Tag: Corporate Compliance

Resale Price Maintenance in China: Enforcement Authorities Imposing Large Fines for Anti-Monopoly Law Violations

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Recently Shanghai High People’s Court reached a decision in the first lawsuit involving resale price maintenance (RPM) since China’s Anti-Monopoly Law (AML) came into effect five years ago.  Shortly thereafter, a key enforcement agency announced RPM-related fines against six milk powder companies, five of which are non-Chinese.  Both cases clearly show that RPM can be a violation of the AML, and that RPM is currently under much greater scrutiny by enforcement authorities.  It would be prudent for all foreign corporations active in China’s consumer markets to take heed of these changes in China and conduct an immediate review of any potential RPM violations.

On 1 August 2013 the Shanghai High People’s Court reached a decision in the first anti-monopoly lawsuit involving resale price maintenance (RPM) since China’s Anti-Monopoly Law (AML) came into effect in August 2008.  In addition to this judicial decision, on 7 August 2013 one of the key agencies in charge of enforcing the AML, the National Development and Reform Commission (NDRC), announced RPM-related fines of USD 109 million against six milk powder companies, five of which are non-Chinese.  Both the High People’s Court and the NDRC have been striving to clarify how they will treat RPM, and specifically have focused on the issue of whether RPM should be treated as a per se violation or should be evaluated according to a “rule of reason” analysis.

Judicial Decisions in Civil Lawsuits

According to the recent decision by the Shanghai High People’s Court, in order to hold that an RPM provision is a monopoly agreement, the court must find that the RPM provision has restricted or eliminated competition.  Furthermore, the burden of proof will be on the plaintiff to show a restriction or elimination of competition arising out of the RPM.  The High People’s Court explicitly stated that this burden is the opposite from the burden of proof for horizontal monopolies, such as a cartel, in which case the burden of proof falls on the defendant to show that the agreement does not have any effect of eliminating or restricting competition.  This burden for horizontal monopolies has been further examined and confirmed by the “Judicial Interpretation of Anti-Monopoly Disputes” that was issued by China’s Supreme People’s Court on 1 June 2012.

Administrative Decisions in Enforcement Actions—Liquor and Infant Milk Formula

There have been several key RPM enforcement actions in 2013.  In February, the NDRC imposed a fine of USD 80 million on the famous Chinese liquor brands Maotai and Wuliangye for requiring distributors to resell the products above a certain price, which is common in some sectors in China.  On 2 July, according to the Price Supervision and Anti-Monopoly Bureau of the NDRC, six milk powder companies came under investigation for RPM violations of the AML.  According to the NDRC’s statements on the case, “from the evidence obtained, the milk powder companies under investigation instituted price controls over distributors and retailers, which excluded and limited market competition and therefore are alleged to have violated the Anti-Monopoly Law”.  The NDRC later announced record fines in that case of USD 109 million, which were the equivalent of between 3 per cent and 6 per cent of the companies’ revenue in 2012.

According to media reports, in the Maotai and Wuliangye cases, the NDRC provided clear indications about some of the factors that it will consider when determining whether the RPM has “eliminated or restricted competition”.   Specifically, when assessing the relevant market and market power of the two companies, the NDRC analysed the market structure and the role played by the two companies in the liquor industry, as well as the degree to which the products are substitutable with similar products and the loyalty of consumers towards the two liquors.  Based on this analysis, the NDRC concluded that the RPM provisions in the agreements with distributors of the two liquor giants eliminated and restricted competition, and thus were vertical “monopoly agreements”.

According to recent media reports, the NDRC has indicated it will “severely crack down” on and sanction vertical monopoly agreements such as RPM if they are maintained by business operators dominant in the market.  If business operators are not dominant, the NDRC reportedly indicated that it would still investigate all vertical monopoly conduct and determine if there has been any elimination or restriction of competition.

Conclusions

These civil lawsuits and administrative cases clearly show that RPM can be a violation of the AML and that RPM is currently under much greater scrutiny by enforcement authorities.  If RPM is an issue in civil lawsuits, a plaintiff will have to prove that RPM eliminates or restricts competition.  However, there are some indications that this burden of proof may be easily met.  In administrative cases, the NDRC will have to be satisfied that it has sufficient proof to show there is an elimination or restriction of competition.  However, it is unclear what level of evidence would be required to show such a restriction and it may not be a very high level, especially if the accused business operator is dominant in the market.

RPM has been a common feature of distribution agreements and other contracts in many sectors in China.  However, the recent cases clearly show there is a serious compliance risk if RPM continues to be part of a corporation’s normal practices.  This is particularly true for business operators that have a dominant market position or a group of business operators that are regarded as jointly dominant under the AML (in China, in certain circumstances, dominance is presumed with a market share as low as 10 per cent).  Unless the RPM conduct clearly falls within an exception in Article 15 of the AML, a company using RPM may face serious fines and confiscation of illegal gains.  It would be prudent for all foreign corporations active in China’s consumer markets to take heed of these changes to the enforcement priorities of the competition/antitrust authorities in China and conduct an immediate review of any potential RPM violations.

Alex An and Jared Nelson also contributed to this article.

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Doing Business In Latin America: Does Your Local Supplier Have Best Practices In Place So That Your Company Can Avoid Liability Under The Foreign Corrupt Practices Act (FCPA)?

