Corporate law Archives - Page 21 of 32

Recent Trends in ESOP Litigation — Employee Stock Ownership Plan

There has been a lot of attention in the world of employee ownership plans to the 2014 Supreme Court Decision in Fifth Third Bancorp v. Dudenhoeffer. In that case, the Court ruled that “the law does not create a special presumption favoring ESOP (Employee Stock Ownership Plan) fiduciaries. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.” This ruling overturns the so-called Moench rule that has been applied to plan fiduciaries for certain 401(k) plans investing in company stock and ESOPs. Moench gave a presumption of prudence to plan fiduciaries unless they knew or should have known the company was in dire financial circumstances.

As important as this ruling is, it actually has very little if any impact on the vast majority of ESOPs, over 95% of which are in closely held companies. The ruling is far more important for public companies with 401(k) plans or ESOPs that offer company stock as an investment choice.

First, it is important to distinguish between a statutory ESOP and what courts came, by a rather tortured logic, to call ESOPs—namely any defined contribution plan that had company stock in it. ESOPs were created as part of ERISA in 1974 and given not just the right but the requirement to invest primarily in employer securities. ESOPs were specifically created to encourage employers to share ownership with employees, and over the years Congress has given these plans a number of special tax benefits. Because fiduciaries are required to invest primarily in employer stock, standard fiduciary obligations concerning diversification in retirement plans would be impractical. The Moench presumption was created in a case involving a statutory ESOP.

The large majority of “stock drop” cases, however, have not involved statutory ESOPs, but 401(k) plans that either allowed employees to invest in company stock and/or matched in company stock. Some of these plans required fiduciaries to offer company stock; others made it optional. Defense attorneys argued that these plans were actually “ESOPs” too and were subject to the Moench presumption. Most district and circuit courts bought that argument, although some applied it only when company stock was required. That, I think, was unfortunate and inappropriate. 401(k) plans were never meant to be vehicles for sharing corporate ownership. They are intended to be safe, cost-effective retirement plans. ESOPs are a specific statutory creation with a specific set of rules and purposes.

When reading the Supreme Court decision, as well as the arguments made before the Court, it is also clear that the justices were thinking entirely of public companies. There is virtually no discussion of ESOPs in closely held companies, and the key tests that the Court now requires plaintiffs to meet in stock drop cases largely do not apply to privately held companies. Since the original Moench decision in 1995, we at the National Center for Employee Ownership have only found two cases in closely held companies that were decided even in part based on that presumption.

The Court’s decision in the Fifth Third case laid out three key hurdles for plaintiffs to overcome to prevail. The first states that it is insufficient to argue that fiduciaries should be able to outguess the market based on publicly available information. The second issue is whether decisions to sell company stock in light of inside information could be prudently taken in light of their potential impact on the prices of company stock. Fiduciaries are also not obligated to violate securities laws. Finally, the Court said plaintiffs must allege a reasonable alternative course of action.

In ESOPs in closely held companies, fiduciaries have few options that could form the basis for plaintiffs arguing a plausible course of action. First, the law requires that ESOPs be primarily invested in company stock. Second, the only liquidity options are a company buy-back of shares, which is probably impractical if the company is already in financial distress, or a sale of the company. But a fire sale like that would mean an even lower price for plan participants. As noted in more detail below, none of the presumption of prudence cases has concerned closely held companies, probably because of these issues. Also note that Dudenhoeffer distinguished between relying on inside information to sell company stock (which it classified as illegal insider trading and thus not required by the duty of prudence) and refraining from buying more company stock (which might be a fiduciary violation). The purchase of shares by an ESOP is already subject to substantial statutory and case law requirements, and this decision is unlikely to change the way these cases are contested.

As a result of all this, the prudence presumption has so far not been an issue for closely held ESOP companies in court, and it is likely to continue not to be as plaintiffs would have a hard time indicating what fiduciaries should have done. Instead, cases will continue to focus, as they have been before where there are alleged problems, on the initial sale price of the shares of the ESOP, which is determined by the trustee and relies on an outside appraiser. It is possible that the Dudenhoeffer decision may embolden the plaintiffs’ bar to initiate more lawsuits, but we would expect that to continue to be primarily in public companies.

Beyond ***Fifth Third*—ESOPs Law for the 97%**

Valuations

The 97% of ESOP companies that are closely held will not be much affected by the Supreme Court decision, but the last 25 years of litigation on ESOPs reveals some important trends that should be considered.

