Tag: Labor Law

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.

New York State Court of Appeals Backs Starbucks Policy on Tip-Pooling

Sheppard Mullin 2012

Starbucks shift supervisors can legally participate in tip-sharing with other store employees, but the coffee chain’s assistant managers have enough managerial responsibility to disqualify them from sharing in customer tips, according to the New York State Court of Appeals.

Starbucks’ policy provides for weekly distribution of gratuities to the company’s two lower ranking categories of employees, baristas and shift supervisors, but not to its two higher ranking categories of employees, assistant managers and store managers. In addressing questions certified by the Second Circuit regarding the validity this policy, the Court of Appeals concluded that since shift supervisors, like baristas, directly serve patrons, they remain tip-pool eligible even if their role also involves some supervisory responsibility. But assistant managers, because they are granted “meaningful authority” over subordinates, are not eligible to participate in the tip pool.

The decision provides guidance to the Second Circuit as it hears appeals of two suits, Barenboim et al. v. Starbucks Corporation, No. 10–4912–cv, and Winans et al. v. Starbucks Corporation, No. 11–3199–cv, each brought by a different putative class of Starbucks workers. The plaintiffs in Barenboimare Starbucks baristas who argue that only baristas, and not shift supervisors, are entitled to participate in tip-sharing. The Winans plaintiffs are assistant managers who claim that they should be allowed a share of the tips. In both cases, the Southern District of New York awarded summary judgment to Starbucks, and the plaintiffs appealed. The Second Circuit certified questions to the New York Court of Appeals regarding the interpretation of New York Labor Law §196-d, which governs tip-pooling.

Shift Supervisors Are Not Company “Agents”

New York Labor Law §196-d prohibits an “employer or his agent or an officer or agent of any corporation, or any other person” from accepting or retaining any part of the gratuities received by an employee. It also states, “Nothing in this subdivision shall be construed as affecting the… sharing of tips by a waiter with a busboy or similar employee.”

According to the plaintiff baristas in Barenboim, Starbucks’ policy of including shift supervisors in the stores’ tip pools violates §196-d because the shift supervisors are company “agents” and therefore not permitted to “demand or accept, directly or indirectly, any part of the gratuities, received by an employee.” Starbucks argues that shift supervisors are sufficiently analogous to waiters, busboys and similar employees, and should therefore be permitted to share in the gratuities pursuant to §196-d.

The Court of Appeals, in deciding that shift supervisors are entitled to share in the tip pool, deferred to the New York State Department of Labor’s (“DOL”) long-standing view that “employees who regularly provide direct service to patrons remain tip-pool eligible even if they exercise a limited degree of supervisory responsibility.” The Court compared the shift supervisors to restaurant captains who have some authority over wait staff, but are nonetheless eligible to participate in tip pools pursuant to the DOL’s Hospitality Industry Wage Order and DOL guidelines dating back to 1972.

“Meaningful Authority” Standard

In Winans, the Starbucks assistant store managers argue that they should be deemed similar to waiters and busboys under §196-d (and therefore eligible for tip-sharing) because they do not have full or final authority to terminate subordinates. The Court of Appeals disagreed: “[W]e believe that there comes a point at which the degree of managerial responsibility becomes so substantial that the individual can no longer fairly be characterized as an employee similar to general wait staff within the meaning of Labor Law §196-d.” That line is drawn, according to the decision, at “meaningful or significant authority or control over subordinates.”

Examples of meaningful authority, according to the decision, are the ability to discipline subordinates, the authority to hire and terminate employees, and input into the creation of employee work schedules. Contrary to the plaintiffs’ claim, authority to hire and fire is not the exclusive test for determining whether an employee is similar to wait staff for the purposes of §196-d.

Tip-Sharing Required?

In addition to the question of which employees are eligible for tip-sharing, the Second Circuit asked the Court of Appeals to consider whether an employer may deny tip pool distributions to an employee who is eligible to split tips under §196-d. The Court held that §196-d excludes certain employees from tip pools, but does not require employers to include all employees who are not legally barred from participating.

