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GC Agenda: October 2014
Practical Law Article 2-582-4265 (Approx. 11 pages)
GC Agenda: October 2014
by Practical Law The Journal
| Published on 01 Oct 2014 • USA (National/Federal) |
A round-up of major horizon issues for General Counsel.
Antitrust
Failure to File Penalties
Companies that fail to make a required Hart-Scott-Rodino (HSR) filing may face substantial civil penalties, as demonstrated by the recent fine imposed on Berkshire Hathaway Inc. by the Federal Trade Commission (FTC).
The FTC fined Berkshire $896,000 for its failure to make an HSR filing when it converted previously purchased convertible shares of USG Corporation. The conversion brought Berkshire’s holdings of USG voting securities to over $950 million, far greater than the then-applicable HSR filing threshold of $283.6 million (which has since increased to $303.4 million). Berkshire was required to make an HSR filing when the notes were converted to voting securities, not upon acquisition of the notes.
The FTC imposed the maximum fine of $16,000 per day for each day that Berkshire was in violation of the HSR Act. The FTC noted that Berkshire had previously inadvertently failed to make an HSR filing in connection with acquiring Symetra Financial Corporation voting securities by exercising warrants. In that case, Berkshire made a corrective filing and was not penalized. However, the FTC’s Premerger Notification Office told Berkshire that it was responsible for instituting an effective compliance program to ensure it met its obligations under the HSR Act.
To avoid substantial failure to file penalties, companies should:
- Ensure that they have a reliable HSR compliance program in place to prevent inadvertent failures to file.
- Submit a corrective filing as soon as a failure to file is discovered.
For more on preventing and correcting inadvertent failures to file, see Practice Note, HSR Act Violations: Failure to Make an HSR Filing and Submitting Corrective HSR Filings Checklist.
Increased Antitrust Enforcement in China
Foreign companies with operations in China may be subject to increased scrutiny from Chinese antitrust authorities. Since China’s Anti-Monopoly Law (AML) was enacted in 2008, China has become active in pursuing anticompetitive practices through three national agencies that regulate competition:
- The National Development and Reform Commission (NDRC), which regulates pricing practices.
- The State Administration for Industry and Commerce (SAIC), which enforces anti-monopoly policy (other than price-related regulations).
- The Ministry of Commerce (MOFCOM), which handles merger control.
Under the AML, antitrust agencies can assess fines of up to 10% of a violating company’s revenue in the previous year.
Recent scrutiny of foreign companies doing business in China has included:
- The SAIC’s dawn raid of Microsoft on suspicions of monopolistic behavior and related investigation of Accenture, which consulted for Microsoft.
- The NDRC’s announcement that it will punish Audi, Fiat Chrysler and Mercedes-Benz for anticompetitive behavior related to the pricing of spare parts.
- The NDRC’s investigation of Qualcomm over allegations of abuse of monopoly power.
- MOFCOM’s decision to block the P3 Alliance agreement among three foreign shipping container carriers. This was the first time the agency prohibited a deal involving only foreign firms.
In light of aggressive antitrust enforcement in China, companies with operations in China should:
- Implement an effective Chinese antitrust law compliance program.
- Create a set of procedures to have in place in the event of a dawn raid, including:
- identifying outside antitrust counsel; and
- training employees on how to respond to a raid.
Commercial
OFAC 50% Rule Revised
US persons (individuals and entities) engaged in international trade should review their counterparty due diligence policies and procedures to ensure compliance with the Office of Foreign Assets Control’s (OFAC’s) recently issued “Revised Guidance on Entities Owned by Persons Whose Property and Interest in Property Are Blocked,” which significantly changed OFAC’s so-called 50% Rule.
OFAC prohibits US persons from engaging in transactions with “blocked persons,” unless granted a special license. Blocked persons include persons on the Specially Designated Nationals and Blocked Persons List and those blocked through the recent Ukraine-related sanctions. The 50% Rule derivatively blocks foreign entities that are 50% or more owned by blocked persons. Effective August 13, 2014, the 50% Rule derivatively blocks foreign entities that are 50% or more owned by blocked persons in the aggregate. Previously, OFAC had only applied the 50% Rule to entities 50% or more owned by any individual blocked person.
As a result of this policy change, US persons contemplating transactions with a foreign counterparty must now:
- Identify each of the counterparty’s stakeholders.