In an analysis by the NCEO of the 224 decisions courts have made on ESOPs in closely held companies between 1990 and 2014, we found that many of the suits involved plan management issues, such as failing to make distributions. The most significant issues, however, concerned valuation, indemnification, and fiduciary duties.

The valuation decisions are mixed. Courts have focused more on process than outcome. Some processes are clearly unacceptable, such as not hiring an independent appraiser or influencing an appraiser’s report. Several key best practices have emerged. A recent settlement between the Department of Labor and GreatBanc Trust in a valuation case (Perez v. GreatBanc Trust Co., 5:12-cv-01648-R-DTB (C.D. Cal., proposed settlement agreement filed June 2, 2014) set out terms for GreatBanc to follow in future engagements that does a good job of summarizing the trends in the courts.

Key points in the settlement included:

Trustees must be able to show that they vetted the independence and qualifications of appraisers carefully.
Trustees must show that they have assessed the reasonableness of financial projections given to the appraiser. Some valuation advisors include disclaimers in their engagement agreements that the DOL reads as too broad, in that read literally the valuation advisor can rely on any information it receives from the plan sponsor company without inquiring as to its reasonableness, no matter how unreasonable the information. The use of these disclaimers will not absolve the trustee of responsibility and the trustee should document how the appraisal firm has analyzed just how reliable projections are.
The trustee should consider how plan provisions, such as those relating to puts, diversification, and distribution policies, might affect the plan sponsor’s repurchase obligation.
The trustee should consider the company’s ability to service the debt if projections are not met.

Documentation should be detailed. While documentation of the valuation analysis may appear to be burdensome, making the effort to document the valuation review process at the time of the transaction can only benefit the valuation advisor and the trustee in later years.

Indemnification

The other significant legal development for closely held company ESOPs in recent years concerns indemnification, ironically also in the case involving Sierra Aluminum and GrratBanc. In Harris v. GreatBanc Trust Co., Sierra Aluminum Co., & Sierra Aluminum ESOP, No. 5:12-cv-01648-R (C.D. Cal. Mar. 15, 2013), a district court ruled that GreatBanc could be indemnified for its role as the ESOP fiduciary. The decision is significant in that it occurred in the one circuit (the Ninth) that has taken the position that indemnification should not be allowed, especially in a 100% ESOP. In Johnson v. Couturier, 572 F.3d 1067 (9th Cir. 2009), the court ruled that ESOP plan assets were not distinguishable from company assets. If plaintiffs prevailed but the company’s indemnification had paid out millions in legal fees to defendants (as was the case here), the plaintiffs would have a very hollow victory. In that same circuit, in Fernandez et al. v. K-M Industries Holding Co., No. C 06-7339 CW (N.D. Cal. Aug. 21, 2009), a court that an indemnification agreement did not apply in the case of a 42% ESOP because if alleged ERISA violations concerning an improper valuation were sustained, the indemnification would harm the value of participant stock.

These decisions seemed to make indemnification largely moot, but in the GreatBanc case the court ruled that regulations (29 C.F.R. § 2510.3-101(h)(3)) of ERISA Section 410 state that in the case of an ESOP, the plan’s assets and the company assets are treated as separate. In Couturier, the Harris court said, the company had already been liquidated and was thus no longer an operating company. The court also distinguished this case from Couturier in that in Couturier, plaintiffs had already shown likelihood to prevail on fiduciary charges, something that could not be said of this case. Finally, the Couturier case involved no exceptions for breaches of fiduciary duty, as was the case here, but only for “gross negligence” and “willful misconduct.”

Other courts in other circuits have not weighed in on this issue. Certainly a good argument can be made that if indemnification means that plaintiffs will lose a substantial amount of a settlement agreement because there is no money to pay, it seems compelling indemnification should not apply. That would not be the case if the company had other available assets. In any event, ESOP advisors now caution clients that indemnification may have limited value and that they should rely primarily on adequate fiduciary insurance.

Conclusion

In recent years, the Department of Labor has been more aggressive in pursuing what it perceives as valuation abuses in ESOP companies. While there have been a few more court cases and settlements per year than normal, a typical year finds only a handful of these out of the 6,500 or so ESOPs in closely held companies. A comprehensive study by the NCEO found that the default rate on leveraged ESOPs (those that borrow money to buy stock, which most do) is just .2% per year, way below other LBOs. If valuations really were routinely excessive, this number would be higher as the debt burden would be unrealistic.

Other ESOP litigation has been relatively mundane, focusing either on administrative errors or the occasional fraudulent behavior. Indemnification could become a more important issue, but companies can (and should) resolve that with proper fiduciary insurance.

