GC Agenda: August/September 2019 | Practical Law

GC Agenda: August/September 2019 | Practical Law

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

GC Agenda: August/September 2019

Practical Law Article w-021-5347 (Approx. 11 pages)

GC Agenda: August/September 2019

by Practical Law The Journal
Published on 31 Jul 2019 • USA (National/Federal)
A round-up of major horizon issues for General Counsel.

Antitrust

Antitrust Focus on Technology Markets

Counsel should monitor the increasing government focus on potential antitrust violations by technology companies.
Sharper scrutiny and calls for more enforcement are coming from a growing number of government sources, including:
  • FTC and DOJ agency leadership, in speeches, hearings, and conferences on the state of competition in technology markets.
  • A new FTC technology task force, which is reviewing whether previous mergers in technology markets have harmed competition.
  • Congressional hearings.
  • Politicians and presidential candidates seeking to investigate, and in some cases break up, large technology companies.
The FTC and DOJ reportedly have divided oversight of four large technology companies. The FTC will oversee Amazon and Facebook, and the DOJ will oversee Apple and Google.
In addition to arguing that certain technology companies are engaging in monopolization, proponents of increased antitrust enforcement are concerned about:
  • Acquisitions by incumbents of nascent rivals or potential competitors in adjacent markets.
  • Vertical integration, for example, where online platforms also compete in the markets they serve.
  • Conglomerate theories of harm, in which companies are active in unrelated spaces that may nevertheless be a source of anticompetitive harm.
  • Areas that are not traditional focuses of antitrust enforcement, such as privacy, wages, and income equality.
While much of the current focus is on technology markets, many of the same theories and criticisms could be applied to other industries, such as the finance, health care, and pharmaceutical industries.
For more information on the FTC’s priorities, see Legal Update, FTC Chairman Simons Delivers Speech on Focus of Antitrust Enforcement.
For more information on the antitrust agencies’ approach in merger review, see Practice Note, How Antitrust Agencies Analyze M&A.

Capital Markets & Corporate Governance

Confidential Treatment Process

Public companies should be aware of a recent US Supreme Court decision that may impact the SEC’s confidential treatment process.
In Food Marketing Institute v. Argus Leader Media, the Supreme Court broadened the definition of confidentiality under the Freedom of Information Act (FOIA) and invalidated the substantial competitive harm test that courts have used as a necessary condition for information to receive confidential treatment. This decision raises questions for SEC registrants seeking confidential treatment of documents filed with the SEC, because the SEC’s current confidential treatment process tracks the standard under FOIA and incorporates the substantial competitive harm test.
Earlier in 2019, the SEC streamlined the confidential treatment process, allowing registrants to file redacted material agreements and other exhibits without applying for confidential treatment if the redacted information is not material and would be competitively harmful if publicly disclosed. Under the new rules, registrants are no longer required to submit a confidential treatment request to the SEC, but must:
  • Mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted.
  • Include a prominent statement on the first page of the redacted exhibit that certain information has been excluded from the exhibit because it:
    • is not material; and
    • would be competitively harmful if publicly disclosed.
  • Indicate with brackets where the information has been omitted from the filed version of the exhibit.
Because the current confidential treatment process requires that the redacted information be competitively harmful, public companies should continue to redact information from exhibits only if disclosure would cause competitive harm, and remain on the lookout for SEC guidance following the Supreme Court’s ruling.
For more information on the SEC’s confidential treatment process, see Filing a Confidential Treatment Request Checklist.

Board Oversight of Risk Management

Boards should ensure that a risk management oversight system is established at the board level to address key risks facing the company, and that this system is continually monitored, following a recent Delaware Supreme Court decision.
In Marchand v. Barnhill, Blue Bell Creameries’ directors were sued for breach of fiduciary duty after a listeria outbreak resulted in the death of several customers who ate the company’s ice cream. The court held that, for a company that produced just one product, a reasonable inference of a breach of the duty of loyalty could be drawn from the board’s failure to establish:
  • A board committee, or board-level process, to oversee food safety.
  • A protocol of advising the board about food safety reports and developments.
Under Delaware law, a director can be personally liable for a breach of the duty of loyalty, and in the absence of good faith, the company may not be able to indemnify the director. Therefore, boards should consider the following best practices:
  • Use an existing board committee or create a new, dedicated committee to address and focus on primary areas of risk to the company.
  • Ensure board-level processes are in place that require management to regularly keep the board apprised of:
    • key risks;
    • how risks are being managed; and
    • any significant deficiencies in risk management processes.
  • Schedule regular, quarterly, or biannual board review of key risks and risk management processes.
  • Ensure that the board minutes accurately reflect the board-level processes regarding, and the board’s review, monitoring, and consideration of, risk management issues and red flags.
For more information on directors’ fiduciary duties, including the duty of loyalty, see Practice Note, Fiduciary Duties of the Board of Directors.

