GC Agenda: February/March 2020 | Practical Law

GC Agenda: February/March 2020 | Practical Law

A round-up of major horizon issues for General Counsel.

GC Agenda: February/March 2020

Practical Law Article w-023-8030 (Approx. 13 pages)

GC Agenda: February/March 2020

by Practical Law The Journal
Published on 29 Jan 2020USA (National/Federal)
A round-up of major horizon issues for General Counsel.


Consummated Merger Challenges

Companies considering M&A transactions should be aware that the FTC and DOJ may challenge consummated mergers, including those that were reviewed and allowed to close under the Hart-Scott-Rodino Act. The agencies most often challenge consummated mergers over one year after a transaction has closed, and challenges are brought irrespective of deal value.
For example, the FTC recently challenged Axon Enterprise, Inc.’s acquisition of VieVu, LLC 20 months after closing. The companies make body-worn cameras used by police departments. The FTC alleged, among other things, that Axon’s prices increased substantially and customer service and innovation suffered post-merger. The FTC brought its challenge using its internal administrative trial process and did not seek a preliminary injunction in federal district court. In contrast to federal preliminary injunction proceedings, which can be resolved in months, an FTC administrative trial can take over one year before a decision is issued on the merits.
Axon has responded to the FTC’s challenge by bringing a separate action in federal district court alleging that the FTC’s administrative trial process violates due process and equal protection. Axon stated that before filing a complaint, the FTC attempted to force Axon into a settlement agreement that required Axon to divest all VieVu assets and offer patent licenses to any acquirer, or be subject to an administrative complaint.
For more information on the antitrust agencies’ review of consummated mergers, see Practice Note, Consummated Mergers Antitrust Enforcement.

Non-Compete and Non-Solicitation Agreement Challenges

Merging parties may face antitrust liability if they enter into anticompetitive non-compete or non-solicitation agreements.
In the recent Axon/VieVu litigation, the FTC challenged the non-compete and non-solicitation agreements Axon entered into with the seller, Safariland, LLC. The FTC argued that the agreements were too long in duration, covered products and services not related to the merger, and limited employee solicitation.
Counsel should ensure that non-compete and non-solicitation agreements are reasonable in duration and limited in scope to protect legitimate business objectives. For example:
  • Non-compete agreements should not prevent competition for products and services unrelated to a merger.
  • Any non-solicitation agreement should be narrowly tailored to the scope of a legitimate business collaboration, for example, limited by employment function and product group.
The DOJ has stated that it intends to criminally prosecute non-solicitation agreements that are unrelated to or unnecessary for a larger legitimate collaboration between employers. To date, the DOJ has brought civil actions challenging non-solicitation agreements, but has not brought any criminal actions.
For more information on the key antitrust issues relating to non-solicitation agreements, see Practice Note, Non-Solicitation Agreements.

Capital Markets & Corporate Governance

Audit Committee Oversight

Public companies should ensure their audit committees are aware of a recent SEC statement that focuses on the need for proactive fulfillment of oversight responsibilities, and for collaboration and open communication with management and independent auditors.
The SEC statement includes observations relating to:
  • Tone at the top. The audit committee should maintain an environment that supports the integrity of financial reporting and auditor independence, including by actively communicating with the auditor to understand audit strategy, status, and issues.
  • Independence. The audit committee should consider periodically the sufficiency of the auditor’s and the company’s monitoring processes, address corporate changes or other events that could affect auditor independence, and facilitate the timely communication of these changes to the auditor.
  • Generally accepted accounting principles (GAAP). The audit committee should engage proactively with management and the auditor to understand the implementation plan for new standards and related controls and procedures.
  • Internal control over financial reporting (ICFR). The audit committee should understand identified ICFR issues and engage proactively to aid in their resolution and remediation.
  • Auditor communications. The audit committee should review auditor communications, as part of the year-end financial reporting process, regarding accounting policies and practices, estimates, and significant unusual transactions.
  • Non-GAAP measures. The audit committee should understand how management uses non-GAAP measures and metrics to evaluate performance, whether they are consistently prepared and presented from period to period, and the related policies and disclosure controls and procedures.
  • Reference rate reform. The audit committee should understand management’s plan to identify and address the risks associated with reference rate reform, the impact on accounting and financial reporting, and any related issues associated with financial products and contracts that reference LIBOR.
  • Critical audit matters (CAMs). The audit committee should discuss the audit and expected CAMs with the auditor to understand their nature, basis for determination, and description in the auditor’s report.
Public companies should:
  • Consider addressing each of the SEC’s observations in an upcoming audit committee meeting.
  • Ensure that audit committees have the resources and support they need to fulfill their oversight obligations.
For resources to assist an audit committee in fulfilling its oversight responsibilities, see Audit Committee Role and Responsibilities Toolkit.

