The FTC recently updated its best practices for merger investigations to increase the efficiency of merger reviews and underscore the importance of early preparation, after determining that its 2006 reforms did little to reduce the length of merger investigations.

The FTC’s updated best practices advise parties to merger investigations to, among other things:

Adhering to guidance from the FTC and DOJ is important to efficiently getting deals through antitrust review, particularly given the continued high levels of merger enforcement activity. For example, in recent months:

For more information on strategies for avoiding or narrowing a Second Request, see Practice Note, Second Requests in Merger Investigations.

Public companies should think about how to calculate their pay ratio following the SEC’s adoption of a final rule implementing the pay ratio disclosure provision (Section 953(b)) of the Dodd-Frank Act.

Covered companies must disclose:

Companies must begin making pay ratio disclosure for the first fiscal year beginning on or after January 1, 2017. Therefore, calendar year-end companies must make this disclosure for fiscal year 2017 in their Form 10-Ks for 2017 due in 2018 or proxy statements for the 2018 annual meeting. Emerging growth companies, smaller reporting companies and foreign private issuers are not required to make this disclosure.

The final rule differs from the SEC’s 2013 proposal in several ways that are more favorable to companies. For example, companies may identify their median employee once every three years instead of annually, unless certain changes occur.

Companies should begin determining whether they have systems in place to collect and process the data necessary to comply with the pay ratio disclosure rule.

The SEC recently proposed a rule that would require listed companies to adopt and comply with written clawback policies. For more information on the proposed rule, see Employee Benefits & Executive Compensation: Clawback Policies.

Another holding in a series of decisions by the US District Court for the Southern District of New York may limit the ability of issuers and majority debtholders to conduct non-consensual out-of-court restructurings involving debt securities issued under Trust Indenture Act (TIA)-qualified indentures.

In a June 2015 decision, Marblegate Asset Management v. Education Management Corporation (Marblegate II), the court endorsed a broad interpretation of Section 316(b) of the TIA. The court held that a debt restructuring that effectively left dissenting bondholders to recover against a shell issuer violated Section 316(b), even though it did not formally modify any indenture provisions governing their right to receive payment of principal and interest. The terms of the restructuring provided that non-consenting bondholders would receive equity in an entity stripped of assets entirely, while consenting bondholders received interests in the transferee entity.

Marblegate II was a decision on the merits following a December 2014 holding in the same litigation (Marblegate I). In Marblegate I, the court declined to enjoin the restructuring, but found the dissenting bondholders likely to succeed on the merits.

The broad interpretation of Section 316(b) in Marblegate II makes uncertain the legality of certain types of debt restructurings to which the TIA applies. Debt issuers may:

For more information on debt restructurings, see Practice Note, Methods of Restructuring Outstanding Debt Securities.

Telemarketing companies should evaluate their practices to ensure compliance with the Telephone Consumer Protection Act of 1991 (TCPA) in light of an expansive and detailed declaratory ruling issued by the Federal Communications Commission (FCC), which became effective on July 10, 2015.

Notably, the FCC ruled on the definition of a prohibited autodialer under the TCPA. In determining whether specific equipment falls within the definition, the ruling states that:

The FCC also ruled on other TCPA issues, including:

The ruling also exempts from the TCPA’s consumer consent requirements certain calls about time-sensitive financial and healthcare issues. These calls are required to both benefit and be free to the called party, among other requirements. To ensure the calls are free, telemarketing companies should first make arrangements with each carrier.

For more information on the statutes, regulations and voluntary codes of practice that apply to direct marketing activities, see Practice Note, Direct Marketing.

Several recent Delaware Court of Chancery decisions have taken aim at stemming the tide of shareholder litigation that accompanies the vast majority of public M&A deals.

Two bench rulings rejected settlements of fiduciary duty claims brought in M&A deals that would have granted the defendants global releases:

The court’s new, stricter approach has already been raised in two other M&A settlement proceedings.

Two recent decisions have also made the practice of post-signing appraisal arbitrage less likely to be profitable:

The Ramtron and Dell decisions provide companies defending their deals against appraisal arbitrageurs with new ways to win, either by obtaining outright dismissal or by securing a ruling that awards dissenting shareholders nothing more than the previously negotiated merger price.

The SEC has proposed a rule to implement the clawback requirements of the Dodd-Frank Act. Companies should be aware that proposed Rule 10D-1 under the Exchange Act would direct the national securities exchanges to establish listing standards requiring listed companies to adopt and comply with written clawback policies.

Under Rule 10D-1, clawback policies would be required to provide for the recovery of excess incentive-based compensation earned by current and former executive officers during a three-year look-back period preceding the date the company is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements. The definition of “executive officer” in Rule 10D-1 is modeled on the definition of “officer” in Section 16 of the Exchange Act.

