Current News and Events from the State Bar of California Business Law Section.
Here is your September eNews from the Business Law Section (“BLS”) :
As I start my one-year term as Chair of the Business Law Section (BLS), I reflect on the reasons I got involved, the professional growth I’ve experienced, and the wonderful relationships I’ve developed along the way. While participation in a bar association can be time-consuming, the rewards are immense. If you have the time and inclination, get involved with the BLS! I promise that the effort you make will be rewarded many times over.
The BLS is one of the State Bar’s 16 legal Sections. It is comprised of about 8,000 attorneys, organized into the following 15 Standing Committees:
Business Law News
Commercial Transactions (formerly UCC)
Consumer Financial Services
Internet & Privacy Law (formerly Cyberspace Law)
Partnerships and Limited Liability Companies.
BLS offers the following publication opportunities:
Business Law News (BLN): A quarterly journal providing articles about cutting edge legal issues affecting the practice of business law in California, including the highly-respected Annual Review of Law issue covering recent legal developments in 13 legal sub-specializations.
eBulletins: BLS sends out over 400 short form articles about newly-published legal decisions, administrative regulations, newly-signed legislation, book reviews, profiles of judges, decision makers, and thought leaders, and other topics that may be of interest to legal practitioners. Your imagination is the limit, so let us know if you wish to publish under this platform.
Practice Guides: Many of our Standing Committees have published or are in the process of drafting practice guides that are widely relied upon by California practitioners. These guides include:
• Commercial Transactions Committee
• Corporations Law Committee
• Insolvency Law Committee
• Partnerships and Limited Liability Companies
If you have ideas for a new practice guide, or expertise in any of the above subject matters, please get in touch with the appropriate BLS Standing Committee.
BLS offers speaking opportunities at live and webinar programs. They include programs at the State Bar’s annual Sections Convention, Standing Committee monthly meetings, and at day-long seminars organized by various Committees. In the past, day-long seminars have been held in conjunction with law schools, bringing together practitioners, law students and law professors who are leaders in their respective fields. BLS also presents webinars, where speakers can discuss cutting edge legal issues from the comfort of the office desks.
Draft and Revise California Legislation:
BLS members have expertise in most business law sub-specialties, which they gladly utilize to comment on pending legislation and to draft Affirmative Legislative Proposals (ALPs). BLS ALPs have been codified into California law on numerous occasions. If you have an interest in helping to improve California law, join one of our Standing Committees. We’d love to harness your expertise.
Programs, Events and Opportunities to Network:
Finally, BLS offers a variety of opportunities to forge lifelong social and professional relationships, through membership on the BLS Executive Committee and individual Standing Committees, or attendance at numerous programs and events presented each year. This past year, the BLS hosted its annual award breakfast and an evening networking reception at the All Sections Convention in San Diego. Events hosted by Standing Committees included, among other:
* Agribusiness Committee’s Equine Tour and program about the legal issues facing the racing and equine industries and the 18th annual Agribusiness Committee Water Tour and exploration of water legal issues;
* Insolvency Law Committee’s business development reception at the California Bankruptcy Forum’s annual conference, where the insolvency bench and bar meet at an informal setting;
* Insurance Law Committee’s Recent Developments in Insurance Legislation lunch with Mark Rakich, Chief Consultant to the Assembly Insurance Committee, and Hugh Slayden, Consultant to the Senate Committee on Insurance;
* Financial Institutions’ annual conference on Dodd Frank implementation, held at the Federal Reserve Board in San Francisco, co-sponsored by the San Francisco Bank Attorneys Association and the Financial Women of San Francisco, and the annual Legislature Day, where Committee members met with legislative staff and members of the legislative Banking and Finance Committees;
* Consumer Financial Services’ monthly Lunchtime Lecture Series, including a presentation by Jeffrey Ehrlich, Deputy Enforcement Director of the Consumer Financial Protection Bureau, on its action against Wells Fargo Bank concerning unauthorized account openings; and
If you’re interested in speaking, writing articles or practice guides, drafting legislation, or attending any of the numerous BLS programs and events, I encourage you to sign up for a Standing Committee constituency list (see below for a link), apply for a Standing Committee or the BLS Executive Committee, and attend our events. If you do, I promise that something good will happen to you. You’ll quickly get excited and realize that you count.
Uzzi O. Raanan, Chair, Danning Gill Diamond & Kollitz (Los Angeles)
Many of you may have asked about the reorganization of the State Bar and what will happen to the Business Law Section (“BLS”) in 2018 and beyond. In short, the BLS and the other 15 Sections and the California Young Lawyers Association are being separated from the regulatory agency of which they have been a part for nearly 40 years.
