ramey, Chandler, McKinley & Zito Ramsey & Murray PC Roberts Markel P.C. Ross, Banks, May, Cron & Cavin, P.C. Rusty Hardin & Associates, P.C. Rymer, Moore, Jackson & Echols, P.C. Schirrmeister Diaz-Arrastia Brem LLPSchwartz, Junell, Greenberg & Oathout, LLP Schwartz, Page & Harding L.L.P. Seyfarth Shaw LLP Shannon Martin Finkelstein & Alvarado, P.C.Shepherd, Scott, Clawater

& Houston, L.L.P.Shipley Snell Montgomery LLP Short Carter Morris, LLPSingleton Cooksey LLP Slusser Wilson & Partridge LLP Smith & Carr, P.C. Smith Murdaugh Little & Bonham, L.L.P. Smyser Kaplan & Veselka, L.L.P.Sprott, Rigby, Newsom, Robbins & Lunceford, P.C.Steele Sturm P.L.L.C. Strong Pipkin Bissell & Ledyard, L.L.P. Sutherland Asbill and Brennan LLP Tekell, Book, Allen & Morris, L.L.P.Thompson & Horton LLP Thompson, Coe, Cousins & Irons, LLP Tucker, Taunton, Snyder & Slade, P.C. Ware, Jackson, Lee & Chambers, L.L.P. Watt Beckworth Thompson & Henneman, LLP Westmoreland Hall Maines & Lugrin PC Weycer Kaplan Pulaski & Zuber, P.C. White Mackillop & Gallant P.C. Williams, Birnberg & Andersen, L.L.P.Williams Kherkher Hart Boundas LLP Williams Morgan & Amerson, P.C. Willingham, Fultz & Cougill, LLP Wilson, Cribbs & Goren, P.C. Wilson, Elser, Moskowitz, Edelman & Dicker Wong, Cabello, Lutsch, Rutherford & Brucculeri, P.C. Wright Brown & Close, L.L.P.Yetter Coleman LLP Ytterberg | Deery LLPZimmerman, Axelrad, Meyer, Stern & Wise, P.C. Zukowski, Bresenhan & Sinex, L.L.P. firms of 25-49 Attorneys Baker & McKenzie LLP Beck Redden & Secrest, L.L.P. Gibbs & Bruns LLP Greenberg Traurig, LLP Hoover Slovacek LLP Hughes Watters Askanase LLP Jones DayLittler Mendelson, PC Looper Reed & McGraw, P.C. Morgan, Lewis & Bockius LLPOlson & Olson LLP Susman Godfrey LLP firms of 50-100 Attorneys Akin Gump Strauss Hauer & Feld LLPBaker Hostetler LLP Beirne, Maynard & Parsons, L.L.P. Chamberlain Hrdlicka White Williams & Martin Coats I Rose Gardere Wynne Sewell LLP Howrey LLP Jackson Walker L.L.P.

King & Spalding LLPMartin, Disiere, Jefferson & Wisdom, L.L.P. Porter & Hedges LLP Thompson & Knight LLP Winstead PC

firms of 100+ Attorneys Andrews Kurth LLP Baker Botts L.L.P. Bracewell & Giuliani LLP Fulbright & Jaworski L.L.P. Haynes and Boone LLP Locke Lord Bissell & Liddell LLPVinson & Elkins LLP

corporate legal departments Anadarko Petroleum Corporation AT&T Texas BP CenterPoint Energy El Paso Corporation Kellogg Brown & Root Inc Lyondell Petrochemical Company MAXXAM IncNewfield Exploration CompanyPetrobras America Inc. Plains Exploration & Production Co. Pride International Inc. Rice University Sysco Corporation Texas Children’s Hospital Total E&P USA Inc. University of Houston System

law School faculty South Texas College of Law Thurgood Marshall School of Law University of Houston Law Center

government Agencies City of Houston Legal Department Harris County Attorney’s Office Harris County District Attorney’s Office Harris County Domestic Relations OfficeMetropolitan Transit Authority of Harris County TexasPort of Houston Authority of Harris County Texas

Returning on the plane from the Middle East this week, I reflected on the first four months of my term as president of the HBA. One of the

questions often asked is, “What do you do at the Bar, and is there a way for me to be involved?” One of the primary focuses of the HBA is serving low-income residents through the Houston Volunteer Lawyers Program (HVLP), the Dispute Resolution Center and many other programs. Accord-ing to 2009 Census Bureau statistics, nearly 57 million Americans now qualify for civil legal assistance from programs such as our HVLP. That is an increase of 3 million from 2008 and the highest number of people eligible for legal aid in our country in the 35-year history of the Legal Service Corpo-ration (LSC), set up to provide federal funds to legal aid providers. Even more disturbing, 19.6 million are children.

Looking at statistics closer to home, the Texas Equal Access to Justice Foundation (TEAJF) reports there are 5.3 million people in Texas who qualify for legal aid, yet our state ranks 39th in the nation in per capita revenue for the provision of civil legal aid. We are meeting only 20-25 percent of the need.

The HVLP is funded in part by the TEAJF, but a primary source is the Houston Bar Foundation. So, there are a number of ways that you can be involved that will make a positive difference in the Bar’s focus on pro-viding pro bono services to low-income resi-dents of Harris County.

If you are a member of a law firm or cor-•porate legal department, encourage your organization to become an HBA Equal

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By T. Mark kellyVinson & elkins llP

Access Champion. This is a program in which law firms and legal departments commit to handle a certain number of pro bono cases through the HVLP each year, for five years. The level of com-mitment depends on the number of attorneys in your firm or legal depart-ment. The Equal Access Champi-ons program is vi-tal to the success of HVLP. Because of this program, HVLP has been able to increase its representation of poor Houstonians from approximately 1,000 cases a year to nearly 2,400. It is also good market-ing for your organization. Your name appears in every Houston Bar Bulletin, every issue of The Houston Lawyer, on the HBA Web site, and even in the lobby of the HBA office.If you are a solo practitioner, you can •also become an Equal Access Champion if you agree to handle just one pro bono case for HVLP each year, for five years. Solos and firms with fewer than five at-torneys make up a significant percentage of the Equal Access Champions.If you or your firm is already an Equal •Access Champion, sign on again for an-other five years. In 2011, it will be time for all our charter firms and individu-als to re-commit to equal access for all Houstonians. Make sure your organiza-tion continues its support.

Help a veteran through the HBA’s Veter-•ans Legal Initiative. You can volunteer for the legal clinics held every Friday afternoon at the Michael E. DeBakey

VA Medical Center; you can volunteer for Saturday legal clinics held twice a year at American Legion and VFW halls; or you can volunteer to handle a pro bono case or ap-peal for a veteran di-rectly through HVLP. Since 2008, over 3,000 veterans have received services through this program. You can read more about the initia-tive and opportunities

to help our veterans on the HBA Web site, www.hba.org.Underwrite the Harvest Party, the main •fundraising event for the Houston Bar Foundation, set for November 15 at Riv-er Oaks Country Club. It is the most im-portant thing lawyers in our community can support financially during the year. One hundred percent of the net proceeds from underwriting go to the Houston Bar Foundation, which allows us to continue to fund the Houston Volunteer Lawyers Program and the services it provides to poor Houstonians. As of last week, we had raised $475,000, but were $50,000 short of reaching our goal.If you can’t underwrite, buy tickets to •the Harvest Party. Ticket sales cover the expenses for the party, which allows the underwriting to go directly to the Foun-dation. For $110 per person, you get

You Should Try It!

“...there are a number

of ways that you can

be involved that will

make a positive difference

in the Bar’s focus on

providing pro bono

services to low-income

residents of

Harris County.”


food, drink and the camaraderie of your friends in the legal profession. Visit the HBA Web site for a ticket order form.Call HVLP at 713-228-0735 and tell •them you want to accept a pro bono case on your own. Handle a divorce for an abused spouse, prepare a will for an elderly person, help someone get their disability benefits or keep their home. There are as many different types of cas-es as there are types of legal problems. If every lawyer in Harris County handled one pro bono case every year, we could quickly wipe out the critical status of le-gal services in our area.

With all the demands on our time, I know adding more activities to a person’s schedule can sometimes be daunting. Two events I participated in during September reminded me of how spending a little time in the ser-vice of others is so worthwhile.

On September 12, the HBA provided a wills clinic at Ellington Air Force Base, and close to 90 Marine Reservists were given peace of mind in settling some of their af-fairs before their deployment. Attorneys from 15 law firms and legal departments prepared the wills, while 36 lawyers and 36 notaries volunteered a part of their Sunday to execute the documents in this worthwhile endeavor. I found it uplifting to visit with these brave individuals about their lives and their dreams.

The next week, I read to four classes of 2nd graders on Constitution Day about the Bill of Rights. Unbeknownst to me, two tele-vision stations showed up to film the event, and afterward I was asked why I would teach the Constitution to kids at such an early age. I noted how quick their minds are and how honest and uninhibited their questions were. Besides, where else after a lecture do you have people fill the front of the class-room eager to hear what you have to say (as opposed to the back row) and come up after to give you a hug!

Without question, involving yourself in a pro bono activity is invigorating, and I believe you will find it infectious. Having done it once, you will want to do more. You should try it.

thehoustonlawyer.com September/october 2010 7

One of the goals of The Houston Law-yer is to help Houston Bar Associa-tion members fulfill their obligation to keep current with the changes taking place in the legal environment by pub-lishing articles on topics or issues that

we believe are important. Most of the articles printed in The Hous-ton Lawyer or available online at www.thehoustonlawyer.com were chosen because they help hone our practice skills, increase our knowl-edge of the corpus of the law, assist us in maintaining our workloads, help develop client relationships, provide assistance to those in need in our communities or teach us where we have been and perhaps where we should be heading. Given that Houston is the nation’s energy cen-ter, it is important that Houston lawyers keep abreast of the ever-changing legal environment we are facing; not only for the energy, refining and petrochemical indus-tries, but all other industries you may represent, as well as the people working and living in Houston.

In this issue, we strive to achieve that goal by focusing on two topics of substantive law—corporate and taxa-tion. Towards that end, we bring you five feature articles that not only provide insightful perspectives on the cor-pus of the law, but also focus on timely issues and legal changes that will affect many practices in Houston as the government reacts and responds to the explosion of the Deepwater Horizon drilling rig and resulting oil spill. Included in this issue are articles on complying with the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, a discussion of problems as-sociated with using boilerplate contractual provisions, proposed taxation changes that may affect your client’s choice of corporation/partnership, the offshore drilling

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By John S. GrayGardere Wynne Sewell llP

ASSociAteeditorS That Ever-changing Legal

EnvironmentKeri BrownBaker Botts L.L.P.

Catherine LeLaw Firm of Catherine Le

Tamara Stiner Toomer Attorney at Law

Don Rogers Harris County District Attorney’s Office

Robert W. Painter The Painter Law Firm

moratorium, and the resultant transformation of the MMS into the BOEMRE (you will have to read the ar-ticles to learn what these acronyms mean).

In addition to these substantive articles, be sure to read our Legal Trend on exemplary damages, Spotlight on the HBA’s Law and the Media Committee, Off the Re-

cord on attorney Ned Barnett and Media Review on Houston attorney Charles Foster and the compel-ling film Mao’s Last Dancer, about a promising young ballet dancer from China, Li Cunxin, who joined the Houston Ballet in the 1980s for three months as part of a cultural exchange program and decided he did not want to return to China. The film focuses on his efforts to

stay in Houston and the lawyering of Charles Foster to help him realize his dream.

Tamara Stiner Toomer, an associate editor of The Houston Lawyer, has done an excellent job of coordinat-ing this issue as our guest editor. She deserves our grati-tude and thanks for her efforts. Without her assistance and the work of all the members of The Houston Lawyer editorial board, the continued publication of this fine magazine would not be possible. Likewise, we are grate-ful for the continued commitment of the advertisers that support this magazine. Due to the efforts of the edito-rial board; dedicated HBA staff such as managing editor, Tara Shockely and executive director, Kay Sim; our pub-lisher, Quantum/SUR Inc.; and the many companies and individuals who advertise in The Houston Lawyer, we are able to provide the nearly 12,000 Houston Bar As-sociation members with a professional, award-winning publication. Please take a few moments to look at the advertisers in this magazine, give them a call, and then use their products and services when possible. Your pa-tronage will keep our journal alive and growing.

“In this issue,

we strive to achieve

that goal by focusing

on two topics of

substantive law—

corporate and taxation.”


BOARD OF DIRECTORS

DIRECTORS (2009-2011) Alistair B. Dawson Hon. David O. Fraga Jennifer A. Hasley Daniella D. Landers

DIRECTORS (2010-2012) Benny Agosto, Jr. Todd M. Frankfort Warren W. Harris John Spiller

EDITORIAl STAFFeditor in chief

John S. Gray

Associate editors

Keri D. Brown Catherine Le Robert W. Painter Don Rogers Tamara Stiner Toomer

editorial Board

Julie Barry Sharon D. Cammack Angela Dixon Don D. Ford III Dori Kornfeld Goldman Al Harrison Farrah Martinez Judy L. Ney Caroline C. Pace Maidie Ryan Joy E. Sanders Mark Schuck Hannah Sibiski Lisa Brindle Talbot Mark R. Trachtenberg Gary A. Wiener N. Jill Yaziji

Managing editor

Tara Shockley

HBA OFFICE STAFF

ADvERTISINg SAlESDESIgN & PRODuCTION

QuAntuM/Sur12818 Willow Centre, Ste. B

Houston, TX 77066281 . 955 . 2449

www.quantumsur.com

PublisherLeonel E. Mejía

Production ManagerMarta M. Mejía

AdvertisingMary Chavoustie

executive directorKay Sim

Administrative AssistantAshley G. Steininger

Administrative AssistantBonnie Simmons

receptionist/resource SecretaryLucia Valdez

director of educationLucy Fisher

communications directorTara Shockley

Membership and technology Services director Ronald Riojas

Membership AssistantBilly Salinas

committees & events director Miguel Trevino

committees & events Assistant Ashley Sugg

communications Assistant/web designerBrooke Eshleman

PresidentT. Mark Kelly

President-electDenise Scofield

first Vice PresidentM. Carter Crow

Second Vice PresidentLaura Gibson

Secretary David A. Chaumette

treasurer Brent A. Benoit Past PresidentBarrett H. Reasoner

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Advising Boards of Directors on

Compliance with Dodd-Frank:

Focus on Executive Compensation and Corporate

Governance Matters

On July 21, 2010, Presi-dent Obama signed the “Dodd-Frank Wall Street Reform and Con-sumer Protection Act” (the “Act”). Portions of

the Act were effective immediately, while others have delayed effective dates or require the SEC to adopt implementing regulations. This article focuses on the ex-ecutive compensation and corporate gov-ernance provisions under the Act applica-ble to public companies registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and provides practical suggestions that boards of directors may wish to consider.

