Department of State Issues Final Rule re: Procedures for Issuing Nonimmigrant Visas

The July 2015 Visa Bulletin Brings Little ChangeThe Department of State (DOS) issued a final rule effective November 2, 2015 updating its regulations regarding the nonimmigrant visa format and record retention procedures found at 22 CFR §41.114, which currently provides for the placement of a nonimmigrant visa stamp in the foreign national’s passport.

The DOS has now amended the regulation to reflect the current practice of issuing machine-readable visas on adhesive foils that are affixed to passports. The updated regulation also allows for the planned future practice of issuing such visas as electronic visas that U.S. Customs and Border Protection officers will be able to access via an electronic database after scanning the machine readable are of the visa holder’s passport to verify the foreign national’s biometrics and identity. Finally, the regulation has been amended to remove DOS procedures regarding visa review and file retention instructions found in the Foreign Affairs Manual.

The DOS’ final rule, available at the Federal Register, is in compliance with regulatory requirements including the Administrative Procedure Act and the applicable Executive Orders. The amendment is issued as a final rule as it is not subject to notice-and-comment rulemaking. The Department of State has certified that the rule will not have a significant economic impact on a substantial number of small entities; rather, only individual foreign nationals seeking consideration for nonimmigrant visas and foreign officials regulating the relevant documentation will be affected. Additionally, DOS does not consider the rule to be an economically significant rulemaking action, and is not aware of any monetary effect (including any increase in costs or prices) due to the update.

The amendments to 22 CFR §41.114 account for useful updates in technology that affect nonimmigrant visa holders. It remains to be seen exactly how the information contained in the electronic visa database available to CBP now provided for in the regulation will be accessible to other stakeholders, including employers.

Article By Lauren A. Tetenbaum of Greenberg Traurig, LLP

©2015 Greenberg Traurig, LLP. All rights reserved.

EEOC Seeks to Clarify Application of GINA to Wellness Programs

Earlier this year, the Equal Employment Opportunity Commission (“EEOC”) published a proposed rule that would amend the agency’s regulations and interpretive guidance implementing Title I of the Americans with Disabilities Act (“ADA”) as they relate to employer wellness programs. Now, the EEOC has turned its attention to Title II of the Genetic Information Nondiscrimination Act of 2008 (“GINA”) as it relates to employer wellness programs that are part of group health plans.

On October 20, 2015, the EEOC issued a proposed rule, or Notice of Proposed Rulemaking (“NPRM”), to amend the regulations implementing Title II of GINA, together with a fact sheet and a series of questions and answers. The proposed rule, which is available in its entirety online, would allow employers that offer wellness programs as part of group health plans to provide limited financial and other incentives or “inducements” in exchange for an employee’s spouse providing information about his or her current or past health status.

Title II of GINA protects job applicants and current and former employees from employment discrimination based on their genetic information. As stated in the NPRM, Congress enacted GINA to address concerns prevalent at the time that individuals would not take advantage of the increasing number of genetic tests that could inform them as to whether they were at risk of developing specific diseases or disorders due to fear that genetic information would be used to deny health coverage or employment. Consequently, GINA expressly prohibits employers with 15 or more employees from using genetic information in making decisions about employment in all circumstances, without exceptions. It also restricts employers from requesting, requiring or purchasing genetic information. In addition, it strictly limits employers from disclosing genetic information. Genetic information includes, among other things, information about the manifestation of a disease or disorder in the family members of an individual. The term “family members” includes spouses.

There are only six very limited circumstances under GINA in which an employermay request, require, or purchase genetic information about an applicant or employee. One of the six exceptions applies when an employee voluntarily accepts health or genetic services offered by an employer, including such services offered as part of a wellness program. The proposed regulations are in response to the numerous inquiries received by the EEOC questioning whether an employer violates GINA by offering an employee an inducement if the employee’s spouse who is covered under the employer’s group health plancompletes a health risk assessment that seeks information about the spouse’s current or past health status, in connection with the spouse’s receipt of health or genetic services as part of an employer-sponsored wellness program.

The proposed regulations would clarify that GINA does not prohibit employers from offering limited inducements (whether in the form of rewards or penalties avoided) for the provision by spouses covered by the employer’s group health plan of information about their current or past health status as part of a health reimbursement account, which may include a medical questionnaire, a medical examination (e.g., to detect high blood pressure or high cholesterol), or both, as long as the provision of the information is voluntary and the individual from whom the information is being obtained provides prior, knowing, voluntary, and written authorization, which may include authorization in electronic format. The proposed regulations do not allow inducements in return for the spouse’s providing his or her own genetic information (including results of his or her genetic tests), for the current or past health status information of an employee’s children, or for the genetic information of an employee’s child.

The proposed regulations would include a requirement that any health or genetic services provided in connection with the requests for genetic information be reasonably designed to promote health or prevent disease, thereby aligning GINA’s regulations with those promulgated under the ADA as they relate to wellness programs. (The ADA permits employers to collect medical information as part of a wellness program only if the program and the disability-related inquiries and medical examinations that are part of the program are reasonably designed to promote health or prevent disease.) As discussed in the NPRM, collecting information on a health questionnaire without providing follow-up information or advice would not be reasonably designed to promote health or prevent disease. Additionally, a program would not be deemed reasonably designed to promote health or prevent disease if it imposes, as a condition of obtaining a reward, an overly burdensome amount of time for participation, requires unreasonably intrusive procedures, or places significant costs related to medical examinations on employees. A program is also not reasonably designed if it exists merely to shift costs from the employer to targeted employees based on their health.

