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GC Agenda: December 2021/January 2022
Practical Law Article w-033-4668 (Approx. 9 pages)
GC Agenda: December 2021/January 2022
by Practical Law The Journal
| Published on 30 Nov 2021 • USA (National/Federal) |
A round-up of major horizon issues for General Counsel.
Antitrust
Merger Prior Approval
The FTC recently announced that merging parties entering into consent orders to settle anticompetitive concerns will be required to obtain FTC approval before closing future transactions in markets affected by the challenged merger. These prior approval requirements will last for a minimum of ten years.
In some cases, the prior approval requirements can apply beyond the markets in which the FTC had competitive concerns. The FTC may also require prior approval if the parties abandon a transaction after complying with a Request for Additional Information and Documentary Material, known as a Second Request, or a Civil Investigative Demand, for non-reportable transactions.
Counsel should be aware of this policy when planning transactions that the FTC will review because of its potential impact on corporate strategy, the timeline of merger investigations, and future transactions. Merging parties before the FTC may:
- Be more likely to divest assets as part of the purchase agreement, known as a fix-it-first.
- Take longer to enter into settlements.
- Abandon transactions earlier if the FTC raises concerns to avoid a prior approval order.
- Resist entering into settlements or be more willing to litigate the proposed terms.
This policy reinstates and expands the FTC’s former practice of including prior approval and prior notice provisions in merger consent orders, which it largely ended in 1995. The DOJ has not announced a similar policy.
For more information on this policy change, see Legal Update, FTC Reinstates Regular Use of Prior Approval Provisions and Imposes Strict Limits on DaVita’s Future Merger Activity.
For more information on merger remedies, see Practice Note, Merger Remedies.
Capital Markets & Corporate Governance
Updating Form 10-K
As the Form 10-K preparation season ramps up, calendar year-end public companies should carefully review and update their risk factors and Management’s Discussion & Analysis (MD&A) disclosures.
Previous risk factor disclosures should be scrutinized and appropriately tailored to the issuer and its current operating environment. Two important areas of risk are:
- Pandemic-related risks. Previous risk factor disclosures regarding economic difficulties as a result of the COVID-19 pandemic may require updating as the economy recovers. Companies that experienced upticks in their businesses due to the COVID-19 pandemic may also need to address the impact as the COVID-19 pandemic eases. Other risk factors may include those related to managing supply chain and distribution issues and coping with labor shortages.
- Hypothetical versus materialized risks. Companies should examine previous risk factors for risks that were hypothetical when disclosed, but have since materialized. Examples include discussions of cybersecurity breaches and supply chain shortages.
MD&A disclosures should be updated in compliance with SEC amendments to disclosure requirements, which apply beginning with the first fiscal year ending on or after August 9, 2021. In particular, companies should review disclosures related to:
- Liquidity and capital resources. The SEC amendments specify that short-term liquidity and capital resources cover cash needs up to 12 months into the future, while long-term liquidity covers items beyond 12 months. Companies are required to discuss their ability to generate cash and their plans for cash on both a short-term and a long-term basis.
- The contractual obligations table. While the contractual obligations table with no materiality threshold is no longer required, companies must disclose material cash requirements from known contractual and other obligations (subject to a materiality threshold), and must specify the type of obligation and the relevant time period for the related cash requirements.
- Critical accounting estimates. Changes in estimates and the sensitivity of the reported amounts to the underlying estimates can prove particularly complex and time consuming to determine. These disclosures should not simply be copied from the accounting principles disclosures in the financial statements footnotes.
For resources to assist counsel in preparing an annual report on Form 10-K, see Annual Report on Form 10-K Toolkit.
Commercial Transactions
Global Supply Chain Disruption
In the midst of significant disruptions to the global supply chain, including shipping delays, labor shortages, increasing demand, and rising prices, companies should implement processes and procedures to mitigate the legal and business risks associated with supply chain challenges.
Engaging the right supply chain participants, maintaining strong collaborative relationships, and implementing interlocking processes across the supply chain are crucial factors that increase the chance of successful outcomes. During the supplier selection process and throughout the term of supplier relationships, companies should:
- Verify that supply chain participants are financially and operationally sound and that alternative suppliers are available should that status change.
- Ensure alignment across participants on the approach to addressing key issues affecting the supply chain, including:
- compliance;
- brand protection;
- data and network security and cybersecurity;
- inventory management;
- crisis management; and
- disaster recovery and business continuity planning.