Conclusion

The Court of Appeals decision provides specific guidance to the Second Circuit Court of Appeals in connection with the two Starbucks cases pending on appeal, but it also provides helpful clarity to any employers with tip-sharing policies. In particular, the decision confirms that employees who regularly provide direct service to patrons may still participate in tip-sharing, but are not required to do so, even if they exercise a limited degree of supervisory responsibility. On the other hand, employees with meaningful authority over subordinates are not eligible to participate in tip-sharing. Employers should carefully review their tip-sharing policies in light of this guidance from the Court of Appeals.

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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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Michigan Supreme Court Won’t Give Advisory Opinion on Right-to-Work

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Saying simply that “we are not persuaded that granting the request would be an appropriate exercise of the court’s discretion,” the Michigan Supreme Court on Friday denied Gov. Rick Snyder’s request that the high court render an advisory opinion about the constitutionality of Michigan’s new right-to-work law.

Relying upon the provision in the state’s constitution’s that allows the governor to request the “opinion of the supreme court on important questions of law upon solemn occasions as to the constitutionality of legislation after it has been enacted into law but before its effective date,” the Governor had asked the Court for a ruling largely because the state’s public workers’ collective agreements are set to expire at the end of 2013. In a brief filed in support of the request for an advisory opinion, Michigan Solicitor General John Bursch said that an advisory opinion would prevent an “impasse at the negotiating table.”

Notwithstanding the Court’s decision, six lawsuits continue challenging the Act. Two of them are brought by unions or labor coalitions. Michigan State AFL-CIO v. Callaghan has been brought in federal court and challenges the constitutionality of the Act as to private sector workers. UAW v. Green, currently pending in the Michigan Court of Appeals, challenges the constitutionality as it applies to public sector workers. Here’s a helpful link to a chart describing the pending litigation.

SG Bursch also said in his filing with the Supreme Court that barring Supreme Court action, the state would consider filing a motion seeking an expedited ruling in the Green case.

The Detroit Free Press coverage on the court’s decision can be found here.

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Defense of Marriage Act’s Demise (DOMA) – What it Means for Canadian Residents with U.S. Ties

Altro Levy LogoLast week, the US Supreme Court issued an historic and landmark ruling in the case of US v. Windsor. It has been hailed in the media as the demise of the Defense Of Marriage Act (“DOMA”), and celebrated as an extension of more than 1,000 federal benefits to same-sex couples.

In US v. Windsor, Edith Windsor brought suit against the US government after she was ordered to pay $363,000 in US estate tax upon the death of her wife Thea Spyer. Edith and Thea were legally married in Canada in 2007, but the US federal government did not recognize their marriage when Thea passed away in 2009. Under DOMA gay marriage was not recognized, even if it was legal in the jurisdiction where it was performed. This lack of recognition meant that Edith could not take advantage of the marital deduction that would have allowed her to inherit from her wife without paying US estate tax.

In its ruling on June 26th, the US Supreme Court ruled that the US federal government could not discriminate against same-sex married couples in the administration of its federal laws and benefits as previously dictated by DOMA. Same-sex couples, who are legally married in one of the 13 states that recognize gay marriage, or a country like Canada, now have access to the same federal protections and benefits as a heterosexual married couple.

Tax Benefits

The demise of DOMA will bring with it a multitude of changes under US tax law. We will not attempt to enumerate all of them here, though we will provide a brief overview of key changes for our Canadian and American clients.

i. US Estate Tax

The case of US v. Windsor was based on the US estate tax, which is imposed by the US federal government on both US citizens and residents, as well as non-residents who own US assets worth more than $60,000 USD. Currently US citizens and residents with less than $5.25 Million USD in worldwide assets do not owe US estate tax on death. Canadians with worldwide assets of $5.25 Million USD or less receive a unified credit under the Canada-US Tax Treaty that works to eliminate any US estate tax owed on their US property.

Under federal law a US citizen may pass his entire estate to his US citizen spouse tax-free upon death. Up until last week this rollover was unavailable to same-sex couples.

Canadian same-sex couples should now benefit from the Canada-US Tax Treaty provisions that provide a marital credit to the surviving spouse. This allows for a doubling up of credit against any potential US estate tax due on US property. Now a Canadian same-sex spouse can inherit a worldwide estate worth up to $10.5 Million USD and should see little to no tax on US assets due upon the death of the first spouse.

ii. Gift Tax

The US imposes a tax on gifts if they exceed $14,000 USD per recipient per year. There is an exemption for gifts between spouses, which are generally not taxable.

