TransactionalGC Agenda

May 2023

GC Agenda: May 2023

A round-up of major horizon issues for general counsel.


Interlocking Directorates

Counsel should ensure that their clients comply with Section 8 of the Clayton Act, which prohibits interlocking directorates. Section 8 compliance is a current DOJ enforcement priority.

DOJ Assistant Attorney General Jonathan Kanter recently announced that the DOJ has launched the broadest enforcement program in the history of Section 8, with 17 active investigations. To date, 12 directors have resigned from corporate boards and one company declined to exercise board appointment in response to DOJ enforcement efforts.

If the jurisdictional thresholds are met, Section 8 prohibits:

  • A company’s officers and directors from serving as officers or directors of a competing company if an agreement between the companies eliminating competition would violate the antitrust laws.
  • A single company from appointing two separate individuals to serve as its agents on the boards of competing companies.

Section 8 violations are per se unlawful, meaning that there can be no justification. The remedy is typically to remove the interlock, but damages are available in theory.

Potential interlocking directorate issues can arise in a variety of contexts. Compliance training should alert officers and directors to Section 8 issues and require them to disclose and clear potential roles before accepting positions as officers or directors of another company. Counsel should also monitor Section 8 compliance after:

  • A merger or an acquisition.
  • A company or private equity firm acquires a minority stake in a competitor.
  • A company enters a new product area that places it in competition with another company.
  • Changes in sales, which may trigger the jurisdictional thresholds.

(For more on Section 8 of the Clayton Act, see Interlocking Directorates on Practical Law; for more on creating and maintaining an effective antitrust compliance program, see Antitrust Compliance Programs on Practical Law.)


Vacatur Grounds for International Arbitration Awards

The Eleventh Circuit recently held that parties to certain international arbitrations may seek to vacate an award on the grounds available to parties in domestic arbitrations, including those listed under Section 10 of the Federal Arbitration Act (FAA).

In Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., the Eleventh Circuit expressly overruled longstanding precedent on the vacatur grounds for international arbitration awards. Before this decision, a losing party’s post-award options were limited to defending against enforcement of the award and only on the narrow grounds listed in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, such as that the losing party had no notice of the arbitration.

With this decision, the Eleventh Circuit joins the Second, Third, Fifth, and Seventh Circuits in holding that an international award may be vacated under Chapter 10 of the FAA if it is governed by the New York Convention and the US is the arbitration’s primary jurisdiction (meaning US law applies or the arbitration is seated in the US).

The US Supreme Court has not squarely addressed this issue, creating uncertainty in those circuits that have not yet addressed it.

(For a collection of resources to assist counsel in vacating, modifying, or correcting arbitration awards in federal and state courts, see Enforcing or Challenging Arbitration Awards in the US Toolkit on Practical Law.)

Capital Markets & Corporate Governance

Rule 10b5-1 Amendments

Public companies should carefully review the recent amendments to Rule 10b5-1 and:

  • Prepare a stand-alone insider trading policy or amend a current policy so it is ready to be filed with the SEC. Beginning with the first full fiscal year starting on or after April 1, 2023 (October 1, 2023 for smaller reporting companies), new Item 408(b) of Regulation S-K requires annual disclosure of whether a company has adopted insider trading policies and procedures in annual reports on Form 10-K or Form 20-F (for foreign private issuers). Adopted policies and procedures must be filed as an exhibit. Companies that have not adopted these policies and procedures must explain why they have not done so.
  • Consider Rule 10b5-1’s new cooling-off periods and whether to amend the purchase windows of the company’s employee stock purchase plan. If a plan’s purchase window ends during a cooling-off period, consider extending the purchase window for greater participation. These cooling off periods will apply to all persons with 10b5-1 plans other than the issuer.
  • Add language to securities grants that are subject to tax withholding to make withholding automatic by the company or an administrator. This accommodates those that forgo Rule 10b5-1 plans under the amended rules.

(For more on the Rule 10b5-1 amendments, see SEC Adopts Amendments to Rule 10b5-1 and Related Disclosure Requirements on Practical Law; for guidance on Rule 10b5-1 generally, see Rule 10b5-1 Plans: Best Practices Checklist on Practical Law.)