Almost all listed companies would be subject to Rule 10D-1 and any listing standards, including:

Rule 10D-1 would also require listed companies to:

After the SEC finalizes Rule 10D-1:

The clawback requirement applies to excess incentive-based compensation received on or after the effective date of Rule 10D-1 (even if the securities exchanges have not yet adopted listing standards) if the compensation results from achieving a financial reporting measure based on financial information for any fiscal period ending on or after the effective date.

Companies should:

For a sample clawback policy, see Standard Document, Clawback Policy.

The Treasury Department and IRS recently issued Notice 2015-49 under which sponsors of defined benefit pension plans are prohibited from implementing lump-sum risk transferring programs or “lump-sum windows” to retirees who have commenced annuity payments.

Employers often limit the risk of pension plan liabilities by offering a one-time lump-sum cash-out opportunity to terminated vested participants or retirees. Lump-sum windows permit a vested participant or retiree to convert the remaining value of his annuity to a lump-sum payment. By reducing the number of participants entitled to benefits from the pension plan, lump-sum windows can help eliminate future pension payments from the plan sponsor’s balance sheet.

Pursuant to Notice 2015-49, the IRS intends to amend the required minimum distribution (RMD) regulations under Internal Revenue Code Section 401(a)(9) to provide that pension plans may not accelerate annuity payments that have commenced with lump-sum distributions. The RMD rules generally provide for only limited circumstances when benefits payments may be accelerated. The proposed amendments in Notice 2015-49 are effective as of July 9, 2015. However, Notice 2015-49 contains certain exceptions, including for certain lump-sum windows adopted before July 9, 2015.

An employer that sponsors a pension plan that intends to provide for a lump-sum window must now limit eligibility to participants who have not commenced benefits payments.

For more information on IRS Notice 2015-49, see Legal Update, IRS Notice 2015-49 Prohibits Plans from Offering Lump-sum Risk Transferring Programs.

Banks concerned about lingering residential mortgage-backed securities (RMBS) liability should take note of the Court of Appeals of New York’s holding that a cause of action for a breach of representations and warranties in a mortgage loan purchase agreement (MLPA) accrues on the MLPA’s closing date. Therefore, the obligation to cure or repurchase non-compliant mortgages under the MLPA also runs from the closing date, regardless of when the breaches were discovered.

In ACE Securities Corp. v. DB Structured Products, Inc., DB sold mortgages to ACE, an affiliate securitization depositor, pursuant to an MLPA. ACE then transferred the mortgages to an issuer trust, which issued RMBS. Subsequently, delinquencies in the issuer trust began to mount. Two certificateholders filed a lawsuit (six years to the day after the closing date) claiming that the mortgages breached the representations and warranties made by DB.

On appeal, the Court of Appeals dismissed the complaint, finding that the six-year statute of limitations to enforce the cure and repurchase provision in the MLPA begins to run on the date that the representations and warranties were breached, which was the closing date. This decision demonstrates:

For more information on securitizations, see Practice Note, Securitization: US Overview.

Companies should consider their data breach litigation strategy given a Seventh Circuit decision departing from the prevailing view that plaintiffs lack standing when they allege no financial injury and rely instead on allegations of increased risk of future harm.

In Remijas v. Neiman Marcus Group, LLC, the district court dismissed plaintiffs’ claims that Neiman’s data breach exposed their credit and debit card information for lack of standing in line with most decisions since the US Supreme Court’s Clapper v. Amnesty International decision. The Seventh Circuit reversed, holding that the plaintiffs had alleged sufficient injury based on:

The Seventh Circuit distinguished Clapper, noting that:

The Seventh Circuit also held that Neiman’s admission of the breach and notice to customers were admissions sufficient to prove causation.

This decision is the first appellate court decision on data breach standing since Clapper and will pose a significant hurdle to standing motions. Counsel should be aware that cases are more likely to be resolved on Federal Rule of Civil Procedure (FRCP) 12(b)(6) motions or at the summary judgment or class certification stages, all of which weigh in favor of early settlement.

For more information on this decision, see Legal Update, Seventh Circuit Holds Neiman Marcus Data Breach Plaintiffs Have Standing.

Companies should review their independent contractor relationships in light of the Department of Labor’s (DOL’s) recent guidance on the economic realities test for identifying misclassified workers.

Administrator’s Interpretation No. 2015-1 (guidance) clarifies the factors for determining if a worker is economically dependent on the company or in business for himself under the Fair Labor Standards Act (FLSA). The guidance takes the aggressive position that most workers are employees under the FLSA and states that a true independent contractor typically:

The guidance rejects the argument commonly made by companies that control over the worker is necessary due to the nature of the business or regulatory requirements.

Courts may vary in the level of deference afforded to the guidance, but companies should:

Written independent contractor agreements are a good practice, although they are not determinative. These agreements should:

For more information on independent contractor classification, including the benefits of the classification and the penalties for misclassification, see Practice Note, Independent Contractor Classification.

