Corporate AlertAugust 2016
The Herrick Advantage
On Tuesday, September 27, Herrick’s Sports Law Group will host a panel discussion regarding the business and legal aspects of sports facility naming rights and sports sponsorships. Distinguished participants include: Peter Murray, Vice President, Global Brand & Sports Marketing, Under Armour; Hymie Elhai, Senior Vice President Business Affairs & General Counsel, New York Jets; and Herrick’s sports law partners Irwin Kishner and Jared Bartie. Terry Lefton, Editor-at-Large, SportsBusiness Journal will moderate the panel.
New York State Department of Financial Services Adopts Enhanced BSA/AML Regulation
Effective January 1, 2017, the New York State Department of Financial Services (“DFS”) will adopt a new regulation (the “Regulation”) that sets forth the minimum requirements for transaction monitoring and filtering programs used by regulated financial institutions to monitor for potential Bank Secrecy Act/anti-money laundering (“BSAL/AML”) violations, suspicious activity reporting and sanctions violations. The Regulation will apply to all financial institutions including domestic banks, New York branches and agencies of foreign banks, trust companies, check cashers and money transmitters chartered or licensed under the New York Banking Law.
Under the Regulation, each regulated financial institution must maintain a transaction monitoring program that is reasonably designed to monitor transactions after execution for potential BSA/AML violations and suspicious activity reporting using either manual or automated systems. The Regulation requires, at a minimum and to the extent applicable, that the program:
- is based on the risk assessment of the regulated financial institution;
- is reviewed and periodically updated at risk-based intervals to take into account changes to applicable BSA/AML laws, regulations and regulatory warnings, and other relevant information;
- appropriately matches BSA/AML laws, regulations and regulatory warnings, and other relevant information;
- appropriately matches BSA/AML risks to the regulated financial institution’s businesses, products, services and customer/counterparties;
- contains BSA/AML detection scenarios to detect potential money laundering, or other suspicious or illegal activities;
- can comprehensively test transaction monitoring pre- and post-implementation;
- can articulate in documentation the financial institution’s current detection-scenario and the underlying assumptions, parameters and thresholds;
- contain protocols to show how alerts will be investigated, the process for deciding which alerts will result in a filing or other action, responsible functions and individuals, and documentation of the investigative and decision-making process; and
- be subject to an on-going analysis to assess the effectiveness of the detection scenarios, the underlying rules, threshold values, parameters and assumptions.
The Regulation also requires each regulated financial institution to maintain a filtering program reasonably designed for the purpose of interdicting transactions that are prohibited by the U.S. Department of the Treasury’s Office of Foreign Assets Control. The Regulation requires, to the extent applicable, that the program:
- be based on the risk assessment of the regulated financial institution;
- be based on technology, processes or tools for matching names and accounts;
- can comprehensively test filtering pre- and post-implementation;
- is subject to ongoing analysis to assess the logic and performance of the matching systems and threshold settings; and
- can articulate in documentation the intent and design of the filtering tools, processes or technology.
The Regulation further requires, to the extent applicable, that the entire transaction monitoring and filtering program include the following attributes:
- identification of all data sources;
- validation of data integrity, accuracy and quality;
- data extraction and loading processes;
- governance and management oversight protocols;
- vendor selection process if a third-party vendor is used to acquire, install, implement or test the transaction monitoring and filtering program in any respect;
- adequate funding;
- qualified personnel or outside consultant responsible for administering the transaction monitoring and filtering program; and
- periodic training.
Each regulated financial institution is required to submit to DFS by April 15 of each year an attestation that, to the best of the knowledge of such regulated financial institution’s board of directors or senior officers, it is in compliance with the Regulation.
Final Anti-Terrorism Transaction Monitoring and Filtering Program Regulation, www.dfs.ny.gov/legal/regulations/adoptions/dfsp504t.pdf (June 30, 2016)
Delaware Chancery Court Applies Business Judgment Standard to Two-Step Merger in Light of Informed Stockholder Approval
The Delaware Chancery Court applied the business judgment standard of review to a two-step cash out merger conducted in accordance with Section 251(h) of the Delaware General Corporation Law. The merger agreement provided for a two-step tender offer which provided for completion of the merger without a stockholder vote due to the acquirer having successfully concluded a (i) tender offer for at least a majority of the target company’s voting stock and (ii) back-end merger at the same price. The court rejected the claimants’ argument that the two-step merger transaction should be treated differently from merger transactions approved by a stockholder vote. The court ruled that stockholder approval of a merger under Section 251(h) by participating in the tender offer has the same “cleansing effect” as a vote in favor of merger. As a result, the claimants were precluded from objecting to the two-step merger transaction other than on the basis of corporate waste.