- Determine which stakeholders are blocked and each blocked stakeholder’s interest.
- Calculate the aggregate ownership percentage blocked persons hold.
- Verify that blocked persons own less than 50% of the counterparty in the aggregate.
OFAC confirmed that the 50% Rule remains inapplicable to entities that are:
- Controlled, but not owned, by blocked persons. However, these controlled entities are at risk of being targeted by future OFAC investigations or enforcement actions.
- Adequately divested by blocked persons. Stakeholder divestiture discharges blocked person status if the divestiture:
- reduces the aggregate blocked ownership below 50%; and
- lacks both a geographic and party connection to the US (blocked persons’ divestitures that occur in the US or result in a US person controlling an interest are still blocked transactions).
- Blocked by a sanction regime that uses a criteria other than the 50% Rule to designate blocked entities. For example, the sanctions imposed on Cuba and Sudan.
For more on OFAC sanctions and trade regulation see, Practice Note, Export Regulation Laws: Overview.
Corporate Governance & Capital Markets
Correcting Proxy Advisor Recommendations
According to a recent working paper authored by SEC Commissioner Daniel Gallagher, public companies encountering difficulties with proxy advisory firms failing to acknowledge or review and revise recommendations based on materially false or inaccurate information may wish to:
- Consider notifying their institutional shareholders of the issue.
- Provide a copy of these shareholder communications directly to Commissioner Gallagher’s office.
Commissioner Gallagher’s paper, “Outsized Power & Influence: The Role of Proxy Advisers” discusses Staff Legal Bulletin No. 20 (SLB 20). He clarifies, among other things, investment advisers’ responsibilities to vote proxies in the best interests of their clients by overseeing the proxy advisory firms they retain. Commissioner Gallagher cited SLB 20 as “a good initial step in addressing the serious deficiencies currently plaguing the proxy advisory process.” However, he pointed out that it fails to fully address proxy advisors’ influence on US corporate governance and their privileged role, similar to that of rating agencies before the financial crisis.
The paper’s suggestion that companies engage their institutional shareholders when facing accuracy issues, links to SLB 20 guidance that investment advisers are required to take reasonable steps to investigate errors. Further, Commissioner Gallagher suggests that repeated instances of proxy advisors failing to correct recommendations they based on materially inaccurate information should cause investment advisers to question the reliability of these proxy advisors’ voting recommendations.
Employee Benefits & Executive Compensation
Pension Plan Funding Relief
Provisions enacted under the Highway and Transportation Funding Act of 2014 (HTFA) extend the defined benefit plan funding relief provisions passed as part of the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21), for plan years beginning January 1, 2014. Employers that sponsor single employer defined benefit pension plans should review HTFA’s provisions with their actuaries to determine their impact on plan funding and minimum required contributions, as these may reduce an employer’s required contributions to their defined benefit plans for 2013 through 2017.
MAP-21 was passed in response to the low interest rate environment which required employers to make larger contributions to their defined benefit plans. Beginning in 2012, MAP-21 stabilized the interest rates used in calculating pension liabilities for purposes of the minimum funding standards under the Internal Revenue Code. This enabled employers to contribute less money to their defined benefit plans by using calculations that allowed them to value their pension liabilities with higher interest rates. Under MAP-21, this funding relief began to slowly phase out from 2012 to 2016 and later.
For more on funding for defined benefit plans, see Practice Note, Benefit Restrictions under IRC Section 436.
Finance
Bank Liquidity Rules
Large banks will need to revise their business, financial and compliance operations to ensure they are compliant with the new Liquidity Coverage Ratio rule (LCR Rule) finalized by the US banking agencies. Banks must be fully compliant with the rule by January 1, 2017.
The LCR Rule will require large banks to hold high quality, liquid assets (HQLA). These include central bank reserves and government and corporate debt that can be converted quickly and easily into cash, in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period.
The LCR Rule will apply to banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, as well as any of their depository institutions that have assets of $10 billion or more. The LCR Rule also will apply a less stringent, modified liquidity coverage ratio to bank holding companies and savings and loan holding companies that do not meet these thresholds but have $50 billion or more in total assets.
Although the LCR Rule is largely identical to the October 2013 proposed rule, there are some important changes, including:
- Changes to the range of corporate debt and equity securities included in HQLA.
- A phasing-in of daily calculation requirements.
- A revised approach to address maturity mismatch during a 30-day period.
