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• Basic introduction to document retention and management (“DRM”) in the legal context

• Why document destruction shouldn’t be relied upon to eliminate document-based litigation and other legal costs

• How to minimize risks by engaging in safe document creation

Agenda

3 Copyrighted material, used with permission.

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Introduction to DRM

Part I

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• Long ago, theories of document retention and management were relatively simple

– In order to be useful, documents must be indexed and stored in an organized manner

– Many documents cease to be useful after a period of time– Document indexing and storage is expensive– Therefore, documents which are no longer useful should be

destroyed

• This is “Traditional DRM”

Traditional DRM

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• Classifying documents into appropriate typesConceptual – identifying relevant types for a specific businessPractical – tagging/labeling documents at the time of creation or otherwise

• Determining the appropriate retention period for each document typeLegal

– Complying with mandated retention periods (e.g., for employment records)– Avoiding obstruction of justice (e.g., retaining documents relevant to an investigation or

proceeding)

Practical– Estimating the time period during which documents are likely to be useful– Balancing usefulness against indexing and storage costs

• SystemsClassification, labeling, indexing, storage, and destruction require organization, facilities, tools and effort

Key focus of Traditional DRM

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• During the past century, with increases in the frequency and complexity of litigation, DRM became (for many people) a euphemism for destroying documents as quickly as possible

– To minimize the risk that they will serve as a “smoking gun”– To reduce the costs of document production during pre-trial

“discovery” procedures

• This is “Document Minimization DRM”– Much more than Traditional DRM, Document Minimization DRM

requires a business to balance the potential cost of having destroyed useful documents against the potential cost of having retained documents that create problems during litigation

Document Minimization DRM

8 Copyrighted material, used with permission.

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• Document Minimization DRM is properly viewed as a mere overlay to Traditional DRM

• It simply assigns a higher cost to document storage by assuming that each stored document carries a litigation-risk cost

• For several decades, it appeared that litigation-risk cost would overwhelm nearly all other costs and benefits, so that shredderswould become more plentiful than file cabinets

• Then the world changed . . . .

It’s All Cost/Benefit

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Why You Can’t Rely on Document Destruction

Part II

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• The IT revolution has made documents much easier to create, copy, distribute, and retain in multiple forms

– Electronic copies of documents “propagate” across networks to become embedded in servers, laptops, backup drives, CDs/DVDs/tapes, Blackberries, PDAs, home computers, personal Web-based e-mail accounts, Internet “X-drives,” etc.

It is now common for individual users to create their own backup archives on CDs, etc. even if such behavior violates explicit company policy

– Convenient laser and inkjet printers lead to multiple printed copies lodged in personal files (in addition to “official” files)

– E-mails and e-mail attachments flow freely across organizational boundaries, making it much more likely that documents will travel beyond theorganization’s control

Recent Changes – Document Propagation

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• Bottom Line

– It’s becoming more costly and difficult to actually destroy a document

– In many cases, especially where a document has traveled outside the organization’s “four walls,” effective destruction is simply impossible

Even if a third party intended to destroy its own copies of the document, it’s likely that some copies would survive

– Inability to efficiently destroy documents undercuts the primary purpose of Document Minimization DRM

Recent Changes – Document Propagation (cont.)

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• Use of e-mail to communicate on business matters has exploded

– While often informal in tone, e-mails are “documents” that may contain important, helpful or hurtful information

• Bottom Line

– The workload for DRM program managers and participants is increasing at a rapid pace

– Many more documents must now be analyzed for possible destruction

Recent Changes – E-Mail

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• Following Enron, Quattrone, and other notorious cases:– Document destruction is now presumed by many people to imply a “cover-

up” of fraud or other misconductAggressive implementations of Document Minimization DRM can make an organization look bad to regulators, prosecutors, arbitrators and juries

– Document Minimization DRM can eliminate the very documents that would demonstrate careful adherence to fiduciary and other standards

Based on the current environment, a senior member of WSGR’s securities litigation practice recommends that board members generate, and retain, detailed notes from board meetings

– Boris Feldman, “Directorial Liability: Tips for Outside Directors on Minimizing Personal Exposure in Shareholder Lawsuits” (August 2002)

– However, there is no consensus on notes generated by individual board members; for example, some litigation attorneys prefer to focus on improving the quality of board minutes

Recent Changes – Politics

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• Bottom Line

– The political and litigation-risk costs of destroying (rather than retaining) documents are increasing

Recent Changes – Politics (cont.)