In re Volcano Corp. Stockholder Litig., C.A. No. 10485-VCMR (Del. Ch. June 30, 2016)
Delaware Chancery Court Denies Advancement of Legal Fees and Expenses to Vice President
The Delaware Chancery Court reluctantly ruled that a vice president of a division of an investment bank was not entitled to advancement of legal fees and expenses under his employer’s by-laws. The by-laws provided for advancement of legal fees and expenses and indemnification to any officer (which was vaguely defined). Notwithstanding his title of vice president, the claimant was found to have no managerial or supervisory responsibilities. This finding was relied upon by the U.S. Third Circuit Court of Appeals in a prior lawsuit filed by the claimant that resulted in the claimant being denied advancement of legal fees and expenses.
The Delaware Chancery Court, despite strongly disagreeing with the Third Circuit’s ruling, was constrained by the doctrine of “issue preclusion” from allowing the claimant to re-litigate his right to advancement of legal fees and expenses. The Delaware Chancery Court advised that absent such constraint, it would have construed the vague by-law in favor of the claimant.
Aleynikov v. The Goldman Sachs Group, Inc., C.A. No. 10636-VCL (Del. Ch. Ct. July 13, 2016)
Delaware Supreme Court Addresses Issue of Personal Jurisdiction of Non-Delaware Corporations
The Delaware Supreme Court held that a foreign corporation registered to do business in Delaware is not subject to the general jurisdiction of the Delaware courts. In the case before the Court, the foreign corporation did not (i) maintain a corporate office in Delaware, (ii) conduct board of directors or stockholders meetings in Delaware and (iii) have any officers working in Delaware. Further, fewer than 1% of the foreign corporation’s (a) employees worked in Delaware, (b) stores were located in Delaware and (c) revenue was derived from Delaware. The Court in so holding overruled a 1988 decision holding that a foreign corporation’s registration to do business in Delaware was sufficient to subject the foreign jurisdiction to the general jurisdiction of the Delaware courts. The case arose out of a case brought by two residents of Georgia against a corporation incorporated in Georgia and headquartered in Atlanta on asbestos-related claims. The court found that the use of the Delaware courts to resolve disputes arising outside of Delaware was inappropriate based on the foreign corporation’s limited contacts and presence in Delaware.
Genuine Parts Co. v. Cepec, No. 528, 2015 (Apr. 18, 2016)
Vesting of Equity Securities Results in HSR Act Violation
The Federal Trade Commission (the “FTC”) settled a claim brought against an off-shore investment trust for failure to comply with the premerger reporting requirements of the Hart-Scott-Rodino Act (the “HSR Act”) in connection with the vesting of restricted stock units. The investment trust, which had prior violations of the HSR Act, paid a civil penalty of $480,000. The HSR Act requires parties to acquisitions of voting securities meeting certain thresholds to notify the FTC and Department of Justice and observe a waiting period. As a result of the vesting of the restricted stock units, the investment trust acquired additional voting securities which exceeded the minimum notification threshold then in effect. The FTC found that the vesting of the restricted stock units was a reportable acquisition of voting securities under the HSR Act even though no purchase of additional securities was involved.
FTC Press Release, Investment Trust to Pay $480,000 to Settle FTC Charges It Violated U.S. Premerger Notification Requirements (Aug. 10, 2016)
FTC Significantly Increases Maximum Civil Penalties for HSR Act Violations
The FTC significantly increased the maximum civil penalty applicable to violations of the premerger notification requirement of the HSR Act. The penalty amount increased from 16,000 per day to $40,000 per day. The increased penalty amount applies to all transactions covered by the HSR Act on or after August 1, 2016. The increase, which is unprecedented, was made in response to federal legislation enacted last year requiring federal agencies to adjust penalty amounts using a “catch-up” inflation adjustment. Commencing with January 2017, the maximum civil penalty amount will be adjusted for inflation on an annual basis.
FTC Press Release, FTC Raises Civil Penalty Maximums to Adjust for Inflation (June 29, 2016)
Section 83(b) Election Process Simplified
The Internal Revenue Service has issued a regulation that eliminates the requirement for an employee, a non-employee director or other service provider (each a “Grantee”) to file a copy of his or her Section 83(b) election with his or her income tax return. A Grantee who receives restricted property as compensation (such as restricted stock) will not be taxed on such compensation until the property is no longer subject to a substantial risk of forfeiture or until the property is freely transferable. Section 83(b) of the Internal Revenue Code, however, permits a Grantee to make an election to be taxed on the value of the restricted property in the year such restricted property was received. The election must be submitted to the Internal Revenue Service not later than 30 days following the date on which the restricted property is received by the Grantee. If the election is timely made, the fair market value of the restricted property at the time received by the Grantee less any amount paid for such restricted property is includable in the Grantee’s income. The regulation applies to all restricted property transferred on or after January 1, 2016.
For more information on the issues in this alert, or corporate matters generally, please contact: