Corporate law Archives - Page 17 of 32

Asset Protection for Doctors and Other Healthcare Providers: What Do You Need to Know?

As a doctor or other healthcare professional, you spend your career helping other people and earning an income upon which you rely on a daily basis—and upon which you hope to be able to rely in your retirement. However, working in healthcare is inherently risky, and a study published by Johns Hopkins Medicine which concluded that medical malpractice is the third-leading cause of death in the United States has led to a flood of lawsuits in recent years. As a result, taking appropriate measures to protect your assets is more important now than ever, and physicians and other providers at all stages of their careers would be well-advised to put an asset protection strategy in place.

What is an asset protection strategy? Simply put, it is a means of making sure that you do not lose what you have earned. Medical malpractice lawsuits, federal healthcare fraud investigations, disputes with practice co-owners, and liability risks in your personal life can all put your assets in jeopardy. While insurance provides a measure of protection – and is something that no practicing healthcare professional should go without – it is not sufficient on its own. Doctors and other healthcare providers need to take additional steps to protect their wealth, as their insurance coverage will either be inadequate or inapplicable in many scenarios.

“In today’s world, physicians and other healthcare providers face liability risks on a daily basis. In order to protect their assets, providers must implement risk-mitigation strategies in their medical practices, and they must also take measures to shield their wealth in the event that they get sued.”

What Types of Events Can Put Healthcare Providers’ Assets at Risk?

Why do doctors and other healthcare providers need to be concerned about asset protection? As referenced above, medical professionals face numerous risks in their personal and professional lives. While some of these risks apply to everyone, it is doctors’ and other medical professionals’ additional practice-related risks – and personal wealth – that makes implementing an asset protection strategy particularly important. Some examples of the risks that can be mitigated with an effective asset protection strategy include:

Medical Malpractice Lawsuits – All types of practitioners and healthcare facilities face the risk of being targeted in medical malpractice litigation. From allegations of diagnostic errors to allegations of inadequate staffing, plaintiffs’ attorneys pursue a multitude of types of claims against healthcare providers, and they often seek damages well in excess of providers’ malpractice insurance policy limits.
Contract Disputes and Commercial Lawsuits – In addition to patient-related litigation, medical practices and healthcare facilities can face liability in other types of civil lawsuits as well. By extension, their owners’ assets can also be at risk, as there are laws that allow litigants to “pierce the corporate veil” and pursue personal liability in various circumstances.
Federal Healthcare Fraud Investigations – Multiple federal agencies target healthcare providers in fraud-related investigations. From improperly billing Medicare or Medicaid to accepting illegal “kickbacks” from suppliers, there are numerous forms of healthcare fraud under federal law. Healthcare fraud investigations can either be civil or criminal in nature, and they can lead to enormous fines, recoupments, treble damages, and other penalties.
Drug Enforcement Administration (DEA) Audits and Inspections – In addition to healthcare fraud investigations, DEA audits and inspections present risks for healthcare providers as well. If your pharmacy or medical practice is registered with the DEA, any allegations of mishandling, diverting, or otherwise unlawfully distributing controlled substances can lead to substantial liability.
Liability for Personal Injury and Wrongful Death in Auto and Premises-Related Accidents – In addition to liability risks related to medical practice, doctors, other practitioners, and healthcare business owners can face liability risks in their personal lives as well. If you are involved in a serious auto accident, for example, you could be at risk for liability above and beyond your auto insurance coverage. Likewise, if someone is seriously injured in a fall or other accident while visiting your home (or office), you could be at risk for liability in a personal injury lawsuit in this scenario as well.

To be clear, an asset protection strategy mitigates the risk of losing your wealth as a result of these types of concerns—it does not mitigate these concerns themselves. The means for addressing medical practice-related concerns is through the adoption and implementation of an effective healthcare compliance program.

Are Asset Protection Strategies Legal?

