Category: Business Organizations

Investment Regulation Update – April 2013

GT Law

The Investment Regulation Update is a periodic publication providing key regulatory and compliance information relevant to broker-dealers, investment advisers, private funds, registered investment companies and their independent boards, commodity trading advisers, commodity pool operators, futures commission merchants, major swap participants, structured product sponsors and financial institutions.

This Update includes the following topics:

  • SEC Adopts Rules to Help Protect Investors from Identity Theft
  • Increased Attention to Broker-Dealer Registration in the Private Fund World
  • SEC Issues Guidance Update on Social Media Filings By Investment Companies
  • AIFMD — Effect on U.S. Fund Managers
  • SEC Announces 2013 Examination Priorities
  • Reminder — Upcoming Form PF Filing Deadline
  • Reminder — Upcoming Dodd-Frank Protocol Adherence Deadline
  • Are you a Lobbyist?
  • Recent Events

SEC Adopts Rules to Help Protect Investors from Identity Theft

On April 10, 2013, SEC Chairman Mary Jo White’s official first day on the job, the SEC, jointly with the CFTC, adopted rules and guidelines requiring broker-dealers, mutual funds, investment advisers and certain other regulated entities that meet the definition of “financial institution” or “creditor” under the Fair Credit Reporting Act (FCRA) to adopt and implement written identity theft prevention programs designed to detect, prevent and mitigate identify theft in connection with certain accounts. Rather than prescribing specific policies and procedures, the rules require entities to determine which red flags are relevant to their business and the covered accounts that they manage to allow the entities to respond and adapt to new forms of identity theft and the attendant risks as they arise. The rules also include guidelines to assist entities subject to the rules in the formulation and maintenance of the required programs, including guidelines on identifying and detecting red flags and methods for administering the program. The rules also establish special requirements for any credit and debit card issuers subject to the SEC or CFTC’s enforcement authority to assess the validity of notifications of changes of address under certain circumstances. Chairman White stated, “These rules are a common-sense response to the growing threat of identity theft to all Americans who invest, save or borrow money.” The final rules will become effective 30 days after date of publication in the Federal Register and the compliance date will be six months thereafter.

Increased Attention to Broker-Dealer Registration in the Private Fund World

The role of unregistered persons in the sale of interests in privately placed investment funds is an area of great interest for the SEC and the subject of recent enforcement actions. On March 8, 2013, the SEC filed and settled charges against a private fund manager, Ranieri Partners, LLC, one of the manager’s senior executives and an external marketing consultant regarding the consultant’s failure to register as a broker-dealer. The Ranieri Partners enforcement actions are especially interesting for two reasons: (i) there were no allegations of fraud and (ii) the private fund manager and former senior executive, in addition to the consultant, were charged.

On April 5, 2013, David Blass, the Chief Counsel to the SEC’s Division of Trading and Markets, addressed a subcommittee of the American Bar Association. His remarks have been posted on the SEC website. Mr. Blass referenced a speech by the former Director of the Division of Investment Management, who expressed concern that some participants in the private fund industry may be inappropriately claiming to rely on exemptions or interpretive guidance to avoid broker-dealer registration.

In addition, Mr. Blass noted Securities Exchange Act Rule 3a4-1’s safe harbor for certain associated persons of an issuer generally is not or cannot be used by private fund advisers. He suggested that private fund managers should consider how they raise capital and whether they are soliciting securities transactions, but he did acknowledge that a key factor in determining whether someone must register as a broker-dealer is the presence of transaction-based compensation. The Chief Counsel also raised the question of whether receiving transaction-based fees in connection with the sale of portfolio companies’ required broker-dealer registration. He suggested that private fund managers may receive fees additional to advisory fees that could require broker-dealer registration, e.g., fees for investment banking activity.

On a related note, in two recent “no-action” letters, the SEC has established fairly clear rules regarding how Internet funding network sponsors may operate without being required to register as broker-dealers. On March 26 and 28, 2013, the SEC’s Division of Trading and Markets addressed this narrow, fact-specific issue in response to requests from FundersClub Inc. and AngelList LLC seeking assurances that their online investment matchmaking activities would not result in enforcement action by the SEC. The April 10, 2013 GT Alert—SEC Clarifies Position on Unregistered Broker-Dealer Sponsors of Internet Funding Networks is availablehere.

SEC Issues Guidance Update on Social Media Filings by Investment Companies

On March 15, 2013, the SEC published guidance from the Division of Investment Management (IM Guidance) to clarify the obligations of mutual funds and other investment companies to seek review of materials posted on their social media sites. This report stems from the SEC’s awareness of many mutual funds and other investment companies unnecessarily including real-time electronic materials posted on their social media sites (interactive content) with their Financial Industry Regulatory Authority filings (FINRA). In determining whether a communication needs to be filed, the content, context, and presentation of the communication and the underlying substantive information transmitted to the social media user and consideration of any other facts and circumstances are all taken into account, such as whether the communication is merely a response to a request or inquiry from the social media user or is forwarding previously-filed content. The IM Guidance offers examples of interactive content that should or should not be filed with FINRA. The IM Guidance is the first in a series of updates to offer the SEC’s views on emerging legal issues and to provide transparency and enhance compliance with federal securities laws and regulations. You may find a link to the SEC Press Release and IM Guidance here.

