Category: Corporate Compliance

OCIE Director Instructs Advisers to Empower Chief Compliance Officers

On November 19, 2020, Peter Driscoll, director of the Office of Compliance Inspection and Examination (“OCIE”) of the Securities and Exchange Commission (“SEC”), gave a speech urging advisory firms to empower their Chief Compliance Officers (“CCOs”).  The speech, made at the SEC’s annual compliance outreach conference, accompanied OCIE’s Risk Alert, issued the same day, identifying notable deficiencies and weaknesses regarding Registered Investment Advisors (“RIAs”) CCOs and compliance departments.  Driscoll’s speech complemented the Risk Alert by outlining the fundamental requirements for CCOs:  “empowered, senior and with authority.”

Under Rule 206(4)-7 promulgated under the Investment Advisers Act of 1940, 17 C.F.R. § 270.38a-1 (the “Compliance Rule”), an RIA must adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder.  According to Driscoll, this cannot be done unless the RIA’s CCO is empowered to fully administer the firm’s policies and procedures and holds a position of sufficient seniority and authority to compel others to comply with those policies and procedures.  In its Risk Alert, OCIE identified common compliance deficiencies among RIAs directly stemming from an unempowered CCO, including a lack of sufficient human resources to implement policies and procedures, failure of executive management to support the CCO, and even firing the CCO for reporting suspicious behavior.  In order to address and prevent these deficiencies, Driscoll described a set baseline expectations regulators should look for, and which firms can adopt, in assessing the power and authority of the CCO and compliance function.

  • Compliance Resources: RIAs should continually reassess their budgetary needs based on their business model, size, sophistication, adviser representative population and dispersal, and provide for sufficient resources as necessary for compliance with applicable laws.  This may mean hiring additional compliance staff and upgrading information technology infrastructure, especially if the firm has grown or taken on a new business.  Compliance staff should be trained, at a minimum, to perform annual reviews, accurately complete and file advisor registration forms (Form ADV), and timely respond to OCIE requests for required books and records.

  • Responsibility of CCOs: While CCOs may have multiple responsibilities, they must be, at a minimum, knowledgeable of the Advisers Act and its mandates in order to fulfill their responsibilities as CCO.  CCOs should not only assist firms from avoiding compliance failures, but should also provide guidance on new or amended rules.

  • Authority of CCOs: Senior management should vest CCOs with ample authority and routinely interact with them.   CCOs need to understand their firm’s business and, when necessary, be brought into the business decision-making process.  CCOs should also have access to critical operational information such as trading exception reports and investment advisory agreements with key clients.  CCOs should be consulted on all matters with potential compliance implications, such as disclosures of conflicts to clients, calculation of fees, and client asset protection.

  • Position of CCOs: At a minimum, CCOs should report directly to senior management, and preferably be a part of senior management.  CCOs should not be mid-level officers or placed under the Chief Financial Officer function.

  • Security of CCOs: CCOs should have confidence that they can raise compliance issues with the backing and support of senior management without being scapegoated or terminated.

These expectations should not be read as an exhaustive checklist but as a preliminary framework for evaluating the effectiveness of a firm’s compliance function and its CCO – key elements of a firm’s ability to comply with the mandates of the Compliance Rule.  This framework can be also be used to ensure the firm’s compliance function is appropriately tailored to its size, business model, and compliance culture.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.

Keeping Things in Bounds: Private Company Owners Need to Abide by Clear Fiduciary Duties in Managing Their Companies

In February 2009, Pittsburgh Steelers wide receiver Santonio Holmes made a toe tapping catch in the back corner of the end zone[1] to secure a thrilling, come-from-behind win and crush the hearts of Arizona Cardinals fans in Super Bowl 43.  For private company owners running their own firms, the boundaries for their conduct are set by the fiduciary duties they owe to their companies.  But in both sports and the management of private businesses, team leaders can find it challenging to remain in bounds.  This post therefore reviews the legal lanes of proper conduct that owners will want to follow to avoid future claims.

The Scope of Fiduciary Duties

The fiduciary duties of corporate directors and officers are not included in the Texas Business Organizations Code (“BOC”), but Texas case law for more than a century makes clear that both directors and company officers owe duties of obedience, care, and loyalty, and these duties are owed to the company, not to the individual shareholders.  See Tenison, v. Patton, 95 Tex. 284, 67 S.W. 92 (1902); Ritchie v. Rupe, 443 S.W.3d 856, 868 (Tex. 2014).  These same fiduciary duties also apply to LLC managers and officers, and all of these parties are referred to in this post as “control persons.”