The future for company stock in public company retirement plans, mostly 401(k) plan, is far less certain. There has been a steady decline in how many companies offer this and how much those that do rely on it. Even for advocates of employee ownership, however, this is not necessarily a bad thing. Good ESOP companies have secondary diversified retirement plans—in fact, ESOP companies are more likely to have a diversified retirement plan than other companies are to have any plan. That is a best practice we strongly encourage.

ARTICLE BY

Corey Rosen

The National Center for Employee Ownership

SEC Charges Chilean Citizens With Insider Trading Concerning Tender Offer for Chilean

The Securities and Exchange Commission recently filed suit in the US District Court for the Southern District of New York, alleging that defendants, Juan Cruz Bilbao Hormaeche and Thomas Andres Hurtado Rourke, both Chilean citizens, illegally traded on material non-public information that Abbott Laboratories was interested in purchasing CFR Pharmaceuticals, S.A., a pharmaceutical company headquartered in Chile.

According to the complaint, on March 10, 2014, CFR’s Board of Directors met to consider Abbott’s offer to purchase CFR; Bilbao, then a member of the board, participated by telephone. After the meeting, between March 12, 2014 and May 7, 2014, Bilbao allegedly directed his business associate, Hurtado, to place trades purchasing more than $14 million in American Depository Shares (ADSs) of CFR in a US brokerage account maintained in the name of a British Virgin Islands company for the benefit of Bilbao. The SEC further alleges that based on knowledge of confidential information, Hurtado purchased 35,000 ADSs of CFR for $707,710. On May 16, 2014, Abbott announced a definitive agreement to acquire CFR, and on September 23, 2014, Abbott completed the tender offer. According to the SEC, Bilbao tendered his ADSs to Abbott on or before September 23, 2014, and saw a profit of more than $10.1 million. The SEC further alleges Hurtado tendered his ADSs to Abbott for a profit of about $495,000.

The SEC sued defendants for illegally trading on insider information. The SEC alleges that the nexus to the United States is the initial purchase of the ADSs through US-based brokerage accounts. The SEC seeks an order freezing defendants’ assets, an order requiring defendants to repatriate funds obtained from the alleged illegal activities, a final judgment that defendants violated the securities laws, and an order directing defendants to disgorge any illegal gains and to pay civil penalties.

Complaint, SEC v. Hormaeche, No. 14-cv-10036-RJS (S.D.N.Y. Dec. 22, 2014).

ARTICLE BY

Emily Stern

Zachary D. Denver

Katten Muchin Rosenman LLP

GoPro Announces Plans to Sell Millions In Stock

Stock sell-off, a term which our readers may have come across before, refers to the selling of securities by a company, whether stocks or bonds or other commodities. According to Investopedia.com, sell-offs can occur for a variety of reasons, such as after a less than satisfactory earnings report or when oil prices significantly increase. A sell-off can be a smart way for companies to deal with uncertainties in the stock market, depending on how they are handled.

Recently, GoPro—the company famous for designing and manufacturing high-definition personal cameras—announced that it would be selling off $100 million worth of stock in order to free up capital to expand its business. The company went public in June, and it is not uncommon for companies to sell stock after a successful initial public offering, particularly when there is still a need to raise capital to launch the company to greater success.

In addition to the $100 million sell-off, existing shareholders are going to sell off $700 million. In total, the sell-off could increase the company’s capital by over 40 percent. That money will reportedly be going toward investment in human capital, technology, as well as infrastructure and potential acquisitions.

There are a variety of ways companies can utilize sell-offs to better position themselves in the marketplace. Regardless of the approach used, it is critical that the sell-off is situated in the context of a long-term plan for the company’s success. Companies considering a sell-off should, naturally, work with an experienced legal team to ensure the success of their efforts.

Source: San Jose Mercury News, “GoPro plans $100 million cash boost with stock sale,” Heather Somerville, Nov. 10, 2014.

ARTICLE BY

Business and Corporate Law Practice Group

McBrayer, McGinnis, Leslie and Kirkland, PLLC

United Kingdom: A Reminder About Careful Drafting of Confidentiality Clauses for Shareholders

The recent decision by the High Court of England and Wales (Chancery Division) in Richmond Pharmacology Limited (Company) v. Chester Overseas Limited, et al. underscores the need to carefully draft confidentiality clauses and to incorporate specific exceptions where these exceptions are reasonably foreseeable in the future. The case involved a shareholders agreement which contained a standard confidentiality clause requiring the parties to treat as strictly confidential all commercially sensitive information concerning the company subject to certain prescribed exceptions. One of the exceptions allowed disclosure to a professional advisor provided that the advisor agrees to be bound by a similar confidentiality obligation. Unsurprisingly, however, there was no specific exception allowing disclosures to a potential third-party buyer. Under the terms of the clause as drafted, the shareholder was required to obtain consent to make the disclosures.

