GC Agenda: Fall 2022

Practical Law Article w-037-1361 (Approx. 10 pages)

GC Agenda: Fall 2022

by Practical Law The Journal

Antitrust

Merger Challenges

Counsel for companies considering mergers should be aware that the US antitrust enforcement agencies continue to aggressively challenge mergers through litigation.

The FTC recently filed a complaint in federal court seeking a temporary restraining order and preliminary injunction to halt the acquisition by Meta Platforms, Inc. (formerly Facebook Inc.) of virtual reality (VR) app developer Within Unlimited, Inc. The FTC alleged that the merger would reduce present and future competition in markets for VR fitness apps, resulting in less innovation, lower quality, higher prices, fewer incentives to attract and retain employees, and less consumer choice.

This is the fourth complaint the FTC has filed in a short period, including three administrative challenges to vertical mergers involving the acquisition by a proposed buyer of a supplier of key inputs, namely:

NVIDIA Corp.’s acquisition of Arm Ltd.
Illumina, Inc.’s acquisition of GRAIL, Inc.
Lockheed Martin Corp.’s acquisition of Aerojet Rocketdyne Holdings, Inc.

Given this increased willingness by the agencies to litigate, counsel for merging parties should:

Examine whether the benefits of the transaction outweigh the risk of an antitrust enforcement action, which can take six to eight months to resolve and result in significant costs.
Draft the transaction documents carefully. The antitrust agencies often use them to build a merger enforcement action.
Account for the increased risk of litigation and divestitures when negotiating risk-shifting provisions in the merger agreement.

For more information on risk-shifting provisions, see Practice Note, Antitrust Risk-Shifting Provisions: Overview.

For more information on the potential competition theories of harm in merger analysis, see Practice Note, Potential Competition in Merger Analysis.

Capital Markets & Corporate Governance

Universal Proxy Cards

Public companies should evaluate their shareholder activism preparedness and playbook, even in the absence of anticipated activist issues, in light of amendments to the federal proxy rules that require the use of universal proxy cards in all non-exempt solicitations in connection with contested elections of directors. The amendments are effective for shareholder meetings held after August 31, 2022.

A universal proxy card allows shareholders to vote by proxy for any combination of candidates for the board of directors as if they attended the shareholder meeting in person and cast a written ballot. Prior to the universal proxy amendments, the company and dissident shareholders each sent proxy cards to shareholders listing only their director nominees, and shareholders voting by proxy were generally required to submit their votes on either the company’s or the dissident’s proxy card. As a result, shareholders voting by proxy could not previously choose a combination of nominees from both cards.

Because the amendments do not impose many conditions on the use of universal proxy cards by dissidents, advance notice bylaws can be an important component of preparedness. Companies that have not already done so should review their advance notice bylaws to be sure they are designed to obtain information early in the process and are closely aligned with the disclosure and procedural provisions of the amended universal proxy rules.

For example, many advance notice bylaws now require the dissident’s nominees to complete a questionnaire, furnished by the issuer, as part of the dissident’s nomination packet. This necessitates some advance communication to the issuer to obtain the questionnaire. The typical questionnaire is highly detailed and expands the information required from nominees significantly beyond what is required by the bylaw.

For more information on universal proxy cards and advance notice bylaw information requirements, see Practice Note, Proxy Contests.

Audit Committee Questions

Public company audit committees should consider the suggested questions for auditors recently issued by the Public Company Accounting Oversight Board.