On a related note, on April 2, 2013, the SEC released a report of an investigation regarding whether the use of social media to disclose nonpublic material information violates Regulation FD. The SEC has indicated that, in light of evolving communication technologies and habits, the use of social media to announce corporate developments may be acceptable; however, public companies must exercise caution and undertake careful preparation if they wish to disseminate information through non-traditional means. The April 5, 2013 GT Alert—Social Media May Satisfy Regulation FD But Not Without Risk and Preparation by Ira Rosner is available here.

AIFMD – Effect on U.S. Fund Managers

New European Union legislation that regulates alternative asset managers who manage or market funds within the EU comes into force on July 22, 2013. The Alternative Investment Fund Managers Directive (AIFMD) will have a significant impact on U.S. fund managers if they actively fundraise in Europe after July 21, 2013 (or if they manage EU-domiciled fund vehicles). Historically, U.S. private equity firms raising capital in Europe have relied on private placement regimes that essentially allowed marketing to institutions and high net worth investors. Beginning July 22, 2013, U.S. fund managers may continue to rely on private placement regimes in those EU jurisdictions that continue to operate them; however, they will now be under an obligation to meet certain reporting requirements and rules set out in the AIFMD relating to:

  • transparency and disclosure, and
  • rules in relation to the acquisition of EU portfolio companies.

The transparency and disclosure rules require, for the most part, the disclosure of information typically found in a PPM; however, additional items are likely to be required such as the disclosure of preferential terms to particular investors and level of professional indemnity cover. The rules also require reports to be made to the regulator in each jurisdiction in which the fund has been marketed. The reports will need to include audited financials, a description of the fund’s activities, details of remuneration and carried interest paid, and details of changes to material disclosures. Acquisitions of EU portfolio companies also lead to reporting obligations on purchase – an annual report – and a rule against “asset stripping” for 24 months after the acquisition of control. Firms with less than €500 million in assets under management are exempt from the reporting requirements and reverse solicitation is potentially an option, as the directive does not prevent an EU institution from contacting the U.S. fund manager, but in practice it may be difficult to apply systematically.  Fund managers may choose to register in the EU on a voluntary basis from late 2015. This will allow marketing across all EU member states on the basis of a single registration. However, registration will come with a significant compliance burden. If you plan to market in the EU after July 23, 2013, ensure that you review your marketing materials, evaluate your likely reporting obligations and consider how the portfolio company acquisition rules are likely to impact your transactions.

SEC Announces 2013 Examination Priorities

On February 21, 2013 the SEC’s National Examination Program (NEP) published its examination priorities for 2013. The examination priorities address issues market-wide, as well as issues relating to particular business models and organizations. Market-wide priorities include fraud detection and prevention, corporate governance and enterprise risk management, conflicts of interest, and technology controls.  Priorities in specific program areas include: (i) for investment advisers and investment companies, presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds; (ii) for broker-dealers, sales practices and fraud, and compliance with the new market access rule; (iii)for market oversight, risk-based examinations of securities exchanges and FINRA, and order-type assessment; and (iv) for clearing and settlement, transfer agent exams, timely turnaround of items and transfers, accurate recordkeeping, and safeguarding of assets, and; (iv) for clearing agencies, designated as systemically important, conduct annual examinations as required by the Dodd-Frank Act. The priority list is not exhaustive. Importantly, priorities may be adjusted throughout the year and the NEP will conduct additional examinations focused on risks, issues, and policy matters that are not addressed by the release.

Reminder—Upcoming Form PF Filing Deadline

SEC registered investment advisers who manage at least $150 million in private fund assets with a December 31st fiscal year end should be well underway in preparing their submissions for the approaching April 30, 2013 deadline. Filings must be made through the Private Fund Reporting Depository (PFRD) filing system managed by the Financial Industry Regulatory Authority (FINRA). As a reminder, advisers to three types of funds must file on Form PF: hedge funds, liquidity funds and private equity funds. Hedge funds are generally defined as a private fund that has the ability to pay a performance fee to its adviser, borrow in excess of a certain amount or sell assets short. Liquidity funds are defined as a private fund seeking to generate income by investing in short-term securities while maintaining a stable net asset value for investors. Private equity funds are defined in the negative as not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not generally provide investors with redemption rights. When classifying its funds, advisers should carefully read the fund’s offering documents and definitions on Form PF and should seek assistance of counsel. Particularly, we have seen the broad definition of hedge fund cause a fund considered a private equity fund by industry-standards to be a hedge fund for purposes of Form PF, thus subjecting the fund to more expansive reporting requirements. As is the case with filing Form ADV through IARD, the $150 Form PF filing fee is paid through the same IARD Daily Account and must be funded in advance of the filing. FINRA recently updated their PFRD System FAQs. The SEC has also posted new Form PF FAQs, which should be referred to for upcoming filings.