The Ritchie case focused on whether minority shareholders have a legal right to secure a court-ordered buyout of their minority ownership interest based on claims that control persons engaged in shareholder oppression.  The Court held no claim for shareholder oppression exists in the BOC or at common law that would authorize a trial court to order the company or majority owners to buy the minority owner’s stake in the business.  But, the Ritchie Court did uphold the right of minority shareholders to pursue claims against officers and directors for breach of their fiduciary duties, and recognized that these claims could be brought on a derivative basis.  In this regard, the Court stated that:

“Directors, or those acting as directors, owe a fiduciary duty to the corporation in their directorial actions,and this duty “includes the dedication of [their] uncorrupted business judgment for the sole benefit of the corporation.”  443 S.W.3d at 868.

The BOC permits the fiduciary duties of control persons to be limited in the company’s governance documents, but the statute does not permit a company to remove the duty of loyalty owed by control persons.  The remainder of this post focuses on what the duty of loyalty requires from governing persons in their business relationship with their companies.

Conflicts Transactions by Control Persons Can Lead to Claims

Owners of private companies commonly engage in transactions with their businesses in their capacity as control persons.  Majority owners may buy, sell and lease property from or to their companies, buy and sell products or services from other businesses they also own or control, and loan money to their companies to fund their business operations.  All of these transactions are not at “arm’s-length” and, instead, they are “interested party” transactions, which are sometimes referred to as “conflict transactions.”  These types of conflicts transactions may result in claims by the minority owners who allege that the transactions breached the control person’s fiduciary duties because they were not fair to the company.

Once again, the Supreme Court in Ritchie addressed this problem:

[T]he duty of loyalty that officers and directors owe to the corporation specifically prohibits them from misapplying corporate assets for their personal gain or wrongfully diverting corporate opportunities to themselves. Like most of the actions we have already discussed, these types of actions may be redressed through a derivative action, or through a direct action brought by the corporation, for breach of fiduciary duty.  443 S.W.3d at 887.

There is a “safe harbor” provision in the BOC for company control persons when they engage in business with their company for their personal benefit.  Section 21.418 of the BOC provides that when a control person enters into a transaction with the Company, which would otherwise be void or voidable, the transaction will be nevertheless be upheld as valid if certain conditions are met.  We discussed this safe harbor statute in more detail in a previous post (Read Here).  In summary, a conflict transaction by a control person will be upheld if (i) the details of the transaction were fully disclosed to and approved by a majority of the shareholders and/or by a majority of the disinterested directors or (ii) if the transaction is deemed to be objectively fair to the company.

Fairness is not defined in the BOC provisions, but fair is defined in Webster’s dictionary as “characterized by honesty and justice” and “free from fraud, injustice, prejudice or favoritism.  Once the minority shareholder brings a claim and demonstrates that a control person engaged in a conflict transaction, the control person will then bear the burden of demonstrating in the case that the terms of the transaction were fair to the company.  To avoid being forced to litigate the issue of fairness, control persons may want to avoid the following types of conflict transactions or, alternatively, they may want to take steps to head off the expected challenge from minority owners that the transaction was not fair to the company.

Examples of Conflicts Transactions

The following are the most common types of conflict transactions that control persons engage in with their companies, and for each of these, an approach is suggested that can either eliminate or reduce the potential for future claims.

  • Theft of corporate opportunity
    The duty of loyalty requires control persons not to take business opportunities for themselves that rightfully belong to the company.  When control persons take company opportunities, this is referred to as usurpation or misappropriation and it is a breach of fiduciary duty.  There is a clear way, however, for control persons to avoid this claim.  In 2003, the BOC was amended to allow for a company to include in its certificate of formation, bylaws or in its company agreement an express waiver of the control person’s duty not to usurp a company opportunity.  See. BOC Section 2.101(21).  The specific language gives the company the power to:

 . . . renounce, in its certificate of formation or by action of its governing authority, an interest or expectancy of the entity in, or an interest or expectancy of the entity in being offered an opportunity to participate in, specified business opportunities or a specified class or category of business opportunities presented to the entity or one or more of its managerial officials or owners. 

As indicated by this provision, the certificate, bylaw or provision of the company agreement needs to make clear the specific type or category of opportunities that are being excluded from the duty.  By including this limitation on the duty of loyalty, however, the control person will be immune from any liability for usurping a corporate opportunity of the company as it is defined in the bylaws or in the provisions of the LLC agreement.

  • Purchase or sale or lease of property to company, and loans to company 
    It is common for control persons to either sell, purchase or lease property, assets or services to/from the company they control or to provide loans to the company.  These are all conflict transactions that can, and often do, give rise to claims for breach of fiduciary duty and fights about whether the control person engaged in a transaction that was unfair to the company.  To avoid or at least limit claims related to these types of transactions, there are a number of common sense, practical steps that control persons can take before they engage in the transaction.