Gifts made in the US between non-US citizen non-resident spouses are taxable, but the annual exemption is $139,000 USD instead of $14,000 USD. Canadian spouses who gift each other US property, US corporate stocks, etc. may gift up to $139,000 USD per year without incurring US gift tax.

These exemptions have now been extended to same-sex couples, expanding their ability to use gifting for tax and estate planning.

iii. US Income Tax

Many Canadians move to the US each year, in part because of the lower personal tax rates. In the US spouses are allowed to engage in a form of income splitting by filing a joint income tax return. By filing jointly, married couples are also generally able to take advantage of further credits and deductions not afforded to individual or single filers. Being able to file jointly can be highly tax advantageous.

Previously, same-sex couples had to file either separately or as head of household. Now they have the option of filing jointly as spouses, and gaining access to the aforementioned income splitting, credits and deductions.

Couples may file up to three years of amended US Income Tax returns if they believe that they would have been entitled to a larger tax return by filing jointly in those years.

iv. Other Tax Benefits

In the US most individuals receive health insurance through their employer at least up until they qualify for US Medicare at age 65. Previously, if the employer sponsored health insurance plan covered the same-sex spouse as well, then it was considered a taxable benefit. Such coverage will now also be tax-free for same-sex couples.

Retirement Benefits

Among the many benefits now extended to same-sex couples are a variety of “Retirement Benefits.”

i. Social Security and Medicare Benefits

With the end of DOMA, same-sex couples may now qualify for retirement, death, and disability Social Security benefits based on their spouse’s qualifying US employment history. For example, same-sex couples that do not have the required US employment history to qualify for US Social Security benefits on their own may now qualify for spousal Social Security benefits based on their spouse’s qualifying employment history. These spousal Social Security benefits are typically equal to 50% of the Social Security benefits received by the spouse with the qualifying employment history.

Additionally, spouses can qualify for US Medicare based on only one spouse’s qualifying US employment. This allows access to premium-free, or reduced-premium, health coverage in retirement.

Previously these important retirement benefits were not available to same-sex spouses.

ii. Individual Retirement Accounts

Important changes to the rights and recognition of spouses under US retirement savings plans result from the end of DOMA. Same-sex couples will now be recognized under 401(k), 403(b), IRA, Roth IRA, and similar plans. Spouses will be required to give their consent for any non-spouse beneficiary designations for these accounts. They will be treated as spouses for purposes of determining required distributions. For example, an inheriting same-sex spouse will not have to begin IRA distributions until age 70 ½, whereas previously he would have had to begin required distributions immediately as would any non-spouse beneficiary.

Immigration

One of the biggest questions after the US Supreme Court’s ruling on DOMA was whether there would be immediate changes to US immigration policy. Previously the US government did not recognize same-sex couples for immigration purposes. This meant that a US citizen spouse could not sponsor his husband for immigration to the US as a permanent resident (a.k.a. green card holder).

Last week, shortly after the ruling on DOMA, Alejandro Mayorkas, the director of US Citizenship and Immigration Services (“USCIS”) announced at the American Immigration Lawyers Association annual conference that the USCIS would begin issuing green cards to qualifying same-sex couples.

As of Friday, June 29, 2013, USCIS began issuing green cards to same-sex spouses. USCIS has stated that it has been keeping a record of spousal green card petitions denied only due to a same-sex marriage for the past two years. It is expected to reopen and reconsider these spousal sponsorship petitions that were previously denied due to same-sex marriage.

Conclusion

The demise of DOMA is exciting news for Americans, and Canadians with US ties. It provides same sex couples a wealth of new tax and estate planning opportunities, not to mention new opportunities for retirement and immigration planning. It is not too early to review your current planning, and take advantage of these changes.

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Obama Administration Delays Until 2015 Large Employer Shared Responsibility Requirements, Reporting and Tax Penalties

Dickinson Wright LogoOn July 2, 2013, the Department of Treasury announced a one-year delay in the employer shared responsibility mandate under the Affordable Care Act (“ACA”) and related information reporting.