Reminder — Upcoming Dodd-Frank Protocol Adherence Deadline

All entities, including private funds, engaged in swap transactions must adhere to the ISDA Dodd-Frank Protocol no later than May 1, 2013 in order to engage in new swap transactions on or after May 1. Adherence to the Dodd-Frank Protocol will result in an entity’s ISDA swap documentation being amended to incorporate the business conduct rules that are applicable to swap dealers under Dodd-Frank.  Adherence to the Protocol involves filling out a questionnaire to ascertain an entity’s status under Dodd-Frank (e.g., pension plan, hedge fund and corporate end-user).  Further information on adherence to the Protocol can be obtained at ISDA’s website by clicking here.

Are you a lobbyist?

Over the last decade, many state and municipal governments have enacted new laws regarding how businesses may interact with government officials. These laws often establish new rules expanding the activities that are deemed to be “lobbying,” who is required to be registered as a lobbyist and what information must be publicly disclosed. Approximately half of the states, and countless municipalities, now define lobbying to include attempts to influence government decisions regarding procurement contracts – including contracts for investment advisors and placement agents – and impose steep penalties for companies that fail to register and disclose their “lobbying” activities and expenditures. Although some lobbying laws include exceptions for communications that occur as part of a competitive bidding process, the rules are inconsistent and not always clear. For example, although New York City’s lobbying law long included procurement lobbying, in 2010 the City’s Corporation Counsel and the City Clerk issued letters warning businesses that “activities by placement agents and other persons who attempt to influence determinations of the boards of trustees by the City’s . . . pension funds” are likely to be considered lobbying activity that requires registration and disclosure. Similarly, California’s lobbying law was expanded in 2011 to expressly include persons acting as “placement agents” in connection with investments made by California retirement systems, or otherwise seek to influence investment by local public retirement plans. Greenberg Traurig’s Investment Regulation Group, in conjunction with our Political Law Compliance team, is available to assist clients with questions regarding how to navigate increasingly complex lobby compliance laws and rules across the country and beyond. GT has a broad range of experience in advising to some of the world’s leading corporations, lobbying firms, public officials and others who seek to navigate lobbying and campaign finance laws.

Recent Events

On April 18, 2013, GT hosted the seminar, “The Far Reaching Impact of FATCA Across Borders and Across Industries” as both a webinar and live program in NY and Miami. The seminar explored the latest FATCA regulations and key intergovernmental agreements as well as their applications to a variety of industries. Click here to view the presentation.

On April 10, 2013, GT sponsored Artisan Business Group’s EB-5 Finance seminar at our NYC office. The program exposed participants to a unique alternative financing opportunity for projects that lend themselves to the EB-5 immigrant investor program and featured several GT speakers, including Steve Anapoell and Genna Garver, Co-Chair of the Investment Regulation Group, who provided a securities law update and considerations in the EB-5 area. Guest speakers included Jeff Carr from EPR, Phil Cohen from the EB-5 Resource Center, and Reid Thomas from NES Financial.

On April 2, 2013, GT co-hosted a Global Compliance seminar with Dun & Bradstreet on Foreign Corrupt Practices Act (FCPA) issues. The program included an overview of the FCPA, with a specific emphasis on the Department of Justice’s recently released Resource Guide to the FCPAand recent enforcement activities. A link to the Resource Guide can be found here.

Article By:

Senate Immigration Bill To Impact Business, Technology and Defense Sectors

Barnes & Thornburg

On April 17, 2013, a bipartisan group of U.S. Senators known as the “Gang of Eight” introduced an immigration bill entitled the “Border Security, Economic Opportunity, and Immigration Modernization Act of 2013.”

The bill includes provisions that substantially increase the number of visas for highly-skilled workers, creates a new visa category for lower-skilled workers, eliminates the backlog for employment-based immigration, and authorizes significant resources to achieve border security.

The bill aims to increase the annual cap of certain employment-based nonimmigrant visas (H-1B) from 65,000 to 110,000 and the number may increase up to 180,000 depending on labor demands and the unemployment rate. In order to ensure that American workers are not displaced by H-1B workers, employers will continue to be required to pay the prevailing wage to H-1B workers and it has been proposed that the prevailing wage system be strengthened. Also in fiscal year 2014, companies will be banned from bringing in additional workers if more than 75 percent of their workers are H-1B or L-1 employees. The bill also provides for dual intent visas for all students who come to the U.S. on a bachelor or advanced degree program.

To ensure the U.S. has sufficient lower-skilled workers, the bill creates a new nonimmigrant category known as the W-Visa. Eligible recipients would be immigrants who come to the U.S. to perform services or labor for a registered employer and for a registered position. Beginning April 1, 2015, unless the Secretary of Homeland Security extends the start date, the maximum cap for four years would be 75,000 visas.