The key executive compensation and corporate governance provisions under the Act include the following:

Allow shareholders to have a nonbind-•ing advisory vote on compensation packages of key executives not less than once every three years. Allow shareholders to have a nonbind-•ing advisory vote on golden parachute payments in conjunction with certain business combinations.Require companies to implement •policies to “clawback” incentive com-pensation from current and former executives if there is an accounting re-statement due to material noncompli-ance with financial reporting require-ments, with a three-year look-back period.Require enhanced disclosure in proxy •statements regarding executive com-pensation. Provide heightened independence re-•quirements for compensation commit-tee members and disclosure require-ments regarding their relationship with compensation consultants and any conflicts of interest.Provide new independence standards •for compensation consultants, law firms and other advisers to compensa-tion committees.

By AAron J. Scheffler, JonAthAn B. newton and MAidie ryAn

shareholders regarding the rationale for all compensation being paid, in-cluding differences in compensation paid to executive officers versus other employees. Review compensation arrangements• . Review the current compensation ar-rangements to ensure that they corre-late with stated objectives, including pay for performance that your board intends to be incentivized.

Say-on-Pay - golden Parachute Payments The Act provides that in any proxy state-ment where shareholders are asked to approve an acquisition, merger, consoli-dation, sale or other disposition of all or substantially all the assets of an issuer, the company must:

Disclose any agreements or under-i. standings it has with any named ex-ecutive officers concerning any com-pensation payments (whether present, deferred or contingent) that are based on or otherwise relate to the transac-tion and the aggregate total of all such compensation (including conditions, if any) that may be paid or become payable; and Provide shareholders with a separate ii. nonbinding advisory vote to approve such agreements and the compensa-tion payments disclosed. Such advi-sory vote is non-binding and is not re-quired if such payments have already been subject to the general say-on-pay on executive compensation described above.

The golden parachute say-on-pay reso-lution must be included in proxy state-ments for shareholder meetings occurring six months after the Date of Enactment. Within six months following the Date of Enactment, the SEC will implement fur-ther rules regarding say-on-pay for golden parachute payments.

In order to assist companies in imple-menting these new requirements, we offer the following:

Review what pay practices or executive •rights would be considered a payment for purposes of the new rule. Relevant

Authorize the SEC to implement •shareholder proxy access for the elec-tion of directors.Prohibit broker discretionary voting in •director elections, executive compen-sation or other significant matters to be determined by SEC rulemaking.

It should be noted that mandatory majority voting in director elections was originally included in the Senate version of the Act but was not included in the fi-nal legislation.

Say-on-Pay - executive compensationThe Act requires companies to provide shareholders with a nonbinding advisory vote on compensation packages of key executives at least once every three years. In addition, shareholders are entitled to determine, at least once every six years, the frequency (once every one, two or three years) with which such advisory vote on executive compensation must be sought. Although the vote is nonbinding, a negative vote would send a message to the company and may be indicative of fu-ture results for votes for directors that are members of the company’s compensation committee.

Both resolutions on executive compen-sation must be included in proxy state-ments for shareholder meetings occurring six months after July 21, 2010, the date of enactment of the Act (the “Date of En-actment”). No further SEC rulemaking is required in order for this say-on-pay leg-islation to take effect.


Engage in a dialogue with sharehold-•ers and proxy advisory firms. New processes should be implemented to communicate with shareholders and proxy advisory firms regarding com-pensation programs, provided that companies adhere to the prohibition against selective disclosure under Reg-ulation FD.Explain philosophy behind all compen-•sation. Provide specific information in SEC filings and in dialogues with

payments could be everything from rights under employment agreements to severance plans to deferred com-pensation arrangements to stock op-tion and restricted stock grants. Consider whether your pay practices •need to be more integrated and ratio-nalized. Most companies implement pay programs one-at-a-time and don’t look at the interrelation of the pro-grams. Consider all the cumulative rights these plans create; disclosure may be needed to explain why certain practices exist or modifications may be needed to harmonize all compensa-tion elements.

clawbacksThe Act requires a company to implement and disclose its policy on incentive-based compensation and recoup (clawback) incentive-based compensation (including stock option or restricted stock awards) from any current or former executive of-ficer in the event of an accounting restate-ment as a result of the company’s “material noncompliance” with any financial report-ing requirement under the securities laws. The amount recoverable is the excess over what would have been paid under the ac-counting restatement, with a three-year look-back period. “Material compliance” is not defined under the Act but may be clar-ified in the implementing SEC regulations. Misconduct is not required.

As the Act requires the SEC to direct the national securities exchanges to im-plement listing standards that require list-ed companies to have clawback policies, further NYSE and NASDAQ rulemaking is required before these provisions take effect. In order to assist companies in im-plementing these new requirements, we offer the following:

Craft clawback policy and prepare cor-•responding disclosure. Implement a policy that provides clear guidelines regarding the recoupment of incentive compensation from current and for-mer executive officers and prepare the corresponding disclosure in the proxy statement.


Review existing compensation ar-•rangements, including incentive plans and employment agreements for any necessary modifications. Review incen-tive plans and forms of award letters or agreements to determine whether explicit provisions outlining the claw-back should be added and whether changes in employment agreements or other agreements need to be imple-mented. Determine if such modifica-tions or implementation of a clawback policy would trigger severance pay-ments (e.g., “right to terminate em-ployment for good reason.”)

disclosure on executive compensationThe Act requires the following disclosure on executive compensation:

The (i) median of the annual total i. compensation of all employees other than the CEO, (ii) annual total com-pensation of the CEO and (iii) ratio of such median employee annual total compensation to the CEO annual total compensation;Enhanced disclosure on the relation-ii. ship between executive compensa-tion actually paid and the financial performance of the company, taking into account any change in the value of the shares of stock and dividends of the company; such disclosure may include a graphic representation of the required information to be disclosed;Enhanced disclosure of the reasons iii. why a company has chosen the same (or different) persons as Chairman and CEO; andDisclosure as to whether any employ-iv. ee or director (or designee) is permit-ted to purchase financial instruments that are designed to hedge or offset any decrease in the market value of the equity securities granted to such employee or director as part of such employee or director’s compensation, or held, directly or indirectly, by such employee or director.

While the disclosure of each of the above items is required in a company’s annual proxy statement, the disclosure of

the CEO’s pay versus the median pay of employees is also required in all SEC fil-ings set forth in Item 10(a) of Regulation S-K, including registration statements and 10-K annual reports.

The Act directs the SEC to enact new rules regarding this enhanced executive compensation disclosure within 180 days of the Date of Enactment, so companies should continue to monitor new dis-closure requirements. In order to assist companies in implementing these new re-quirements, we offer the following:

Prepare ratio of CEO pay versus em-•ployee pay. Calculate and analyze the ratio of CEO total compensation in relation to the median total compen-sation for all other employees for the past fiscal year. Consider the disclo-sures that will need to be made to ex-plain the differences in compensation. In doing so, consider the following:

Total compensation is defined in –Item 402(c)(2)(x) of Regulation S-K, and includes salary, bonuses, values of equity awards, perquisites and all other compensation. Review the elements of CEO total –compensation as calculated in the current Summary Compensation Table.

Prepare enhanced disclosure on ex-•ecutive compensation for 2011 proxy statement. Review last year’s proxy statement and consider providing greater disclosure regarding your com-pensation policies and alignment to fi-nancial performance.Prepare disclosure on hedging policy• . Implement a policy regarding hedging by employees and directors in respect of equity securities granted by the company or held by them and prepare the corresponding disclosure in the proxy statement.

independence of compensation committees, consultants and legal and other AdvisersThe Act requires the SEC to direct the national securities exchanges to adopt listing standards that would require each

member of a company’s compensation committee to be independent, similar to the requirements currently in place for audit committee members pursuant to Sarbanes-Oxley. Whether a member of the compensation committee would be considered independent would depend on such factors as the source of compen-sation paid to a compensation commit-tee member (including any consulting, advisory, or other compensatory fee paid by the company to such member), and whether the member is affiliated with the company directly or through an affiliate or subsidiary of the company.

The Act also requires that compensa-tion consultants, legal counsel and other advisers engaged by the compensation committee be selected only after consid-ering factors that may affect the advisers’ independence. The Act directs the SEC to identify such factors, including:

The services by the employer of the i. adviser to the company;The amount of fees received by the ii. employer of the adviser to the com-pany as a percentage of total revenue of such employer;The policies and procedures of the em-iii. ployer of the adviser that are designed to prevent conflicts of interest; Any business or personal relationship iv. the adviser has with a member of the compensation committee; and Any stock of the company owned by v. the adviser.

The company must provide appropriate funding for the compensation commit-tee to retain compensation consultants, legal counsel or other advisers, leaving the direct responsibility for the appoint-ment, compensation and oversight of the compensation consultant, legal counsel or other advisers to the compensation committee. The Act further requires the company to disclose in its annual proxy statement whether the compensation committee retained or obtained the ad-vice of a compensation consultant and whether the work associated with the compensation consultant raised any con-flict of interest, and, if so, the nature of


Equal Access ChampionsWhat does it take to become an “Equal Access Champion”? The firms and corporations listed below have signed 5-year commitment forms that indicate they will uphold a pledge to provide representation in a certain number of cases each year, based on the number of attorneys in the firm or legal department. The goal is to provide pro bono representation in at least 1,500 cases through the Houston Volunteer Lawyers

Program each year, and to increase that goal each year. For more information contact Kay Sim at (713) 759-1133.

large firm championsAndrews Kurth LLPBaker Botts L.L.P.Bracewell & Giuliani LLPFulbright & Jaworski L.L.P.Locke Lord Bissell & Liddell LLPVinson & Elkins LLP corporate championsBaker Hughes IncorporatedBPCenterPoint Energy, Inc.ConocoPhillipsContinental Airlines, Inc.Exxon Mobil CorporationMarathon Oil CompanyPort of Houston AuthorityRosetta Resources Inc.Shell Oil CompanyWaste Management, Inc. intermediate firm championsAkin Gump Strauss Hauer & Feld LLPBeirne, Maynard & Parsons, L.L.P.Gardere Wynne Sewell LLPHaynes and Boone, L.L.P.King & SpaldingThompson & Knight LLP Mid-Size firm championsAdams & Reese LLPBaker & Hostetler LLPChamberlain, Hrdlicka, White, Williams & MartinGreenberg Traurig, LLPHowrey LLPJackson Walker L.L.P.Jones Day

Morgan, Lewis & Bockius LLPPorter & Hedges, L.L.P. Strasburger & Price, L.L.P.Susman Godfrey LLPWeil, Gotshal & MangesWinstead PC Small firm championsAbraham, Watkins, Nichols, Sorrels, Agosto & FriendBeck, Redden & Secrest, L.L.P.Doyle, Restrepo, Harvin & Robbins, L.L.P.Gibbs & Bruns LLPHays, McConn, Rice & Pickering, P.C.Hughes Watters Askanase LLPJohnson DeLuca Kennedy & Kurisky, P.C.Kroger FrisbySchwartz, Junell, Greenberg & Oathout, L.L.PShook Hardy & Bacon, L.L.P.Sutherland Asbill & Brennan LLPWeycer, Kaplan, Pulaski & Zuber, P.C.Yetter Warden & Coleman LLP

Boutique firm championsAbrams Scott & Bickley, L.L.P.Coane & AssociatesConnelly • Baker • Wotring LLPEdison, McDowell & Hetherington LLPFullenweider Wilhite PCFunderburk & Funderburk, L.L.P.Hicks Thomas LLPJenkins & Kamin, L.L.P.Ogden, Gibson, Broocks, Longoria & Hall, L.L.P.Squire, Sanders & Dempsey L.L.P.Strong Pipkin Bissell & Ledyard, L.L.P.Wilson, Cribbs & Goren, P.C.

Solo championsLaw Office of O. Elaine ArchieBasilio & AssociatesPeter J. BennettFatima BrelandLaw Office of Fran BrochsteinLaw Office of Barbara CalderonLaw Office of Robbie Gail CharetteDe la Rosa & Chaumette Papa DieyeThe Ericksen Law FirmFrye & Cantu, PLLCFuqua & AssociatesTerry L. HartLaw Office of David S. HsuKatine & Nechman L.L.P.The Keaton Law Firm, PLLCGregory S. LindleyLaw Office of Maria S. LowryMartin R. G. Marasigan Law OfficesThe Law Office of Evangeline Mitchell, PLLCThe Montalvo Law FirmMorley & Morley, P.C.Bertrand C. MoserPilgrim Law OfficeRobert E. PriceW. Thomas (Tommy) ProctorGwen E. RichardLaw Offices of Judy RittsCindi L. RobisonScardino & FazelShortt & Nguyen, P.C.Sadler Law FirmJeff SkardaTeal & AssociatesTindall & England, P.C.Diane C. TreichNorma Levine Trusch

the conflict and how the conflict is being addressed.

The disclosure regarding retention of compensation consultants and any conflicts of interest must be included in proxy statements for shareholder meet-ings occurring one year after the Date of Enactment. Within 360 days of the Date of Enactment, the SEC will be re-quired to direct the national securities exchanges to implement listing standards that prohibit any listed company that is not in compliance with the compensation committee and compensation consultant requirements of the Act from listing its securities on such exchanges. The exist-ing standards for the stock exchanges test independence through a variety of factors that might signal a potential conflict of in-terest and requires the issuer to make an affirmative determination that indepen-dence is satisfied.


