Firm Advice

D.C. Circuit’s Rail Freight Contacts Decision Reflects Greater Scrutiny of Antitrust Class Certification in the Wake of Supreme Court’s Comcast Ruling

By Arnold and Porter LLP | Posted on

[Editor’s Note: The following post is authored by Arnold & Porter LLP]

Earlier this month, the influential U.S. Court of Appeals for the D.C. Circuit issued an important decision on the standards for certifying antitrust class actions.  Taking its cue from the Supreme Court’s decision this past March in Comcast Corp. v. Behrend, the D.C. Circuit vacated a lower court decision certifying a class of shippers in an antitrust case against railroads alleging collusion on fuel surcharges.  The ruling in In re: Rail Freight Fuel Surcharge Antitrust Litigation is significant as the first known decision to apply Comcast to reject a proposed antitrust class.  Companies facing overreaching class action suits may be able to take comfort that, after a few lower court decisions sidestepping Comcast, the principles set forth in that decision are now catching on in the lower courts.

Click here to see the entire Arnold & Porter Advisory.

FTC Adopts Final Guidance on Cross-Border Swaps and Compliance Schedule

By Davis Polk and Wardwell LLP | Posted on

[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]

On July 12, 2013, the Commodity Futures Trading Commission (“CFTC”) adopted final cross-border guidance (the “Final Guidance”) that provides guidelines for the application of the CFTC’s swap regulatory regime to cross-border swap activities. At the same time, the CFTC adopted a phase-in compliance schedule (the “Exemptive Order”) that extends, with material changes, the cross-border exemptive order issued by the CFTC in January 2013.

The Final Guidance and the Exemptive Order address several topics, including: (1) the final definition of U.S. person for purposes of the CFTC’s swap regulatory regime; (2) guidance on which swaps a non-U.S. person must include in, and can exclude from, its swap dealer de minimis and major swap participant (“MSP”) threshold calculations; (3) guidance on the types of offices the CFTC would consider to be a “foreign branch” of a U.S. swap dealer or MSP and the circumstances in which a swap transaction would be considered to be “with” such a foreign branch; (4) guidance on how swap-related requirements will be applied to cross-border swap transactions and when substituted compliance would be available if the CFTC determines that a foreign jurisdiction’s rules are comparable to its own; and (5) phased-in compliance periods for many of the swap regulatory regime’s requirements. For more information, see the July 3, 2012 Davis Polk Client Memorandum, CFTC Finalizes Cross-Border Swaps Guidance and Establishes Compliance Schedule.

Comments on the Exemptive Order are due on August 21, 2013.

The full Davis Polk Client Advisory includes recent update on the following topics:

SEC Rules and Regulations

  • SEC Grants No-Action Relief to Allow Registered Investment Companies to Maintain Assets with 
  • CME to Meet Margin Requirements for Additional Swaps Cleared by CME
  • SEC Extends Immediate Effectiveness of Post-Effective Amendments to Additional Closed End Funds

Industry Update

  • CFTC Adopts Final Guidance on Cross-Border Swaps and Compliance Schedule
  • SEC’s Division of Investment Management Answers Questions Concerning Form 13F

Litigation

  • Department of Justice Indicts Hedge Fund Advisers and SEC Charges Advisers’ Founder
  • CFTC Brings First “Spoofing” Case Against High-Frequency Trading Firm

 

Delaware Court of Chancery Issues Post-Trial Decision in Trados

By David J. Berger, Steven Guggenheim, Elizabeth Saunders, and Herb Fockler | Posted on

[Editor’s Note: The following update is authored by Wilson Sonsini Goodrich & Rosati]

On August 16, 2013, the Delaware Court of Chancery issued a much-anticipated post-trial decision in In Re Trados Incorporated Shareholder Litigation, holding that the sale of Trados to SDL was entirely fair to the Trados common stockholders and that the Trados directors had not breached their fiduciary duties in approving the transaction.1 The case involved a common fact pattern: the sale of a venture-backed company where (1) the holders of preferred stock, with designees on the board, receive all of the proceeds but less than their full liquidation preference, (2) the common stockholders receive nothing, and (3) members of management receive payments under a management incentive plan.

