Federal Securities Law Source

Recent IRS guidance affects corporate tax deductibility of public company executive compensation arrangements and related proxy statement disclosures

Publicly traded companies have long been concerned with Internal Revenue Code Section 162(m) in order to maximize the deductibility of compensation paid to certain covered officers. Last year’s tax reform act made significant changes to Code Section 162(m). The IRS also recently published a Notice that explained some of these changes in more detail. To address these issues, public companies may need to review their administrative practices, particularly how they keep track of their covered officers (which now include CFOs) and executive agreements. Also, because there no longer is a performance-based exception, they may want to consider revising their incentive plans to address business goals rather than former 162(m) requirements. Before doing so, however, they will want to make sure they don’t cause exempt agreements to lose their grandfathered status under the prior Code Section 162(m) requirements.

Our companion blog, Employee Benefits Law Report, summarizes these changes and identifies the steps public companies should take to respond to them. Read the full article here. 

Virtual shareholder meetings: advantages, disadvantages and practical considerations

As spring approaches, so do annual shareholder meetings for many public companies. Traditionally, these meetings were held in-person. However, due to fairly recent advances in technology, companies now have the option to hold these meetings exclusively online or by providing for online participation, which both offer advantages and disadvantages to shareholders and company leaders. Furthermore, not all state corporate statutes permit a virtual component, and those that do may impose specific requirements. With an increasing amount of public companies adopting virtual components, key stakeholders in today’s public companies should understand the advantages, disadvantages and any important practical and legal considerations to take into account- before deciding to take the virtual leap. Continue Reading

How to avoid registration under the Investment Company Act of 1940

One of the worse situations a company may face to be determined to be an investment company under the Investment Company Act of 1940, as amended (the act). If determined to be an investment company, the company is subject to the full regulation under the act. In addition, a company may inadvertently become an investment company; in such a case, all of its contracts are potentially voidable and it cannot engage in any other business. Generally, companies inadvertently become investment companies by virtue of their investments in certain securities which trigger the act’s 40 percent test.

Many times a number of companies fall within the definition of an investment company because operating companies have large amounts of assets invested in cash management instruments, government securities and money market funds. Continue Reading

SEC seeks to regulate transactions utilizing cryptocurrencies under federal securities laws

Any person who regularly monitors the U.S. financial markets has likely noticed the recent emergence of digital currency, also referred to as “cryptocurrency,” in recent months. For example, the price of bitcoin, the most widely known form of cryptocurrency, surged from a price below $800 per bitcoin in 2016, to a remarkable $17,000 per bitcoin recently in 2017. Despite this potential volatility, the acceptance of cryptocurrencies as legitimate forms of currency is likely; as evidenced by an array of local, national and international markets as well as an increasing range of products and participants, associated with these currencies. With the potential for these currencies to be used in everyday transactions, many questions are raised. What are cryptocurrencies? Can cryptocurrencies and their associated products be used to secure investments? And if so, can secured investments using these products be regulated? The commissioner of the Security Exchange Commission (SEC) released a statement in December 2017 addressing these issues, and many of the answers depend on the familiar adage: substance over form. Accordingly, one contemplating a transaction utilizing cryptocurrencies should first consider how these currencies might be regulated. Continue Reading

How to structure a joint venture

Joint ventures should be considered as an alternative to an acquisition if the acquiring party feels it does not have the experience or the business risk appetite to do it individually. They have the benefit of allowing parties to have greater success working together on a specific project than if they did it themselves.

Benefits of a joint venture

There are many benefits of entering into a joint venture. Some of them include: Continue Reading

Boilerplate provisions in a contract

The term “boilerplate” refers to standardized language in a contract that usually appears at the end of the agreement (often in a section titled “miscellaneous” or “general terms”). While boilerplate provisions are common clauses in a contract, they should always be checked carefully and tailored to the particulars of the situation as they will address important issues that will be determinative of the parties’ rights with respect to the business contract. You should remember that every clause in a contract may be negotiated – even the boilerplate provisions. Continue Reading

Methods to minimize indemnification obligations

Because most indemnification claims are made by a buyer, the seller seeks to limit its indemnification obligations. Some ways in which the indemnification obligations can be limited include:

  • Materiality of breach or claim amount
  • Caps on indemnification
  • Baskets
  • Payment adjustments for insurance proceeds or tax benefits

Sellers often like to include materiality qualifiers in the indemnification clause as to the claim amount and the type of claim. These qualifiers serve the purpose of limiting the right of the buyer to indemnification. Continue Reading

Litigation provisions v. arbitration provisions in business contracts

Arbitration is an increasingly popular method of resolving disputes, but drafters of business contracts need to be aware that arbitration may not be suitable for every dispute. The question of whether or not to arbitrate often comes down to when you want to decide arbitration is right – before or after a dispute.

Many people decide to include an arbitration clause during the negotiation of the business contract. The parties may decide to include an arbitration clause in their business contract that applies to future disputes. The decision to arbitrate after a dispute has occurred is clearer at this point because the matters in dispute are known. It can be difficult to reach an agreement to arbitrate at this stage if one of the parties has an interest in delaying matters or believes litigation provides a strategic advantage. Continue Reading

Delaware limits appraisal rights, but at what cost?

Back in August 2016, Delaware amended Section 262 of the Delaware General Corporation Law to address the rise of the appraisal arbitrage strategy where certain sophisticated investors would find a target company that is involved in a merger or acquisition, buy stock in the target company, and then invoke appraisal rights under Section 262. The main goal of the strategy is to strong-arm management to settle for a higher sale price in order to avoid litigation costs and/or gain from receiving statutory interest that accrued on the court-appraised amount. The idea behind the 2016 amendments was to curtail this appraisal arbitrage strategy by limiting a shareholder’s appraisal rights under Section 262 in two main respects: (i) by allowing surviving corporations to prepay dissenting shareholders prior to a final court determination in order to avoid paying statutory interest on the final appraisal value,[1] and (ii) by taking away appraisal rights from de minimis shareholders who hold stock that is listed on a national security exchange.[2]

A recent study published by the Harvard Law School has analyzed the effect of the 2016 amendments on appraisal actions in Delaware since the amendments went into place one year ago. The study found that appraisal actions did, in fact, decrease by 33 percent in 2017 as compared to the same period in 2016. The analysis also found that, surprisingly, the average deal premium fell from 28.3 percent in 2016 to 22.4 percent in 2017, the lowest of any year since at least 2005. As deal premiums fell, the average total change-in-control payments to CEOs (i.e. golden parachute payments) rose from 0.9 percent of transaction equity value to 2.1 percent, which brings into question whether CEOs acquiesced in lower deal premiums for higher parachute payments at the conclusion of the transaction. All in all, the study found that the decrease in deal premiums from 2016 to 2017 resulted in target shareholders losing around $77.4 billion, which, by any standards, isn’t a nominal amount. Continue Reading

Rate increases for issuers registering securities

New rates will take effect at the beginning of the next fiscal year, Oct. 1, 2017, for public companies and other issuers to register their securities with the U.S. Securities and Exchange Commission (SEC).

The SEC announced on Aug. 24, 2017, that the fiscal year 2018 fees to register securities will be set at $124.50 per million dollars. This is up from the $115.90 per million dollars fee for fiscal year 2017. The 7.4 percent increase is significantly less than the increase from fiscal year 2016 to fiscal year 2017 ($100.70 to $115.90, or 15.1 percent). However, issuers saw the rates lowered for fiscal year 2015 to 2016. Continue Reading

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