Review need for independent legal •

counsel. In light of these new require-ments, directors should review the current legal needs of the compensa-tion committee and the current rela-tionships they have with legal counsel to determine whether there is a need to engage independent legal counsel to the compensation committee. Review independence of compensa-•tion committee members. Consider the changes that might be necessary to the composition of your compensa-tion committee in anticipation of the heightened independence standards.Review independence of advisers• . Re-view the factors enumerated above to determine whether compensation con-sultants, legal counsel and other advis-ers will be deemed independent. Ac-cording to the Act, this assessment is required before such adviser is retained by the compensation committee.Review relationships with compensa-•tion consultants. Review relationships with compensation consultants to de-termine if any conflicts or potential

conflicts of interest exist. If conflicts or potential conflicts exist, prepare the corresponding disclosure and take steps to eliminate such conflicts.

Proxy AccessThe Act provides that the SEC may adopt proxy access rules to facilitate the ability of shareholders to nominate directors. The SEC’s most recent proposal on proxy access in May 2009 called for a sliding ownership threshold ranging from 1 to 5 percent depending on a company’s market capitalization, as well as a one-year hold-ing period. It is likely that the SEC will issue rules to implement the Act’s proxy access requirements in time for the 2011 proxy season.


Anticipate shareholder activism• . Un-derstand your company’s shareholder base and identify significant share-holders, and engage them in regular communications.

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Anticipate the areas of concern of •shareholder activists. Consider “hot” areas of shareholder activism and fac-tors that might provide an invitation to activists to use proxy access to push for changes in corporate behavior. Review your by-laws, nominating •committee charter and any corporate governance guidelines. In light of ex-pected SEC rulemaking to provide for shareholder proxy access, consider potential changes to your by-laws, nominating committee charter and any corporate governance guidelines to reflect the requirements that share-holders will need to meet to nominate directors.

Broker discretionary VotingThe Act now prohibits broker discretion-ary voting with respect to director elec-tions, executive compensation or other significant matters as will be determined by further SEC rulemaking. As a conse-quence, brokers may no longer vote un-instructed shares on significant proposals

such as “say-on-pay,” which increases the possibility of such proposals being voted down by shareholders.

Given the risks associated with the pro-hibition of broker discretionary voting in these important matters and the mandate for shareholder say-on-pay, companies may wish to consider the following:

Anticipate impact of broker non-votes• . Anticipate the impact of broker non-votes and abstentions. Examine proxy advisory policies• . Re-view proxy advisory policies to deter-mine the likelihood of a “vote against” or “withhold” recommendation. Consider hiring proxy solicitation firm• . If your company maintains a large re-tail shareholder base, consider hiring a proxy solicitation firm to “get out the vote” for director elections and say-on-pay proposals.

Additional requirements for financial institutionsThe Act imposes additional requirements on certain financial institutions, includ-

ing registered broker-dealers, with assets of $1 billion or more. Under the Act, the appropriate Federal regulators must pre-scribe the following regulations or guide-lines no later than nine months after the Date of Enactment:

Require the disclosure by covered fi-i. nancial institutions to the appropri-ate Federal regulator the structure of all incentive-based compensation ar-rangements to determine whether the compensation structure provides an executive officer, employee, director or principal shareholder with exces-sive compensation, fees or benefits or could lead to material financial loss to the covered financial institution; andProhibit incentive-based payment ar-ii. rangements that the regulators deter-mine encourage inappropriate risks by covered financial institutions by pro-viding an executive officer, employ-ee, director or principal shareholder with excessive compensation, fees or benefits or that could lead to material


financial loss to the covered financial institution.

disclosure requirements for oil & gas, Mining and other resource extraction companiesWhile not directly related to executive compensation or corporate governance, the Act’s impact on the natural resource industry is of particular importance to many lawyers across the Houston area.

The Act requires any company who en-gages in the commercial development of oil, natural gas or minerals to include in its annual reports filed with the SEC dis-closure regarding any payments made by the company to the United States or a non-U.S. government, agency, instrumentality or department for the purpose of further-ing the commercial development of oil, natural gas or minerals. The disclosure must include the type and total amount of such payments made for each project of the issuer and the type and total amount of such payments made to each govern-ment, agency, instrumentality or depart-

ment. The Act requires the SEC to issue final rules to enact the foregoing within 270 days after the Date of Enactment.

Additionally, any company that is an operator, or has a subsidiary that is an op-erator, of a coal or other mine subject to the Mine Safety Act must include in each annual and quarterly report it files with the SEC detailed information regarding the safety record of each such mine for the time period covered by such report. The SEC is authorized to issue rules to carry out the purposes of the foregoing.

Aaron J. Scheffler is an associate and Jonathan B. Newton is a partner in the Corporate & Securities section of the Hous-ton office of Baker & McKenzie LLP. Mai-die Ryan is the Assistant General Counsel of Seahawk Drilling, Inc. and is a member of The Houston Lawyer editorial board.

Author’s note: Roslyn Tom, a Corporate & Securities partner in the New York office of Baker & McKenzie LLP, provided valuable contributions to the content of this article.

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When documenting a potential deal, attorneys and cli-ents tend to fo-cus on the “deal terms,” like the

sales price, and overlook seemingly in-nocuous boilerplate provisions. Failure to watch out for the potential pitfalls as-sociated with typical boilerplate provi-sions can result in problematic litigation when the deal falls apart or a dispute aris-es. Transactional attorneys should avoid the false sense of security in boilerplate provisions, and consider such provisions with an eye toward future litigation.

The efficacy of any agreement remains unknown until the agreement comes un-der scrutiny in litigation. Once under a microscope, conflicting choice of law, forum selection, dispute resolution or ar-bitration provisions, unintelligible vari-able interest rate provisions, insufficient merger or entirety clauses, or incomplete force majeure clauses can create costly and unnecessary litigation headaches. This article considers the litigation pit-falls that arise when transactional at-torneys fail to watch the pot, and offers potential solutions to keep the pot from boiling over.

A. watch for consistency: conflicting Provisions in Separate AgreementsIn any given deal, there can be myriad separate, but related agreements: pur-chase agreements, guaranties, financ-ing agreements, indemnity agreements, pledge agreements, and security agree-ments. Although separate agreements executed at the same time as part of the same transaction are construed as a sin-gle transaction, problems arise when the separate agreements contain conflicting provisions regarding the same topics. A claim arising from one document may be subject to arbitration while a claim aris-ing under a separate document may be subject to litigation in a particular forum.

By liz KlingenSMith and lArry huelBig

A Watched Pot Never

Boils: Preventing Boilerplate Provisions

from Bubbling

Over

Construction of one agreement may re-quire application of Texas law, but con-struction of a related agreement may re-quire application of Louisiana law. There may be instances where separate agree-ments both provide for arbitration, but the procedure set forth for initiating the arbitration process or the selection of an arbitrator or arbitrators differs.

When such provisions clash, litigators face the unpleasant task of navigating through unnecessarily complex proce-dural hoops. Such navigation requires litigating gateway issues before getting to the merits of the dispute. These threshold issues often relate to how to initiate liti-gation or arbitration, where the dispute will be heard, what law applies, or what procedural rules apply. The end result can be expensive piecemeal litigation in separate forums applying different law with the very real risk of conflicting rul-ings or judgments.

Conflicting provisions generally arise from the use of forms from prior transac-tions, combining standard forms with a unique document, or mixing and match-ing forms from separate parties. From the outset, parties involved in a transaction comprised of separate agreements should consciously decide on a particular forum, arbitration procedure, and the applicable law. As forms to be used in the transaction come into play, attorneys should carefully proofread the forms to make sure that the provisions related to dispute resolution accurately reflect the parties’ agreement for future resolution of any disputes, and that they do not inadvertently conflict with one another.

B. watch the forum: crafting an Arbitration AgreementMany clients include boilerplate arbitra-tion agreements in their forms based on a perception that arbitration is more ef-ficient, less costly, more predictable, con-fidential, more final, and generally better for complicated fact situations that re-quire expertise to understand. In reality, arbitration often does not cost less than a trip to the courthouse, and may not re-

sult in a “quick” or more predictable reso-lution. In the event the arbitrator issues a clearly erroneous award against your client, your client has little-to-no right to appeal the award. The realities of arbitra-tion often conflict with a client’s percep-tion of the process.

Instead of automatically assuming ar-bitration is the preferable form of dispute resolution, attorneys should first consider the inclusion of a jury waiver provision in lieu of an arbitration agreement.1 In ar-bitration, parties typically share the cost for the arbitrator or arbitrators—costs that can quickly skyrocket. The court-house down the street is a free forum. A jury waiver allows the judge to act as the finder of fact and avoids the uncertainty inherent in any jury pool. If the judge makes the wrong call, then a party has the right to appeal, a right essentially for-saken in binding arbitration.

If, after dismissing the virtues of the courthouse, the parties remain com-mitted to arbitration, careful attention should be paid to the drafting of the ar-bitration clause. Too often such clauses appear to be drafted by attorneys who may have never actively participated in an arbitration. Without knowledge of the arbitration process, the arbitration clause may contain gaps that can cause costly litigation of gateway issues related to arbitrability, e.g. whether an arbitra-tion agreement exists, or whether certain claims fall within the scope of the arbi-tration provision.

To dodge troublesome and costly gate-way issues, the drafting attorney should consider the following checklist when constructing a custom arbitration agree-ment:

carefully define the scope of the clause 1. to include the claims subject to arbi-tration, and specifically exclude those claims (or third parties) that will not be subject to arbitration;specify whether the arbitration agree-2. ment is subject to application of the Federal Arbitration Act or the Texas Arbitration Act, and when the Texas Arbitration Act applies determine

whether to specifically and expressly exclude application of the Federal Ar-bitration Act;detail the steps necessary to initiate 3. the arbitration process, which may include written notice, followed by an attempt at resolution by senior man-agement representatives from the par-ties or mediation;specify the locale for the hearing, the 4. governing law, and the applicable ar-bitration rules;2

specify the number of arbitrators 5. and the process for selecting the arbitrators; 3 set forth the requirements for the ar-6. bitrators, such as years of experience in a specific industry, and any other considerations for ensuring the neu-trality and independence of potential arbitrators;set forth the parameters of discovery, 7. depositions (if any), the exchange of documents, initial disclosures, inter-rogatories, or other custom discovery tools;consider whether to allow parties to 8. the arbitration to file dispositive mo-tions or prohibit such motions in ar-bitration;include any limitation on any future 9. award by the arbitrator, whether the exclusion of consequential damages or limiting the amount of any single award;consider defining the form of the 10. award, e.g., requiring findings of fact and conclusions of law, a reasoned award, or a simple monetary award; and determine whether the prevailing par-11. ty will be entitled to attorneys’ fees or costs of arbitration.

Last but not least, ask an attorney ex-perienced in arbitration to review the clause.

c. watch for cracks: Making a Merger clause countMerger or entirety clauses purport to tie the deal up in a neat little bow. They al-legedly prevent future oral amendments


or modifications to the agreement and future claims of fraud based on represen-tations outside the agreement. A typical merger clause contains language similar to the following:

This Agreement, together with all Ex-hibits referenced herein, constitutes the entire agreement between the Par-ties in relation to the Subject Matter of this Agreement and supersedes all prior agreements, understandings and commitments, whether oral or in writ-ing, between the Parties. This Agree-ment may not be amended or modi-fied in any manner except by a written document signed by both Parties that expressly amends this Agreement.

Despite a transactional attorney’s best intention to tie a bow around the deal, cracks in the clause may allow room for oral amendments or modification of the agreements, and claims of fraudulent in-ducement.

The statute of frauds requires certain types of agreements to be in writing.4 Where an underlying agreement is not subject to the statute of frauds, it is likely that any amendment or modification will likewise not be subject to the statute of frauds. Thus, if the alleged amendment or modification does not fall within the stat-ute of frauds, it may be enforceable, de-spite the contrary working of the merger clause.

A merger clause does not shield a deal from future claims of fraudulent induce-ment. Although the typical merger clause purports to define the entire agreement within the four corners of the agreement and specifically excludes any prior agree-ments between the parties, a party to an agreement may nevertheless assert claims of fraud based on oral or written repre-sentations that occurred outside the four corners of the document.5 To ward off the threat of future claims of fraudulent inducement, the merger clause should knock out the reliance element necessary to establish a claim of fraudulent induce-ment by including an express waiver of any reliance on any representation made outside the four corners of the agreement.

Consideration should also be given to ex-pressly waiving reliance on specific rep-resentations that naturally flow from the subject matter of the transaction, such as the value or condition of the subject mat-ter. The merger clause may also include an affirmative statement of exclusive reli-ance on each individual party’s own due diligence, evaluation or investigation of the subject matter of the agreement.

d. watch the unforeseen: defining force MajeureOften considered the ultimate boiler-plate provision, the force majeure clause can excuse a party’s performance when certain unexpected events occur. Recent events have brought overlooked force ma-jeure provisions to the forefront, includ-ing the government’s drilling moratorium in response to the Deepwater Horizon oil spill. Hurricanes in the Gulf of Mexico have shut down refineries and manufac-turing plants, raised the price of com-modities and restricted transportation access and routes. China’s massive con-struction programs have caused a rapid rise in commodity prices. When these types of purportedly unexpected events occur, parties may look to the force ma-jeure clause to justify non-performance, late delivery or an increase in price. Cli-ents seeking relief or receiving a force majeure notice may be disappointed to learn that the force majeure clause was nothing but an afterthought.

Transactional attorneys should bring the force majeure clause into focus by clearly defining what constitutes a force majeure event, and what happens when such an event occurs. For example, if a hurricane constitutes a force majeure event, the agreement should identify the parties’ remedies, whether performance delay, cancellation of the contract, an increase in price, or a duty to cover. The duration of those remedies should like-wise be defined to alleviate uncertainty as to how long deliveries can be delayed, performance excused, or prices elevated. The force majeure provisions should not only describe what constitutes a force

majeure event and what remedies are available, but also how to proceed after such an event. For example, the provi-sion should detail how to provide notice of a force majeure event, and when any response to such notice may be due. Con-sideration should be given to whether the responding party has an option to cancel the contract altogether or delay perfor-mance. Contractual force majeure terms control over common law rules that can fill gaps.6 To eliminate future reliance on the common law gap fillers, the parties may detail their rights, remedies, and the procedure in the force majeure clause.

e. watch for clarity: Keep Variable interest SimpleVariable interest rate provisions often complicate the litigation process and impede enforcement of a judgment at the conclusion of the dispute resolution process. The law allows recovery of pre- and post-judgment interest, but exactly what that amounts to may be in jeopardy when neither the jury, nor the court, nor the sheriff can make heads or tails of the provision on which an award of interest is based. Variable interest rate provisions can include definitions that go on for pages and pages amounting to an unin-telligible mess that only the drafting at-torneys can decipher.