After years of study directed by prior legislation, and input from the Task Force for Governance in the Public Interest, the State Bar’s Board of Trustees, the former and the current Executive Directors of the State Bar Elizabeth Rindskopf-Parker and Leia Wilson, respectively, the staff of the State Bar, and the leaders of the Sections and Council of State Bar Sections, separation was determined to be both inevitable and in the best interest of both the Sections and the State Bar. The State Bar will be able to concentrate on its core public protection missions of admissions and discipline while the Sections will be able to streamline and enhance services to members, lower costs, expand areas of service, and operate without the growing regulations, restrictions, complications, and cost that accompanied being part of an agency of the State of California.
The mechanism of separation is Senate Bill 36, the State Bar’s 2018 dues bill, introduced by Senator Hannah-Beth Jackson, Chairperson of the Senate Judiciary Committee. SB 36 was amended by Assemblyperson Mark Stone, Chairperson of the Assembly Judiciary Committee, with substantial input from the Chief Justice of California, Tani Gorre Cantil-Sakauye and has now passed both the Senate and Assembly on unanimous votes. SB 36 is now on the desk of Governor Brown awaiting signature. The signature of SB 36 will enable the formation of a new private, non-profit entity 501(c)(6) entity, the transfer of Section reserves and intellectual property, and will permit the continued collection of Section dues through the fee statements sent annually to all California lawyers.
The process of planning and implementing the transition is well underway. Pam Wilson & Associates, headed by the Sections' former senior executive Pam Wilson, has been selected as the primary consultant to head and effectuate the transition. Given the expectation that the Sections will commence operations in the new entity in January, 2018, dozens of volunteers are working with the Bar’s Pam Wilson & Associates to shape the future and improve upon the current model of the Sections.
If you would like to know more or to get involved, feel free to contact Section Chair Uzzi Raanan or email me directly at firstname.lastname@example.org
The Seminar is on Friday, October 20, 2017, and is presented by the Los Angeles County Bar Association’s Business and Corporations Law Section and the U.S. Securities and Exchange Commission. The 50th Annual Securities Regulation Seminar, co-sponsored with the California Department of Business Oversight and FINRA, will include discussions of SEC initiatives, rulemaking and priorities, as well as an overview of judicial, regulatory and enforcement developments, regulatory examination insights from the SEC Office of Compliance Inspections and Examinations, raising capital for small and medium-sized businesses, the SEC whistleblower program, recent developments in mergers & acquisitions transactions, and other matters of interest. It will be held at the Millennium Biltmore Hotel, 506 South Grand Avenue in Los Angeles, from 8 am to 5 pm. For more information, click here.
This fall, the Corporations Committee will be working on finalizing two publications - a securities guide and a handbook on incorporating in California. The Corporations Committee is also actively working on three separate ALPs: (i) an amendment to the California General Corporation Law that provides a statutory mechanism for the ratification of defective corporate acts (similar to the statutory amendments recently enacted by Delaware and Nevada); (ii) an amendment to the California General Corporation Law intended to (a) alleviate the financial burden of reviving an abandoned corporation for dissolution, and (b) provide a means by which the California Secretary of State may dissolve abandoned corporations after a significant period of time; and (iii) an amendment to California's securities laws to allow issuers in California to more easily take advantage of new Rule 147A and amended Rule 147. The Corporations Committee hopes to move forward with the ratification of defective corporate acts ALP this term, while the other ALPS are likely multi-year projects. The Corporations Committee will also continue to publish e-Bulletins that highlight significant or interesting developments in corporate law that are pertinent to California practitioners.
The Corporations Committee will be Co-Chaired this term by Evan Pickering and Jerry Yen. Evan Pickering practices in Santa Barbara and is a corporate attorney
with the law firm of Seed Mackall LLP. Jerry Yen practices in Sacramento and is a Deputy Attorney General in the Corporate Fraud Section of the California Department of Justice.
Evan Pickering, Co-Chair, Seed Mackall, LLP (Santa Barbara)
The committee anticipates a fast, productive year so now's the time to start participating by reaching out: Soyeun@SoyeunEsq.com. Soyeun is the Chair of the Partnerships & LLCs Committee. She is a sole practitioner focusing on Business and Intellectual Property issues .
Soyeun Choi, Chair (Bay Area)
Craig S. Rutenberg, Chair, Manatt, Phelps & Phillips, LLP. (Los Angeles) Craig's practice focuses on complex civil litigation matters primarily in the health care industry.
Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the September 2017 update to Sales and Mergers of California Businesses. References are to the book’s section numbers. See CEB’s BLS Landing Page for special discounts for Business Law Section members. The most significant legal developments since the last update include developments in such important topic areas as conflicts of interest, cybersecurity due diligence, noncompete covenants, advance IRS rulings, recent SEC rule changes, Hart Scott Rodino, insider trading, fraudulent transfers, and other topics.
SALES AND MERGERS OF CALIFORNIA BUSINESSES
September 2017 Update
Conflicts of Interest
In evaluating potential conflicts, the first step is to determine whether the representation at issue is concurrent or successive. Ontiveros v Constable (2016) 245 CA4th 686, 695. In that case, the court affirmed the disqualification of counsel for the corporation, who also represented the majority shareholder and his wife. The court found that the minority shareholder's derivative fraud claims rendered the interests of the majority shareholder and the corporation adverse to one another; therefore, the majority shareholder's attempt to consent to its counsel's concurrent representation of the corporation in the face of the minority shareholder's objection was not effective. See §1.2.
Cybersecurity Due Diligence
The business world today depends on digital assets, including trade secrets and other intellectual property, business plans, and customer data; the theft or destruction of those digital assets is one of the most serious threats that a company can face. Moreover, data security and privacy are increasingly subject to federal and state regulation. Cybersecurity and data privacy are therefore key issues for companies contemplating a merger or acquisition and should be addressed in a due diligence investigation. The results of the investigation may influence the terms of the transaction if, for example, there are costs to remediate deficiencies in cybersecurity and cyber-risk management. A new topic has therefore been added to the due diligence checklist in Chapter 1: cybersecurity and data privacy. See §1.54A.
In Robinson v U-Haul Co. of Cal. (2016) 4 CA5th 304, the court of appeal affirmed the trial court's grant of a permanent injunction under the Unfair Competition Law (UCL) (Bus & P C §§17200–17210) that prohibited U-Haul from attempting to enforce a noncompete covenant in its dealer agreements. The trial court found that U-Haul knew the noncompetition covenant was illegal when it inserted the covenant in its dealer agreements, yet U-Haul continued to try to enforce the clause. See §2.12.
Fiduciary Duties of Majority Shareholders
Counsel should be aware of the judicially created doctrine under which majority shareholders may not abuse controlling power to benefit themselves to the detriment of minority shareholders. See, for example, Jones v Ahmanson& Co. (1969) 1 C3d 93; but see Kaul v Mentor Graphics Corp. (ND Cal, Oct. 26, 2016, No. 16-cv-02496-BLF) 2016 US Dist Lexis 148464 (distinguishing Jones based on pre-existing contractual relationship and call option previously negotiated by sophisticated parties). See §2.23.
Advance IRS Rulings
The IRS will no longer issue advance rulings that a transaction qualifies as a tax-free reorganization unless the IRS determines that there is a legally significant issue that must be resolved. See Rev Proc 2017–1, 2017–1 Int Rev Bull 1; Rev Proc 2017–3, 2017–1 Int Rev Bull 130. See §§3.4, 3.21.
What Is a Security?
In People v Black (2017) 8 CA5th 889, the court held that the promissory notes offered by the defendant in exchange for a real estate investment were not securities. The investment was a single transaction; there was no evidence that the notes could have been traded publicly; the notes were secured by the defendant's separate property; and the agreement provided for repayment regardless of whether the deal succeeded. See §4.3.
SEC Rules 504 and 505
Effective January 20, 2017, (see SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016)) the SEC amended SEC Rule 504 (17 CFR §230.504) to increase the aggregate amount of securities that may be offered and sold in any 12-month period under Rule 504 from $1 million to $5 million. In addition, as of the same date, Rule 504 incorporates the same "bad actor" disqualification provisions as are applicable in offerings under SEC Rule 506 (17 CFR §230.506). See §4.13A. SEC Rule 504 thus now provides an exemption for an offering up to $5 million (reduced by the dollar amount of similar and certain other offerings within the preceding 12 months), without any limitations on the number or nature of the purchasers or the information disclosure required. Note, however, that Rule 504 prohibits general solicitation or advertising for offerings (1) that are not registered under a state law requiring a presale disclosure document delivery or (2) that are not exempt under a state law permitting general solicitation and advertising provided that sales are made only to accredited investors. See §4.11.