One of the most-common misconceptions about asset protection is that it is somehow illegal. However, there are various laws and legal structures that are designed specifically to provide ways for individuals and businesses to protect their assets, and it is absolutely legal to use these to your full advantage. Just as you would not expect your patients to ignore treatment options that are available to them, you are not expected to ignore legal tools and strategies that are available to you.

What are Some Examples of Effective Asset Protection Tools for Doctors and Other Healthcare Providers?

Given the very real liability risks that doctors and other healthcare providers face, for those who do not currently have an asset protection strategy in place, implementing a strategy needs to be a priority. With regard to certain issues, asset protection measures need to be in place before a liability-triggering event occurs. Some examples of the types of tools that physicians, healthcare business owners, and other individuals can use to protect their assets include:

1. Maximizing Use of Qualified Retirement Plans

Qualified retirement plans that are subject to the Employee Retirement Income Security Act (ERISA) can offer significant protection. Of course, obvious the limitation here is that these assets placed in a qualified plan will only be available to you in retirement. However, by maximizing your use of a qualified retirement plan to the extent that you are preserving your assets for the future, you can secure protection for plan assets against many types of judgments and other creditor claims.

2. Utilizing Nonqualified Retirement Plans as Necessary

If you operate your medical practice as a sole proprietor, then you are not eligible to establish a qualified retirement plan under ERISA. However, placing assets into a nonqualified retirement plan can also provide these assets with an important layer of protection. This protection exists under state law, so you will need to work with your asset protection attorney to determine whether and to what extent this is a desirable option.

3. Forming a Trust

Trusts are the centerpieces of many high-net-worth individuals’ asset protection strategies. There are many types of irrevocable trusts that can be used to shield assets from judgment and debt creditors. When you place assets into an irrevocable trust, they are no longer “yours.” Instead they become assets of the trust. However, you will still retain control over the trust in accordance with the terms of the trust’s governing documents. Some examples of trusts that are commonly used for asset protection purposes include:

Domestic asset protection trusts (DAPT)
Foreign asset protection trusts (FAPT)
Personal residents trusts
Irrevocable spendthrift trusts

4. Offshore Investing

Investing assets offshore can offer several layers of asset protection. Not only do many countries have laws that are particularly favorable for keeping assets safe from domestic liabilities in the United States; but, in many cases, civil plaintiffs will be deterred from pursuing lawsuits once they learn that any attempts to collect would need to be undertaken overseas. Combined with other asset protection strategies (such as the formation of a trust or limited liability company (LLC)), transferring assets to a safe haven offshore can will provide the most-desirable combination of protection and flexibility.

5. Forming a Limited Liability Company (LLC) or Other Entity

If you are operating your medical practice as a sole proprietor, it will almost certainly make sense to form an LLC or another business entity to provide a layer of protection between you and any claims or allegations that may arise. However, even if you have a business entity in place already—and even if you are an employee of a hospital or other large facility—forming an LLC or other entity can still be a highly-effective asset protection strategy.

6. Utilizing Prenuptial Agreements, Postnuptial Agreements, and Other Tools

Depending on your marital or relationship status, using a prenuptial or postnuptial agreement to designate assets as “marital” or “community” property can help protect these assets from your personal creditors (although debts and judgments incurred against you and your spouse jointly could still be enforced against these assets). Additionally, there are various other asset protection tools that will be available based on specific personal, family, and business circumstances.

7. Gifting or Transferring Assets

If you have assets that you plan to give to your spouse, children, or other loved ones in the future, making a gift now can protect these assets from any claims against you. Likewise, in some cases it may make sense to sell, transfer, or mortgage assets in order to open up additional opportunities for protection.

Ultimately, the tools you use to protect your assets will need to reflect your unique situation, and an attorney who is familiar with your personal and professional circumstances can help you develop a strategy that achieves the maximum protection available.

ARTICLE BY Dr. Nick Oberheiden of Oberheiden P.C.