Confusion arising from variable in-terest rate provisions can be caused by a number of situations. Many variable interest rate provisions rely on sources outside the agreement to determine the applicable rate. Those sources may in-clude various financial publications or pronouncements by other large financial institutions. Complications also arise when different rates may apply to differ-ent tranches or levels of funding. To fur-ther obscure the applicable interest rate, calculation of the rate may be based on subjective conditions or events occurring outside the agreement.

The litigator faces the challenge of of-fering specific proof of the applicable in-terest rate and interest calculation at trial. A judgment must be complete on its face,


and cannot change based on future fluc-tuations in the market. If the applicable interest rate is based on a third-party publication, the litigator can acquire proof of the interest rate during discov-ery through a deposition on written ques-tions. However, at trial, the applicable rates determined during discovery may have changed due to more recent publica-tions by third parties, or the occurrence of certain events or subjective conditions. Without a crystal ball, future fluctua-tions in the applicable rate are simply in-determinable. The inability to determine a future interest rate throws a wrench in the path to achieving a judgment that is complete on its face. To establish a future interest rate, there must be a quantita-tive formula for doing so on the face of the note or applicable agreement. In the absence of such a provision, there is no way to prove the future rate. The litigator must then attempt to convert the variable interest rate into a fixed rate.

The uncertainty of future interest rates generates risks beyond the court room. The judgment, if uncertain or incomplete, can hinder a party’s ability to recover on the judgment. The sheriff responsible for executing a judgment must also be able to calculate the amount of the judgment, including interest to enforce it against a judgment debtor. If unable to do so, the sheriff cannot enforce the judgment. Moreover, a client may be subject to li-ability for any miscalculation that leads to an event of default and premature ac-celeration of any underlying note.

To avoid the pitfalls associated with complex variable interest rates, transac-tional attorneys should keep it simple. Consider the inclusion of a provision that applies “the highest rate allowed by law” upon an event of default or post-maturity. Prior to reaching maturity or default the variable interest applies, but upon matu-rity or an event of default the applicable interest rate defaults to the highest rate allowed by law. Where an outside source is the basis for the rate, such as LIBOR or the prime commercial rate of a large bank, such as Citibank, consider a pro-

vision that makes the current lender’s records prima facie evidence of the ap-plicable interest rate. Both of these solu-tions curb the challenge of proving the uncertain, and provide a sound basis for an enforceable award of pre- and post-judgment interest without subjecting the client to potential liability.

f. watch the note: who’s got it?Lenders today frequently fail to confirm prior to initiating litigation or foreclosure proceedings that they hold the underly-ing note. To prevail in a suit upon a prom-issory note, the lender must establish standing to bring the suit. To establish standing, the lender must prove that it is the owner and holder of the promissory note. Because lenders today slice, dice, sell and flip loans, the original note can get lost in the transfers, and with it, the ability to establish standing in a subse-quent foreclosure action. If the note is not lost, then it may be improperly pledged to another lender.7 For example, A borrows money from B to loan to C, and gives B the original note with an absolute endorse-ment as security. In such a situation, the agreements between A and B may reflect that the absolute endorsement is only for security purposes, but the effect is nev-ertheless the same—B is the owner and holder of the note. Thus, when A seeks to foreclose on a loan to C, A lacks stand-ing because B owns and holds the note through the absolute endorsement.

To avoid this problem, lenders should keep track of the underlying note during any slicing and dicing of the loan. In the above example, A should only collater-ally endorse the note to B, and B should give A the note in trust when A seeks to foreclose on the loan with C. To avoid any owner and holder debacles, draft-ers of loan agreements should consider structuring the loan strictly in the form of a contract rather than as a negotiable instrument.

g. conclusionPreventing the pot from boiling over re-quires nothing more than careful draft-

ing of traditional boilerplate provisions with an eye toward future litigation of the agreement.

Liz Klingensmith, a University of Houston Law Center graduate, practices in the business litigation section of Haynes and Boone, LLP. She primarily focuses her practice on disputes arising from oil and gas-related projects. Larry Huelbig, a partner at Haynes and Boone, LLP, has more than 40 years in business related litigation with a primary focus on litigation involving financial institutions and post-judgment remedies.

endnotes1. Parties may contractually agree to waive their rights to a trial by

jury. In re Prudential Ins. Co., 148 S.W.3d 124, 132 (Tex. 2004) 2.

The American Arbitration Association (“AAA”) rules for various

industries can be found at http://www.adr.org/arb_med (last

visited April 23, 2010). 3. The AAA rules set forth a procedure

for the selection of an arbitrator or arbitrators, but the parties

may agree on a different selection process independent from the

AAA. See, e.g., AAA, Commercial Arbitration Rules, R-11 – R-19.

Where the parties agree on such a process, and exclude the AAA’s

involvement in that process, the parties may receive a 50 percent

reduction in proceed fee in the Pilot Flexible Fee Schedule. See

id. at Administrative Fees. 4. See TEX. BUS. & COM. CODE §

26.01, et. seq. (2010) (Statute of Frauds). 5. See Schlumberger Tech.

Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997) (emphasizing

that a merger clause will not always bar a claim of fraudulent

inducement); Desert Palm Props., N.V. v. Macfarlane, No. 01-09-

00967-CV, 1994 Tex. App. LEXIS 2951 (Tex. App.—Houston [1st

Dist.] Dec. 8, 1994, writ denied) (observing that the merger clause

“does not preclude liability for, or provide grounds for summary

judgment on, plaintiffs’ claims for fraud, conspiracy, and negligent

misrepresentations because it contemplates only contractual

obligations, and would not obviate tort liability.”); Burleson State

Bank v. Plunkett, 27 S.W.3d 605, 616 (Tex. App.—Waco 2000, pet.

denied) (concluding that a merger clause in the form of a “notice

of final agreement” is not binding and neither prevents nor limits

the right to pursue tort claims). The parol evidence rule will not

bar proof of fraudulent inducement claims. See Desert Palm Props.,

1994 Tex. App. LEXIS 2951 at *27 (noting that the parol evidence

rule does not bar proof of claims for fraud, conspiracy or negligent

misrepresentation). 6. R & B Falcon Corp. v. Am. Exploration Co.,

154 F. Supp. 969, 973 (S.D. Tex. 2001) (citing Sun Operating Ltd.

v. Holt, 984 S.W.2d 277, 283 (Tex. App. –Amarillo 1998, no pet.));

see also TEX. BUS. & COM CODE § 2.616 (providing procedure

upon receipt of a notice claiming force majeure). 7. See Vestal v.

Conner, No. 14-96-00576-CV, 1997 Tex. App. LEXIS 4244 (Tex.

App.—Houston [14th Dist.] Aug. 14, 1997, pet. denied) (granting

summary judgment based on lender’s failure to establish lender’s

status as the owner and holder of the underlying promissory note

when lender collaterally assigned note to a bank for a loan); Lawson

v. Gibbs, 591 S.W.2d 292 (Tex. App.—Houston [14th Dist.] 1979,

no writ) (superceded by statute on other grounds) (upholding

substitute trustee’s sale authorized by bank after determining that

bank despite having been collaterally assigned the underlying

note by the payee was also the owner and holder of the note when

the payee also endorsed and delivered the underlying note to the

bank).


Offshore Drilling in the

Gulf of Mexico

How to Survive in the New

Regulatory Environment Editor’s Note:

As this issue went to press, the Obama administration announced it was lifting the deepwater drilling moratorium. Look for more details in the next issue of The Houston Lawyer.

In the last six months, the offshore drilling industry in the Gulf of Mex-ico has been affected by a national regulatory policy that has vacillated between: (1) initially favoring new drilling in the eastern Gulf; (2) or-

dering a moratorium on all deep water drilling based on safety concerns in re-sponse to the blowout on the Deepwater Horizon drilling rig (the “Original Mor-atorium”); (3) imposing a second mora-torium based on a stronger statement of environmental concern shortly after a court found that the Original Moratori-um was likely “arbitrary and capricious” (the “Second Moratorium,” collectively the “Moratoria”); and (4) beginning the development of new offshore drilling regulations to be enforced by the newly created Department of Interior’s Bureau of Ocean Energy Management, Regula-tion and Enforcement (“BOEMRE”).

While to date only a few drilling rigs have been re-deployed away from the Gulf to other international areas of ac-tivity, there is concern that the Mora-toria and upcoming regulatory changes could cause drilling companies to decide to move more rigs out of the Gulf. Drill-ing industry sources have expressed fear that the new government regulations under discussion (the “New Rules”) will have a fundamentally adverse impact on the industry. For example, in a July 22, 2010 press release, the National Ocean Industries Association (“NOIA”), an offshore drilling industry trade associa-tion, warned:

Many in the current administration and Congressional leadership have indicated that it is perfectly accept-able to reduce the number of oil and gas exploration companies to those judged to be big enough to pay . . . The move to drastically increase the amount of financial responsibil-ity necessary to bid on leases and to make an unlimited liability cap will, without a doubt, result in many com-

By zAcK A. cleMent and r. Andrew BlAcK

panies being no longer able to stay in business. The result is more and more jobs lost and less energy pro-duced at home.

This article describes strategies that a company in the offshore drilling in-dustry (the “industry”) can use to sur-vive the fundamental changes caused by these changing government policies. This survival process includes: (1) under-standing the structure and extent of the offshore drilling industry in the Gulf of Mexico and its long-term importance to the United States; (2) understanding how long the Mora-toria will continue and whether court action is likely to shorten them; (3) developing a plan to conserve cash and other resources to survive during the Moratoria; (4) un-derstanding the New Rules and what they will mean for future business operations and net revenue; (5) considering how, if necessary, to modify a company’s capital structure to meet projected new levels of net revenue; and (6) determining whether a sale or merger transaction is an appropriate strategy in the new regulatory environment.

i. the industryA study published in July 2010 by IHS Global Insight concludes that U.S. off-shore oil and gas operations, primarily in the Gulf of Mexico, produced about 30 percent of U.S. oil and 10 percent of U.S. natural gas in 2009. Of this, over 50 percent comes from deepwater drill-ing projects. The industry has a huge economic impact throughout the Gulf of Mexico region, employing over 380,000 people and generating over $70 billion of economic value in 2009, according to IHS. This is a vital national resource

that cannot easily be abandoned when a sufficient supply of alternative fuels is not available to replace these hydrocar-bons, and acquiring them overseas puts the United States at greater risk of con-flict over energy resources in a world in which national oil companies are assert-ing greater control over their country’s oil and gas.

Independent (non-major) oil compa-nies act as operators on more than half of the wells drilled in the Gulf. Currently

shallow water drill-ing and production is dominated by in-dependent explora-tion and production companies (“inde-pendents”) who do not need to find huge reserves to justify a drilling program. But even in deep-water projects with their higher capital requirements and potentially larger finds, the partici-pation of indepen-dents in many deals enables many more

wells to be drilled, permitting major oil companies to spread risk over a larger number of projects, thus expanding sig-nificantly the amount of drilling activity that occurs.

The IHS study expresses concern that the New Rules will make it more diffi-cult for independents to continue, much less expand, the level of drilling activi-ties, thus reducing the amount of work available in the Gulf for drilling compa-nies and providers of related services. The concern is that tightening of safety regulations, related requirements for additional capital investment in safety technology, and additional bond and in-surance costs might make it prohibitive for all but the largest independents to act as operators in the Gulf. If this is true, it will reduce the level of drilling and reduce net revenues for other indepen-

“A study published

in July 2010 by IHS Global

Insight concludes that U.S.

offshore oil and gas operations,

primarily in the Gulf of

Mexico, produced about

30 percent of U.S. oil and

10 percent of U.S. natural gas

in 2009. Of this, over

50 percent comes from

deepwater drilling projects.”

Offshore Drilling in the

Gulf of Mexico

How to Survive in the New

Regulatory Environment Editor’s Note:

As this issue went to press, the Obama administration announced it was lifting the deepwater drilling moratorium. Look for more details in the next issue of The Houston Lawyer.


dents and their vendors and suppliers. While larger drilling companies might be able to respond by deploying their rigs elsewhere around the world, smaller drilling companies that have focused on the Gulf will have difficulty doing so, as will many of their equipment and ser-vice providers.

ii.the two Moratoria and related lawsuitsOn May 30, 2010, the U.S. Department of Interior’s Minerals Management Service (the “MMS”), now known as BOEMRE, issued the Original Moratorium barring the issuance of new permits for deep-water drilling for six months; a similar Second Moratorium was issued in July. Two pending lawsuits have challenged the Moratoria and a preliminary injunc-tion has been issued staying enforce-ment of the Original Moratorium, but the Moratoria will likely expire by their own terms on November 30, 2010, be-fore plaintiffs’ claims are finally resolved through the appeals process. The next scheduled hearing in either suit was set for September 22, 2010 (after the press deadline for this article).

A. The Hornbeck LawsuitOn June 7, 2010 Hornbeck Offshore Services, LLC and other industry par-ticipants filed a complaint in a federal district court in Louisiana alleging that the Original Moratorium was “ar-bitrary and capricious and an abuse of discretion” and seeking an injunction

staying its enforcement. On June 22, the district court issued an Order preliminarily enjoining the Original Moratorium, find-ing that it was likely “arbitrary and capricious” because: (1) it was not supported by factual data; (2) it was overly broad; (3) it did not balance competing in-terests; and (4) its enforcement would cause irreparable injury through the loss of jobs and con-sequent harm to the economy.

The next day, the MMS and other government agencies ap-pealed the district court’s Order and sought a stay pending the appeal. On July 8, 2010, the Fifth Circuit denied the government’s request for a stay. On July 12, 2010, the BOEMRE rescinded the Original Moratorium and is-sued a Second Moratorium that imposed the same bans and sus-

pensions and purported to include additional evidentiary support. Si-multaneously, the government filed a Motion to Dismiss in the district court and a Motion to Vacate in the circuit court, both arguing that the Hornbeck suit is now moot.

