The National Law Forum

Staying Above The Political Fray – The RIA (Registered Investment Adviser) Political Contribution Rule

It is entirely understandable if after the recent hotly contested “mid-term” elections the general public would like to put political campaigns behind them– at least for the few months before the hype around the 2016 U.S. Presidential elections kicks into gear. For many folks in the U.S. financial services industry, however, political campaigns have to be kept in mind all year round, every year. This is thanks, foremost, to the U.S. Securities and Exchange Commission’s “pay-to-play” rules promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”). The so-called “pay-to-play” rules can be found in Advisers Act Rule 206(4)-5 (the “Political Contribution Rules”) (which can be found on page 194 of this PDF). The Political Contribution Rule was first proposed in 2009, in the wake of the scintillating tales arising out of the unquestioned abuse of position by certain politicians at the pension plans for New York, California, Illinois and New Mexico, to name a few. The Political Contribution Rule was adopted in 2010 (and went effective in 2011) and has found its place into the compliance programs of RIAs across the US.

In brief (and the Political Contribution Rule should not be thought of in brief, as it is a very complicated rule, and far reaching), the Political Contribution Rule provides that it constitutes fraudulent activity for an SEC registered investment adviser to accept compensation for the provision of advisory services to a US public pension plan (other than a federal pension plan) if within the prior two years certain folks at the firm (or their family members) made non-de minimisdonations (roughly, in excess of $350 or $150 per campaign, depending) to any government official or candidate whose governmental position puts (or would put) them in a position to influence the decisions of a public pension plan. The express prohibition on “doing indirectly that which you are prohibited from doing directly” (see Rule 206(4)-5(d)) and coverage of political activity committees (PACs) make clear that the Political Contribution Rule is intended to capture a broad range of political giving. For this reason, an RIA compliance policy designed to avoid any issues with the Political Contribution Rule will pick up RIA staff (regardless of title – to avoid any inference of firm directed giving by senior staff), their immediate family members (including children) and, most conservatively, prohibit all political giving, entirely. Another reasonable response to the Political Contribution Rule is to simply not manage any money for or accept investments from public pension plans.

As invasive and hard to read as the Political Contribution Rule is, the SEC staff stand ready to enforce the rule. In the first administrative proceeding brought under the rule, TL Ventures Inc. agreed to pay $295,000 to settle claims made by the SEC under the Political Contribution Rule. The SEC action against TL Ventures arose out of a pair of political contributions made in 2011 (the year the Political Contribution Rule went into effect) by a “covered associate” of TL Ventures, who donated $2,000 to the governor of the State of Pennsylvania and another $2,500 to a Philadelphia mayoral candidate. These donations resulted in a violation of the Political Contribution Rule when matched with the fact that TL Ventures had accepted investments by the Pennsylvania State Employees’ Retirement System in two TL Ventures venture funds formed in 1999 and 2000, as well as an investment by the Philadelphia Retirement Board in the TL Ventures venture fund formed in 2000. Although these fund investments were fairly dated by 2011, they were still generating fees to TL Ventures during their run off phase. The dates involved might suggest to a more sympathetic observer that the violation was an oversight, but (as is often the case) other issues that arose during the SEC exam of TL Ventures likely exhausted any willingness on the part of the staff to give TL Ventures the benefit of the doubt. The order describing and resolving the TL Ventures case presents an interesting set of facts, generally; you can read more about the TL Ventures settlement here.

However, and not without irony, political developments may draw the Political Contribution Rule out of the shadows of regulatory compliance and plop it squarely onto the political stump. The reason is that in the upcoming 2016 presidential campaign certain candidates for higher office might find themselves at a disadvantage with deep pocketed would-be campaign contributors (i.e., owners and employees of financial services firms) due to the Political Contribution Rule. A prime example would be New Jersey Governor Christopher Christie, who is widely expected to throw his hat into the ring for nomination as the presidential candidate for the Republican Party. As the sitting Governor of New Jersey, Chris Christie is an “official” under the Political Contribution Rule, and as governor of New Jersey holds sway over the approximately $81 billion New Jersey’s Public Employees’ Retirement System, through the Governor’s ability to make appointments to the New Jersey State Investment Council. The Political Contribution Rule does not apply to U.S. federal officials, but, as a sitting governor, any political contributions to Gov. Chris Christy’s presidential campaign would be picked up by the Political Contribution Rule. Thus, any contribution to a Christie presidential campaign by an owner or employee of a hedge or private equity fund (or other asset manager) would side line her or his advisory firm from managing investments for New Jersey state pension plans. And, of course, Governor Christie’s proximity to Wall Street and its deep pocketed financial services firms will make the issue that much more acute for him.