First, the control person should fully disclose all material terms of the transaction to other shareholders, the board and/or managers of the company and seek their approval, which if given, should eliminate all future claims.  Second, when there are objections raised to the transaction, the control person should consider securing input from outside experts to provide objective information.  For example, if the control person is selling or leasing property to the company, the control person should arrange for an independent appraiser to provide a written appraisal to set the property’s market value.  If a lease of property is at issue, an independent broker can provide market value lease rates for the type of property at issue.  Third, when the company is receiving loans from the control person, bankers can readily provide loan terms that reflect market rates.

Finally, the control person should consider structuring the transaction in a way that provides the company with a better deal on terms more favorable than market rates.  The control person does not need to give the company a gift in the transaction, but if the company receives a deal that is better than market rates, that will make it harder for the other shareholders or LLC members to complain that there was any lack of fairness in the transaction to the company.

  •  Compensation and bonuses 
    Finally, a hot button point with shareholders and members is often compensation, and more specifically, how much money is paid in base compensation and bonuses to the majority owner in his/her capacity as an officer, director or manager.  The obvious concern is that funds paid in compensation should, instead, be issued as dividends or distributions to all owners, and that the compensation paid to the majority owner is considered a “disguised distribution.”

If the other shareholders or members express concern regarding the compensation and bonuses that are being paid to the majority owners, this issue should be addressed by hiring an experienced and independent executive compensation expert.  The compensation expert will provide the company with a range of compensation that is being paid to executives at similarly situated companies in the same or similar industry and geographic region.  As noted above, rather than choosing a compensation/bonus level at the top end of the range determined by the expert, the majority owner is advised to select a range of compensation in the 70-80% range to limit the likelihood of any claim being brought by minority owners on this basis.

Conclusion

In King Henry IV, Shakespeare wrote: “Uneasy lies the head that wears a crown.”  One cause for this unease by private company owners who wear the mantle of leadership is that they are subject to suits by co-owners for breach of loyalty to the company.  But staying inbounds is by no means an insurmountable challenge for majority owners, as control persons, if they follow a few simple ground rules.  In short, majority owners need to be fully transparent in all of their transactions with the company, they should seek agreement when possible with other owners, but when an agreement is not possible, they need to secure specific input from outside experts who can validate the fairness of the transaction to the company before it takes place.  And regarding that Santonio Holmes TD catch, let’s look ahead and hope the Cardinals get another chance at a Super Bowl win soon led by their exciting QB and No. 1 Draft Choice, Kyler Murray.

_____________________________

[1] Cardinals fans like me continue to question whether Holmes actually managed to get his right toes down on the turf in the end zone before he was pushed out of bounds, and photographs of the catch prolong this debate.

© 2020 Winstead PC.
For more on Corporate Fiduciary Duties, see the National Law Review Corporate & Business Organization’s law section.

Secretary Of State Issues 2020 Women On Boards Report

The legislation creating California’s female director board quota requires the Secretary of State to publish on his Internet website a report no later than March 1, 2020 a report of the following:

  1. The number of corporations subject to the law that were in compliance during at least “one point during the preceding calendar year”.

  2. The number of publicly held corporations that moved their United States headquarters to California from another state or out of California into another state during the preceding calendar year.

  3. The number of publicly held corporations that were subject to this section during the preceding year, but are no longer publicly traded.

The Secretary of State published the mandated report a day late and without some of the required information.  Below is the Secretary of State’s summary of the report:

The above table illustrates one confusing aspect of the new law – the female director quota law refers to “publicly held corporations” and foreign corporations that are “publicly held corporations” while the corporate disclosure statement requirement applies to “publicly traded corporations” and “publicly traded foreign corporations”.  See Publicly Held Corporations and Publicly Traded Corporations – Non Bis In Idem?

The report explains that the Secretary of State lacked the data necessary to comply with the requirement to report on publicly held corporation’s movement of headquarters or delisting of shares from a particular market or exchange.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

Illinois House Bill Requires Corporations to Report to Secretary of State

House Bill 3394, approved by the Governor on August 27, 2019 and effective immediately (Public Act 100-589), amends the Business Corporation Act of 1983 (“BCA”) to add new Section 8.12 and amend Section 14.05.

New BCA Section 8.12 provides that domestic and foreign corporations, as soon as possible but not later than January 1, 2021, to report to the Secretary of State, on its Annual Report:

  1. Whether the corporation is a publicly held domestic or foreign corporation with its principal executive office located in Illinois
  2. Data on specific qualifications, skills and experience that the corporation considers for its board of directors, nominees for the board of directors and executive officers
  3. Whether each member of the corporation’s board of directors self-identifies as a minority person and, if so, which race or ethnicity to which the member belongs
  4. Other information

New BCA Section 8.12 also requires the Secretary to State to make the information public and report the information to the University of Illinois which is to review the reported information and publish, on its website, a report that provides aggregate data on the demographic characteristics of the boards of directors and executive officers of corporations filing an annual report for the preceding year along with an individualized rating (establish by the University of Illinois assessing the representation of women and minorities on corporate boards)  for each such corporation. The University of Illinois’ is also required to identify strategies for promoting diversity and inclusion among boards of directors and corporate executive officers.