For more articles on healthcare providers, see the National Law Review Health Law & Managed Care section.

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.}

ARTICLE BY Winstead’s Business Divorce Team.

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

Reporters Are Pushing to Reveal CARES Act Beneficiaries. Is Your Firm Prepared for Tough Questions?

As law firms continue to announce restructuring, furloughs and layoffs in response to the economic emergency caused by the coronavirus, CMOs and marketing directors of small to midsize firms are quickly realizing they may have to contend with a corresponding PR crisis: their firms’ financials are under increased media scrutiny.

That’s because reporters across the legal and mainstream media are pushing the Small Business Administration and Treasury Department to make public the names of companies that accepted assistance through the various programs created through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the Payroll Protection Program and Economic Injury Disaster Loans.

We all saw the stories back in March of billion-dollar-plus companies whose bailouts depleted the PPP fund within days, only to be forced, sheepishly, to return the money after the public outcry. Obviously, midmarket firms are far smaller than those companies in both staff and revenue, but seeing so many powerful corporations take advantage of government support that was intended to help the little guy has made the public skeptical and even hostile toward any business larger than the corner hardware store who received government help.

Add to this inhospitable climate the lack of clear guidance for borrowers and grant recipients on how the money can be used, and all law firms who participated, even those working in good faith to stay well within the bounds of eligibility requirements, could face damage to their reputations. This is particularly true for law firms that predominantly serve small business clients. How will those clients respond if they learn their lawyers received the funding when they themselves struggled to secure it to protect their own business?

One thing we know for sure: this information eventually will be made public, whether the government releases it or it is leaked to reporters at the Washington Post or ALM. Therefore it is critical for CMOs and marketing directors to create a plan for how they will respond if their firm’s name is likely to show up on the list.

Anytime negative media coverage hits, firms have a few options:

Say nothing. Hope for the best. Maybe your firm will show up so far down the list that no one will notice?
Wait for the information to become public and then issue a statement confirming the barest set of facts.
Confirm the facts and make a spokesperson available for interviews.
Proactively disclose your participation in CARES Act programs, explaining why you did so, focusing on the jobs you’re protecting and describing your firm’s plans for weathering the coming months.

While many firms are banking on option #1 and hoping to benefit from chaotic news cycles and short attention spans, there is a risk that they could be underestimating the blowback they may face. If you remain silent while reporters write stories about your firm, your clients and prospects will tend to fill the information vacuum with their own speculation.

The smarter play is to deploy some combination of the other three options, and what that plan looks like will depend on strategic coordination with firm leadership and your answers to a few key questions, such as:

How will your most important clients react to the news that your firm received CARES Act support? Some clients will be relieved to know their law firm is on solid ground and can continue to provide uninterrupted service. Others might question the firm’s underlying financials or, as mentioned above, react with resentment that a business with revenue in the nine figures is displacing a small business. Predicting key clients’ responses to the news will allow you to create a media strategy that defuses criticism and shapes a more positive narrative about why the firm accepted the government support. Think about all the messages you’ve sent over the years about who you are and what you value as a firm. If leadership’s decision-making here was consistent with those messages and values, you’re in good shape.

Has your firm eliminated jobs, and does it plan to? One of the most important and well publicized terms of the PPP is that, in order for the loans to be forgivable, 75% of the funding must be used to cover payroll. This is intended to protect as many jobs as possible. That doesn’t necessarily mean that moving ahead with job eliminations violates the terms of the loan, which can be repaid, in full or in part, at a 1% interest rate. But taking PPP funds and cutting jobs will raise eyebrows. Timing here is key. Did your firm lay people off and then take the funding? Could that be perceived as funneling the benefits to members of the firm who already receive the highest compensation? These are the kinds of questions reporters will be asking; leaders need to be prepared to answer them.