Given the SEC's recent amendments to Rule 504 (17 CFR §230.504) (see §4.11), the SEC has repealed Rule 505 effective as of May 20, 2017. See SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016). See §4.12.
SEC Rules 147 and 147A
New SEC Rule 147A (17 CFR §230.147A), effective April 20, 2017, was adopted by the SEC in accordance with its general exemptive authority and as a consequence is not subject to the statutory limitations of Securities Act §3(a)(11) (15 USC §77c(a)(11)). Further, unlike Rule 147, it does not operate as a safe harbor from that statute. See SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016). It is an independent intrastate exemption from the registration requirements of Securities Act §5 (15 USC §77e). Rule 147A is similar to Rule 147 but has no restrictions on offers and allows issuers to be organized outside the state in which the offering is conducted, provided that certain conditions are met. Under Rule 147A, a corporation incorporated in Delaware but doing business in California could be eligible to conduct an offering to California residents. See §4.16.
The Jumpstart Our Business Startups Act (JOBS Act) (Pub L 112–106, 126 Stat 306) established a new crowdfunding exemption from registration under §4(a)(6) of the Securities Act of 1933 (Securities Act) (15 USC §77d(a)(6)) for so-called "equity-based" crowdfunding. On October 30, 2015, the Securities and Exchange Commission (SEC) issued its final rules (Regulation Crowdfunding) to implement the new crowdfunding exemption. See 17 CFR §§227.100–227.503; SEC Release Nos. 33–9974, 34–76324 (Oct. 30, 2015), available at https://www.sec.gov/rules/final/2015/33-9974.pdf. The new rules became effective on May 16, 2016. Although the new rules have some significant limitations, they have created what many hope ultimately will be a viable fundraising alternative for smaller companies that are unable to access more traditional forms of financing, such as bank loans and venture capital funding. For a detailed discussion of the crowdfunding exemption, see Financing and Protecting California Businesses, chap 6B (Cal CEB). See §4.17A.
In Salman v United States (2016) 580 US ___,137 S Ct 420, 423, the Supreme Court confirmed the Dirks holding that a tippee's liability for trading on inside information hinges on whether the tipper breached a fiduciary duty in providing the information and that a tipper breaches such a fiduciary duty when the tipper discloses the inside information for a personal benefit. The Court in Salman held that the defendant's jury was properly instructed that a "personal benefit" included the benefit that the tipper would obtain from simply making a gift of confidential information to a trading relative. See §4.35.
Hart Scott Rodino Threshholds
Effective February 27, 2017, the Hart Scott Rodino notification requirements apply when the total size of the transaction exceeds $323 million; for smaller transactions, the notification requirements apply if one party's annual net sales or total assets amount to at least $161.5 million, the other party's amount to at least $16.2 million (only the test of assets applies if this party is a nonmanufacturing enterprise), and as a result of the transaction, the buyer will hold more than $80.8 million of the seller's voting securities or assets that are transferred. These amounts are revised annually. 15 USC §18a. See 80 Fed Reg 2934 (2015). A filing fee must be paid by the acquiring entity to file a premerger notification. The fee depends on the size of the transaction. The range currently is as follows: $45,000 for transactions valued at more than $80.8 million but less than $161.5 million; $125,000 for transactions valued at $161.5 million or more but less than $807.5 million; and $280,000 for transactions valued at $807.5 million or more. 16 CFR §803.9. The premerger notification form and instructions can be found on the FTC's website, at http://www.ftc.gov/bc/hsr/index.shtm. See §5.2.
A transfer of assets is considered constructively fraudulent to the transferor's existing creditors if the transferor did not receive a "reasonably equivalent value" in exchange and was insolvent at that time or became insolvent as a result of the transfer. CC §3439.05. In Tracht Gut, LLC v L.A. County Treasurer & Tax Collector (9th Cir 2016) 836 F3d 1146 and Crespo v Abijah Tafari Immanuel (In re Crespo) (Bankr ED Pa 2016) 557 BR 353, the courts discussed the "reasonably equivalent value" determination for purposes of Bankruptcy Code §548, 11 USC §548. See §6.18.
Particularly in transactions involving pass-through entities (partnerships or limited liability companies) and other transactions for which the tax consequences may be important, the buyer may request an opinion concerning certain tax aspects of the transaction. In Williams Cos. v EnergyTransferEquity, L.P. (Mar. 23, 2017, No. 330, 2016) 2017 Del Lexis 128, the Delaware Supreme Court allowed the buyer to terminate a merger agreement when its counsel could not deliver the tax opinion that was a condition to closing. See §10.81.
