Halliburton Shareholder Derivative Action Settlement: Lessons for Enhancements to Your
Compliance Program
In a story first reported in the Wall Street Journal (WSJ), entitled “Halliburton Says Court
Approved Corruption Lawsuit Settlement”, Sam Rubenfeld reported that Halliburton has settled
a shareholder derivative action which had been filed in state district court in Houston, Texas. The
lawsuit, the consolidation of actions brought by two institutional shareholders and one individual
shareholder against the company and its Board of Directors individually, had alleged that “the
board’s failure to stop the activity caused the company to have to pay hundreds of millions of
dollars in settlements and fines, and it damaged Halliburton’s reputation”.
The settlement is interesting for several reasons. Initially, it should be noted that Halliburton will
not pay any damages but more than that, Rubenfeld reported that “the plaintiffs said in the
settlement they faced “very steep hurdles” in establishing that the directors named in the suit
were liable for the illegal activity, and that it was unlikely they would win damages “even
closely approaching” what they sought in litigation”. In the settlement, Halliburton agreed to
make changes to its corporate governance structure “including a clawback of compensation for
board members who were involved in or approved the activity, beefing up its compliance
program and strengthening the roles of its board members.” In other compliance areas, the
company agreed to publish “newsletters and internal bulletins to include at least six articles per
year addressing ethics and compliance issues.” Finally, Halliburton agreed that it’s “code of
conduct has to be revised so as a layperson can understand it, and it has to be changed to
specifically prohibit the use of bribes and kickbacks.”
I.
Clawback Provisions
There were several specific provisions relating to clawbacks which may well now become
standard provisions for officers and directors of companies going forward. They related to both
monetary compensation and non-monetary compensation, such as stock. All the provisions turn
on the following:
a. If an officer or director is named for “substantially participating in a significant violation
of the law”;
b. And either a company investigation determines the officer’s or director’s conduct was
“not indemnifiable”; OR
c. The officer or director “does not prevail at trial, enters into a plea arrangement…or
otherwise admits to the violation in a legal proceeding.”
d. Then the clawback is triggered.
II.
Greater Oversight of Compliance
The settlement specifies several steps the Audit Committee of the Board should take to enhance
its role in the compliance function including holding more regular meetings and reporting to the
full Board on issues relevant to compliance and risk management in general. The settlement also
specified that a Management Compliance Committee shall be created and detailed investigation
and reporting protocols for any “Significant Violation of any federal or state law”.
III.
Compliance Program Enhancements
Here the settlement specified that for employees working in high risk countries “who have job
descriptions associated with business development and procurement activities [emphasis mine]
they should have annual compliance training. The settlement also specified Halliburton to
rewrite its Code of Business Conduct in plain English “so that it is written in a manner as is
commonly understood by a layperson.” The Code of Business Conduct rewrite is to be expanded
to make clear that foreign bribery and kickbacks are prohibited and will not use agents
recommended by foreign governmental officials, unless such agents are screened through
appropriate due diligence. As noted by Rubenfeld’s article Halliburton agreed to publish
newsletters and provide email updates and intranet postings, which will address compliance at
least six times per year. The company agreed to strive to maintain a ratio of one “Audit Service
position for every 5,000 employees” and to certain restrictions in hiring a Chief Financial Officer
(CFO).
In a section specified “To assure that its compliance program be deemed “effective” under the
revised Federal Sentencing Guidelines” the company agreed to have a compliance program
which would be designed to detect an offense “before discovery outside of the organization or
before discovery was reasonably likely”. If there is a determination that such conduct occurs the
company will take steps to prevent it from reoccurring. Halliburton agreed to take “reasonable
steps to remedy the harm from criminal conduct”. Lastly, the Chief Compliance Officer (CCO)
was given direct reporting authority to the Board and directed to report “no less than annually on
the implementation and effectiveness of Halliburton’s compliance program.”
This settlement is a welcome addition for the compliance practitioner. First and foremost, the no
payment of damages is a welcome change from such claims. Moreover, the enhancements agreed
to by Halliburton give both compliance practitioners and company specific guidance on good
corporate government practices in the compliance arena and specific ways to tie a compliance
program to the US Federal Sentencing Guidelines.
This publication contains general information only and is based on the experiences and research
of the author. The author is not, by means of this publication, rendering business, legal advice,
or other professional advice or services. This publication is not a substitute for such legal advice
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© Thomas R. Fox, 2012