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Imagine yourself the CEO of a successful multinational company. In the past few years, you have overseen ACME’s expansion into Latin America – a market whose demographic profile holds the promise of mouthwatering profits for your company, particularly with the upcoming holiday season. As they say, la vida es buena!

In planning for the Latin America expansion, you knew about the rules and prohibitions of the Foreign Corrupt Practices Act (“FCPA”) and implemented measures to ensure your employees do not run afoul of the law. However, you may not have known that the company can incur FCPA liability for payments made by third parties, such as such as suppliers, logistics providers, and sales agents, with whom your company works. In fact, a company can be held liable if it knows or should know that a third-party intends to make a corrupt payment on behalf of or for the benefit of the company. Because a company can be responsible for conduct of which it should have known, a conscious disregard or deliberate ignorance of the facts will not establish a defense.

To protect your company from third party liability, it is essential to perform due diligence on potential business partners. This is not to say that you cannot consider the recommendations of local employees in selecting business partners. Relying on those recommendations alone, however, could expose the company to FCPA liability if that company does not conduct itself with the same level of integrity that you do. The amount of diligence necessary varies from one potential business partner to the next and can include an anti-corruption questionnaire, document review, reference interviews, or local media review, among other things.

That’s all well and good, but what about companies with whom you are already doing business and whom you now realize you may not have adequately investigated? Asking to review those companies’ FCPA compliance policies is a good first step. If you determine that a policy is inadequate, you may ask the company to provide FCPA training to its employees. You should also carefully monitor the company’s contract performance to ensure compliance. In particular, you should consider evidence of unusual payment patterns, extraordinary “commissions,” or a lack of transparency. The key question is: how is the company spending your money?

When in doubt, experienced legal counsel can assist you in navigating these and other FCPA issues. For example, Sheppard Mullin offers Spanish language training on the provisions of the FCPA and advice for successfully implementing internal safeguards and controls to protect against FCPA liability.

With a solid FCPA plan in place, your thoughts wander back to the upcoming holiday season and your company’s projected profits for the new Latin America division and you smile to yourself. La vida es buena.

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Starting an Online Business: Licensing Requirements

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Individuals interested in starting an online business are often confused or uninformed as to the licensing requirements for such businesses.  In many ways, an online business is like any “brick and mortar” store and the owner will probably be required to obtain certain licenses or permits to operate.

Federal Requirements

Business Licenses.  Most businesses do not require a federal business license or permit.  However, a business engaged in one of the following activities should contact the responsible federal agency to determine the requirements for doing business:  Investment Advising, Drug Manufacturing, Preparation of Meat Products, Broadcasting, Ground Transportation, Selling Alcohol, Tobacco, or Firearms.

Tax Identification Number.  A federal tax identification number, also known as an Employer Identification Number (EIN), is a federal identification number issued by the Internal Revenue Service to identify a business entity.  Nearly all businesses are required to have a tax identification number.

If a business is operated as a sole proprietorship, the owner may use his or her social security number in place of an EIN on all governmental forms and other official documents.  However, most small business advisors recommend using a federal tax identification number instead.

To obtain a federal tax identification number, a business owner should contact the nearest Local IRS Field Office or call the IRS Business and Specialty Tax Hotline at 800-829-4933.  The necessary form, IRS Form SS-4, can be downloaded directly from the Small Business Administration website.

State Requirements

Many states and local jurisdictions require a person to obtain a business license or permit before beginning business operations.  A business that operates without the required license or permit may be subjected to fines or may be barred from further business activity.  In some localities, a business operating out of a residence may require an additional permit.

While business licensing requirements vary from state-to-state, the most common types include:

·    Basic Business Operation License – a legal document issued by a local governmental authority that authorizes a person to conduct business within the boundaries of the municipality.  Many states have established small business assistance agencies to help small businesses comply with state requirements;

  • Fictitious Name Certificate – a document, usually filed with a state agency, which is required to operate a business using an assumed name or trade name (essentially, any name other than the full, formal name of the individual or company);
  • Home Occupation Permit – a permit which may be required to conduct business from a residence;
  • Tax Registration – if the state has a state income tax, a business owner must usually register and obtain an employer identification number from the state Department of Revenue or Treasury Department.  If the business engages in retail sales, the owner must usually obtain a sales tax license;
  • Special State-Issued Business Licenses or Permits – these permits may be required for a business that sell highly-regulated products like firearms, gasoline, liquor, or lottery tickets;
  • Zoning and Land Use Permits – may be required to develop a site or property for specific purposes
  • Employer Registrations – if the business has employees, the owner must usually make unemployment insurance contributions;

Additional state licenses may be required for regulated occupations such as building contractors, physicians, appraisers, accountants, barbers, real estate agents, auctioneers, private investigators, private security guards, funeral directors, bill collectors, and cosmetologists.

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New Requirements for Illinois Businesses under Concealed Carry Act

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Illinois employers may be surprised to learn what action items may be necessary for their businesses following enactment of Illinois’ new Concealed Carry Act.