Over time Chester Overseas Limited decided to sell its shares and engaged a corporate finance advisor (Advisor) to assist in facilitating the sale. After the initial discussions regarding a management buy-out fell through, the Advisor sought to generate interest from third parties. In doing so, the Advisor took care to obtain nondisclosure agreements from certain of these potential buyers prior to disclosing the sensitive information.

In its decision, the High Court stated that while the shareholder was entitled to disclose the information to its Advisor pursuant to the professional advisor exception, it was not authorized to disclose the confidential information to third parties.

While the High Court’s decision regarding the confidentiality clause may not come as a surprise, it does reinforce the need to carefully consider a client’s position in future transactions governed under English law.

The High Court’s decision is available here.

ARTICLE BY

Neil Robson

Katten Muchin Rosenman LLP

The Real Tax Benefits of Inverting to Canada

On August 26, Burger King announced that it entered into an agreement to acquire Tim Hortons, Inc., the Canadian coffee-and-doughnut chain, in a transaction that will be structured as an “inversion” (i.e., Burger King will become a subsidiary of a Canadian parent corporation). The deal is expected to close in 2014 or 2015. The agreement values Tim Hortons at approximately $11 billion, which represents a 30 percent premium over Tim Hortons’ August 22 closing stock price.

Under the terms of the deal, Tim Hortons shareholders will receive a combination of cash and common shares in the new company. Each common share of Burger King will be converted into 0.99 of a share of the new parent company and 0.01 of a unit of a newly formed, Ontario-based limited partnership controlled by the new parent company. Holders of shares of Burger King common stock, however, will be given the right to elect to receive only partnership units in lieu of common shares of the new parent company, subject to a limit on the maximum number of partnership units issued. Burger King shareholders who make this election will be able to defer paying tax on the built-in gain in their Burger King shares until the partnership units are sold. 3G Capital, Burger King’s principal shareholder, has elected to receive only partnership units. 3G will own approximately 51 percent of the new Burger King-Tim Hortons company, with current public shareholders of Burger King and Tim Hortons receiving 27 percent and 22 percent, respectively.

Inversions have gotten plenty of negative publicity during the past few years. Most of the reported deals involve U.S. companies that have acquired smaller foreign companies in low tax jurisdictions such as Ireland, Switzerland, and the U.K. As with any inversion transaction, the U.S. company will continue to be subject to U.S. federal income tax on its worldwide income. The U.S. company will benefit, however, from the ability to: (i) reorganize its controlled foreign subsidiaries under a new foreign parent corporation (thereby removing those subsidiaries from the U.S. “controlled foreign corporation” regime and also allowing for the future repatriation of non-U.S. source profits to the foreign parent corporation and avoid U.S. corporate income tax); and (ii) “base erode” the U.S. company with intercompany debt and/or license arrangements with the new foreign parent or its non-U.S. subsidiaries.

It has been reported that Burger King’s effective tax rate was 27.5 percent in 2013 and Tim Hortons was 26.8 percent (15 percent federal rate plus 11.8 percent provincial rate), so “base eroding” Burger King with deductible interest and/or royalty payments to Canada will not provide a significant tax benefit to Burger King. Where the use of a Canadian parent corporation, however, will benefit Burger King (and other U.S. companies that have inverted into Canada) from a tax perspective is the ability to take advantage of Canada’s (i) “exempt surplus” regime, which allows for the repatriation of dividends from foreign subsidiaries into Canada on a tax-free basis; and (ii) income tax treaties that contain tax sparing provisions, granting foreign tax credits at rates higher than the actual foreign taxes paid. The United States does not provide either of these tax benefits under its corporate income tax system or treaty network.