The bill proposes to exempt from the annual numerical limits multinational executives and managers; immigrants of extraordinary ability in the sciences, arts, education, business, or athletics; and doctoral degree holders in the science, technology, engineering and mathematics (STEM) fields.

The bill allocates a significant number of all employment-based visas to individuals holding advanced degrees in STEM fields, in particular. The bill also creates startup visas for foreign entrepreneurs seeking to establish a company in the U.S.

The bill provides $3 billion to implement the Comprehensive Southern Border Security Strategy for achieving and maintaining effective control in all high risk border sectors along the southern border. The funds will be used for acquiring, among other things surveillance and detection capabilities developed or used by the U.S. Department of Defense; fixed, mobile, and agent portable surveillance systems; and unmanned aerial systems and fixed-wing aircraft and necessary and qualified staff equipment to fully utilize such systems.

The bill permits undocumented immigrants, who entered the U.S. before December 31, 2011 and who do not have a serious criminal record, to apply for a Registered Provisional Immigrant (RPI) status. This would permit an individual to work legally in the U.S. for any employer. RPI status would last for a 6-year term that is renewable if the worker has not committed any acts that would render the worker deportable.

The Senate bill is likely to undergo changes as other U.S. Senators and constituents weigh in on this important bill. A House bill is also expected to be unveiled soon. If the bills can pass their respective chambers, then bicameral negotiations would begin in an attempt to pass a final comprehensive immigration reform bill for the President to sign into law.

Article By:

 of

Congress Renews Violence Against Women Act, Expands Tribal Court Jurisdiction

The National Law Review recently featured an article by Brian L. Pierson with Godfrey & Kahn S.C., regarding Recent Congressional Actions:

Godfrey & Kahn S.C. Law firm

On February 28, 2013 the House of Representatives approved Senate Bill 47, which reauthorizes and amends the Violence Against Women Act of 1994 (VAWA). The Bill, already approved in the Senate, became law when the President signed it on March 7th.

The VAWA is a major legislative achievement for Indian country. The Supreme Court held in 1978 that tribes lack inherent power to exercise criminal jurisdiction over non-Indians. For the first time since that decision, Congress has authorized tribes to exercise such jurisdiction. Title IX of the VAWA amends the Indian Civil Rights Act (ICRA) to permit tribes to exercise “special domestic violence criminal jurisdiction” over non-Indians who are charged with domestic violence, dating violence, and violations of protective orders that occur on their lands. Features of special domestic violence criminal jurisdiction include:

  • either the perpetrator or victim must be Indian
  • the tribe must prove that the defendant has ties to the tribal community
  • tribal jurisdiction is concurrent with state and federal jurisdiction
  • the defendant has the right to a trial by an impartial jury that is drawn from sources that –
    • reflect a fair cross section of the community; and
    • do not systematically exclude any distinctive group in the community, including non-Indians
  • In the event that a sentence of imprisonment “may” be imposed, the tribe must guarantee the defendant the enhanced procedural rights added to the ICRA by the Tribal Law and Order Act of 2010, including:
    • effective assistance of counsel, paid for by the tribe if the defendant is indigent
    • a legally trained judge licensed to practice law
    • published laws and rules of criminal procedure
    • recorded proceedings

Copyright © 2013 Godfrey & Kahn S.C.

Not so Fast at the Eden Roc

The National Law Review recently published an article, Not so Fast at the Eden Roc, written by Nelson F. Migdal with Greenberg Traurig, LLP:

GT Law

 

Within hours of the appeals court’s ruling [Marriott International v Eden Roc 3-26-2013.pdf], there have been announcements about the demise of the long-term hotel management agreement and the hotel owner’s inviolate right to terminate (revoke) management agreements “at-will.”  But the wiser course might be to not speak too soon, but, rather, to ponder the consequences.  Remember that Judge Schweitzer’s prior ruling on October 26, 2012 granted Marriott’s request for a preliminary injunction to prevent the hotel owner from removing the hotel operator in another of a series of “midnight raids,” where the hotel owner sweeps in and removes the hotel operator.  The hotel operator at the Eden Roc chose to stand its ground, and the injunction order maintained the status quo.  In many situations, the parties are able to resolve their dispute, either on their own or with the assistance of a mediator.  In fact, the Judge urged the parties to do just that.

The parties were not able to resolve their differences, and on March 26, 2013, a New York appeals court vacated Judge Schweitzer’s injunction.  This is not a sweeping and staggering new law. Citing the 1991 Woolley case, the order merely confirms that a principal may freely remove its agent and terminate the agency relationship “at-will” (absent the presence of a “coupled interest” as part of the contract; see the attached link to our prior piece on the Turnberry decision).  (To this extent, I disagree with the appellate court’s dicta that the agreement in question is not an agency agreement; in fact it is). The order further confirms that certain contracts that have the characteristics of a personal services contract cannot be enforced by means of an injunction.  It is also not news that if a hotel owner desires to terminate its management agreement with the hotel operator in this manner, that the hotel owner may be answerable in damages to the hotel operator.  Some blog posts within the last 24 hours make reference to the recent Fairmont Hotels & Resorts termination at the Turnberry Resort.  Very few of those blog posts complete the factual story and note that the hotel owner ultimately paid Fairmont damages reported to be roughly $19,000,000, representing the approximate present value of expected future management fees. Depending on the performance of the hotel, an Owner’s summary revocation of a hotel management agreement could be akin to selling “puts”; you get to own the stock, but do you really want to own it that cost?