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Section 802 of the Sarbanes-Oxley Act of 2002 (“SOX 802”)

“Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede,

obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any

department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any

such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”

Recent Changes – Law

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• The ultimate impact of SOX 802 is uncertain– However, SOX 802 clearly is intended to criminalize some activities

previously thought to be legitimate components of a DRM program“This statute is specifically meant not to include any technical requirement, which some courts have read into other obstruction of justice statutes, to tie the obstructive conduct to a pending or imminent proceeding or matter” Senate Report No. 107-146.Key issue for the courts to decide: Does this mean that a DRM program (e.g., Document Minimization DRM) can be criminal simply because its purposes include generalized reduction of the evidentiary record without there being a specific claim or matter in mind?

– Private equity firms should exercise caution when evaluating DRM programs in light of SOX 802

Many, if not most, material documents generated by a typical private equity firm relate to some matter within the jurisdiction of a federal agency (e.g., SEC, IRS, DOL), and therefore are covered by SOX 802

Recent Changes – Law (cont.)

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– Until the courts have ruled otherwise, it may be prudent to base DRM programs solely upon goals demonstrably unrelated to reducing the evidentiary record (e.g., reduction of search and storage costs)

Also, be ready to cease document destruction and consult with counsel immediately upon learning that a material risk of litigation or investigation has arisen

• Bottom Line

– The range of documents that can be destroyed without legal risk is narrowing

Recent Changes – Law (cont.)

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• The non-litigation cost of retaining documents has declined significantly

– “Text string” and other electronic search tools have made it easier to find documents without time-consuming and costly indexing and filing systems

Historically, a key reason to destroy documents was to reduce the “needle in a haystack”problem of finding relevant documents Electronic search tools minimize this problem

– The cost of electronic storage has reached nearly de minimis levelsA 250 gigabyte hard drive, capable of storing over 30 million pages of text, costs only a few hundred dollarsA DVD-R disk, capable of permanently archiving over 500,000 pages of text, costs less than two dollars*

– The percentage of documents created/received in non-electronic form is declining rapidly and, for many users, is already negligible

Recent Changes – Search and Storage Costs

* Note that electronic search and storage costs may substantially exceed the mere cost of storage media. Depending upon a firm’s size as well as its existing hardware and software infrastructure, the incremental cost of a high-quality DRM system could range from near-zero to many thousands of dollars per year.

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• Bottom Line– The practical (non-litigation) need to destroy documents is

declining– This may make it more difficult to justify a particular

Document Minimization DRM program in the face of attack under SOX 802 or other “obstruction of justice”statute/doctrine

Recent Changes – Search and Storage (Cont.)

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• Simple rules (e.g., automatically delete all e-mails after 90 days and shred paper files after one year) create many risks

• The automatic system may:– Illegally destroy documents that are relevant to a pending, threatened or

contemplated litigation or investigation

– Illegally destroy records that are required to be maintained under applicable law

– Destroy documents which could refute claims of wrongdoing

– Destroy documents necessary to understand agreements or arrangements with third parties

– Destroy documents otherwise containing valuable information that is expensive or impossible to re-acquire

– Destroy only the easily accessible copies, leaving the “smoking guns” to surprise everyone during an investigation or litigation discovery process

Finally, It’s Hard to Intelligently Destroy Documents

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• More sophisticated rules involve substantial effort from users, not just DRM staff

– Often, only the individual who created/received the document is qualified to classify/label it for DRM purposes

– In our experience, private equity professionals do not rigorously comply with such systems

– Ad hoc, or selective, compliance with a DRM policy can be much more damaging than simply retaining everything

Arthur Andersen might still be in business today if it hadn’t engaged in selective compliance with its own DRM policy

• Bottom Line– Don’t attempt to destroy documents unless you’re willing to commit

substantial resources to doing it correctly

Finally, It’s Hard to Intelligently Destroy Documents (cont.)