Commercial Transactions

Text Messages as Evidence of a Binding Contract

A recent Southern District of New York decision indicates that courts are increasingly finding that text messages, like emails, can serve as evidence of a binding contract.
In Tayyib Bosque, Corp. v. Emily Realty, LLC, the plaintiff, a real estate and business broker, alleged that he was owed commission after he found a buyer for three of the defendant’s businesses. The plaintiff relied on a series of text message exchanges with the defendant to show the existence of a binding fee agreement. The court held that the text messages satisfied the writing requirement of the statute of frauds because they contained the essential terms of the transaction. However, because the plaintiff could not show that the defendant signed the text messages, the text messages did not satisfy the signature requirement of the statute of frauds, and therefore did not constitute a valid agreement.
In St. John’s Holdings, LLC v. Two Electronics, LLC, a Massachusetts court held that a text message constituted a valid and enforceable contract for the sale of land. In reaching that conclusion, the court found that the text message:
  • Qualified as a writing under the statute of frauds, because it contained sufficiently complete terms and an intention to be bound by those terms.
  • Satisfied the signature requirement of the statute of frauds, because it included a signature that, when read in the context of multiple text message exchanges between the parties, evidenced an intent to have the writing be legally binding.
  • Evidenced offer and acceptance.
As more courts hold that text messages may serve as evidence of a binding contract, in-house counsel should update their training materials for employees who negotiate contracts with third parties to address this issue. In particular, counsel should advise their business colleagues to:
  • Include a disclaimer in text message communications with third parties to clarify that offers or negotiations are contingent on the parties signing a written contract.
  • Use language to make it clear that the text message is not intended to create a binding contract.
  • Review all text message communications with third parties carefully before sending to ensure that they will not be contractually binding.
  • Avoid negotiating contracts or discussing contract terms with third parties in text messages, if possible.
For more information on electronic business transactions generally, see Practice Note, Signature Requirements for an Enforceable Contract.

Employee Benefits & Executive Compensation

Health Reimbursement Arrangements

Employers that offer health insurance coverage should be aware of a new employee benefit arrangement that is available under final regulations issued in June 2019 by the Departments of Labor, Health and Human Services, and the Treasury.
The final regulations expand the usability of health reimbursement arrangements (HRAs) by allowing HRAs and other account-based group health plans to be integrated with individual health insurance coverage. These arrangements are known as individual coverage HRAs. The final regulations also permit HRAs that satisfy certain conditions to be recognized as limited excepted benefits.
The final regulations, which generally apply to plan years beginning on or after January 1, 2020, remove a prohibition on integrating an HRA with individual coverage under existing guidance. This means that HRAs can be integrated with individual coverage if several conditions addressed in the final regulations are satisfied, such as:
  • All individuals covered by an individual coverage HRA must be enrolled in individual health insurance coverage.
  • Individuals in a class of employees cannot be given a choice between a traditional group health plan or an individual coverage HRA.
  • Employers that offer individual coverage HRAs to a class of employees must do so on the same terms to all employees within the same class.
The final regulations also add a minimum class size requirement that applies in some cases.
Although it remains to be seen whether employers will adopt individual coverage HRAs for the 2020 plan year, these arrangements could become more popular if the individual market for health insurance coverage is stable. 

For more information on individual coverage HRAs, see Legal Update, Final Rules Permit HRAs to Be Integrated with Individual Health Insurance Coverage.