Has your managing partner and other members of the c-suite agreed to sacrifice some of their own compensation? If your firm decides to take the most proactive course and disclose its status, it’s crucial to use that opportunity to tell the most compelling story of why you did so. Of course, every managing partner has sent out a reassuring email to the firm in the past few weeks that says some version of “We’re all in this together,” but this message is a lot more meaningful when leadership can point to actual sacrifices they’ve made to try to save people’s jobs.

One positive development around the CARES Act programs is that now, some weeks after the disastrous rollout and the better-managed second round of PPP loans, businesses are no longer in competition with each other to get needed support. The sense that this is a zero-sum game has subsided, and that’s good news for midsize law firms that may need to disclose their participation. Still, marketers must think carefully about how to engage with the media on this sensitive and still-evolving issue. Don’t wait until a reporter calls to decide what you’re going to say.

ARTICLE BY Debra Pickett at Page 2 Communications.

For more on the SBA PPP Loan, see the National Law Review Coronavirus News section.

Board Oversight in the Age of COVID-19: Part Four

Part 4 of a weekly series detailing approaches that independent board members are utilizing to address coronavirus-related matters and highlighting emerging issues. Part 1, Part 2 and Part 3 of the series may be accessed on our website.

The surreal nature of the current coronavirus environment in the United States continues. The number of new cases appears to have peaked in New York City and the Bay Area, while the S&P 500 ended the week down only about 13.5% year to date, and is higher now than on January 1, 2019. Yet, unemployment claims surged and are approximately 8.5 times higher than levels from the 2008–2009 financial crisis, and scores of businesses across the country remain shuttered and face bankruptcy. So the question of the past four weeks remains — where exactly do we go from here?

What Are Boards Doing Now?

Board Communications. Boards continue to evolve the nature of the periodic updates they are receiving. In addition to hearing about fund performance and operational matters, now some are including presentations from those asset management employees that focus on macro-economic themes, including the head of fixed-income research or those in similar positions.

Future Board Meetings. Boards continue to evaluate their June board schedules, and more are expecting to hold these meetings virtually. Some are also considering the need to hold additional telephonic board meetings to address items already deferred from meeting agendas in March, and expected to be deferred from June meeting agendas, as boards continue to assess the maximum length and most efficient structure of virtual board meetings.

15(c) Requests. Boards and their independent counsel continue to evaluate additional questions for 15(c) Request Letters to address COVID-19 matters. While the nature and extent of these requests is dependent on the types of periodic updates the board is already receiving, most are expecting to request and receive some form of “bring down” update from Fund management closer to the date of the meeting during which 15(c) renewals will be considered.

What’s Next – Emerging Issues

Below are some emerging issues that came to light over the past week, which boards may want to consider as they continue to exercise their fiduciary duties.

Liquidity: Some complexes are filing Form N-LIQUID with respect to funds that have breached the 15% limit on illiquid securities, and related reports are being made to the board, along with a remediation plan. Breaches may be due to a more careful review of holdings or to changes in the character of holdings. Alternatively, some complexes are reporting issues with liquidity categorizations provided by third party service providers causing Liquidity Risk Program Administrators to consider overriding or challenging the liquidity classifications provided. The SEC staff has been open and willing to discuss such filings and related matters, and we are aware that OCIE staff has been participating on some of these calls.

Service Providers: As the impact of the virus is expanding globally, boards are considering the types of risks that may be presented by service providers with operations in less developed countries, including India, where BCP plans may be less robust, do not contemplate “work from home” opportunities for all employees and may be harder to implement. This may be a heighted concern for ETFs, as these funds tend to have more unaffiliated service providers with offshore operations.

Index providers: Fund management has noted the benefit of advance communication with index providers to address the potential impact of market halts or bankruptcies of companies included in an index. While most index rebalances have been suspended, the impact of other market developments remains.

Back Office Issues: Fund management continues to consider operational matters, including the speed and efficiency of processing customer orders and the working relationship with financial printers, where production delays and other operational concerns are occurring.

