Dodd-Frank Liquidation Rules Should Not be Scrapped

The debate regarding how to effectively handle a failure of major financial institutions has reignited under the Trump Administration, prompting critical reaction from overseas regulators.  In April, President Trump ordered the Treasury Department to review current Dodd-Frank rules and determine if an improved bankruptcy process could be a better option. Some Congressional republicans agree that it is.

Under Dodd-Frank regulations, when a big bank fails, the FDIC will step in, unwind nonbank and other financials firms integral to it, and set up a fund, the Orderly Liquidation Authority, to pay for the cost. It would initially borrow from the Treasury Department and recover the funds by charging the bank.

Foreign regulators have threatened to impose higher capital requirements on overseas subsidiaries of American banks if the Dodd-Frank rules are scrapped.

Potential legislation should prevent panic and lack of liquidity throughout the entire American and overseas financial system. Given the FDIC’s ability to coordinate responses to multiple failing banks, Dodd Frank is the superior option. Replacing Dodd Frank bankruptcy rules with a revised bankruptcy process could mean bankruptcy judges would be assigned to one specific case and could not cross coordinate with each other.

Bankruptcy judges do not have the legal mandate, prior experience, nor the incentive necessary to maintain the stability of the financial system as a whole. Their legal responsibility is to adjudicate creditor’s claims against the bank, rather than minimize debilitating effects on the entire economy.

While the bankruptcy process can serve as a useful additional channel for resolving failing financial institutions, wide scale crisis demands regulatory authority to manage it. An outright replacement of the Orderly Liquidation Authority, as administered by the F.D.I.C., could severely undermine our financial system’s stability.

Fortunately, Wall Street’s support for maintaining the liquidation authority, Secretary Steve Mnuchin’s pragmatic policy approach, and threats from overseas regulators make the odds of major deregulation bleak.

Dodd-Frank Liquidation Rules Should Not be Scrapped (PDF)

Uber: Two Stock Prices but Not One Deal

The potential billion-dollar transaction between Uber and the Japanese investment company, SoftBank, was announced several months ago, though the deal has yet to close.

SoftBank’s Chief Executive Officer, Masayoshi Son, plans to invest $10 billion in the ride-sharing giant to become a significant shareholder in the company. The investment is comprised of a $1 to $1.25 billion investment, and the purchase of 14 to 17 percent of Uber’s shares.

There are two different sets of shares under this deal. Uber will issue new shares to sell to SoftBank for the first set, and SoftBank will acquire the second set from current investors through a tender offer.  However, not all current investors will be authorized to accept SoftBank’s tender. Eligible shareholders include (but are not solely limited to) current Uber employees and board members with at least 10,000 shares, who may sell no more than half of their total shares.

Although Son intends to buy the newly issued shares based on Uber’s most recent $68 billion company valuation, he is only willing to make an offer for the second set of shares based on a $50 billion company valuation. Because Uber is a private company, investors like SoftBank can in fact determine the company’s valuation on its own. This of course may have harmful effects on those Uber shareholders who desperately want to exit the scandal-labeled company and may be forced to sell their shares at this lower valuation in order do so.

The SoftBank deal, coupled with Uber’s recent change in its governance structure, may offer hope to those dissatisfied shareholders and investors unable to sell their stocks. In addition to SoftBank appointing two directors to Uber’s new 17-member board if the deal is completed, Uber’s board hopes to carry out an initial public offering by 2019. Investors in public markets have greater freedom to transfer their shares and valuations are much more transparent than in private companies.

Despite the delay and obvious drawbacks, Uber board member Arianna Huffington said she remains “optimistic” that SoftBank and Uber’s massive deal will soon close.

Uber Two Stock Prices but Not One Deal (PDF)

Is a Training Intern Entitled to Wages under the FLSA? The Eleventh Circuit Court of Appeals Says “Maybe”

Businesses who take on unpaid training interns or participants under job shadowing programs may want to take notice of this ruling from the Eleventh Circuit Court of Appeals, which indicates that it is possible for those participants to be entitled to wages under the Fair Labor and Standards Act.

Scott Axel was having trouble finding work. His father worked as a wholesaler at an auto dealer and persuaded his employer, Fields Motorcars, to bring his son in as a training intern. For fifteen months, Scott Axel shadowed his father on the job, but his activities took a turn when he took on retail and sales tasks, such as posting cars for sale on social media and auction websites.

The plaintiff’s father’s employment with the dealer was terminated and as a result, Axel’s training activities ended. He sued under the Florida Labor Standards Act (FLSA) and the Florida Minimum Wage Act (FMWA), estimating that over his fifteen-month tenure, he worked over sixty hours per week without pay.