Complexity Leads to Delayed Reporting Implementation

The Department said that over the past several months, the Administration engaged in dialogue with businesses about the new employer and insurer reporting requirements under ACA. It took into account employer concerns about the complexity of the requirements and their need for more time to implement them effectively. Based on this, the Administration announced that it will provide an additional year, to January 1, 2015, before the ACA mandatory employer and insurer reporting requirements begin. It said the delay is designed to meet two goals. First, it will allow the Department to consider ways to simplify the new reporting requirements consistent with the law. Second, it will provide time to adapt health coverage and reporting systems while employers are moving toward making health coverage affordable and accessible for their employees. The Department said that within the next week, it will publish formal guidance describing the transition. In doing so, it said it is working hard to adapt and be flexible about reporting requirements as it implements the law.

More specifically, the Department said that the ACA includes information reporting (under Code Section 6055) by insurers, self-insured employers, and other parties that provide health coverage. It also requires information reporting (under Code Section 6056) by certain employers with respect to the health coverage offered to their full-time employees. The Department expects to publish proposed rules implementing these provisions this summer, after a dialogue with stakeholders – including responsible employers that already provide their full-time work force with coverage that exceeds the minimum employer shared responsibility requirements – in an effort to minimize the reporting, consistent with effective implementation of the law.

Once these rules have been issued, the Administration will work with employers, insurers, and other reporting entities to strongly encourage them to voluntarily implement this information reporting in 2014, in preparation for the full application of the provisions in 2015. It said that real-world testing of reporting systems in 2014 will contribute to a smoother transition to full implementation in 2015.

Delayed Implementation of Shared Responsibility and Tax Penalties

The Department said it recognizes that this transition relief will make it impractical to determine which applicable large employers owe the shared responsibility tax payment for not providing minimum essential coverage that is affordable and provides minimum value (under Code Section 4980H) for 2014. Accordingly, the Department is extending transition relief on the employer shared responsibility payments. Under the transition relief, applicable large employers will not owe either the $2,000 tax or the $3,000 tax for 2014. Any employer shared responsibility tax payments will not apply until 2015. During the 2014 transition period, the Department strongly encourages employers to maintain or expand the health coverage they provide to their employees.

Importantly, the Department said its actions do not affect employees’ access to the premium tax credits available under the ACA, although without employers reporting on who they provide coverage to, it is hard to see how the government will know which individuals qualify for a tax credit. Without more, this suggests that the Department intends that marketplaces for individuals will still be available January 1, 2014. It also suggests that most Americans will still have to obtain health benefits coverage or pay the individual tax. It is not clear if the notice employers are required to send to all employees by October 1, 2013 advising them of the marketplaces will still be required. The upcoming guidance should address this and other requirements. The Department also said that this delay does not change the compliance requirements under any other provision of the ACA. This suggests that the PCORI fee payable by July 31, 2013 is still due, the 90-day maximum waiting period for benefits eligibility in 2014 still applies, etc.

Hopefully, the upcoming guidance will provide more detail on on-going employer responsibilities. Until then, it appears that, presuming there are no additional delays or relief:

  • Employers will not have to count full-time employees and full-time equivalents in 2013 to determine if they are applicable large employers beginning January 1, 2014.
  • Applicable large employers will not have to determine their full-time employees for purposes of providing minimum essential coverage in 2014.
  • Applicable large employers who do not provide minimum essential coverage to all full-time employees in 2014 will not owe the $2,000 tax times all full-time employees (minus 30) if one full-time employee purchases coverage through a marketplace and obtains a tax credit or subsidy.
  • Applicable large employers that provide minimum essential coverage that is not affordable or does not provide minimum value in 2014 will not owe the $3,000 tax times all full-time employees who purchase coverage through a marketplace and receive a tax credit or subsidy.
  • Employers will not have to report to the government on their full-time employees and health plan coverage in 2014, although the government will urge voluntary reporting.
  • Employers that have been considering adjusting the structure of their workforces to minimize the number of their full-time employees appear to have additional time in which to analyze and implement workforce changes.
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China to Strictly Regulate Secondment/Staffing Business Model

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Amendments to the PRC Labor Contract Law take effect on July 1, adding limitations on employment structures.