Supply Chain Financing

Public companies that use supply chain financing should consider whether disclosure on the topic in the management’s discussion and analysis (MD&A) section of annual reports is appropriate in light of recent comment letters issued by the SEC on this growing practice.
Supply chain financing (also known as supplier finance, structured trade payables, reverse factoring, and vendor payable programs) typically involves an intermediary, such as a financial institution, settling amounts owed to a company’s suppliers of goods or services, and the company settling its associated payment obligations directly with the intermediary. The use of supply chain financing frequently improves operating cash flows, but companies do not always disclose their use of this practice, according to remarks by a deputy chief accountant in the SEC’s Division of Corporation Finance at a recent conference.
If the effects of supply chain financing are material to a company’s current period or are reasonably likely to materially affect liquidity in the future, the company should consider the following MD&A disclosures:
  • The material terms of the supply chain financing.
  • The general benefits and risks of the supply chain financing.
  • Any guarantees provided by subsidiaries, the parent company, or both.
  • Plans to further extend terms to suppliers.
  • Any factors that may limit the company’s ability to continue using similar supply chain financing to further improve operating cash flows.
  • Trends and uncertainties related to the extension of payment terms.
Companies conducting securities offerings should also be prepared to address supply chain financing, if material, as part of underwriter and counsel due diligence investigations.
Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP have jointly asked the Financial Accounting Standards Board to clarify the presentation and disclosure rules regarding supply chain financing.

Commercial Transactions

Disclosure Guide for Social Media Influencers

Companies that use social media influencers to advertise their products or services should review the FTC’s recently released Disclosures 101 for Social Media Influencers and the accompanying informational video.
The guide reminds influencers that they have a responsibility to disclose any material connections to a brand clearly and conspicuously when posting about a product or service. The FTC may hold the influencer, as well as the company, liable for failure to disclose the material connection.
To make a clear and conspicuous disclosure, the guide advises influencers to:
  • Place the disclosure close to the endorsement.
  • Superimpose the disclosure over an endorsement that features a picture, including on Snapchat, Instagram Stories, and similar platforms.
  • Include the disclosure in the video itself, rather than only in the description, for endorsements made in videos.
  • Periodically repeat the disclosure during a livestream for viewers who may not see the full stream.
  • Ensure that viewers have enough time to notice and read disclosures that have a limited duration.
Companies should require their influencers to become familiar with the guide and video, as well as other relevant FTC guidance. Additionally, companies and their advertising partners should continuously manage and monitor influencer posts to ensure compliance.
For more information on the issues a company should consider when working with influencers, see Social Media Influencer Marketing Campaigns: Legal Issues Checklist.
For a model agreement between a company and an influencer for a single marketing campaign, with explanatory notes and drafting and negotiating tips, see Standard Document, Social Media Influencer Letter Agreement.