So, let’s just be more judicious here.  Hotel owners and hotel operators actually do talk with each other more often than not, and do enter into legally binding agreements for management of the owner’s hotel.  I will continue to advocate for good faith negotiation over litigation, and monitor the complete story, including the fact that terminating the hotel management agreement may grant an owner its wish to regain the hotel, but that will come at a price, and then, the next step is that the hotel owner will need to replace the removed hotel operator with yet another hotel operator – which hotel owners realize can add a significant expense for the owner.

©2013 Greenberg Traurig, LLP

Protect Your CEO’s Tweets and Posts from U.S. Securities Exchange Commission (SEC) Enforcement Action

vonBriesen

The U.S. Securities Exchange Commission (SEC) Enforcement Division altered the jet stream of blogosphere commentary last December by, for the first time, recommending legal action against a CEO on account of a Facebook post. Immediately after the announcement, a blizzard of articles, tweets, and blogs buried the mediascape with opinions about the critical role of CEO social media use in the new economy, the wisdom or foolishness of allowing CEO’s to Tweet or post, and whether the SEC should be time warped back to the Stone Age it seems to prefer.

Sweeping away the accumulated hyperbole reveals two important takeaways from the SEC’s announcement, applicable to both public and private companies: i) the more things change, the more they remain the same, and ii) this latest “grave threat” to the modern world is not a crisis, but an opportunity. Social media can be a valid, legal, and effective way to communicate with investors, if it’s done right.

About Regulation FD

The SEC’s action responded to a July 2012 Facebook post by CEO Reed Hastings stating that members watched over 1 billion hours on Netflix in June. Netflix estimated that Hastings had reached 200,000 people through his Facebook, Twitter, and LinkedIn accounts. The SEC felt this was material information for investors and that by announcing it through social media, rather than more traditional outlets, Netflix had violated Regulation Fair Disclosure (Reg. FD).

The SEC adopted Reg. FD in 2000 to fix a perceived lack of fairness in the public securities markets. Before Reg. FD, public companies could share material information with analysts who participated in conference calls or meetings not open to smaller investors. Well-connected investors got trading advantages over the general public. Reg. FD prohibits public companies from providing material information to limited groups of investors without simultaneously making the information available to the entire marketplace.

Under Reg. FD, public disclosures must be made by “filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.” The “other method” most often employed is a press release to an array of media outlets likely to disseminate the information broadly and quickly. Individuals and companies violating Reg. FD risk injunctions and monetary penalties.

Use of Social Media Growing, Creating Risks

Social media channels first became critical communication tools for companies after adoption of Reg. FD. A 2010 study of the 100 largest companies in the Fortune 500 found that 79% were using at least one of the four most popular social media platforms. See Burson-Marsteller Fortune Global 100 Social Media Study, Feb. 23, 2010, available at http://www.burson-marsteller.com/Innovation_and_insights/blogs_and_podcasts/BM_Blog/Lists/Posts/Post.aspx?ID=160

A 2012 Forbes article cited an IBM study saying 57% of surveyed CEO’s likely would be using social media by 2017. Mark Fidelman, IBM Study: If you Don’t Have a Social CEO, YourGoing to be Less Competitive, FORBES, May 22, 2012.

The SEC itself uses social media to disclose important information such as speeches, trading suspensions, litigation releases, and administrative proceedings.

While some CEOs see social media as “part of their job description,” others try to minimize risk by having employees write or review tweets before posting, and some CEOs have already tried social media and moved on. See Leslie Kwoh and Melissa Korn, 140 Characters of Risk: Some CEO’s Fear Twitter, WALL STREET JOURNAL, September 26, 2012.

Not everyone does, or should, use all forms of social media. The point of Twitter, for example, is to provide information contemporaneously with the occurrence of a thought or an event. This promptness is both the differentiating touchstone of the medium and its source of danger. Quick, unconsidered, unscripted communications by senior executives of public companies pose risks in the form of leaked intellectual property, disclosed business plans, angered customers, litigious investors, and frothy regulators. The SEC Netflix announcement demonstrates the potential for liability arising from disclosures of information requiring consideration through social media focused solely on promptness. A Facebook post subjected to prior review might have been a better choice.