There may be no need to wait for the political fireworks to start popping on this issue. The New York and Tennessee state Republican parties have already brought a legal action against the SEC to invalidate the Political Contribution Rule. In that case, the plaintiffs allege that the SEC overstepped its authority because the Political Contribution Rule illegally attempts to regulate activity that is exclusively the responsibility of the Federal Election Commission. (Copy of the complaint). This is similar to the claims of the law suit that lead to the “Goldstein” decision, which saw the SEC’s initial attempt at forcing hedge fund managers to register with the SEC as investment advisers invalidated in 2006. However, on September 30, 2014, U.S. District Judge Beryl Howell dismissed the plaintiff’s challenge to the Political Contribution Rule, finding that the court lacked jurisdiction and that only the U.S. Court of Appeals for the District of Columbia Circuit had authority to hear the case. Presently, it remains to be seen whether the New York and Tennessee state Republican parties (or anyone else) will renew the complaint with the U.S. Court of Appeals for the District of Columbia.

The political winds seem to be blowing in such a way that the Political Contribution Rule may get blown out of RIA compliance programs. The SEC staff’s rationale for wanting to address the pay-to-play scandals of the recent and not so recent past are entirely understandable. But the breadth of the Political Contribution Rule does suggest that the behavior being targeted is best addressed by public pension plans, many of whom have already taken affirmative steps to address the SEC staff’s concerns about the temptations they present to fund manager (many or which are notably doing). The Political Contribution Rule is hard to implement, cuts too close to the right to political speech, and, ultimately, may hit too close to home for many politicians.

ARTICLE BY

Thomas M. Devaney

Jung Yeon Son

Sheppard, Mullin, Richter & Hampton LLP

2014 Year-End Illinois Estate Planning: It’s Time for a Careful Review

As 2014 comes to a close, now is the perfect time for careful planning to address the income, estate, gift and generation-skipping taxes that can directly affect you. In addition to making sure your estate plan is up to date, making a few important decisions now can reduce your tax liability later.

Transfer Tax Exemption and GST Exemption

The exemption amount that individuals may transfer by gift and/or at death without being subject to federal transfer taxes increased in 2014 to $5,340,000; it will further increase to $5,430,000 in 2015. The maximum federal estate tax rate remains 40%. In contrast, Illinois imposes a state estate tax once a decedent’s estate exceeds $4,000,000 (which is not adjusted for inflation). The rates of Illinois estate tax range from 8% to 16% (with the Illinois estate tax paid allowable as a deduction for federal estate tax purposes). Both the federal and Illinois estate tax laws allow for a marital deduction for assets passing outright to a spouse or to qualifying trusts for the benefit of a surviving spouse. Illinois allows this deduction to be claimed even if a marital deduction is not elected for federal purposes.

In order to impose a death tax at each successive generational level, a generation-skipping transfer (“GST”) tax – equal to the highest estate tax rate – is assessed on transfers to grandchildren or more remote descendants. However, every taxpayer is also given a separate federal GST exemption equal to the federal transfer tax exemption (i.e., $5,340,000 in 2014 and $5,430,000 in 2015).

Estate planning documents should be reviewed to make certain that beneficial use of the federal and state transfer tax exemptions, federal and/or state marital deductions and federal GST exemption are being utilized.

Annual Exclusion Gifts

Making use of annual exclusion gifts remains one of the most powerful – and simplest – estate planning techniques. For 2014 (and 2015), individuals can make an unlimited number of gifts of up to $14,000 per recipient, per calendar year. Over a period of time, these gifts can result in substantial transfer tax savings, by removing both the gift itself and any income and growth from the donor’s estate, without paying any gift tax or using any transfer tax exemption. An individual cannot carry-over unused annual exclusions from one year to the next. If such exclusions are not utilized by the end of the year, the balance of any annual exclusion gifts that could have been made for that year are lost. These transfers may also save overall income taxes for a family, when income-producing property is transferred to family members in lower income tax brackets (who are not subject to the “kiddie tax”.)

Tuition and Medical Gifts

Individuals can make unlimited gifts on behalf of others by paying their tuition costs directly to the school or their medical expenses directly to the health care provider (including the payment of health insurance premiums).