On August 16, 2010, the Fifth Cir-cuit asked the district court to consid-er: (1) whether BOEMRE has authority to rescind the Original Moratorium, (2) whether the evidence supporting the Second Moratorium was available for the First Moratorium, and (3) the differences between the two Morato-ria. Although the district court has re-sponded to the Fifth Circuit’s request, the Fifth Circuit, as of September 13, has not scheduled oral arguments on the Government’s appeal of the pre-

liminary injunction of its Original Moratorium.

B. The Ensco LawsuitOn July 20, 2010, Ensco Offshore Company (“Ensco”) filed an amended complaint against the Government before the same Louisiana federal dis-trict court challenging the Original Moratorium and the Second Morato-rium under many of the same theo-ries asserted by Hornbeck. The En-sco suit also challenges new shallow and deepwater drilling and permit requirements imposed by BOEMRE that have essentially shut down all deepwater drilling operations in the Gulf. Ensco and the government filed cross-motions for summary judg-ment. Oral argument on the motions was scheduled for September 22, 2010.

C. The De Facto MoratoriaThere is a substantial likelihood that neither the Hornbeck Lawsuit nor the Ensco Lawsuit will have reached a fi-nal order vacating the Moratoria be-fore they expire by their own terms on November 30, 2010. Meanwhile, the BOEMRE is reported to have substan-tially reduced its pace in granting new drilling permits and has proposed that some spill response plans satisfy newly imposed requirements.

iii. the new rulesA. What Will the New Rules Be?One result of these lawsuits is the cre-ation of a climate pressuring the gov-ernment to end the Moratoria and pro-mulgate the New Rules by November 30, 2010. It is difficult to know with precision what New Rules BOEMRE will propose. It has available to it a number of sources for advice. For example, there is the May 27, 2010 Safety Report that formed the basis for the Original Moratorium (this is the report that was purportedly based on the work of a number of listed experts who later claimed their conclusions were misrepresented). In addition,


BOEMRE has been in consultation with a group from the Natural Academy of Engineering that has focused on stan-dardizing technology and practices for (1) blowout prevention, (2) well opera-tions and (3) other safety systems.

NOIA and the American Petroleum Institute have issued two reports dat-ed September 3, 2010 (the “ industry Reports”) setting forth the industry’s recommendations concerning the New Rules. It is not possible to know wheth-er these recommendations will be fol-lowed.

Perhaps the best insight into BOEM-RE’s thinking are Notices to Lessees 2010 No. 5 and No. 6 published in June 2010. These notices reiterate a require-ment for more de-tailed checking and certification of (1) blow out preven-ters; (2) all proce-dures concerning well operations; (3) safety procedures; and (4) training of personnel to deal with emergencies. Company CEO’s are required to certify compliance with all rules in these four areas. More-over, these notices list a number of ad-ditional things that must be done based on recommendations made by the May 27 Safety Report. B. What Impact Will the New Rules Have?The New Rules are likely to increase capital costs for new safety equipment and increase operating expense by re-quiring more expensive methods of op-erating, larger bonds and more expen-sive insurance based on higher liability limits. They will likely result in larger capital requirements and reduced net earnings after expenses. The extent of these economic impacts will be clearer as we approach the November 30, 2010

expiration of the Moratoria and the likely promulgation of the New Rules. Numerous experts will offer their in-sight as drafts of the New Rules are released and they are ultimately pro-mulgated.

iV. Stand-Alone restructureA. Short-Term Survival of the MoratoriaThe short term goal for companies in the industry is to survive until the Moratoria expire. This could require a stringent program of cash conserva-tion. Because it may be difficult and expensive to obtain a new loan or raise new equity financing during the Mora-toria, the most likely available source

for any needed ad-ditional cash would be the sale of assets. However, the cur-rent situation has made valuation of assets particularly challenging; more-over, it is important that a company sell only those assets that are ancillary to its future core op-erations. There are numerous financial restructuring ex-

perts who can help with programs to conserve cash, identify core assets, and assist in valuing and marketing non-core assets.

B. Long-Term Restructure To Survive Under the New RulesIt will be important to quickly appre-ciate the effect of the New Rules on capital expenditures and operating expense, and their impact on net rev-enue available to service debt. The same financial restructuring advisors who can help with survival during the Moratoria can undertake this analysis and assist in any necessary restructur-ing negotiations with lenders and other capital suppliers.

In the last several years, many se-

cured lenders have been willing to negotiate to lower current debt service payments and extend maturities. And many unsecured bondholders have been willing to negotiate the conver-sion of debt to equity. There are nu-merous capital providers willing to lend and make equity investments in restructuring situations. Restructur-ing negotiations involving these same three elements have often occurred outside of bankruptcy courts and re-sulted in many successful stand-alone restructurings.

If these negotiations fail, the Bank-ruptcy Code permits stretching out se-cured debt payments, converting unse-cured debt to equity, making new loans with “priming” first priority liens and making new equity investments upon exit from bankruptcy.

Often, the essential questions for the viability of a stand-alone plan of reor-ganization, whether in bankruptcy or out, are (1) can a feasible plan be shown that merely stretches out secured debt and converts some, or all, unsecured debt to equity; or (2) will it be neces-sary to obtain additional restructure/exit financing; and (3) is restructure/exit financing available for the com-pany at an acceptable price?

V. transactions By Sale or MergerIf new capital cannot be attracted to a stand-alone restructuring of a company, it is often an indication that a restructur-ing plan is not feasible. In that situation, it might be useful to consider the sale of the company or its assets. Although these sales can be done outside of bankruptcy, some purchasers favor buying assets from a Chapter 11 estate because the pur-chased assets can be acquired free and clear of claims by creditors of the seller. Some purchasers care so much about this clean, unencumbered title that, to ob-tain it, they are willing to go through the cumbersome process of being a “stalking horse” bidder at a bankruptcy auction, entitled to a break up fee if they lose.

A catalyst for a sale transaction might

“The short term goal

for companies in the

industry is to survive

until the Moratoria

expire. This could

require a stringent

program of cash

conservation.”


be that one or more companies have de-cided to act as accumulators or consolida-tors to achieve a larger size which may be beneficial under the New Rules. However, that larger size can also be achieved by a “roll up” merger of a number of smaller companies into a merged company able to function bet-ter in this new mar-ket. This could be accomplished in two ways. First, a number of companies might recognize the need for a merger and do so in an out of court transaction. It would, of course, greatly facilitate this approach if a capital provider were willing to put new capital into the new combined entity. Second, if a number of smaller companies are forced into Chapter 11 cases by the Moratoria and the New Rules, they might

participate in such a merger as they exit bankruptcy. Again, this process would be greatly facilitated if capital providers

were willing to in-vest new capital as bankruptcy exit fi-nancing.

The analysis de-scribed above could apply not only to independents but also to drilling com-panies and all types of industry-related equipment and ser-vice providers. Some industry companies in each of these cat-egories may be bet-

ter able to survive the Moratoria and New Rules either by stand-alone reorganiza-tions or by horizontal or vertical consoli-dations through sale or merger.

Vi. conclusionHow does a company in the industry

survive the Moratoria and New Rules? Accept the fact that cash must be con-served to survive as long as the Mora-toria are in effect. Come to grips early with the impact the New Rules will have on operations, insurance, risk manage-ment, capital requirements and net rev-enues.

If nothing further needs to be done, great! If capital structures need to be adjusted to fit projected new lower net revenue streams, negotiate consensual restructure deals promptly.

If needed restructuring is not possible on a stand-alone basis, look for a pur-chaser or merger partner sooner rather than later. Staying agile in the face of this uncertain, rapidly changing environ-ment will be essential and the chances of survival much greater for those who act early.

Zack A. Clement is a partner and R. Andrew Black is senior counsel in the Bankruptcy and Insolvency Practice Group of Fulbright & Jaworski L.L.P.

“It will be important

to quickly appreciate

the effect of the New Rules

on capital expenditures

and operating expense,

and their impact on

net revenue available

to service debt.”


Major Changes to the Minerals

Management Service and Off-Shore

Drilling Regulation in the Aftermath

of the Deepwater Horizon Explosion


The Deepwater Horizon explosion and spill in the Gulf of Mexico left many casualties—the death of 11 platform workers and inju-ries to 17 others, damage

to the environment and marine life, and a staggering economic impact. One gov-ernmental agency has reluctantly joined this undistinguished list, the Minerals Management Service (MMS), the division of the U.S. Department of the Interior with responsibility for both regulatory oversight and revenue manage-ment for oil, gas and mineral projects on the Outer Continental Shelf.

For years MMS was plagued by accusa-tions of disturbing ethical lapses, con-flicts of interest, and poor oversight. Most recently, in May 2010, the Department’s Acting Inspec-tor General wrote a memorandum to Interior Secretary Ken Salazar announc-ing the findings of an investigation of MMS’s business and ethical practices.1 The report expressed tremendous con-cern about fraternization between MMS employees and industry, and the revolv-ing doors that whisked personnel easily from one sphere to the other. The Inspec-tor General’s investigation revealed nu-merous serious problems that betrayed public confidence and diminished orga-nizational effectiveness, including gov-ernment employees routinely accepting gifts from companies they regulated. The report detailed one incident in which an inspector conducted four inspections of offshore platforms while in the process of negotiating and later accepting em-ployment with that company.

By roBert PAinter While the time period covered by the

Inspector General’s investigation pre-ceded the recent Gulf of Mexico disas-ter, the findings in the report helped to propel the need for comprehensive MMS reform to the forefront once the Deepwa-ter Horizon incident occurred. Shortly after the Deepwater Horizon explosion took and injured lives, and initiated the worst offshore environmental disas-ter in American history, MMS Director Elizabeth Birnbaum resigned. Secretary

Salazar seized the opportunity to reform MMS by issuing two secretarial orders that will result in a sweeping re-organization of the beleaguered agency.

The shakeup sounds simple enough at first glance, but the details of where the former agen-cy’s broad powers will reside in the

new structure are anything but straight-forward. The task is so complex, in fact, that the Obama Administration has not yet been able to think it through to con-clusion; it will take around 18 months to be fully implemented.2 This drawn-out, incremental approach will, no doubt, create a confusing climate for extraction companies, attorneys, and even the gov-ernment regulators themselves.

The highest level of restructuring may actually be little more than rebranding. Secretarial Order 3302, signed on June 18, 2010, changed the name of the entire agency to the Bureau of Ocean Energy Management, Regulation and Enforce-ment (BOEMRE).3 Days later, President Barack Obama named Michael Brom-wich the first Director of BOEMRE. Bromwich quickly assumed the post be-cause the position does not require con-firmation by the U.S. Senate.4

Major Changes to the Minerals

Management Service and Off-Shore

Drilling Regulation in the Aftermath

of the Deepwater Horizon Explosion

“While the time period

covered by the Inspector

General’s investigation

preceded the recent Gulf of

Mexico disaster, the findings

in the report helped to propel

the need for comprehensive

MMS reform to the forefront

once the Deepwater Horizon

incident occurred.”


Bromwich, an attorney, has a reputa-tion for cleaning up troubled organiza-tions.5 At the time of his appointment Bromwich was a partner at a Washing-ton, DC law firm, Fried, Frank, Har-ris, Shriver and Ja-cobson, where he was a litigator and conducted internal investigations for private companies. Bromwich was pre-viously a federal prosecutor and In-spector General for the Department of Justice, and has led investigations into numerous governmen-tal entities, including our own Houston Police Department’s famously troubled Crime Lab.

While the renaming of MMS will probably have little real impact on in-dustry or Americans, the divvying up of its extensive powers will likely be much

more significant. Secretarial Order 3299, dated May 19, 2010, splits the former-MMS’s authorities among three new di-visions, all of which fall under BOEM-

RE.6 Whether this will turn out to be a game of bureaucrat-ic musical chairs is the subject of some debate, but it seems probable that the holders of the new positions created by Order 3299 will choose to put their marks on govern-mental policy. Thus, attorneys handling

offshore matters need to be aware of the new structure and pay careful attention to new developments as the staggered implementation takes place. Even at that point the changes will not be complete because the new governmental enti-ties will likely start issuing their own regulations.

One of the principal goals in the MMS restructuring is to create independence and separate financial considerations from the regulatory arm. Secretary Sala-zar attempts to achieve this by having these functions supervised by different directors and chains of command.

The Assistant Secretary of Interior of Policy, Management and Budget will oversee the Office of Natural Resources Revenue (ONRR), which will be led by its own director. ONRR’s mission will in-volve royalty and revenue management, and will be separate from the bureau in charge of safety and environmental prac-tices. Offshore activities have contribut-ed a significant sum to the U.S. Treasury, recently averaging $13 billion per year. In order to satisfy criticisms that there is an inherent conflict of interest in having the same agency that regulates oil and gas operators also collect revenue from the operators, the ONRR aspect of the reorganization has been expedited, with the goal of an effective date of October 1, 2010.7

“While the renaming

of MMS will probably

have little real impact

on industry or Americans,

the divvying up of its

extensive powers will likely

be much more significant.”

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Empowering the new regulatory bu-reaus will take more time, with a phased implementation beginning in January 2011, and lasting at least one year. The Assistant Secretary of the Interior for Land and Minerals Management will oversee the two new regulatory bureaus, each of which will be led by its own di-rector.

First, the Bureau of Ocean Energy Management will be in charge of balanc-ing environmental considerations with appropriate development of the Outer Continental Shelf for energy and min-eral resource projects. In this role, the bureau will oversee resource evaluation, permitting and leasing, and all residual powers of the previous agency not other-wise assigned by Secretarial Order 3299. In July, Director Bromwich informed Congress of the creation of an Investiga-tions and Review Unit within the Bureau of Ocean Energy Management, which will function as an internal watchdog to probe allegations of misconduct or un-ethical behavior by bureau employees

or the industry, and ensure readiness to respond to spills and accidents.8

Second, the Bureau of Safety and Envi-ronmental Enforcement will be charged with promoting and enforcing safety in offshore energy ex-ploration and pro-duction, with appro-priate consideration of environmental impacts. The bureau will be responsible for safety and over-sight, with powers to inspect, investi-gate, summon wit-nesses, obtain evi-dence, levy penalties, and cancel or sus-pend extraction activities.