The district court granted summary judgment in favor of Fields Motorcars. Upon appeal, the Eleventh Circuit Court of Appeals vacated the summary judgment ruling for the defendant and remanded the case to the district court. The Court of Appeals noted that Axel’s activities were sometimes consistent with the activities of an employee, and other times a trainee.

While the Eleventh Circuit concluded that it did not have enough information about the plaintiff’s time spent on his father’s work (wholesaling tasks) or retail tasks under the supervision of other employees, the court noted that the proper outcome was not necessarily an “all or nothing” determination.

The circuit court’s ruling poses a cautionary tale for businesses that may consider offering unique training opportunities as part of their business. Here, the circuit court suggests that depending on the activities performed by a person who is an informational intern, a job shadower, or a trainee, those activities could entitle a person to wages under the FLSA or state minimum wage laws.

Is a Training Intern Entitled to Wages under the FLSA The Eleventh Circuit Court of Appeals Says Maybe (PDF)

Recap: “BCLBE Leadership Lunch Talk – Funding Innovation”

On October 23, 2017, the Berkeley Center for Law, Business and the Economy (BCLBE) welcomed Chris Young ‘05, Head of Legal at GoFundMe, for a Q&A discussion about his career, his position as a company counsel at a venture-backed startup, and the crucial role attorneys play in the startup world.

A graduate of SDSU and Berkeley Law, Young began his career as a litigator at Morrison Foerster. After litigating a high-profile class action suit addressing education inequality, Young was asked to join the 2008 Obama presidential campaign as the Deputy Finance Director of Northern California. Faced with a difficult decision between staying at his firm, clerking, or joining the campaign, Young’s mentors encouraged him to take advantage of the opportunity to work for President Obama. He took their advice and served on the campaign until the election, at which point he returned to his hometown of Sacramento to work as Mayor Johnson’s Senior Advisor. Young moved to Washington D.C. shortly thereafter to work in the White House and the Department of Justice. He then returned to the Bay Area in 2010 to work as a Senior Associate trial attorney at Keker, Van Nest & Peters. In 2014, he left to join OpenGov as its head of business development and counsel, until finally starting his current position in November 2015.

Young attributes part of his success to the encouragement and understanding of his mentors. When presented with the opportunity to work for President Obama, he was initially hesitant to leave his firm and defer his clerkship. However, a senior partner pushed him to take it, stressing that Young could always return to big law. The judge also told him to risk it and enjoy the journey. At the end of the day, Young would encourage any law student to “take chances and bet on yourself” when making career decisions.

Those chances eventually brought Young to GoFundMe, where he has served as Head of Legal for two years. GoFundMe, which Young refers to as “America’s company,” is a rapidly expanding crowd-funding platform, experiencing 300% annual growth with 50 million users worldwide since its launch eight years ago. Young said the best part of his job is that every day there is something new on his desk. Whether he is dealing with corporate governance, litigation, contract negotiations, or equity issues, Young said, “you have to have a sense of confidence and a little bit of insanity to think that you can handle everything that comes your way.” He shared that as counsel to a startup, it is important to balance the company’s want for growth with keeping it out of harm’s way, which presents new challenges every day.

Young also loves the public service aspect of his job. He emphasized that GoFundMe is an open platform that helps people from all walks of life, regardless of their location or political beliefs. Young recently started a charity through GoFundMe to directly assist those in need, and was able to raise $6 million to help hurricane, California fire, and Las Vegas shooting victims. Young said that seeing how those funds impacted people’s lives was inspiring, and reinforced the importance of GoFundMe’s role in the world.  “When I wake up in the morning, I know that I’m going to work at a company that’s allowing people to help each other out,” Young shared.

Recap BCLBE Leadership Lunch Talk – Funding Innovation (PDF)

Aramco Still Plans to Go Public in 2018 in Largest IPO in History

Early last year, Saudi Arabia’s Crown Prince, Mohammed bin Salman, announced that talks of an Aramco initial public offering (IPO) were in progress. Aramco is by far the largest oil company in the world, with the Crown Prince and other Saudi officials valuing the company above $2 trillion. The public sale of just 5% of the company would mark it as the largest IPO in history (Alibaba’s $25 billion IPO in 2014 is currently the largest).

Aramco’s CEO, Amin Nasser, told the New York Times that the IPO is planned for the latter half of 2018. Where to go public, specifically, is the question that has been causing a stir. According to the Saudi Finance Minister, a listing on Tadawul, the Kingdom’s local exchange, is set in stone. So the burning question is where else will Aramco be listed?

Expectedly, major international exchanges such as the New York and London exchanges are competing as potential venues for the IPO, which will surely bolster trade activity. Rumors have also circulated the past few months of a possible private sale to China – which Aramco’s CEO has denied. Because many believe that an overseas listing occurring before 2019 is not feasible, there has been speculation that Tadawul could be the only exchange where Aramco will be listing.