- Changes in the stress period, calculation frequency and implementation timeline for the bank holding companies and savings and loan companies subject to the modified liquidity coverage ratio.
The LCR Rule is consistent with the Basel Committee’s liquidity coverage ratio standard. However, it is more stringent in certain areas, including a shorter transition period for implementation.
For more on the liquidity coverage ratio, see Legal Update, Bank Liquidity and Supplementary Leverage Rules Adopted.
Enhanced Offering and Disclosure Rules for Registered ABS
The SEC has adopted final rules revising the disclosure, reporting and offering process for asset-backed securities (ABS) issued in registered transactions. Compliance with these rules, referred to as Regulation AB II or “Reg AB II,” is required for eligibility to use the SEC short-form shelf-registration on Form S-3, which is how most registered ABS are issued in the US.
The revised rules become effective 60 days after publication in the Federal Register (which is expected to occur in November 2014) and issuers must comply with the new rules (including the use of the new disclosure forms) other than asset-level disclosure requirements, no later than one year after the rules are published in the Federal Register. Registered offerings of ABS backed by residential and commercial mortgages, auto loans, auto leases and debt securities (including resecuritizations, such as collateralized debt obligations), must comply with the new asset level disclosure requirements no later than two years after the rules are published in the Federal Register.
The reforms aim to enhance transparency in registered ABS transactions, better protect investors in registered ABS and make it easier for investors to perform their own due diligence by:
- Requiring certain asset classes to provide asset-level information in a standardized, tagged data format.
- Providing investors with additional time to consider transaction-specific information.
- Removing the investment grade rating requirement for ABS shelf-registration eligibility.
- Amending ABS prospectus disclosure requirements.
- Revising Regulation AB to include:
- standardization of certain static pool disclosure;
- revisions to the definition of “asset-backed securities”;
- specific disclosure that must be provided on an aggregate basis relating to the type and amount of securitized assets in the transaction’s collateral pool that do not meet the underwriting criteria described in the prospectus; and
- changes to disclosure Forms 10-D, 10-K and 8-K.
For more on the final rules, see Legal Update, SEC Adopts Enhanced Offering and Disclosure Rules for Registered ABS.
Intellectual Property & Technology
Enforceability of Browsewrap Agreements
Companies using online browsewrap agreements should evaluate the enforceability of these agreements, given a Ninth Circuit decision holding that the Terms of Use (TOU) presented in a browsewrap agreement did not establish a website user’s unambiguous assent to the TOU’s arbitration provision.
In Nguyen v. Barnes & Noble Inc., the plaintiff sued Barnes & Noble alleging deceptive business practices and false advertising when Barnes & Noble canceled orders for a handheld tablet after experiencing unexpected demand. Barnes & Noble unsuccessfully moved to compel arbitration, arguing that the plaintiff had constructive notice of, and was therefore bound by, its website TOU’s arbitration provision. The plaintiff argued he was not bound because he had neither clicked on the TOU hyperlink nor read the TOU.
On appeal, the Ninth Circuit found that while a browsewrap agreement presenting terms through a hyperlink can create a binding contract, Barnes & Noble’s TOU did not provide the actual or constructive notice needed to establish mutual assent. While Barnes & Noble posted the TOU hyperlink prominently on each web page, it did not:
- Otherwise provide users with notice of the browsewrap agreement’s terms, for example, through noticeable warnings that continued use of the site would bind users to the TOU.
- Prompt website users to affirmatively express assent.
Companies using these agreements should:
- Evaluate the notice they provide to users.
- Consider means of obtaining affirmative assent, for example, by posting clickthrough agreements requiring users to click a button to show assent.
For a website terms of use template, see Standard Document, Website Terms of Use.
Labor & Employment
Receipt of FMLA Notices
Employers mailing out legally mandated notices to employees on Family and Medical Leave Act (FMLA) leave should be prepared to provide proof of receipt, in light of the Third Circuit’s decision in Lupyan v. Corinthian Colleges, Inc.
In Lupyan, the Third Circuit held that an FMLA plaintiff rebutted the presumption under the “mailbox rule” that she received a properly addressed notice her employer mailed by swearing in an affidavit that she did not receive it. The Third Circuit reversed summary judgment for the employer and allowed her to go to trial on whether her FMLA rights were violated.