Background

In 2005, the board of directors of Trados, a translation software company, approved the sale of Trados to SDL plc through a merger. In the four years leading up to the transaction, Trados had received multiple rounds of venture capital financing and issued several series of preferred stock. Shortly before the sale, Trados was sharply in need of capital, due to significant downturns in its business. Its venture capital investors were unwilling to inject more cash into the business, so Trados obtained an infusion of venture debt, adopted a management incentive plan (MIP) so that it could recruit and retain new management, and hired a new management team, including a new CEO and CFO. Trados also hired an investment banker to explore strategic alternatives and shopped the company to several possible buyers. Trados’ new management was able, at least in the short term, to “clean up” the business, beating budget estimates and increasing revenue, while also exploring strategic alternatives for the longer term. Trados was ultimately able to negotiate a sale to SDL on terms deemed favorable by the Trados board. In the sale to SDL, Trados received $60 million. The first 13 percent of the merger consideration, or $7.8 million, went to management under the MIP. The remaining $52.2 million was distributed to holders of the company’s preferred stock—less than their total liquidation preference of $57.9 million, although some of the preferred stockholders received some gain on their initial capital investment. The holders of common stock received nothing.

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The Alternative Investment Fund Managers Directive – UK Treasury Releases Near-Final Draft of Implementing Regulations

By Goodwin Procter LLP - Glynn Barwick | Posted on

[Editor’s Note: The following Post is authored by Goodwin Procter LLP’s Glynn Barwick.]

The UK Treasury has recently published a new, and near final, version of the implementing Regulations for the Alternative Investment Fund Managers Directive (the “AIFMD”). (We have commented on the consequences of the AIFMD for EU managers and non-EU managers in our 4 January, 11 January, 27 February and 27 March client alerts.) This updated version of the implementing Regulations represents a considerable improvement for managers compared to the initial draft.

In summary, with effect from the implementation date (22 July 2013), European managers of Alternative Investment Funds (“AIFs”) – essentially:

(a) any European manager of a PE, VC, hedge or real estate fund will need to be authorised in its home member state and comply with various requirements regarding the funds that it manages concerning information disclosure and third-party service providers; and

(b) any non-European manager of a PE, VC, hedge or real estate fund will need to comply with various marketing and registration restrictions if it wishes to obtain access to European investors.

This Client Alert discusses the major changes to the AIFMD implementing Regulations.

Click here to read the complete story.

Recent Lessons on Management Compensation at Various Stages of the Chapter 11 Process

By Kirkland & Ellis LLP - James H.M Sprayregen, Christoper T. Greco, and Neal Paul Donnelly | Posted on

[Editor’s Note:  The following Post is authored by Kirkland & Ellis LLP’s James H.M Sprayregen, Christoper T. Greco, and Neal Paul Donnelly.]

Setting compensation for senior management can be among the most contentious issues facing companies reorganizing under Chapter 11 of the US Bankruptcy Code. Corporate debtors argue that such compensation—often in the form of base salary, bonuses, or stock of the reorganised company–helps retain and incentivize management, whose services are believed necessary to achieve a successful reorganisation. Creditors, by contrast, may be loath to support compensation packages that they perceive as enriching the very managers who led the company into bankruptcy.

This tension over management compensation, though long present in corporate bankruptcy cases, has been more pronounced since 2005, when the US Congress added Section 503(c) to the Bankruptcy Code. Section 503(c) limits bankrupt companies’ freedom to give management retention bonuses, severance payments, or other ancillary compensation. For instance, under the current regime, a company cannot pay managers retention bonuses unless it proves to a bankruptcy court that the managers both provide essential services to the reorganising business and that they have alternative job offers in hand. Even then, the Bankruptcy Code caps the amount of the retention bonuses. Severance payments to managers are similarly restricted by Section 503(c).

Despite these restrictions, companies continue to search for ways to boost managers’ compensation in and around the time of bankruptcy. They do so because retaining existing managers is often the best way to maximise the value of the company in a restructuring. Existing managers typically have valuable institutional knowledge and industry-specific experience that is hard to replace. They may also be vital to preserving relationships with customers, employees, and suppliers. Recognising their value, leaders of bankrupt companies often demand incentives to stay on during bankruptcy. Even where a company would prefer new management, it can be hard to recruit top people to a bankrupt company undergoing a restructuring. Companies must therefore choose how and when to compensate managers without running aground on Section 503(c) and related provisions of the Bankruptcy Code.

Click here to read the complete story.