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Safe Document Creation

Part III

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• We believe that private equity firms should focus on improving documents rather upon document destruction

– Properly drafted documents tend to do more good than harm

– The difference between a helpful and a harmful document often is based upon just a few words

– In most cases, creating helpful documents is easy, once you’ve learned a few basic lessons

• This is “Safe Document Creation” (“SDC”)

Proposal

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• SDC supplements, rather than replaces, Traditional DRM– Useless documents can still be destroyed to reduce search

and storage costs

• SDC can even be used along with Document Minimization DRM

– Creating helpful, rather than harmful, documents makes the need for aggressive Document Minimization DRM less urgent

This allows longer retention periods and reduced likelihood of destroying useful/important documents

Proposal (cont.)

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• Conscious drafting

• Tips to avoid ambiguity and unintended contracts or reliance

• Make sure the paper trail tells the right story (i.e., the gentle art of CYA)

• Standard forms that incorporate best practices

Key Components of SDC

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Warning

Notwithstanding the use of terms such as “Safe Document Creation,” there is no such thing as a document that cannot, under any circumstances, be used against you in litigation

For purposes of this presentation, a “safe” document is one that has been properly drafted to minimize unnecessary risks

Self-Serving Example

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• Briefly stated, “conscious drafting” means being aware of the meaning of your words and how they may be used by others

• People often fail to engage in conscious drafting because they don’t consider the implications of their words or prefer to assume that the world is a nicer place than it really is

• Assume that everything you write will be read, years later, by someone who is paid to be suspicious of your motives and adverse to your interests

Conscious Drafting

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• From New York Times article Conviction of Banker Vindicates New Strategy by Prosecutors, May 4, 2004:

“Why do people still, after Enron, after Arthur Andersen, after all the major scandals that have been reported in the press,

still think out loud in e-mails?”

Conscious Drafting

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– Myth“I’m just responding to Joe’s verbal offer. He’ll understand my meaning, even if I don’t place my words in full context.”Facts

– You may simply be wrong. Joe may very well misunderstand your meaning. He may even have a different recollection regarding the specifics of his offer.

– Joe may not be the only person reading your message. Other people, who have not participated in your verbal discussions with Joe, may draw an entirely different meaning from your message. In some cases, those people may be have titles like “juror,” “SEC investigator” or “prosecutor.”

Solutions– When responding to an e-mail, include the prior message to provide context

– In all cases, make sure you use enough words to make your meaning absolutely clear

Conscious Drafting (cont.)

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– Myth“This e-mail is addressed to Jane Doe. She’ll understand its sensitive nature and won’t share it with anyone else.”Facts

– Sensitivity is in the eye of the beholder. If you want it treated as confidential, say so

– Many people forward e-mails without even reading them, based solely upon the “Subject” line

– The recipient may be under a real, or perceived, duty to share your communication with workplace superiors, attorneys, accountants or others, despite your intentions or requests for confidentiality

– Many people simply don’t comply with expectations of, or requests for, confidentiality

The more interesting, or shocking, your message is, the more likely it is to be forwarded

Conscious Drafting (cont.)

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Solutions– Some things are better left unsaid– If a document is intended to be treated as confidential, place warnings (e.g.,

“Confidential” and “Do Not Forward”) where they will be noticed (e.g., e-mail subject line or top of printed page)

– Anticipate that confidentiality may be breached and consider whether an alternate mode of communication would be more appropriate

Conscious Drafting (cont.)

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– Myth“If I write ‘Privileged and Confidential’ on a document, it can’t be disclosed or used against me”Facts

– That phrase may work, but only if you’re communicating with your attorney, and only if the subject matter is relevant to the legal representation. Moreover, there are exceptions that can apply in extreme circumstances.