To prevent costly litigation, employers should not rely solely on regular US mail to send legally mandated notices to an employee on leave. Instead, employers should consider:
- Using a trackable method of communication, such as UPS or FedEx.
- Following up with the employee by personal e-mail or telephone to ensure the employee received the notice.
- Using electronic communications, such as e-mail sent with a request for a “read” receipt, or an electronic notice method that requires acknowledgment that it was received and read.
- Having an external vendor administer employee benefits, as long as the vendor’s efforts to provide notice are effective at actually reaching employees.
Additionally, employers should keep detailed records on all efforts to personally communicate with employees about their FMLA rights and responsibilities.
For more on the rights and obligations of private employers and employees under the FMLA, see Practice Note, Family and Medical Leave Act (FMLA) Basics.
For a standard form to notify employees about their eligibility for FMLA leave, see Standard Document, FMLA Notice of Eligibility, Rights and Responsibilities.
Disciplining Employees for Social Media Posts
Following a recent National Labor Relations Board (NLRB) decision, employers should not assume they can lawfully discharge employees who disparage them or their managers in expletive-laden social media discussions, and should expect further scrutiny of their social media policies.
In Three D, LLC, the NLRB found that the National Labor Relations Act (NLRA) protected two employees, one of whom clicked the “Like” button for a Facebook post by a former colleague complaining about owing taxes because of the employer’s alleged error. The other employee commented on the Facebook post and used an expletive to describe the owner when stating that she also owed taxes.
The NLRB found that the employer had unlawfully terminated the employees for their protected comments, even though they were part of an expletive-ridden, defamatory discussion. Additionally, although the employer did not rely on the company’s Internet/ Blogging policy when discharging the employees, the NLRB found that the policy was unlawfully vague because employees could interpret it as infringing on their NLRA rights.
Given this decision, employers that have social media policies should consider revising them to reduce ambiguities. For example, they might prohibit employees from:
- Disclosing specified trade secrets or confidential information.
- Misrepresenting that they are spokespersons for the employer.
Employers concerned about an employee’s post should:
- Consider asking the employee to retract the post given the policy and the liability the post might cause the employer.
- Evaluate the risks before disciplining an employee who refuses to retract a post, keeping in mind that the NLRB liberally protects employees who disparage their employers on social media.
Employers facing NLRB charges for disciplining employees should not supply unsolicited employment policies to investigators. The NLRB is supplementing complaints on those charges with allegations that unrelated policies are unlawfully vague.
For a sample social media use policy, see Standard Document, Social Media Policy (US).
Litigation & ADR
Forum Selection Clause may Supersede Right to FINRA Arbitration
Financial Industry Regulatory Authority (FINRA) member firms should be aware that the Second Circuit recently decided that mandated FINRA arbitration may be overcome by a different forum selection clause in broker-dealer agreements.
In Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, the Second Circuit considered broker-dealer agreements entered into by FINRA members Goldman and Citigroup Global Markets Inc. These agreements included forum selection clauses requiring “all actions and proceedings” arising out of the agreement to be brought in federal court. Each agreement also contained a merger clause.
At issue was FINRA Rule 12200, which both Goldman and Citigroup are bound to as FINRA members. The rule requires members to “arbitrate a dispute” if both:
- The customer requests arbitration.
- The dispute arises in connection with the business activities of the member.
Despite executing agreements that provided that disputes were to be resolved in court, the customers commenced FINRA arbitrations. The Second Circuit agreed with the financial institutions that the forum selection clauses superseded the FINRA arbitration rule, which the court considered a prior agreement to arbitrate. In reaching this conclusion, the Second Circuit agreed with the Ninth Circuit but rejected a contrary decision by the Fourth Circuit.
This ruling potentially creates a serious conundrum for FINRA member firms because FINRA may bring an enforcement action against a company that expressly avoids the arbitration mandate. Until this issue is clarified by FINRA or the courts, counsel should proceed with caution. If counsel wishes to rely on a forum selection clause, one approach might be to request that FINRA issue guidance or at least refrain from seeking to discipline a member for abiding by a controlling judicial ruling.
For more information on this decision, see Legal Update, Forum Selection Clause Supersedes Right to FINRA Arbitration: Second Circuit.
Compelling Arbitration in California
Given the recent California state court decision in Maxim Marketing v. ConAgra Foods Inc., companies drafting agreements providing for arbitration in California should understand the obstacles that California state law imposes.