Finance

2019 Mid-Year Trends in Large Cap and Middle Market Loans

Practical Law Finance recently analyzed the current state of the leveraged loan market. Highlights include:
  • Covenant-lite loan issuance and concerns about excessive quantities of covenant-lite debt in the market.
  • The current impact of the Leveraged Lending Guidance and the risks associated with elevated leverage levels.
  • The Windstream litigation and the broader impact on the loan market of parties holding credit default swap positions in borrowers.
  • Recent legislation impacting the leveraged loan market, including the Tax Cuts and Jobs Act and the Delaware Limited Liability Company Act.
  • The replacement of LIBOR, including the Secured Overnight Financing Rate as a recommended alternative, and the Alternative Reference Rates Committee’s robust fallback language for credit documents.
  • An update on Brexit, including its impact on finance transactions and the potential outcomes following the Article 50 negotiation period.
  • The final Qualified Financial Contract Stay Rules, including the Loan Syndications and Trading Association’s recently published template credit agreement language.
  • Increasing interest in more environmentally conscious loans, including green loans and sustainability-linked loans.
  • A discussion of prominent loan agreement negotiation points between borrowers and lenders, including most favored nation provisions, designation of unrestricted subsidiaries, EBITDA cost-savings and synergies addbacks, and mandatory prepayment provisions.

For more information on these and other trends in the leveraged loan market, including Expert Q&As with Aaron F. Adams of Gibson, Dunn & Crutcher LLP, Adam D. Summers of Fried, Frank, Harris, Shriver & Jacobson LLP, and Samantha Hait, Judson A. Oswald, and Jay M. Ptashek of Kirkland & Ellis LLP, see Practice Note, What’s Market: 2019 Mid-Year Trends in Large Cap and Middle Market Loans.

Intellectual Property & Technology

Trademark Licenses in Bankruptcy

A recent decision by the US Supreme Court provides clarity for trademark license parties regarding the status of a licensee’s rights in the event of the licensor’s bankruptcy.
In Mission Product Holdings, Inc. v. Tempnology, LLC, the Supreme Court resolved a circuit court split by holding that a debtor-licensor’s rejection of a trademark license is a breach of an executory contract under section 365(g) of the Bankruptcy Code, but does not terminate the licensee’s rights to continue using the licensed marks under the contract. The decision provides assurance to licensees that a debtor-licensor cannot unilaterally prevent a licensee’s use of a licensed mark by rejecting a license agreement in bankruptcy.
Trademark license parties can avoid the time and expense of mitigating the risk of licensor rejection, for example, through coexistence agreements or creating trademark holding entities. However, in drafting new license agreements or amendments to existing license agreements, companies should consider including provisions to address continuing areas of concern, such as:
  • How the parties will preserve the value of the licensed marks through maintenance, enforcement, and quality control post-rejection.
  • The extent to which a licensee’s post-rejection right to continue using the licensed marks may be limited by:
    • the license agreement terms; or
    • applicable non-bankruptcy law.
  • Whether section 365(n) of the Bankruptcy Code should apply to the licensee’s post-rejection right to continue using IP other than trademarks under mixed IP licenses, for example, technology licenses that include both patent and trademark rights.
For more information on this decision, see Legal Update, Supreme Court Resolves Circuit Split: Trademark Licensee’s Rights Continue After Debtor-Licensor’s Rejection in Bankruptcy.

Labor & Employment

Title VII Charge-Filing Requirement

Employers facing a Title VII employment discrimination lawsuit should promptly raise the plaintiff’s failure to satisfy Title VII’s charge-filing requirement or risk forfeiting that defense in light of a recent US Supreme Court decision.
In Fort Bend County, Texas v. Davis, the Supreme Court held that the statutory requirement that a Title VII claimant file a charge with the EEOC or an equivalent state agency before raising that claim in a federal lawsuit is a mandatory, non-jurisdictional claim-processing rule, but not a jurisdictional prerequisite. Accordingly, where an employer timely raises that defense, a court must enforce the charge-filing rule and dismiss claims not previously raised in administrative proceedings. However, if an employer does not timely assert that defense, it is waived, and litigation based on the previously uncharged claim may continue.
In Fort Bend, the plaintiff noted she had a religious discrimination claim on an EEOC intake form, but did not allege or provide any information concerning a religious discrimination claim in her formal EEOC charge. The Supreme Court affirmed that the employer waived its failure-to-file defense as to the uncharged religious discrimination complaint allegation by waiting five years to raise it.
Employers defending against a Title VII claim should consider:
  • Developing a consistent protocol for reviewing a plaintiff’s prior administrative proceeding so that counsel handling the litigation may timely raise a defense against any previously unfiled claims.
  • Preparing to raise a failure-to-file and any other statutory claim-processing rule defense, such as any statute of limitations defense, in a motion to dismiss or as an affirmative defense in the employer’s initial answer.

For more information on affirmative defenses in employment litigation, see Employment Litigation: Affirmative Defenses Checklist.