The proposed regulations would limit the total inducements (both financial and in-kind inducements, such as time-off awards, prizes, or other items of value, in the form of either rewards or penalties) to the employee and spouse to participate in a wellness program that is part of a group health plan and collects information about current and past health status to not more than 30 percent of the total cost of the plan in which the employee and any dependants are enrolled. The maximum portion of an incentive that may be offered to an employee alone may not exceed 30 percent of the total cost of self-only coverage.

Finally, it is important to note that this proposal would not alter GINA’s absolute prohibition against the use of genetic information in making employment decisions.

The EEOC’s approach to wellness programs is still developing, and interested members of the public have until Tuesday, December 29, 2015, to submit comments on the NPRM to the EEOC in order to seek clarity or request changes and/or additions to the proposed rules.

Article By Mary Pat Gallagher of Gonzalez Saggio & Harlan LLP

Gonzalez Saggio & Harlan LLP | Copyright (c) 2015

Chicago Mayor’s Tax-Heavy Budget Passes: Lease and Amusement Tax Implications

Last week the Chicago City Council approved Mayor Rahm Emanuel’s 2016 revenue ordinance as part of his tax-laden budget proposal. The revenue ordinance included noteworthy changes to the personal property lease transaction tax (lease tax) and amusement tax, both of which we have covered in-depth since the Department of Finance (Department) issued two rulings over the summer officially extending a nine percent tax to most services provided online. The portions of the revenue ordinance related to the lease tax were drafted in response to the concerns raised by the startup community. As discussed in more detail below, the lease tax amendments provide little relief for the vast majority of businesses dreading the January 1st effective date of the ruling. The amendments to the amusement tax provide no relief whatsoever.

Chicago Lease Tax Amendment

The changes to the Lease Tax Ordinance include: (1) a narrowly defined exemption for small businesses; (2) a reduction of the rate for cloud-based services where the customer accesses its own data; and (3) codification of the applicability of the Illinois mobile telecom sourcing rules. The amendments were touted by the mayor as addressing many of the concerns expressed by small businesses after the Department administratively interpreted the nine percent lease transaction tax to apply to most cloud-based services in June. In response to an outcry from the startup community, the Department subsequently delayed the effective date of the ruling to January 1, 2016. Unfortunately the mayor’s solution falls short of providing any significant relief and will not alleviate the concerns of the vast majority of customers and providers affected by the ruling.

Effective immediately upon publication, the lease transaction amendments approved yesterday will:

  1. Exempt “small new businesses” that are lessors or lessees of non-possessory computer leases from their respective lease transaction tax collection and payment obligations. For this purpose, “small new business” is a business that (1) holds a valid and current business license issued by the city or another jurisdiction; (2) during the most recent full calendar year prior to the annual tax year for which the exemption provided by this subsection is sought had under $25 million in gross receipts or sales, as the term “gross receipts or sales” is defined for federal income tax purposes; and (3) has been in operation for fewer than 60 months. For the purpose of calculating the $25 million limit, gross receipts or sales will be combined if they are received by members of a single unitary business group. This will exclude most subsidiaries from taking advantage of the “small new business” exemption.

  2. Reduce the rate from nine percent to 5.25 percent of the lease or rental price in the case of the non-possessory lease of a computer primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer.

  3. Codify the use of the sourcing rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act (35 ILCS 638, as amended) for the purpose of determining which customers and charges are subject to the lease transaction tax when the user accesses the provider’s computer via a mobile device. The lease transaction tax ruling issued in June prescribes the use of these rules, but the legislation adds clarity by codifying this regime. Generally these rules result in tax applying to Chicago residents and companies with primary business addresses in the city. Customers can provide evidence of complete or partial out-of-city use. If a provider has no information indicating Chicago use, it has no duty to collect tax. If the sourcing rules indicate that the tax applies, a taxable presumption is created unless the contrary is established by books, records or other documentary evidence.

The “relief” provided by the amendments is minimal as very few companies will qualify for the small business exemption and rate reduction. Because the amendments do not modify the actual imposition of the lease tax (instead they simply provide an exemption, reduce the rate for certain taxpayers and codify sourcing rules) the January 1, 2016, effective date of the lease tax ruling still appears to be in effect.

Chicago Amusement Tax Amendment

The changes to the Amusement Tax Ordinance merely codify the sourcing rules announced in the Department’s latest ruling. Specifically, the amendment provides that

“[i]n the case of amusements that are delivered electronically to mobile devices, as in the case of video streaming, audio streaming and on-line games, the rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, as amended, may be utilized for the purpose of determining which customers and charges are subject to the tax imposed by this chapter. If those rules indicate that the tax applies, it shall be presumed that the tax does apply unless the contrary is established by books, records or other documentary evidence.”

This change is significant because video streaming, audio streaming and on-line games were formerly not included in the imposition language of the Amusement Tax Ordinance.  The amendment illustrates that the City Council is well aware of and approves the Department’s recent ruling that explicitly imposes the tax on charges for video streaming, audio streaming, computer game subscriptions, and other forms of online entertainment.  The amusement tax ruling became effective September 1st and is currently being challenged in the Circuit Court of Cook County.