Firm Advice: Implementing Dodd-Frank

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

The comment period recently expired on the Federal Reserve’s proposal to require foreign banking organizations with at least $50 billion in global assets and $10 billion in U.S assets to form an intermediate holding company for most of their U.S. assets.  The proposal is part of the Board’s implementation of Sections 165 and 166 of the Dodd-Frank Act. In a recent Client Alert, Gibson Dunn advises that “the IHC requirement likely exceeds the Board’s legal authority in implementing Sections 165 and 166 of Dodd-Frank, has the tendency to increase, rather than reduce, financial instability in the United States and globally, threatens other adverse effects, and does not effectively respond to the developments that the Board perceives in the U.S. operations of FBOs and in international banking regulation generally.” Gibson Dunn explains why here.

On April 10th, the White House released its proposed budget, which contained significant new tax proposals. While often general, the budget laid out specific proposals for: 1) the Buffet Rule, 2) marking to market of derivatives, and 3) alternative treatment for debt purchased on the secondary market. Skadden’s recent Client Alert explains the various proposals and both their foreign and domestic tax implications.

Federal Reserve FBO Proposal: Will Comments on the Intermediate Holding Company Requirement Be Heeded?

By Gibson, Dunn & Crutcher LLP | Posted on

[Editor’s Note:  The following post is a Gibson, Dunn & Crutcher LLP Publication, authored by its Financial Institutions Practice Group.]

The comment period has now closed on the controversial proposed rule (FBO Proposal) of the Board of Governors of the Federal Reserve System (Board) implementing Sections 165 and 166 of the Dodd-Frank Act (Dodd-Frank) for foreign banking organizations (FBOs) and foreign nonbank financial companies supervised by the Board.  If the FBO Proposal becomes final in the manner proposed, it will mark a sea change in the regulation of the U.S. operations of FBOs, by requiring FBOs with $50 billion or more in total global consolidated assets and $10 billion or more in total U.S. nonbranch assets to form an intermediate holding company (IHC) for almost all of their U.S. subsidiaries.  In our view, the IHC requirement likely exceeds the Board’s legal authority in implementing Sections 165 and 166 of Dodd-Frank, has the tendency to increase, rather than reduce, financial instability in the United States and globally, threatens other adverse effects, and does not effectively respond to the developments that the Board perceives in the U.S. operations of FBOs and in international banking regulation generally.

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DOJ’s Antitrust Division Reverses Policy on Individual Carve-Outs in Company Plea Agreements

By Wilson Sonsini Goodrich & Rosati | Posted on

[Editor’s Note:  The following is a Wilson Sonsini Goodrich & Rosati Client Alert.]

On Friday, April 12, 2013, the Antitrust Division of the United States Department of Justice announced a reversal in policy relating to its negotiations with companies that plead guilty of criminal antitrust violations.  The new policy significantly affects how the Antitrust Division will approach the plea negotiation process and enforce the criminal antitrust laws.

First, the Antitrust Division announced that it would no longer publicly disclose the names of individuals excluded (or “carved out”) from the non-prosecution provision of company plea agreements.  This provision protects the company and its employees from further prosecution under the antitrust laws for the conduct at issue (a core benefit for companies entering into the plea), but some employees typically are carved out from this protection.  Prior to the announcement last week, the Antitrust Division had a long-standing practice of disclosing the names of these carve-out employees in the plea agreement, a practice that some have called a “perp walk.”  The division now has put an end to this practice, recognizing that “[a]bsent some significant justification, it is ordinarily not appropriate to publicly identify uncharged third-party wrongdoers.”

Second, the Antitrust Division announced that it no longer would carve out individuals from pleas merely for not cooperating in its investigation.  Instead, the division will carve out only those individuals who are “potential targets” of the investigation (i.e., only those whom the division has reason to believe were engaged in the criminal conduct at issue and targets for potential prosecution).  Prior to the announcement, the Antitrust Division had a long-standing practice of carving out from the non-prosecution protection of a plea agreement two categories of individuals:  (1) those the division has reason to believe were involved in criminal wrongdoing (i.e., potential targets) and (2) those who are uncooperative in its investigation or are difficult to find or contact.  Under the new policy, the division will limit the carve-outs to the first category of individuals.  The Assistant Attorney General of the Antitrust Division, Bill Baer, elaborated publicly, stating:  “I reached the conclusion that . . . focusing on the group of people who are potentially targets of the investigation, potentially liable, [and] can be charged [] was a better way of defining our carve-out groups.”