– Generally speaking, unless you have a binding confidentiality agreement in place, a third party is not obligated to treat a document as confidential just because you say it is

– Even if a binding confidentiality agreement exists, a third party may be compelled to disclose documents in connection with a legal investigation or proceeding, under a “sunshine” law like the Freedom of Information Act, or otherwise

Solutions– When communicating with your attorney, ask him/her about availability of

privilege

– With respect to all other communications, don’t assume that requests for confidentiality will survive attack, even if the recipient of your message wants to comply

Conscious Drafting (cont.)

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– Myth“Drafting with precision and clarity will make me sound like a lawyer”Facts

– “Legal style” drafting is just that, a style. It’s even changed with the times, like fashion. No style has a monopoly on precision and clarity.

– Precision and clarity often make your messages easier and more pleasant to read. Few people enjoy struggling to understand your meaning.

Solutions– Review every document before you send it. Ask yourself, “Is it

clear? Will the recipient understand my meaning?”

Conscious Drafting (cont.)

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– Myth“If my style is clearly informal, I can’t be creating legal liability.”Facts

– Like “legal style,” informality is just that, a style

– Your message will be read as a whole. If it appears to include a promise, offer, or acceptance, you likely will be treated as having made a real promise, offer or acceptance.

– Trying to be informal often leads to even greater problems, as the writer “throws in” ever more sloppy or ambiguous phrases

Example: “Let’s just cut the $%%&*. You put in the technology, we’ll put in the cash and I guarantee you won’t regret turning down that offer from Microsoft”

Solutions– Treat business communications as what they are, business

– Assume that you will be held to account for your words, regardless of the style you use

– Be careful about jokes (particularly those involving derogatory statements about third parties); readers often fail to identify humorous intent

Conscious Drafting (cont.)

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– Myth“It will be cheaper if I keep the lawyers/accountants out until the parties have agreed to a deal”Facts

– While there are some cases where money can be saved in this manner, the legal cost of cleaning up a mess usually far outweighs the cost of avoiding a mess in the first place

– Lawyers and accountants generally are willing and able to do a “90,000 foot review” to quickly and cost-effectively spot major issues

Solutions– If you’re preparing a document with significant legal or accounting

ramifications, and you’re not personally expert, check with a lawyer/accountant before sending

Conscious Drafting (cont.)

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– Myth“Since there’s no third party involved, I don’t have to worry about internal e-mails.”Facts

– Anyone can become a third party. They just need to make a claimagainst you or your firm.

– The more significant/inappropriate/shocking your e-mail, the more likely it is that the recipient will save/print a copy or forward it outside the firm

Solutions

– Prepare internal communications with the same care as third party communications

– Don’t forget that “instant messages” can be printed or saved just as easily as regular e-mails

Conscious Drafting (cont.)

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– Myth“E-mails are special. It’s standard to just delete them after a short period of time, such as 90 days.”Facts

– Increasingly, organizations are treating e-mails in the same manner as other documents and storing them in accordance with DRM programs

– E-mails can be valuable assets in defending against meritless claims and assessing the strength of others

Solutions– See sample “E-mail Retention Matrix” on following slide– Don’t forget voicemails, which may be transcribed or saved in a

variety of formats. Use care when leaving voicemail messages. If necessary, write your message out before leaving it (so that youjust read your message into the phone).

Conscious Drafting (cont.)

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• Should you retain an e-mail sent to a third party?

E-Mail Retention Matrix

Unclear. The e-mail may be a “smoking gun”that would not otherwise be available to the third party in the case of litigation, or it may be proof of innocence. Only review of the specific e-mail will tell. However, if you do decide to destroy, use care to ensure that destruction won’t violate applicable law.

You probably should retain. The e-mail will give you an information advantage over the third party, and can be used to defend yourself against meritless claims.

The third party can be expected to have completely destroyed the e-mail

You probably should retain. You probably gain no informational benefit from destroying the e-mail, since the third party can always use their own copy against you. If you destroy it, you’ll be less able to evaluate your exposure when litigation is threatened. However, there’s always the risk that the third party will fail to discover the e-mail during their internal document review, so that your production of the e-mail during discovery procedures will help them to find the “smoking gun.”

