Legal, Tax & Accounting Conference AGENDA AGENDA National Council of Farmer Cooperatives Legal, Tax & Accounting Conference Hilton New Orleans Riverside, LA February 7-9, 2018
WEDNESDAY, FEBRUARY 7
2:00–4:00pm CFO Roundtable Camp Room Moderated by: Joe Werstak, CFO, United Producers, Inc.
This informal roundtable session will include discussion of current issues faced by CFOs. Topics will include cybersecurity, human resources challenges, budgeting and more.
6:00–8:00pm Welcome Reception St. Charles Ballroom Attendees and guests are welcome.
THURSDAY, FEBRUARY 8
6:30-8:00am Buffet Breakfast Grand Ballrooms C&D
8:30-10:15am LTA Conference Participation in NCFC General Session I Grand Ballrooms A&B
Chairman’s Welcome
President’s Remarks
“Facing New Challenges to Security and Privacy”
10:15am Break
10:30-Noon LTA General Session I Grand Salon A Moderated by: Alan Weinstein, Vice President/Tax, CoBank
10:30-10:50am Welcome and Self Introductions
10:50-12:00pm Tax Reform Implications for Cooperatives Featuring: George Benson, Partner, McDermott Will & Emery Marlis Carson, Sr. Vice President & General Counsel, NCFC Bob Glass, Tax Director, Land O’Lakes, Inc. Eric Krienert, Director, Moss Adams, LLP
This session will explore the new Section 199A calculations for both farmers and cooperatives; interest deductibility; expensing; and other tax reform provisions. THURSDAY, FEBRUARY 8—CONTINUED
12:15–1:45pm Industry Relations Luncheon & Awards Program Grand Ballrooms C&D All are welcome to attend Featuring: Chris Stirewalt, Politics Editor, Fox News and Co-host, “I’ll Tell You What”
12:15–1:45pm LTA In-House Luncheons (By invitation only) • CFO Working Group Grand Salon B • In-House General Counsels Marlborough B • Tax Directors Forum Marlborough A
2:00-5:00pm LTA General Session II Grand Salon A Moderated by: David Antoni, Managing Director, KPMG LLP
2:00-3:00pm Cooperative Bylaws and Articles: Top Issues for Your Consideration Featuring: Teree Castanias, CPA Todd Eskelsen, Partner, Schiff Hardin LLP Dan Mott, Shareholder, Fredrikson & Byron, P.A. Moderator: Charlie Sullivan, Member, Bond, Schoeneck & King, PLLC
The LTA Bylaw Working Group has completed a comprehensive study of cooperatives articles and bylaws. This session will explore some of the key issues your board and management should consider when developing or updating articles and bylaws. Attendees will receive NCFC’s publication on articles and bylaws, including commentary.
3:00-3:50pm Accounting and Audit Update Featuring: Dave Burlage, CFO, CoBank Eric Kroll, Partner, Baker Tilly Jay McWatters, Partner, Dopkins & Company, LLP
Learn the latest developments on revenue recognition, lease accounting, and other Financial Accounting Standards Board developments.
3:50-4:00pm Break
4:00-5:00pm Cybersecurity: Practical Risks and Professional Duties Featuring: Scott Blickenstaff, Vice President, General Counsel & Secretary, The Amalgamated Sugar Company LLC Frank Harty, Director, Nyemaster Goode, P.C. Sheilah Stewart, Vice President & Deputy General Counsel, Land O’Lakes, Inc.
Cybersecurity is the hot topic of the day for all sectors of the economy. This session will explore the role of in-house counsel in maintaining the security of co-op data. We will apply for legal ethics credit for this session.
FRIDAY, FEBRUARY 9
7:00–8:15am Cooperative Tax Roundtable & Breakfast Grand Salon B Moderated by: Teree Castanias, CPA
This roundtable session provides an opportunity to discuss the latest tax legislation, IRS rulings, and litigation impacting farmer cooperatives. FRIDAY, FEBRUARY 9—CONTINUED
7:15-8:15am LTA Conference Participation in NCFC General Session II Grand Ballrooms C&D Breakfast served. Economic Outlook Featuring: Dr. Terry Barr, CoBank
8:30-Noon LTA General Session III Grand Salon A Moderated by: Alan Weinstein, Vice President/Tax, CoBank
8:30-9:20am Washington Update Featuring: Lisa Van Doren, Vice President and Chief of Staff for Government Affairs, NCFC
What’s happening in Washington? Farm Bill, EPA, immigration, food labeling—all of these issues impact farmer cooperatives in significant ways. Hear the latest from NCFC’s chief lobbyist.