Lifetime Utilization of New Transfer Tax Exemption

The ability to transfer $5,430,000 ($10,860,000 per married couple) – after annual exclusion and medical and tuition gifts, and without having to pay gift taxes – paves the way for many planning opportunities. When combined with valuation discounts and leveraging strategies (e.g., family partnerships, sales to grantor trusts, grantor retained annuity trusts, etc.), tremendous amounts of wealth may pass for the benefit of many generations free of federal and Illinois transfer taxes. Lifetime gifts utilizing the exemption amounts will almost always result in overall transfer tax savings (unless the assets which have been transferred decline in value). The main reason is the removal of the income and growth on the gifted assets from the taxable estate.

For individuals who fully used their transfer tax exemptions in prior years, consideration should be given to making gifts of the additional inflation adjusted amount (i.e., the $90,000 increase in the transfer tax exemption from 2013 to 2014, and an additional $90,000 increase in the exemption from 2014 to 2015).

Benefits of Acting Early. The main benefit of making gifts that utilize the transfer tax exemption is to remove from the taxable estate the income and appreciation on those assets from the date of the gift to the date of death. The sooner the gifts are made, the more likely that additional income and growth on such assets will escape taxation.

Gifts in Trust. Despite the tax savings, many individuals are uneasy about making outright gifts to their descendants. Such concerns are usually addressed by structuring the gifts in trust, which allows the donor to determine how the assets will be used and when the descendants will receive the funds. The use of gift trusts can also provide the beneficiaries with a level of creditor protection (including protection from a divorcing spouse) and additional transfer tax leverage. This is particularly effective when coupled with applying GST exemption to the trust (discussed above) and making the trust a “grantor trust” for income tax purposes (discussed below).

Many individuals may not be comfortable giving away significant amounts of wealth. However, the gift trust technique is not limited to trusts for descendants, but may also include a spouse as a beneficiary (or as the sole primary beneficiary). Making the spouse a beneficiary of a gift trust (generally referred to as a spousal lifetime access trust, or “SLAT”) provides indirect access to the trust assets, while allowing the income and growth to accumulate in the trust (if not otherwise needed), and pass free of estate and gift taxes.

One of the most powerful estate planning strategies is the utilization of a “grantor trust.” Significant additional transfer tax benefits can be obtained by structuring a gift trust as a “grantor trust” for income tax purposes. The creator (or “grantor”) of a “grantor trust” is required to report and pay the tax on the income earned by the trust. This allows the grantor to pass additional funds to the trust beneficiaries free of gift and estate taxes and income taxes, as the grantor’s payment of the trust’s income taxes each year would be considered his or her legal obligation and would not be considered additional gifts.

Taxable Gifts

Although individuals generally dislike paying taxes, making taxable gifts and paying a gift tax may prove to be beneficial. While the federal government imposes a 40% estate tax on taxable estates and a corresponding 40% gift tax on taxable gifts, Illinois does not impose a gift tax. Thus, taxable gifts result in an overall savings of state estate and gift tax. Moreover, the differing manner in which the gift and estate taxes are computed and paid results in overall transfer tax savings.

The gift and estate tax, although “unified,” work quite differently. The estate tax is “tax inclusive:” the tax is determined based upon the assets owned at death, and paid from those assets (similar to the income tax, which “after tax” dollars must be used to pay the tax). However, the gift tax is “tax exclusive:” the gift tax is determined based on the assets gifted, and paid from other assets owned by the donor. As an example, if you previously used your transfer tax exemption and then make a $1,000,000 gift you would incur a $400,000 gift tax, $1,400,000 will be removed from your estate, and the donees will receive $1,000,000. However, if you die without making the $1,000,000 gift, you would have the full $1,400,000 included in your estate, resulting in approximately $676,000 of federal and Illinois estate taxes, leaving only $724,000 rather than $1,000,000 for your descendants. In order to leave $1,000,000 for your descendants at death you would need approximately $1,934,000. The estate tax on such amount would be approximately $934,667, leaving $1,000,000 for your descendants. Stated another way, by gifting assets the IRS gets 40¢ for each $1.00 your beneficiaries receive, but by dying with the assets the IRS gets 93¢ for each $1.00 your beneficiaries receive. However, there are also potential downsides: paying a tax earlier than otherwise may be needed, the possibility that the estate tax may be repealed or the rates reduced, the loss of income/growth on assets used to pay the gift tax, the possibility that the transfer tax exemption may be increased which would have allowed the gifts to pass tax free, etc.