Article By Stephen P. Kranz, Catherine A. Battin & Eric Carstens of McDermott Will & Emery

© 2015 McDermott Will & Emery

Join LMA New England for their annual conference – November 12-13 in Boston

Please join the LMA New England Chapter next week at their 2015 Regional Conference, taking place on November 12 -13 at the Hyatt Regency in Boston. This year’s theme is “What’s Your WOW Factor?” Join attendees as they learn about the best tools and approaches to stand out among the competition, succeed at winning new business and become industry trendsetters. Don’t miss out on the chapter’s most important and popular event, one that saw record attendance last year!

lma new england lmane Boston regional conference

When – November 12-13

Where – Hyatt Regency Boston

Register today!

Three Trending Topics in IoT: Privacy, Security, and Fog Computing

Cisco has estimated that there will be 50 billion Internet of Things (IoT) devices connected to the Internet by the year 2020. IoT has been a buzzword over the past couple of years. However, the buzz surrounding IoT in the year 2015 has IoT enthusiasts particularly exerted. This year, IoT has taken center stage at many conferences around the world, including the Consumer Electronics Show (CES 2015), SEMI CON 2015, and Createc Japan, among others.

1. IoT will Redefine the Expectations of Privacy

Privacy is of utmost concern to consumers and enterprises alike. For consumers, the deployment of IoT devices in their homes and other places where they typically expect privacy will lead to significant privacy concerns. IoT devices in homes are capable of identifying people’s habits that are otherwise unknown to others. For instance, a washing machine can track how frequently someone does laundry, and what laundry settings they prefer. A shower head can track how often someone showers and what temperature settings they prefer. When consumers purchase these devices, they may not be aware that these IoT devices collect and/or monetize this data.

The world’s biggest Web companies, namely, Google, Facebook, LinkedIn, and Yahoo are currently involved in lawsuits where the issues in the lawsuits relate to consent and whether the Web companies have provided an explicit enough picture of what data is being collected and how the data is being used. To share some perspective on the severity of the legal issues relating to online data collection, more than 250 suits have been filed in the U.S. in the past couple of years against companies’ tracking of online activities, compared to just 10 in the year 2010. As IoT devices become more prevalent, legal issues relating to consent and disclosure of how the data is being collected, used, shared or otherwise monetized will certainly arise.

2. Data and Device Security is Paramount to the Viability of an IoT Solution

At the enterprise level, data security is paramount. IoT devices can be sources of network security breaches and as such, ensuring that IoT devices remain secure is key. When developing and deploying IoT solutions at the enterprise level, enterprises should conduct due diligence to prevent security breaches via the IoT deployment, but also ensure that even if an IoT device is compromised, access to more sensitive data within the network remains secure. Corporations retain confidential data about their customers and are responsible for having adequate safeguards in place to protect the data. Corporations may be liable for deploying IoT solutions that are easily compromised. As we have seen with the countless data breaches over the past couple of years, companies have a lot to lose, financially and otherwise.

3. Immediacy of Access to Data and Fog Computing

For many IoT solutions, timing is everything. Many IoT devices and environments are “latency sensitive,” such that actions need to be taken on the data being collected almost instantaneously. Relying on the “cloud” to process the collected data and generate actions will likely not be a solution for such IoT environments, in which the immediacy of access to data is important. “Fog computing” aims to bring the storage, processing and data intelligence closer to the IoT devices deployed in the physical world to reduce the latency that typically exists with traditional cloud-based solutions. Companies developing large scale IoT solutions should investigate architectures where most of the processing is done at the end of the network and closer to the physical IoT devices.

The Internet of Things has brought about new challenges and opportunities for technology companies. Privacy, security and immediacy of access to data are three important trends companies must consider going forward.

Article By Shabbi S. Kahn of Foley & Lardner LLP

© 2015 Foley & Lardner LLP

Congress to Examine Russia’s Role in the Crises in Syria and Ukraine; The First Lady Travels to Qatar and Jordan

Syrian and Iraqi Crises

Secretary of State John Kerry delivered remarks on U.S. Middle East policy last Wednesday at the Carnegie Endowment for International Peace.  The Secretary called on the Russian Government to contribute to the end of the Syrian conflict, including through a political settlement.  He also highlighted areas where the United States, Russia, and others agree, which include the fact that Daesh cannot be victorious and that a secular and united Syria must be preserved.  That same day, Deputy Secretary of State Antony Blinken warned that Russia cannot win in Syria, adding it can perhaps prevent Assad from losing.  Earlier in the week, the press reported that Russia has sent a few dozen special operations troops to Syria, redeploying the elite units from Ukraine as the Kremlin shifts its focus to supporting the Syrian regime.

Secretary Kerry then headed to Vienna, Austria, for another round of multilateral talks regarding the Syrian conflict, talks that will for the first time include Iran. At his Senate Foreign Relations Committee confirmation hearing to be Under Secretary of State for Political Affairs, State Department Counselor Tom Shannon testified that Secretary Kerry was convening the meeting in Austria to ascertain Russia’s commitment to fighting ISIL and to finding a political solution to the crisis that does not include Syrian President Bashar al-Assad.  This comes after Secretary of Defense Ash Carter signaled last Tuesday that the Administration is considering deploying a small number of special operations forces to Syria and attack helicopters to Iraq to build momentum in the fight against ISIL.

