Federal Securities Law Source

Non-competition agreements: Ensuring enforceability

A non-competition agreement raises state-law public policy concerns. As a result, states often restrict the scope of non-competition agreements before they will enforce them. The protectable interests that states will recognize, the rules of construction that states will apply and the required elements of a non-competition agreement will vary from state to state. You may adhere to general guidelines in drafting non-competition agreements, but you should always consult local law.

Most jurisdictions disfavor non-competition agreements as a matter of public policy because they view such agreements as a restraint of trade. Broader language places a heavier burden on the employer to justify the restrictions whereas narrowly tailoring the language of a non-competition agreement reduces the risk that a court will construe the agreement to unnecessarily restrain trade.

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The importance of reading the documents

One of the most important things lawyers and clients should do in every merger & acquisition transaction is to read the documents, and be clear on the central facts of their transaction. This seems so profoundly simple and obvious that it seems that it would not need to be repeated. But a recent U.S. Tax Court case highlights the implications of not doing so.

In Makric Enterprises, Inc. v. Commissioner, TC Memo 2016-44 (Dkt. No. 1017-13, issued 03/9/2016), the taxpayers of Makric Enterprises, Inc. (Makric) sued the IRS to set aside a determination that the they collectively owed the IRS $2,839,780 and an accuracy-related penalty of $567,956 stemming from a relatively simple sale of the common stock of a parent company of its wholly owned subsidiary to a third-party purchaser.

Makric was the parent company, its subsidiary entity was Alpha Circuits, Inc. (Alpha), and the third party purchaser was TS3 Technology, Inc. (TS3).

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Data breaches and due diligence

Chances are that you or someone you know has been the victim of a data breach. The high number of cyberattacks and data breaches, now reported almost daily, calls attention to the importance of addressing these areas in the due diligence process in M&A deals.

Whether a target company has had issues with cybersecurity breaches in the past is a question that should be on the top of all acquirer’s minds, especially if that target has an online presence. If the target is a consumer facing business who regularly collects personal information, acquirers should focus its due diligence requests on the security practices of the target. Has the target implemented credit card tokenization? Have they updated their point-of-sale systems? How long do they retain customer information? If a target does not have a consumer base, the due diligence may instead focus on other areas, including how the target protects its trade secrets or confidential information. Continue Reading

Why indemnification clauses need to be scrutinized in purchase and sale agreements

Indemnification clauses in purchase and sale agreements are intended to address the obligation of one party to indemnify and hold the other party harmless from direct and third party claims. However, indemnification clauses also allocate the risk of losses between the parties.

An indemnification clause should specify the rights of the parties following a breach of representations, warranties, covenants or the occurrence of a specific liability. On one hand, a buyer will negotiate an indemnification clause to expand the scope or availabilities of other remedies, at law or equity, including adding other persons whom the buyer may otherwise have difficulty recovering from and expanding the types of recoverable losses. On the other hand, a seller will negotiate an indemnification clause to limit indemnification as the exclusive remedy to permit more predictable outcomes and mitigate potential liability.

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Will the DOL continue to make ESOPs a compliance priority?

Greg Daugherty, our colleague at Employee Benefits Law Report shared a post exploring whether or not the Department of Labor (DOL) under President Trump will continue to make employee stock ownership plans (ESOPs) a compliance priority.

A recently filed case suggests that the DOL may continue to make a priority out of investigating potential abuses in ESOP transactions. As such, employers who are considering the adoption of the ESOP should be mindful of putting together an experienced team to guide them through the fiduciary issues. In particular, it is critical for the trustee of an ESOP to hire an independent appraiser that has not performed a preliminary ESOP feasibility study for the company, and the trustee and other fiduciaries of the ESOP should be engaged with the due diligence process.

Read the full post here.

FTC revises HSR and interlocking directorate thresholds

The Federal Trade Commission has announced annual filing threshold revisions under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act that set new antitrust reporting standards.

Jay Levine, our colleague at Antitrust Law Source, provides perspective about the updated HSR requirements in his recent blog post. Read the full article here: “FTC revises HSR and interlocking directorate thresholds.”

SEC enforces rules regarding use of non-GAAP measures and undisclosed perks

Last week, the Securities and Exchange Commission (SEC) made good on its promises to enforce violations of its non-GAAP financial measure disclosure rules. MDC Partners agreed to pay a $1.5 million dollar penalty to settle the SEC’s charges relating to non-GAAP disclosures made by the company. The SEC alleged that MDC Partners had misused several non-GAAP measures in its earnings releases and periodic reporting and that MDC Partners had failed to disclose perks that it had provided to its former chief executive officer. Continue Reading

Supreme Court affirms family insider trading conviction

On Tuesday, The United States Supreme Court unanimously affirmed an insider trading conviction by finding that inside information exchanged between relatives violates federal security laws. The case is Salman v. United States.

The decision provides new life to family insider trading prosecutions which had been stymied by the Second Circuit’s 2014 Newman decision. Newman held that, in order to convict a tipster of insider trading, the tipster had to have provided the information exchanged for some type of personal benefit.

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SEC forces Mickelson to return $1 million from insider trading

PGA golfer Phil Mickelson agreed to forfeit almost $1 million that the Securities and Exchange Commission (SEC) said was obtained through insider trading. Mickelson was named as a “relief defendant” in a criminal case, filed in the Southern District of New York against professional gambler William Walters and a former director of Dean Foods, Thomas Davis. Mickelson was not criminally charged but is subject to a SEC civil action requiring a claw back of profits he made from the improper trades.

According the SEC complaint, Walters received non-public, insider information from 2008 through 2012 about Dean Foods, the nation’s largest milk producer, from his long-time friend Davis, who was at the time chairman of Dean Foods. The inside information concerned plan to spin off subsidiary WhiteWave Foods Co.

In 2012, Mickelson received a telephone tip from Walters that Mickelson should purchase Dean Foods stock because the company was about to spin off its profitable subsidiary. At the time of the call, Mickelson owed Walters money over sports gambling bets. Walters is considered by many as the most successful sports bettor in the country. Continue Reading

Delaware Courts continue scrutiny of “disclosure only” settlements in M&A litigation

On Jan. 22, 2016, the Delaware Court of Chancery released its opinion in In re Trulia Stockholder Litigation in which it rejected a “disclosure only” settlement of a shareholders’ suit challenging an M&A transaction. This decision confirms the trend of increasing hostility of the Delaware courts towards “disclosure only” settlements and serves as a warning to plaintiffs firms that they will find it increasingly difficult to extract attorneys’ fees from companies in these types of settlements.

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