Delaware Chancery Court Provides Useful Guidance for Protecting Pre-Merger Privileges in Post-Closing Litigation Between Buyers and Sellers

John StigiBy John Stigi on Posted in Mergers & Acquisitions

In Shareholder Representative Services LLC v. RSI Holdco, LLC, No. 2018-0517-KSJM, 2019 WL 2290916 (Del. Ch. May 29, 2019), the Delaware Court of Chancery reaffirmed that a target company may protect its pre-merger privileged communications in a post-closing dispute with the acquirer by including clear and unambiguous language in the merger agreement that seeks to protect the privilege. This decision provides additional guidance to sellers intent upon protecting their rights in potential post-closing litigation with buyers. Continue Reading

Opportunity Zones Update: NEW PROPOSED TREASURY REGULATIONS (PART II)

Judith FioriniAmy TranckinoJohn CrispBy Judith Fiorini, Amy Tranckino and John Crisp on Posted in Tax

Qualified Opportunity Zone Businesses

BACKGROUND

In December 2017, as part of the Tax Cuts and Jobs Act (“TCJA”), Congress established a new tax incentive program to promote investment in certain low-income communities designated by the IRS as qualified opportunity zones. The tax incentives obtained by investing in a qualified opportunity fund (“QOF”) allow taxpayers to (i) defer paying taxes on capital gain from the sale or exchange of appreciated assets; (ii) receive a permanent exclusion from taxation of up to 15 percent of the originally deferred gain; and (iii) for taxpayers that hold their investment in the QOF for at least 10 years, a permanent exclusion from taxation for any appreciation in excess of the deferred gain.

On April 17, the Treasury Department released its second round of guidance on Opportunity Zone investments in the form of proposed regulations (the “New Proposed Regulations”). These newly proposed regulations supplement and in some cases revise the proposed regulations issued in October of 2018 (the “October Proposed Regulations”). [1]

The New Proposed Regulations provide further clarity, but leave many questions unanswered. This is Part II of our series of blog posts on the New Proposed Regulations. This post addresses key issues relating to the requirements for qualified opportunity zone businesses and qualified opportunity zone business property. For Part I of our explanation, which addresses qualified investments in qualified opportunity funds, please click on the link here. Continue Reading

Opportunity Zones Update: NEW PROPOSED TREASURY REGULATIONS (PART I)

Amy TranckinoJudith FioriniJohn CrispBy Amy Tranckino, Judith Fiorini and John Crisp on Posted in Tax

Background

In December 2017, as part of the Tax Cuts and Jobs Act (“TCJA”), Congress established a new tax incentive program to promote investment in certain low-income communities designated by the IRS as qualified opportunity zones. Section 1400Z-2 of the Internal Revenue Code provides three compelling tax incentives to encourage investment in qualified opportunity funds (“QOFs”).

  • Taxpayers can defer paying taxes on capital gain from the sale or exchange of appreciated assets by investing such gain in a QOF within 180 days following such sale or exchange. Such gain may be deferred until the earlier of (i) when the investment is sold or exchanged or (ii) December 31, 2026.
  • Investors receive a step-up in the basis equal to 10% of the original deferred gain if the investment in the QOF is held for at least five years, with an additional 5% basis step-up if the investment is held for seven years. These basis step-ups can result in permanent exclusion from taxation of up to 15% of the originally deferred gain.
  • If the investor holds the investment in the QOF for at least 10 years, an elective basis adjustment made upon sale of the interest in the QOF provides a permanent exclusion from taxation for any appreciation in excess of the deferred gain.

On April 17, 2019, the Treasury Department released its second round of guidance on opportunity zone investment in the form of proposed regulations (the “New Proposed Regulations”). These newly proposed regulations supplement and in some cases revise the proposed regulations issued in October 2018 (The “October Proposed Regulations”). Continue Reading

New Effort to Exempt Crypto Currency from Certain SEC, Tax and Other Regulatory Burdens

James GattoBy James Gatto on Posted in Cryptocurrency, Securities and Exchange Commission

A new bill, the Token Taxonomy Act was introduced to congress to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes. Continue Reading

United States Supreme Court Holds That Knowing Dissemination of False Statements Made by Others Can Constitute Primary “Scheme Liability” In Violation of Rule 10b-5(a) and (c)

John StigiBy John Stigi on Posted in Investigations and Enforcement, Securities and Exchange Commission, Securities Litigation