The Department of the Interior is implementing these changes based on secretarial orders rather than new legis-lation. The horrifying scope of the Deep-water Horizon incident, though, has re-kindled ongoing efforts for an even more

comprehensive Congressional reform of the former MMS. This, too, is something attorneys involved in offshore inter-ests must monitor because it will have

an immediate and sweeping impact on the industry if it be-comes law.

In September 2009, U.S. House of Representatives Energy and Natural Resources Chair-man Nick Rahall (D-WV) introduced H.R. 3534, the “Con-solidated Land, En-ergy, and Aquatic

Resources (CLEAR) Act,” a bill to cre-ate a new agency within the Department of the Interior to revamp the federal offshore royalty system and administer oil and gas leasing on federal lands (in-cluding offshore).9 Congressman Rahall made significant amendments to the bill after the Deepwater Horizon incident,

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“Empowering the new

regulatory bureaus will

take more time, with a

phased implementation

beginning in January 2011,

and lasting at least

one year.”


including his own take on MMS restruc-turing, which is actually quite similar to those currently underway by the Depart-ment of the Interior.10 The bill was voted favorably out of committee to the House of Representatives.

If the amended CLEAR Act becomes law there would be a number of specific re-quirements and policy changes to contend with that have not yet been addressed in the reforms generated by Secretarial Orders 3299 and 3302. For example, the Rahall legislation would require new offshore drilling safety standards, independent certifications of critical offshore equip-ment, operator demonstration of readi-ness to respond to blowouts or spills, more inspections, harsher penalties, and elimination of the practice of granting en-vironmental waivers for offshore drilling

plans.11 The CLEAR Act would also es-tablish a training academy for federal oil and gas inspectors, which would have the goal of supplying BOEMRE with quali-fied inspectors who would abide by strict

ethical standards. At this stage, it is

impossible to say what specific responsibili-ties each of the new bureaus will possess and when responsi-bilities will shift from the old structure to the new ones. We also do not know what policy and regulatory changes will follow

once the transition to the new structure is finished. Confounding this uncertainty is the possibility that Congress may get involved. Suffice it to say that, in the af-termath of the Deepwater Horizon trag-edy, considerable change to offshore ex-ploration and production is coming, and it is coming soon.

Robert Painter is an associate editor of The Houston Lawyer. He is an attorney at Painter Law Firm PLLC, where he handles litigation matters, including representing plaintiffs in oil and gas explosions.

endnoteshttp://www.doioig.gov/images/stories/reports/pdf/Island 1.

OperatingCo.pdf

http://www.doi.gov/deepwaterhorizon/loader.2.

cfm?csModule=security/getfile&PageID=38543%20


cfm?csModule=security/getfile&PageID=35872

The former MMS, now called BOEMRE, is the only major 4.

Department of the Interior bureau led by an official that

does not require U.S. Senate confirmation. See Noelle

Straub, Sweeping Rahall Bill Would Overhaul Federal Oil

and Gas Leasing, Royalties, N.Y. TIMES, Sept. 9, 2009.

http://www.boemre.gov/ooc/PDFs/5.

BromwichTestimony0722.pdf


cfm?csModule=security/getfile&PageID=32475


cfm?csModule=security/getfile&PageID=38543%20

http://www.boemre.gov/ooc/PDFs/8.

BromwichTestimony0722.pdf

http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.03534:9.

http://resourcescommittee.house.gov/images/Documents/10.

h3534_001_xml.pdf

http://resourcescommittee.house.gov/images/Documents/11.

clear%20act%20%20discussion%20draft%20ans.pdf

“We also do not know

what policy and

regulatory changes

will follow once

the transition to

the new structure

is finished.”


Dan Downey

alternative dispute resolutionMEDIATION, ARBITRATION, SPECIAL JUDGE (Chap.151, CPRC)

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You may have seen news about a potential tax in-crease on the “carried interests” of hedge fund managers and dismissed it, first because you re-

fused to worry about the tax problems of some fat cats in Connecticut but also because it seemed to have no relevance to your general business practice. Think again. The proposed tax would have a reach far beyond hedge fund managers and may become a scale-tipper when you decide whether to recommend a partner-ship (or LLC) or a corporation for your client’s new business.

H.R. 4213, “The American Jobs and Closing Tax Loopholes Act,” narrowly missed passage by the Senate on June 24, 2010. The Act would deny capital gains rates to income from certain partnership interests referred to as “carried interests,” thereby changing the tax rate on the partner’s profit share from 15 percent to potentially as high as 42.5 percent. This change was scored as raising as much as $24 billion, however, and, given the never-ending need of Congress for revenue raisers, it is generally thought to be a question of when, not if, the bill will pass.

In general, carried interests are interests that receive a share of the profits of the partnership but that are not contingent upon a proportionate capital contribution to the partnership. Many businesses in partnership and LLC form, particularly those in the securities, real estate, and oil and gas industries, as well as entrepreneurial start-ups, have traditionally structured the compensation of the managers or developers of the business to include a carried interest. Use of a carried interest allows the investment managers, developers or entrepreneurs to participate in the partnership’s upside without a significant front-end capital contribution.

In the past, to the extent a partnership

By BArBArA S. de MArigny

Corporation or

Partnership? Proposed

Federal Tax

May Affect Your

Choice34 September/october 2010 thehoustonlawyer.com

had capital gains from, for example, the sale of stock, securities, or real estate, the partner’s share of that gain was also treated as capital gain on the partner’s tax return, even though the partner may not have contributed capital to the partnership. Similarly, if the partner sold the partnership interest, the partner recognized capital gain on the sale.

The proposed tax change is based on the theory that, if the partner did not contribute capital to the partnership and yet receives a share of its profits, and if the partner is providing advice or management services to the partnership, then the profit share must really be compensation for services. Then, as the theory goes, if the profit or gain is really compensation for services, it should really be taxed at ordinary income rates, just like other compensation for services, such as salaries. The concept sounds reasonable, except that it throws out the window close to a century of precedent in partnership tax treatment. One reason that consistency in the tax law is valuable is that it allows businesses to plan their affairs with some hope that actual results will match projections. Imagine the magnitude of this change: I don’t want to be the one to break the news to a real estate developer that when the shopping center he developed finally sells, he’ll be paying ordinary income tax rates on his gain.

The proposed legislation would change the tax rate from the 15 percent rate on capital gains to the ordinary income rate, which in 2011 is expected to revert to 39.6 percent. In addition, these amounts would be subject to self-employment (Social Security) taxes, which generally figure at a rate around 2.9 percent, suggesting a potential tax rate of as much as 42.5 percent.

The proposed legislation also would change the rates on not just the profits distributed by the partnership to the partner but also on the gain on all sales or other dispositions of the partnership interest. The current proposal does not define “disposition” to exclude transfers of the interest that otherwise would be

nontaxable, such as an incorporation. For example, under the proposed legislation, the incorporation or liquidation of a partnership or LLC in preparation for an IPO would trigger ordinary income for partners with carried interests, even

though the partners may not receive any cash in the incorporation.

A partner’s profits would not be subject to ordinary rates if the partner contributed capital to the partnership in an amount that is proportionate to the capital contributions of the other partners. Therefore, one way to avoid the impact would be to identify a contribution of capital for the partner. This is not likely to be a very useful exception for most clients, however, since the very reason that they are receiving a carried interest is their lack of seed capital to contribute.

Although this change in tax treatment was first proposed in 2007, it has not been enacted due to heavy lobbying by the securities industry. Compensation structures in the financial sector have come under increasing scrutiny, however, and hedge fund managers don’t get a lot of sympathy votes. In the current economic and regulatory climate, it appears likely that some version of the proposal will be enacted this year. Congress also needs this revenue-raising provision to offset the cost of a tax extenders package. The earlier versions of the proposal targeted

hedge fund managers, but the more recent versions have broadened the application in order to maximize the revenue.

The latest version extends beyond securities investment firms to any partnership or LLC if a partner does not contribute proportionate capital and receives the partnership interest for advising or managing the partnership’s assets, including real estate and interests in other partnerships. Now, in addition to the securities industry and many other business groups, the real estate industry has been lobbying hard against enactment, pointing to the precarious state of commercial real estate today and the potentially devastating impact of increased taxes on the real estate industry.

The effective date of these rules is expected to be post-enactment, without any grandfathering for existing partnerships. Therefore, any post-enactment partnership distributions or sales would be subjected to ordinary income rates when the partner holds a carried interest. Tax lawyers are busily considering structures that could reduce the impact of the change but, as the title of the “Closing Tax Loopholes Act” would suggest, do not expect any quick fixes. The proposal even contains what is referred to as an “anti-abuse” provision that could be loosely paraphrased as “if you are thinking about structuring to avoid these rules, it won’t work” or, put into the words you use with your children, “don’t even think about it.”

As you can see, we are about to have a whole new cost-benefit analysis to perform when advising on business structures. And you thought choice-of-entity criteria were well-settled and straightforward. On the bright side, you may get the opportunity to be your clients’ hero by protecting them from a looming tax problem.

Barbara Spudis de Marigny is a partner in the Houston office of the law firm of Gardere Wynne Sewell LLP, where she specializes in the taxation of partnerships and LLCs.

“The proposed tax change is based on the

theory that, if the partner did not contribute capital

to the partnership and yet receives a share of

its profits, and if the partner is providing advice or

management services to the partnership, then the profit

share must really be compensation for services.”


committee spotLight

The Law and the Media Com-mittee was established in 1986 with the goal of encouraging dialogue and education be-tween the legal and media pro-

fessions. This year, the Committee is led by an attorney co-chair, Scott A. Durfee of the Harris County District Attorney’s Of-fice, and two media co-chairs, Phil Archer of KPRC TV and Mark Babineck of Argus Me-dia, Inc. The membership is comprised of both attor-neys and me-dia and com-munication professionals.

Originally established as a project of the HBA Continuing Legal Educa-tion Com-mittee, a pri-mary func-tion of the committee is planning and executing an annual Law and the Media seminar in coordination with the Society of Professional Journal-ists and the Houston Press Club. Each year, the seminar brings together lawyers, journalists, communication profession-als, law students and journalism students.

The program is offered free of charge to media professionals and students.

The 2010 seminar was held January 30 at South Texas College of Law, with nearly 90 individuals in attendance. The two-panel program focused on transparency in the courts and in government. Dis-cussing transparency in the courts were Harris County District Attorney Patricia

Lykos, Har-ris County District Clerk Loren Jack-son, Houston Chronicle le-gal reporter Mary Flood, and moderat-ing attorney Brian Wice. The second panel, ex-ploring trans-parency in government, included FBI Special Agent Shauna Dun-lap, Houston Chronicle in-ves t iga t ive reporter Terri L a n g f o r d , Texas Tribune reporter Matt

Stiles, and moderator Alan Bernstein of the Harris Country Sheriff’s Office. The seminar featured a keynote address en-titled “Forensic Science Reform in Texas – Dead or Just Delayed?” presented by Aus-tin attorney Samuel E. Bassett of Minton,

Burton, Foster and Collins LLP, who once chaired the Texas Forensic Science Com-mission.

In addition to the Law and the Media Seminar, the committee also provides a bi-annual Media Training Program for HBA board members. The program in-volves a simulated press interview dur-ing which media representatives question board members on tape, and then critique their performance. The program is a lively and fun way for board members to hone their interviewing skills, while building relationships with print, radio and televi-sion media.

This year, the committee will continue its mission of fostering educational objec-tives at the intersection of law and media. This will be the 25th anniversary of the Law & the Media Seminar, and it has been set for Saturday, January 29, 2011 at South Texas College of Law. The committee is already working on discussing topics and speakers.

Co-chair Scott Durfee notes that “[t]he committee has done a great deal over the years in helping to find common ground between the often adversarial professions of law and journalism. I am proud to have the opportunity to advance the commit-tee’s work in developing lines of commu-nication between legal and media profes-sionals, educating each other on profes-sional standards, and increasing mutual respect and trust between our respective communities.”

Joy Sanders ([email protected]) practices immigration law with Fong & Associates, L.L.P., and is a member of The Houston Lawyer editorial board.

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Law and the Media Committee By Joy Sanders

2009-2010 hBA President Barrett reasoner, at the podium, introduces a panel from the 2010 seminar on “transparency in the courts” that included, from left, attorney Brian wice; Mary flood, former legal reporter with the houston chronicle; harris county district clerk loren Jackson; and harris county district Attorney Patricia lykos.

Sam Bassett, former chair of the texas forensic Science commission, discusses forensic science reform in texas at the 2010 seminar.


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Now Playing at a Theater Near You (And featuring houston Attorney charles foster)

By Keri d. Brown and Joy e. Sanders

Readers of The Houston Lawyer who already know Charles Foster also undoubtedly al-ready know what this article is about. For the uninitiated,

the answer is Mao’s Last Dancer. Finally making its way to the United States, this independent movie, originally released in 2009 and opening in Houston this past August 20, tells the story of Li Cunxin, a promising young ballet dancer from China who began his rise to international acclaim in the early 1980s. The film in-cludes Charles’ role in helping Li remain in the United States after a 21-hour stand-off at the Chinese Consulate on Montrose Blvd. in Houston. It is not often that an attorney is the hero in a movie without ever stepping foot in a courtroom, but that is exactly what happened here.

For those of you unfamiliar with the story, Li Cunxin was the first Chinese na-tional to visit the U.S. as part of its new cultural exchange program, and was quickly becoming a star of the Houston Ballet after less than a year’s stay in Hous-ton. Just prior to the end of his scheduled visit, Li’s heart led him to remain in Hous-ton. Concerned with what his decision might mean for U.S.-China relations, the Houston Ballet and Ben Stevenson (then Artistic Director of the Houston Ballet), Li confided in a friend who assisted him in seeking out legal representation. With some guidance from the University of Texas Law School, Li found counsel in Charles Foster. No one could have antici-

pated how auspicious their relationship would become.

Charles thought that the matter would be fairly routine: seek an employment visa for Li based on his incred-ible dancing ability (equiv-alent to a visa based on “ex-traordinary ability” to-day). Given Li’s ballet tal-ents and ris-ing stardom, Charles did not think there would be a problem. What Charles did not foresee was Li being tackled and dragged away by five Chinese consular officials upon en-tering the consulate for discussions of his intent to remain in the U.S. Those events pitted the Chinese embrace of collective rights against the United States’ embrace of individual rights.