MD&A Considerations

Public companies should consider:

  • Reviewing their Management’s Discussion & Analysis (MD&A) disclosure in light of a noticeable uptick in SEC comments on these disclosures in 2023 compared to previous years.
  • Disclosing in their MD&A that a possible use of cash is to make debt repurchases. Some companies are repurchasing their own bonds because the higher interest rate environment is depressing the value of previously issued bonds.

(For more on preparing and drafting MD&A disclosure, see Preparation of Management’s Discussion and Analysis of Financial Condition and Results of Operations on Practical Law.)

Clawback Listing Standards

Public companies should be aware that proposed NYSE and Nasdaq clawback listing standards may be in place earlier than expected. Companies that have existing clawback policies should consider what, if any, changes may be necessary to comply with the proposed standards. Companies without existing policies should begin preparing a clawback policy that complies with the proposed standards. (For more information, see Employee Benefits & Executive Compensation: NYSE and Nasdaq Listing Standards below.)

Data Privacy & Cybersecurity

Managing Biometric Privacy Risk

Organizations must stay current on developments in biometric privacy law, which impose new compliance requirements and present additional risks. Biometric privacy law is rapidly evolving and highly litigated. The Illinois Supreme Court recently issued several pivotal decisions interpreting the Illinois Biometric Information Privacy Act (BIPA), holding that:

  • All BIPA violations are subject to a five-year statute of limitations (Tims v. Black Horse Carriers, Inc.).
  • A separate claim accrues each time a private entity scans or transmits an individual’s biometric identifier or information to a third party without the individual’s prior informed consent (Cothron v. White Castle System, Inc.).
  • Federal labor law preempts an employee’s BIPA claims when an employer’s response includes invoking a broad management rights clause in the plaintiff’s collective bargaining unit’s agreement (Walton v. Roosevelt Univ.).

To effectively manage biometric privacy risk, counsel should:

  • Identify business practices that may trigger biometric privacy laws or consumer privacy laws that include biometric data in their sensitive data definition. Organizations may use biometric data in a variety of ways, including when:
    • tracking employee time;
    • restricting access to physical and digital assets;
    • monitoring consumer shopping behavior; and
    • integrating biometric data into consumer products and services.
  • Consider whether the organization’s current policies and procedures meet applicable biometric data handling requirements, including notice, consent, retention, storage, and security obligations.
  • Review applicable laws and obligations when contracting with service providers that handle biometric data and continuously monitor their performance.
  • Ensure that the organization has adequate insurance coverage for biometric privacy claims and litigation, considering, for example, that a BIPA claim accrues from each instance of data collection or disclosure.
  • Review any collective bargaining agreements.

(For more on biometric privacy and BIPA, see Biometric Data Laws: Overview and BIPA Compliance and Litigation Overview on Practical Law.)

Employee Benefits & Executive Compensation

NYSE and Nasdaq Listing Standards

Companies listed on the NYSE or Nasdaq should be aware that they may be required to adopt a compliant clawback policy as early as August 2023, following recently proposed NYSE and Nasdaq listing standards and updated guidance from the SEC.

The SEC’s final rules implementing the clawback requirements of the Dodd-Frank Act were published in the Federal Register on November 28, 2022. The final rules directed the NYSE and Nasdaq stock exchanges to propose listing standards implementing the clawback requirements. It was anticipated that the NYSE and Nasdaq listing standards would become effective on or around November 28, 2023, and then under the SEC’s implementation timing rules, listed companies would have 60 days to adopt a compliant clawback policy.

In February 2023, the NYSE and Nasdaq filed proposed new listing standards, which contemplated that they could become effective as early as April 27, 2023. This date was much earlier than many had expected, prompting comments requesting additional lead time. In response, the SEC designated a longer period of time to consider the proposed rule changes and comments received. It designated June 11, 2023 as the date by which it will either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule changes. Listed companies would then have 60 days to adopt a compliant clawback policy (by August 10, 2023).

The SEC delay is welcome news, but the early August compliance deadline is not far off and still earlier than many anticipated. Companies should accelerate preparation for the new listing standards and continue to monitor developments in this area.

(For more on the proposed listing standards, see SEC Adopts Final Executive Compensation Clawback Rules, NYSE and Nasdaq Propose Listing Standards to Implement Clawback Rules and SEC Issues New C&DIs on Clawback Rules on Practical Law.)