You probably should retain. You probably gain no informational benefit from destroying the e-mail, since the third party can always use their own copy against you. If you destroy it, you may be less able to defend yourself against meritless claims. However, storing, retrieving and handling the e-mail will have some costs.

The third party can be expected to have retained the e-mail

You’ve drafted the e-mail without sufficient care and precision

You’ve drafted the e-mail carefully and precisely

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• Under contract law, you can be liable to someone who reasonably relies upon your statements, even if no formal contract exists

– “Jerry, I think you should immediately give notice at OldCo so that you can pursue the NewCo job – I’ve got a lock on it for you”

• When responding to an offer, repeat the key details– “Jerry, you offered to purchase all of our shares of NewCo for $3.20/share. We accept

and propose a closing date of January 2nd.”

• If you need something from the other side, say so clearly– “However, if you can’t close by February 1st, the price must increase to $3.75/share.”

• If you’re not sure that your message is clear and precise, ask a colleague to read it before sending

• If you don’t intend to be legally bound, say so– “Jerry, please remember that these are just preliminary, non-binding discussions.”

Tips to Avoid Unintended or Ambiguous Contracts or Reliance

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• “The foregoing is intended to be for discussion purposes only and must not be relied upon in any way.”

• “As I’m sure you understand, these are merely preliminary discussions which may give rise to a written, binding agreement. We do not intend to become legally obligated in respect of this transaction until such a written agreement is executed by all parties.”

• “Finally, please keep in mind that Sample Ventures views these discussions as preliminary and non-binding. While we hope to reach final agreement and execute a binding written document, we do not intend to become legally obligated in respect of this transaction until such a written document is executed by all parties.”

Note:

The effectiveness of these (and similar) inserts will be determined by the overall context in which they are used. Don’t expect boilerplate inserts to supersede other language which clearly

indicates a contrary intent.

Sample Text Inserts to Negate Reliance/Contract

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• Should your e-mail system automatically include the following contract-negating language in every message?

“Sample Ventures, L.L.C. and its affiliated investment funds do not enter into contracts or other binding arrangements via e-mail. Any statement of business terms or similar matters in this e-mail is intended to be for discussion purposes

only and shall not be relied upon as an offer, acceptance, or otherwise. The foregoing shall not apply to any document executed by an authorized signatory

and transmitted as an e-mail attachment.”

• Probably not– Automated boilerplate likely will not be deemed to supersede contrary language in the

body of the e-mail

– Your own personnel likely will forget that the language is being inserted, and may be defeated when they actually try to reach binding agreement via e-mail

Automated E-Mail Footers

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• Avoiding mistakes is only a part of SDC

• Don’t just eliminate “smoking guns;” take steps to make the documentary record proof of your good behavior

• “Close the loop” on open or ambiguous communications by clear statements

• Follow-up important verbal understandings with written confirmation

• Look for ways to memorialize in writing that you’ve done what you’re supposed to do

Controlling the Paper Trail

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• Joe VC sits on the board of TrustCo, a portfolio company that provides fiduciary services to widows and orphans

• At one meeting, another board member proposes hiring Snidely Whiplash as the new CFO. Nearly all of the other board members enthusiastically agree.

• However, Joe remembers hearing allegations that Whiplash was involved in past financial scandals involving widows and orphans. He proposes that a vote on hiring Whiplash be deferred until a professional background check can be conducted.

• The other board members disagree, and the board authorizes the CEO to offer the CFO position to Whiplash.

Controlling the Paper Trail: Example 1

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• At the next board meeting, the CEO announces that Whiplash has accepted the CFO position and started work. The Secretary distributes minutes from the prior meeting.

• Joe notices that his objection to hiring Whiplash was omitted from the minutes, but does nothing.

• Six months later, the board learns that Whiplash has fraudulently foreclosed upon and sold the farms of many TrustCo clients, taking the proceeds with him to Uruguay. Even worse, it turns out that Whiplash had been charged with fraud and was awaiting trial at the very time he was hired by TrustCo. Lawsuits against the board are now inevitable.