Borrowing Relief: So far, we are not seeing many Funds utilizing this relief to access liquidity, as fund management considers operational issues.

Closed End Funds: The advantages of holding virtual annual shareholders meetings are being weighed against potential disadvantages, including that certain proxy solicitation firms may object to hosting a virtual meeting if it is contested and concerns that activists could take advantage of this format to hijack the meeting.

Interval Funds: Boards are closely monitoring management’s preparation for upcoming periodic repurchase offers to assess liquidity and valuation issues. In addition, boards are discussing whether repurchase amounts should be set at levels that seek to clear out shares tendered or to prorate, and considering the impact of such decisions on the management of the portfolio, continuing sales and liquidity for future repurchase offers.

ARTICLE BY Marguerite C. Bateman, Kimberly Karcewski Vargo, Cathy Gonzales O’Kelly and Bruce A. Rosenblum of Vedder Price.

For more on COVID-19 impact on various industries, see the Coronavirus News section of the National Law Review

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:

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

ARTICLE BY Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP.

More on director board quotas via the National Law Review Corporate & Business Organization Law section.

Healthy Habits for You and Your Company: File Your Annual Reports, Replace Your Air Filters, and Renew Your DMCA Agent Registration

Businesses and people alike each have recurring routine tasks they need to perform to stay in good shape. Every year we prepare corporate filings, undergo our necessary medical examinations, and file our taxes.¹ And starting in December 2019, companies began adding a new task to this checklist: renewing their DMCA Agent registration. Is your company prepared?

The DMCA can protect your website from its users’ copyright infringement.

Anyone with a website that allows users to post content to the site, even in a simple comment section, risks liability for copyright infringement based on those users’ posts. The Digital Millennium Copyright Act (“DMCA”) helps website owners mitigate that risk. If you operate a site and you comply with the safe harbor criteria, the DMCA shields you from copyright liability. The DMCA isn’t limited to internet service providers; its safe harbor offers websites an immensely valuable protection against costly and lengthy copyright infringement lawsuits. A registered Agent is only one of the many required elements needed for DMCA compliance, but it’s a crucial requirement that’s easy to overlook.

Congress passed the DMCA in 1998 to strike a balance between protecting the dynamic creativity of internet users and enforcing federal copyright protection. And regardless of whether you think Congress managed to find that balance, the DMCA sets the standard for statutory copyright enforcement on the internet—users ignore it at their peril. Websites that don’t comply with the DMCA must² screen every comment and post submitted to the site by anyone for potential copyright violations, because the site can be held directly liable for any infringing submissions.³ On the other hand, DMCA compliance makes the website essentially immune from its users’ infringement.

Social media networks are the most obvious beneficiaries of DMCA safe harbor protection. Can you imagine if Facebook or Twitter needed to pre-screen every single post or tweet before it went live? In exchange for this safe harbor protection, the DMCA requires businesses to (among other things) create and enforce copyright takedown procedures for copyright holders to use when they spot potentially infringing content on the website.⁴

The Designated Agent is a key part of DMCA compliance.

Every organization that seeks safe harbor protection needs to designate an Agent as the organization’s point of contact for takedown notices. The designation is submitted to the U.S. Copyright Office, where it’s published on a searchable database. The designated Agent (which can be one person or an entire department) is then responsible for receiving all of the company’s DMCA takedown notices and then ensuring that they are acted upon.

Each Agent designation is effective for three years. Whenever the designated Agent’s information is updated with the Copyright Office, the three-year clock starts over. But if a three-year period ends without an update or renewal, the designation becomes invalid and the organization’s DMCA safe harbor protection ends with it.

You don’t want to forget about your renewal and you shouldn’t wait three years between checkups.

Fortunately, it’s pretty simple to figure out when your company’s Agent designation will expire. You can check the date that your organization’s Agent was last updated by searching the DMCA Designated Agent Directory and clicking on the name of the Service Provider.⁵ Add three years to the displayed effective date, and that’s your deadline.