BCA Section 14.05 as amended adds new Sections 14.05(k) and 14.05(l).  New BCA Section 14.05(k) requires each corporation or foreign corporation to state on its Annual Report whether the corporation has outstanding shares listed on a major United States stock exchange and is thereby subject to the reporting requirements of new BCA Section 8.12.  New BCA Section 14.05(l) requires corporations subject to new BCA Section 8.12 to provide the information required by new BCA Section 8.12.

It is our understanding that Form 14.05, Illinois Annual Report, is currently being amended to reflect these changes.

© Horwood Marcus & Berk Chartered 2020. All Rights Reserved.

For more on corporate reporting requirements, see the National Law Review Corporate & Business Organizations law page.

California Secretary Of State Issues First Board Gender Quota Report But Is Something Missing?

Yesterday was the first of several deadlines under California’s unprecedented legislation, SB 826, imposing gender quota requirements on all publicly-held domestic or foreign corporations whose principal executive offices are located in California.  This legislation also required the Secretary of State’s office to publish a report on its website no later than July 1, 2019 documenting those corporations subject to the law “who [sic] have at least one female director”.

The Secretary of State did, in fact, publish a report yesterday listing 538 corporations, their jurisdiction of incorporation, street address, phone number and stock exchange.  Oddly missing from the list was any indication of the number of female directors (if any) even though the law clearly requires that information.  It is also unclear why the Secretary of State chose to publish address and telephone information when that information was not required to be in the report.

The Secretary of State’s office did publish an explanation of its methodology that basically consisted of searches of Securities and Exchange Commission and other public filings.  The explanation includes this warning as well:

“Note that federal filing deadlines for filing the annual SEC Form 10-K (60, 75 or 90 days after the end of the fiscal year) differ from the California deadline for filing the Publicly Traded Disclosure Statement (150 days from the end of the fiscal year) so there may be gaps in available data.”

The Secretary of State has modified its corporate disclosure statement to require publicly traded companies to disclose if they have one or more female directors on their current Boards of Directors.  Given the definition of “female” in the statute (an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth), I wouldn’t be surprised to see a question concerning gender identification appearing on Directors and Officer questionnaires.

 

© 2010-2019 Allen Matkins Leck Gamble Mallory & Natsis LLP
For more on corporate compliance, please see the National Law Review Corporate & Business Organizations page.

Illinois Employers Face A Recent Rash of Class Action Lawsuits Filed Under State Biometric Information Privacy Law

Illinois enacted its Biometric Information Privacy Act (“BIPA”) in 2008 to regulate, among other things, employer collection and use of employee biometric information.  Biometrics is defined as the measurement and analysis of physical and behavioral characteristics.  This analysis produces biometric identifiers that include things like fingerprints, iris or face scans, and voiceprints, all of which can be used in a variety of ways, including for security, timekeeping, and employer wellness programs.

Illinois is not the only state with a biometrics privacy law on its books, however, its version is considered the nation’s most stringent.  BIPA requires a business that collects and uses biometric data to protect the data in the same manner it protects other sensitive or confidential information; to establish data retention and destruction procedures, including temporal limitations of three years; to publish policies outlining its biometric data collection and use procedures; and to obtain prior, informed consent from any individuals from whom it plans to obtain and use biometric data.   The statute also requires  businesses to notify employees in the event of a data breach.

Protection of biometric data is viewed as critical because, unlike passwords comprised of letters, numbers, or typographical characters, biometric data is unique and cannot be replaced or updated in the event of a breach.  Technology now allows biometric data to be captured surreptitiously, such as recording a voice over the phone, or face mapping individuals in a crowd or through photographs, increasing the risk for its theft or unauthorized or at least, unknown, use.  In fact, these more furtive methods of collecting and using biometric data is what led to the filing of five BIPA class action lawsuits in 2015 – four against Facebook, and one against online photo website Shutterfly – that alleged these companies used facial recognition software to analyze online posts, but did not comply with BIPA’s consent or other procedural requirements.  These first lawsuits brought attention to the private right of action authorized under BIPA, which provides that any “aggrieved” person may sue and recover $1,000 for each negligent violation and $5,000 for each intentional or reckless violation, or, in both circumstances, actual damages if greater than the statutory damages.  Prevailing parties may also recover their attorneys’ fees and costs.