Facing a deadline imposed by the Seventh Circuit’s 2012 ruling that the state’s concealed carry ban was unconstitutional, on July 9 the Illinois state legislature overrode Governor Quinn’s amendatory veto to enact Public Act 98-0063, which includes the new Firearm Concealed Carry Act (“Act”) and related laws and amendatory legislation. The Act makes Illinois the 50th state to enact legislation allowing concealed carry, and permits Illinois residents and non-residents who meet specified qualifications to apply for a license to carry a “concealed firearm” — defined as a concealed loaded or unloaded handgun carried on or about a person or within a vehicle — in the state. Among other provisions, the Act specifies qualifications, procedures and content of applications for licenses and areas where those holding licenses will be prohibited from carrying firearms. Individuals cannot apply for a concealed carry license in Illinois until the Department of State Police issues the applications (the Department has up to 180 days to do so).

Required Postings for “Prohibited Areas”

The Act prohibits authorized licensees from carrying a firearm into “prohibited areas” and further mandates clear notices at entrances of such venues that firearms are prohibited. (Required signage and accompanying rules will be issued by the Department of State Police and are not yet available.) Among others, the following are types of establishments subject to these requirements that must post clear notices prohibiting the carrying of firearms:

  • Areas controlled by public or private hospitals or their affiliates, mental health facilities, nursing homes, public or private elementary or secondary schools, pre-schools, and child care facilities.
  • Areas under the control of an establishment serving alcohol on its premises, if more than 50% of the establishment’s gross receipts within the prior 3 months is from the sale of alcohol. (The Act further provides that owners of such establishments who fail to prohibit concealed firearms are subject to penalties up to $5000.)
  • Buildings, classrooms, laboratories, clinics, hospitals, artistic, athletic or entertainment venues and other areas under the control of a public or private community college, college, or university.
  • Events authorized by Special Event Retailer’s license during the time alcohol will be sold.
  • Areas under the control of a gaming facility licensed under the Riverboat Gambling Act or the Illinois Horse Racing Act of 1975.
  • Public gatherings or special events conducted on property open to the public that requires the issuance of a government permit.
  • Any stadium, arena, or the property or areas under the control of a stadium, arena, or any collegiate or professional sporting event.
  • Areas under the control of a museum, amusement park, zoo, or airport.
  • Any areas owned, leased, controlled or used by a nuclear energy storage, weapons, or development site.
  • Buses, trains, or other forms of transportation paid in whole or in part with public funds, and any areas controlled by a public transportation facility.
  • Areas where firearms are prohibited under federal law.

Prohibition by Other Owners Desiring to Maintain Gun-Free Facilities

Employers and other property owners can still prohibit the carrying of concealed firearms on property under their control that is not among the enumerated “prohibited areas” provided they post the state-approved sign indicating that firearms are prohibited. (Owners of private residences desiring to prohibit firearms need not post the sign.) Because this provision of the Act applies to owners of “private real property” however, it raises questions for businesses operating on leased premises who desire to ban firearms. At a minimum, such businesses should ensure that their landlord’s concealed carry policy is consistent with their own.

Special Provisions for Parking Areas

Note that while the carrying of concealed firearms may be prohibited in buildings, facilities and properties — including parking areas — authorized licensees can still drive with concealed firearms into the parking areas, and can store the firearms and ammunition in a case in their locked vehicle or in a locked container out of plain view. Thus while licensed employees and visitors may be prohibited from bringing a firearm into a business or venue, they cannot be prohibited from keeping the firearm in their car. Employers must be sure that any policies or procedures governing handguns in the workplace do not infringe on the rights of employees to keep authorized handguns locked in their cars, even if in employer-owned parking lots.

An Evolving Area of Law

This area of the law continues to evolve. On July 16, Chicago’s City Council unanimously voted to strengthen the City’s assault weapons ban with measures that prohibit more weapons, add stricter penalties for violations, and outline student safety zones in order to meet a 10-day deadline imposed by companion amendments within Public Act 98-0063.

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Federal Trade Commission (FTC) Settles with HTC America Over Charges it Failed to Secure Smartphone Software

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Smartphone manufacturer HTC agreed in February to settle Federal Trade Commission (FTC) charges that the company failed to take reasonable steps to secure software it developed for its mobile devices including smartphones and tablet computers. In its complaint, the FTC charged HTC with violations of the Federal Trade Commission Act.  On July 2 the FTC approved a final order settling these charges.

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The FTC alleged HTC failed to employ reasonable security measures in its software which led to the potential exposure of consumer’s sensitive information. Specifically, the FTC alleged HTC failed to implement adequate privacy and security guidance or training for engineering staff, failed to follow well-known and commonly accepted secure programming practices which would have ensured that applications only had access to users’ information with their consent. Further, the FTC alleged the security flaws exposed consumers to malware which could steal their personal information stored on the device, the user’s geolocation information and the contents of the user’s text messages.

HTC is a manufacturer of smartphones but it also installs its own proprietary software on each device. It is this software that the FTC targeted. While HTC smartphones run Google’s Android operating system, the HTC software allegedly introduced significant vulnerabilities which circumvented some of Android’s security measures.

As part of the settlement consent order, HTC agreed to issue security patches to eliminate the vulnerabilities. HTC also agreed to establish a comprehensive security program to address the security risks identified by the FTC and to protect the security and confidentiality of consumer information stored on or transmitted through a HTC device. HTC further agreed to hire a third party to evaluate its data and privacy security program and to issue reports every two years for the consent order’s 20 year term. The implication of the FTC’s policy makes it clear that companies must affirmatively address both privacy and data security issues in their custom applications and software for consumer use.

