Business Law Section eNews
Current News and Events from the State Bar of California Business Law Section.
Here is your March eNews from the Business Law Section (“BLS”):
Message from Jim Hill, Chair of the Business Law Section: Exciting New Developments for the Future of the Business Law Section
The BLS and other Sections of the State Bar are working on comments and recommendations to recently-drafted enabling legislation from the California State Senate that will achieve separation of all Sections from the public agency functions of the State Bar. As important, the BLS and other Sections are collaborating with State Bar staff on transition plans to ensure that the new voluntary association will be set up, with sufficient funding, staff and volunteers, to ensure continuity of services for our approximately 66,000 members of 16 Sections.
The BLS leadership and its advisors continue to champion provisions in the enabling legislation that empower and enhance the freedom and creativity of the Sections as they make the transition from being part of a regulatory agency of the State of California to a professional association of California lawyers. In conjunction with leaders of other Sections, the BLS has asked that the legislation grant the new entity the right to choose its own form of governance through bylaws and a charter adopted by the Sections, rather than through a statutory mandate. The BLS is represented in these discussions by me and Rob Harris, the immediate past BLS Chair and Chair of a Council of State Bar Sections (CSBS) planning group. We are further aided by a number of past BLS chairs, among other able advisors.
It is encouraging that the latest draft legislation is a vast improvement from where we were back in September 2016, when the debate centered on whether Sections should even separate from the public agency State Bar. Now that the public entity structure concept has been abandoned, we are able to focus on issues beyond the new entity’s structure. This includes ensuring that BLS members will continue to receive not only the publications, programs and legislative analysis that they have grown to expect and rely upon from leading California business lawyers, but also electronic connections and immediately available content.
Do we have more work to do? Certainly. Will we get it done? We will do so given the substantial progress we have made from September 2016 to now. We owe great thanks to those among the BLS advisors and other leaders who have kept to task and not given up—helping us to get to where we are today. What they helped to build in our first 40 years as a State Bar Section will only get better as we emerge with the other Sections into a voluntary professional association that builds on that strong foundation.
With an eye toward the new California Bar Sections Association, the 16 substantive law Sections have planned our first ever Convention of State Bar Sections, scheduled for August 18-19, 2017, in sunny San Diego at the Sheraton Hotel & Marina. The Convention will feature educational programs offered not just by the BLS, but by many of the 16 Sections of the State Bar, as well as networking events and special programs with keynote speakers. We will also mark and celebrate this 40th Year of the Business Law Section serving California’s business lawyers. We highly recommend that you attend this exciting new Convention weekend. Space will be limited, so please sign up quickly when you get notice from the State Bar that registration for this event has opened up.
Save the Date! August 18-19, 2017, All Sections–Bar Section Convention at the Sheraton San Diego Hotel and Marina
Plan now to attend the All Sections—Bar Section Convention. Join us on August 18-19, 2017, in San Diego, CA, at the Sheraton San Diego Hotel and Marina
Join us on August 18-19, 2017, in San Diego, CA, at the Sheraton San Diego Hotel and Marina where you will have multiple opportunities to earn MCLE credits in informative live programs, attend networking events and receptions, hear the BLS Keynote speaker, and learn more about getting involved in one of the 16 Sections. Instead of the traditional State Bar Annual Meeting – this year all of the Sections of the State Bar are hosting a two-day Convention packed with educational programs, networking, and fun events! So mark your calendars for August 18th to 19th, 2017 at the San Diego Sheraton Marina Hotel. More details to follow.
Insolvency Law Committee to participate in California Bankruptcy Forum’s 29th Annual Insolvency Conference
ILC will again participate in the California Bankruptcy Forum’s Annual Insolvency Conference, to be held on May 19-21, 2017, at the Loews Coronado Bay Resort. Each year, the ILC hosts a Friday night business development reception at the CBF Annual Insolvency Conference, where the ILC promotes its eBulletins and other projects to insolvency professionals and judges from all over the State of California. Look for more details in April.
