Foley Hoag LLP

SUMMARY

Excerpt:

Q: Has the current economic crisis altered the regulatory environment? If so, how?

A: The current economic crisis has altered the regulatory environment in two important and related respects.

First, the law has changed. Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”), which requires all federal financial regulatory agencies to cooperate with the Federal Bureau of Investigation (“FBI”) and all “other law enforcement agencies,” including state regulatory agencies, that are “investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products.” As a practical matter, this requires financial regulatory agencies, such as the Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA,” formerly the NYSE), to provide support to the FBI’s and state law enforcement’s criminal investigations of financial fraud. As a result of this broad mandate, more criminal investigations concerning the current economic crisis should be expected. The EESA also creates new civil liabilities (e.g., for misrepresenting or falsely advertising the insured status of bank deposits) and new disclosure obligations (e.g., for those financial institutions participating in the Troubled Asset Relief Program (“TARP”)).

Second, the climate has also changed. The public desire to assign blame for the financial crisis and the attendant political pressure to prosecute entities or individuals who may be responsible will likely lead to more vigorous enforcement of familiar criminal laws and financial regulations, such as prohibitions on securities fraud and insider trading as well as wire, mail, bank and bankruptcy fraud. In addition, pending investigations may lead to high-profile prosecutions that press novel theories under more general laws, such as New York’s Martin Act. For example, New York Attorney General Andrew Cuomo is currently investigating executive compensation and corporate spending at major financial institutions that have received federal bailout funds, and he has threatened to “seek appropriate sanctions and remedies” against any company that “wastes” taxpayer funds—for example, by deeming employee bonuses to be fraudulent conveyances in violation of New York law. Massachusetts Secretary of State William Galvin has already charged investment banks with violating state securities laws by defrauding investors who purchased collateralized debt obligations and auction rate securities.

Other questions include: 

• Which government agencies are investigating activities relevant to the current economic crisis? And who is under investigation?
• What types of activities will investigators be looking at? Can you give some examples?
• What steps should we take if our company receives the proverbial “knock on the door”?
• Our best client/joint venture partner is under investigation. What steps should our company take?

SUMMARY

Excerpt:

Q: Has the situation on Wall Street made the current climate untenable for companies seeking funding?

A: No. While the threshold may be higher and funding sources more difficult to identify, they are still available. It depends on the company, its industry, its business model, its overall health and its operations. Creative companies will look for ways to raise capital in unconventional ways, or to make existing resources stretch longer than originally planned. But it is definitely an investor friendly environment, in which the lenders and venture capitalists who have money to put to work can be more selective and more demanding about the prices and other terms they can extract from issuers.

Other questions include:

• What are the industries likely to maintain their health and the activity during this time? Where do you see deals happening?
• What about debt financing? I heard that debt markets were completely closed.
• How is the crisis affecting due diligence? What should I expect to encounter?
• Where do IP assets fit into today’s dealmaking climate?
• I read that M&A is very slow. Is that true?

SUMMARY

In light of the turmoil currently affecting the world securities markets, on Thursday, October 16, 2008, NASDAQ announced that it has temporarily suspended enforcement of its rules requiring listed companies to maintain a minimum bid price of $1.00 and a specified minimum market value of publicly held shares. The suspension applies to shares of common stock, as well as other securities, including preferred stock, American Depository Receipts and limited partnership interests... (continues)

SUMMARY

On October 15, 2008, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted an interim temporary final rule (.pdf) (the “Interim Rule” or “Rule 10a-3T) requiring institutional investment managers (those required to file Form 13F) to report information concerning daily short sales of securities. The previous emergency order regarding the filing requirements was due to terminate on October 17, 2008. The Interim Rule will take effect beginning October 18, 2008 and extend until August 1, 2009 unless it is terminated or extended... (continues)

SUMMARY

Borrowers Need to Monitor Whether to Elect Prime Rate rather than LIBOR under Credit Facilities

U.S. Companies that borrow under bank credit facilities that provide for the borrower to elect payment of interest at either a LIBOR-based rate (sometimes called a "Eurodollar" loan) or a Prime Rate-based rate (sometimes called a "Base Rate" loan) need to be aware of a significant development resulting from the recent turmoil in the world’s credit markets...

SUMMARY

On October 7, 2008, the Securities and Exchange Commission (“SEC” or the “Commission”) released a statement regarding the expiration of the emergency order (the “Order”) prohibiting persons from short selling in the securities of financial companies.

On Friday, October 3, 2008, the President signed the Emergency Economic Stabilization Act of 2008 (the “Legislation”), aimed at stemming the credit crisis. When the Order was extended, the SEC stated that the Order would expire on the third business day after enactment of the Legislation. Accordingly, the Order will expire at 11:59 p.m. ET on Wednesday, October 8, 2008.