Disclaimer of Reliance
In IAC Search, LLC v Conversant LLC (Del Ch, Nov. 30, 2016, No. 11774-CB) 2016 Del Ch Lexis 176, the court held that a standard integration clause without specific antireliance language by the defendant will not defeat a plaintiff's fraud claim—the defendant would remain liable for its oral and extracontractual fraudulent representations. In IAC Search, however, the plaintiff-buyer made the following specific disclaimer of reliance, which was effective to shield the seller from the buyer's fraud claims:
The Buyer acknowledges that neither the Seller nor any of its Affiliates or Representatives is making, directly or indirectly, any representation or warranty with respect to any data rooms, management presentations, due diligence discussions, estimates, projections or forecasts involving the [Target], including, without limitation, as contained in the [confidential information packet] dated [date] and any other projections provided to Buyer, unless any such information is expressly included in a representation or warranty contained in Article [ ].
CEB is currently offering discounts to BLS Members, including 10% off the price of a wide selection of CEB print and OnLAW publications as well as savings on section dues. For more information on these and other CEB discounts, click HERE.
The Business Law News (BLN) is seeking articles of general interest to business law practitioners for its next publication. With approximately 8,200 members, the BLS has a wide-ranging audience. The BLN is not only circulated to BLS members in print every quarter, it is also available to BLS members on the internet at www.calbar.ca.gov. Please submit your articles to the new editor-in-chief, Jerome A. Grossman (Jerome.Grossman@GreshamSavage.com).
A subscription to the BLN is one of the most significant membership benefits of the BLS. Publishing in the BLN is a terrific opportunity both to influence the discourse in the areas in which you practice and to market yourself and your skill set. Now is your chance to participate!
Jerome.Grossman@GreshamSavage.com) You can find the BLN’s submission guidelines HERE. Finally, have you been interested in getting involved in the BLS but don’t know where to start? BLN is now seeking enthusiastic section members to join its Editorial Board. You can find more information about the BLN Editorial Board HERE and the application to join BLN HERE.
The 15 BLS Standing Committees publish eBulletins announcing developments in their area of law and upcoming events open to BLS members. Click HERE to sign up to receive these eBulletins from any BLS Standing Committee completely free of charge.
We all know that social media can help drive new business. Did you know that the BLS maintains a presence on LinkedIn, Twitter, and Facebook where it posts regular updates about new cases, new regulations, key legislative developments, and news and events from the BLS’s Standing Committees? What you may not know is that you can not only send items to the BLS to post or tweet, but also suggest items from your own social media pages for the BLS to re-post, re-tweet, or like. Doing so expands the reach of what you have to say to everyone who likes or follows the BLS on its various social media platforms, and may result in the BLS following you! Please submit your suggested items for consideration or direct any questions to BLS Social Media Coordinator, Reno F.R. Fernandez III (Reno@MacFern.com); BLS Vice-Chair of Publications, Monique D. Jewett-Brewster (email@example.com); or BLS Chair, Uzzi O. Raanan (firstname.lastname@example.org), and join the ever expanding discussion!
Standing Committees continue to accept applications to fill vacant seats. Practitioners and other legal professionals who are members of the BLS and who have at least five years of experience are eligible to apply. Membership on a committee affords unique opportunities to participate in the creation of law in your practice area, to get to know and be known by other practitioners, to work with the recognized leaders in your field, and to stay on the cutting edge of developments and practice techniques. Membership is a rewarding experience that keeps one ahead of, and in touch with, business law developments. Most committees meet once a month, often by phone. A description of the required commitment and application process, along with a link to the application, can be found HERE.
The BLS achieves its goals through the work of its 15 Standing Committees. You are invited to attend the regular monthly meeting of any BLS Standing Committees (see below for meeting dates). These monthly meetings provide attendees an excellent opportunity to chat with committee members and other lawyers with a similar expertise. Some committees even offer free MCLE credit! Please see the contact person listed below to RSVP or request more information. Follow us on Twitter @calbarbuslaw. Use a Standing Committee’s hashtag to search for tweets by that committee in its designated field and to re-tweet.
For a list of upcoming meeting dates and contact persons, click HERE.
Dennis Wickham, Editor-in-Chief
Kristina Del Vecchio, Contributing Editor
Corey R. Weber, Contributing Editor
Monique D. Jewett-Brewster, BLS Vice Chair of Publications
Uzzi O. Raanan, BLS Chair
For contact information, see the Executive Committee Roster HERE.
To join the BLS and receive membership benefits