Companies that participate in information exchange programs with competitors should note the potential antitrust risks involved. In a recent business review letter issued to CyberPoint International LLC, the Department of Justice (DOJ), while stating that it did not intend to challenge the information exchange at issue, noted that the antitrust agencies evaluate competitor information exchange agreements under the rule of reason.

The antitrust agencies' central concern with these agreements is whether they harm competition by incentivizing participants to raise prices or lower standards of quality, service or innovation. The DOJ explained that it considers three factors when analyzing these agreements:

In addition to understanding these factors, counsel should note that companies can request business review letters from the DOJ regarding proposed joint ventures or business conduct. Business review letters afford companies the opportunity to seek the DOJ's opinion on the potential competitive impact of proposed business conduct and whether the DOJ would challenge the conduct under the antitrust laws.

However, the DOJ:

To request a review, counsel should submit a written request to the Assistant Attorney General, providing the information and documents identified in 28 C.F.R. Section 50.6(5).

For more on competitor collaborations, see Practice Note, Competitor Collaborations in the US and Cooperating with Competitors Checklist.

Counsel should be aware that the Federal Trade Commission (FTC) will challenge agreements between competitors to refrain from competing on non-price terms even if the parties are still competing on price. The FTC recently settled charges with two propane tank companies, Blue Rhino and AmeriGas Cylinder Exchange, that after independently reducing the amount of propane in their exchange tanks, colluded with each other by secretly agreeing to refuse to modify the fill levels during their negotiations with Walmart.

The FTC brought the action under Section 5 of the FTC Act alleging that the parties agreed not to compete. The Commission voted 3-1-1 to issue the complaint and accept the consent orders, with Commissioner McSweeny abstaining. In a concurring statement, Commissioner Wright argued that the parties' behavior violated Section 1 of the Sherman Act and noted that neither party presented any procompetitive justification for its conduct.

Commissioner Ohlhausen dissented and noted that the conduct did not constitute a per se violation of the antitrust laws. Commissioner Ohlhausen also argued that the facts did not suggest the parties agreed to set prices for Walmart.

Counsel should ensure that:

For resources to help companies comply with the antitrust laws, see Antitrust Compliance Toolkit.

Online retailers should review their use of negative option transactions and ensure compliance with the Restore Online Shoppers' Confidence Act (ROSCA) following recent enforcement actions brought by the FTC and Washington State Attorney General (AG).

FTC v. Health Formulas, FTC v. JDI Dating and Washington v. Internet Order LLC, all brought in 2014, were the first ROSCA enforcement actions filed against online retailers since it was signed into law in 2010. The ROSCA actions alleged improper use of negative options. Negative options refer to transactions where a consumer is automatically charged on a recurring basis until the consumer takes affirmative action to stop the charges.

Under ROSCA, a negative option is improper unless the retailer:

A proper negative option depends on the disclosure's clarity, as determined by the context of the advertisement.

These cases demonstrate how these types of enforcement actions now proceed under a statute, as opposed to an FTC rule or statutory interpretation. Previously, the FTC and state AGs typically brought enforcement actions as a generally deceptive practice under Section 5(a) of the FTC Act, which would likely consider the particular negative options at issue improper.

ROSCA also regulates post-transaction marketing, or upselling. Specifically, ROSCA prohibits online retailers from engaging in "data pass" transactions, where a retailer, from which a consumer has made an initial purchase, transfers the consumer's financial information to a third-party retailer who attempts to upsell the consumer after the initial transaction. To date, no upselling enforcement actions have been brought. However, recent regulatory interest in ROSCA's negative option provisions may signal general interest in enforcing the statute.

For more on consumer protection statutes and regulations and a brief discussion of product liability remedies, see Practice Note, Consumer Protection: Overview.

Public companies should evaluate their upcoming annual meeting agendas in light of the new 2015 proxy voting guidelines of Institutional Shareholder Services Inc. (ISS) and Glass Lewis.

Key governance policy updates include:

For a summary of the key executive compensation policy updates, see Employee Benefits & Executive Compensation: New ISS and Glass Lewis Executive Compensation Guidelines.

For more on ISS's and Glass Lewis's updated guidelines, see Legal updates, ISS Releases 2015 Proxy Voting Guideline Updates and Glass Lewis Releases 2015 Proxy Guidelines.

Given the recent high-profile increase in proxy access shareholder proposals, public companies of all sizes should begin planning how they might respond to this type of proposal.