Making Use of Historically Low Interest Rates

Interest rates remain very low (with increases likely on the horizon). The current (and historically low) interest rates continue to create an environment ripe for estate planning and transferring wealth to descendants on a tax-advantaged basis. Techniques such as grantor retained annuity trusts (“GRATs”), charitable lead trusts (“CLTs”), intra-family loans (bearing the minimal interest in order to avoid a gift of 0.39% for loans of 3 years or less, 1.90% for loans of 3 to 9 years, and 2.91% for loans of 9 years or more as of November 2014), and sales to “grantor trusts” are sensitive to interest rate changes – and are very beneficial in a low interest rate environment.

Illinois QTIP

Given the disparity between the $5,340,000 federal estate tax exemption and the $4,000,000 Illinois estate tax exemption, married couples domiciled in Illinois should make certain that their estate plans are structured to take advantage of the Illinois QTIP marital deduction. Otherwise, an estate plan that is designed to fully utilize the federal $5,340,000 exemption can inadvertently cause a $382,857 Illinois estate tax upon the death of the first spouse.

Net Investment Income (Medicare) Tax

Higher-income-earners should also plan for the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax that applies to individuals earning in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately.) While the 0.9% additional tax on wages is only imposed on individuals, the 3.8% tax on net investment income is imposed on individuals, estates and trusts. Individuals are only subject to this new 3.8% Medicare tax if their “modified adjusted gross income” exceeds $250,000 for joint filers ($125,000 for a married individual filing a separate return) and $200,000 for single individuals. In 2014, trusts and estates are subject to this tax at a $12,150 threshold ($12,300 in 2015). The approach to minimizing or eliminating the 3.8% surtax depends on each taxpayer’s individual situation. Some taxpayers should consider ways to minimize (e.g., through deferral) additional net investment income for the balance of the year, while others should review whether they can reduce modified adjusted gross income other than unearned income. In contrast, others may want to accelerate net investment income and/or modified adjusted gross income that would be received next year so that it is included this year (e.g., to take advantage of deductions this year). Year-end planning (such as timing the receipt of net investment income, the receipt of modified adjusted gross income and the payment of deductible expenses) can save significant taxes.

Retirement Plans and Beneficiary Designations

Contribution limitations for pension plan and other retirement accounts for 2015 were recently released by the IRS. The following adjustments were triggered by an increase in the cost-of-living index:

Elective deferral contribution limits for employees who participate in a 401(k), 403(b) and 457(b) plans increased from $17,500 in 2014 to $18,000 in 2015.
The catch-up contribution limit for employees (aged 50 or older) who participate in a 401(k), 403(b) and governmental 457(b) plans increased from $5,500 in 2014 to $6,000 in 2015.

The end of the year is a good time to review the beneficiary designations on your pension plan and other retirement accounts (as well as life insurance policies). Failing to name beneficiaries or keep designations current to reflect changing circumstances can create substantial difficulties and expense (both emotionally and financially) – and may lead to unintended estate, gift and income tax consequences. You should make certain to designate beneficiaries when participating in a new retirement plan and update beneficiary designations when circumstances dictate (e.g., death of a spouse). Finally, it is prudent to maintain a current list of accounts with beneficiary designations – which specifies the type of asset, account numbers, account custodians/administrators and beneficiaries designated for each account (primary and contingent).

ARTICLE BY

Gregg M. Simon

Much Shelist, P.C.

Attend the 2nd Annual Bank and Capital Markets Tax Institute West – December 2-3 in San Francisco

The National Law Review is please to give you information on the 2nd Annual Bank and Capital Markets Tax Institute West Bank and Captial Markets Tax Institute Dec 2-3 San Francisco, CA - Register Now!

WHEN

December 2-3, 2-14

WHERE

San Francisco, CA

Due to the success of last year’s first ever west coast Bank and Capital Markets Tax Institute (BTI), we are proud to announce that BTI West will be coming back for a second year! For 48 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis

The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

Employment Related Lawsuits Are on the Rise. Are You Covered?

On September 25, 2014, the Equal Employment Opportunity Commission (“EEOC”) filed the first two suits in its history challenging transgender discrimination under the 1964 Civil Rights Act. As discrimination litigation evolves, it is important to know whether your insurance coverage is evolving with it.

Coverage for employee-related lawsuits has always been important, but the increase in suits brought by the EEOC over the last several years (and the last several decades) has made employment practices liability (“EPL”) insurance of particular importance to protecting your company. Last year, the EEOC recovered a record-setting $372.1 million.