The questions are intended as part of ongoing engagement and discussion with auditors and aimed at helping the audit committee understand how the auditors are responding to the financial reporting and audit risks posed by the current economic environment. They cover topics such as:

Fraud and other risks, including how economic factors and emerging issues (for example, supply chain disruption, inflation, and the invasion of Ukraine) influence risk assessment and audit strategy.
Audit execution, including how internal staff turnover may impact the quality of accounting and financial reporting processes, internal controls, and preparation for the audit.
Auditor independence, including:
- identifying, evaluating, and addressing any threats to auditor independence; and
- ensuring that any independence violations are properly communicated to the audit committee.
Quality control systems, including:
- recurring audit deficiencies identified by regulators or the audit firm’s internal quality monitoring; and
- open quality control criticisms in the nonpublic portion of the audit firm’s recent reports and the audit firm’s plans to remediate those criticisms.
Digital assets, including:
- the financial reporting implications of the company’s digital asset activities; and
- audit firm policies and procedures regarding audits that involve digital assets (for example, crypto mining), as well as the associated risks.
Cyber threat response, including:
- the auditor’s view on management’s cybersecurity risk assessment approach, overall cyber assessment, and conclusions; and
- any changes to the audit firm’s overall approach to addressing cybersecurity risks as a result of increased cyber threats.
The use of data and technology in the audit.

For a collection of resources to assist counsel in understanding the governance standards for and duties of an audit committee, see Audit Committee Role and Responsibilities Toolkit.

Commercial Transactions

ESG Clauses

Suppliers should be aware that environmental, social, and governance (ESG) matters, including climate-related obligations, have become increasingly important in supply chain relationships. In many cases, companies with significant negotiating leverage are requiring that ESG clauses be included in supply contracts.

Traditionally, companies have applied ESG-related requirements to their upstream vendors by implementing a supplier code of conduct and incorporating it by reference in supply contracts. This type of supplier code of conduct can be found on the websites of many large purchasers (including retailers).

Now, companies increasingly are embedding ESG-related requirements in supply contracts. A breach of an ESG clause in a supply contract subjects the breaching party to contractual liability in addition to public or private legal remedies. Examples of ESG clauses include:

Conflict minerals clauses. These clauses require the seller of goods to represent that the goods do not (or covenant that the goods will not) contain conflict minerals, which could trigger conflict minerals rules promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as Office of Foreign Assets Control sanctions.
Forced labor clauses. These clauses help to ensure compliance with the prohibition on importing goods made with forced labor, including forced or indentured child labor, into the US.

For a collection of resources to assist companies in embedding ESG-related requirements in their supply contracts, see ESG in the Supply Chain Toolkit.

Employee Benefits & Executive Compensation

DGCL Amendments

Delaware corporations should be aware of recent amendments to the Delaware General Corporation Law (DGCL), effective August 1, 2022, that expand the ability of boards of directors of Delaware corporations to delegate authority regarding equity award grants.

Under the amended statute, boards may delegate to a designated person or body (the designated body) the authority to issue rights, options, or shares on terms determined by the designated body by resolution. The board’s delegation of authority must establish:

The maximum number of rights, options, or shares that the designated body may issue (including the maximum number of shares that may be issued on exercise).
The time period during which the rights, options, or shares may be issued.
The minimum consideration payable for the rights, options, or shares.

The designated body may not issue rights, options, or shares to its members.

Boards that elect to take advantage of this increased flexibility must ensure that their delegation of authority meets the statute’s requirements. Boards should also take steps to ensure that the designated body is prepared to properly perform its delegated functions. While boards previously had the ability to delegate certain grant-making authority to corporate officers, that authority was much more limited. For example, boards could not give corporate officers the authority to make grants to non-employees or to determine award terms such as customized vesting schedules.

For a model policy and procedures governing the granting of equity-based awards, with explanatory notes and drafting tips, see Standard Document, Sample Policy and Procedures for the Granting of Equity-Based Awards.

Finance

UCC Article 12

Indiana, Iowa, Nebraska, and New Hampshire recently adopted legislation to give effect to the new Uniform Commercial Code (UCC) amendments (2022 Amendments) relating to emerging technology and digital assets.

The American Law Institute and the Uniform Law Commission recently approved the 2022 Amendments, which revise most Articles of the UCC and include a new UCC Article 12. UCC Article 12 governs the transfer of property rights in certain digital assets, called controllable electronic records (CERs), that have been or may be created by emerging technology. Examples of CERs existing currently include certain types of virtual currency and most non-fungible tokens.