You could, in theory, set a calendar reminder for every three years and forget about the DMCA in the interim, but we don’t recommend it. What if your Agent takes a leave of absence or leaves the company? What if your company reorganizes and the designated department is renamed (or gets lost in the transition)? We recommend that you check your Agent’s status at least once a year, just to be safe. It only takes a moment to do.

When in doubt, check with your attorneys to make sure that your rights are still being protected.

There’s much more to DMCA protection beyond Agent registration. Copyright law is constantly evolving—especially when it comes to the internet. DMCA safe harbor protection has many requirements beyond just having a designated Agent, and there’s a lot at risk if your company doesn’t qualify for the safe harbor. You can’t “undo” a gap in safe harbor protection, but you can close the door on future liability. That’s a door you want to keep shut. As your business’s online presence grows, so does its exposure to potential liability.

So when you’re checking your DMCA Agent registration, don’t just tick the box and wait until the next year. Take the time to consider your DMCA protocols. If your company’s DMCA compliance protocols aren’t up to date and compliant, your safe harbor is in jeopardy. What about the company’s future needs? If your company’s online presence will be growing, is your designated Agent capable of handling an increased caseload of takedown notices? This is an area where it’s better to be safe than sorry.

References:

¹This article is not meant to provide specific legal or medical advice. If you would like more specific legal advice, please contact an attorney. If you’re looking for specific medical advice, you’re reading the wrong article.
²Or at least they really, really should.
³ Damages for copyright infringement are no joke. A successful plaintiff can receive their actual damages while also forcing the infringer to disgorge its profits from the infringement, or can alternatively obtain statutory damages of up to $150,000 per infringed work.
⁴ Many articles could be (and have been) written on abusive and overzealous DMCA takedown notices, especially since the development of automated takedown services that can act without human interaction. For brevity’s sake, this article won’t dive into those deep waters.
⁵ If you run a website, you should assume that you’re a service provider under the DMCA.

ARTICLE BY Jason Cassidy and Daniel S. Herder of Ryley Carlock & Applewhite, A Professional Corporation.

For more on the Digital Millennium Copyright Act, see the National Law Review Intellectual Property law section.

FTC Announces 2020 Thresholds for Merger Control Filings Under HSR Act and Interlocking Directorates Under the Clayton Act

The Federal Trade Commission (“FTC”) has announced its annual revisions to the dollar jurisdictional thresholds in the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”); the revised thresholds will become effective 30 days after the date of their publication in the Federal Register. These changes increase the dollar thresholds necessary to trigger the HSR Act’s premerger notification reporting requirements. The FTC also increased the thresholds for interlocking directorates under Section 8 of the Clayton Act, effective as of January 21, 2020.

Revised HSR Thresholds

Under the HSR Act, parties involved in proposed mergers, acquisitions of voting securities, unincorporated interests or assets, or other business combinations (e.g., joint ventures, exclusive license deals) that meet certain thresholds must report the contemplated transactions to the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”) unless an exemption applies. The parties to a proposed transaction that requires notification under the HSR Act must observe a statutorily prescribed waiting period (generally 30 days) before closing. Under the revised thresholds, transactions valued at $94 million or less are not reportable under the HSR Act.

A transaction closing on or after the date the revised thresholds become effective may be reportable if it meets the following revised criteria:

Size of Transaction Test

The acquiring person will hold, as a result of the transaction, an aggregate total amount of voting securities, unincorporated interests, or assets of the acquired person valued in excess of $376 million;

Size of Person Test

One party (including the party’s ultimate parent entity and its controlled subsidiaries) has at least $188 million in total assets or annual sales, and the other has at least $18.8 million in total assets or annual sales. If the acquired party is not “engaged in manufacturing,” and is not controlled by an entity that is, the test applied to the acquired side is annual sales of $188 million or total assets of $18.8 million.