Even where the SEC does not act, executives may be at risk. In May 2012, retailer Francesca’s Holdings Corporation fired its CFO, Gene Morphis after he tweeted: “Board meeting. Good numbers = Happy Board.” Mr. Morphis, who was also active on other social media outlets, had a history of postings about earnings calls, road shows, and other work related matters. Morphis lost his job even though the SEC took no action. Rachel Emma Silverman, Facebook and Twitter Postings Cost CFO His Job, WALL STREET JOURNAL, May 14, 2012.

Social Media Without Big Risk

The SEC has never issued guidance about the use of social media, but it has issued guidance that websites could be deemed sufficiently “public” to satisfy Reg. FD when: (1) it is a recognized channel of distribution, (2) posting on the web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information. Indeed, “for some companies in certain circumstances, posting … information on the company’s web site, in and of itself, may be a sufficient method of public disclosure,” SEC Release No. 34-58288 (Aug. 7, 2008) at 18, 25.

This is an example of how “the more things change, the more they stay the same” when it comes to the intersection of law and technology. The purpose of Reg. FD is to make sure that all investors have access to the same information roughly simultaneously. The specific communications method is not important so long as the principle of public disclosure to the general market, not subsets of investors, is served. Because 8-K filings and press releases were the most common ways to quickly and broadly disseminate information in the past, investors knew where to look for them and could monitor those information outlets. Now, when companies establish their websites as well-known places to find press releases, SEC filings, and supplemental information, they, too, have become acceptable means for Reg. FD disclosures.

The same analysis applies to social media, as well as any new communications technology that may exist in the future. The critical question is: has the company sufficiently alerted the market to its disclosure practices based on the regularity, prominence, accuracy, accessibility, and media coverage of its disclosure methods? If so, social media should be just as acceptable as any other communication tool.

One company seems to have found the right balance. Alan Meckler, CEO of WebMediaBrands Inc. drew the SEC’s attention after a pattern of regularly disclosing company information through social media back in December 2010. The SEC’s Division of Corporation Finance questioned whether Mr. Meckler’s Tweets “conveyed information in compliance with Regulation FD.”SEC letter dated December 9, 2010. Despite, the investigation, the SEC brought no enforcement action.

To use social media with minimum SEC risk, the company must educate investors so that they know such communications will always occur at a particular place and at least simultaneously with other outlets. This is done by a regular pattern of social media disclosure and links to other sources, such as SEC filings, showing the way. A company should not force investors to win a shell game, finding the nut of important information in Twitter this time, on Facebook the next time, and Instagram after that. Consistency, predictability, and transparency are key. Used this way, social media present an opportunity to communicate with investors in new ways, not a source of legal problems.

©2013 von Briesen & Roper, s.c

Three Provisions You Cannot Operate Without In Your Operating Agreement

McBrayer NEW logo 1-10-13

Deciding on the entity form to use for your business depends on a number of factors, but for many entrepreneurs, an LLC is the best fit. An LLC is a hybrid entity as it provides liability protection similar to a corporation and favorable income tax treatment similar to a partnership. If you are starting or currently operating a business through an LLC, your most important organizational document is the agreement between you and your partners: the Operating Agreement. An operating agreement establishes the internal operations of the business in a way that suits the specific needs of the business owners. Once signed by the members of the LLC, it is an official binding contract.

Another benefit of using an LLC to operate your business is the flexibility LLC owners have to structure their operations and business relations with their partners. While the Kentucky Limited Liability Company Act contains default provisions for many of the organizational issues that may arise, members of an LLC may agree to operate under provisions other than the Act’s default provisions. No matter the nature of your business, your LLC should have an operating agreement that includes details such as voting rights and responsibilities, powers and duties of members and managers, allocation of profits and losses, and distribution of capital, whether the members agree to use the LLC Act’s default provisions or alternatives to the default language.

As an example of the flexibility of the Act, and also of the importance of carefully considering the effects of each section of your operating agreement, consider the following three provisions that will help your business run smoothly.

1. Transfer provisions.

An operating agreement typically contains some language about the circumstances under which a member may or must transfer his ownership interest in the LLC to another person or entity. Under the Act, a member may freely transfer membership interest to anyone. There are a number of provisions in the Act that tell us how the transferring member and the new owner are to be treated, one of which is that the new owner will not be a full member with the right to vote unless a majority of the other members vote to make the new owner a full member. If members are allowed to freely transfer their interests however, founding members may find themselves faced with new business partners they did not approve. Moreover, a member’s interest could be transferred involuntarily, such as by death, divorce, or bankruptcy. For these and other reasons, you and your business partners may decide on a transfer provision that would limit uncertainty in these situations. Terms in the operating agreement may require a majority of members to vote to allow a proposed transfer before it can occur, or give the company or the members a right of first refusal to purchase the membership interest subject to a proposed transfer. The members might agree to purchase life insurance policies to provide the funds to purchase the membership interest of a member at death. The operating agreement may also prohibit members from pledging (granting a lien on) membership interest. Putting restrictions on transferability gives members control over when, how, and why membership interests are transferable.