Canadian Exempt Surplus Regime

In general, under Canadian law, dividends received by a Canadian corporation out of the “exempt surplus” of a foreign subsidiary are not subject to corporate income tax in Canada. Exempt surplus includes earnings of a foreign subsidiary that is resident in, and carrying on an active business in, a country with which Canada has concluded an income tax treaty or, more recently, a tax information exchange agreement (TIEA). A TIEA is an agreement between two jurisdictions pursuant to which the jurisdictions may request and share certain information that is relevant to the determination, assessment and collection of taxes, the recovery and enforcement of tax claims, and the investigation or prosecution of tax matters. The extension of the exempt surplus regime to jurisdictions that have signed TIEAs (but not income tax treaties) with Canada is significant because Canada has signed such agreements with low-tax jurisdictions, such as the Cayman Islands, Bermuda, and the Bahamas. Historically, the use of a Barbados IBC, which has a maximum corporate income tax rate of 2.5 percent, was the preferred jurisdiction for a Canadian parent company operating in a low-tax jurisdiction because of the long standing Canada-Barbados income tax treaty.

On the other hand, dividends received by a Canadian corporation out of the “taxable surplus” of a foreign subsidiary will be taxable in Canada (subject to a grossed-up deduction for foreign taxes) at regular corporate income tax rates. Taxable surplus includes most types of passive income, such as royalties, interest, etc., and active business income of a foreign subsidiary that is resident in, or carrying on business in, a country with which Canada has neither an income tax treaty nor a TIEA. Special rules may deem certain passive income (such as interest or royalties) to be included in exempt surplus if received by a foreign subsidiary resident in a tax treaty or TIEA jurisdiction, if those amounts are deductible in computing the exempt earnings of another foreign subsidiary. For example, interest and royalties paid from an active business of a U.K. subsidiary of a Canadian parent corporation to a Cayman Islands subsidiary of such Canadian parent will be eligible to be repatriated to Canada from the Cayman Islands under the exempt surplus regime on a tax-free basis.

It is interesting to note, however, that Burger King will not be able to repatriate most of its foreign-source income to Canada on a tax-free basis under the exempt surplus rules. The majority of Burger King’s foreign-source income consists of royalties and franchise fees, which will be considered passive income for Canadian income tax purposes. (Burger King, which operates in about 14,000 locations in nearly 100 countries, has become a franchiser that collects royalty fees from its franchisees, not an operator of restaurants).

Canada’s Tax Sparing Provisions

Another tax benefit offered by a Canadian parent corporation is the ability to utilize the “tax sparing” provisions contained in many Canadian income tax treaties. Canada currently has income tax treaties that contain tax sparing provisions with more than 30 countries, including Argentina, Brazil, China, Israel, Singapore, and Spain. In general, the purpose of a tax spari
ng provision is to preserve certain tax incentives granted by a developing jurisdiction by requiring the other jurisdiction to give a foreign tax credit for the taxes that would have been paid to the developing country had the tax incentive not been granted. For example, under Article 22 of the Canada-Brazil income tax treaty, dividends paid by a Brazilian company to a Canadian parent corporation are deemed to have been subject to a 25 percent withholding tax in Brazil and therefore, eligible for a 25 percent foreign tax credit in Canada, even though the treaty limits the withholding tax to 15 percent (and in actuality, Brazil does not even impose withholding taxes on dividends under its local law). A similar benefit is available for interest and royalties paid from Brazil to Canada (e.g., a deemed withholding tax, and therefore foreign tax credit, of 20 percent, even though the treaty caps the withholding tax at 15 percent). As noted above, the United States does not currently have any income tax treaties that contain tax sparing provisions.

Conclusion

With Burger King’s effective corporate tax rate of 27.5 percent in the United States in 2013 and Tim Hortons 26.8 percent in Canada, the tax benefits of Burger King inverting to Canada are not readily apparent. Notwithstanding the lack of a significant disparity in these tax rates, Canada does offer the ability to exclude from its corporate income tax dividends received from the earnings of a foreign subsidiary that is resident in, and carrying on an active business in, a jurisdiction that has concluded an income tax treaty or TIEA with Canada. This key benefit, along with the Canadian income tax treaties that contain tax sparing provisions, provides one more example of why U.S. multinationals are operating at a competitive disadvantage when compared to other OECD countries around the world.

ARTICLE BY

Jeffrey L. Rubinger

Bilzin Sumberg Baena Price & Axelrod LLP

What 2014’s Continued IPO Surge Means for Clean Tech and Renewable Energy Companies

The year 2014 is on track to be the most active IPO marketin the United States since 2000, with the mid-year total number of IPOs topping last year’s mid-year total by more than 60%^.[1] There were 222 US IPOs in 2013, with a total of $55 billion raised, and 2014 has already seen 151 US IPOs, for a total of $32 billion, completed by the mid-year mark. The year 2000 (over 400 IPOs) was the last year of a 10-year boom in US IPOs that reached its peak in 1996 (over 700 IPOs).