Employee Benefits & Executive Compensation


Companies that sponsor retirement plans should determine what new procedures and plan amendments are needed to comply with the recently enacted Setting Every Community Up for Retirement Enhancement Act (SECURE Act), the most significant legislation affecting retirement plans in more than a decade.
Changes that became effective on the SECURE Act’s enactment or for plan years after December 31, 2019 involve:
  • The required minimum distribution (RMD) age. The age for taking RMDs has increased from 70.5 to 72. This change is effective for individuals who turn age 70.5 after December 31, 2019.
  • 401(k) automatic enrollment. For 401(k) plans with an automatic enrollment feature, the maximum default contribution rate has increased from 10% to 15% after the first year of participation.
  • An annuity safe harbor. The SECURE Act creates a new fiduciary safe harbor for retirement plans that select an annuity provider, and increases the portability of lifetime income options.
  • Withdrawal for birth or adoption. A new penalty-free withdrawal of up to $5,000 on the birth or adoption of a child is available for participants in a retirement plan or individual retirement account.
  • Small employer tax credits. Small employers (with 100 or fewer employees) that establish a retirement plan or add automatic enrollment features can take advantage of increased tax credits.
Future effective dates will apply to changes impacting:
  • Lifetime income disclosure. A new required disclosure about lifetime income includes an estimate of the amount of monthly annuity income from the participant’s retirement benefit.
  • Multiple employer plan (MEP) access. A new type of MEP, called a pooled employer plan, would allow unrelated employers to participate in one benefit plan. The SECURE Act includes tax changes to encourage participation in MEPs.
  • Retirement plan administration. Changes include combined reporting for groups of plans on the annual Form 5500 filing.
Plan sponsors and counsel should:
  • Establish procedures to implement the new requirements and review communication materials.
  • Identify qualified retirement plans that will need amendments. Under the SECURE Act, the deadline for amendments is the 2022 plan year.
  • Monitor the issuance of regulations or guidance from the IRS and DOL on the SECURE Act’s provisions.

Section 162(m) Proposed Regulations

Proposed regulations recently issued by the Treasury Department and the IRS provide guidance for employers on the changes made to Section 162(m) of the Internal Revenue Code (Code) by the Tax Cuts and Jobs Act.
The proposed regulations incorporate guidance previously issued in IRS Notice 2018-68 on the amended rules for identifying covered employees and the transition rule that applies to certain grandfathered compensation arrangements, as well as provide additional guidance on:
  • The expansion of publicly held corporations subject to Section 162(m).
  • The amended rules for determining the compensation to which Section 162(m) applies.
  • The elimination of the three-year transition period for newly public companies following an IPO and the one-year transition period for newly spun-off public companies.
  • The application of the transition rule to certain grandfathered arrangements.
  • The coordination of Section 162(m) with Section 409A of the Code.
For grandfathered arrangements, the proposed regulations clarify that:
  • Negative discretion is taken into account to determine a compensation arrangement’s grandfathered amount only to the extent that the employer may exercise the negative discretion under applicable law.
  • Accelerating the payment of compensation is a material modification that causes an arrangement to lose grandfathered status, but accelerating the vesting of compensation is not a material modification.
  • A clawback right is disregarded to determine a compensation arrangement’s grandfathered amount, but if an event triggering the clawback occurs, only the amount the employer is obligated to pay (the amount that is not recoverable under the clawback) remains grandfathered.
The proposed regulations are generally effective for taxable years beginning on or after December 20, 2019, but special effective dates apply for certain provisions.

Affordable Care Act Developments

Two recent developments involving the Affordable Care Act (ACA) may impact plan sponsors’ health and welfare plan offerings.
In Texas v. US, the Fifth Circuit affirmed a district court’s ruling that the ACA’s individual mandate, which required most individuals to maintain minimum essential health insurance coverage, is unconstitutional. However, the Fifth Circuit remanded to the district court to conduct a more searching analysis of whether the ACA’s individual mandate is severable from the rest of the ACA. As a result, there is continued uncertainty for plan sponsors and their advisors regarding whether ACA provisions other than the individual mandate will be upheld. The US House of Representatives and several states have asked the US Supreme Court to review the Fifth Circuit’s ruling.
The recently enacted Further Consolidated Appropriations Act, 2020 (Act) repeals several ACA taxes and fees, including the widely unpopular Cadillac Plan excise tax. The Cadillac Plan would have imposed a 40% excise tax on the cost of employer-sponsored health coverage that exceeded an annual dollar limit. Additionally, the Act:
  • Repeals the ACA’s medical devices tax and the annual fee on health insurance providers, which was based on each provider’s relative market share.
  • Provides for a ten-year extension of the ACA’s Patient-Centered Outcomes Research (PCOR) Trust Fund, which is funded by fees on health insurance and self-insured health plans.
  • Extends, through 2020, the employer credit for family and medical leave enacted under the Tax Cuts and Jobs Act.