  • On Wednesday, 4 November, the House Foreign Affairs Committee is expected to hold a hearing titled, “U.S. Policy after Russia’s Escalation in Syria.”

  • On Wednesday, 4 November, the House Foreign Affairs Subcommittee on Europe is expected to hold a hearing titled, “Challenge to Europe: The Growing Refugee Crisis.”

Ukraine Crisis

Last Monday, the White House and State Department issued statements commending Sunday’s elections in Ukraine and calling for votes on 15 November in Mariupol and in other parts of eastern Ukraine where the elections could not take place.

Commerce Secretary Penny Pritzker travelled to Ukraine early last week to meet with Government officials and to discuss ongoing economic reforms.  She reiterated U.S. support for Ukraine and announced that President Obama, working with Congress, intends to move forward with a third $1 billion loan guarantee for Ukraine in the coming months.  This, she said, fulfills a U.S. commitment to consider providing a third $1 billion loan guarantee in late 2015, if the conditions warrant.

The press reported last week that NATO is considering proposals to deploy 4,000 troops to Eastern European countries bordering Russia.  The proposals are apparently part of an ongoing debate within the Alliance about the long-term response to Russia’s 2014 annexation of Crimea and its support for the separatist uprising in eastern Ukraine.

  • On Tuesday, 3 November, the Senate Foreign Relations Committee is expected to hold a hearing titled, “Putin’s Invasion of Ukraine and the Propaganda that Threatens Europe.”

NDAA – Avenues Sought

After the presidential veto, Congressional leaders are looking for options to advance the Fiscal Year (FY) 2016 National Defense Authorization Act (NDAA; H.R. 1735).   Some sources report that Senate Armed Services Chairman John McCain (R-Arizona) may be considering drafting a revised NDAA that could be attached to an Omnibus appropriations measure that will likely move later next month or early December.  However, some Members are reportedly advocating for a revised NDAA – one that reflects the $5 billion in cuts mandated by the Budget deal – to be passed quickly and not delayed until Congress takes up the expected Omnibus bill.

TPP Update

Last Thursday, Agriculture Secretary Tom Vilsack sought to explain the delay around publicly releasing the final text of the Trans-Pacific Partnership (TPP), attributing it to the Canadian election.  Reports around Washington indicate the release of the text is weeks away.  At a Thursday press conference, Representative Rosa DeLauro (D-Connecticut) called on the White House to “stop selling something [TPP deal] that nobody but them knows about.”  Meanwhile, Senate Finance Committee Ranking Member Ron Wyden (D-Oregon) praised the Office of the U.S. Trade Representative (USTR) last Thursday for issuing new guidelines that allow the Committee Members’ personal staff to access the text of the deal.

Ex-Im Bank Re-Authorization Advances

Early last week, the House of Representatives passed a measure to reauthorize the U.S. Export-Import (Ex-Im) Bank by a vote of 313-118 over the objections of the chamber’s most conservative Republican members.  Senate Majority Leader Mitch McConnell (R-Kentucky) blocked the measure from being brought to the floor as a standalone bill last week and instead reiterated the bill will have to be attached to another legislative vehicle expected to advance in the Senate.

Washington Prioritizes TTIP

U.S. Trade Representative Michael Froman confirmed last Tuesday at an Atlantic Council event that last month’s conclusion of the TPP deal allows USTR to shift its focus to advancing and accelerating the Transatlantic Trade and Investment (TTIP) negotiations with the European Union.  That same day, SPB released a client alert on Washington’s shift to TTIP.

U.S.-India Trade Policy Forum

Last week, the U.S.-India Trade Policy Forum convened in Washington to discuss agriculture, trade in services and goods, promoting investments in manufacturing, and intellectual property.

Other Congressional Hearings This Week

  • On Tuesday, 3 November, the Senate Armed Services Committee is expected to hold a hearing titled, “Future of Warfare.”

  • On Tuesday, 3 November, the House Energy and Commerce Committee is expected to hold a hearing titled, “Examining the EU Safe Harbor Decision and Impacts for Transatlantic Data Flows.”

  • On Tuesday, 3 November, the House Judiciary Committee is expected to hold a hearing titled, “International Data Flows: Promoting Digital Trade in the 21st Century.”

  • On Tuesday, 3 November, the House Armed Services Subcommittee on Seapower and Projection Forces is expected to hold a hearing titled, “Aircraft Carrier – Presence and Surge Limitations. Expanding Power Projection Options.”

  • On Wednesday, 4 November, the House Foreign Affairs Subcommittee on Global Human Rights is expected to hold a hearing titled, “Demanding Accountability: Evaluating the 2015 Trafficking in Persons Report.”

  • On Wednesday, 4 November, the Senate Foreign Relations Committee is expected to hold a hearing titled, “U.S. Policy in North Africa.”

  • On Wednesday, 4 November, the House Ways and Means Subcommittee on Oversight is expected to hold a hearing titled, “Iran Terror Financing and the Tax Code.”

  • On Friday, 6 November, the House Foreign Affairs Subcommittee on the Western Hemisphere is expected to hold a hearing titled, “Deplorable Human Rights Violations in Cuba and Venezuela.”

Looking Ahead

Washington will likely focus on the following upcoming matters:

  • 1-7 November: First Lady Michelle Obama travels to Doha, Qatar, and Amman, Jordan

  • 9 November: President Obama hosts Israeli Prime Minister Benjamin Netanyahu

  • 14-22 November: President Obama travels to Turkey, the Philippines, and Malaysia

  • 30 November-11 December:  U.N. Global Climate Conference in Paris

  • 15-18 December: 10th WTO Ministerial Conference to be held in Nairobi, Kenya

Article By Stacy A. Swanson of Squire Patton Boggs (US) LLP
© Copyright 2015 Squire Patton Boggs (US) LLP

October 2015 – gTLD Sunrise Periods Now Open

The first new generic top-level domains (gTLDs, the group of letters after the “dot” in a domain name) have launched their “Sunrise” registration periods.

As of the date of this post, Sunrise periods are open for the following new gTLDs:

.pohl

.allfinanz

.trading

.spreadbetting

.cfd

.swiss

.xn--45q11c (八卦 for “gossip” in Chinese)

.forex

.broker

.earth

.gdn

.kyoto

.feedback

ICANN maintains an up-to-date list of all open Sunrise periods here. This list also provides the closing date of the Sunrise period. We will endeavor to provide information regarding new gTLD launches via this monthly newsletter, but please refer to the list on ICANN’s website for the most up-to-date information – as the list of approved/launched domains can change daily.

Because new gTLD options will be coming on the market over the next year, brand owners should review the list of new gTLDs (a full list can be found here) to identify those that are of interest.

Article By Monica Riva Talley, Tracy-Gene G. Durkin, Ivy Clarice Estoesta, Lauriel F. Dalier & Shana L. Olson of
Sterne, Kessler, Goldstein & Fox P.L.L.C.

© 2015 Sterne Kessler

Rainmaker 101: 3 Tips from a Top Producer at a Law Firm [VIDEO]

One of the most interesting elements of my job as a business development coach for attorneys is interviewing top rainmakers to better understand “How they did it.” While every attorney knows a rainmaker or high-level business developer, you might never get the chance to hear how they actually accomplished their goals, what it really took to do so and how to avoid the pitfalls they’ve encountered. One of my first interviews occurred with the Managing Partner and co-founder of Stahl Cowen, Jeff Stahl. He put everything on the line when he went out on his own.  As he stated in our interview, it was “a combination of need and fear,” to begin developing his book of business. Here are Jeff’s top three tips for success in building his legal practice, followed by some of my own thoughts on the subject.  Jump to the end for the full interview. Enjoy!

Jeff’s Tip #1: Helping versus Selling

Jeff’s first and most important revelation as a business developer was to really want to help people, not to sell them legal services.  He says quite empathetically that it’s imperative to, “Recognize when someone is in need of service and then be there, and be creative to help them. Then it isn’t perceived as a sale, but as assistance that usually has greater receptivity than somebody who is hard selling.”

From my point of view, he is touching on one of the critical turning points for attorneys as it relates to sales and being viewed as a “salesman.” I don’t know too many lawyers who like or want to be seen as a salesman. What Jeff explains so clearly in his interview is that you need to switch off that mindset and turn on the idea that you are in the unique position to help people with real problems. The key here is to try not pitching and selling, but rather try asking and listening.

One of my favorite mantras is, “Prescription before diagnosis is malpractice.” Think about that. If you walked into a doctor’s office with a migraine and he suggested amputating your head, I’m sure you’d move pretty quickly to the nearest exit. The same rule should apply to prescribing legal services in the form of a pitch meeting. Just don’t do it! At least not until you’ve fully diagnosed the issues, needs and pains the prospective client is dealing with.

Jeff’s Tip #2: Market Yourself When You’re Busiest

If I’ve heard it once, I’ve heard it 1000 times, “I’m too busy to market myself.” One of the best take-aways from Jeff’s interview was his statement, “Too many people go out and market when they’re slow. You need to market when you are busy, because when you market when you’re slow, you often appear desperate. That comes across and people realize that.” Even when you’re working 60 hours a week, it’s imperative to find ways to market. If nothing comes in right away from the effort, at least you’re building your pipeline which will pay off when things do slow down.

In my experience, the key to success here is to find the time to market by getting organized with your day and opening up gaps of time for business development. A few suggestions I typically offer include:

  • Time blocking- Get into the office at 6:30 am once a week and spend an uninterrupted hour emailing clients, strategic partners and new people you’ve met to schedule a coffee or lunch sometime in the next few weeks. This one hour block of time each week will help ensure that you get meetings set every week without fail.
  • Delegating more- Do everything in your power to delegate administrative tasks to others at a lower billable rate. If you are billing $300-600 an hour, why are you making copies or doing filing? Try making a list of every administrative task that you do and add up the hours in a week. You might be shocked at how much time you’re wasting on activities that can be done for under $50 an hour by someone else. This “found time” can be better used for business development activities or even going home for supper with your family once in a while.
  • Never eat lunch alone- It’s the title of a great networking book for a reason. Schedule lunch at your office and invite someone to join you. Utilize a conference room so that it’s quiet and you can focus the conversation on your guest. If you did this with two of your existing clients or strategic partners every week, you will be delighted to the results you might see. Working during lunch might be helpful to get things done, however it doesn’t have to be your routine every day.

Jeff’s Tip #3: Be Impressive!

“When a client tells you what their issue is, it isn’t always their issue. Through effective listening you may recognize things that they may not even realize themselves.” Effective questioning and listening is not only important as a way to best service the client, but also as a way of differentiating yourself from other attorneys who aren’t focused on the clients story, needs and issues. From Jeff’s perspective it’s more important to be perceived as impressive and knowledgeable, than to beat your chest regarding your prowess as a successful attorney.

Jeff’s  hit on something really critical here. Perception is reality and belief stronger than fact. The concept is simple if you think about it. By asking relevant, probing and open ended questions, the prospective client will perceive that you are an expert based on the way you are managing the conversation and your bedside manner. A great example here would be observing two psychologists. The first spouts off about why she is so good at what she does and her advanced degrees. The other, warmly welcomes her patient onto the couch and begins building rapport. Then the second psychologist begins asking questions about the patients reason for being here today. The patient’s response is followed up with additional questions which open up the dialogue to reveal the actual issues being faced.

If you are working diligently to find new business opportunities, and a prospective client finally agrees to meet with you, try to act like the second therapist by asking questions and being an expert listener. You will not only build greater credibility as a lawyer, but also uncover issues that your new client didn’t even know he had. A win-win outcome is inevitable.

I’d like to thank Jeff Stahl for his rainmaking insights. The reality is that there is always a way to find balance in work and in life. For many of you, it’s a matter of having the proper mindset. For others it’s obtaining new strategies and tactics to accomplish the goals you’ve set. Check in monthly for a new installment of Rainmaker 101 for more tips from the business development superstars I’ve interviewed.

Article By Steve Fretzin of Sales Results, Inc.
Copyright @ 2015 Sales Results, Inc.

Business Succession Planning: An Ounce of Prevention Today

If you told a family business owner that he or she had a one in three chance of survival as a result of a current condition, you would likely get their attention. However, when you tell that same owner that their business, as it currently exists, has a one in three chance of survival in the event of their death the response is often “I will worry about that tomorrow.” The failure to plan may put the family’s financial well-being at risk. This article will address the conflicts that cause family businesses to fail to survive into successive generations and the potential solutions which should be implemented to alleviate such conflicts.

Why Do Family Businesses Fail?

Family businesses fail twice as often because of relationship issues within the family as due to management issues. Which child or children will work in the business and which will not? Which child will be in charge? Will all family members be supported by the business and what internal and external resentments will be heightened by that decision? If the head of the family does not effectively balance the goals of securing the future success of the business with family unity, survival is unlikely. Recognizing the disparate characteristics between family operations and business operations is a start. Families are fueled by emotion and businesses are fueled by logic. Families rely on history and are resistant to change whereas businesses need to adapt and grow. Families accept shortcomings and rationalize poor performance while businesses fire those who are unproductive. Families seek equality while businesses reward achievement. Acknowledging and addressing these conflicts is essential to a successful business succession plan.

Developing the Plan.

1. Identifying Objectives. The first decision to be made by the business owner is the identification of goals and objectives. What does the owner want to happen; i.e., sale versus transfer by gift. When should it happen, today, five years from now or only on death? How should it happen, gifts, sale, inheritance? Who should be involved, children employed by the business only, all children, descendants, in-laws?

2. Identifying Financial Needs. The financial needs of the business owner and spouse will often be determinative with respect to the previously-mentioned objectives. If the business is the owner’s primary asset and therefore the primary method for funding retirement, then value realization is key. The threshold question is what is the business worth? Owners often have an elevated opinion as to the business’s value given it is the culmination of their life’s work. A professional business appraiser will value the business more objectively. The next question is will the realization of that value adequately fund the owners’ expected level of retirement? Finally, on what basis will those funds need to be paid, how does the owner insure future security, and will the business survive under the weight of those payments?

3. Developing Successor Management. It is often difficult for an owner to relinquish day-to-day control. However, the development of successor management is essential for emergency as well as long-term planning. An emergency plan should be established utilizing existing personnel and outside professional advisors such as accountants, attorneys and financial advisors. A long-term plan may include the next generation of family members, key employees or some combination of the two. The formulation of this plan should commence five to ten years in advance of the date of the owner’s retirement. If the future leader is a family member, it is important that he or she be qualified for the position and have the support of employees and other family members. A gradual transition will allow for the development of the successor’s capabilities. Further, as the successor becomes more accustomed to increased responsibility the existing owner can adapt to the loss of responsibility. Such advance planning will more likely result in a smooth transition.

4. Retaining Key Employees. Family businesses often have a few key employees who are critical not only to the eventual succession of the leadership of the business but also to the emergency plan that should be in place in the event of the death or disability of the leader. The following four techniques can be utilized to retain key employees.

a. Employment Agreements. An Employment Agreement will summarize the duties and responsibilities of the employee. However, to encourage retention, the Agreement can also incorporate legal restrictions such as a covenant not to compete and financial incentives such as profit sharing or incentive compensation arrangements. These financial incentives can also utilize vesting periods to encourage continued employment and productivity.

b. Non-qualified Deferred Compensation Plan. A Deferred Compensation Plan is an agreement where the company promises to pay a benefit to the employee at his or her retirement, death or disability as long as the employee continues to be employed for a stated period of time or if the employee is employed upon the sale of the business. If the employee does not continue to be employed, the benefit is forfeited. If properly structured, the payments are taxed to the employee and deducted by the company at the time of payment.

c. Phantom Stock Plan. A Phantom Stock Plan or Stock Appreciation Rights Plan will provide an employee with a benefit that will simulate the appreciation in value of a common stock ownership in the company during the period the employee is employed. This arrangement will compensate the employee for his or her contribution to the success and increasing the value of the company. Vesting provisions can also be utilized to retain the services of the employee. Finally, such a plan avoids the entanglements that can come with true stock ownership by an employee such as voting rights, possible breach of fiduciary duty claims and the obligation to repurchase the stock upon termination of employment.

d. Change of Control Agreement. A Change of Control Agreement can be utilized with the previously-mentioned arrangements to provide comfort to an employee that his or her terms of employment such as compensation and benefits will not be changed for a set period (one to three years) following the transfer of the business. Even if the employee is terminated, the Agreement will guarantee continued payment or a bonus for continuing to be employed with the business until the sale.