This Month in Business Law History
Can you guess how many states have enacted the most recent version of the Uniform Partnership Act?
The Uniform Partnership Act was first enacted in 1914 by every state except Louisiana. It was modernized by the Uniform Partnership Act of 1997 (UPA) and later amended twice: in 2011 and 2013. The UPA is important because, among other things, it establishes partnership as a separate legal entity, rather than an aggregate of partners.
Answer: 41. They include: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, U.S. Virgin Islands, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming
BLS Attorney Spotlight: Bill Webb
William Webb founded the Webb Legal Group in San Francisco in 2008 in order to provide high-quality commercial litigation and trial services to businesses for reasonable rates.
William Webb explains that he noticed that fewer meritorious cases were going to trial because, when paying big-firm rates, he believes that companies are more likely to settle rather than incur the cost of a trial. “By leveraging our reasonable rates, our clients are able to afford to defend cases at trial that they might otherwise have settled, and that suits us, because we enjoy being in the courtroom. We have successfully tried about a case a year over the last half dozen years, and litigate many more short of trial,” he notes.
Bill attended the University of Notre Dame for undergraduate studies as well as its Law School. While there, he sat bow seat on the rowing team. He began his practice in the Midwest, and then migrated West, stopping in Colorado before moving to San Francisco fifteen years ago. He currently practices in courts in both Northern and Southern California.
Over a quarter-century, Mr. Webb has represented plaintiffs and defendants in trials and arbitrations involving commercial, construction, environmental, securities, professional malpractice, insurance coverage, insurance defense, products liability, probate litigation, labor and employment, uninsured motorist coverage and personal injury. In addition, he has represented clients involved in disputes concerning labor relations and other commercial disputes that were resolved short of trial. He has also represented clients in both state and federal courts of appeal, in cases involving consumer financial services, lender liability, intellectual property, municipal liability, real estate and construction issues, to name a few.
Bill has taught trial advocacy to law students and practicing attorneys including in California, nationally through the National Institute for Trial Advocacy, and at Notre Dame Law School. He does so in order to keep his trial skills sharp. “Since fewer cases are going to trial, it’s becoming a lost art. Teaching through these programs helps me prepare the next generation of trial attorneys,” he notes.
From 2005 – 2009, Bill lectured on the Uniform Commercial Code at San Francisco Law School.
Bill is a past Chair of the Consumer Financial Services Committee of the Business Law Section. He has also served as both a member and as an advisor to the BLS Executive Committee, and currently serves as an advisor to BLS’ Business Litigation Committee.
Bill and his wife Irina live in San Rafael with their four-year-old son, Connor, the best negotiator in the family. The Webbs enjoy cooking, hiking, traveling and skiing together. Six Saturdays in the fall, you can look for him in Section 125, Seat 1 in the House that Rockne built.
Corporations Law Committee Highlights Three California Court of Appeals Decisions
The Corporations Committee has circulated three e-Bulletins in recent weeks authored by Richard G. Burt, an advisor to the Corporations Law Committee, who practices in San Jose, California.
In recent weeks, the Corporations Committee has circulated three e-Bulletins authored by Richard G. Burt, an advisor to the Corporations Law Committee who practices in San Jose, California. The first eBulletin was regarding a California court of appeal decision holding that a single promissory note, negotiated one-on-one, to fund an investment in real property was not a security under the California Corporate Securities Law of 1968. To read the eBulletin, click here.
The second eBulletin analyzed a recent California court of appeal decision holding that an out-of-state corporation was not deemed to be “doing business” in California—and thus not required to file a California corporate franchise tax return and pay the $800 minimum franchise tax due on that return--by owning a passive investment in a California manager-managed LLC. To read the eBulletin, click here.
The third eBulletin concerned a recent California court of appeal decision holding that a California LLC was bound by an indemnity agreement that was outside its business purpose and whose signatory was technically not the manager. To read the eBulletin, click here.