Insurer Enters Into $1.7 Million Health Insurance Portability and Accountability Act (HIPAA) Settlement

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The U.S. Department of Health and Human Services (HHS) announced yesterday that it has entered into a resolution agreement with a national managed care organization and health insurance company (hereinafter “Company”) to settle potential violations of the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

Investigation and Resolution Agreement

The HHS Office for Civil Rights (OCR) conducted an investigation after receiving the Company’s breach report, a requirement for breaches of unsecured protected health information (PHI) pursuant to the Health Information Technology for Economic Clinical Health Act (HITECH) Breach Notification Rule.

The investigation indicated that the Company had not implemented appropriate administrative and technical safeguards required by the Security Rule; and as a result, security weaknesses in an online application database left electronic PHI (ePHI) of 612,042 individuals unsecured and accessible to unauthorized individuals over the internet. PHI at issue included names, dates of birth, addresses, social security numbers, telephone numbers, and health information. Specifically, with regard to ePHI maintained in its web-based application database, the Company did not:

  1. Adequately implement policies and procedures for authorizing access to ePHI;
  2. Perform an adequate technical evaluation in response to a software upgrade affecting the security of ePHI; or
  3. Adequately implement technology to verify the identity of the person/entity seeking access to ePHI.

HHS and the Company entered into a resolution agreement, and the Company agreed to pay a $1.7 million settlement.  Notably, the resolution agreement did not include a corrective action plan for the Company.

Stepped up Enforcement

Beginning with the September 23, 2013 Omnibus Rule compliance date, HHS will have direct enforcement authority over business associates and subcontractors.  The settlement is an indication that HHS will not hesitate to extend enforcement actions to business associates and subcontractors.

The settlement is also a reminder of HHS expectations regarding compliance with HIPAA and HITECH standards.  HHS noted “whether systems upgrades are conducted by covered entities or their business associates, HHS expects organizations to have in place reasonable and appropriate technical, administrative and physical safeguards to protect the confidentiality, integrity and availability of electronic protected health information – especially information that is accessible over the Internet.”

More information regarding the Omnibus Rule and its expanded liability is available here.

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Securities and Exchange Commission (SEC) Sanctions Revlon Financial Makeover; Tips for Setting a Strong Foundation for Going Private Transaction Success

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On June 13, 2013, the SEC entered into a cease and desist order and imposed an $850,000 civil money penalty against Revlon, Inc. (Revlon) in connection with a 2009 “going private” transaction (the Revlon SEC Order).  This article identifies some of the significant challenges in executing a going private transaction and highlights particular aspects of the Revlon deal that can serve as a teaching lesson for planning and minimizing potential risks and delays in future going private transactions.

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Background of Revlon Going Private Transaction.

The controlling stockholder of Revlon, MacAndrews & Forbes Holdings Inc. (M&F), made a proposal to the independent directors of Revlon in April of 2009 to acquire, by way of merger (the Merger Proposal), all of the Class A common stock not currently owned by M&F (the Revlon Minority Stockholders).  The Merger Proposal was submitted as a partial solution to address Revlon’s liquidity needs arising under an impending maturity of a $107 million senior subordinated term loan that was payable to M&F by a Revlon subsidiary.  A portion of this debt (equal to the liquidation value of the preferred stock issued in the Merger Proposal) would be contributed by M&F to Revlon, as part of the transaction.  This was submitted as an alternative in lieu of potentially cost-prohibitive and dilutive financing alternatives (or potentially unavailable financing alternatives) during the volatile credit market following the 2008 sub-prime mortgage crisis.

In response to the Merger Proposal, Revlon formed a special committee of the Board (the Special Committee) to evaluate the Merger Proposal.  The Special Committee retained a financial advisor and separate counsel to assist in its evaluation of the Merger Proposal.  Four lawsuits were filed in Delaware between April 24 and May 12 of 2009 challenging various aspects of the Merger Proposal.

On May 28, 2009, the Special Committee was informed by its financial advisor that it would be unable to render a fairness opinion on the Merger Proposal, and thereafter the Special Committee advised M&F that it could not recommend the Merger Proposal.  In early June of 2009, the Special Committee disbanded, but the independent directors subsequently were advised that M&F would make a voluntary exchange offer proposal to the full Revlon Board of Directors (the Exchange Offer). Revlon’s independent directors thereafter chose to continue to utilize counsel that served to advise the Special Committee, but they elected not to retain a financial advisor for assistance with the forthcoming M&F Exchange Offer proposal, because they were advised that the securities to be offered in the Exchange Offer would be substantially similar to those issuable through Merger Proposal.  As a result, they did not believe they could obtain a fairness opinion for the Exchange Offer consideration.  The Board of Directors of Revlon (without the interested directors participating in the vote) ultimately approved the Exchange Offer without receiving any fairness opinion with respect to the Exchange Offer.