The recently adopted state-level UCC amendments incorporate the provisions relating to CERs and are effective either:

July 1, 2022 (Indiana, Iowa, and Nebraska).
January 1, 2023 (New Hampshire).

For more information on UCC Article 12, see Practice Note, Cryptocurrency and Virtual Currency Regulatory Tracker and Legal Update, States Begin to Adopt UCC Article 12 Covering Digital Assets.

For more information on perfecting a security interest in virtual currency, see Practice Note, Security Interests: Bitcoin and Other Cryptocurrency Assets.

Health Care

Non-Physician Practitioner Practice

Health care providers should closely monitor the rapidly evolving landscape of non-physician practitioner (NPP) practice.

NPP practice, including that of nurse practitioners, physician assistants, certified registered nurse anesthetists, and nurse midwives, has changed dramatically in response to the COVID-19 pandemic, with at least four more states permanently removing restrictions on independent NPP practice (22 states already conferred full practice authority prior to the pandemic) and several others temporarily relaxing NPP licensure requirements and practice restrictions under emergency and executive orders.

However, this landscape is once again shifting as states begin lifting waivers and reinstating suspensions. The Centers for Medicare and Medicaid Services (CMS) also recently introduced changes, including:

The May and June 2022 termination of blanket waivers, reinstating federal physician supervision requirements and other restrictions for certain types of facilities.
The permanent removal of:
- supervision requirements for physician assistants who meet state law licensure and scope of practice requirements; and
- medical record documentation re-entry and verification requirements, so that NPPs may now review and authenticate records for purposes of Medicare Part B billing.

To maintain compliance, providers should evaluate:

The status of pre-pandemic restrictions imposed under state and federal law or payor contracts and conditions.
The extent to which the provider’s NPP utilization and practice complies with pre-pandemic restrictions and requirements (for more information, see Standard Document, Health Care Collaboration Agreement with Non-Physician Practitioner).
Areas where NPP roles or utilization have expanded beyond pre-pandemic levels.
How a contraction in NPP roles or presence would impact care access, quality, or continuity.

For state-specific information on the scope of NPP roles, see State Q&A, Non-Physician Practitioners.

Intellectual Property & Technology

PTAB Patent Challenges

Companies should consider adjusting their patent litigation and portfolio valuation strategies in light of developments in patent challenge proceedings before the Patent Trial and Appeal Board (PTAB).

In mid-2021, the PTAB began denying fewer inter partes review (IPR) petitions based on Apple Inc. v. Fintiv, Inc., a PTAB opinion that established factors for discretionarily denying IPR petitions against issued patents involved in parallel litigation. Previously, the PTAB’s Fintiv denials effectively deferred patent validity adjudication to fast-moving district courts and the International Trade Commission (ITC).

As Fintiv denials subsided, patent challenge institutions increased. The PTAB’s June 2022 Interim Procedure for Discretionary Denials should continue this trend because the PTAB will not deny institution of an IPR when:

A petition presents compelling evidence of unpatentability.
A petitioner stipulates not to pursue in parallel litigation the same grounds as in the petition or any grounds that could have reasonably been raised in the petition (a Sotera stipulation).
A request for denial is based on a parallel ITC proceeding.

Companies planning to enforce patents while attempting to minimize the potential impact of IPR should consider filing lawsuits in jurisdictions that are less likely to stay their proceedings, such as:

The Eastern District of Texas.
The ITC.

Companies defending infringement charges should consider:

Delaying filing for IPR until after receiving the patent owner’s infringement contentions.
If agreeing to a Sotera stipulation, spending extra resources on the IPR to compensate for giving up key invalidity arguments.

While the reduction in IPR denials generally favors patent challengers, companies valuing patents for a potential acquisition should not assume that an IPR institution will result in patent invalidation, though the PTAB’s high invalidation rate may warrant some discount on patent values.