The Corporations Law Committee is also actively engaged in several Affirmative Legislative Proposals and in updating the State Bar’s Handbook for Incorporating a Business in California.
Get Writer Credit! Partnerships and Limited Liability Companies Committee seeking attorney for its Guide to Organizing and Operating a Limited Liability Company
The Partnerships and Limited Liability Companies Committee is seeking attorneys who would like to draft and revise chapters of our Guide to Organizing and Operating a Limited Liability Company.
The Committee is updating the old Guide (issued in 2001) to include the new LLC laws that were adopted in 2014, as well as to cover new information about formation, operation and tax issues. The chapters that are available right now to be drafted and revised are:
- Attorney-Client Relationship;
- Preliminary Considerations e.g., choice of entity and choice of formation state;
- Tax Considerations in forming an LLC (this is a short section, as there will be a longer section on taxes and LLCs);
- Non-Tax Considerations in forming an LLC;
- Income Taxation of LLCs. This will be a long section, and will likely need to be divided into two parts so no one person has this entire job. e.g., California taxes, pass through treatment, reporting requirements, distributive shares, basis, liquidating distributions, tax terminations;
- Operating Agreement, This will be an extensive section, and will include a sample Operating Agreement;
- Issuing and Transferring Member Interests. e.g., capital contributions, Securities Act requirements, transferring an interest to a current member or outside of the LLC;
- Dissociation - e.g., dissociation events, wrongful dissociation
If any of these topics are in your area of expertise and you'd like to be a part of this project (you'd get writer credit in the final publication!), please contact Teri Shugart and let her know how you would like to contribute. Teri@terishugart.com
Upcoming Webinar: Trends in Telemarketing: An Overview of the TCPA and the Telemarketing Sales Rule (April 6, 2017 12:00PM – 1:00 PM)
Telemarketing continues to be a useful marketing tool for many businesses as well as a hotbed for litigation. This webinar will provide an overview of the laws governing telemarketing and recent litigation. Speakers: Karl Kronenberger, Jeff Rosenfeld, Liana Chen. This Webinar provides 1 Hour Participatory MCLE Credit. For more info and to register CLICK HERE
Upcoming Webinar: How to Root Out Unconscious Bias in Hiring and Retaining Diverse Attorneys
April 20, 2017 12:00PM – 1:00 PM
Numerous studies demonstrate that a diverse and inclusive workforce is more collaborative and generates higher levels of creativity and productivity. Yet, many of today’s diversity and inclusion initiatives fail to increase and retain diversity in the workplace. Why?
We all have unconscious thought patterns that impact how we make decisions. Unconscious thought patterns can impede diversity and inclusion initiatives. Unconscious thought patterns can negatively impact our judgment and influence our decisions. The purpose of this webinar to gain a better understanding of these challenging thought patterns and to learn the extent to which they impact individual decision-making, hiring, and retention.
Through this webinar participants will:
· Learn to recognize their own unconscious biases;
· Understand the impact those biases have on their self and others;
· Develop strategies to be able to identify when unconscious bias can impact decision making; and
· Develop tools to minimize the impact of unconscious bias.
Speaker: Michael Thomas. This Webinar provides 1 Hour Participatory MCLE Credit. For more info and to register CLICK HERE.
Upcoming Webinar: Killing HIPAA ... It’s About Time
May 4, 2017 12:00PM – 1:00 PM
This program will explore the evolution of HIPAA over the past 21 years and the issues underlying the effectiveness of patient privacy laws today. Speaker: Michael Thomas. This Webinar provides 1 Hour Participatory MCLE Credit. For more info and to register CLICK HERE.