Now, the scope of EEOC suits is increasing as a result of the EEOC’s ongoing efforts to implement its Strategic Enforcement Plan (“SEP”), adopted in December of 2012. As part of its SEP, the EEOC makes “coverage of lesbian, gay, bisexual and transgender individuals under Title VII’s sex discrimination provisions, as they may apply” a “top commission enforcement priority.”

Comprehensive general liability (“CGL”) policies, are a type of commercial third-party liability insurance. Most businesses in the United States purchase CGL policies in order to protect against the risk of suits by third parties. If a patron sues you for a slip and fall in your mom-and-pop shop, your CGL policy probably covers the suit. Likewise, if you distribute across the entire country a product that allegedly causes bodily harm to thousands of people, your CGL policy probably covers the suits.

As broad as CGL coverage is, however, it is only one piece to a balanced insurance portfolio. CGL policies typically exclude coverage for suits brought by employees of the company. EPL polices step in to fill one part of the gap in coverage. Other parts of the gap are filled by workman’s compensation policies and directors and officers liability policies.

A typical EPL policy may list a number of categories of protected classes covered by insurance, and then add coverage for “other protected classes.” A policy may also protect against claims for “Discrimination,” and define that discrimination broadly to mean “any actual or alleged violation of any employment discrimination law.” However, some polices offer more limited coverage. For example, some carriers may restrict coverage to only sexual harassment.

Just as you protect your company from fire by installing sprinklers in your warehouses and doing regular safety inspections, it is imperative that you keep your employment practices up to date. Educate your employees on proper workplace behavior, and try to think about ways to get ahead of the curve to minimize your liability for alleged workplace discriminations.

Just as discrimination litigation is evolving, other areas of litigation continue to evolve and create new risks for your company. In addition, coverage law continues to evolve across the United States, on a state-by-state basis. As coverage law evolves, it has a direct effect on the value of your insurance portfolio.

ARTICLE BY

João Santa-Rita

Gilbert LLP

Trademark Assignments: Keeping it Valid

After a trademark achieves federal registration, ownership of the mark may change hands for a variety of reasons. When a trademark owner transfers their ownership in a particular mark to someone else, it is called an assignment. Generally, for an assignment of a trademark to be valid, the assignment must also include the ‘goodwill’ associated with the mark (goodwill is an intangible asset that refers to the reputation and recognition of the mark among consumers). If the assignment of a trademark includes the mark’s goodwill and is otherwise legal, the assignee gains whatever rights the assignor had in the mark. Importantly, this includes the mark’s priority date, which has implications for protecting the mark from potential infringers going forward.

In contrast, if an assignment of a trademark is made without the mark’s accompanying goodwill, then it is considered an assignment “in gross” — and the assignment is invalid under U.S. law. Courts have analyzed whether an assignment was made in gross in a few different ways, but, as is the case with much of trademark law, protecting customers from deception and confusion is the primary motivation behind any analysis for determining the validity of an assignment.

One way courts determine if an assignment was made in gross is through the substantial similarity test. This test essentially examines whether the assignee is making a product or providing a service that is “substantially similar” to that of the assignor, such that consumers would not be deceived by the assignee’s use of the mark. This analysis includes an assessment of the quality and nature of the goods and services provided under the mark post-assignment. Thus, even if an assignee is using the mark on the same type of goods, but the goods are of lower quality than the goods previously offered by the assignor under the mark, the assignment could be invalid. However, slight or inconsequential changes to goods and services after an assignment are not likely to invalidate the assignment, as such changes are to be expected and would not thwart consumer expectations.

Decisions on the question of substantial similarity are only marginally instructive, as the test calls for a fact specific inquiry into what the consuming public has come to expect from the goods or services offered under a given mark. For example, courts have noted that despite similarities in services and goods, “even minor differences can be enough to threaten customer deception.”^[1] Instances of products or services that were deemed not substantially similar (and thus resulted in invalid assignments) include: an assignee offering phosphate baking powder instead of alum baking powder;^[2] an assignee using the mark on a pepper type beverage instead of a cola type beverage;^[3] an assignee producing men’s boots as opposed to women’s boots;^[4]an assignee using the mark on beer instead of whiskey;^[5] and an assignee selling hi-fidelity consoles instead of audio reproduction equipment.^[6]

Conversely, case law has also shown that substantial similarity can be found even when products or services do differ in some aspects, if consumers aren’t likely to be confused. For example, the following product changes did not result in a finding of an invalid assignment: an assignee offering dry cleaning detergent made with a different formula;^[7]an assignee using thinner cigarette paper;^[8] and an assignee selling a different breed of baby chicks.^[9]

Whether goods or services are substantially similar may seem like an easy test to apply, but, as case law demonstrates, this fact-intensive analysis can yield results that look strange in the abstract. Disputes involving the validity of a trademark assignment are decided on a case-by-case basis, using the specific facts at hand to determine if consumer expectations are being met under the new use. Thus, while trademarks acquired through assignment can have significant value (and grant the assignee important rights formerly held by the assignor), assignees should be wary of changes to goods or services under an acquired mark that could be seen as deceiving the public.