For a collection of resources to assist counsel involved in PTAB proceedings, including IPR, see PTAB Proceedings Toolkit.

Labor & Employment

Employer Prohibitions on Disclosing Discrimination

Maine, Oregon, and Washington have recently passed laws, similar to those enacted in many other states after the #MeToo movement, that limit an employer’s ability to prohibit its employees or former employees from disclosing workplace discrimination, harassment, or assault. Employers drafting settlement, separation, and other employment agreements should ensure compliance with these state laws that limit the use of non-disclosure or confidentiality provisions.

This is particularly important when a company must comply with the laws of multiple states. Employers should consider adopting separate template agreements for each state. Although doing so presents logistical challenges, separate template agreements:

Help ensure compliance with the relevant state law (for example, some states require the inclusion of specific language if there is a non-disclosure clause in the agreement).
Allow the employer to assert broader protections in the states that permit it.

Confidentiality provisions in settlement agreements are of particular concern to many companies. Employers settling employment claims with a current or former employee should evaluate whether it is possible to have a confidentiality provision in the settlement agreement. Employers that cannot include a confidentiality provision under state law may prepare for future disclosures by inquiring with opposing counsel whether they or the client intend to publicize any underlying allegations. In states that allow a confidentiality provision at the employee’s preference, counsel should ask whether the employee would prefer to have such a provision.

Some states, such as Illinois, allow a confidentiality provision if the employee prefers confidentiality, there is consideration for the confidentiality, and other conditions are met. In states where additional consideration is required, employers should:

Allocate a portion of the consideration to cover the confidentiality provisions.
Determine what qualifies as sufficient consideration under that state’s law. Consideration may include non-monetary incentives, such as the opportunity to designate a separation as a resignation or outplacement services.

For more information on the state laws that restrict non-disclosure and confidentiality provisions in employment agreements, see Practice Note, Sexual Harassment Claims in Settlement, Arbitration, and Other Employment Agreements State Laws Chart: Overview.

Litigation

Forum Selection Clauses in Corporate Bylaws

A recent Ninth Circuit decision upholding the enforceability of forum selection clauses in corporate bylaws has created a circuit split with the Seventh Circuit.

In Lee v. Fisher, the plaintiff brought a shareholder derivative action against The Gap, Inc. and its directors (collectively, Gap) for allegedly failing to create meaningful diversity within company leadership roles. The plaintiff also alleged that Gap made false statements to shareholders in its proxy statements regarding its level of diversity. Gap’s bylaws contained a forum selection clause that required any derivative action to be brought in the Delaware Court of Chancery. The plaintiff, however, brought the action in a federal district court in California, alleging violation of Section 14(a) of the Securities Exchange Act of 1934 and state law.

The district court dismissed the plaintiff’s complaint under the doctrine of forum non conveniens, holding that the plaintiff was bound by the forum selection clause. The Ninth Circuit affirmed the district court’s ruling, finding that the plaintiff did not meet the heavy burden of showing that Gap’s forum selection clause is unenforceable.

This decision diverges from the Seventh Circuit’s recent opinion in Seafarers Pension Plan v. Bradway, which found that an identical forum selection clause in The Boeing Company’s corporate bylaws was unenforceable because it was “contrary to Delaware corporation law and federal securities law.” Counsel should continue to monitor the enforceability of forum selection clauses in corporate bylaws.

For more information on forum selection clauses, see Practice Notes, Choice of Law and Choice of Forum: Key Issues and Shareholder Derivative Litigation.

Real Estate

Purchase and Sale of Ownership Interests

Despite rising interest rates and inflation, the commercial real estate market is continuing to see strong growth in the second half of 2022. As deal volume rises, parties to commercial real estate transactions should carefully consider alternative transaction structures.