Nonprofit Organizations Law Committee to Present Nonprofit Accounting Overview (with a little Tax) on April 20, 2017
The new non-profit accounting standards will change financial classifications and statement presentations. Join the Nonprofit Organizations Law Committee for an overview of general NP accounting principles, the new accounting standards and relevant 2017 tax changes. Speakers at the program include:
Janet Holland, Audit Partner, DZH Phillips LLP CLICK FOR BIO HERE
Deborah Kaminski, Director of Tax Exempt Organizations, DZH Phillips LLP CLICK FOR BIO HERE
One (1.0) hour of general MCLE credit will be offered by California Community Foundation. Please note that The State Bar of California is not the provider of this MCLE credit.
The program will take place on April 20, 2017 at 10:00 a.m. Following the program, the NonProfit Organizations Law Committee will hold its regular monthly meeting. Those interested can participate in the meeting by telephone from locations listed in the Notice and Agenda posted on the BLS website HERE. The call in number is (855) 520-7605, and the conference code is 7547908615#.
For more information about the Nonprofit Organizations Law Committee and its programs, please contact Chair Myron Steeves (firstname.lastname@example.org) or Carol Bradford (email@example.com).
Selected Developments in Business Law — Financing and Protecting California Businesses
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 February 2017 update to Financing and Protecting 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 federal securities law (crowdfunding regulations, amendments to Rule 504, repeal of Rule 505, amendments to Rule 147, new Rule 147A, impact of the Omnicare decision on private placements), federal tax law (qualified small business stock, bonus depreciation, qualified improvement property), jury trial waivers, cybersecurity, and the new Defend Trade Secrets Act of 2016.
February 2017 Update
Securities and Exchange Commission Actions
Crowdfunding. The Jumpstart Our Business Startups Act (JOBS Act) (Pub L 112–106, 126 Stat 306) established a new crowdfunding exemption from registration under Securities Act §4(a)(6) (15 USC §77d(a)(6)), which lay the foundation for so-called "equity-based" crowdfunding. On October 30, 2015, the Securities and Exchange Commission issued its final rules to implement the crowdfunding exemption. See 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. The crowdfunding exemption authorizes companies to offer and sell, through qualified intermediaries, limited amounts of equity securities to members of the general public who do not qualify as "accredited investors" under other available exemptions from federal and state securities laws. The requirements of the new crowdfunding exemption are discussed at length in new Chapter 6B.
Amendments to Rule 504; repeal of Rule 505. Effective as of a date near the end of December 2016 (60 days after publication in the Federal Register of SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016)), the aggregate amount of securities that may be offered and sold in any 12-month period under Rule 504 will increase from $1 million to $5 million. In addition, as of the same date, Rule 504 will incorporate the same "bad actor" disqualification provisions as are applicable in offerings under Rule 506 (17 CFR §230.506). See §§6.17, 6.19. In view of the SEC's amendments to Rule 504 (17 CFR §230.504), the SEC is repealing Rule 505 effective as of a date near the end of April 2017 (180 days after publication in the Federal Register of SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016)). See §§6.18, 19.64–19.75.
Amendments to Rule 147; new Rule 147A. Effective as of a date near the end of March 2017 (150 days after publication in the Federal Register of SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016)), the SEC has amended Rule 147 (17 CFR §230.147) and adopted new Rule 147A (17 CFR §230.147A), a new intrastate offering exemption, which is similar to amended 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.
- Amended Rule 147. Rule 147 (17 CFR §230.147), as amended (see SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016)), is intended to provide a safe harbor by specifying that an issuer's offers and sales are deemed to comply with Securities Act §3(a)(11) (15 USC §77c(a)(11)) when the "offers and sales are made only to persons resident within the same state or territory in which the issuer is resident and doing business" and otherwise comply with the terms and conditions of the rule. Securities Act Rule 147(b) (17 CFR §230.147(b)). The rule is nonexclusive and does not create a presumption that the exemption is unavailable for transactions that do not satisfy all its terms and conditions. See Securities Act Rule 147(a) (17 CFR §230.147(a)). Those who choose to rely on the statutory intrastate exemption without complying with the rule, however, must establish that they complied with the judicial and administrative interpretations of the exemption in effect at the time of the offering. See Preliminary Note 3 to Securities Act Rule 147.