ARTICLE BY

Rachel A. Nicholas

Lewis Roca Rothgerber LLP

_{^[1] Clark & Freeman Corp. v. Heartland Co. Ltd., 811 F. Supp. 137 (S.D.N.Y. 1993).}

_{^[2] Independent Baking Powder Co. v. Boorman, 175 F. 448 (C.C.D.N.J.1910).}

_{^[3]Pepsico, Inc. v. Grapette Company, 416 F.2d 285 (8th Cir. 1969).}

_{^[4]Clark & Freeman Corp. v. Heartland Co. Ltd., 811 F. Supp. 137 (S.D.N.Y. 1993).}

_{^[5] Atlas Beverage Co. v. Minneapolis Brewing Co., 113 F.2d 672 (8 Cir. 1940).}

_{^[6] H. H. Scott, Inc. v. Annapolis Electroacoustic Corp., 195 F.Supp. 208 (D.Md.1961).}

_{^[7] Glamorene Products Corp. v. Procter & Gamble Co., 538 F.2d 894 (C.C.P.A. 1976).}

_{^[8]Bambu Sales, Inc. v. Sultana Crackers, Inc., 683 F. Supp. 899 (1988).}

_{^[9] Hy-Cross Hatchery, Inc v. Osborne 303 F.2d 947, 950 (C.C.P.A. 1962)}

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

Illinois Guaranty Fund Gets Setoff From Statutory Dram Shop Limit Rather Than Jury Verdict

Eighteen-year-old boy was killed in a head-on collision with a vehicle driven by an intoxicated person. His parents received $26,550 from the drunk driver’s insurance carrier and $80,000 from their own insurance carrier. They subsequently filed a dram shop suit. While it was pending, the dram shop’s insurance carrier was declared insolvent, and the Illinois Guaranty Fund assumed the defense. The issue was whether the $106,550 should be set off from a potential jury verdict or from the statutory dram shop limit of $130,338.51. The Fifth District held the setoff should be applied against the jury verdict.

The Supreme Court reversed and held the setoff should be applied against the statutory limit. The Fund’s obligation cannot be expanded by a jury verdict. It can only be reduced by other insurance. Rogers v. Imeri, 2013 IL 115860.

ARTICLE BY

Insurance Coverage Practice Group

Heyl, Royster, Voelker & Allen, P.C.

Vacation Policy Pitfalls for Illinois Employers

The Illinois Wage Payment and Collection Act, 820 ILCS 115/1, et seq., governs the payment of wages—including vacation pay—in Illinois. While most employers understand that they must pay their workers on a regular basis for the wages the employees have earned, many do not consider how vacation policies may create a heightened risk of a wage class action lawsuit.

Simply put, employers must pay the wages earned by an employee at least semi-monthly, or no more than 13 days after they are first earned. Departing employees must be paid all earned wages by the next regular pay period. The Act defines wages to include vacation pay. This is where things can get tricky. An employer is not obliged to provide any vacation time to its employees. However, once it chooses to provide vacation, the vacation time becomes earned wages that must be paid under the Act to the employee, even if the employee terminates their employment.

Employees receive vacation time in one of two ways. First, an employer can award vacation time without requiring employees to first work some period of time. Such a policy is called an “inducement for future service” policy and immediately vests. Hence, employees may take vacation time under an “inducement for future service” policy without meeting any length of service criteria (and with no obligation to repay the vacation time should the employment end). Such “inducement for future service” policies are unusual.

The other alternative is where the vacation is earned based on service. For example, the employer can award two weeks of vacation for each year of employment. This is considered a “length-of-service” policy and the law requires that employees earn “length-of-service” vacation time on a pro rata basis, even where the employer’s policy says they do not. In other words, the vacation time vests as the employee works. Thus, an employee who would earn two weeks of vacation after completing a year of employment is entitled to be paid for one week of vacation wages if he/she leaves the employer six months into the year, regardless of what the employer’s policy says. Most employers have “length-of-service” policies.