The New York City Comptroller recently announced he would submit proxy access proposals on behalf of the New York City Pension Funds to 75 companies across a range of industries and market capitalizations. The proposals request a by-law empowering any shareholder who has beneficially owned at least 3% of the outstanding stock for at least three years to include its own director candidates in the company's proxy statement. The targeted companies were selected because they:

The Comptroller's announcement included strong supporting statements from some of the nation's largest state and municipal pension funds, including the California Public Employees' Retirement System (CalPERS).

As a result of these developments, companies should:

For an overview of the shareholder proposal process and when a shareholder proposal may be excluded, see Practice Note, How to Handle Shareholder Proposals.

As part of their annual corporate governance policy review, public companies should consider what changes are needed to reflect the Public Company Accounting Oversight Board's (PCAOB's) new and amended auditing standards on related party transactions and other matters.

The new and amended standards expand:

The new and amended standards are effective for audits of financial statements for fiscal years beginning on or after December 15, 2014 and for reviews of all related interim periods.

In anticipation of these changes, companies should:

For more on the PCAOB's new and amended auditing standards, see Legal update, SEC Approves New PCAOB Related Party Auditing Standard and Related Amendments.

Public companies planning to adopt or amend equity plans before their upcoming annual meetings should review the new ISS and Glass Lewis proxy voting guidelines on executive compensation.

The most significant update for 2015 is ISS's new Equity Plan Scorecard for evaluating equity incentive plan proposals. ISS will consider a range of positive and negative factors in the following three categories, with each category assigned a different weight:

ISS will recommend against a plan proposal if this analysis indicates that the plan is not in shareholders' interests, or if any of the following would apply:

Glass Lewis has updated its analysis of awards granted outside of existing incentive programs and added another focus area in reviewing say on pay proposals.

For a summary of the key corporate governance policy updates, see Corporate Governance & Capital Markets: ISS and Glass Lewis 2015 Proxy Voting Guidelines.

For more on ISS's and Glass Lewis's 2015 guidelines, see Legal updates, ISS Releases 2015 Proxy Voting Guideline Updates and Glass Lewis Releases 2015 Proxy Guidelines.

The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency (together, the agencies) recently issued a press release on the findings of the annual Shared National Credit (SNC) review, which raised concerns over leveraged lending practices. As a result, regulators plan to increase the frequency of leveraged lending reviews to maintain an adequate level of risk.

The SNC review included a supplement relating exclusively to leveraged loans which exposed a variety of concerns regarding leveraged lending, including:

In researching this leveraged loan supplement, the agencies reviewed $623 billion of commitments, which represent 81% of all leveraged loans by dollar commitments.

For more on recent regulatory developments in leveraged lending, see Legal updates, Regulators Release Shared National Credits Review and Express Concern over Leveraged Lending and US Bank Regulators Release Supervisory Guidance on Leveraged Lending.

The International Swaps and Derivatives Association, Inc.'s (ISDA's ) 2014 ISDA Resolution Stay Protocol is now open to adherence by any party. The protocol imposes a stay on early termination rights under ISDA Master Agreements between parties that have adhered to it.

The protocol was developed to support the orderly cross-border resolution of global financial institutions in the event of a failure of one or more of these institutions. The protocol was signed by 18 major banks at launch and is effective as of January 1, 2015 for those banks.

Under the protocol, early termination rights under the ISDA Master Agreements of a failed institution are stayed for up to 48 hours after a bankruptcy filing or other equivalent domestic or overseas proceeding. These stays are intended to give regulators time to facilitate an orderly resolution of a troubled bank. The protocol has met with some resistance from buy-side participants (including hedge funds) reluctant to give up bargained-for early termination rights under their ISDA Master Agreements.

Adherence is voluntary, but regulators are working to develop new regulations to encourage further adoption of stay provisions. The bankruptcy component of the protocol will become effective in the US once relevant rules have been issued by US regulators.

For more on these developments, see Legal update, ISDA 2014 Resolution Stay Protocol Opens for Adherence.

As governmental focus on data security increases, companies' legal exposure from data breaches is rising. Counsel can better protect their company from the consequences of a data breach by getting more involved in how technology is managed before a breach occurs.

The Federal Communications Commission (FCC) recently proposed $10 million in fines against two companies for allegedly mishandling sensitive customer information by making it accessible to the public on the internet. State legislatures are also strengthening their data security laws. For example, California's legislature recently amended the California data breach statute to:

To proactively manage data security risk, counsel must know more than just which data breach notification laws and regulations apply. They should thoroughly understand their company's technology and data, and specifically:

Learning more about the company's data security practices involves greater communication with the company's technology managers and any outside consultants that assist with data security.