2. Deadlock provisions.

Management or member deadlock occurs when a company’s decision makers are evenly split on a matter and neither side will relent. It is a potentially fatal problem and, thus, should always be addressed within the operating agreement. Under the Act, the remedy for deadlock is judicial dissolution. A court “may dissolve a limited liability company in a proceeding by a member if it is established that it is not reasonably practicable to carry on the business of the limited liability company in conformity with the operating agreement.” Once the LLC is dissolved, it cannot carry on business, but must wind up and liquidate its business. There are, however, many strategies that can be put into your operating agreement to avoid this problem:

· The opposing member may be allowed to withdraw from the LLC.

· The operating agreement may require that a deadlock at the manager level be subject to a vote of the members.

· The members may agree to be bound by a coin flip.

· The members may be required to take the issue to binding arbitration.

· The members may incorporate a buy-sell provision that would require one member to provide a purchase price to the other member and then require that other member to purchase or sell the membership interest in the LLC at that purchase price such that the selling member ceases to be a member of the LLC.

With each of these strategies, the common feature is that the LLC is likely to continue as a functioning business after the deadlock is resolved.

3. Additional Capital Contributions.

A company operating agreement will usually state the amount of money or the value of property each member initially contributes to the company for operations, known as initial capital contributions. As an example, three people may decide to start a business and agree that each of them will give the company $3,000 so the company has $9,000 in start-up capital. Most operating agreements also have language about additional money from the members, known as additional capital contributions. Because the Act allows flexibility here as well, that language may state that members are not required to make additional capital contributions, or it may require additional capital contributions and allow for one member to make an additional capital contribution for another member that fails to make that contribution when due in exchange for a portion of that member’s membership interest. There are many possibilities. But frequently, when considering these possibilities, members fail to consider the effect of the additional capital contribution language on the limited liability feature of the LLC.

One important function of an LLC is that the members are not individually liable for the debts of the LLC if the LLC cannot pay its creditors. That protection from individual liability is not absolute, however. Among other things that may cause a court to ignore limited liability protection, including fraud, intentional misconduct, or the failure to maintain a real distinction between the LLC and its members, the additional capital contribution language can be read to require the members to pay LLC debt that the LLC cannot pay itself. The members may avoid this by affirmatively stating in the operating agreement that additional capital contributions are never required and the members have no personal liability for the debts of the LLC, but that may cause problems later if the LLC needs additional capital. The members may instead decide to have additional capital contribution language, but to have it drafted carefully so as to avoid unintentionally negating the limited liability protection generally afforded by the LLC. The important thing is to consider and plan for the potential needs of the LLC, and to do so in a way that doesn’t result in unintended consequences for the LLC or its members.

Every successful business encounters bumps in the roads. An operating agreement is a road map, a tool to navigate through the difficult obstacles.

© 2013 by McBrayer, McGinnis, Leslie & Kirkland, PLLC

Supreme Court Clarifies Antitrust Immunity For State-Sanctioned Conduct

Bracewell & Giuliani Logo

On February 19, 2013, the U.S. Supreme Court, in a unanimous decision, found that a merger of two Georgia hospitals was not immune from federal antitrust laws under the “state-action” exemption, reversing a decision of the Eleventh Circuit Court of Appeals. The Supreme Court’s ruling has implications for activities of local governmental entities, such as counties and municipalities, as well as private actors exercising authority delegated by a state.

In this case, Federal Trade Commission v. Phoebe Putney Health System, Inc.,1 the Hospital Authority of Albany-Dougherty County (Authority), a non-profit entity formed by the city of Albany and Dougherty County pursuant to Georgia law, owned and operated Phoebe Putney Memorial Hospital.  In 2010, the Authority authorized the purchase of the only other hospital in Dougherty County, Palmyra Medical Center. The Federal Trade Commission (FTC) sought to block the merger on the grounds that it would create a virtual monopoly and would substantially lessen competition in the market for acute-care hospital services, in violation of Section 5 of the Federal Trade Commission Act and Section 7 of the Clayton Act. Both the federal district court and the Eleventh Circuit denied the FTC’s request for an injunction, finding that the state-action doctrine immunized the merger from antitrust liability.

The state-action doctrine, which was first recognized by the U.S. Supreme Court in Parker v. Brown,2 exempts from the federal antitrust laws actions by a state acting in its sovereign capacity. The doctrine was subsequently expanded to cover subdivisions of a state, such as municipalities and other local governmental entities which, although not sovereign, are immune from federal antitrust scrutiny if their activities are undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition. Even anticompetitive actions of private parties implementing state policy may be entitled to immunity if the “clear articulation” requirement is met and the policy is “actively supervised” by the state itself.3

To pass the “clear articulation” test, a state legislature need not expressly state an intention for a delegated action to have anticompetitive effects. Rather, state-action immunity applies if the anticompetitive effect was the “foreseeable result” of what the state authorized.  The Eleventh Circuit found that, because the Authority was granted broad corporate powers, including power to acquire and lease hospitals, anticompetitive conduct by the Authority must have been reasonably anticipated by the Georgia Legislature and therefore was foreseeable.