In Maxim, the court denied defendant Trader Joe’s motion to compel arbitration of claims that plaintiff Maxim, a former supplier, brought even though the court found that they had a valid arbitration agreement. Maxim successfully argued that Section 1281.2 of the California Arbitration Act (CAA) permits a court to deny arbitration when the arbitrable claims are inextricably intertwined with claims against a third party (in this case, ConAgra), who did not have an arbitration agreement with Maxim.
Citing Ninth Circuit precedent, Trader Joe’s argued that a contractual choice of California law, without more, does not show that the parties intended to displace the Federal Arbitration Act (FAA) and instead incorporate state procedural rules on arbitration (that is, the CAA). Under FAA jurisprudence, a plaintiff’s claim against a co-defendant would not bar enforcement of an arbitration clause. Notwithstanding federal precedent to the contrary, California state courts continue to hold that a general choice of law provision incorporates both California’s substantive law and its arbitration law.
To enhance the enforceability of agreements to arbitrate in California, parties should include language clearly stating that federal arbitration law applies. For example, parties may wish to include the following model clause:
"This arbitration agreement and any arbitration shall be governed by the Federal Arbitration Act, to the exclusion of state law inconsistent therewith."
For more on arbitration in California, see Practice Note, Choosing an Arbitral Seat in the US.
M&A
By-law Selecting Foreign Jurisdiction as Exclusive Forum Upheld
The Delaware Court of Chancery’s recent decision in City of Providence v. First Citizens BancShares, Inc. provides further support for boards wishing to adopt exclusive forum by-laws.
In First Citizens, the court upheld as facially valid a Delaware corporation’s forum selection clause selecting a non-Delaware jurisdiction as the exclusive forum for intra-entity claims against the corporation and its directors. The court also held that the board’s adoption of the by-law on the same day that it approved a merger agreement for the corporation was not grounds to find the by-law’s adoption unreasonable.
First Citizens expands the Delaware Court of Chancery’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp. The Chevron court held that a by-law selecting Delaware as the exclusive forum for intra-entity claims was reasonable because the claims would be decided by courts with the authoritative, final say on the interpretation of the governing law. However, as the First Citizens court explained, nowhere in Chevron did the court hold that Delaware was the only reasonable forum for that interpretation.
First Citizens also affirms that the timing of the adoption of an exclusive forum selection by-law does not raise suspicions of inequitable conduct under Delaware law. Notably, this issue remains open in some courts. For example, in Roberts v. TriQuint SemiConductor, Inc., an Oregon state court recently refused to enforce a by-law selecting Delaware as the exclusive forum because the board adopted it on the same day that a merger was announced.
Most state courts that have addressed Chevron have upheld forum selection by-laws without distinguishing between by-laws adopted on “clear” or “cloudy” days. However, as long as corporations remain vulnerable to a suit brought in a court that has yet to opine on the issue, the best practice remains to adopt these by-laws when no personal motivation of the directors can be inferred.
For more on First Citizens, see Legal Update, Delaware Court of Chancery Upholds Board-adopted By-law Selecting Foreign Jurisdiction as Exclusive Forum.
GC Agenda is based on interviews with Advisory Board members and leading experts from Law Department Panel Firms. Practical Law would like to thank the following experts for participating in interviews for this month’s issue:
Antitrust
Lee Van Voorhis
Baker & McKenzie LLP
Corey Roush and Logan Breed
Hogan Lovells US LLP
Laura Wilkinson
Weil, Gotshal & Manges LLP
Corporate Governance & Capital Markets
Adam Fleisher
Cleary Gottlieb Steen & Hamilton LLP
Greg Rodgers
Latham & Watkins LLP
David Lynn and Anna Pinedo
Morrison & Foerster LLP
Thomas Kim
Sidley Austin LLP
Frank Marinelli and Yafit Cohn
Simpson Thacher & Bartlett LLP
Robert Downes
Sullivan & Cromwell LLP
Employee Benefits & Executive Compensation
David Kaleda and Brigen Winters
Groom Law Group, Chartered
Sarah Downie
Hughes Hubbard & Reed LLP
Hannah Widlus
Seyfarth Shaw LLP
Alvin Brown and Jamin Koslowe
Simpson Thacher & Bartlett LLP
Neil Leff, Michael Bergmann, David Olstein and Alessandra Murata
Skadden, Arps, Slate, Meagher & Flom LLP