LIBOR Transition Relief for Swaps

The CFTC recently issued three separate no-action letters to provide relief to swap dealers (SDs) and other market participants during the transition from LIBOR to alternative benchmark rates.
The following no-action letters grant relief to SDs amending swaps to update provisions referencing LIBOR and the other IBORs (collectively, impaired reference rates (IRRs)) with replacement rates:
  • No-Action Letter No. 19-26, issued by the Division of Swap Dealer and Intermediary Oversight, provides relief from:
    • de minimis registration requirements;
    • uncleared swap margin rules;
    • business conduct requirements;
    • transaction confirmation, documentation, and reconciliation requirements; and
    • certain eligibility requirements that would have applied to certain swaps amended for IRR replacement.
  • No-Action Letter No. 19-27, issued by the Division of Market Oversight, provides relief from the trade execution requirement to the extent it would have applied to certain swaps amended for IRR replacement.
  • No-Action Letter No. 19-28, issued by the Division of Clearing and Risk, provides relief from the swap clearing requirement and related rules to the extent they would have applied to certain legacy swaps amended for IRR replacement.
LIBOR is being replaced as the interest rate benchmark for financial contracts by the Secured Overnight Financing Rate in the US and by the Sterling Overnight Index Average in the UK.

Guidance on Hemp Regulation

The Federal Reserve Board, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network (FinCEN), and Office of the Comptroller of the Currency, in consultation with the Conference of State Bank Supervisors, recently issued joint guidance clarifying the legal status of hemp growth and production.
The guidance clarifies that:
  • Hemp may be grown only with a valid license from the US Department of Agriculture (USDA) or under a USDA-approved state or tribal plan.
  • Although the production of hemp is legal under federal law, an applicable state or tribal government may prohibit production.
  • Although hemp is not covered under the Controlled Substances Act (CSA), marijuana is a controlled substance under federal law.
  • Banks are no longer required to file a Suspicious Activity Report (SAR) on customers solely due to their involvement in the growth or cultivation of hemp. However, banks are still expected to follow standard SAR procedures, and file SARs if there is any indication of suspicious activity.
  • Banks engaged in hemp-related business activities are responsible for complying with the requirements set forth in the Agriculture Improvement Act of 2018 (2018 Farm Bill) and applicable regulations.
  • Banks serving hemp-related businesses must comply with applicable regulatory requirements for customer identification, SARs, currency transaction reporting, and risk-based customer due diligence.
  • Banks serving marijuana-related businesses should continue following previously issued FinCEN guidance.
Hemp production has been regulated by the USDA, in consultation with the US Attorney General, since the 2018 Farm Bill removed hemp as a Schedule I controlled substance under the CSA.

Intellectual Property & Technology

Infringement by Imports Made Using US-Patented Processes

US companies obtaining products or product components from outside the US should take note of a recent Federal Circuit decision that makes it easier for patent owners to bring infringement claims against products made abroad using US-patented processes.
In Syngenta Crop Protection, LLC v. Willowood, LLC, the Federal Circuit held, on an issue of first impression, that a patent owner does not have to show that a single entity performs, controls, or directs all steps of the patented process to prove liability for infringing a process patent under 35 U.S.C. § 271(g). The Federal Circuit rejected the argument that the decision would impermissibly extend US patent protection to extraterritorial conduct, clarifying that Section 271(g) infringement liability is based on the importation, sale, offer for sale, or use in the US of products resulting from a patented process, not the unauthorized performance of the process outside the US.
Following Syngenta, US companies obtaining products or product components from overseas suppliers should:
  • Expect increased district court enforcement of US process patents, particularly in the chemicals and pharmaceuticals industries, where parties typically seek product, process, and product-by-process patent protection.
  • Ensure that any freedom to operate analyses and due diligence investigations of overseas partners consider potential process patent infringement liability at each step of the supply chain.
  • Reexamine contractual protections, such as supplier and manufacturer warranties and indemnification provisions, where process patent infringement liability may arise.