An employer with a “length-of-service” policy must pay a departing employee the vacation wages they earned on a pro rata basis. This is where a vacation policy can become dangerous. If the employer has a policy that an employee only gets their vacation if they are employed in the following year, the employer is at risk with regard to every employee who left or, in the future leaves, its employment without getting paid vacation pay on a pro rata basis. Such policy flaws lend themselves to class action lawsuits because the employer’s liability to the class will usually turn on a single question, such as whether the vacation policy is legal or not.

A class action lawsuit can be filed by one departing employee on behalf of all employees who left the employment without getting vacation pay. A class action lawsuit is dangerous because it aggregates all employees’ claims into a single lawsuit brought by just the class representative. In 2010, the Illinois legislature amended the statute of limitations under the Act to allow a class representative to file on behalf of a class that goes back in time up to ten years. Because of the large number of unnamed, but represented, employees that can be in a class, the situation can create potentially disastrous financial exposure for an employer. And, if the representative employee prevails, she is entitled to recover from the employer her attorneys’ fees, which are usually substantial. As if this were not enough, the 2010 amendment also permits employees to collect damages of two percent per month—of 24 percent per annum—on any unpaid wages. Willful refusals to pay wages can also be criminal.

Even if the class action lawsuit settles for a set amount of money, the employer usually must also pay the class representative’s attorneys’ fees. Under the 2010 amendment, a prevailing employee is entitled to recover her attorneys’ fees, even she did not file her case as a class action.

Recognizing the risk, some employers have tried to limit their exposure by requiring that employees sign an agreement that they will make any claims within a short period of time—for example, six months. Importantly, the plaintiffs’ bar and the Illinois Department of Labor take the position that the Act prevents an employee from agreeing to limit any of the rights bestowed on the employee by the Act. Thus, an employee’s written agreement that they will bring any claims for unpaid wages within six months is unenforceable as a matter of public policy.

Employers should be careful to ensure that their policies comply with each state law in which they have employees, including the 2010 amendments to the Act. If an employer is unfortunately named in a class action lawsuit, they should promptly seek legal advice from a law firm with experience in defending against class action lawsuits.

ARTICLE BY

Insurance Coverage Practice Group

Heyl, Royster, Voelker & Allen, P.C.

The Road to Paris 2015: Contrasting Media Perspectives on the US-China Accord on Climate Change and Clean Energy

As has been widely reported, on November 12 President Obama and China’s President Xi Jinping released a joint announcement on climate change and clean energy cooperation. Beyond the announced greenhouse gas emission targets—for the U.S., to reduce emissions 26-28% below 2005 levels by 2025; for China, (i) to peak CO2 emissions by around 2030, with the intention to try to peak earlier, and (ii) to increase the non-fossil fuel share of primary energy consumption to around 20 percent by 2030—we note the following.

Differing reporting in the U.S. and China.The climate announcement received starkly different emphasis in U.S. and Chinese media. In the United States, the announcement was the lead or among the lead news stories in all major outlets we surveyed, including The New York Times, The Los Angeles Times, The Washington Post, The Wall Street Journal and USA Today. In China, People’s Daily led with Obama’s and Xi’s talks generally, with the two parties reaffirming their goal, expressed at the Sunnylands Summit in 2013, of developing a “new pattern of major power relations” between the two counties—but placed news of the emissions announcement in a separate story on page 2. Jiefang Daily gave similar treatment to the announcement. Cankao News, which has a conservative reputation, likewise discussed the emissions targets on the second page of the lead story. And Beijing News, which is considered more liberal, mentioned the climate announcement in the lead’s subtitle, but only discussed its substance on the third page of coverage of the talks, on page 8 of Thursday’s edition. (Links to Chinese editions.)

The contrasting coverage reflects different economic and political contexts in the two nations. Beyond the substance of the agreement and fact that China is for the first time publicly stating a specific goal to peak emissions, the story’s heightened newsworthiness in the United States also likely reflects the American media’s sense of surprise, the back story of secret climate negotiations, economic tension between federal mandates and free markets, the chronically polarized politics of U.S. climate and energy policy, and the currently heightened executive vs. legislative branch posturing following last week’s elections. By contrast in China, secrecy and surprise of policy announcements are common, national economic planning with detailed, prescriptive goals is a foundation of the economy, and divided government and partisan politics are non-existent. To the extent that the announcement was important inside China, it seemed important for instrumental reasons—because, together with the broader dialogue of mutual cooperation, it demonstrated China’s stature in the bilateral relationship—not primarily because action on climate change is important for its own sake.