The plaintiffs’ employment bar recently has gotten seriously into the BIPA class action game; since August 2017, approximately 30 lawsuits have been filed in Cook County, Illinois (where Chicago is), alone.  These putative class actions have been filed against employers in many industries including gas stations, restaurants, and retail, and typically involve the employer’s use of fingerprint operated time clocks.  The cases allege that the defendant employers failed to obtain proper informed consent or fail to maintain and inform employees about policies on the company’s use, storage, and destruction of biometric data.  Many of these lawsuits also allege the employer companies have improperly shared employee biometric data with third-party time clock vendors, and some even name the vendor as a defendant.

In addition to the obvious cost of class action litigation, these suits present additional legal challenges because many aspects of BIPA remain untested.  For example, the statutory term “aggrieved” person leaves open the question whether a plaintiff must be able to prove actual harm in order to recover.  The U.S. District Court for the Northern District of Illinois and U.S. District Court for the Southern District of New York both have dismissed BIPA suits for lack of standing where the plaintiffs did not allege actual harm.  The latter case, Santana v. Take-Two Interactive Software, is currently before the United States Court of Appeals for the Second Circuit, which heard oral argument in October 2017, but has not yet issued its ruling.   Other aspects of BIPA also remain in flux – such as whether facial recognition through photography is biometric data, as defined under the statute, and what forms of consent are compliant.  On the other side, defendants are challenging the constitutionality of the damages provisions, arguing that their potentially disproportionate nature to any actual harm violates due process.  As these issues are flushed out under BIPA, they are certain to affect other states who have already enacted, or may seek to enact, laws regarding use of biometric data.

This post was written by Daniel B. Pasternak of Squire Patton Boggs (US) LLP., © Copyright 2017
For more Labor & Employment legal analysis go to The National Law Review 

Federal Laws Do Not Preempt Connecticut Law Providing Employment Protections to Medical Marijuana Users

Connecticut employees using medical marijuana for certain debilitating medical conditions as allowed under Connecticut law for “qualified users” are protected under state law from being fired or refused employment based solely on their marijuana use. Employers who violate those protections risk being sued for discrimination, according to a recent federal district court decision.

Background

In Noffsinger v. SSC Niantic Operation Company (3:16-cv-01938; D. Conn. Aug. 8, 2017), the federal district court ruled that “qualified users” are protected from criminal prosecution and are not subject to penalty, sanction or being denied any right or privilege under federal laws, such as the Controlled Substances Act (CSA), the Americans with Disabilities Act (ADA) and the Food, Drug and Cosmetic Act (FDCA), because the federal laws do not preempt Connecticut’s Palliative Use of Marijuana Act (PUMA).

PUMA prohibits employers from refusing to hire, fire, penalize, or threaten applicants or employees solely on the basis of being “qualified users” of medical marijuana. PUMA exempts patients, their caregivers and prescribing doctors from state penalties against those who use or distribute marijuana, and it explicitly prohibits discrimination by employers, schools and landlords.

In Noffsinger, Plaintiff was employed as a recreational therapist at Touchpoints, a long term care and rehabilitation provider, and she was recruited for a position as a director of recreational therapy at Bride Brook, a nursing facility. After a phone interview, she was offered the position at Bride Brook and accepted the offer, and she was told to give notice to Touchpoints, which she did to begin working at Bride Brook within a week. Plaintiff scheduled a meeting to complete paperwork and routine pre-employment drug screening for Bride Brook, and at the meeting, she disclosed her being qualified to use marijuana for PTSD under PUMA. The job offer was later rescinded because she tested positive for cannabis; in the meantime, Plaintiff’s position at Touchpoints was filled, so she could not remain employed there.

Litigation

Plaintiff sued for violation of PUMA’s anti-discrimination provisions, common law wrongful rescission of a job offer in violation of public policy and negligent infliction of emotional distress. Defendant filed a Rule 12(b)(6) pre-answer motion to dismiss based on preemption under CSA, ADA, and FDCA. The federal court denied the motion and ruled that PUMA did not conflict with the CSA, ADA or FDCA, because those federal laws are not intended to preempt or supersede state employment discrimination laws. The court concluded that CSA does not make it illegal to employ a marijuana user, and it does not regulate employment practices; the ADA does not regulate non-workplace activity or illegal use of drugs outside the workplace or drug use that does not affect job performance; and the FDCA does not regulate employment and does not apply to PUMA’s prohibitions.

The court’s decision is notable in that it is the first federal decision to determine that the CSA does not preempt a state medical marijuana law’s anti-discrimination provision, and reaches a different result than the District of New Mexico, which concluded that requiring accommodation of medical marijuana use conflicts with the CSA because it would mandate the very conduct the CSA proscribes. The Noffsinger decision supplements a growing number of state court decisions that have upheld employment protections for medical marijuana users contained in other state statutes. These decisions stand in stark contrast to prior state court decisions California, Colorado, Montana, Oregon, and Washington that held that decriminalization laws – i.e., statutes that do not contain express employment protections – do not confer a legal right to smoke marijuana and do not protect medical marijuana users from adverse employment actions based on positive drug tests.

