Federal Securities Law Source

Reminder: SEC exhibit hyperlink and format rules become effective Sept. 1, 2017

Effective for filings on and after Sept. 1, 2017, registrants will be required to include a hyperlink to each exhibit identified in the exhibit index of periodic reports, current reports and registration statements. For registration statements, the rule applies to the initial registration statement, and to each subsequent pre-effective amendment.

The SEC adopted the final rules on March 1, 2017. According to the SEC’s adopting release, the rules are intended to address the inefficient and time-consuming search required to locate exhibits that have been incorporated by reference into reports and registration statements.

These rules apply to the following types of filings:

  • Form 8-K
  • Form 10-Q
  • Form 10-K
  • Form 10
  • Form 10-D
  • Registration statements:
    • Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3, F-4, SF-1, SF-3, SF-3, F-10 and 20-F

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The impact of efforts clauses in transactional documents

Most transactional documents include effort clauses as covenants to require a party to perform a certain act or acts to achieve a stated goal. These terms generally include the following:

  • Best efforts
  • Reasonable efforts
  • Commercially reasonable efforts

There are no universally accepted definitions or standards for interpreting these terms. As a result, their use can create ambiguity and uncertainty when a dispute arises, making it difficult to predict an outcome.

When a court evaluates whether a party has exerted the necessary effort standard, the court generally first examines the business contract for a definition of the efforts term. If the business contract contains such a definition, the court will apply that standard. If the business contract is silent, the court has discretion to interpret an efforts clause or term by considering the business contract’s facts and circumstances.

In the absence of a definition, a court will impose standards of:

  • Good faith, which requires honesty and fairness from the acting party
  • Reasonableness, which requires diligence from the acting party and is often a more demanding standard than good faith

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Retaining key employees in an acquisition

Imagine identifying an acquisition target that looks great on paper: strong earnings, efficient operations and good workplace environment. But after acquiring the target, a key employee leaves, taking with him or her key customers and suppliers. From day one, the newly acquired business is treading water due to the lack of business continuity after the acquisition.

Even though an acquisition might look good in theory, the reality of its execution poses multiple threats that could disrupt the business after the transaction, including employees who view the change in ownership as a threat or a risk, customers who feel the change in ownership might be a good time to shop around and suppliers wanting to perhaps renegotiate contracts. In order to alleviate some of these risks, potential buyers need to address these considerations head-on during the due diligence and negotiation process.

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Learning from Yahoo!’s missteps: Meeting SEC disclosure obligations after a cyber-attack

In July 2016, Verizon announced it would buy Yahoo! for an unprecedented $4.83 billion. Several months later, Yahoo! disclosed two massive data breaches that affected 1.5 billion people, threatening to scuttle the agreement. Although Verizon recently finalized the acquisition, the hack forced Yahoo! to accept a $350 million reduction in purchase price.

Within the last few years, publically held companies—including Sony, Target, and most recently, Chipotle Mexican Grill—have been infiltrated by hackers bent on stealing trade secrets and personal information. The efficacy of cloud computing has spawned a digital arms race between companies who attempt to safeguard customer information and private and state actors, who wish to obtain it. Given that large-scale data breaches are becoming the norm, companies need to be aware of reporting and disclosure obligations they may face in the event of a breach. While most companies recognize their obligations under state data breach laws and HIPAA, few publically traded companies consider what, if anything, they should disclose to the U.S. Securities and Exchange Commission (SEC) in the event of a breach. In failing to do so, they risk SEC sanctions and potential liability from class action lawsuits, either of which could result in significant losses.

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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.”