On September 24, 2009, the final terms of the Exchange Offer were set and the offer was launched.  The Exchange Offer, having been extended several times, finally closed on October 8, 2009, with less than half of the shares tendered for exchange out of all Class A shares held by the Revlon Minority Stockholders.  On October 29, 2009, Revlon announced third quarter financial results that exceeded market expectations, but these results were allegedly consistent with the financial projections disclosed in the Exchange Offer.  Following these announced results, Revlon’s Class A stock price increased.  These developments led to the filing of additional litigation in Delaware Chancery Court.

The Revlon SEC Order and Associated Rule 13e-3 Considerations.

A subset of the Revlon Minority Stockholders consisted of participants in a Revlon 401(k) retirement plan, which was subject to obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and a trust agreement (the Trust Agreement) between Revlon and the Plan’s trustee (the Trustee).  Provisions of ERISA and the Trust Agreement prohibited a 401(k) Plan participant’s sale of common stock to Revlon for less than “adequate consideration.”

During July of 2009, Revlon became actively involved with the Trustee to control the flow of information concerning any adequate consideration determination, to prevent such information from flowing back to Revlon and to prevent such information from flowing to 401(k) participants (and ultimately Revlon Minority Stockholders); certain amendments to the Trust Agreement were requested by Revlon and agreed to by the Trustee to effect these purposes.  This also had the additional effect of preventing the independent directors of Revlon from being aware that an adequate consideration opinion would be rendered for the benefit of Revlon’s 401(k) Plan participants.

On September 28, 2009, the financial advisor to the 401(k) Plan rendered an adverse opinion that the Exchange Offer did not provide adequate consideration to 401(k) Plan participants.  As a result, the Trustee informed 401(k) Plan participants, as previously directed by Revlon, that the 401(k) Plan Trustee could not honor tender instructions because it would result in a “non-exempt prohibited transaction under ERISA.”  Revlon Minority Stockholders, including 401(k) Plan participants, were generally unaware that an unfavorable adequate consideration opinion had been delivered to the Trustee.

In the Revlon SEC Order, the SEC concluded that Revlon engaged in a series of materially misleading disclosures in violation of Rule 13e-3.  Despite disclosure in the Exchange Offer that the Revlon Board had approved the Exchange Offer and related transactions based upon the “totality of information presented to and considered by its members” and that such approval was the product of a “full, fair and complete” process, the SEC found that the process, in fact, was not full, fair and complete.  The SEC particularly found that the Board’s process “was compromised because Revlon concealed from both minority shareholders and from its independent board members that it had engaged in a course of conduct to ‘ring-fence’ the adequate consideration determination.”  The SEC further found that “Revlon’s ‘ring-fencing’ deprived the Board (and in turn Revlon Minority Stockholders) of the opportunity to receive revised, qualified or supplemental disclosures including any that might have informed them of the third party financial advisor’s determination that the transaction consideration to be received by the 401(k) members . . . was inadequate.”

Significance of the Revlon SEC Order.

The Revlon Order underscores the significance of transparency and fairness being extended to all unaffiliated stockholders in a Rule 13e-3 transaction, including the 401(k) Plan participants whose shares represented only 0.6 percent of the Revlon Minority Stockholder holdings.  Importantly, the SEC took exception to the fact that Revlon actively prevented the flow of information regarding fairness and found that the information should have been provided for the benefit of these participants, as well as all Revlon Minority Stockholders.  This result ensued despite the fact that Revlon’s Exchange Offer disclosures noted in detail the Special Committee’s inability to obtain a fairness opinion for the Merger Proposal and the substantially similar financial terms of the preferred stock offered in both the Merger Proposal and the Exchange Offer transactions.

Going Private Transactions are Subject to Heightened Review by the SEC and Involve Significant Risk, Including Personal Risk.

Going private transactions are vulnerable to multiple challenges, including state law fiduciary duty claims and wide ranging securities law claims, including claims for private damages as well as SEC civil money penalties.  In the Revlon transaction, the SEC Staff conducted a full review of the going private transaction filings.  Despite the significant substantive changes in disclosure brought about through the SEC comment process, the SEC subsequently pursued an enforcement action and prevailed against Revlon for civil money penalties.

Although the SEC sanction was limited in scope to Revlon, it is worth noting that the SEC required each of Revlon, M&F and M&F’s controlling stockholder, Ronald Perelman, to acknowledge (i) personal responsibility for the adequacy and accuracy of disclosure in each filing; (ii) that Staff comments do not foreclose the SEC from taking action including enforcement action with regard to the filing; and (iii) that each may not assert staff comments as a defense in any proceeding initiated by the SEC or any other person under securities laws.  Thus, in planning a going private transaction, an issuer and each affiliate engaged in the transaction (each, a Filing Person) must make these acknowledgements, which expose each Filing Person (including certain affiliates who may be natural persons) to potential damages and sanctions.

The SEC also requires Filing Persons to demonstrate in excruciating detail the basis for their beliefs regarding the fairness of the transaction.  These inquiries typically focus on the process followed in pursuing and negotiating the transaction, the procedural fairness associated with such process, and the substantive fairness of the overall transaction, including financial fairness.  As a result of this, each Filing Person (including certain natural persons) in a going private transaction should be prepared to diligently satisfy cumbersome process and fairness requirements as part of the pre-filing period deliberative process, and later stand behind extensive and detailed disclosures that demonstrate and articulate the basis of the procedural and substantive fairness of the transaction, including financial fairness.