However, it is important to view the IPO in the context of its timing and purpose. The Aramco IPO is the crux of Saudi Vision 2030, a plan headed by the Crown Prince to diversify the Kingdom’s traditionally oil-based economy and reduce its reliance on oil. Saudi Arabia owns Aramco, and therefore any significant move on Aramco’s part would affect the Saudi economy.

The Saudi Government has made it clear, economic growth beyond current levels is an important and viable long-term goal for the Kingdom. Whatever measures taken by the Kingdom’s prized possession will be carefully designed to accelerate that prosperity. With hundreds of billions of dollars in reserves, Saudi Arabia is not likely going public solely for the payout.

The Aramco IPO has the potential to produce a myriad of fruitful effects for the Saudi financial landscape. The IPO will encourage market transparency within the kingdom and undoubtedly  attract foreign investment, both of which seem it be in line with the Crown Prince’s vision. Given what is at stake for the Kingdom and the potential for adverse legal implications of listing in foreign exchanges, Aramco’s caution in choosing where to list should come as no surprise.

Aramco Still Plans to Go Public in 2018 in Largest IPO in History (PDF)

Grab Expands its Runway with Record Debt Funding

Singapore based ride-sharing start-up, Grab, announced on October 20, 2017, that it was moving forward with the single largest debt financing deal secured by a Southeast Asian company to date, at $700 million.

Originally conceived as a taxi-hailing service, Grab, formerly GrabTaxi, is one of the most popular mobile applications in Southeast Asia, servicing Singapore, Malaysia, Indonesia, the Philippines, Vietnam, Thailand, and Myanmar.  It outperforms Uber both in application downloads and market share, accounting for more than 70% of all private vehicle hailing.  It’s latest round of debt financing comes on the curtails of a larger capital raising venture that has netted the start-up $4 billion to date.

The express purpose of its latest debt financing is to purchase a fleet of vehicles which can be offered with affordable leasing terms to prospective partner-drivers in Singapore and Indonesia, many of whom cannot afford a car given high prices in the former and lack of credit options to purchase a car in the latter.

Grab’s ridesharing service is not limited to cars, as it also offers a bike sharing service. GrabBike provides a faster, cheaper, and more efficient more of transportation in many of the heavily congested cities in which the app operates. However, regulatory issues in countries like the Philippines have forced GrabBike to cease operations. Moreover, GrabBike only recently became available in Thailand after transport authorities forced the app to suspend service last year in light of regulatory concerns.

Whether Grab plans to expand its vehicle holdings to other countries in the region in order to counteract legal pushback associated with its expanding bike service remains unknown. However, it certainly raises important questions about how investors should consider the often unanticipated legal obstacles that can emerge from novel tech start-ups.

Grab Expands its Runway with Record Debt Funding (PDF)

The Struggle for Transparency in Political Advertising

On October 19, 2017, Senators Mark Warner, Amy Klobuchar, and John McCain introduced new campaign finance legislation. The “Honest Ads Act” seeks to compel greater disclosure surrounding online political advertising. More specifically, the bill would force large digital platforms (those with at least 50 million monthly views) to keep a public file of paid political advertising exceeding $500 per advertiser.

In response to reports of Russian interference in the 2016 election, the goal of the Honest Ads Act is to prevent foreign actors from buying ads on online platforms. It would require sites like Facebook and Twitter to “make ‘all reasonable efforts’ to ensure that foreign individuals and entities are not buying political advertisements to influence the U.S. electorate.”

Per the Federal Election Campaign Act of 1971, radio, television, and newspaper ads already carry restrictions when it comes to political advertisement disclosures. Online advertising, however, has remained untouched by these rules. Proponents of the exemption argued that as an “evolving mode of mass communication,” the Internet required fewer restrictions than other forms of media. This exemption allowed Russian companies to purchase $100,000 in political advertisements during the latest presidential election.

Despite the bipartisan nature of this bill, some social media companies have already mounted a campaign to influence or even resist the proposed changes. Facebook’s Chief Operating Officer argued that Facebook is not a media company, but rather “a tech company” that would take its own steps to achieve advertising transparency. Facebook’s Vice President of U.S. Public Policy, however, said the company would work with lawmakers to create a legislative solution to the political advertisement problem. A Twitter spokesperson noted that the company “look[s] forward to engaging with Congress and the FEC on these issues.”

Representatives Derek Kilmer and Mike Coffman have introduced a companion bill to the Honest Ads Act in the House. It is unclear when either version of the bill will come up for a vote.

The Struggle for Transparency in Political Advertising (PDF)

Uber Discrimination Lawsuits in Tech

Three Latina female engineers have filed suit against Uber for gender and race discrimination. The suit, filed in San Francisco on October 24, 2017, alleges that Uber violated the Equal Pay Act by using a “stack ranking” system. The promotion vehicle is alleged to be an unreliable qualitative method that systematically undervalues female employees and employees of color. The three plaintiffs are represented by Outten & Golden, which has also represented employees in suits against Goldman Sachs and Microsoft.