Executing the Plan.

The key to effectively executing the plan is balancing the owner’s financial security with fairness and family harmony. The following are alternatives and considerations:

1. Sell the Business to Active Children. If the business is sold to active children for its fair market value as determined by an independent appraiser, then all family members are effectively treated equally. The purchasing children get the business, the financial future of the owner and the owner’s spouse is secured and upon the death of the survivor of them, both active and non-active children can inherit equally. The issues of conflicting opinions and the disparate needs of active and non-active children are eliminated. The downside of this approach is its tax inefficiency. The owner will recognize capital gains and the active children will purchase with after-tax dollars.

2. Business Real Estate. If the owner owns the real estate on which the business is operated, the owner could consider retention of the business real estate subject to a long-term lease. The lease would provide the owner and the owner’s spouse with a continuing source of income. Retention of the business real estate could also provide an asset for the equalization of the inheritance of non-active children. Finally retention of this asset would reduce the lifetime transfer cost of the business interest to the active children.

3. Voting and Non-Voting Stock. Whether the owner of the business wants to transfer ownership currently or needs to use the business to equalize the inheritance of active and non-active children at death, consideration should be given to recapitalizing the company with voting and non-voting stock. Active children can receive the voting stock to allow for the effective management of the company and non-active children can receive the non-voting stock to allow for the continued participation in the growth of the value of the company. Active children should have Employment Agreements to ensure them fair compensation and protect non-active children from the misdirection of company assets. The non-voting stock could be subject to “call” options by the active children and could be subject to a “put” option by the non-active children to allow for a fair separation of interests should one be necessary. A “buy-sell” agreement between the shareholder children can incorporate the “put” and “call” as well as the transfer on death or disability of a shareholder child.

4. Equalize with Non-Business Assets. If there are sufficient non-business assets in the estate of the owner, then equalization of inheritances is more easily accomplished. Ownership interests in the business can be transferred during life or at death to active children and the non-business assets can be transferred to the non-active children. Since all assets are valued at fair market value at death, equality can be made more apparent.

5. Tax Minimization. Although financial security and family fairness are often the primary goals of succession planning, tax minimization is normally also a high priority. Various planning techniques can be incorporated in the context of succession planning discussed above.

Conclusion.

Succession planning does not happen by accident. Successful planning for the termination of ownership of a business interest should be started well in advance of when the ownership will be terminated.

Article By Natale A. Messina & Marcel J. Bernier of Murtha Cullina
© Copyright 2015 Murtha Cullina

Using Phantom Equity to Grow Your Business: Pros and Cons

phantom equityThis is the second article in a series examining when an entrepreneur should consider granting equity or equity-like interests in his or her company, and if so, how to properly structure that equity or equity-like grant.  To view the first article in this series, please click here.  Today’s topic: Phantom Equity.

Phantom Equity Overview

Phantom equity is an equity-like grant that is tied to the underlying value of a unit (if the company is an LLC) or a share of stock (if the company is a corporation) in the company. More often than not, phantom equity is granted pursuant to a phantom equity plan, with individual phantom equity agreements for each of the applicable employees/executives.  The individual phantom equity agreements will likely have some customized terms for each particular employee (number of units, vesting schedule, etc.), while other terms are usually standard across each of the phantom equity agreements (rights to certain payments, forfeiture upon termination, rights to certain information, etc.).

An example may be helpful.  Let’s assume there are 100 units issued and outstanding to the members of an LLC prior to creating the phantom equity.  Then, 10 “phantom units” are granted to key employees pursuant to a phantom equity plan.  The end result is that the phantom unit holders would receive an amount equal to 9.09% (10 units out 110 units total) of certain payments made to the real unitholders (the holders of the 100 units) of the company.  The key fact to remember is that these phantom units are not actual units of equity in the company, but they are counted as if they are actual units for purposes of certain payment or events of the company.

Vesting

Generally, phantom units or shares are not paid for by an employee, but instead vest over time in exchange for the employee continuing to work full-time at the company during such vesting period.  Typically, I see a one year cliff (from the first date of employment), then vesting in monthly or quarterly increments over the following two to four years.  The one year cliff (meaning, no vesting occurs during the first year of employment) is done to protect the company from granting phantom equity to employees that leave the company for whatever reason within their first year of employment.  Sometimes, an employee that is granted phantom equity will negotiate partial or accelerated vesting if the company terminates the employee “without cause.”  This is typically not granted by most companies, but every situation is unique and I have seen it negotiated and granted to a few individuals.

Eligible Payments

A phantom equity holder will be entitled to payments in connection with certain triggering events.  These triggering events will be set forth in either the phantom equity plan or in the phantom equity agreement.  There is great flexibility for a company in designing their own particular phantom equity plan and what payments the phantom equity holders participate in.