On July 1, 2013, amendments to the People’s Republic of China (PRC) Labor Contract Law will take effect. The amendments increase the regulation of staffing and labor service businesses and discourage the use of secondment arrangements to avoid employer-related liabilities. The new law was published on December 28, 2012 and is an important development in China’s business community.

In recent years, increasing numbers of labor-intensive businesses, including state-owned banks and large multinationals, have used secondment services provided by staffing firms due to the difficulties involved in terminating employees and increased compliance costs in China. The secondment arrangements became attractive options among employers because the termination of such an arrangement was not subject to the numerous restrictions set forth in the labor law and regulations and avoided triggering severance obligations.

In light of the Chinese government’s amendments to the PRC Labor Contract Law, companies with operations in China should keep in the mind the below major requirements when formulating or executing compliance plans.

Qualification of Staffing Firms

To engage in a staffing business for the provision of secondment services, a company must meet the new law’s requirements, which include a minimum registered capital of at least RMB$2 million. In addition, a company must apply for a special permit before conducting any staffing business. As the law is silent on the qualifications of an applicant to obtain such a permit, the approval authorities have broad discretion. It is possible the Chinese government will control the number of service providers in a particular geographic area by limiting the number of permits issued. In practice, firms without permits may structure their business models as outsourcing businesses by arguing that they are not providing staffing services. However, because the distinction between “secondment” and “outsourcing” is not defined in any law or regulation, the regulatory authorities may treat the outsourcing model as secondment in substance and thus require a permit.

Equal Work, Equal Pay

The new law requires that the recipients of secondment services compensate the secondee for his or her services on the principle of “equal work, equal pay.” Although this concept has been in existence since the promulgation of the PRC Labor Law in 1994, it is not a defined term in any labor regulation, including the new law. Traditionally, benefits and other nonsalary items, such as equity incentive awards, have not been considered when applying the principle of equal work, equal pay. It remains to be seen how the courts and labor arbitration organizations will interpret the principle in the context of the new law.

Limitation on the Role of Secondees

The new law expressly states that, as a general principle, employers should hire employees through signed labor contracts and that secondment can be used only if the position is of a temporary, auxiliary, or replaceable nature. A position will be treated as temporary if it lasts no more than six months, but it is not clear whether the secondment term can be renewed upon expiration. “Auxiliary positions” are defined as noncore business positions without further explanation. In practice, it may often be very difficult to distinguish between core and noncore positions. For instance, while it can be argued that only bankers are core to the banking business, it can also be asserted that in-house lawyers should be core personnel as well because of their role in controlling and managing risks, which is critical to banks. The new law defines “replaceable positions” as those left vacant because the formal employees are on leave for personal or business reason, but it is not clear if replacement positions can be renewed.

Percentage Limitation on the Number of Secondees

The new law requires employers to strictly limit the number of secondees to a certain percentage of the total number of personnel (including secondees). Specific percentages will be announced by the State Council. It is generally understood that the percentage should be within a 10% to 30% range. A literal reading of the language of the new law suggests that any percentage limitation should be in addition to the requirement that the positions for secondees should be of a temporary, auxiliary, or replaceable nature. Thus, an employer may not argue that it complies with the law by limiting the number of secondees below the maximum percentage, regardless of the nature of a secondee’s position. In practice, however, employers or regulatory authorities may take the percentage cap as a safe harbor due to the difficulties of defining the nature of a secondee’s position.

Consequences of Breach

For staffing firms without a permit, the Chinese government may take away all illegal revenue and impose monetary penalties of up to five times the amount of the revenue. If a staffing firm or employer fails to comply with the law, the labor regulatory authority will order it to take corrective measures. A per person penalty ranging from RMB$5,000 to RMB$10,000 will be imposed if no remedial measures are adopted by the employer or staffing service provider. The new law is silent on whether a secondee may request that the employer convert him or her into a formal employee if the employer is found to be noncompliant. If the answer is no, what will happen to the existing secondment? Should the parties terminate the secondment and should the actual user of the employee’s service formally employ someone for the same position? May the secondee have a right of first refusal if the actual user is required to do so? These and other similar questions remain to be answered by further implementing rules from the State Council or judicial interpretation from the Supreme People’s Court.