NLRB Access in Employment Arbitration Agreements

Employers should ensure that their employment arbitration agreements do not interfere with employees’ rights to file unfair labor practice (ULP) charges or participate in NLRB processes.
In Prime Healthcare Paradise Valley, LLC, the NLRB held that, as a matter of law, there is no legitimate justification for a provision in an arbitration agreement to restrict employees’ access to the NLRB’s processes. Consequently, an agreement violates the National Labor Relations Act (NLRA) when it either expressly prohibits or would reasonably be interpreted to prohibit the filing of charges with the NLRB or with administrative agencies generally, for example, by making arbitration appear to be the exclusive forum to resolve all claims.
The NLRB noted that neither the Federal Arbitration Act nor the US Supreme Court’s holding in Epic Systems, which approved class and collective action waivers in mandatory arbitration agreements, authorizes arbitration agreements that prohibit employees from exercising rights under the NLRA, including by filing ULP charges.
Employers should consider:
  • Drafting arbitration agreements using plain language that employees can easily understand.
  • Expressly excluding claims under the NLRA from the scope of claims covered by arbitration agreements.
  • Expressly stating that arbitration agreements do not preclude employees from filing charges, participating in investigations, or testifying in NLRB or other administrative agency processes.
  • Reviewing other agreements, policies, and provisions to ensure they do not preclude access to the processes of the NLRB or other administrative agencies, such as the EEOC.

For resources to assist employers and their counsel in drafting employment arbitration agreements, see Employment Arbitration Toolkit (US).

Litigation & ADR

Attorney-Client Privilege in the Boardroom

A recent district court decision provides guidance for counsel presenting privileged information to a board.
In In re Smith & Nephew Birmingham Hip Resurfacing (BHR) Hip Implant Products Liability Litigation, the District of Maryland reviewed a plaintiff’s request to obtain certain materials that Smith & Nephew, Inc.’s Chief Legal Officer (CLO) drafted with outside counsel and presented to the board, along with board meeting minutes that contained a summary of the presentation and the related PowerPoint slides.
The plaintiff argued that, although these materials reflected the CLO’s legal advice to the board, the attorney-client privilege and work product doctrine did not attach because the documents served additional purposes beyond providing legal advice. The court, however, focused on the primary purpose of these documents, which was to provide legal advice, and concluded that a document’s multiple purposes do not strip the protections that generally apply to legal advice provided to a board in anticipation of pending litigation.
Counsel making board presentations should consider adopting measures to ensure that a court will enforce the attorney-client privilege, such as including in all presentation materials:
  • Prominent language stating that the primary purpose of the materials is to provide legal advice.
  • References to any pending litigation that is impacted by the advice.
  • A “legally privileged and confidential” legend.
Counsel should also consider whether the company will use the presentation materials, or adapt them for use, in other contexts to avoid creating waiver issues. 

For resources to assist counsel in navigating the attorney-client privilege and the work product doctrine in federal litigation, see Attorney-Client Privilege and Work Product Doctrine Toolkit.

Reconsideration of Arbitral Awards

Counsel drafting arbitration agreements should consider whether to include a reconsideration clause given two recent decisions that demonstrate the limits of an arbitral tribunal’s authority to reconsider its awards.
In Crédit Agricole Corporate & Investment Bank v. Black Diamond Capital Management, LLC, the Southern District of New York held that a tribunal exceeded its authority when it granted a motion to reconsider its interest calculation method after issuing its final award. Applicable arbitral rules limited reconsideration to clerical errors, and the court determined the tribunal exceeded its authority by recalculating interest using different legal principles.
In American International Specialty Lines Insurance Co. v. Allied Capital Corp., the Appellate Division of the New York Supreme Court held that an ad hoc tribunal (operating with no administering entity) exceeded its authority when it granted a party’s request to reconsider whether a settlement payment constituted a “loss” under an insurance policy. The tribunal had issued a partial final award that the payment was not covered, but reversed itself on reconsideration. According to the court, under the common law functus officio doctrine, the partial award was final and could not be revisited.
As these cases demonstrate, neither typical arbitral rules nor common law generally permit a tribunal to reconsider its final award. However, because a tribunal derives its authority from the arbitration agreement, a reconsideration clause in the arbitration agreement overrides both arbitral rules and common law, and ensures that the tribunal may correct awards.
Therefore, when drafting an arbitration agreement, counsel should consider including:
  • A reconsideration clause authorizing the tribunal to consider a prompt motion for reconsideration of awards.
  • A provision for fees to be awarded against an unsuccessful moving party, to deter ill-considered or harassing motions.