Key Takeaways

Employers may continue to prohibit use of marijuana at the workplace; and qualified users who come to work under the influence, impaired and unable to perform essential job functions are subject to adverse employment decisions. Employers in Connecticut, however, may risk being sued for discrimination for enforcing a drug testing policy against lawful medical marijuana users.  In those cases, employers may have to accommodate off-duty marijuana use, and may take disciplinary action only if the employee is impaired by marijuana at work or while on duty.

It remains unclear how employers can determine whether an employee is under the influence of marijuana at work. Unlike with alcohol, current drug tests do not indicate whether and to what extent an employee is impaired by marijuana. Reliance on observations from employees may be problematic, as witnesses may have differing views as to the level of impairment, and, in any event, observation alone does not indicate the source of impairment. Employers following this “impairment standard” are advised to obtain as many data points as possible before making an adverse employment decision.

All employers – and particularly federal contractors required to comply with the Drug-Free Workplace Act and those who employ a zero-tolerance policy – should review their drug-testing policy to ensure that it: (a) sets clear expectations of employees; (b) provides justifications for the need for drug-testing; and (c) expressly allows for adverse action (including termination or refusal to hire) as a consequence of a positive drug test.

Additionally, employers enforcing zero-tolerance policies should be prepared for future challenges in those states prohibiting discrimination against and/or requiring accommodation of medical marijuana users. Eight other states besides Connecticut have passed similar medical marijuana laws that have express anti-discrimination protections for adverse employment actions: Arizona, Delaware, Illinois, Maine, Nevada, New York, Minnesota and Rhode Island. Those states may require the adjustment or relaxation of a hiring policy to accommodate a medical marijuana user. Additionally, courts in Massachusetts and Rhode Island have permitted employment discrimination lawsuits filed by medical marijuana users to proceed.

Finally, employers should be mindful of their drug policies’ applicability not only to current employees, but also to applicants.

This post was written by David S. Poppick & Nathaniel M. Glasser of Epstein Becker & Green, P.C.  ©2017. All rights reserved.
For more Health Care Law legal analysis go to The National Law Review

What the Demise of DACA Means for Employers

Absent congressional action, the Trump administration’s decision to wind down the DACA program will end the work authorization of DACA beneficiaries.

In a decision announced earlier today by Attorney General Jeff Sessions, the Trump administration rescinded the memorandum that created the Deferred Action for Childhood Arrivals (DACA) program. Concurrently, the Department of Homeland Security (DHS) announced that US Citizenship and Immigration Services (USCIS) will begin a six-month winding-down of the DACA program, which was created in 2012 and through which approximately 800,000 beneficiaries have qualified for employment authorization in the United States.

According to today’s announcements, effective immediately USCIS will no longer accept new or initial applications for DACA benefits, which includes renewable two-year work permits. Applications already received and awaiting adjudication will be reviewed on a case-by-case basis. Individuals who have work permits that will expire prior to March 5, 2018 may file for a two-year extension of their current work authorizations, provided that they do so by October 5, 2017. Individuals with work permits set to expire after March 5, 2018 will not be permitted to extend their employment authorizations and will lose employment eligibility when their current permits expire. Accordingly, all DACA beneficiaries will be without employment authorization by March 5, 2020.

Background

Former US President Barack Obama announced the creation of DACA in June 2012 to remove the threat of deportation for and to provide temporary employment authorization to individuals who were brought to the United States as children and who either entered unlawfully or overstayed their periods of admission. Eligibility for DACA benefits was available to any individual who at the time could show that he or she

  • was under the age of 31 as of June 15, 2012;

  • came to the United States before reaching his/her 16th birthday;

  • had continuously resided in the United States from June 15, 2007 through the present time;

  • was physically present in the United States on June 15, 2012 and at the time of making his/her request for consideration of deferred action with USCIS;

  • had no lawful status on June 15, 2012;

  • was currently in school, had graduated, or had obtained a certificate of completion from high school, had obtained a General Educational Development (GED) certificate, or was an honorably discharged veteran of the Coast Guard or Armed Forces of the United States; and

  • had not been convicted of a felony, a significant misdemeanor, or three or more other misdemeanors, and did not otherwise pose a threat to national security or public safety.

