Category: Corporate law

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:

  1. Say nothing. Hope for the best. Maybe your firm will show up so far down the list that no one will notice?
  2. Wait for the information to become public and then issue a statement confirming the barest set of facts.
  3. Confirm the facts and make a spokesperson available for interviews.
  4. 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.

© 2020 Page2 Communications. All rights reserved.

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.

© 2020 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:

  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

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:

1 This 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.
2 Or 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.

Copyright © 2020 Ryley Carlock & Applewhite. A Professional Association. All Rights Reserved.

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;

or

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 $94million but not more than $376 million, and the Size of Person thresholds below are met.

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.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

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:

  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 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.

© 2010-2019 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”

  1.  Use a neutral word or phrase such as “person” or “individual”

  2. Define the term and repeat that noun

  3. Rewrite the sentence in order to eliminate the pronoun completely

What to be wary of (for now):

  1. 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.”

  2. 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.

  3. 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.

©1994-2019 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

ARTICLE BY Kati I. Pajak of Mintz.

Corporate Closedown Does Not Shield Boss From Potential TCPA Culpability

So, your corporation is sued under the Telephone Consumer Protection Act (TCPA). One defense strategy if you are the founder and sole owner: cease operations, terminate your employees, close your offices, formally dissolve the corporation and live in British Columbia. No potential individual exposure for TCPA violations in Alabama – right?

Not so fast, said the United States District Court for the Northern District of Alabama in Eric K. Williams v. John G. Schanck. 2019 U.S. Dist. LEXIS 151778, Case No.:5-15-cv-01434-MHH, decided September 6, 2019. Mr. Williams originally sued Stellar Recovery, Inc., a company founded and solely owned by Schanck, for collection calls made to the plaintiff’s cellphone in Alabama. Mr. Schanck then told the Court in a telephone conference call that “Stellar Recovery had dissolved and did not intend to participate in this lawsuit.” Mr. Williams moved to amend his complaint to add Mr. Schanck individually and Judge Madeline Hughes Haikala granted his motion.

But, wait a minute, countered Mr. Schanck. Service of the amended complaint on me in Vancouver, British Columbia does not afford the Court personal jurisdiction. Furthermore, Mr. Williams is too late because he added me as a defendant after the four-year TCPA statute of limitations had passed. So, Mr. Schanck moved to dismiss under Federal Rules of Civil Procedure (FRCP) 12(b)(2) and 12(b)(6), respectively.

The Court was unconvinced on both counts.

First, on the jurisdictional issue, the Court examined whether Mr. Schanck’s alleged contacts with the State of Alabama were sufficient to satisfy specific jurisdiction (i.e., “contacts within the forum state give rise to the action before the court”). Mr. Williams asserted that Mr. Schanck “guide[d], over[saw], and ratifie[d] all operations of…Stellar” and knew of the “‘violations of the TCPA alleged’ in the complaint and ‘agreed to and ratified such actions of his company.’” Indeed, throughout the complaint, Mr. Williams contended that “Stellar acted on behalf of Defendant Schanck.”

Mr. Schanck did “not challenge the factual allegations concerning his ownership interest in Stellar or his managerial control over the company.” Rather, he contended that the “corporate shield doctrine” precluded the Court from exercising jurisdiction over him. However, Judge Haikala noted that the “express language of the TCPA allows actions against corporate officers who authorize TCPA violations” and Mr. Williams “has alleged just that – that Mr. Schanck directed and authorized the alleged TCPA violations that purportedly occurred in this District.” Motion to dismiss for lack of personal jurisdiction under FRCP 12(b)(2) denied.

Second, the Court also dispensed with the statute of limitations issue. The Court concluded that the claim against Mr. Schanck as an individual arose out of the “conduct, transaction or occurrence set forth or attempted to be set forth in the original pleading.” Under such circumstances, the claims in the amended complaint could relate back to Mr. Williams original complaint.