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Tri-Agencies Release Final Rules on Wellness Programs

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On May 29, 2013, the U. S. Departments of Labor, Health and Human Services and the Treasury (the Tri-Agencies) issued final regulations (the final rules) implementing the changes that the Patient Protection and Affordable Care Act (PPACA) made to wellness programs. The final rules apply to both grandfathered and non-grandfathered group health plans and are effective for plan years beginning on or after January 1, 2014.

The final rules do not change the basic distinction between “participatory” wellness programs and “health-contingent” wellness programs. The final rules, consistent with the proposed rules, focus largely on revisions to health-contingent wellness programs. The key PPACA changes to the 2006 wellness regulations include:

  • Increases in the maximum allowable rewards under a health-contingent wellness program from 20% of the cost of coverage to 30% for non-smoking related programs and a 50% maximum for smoking related programs;
  • Clarifications of what constitutes a “reasonably designed” health-contingent wellness program; and
  • Additional guidance on reasonable alternatives that must be offered under any health-contingent wellness program so that the program remains non-discriminatory.

Participatory wellness programs are programs that either do not provide a reward or do not require an individual to meet a standard related to a health factor in order to obtain a reward. Participatory wellness programs are presumed to be nondiscriminatory if participation is made available to all similarly situated individuals, regardless of their health status. Examples include programs that reimburse employees for the cost of membership in a fitness center, or reward employees who complete a health risk assessment. These programs are easier to administer and not subject to the more exacting criteria that apply to health-contingent wellness programs.

Health-Contingent wellness programs require an individual to satisfy a health-related standard to obtain a reward. Examples include programs that provide a reward for smoking cessation, or programs that reward achievements for specified health-related goals, such as lowering cholesterol levels or losing weight. The final rules subdivide health-contingent wellness programs into two types: activity-only and outcome-based. An activity-only wellness program requires an individual to perform or complete an activity related to a health factor (e.g., a diet or exercise program), but it does not require the individual to reach or maintain a specific health result. In contrast, an outcome-based wellness program requires an individual to reach or maintain a specific health outcome (such as not smoking or attaining certain results on biometric screenings).

Modification to Maximum Rewards

All health-contingent wellness programs must satisfy five requirements to ensure compliance with the HIPAA non-discrimination rules. The final rules, as noted above, increase the maximum rewards allowed under a health-contingent wellness program. The five requirements are listed below and reflect the PPACA increases in the maximum rewards:

  1. The reward must be available to all similarly situated individuals;
  2. The program must give eligible individuals the opportunity to qualify for the reward at least once a year;
  3. The program must be reasonably designed to promote health and prevent disease;
  4. The reward must not exceed 30% of the cost of coverage (or 50% for programs designed to prevent or reduce tobacco use); and
  5. The program must provide a reasonable alternative standard to an individual who informs the plan that it is unreasonably difficult or medically inadvisable for him or her to achieve the standard for health reasons and therefore will not get the reward.

Clarifications to Reasonable Designs

Consistent with the 2006 regulations, the final rules continue to require that health-contingent wellness programs be reasonably designed to promote health or prevent disease. A program will meet this standard if it has a reasonable chance of improving health or preventing disease; is not overly burdensome; is not a subterfuge for discrimination based on a health factor; and is not highly suspect in the method chosen to promote health or prevent disease. The rules provide plan sponsors with a great deal of flexibility to design a wellness program.

Guidance on Reasonable Alternatives

The final rules modify the structure of the 2006 requirements with respect to providing reasonable alternatives for those individuals who are unable to attain the health-related goals of a health-contingent wellness program.

First, to satisfy the reasonable alternative requirement, the same full reward must be available to individuals who satisfy the reasonable alternative as is provided to individuals who are able to satisfy the standard program. As noted in the Preamble to the final rules, this means that the reasonable alternative must allow the individual a longer period to complete the program, and the reward earned must be the same as that given under the standard program.