- Establish a periodic review process to anticipate and address geopolitical risks.
For more information on managing global supply chain disruptions, see Practice Note, Global Supply Chain: Overview.
Finance
DOJ Addresses Cybersecurity Breaches and Cryptocurrency Abuses
The DOJ recently announced the creation of a National Cryptocurrency Enforcement Team (NCET) and a Civil Cyber-Fraud Initiative (Initiative) as part of a comprehensive plan to combat cybersecurity breaches and cryptocurrency abuses.
The NCET focuses on complex investigations of criminal misuse of cryptocurrency and is an extension of the DOJ’s Cryptocurrency Enforcement Framework (CEF) efforts. The NCET will work with the DOJ Criminal Division’s Money Laundering and Asset Recovery Section, Computer Crime and Intellectual Property Section, and experts on tracing and recovering assets lost to fraud and extortion. The NCET will also investigate and prosecute cases against cryptocurrency exchanges, infrastructure providers, and other entities that enable the misuse of cryptocurrency and related products.
The Initiative is designed to thwart cybersecurity-related fraud and will utilize the False Claims Act (FCA) as the primary tool to pursue claims against actors that put US information or systems at risk. The FCA can be breached in this context by knowingly:
- Providing deficient cybersecurity products.
- Misrepresenting cybersecurity practices and protocols.
- Violating obligations to monitor and report cybersecurity incidents and breaches.
For more information on the NCET and the Initiative, see Legal Update, DOJ Announces Cryptocurrency Enforcement Team and Cyber-Fraud Initiative.
For more information on the CEF, see Legal Update, DOJ Releases Cryptocurrency Enforcement Framework.
Health Care & Life Sciences
Leveraging Medical Device Data
Medical device companies considering using or acquiring medical device data for product development or other purposes should understand the strategic, policy, and legal questions that may arise and monitor FDA guidance in this area.
Medical devices are unique among FDA-regulated products because they can generate, collect, store, and report data. This data can then be used on its own, or combined with other data sets (for example, patient records), to research, develop, and assess products. Using large patient or consumer digital data sets and artificial intelligence implicates questions both under traditional health law and food and drug law.
Unique issues may also arise depending on a company’s specific plan for leveraging medical device data. For example, a company might seek to:
- Generate and capture non-essential device data.
- Investigate a health care system’s or data aggregator’s consent procedures and data security, if purchasing data.
- Use new sources and analyses of data to expedite products’ arrival on the market, such as:
- using post-market data to support a new label indication; or
- analyzing a data set of clinical measures to provide stronger and more efficient support than obtained by conducting a traditional clinical trial.
As the medical device sector’s and the FDA’s approaches to gathering and using data rapidly evolve, companies should monitor the FDA’s Digital Health Center of Excellence and Real-World Evidence sites to track key developments.
For more information on the legal issues associated with sharing health information, see Practice Note, Health Information Sharing Scenarios and Issues: Overview.
For more information on the characteristics of medical devices, see Practice Note, Identifying and Classifying Medical Devices: Overview.
Intellectual Property & Technology
IP Protection for Artificial Intelligence
The significant rise in patent applications involving AI highlights for companies using or developing AI the importance of evaluating how existing IP protection laws apply to this emerging technology.
Companies with traditional IP assets generally weigh whether to patent those assets or hold them as trade secrets. This framework similarly applies to AI. Companies with AI assets should consider:
- Reverse engineering risk. Unlike patent law, trade secret law does not prevent duplication by reverse engineering. An AI trade secret’s strength may depend on whether it is black box technology or easily discovered through reverse engineering. Similarly, an AI patent’s strength may be weakened if reverse engineering cannot detect potential infringement.
- Patentability. Companies should evaluate whether courts or the US Patent and Trademark Office (USPTO) may consider an AI innovation to be an unpatentable abstract idea under Alice Corp. v. CLS Bank International. Innovations made by AI, not a human inventor, are also not patentable.
- Patent prosecution uncertainty. An AI patent application may:
- require extra detail to satisfy the Patent Act’s written description and enablement requirements;
- be rejected outright by the USPTO, providing the company nothing in return for the innovation’s public disclosure; or
- issue with claims too narrow to outweigh the drawbacks of publicly disclosing the innovation.
- Duration. Trade secret protection lasts for as long as the information remains a trade secret, which may outlive a patent’s 20-year lifespan.