Labor & Employment

Labor, Employment, and Immigration Law Highlights

Employers should be aware of recent developments in labor, employment, and immigration law to prepare for the year ahead.

Labor Law

The NLRB is reversing standards changed under the Obama administration to become more employer-friendly. In 2020, the NLRB’s composition will narrow to three President Trump appointees and it likely will continue to pursue changes that favor employers (for example, modifying the “quickie” election rules to extend the amount of time between a union petition filing and an election). Key issues include:
  • Employers’ right to restrict employees’ email usage. In Caesars Entertainment d/b/a Rio All-Suites Hotel & Casino, the NLRB overturned Purple Communications, Inc., holding that employees do not have a statutory right to use their employer’s email system and other IT resources for non-work-related communications. However, employers cannot discriminate against union activity or other protected concerted communications.
  • The validity of employer rules requiring employee confidentiality during workplace investigations. In Apogee Retail LLC d/b/a Unique Thrift Store, the NLRB overturned Banner Estrella Medical Center, which severely limited confidentiality in investigations.

Employment Law

Employers should monitor employment law changes at the federal and state levels. Key issues include:
  • Federal wage and hour law changes, including new DOL regulations on the regular rate, overtime thresholds, and joint employment, and proposed changes to the fluctuating workweek regulations.
  • State and local developments, including laws adding new rights and protections, such as minimum wage increases, new leave provisions, and new grounds for discrimination. New York and California have been particularly active, although legal challenges are creating uncertainty in California. As of press time, temporary restraining orders blocked AB 51’s ban on mandatory arbitration and AB 5’s independent contractor test for independent truckers.
  • Revised employment standards for federal contractors subject to active compliance initiatives by the Office of Federal Contract Compliance Programs.

Immigration Law

Employers should expect regulatory and policy changes to business immigration, including possible changes to the H-1B and L-1 work visa categories. Key issues include:
  • The new registration requirement for filing cap-subject H-1B petitions, effective in March 2020.
  • Proposed fee increases likely to be implemented in 2020.
  • Increased scrutiny of employment-based petitions under the Buy American and Hire American Executive Order.
  • The resumed issuance (after a seven-year hiatus) of Social Security Administration no-match letters.

Litigation & ADR

Federal Rule Amendments

Companies should be aware of important amendments to the Federal Rules of Appellate Procedure (FRAP), Federal Rules of Evidence, and Federal Rules of Criminal Procedure, which went into effect on December 1, 2019.
The amendments significantly impact federal civil practice by, among other things:
  • Eliminating proof of service requirements for certain documents filed with federal courts of appeals using the Case Management/Electronic Case Filing system.
  • Expanding the types of information that parties must disclose in FRAP 26.1 disclosure statements.
  • Changing the requirements for the residual hearsay exception by, among other things:
    • eliminating the requirement that a proffered hearsay statement must have “equivalent” circumstantial guarantees of trustworthiness; and
    • updating the requirements for notice of the intent to use the exception.
Companies involved in federal criminal proceedings may be impacted by new Federal Rule of Criminal Procedure 16.1, which:
  • Requires that government and defense attorneys confer and attempt to agree on timing and procedures for the pre-trial disclosure of Rule 16 discovery no later than 14 days after an arraignment.
  • Permits parties to ask the court to determine or modify aspects of the pre-trial disclosure of Rule 16 discovery, including timing and manner, to facilitate trial preparation.