At the time, the Obama administration described the implementation of DACA as a response to congressional failure to pass the Dream Act, which would have provided a path to residency and citizenship for eligible individuals. Proponents of the DACA policy described it as a legitimate exercise of executive branch prosecutorial discretion. Critics described DACA as an unconstitutional overreach of executive authority. The decision by the Trump administration to rescind and wind down DACA now shifts attention back to Congress, where debate concerning so-called “Dreamers” is already part of a larger discussion involving overall immigration limits, the border wall, E-Verify, and other immigration-related issues. Whether Congress will create and pass legislation that provides for continued employment eligibility for DACA beneficiaries is uncertain, as is the question of whether President Donald Trump would sign any such legislation.

What Employers Need to Know

Individuals who have employment authorization based on DACA benefits remain employment authorized until the expiration of their employment authorization documents (EAD). Employers who properly completed Form I-9, Employment Eligibility Verification, at the time of hire will have on file for any DACA beneficiaries the Form I-9 wherein Section 1 indicates that the employee has temporary employment eligibility that expires on the indicated date. As with any other employee who indicates that s/he is a foreign national with temporary employment eligibility, the employer is under an obligation to reverify that individual’s employment authorization by completing Section 3 of Form I-9 in accordance with the guidance in the USCIS Handbook for Employers M-274. Individuals who are unable to provide evidence of their continued employment eligibility may no longer be employed.

Employers are not required to take any other preemptive action with respect to employees who are DACA beneficiaries as their employment authorization continues through the validity date of their EADs. However, for purposes of planning and contingencies, employers may wish to determine who among their workforce is currently employed pursuant to DACA benefits by reviewing Forms I-9 already on file and photocopies already on file of any EAD that was presented and photocopied at the time of Form I-9 completion. An individual whose work authorization is based on DACA benefits will have an EAD that reflects employment eligibility based on Category C33. As a general rule, employers should not take additional measures to affirmatively identify DACA beneficiaries in their workforce, and should consult employment or immigration counsel to address any questions or concerns in this regard.

In addition, DACA beneficiaries who previously received Advance Parole documents that permitted international travel should consult with counsel prior to using a facially valid Advance Parole document for travel. US Customs and Border Protection (CBP) retains the authority to determine the admissibility of any person presenting at the border. Further, USCIS may terminate or revoke Advance Parole at any time.

This post was written by Eric S. Bord of Morgan, Lewis & Bockius LLP. All Rights Reserved  Copyright © 2017

2016 Year In Review: Corporate Governance Litigation and Regulation

2016 year in review2016 saw many notable developments in corporate governance litigation and related regulatory developments.  In this article, we discuss significant judicial and regulatory developments in the following areas:

  • Mergers and Acquisitions (“M&A”): 2016 was a particularly significant year in M&A litigation.  In Delaware, courts issued important decisions that impose enhanced scrutiny on disclosure-only M&A settlements; confirm the application of the business judgment rule to mergers approved by a fully informed, disinterested, non-coerced shareholder vote; inform the proper composition of special litigation committees; define financial advisors’ liability for breaches of fiduciary duty by their clients; and offer additional guidance for calculating fair value in appraisal proceedings.

  • Controlling Shareholders: Delaware courts issued important decisions clarifying when a person with less than majority stock ownership qualifies as a controller, when a shareholder may bring a quasi-appraisal action in a controlling shareholder going-private merger, and when the business judgment rule applies to controlling shareholder transactions. In New York, the Court of Appeals followed Delaware’s guidance as to when the business judgment rule applies to a controlling shareholder squeeze-out merger.

  • Indemnification and Jurisdiction: Delaware courts issued decisions clarifying which employees qualify as officers for the purpose of indemnification and articulating an updated standard for exercising jurisdiction in Delaware over actions based on conduct undertaken by foreign corporations outside of the state.

  • Shareholder Activism and Proxy Access: Shareholder activists remained busy in 2016, including mounting successful campaigns to replace CEOs and board members at Chipotle and Hertz. Additionally, the SEC’s new interpretation of Rule 14a-8 has limited the ability of management to exclude a shareholder proposal from a proxy statement on the grounds that it conflicts with a management proposal.  Also, some companies have adopted “proxy rights” bylaws, which codify a shareholder’s right to directly nominate board members.

I.  M&A

A.Enhanced Scrutiny of Disclosure-Only Settlements

In January 2016, the Delaware Court of Chancery issued an important decision, In re Trulia, Inc. Stockholder Litigation,1 making clear the court’s renewed scrutiny of—and skepticism towards—so-called disclosure-only settlements of shareholder class actions. In Trulia, shareholders sought to block the merger of real estate websites Zillow and Trulia.  After litigation was commenced, the parties agreed to a settlement in which Trulia would make additional disclosures in proxy materials seeking shareholder approval of the transaction in exchange for a broad release of present and future claims by the class and fees for plaintiffs’ counsel.