- New Rule 147A. Securities Act Rule 147A (17 CFR §230.147A) was adopted by the SEC in accordance with its general exemptive authority under Securities Act §28 (15 USC §77z–3). As a consequence, Rule 147A is not subject to the statutory limitations of Securities Act §3(a)(11) (15 USC §77c(a)(11)) and, unlike Rule 147 (see §19.47), does not operate as a safe harbor from that statute. See SEC Release Nos. 33–10238, 34–79161 (Oct. 26, 2016) at 7. It is an independent intrastate exemption from the registration requirements of Securities Act §5 (15 USC §77e). Unlike amended Rule 147, an issuer that is a corporation, limited partnership, trust, or other business entity need not be incorporated or organized in the state in which offers and sales subject to the rule are made. Thus, a Delaware corporation based in California could be eligible to use Rule 147A for an intrastate offering to California residents. Further, under Rule 147A, offers can be made over the Internet and therefore can be viewed by a significant number of out-of-state residents, but issuers must limit actual sales to in-state residents.
The SEC Release is available at https://www.sec.gov/rules/final/2016/33-10238.pdf. The amendments to Rule 147 and new Rule 147A are discussed at length in §§19.44–19.63.
Qualified small business stock. Individuals and other noncorporate taxpayers have generally been able to exclude from gross income 50 percent of the gain from the sale or exchange of "qualified small business stock" (QSBS) held for more than 5 years under IRC §1202. To encourage investment in qualified small business stock, Congress amended IRC §1202 to allow a 75 percent capital gains exclusion for stock acquired after February 17, 2009, but on or before September 27, 2010, and to allow a 100 percent capital gains exclusion for stock acquired after September 27, 2010. Internal Revenue Code §1202 is intended to encourage greater equity investment in small businesses. Gains eligible for exclusion are limited to the greater of ten times the investor's basis or $10 million for each qualified small business. IRC §1202(b). An individual may elect a tax-free rollover of capital gain from the sale of QSBS held more than 6 months if other QSBS is purchased within 60 days after the sale, to the extent that the cost of the replacement QSBS purchased is at least equal to the amount realized from the sale. IRC §1045. For further discussion of QSBS, see Karachale, Qualified Small Business Stock Under IRC §1202: Tax-Free Money for the Masses?, 31 CEB Cal Bus L Prac 73 (Summer 2016). See §4.20A. Sample new QSBS provisions are included in the forms of Share Purchase Agreement and Subscription Agreement in Chapter 5A at §§5A.21 and 5A.30.
Finders. Persons who act as "finders" in connection with securities offerings, bringing together buyers and sellers for a fee, also face issues related to broker-dealer registration. California recently addressed this issue with the adoption of Corp C §25206.1, which became effective January 1, 2016. Corporations Code §25206.1 provides an exemption from the California broker-dealer licensing requirements for individuals who introduce or refer accredited investors to an issuer (or an issuer to accredited investors) in connection with a transaction or series of related transactions for the offer or sale of securities of the issuer with an aggregate purchase price of $15 million or less, provided that certain specified conditions are met. Corporations Code §25206.1 requires the finder to make certain filings with, and pay certain fees to, the commissioner, and to have a written agreement with the issuer and the accredited investors introduced or referred containing certain specified terms. See §6.31.
