The FTC issued a policy statement on the principles it will consider when deciding whether conduct is an unfair method of competition in violation of Section 5 of the FTC Act, in a step towards increased clarity for companies on the proper scope of Section 5. The lack of formal guidelines and jurisprudence has made it difficult for companies to predict the circumstances under which the FTC may use Section 5 to challenge standalone violations (that is, conduct that does not violate other antitrust laws).

According to the policy statement, when evaluating potential Section 5 violations, the FTC:

The policy statement formally commits the FTC to certain traditional antitrust concepts when relying on Section 5, such as the rule of reason and the consumer welfare standard. However, Commissioner Ohlhausen noted in a dissenting statement that the policy statement lacks concrete guidance, and companies will continue to face a measure of unpredictability regarding the FTC's use of its Section 5 authority.

For more information on Section 5 and its scope, see Practice Note, FTC Act Section 5: Overview.

Public companies should begin early-stage planning for the SEC's new pay ratio disclosure requirement.

New Item 402(u) of Regulation S-K requires a company to compare the annual total compensation of its CEO to the median annual total compensation of all employees. While disclosure is not required until the 2018 proxy season, significant lead time will be needed to tackle the complex legal and logistical issues related to the:

In-house counsel should begin preparing now by:

Companies with overseas operations will need additional lead time to:

Companies should consider conducting a dry run of their new pay ratio processes using 2016 compensation data to identify potential problems and test alternative methodologies for identifying their median employee. Companies should also consider whether to engage compensation consultants or other advisors to assist in their preparations.

Companies should review their policies and training materials to ensure their hiring policies are compliant with Foreign Corrupt Practices Act (FCPA) regulations. The SEC recently announced that The Bank of New York Melon (BNY) agreed to pay $14.8 million to settle charges that it violated the anti-bribery and internal control provisions of the FCPA because it provided valuable internships in exchange for doing business with a foreign wealth fund.

BNY approved and provided valuable internships to relatives of foreign government officials in order to obtain and retain business with a Middle Eastern sovereign wealth fund. The internships were unusual and suspect because:

The SEC concluded that the internships were an "expensive favor" for the foreign government officials, who derived personal value from being able to confer this benefit on their relatives.

Simply having an FCPA policy is not enough. Companies should ensure:

For more information on complying with the FCPA, see Practice Note, The Foreign Corrupt Practices Act: Overview.

The Delaware Court of Chancery recently held that stockholders were entitled to a "fairer price," not just an "arguably fair price," because of the fraud committed by a corporation's controlling stockholder and its COO in connection with a going private transaction.

In In re Dole Food Co., Inc. Stockholder Litigation, David H. Murdock, the Chairman, CEO and 40% stockholder of Dole Food, acquired all the remaining shares of the company. To qualify for business judgment review under MFW, Murdock conditioned the acquisition on the approval of a special committee of independent directors and a majority of the unaffiliated stockholders. Despite the offer's nominal adherence to MFW, Murdock and the COO took action to drive down the stock price before making the offer and manufactured false projections to convince the special committee's financial advisor that the offer price was fair. The court therefore subjected the transaction to entire fairness review, which it failed to satisfy.

The court found that the special committee and its financial advisor had done the best they could to negotiate a strong deal for the stockholders. The court also acknowledged that the offer price may arguably have been fair, as it exceeded the financial advisor's range of fairness reached through some of its valuation analyses. However, the court ruled that when a transaction fails entire fairness review because of a breach of the fiduciary duty of loyalty that stems from fraud, the stockholders are entitled to a "fairer price" that strips out the benefits of the breach.

Although the court found Murdock and the COO joint and severally liable, it rejected the plaintiff stockholders' argument that Murdock's financial advisor should be held liable for aiding and abetting the breach. In doing so, the court applied a standard of "knowing participation" in the acts that gave rise to the defendants' breaches of their fiduciary duty. Although the financial advisor assisted in various steps of the offer process, it did not participate in the breaches themselves.

For more information on this decision, see Legal Update, In re Dole Food: Delaware Court of Chancery Awards "Fairer Price" under Entire Fairness Review where Breach of Duty of Loyalty Was Based on Fraud.

Three recent Delaware Court of Chancery decisions emphasize for companies and their boards that the directors, not the stockholders, have the final say over management of a corporation.

In Fox v. CDX Holdings, Inc., the holders of stock options of a corporation that underwent a merger complained that the cash-out value assigned to their options was arrived at through an arbitrary and capricious process. The court found that the directors had barely involved themselves in the valuation process, essentially offloading the decision to the corporation's controlling stockholder. The court emphasized that under the "bedrock statutory principle of director primacy," the board must make these types of findings and does not merely advise the controlling stockholder.

In Gorman v. Salamone, a corporation's majority stockholder acted by written consent to amend the corporation's by-laws to allow stockholders to remove and replace corporate officers. Having approved the by-law, the stockholder immediately sought to implement it by removing the defendant as CEO and appointing himself to that role. The court held that the by-law, though passed by a stockholder majority, was invalid and of no effect. The court reasoned that the by-law would have interfered with the directors' ability to manage the corporation by preventing them from discharging one of their most important functions, to appoint officers.

In OptimisCorp v. Waite, a corporation's CEO, majority stockholder and director posited that under Delaware precedent, if the board intends to remove such a "super director" as CEO, the individual is entitled to advance notice so that he can first act to replace the board. The court acknowledged that a line of decisions supports this theory, but declined to follow them, holding that they threaten the fundamental premise of Delaware law that a corporation is managed by its board. The court emphasized that in appropriate instances, the fiduciary duties of directors may enable a board to take action against a controlling stockholder.