But, Mr. Schanck argued, Mr. Williams knew about him and his status in Stellar yet chose only to sue the latter. Therefore, there could have been no mistake on his part about the “identity” of the proper party (i.e., Mr. Schanck) to sue and the FRCP 15(c) requirements regarding the timing of serving Mr. Schanck as a new defendant were not met.

Correcting Mr. Schanck’s application of that requirement, the Court noted that the issue was not about Mr. Williams knowledge, but “whether Mr. Schanck himself knew or should have known that he would be named as a defendant ‘but for an error’” by Mr. Williams. And at this stage, “if Mr. Williams contentions about Mr. Schanck’s involvement with Stellar prove correct,” then Mr. Schanck “reasonably should have known that he would be named as a defendant but for an error.” Motion to dismiss for failure to state a claim under FRCP 12(b)(6) denied.

So some TCPAWorld lessons learned about the solidity of the “corporate” shield when one person allegedly runs the company show.

© Copyright 2019 Squire Patton Boggs (US) LLP

“Broken Link in the Chain of Liability”: MTCA Decision Highlights Intricacies of Corporate Law

Last week, in a decision highlighting the overlay of environmental and corporate law, a Washington federal district court dismissed claims seeking remediation costs, attorneys’ fees, and a declaratory judgment on liability under the Model Toxics Control Act (MTCA) by the current owner of a service station in Cle Elem against Chevron Corp., Chevron USA, Inc., and unnamed “predecessor companies and subsidiaries.” Short Stop Shell, LLC v. Chevron Corp., No. 1:19-cv-03103-RMP, Dkt. No. 43 (E.D. Wash. Aug. 27, 2019) (Order Granting in Part & Denying in Part Defendants’ Mot. to Dismiss & Denying Plaintiff’s Mot. for Summ. J.). The court rejected the allegation that the Chevron entities were corporate successors to Texaco, Inc., which was believed to be responsible for contamination at the service station.

The court’s findings reflect a limitation on the sweeping liability under MTCA and similar statutes, the relevance of corporate transactions in minimizing such liability, and the potential difficulty of identifying proper corporate defendants before filing lawsuits for cost recovery at contaminated sites.

Site Background – Petroleum Contamination at Service Station

The claims alleged that, until 1984, Texaco owned and operated the service station where contamination had been disposed or released at the property. In 2000, Texaco agreed to indemnify an owner of the service station for “actual petroleum contamination originating from the Property in excess of clean up levels [that] originated from Texaco’s operation of a gasoline … facility … or from deliveries of motor fuels to the station ….” Then, in 2001, Chevron Corp. acquired Texaco in a “reverse triangular merger.”

The plaintiff acquired the property in 2012, decommissioned several underground storage tanks alleged to be leaking, and incurred over $275,000 in remediation costs.

Court Decision – “Broken Link in the Chain of Liability”

Ultimately, the court concluded that the “reverse triangular merger,” in which Texaco merged with a subsidiary of Chevron Corp., did not cause Chevron to assume Texaco’s liabilities. Rather, Texaco remained a “separate entity” as a Chevron subsidiary and Chevron was not a successor to Texaco’s liabilities. The Court found further that suing unnamed defendants was a “disfavored practice” and agreed to strike the “John Doe”-style pleading that included a general reference to the defendants’ “predecessor companies and subsidiaries.”

The court also rejected a judicial estoppel theory that the defendants had already accepted liability “through their actions,” which included interactions between Chevron EMC, a Chevron subsidiary “that manages environmental matters for affiliated companies, including Texaco,” and Ecology. Notably, the court determined that even if, in an ambiguous exchange with Ecology in 2003, Chevron had accepted “potentially liable person status,” that such an acceptance did not amount to a “representation” that the defendants had “expressly assumed Texaco’s liabilities.”

However, litigation is likely to continue. In order to “properly allege a theory of liability,” the court granted the plaintiff leave to incorporate allegations in an amended complaint that the defendants “delivered gasoline products to tanks” that they “knew were leaking.”

© 2019 Beveridge & Diamond PC
For more in environmental contamination, see the National Law Review Environmental, Energy & Resources law page.