Small Business Lending Data Collection Rule

The Consumer Financial Protection Bureau (CFPB) recently issued a final rule requiring certain financial institutions to collect and report data on small business credit applications.

The CFPB issued a proposed rule in September 2021. The final rule makes several changes to the proposed rule, including:

  • Phased-in implementation, with the largest lenders required to report first.
  • Streamlined and improved demographic and financial data collection.
  • Reduced duplicative reporting requirements.
  • Industry-driven solutions to data collection so that groups of financial institutions and third parties, including industry associations, can develop technologies to assist in lenders’ collection and reporting of data.
  • Extra time for lenders with strong records of service to meet the needs of the communities they serve.

It is intended to foster transparency and accountability by requiring financial institutions to collect and disclose data about small business loan recipients’ race, ethnicity, and gender, as well as geographic information, lending decisions, and credit pricing. The information to be provided to the CFPB will be compiled in a comprehensive, publicly available database to help policymakers, borrowers, and lenders better address economic development needs and adapt to future challenges.

The final rule will be effective 90 days after its publication in the Federal Register. However, it contains a variety of compliance date tiers that differ depending on the number of covered credit transactions to small businesses a financial institution originated in 2022 and 2023.

The final rule also amends the CFPB’s Regulation B to implement changes to the Equal Credit Opportunity Act required by Section 1071 of the Dodd-Frank Act.

(For more on the final rule, see CFPB Issues Final Small Business Lending Data Collection Rule on Practical Law.)

Intellectual Property & Technology

New European Unified Patent Court

US companies that hold European patents (EPs) should be aware that the Unified Patent Court (UPC) opens on June 1, 2023. Owners of existing EPs must decide whether to allow their existing patents to come under the UPC’s jurisdiction by default or to opt out. Owners of new patents will have the option to validate EPs as a Unitary Patent (UP) subject to the UPC or in individual countries under the existing system.

The UPC’s jurisdiction covers infringement and validity actions involving non-opted out EPs and all UPs and Supplemental Protection Certificates. During a transition period of at least seven years from June 1, non-unitary EP owners can opt out of the UPC’s exclusive jurisdiction unless the patent is already involved in a UPC proceeding. By opting out, patent owners can avoid unwanted UPC proceedings. Patent owners retain the option to opt back in if there are no pending national proceedings.

Patent owners must balance projected patenting and litigation costs and risks when making opt-out and future EP validation decisions. Owners of high-value patents may want to avoid uncertainty inherent in the new system and diffuse risk among countries by opting out rather than face blanket UPC decisions. Validating and renewing an EP as a UP may be less expensive than corresponding national validations but without the flexibility to drop countries. Some patent owners may choose to avoid EPs and the UPC altogether by filing national applications directly.

All European Union (EU) states, except Spain, Poland, and Croatia, are participating. Non-EU states, such as the UK, cannot participate. The UPC will apply the UPC Agreement, the European Patent Convention (EPC), and other authority, subject to the primacy of EU law.

(For more on the UPC, see Overview of Unified Patent Court and The Unitary Patent on Practical Law; for more on a global approach to patent litigation, see Patent Litigation: Mapping a Global Strategy on Practical Law.)

Labor & Employment

NLRB Scrutiny of Severance and Separation Agreements

Employers should review confidentiality and non-disparagement provisions in their severance and separation agreements in light of a recent National Labor Relations Board (NLRB) decision.

In McLaren Macomb, the NLRB held that merely proffering an agreement containing unlawfully broad confidentiality and non-disparagement provisions violated the National Labor Relations Act (NLRA), even if there was no acceptance, enforcement, or animus. This decision has far-reaching effects, as the NLRA covers most private employers, even where there is no union present or organizing underway.

Employers should consider developing separate agreements for supervisory and nonsupervisory employees, as statutory supervisors are exempt from coverage under the NLRA. In agreements with nonsupervisory employees, employers should consider:

  • Limiting confidentiality provisions to proprietary information, trade secrets, and the severance dollar amount.
  • Limiting non-disparagement provisions to defamatory statements that are maliciously untrue and statements about the employer’s products and services.
  • Including provisions, such as a savings clause or disclaimer language, that carve out the right to engage in protected, concerted activities under Section 7 of the NLRA (but not relying on this because a savings clause does not cure an overly broad provision).