• What does Joe wish he had done six months earlier?– Verbally request that the minutes be amended?– Write a letter to the Chairman and Secretary memorializing his objections to

hiring Whiplash without a background check?– Other?

Controlling the Paper Trail: Example 1 (cont.)

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• Jane Doe is the Managing Director of SureFire Ventures, a highlysuccessful venture capital firm in Menlo Park, California (“SureFire”). John Smith is a junior investment professional at LongNight Ventures, a somewhat less successful venture capital firm in Barstow, Alaska (“LongNight”).

– Jane offers John a job at SureFire. In response to her offer, John sends an e-mail saying, “Thanks so much for your generous offer. The most important thing to me, however, is a guarantee that I won’t be harmed if things don’t work out for me at SureFire.”

– Upon reading the e-mail, Jane calls John and says, “I’m sorry, I can’t offer any guarantees. But you know, of course, that your prospects are much better at SureFire than at LongNight.” After pondering for a few minutes, John accepts.

Controlling the Paper Trail: Example 2

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• After six months on the job, it’s clear that John doesn’t have what it takes to be successful on Sand Hill Road. Jane terminates his employment and offers two months severance.

• John, claiming that his career has been destroyed because LongNight won’t take him back, sues for $6 million on the grounds that he never would have taken the job at SureFire without a guarantee that hewouldn’t be harmed

– To support his claim, he produces a copy of his e-mail to Jane– When Jane cites their subsequent conversation, John denies any

recollection

• What does Jane wish she had done six months earlier?– Memorialize their conversation via a follow-up e-mail?– Demand that John sign an airtight “at will” employment agreement which

explicitly supersedes all prior agreements?– Other?

Controlling the Paper Trail: Example 2 (cont.)

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• One of the most effective ways to minimize the risk associated with a documentary record is to use standard forms that incorporate careful drafting and “best practices”

• Standard forms exist in a variety of formats, ranging from complete documents to single sentence/paragraph inserts

• Private equity firms should consider many different types of standard forms, including various flavors of the following:

Standard Forms

Limited partner transfer and substitution agreementCertificate of representations regarding qualified small business stock

Annual privacy noticeNotice of capital call

Warning letter to defaulting limited partnerNondisclosure agreement

Employment agreementEmployment offer letter

Authorization to disclose confidential informationBackground investigation authorization

Notice of fund distributionCover letter for portfolio investment term sheet

Notice of decision not to go forward with investment opportunity

Letter acknowledging receipt of business plan

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• For many years, people sought to minimize the risks associated with documentary records by destroying documents as quickly as reasonably possible

• Technological advances have made it more costly and difficult to destroy documents, and have increased the number of documents that are simply impossible to destroy

• Legal and political developments have further narrowed the range of documents that can be destroyed

• In light of these changes, private equity firms should focus increased attention on Safe Document Creation as a means to reduce risk

• The single most important element of Safe Document Creation is to:

Conclusions

Assume that everything you write will be read, years later, by someone who is paid to be suspicious of your motives

and adverse to your interests

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• This presentation generally assumes that a private equity firm will take appropriate steps to actually retain those documents that it intends (or is required) to retain

• Ensuring the retention of documents can be almost as great a challenge as destroying them

• Don’t forget to adopt systems which capture easily lost data stored in:– Laptop and desktop local hard drives– Blackberry and similar handheld devices

• When an employee/fund manager leaves the firm, don’t just wipe their hard drive and issue their computer to someone else

– Back-up the hard drive first to ensure that data isn’t lost

• Consider systems/techniques/policies which make it harder for individual users to improperly destroy data that is intended/required to be retained

Final Note

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This presentation is intended only as a general discussion and should not be regarded as legal advice. For more information, please

contact your Fund Services Group attorney.

Wilson Sonsini Goodrich & RosatiFund Services Group650 Page Mill Road

Palo Alto, California 94304Tel: 650-493-9300

www.wsgr.com