Companies should also consider whether copyright law may better protect a particular AI innovation.
For more information on IP protection for AI, see Practice Note, Artificial Intelligence Key Legal Issues: Overview.
Labor & Employment
Religious Accommodation for COVID-19 Vaccine Mandates
Employers must properly review and respond to employee requests for religious accommodation for mandatory COVID-19 vaccination requirements, keeping in mind operational, safety, and employee morale issues.
Title VII of the Civil Rights Act of 1964:
- Prohibits employment discrimination based on religion, and allows job applicants and employees to request a religious accommodation to be exempted from employer requirements that conflict with their sincerely held religious beliefs, practices, or observances.
- Requires employers to provide an accommodation if it is reasonable and does not result in undue hardship to the employer.
When handling religious accommodation requests, employers should:
- Document the process by using religious accommodation request forms that ask employees to provide information about:
- the employee’s sincerely held religious belief, practice, or observance;
- how their religious belief conflicts with a work rule, such as a mandatory vaccination requirement; and
- how an accommodation would allow the employee to maintain their religious belief or practice and perform their work duties.
- Consider various options for accommodation (for example, an employer paying for an employee’s COVID-19 testing in lieu of getting vaccinated can be a form of reasonable accommodation).
- Assess each request on a case-by-case basis.
- Understand that:
- the standard under Title VII for showing undue hardship only requires more than a de minimis burden (a lesser burden than under the Americans with Disabilities Act); and
- state laws may impose a higher burden than federal law on employers to demonstrate undue hardship or to engage in the interactive process.
- Train HR or legal personnel to properly review religious accommodation requests in a consistent manner.
- Consider any collective bargaining agreements that may apply.
The EEOC has stated that employers should assume that a request for religious accommodation is based on sincerely held religious beliefs. If an employer has an objective basis for questioning the religious nature or the sincerity of a belief, the employer may make a limited factual inquiry and request additional supporting information.
For more information on responding to requests for religious accommodation, see Religious Accommodations Under Title VII Checklist.
Litigation
Scope of Representation and Attorney-Client Privilege
The recent criminal case against Theranos founder and CEO Elizabeth Holmes emphasizes that companies should clearly define and communicate the scope of counsel’s representation to avoid endangering the attorney-client privilege.
Holmes, defending fraud charges related to Theranos’s blood testing technology, argued that her communications with the company’s outside counsel were protected by the attorney-client privilege and that she could invoke or waive that privilege. The court rejected her argument and held that the privilege belonged solely to the company, and the company’s assignee had waived it.
To clearly define the scope of counsel’s representation, counsel should consider:
- Advising the company to obtain separate counsel for an officer or employee if there is a potential for individual liability or a conflict of interest between the individual and the company.
- Confirming that engagement letters clearly state the scope of the representation (including whether the representation includes any individuals). If counsel represents both the company and individuals, counsel should confirm that all clients understand the risks if a conflict arises.
- Ensuring affected individuals who are not within the scope of the representation are given Upjohn warnings to remind them that though their communications with counsel are protected by the attorney-client privilege, the company (rather than the individual employee or officer) owns and controls the privilege.
For more information on the attorney-client privilege, see Practice Notes, Attorney-Client Privilege: Clients and Client-Agents (Federal) and Internal Investigations: Planning an Investigation That Preserves the Attorney-Client Privilege and Work Product Doctrine Protections.
Real Estate
Construction Supply and Labor Shortages
Parties involved in construction projects should be aware that supply and labor shortages stemming from the COVID-19 pandemic continue to impact the construction industry, causing escalating budgets, reduced investment returns, delays in project timelines, and disputes.
Contractors, owners, and investors must understand their rights and remedies under their construction contracts and joint venture agreements. In particular, the parties should review their:
- Construction contracts to determine whether:
- an excusable delay or force majeure clause addresses delivery delays, supply shortages, or other events beyond the contractor’s control;
- a delay or force majeure event excuses the contractor’s performance or extends its performance time;
- the contractor is entitled to additional compensation to cover the cost of a force majeure event;
- the contractor is required to mitigate damages and delays;
- the owner has the right to suspend some or all of the work or to terminate the contract; and
- there is a mandated dispute resolution mechanism.
- Joint venture agreement (if applicable) to determine who is responsible for payment of cost overruns and any limits on that obligation.