Implications for Paris 2015.The joint announcement has been described as an important break-through leading-up to next year’s global climate talks. With the world’s largest carbon emitters staking out goals to reduce carbon emissions, lesser emitters will find it more difficult to resist similar commitments. More significantly, the joint announcement has served to establish China as standard-setter, together with the United States. Its stature already established, China should be less inclined to oppose the United States in Paris for the sake of demonstrating its influence in multilateral negotiations.

Ashwin Kaja contributed to this article.

ARTICLE BY

W. Andrew Jack

Daniel B. Levine

Covington & Burling LLP

The New Balance of Power: What the 114th Congress Means for Business

As the now-lame-duck U.S. Congress convenes for its final legislative session of 2014, the 114th U.S. Congress is gearing up for action. Officeholders on both sides of the aisle are preparing for the shift to Republican control of both the Senate and House of Representatives, and are anticipating renewed debate on a broad range of issues. This collection of On The Subject articles examines what we can expect from the new Congress and how upcoming legislative efforts may—and may not—affect businesses in the United States and around the world.

Following the election of November 2014, here are the before and after numbers:

BEFORE THE ELECTION

AFTER THE ELECTION

HOUSE

      234 Republicans

      201 Democrats (includes 1 currently
vacant R seat, 2 currently vacant D
seats)

HOUSE

     At least 244 Republicans (net gain of at
least 12, largest R majority since 1928)

     At least 184 Democrats
7 races still pending

SENATE

       55 Democrats (including 2 Independents
who caucus with Ds)

       45 Republicans

SENATE

     53 Republicans (net gain of at least 8,
more likely 9)

     46 Democrats
Still pending – Louisiana runoff on
December 6

The Democrats were delivered a serious and important rebuke by the voters. Even attractive, younger incumbent Democratic senators, such as Senator Kay Hagan of North Carolina or Senator Mark Begich of Alaska, who ran “perfect” races lost their seats. Rising stars, including Senator Mark Warner of Virginia, barely returned.

The new Senate will be solidly controlled by the Republicans and the House will have a much larger Republican majority. For Speaker John Boehner (R-OH), who previously could be held hostage by a dozen of his own members, the larger majority will allow him to lead more and follow less.

But the Senate Democrats, diminished in number, will remain a brake on Republican legislative ambitions. Under current legislative rules, it still requires 60 votes on most contentious legislative issues. This requires the Republicans to maintain their party discipline, and pick up the remaining votes on the Democratic side. For many reasons, Democrats historically have demonstrated they are unlikely to exhibit the same remarkable level of party discipline that Republicans were able to achieve while in the minority from 2012 through 2014. A handful of Democrats represent “red states,” such as Senator Joe Manchin of West Virginia, and often can be approached by Republican counterparts. Former Democratic governors, including the above-mentioned, now-chastened Senator Warner and Senator Tom Carper of Delaware, are by temperament and deportment willing to find common cause to legislate.

For these and many other reasons, now that roles are reversed we believe Republicans will have more success in legislating and avoiding Democratic filibusters, the Republican versions of which so frustrated Senate Democrats in the last Congress. But as the 2014 election becomes more remote, those Senators who “cross over” most often will have an even more complex task, especially if Republican hardliners stop most or all Senate confirmations, as some have threatened.

So what does this mean for business? While oceans of ink and terabytes of data are being spilled over the answer, here are 10 areas where you should look for change:

ARTICLE BY

McDermott Will & Emery

The National Law Forum

Staying Above The Political Fray – The RIA (Registered Investment Adviser) Political Contribution Rule

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2014 Year-End Illinois Estate Planning: It’s Time for a Careful Review

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Annual Exclusion Gifts

Tuition and Medical Gifts

Lifetime Utilization of New Transfer Tax Exemption

Taxable Gifts

Making Use of Historically Low Interest Rates

Illinois QTIP

Net Investment Income (Medicare) Tax

Retirement Plans and Beneficiary Designations

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Attend the 2nd Annual Bank and Capital Markets Tax Institute West – December 2-3 in San Francisco

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Employment Related Lawsuits Are on the Rise. Are You Covered?

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Trademark Assignments: Keeping it Valid

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GoPro Announces Plans to Sell Millions In Stock

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Illinois Guaranty Fund Gets Setoff From Statutory Dram Shop Limit Rather Than Jury Verdict

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Vacation Policy Pitfalls for Illinois Employers

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The Road to Paris 2015: Contrasting Media Perspectives on the US-China Accord on Climate Change and Clean Energy

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The New Balance of Power: What the 114th Congress Means for Business

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