The night of the stand-off, Li was sched-uled to attend a going-away party hosted by Louisa Sarofim. When Li didn’t show, Ben Stevenson tracked him down and discovered his plan to remain in the U.S. Li and Charles decided to meet with Chi-nese consular officials, declare Li’s inten-tion and exonerate the U.S. government and the Houston Ballet. But curiously, Chinese officials insisted that the meeting take place at the consulate, instead of the restaurant that Charles suggested. Upon arrival, Charles was separated from Li and Li was seized. The standoff ensued.

Fortuitously, Charles knew specifically of perhaps the only other instance of forc-ible repatriation. In 1970, a Lithuanian sailor named Simas Kudirka made inter-national waves when he jumped off a So-viet ship off the Atlantic coast and, seek-ing asylum, swam to the U.S. Coast Guard cutter to which the Soviet ship was teth-ered. The Coast Guard allowed the Soviets to retrieve Kudirka from the Coast Guard

vessel, but because the deck of the cutter was U.S. soil, the return was wrongful and the responsible Coast Guard officers were subject to a court martial and, following

a reprimand, took early retirement. Coinciden-tally, Charles had already d i s c u s s e d the particu-lars of the Kudirka case with Judge W o o d r o w

Seals, a federal judge in Houston. Equipped with this knowledge, Charles did several things upon Li’s detention: (1) he called and woke Judge Seals to obtain a restrain-ing order and writ of habeas corpus; (2) he called the State Department and spoke with the China desk officer, politely not-ing his obligations per the Kudirka fiasco and warning of the repercussions should the desk officer stand by and allow Li to be forcibly removed from the United States; and (3) he called the Executive Assistant to then-Vice President George H.W. Bush.

All the while, Charles tried to convince the Chinese to release Li. Having long-standing ties to the Chinese community, Charles knew that he had to balance the legal issues with the diplomatic issues. Diplomatic relations aside, Charles shared Li’s deep concerns for his family back in China. At first he told the two members of the Houston press that had gathered late that evening almost nothing, hoping that everything was about to be resolved, and then telling the Chinese officials that if they didn’t release Li, his story would be on the front pages of every newspaper in the world. Once Charles realized he was making no headway with a low key approach, he urged Ben Stevenson and the other members of the Houston Ballet board, all still decked out in gala finery

Ben Stevenson, former artistic director of the houston Ballet, director Bruce Beresford, li cuxin, charles foster and Kyle Maclachlan at a reception at the Museum of fine Arts this summer.


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from the party, to remain in the consul-ate, paraphrasing Justice Lewis Brandeis, “Sunshine is the best disinfectant.” The Houston Chronicle and Houston Post re-porters, while not fully appreciating all the events taking place in the consulate, told Charles that they could wait no lon-ger and had an obligation to their readers. By early morning, Li’s case was making headlines across the world.

By 6:00 a.m. Charles had drawn up a restraining order and writ of habeas cor-pus and went to meet Judge Seals at the Federal Court House loading dock on Capitol Street. At the meeting, Judge Seals had with him Judge John Singleton, Chief Judge of the Southern District, the U.S. marshal, and Assistant U.S. Attorney Mi-chael O’Connor. He convinced Judge Sin-gleton to grant the restraining order and the writ of habeas corpus and returned to the Chinese Consulate with the U.S. mar-shal in tow.

When Charles returned, he was ap-proached by a “reporter” who identified himself as Charles’ FBI contact. When the agent told Charles that the FBI had the building plans for the consulate and they had every exit covered, Charles knew that Li would not and could not be taken away for an early morning flight.

Meanwhile, Li was inside, being told that he had been abandoned by his friends in the United States. Twenty-one hours af-ter the standoff began, the Chinese Con-sulate asked Li one final time if he would return to China. Li again replied that he would not, and he was finally released.

With the legal spectacle over, Li went on to dance with the Houston Ballet until 1995, when he moved to Australia, where he resides today. Charles remains in near-daily contact with Li while continuing his practice at FosterQuan LLP, and today he is one of the preeminent immigration lawyers in the country. For three decades now, Charles and his firm have provided pro bono representation for the artists brought to dance at the Houston Ballet

as well as international talent working with the Houston Symphony Orchestra, DaCamera Society, Alley Theatre, Hous-ton International Festival, Theater Under the Stars and many more. Among his many services to the community, Charles is chair of the Asia Society Texas Center, Chair of the Task Force on Immigration for the Greater Houston Partnership, and Honorary Consul-General to the King-dom of Thailand.

Charles is played in Mao’s Last Dancer by Kyle MacLachlan (of “Desperate House-wives,” “Sex and the City,” “Twin Peaks” and “Blue Velvet” fame). Kyle spent three days in Houston visiting with Charles in preparation for the role, studying Charles’ mannerisms and even ordering a Univer-sity of Texas class ring to match the one that Charles wore. Charles clearly left an impression on the actor. Recently, during an NBC-TV “Today Show” interview, Kyle described Charles as “an intelligent, well spoken, interesting guy” and added that “he’s a widely recognized expert in his field.”

Charles and his wife Lily (herself a highly-accomplished and popular Chi-nese actress) have two sons, each of whom is nonchalant about their father being one of the key subjects in Mao’s Last Dancer. The children have met plenty of famous people and are more impressed that other people consider their father to be a hero in Li Cunxin’s story. For Charles Foster, be-ing immortalized in film is merely “satis-fying.” The rest of us just have to remind him how remarkable it really is.

Keri D. Brown is is an associate in Baker Botts L.L.P.’s Private Clients section and associate editor for Legal Trends of The Houston Lawyer. Joy E. Sanders ([email protected]) practices immigration law with Fong & Associates, L.L.P., and is a member of The Houston Lawyer editorial board. She tweets about law, sustainability and com-munity at http://twitter.com/sandersjoy.

Rainmaking 101How to Grow Your Client Base & Maximize Your Income By Patrick d. KellyPublished by Authorhouse 2009102 pages

reviewed by Angela l. dixon

With an economy that is steadily on the down-turn, individuals are seeking ways to make themselves more mar-

ketable and productive. Patrick Kelly has written Rainmaking 101, which explains the art of rainmaking and how it can be used to help you stand out from the crowd.

As a young lawyer, Kelly wanted to know how to become a partner with his firm. He was told by a senior partner that in order to become one, he must be a rain-maker. Realizing that he did not learn this skill in law school, Kelly set out to not only learn what a rainmaker was, but to become one himself.

Kelly does a good job of explaining what rainmaking is in the introduction. His definition stems from what he has observed over the years and his own ex-periences. Kelly discusses the importance of relationships and first impressions. He also provides tips on how to make yourself memorable to others and how a simple thank you note can make a lasting impression.

Kelly stresses that rainmakers must communicate well with others, and he has a chapter dedicated to cocktail chatter. In


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this chapter, Kelly gives examples of con-versation starters and ideas for conversa-tion topics. Kelly also devotes one of the longer chapters to the importance of mak-ing the most of presentations. Whether it is a presentation to a civic group or a professional group, it is an opportunity to build relationships. Kelly addresses such things as what to consider when drafting the message, the importance of knowing the audience, whether or not to use hand-outs and humor, and how to incorpo-rate audience participation, among other things. He even includes a presentation checklist to get the reader started.

Kelly also covers the importance of good manners, sometimes overlooked by people when they are trying to make it to the top. Business etiquette, building healthy habits and effective time manage-ment skills all are addressed in subse-quent chapters of the book. Kelly gives basic information on business etiquette, but for someone who is unfamiliar, it will be helpful because it covers everything from invitations to formal dinners, and even provides a graphic and explanation of the purpose and location of the place settings. In terms of healthy habits, Kelly discusses the basics–exercise, diet and sleep—but also addresses some hidden benefits that might not be so obvious, but are just as important. Kelly concludes the book by acknowledging that failure is a part of the process of implementing and developing rainmaking skills and encour-ages the reader to learn from it.

This book is a quick read with roughly 100 pages filled with tips and techniques to take your rainmaking skills to the next level. It teaches the basics, so for those well versed in rainmaking techniques, it can be used as a refresher. For those new to the game, there is a wealth of easy, prac-tical marketing tips sure to be helpful in developing a good client base.

Angela L. Dixon is a solo practitioner and handles primarily civil matters. She is a

member of The Houston Lawyer editorial board.

Bond Daddy By John P. Bott and Jason l. fowellPublished by iuniverse incorporated, 2010248 pages

reviewed by nicole S. Soussan

Houston attorney Jason L. Fowell teamed up with li-censed securities broker John P. Bott to write Bond Daddy, a quick and enjoy-

able read that chronicles the tremendous success and terrible failure of men trusted by everyone from government officials to powerful bank owners to play the market and win. Inspired by actual events from a 1970s Houston boiler room operation, Bond Daddy is a particularly riveting read in the wake of the latest financial crisis.

In the book, two best friends stumble upon the opportunity of a lifetime at the fictitious Texas brokerage dealing firm HAYNES, OLIVE, GAGE & STRONG. Jack, a college graduate with a strong, sixth sense of the market, and Aaron, a less-educated top-notch salesman who got the job after selling one of the part-ners a backyard pool, were lured by the Firm’s “get rich quick” promises.

The Firm developed rookie brokers like Jack and Andrew by first breaking them down through strict codes of con-duct and abusive treatment, and then building them back up until they began to make enormous profits for the Firm and take home large commissions. The partners used the lure of endless luxury to motivate and strong-arm the rookies into pursuing deals relentlessly, without ever questioning what they were told or

where to place their loyalties. Taught to spend as though the cash “had an expira-tion date,” the rookies wore the sharpest labels that Neiman Marcus had to offer and were constantly surrounded by the finest liquor, the most beautiful women, and the fastest cars. When they weren’t racing Ferraris on the downtown streets of Houston or placing thousand dollar bets in Las Vegas, the rookie brokers were (sometimes literally) tied to their desks on the trading floor, employing whatever tactics necessary to sell bonds to unsus-pecting clients. Morals and ethics had no place at the Firm, and the partners were quick to remind (or to get rid of) anyone who questioned that.

With hard work and personal sacrifice, Jack and Aaron quickly became two of the top-selling brokers in their class and received promotions that included more than just new titles. Asked to be a part of the “Zeros,” the boys-turned-men got a taste of the good life, including invi-tations to attend the lavish and risqué parties thrown after hours at the Firm. To keep up with this lifestyle, they were taught to spend before they saved and were ridiculed if they did not have the latest in fine automobiles.

If it all sounds too good to be true, that is because it was. Bond Daddy is a page-turner because the authors create tremendous anticipation of the rookie brokers’ great fall to come. The authors also tangle the reader in the rookies’ web, making the reader root for these two young, ambitious businessmen and their principled friend, Bart, and hope against hope that the three friends will somehow emerge from their lavish but less-then-honest lifestyle and be alright in the end.

Nicole S. Soussan is a third year law student at Vanderbilt Law School and plans to practice law in Texas. She wrote this review while clerking at Fulbright & Jaworski L.L.P.


LegAL tRends

Massive Fines and Puni-Cows:“legal thuggery” Might now Affect exemplary damages

By erin reed

In Bennett v. Reynolds, No. 08-0074 (Tex. June 25, 2010), the Texas Su-preme Court further clarified the standards for reviewing awards of ex-emplary damages. This case, which

has become known as the “puni-cow” case, arose from Bennett’s conversion of Reynolds’ thirteen head of cattle, which had strayed onto the ranch land owned by Bennett’s corporation. A jury awarded Reynolds approximately $5,000 in actual damages and a total of $1.25 million in punitive damages because the transgres-sion—one in a series of hostilities be-tween the feuding ranchers—was com-mitted with malice. Although the Court agreed that punitive damages were war-ranted against both the defendant Ben-nett and his corporation, the Court held that the amount of punitives awarded (a ratio of 47:1 as to Bennett and 188:1 as to the corporation) violated due process and remanded to the court of appeals for remittitur.

The Court first noted that even a 4:1 ratio might be pushing the outer limits of constitutionality and that the U.S. Su-preme Court has steadily restricted due process standards in this area. The Court then looked to three guideposts govern-ing those due process standards: the rep-rehensibility of the defendant’s conduct; the ratio of exemplary to actual damages awarded; and the amounts of legislative civil penalties in comparable cases.

In analyzing reprehensibility, the most important of the three guideposts, the

Court considered five nonexclusive fac-tors. Bennett’s conduct satisfied the fifth factor—the harm resulted from inten-tional malice—but it did not cause phys-ical harm (factor 1), endanger the health or safety of others (factor 2), threaten financial ruin (factor 3), or involve re-peated thefts (factor 4). The amount of punitives awarded therefore left no room for greater punishment in more egregious cases. The Court accordingly remanded for a determination of a more modest penalty. In dicta, the Court sug-gested that—although looking to crimi-nal sanctions has little utility in assessing punitives—because no comparable civil statute existed in this instance, pegging punitives to the $10,000 fine for third-degree felony theft would produce a (per-haps more appropriate) 1.877:1 ratio.

Additionally, the Court noted that this case posed a critical threshold question of whether Bennett’s actions beyond the cattle theft itself might factor into the rep-rehensibility analysis. Because Bennett had engaged in a “scheme of deception” throughout the litigation process aimed to either cover up the theft or taint the outcome at trial, the Court held that his “extra-conversion misdeeds” aimed to worsen the original damage inflicted on Reynolds. Specifically, the Court an-nounced that allegations similar to the following may properly inform a repre-hensibility analysis: (1) bribing a witness and/or urging him to lie; (2) threaten-ing bodily harm to a witness, even when the threat goes awry (e.g., is unwittingly delivered to the wrong person); (3) evi-dence tampering; (4) other “intimidation techniques,” such as filing a separate suit against a key witness; and (5) other “cover-up efforts” (e.g., here, attempting to register Reynolds’ cattle brand as Ben-nett’s own).

Erin Reed practices in the Business Litigation group at Haynes and Boone, LLP in Houston.

Kagan Confirmation Contentiousness Continues Partisan TrendBy edward c. dawson

On August 7, 2010, Elena Kagan was sworn in as the 112th justice of the Supreme Court of the United States. She is the fourth female jus-

tice and one of three women currently sit-ting together—the first time in the Court’s history this has happened.