Public companies will be required to comply with the SEC's new pay ratio disclosure requirement for the 2018 proxy season and should begin preparing accordingly. For more information, see Capital Markets & Corporate Governance: Planning for Pay Ratio Disclosure.

A recent Second Circuit decision clarifies the standard for debtors seeking to extinguish liens under Chapter 11 plans.

In City of Concord, N.H. v. Northern New England Telephone Operations, LLC (In re Northern New England Telephone Operations, LLC), NNETO filed for relief under Chapter 11 in the US Bankruptcy Court for the Southern District of New York, which confirmed a plan. The city of Concord, New Hampshire filed proofs of claim for prepetition Q1 and Q2 taxes related to real property owned by NNETO, but it did not file proofs of claim for postpetition Q3 and Q4 taxes. Concord moved to allow its claims on the Q3 and Q4 taxes, arguing that they were secured by a lien that was not discharged by the plan. The bankruptcy court denied the motion and the district court affirmed.

The Second Circuit held as a matter of first impression that under section 1141(c) of the Bankruptcy Code, a lien on property that is "dealt with" by a confirmed plan of reorganization that does not preserve the lien is extinguished by the plan if the lienholder participated in the bankruptcy proceedings. Although it noted the "longstanding background rule" that "liens pass through bankruptcy unaffected," the Second Circuit found that the express wording of section 1141(c) provides that a lien is extinguished if:

The Second Circuit found that:

For more information on the Chapter 11 plan process, see Practice Note, Chapter 11 Plan Process: Overview.

Companies should consider securing cyber insurance coverage or evaluating their existing cyber coverage in light of continuing data security risks and the trend away from coverage for data breaches under traditional business insurance policies.

In considering cyber coverage, companies should analyze their specific data risks to effectively identify coverage needs. While most companies recognize the expenses associated with investigating and responding to an incident, they should not underestimate business interruption costs, which are often substantial.

In evaluating policies, companies should pay particular attention to:

Insurers are moving toward using a managed services model where insureds must use technical or legal vendors designated by the insurer, such as forensic investigators and attorneys. Companies should carefully review the vendor panel before choosing a policy. Once the company selects a policy, it should work to develop relationships with the chosen vendors in advance of any incident.

In applying for cyber coverage, companies should also be aware that insurers may require extensive information regarding security and breach readiness as part of the application process, including:

Companies should also understand that some policies may include coverage exclusions when the company fails to take certain security measures.

For more information on cyber coverage, see Practice Note, Cyber Insurance: Insuring for Data Breach Risk.

Entities (whether unionized or not) should be aware that their commercial contracts can render them joint employers in some circumstances.

In Browning-Ferris Industries of California, Inc., the National Labor Relations Board (NLRB) found that modern workplace arrangements require a new standard for determining whether multiple entities jointly employ workers who petition for union representation. Under the new standard, the NLRB will look at the extent to which an entity shares or codetermines control over workers' employment terms and conditions, even if that control is not direct or exercised. Many commercial contracts reserve rights to the entities with bargaining leverage that the entities never exercise. Those provisions may now render the entity a joint employer under the National Labor Relations Act.

The new standard is likely to impact many arrangements, such as subcontracting, employee leasing, temporary staffing and franchising. Entities should:

Other administrative agencies may also adopt the NLRB's new standard.

For more information on the joint employer standard, see Legal Update, NLRB Issues New Joint Employer Standard, Blends Economic Realities Elements into Control Test.

A recent Second Circuit decision makes it significantly more difficult for companies defending against shareholder derivative actions to justify dismissal of the action on appeal. The Second Circuit adopted a de novo standard of review for dismissals of derivative actions, discarding its former, more deferential abuse of discretion standard.

In Espinoza ex rel. JPMorgan Chase & Co. v. Dimon, Espinoza, a JPMorgan shareholder, demanded that JPMorgan's board investigate both the alleged wrongdoing in the London Whale trading debacle and later misstatements by corporate officers about that wrongdoing, which resulted in JPMorgan losing billions of dollars. After JPMorgan rejected the demand, Espinoza filed a lawsuit claiming that the investigation was unreasonably narrow and overlooked the alleged misstatements about the scale of JPMorgan's losses. The district court dismissed the lawsuit, finding that Espinoza's complaint did not show that the board failed to exercise appropriate business judgment in rejecting the demand.

In overruling the district court's decision, the Second Circuit:

For more information on shareholder derivative lawsuits, see Practice Note, Shareholder Derivative Litigation.

A recent Ninth Circuit decision stresses the importance of precise and deliberate drafting of delegation provisions in arbitration clauses.

In Brennan v. Opus Bank, the plaintiff sued his former employer for wrongful termination of his employment contract and challenged the contract's arbitration provision as substantively and procedurally unconscionable. The district court dismissed the action in favor of arbitration. The Ninth Circuit affirmed, holding that:

After Brennan, employers in the Ninth Circuit may choose to adopt express language delegating the question of arbitrability to the arbitrator. This practice would provide more certainty than merely incorporating AAA rules because:

Counsel for employers may want to make the delegation provision separate from the rest of the arbitration clause.

This decision also highlights a broader point that counsel drafting arbitration provisions should expressly delegate the authority to decide other important issues to the arbitrator or the courts, as desired. For instance, given that most employers would prefer that courts decide the question of enforceability of classwide arbitration waivers, counsel should explicitly reserve that issue for the courts.

For more information on the Brennan decision, see Legal Update, Incorporation of AAA Rules Evinces Intent for Arbitrator to Decide Arbitrability: Ninth Circuit.

For more information on conducting arbitration under the rules of the AAA, see Practice Note, AAA Arbitration: A Step-By-Step Guide.