What does this mean for emerging energy technology andrenewables companies that might be looking to the capital markets? As of mid-year 2014, there have been six cleantech/renewables IPOs, while there were a total of seven in all of 2013. In both years, these deals have represented a relatively small percentage of total IPOs and still do not match the level of activity in the more traditional energy and oil & gas sector. In 2014, IPOs were completed by a range of innovative companies, including Aspen Aerogels, TCP International and Opower.

Two unambiguously positive developments for clean energy in 2013 and the first half of 2014 have been the strong market for follow-on offerings and YieldCo IPOs. As was the case in 2013, several larger energy tech companies that are already public completed follow-on offerings to bolster cash for growth in 2014. Following in the footsteps of Tesla, SunEdison, First Solar, and other companies who completed secondary offerings in 2013, Jinko Solar (January 2014), Pattern NRG (May 2014), Plug Power (January and April 2014), Trina Solar (June 2014), and several other public companies capitalized on the continued receptiveness of clean-tech capital markets.

Following on successful YieldCo IPOs in 2013 (NRG Yield, Pattern Energy), there have already been three YieldCo IPOs in 2014: Abengoa Yield, NextEra Energy Partners, and, most recently, Terraform Power. The continued growth of YieldCo deals as well as the growing dollar amount of such offerings is an extremely encouraging sign for the energy and clean-tech sector as a whole, signaling a longer-term market acceptance of the ongoing changes in domestic and global energy consumption. The successful public market financings of these companies – whose strategy typically involves the purchase and operation of existing clean, energy-generating assets – should result in increased access to capital for renewable energy generation assets, as well as related technologies and services across the sector.

If the first half of this year is any indication, 2014 should prove to be a strong year for clean-tech and renewable energy companies opting to pursue the IPO path. The IPOs, follow-on offerings, and YieldCo successes that we’ve seen so far should improve the prospects for forthcoming clean-energy IPOs in the second half of 2014 and beyond. I expect to see more renewable/clean energy companies follow the IPO route and make the most of the market’s continued receptiveness.

_{[1] Please note that there will be some variance in the statistics for IPOs generally. This is because most data sets exclude extremely small initial public offerings and uniquely structured offerings that don’t match up with the more commonly understood public offering for operating companies. The data above is based on information from http://bear.warrington.ufl.edu/ritter/IPOs2012Statistics.pdf and Renaissance Capital www.renaissancecapital.com.}

ARTICLE BY:

Sahir Surmeli

OF:

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C

New Transportation Investment Center Boosts P3 (Public-Private Partnerships) Projects: “P3 or Not P3?” That is the Question. Obama Says: “P3.”

President Obama last week formally embraced the expansion of Public-Private Partnerships (P3s) as a means to fill the gap in public sector transportation financing. Infrastructure developers and project sponsors should look to a planned September 9 summit on infrastructure investment hosted by the U.S. Treasury Department to learn more about how they may gain access to/benefit from expanded resources for P3s.

In an announcement culminating after a series of events aimed at cajoling Congress into addressing the looming deficit in the Highway Trust Fund, the President established the “Build America Transportation Investment Center,” a new office in the U.S. Department of Transportation (DOT) focused on encouraging P3s. Citing the potential for domestic and foreign investment in American infrastructure, the President moved to create this resource center within DOT to assist states and local governments find ways to expand the use of innovative financing to build needed projects.

For many years, the Office of Innovative Program Delivery Finance was housed within theFederal Highway Administration (FHWA). This latest move will centralize P3 resources at DOT for highway, transit and other crucial projects, particularly those considered to be of regional and national significance and “those that cross state boundaries,” according to the White House statement.

If those sorts of projects are truly the focus of this initiative, perhaps there could be new life (or added momentum) for long-planned, but delayed projects like the Columbia River Crossing in Washington State/Oregon or the New International Trade Crossing between Detroit and Windsor, Ontario or even a variety of high-speed rail proposals that fell victim to budgetary politics during President Obama’s first term.

The President’s announcement offers the promise of additional access to existing DOT credit programs, including the highly successful Transportation Infrastructure Finance and Innovation Act (TIFIA) program. According to government estimates, each dollar of TIFIA loans leverages an additional $10 in private loans, guarantees, and lines of credit. The new Investment Center will also offer technical assistance to states that wish to expand private infrastructure investment and the 20 states that have not yet entered the P3 market at all. The Center may offer case studies of successful projects, examples of deal structures, and analytical toolkits.

