CORPORATE GOVERNANCE Expert Witnesses

Part 1:  Industry Experts

By Donna C Kline, Attorney at Law

Early, creative, and well-focused use of consulting experts in corporate governance litigation can help the lawyers assemble the four key components of a successful trial.  Although a corporate governance case may involve sophisticated business concepts and complex technical or financial facts, the case still must be presented in a persuasive manner to a jury of ordinary persons who have only a few days to gain an appropriate understanding of those concepts and facts.  To persuade the jury to return a favorable verdict, the facts must be presented in a manner that dovetails with the legal instructions that the judge will give and that resonates with the jury’s moral sense of the case.   This article describes the vital role that an industry expert and a fiduciary duty expert can play in trial preparation.

Experienced counsels are familiar with the many testifying experts who may be involved in financial litigation.  These may include forensic accountants to scrutinize the defendant company’s accounting practices, technical experts such as engineers if the case involves an industrial catastrophe, business and financial experts to analyze the events from the perspective of their effect on the company, forensic computer examiners and other information technology gurus, and economists to discuss the effect of the challenged transactions on share price.  Some of these experts may be for consulting purposes only, to assist in development of the case, but many will also testify at trial.

There are two main types of experts who can materially assist the attorneys in the earliest stages of the case.  The first is an expert on the specific industry and transaction or event involved.  The second is an expert on the fiduciary duties of directors and officers in the context of the allegations of the particular case.  Moreover, these experts may be most useful if they are consulting, rather than testifying, experts. They can help the attorneys get a swift and accurate grasp of the events at issue and can help them formulate the likely legal structure of the claims.  We will be focusing on the industry specific expert in this article.

Early expert consultation and the successful presentation of a corporate case

Retaining these experts as early as possible serves several functions.  First, the industry expert can educate the lawyers about the transaction or event in issue in the context of the particular company involved and the industry in general.  Even a lawyer with extensive experience in commercial litigation can usually benefit from additional unbiased information about the industry and transaction or event at issue.  This can be particularly important for the plaintiffs’ attorney who does not have access to the corporation’s employees, including those with relevant expertise.  For the defense attorney, an industry expert is neutral; his or her career does not turn on the outcome of the case.  Therefore, hopefully, the industry expert’s information is not slanted toward vindicating the company’s actions but will point out both the favorable and unfavorable aspects of the company’s conduct.

Corporate governance litigation can involve complex business transactions, large amounts of money, and huge amounts of business data. Some financial cases involve multiple sophisticated parties enmeshed in investments of mind-boggling complexity.  The procedural rules, including especially edisovery obligations, increase the burden of the trial team’s tasks.

The role of an expert needs to be considered in the context of the components of successful trial presentation.  The four basic components of successful trial presentation are:

  1. Articulating a coherent and understandable narrative of the central events of the case;
  2. Identifying the core business facts that are relevant to that narrative;
  3. Forming a discovery strategy calculated effectively to assemble the evidence to support that narrative and to counteract the other side’s version; and
  4. Integrating that narrative into the legal and moral matrix of corporate governance.

However, if the case is to be tried to a jury, the four components listed above are still the components of successful trial presentation.  Judicious early use of an industry expert and a fiduciary duty expert, early in the case can prevent the attorney from becoming overwhelmed by the complexity.  The industry expert helps counsel to look for the likely components of the story of the events in question.

In addition, the finances of the litigation may be a crucial factor.  If the trial team expends limited resources on efforts that are not central to the case may mean that resources are lacking for critical efforts.  Accurate understanding as gained from knowledgeable consultants can help the lawyers avoid running down rabbit trails of useless discovery.

The business or transaction expert

Counsel can only construct a coherent, believable narrative of the events if he or she understands the facts involved.  Moreover, the events must be seen in the context of the specific transaction at issue.

Here is an entirely hypothetical example.  Suppose that a pharmaceutical company releases a new miracle drug.  Sometime later,  however, serious side effects are reported.  Patients bring ruinous personal injury suits against the company, and shareholders sue the board for various breaches of fiduciary duty, from failing to ensure that safety was adequately investigated to selling their own stock before the extent of the calamity was publicly disclosed.

To effectively present this case, both defense and plaintiff attorneys need to understand how new drugs are developed and tested.  They need to appreciate the importance of the drug being marketed – was it the only treatment for a devastating illness or did it alleviate a common and mildly inconvenient health problems?

Counsels also need to become familiar with mechanics of the governance of a drug company.  For example, they need to understand the flow of information in a drug company, both as it actually happened in this hypothetical case and as it reasonably should take place.  What level of understanding and diligence can be expected, for example, of an outside director with little or no medical training?  As one can imagine, industry experts can be hard to find.

Finally, a word is in order about the advantages of designating the early experts in a case as consulting experts only.  If a careful separation is maintained so that their work is for the attorneys only and does not form part of the basis of the opinion of testifying experts, it is likely that their work is not discoverable.  That means that the attorneys are freer to explore ideas with the consulting expert.  There is less need for counsel to censor their discussions with a consulting expert.  Moreover, during the preparation of the case, the attorneys remain free to try out ideas with the consulting expert and to explore different options and approaches, without the fear that the expert will be later impeached for his or her abandonment of a particular theory or analysis.