To read the rest of the WSGR Article, click here.

SEC Staff Provides New Guidance Regarding the Rule 15a-6 Registration Exemption for Foreign Broker-Dealers

By Latham & Watkins LLP - Dana G. Fleischman, Stephen P. Wink and Kaitlin M. Betancourt | Posted on

[Editor’s Note:  This post is a Latham & Watkins Client Advisory.  The Network has further coverage in another post.]

On March 21, 2013, the Staff of the Division of Trading and Markets of the US Securities and Exchange Commission published guidance in the form of Frequently Asked Questions on Rule 15a-6 under the Securities Exchange Act of 1934.

The FAQs resulted from the efforts of a Task Force assembled by the Trading and Markets Subcommittee of the American Bar Association to discuss and seek clarification from the Staff with respect to certain recurring issues regarding Rule 15a-6.  This clarification was requested in the form of published FAQs to provide greater transparency to the industry and to resolve certain inconsistencies created by, among other things, Staff turnover and general confusion by the industry and other regulators as to the proper application of the Rule’s rather complex provisions to a marketplace that has become markedly more global and technologically advanced in the nearly 25 years since the Rule’s adoption.

In the FAQs, the Staff affirms the general applicability of certain previously issued interpretive guidance and addresses certain aspects of the operation of Rule 15a-6, primarily with respect to issues concerning solicitation, the dissemination of research reports, recordkeeping requirements and chaperoning arrangements between foreign broker-dealers and SEC-registered broker-dealers. Although necessarily limited in scope, the FAQs provide much welcome guidance at a time when cross-border transactions have become an integral part of the securities markets.

Background

Rule 15a-6 permits foreign broker-dealers to conduct certain limited activities in the United States and with US persons without having to register as a broker or dealer under the Exchange Act. Under Rule 15a-6, foreign broker-dealers may (i) effect “unsolicited” transactions with any person; (ii) solicit and effect securities transactions with SEC-registered broker-dealers, US banks acting in compliance with certain exceptions from the definitions of “broker” and “dealer”, certain supranational organizations, foreign persons temporarily present in the United States, US citizens resident abroad and foreign branches and agencies of US persons; and (iii) subject to a number of conditions, provide research to and effect resulting securities transactions with certain types of large institutional investors.  Rule 15a-6 also provides that a foreign broker-dealer may engage in a broader scope of activities, including soliciting and entering into transactions with specified categories of institutional investors, with the assistance or intermediation of an SEC registered broker-dealer (the establishment of such an arrangement is typically referred to as a “chaperoning arrangement” and the SEC-registered broker-dealer is often referred to as the “chaperoning broker-dealer”).

To read the rest of this Client Advisory, please click here and search the Advisory number “1495.”

SEC Reminds Private Funds of Broker-Dealer Registration Requirements

By Arnold & Porter LLP - Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman | Posted on

[Editor’s Note:  The following is an Arnold & Porter LLP Client Advisory, written by Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman.]

SEC official reminds private funds, including contacts private equity funds, that certain fund-raising and marketing activities and fees for “investment banking activities” require broker-dealer registration.

On April 5, 2013, David Blass, Chief Counsel of the Division of Trading and Markets of the Securities and Exchange Commission (SEC), spoke before the Trading and Markets Subcommittee of the American Bar Association on broker-dealer registration issues that arise in the private funds context. In his remarks, Mr. Blass warned that acting as an unregistered broker-dealer is a violation of the Securities Exchange Act of 1934, as amended (the Exchange Act), and can have serious consequences, including sanctions by the SEC and rescission rights, even when no other wrong-doing is found. Mr. Blass also noted that the SEC staff has increased its attention to the issue of broker-dealer registration, and he reminded the audience that compliance by private fund advisers with the requirements of the Investment Advisers Act of 1940, as amended, is not enough. In light of the significant consequences of acting as an unregistered broker-dealer and the SEC staff’s increased attention to this issue and the private fund space in general, private fund advisers should review their fund-raising and marketing activities, policies and procedures and contracts and arrangements with portfolio companies and solicitors to ensure compliance.

Click here to read the entire Arnold & Porter Advisory.