Omnicare decision. Federal and state securities laws require the issuer to provide investors with complete and fair disclosure of all "material" facts about the offering, the issuer, and the issuer's business, finances, management, operations, and, most significantly, the risks associated with its business, finances, management, and operations. See 15 USC §§77h(d), 77k(a), 77l; Corp C §§25110, 25120. Information is "material" if a reasonable investor would consider the information important in making an investment decision. See Omnicare, Inc. v Laborers Dist. Council Constr. Indus. Pension Fund (2015) ___ US ___, 135 S Ct 1318; TSC Indus., Inc. v Northway, Inc. (1976) 426 US 438, 449, 96 S Ct 2126. Issuers often attempt to avoid claims for misleading statements of fact by using words such as "believes," "anticipates," "intends," or similar qualifying language to interject a sense of uncertainty. The U.S. Supreme Court, however, has ruled that such qualifying words equate to statements of opinion and that an issuer's failure to articulate particular and material facts forming the basis of the opinion would be actionable under the Exchange Act if the omission would make the opinion statement misleading to a reasonable person reading such statement. See Omnicare, Inc. v Laborers Dist. Council Constr. Indus. Pension Fund, supra; In re Velti PLC Sec. Litig. (ND Cal, Oct. 1, 2015, No. 13-cv-03889-WHO) 2015 US Dist Lexis 135004. After Omnicare (2015 US Dist Lexis 135004, *56, citing Omnicare, 135 S Ct at 1330) a plaintiff seeking to establish liability under the omissions clause based on a statement of opinion must: (1) 'identify [a] particular [omitted] fac[t] going to the basis for the [defendant's] opinion—[a] fac[t] about the inquiry the [defendant] did or did not conduct or the knowledge it did or did not have;' (2) show that the fact is material, i.e., that 'there is a substantial likelihood that a reasonable investor would consider it important;' and (3) show that the omission of the fact rendered the opinion statement misleading to a reasonable person reading it 'fairly and in context,' i.e., 'in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information,' as well as 'the customs and practices of the relevant industry.'
Although Omnicare concerned statements of opinion under Securities Act §11 (which does not apply to private placements), several courts have applied the Omnicare analysis to private placements of securities with respect to potential liability under Exchange Act §10(b). See, e.g., In re Lehman Bros. Sec. & ERISA Litig. (SD NY, Sept. 18, 2015, No. 09-02017) 2015 US Dist Lexis 125202, *251 n48 ("Omnicare was a Section 11 case. Nonetheless, its reasoning applies with equal force to other provisions of the federal securities laws, including, as relevant to this case, Section 10(b) . . . , which uses very similar language."); City of Westland Police & Fire Ret. Sys. v MetLife, Inc. (SD NY 2015) 129 F Supp 3d 48 (same); In re Merck& Co. (D NJ, May 13, 2015, No. 05-cv-01151) 2015 US Dist Lexis 62983, *94 (noting that Omnicare "illuminates this Court's Section 10(b) scienter analysis" of defendant's allegedly misleading statements of opinion); In re Velti PLC Sec. Litig. (ND Cal, Oct. 1, 2015, No. 13-cv-03889-WHO) 2015 US Dist Lexis 135004. See §6A.2.
Finance lenders. In Montgomery v GCFS, Inc. (2015) 237 CA4th 724, the court of appeal held that licensed finance lenders are permitted to sell or assign loans to nonlicensed persons, as well as to institutional investors or licensed finance lenders as expressly provided in the finance lenders statute. Therefore, although the original lender must be licensed for the usury exemption to apply, the assignee does not need to be similarly licensed for the usury exemption to continue to apply to the loan. See §8.16.
Jury trial waivers. In In re County of Orange (9th Cir 2015) 784 F3d 520, the Ninth Circuit held that the federal rule on jury trial waivers was a constitutional minimum and that California's more protective law on jury trial waivers was incorporated into federal law. Applying California law, the court declined to enforce a pre-dispute jury trial waiver. See §8.87.
Standby letters of credit. In Mago Int'l v LHB AG (2d Cir, Aug. 15, 2016, No. 15-2776) 2016 US App Lexis 14930, the Second Circuit affirmed summary judgment for the confirming bank based on the seller's failure to strictly comply with conditions of a standby letter of credit. See §9.20.