In Lorenzo v. Securities & Exchange Comm., No. 17-1077, 2019 WL 1369839 (U.S. Mar. 27, 2019), the Supreme Court of the United States (Breyer, J.) held that an individual who did not “make” a false or misleading statement within the meaning of Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (blog article here), but instead disseminated it to potential investors with intent to defraud, can be held to have employed a scheme to defraud and/or engaged in an act, practice or course of business to defraud in violation of subsections (a) and (c) of Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. This decision broadens the scope of primary liability under Rule 10b-5 beyond those who make false and misleading statements to include those who knowingly “disseminate” (i.e., communicate to potential investors) such false or misleading statements. Although this decision involved an SEC enforcement action, it is likely to be invoked by plaintiffs in private securities litigation to expand the scope of named defendants beyond the issuer and individuals directly responsible for making public statements on the issuer’s behalf. Continue Reading

Second Circuit Holds That Issuer’s Alleged Statements Concerning Its Regulatory Compliance Efforts Do Not Constitute Material Misstatements

John StigiJohn LandryBy John Stigi and John Landry on Posted in Securities Litigation

In Singh v. Cigna Corp., No. 17-3484-cv, 2019 U.S. App. LEXIS 6637 (2d Cir. Mar. 5, 2019), the United States Court of Appeals for the Second Circuit affirmed the dismissal of a class action complaint that purported to base a securities fraud claim upon alleged statements made by defendant Cigna Corporation (“Cigna” or the “Company”) about its efforts to comply with Medicare regulations. According to the complaint, the statements materially misled investors and, when news of regulatory non-compliance surfaced, the Company’s stock price declined. The Second Circuit held the statements to be only “generic” descriptions of the Company’s compliance efforts. The Court held that no reasonable investor would rely upon them as “representations of [the Company’s] satisfactory compliance,” and so they did not constitute material misstatements sufficient to support a securities claim. Continue Reading

With the SEC, Cooperation is Key

Andrea CataneoWinnie WeilBy Andrea Cataneo and Winnie Weil on Posted in Securities and Exchange Commission

As an expensive “slap on the wrist,” the Securities and Exchange Commission (“SEC” or the “Commission”) recently concluded that approximately $12.7 million worth of funds raised in a 2017 Initial Coin Offering (“ICO”) by Gladius Network LLC (“Gladius”) were part of an unregistered securities offering, and all proceeds must be returned to investors. However, the penalty to Gladius for their regulatory violations was zero. Continue Reading

Ninth Circuit Holds That Statutes Do Not Constitute “Rules or Regulations of the SEC” for Purposes of Sarbanes-Oxley Act Whistleblower Claims

John StigiJennifer RedmondKristi ThomasBy John Stigi, Jennifer Redmond and Kristi Thomas on Posted in Corporate Governance, Labor & Employment

In Wadler v. Bio-Rad Laboratories, Inc., No. 17-16193, 2019 WL 924827 (9th Cir. Feb. 26, 2019), the United States Court of Appeals for the Ninth Circuit held that statutes, including the Foreign Corrupt Practices Act (“FCPA”), do not constitute “rule[s] or regulation[s] of the Securities and Exchange Commission” (“SEC”) for purposes of determining whether an employee engaged in protected activity in a whistleblower claim under Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”).  This decision clarifies the proper application of the express statutory language of Section 806. Continue Reading

SEC Issues New Guidance on Diversity Disclosure Requirements

Jeffrey FesslerJustin AnslowBy Jeffrey Fessler and Justin Anslow on Posted in Disclosure, Securities and Exchange Commission

On February 6, 2019, the Securities and Exchange Commission released two Compliance and Disclosure Interpretations (CDIs) discussing disclosure requirements in instances where a director or board nominee self-identifies specific diversity characteristics, such as race, gender, ethnicity, religion, nationality, disability, sexual orientation and cultural background. Continue Reading

Court Finds Cybersecurity-Related Claims Sufficient in Securities Class Action

Jonathan E. MeyerElfin NoceBy Jonathan E. Meyer and Elfin Noce on Posted in Courts and ADR, Cybersecurity, Disclosure, Securities Litigation

In the aftermath of Equifax’s data breach, a federal court recently found that allegations of poor cybersecurity coupled with misleading statements supported a proper cause of action. In its decision, the U.S. District Court for the Northern District of Georgia allowed a securities fraud class action case to continue against Equifax. The lawsuit claims the company issued false or misleading statements regarding the strength and quality of its cybersecurity measures. In their amended complaint, the plaintiffs cite Equifax’s claims of “strong data security and confidentiality standards” and “a highly sophisticated data information network that includes advanced security, protections and redundancies,” when, according to the plaintiffs’ allegations, Equifax’s cybersecurity practices “were grossly deficient and outdated” and “failed to implement even the most basic security measures.” The court found that data security is a core aspect of Equifax’s business and that investors are likely to review representations on data security when making their investment decisions. Continue Reading

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