Chancellor Bouchard rejected the proposed settlement and criticized disclosure-only settlements as generally unfair to shareholders.  Chancellor Bouchard noted that the Court of Chancery had previously expressed concerns regarding the incentives of plaintiff counsel to settle class action claims in which broad releases were granted in exchange “for a peppercorn and a fee”—i.e., for fees and immaterial disclosures that provided little benefit to shareholders.2  According to the Court, “these settlements rarely yield genuine benefits for stockholders and threaten the loss of potentially valuable claims that have not been investigated with vigor.”3

Continue reading at the National Law Review…

ARTICLE BY Nathan Bull, Alejandra Contreras, Jaclyn A. Hall, Jason M. Halper, Hyungjoo Han & Adam Magid of Cadwalader, Wickersham & Taft LLP
© Copyright 2017 Cadwalader, Wickersham & Taft LLP

Importance of Making Sure Your Corporate Status is Up to Date

On September 8, 2015, the United States Civilian Board of Contract Appeals (CBCA) dismissed a claim for lack of jurisdiction when it determined that a contractor was not in good standing at the time of the filing, and thus it could not file the claim.

Western States Federal Contracting, LLC (Western States) filed a protest seeking damages from the Department of Veterans Affairs (VA). The VA filed a motion to dismiss, asserting that Western States did not have the right to sue because it was not in good standing in its state of incorporation due to unpaid taxes in the amount of $981.

On several occasions, the CBCA ordered Western States to show that it was in good standing and had the right to sue. Although Western States was not in good standing in Delaware, where it was incorporated, Western States first attempted to show it was in good standing in Arizona, where it was conducting business. CBCA rejected this showing and ordered Western States to show it was in good standing in Delaware. Western States was unable to make this showing.

After Western States paid its overdue tax bill, and regained its good standing in Delaware, it argued that its good standing status should be retroactive. The CBCA found that Western States did not have standing to pursue its damages claim because it was not in good standing when it filed its appeal.

In addition to the having the capacity to sue and be sued, here are three other primary reasons why keeping your business in good standing status is good for business.

1. Lenders, Vendors, and Others Might Require a Good Standing Certificate

Lenders sometimes require good-standing status in order to approve new financing. They generally view a loss of good standing status as an increased risk which may increase the cost of financing or even limit the ability to obtain financing. Other businesses might require a Certificate of Good Standing for certain transactions, requests for proposals (RFPs) or contracts. Or, you may need one to sell the business, for real estate closings, or for mergers, acquisitions, or expansions. If a business can’t provide a Certificate of Good Standing, it raises a compliance “red flag” that indicates something’s wrong with the company’s state status.

2. Keeping Your Business Good Standing Often Saves Money in the Long Run

If a business doesn’t maintain its good-standing status, the state likely will make an involuntary adverse status change for the company, labeling it as “delinquent,” “void,” “suspended” or “dissolved,” depending on the state and the compliance problem. The most common reasons for losing good standing include a missed annual report, problems regarding the company’s registered agent-and-office, or unpaid fees or franchise taxes. The cost of fixing these mistakes can add up; preventing these mistakes is not expensive. By simply keeping your LLC or corporation in good standing, you could help:

  • Keep overall operating costs lower—filing on time avoids extra fees and fines from sapping your budget.

  • Prevent a state from administratively dissolving the LLC or corporation (and then having to try for a reinstatement) or worse yet, have to start all over again because your LLC or corporation has been permanently “purged”.

  • Maintain the limited liability protection that an LLC, corporation, or other business entity provides.

  • Preserve your rights to your LLC’s or corporation’s legal name in state records.

  • Keep your business poised for sudden contract opportunities, bids, or deals with other companies that require a Certificate of Good Standing to pursue or seal the deal.

3. Good Standing Helps When You Expand Into Other States

When you form your LLC or corporation, the state generally considers you to be “organizing” a business “entity.” Your business entity (e.g., LLC, corporation) has the right to do business in the state of organization only. If you want to expand and do business in other states, you’ll need to register to transact business in those states, too. Usually, the new state(s) ask for a Certificate of Good Standing from your formation state (or your “domestic” state) before they’ll let you register.

Checking Your Good Standing

Still, it’s not always easy to know which regulations and obligations apply to your corporation or LLC. Compliance can seem complicated or costly at times. Regulations change. And it can be difficult to keep track of the various deadlines your company must meet.  However, compliance can be done easily and inexpensively, relative to the cost of noncompliance.  We recommend that at least annually, you or your legal counsel should confirm that your LLC or corporation is in good standing in its state of formation as well as every state with which you are conducting business.

All states allow steps to be taken for a not-in-good-standing corporation or LLC to restore its standing, and that if good standing is restored, generally it will be as if the corporation or LLC had consistently remained in good standing.

Article By Michelle DiCintio of Odin, Feldman & Pittleman, P.C.

© 2015 Odin, Feldman & Pittleman, P.C.