SUMMARY

Foley Hoag LLP’s interdisciplinary team counsels and protects the interests of its clients facing new realities, challenges and risks framed by today’s tumultuous economic and market conditions. By maintaining an active and engaged dialogue with our clients during this period of economic distress, our lawyers are better able to adapt to the changing legal needs of clients affected in the short term. More importantly, our immersion in their businesses and industries enables our lawyers to provide sound, strategic counsel to protect our clients’ interests in the longer term. The Economic Crisis Team delivers forward-thinking advice, focusing on long-standing core, integrated strengths of the firm.

Topics include:

• Financial investigations, enforcement proceedings and litigation
• Federal and state securities regulation
• Deal-making, corporate finance and investment restructuring
• Bankruptcy, corporate reorganization and financial disputes

SUMMARY

1. Prohibition on Short Selling in Financial Companies

On October 1, 2008, the Securities and Exchange Commission (“SEC” or the “Commission”) extended the emergency order (the “Order”) prohibiting short selling in the securities of financial companies. The Order was issued pursuant to the Commission’s authority under Section 12(k)(2) of the Securities Exchange Act of 1934.

The Order will be extended beyond its currently scheduled expiration to allow time for completion of work on the anticipated passage of the Economic Stabilization Act of 2008 (the “Legislation”). The Order will now expire at 11:59 p.m. ET on the third business day after enactment of the Legislation, but in any case no later than 11:59 p.m. ET on Oct. 17, 2008.

2. Requirement of Institutional Investment Managers to Report New Short Sales

On October 1, 2008, the SEC also extended the emergency order (the “Second Order”) requiring institutional investment managers (those required to file a Form 13F) to report information concerning daily short sales of securities. The Second Order was also issued pursuant to the Commission’s authority under Section 12(k)(2) of the Securities Exchange Act of 1934.

The Second Order will also be extended to 11:59 p.m. ET on Oct. 17, 2008, but the Commission intends that the reporting requirement will continue in effect beyond that date without interruption in the form of an interim final rule. The Commission will seek comments on all aspects of the anticipated rulemaking. The SEC has also now indicated that disclosure of short positions reported under the Second Order will be made only to the SEC. This is a modification of the Second Order and will avoid public disclosure. It is unclear whether public disclosure will be required under any final rule.

SUMMARY

As a follow up to our Foley Adviser on September 19, 2008, we have prepared answers to the following frequently asked questions regarding the Securities and Exchange Commission’s (“SEC” or the “Commission”) emergency order (the “Order”) requiring institutional investment managers to report information concerning daily short sales of securities.

Questions Include:

• What is Form SH?
• Who must file?
• When is the filing required?
• How is the filing made?
• How soon will Form SH information be publicly available?
• What transactions are reportable?
• Are small short sales reportable?
• What must be disclosed on Form SH?
• What about pre-existing short positions?
• What if I increase a pre-existing short position?

SUMMARY

SEC Issues Emergency Order to Prohibit Short Selling of Financial Stocks to Protect Investors and Markets

On September 19, 2008, the Securities and Exchange Commission (“SEC” or the “Commission”) issued an emergency order (the “Order”) to prohibit short selling in the securities of 799 financial companies (the “Securities”), which are identified in Exhibit A. The Order was issued pursuant to the Commission’s authority under Section 12(k)(2) of the Securities Exchange Act of 1934.

Under the Order, all persons are prohibited from short selling the Securities except for registered market makers, block positioners, or other market makers obligated to quote in the over-the-counter market. The Order will be immediately effective and will terminate at 11:59 p.m. ET on October 2, 2008. The SEC may extend the Order beyond 10 business days if the SEC determines that the continuation of the Order is necessary in the public interest and for the protection of investors, but not for more than 30 calendar days in total duration. (continues...)

SUMMARY

The Office of Chief Counsel, Division of Investment Management of the Securities and Exchange Commission (the “SEC”) has issued an Interpretative Letter (the “Interpretative Letter”) dated July 15, 2008, clarifying its position concerning the applicability of Rule 206(4)-3 under the Investment Advisers Act of 1940 (the “Advisers Act”) in the context of a fund or other investment pool. In the Interpretative Letter, the SEC indicated that it believes Rule 206(4)-3 does not generally apply to a registered investment adviser’s cash payment to a person for soliciting or referring investors for an investment pool managed by that adviser since these investors are not “clients” of the investment adviser.

SUMMARY

On July 15, 2008, the Securities and Exchange Commission (“SEC” or the “Commission”) issued an emergency order (the “Order”) to enhance investor protections against “naked” short selling in the securities of Fannie Mae, Freddie Mac and primary dealers at commercial and investment banks (the “Securities”), which are identified in Exhibit A (.pdf). The Order was issued pursuant to the Commission’s authority under Section 12(k)(2) of the Securities Exchange Act of 1934. In addition, the SEC will undertake rulemaking to address these issues across the entire market.