The suit comes after Uber attempted to amend some of its culture issues. In August, the company instituted a new policy that bumped up the salaries of employees who were not paid the median amount for their jobs. The policy change also included a 2.5% salary increase for each year an employee had worked at Uber.

These changes come after Uber acknowledged its pervasive sexism following a viral blog post detailing an engineer’s experience with rampant sexism and sexual harassment. In response, Uber’s CEO Travis Kalanick ultimately resigned. Eric Holder was then hired to review the company’s policies, and Frances Frei of Harvard Business School was brought on board to improve company culture.

Uber is not the only company facing similar charges. Google, Tesla, and Microsoft have been the subject of discrimination lawsuits in recent months. Given the pervasiveness of these suits, it is possible that more employees will come forward in the future. With more employees beginning to speak out, these suits may mark a watershed moment in the technology industry.

Uber Discrimination Lawsuits in Tech (PDF)

Supreme Court to Decide Microsoft Data Privacy Case

This month, the Supreme Court has decided to hear a case that will resolve whether a United States company, Microsoft, must provide data stored on servers outside the United States.  The decision will impact what data is available to the United States Government and will have reactions in countries where the data is stored.

In 2016, a Second Circuit decision overturned a district court ruling and held that the Government cannot compel an internet service provider to produce information overseas that would constitute an extra-territorial application of the statute not in accordance with congressional intent.  The court focused on user privacy and increased global freedom of expression.

This decision has been criticized for not addressing the complexities of data in the technological age. One of the difficulties in all of this is interpreting anachronistic legal terms and cases to a world that where technological progress and entrepreneurship is moving at an incredible pace.  Applying the Fourth Amendment in a digital world means a breakdown of traditional distinctions protecting privacy.

Additionally, there may be impacts in foreign relations.  The European Union (EU) has updated their policies in what they call the General Data Protection Regulation.   It is worth considering whether this policy, which has yet to go into effect, would have implications for EU companies with data stored in the United States.  One of the key changes in their law is the extra-territorial application.

What will the Supreme Court have to say?  Will they draw clear lines?  Will they acknowledge the complexities of this space?  Will they issue a ruling that impacts entrepreneurship or your individual data privacy?  Or will they send a message the Fourth Amendment needs to be squared immediately with our individual constitutional rights?

Supreme Court to Decide Microsoft Data Privacy Case (PDF)

Nursing Home Giant Owes Landlord Over $300 Million In Rent

Significant changes could be coming for thousands of elderly residents living at HCR ManorCare’s 292 nursing home and assisted care facilities. On August 17, 2017, HCR’s landlord and real estate company, Quality Care Properties, Inc., filed a complaint seeking to recover over $300 million in rent owed. The complaint asks the Court to appoint a receiver to facilitate transfer of the homes to a new operator. On October 19, QCP announced it had agreed to extend the deadline for HCR to respond to the receivership complaint. HCR now has until November 1 to respond.

A receivership is an alternative remedy to traditional bankruptcy and eviction. In a receivership proceeding, the court orders transfer of the insolvent’s assets to an appointed receiver. The receiver will facilitate transition of ownership to a new entity who will hopefully be able to run the operation profitably and meet its obligations. During the interim, the court empowers the receiver with the power to manage the business and protect its assets. Receiverships enable continuity and stability, but are only granted in certain circumstances that vary depending on jurisdiction.

Receiverships have been used to transfer ownership of smaller nursing home companies in the past. Recently in July 2017, a court approved the transfer of Fortis Management Group’s 65 nursing homes and assisted living facilities to a receiver. However, a court has yet to apply receivership to a nursing home giant like HCR ManorCare.

QCP’s lawsuit hits HCR amidst Department of Justice accusations of Medicare fraud. On April 21, 2015, the DOJ announced it had intervened in a consolidated False Claims Act lawsuit against HCR. The government alleged that HCR pressured staff to push unnecessary services on residents and kept discharge-worthy patients in its facilities to increase Medicare billables. The case is still pending in District Court. If the Court finds HCR engaged in intentional fraud, liability under the False Claims Act may not be dischargeable in bankruptcy.

HCR and QCP expect to use the deadline extension to discuss the possibility of selling and releasing properties, governance and protocol changes, and asset stewardship. It is unclear whether these talks are aimed at completely avoiding the receivership or preliminarily restructuring HCR’s assets in advance of the proceeding. Either way, for thousands of HCR ManorCare residents, home could be completely different in the not so distant future.

Nursing Home Giant Owes Landlord Over $300 Million In Rent (PDF)