The most company-friendly plans only provide for a payment in the event of a change in control transaction (i.e. the sale of the company).  This means any dividends that flow to members or stockholders of the company (not otherwise in connection with a change of control transaction) will not be shared with the phantom equity holders.  For example, if a company has 100 shares issued and outstanding to its shareholders and 10 phantom shares issued to is phantom equity holders that do not have a right to participate in dividends, and the Company is going to dividend out $1,000,000, then the holder of each share of stock would receive $10,000 per share ($1,000,000 split amongst 100 shares), while the phantom shareholders (10 shares) would receive nothing.  If a phantom equity plan is structured this way, the clear message to the phantom equity holders is that they will only share in the success of the company if the company is ultimately sold.  Phantom equity holders should understand the risk that he or she may not work at the company when it is sold, and therefore it is likely that such phantom equity holder will not receive any benefit from the phantom equity.  This is because phantom equity is often contractually forfeited by the employee when he or she leaves the company.  This allows the company to issue new phantom equity to future hires without further diluting payments made to real equity holders.

Valuation Hurdle/Phantom Appreciation Rights

Another key feature typically found in phantom equity grants is the concept of a valuation hurdle, or what is sometimes referred to as a “phantom appreciation right.”  If a company has been in existence for a few months or longer, then the company likely has some ascertainable “fair market value” greater than zero.  Let’s assume that a company’s fair market value is determined to be $5,000,000, and this company now desires to grant phantom equity to certain employees.  If there is a valuation hurdle in the phantom equity plan or agreement, then the phantom equity holders only share in the value that is created (based on their phantom equity percentage) that is above $5,000,000.  Using this same example, let’s assume the company is sold three years later for $10,000,000 and there are 100 units of real equity issued and outstanding and 10 units of phantom equity.  In such example, the real equity holders (100 units) would receive all of the first $5,000,000 of proceeds from the sale, and then the next $5,000,000 would be split 90.91% to the real equity holders and 9.09% to the phantom equity holders (per the math at the beginning of this article).

No Ownership Rights/Control 

From the company’s perspective, it is important that the plan and/or phantom agreements very clearly spell out that phantom equity does not grant any rights to the holder that would be typically granted to a normal equity holder under law.  This provision should explicitly state that the phantom equity holder has no voting or decision making authority with respect to the company in connection with being granted phantom equity.  It should also limit the rights of the phantom equity holder to demand certain information (financial or otherwise) from the company.  Conversely, if you are the person being granted phantom equity, you should consider negotiating certain information rights into your phantom equity agreement.

Tax Implications

Whether phantom equity or phantom appreciation rights are being granted, the tax situation is generally the same for the company.  Generally, payments made by a company in connection with phantom equity or phantom appreciation rights are deductible by the company at the time the payment is made.  Regardless, always be sure to discuss the tax consequences with a tax advisor before granting phantom equity or phantom appreciation rights.

Conversely, and as a big disadvantage to the employee being granted phantom equity instead of real equity, payments received by phantom equity holders are taxed as ordinary income.  The difference between ordinary income and capital gains (which typically would apply to certain payments made to true equity owners) can add up to thousands (if not millions) of dollars of additional taxes paid by the employee if the company has a successful exit event.  However, in positive news for the recipient, no taxes should be due by the phantom equity holder upon his or her receipt of phantom equity.  With respect to true equity issuances, the recipient will likely owe tax on the fair market value of the equity received, unless such equity was actually purchased by the recipient for fair market value.

General Pros and Cons

There are a number of reasons phantom equity may make sense for a company as compared to other types of equity and equity-like plans.  Below are a few final points to think about as you decide whether or not phantom equity may be a viable option for your company:

Pros:

  • It allows certain key employees to share in the growth and success of the company while existing equity owners are not explicitly diluted and do not give up any control.

  • May serve as a golden handcuff to keep key executives from looking at other job opportunities.

  • Employees do not need to actually purchase the phantom equity; in other equity plans, the employees will likely need to purchase the equity at fair market value or have to pay tax on the fair market value of the equity that they receive.

  • There is a great deal of flexibility that can go into the phantom equity structure.  The phantom equity can mirror true equity almost completely (participate in dividends, etc.), or it can be very limited (participates only in a change of control event, with a valuation hurdle).

  • If structured correctly, phantom equity can easily be forfeited without penalty to the employer or the employee if the employee leaves the company.

            Cons:

  • If structured poorly it can lead to extremely bad results, including the permanent dilution of existing shareholders or unit holders, and/or the forced disclosure of sensitive information to individuals no longer working at the company.

  • May require a valuation of the company by an outside accounting or valuation firm.

  • May not be as attractive to a key employee because it is not real equity, and the company usually has the ability to terminate the employee and consequently extinguish the phantom equity.

  • 409A (deferred compensation) issues can add complexity to structuring and achieving the intended objectives of the company and the employee recipients.

Summary

When structured correctly, phantom equity is an excellent option for both companies and key employees.  As I like to tell clients, granting phantom equity is somewhat akin to dating before getting married – there are clear benefits to both the employee and employer in putting a phantom equity plan in place, but if it does not work out, both sides can walk away with minimal, if any, strings attached.

Article By Aaron D. Werner of Horwood Marcus & Berk Chartered
© Horwood Marcus & Berk Chartered 2015. All Rights Reserved.