Damages and Penalties in Going Private Transactions Can Be Significant.

It is worth noting that civil money penalties and settlements that have been announced to date by Revlon for its Exchange Offer going private transaction is approximately $30 million.  After factoring in professional fees, it would not be surprising that the total post-closing costs, penalties and settlements approach 50 percent of the implied total transaction value of all securities offered in the Exchange Offer transaction.  From this experience, it is obvious that costs, damages and penalties can be a significant component of overall transaction consideration, and these risks must be factored in as part of overall transaction planning at the outset.

Given the risks of post-transaction damages and costs, it is essential that future going private transactions be structured and executed by Filing Persons with the foregoing considerations in mind in order to advance a transaction with full transparency, a demonstrably fair procedural process and deal consideration that is substantively fair and demonstrably supportable as fair from a financial point-of-view.

Department of State Releases August 2013 Visa Bulletin

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EB-2 category for individuals chargeable to India advances by more than three years.

The U.S. Department of State (DOS) has released its August 2013 Visa Bulletin. The Visa Bulletin sets out per country priority date cutoffs that regulate the flow of adjustment of status (AOS) and consular immigrant visa applications. Foreign nationals may file applications to adjust their status to that of permanent resident or to obtain approval of an immigrant visa at a U.S. embassy or consulate abroad, provided that their priority dates are prior to the respective cutoff dates specified by the DOS.

What Does the August 2013 Visa Bulletin Say?

The cutoff date in the EB-2 category for individuals chargeable to India has advanced by three years and four months in an effort to fully utilize the numbers available under the annual limit. It is expected that such movement will generate a significant amount of demand from individuals chargeable to India during the coming months.

EB-1: All EB-1 categories remain current.

EB-2: A cutoff date of January 1, 2008 is now in effect for individuals in the EB-2 category from India, reflecting forward movement of three years and four months. A cutoff date of August 8, 2008 remains in effect from the July Visa Bulletin for individuals in the EB-2 category from China. The cutoff date remains current for individuals in the EB-2 category from all other countries.

EB-3: There is continued backlog in the EB-3 category for all countries, with minor forward movement for EB-3 individuals from the Philippines and no forward movement for EB-3 individuals from the rest of the world.

The relevant priority date cutoffs for foreign nationals in the EB-3 category are as follows:

China: January 1, 2009 (no forward movement)
India: January 22, 2003 (no forward movement)
Mexico: January 1, 2009 (no forward movement)
Philippines: October 22, 2006 (forward movement of 21 days)
Rest of the World: January 1, 2009 (no forward movement)

Developments Affecting the EB-2 Employment-Based Category

Mexico, the Philippines, and the Rest of the World

In November 2012, the EB-2 category for individuals chargeable to all countries other than China and India became current. This meant that EB-2 individuals chargeable to countries other than China and India could file AOS applications or have applications approved on or afterNovember 1, 2012. The August Visa Bulletin indicates that the EB-2 category will continue to remain current for these individuals through August 2013.

China

As with the July Visa Bulletin, the August Visa Bulletin indicates a cutoff date of August 8, 2008 for EB-2 individuals chargeable to China. This means that EB-2 individuals chargeable to China with a priority date prior to August 8, 2008 may continue to file AOS applications or have applications approved through August 2013.

India

From October 2012 through the present, the cutoff date for EB-2 individuals chargeable to India has been September 1, 2004. The August Visa Bulletin indicates forward movement of this cutoff date by more than three years to January 1, 2008. This means that EB-2 individuals chargeable to India with a priority date prior to January 1, 2008 may file AOS applications or have applications approved in August 2013. The August Visa Bulletin indicates that this cutoff date has been advanced in an effort to fully utilize the numbers available under the EB-2 annual limit. It is expected that such movement will generate a significant amount of demand from individuals chargeable to India during the coming months.

This significant advancement in the cutoff date for EB-2 individuals chargeable to India will quite possibly be followed by significant retrogression in the new fiscal year. Consequently, AOS applications filed in September 2013 may be received and receipted by U.S. Citizenship and Immigration Services; however, adjudication could be delayed. Applications for interim benefits, including employment authorization and advance parole, should be adjudicated in a timely manner notwithstanding any possible retrogression of cutoff dates.

Developments Affecting the EB-3 Employment-Based Category

In May, June, and July, the cutoff dates for EB-3 individuals chargeable to most countries advanced significantly in an attempt to generate demand and fully utilize the annual numerical limits for the category. The August Visa Bulletin indicates no additional forward movement in this category, with the exception of the Philippines, which advanced by 21 days.

China

The July Visa Bulletin indicated a cutoff date of January 1, 2009 for EB-3 individuals chargeable to China. The August Visa Bulletin indicates no movement of this cutoff date. This means that EB-3 individuals chargeable to China with a priority date prior to January 1, 2009 may file AOS applications or have applications approved through August 2013.

India

Additionally, the July Visa Bulletin indicated a cutoff date of January 22, 2003 for EB-3 individuals chargeable to India. The August Visa Bulletin indicates no movement of this cutoff date. This means that EB-3 individuals chargeable to India with a priority date prior to January 22, 2003 may file AOS applications or have applications approved through August 2013.