Proposed amendments to FRCP 26(b)(1) will offer parties an opportunity to significantly reduce the costs and burdens associated with discovery in complex civil litigation.

The proposed amendments, which are widely expected to become effective on December 1, 2015, will significantly impact discovery practice by, among other things:

Active judicial case management and better cooperation among the parties can help ensure that these new limits on the scope of discovery are properly applied. To effectively reduce the costs and burdens of discovery under the proposed amendments, parties should consider:

For more information on key issues related to the production of ESI in litigation, see Practice Note, E-Discovery in the US: Overview.

A Tenth Circuit decision reminds companies that are sued in court on claims that may be covered by an arbitration agreement not to delay in asserting their right to arbitrate.

In Healy v. Cox Communications, Inc., the Tenth Circuit affirmed the district court’s decision denying Cox’s motion to compel individual arbitration of antitrust claims by a class of Oklahoma cable television subscribers, holding that Cox’s failure to mention its right to arbitrate until after class certification “manipulat[ed] the litigation machinery” and constituted waiver.

Cox began inserting arbitration clauses into its subscribers’ contracts in 2009, while facing antitrust claims by a putative nationwide class of subscribers. In 2012, after the court denied certification of the nationwide class, the plaintiffs launched new lawsuits with classes for specific geographic regions. Without mentioning its right to arbitrate, Cox unsuccessfully moved to dismiss the Oklahoma case. For the next two years, Cox never mentioned its arbitration right as the parties conducted extensive discovery and litigated class certification. After the class was certified, Cox moved to compel arbitration.

The Tenth Circuit agreed with the district court that Cox’s motion to compel arbitration, which would have removed 87% of the class, would have had a material impact on the district court’s numerosity analysis for class certification. Rejecting Cox’s contention that it could not move to compel arbitration by absent class members until after certification, the Tenth Circuit noted that Cox could have raised an arbitration defense or informed the court of its arbitration right earlier. Admonishing Cox for its “cynical” attempt to “game the federal courts” and play “heads I win, tails you lose,” the Tenth Circuit concluded that Cox’s conduct was inconsistent with an intent to arbitrate.

This case underscores that even though courts generally favor arbitration, they do not tolerate gamesmanship and will reject eleventh hour efforts to compel arbitration that could have been raised earlier.

For recent developments in class arbitration waivers, see Practice Note, Class Arbitration Waivers in the US: Case Tracker.

As more landlords seek to capitalize on the recovering real estate markets by selling their properties, tenants are increasingly likely to receive requests for tenant estoppel certificates. Overlooking the importance of estoppel certificates and approving inaccurate information can bind a tenant to inaccurate, and potentially harmful, terms in future dealings with its new landlord.

An estoppel certificate is a tenant’s certification of certain material terms of its lease. Many tenants fail to carefully review estoppel certificates and instead, merely execute and return them to their landlords. Most courts hold that the contents of an estoppel certificate are binding even if the lease contains contrary facts.

Given their importance, tenants should implement policies for the delivery of estoppel certificates. Tenants should:

For a sample estoppel certificate drafted from the lender’s perspective in the context of a landlord’s financing of the underlying commercial property, see Standard Document, Tenant Estoppel Certificate. This estoppel certificate can be modified to apply in the context of a sale of the property.

For more information on seller deliverables in a commercial real estate purchase and sale transaction, see Practice Note, Closing the Purchase and Sale of Commercial Real Estate.

The IRS and Treasury Department recently issued proposed regulations and announced a change to the safe harbor of Revenue Procedure 93-27, which may discourage fund managers from waiving management fees or structuring new management fee waivers.

The proposed regulations provide for when a share of partnership income and distributions is treated as a disguised payment for services. They address management fee waivers used primarily in the private equity fund industry to convert ordinary fee income into an interest in future fund profits. Under the proposed regulations, the determination of whether an arrangement is a payment for services is based on all the facts and circumstances. The proposed regulations include a non-exclusive list of six relevant factors, the most important of which is whether the allocation and distribution is subject to significant entrepreneurial risk.

The IRS and Treasury Department also announced their intention to provide an additional exception to the safe harbor in Revenue Procedure 93-27 (applicable to the receipt of a profits interest), which taxpayers have generally relied on to take the position that the receipt of a profits interest in exchange for waiving management fees is not a taxable event. The additional exception will apply to a profits interest issued in conjunction with a partner waiving payment of an amount that is substantially fixed (including a typical fund management fee) for the performance of services. As a result, the issuance of profits interests in exchange for many common types of management fee waivers may be subject to potential valuation issues.

The proposed regulations would be effective for arrangements entered into or modified after the issuance of final regulations. To the extent an arrangement permits a service provider to waive all or a portion of its fees for any period after the arrangement is created, the arrangement is considered to be modified for purposes of the effective date on the date or dates the fee is waived.