The Supreme Court disagreed.  Writing for the Court, Justice Sonia Sotomayor noted at the outset that “state-action immunity is disfavored.” The Court held that the Eleventh Circuit applied the concept of foreseeability too loosely and that the “clear articulation” standard is met only where anticompetitive effects are the “inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” More specifically, the Supreme Court said that grants of general corporate power to substate governmental entities, such as the Authority, do not meet the “clear articulation” requirement for state-action immunity. The acquisition and leasing powers exercised by the Authority mirror general powers routinely conferred by state law upon private corporations and are typically used in ways that raise no antitrust concerns. As a result, a state that has delegated such general powers cannot be said to have contemplated that they will be used to displace competition, for example, by consolidating ownership of hospitals.

The Supreme Court did acknowledge that public, non-profit entities like the Authority differ materially from private corporations that offer hospital services. However, neither the Georgia Legislature’s objective of improving access to affordable health care, nor the Authority’s non-profit status, logically suggested that the State intended hospital authorities to pursue their goals through anticompetitive mergers. Even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, such as the Legislature’s certificate of need requirement, did not mean the State affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related.

The Supreme Court’s decision narrows the scope of state-action immunity and has implications for conduct of local governmental entities as well as private actors, not only involving mergers and acquisitions in the health care sector, but also in other contexts and other industries. This was noted by the FTC, which issued astatement praising the Court’s opinion and stating that it “will ensure competition in a variety of other industries, as well.” Entities acting under existing state legislation may need to re-evaluate whether the statutes that empower them offer immunity from federal antitrust scrutiny. Even legislation that explicitly allows some activities that might be anticompetitive may now need to be read more carefully. Parties seeking to get new legislation passed to protect certain conduct that may displace competition now have a clearer roadmap for the degree of specificity required in the statutory language.

1 568 U.S. ___ (2013).

2 317 U.S. 341 (1943).

3 Local governmental entities are not subject to the “active state supervision” requirement because they have less of an incentive to pursue their own self-interest under the guise of implementing state policies.

© 2013 Bracewell & Giuliani LLP

Court Grants Summary Judgment Against Coca-Cola in Breach of Collective Bargaining Agreement Claim by United Steel Workers

The National Law Review recently published an article by Bryan R. Walters of Varnum LLP regarding Coca-Cola’s Breach of Collective Bargaining Agreement:

Varnum LLP

 

In Local Union 2-2000 United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial, Chemical and Service Workers International Union v. Coca-Cola Refreshments U.S.A. Inc. (W.D. Mich. Nov. 21, 2012), the Honorable Janet T. Neff granted summary judgment in favor of the United Steel Workers against Coca-Cola on a breach of contract claim concerning wage increases under the parties’ collective bargaining agreement. The opinion addressed two interesting legal issues.

First, the court rejected Coca-Cola’s statute of limitations argument under 29 U.S.C. § 160(b), which provides that “no complaint shall issue based upon any unfair labor practice occurring more than six months prior to the filing of the charge with the Board and the service of a copy thereof upon a person against whom such charge is made.”  Coca-Cola argued that, because the United Steel Workers had filed an unfair labor practice charge concerning their unpaid wages claim approximately nine months after becoming aware of the issue, Section 160(b) barred the union’s claim.  The court rejected this argument, concluding that it would be “inappropriate” to apply the six-month limitations period to what was a pure breach of contract claim.  Instead, the court held that the applicable statute of limitations was the six-year statute of limitations under Michigan law for breach of contract actions.  Op. at 13–15.

The second significant issue related to interpretation of the collective bargaining agreement.  The collective bargaining agreement included schedules for wage increases in “Year 1, Year 2, and Year 3” without further defining those terms within the primary contract document.  The court held that this contract language was ambiguous, requiring introduction of parol evidence of the parties’ negotiation history. The court found clear and convincing evidence in the negotiating history that the union’s interpretation of the “Years” was correct, in that “Year 1” referred to the first 365 days after the effective date of the contract, etc.  Id. at 19.

The court also concluded that there was clear and convincing evidence of a mutual mistake in the drafting of the final collective bargaining agreement. Coca-Cola listed specific dates for the wage adjustments in an appendix to the collective bargaining agreement. The court found that the dates listed in the appendix were not bargained for and never agreed to by the parties, rejecting as self-serving subsequent statements from Coca-Cola’s negotiators that Coca-Cola did not consider the dates unilaterally added to the appendix by Coca-Cola a “mistake.”  Id. at 20–21.

© 2012 Varnum LLP

Negotiating Business Acquisitions Conference – November 1-2, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Conference on Business Acquisition Negotiations:

When

November 01 – 02, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America

Negotiating Business Acquisitions Conference – November 1-2, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Conference on Business Acquisition Negotiations:

When

November 01 – 02, 2012

Where

  • Wynn Las Vegas
  • 3131 Las Vegas Blvd S
  • Las Vegas, NV, 89109-1967
  • United States of America