The White House also announced that the Treasury Department will host a summit on infrastructure investment in the U.S. on September 9, 2014 for state and local officials to meet with their federal counterparts.

Article By:

James M. Auslander

Brian C. Levey

Fred R. Wagner

Of:

Beveridge & Diamond PC

SawStop Dismissal Explained: Opinion Crosscutting SawStop’s Antitrust Lawsuit Released

Judge Claude M. Hilton of the Eastern District of Virginia recently issued a Memorandum Opinion following up on his June 27, 2014 order (on which we previously wrote here and here) dismissing the complaint filed against the power tool industry bySawStop, LLC.

To recap, according to the February 2014 complaint, in 2000, Stephen Gass, inventor of “SawStop” and a patent attorney, began licensing negotiations with several companies now named as defendants in the lawsuit. As a result, the companies allegedly held a vote on how to respond to SawStop and shortly thereafter ended their individual licensing negotiations with Gass. The complaint also alleges the companies conspired to alter voluntary standards to prevent SawStop technology from becoming an industry standard.

In his opinion dismissing SawStop’s antitrust claims, Judge Hilton wrote:

An alleged antitrust conspiracy is not established simply by lumping ‘the defendants’ together.

Judge Hilton found no evidence that any of the named manufacturer defendants conspired through their industry organization, the Power Tool Institute, Inc. (PTI), not to license SawStop’s safety technology. Judge Hilton also found that the conspiracy allegations were belied by SawStop’s admissions in the complaint that it was actively negotiating with Emerson, Ryobi, and Black & Decker “well after the alleged group boycott began in October 2001,” concluding that “[s]uch history fails to show an agreement to restrain trade.”

The judge also pointed to other contradictions in SawStop’s complaint, including evidence that Ryobi signed an agreement with SawStop regarding royalties related to SawStop’s technology licensing during the time period of the alleged conspiracy. In addition, the judge ruled that Black & Decker’s proposed a licensing agreement with the SawStop, which was negotiated 6 to 8 months after the alleged conspiracy was formed, similarly contradicted SawStop’s allegations. The judge further dismissed SawStop’s arguments that Black & Decker’s 1% royalty payment offer was disingenuous, noting that even if that were the case, such actions do “not sufficiently infer conspiratorial conduct” and cannot be characterized as refusals to deal.

Finally, the judge found that SawStop failed to adequately plead that the defendants corrupted the standard setting process or otherwise agreed to a boycott, pointing out that the complaint alleged that only 5 of the 24 defendants had representatives on the relevant standards-setting committee. Moreover, the court found SawStop’s allegations of competitive harm resulting from the conspiracy (lost sales and profits from UL failing to mandate its safety technology on the market) insufficient, stating:

‘Lost sales’ do not amount to competitive harm because [users] were not ‘in some way constrained from buying [SawStop’s] products’ . . . and failing to mandate [SawStop’s] proposed safety standard does not thereby harm their market access.

Finding no support for an inference that defendants had entered into an agreement to boycott SawStop’s product or otherwise restrain trade, the court dismissed SawStop’s complaint in its entirety.

In addition to the antitrust lawsuit, SawStop technology is at the center of an ongoing rulemaking by the U.S. Consumer Product Safety Commission (CPSC). You can read more about the CPSC’s rulemaking here.

Article By:

Helen J. Kim

Charles A. Samuels

Of:

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

ATP Tour, Inc. v. Deutscher Tennis Bund: How Broad Was That Bylaw?

On our July 1st posting, I noted a recent Form 8-K filing that discloses the adoption of a fee-shifting bylaw. In ATP Tour, Inc. v. Deutscher Tennis Bund, 2014 Del. LEXIS 209 (Del. May 8, 2014), the Delaware Supreme Court held that a fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law. In reaching this conclusion, the Court said: ”A bylaw that allocates risk among parties in intra-corporate litigation would also appear to satisfy the DGCL’s requirement that bylaws must ‘relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.’” Note that the Court held that a fee-shifting bylaw “can be valid and enforceable”. Thus, the Court only addressed the question of facial validity – it expressly disclaimed any conclusions on either the adoption or use of the bylaw in question.

In my review of the bylaw at issue in the case, it seems to me that it is so broadly worded that it arguably covers situations unrelated to the business of the corporation et cetera. Here is the bylaw as quoted in the Court’s opinion:

In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.