While avoiding a data breach may be impossible, documenting data security efforts will be critical to minimizing the fallout of a data breach by demonstrating that the company made reasonable efforts to protect customer data and comply with industry standards.

For more on these developments, see Legal updates, FCC to Fine Phone Carriers $10M for Failing to Safeguard Customer Data and California Enacts Law Protecting Student Privacy and Amends Data Breach Statute.

For more on identifying data security risks, see Common Gaps in Information Security Compliance Checklist.

Employers should review their arbitration programs carefully following the Fifth Circuit's decision in Sharpe v. AmeriPlan Corp., which held that a court may enforce a mandatory arbitration provision only if it is compatible with the dispute resolution clauses in prior agreements.

In this case, the court evaluated whether it could compel arbitration under an arbitration provision the company added to its Policies and Procedures Manual. The company had earlier entered into separate agreements with different dispute resolution procedures with four plaintiff employees. The court found the specific language in three of the plaintiffs' agreements was inconsistent with the Manual's language and refused to compel arbitration. However, the court compelled arbitration of the fourth plaintiff's claims because the more general language in that plaintiff's agreement comported with the Manual's language.

In light of Sharpe, employers either considering a new arbitration program or reviewing existing arbitration agreements should:

For resources to assist with drafting alternative dispute resolution clauses and agreements, see US Arbitration Toolkit.

A recent decision provides counsel with guidance on how courts will treat subpoena-related motions under amended Federal Rule of Civil Procedure (FRCP) 45 that went into effect on December 1, 2013.

In Agincourt Gaming, LLC v. Zynga, Inc., an action pending in Delaware, the defendant Zynga served document subpoenas on:

Bally and the individuals moved to quash the subpoenas in the District of Nevada. The district court concluded that under amended FRCP 45 it lacked jurisdiction to decide the individuals' motions because only the compliance court could hear them. The district court also transferred Bally's motion to the District of Delaware under FRCP 45(f), which allows the transfer of subpoena-related motions where exceptional circumstances exist.

The district court's rulings highlight three important aspects of amended FRCP 45:

For more on amended FRCP 45, see Legal update, Amended Federal Rule of Civil Procedure 45 Simplifies Subpoena Practice.

Following two recent circuit court decisions, companies should take care to draft clear arbitration provisions specifying who determines arbitrability. Anything short of a broad arbitration provision clearly placing this determination with the arbitrator may open the parties to litigation over the applicability of the arbitration provision to the particular claims asserted.

In U.S. Nutraceuticals, LLC v. Cyanotech Corp., the Eleventh Circuit reversed the district court's decision regarding the arbitrability of claims arising from two sequential contracts:

The Eleventh Circuit found that because certain of the asserted claims might arise under the earlier agreement, that agreement's broad arbitration provision evinced the parties' agreement that the arbitrator should decide whether all of the asserted claims are subject to arbitration, and remanded the action to the district court to compel arbitration.

In NASDAQ OMX Group, Inc. v. UBS Securities, LLC, the Second Circuit affirmed the district court's decision that the court should resolve the question of the arbitrability of UBS's claims under a broad arbitration clause containing a carve-out for certain claims. The court found that the carve-out rendered it unclear whether the parties intended for issues of arbitrability to be determined by the arbitrator where the claims at issue arguably fell within the carve-out.

Parties that wish to carve out certain claims from arbitration, or only provide for arbitration of limited categories of claims, must clearly and unmistakably indicate whether the determination of the scope of the arbitration provision falls to the arbitrator.

For issues to consider before drafting a motion to compel arbitration, see Compelling Arbitration in US Federal Courts: Motion to Compel Arbitration Checklist.

In two recent decisions, the Delaware Court of Chancery described the degree of control required for a stockholder or group to qualify as a controlling stockholder and trigger entire fairness review for conflict transactions.

In In re KKR Financial Holdings LLC Shareholder Litigation, the court granted the defendants' motion to dismiss where:

The plaintiffs argued that the stockholder (KKR) exerted sufficient control over the corporation (KFN) under the terms of a management agreement between its affiliate and KFN. The court rejected this argument, noting that the agreement only delegated control over KFN's day-to-day operations to the KKR affiliate. However, the agreement did not delegate any control over KFN's board or prevent it from hiring advisors or gathering information independently.

The KKR decision is echoed in In re: Crimson Exploration Inc. Stockholder Litigation. In that ruling, the court emphasized that a large blockholder will not be considered a controlling stockholder unless it actually controls the board's decisions about the challenged transaction. On that basis, the court held that a private equity firm still did not qualify as a controlling stockholder even though it:

More important to the court was that the stockholder was an outside investor that did not instigate the merger negotiations or even learn about them until informed of them by the CEO.