Arbitral Award Modification

Counsel should ensure that arbitral awards contain decisions on all relief requested before seeking to enforce arbitral awards in court. Courts generally do not have the power to modify arbitral awards to correct legal or factual errors or omissions made by the arbitrator.
In Prime Pork, LLC v. NBO3 Technologies, LLC, & H3 Enterprises, Prime Pork brought an arbitration against NBO3 and H3, alleging wrongful termination of a joint marketing and distribution agreement and citing to the joint obligations of NBO3 and H3 contained in the agreement. The arbitrator awarded Prime Pork nearly $2 million against NBO3, but did not address the liability of H3.
Prime Pork petitioned the Minnesota federal district court to confirm the arbitral award against both NBO3 and H3, arguing that because the agreement imposed joint obligations on NBO3 and H3, Minnesota law permits the court to enter judgment jointly against both entities. The court confirmed the arbitral award against NBO3 only because the arbitration award did not address the liability of H3. The court explained that Prime Pork’s petition required modification of the arbitral award and district courts lack the power to modify arbitral awards, except in the limited circumstances set out in 9 U.S.C. § 11.
For more information on a court’s power to modify arbitral awards, see Practice Note, Correction, Modification, and Remand of Arbitral Awards in the US.

Real Estate

Retail Outlook

Against the backdrop of record-breaking traditional retail store closures and e-commerce growth, retailers should seek to identify opportunities in this evolving market.
For example, retailers should consider taking advantage of:
  • Market conditions. Landlords are becoming more flexible, and offering rent and other concessions, because of the soft market.
  • Mixed-use developments. The proliferation of mixed-use developments presents a significant opportunity in retail. Even in car-centric cities, young professionals and empty nesters are gravitating toward these developments, which offer residences, shops, employers, exercise facilities, and restaurants within a small, densely populated geographic area.
  • The shopping experience. Selling an experience has become critical to many retail stores’ success because the experience, as much as the product, attracts consumers.
  • The ability to reinvent themselves. Retailers that continually evolve, creating a new presence and new store concepts, give consumers a reason to visit their stores.
  • Physical stores. Although more than half of consumers reportedly would choose online shopping over in-store shopping, online retailers are recognizing the importance of a physical presence. Many online retailers are appearing in retail developments or partnering with brick-and-mortar retailers.
  • Smaller spaces. Retailers are having success with smaller spaces. The online availability of stock reduces the amount of stock that is needed in stores. Some retailers carry very little inventory and instead assist consumers in purchasing online while in stores.
  • Technology. Retailers are taking advantage of apps, providing discounts, and hosting loyalty programs that are accessible through consumers’ smartphones.
GC Agenda Interviewees
GC Agenda is based on interviews with Advisory Board members and leading experts from Law Department Panel Firms. Practical Law would like to thank the following experts for participating in interviews for this issue:
Logan Breed
Hogan Lovells US LLP
Lee Van Voorhis
Jenner & Block LLP
Laura Wilkinson
PayPal, Inc.
Capital Markets & Corporate Governance
Adam Fleisher
Cleary Gottlieb Steen & Hamilton LLP
Craig Arcella
Cravath, Swaine & Moore LLP
Thomas Kim
Sidley Austin LLP
Robert Downes
Sullivan & Cromwell LLP
Employee Benefits & Executive Compensation
Tamara Killion, Rachel Leiser Levy, and Brigen Winters
Groom Law Group, Chartered
Jamin Koslowe
Simpson Thacher & Bartlett LLP
Michael Bergmann and Jeffrey Lieberman
Skadden, Arps, Slate, Meagher & Flom LLP
Sarah Downie
Weil, Gotshal & Manges LLP
Intellectual Property & Technology
Edward Tulin
Skadden, Arps, Slate, Meagher & Flom LLP
Labor & Employment
Melissa Allchin, Jordan Faykus, and Emily Harbison
Baker McKenzie LLP
Alessandro Villanella
Jackson Lewis P.C.
Susan Harthill and Eleanor Pelta
Morgan, Lewis & Bockius LLP
Mark Kisicki and John Merrell
Ogletree Deakins
David Grunblatt
Thomas Wilson
Vinson & Elkins LLP
Real Estate
Andrew Lance
Gibson, Dunn & Crutcher LLP
Stuart Saft
Holland & Knight LLP
Kathleen Wu
Hunton Andrews Kurth LLP
Andrew Van Noord
Kirkland & Ellis LLP
Kim Blanchard
Weil, Gotshal & Manges LLP