Now, let’s suppose that one member of the corporation is driving to pick up her child at school and collides with an automobile driven by another member who is on her way to a social occasion. If the first member sues the second member and fails to obtain a judgment on the merits, will that member be liable under the bylaw for attorneys’ fees and other costs? The bylaw seems to require only that a member assert a claim against another member and fail to obtain a judgment. The bylaw does not on its face require that the claim be brought by or against a member qua member.

Article By:

Keith Paul Bishop

Of:

Allen Matkins Leck Gamble Mallory & Natsis LLP

Hobby Lobby: The Supreme Court’s View and Its Impact

For the second time in two years the United States Supreme Court (the “Court”) hasruled against the Obama Administration with respect to elements of the Affordable Care Act (the “ACA”). In a 5-4 decision announced today in Burwell v. Hobby Lobby Stores, Inc. (“Hobby Lobby”) (f/k/a Sebelius v. Hobby Lobby Stores, Inc.), the Court ruled that the federal government, acting through Health and Human Services (“HHS”), overstepped its bounds by requiring faith-based private, for-profit employers to pay for certain forms of birth control that those employers argued contradicted their religious beliefs, in violation of the Religious Freedom Restoration Act of 1993 (“RFRA”).

In Hobby Lobby, the Court found that for-profit employers are “persons” for purposes of the RFRA. The Court, assuming that the government could show a compelling interest in its desire to provide women with access to birth control, ultimately held that the government could have met this interest in a less burdensome way.

Background

Among its many insurance mandates, the ACA requires non-grandfathered health insurance plans to cover “preventive services” at no cost to participants.

As part of its implementation of the ACA, HHS added 20 contraceptives that were required to be included as preventive services, including four that may have the effect of preventing a fertilized egg from developing.

Hobby Lobby argued that requiring the company to pay for or provide pills and procedures that they believe terminate life—so-called abortifacients—intrudes intrudes on their religious beliefs. Hobby Lobby sued HHS, asserting that requiring them to pay for or provide abortifacients violated their First Amendment rights to freedom of religion and also violated the RFRA.

The RFRA provides that the federal government “shall not substantially burden a person’s exercise of religion” unless that burden is the least restrictive means to further a compelling governmental interest. The Administration argued, however, that neither Hobby Lobby nor Conestoga or any other for-profit, faith-based employer was a person for purposes of the RFRA or the First Amendment.

The Decision

Writing for the majority, Justice Samuel Alito held that private—as opposed to publicly traded—employers could be considered “persons” for the RFRA. The Court noted that the law imposed a substantial burden on religious beliefs, requiring the owners of Hobby Lobby to engage in conduct that “seriously violates their sincere religious beliefs.”

The Court noted that for the government to prevail it needed to demonstrate a compelling state interest and that its application was the least restrictive means to achieve its goals. The Court assumed (with Justice Kennedy providing the swing vote in his concurrence) that the government does, in fact, have a compelling interest to, among other things, promote “public health” and “gender equality” by providing contraceptive coverage for women. However, the Court found that even assuming a compelling interest there were less restrictive alternatives for the government. The government could, the four-person majority noted, simply provide these benefits to all, without charge to the individuals; in his concurrence, Justice Kennedy questioned this, and noted the Court’s opinion does not decide this issue. But Kennedy and the four-person majority agreed the government could extend the accommodation it made religiously affiliated employers: they do not have to provide the benefit but their insurers or third-party administrators would without charge to either the employers or the employees.

Because there are less restrictive alternatives, the Court found that HHS had violated the RFRA as applied to these faith-based, for profit, private employers.

The Impact

The Hobby Lobby ruling has a direct impact on a relatively small number of employers—as a percentage of total employers across the country there are very few that can be considered faith-based employers.

However, the ruling is significant in that it signals an ongoing willingness by the Court to exercise its checks-and-balances power. The Court indicated it may not provide the Administration much leeway in its implementation of the ACA, when implementation impacts and is limited by other federal rights.

The ruling may also be significant for certain religious-affiliated non-profit employers who are operating under the accommodation discussed above. By identifying the accommodation as a less restrictive alternative, the Court may be signaling it believes that the exception HHS provided them suffices to meet any concerns they may have. The Court, however, noted it was not deciding this issue, and the “government-pay” approach tendered by four justices may provide a possible opening for relief for the religious-affiliated non-profit employers.

Finally, the Hobby Lobby decision should stand as a reminder that while there may be differences of opinion about specific rules and requirements under the ACA, and some of those differences may be decided against the government, the law itself is not going away. Employers need to continue to monitor new developments and implement strategies for complying with the ACA.

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Category: Corporate law

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