Justice Kagan is also the fourth Justice to be confirmed to the Court in the last five years—joining Justices Roberts, Alito, and Sotomayor. The four will likely have a long tenure together on the Court, since all of them are age 60 or under (Justice Kagan herself is only 50), accompanied by Justice Thomas, who despite having served for 18 years is only 62.

This new wave of appointments brings a concentrated, relatively rapid turnover in the Court’s composition after a long period of stability. There was no change in Court membership between 1994 and 2005. During that long period, changes in the political culture seem to have altered the basic dynamics of the confirmation process. Whether because of increased partisanship in general, or a growing rec-ognition of the power that courts wield over crucial social issues, between 1994 and 2005 there was an erosion of the norm that a President was entitled to easy confirmation of any qualified nominee. During that time, the change manifested in the confirmation process for nominees


LegAL tRends

to the federal circuit courts, as qualified nominees of both parties were held up or blocked entirely by the opposing side.

Thus, of the pre-1994 Justices, almost all were confirmed by overwhelming majority votes (Scalia 98-0, Kennedy 97-0, Gins-burg 96-3, Breyer 89-7). The new wave, in contrast, was confirmed by narrower, more closely partisan majorities (Chief Justice Roberts 78-22, Justice Alito 58-42, Justice Sotomayor 68-31, Justice Kagan 63-37). Justice Thomas is actually closer to the newer justices in this respect, just as he is in age, because his confirmation was 52-48 and probably the most bitterly contested of any of the currently sitting justices’.

As for Justice Kagan’s confirmation, the process was relatively smooth, primarily because the Democrats’ large majority in the Senate basically guaranteed her confir-mation. Nonetheless, the process was still contentious. At Justice Kagan’s confirma-tion hearings before the Senate Judiciary Committee, Republican Senators pressed her on her views and tried to score political points. Senator Sessions, for example, at-tacked her for a perceived lack of litigation and judicial experience. Other Republi-cans questioned her about her decision to forbid military recruiters from Harvard Law School’s career center because she be-lieved the military’s “don’t ask don’t tell” policy violated the school’s anti-discrimi-nation policy.

Justice Kagan, for her part, handled the confirmation questioning adeptly, and largely without disclosing her views on specific legal doctrines or how she might rule in particular cases. In so doing, she followed a model she had earlier criticized in a 1995 law review article about flaws in the modern confirmation process. In that article, she had praised “the essential right-ness — the legitimacy and the desirability — of exploring a Supreme Court nomi-nee’s set of constitutional views and com-mitments.” As a nominee, she distanced herself from that view, explaining that she had realized it is insufficiently sensitive to

the many interests a nominee must bal-ance when being questioned. Still, she was more forthcoming than many other recent nominees as to her politics and her broad constitutional commitments, confirming that her personal politics are progressive, that she favors a broad reading of the com-merce clause, and that she believes origi-nalist analysis is a (though not the only) legitimate means of interpreting the Con-stitution.

While the hearings were anticlimactic, if not uneventful, the confirmation vote was notable because like other recent votes it was basically partisan. Kagan received the fewest affirmative votes for a Democratic President’s nominee in the modern era. Only five Republicans supported her, and only one Democrat voted against. After the vote, Justice Ginsburg publicly criticized the partisan trend in a speech accepting a lifetime award from the ABA, saying: “May the U.S. Senate someday return to the col-legial bipartisan spirit that Justice Breyer and I had the good fortune to experience.” Senator Lindsey Graham, one of the few Republicans to support Kagan, similarly expressed the view that the confirmation system is broken, and that it would be de-sirable to return to the tradition of wide deference to presidential nominees.

For now, though, there are no signs this is likely to oc-cur. Instead, even more con-tentious battles are likely yet to come, particu-larly when there is a nomination that could seri-ously shift the political center of the Court. Of the four recent nominat ions , three (Roberts, Sotomayor, and Kagan) did not

shift the Court politically much at all. Jus-tice Alito replaced a more liberal Justice from the same party (O’Connor), and even that incremental shift produced major changes in areas such as Second Amend-ment rights and campaign finance reform. If one of the Court’s four more conservative justices were to leave the Court under the current Administration, if a future Repub-lican president were to replace one of the four more liberal justices, or if the current swing vote, Justice Kennedy, were to leave under a president of either party, the result-ing confirmation fight might well surpass in acrimony anything yet seen.

This trend may be undesirable, but it is probably also inescapable. As Justice Ka-gan wrote in her article about confirma-tions: “It should be no surprise by now that many of the votes a Supreme Court justice casts have little to do with technical legal ability and much to do with conceptions of value.” As this proposition becomes more and more accepted, in an era when “con-ceptions of value” are especially hotly con-tested between the parties, it is likely that the confirmation process will stay conten-tious for at least the near future.

Ed Dawson is a partner at Yetter Coleman LLP, where his practice focuses on complex appeals involving commercial and public law.

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After twenty years as a practicing criminal defense attorney, Ned Barnett took a ride that changed the course of his daily life. After several years riding in the MS150, Ned decided to try a com-petitive bike race. On May 1, 2010, he raced competitively for the first time

in a 65-mile road race – and placed fifteenth out of about 100 riders, many of whom were young enough to be his children rather than his competition. Ned was off on a new, high-speed adventure.

Training with professional coaches and racing around the country, Ned has a new passion that fills his early mornings and weekends. Ned usually starts training at 4:30 each morning, riding his own bike on a set of rollers that allow him to train indoors with-out sacrificing the quality of his training. He has attended camps with Lance Armstrong’s coach Chris Carmichael, and he works with trainers who analyze the data from his bike rides – including the speed his bike is mov-ing, the rate his heart is working, and the power with which he is peddling – and pro-vide detailed assessments of how he needs to change his train-ing and his racing strategies. And that’s just during the week.

Ned spends his weekends racing – and winning. In the mere four months since his first competitive race, Ned has competed in more than 25 races and also participated in countless charity rides. He competes in every kind of bike race there is – from long road races of 100 miles or more to shorter criterium and time trial races. He rides two bikes, one of which is identical to

the winning bike in the Tour de France last year and the other of which is identical to the bike that took second.

Ned participates in these races individually and through his team, the Gulf Coast Cycling Association (“GCCA”), which is sponsored by Toyota and others. GCCA teammates enter races

together and develop a team strategy to win as a team – they plan their positions and their procedures for the race before the race ever starts.

At 49, Ned often is one of the oldest par-ticipants in a race. Yet he regularly beats 26-year-olds. Next year, at 50, Ned will begin racing in the highly competitive over-50 rac-es. He is training hard to be ready to defend his growing reputation as the rider to beat.

Ned has even won some money – granted, not enough to cover the motel room he used between race days – but certainly more than enough to feed his competitive spirit. In racing, Ned has found a semi-professional hobby that only looks unrelated to his day-to-day life as a lawyer. The dress codes may be different, but Ned’s goal is the same – whether in the courtroom or on his bicycle,

Ned is focused on streaking ahead and leaving the rest of us eating his dust.

Hannah Sibiski practices commercial litigation and appellate law with Watt Beckworth Thompson & Henneman, L.L.P. She chairs the HBA Appellate Practice Section’s Pro Bono Program in the First and Fourteenth Courts of Appeals, and she is a member of The Houston Lawyer editorial board.

oFF the RecoRd

Charting a New Path–at

High SpeedsBy hannah Sibiski

After starting his new avocation only four months ago, ned Barnett is already winning competitive bike races.


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THE MOST

THE MOST!Morgan & Weisbrod, L.L.P.,

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Judicial PortraitsPortraits of the Hon. Tom F. Coleman and the Hon. Alice Oliver-Parrott, honoring their service on the 151st District Court, were unveiled in a special ceremonoy on September 17, 2010. At left, Tom F. Coleman, III unveils the portrait of his late father, while at right, the Hon. Alice Oliver-Parrott unveils her portrait. Judge Mike Engelhart, current judge of the 151st, presided.


THE MOST

A Practical Approach to Assisting with Veteran’s Legal Issues

Changing Practice for Changing Times: Working from Home

Changing Practice for Changing Times: Going Solo

Construction Law’s Dirty Dozen: Twelve Things Every Lawyer Should

Know

Copyright Infringement for the General Practitioner

Crimes in Foreign Lands

Eminent Domain for the General Practitioner

Entertainment Law-Intellectual Property Protection

Ethics Issues Updates: E-Discovery, Trial Prep, Advertising, Grievances,

Lying & Negotiations

Ethics Traps and the Texas Grievance System

Family Law for the Non-Family Attorney

Firing Without Fear

Fundamentals in Real Estate

Handling High Profile Cases: Considerations When Dealing with

the Media

HIPAA Update: Privacy and Security Regulation in 2010 and Beyond

Income Tax for the Solo/Small Firm Attorney

Juvenile Adjudication, Disposition and Modification

Law Practice Management: Building and Enhancing Client Relationships

Lessons from the Courtroom

Margin Tax: What Every Lawyer Needs to Know About the New Texas

Franchise Tax

Mediation - From the Mediator and the Litigant

Nuts and Bolts of Texas Criminal Law

Off to Slake Their Thirst: The Texas Dram Shop Act

Offer of Settlement Under Texas Rule 167 - A Double Edged Sword

Persuasive Communication for Lawyers - Both Inside and Outside

the Courtroom

Post-Judgment Collection Techniques

Practicing Law in the IV-D CourtsProsecution and Defense for

Healthcare Fraud

Search & Seizure Law Update For the 21st Century Attorney

Summary Judgments: Views From the Trial and Appellate Bench

Tax Return Preparer’s Penalties: What General Practitioners Need to Know

and Why

Ten Rules for Great Jury Selection

Texas Attorney Grievance Procedures

The City of Houston as Plaintiff: Litigation You Never Knew Existed

The Equal Protection Clause and the Lasting Meaning of Brown v. Board of Education: From Desegregation

Through Affirmative Action Admissions”

The Ultimate Settlement Secret: The Advantages of §468B Qualified

Settlement Funds for Medicare/Medicaid Claims

U.S. Immigration Law: Qualifying Through Employment & Family

Update on Employment Law

Update on Texas Juvenile Law in Harris County

Voir Dire and the Jury Charge: How to Master Two Essential Trial Skills

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What to Do When ICE Comes Calling on Your Client

HBA-CLE OnlineThe following topics are just some of the more than 115 hours of HBA/CLE Seminars that are available online at CLEonline.com. To receive a 20% discount on HBA programs online, HBA members must call (713) 759-1133 prior to registering.

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Whether in the courtroom, at the negotiation table, or working through other challenges in our profes-sional lives, as lawyers and

judges we stand on a grand stage in a big arena. We are individually empowered to show by noble deeds, great and small, that we are members of an honorable profession.

When we joined the bar, we made a commit-ment that surpasses a vow of personal integrity and calls us to uphold a sacred honor. Just as what we think and do define us as individuals, our words and actions as lawyers and judges define the character of our profession. Our character as individuals is measured by what we do when no one is watching; the same standard governs our

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words and actions as members of the bar. Good or bad, the behavior we model in our professional lives is the behavior by which our entire profes-sion is judged—a weighty responsibility, yes, but also an extraordinary opportunity.

As members of the bar, we are empowered not only to practice in a way that justifies the honor, but also to preserve this rich tradition through modeling and mentoring. Telling the next genera-tion of lawyers what to do and how to act is not enough. We must come alongside them and let them see by good example the way to practice law honorably. The greatest legacy we, as members of the legal profession, can leave our communities is a bar whose members understand that how law-yers practice is just as important as what they ac-complish.


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5084 Full time associate po-sition available. 5+ years ex-perience required. Must have commercial and personal injury background. Competi-tive compensation package.

5094 PROBATE lAWYER. Sugar land estate planning/probate firm with Houston-galleria office seeking attor-ney with extensive experi-ence in TX probate and trust administration, Form 706 preparation, estate and gift tax planning.

2062 very Experienced Trial Attorney intimately familiar with the mechanics and opera-tion of the Commercial Mort-gage Backed Securities (CMBS) industry, including the securi-tization process of commercial loans and the duties and re-sponsibilities of Mortgage loan Originators/Depositors, un-derwriters of REMIC Trusts, Rating Agencies, Trustees, Ser-vicers and Special Servicers. looking for in-house position.

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PlAceMent PolicyThe Houston Bar Association Lawyer Placement Service will assist members by coordinating place-ment between attorneys and law firms. The service is available to HBA members and provides a con-venient process for locating or filling positions.

1. In order to place an ad, attorneys and law firms must complete a registration record. Once registration is complete, your position wanted or available will be registered with the placement service for six months. If at the end of the six-month period you have not found or filled your position, it will be your responsibility to re-register with the service in writing.

2. If you are registered, resumes will be sent out under their assigned code numbers. Once a firm has reviewed the resumes, they are to contact the placement office with the numbers they are interested in pursuing. The placement coordinator will then contact the attorney, give him/her some background information on the inquiring firm, and the attorney will then let the coordinator know if he/she wishes personal in-formation to be released to the firm. This pro-cess will insure maximum confidentiality and get the information to the firms and attorneys in the most expedient manner.

3. In order to promote the efficiency of the Houston Lawyer Placement Service. PleASe notify the PlAceMent coordinAtor of Any PoSition found or filled.4. To reply for a position available, send a letter to HBA, placement coordinator at the Houston Bar Association, 1300 first city tower, 1001 fannin Street, houston, texas 77002 or e-mail Brooke Eshleman at [email protected]. Include the code number and a resume for each position. The resume will be forwarded to the firm or company. Your resume will not be sent to your previous or current employers.

PlAceMent deAdlineS Jan. 1 Jan./Feb. Issue Mar. 1 March/April Issue May 1 May/June Issue July 1 July/August Issue Sept. 1 Sept./Oct. Issue Nov. 1 Nov./Dec. Issue

If you need information about the Lawyer Place-ment Service, please contact hBA, placement co-ordinator, at the HBA office, 713-759-1133.

5076 Boutique Civil litiga-tion law firm specializing in complex business litigation is looking for an associate attor-ney with 1-3 years litigation experience and excellent re-search and writing skills.

5080 Houston public pension fund seeking Associate Coun-sel reporting to ClO. Approx. 4 yrs. experience with pen-sions, employment, admin-istrative, institutional invest-ing or local government law. Competitive benefit package. Background checks required.

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