The full list of the revised thresholds is as follows:

Original Threshold	2019 Threshold	2020 Revised Threshold (Effective 30 days after publication *in the Federal Register)*
$10 million	$18 million	$18.8 million
$50 million	$90 million	$94 million
$100 million	$180 million	$188 million
$110 million	$198 million	$206.8 million
$200 million	$359.9 million	$376 million
$500 million	$899.8 million	$940.1 million
$1 billion	$1,799.5 million	$1,880.2 million

The filing fees for reportable transactions have not changed, but the transaction value ranges to which they apply have been adjusted as follows:

Filing Fee	Revised Size of Transaction Thresholds
$45,000	For transactions valued in excess of $94 million but less than $188 million
$125,000	For transactions valued at $188 million or greater but less than $940.1 million
$280,000	For transactions valued at $940.1 million or more

Note that the HSR dollar thresholds are only part of the analysis to determine whether a particular transaction must be reported to the FTC and DOJ. Failure to notify the FTC and DOJ under the HSR Act remains subject to a statutory penalty of up to $43,280 per day of noncompliance.

Revised Thresholds for Interlocking Directorates

Section 8 of the Clayton Act prohibits one person from simultaneously serving as an officer or director of two corporations if: (1) the “interlocked” corporations each have combined capital, surplus, and undivided profits of more than $38,204,000 (up from $36,564,000); (2) each corporation is engaged in whole or in part in commerce; and (3) the corporations are “by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”¹

Section 8 provides several exemptions from the prohibition on interlocks for arrangements where the competitive overlaps “are too small to have competitive significance in the vast majority of situations.”² After the revised thresholds take effect, a corporate interlock does not violate the statute if: (1) the competitive sales of either corporation are less than $3,820,400 (up from $3,656,400); (2) the competitive sales of either corporation are less than 2 percent of that corporation’s total sales; or (3) the competitive sales of each corporation are less than 4 percent of that corporation’s total sales.

The revised dollar thresholds for interlocking directorates of $38,204,000 and $3,820,400 will be effective upon publication in the Federal Register; there is no 30-day delay as there is for the HSR thresholds.

1 15 U.S.C. § 19(a)(1)(B).

2 S. Rep. No. 101-286, at 5-6 (1990), reprinted in 1990 U.S.C.C.A.N. 4100, 4103-04.

ARTICLE BY Joel Mitnick and Ngoc Pham Hulbig of Cadwalader, Wickersham & Taft LLP.

For more on Hart-Scott-Rodino thresholds, see the National Law Review Antitrust Law and Trade Regulation section.

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:

Whether the corporation is a publicly held domestic or foreign corporation with its principal executive office located in Illinois
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
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
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.

ARTICLE BY the Business and Finance Group at Horwood Marcus & Berk.

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

California Board Gender Quota Law Challenged In Federal Court

Cydney Posner at Cooley LLP wrote last week about a new challenge to California’s Board Gender Quota law. The lawsuit, Creighton Meland v. Alex Padilla, Secretary of State of California, was reportedly filed in federal district court in California by a shareholder of OSI Systems, Inc. According to OSI’s most recently filed Form 10-Q, the company is incorporated in Delaware, its principal executive offices are in California, and its shares are traded on The Nasdaq Global Select Market. The lawsuit alleges violation of the equal protection clause of the Fourteenth Amendment and seeks declaratory and injunctive relief.

As this case progresses, one question might be whether the plaintiff’s claim is direct or derivative. OSI is not named as a party to the lawsuit and the plaintiff alleges that the law injures his “right to vote for the candidate of his choice, free from the threat that the corporation will be fined if he votes without regard to sex”. The Delaware Supreme Court’s test for whether a stockholder’s action for breach of fiduciary duty is derivative or direct asks two questions:

“Who suffered the alleged harm–the corporation or the suing stockholder individually–and who would receive the benefit of the recovery or other remedy?”

Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). Although the corporation will be fined and the fine suffered by all of the stockholders, the plaintiff is alleging that he is being injured by being denied the freedom to vote without regard to sex. Presumably, that injury would be removed if the law is enjoined.

Interestingly, OSI does not appear in the California Secretary of State’s listing of SB 826 corporations published earlier this year. According to the proxy statement filed by OSI last month, all of the current directors are men, but a female has been nominated for election at the upcoming meeting.

ARTICLE BY Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP.

More on Corporate Board diversity rules on the Corporate & Business Organizations law page of the National Law Review

How to Write Gender-Neutral Contracts

“Men” is not synonymous to “person”, nor does “he” mean “she.” It is important for contractual language to be not only precise but also accurate. Many agreements govern multiple individuals, some of whose gender is unclear or variable. This article will give you advice and guidance on how to adjust contract language to be gender-neutral. As society moves towards treating all genders equally, legal contracts should too.

What is gender?

Gender is the socially constructed characteristics of “male” and “female” and includes norms, roles, and relationships of and between groups of men and women.

What is gender-neutral?

Merriam-Webster defines gender-neutral as “not referring to either sex but only to people in general.”

Why it matters:

Conversations around gender and gender-neutrality are becoming more and more mainstream. Thomson Reuters reported that in the past year (2018), there has been an increase in the number of clients requesting gender-neutral documents. Startups are at the forefront of change and industry disruption, so it is logical that they stay ahead of the trend.

As you operate business, there are a number of form contracts that you will use regularly. These form contracts are agreements your attorney drafts with brackets and spaces for you to update depending on each use. For example, common form contracts include (1) Employee Offer Letters, (2) Confidentiality, Nondisclosure, and Assignment of Inventions Agreements, (3) Equity Incentive Plan, (4) Stock Option Grants, and (5) Restricted Stock Purchase Agreement.

Traditionally, these form contracts used masculine pronouns. It used to be that progressive contracts simply did not use “he” but rather “she” or “he or she.” As Thomson Reuters reported:

“In the old days it was almost certain that your senior employees would be men; a contract would be drafted accordingly, and then the ladies would be given a metaphorical pat on the head by including in the boilerplate the reassurance that references to the male gender should be interpreted to include the female.”

Now, the shift towards non-gendered pronouns and away from binary choices of “he” or “she” means attorneys need to adopt new drafting techniques. As entrepreneurs and leaders of your own business, you can encourage this shift.

What to do:

Replace the masculine pronoun with an article, for example using “the position” in place of “his position”

Use a neutral word or phrase such as “person” or “individual”
Define the term and repeat that noun
Rewrite the sentence in order to eliminate the pronoun completely

What to be wary of (for now):

Using the singular “they” and its other grammatical forms to refer to indefinite pronouns and singular nouns, for example using “they” in place of “she” and “them,” “themselves,” and “their” in place of “her,” “herself,” and “hers.”
1. Part of drafting a contract is using precise language. While there is rising social acceptance of the use of singular “they,” a court has not ruled on its interpretation in contracts. Likely, it will take legal precedent in Delaware interpreting such use to accept the use of the singular “they.”
2. This same logic applies to the use of the singular “ze.”
Using the plural “they.”
1. Similarly, the use of the plural can be misleading. For an employment offer letter, for instance, the offer is not to a number of people but rather to one individual.
A catch-all clause like “Unless the context otherwise requires, a reference to one gender shall include reference to the other genders”
1. It was offensive when the use of male pronouns were supposed to encompass women and men. Such use effectively reinforced gender stereotypes. It is equally offensive when it is used to refer to all genders.

Gender neutrality facilitates accurate, precise contracts. It is important that an individual who is subject to a contract feel as though the contract applies to that individual. In addition, that individual should also feel respected.

ARTICLE BY Kati I. Pajak of Mintz.

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

Category: Corporate law

Asset Protection for Doctors and Other Healthcare Providers: What Do You Need to Know?