The final rules do not require that the reasonable alternative be determined in advance and, consistent with past practice, allows the alternative to be set on an individual-by-individual basis. The final rules reiterate that, in lieu of providing a reasonable alternative, a plan or issuer may waive the otherwise applicable standard and simply provide the reward. Although in general a doctor’s verification is not needed for an individual to qualify for the reasonable alternative, the final rules do permit a doctor’s verification to be required under the activity-based reasonable alternative.

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I-94 Automation and the I-9 Process: Making the Immigration Form I-9 More Complicated

Sheppard Mullin 2012

This spring U.S. Customs and Border Protection (CBP) began implementation of a phased in Form I-94, Arrival/Departure Record, automation process. The Form I-94 is issued to all visitors entering the U.S. and assists CBP in tracking temporary non-immigrants, visa overstays, and other relevant information concerning foreign nationals entering the U.S. The new program created a paperless admission process with the ultimate goal of eliminating the paper I-94 card for foreign travelers. The automation enables CBP to organize admission data for sea and air entries easily and accessibly, saving an estimated $15.5 million per year in related costs (not from a reduction in paper). While the effort to move to an electronic system should be commended, the new system may make life a bit more complicated for employers sponsoring foreign workers due to the requirements of the Form I-9, Employment Eligibility Verification Form process. Travelers, with the exception of asylees and refugees who will continue to receive paper Form I-94 cards, will now receive an admission stamp together with a tear sheet providing instructions on how they may access and print their electronic Form I-94 by visiting www.cbp.gov/I94.

How will I-94 automation impact the Form I-9 Employment Eligibility Verification process?

For those employees entering the United States to work for a sponsoring employer, current Form I-9 instructions state that the individual must present his/her foreign passport and I-94 card for recording List A document information. With the new system, however, workers will need to go online to retrieve their I-94 numbers and present employers with their foreign passport and I-94 printout from the CBP Website. Based on our conversations with U.S. Citizenship and Immigration Services (USCIS), it appears that the Service will accept either the paper I-94 card or the printout of the I-94 for Form I-9 purposes in combination with the employee’s foreign passport. Employers collecting an I-94 printout should record it as an “I-94” for Form I-9 purposes, with the issuing authority as “CBP” and the document number and expiration date taken from the printout itself.

In addition, CBP will issue Form I-94 cards to refugees, asylees, and parolees with preprinted numbers on the documents that have been crossed out. CBP officials will hand write the valid admission number on the I-94 card. When completing a Form I-9 for an employee with a paper Form I-94 with a crossed out number, be sure to record the handwritten admission number in Section 2 of the Form I-9 if that employee presents his or her I-94.

Making the process more confusing, the new Form I-9 requires employees to know which government agency issued the I-94 number: USCIS or CBP. If CBP issued the employee’s I-94 number, the employee must complete Section 1 of the Form I-9 with an I-94 number instead of an Alien Registration/USCIS Number and must complete the Form I-9 with their admission number, foreign passport number and country of issuance. Generally, CBP will issue the Form for visitors entering through a land or sea port of entry. However, if USCIS is the government entity that issued the I-94 admission number “N/A” should be entered by the employee for the foreign passport number and country of issuance and the employee should record his/her Form I-94 admission number in Section 1 of the Form I-9. USCIS will issue the Form when there is a change, amendment, or extension of an employee’s status in the United States.

Issues with the Automated System

Some employers have already encountered issues with this new system, as not all new hires have been able to access their I-94 information from the online system. After speaking with CBP officials, it appears that this mainly is occurring when employees enter the country and then begin work almost immediately after entry. CBP is working to correct the problem. In the meantime, employers processing Form I-9 paperwork for new foreign national hires with electronic I-94 documents should use caution when completing the Form and should document the reason for any delays in processing if they are due to errors with the new government system. Completing the Form I-9 paperwork should not be delayed under any circumstance, as late completion could expose a company to liability. In addition, employees with issues accessing their I-94 information should call CBP at 1-877-221-5511 and inquire into their case status and the reason for the delay. Calls to USCIS inquiring into what employers should do in this situation were met with the same response.

