“Taking Care of Business” is a new blog from White and Williams’ Corporate and Securities Group. With the help of our friends in Cyber Law and Data Protection, Tax, Real Estate and Finance, Bankruptcy, Intellectual Property, Labor & Employment and Commercial Litigation, TCB will focus on emerging issues impacting the business community at every stage of the lifecycle from formation to growth and to exit. Whether it be important updates on day-to-day operational matters such as tax planning, employee benefits, commercial contracts, corporate finance, intellectual property, regulatory and data privacy and cybersecurity, or best practices and recent trends or legal developments of note applicable to transactional matters including acquisitions, strategic alliances, private equity and venture capital financings and debt financings, we’ve got you covered. And of course, we will keep you posted on any recent developments on the litigation and bankruptcy fronts too. In short, TCB will be a “one stop shop” for insights and commentary on everything relevant to owning and operating a business.
To give you a sense of the breadth of topics to be covered, today’s blog highlights five current legal issues that are on the minds of many of our clients.
Availability of capital for expansion of business is a significant challenge for many early and growth stage companies. One of the impediments to raising capital often cited is the inability to use a “finder” or unregistered broker to assist with outreach to the investment community, particularly when the founders of the company have never previously been through the process. Registered broker-dealers are generally not interested in assisting on these small transactions and if they are interested, the costs of using such broker-dealers are prohibitively expensive. Often companies unknowingly violate the applicable laws. On September 21, 2017 the Securities and Exchange Commission Advisory Committee on Small and Emerging Companies (ACSEC) delivered its final report setting forth its recommendations on a number of issues, including reiterating its prior recommendations that “the Commission adopt rules in the near future to provide regulatory certainty for finders, private placement brokers, and platforms not registered as broker-dealers involved in primary and secondary transactions of unregistered securities.”
The ACSEC expressed its disappointment that the Commission has not yet taken actions to address these concerns. Although not necessarily contrary to such recommendations at an event held on September 28th at the Brookings Institution, SEC Chairman Jay Clayton said that while there is a data set on bad registered brokers and advisors, he has people at the SEC trying to pull together a data set of individuals not registered as advisors or brokers as he is concerned about the amount of garden-variety retail fraud. At his testimony before the Senate Banking Committee on September 26th he also focused on retail fraud and noted the SEC’s recent launch of the Retail Strategy Task Force. Hopefully, the adoption of a narrow set of rules to allow for private capital raising will still be pursued despite these concerns.
The so-called “Big Six” (Treasury Secretary Steven T. Mnuchin, Speaker of the House Paul Ryan, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, House Ways and Means Committee Chairman Kevin Brady, and National Economic Council Director Gary Cohn) released a statement and framework on September 27, 2017 further outlining Republican efforts to enact federal tax reform. Unfortunately, the latest framework builds only slightly on previous public releases and still lacks many of the crucial details needed to fully plan for and ultimately act upon any of the prospective changes.
Among the more notable goals of the tax reform effort are lower personal and corporate income tax rates, a cap on the tax rate applicable to business income generated by pass through entities (such as S Corporations and partnerships), limitations on personal and business deductions, full expensing of some capital purchases for a limited number of years, and repeal of the federal estate and GST taxes. The framework leaves the specifics of each of these reform efforts to the legislative committees in the House and Senate to be worked out in the coming months. We anticipate that tax reform will present opportunities for many individuals and businesses once those details emerge and the actual legislation takes shape. In the interim, tax advisers and their clients will unfortunately have to remain in suspense.
Delaware Appraisal Proceedings
The Delaware Supreme Court in DFC Global Corp. v. Muirfield Value Partners, L.P. declined to adopt a presumption that the deal price represents fair value in an arm’s length merger. Nevertheless, the Court acknowledged that the best evidence of fair value is the deal price where the transaction is conflict-free, transparent, and competitive. The Court further held that only compelling reasons “grounded in the record and reliable principles of corporate finance and economics” will justify departure from the deal price in such cases. The Chancery Court is accordingly on notice that it must provide a reasoned analysis when deviating from the deal price for fair value in an arm’s length merger. Whether DFC Global results in less appraisal arbitrage remains to be seen. However, one cannot overlook the Supreme Court’s obvious preference for the deal price as an indicator of fair value in arm’s length mergers. Management is accordingly well advised to mitigate potential stockholder challenges to a merger price by following sound process and conflict avoidance.
Since the inauguration of President Donald Trump, companies have long awaited further direction on the Department of Labor’s 2016 Final Rule regarding the exemptions to overtime wages mandated under the Fair Labor Standards Act. The Final Rule sent employers scrambling in 2016 when the DOL announced its intent to double the minimum salary required to qualify for the FLSA’s white collar exemptions (executive, administrative and professional). In November 2016, the Eastern District of Texas issued a nationwide order temporarily enjoining enforcement of the Rule. On June 30, 2017, and following changes to the Administration, the DOL notified the Fifth Circuit of its intent to withdraw its defense of the new salary requirements. Last week, the DOL completed a public comment period of a new rulemaking process to reassess and determine an appropriate salary level for the exemptions. While the salary level requirements of the federal overtime exemptions remain uncertain, companies should not be lulled into a false sense of security that federal, state or local agencies or their employees will take a less aggressive approach regarding the enforcement of wage and hour laws. Despite the uncertainty surrounding the Final Rule, employers are encouraged to proactively review positions now to confirm whether each position is exempt from current overtime requirements.
Social Media and Endorsements
The U.S. Federal Trade Commission is cracking down on ‘deceptive endorsements’ by Internet influencers who have been paid by brands to promote their products. For the first time, the FTC has brought claims not just against the agencies and advertisers, but against the influencers as well. Reaching consumers has become increasingly difficult due to ever-falling television ratings. Companies believe social media may be the way to do so. But there are rules and disclosures required in order to prevent misleading or confusing consumers into thinking a review is an objective opinion rather than a paid endorsement. In short, all such arrangements must be clearly and conspicuously disclosed. The issues include, among other things, the proximity and prominence of such notice. Instagram has already addressed the issue with “paid partnership” tags. It will be interesting to see how other leading social media sites handle the issue. Companies using social media to promote their products need to be cognizant of these rules to avoid potential liability.