- Guarantor obligations under any completion guaranties delivered by the developer or contractor.
- Insurance coverage (if applicable), such as business interruption coverage.
- Construction loan document provisions addressing:
- budget controls;
- balancing requirements;
- force majeure; and
- guaranty obligations.
For more information on managing construction disputes, see Practice Notes, Dispute Resolution Mechanisms in Construction Contracts in the US and COVID-19: Key Considerations for Privately Owned Construction Projects.
Tax
OECD Framework to Modernize International Tax Rules
The Organization for Economic Cooperation and Development (OECD) recently released an updated statement on the two-pillar solution, which seeks to address challenges arising from digitalization of the economy by modernizing international tax rules.
Over 136 members of the OECD/G20 Inclusive Framework on BEPS (base erosion and profit shifting) have agreed to the two-pillar plan. G20 finance ministers and G20 leaders have also endorsed it. The proposed two-pillar solution includes:
- A new taxing right for market jurisdictions over some of the profits of the largest and most profitable multinational enterprises (MNEs), expected to include approximately 100 companies (pillar one). This new taxing right applies to 25% of profits, exceeding a 10% margin, of these MNEs. Extractives and regulated financial services are excluded.
- A global 15% minimum tax for large MNEs (pillar two). The minimum tax applies to a broader range of MNEs (those with annual revenues meeting or exceeding a 750 million euro threshold).
The global minimum tax is implemented by:
- Two non-mandatory domestic global anti-base erosion (GloBE) rules that:
- require a parent entity to pay top-up tax on low-tax income of its constituent entities (income inclusion rule (IIR)); and
- deny deductions (or require an equivalent adjustment) to the extent that the low-tax income of a constituent entity is not subject to tax under an IIR (undertaxed payment rule (UTPR)).
- A treaty-based subject to tax rule that allows source countries to impose taxation on some related-party payments that are taxed at or below a minimum rate.
Under an ambitious implementation plan, the market taxing rights of pillar one will generally be effected through a multilateral convention (MLC) expected to be open for signature in 2022, with the goal of having the MLC in effect from 2023. The MLC will require parties to remove all digital services taxes and similar measures and commit to not introducing these measures in the future. The OECD statement also provides for a moratorium (until the earlier of December 31, 2023 or the MLC’s entry into force) on new digital services taxes and relevant similar measures. Development of an implementation framework for the GloBE rules is expected to be completed by the end of 2022, with the rules effective in 2023 (the UTPR is expected to go into effect in 2024).
MNEs should monitor developments relating to the two-pillar solution and consider the impact of these changes on their global businesses. Although much work needs to be done to implement the plan, the agreement reflects widespread acknowledgement that an overhaul of international tax rules is needed.
GC Agenda Interviewees GC Agenda is based on interviews with Advisory Board members and other leading experts. Practical Law would like to thank the following experts for participating in interviews for this issue: Antitrust Lee Van Voorhis Jenner & Block LLP Capital Markets & Corporate Governance Thomas Kim Gibson, Dunn & Crutcher LLP Robert Downes Sullivan & Cromwell LLP Employee Benefits & Executive Compensation Jim Cole and Jeanne Klinefelter Wilson Groom Law Group, Chartered Jennifer Kraft and Ameena Majid Seyfarth Shaw LLP Jamin Koslowe Simpson Thacher & Bartlett LLP Shalom Huber and Jeffrey Lieberman Skadden, Arps, Slate, Meagher & Flom LLP Health Care & Life Sciences Vernessa Pollard McDermott Will & Emery LLP Intellectual Property & Technology Frank DeCosta, III, Ph.D. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP Labor & Employment Robin Samuel Baker McKenzie LLP Aaron Goldstein and Jillian Kornblatt Dorsey & Whitney LLP Katherine Dudley Helms Ogletree Deakins Kate Gold Proskauer Thomas Wilson Vinson & Elkins LLP REAL ESTATE Claramargaret Groover Becker & Poliakoff Andrew Lance Gibson Dunn & Crutcher LLP Stuart Saft Holland & Knight LLP Kathleen Wu Hunton Andrews Kurth LLP Todd Eisner McDermott Will & Emery LLP Peter Fisch Paul, Weiss, Rifkind, Wharton & Garrison LLP Jennifer Chavez Sheppard, Mullin, Richter & Hampton LLP Tax Kim Blanchard Weil, Gotshal & Manges LLP |