Rest of the World

The July Visa Bulletin indicated a cutoff date of January 1, 2009 for EB-3 individuals chargeable to the Rest of the World. The August Visa Bulletin indicates no movement of this cutoff date. This means that individuals chargeable to all countries other than China, India, Mexico, and the Philippines with a priority date prior to January 1, 2009 may file AOS applications or have applications approved through August 2013.

How This Affects You

Priority date cutoffs are assessed on a monthly basis by the DOS, based on anticipated demand. Cutoff dates can move forward or backward or remain static. Employers and employees should take the immigrant visa backlogs into account in their long-term planning and take measures to mitigate their effects. To see the August 2013 Visa Bulletin in its entirety, please visit the DOS website here.

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America Invents Act – Practical Considerations for Portfolio Companies

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Private equity funds should familiarize themselves with recent changes to U.S. patent law that affect patent protection strategies for their portfolio companies.  In September 2011, the U.S. Congress enacted the America Invents Act (AIA) patent reform bill, which significantly overhauled U.S. patent law.  This article summarizes practical considerations that private equity funds should bear in mind when evaluating and managing the patent portfolio of their investments.

First Inventor to File 

In the broadest sense, the AIA converts U.S. patent law into a “first-inventor-to-file” system from a “first-to-invent” system.  This conversion harmonizes U.S. patent law with the rest of the world’s patent laws.  In practice, it means that businesses should not delay filing patent applications, as they can no longer antedate patent-defeating prior art with an earlier invention date.

Challenges to Patent Rights 

Effective September 12, 2012, the AIA provided businesses new post-issuance patent validity challenge options that may be exercised before the U.S. Patent and Trademark Office (USPTO).  The new post-issuance challenges provide businesses new and predictable avenues to test the validity of a competitor’s patent that is, or may in the future be, an impediment to commercialization.  These post-issuance challenges include post-grant review, inter partes review and the Transitional Program for Covered Business Methods.  Each of the three post-issuance challenges is defined briefly here.

Post-Grant Review

Someone other than the patent owner may file a petition for post-grant review challenging the validity of a patent within nine months of the patent’s date of issue or reissue on any statutory grounds for invalidity.  Thus, even if a patent has been grated to a portfolio company, it may be subject to challenge by third parties in the time period immediately following issuance.  Similarly, a portfolio company could elect to challenge a competitor’s rights, even after a patent has been issued.

Inter Partes Review 

Someone other than the patent owner may file a petition for inter partes review challenging the validity of the patent nine months after the date of issue or reissue on limited invalidity grounds.  Inter partes review may only be instituted after the time period for post-grant review has expired and offers only a subset of the challenges available in post-grant review.  This means that throughout the entire life of an issued patent, generally 20 years from the filing date of the earliest priority document, it may be subject to challenge and invalidation.  Private equity funds should closely consider any potential challenges that could be lodged against a portfolio company and should evaluate potential risk before investing.

Transitional Program for Covered Business Methods

With regard to business method patents, someone other than the patent owner may file a petition for covered business method review challenging the validity of a patent if (1) the petitioner has been sued for infringement or threatened with an infringement suit, and (2) the patent claims a financial product or service.  Practically speaking, this scope is broader than mere financial products or services, such that any patent claiming anything related to money may potentially be challenged using a covered business method review.  Versata Development Group Inc. recently filed suit against the USPTO in the Eastern District of Virginia alleging that such a scope is impermissibly broad.  Until the result of that case or guidance is issued by the USPTO, private equity funds should proceed under the broad definition of “financial product or service” when evaluating a portfolio company with patents that may be challenged under the covered business method review.

Conclusion

Whether used against competitors’ patents or in defense of a business’ own interests, the new post-issuance challenges available under the AIA are powerful new tools in a portfolio company’s strategic toolbox.

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Financial Innovation for Clean Energy Deployment: Congress Considers Expanding Master Limited Partnerships for Clean Energy

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Technological innovation is driving renewable energy towards a future where it is cost competitive without subsidies and provides a growing share of America’s energy. But for all the technical progress made by the clean energy industry, financial innovation is not keeping pace: access to low-cost capital continues to be fleeting, and the industry has yet to tap institutional and retail investors through the capital markets. This is why a bipartisan group in Congress has proposed extending master limited partnerships (MLPs), a financial mechanism that has long driven investment in traditional energy projects, to the clean energy industry.

Last month Senators Chris Coons (D-DE) and Jerry Moran (R-KS) introduced the Master Limited Parity Act (S. 795); Representatives Ted Poe (R-TX), Mike Thompson (D-CA), and Peter Welch (D-VT) introduced companion legislation (H.R. 1696) in the House of Representatives. The bills would allow MLP treatment for renewable energy projects currently eligible for the Sec. 45 production tax credit (PTC) or 48 investment tax credit (ITC) (solar, wind, geothermal, biomass, hydropower, combined heat and power, fuel cells) as well as biofuels, renewable chemicals, energy efficient buildings, electricity storage, carbon capture and storage, and waste-heat-to-power projects. The bill would not change the eligibility of projects that currently qualify as MLPs such as upstream oil and gas activities related to exploration and processing or midstream oil and gas infrastructure investments.