The Crimson Exploration decision highlights that there is no "linear, sliding-scale approach whereby a larger share percentage makes it substantially more likely that the court will find the stockholder was a controlling stockholder." Rather, the analysis is fact-specific and driven by considerations of actual control over the board's decision to approve the challenged transaction.

In the closely watched battle for corporate control of Allergan, Inc., the US District Court for the Central District of California's recent decision serves as a warning that a co-bidder structure is not a safe harbor from insider trading liability.

In Allergan Inc. v. Valeant Pharmaceuticals International Inc., the district court held that Allergan had raised "serious questions" as to whether hedge fund Pershing Square had avoided insider trading liability under SEC Rule 14e-3 when it acquired a toehold of shares in Allergan before the official launch of a tender offer by Valeant.

Allergan's complaint alleged that Valeant was an "offering person" that had taken substantial steps towards commencing a tender offer before officially launching it, while Pershing Square was in possession of material information relating to that tender offer (namely, that a tender offer would be formally launched) and nevertheless bought stock in Allergan. The district court highlighted examples of the defendants' conduct that would appear to qualify as substantial steps taken before the official announcement of the offer, such as:

The district court also rejected the defendants' alternative theory that Valeant and Pershing Square were collectively one offering person. The district court reasoned that Pershing Square had no control over price or the mix of consideration and had no intention of either:

As a remedy, the district court ordered Valeant to make certain corrective disclosures. However, the district court declined to grant an injunction to totally remove the defendant's voting power over the co-bidding entity's shares, preferring to let the shareholders have the ultimate say. Despite allowing the defendants to vote, the decision indicates that the co-bidder vehicle arrangement is hardly a safe harbor from insider trading liability absent greater control for the party establishing a toehold in the target company.

In a bench ruling that could potentially chill the use of "proxy put" provisions in loan agreements, the Delaware Court of Chancery highlighted the fiduciary conflict raised by proxy puts, which tend to deter stockholders from nominating their own directors for fear of triggering the put.

In Pontiac General Employees Retirement System v. Ballantine, the court declined to dismiss a claim of breach of fiduciary duty brought against the individual directors of the borrower for agreeing to a proxy put, as well as a claim of aiding and abetting that breach brought against the company's lender administrative agent.

The court rejected the directors' motion to dismiss, finding the claim to be ripe. The court explained that the deterrent effect of proxy puts is not contingent on a proxy contest actually being threatened. However, the court emphasized that its finding of ripeness did not assume that the act of agreeing to a proxy put is a per se breach of fiduciary duties. The court considered the claim ripe because of the "factually specific manner" in which it was alleged that the board breached its fiduciary duties, such as by agreeing to the put soon after declassifying the staggered board in response to stockholder pressure.

The court also rejected the lender's motion to dismiss. The court acknowledged that negotiating at arm's length usually does negate a claim of aiding and abetting. However, the court differentiated between negotiating for the best possible economic terms, which is entirely permissible, and negotiating for a provision that takes advantage of the counterparty's fiduciary conflict of interest, which is not.

For more on this case, see Legal update, Pontiac GERS v. Ballantine: Chancery Court Declines to Dismiss Claims Against Board and Lenders Based on Loan Agreement Proxy Put.

Property owners can no longer avoid transfer tax liability in Los Angeles County, California by structuring their real property transfer transactions as an indirect entity transfer, following a recent California intermediate appellate court decision.

In 926 North Ardmore Avenue, LLC v. County of Los Angeles, the California Court of Appeal Second District clarified that a change in ownership of an entity that indirectly owns real property through another entity constitutes a "change of ownership" of the real property itself, triggering the imposition of documentary transfer tax (DTT) under the Revenue and Taxation Code (RTC).

The court held that realty was sold (and DTT was due) under the RTC and Los Angeles County Code both when:

DTT may be imposed upon a change in control of a legal entity owning California real property (including real property that is indirectly owned through a single member limited liability company). Generally, a change in control of a legal entity (usually an acquisition that causes a single person or entity to hold more than 50% of the ownership interests of the legal entity) will be treated as a change of ownership of its underlying real property, triggering DTT.

Counsel should consider this case when advising clients on deal structure and transferring real property in California. The court's decision:

For more on this development, see Legal update, California Court of Appeal Broadens the Application of Transfer Tax in Legal Entity Changes of Ownership.

For a state-by-state overview of the taxes levied on the transfer of real property, see State Transfer Tax Comparison Chart.