For more information on reconsideration of arbitral awards, see Practice Note, Correction, Modification, and Remand of Arbitral Awards in the US.

Real Estate

Construction Manager Retention

Companies constructing new facilities or engaging in a major renovation of existing facilities should consider retaining a construction manager as an agent or advisor to help avoid the challenges that often arise during the construction process and ensure that the owner’s vision is executed.
Construction managers are licensed professionals who maintain standards of practice and care in performing their responsibilities. Construction managers can identify the need for and utility of sustainable and technological advances for construction projects, including:
  • Sustainability and building certification, such as Leadership in Energy and Environmental Design.
  • Building information modeling.
  • Drones.
An owner can contract with a construction manager to provide a range of services at all stages of a construction project, including at the:
  • Planning and design stage to:
    • review the owner’s program;
    • evaluate the constructability of the design;
    • prepare preliminary estimates of the cost of the work and any alternates; and
    • create a schedule to perform the construction.
  • Construction stage to:
    • provide on-site supervision of the construction;
    • inspect the progress of the work;
    • maintain and update the project schedule;
    • monitor and evaluate costs in relation to budget constraints;
    • review, analyze, and negotiate change orders; and
    • provide regular reporting to the owner on the progress and cost of the work.

For more information on construction management, see Practice Notes, Private Construction Project Delivery Systems: Overview and Selecting the Right Private Project Delivery System.

Tax

Participation Exemption for Foreign Dividends

The IRS and Treasury Department recently released Temporary Regulations designed to ensure that the participation exemption for foreign dividends under Section 245A of the Internal Revenue Code (Code) operates properly and does not reverse the intended effect of the Subpart F and global intangible low-taxed income (GILTI) regimes.
The participation exemption seeks to encourage US companies to repatriate their foreign earnings and invest them in the US. Under the participation exemption, a 100% dividends received deduction (DRD) is allowed for the foreign-source portion of dividends received from a specified 10%-owned foreign corporation (SFC) by a US corporation that is a “United States Shareholder” of the SFC (as defined under Code Section 951(b)), provided that a holding period requirement and certain other requirements are satisfied. The participation exemption applies to distributions made after December 31, 2017.
The Temporary Regulations limit the availability of the participation exemption if the dividend is generated from an SFC’s earnings and profits before the GILTI rules went into effect (January 1, 2018), or if the SFC experiences certain ownership changes. More specifically, the Temporary Regulations limit the DRD allowed under the participation exemption to the portion of a dividend that is not an “ineligible amount.” In general, the ineligible amount is the sum of:
  • The extraordinary disposition amount, which is 50% of the portion of the dividend attributable to certain earnings and profits resulting from transactions between related parties during a period after the measurement date under Code Section 965(a)(2), and in which the SFC was a controlled foreign corporation (CFC), but during which the GILTI rules did not apply.
  • The extraordinary reduction amount, which is 100% of the dividend attributable to certain earnings and profits generated during any taxable year (ending after December 31, 2017) in which a “controlling shareholder” transfers more than 10% of its CFC stock or there is a greater than 10% change in the controlling shareholder’s overall ownership of the CFC.
The Temporary Regulations apply retroactively to distributions occurring after December 31, 2017, and therefore may apply to transactions for which a US federal income tax return was already filed.

For more information on the participation exemption, see Practice Note, Participation Exemption for Foreign Dividends.
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:
Antitrust
Logan Breed
Hogan Lovells US LLP
Adam Paris
Sullivan & Cromwell LLP 
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
Rachel Leiser Levy
Groom Law Group, Chartered 
Michael Bergmann and Jeffrey Lieberman 
Skadden, Arps, Slate, Meagher & Flom LLP 
Intellectual Property & Technology
Bruce Goldner
Skadden, Arps, Slate, Meagher & Flom LLP 
Labor & Employment
Emily Harbison, Michael Leggieri, and Robin Samuel
Baker McKenzie LLP
Klair Fitzpatrick
Morgan, Lewis & Bockius LLP 
Chris Murray
Ogletree Deakins
Thomas Wilson
Vinson & Elkins LLP 
Litigation & ADR
Richard Ziegler
AcumenADR LLC
Joel Eads
Greenberg Traurig, LLP 
Real Estate
Claramargaret Groover
Becker & Poliakoff 
Tax
Kim Blanchard
Weil, Gotshal & Manges LLP