If CBP is unable to provide the information for a new hire, the employee may want to consider adding a note to the Form I-9 in Section 1, explaining “No I-94 number available due to a government system issue.” The employee should be reminded to call CBP and continue to check the I-94 website. After the employee’s information is loaded to the system and the employee receives the I-94 number, Section 1 should be amended to include the I-94 number with the appropriate initial and dating. In Section 2 of the Form I-9, the employer should record the foreign passport information and the I-94 stamp information. In the “document number” field, the employer should indicate “I-94 number pending.” Upon receipt of the I-94 printout, the Form should be amended to include the appropriate I-94 number and should be initialed/dated by the employer.

Hopefully the issue of lag time between the entry of data and employee’s first day of work will be remedied by CBP in the coming weeks, but until then be sure that your company has a policy for addressing the situation and that the policy is applied consistently to all foreign national workers.Jennifer Biloshmi also contributed to this article.

Jennifer Biloshmi also contributed to this article.

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Does A Securities and Exchange Commission (SEC) Attorney Commit An Ethical Violation By Encouraging Whistleblowing Lawyers?

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The Harvard Law School Forum on Corporate Governance and Financial Regulation included a comprehensive post by Lawrence A. West which tackles the question of whether attorneys can be award seeking whistleblowers.  I want to approach the topic from the other direction.  May an SEC attorney actively solicit disclosure of client confidences from an member of the California State Bar?

California lawyers are governed by the State Bar Act (Cal. Bus. & Prof. Code §§ 6000 et seq.) and the California Rules of Professional Conduct adopted by the Board of Governors of the State Bar of California and approved by the Supreme Court of California pursuant to Sections 6076 and 6077 of the Business and Professions Code.  The federal District Courts located in California have adopted California’s statutes, rules and decisions governing attorney conduct.  Central District Local Rule 83-3.1.2, Eastern District Local Rule 180(e), Northern District Local Rule 11-4, and Southern District Local Rule 83.4(b).

Section 6068(e) provides that members of the California bar must “maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client”.   The only statutory exception permits, but does not require, an attorney to ”reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual”.

Rule 1-120 of the California Rules of Professional Conduct provides that a member “shall not knowingly assist in, solicit, or induce any violation of these rules or the State Bar Act,” including Section 6068(e).   Thus, an SEC attorney who is a member of the California State Bar (or subject to the local rules of the U.S. District Court) could be found to violate Rule 1-120 if she actively induces an attorney to violate of Section 6068(e).

Of course, the SEC has taken the position that its attorney conduct rules (aka “Part 205 Rules”) preempt conflicting state law.  However, there is a real question of whether the SEC acted in excess of its authority in purporting to immunize lawyers.  More importantly, it is questionable whether the SEC can preempt state law in this regard.  In 2004, I co-wrote a law review article for the Corporations Committee of the Business Law Section of the State Bar that considered these questions in detail, Conflicting Currents: The Obligation to Maintain Inviolate Client Confidences and the New SEC Attorney Conduct Rules, 32 Pepp. L. Rev. 89 (2004).  The other authors were James F. Fotenos, Steven K. Hazen, James R. Walther, and Nancy H. Wojtas.

If you think it is ok to violate your client’s confidences, you may want to reflect on the case of Dimitrious P. Biller.  In 2011, an arbitrator order Mr. Biller to pay his former employer $2.6 million in damages and $100,000 in punitive damages.   According to the arbitrator,Hon. Gary L. Taylor (Ret.), Mr. Biller “did the professionally unthinkable: he betrayed the confidences of his client.”  The arbitration award was confirmed by the trial court and upheld by the Ninth Circuit Court of Appeals, Biller v. Toyota Motor Corp., 668 F.3d 655 (9th Cir. 2012).  You may also want to consider what Justice Shinn had to say about an attorney who disclosed confidential client information after being ordered to do so by a trial court:

Defendant’s attorney should have chosen to go to jail and take his chances of release by a higher court

People v. Kor, 277 P.2d 94, 101 (Cal. Ct. App. 1954) (emphasis added).

Finally, you may want to put yourself in the position of a client.  How effectively represented would you feel if you knew that your lawyer could be rewarded for violating your confidences?  How would you feel about a government agency that believes it is permissible to encourage lawyers to do the “professionally unthinkable”?

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