MLPs have been successfully utilized for traditional fossil-fuel projects because they offer an efficient means to raise inexpensive capital. The current total market capitalization of all energy-related MLPs exceeds $400 billion, on par with the market value of the world’s largest publicly traded companies. Ownership interests for MLPs are traded like corporate stock on a market. In exchange for restrictions on the kinds of income it can generate and a requirement to distribute almost all earnings to shareholders (called unitholders), MLPs are taxed like a partnership, meaning that income from MLPs is taxed only at the unitholder level. The absence of corporate-level taxation means that the MLP has more money to distribute to unitholders, thus making the shares more valuable. The asset classes in which MLPs currently invest lend themselves to stable, dividend-oriented performance for a tax-deferred investment; renewable energy projects with long-term off-take agreements could also offer similar stability to investors. And since MLPs are publicly traded, the universe of potential investors in renewable projects would be opened to retail investors.

The paperwork for MLP investors can be complicated, however. Also, investors are subject to rules which limit their ability to offset active income or other passive investments with the tax benefits of an MLP investment. Despite the inherent restrictions on some aspects of MLPs, the opportunities afforded by the business structure are generating increasing interest and support for the MLP Parity Act.

Proponents of the MLP Parity Act envision the bill as a way to help renewable energy companies access lower cost capital and overcome some of the limitations of the current regime of tax credits. Federal tax incentives for renewable energy consist primarily of two limited tools: tax credits and accelerated depreciation rates. Unless they have sizeable revenue streams, the tax credits are difficult for renewable project developers to directly use. The reality is only large, profitable companies can utilize these credits as a means to offset their income. For a developer who must secure financing though a complicated, expensive financing structure, including tax equity investors can be an expensive means to an end with a cost of capital sometimes approaching 30%. Tax credits are a known commodity, and developers are now familiar with structuring tax equity deals, but the structure is far from ideal. And as renewable energy advocates know all too well, the current suite of tax credits need to be extended every year. MLP treatment, on the other hand, does not expire.

Some supporters have noted that clean energy MLPs would “democratize” the industry because private retail investors today have no means to invest in to any meaningful degree in clean energy projects. Having the American populace take a personal, financial interest in the success of the clean energy industry is not trivial. The initial success of ‘crowd-funded” solar projects also provides some indication that there is an appetite for investment in clean energy projects which provide both economic and environmental benefits.

Sen. Coons has assembled a broad bipartisan coalition, including Senate Finance Energy Subcommittee Chair Debbie Stabenow (D-MI) and Senate Energy and Natural Resources Ranking Member Lisa Murkowski (R-AK). Republican and Democratic cosponsors agree that this legislation would help accomplish the now-familiar “all-of-the-above” approach to energy policy.

However, some renewable energy companies that depend on tax credits and accelerated depreciation are concerned that Republican supporters of the legislation will support the bill as an immediate replacement for the existing (but expiring) suite of renewable energy tax credits. Sen. Coons does not envision MLP parity as a replacement for the current production tax credits and investment tax credits but rather as additional policy tool that can address, to some degree, the persistent shortcomings of current financing arrangements. In this way, MLPs could provide a landing pad for mature renewable projects as the existing regime of credits is phased out over time, perhaps as part of tax reform.

So would the clean energy industry utilize MLP structures if Congress enacts the MLP Parity Act? The immediate impact may be hard to predict, and some in renewable energy finance fear MLP status will be less valuable than the current tax provisions. This is in part because the average retail investor would not be able to use the full share of accompanying PTCs, ITCs, or depreciation unless Congress were also to change what are known as the “at-risk” and “passive activity loss and tax credit” rules. These rules were imposed to crack down on perceived abuse of partnership tax shelters and have tax implications beyond the energy industry. Modifying these rules is highly unlikely and would jeopardize the bipartisan support the bill has attracted so far. But other renewable energy companies believe they can make the structure work for them now, and industries without tax credits — like renewable chemicals, for instance — would not have the same concerns with “at-risk” and “passive activity loss” rules. Furthermore, over the long term, industry seems increasingly confident the structure would be worthwhile. Existing renewable projects that have fully realized their tax benefits and have cleared the recapture period could be rolled up into existing MLPs. Existing MLP infrastructure projects could deploy renewable energy assets to help support the actual infrastructure. Supporters of the legislation see the change as a starting point, and the ingenuity of the market will find ways to work within the rules to deliver the maximum benefit.

The future of the MLP Parity Act will be linked to the larger conversation in Congress regarding tax reform measures. The MLP Parity Act is not expected to pass as a stand-alone bill; if it were to be enacted, it would most likely be included as part of this larger tax-reform package. Congress currently is looking at ways to lower overall tax rates and modify or streamline technology-specific energy provisions. This has many renewable energy advocates on edge: while reform provides an opportunity to enact long-term policies (instead of one-year extensions) that could provide some level of stability, it also represents a chance for opponents of renewable energy to exact tough concessions or eliminate existing incentives. As these discussions continue in earnest this year, the reintroduction of the MLP Parity Act has already begun to generate discussions and mentions in policy white papers at both the House Ways and Means Committee and the Senate Finance Committee. Whether a highly partisan Congress can actually achieve such an ambitious goal as tax reform this year remains uncertain. But because of its bipartisan support, the MLP Parity Act certainly will be one of the many potential reforms Congress will consider seriously.