Enhanced damages for willful patent infringement. If the infringement is willful, the court has discretion to increase the damages up to three times the damages awarded. 35 USC §284. An infringer's subjective bad faith alone may support an award of such enhanced damages. Halo Electronics v Pulse Electronics (2016) ___ US ___, 136 S Ct 1923. In other words, the subjective willfulness of a patent infringer, intentional or knowing, may warrant an enhancement. Further, the appropriate time frame for considering willfulness is determined by assessing the infringer's knowledge at the time of the infringing activities. The standard for willfulness had been whether the infringing conduct was objectively reckless. See In re Seagate Technol., LLC (Fed Cir 2007) 497 F3d 1360, overruled in part Halo Electronics v Pulse Electronics, supra. However, in Halo, the Supreme Court rejected that standard. The Supreme Court also held that willfulness can now be proven by a preponderance of the evidence, rather than the more difficult "clear and convincing" evidence standard set forth in Seagate. See §12.12A.
The Defend Trade Secrets Act. The Defend Trade Secrets Act of 2016 (DTSA) (Pub L 114–153, 130 Stat 376) extends federal civil protection for misappropriation of trade secrets and allows for a private right of action. The DTSA is intended to supplement, rather than preempt, state law and is consistent with California's version of the Uniform Trade Secrets Act (UTSA) (see §12.82A) having nearly identical definitions and damage provisions. A claim may be filed under the DTSA "if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce." 18 USC §1836(b)(1), (c). The DTSA also provides immunity from liability if a person discloses a trade secret (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law, or (2) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. 18 USC §1833(b)(1). The employer must provide notice of this whistleblower immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. An employer who fails to comply with the notice requirement will not be awarded exemplary damages or attorney fees. 18 USC §1833(b)(3)(C). See §12.82.
Cybersecurity guidance for directors and officers. In October 2015, the New York Stock Exchange, Palo Alto Networks Inc., and other co-sponsors published Navigating the Digital Age: The Definitive Cybersecurity Guide for Directors and Officers, available for free download at https://www.securityroundtable.org/the-book/. The guide is 355 pages long and is intended to provide guidance on best practices for cybersecurity risk management. It includes practical advice from experts on issues such as business enablement, breach avoidance and response, and compliance. See §13.14A.
California Attorney General's Data Breach Report. In February 2016, California Attorney General Kamala D. Harris released the California Data Breach Report, available at https://oag.ca.gov/breachreport2016, which, among other things, provides an overview of businesses' responsibilities regarding protection of personal information and reporting data breaches and a series of recommendations for businesses and state policy makers to follow to help safeguard the personal information of California residents. Importantly, the report states that "[t]he failure to implement all the [Center for Internet Security's Critical Security] Controls that apply to an organization's environment constitutes a lack of reasonable security" under California's information security statute (CC §1798.81.5). See §13.15A.
Bonus depreciation. The Protecting Americans from Tax Hikes Act of 2015 (2015 PATH Act) (Pub L 114–113) extended the bonus depreciation to property acquired and placed in service before January 1, 2020 (January 1, 2021, for certain aircraft and long-production-period property). The allowance is equal to the following percentages of the unadjusted depreciable basis of "qualified property" (IRC §168(k); Treas Reg §1.168(k)–1(d)(1)):
- 100 percent, if acquired and placed in service after September 8, 2010, and before January 1, 2012 (before January 1, 2013, for property described in IRC §168(k)(2)(B)–(C), i.e., certain aircraft and long-production-period property);
- 50 percent, if acquired and placed in service (1) after December 31, 2007, and before September 9, 2010, or (2) after December 31, 2011, and before January 1, 2014 (before January 1, 2015, for property described in IRC §168(k)(2)(B)–(C));
- 40 percent, if acquired and placed in service after December 31, 2017, and before January 1, 2019; and
- 30 percent, if acquired and placed in service after December 31, 2018, and before January 1, 2020.