Under the Order, anyone effecting a short sale in the Securities must arrange beforehand to borrow the Securities and deliver them at settlement. The Order took effect at 12:01 a.m. ET on Monday, July 21, 2008 and will terminate at 11:59 p.m. ET on Tuesday, July 29, 2008. The SEC may extend the Order if the SEC determines that the continuation of the Order is necessary in the public interest and for the protection of investors, but not for more than 30 calendar days in total duration.

SUMMARY

The Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority (“FINRA”) and New York Stock Exchange Regulation, Inc. (“NYSE Regulation”) have taken unprecedented steps in response to the concern that the stock collapse of Bear Stearns and Lehman Brothers resulted from the spread of false and misleading rumors, and that the rumors may have been linked to “naked” short selling.  

SUMMARY

By a vote of 233 – 189, the House of Representatives approved on June 25 amendments to the Internal Revenue Code that would tax carried interests at ordinary income rates. This change was one of several “offsets” included in the Alternative Minimum Tax Relief Act of 2008 (H.R. 6275). Other offsets include curbing the Code section 199 deduction for oil and gas companies and requiring information reporting for credit card reimbursements.

SUMMARY

Every U.S. person with a financial interest in, or signature or other authority over, any financial account outside the U.S. must file an annual report on Treasury Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) if the aggregate value of all such accounts exceeds 10,000 USD at any time during the calendar year. Form TD F 90-22.1 must be filed on or before June 30^th each year.

SUMMARY

Established in December 1980 by the partners of law firm Foley Hoag, The Foley Hoag Foundation is a private foundation that seeks to combat racism, especially among youth, in the City of Boston. The Foundation awards grants to organizations working to improve the racial climate in Boston by addressing issues of diversity and racism. Grantee organizations achieve their goals through a variety of means, including arts and cultural activities, youth leadership and recreational programs. Other grantees provide advocacy assistance, enabling individuals to confront racism through legal or political action. Some grantee organizations work to prepare young children to live in the reality of a multicultural society, others engage teens, and a few target a primarily adult constituency.

The Foley Hoag Foundation was the first—and remains the only— foundation to focus exclusively on the improvement of race relations in Boston. The trustees are fortunate to have the unqualified endorsement of Foley Hoag, which has provided an enormous amount of financial, administrative and moral support.

SUMMARY

This article was originally published in the ACEF Newsletter.

A good term sheet sets up the business for success. While we do include a variety of terms that may be useful at various times, everyone needs to recognize that the principal reason for a term sheet is to outline the participants’ understanding, not necessarily to set up a plan to enforce in court every right at every time.

When it comes time to negotiate terms, I encourage angel investors and entrepreneurs to keep these points in mind:

• How is everyone going to make money from the deal?
• How do you want to do the next round of financing because there will almost certainly be another round?
• What is your exit strategy?

Success and prosperity is a good theme; there are ways to draft the documents along those lines.

For purposes of this discussion, I will exclude valuation as a separate topic, recognizing its extreme importance and complexity and that it is more a business than legal issue.

SUMMARY

On February 19, 2008, the Internal Revenue Service issued Revenue Ruling 2008-12, clarifying the tax treatment of interest expense incurred by a securities-trading partnership. The Service ruled that the interest expense is not "business interest" (generally fully deductible), but rather is "investment interest," deductible by each partner only to the extent of the partner's net investment income for the year in question. This will be true whether or not the partnership elects to be treated as a "trading" partnership so that its other expenses are treated as business expenses. The ruling will apply to limited partners of a limited partnership as well as “members” of a limited liability company, other than corporations, who do not “materially participate” in the trading activity. Partners or members that are corporations, or that materially participate in the trading activity, will not be subject to the ruling.

SUMMARY

• In Stoneridge, the Supreme Court ruled that businesses may not be sued in private securities fraud lawsuits unless they themselves make deceptive statements or acts directly relied on by investors.

• The Court sought to shield parties in "the realm of ordinary business operations" who do not attempt to "affect securities markets" from the risks and costs associated with private shareholder litigation.

• The SEC and Justice Department may still proceed against businesses that participate in fraudulent schemes or otherwise "aid and abet" fraud.

SUMMARY

Massachusetts has long recognized that it is a violation of the covenant of good faith and fair dealing for an employer to terminate an at-will employee in order to deprive the employee of earned compensation, such as commissions. However, courts have struggled with the application of this rule to other aspects of the employment relationship. Recently, in Eigerman v. Putnam Investments, Inc., the Supreme Judicial Court (SJC) addressed whether the covenant of good faith and fair dealing applies to employer stock plans. It held that employers do not breach the covenant if they exercise their discretion to administer such plans, even if they do so to the employer’s advantage and employees’ disadvantage.