Most real property sales are consummated by delivery of a deed conveying fee simple title. However, in certain instances, parties may choose to structure the transaction as a sale of ownership interests in an entity that directly or indirectly owns the real property. This type of transaction structure may be preferable:

To reduce or avoid transaction costs, such as transfer taxes, title insurance premiums, or a FIRPTA (Foreign Investment in Real Property Tax Act of 1980) withholding.
To allow the transaction to close faster and avoid potential delays (for example, because third-party consents are not needed for the sale).
When the seller is a member of a joint venture and the other members do not want to sell the property.
When the seller owns 100% of the entity and wants to raise capital by selling a portion of its ownership interests.

For a collection of resources to assist counsel in structuring a commercial real estate transaction as a purchase or sale of ownership interests, see Purchasing and Selling Ownership Interests in Real Estate Entities Toolkit.

Tax

Inflation Reduction Act

US corporations should consider the tax implications of the recently enacted Inflation Reduction Act of 2022 (Act).

The Act, which includes climate, healthcare, and tax provisions, introduces two new corporate taxes:

A 15% corporate alternative minimum tax (AMT) on the adjusted financial statement income of certain large corporations, effective for taxable years beginning after December 31, 2022.
A 1% excise tax on certain stock buybacks by publicly traded corporations, applicable to buybacks after December 31, 2022.

The corporate AMT is intended to tax large corporations that have book profits but pay little or no federal income tax. The AMT applies to an “applicable corporation,” which is a corporation with average adjusted financial statement income (AFSI) in excess of $1 billion for three consecutive years, if the minimum tax exceeds the corporation’s regular tax plus the base erosion and anti-abuse tax. Once a corporation meets the $1 billion threshold, it generally remains an applicable corporation even if its AFSI in subsequent years is less than the $1 billion threshold.

The corporate AMT also applies to a US corporation that is a member of a foreign-parented multinational group if both:

The AFSI of the group including all foreign group members exceeds $1 billion.
The AFSI of the US corporation equals or exceeds $100 million.

The corporate AMT does not apply to S-corporations, regulated investment companies (RICs), and real estate investment trusts (REITs).

Additionally, the Act imposes a 1% non-deductible excise tax on the fair market value (FMV) of stock repurchased after December 31, 2022 by “covered corporations,” which are generally publicly traded US corporations (not including RICs and REITs). The excise tax is imposed on the corporation repurchasing stock. The FMV of stock repurchased during a taxable year is determined on a net basis, allowing reductions for the FMV of stock issued by the corporation during the year, including as compensation.

A repurchase subject to the excise tax includes:

A redemption of stock within the meaning of Internal Revenue Code Section 317(b). This generally includes a corporation’s repurchase or ordinary buyback of its stock.
Any transaction determined by the Secretary of the Treasury to be economically similar to a stock redemption.

The excise tax also applies to certain purchases of a corporation’s stock by an affiliated corporation or partnership.

Various exceptions apply to the excise tax, including for stock repurchases that are part of tax-free and tax-deferred reorganization transactions, in which no gain or loss is recognized by a shareholder from the stock repurchase, and repurchases in which the repurchased stock is contributed to retirement, employee stock ownership, or similar plans.

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

Logan Breed

Hogan Lovells US LLP

Lee Van Voorhis

Jenner & Block LLP

Adam Paris

Sullivan & Cromwell LLP

Capital Markets & Corporate Governance

Adam Fleisher

Cleary Gottlieb Steen & Hamilton LLP

Thomas Kim

Gibson, Dunn & Crutcher LLP

Greg Rodgers

Latham & Watkins LLP

Robert Downes

Sullivan & Cromwell LLP

Employee Benefits & Executive Compensation

Jamin Koslowe

Simpson Thacher & Bartlett LLP

Intellectual Property & Technology

Joshua Goldberg

Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Labor & Employment

Krissy Katzenstein and Kaitlin Thompson

Baker & McKenzie LLP

Susan Gorey and Dee Anna Hays

Ogletree Deakins

Kate Gold and Dakota Treece

Proskauer

Thomas Wilson

Vinson & Elkins LLP

Tax

Kim Blanchard

Weil, Gotshal & Manges LLP

GC Agenda: Fall 2022 | Practical Law