"Qualified improvement property." Commencing in 2016, a new category of "qualified property" defined as "qualified improvement property" (a class of nonresidential real property) is eligible for bonus depreciation regardless of its recovery period. Under IRC §168(k)(3), "qualified improvement property" is defined as improvements to the interior of any nonresidential real property placed in service after the date the building was first placed in service. "Qualified improvement property" does not include expenditures to enlarge the building, elevator or escalator expenditures, or expenditures for the structural framework of the building. See §15.12.
Partnership equity in exchange for services. On July 23, 2015, the IRS proposed regulations that address the tax treatment of partnership equity issued in exchange for services. See 80 Fed Reg 141 (2015). The proposed regulations set forth a "facts and circumstances" test for determining whether an arrangement with a service provider will be treated as a disguised payment for services as opposed to a nontaxable grant of a profits interest in the partnership. 80 Fed Reg 141 (2015). Practitioners may wish to consult these proposed regulations in the case of any potential grant of partnership interests for services. See §15.18.
"Doing business" in California. Franchise Tax Board Legal Ruling 2014–01, issued July 22, 2014, available at https://www.ftb.ca.gov/law/rulings/active/lr14_01.pdf, was issued during pending FTB litigation addressing whether an out-of-state corporation member of a California LLC is "doing business" in California. Subsequent to issuance of FTB Legal Ruling 2014–01, the Superior Court of Fresno County, in Swart Enters., Inc. v Franchise Tax Board (Nov. 10, 2014, No. 13CEG02171) 2014 Cal Super Lexis 1108 (Swart), held that a passive out-of-state corporation member of a manager-managed California LLC who had no management authority was not "doing business" in California when the member's sole connection to California was passively holding the LLC membership interest in an investment capacity. The Swart holding is contrary to the FTB's position in FTB Legal Ruling 2014–01, and the FTB has appealed the decision to the Fifth District Court of Appeal (Jan. 16, 2015, No. F070922). See §15.22.
Payroll tax credit. As a result of the Protecting Americans from Tax Hikes Act of 2015 (2015 PATH Act) (114 Pub L 113, 129 Stat 2242), for tax years beginning in 2016, a credit to offset the employer portion of Social Security taxes is also allowable to certain qualified small businesses that have claimed a research and development credit under IRC §41(h). See IRC §3111(f). The IRC §3111(f) election to claim a research and development credit as a payroll tax credit rather than an income tax credit under IRC §41 is generally beneficial to start-up businesses that may not have taxable income in their initial years of operation. See §16.23.
Proxy advisory firm recommendations. A company preparing for an IPO should be aware that Institutional Shareholder Services (ISS), the influential proxy advisory firm, generally will recommend "vote against" or "withhold vote" for directors of a company that, prior to or in connection with its IPO, adopted bylaw or charter provisions that ISS considers adverse to shareholders' rights, including such common anti-takeover protections as a classified board, supermajority thresholds to amend the charter or bylaws, limitations on the shareholders' right to amend the charter or bylaws, and dual-class shares. See https://www.issgovernance.com/file/policy/2016-us-summary-voting-guidelines-23-feb-2016.pdf. An IPO company that wants to mitigate the potential for adverse director recommendations can put its anti-takeover provisions to a shareholder vote within 3 years of the IPO (per the ISS policy). A newly public company should consider putting these protective provisions to a vote quickly, when its pre-IPO shareholders still hold a large position and will presumably be supportive. See §17.12.
Upcoming Webinar: Enforcing Noncompetition, Confidentiality and Related Agreements in California
May 18, 2017 12:00PM – 1:00 PM
California takes a unique approach to the enforcement of noncompetition, confidentiality and related agreements and this panel will explore statutory restrictions and recent case law surrounding these agreements. Speaker: Craig Garner. This Webinar provides 1 Hour Participatory MCLE Credit. For more info and to register CLICK HERE.
CEB Offers Discounts to BLS Members
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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 full list of the Standing Committee meeting dates for March are listed below. A description of the required commitment and application process, along with a link to the application, can be found HERE.
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