Employers should also revisit the business reasons for these provisions and evaluate:

  • The likelihood of the matter appearing before the NLRB, particularly with a nonunionized workforce.
  • The limited remedies available to the NLRB without employer enforcement efforts (for example, cease and desist orders).
  • The value of the provisions, particularly if they are difficult to enforce.

There is uncertainty regarding how the NLRB will enforce McLaren Macomb. Employers should make decisions based on their risk tolerance and continue to monitor appellate activity and future developments, including further NLRB scrutiny and extensions of McLaren Macomb in different contexts, such as other:

  • Workplace agreements and policies, including:
    • offer letters;
    • last chance agreements; and
    • settlement agreements.
  • Employment provisions, including:
    • non-compete clauses;
    • non-solicitation clauses;
    • no poaching clauses;
    • broad liability releases and covenants not to sue; and
    • broad cooperation requirements.

Employers should also be aware of the NLRB General Counsel’s non-binding guidance memorandum, which broadly interpreted McLaren Macomb, and potential implications for supervisors and retroactive application to past agreements with former employees.

(For more on this decision, see The NLRB’s Scrutiny of Severance Agreements in McLaren Macomb on Practical Law.)


AI in Litigation Management

Law departments must understand the possibilities and pitfalls of using generative AI in dispute resolution and litigation management.

Generative AI presents important opportunities to provide legal and operational value to the C-suite and internal business clients. With generative AI, in-house counsel can become more effective and accurate in mitigating legal risk and exposure and predicting legal spend in both bet-the-company litigation and more commoditized legal disputes. For example, AI can be used in:

  • Benchmarking and forecasting litigation outcomes based on internal and external data.
  • Developing more predictive legal budgeting based on forecasted outcomes.

Law departments, however, must set clear parameters on the use of company data when using non-proprietary or publicly available web-based AI platforms and chatbots. These technologies operate largely by data collection and analysis, both from the user and the AI provider. This means that employees’ use of generative AI can have unintended consequences, such as exposing trade secrets, confidential information, and fact and opinion attorney work product.

Another risk is the inaccuracy of results. There currently is no quality control over AI-generated information, meaning results can provide false positive outputs that range from inaccurate statements of law to biased legal analyses.

Law departments should set firm policies for corporate behaviors surrounding the use of AI to ensure the safety and security of their company’s business and legal information, while better managing their litigation risk.

(For more on the potential uses and risks of using AI in litigation see ChatGPT, Generative AI, and LLMs for Litigators in this issue of Practical Law The Journal; for a collection of resources to assist counsel with litigation management, see Preventing and Managing Litigation Toolkit on Practical Law.)

Real Estate

Real Estate Market Updates

Real estate transactions faced serious headwinds in Q1 of 2023 as interest rates continued to climb and the lending industry was shaken by a series of bank failures. Property sellers faced repeated delays as buyers asked for multiple contract extensions to grapple with:

  • The rising cost of acquisition financing.
  • The uncertainty of property valuations caused by the prospect of declining property values.
  • The mortgage lender’s reluctance to close loans in a volatile economic environment.

Property owners seeking to refinance mortgage loans faced similar delays and higher costs with fewer conventional mortgage lenders extending credit. Some pending transactions stalled or terminated as both lenders and borrowers reevaluated the transaction in light of changing economic realities. For some borrowers, refinancing offered less proceeds at less favorable rates than their existing loans. Refinancing delays were even more serious for loans close to maturity, exacerbating the risk of a maturity default and the possibility of foreclosure.

While sellers and lenders are generally agreeing to extend pending transactions to avoid the possibility of default, this may change if the banking industry or the general economy suffers another major loss in the short term.

(For guidance on extensions or modifications to existing transaction documents, see Commercial Real Estate Purchase and Sale Agreement Crisis Management Checklist (Seller), Commercial Real Estate Purchase and Sale Agreement Crisis Management Checklist (Purchaser), Commercial Mortgage Loan Crisis Management Checklist (Lender), and Commercial Mortgage Loan Crisis Management Checklist (Borrower) on Practical Law.)

GC Agenda Interviewees