9:20-10:10am Antitrust Caselaw Developments: Implications for Your Bottom Line Featuring: Chris Ondeck, Partner, Proskauer Rose LLP
Some of the antitrust cases involving farmer cooperatives have settled, while others seem to be caught up in endless litigation. How have the rulings and results from these cases impacted antitrust law and its application to farmer cooperatives? This session will explore recent developments and their implications for your day-to-day operations.
10:10-10:20am Break
10:20-11:10am Defined Benefit Retirement Plans: Challenges, Changes, and Benefits for Cooperatives Featuring: Michael Boland, Professor of Agricultural Economics, University of Minnesota John Caragozian, Vice President & General Counsel, Sunkist Growers, Inc. Tim Goodman, Partner, Dorsey & Whitney LLP Ian O’Connell, VP of Finance and CFO, Southern Minnesota Beet Sugar Cooperative
This session will discuss defined benefit plan challenges, including merging or acquiring an entity with a defined benefit plan, withdrawal from a multiple-employer plan, and freezing a plan. We will also discuss the benefits that offset some of those challenges— employee retention, rewards for long-term employees, and higher likelihood of retirement readiness.
11:10-Noon A View from USDA Featuring: Kristi Boswell, Senior Advisor to the Secretary United States Department of Agriculture
This session will include an overview of Secretary Perdue’s priorities for the Department.
Noon Passing of the Gavel and Adjournment
12:30-2:00pm LTA Executive Committee Lunch Marlborough B ATTENDEE LIST 2018 NCFC Annual Meeting LTA Attendee List
Last Name First Name Company Acord Kevan Bridge Builder Tax and Legal Services Antoni David KPMG Aufman Matt Welch Foods Inc. Barenys Josep Michigan Milk Prodcers Barnes Donald Porter Wright Morris & Arthur LLP Barrett David Barrett, Easterday, Cunningham & Eselgroth LLP Barrett Seleise Kansas State University/ACCC Bender Braden Sun-Maid Growers of California Benson George McDermott Will & Emery LLP Blickenstaff Scott Snake River Sugar Company Bostrom Brent GROWMARK, Inc. Boyle Larry Ocean Spray Cranberries, Inc. Brandenburg Jeffrey CliftonLarsonAllen LLP Brummel Andrew Dairy Farmers of America Burlage David CoBank Buss Linda Landus Cooperative Caragozian John Sunkist Growers, Inc. Cargin Gregory Gardiner Thomsen Castanias Teresa Teresa Castanias CPA Clippinger Lucy Baker & Miller PLLC Cody Kevin Dairy Farmers of America Condron Robert MFA Oil Company Cool Renee Dairy Farmers of America, Inc. Covey William GROWMARK, Inc. Cowell Jon Ocean Spray Cranberries, Inc. Currie Angela Sunkist Growers, Inc. Dauwalter John Baker Tilly Deeb Sam Dairy Farmers of America Duggan Christopher Dorsey & Whitney LLP Ellixson Ashley United Dairymen of Arizona Emmert Mitchell Saalfeld Griggs Eselgroth Carolyn Eselgroth LLP Eskelsen Todd Schiff Hardin Faries Gail D. Willams & Co., P.C. Feeley Kevin McDermott WIll & Emery LLP Feider Joseph Snake River Sugar Company Fontes Mike Sunkist Growers, Inc. Fredericks Bryanna Herbein + Company, Inc. Fuller Jo Ann Alabama Farmers Cooperative Last Name First Name Company Gardiner Dennis Gardiner Thomsen, CPA Gardiner Mark Gardiner Thomsen, CPA Genetti Mike KPMG Glass Robert Land O' Lakes Inc. Guler Tara Baker Tilly Hall Daniel GROWMARK, Inc. Hallin Thomas Alabama Farmers Cooperative Hanks Craig Snake River Sugar Company Helme Morgan Dorsey & Whitney LLP Hendry Chip Florida's Natural Growers Hensley Robert Dorsey & Whitney LLP Heron Julian Tuttle Taylor and Heron Huff Shannon Tennessee Farmers Cooperative Huston Brett KPMG LLP Jacobsen Vanessa Eimer Stahl LLP Janzen Pete Land O'Lakes, Inc. Johnson Tina Alabama Farmers Cooperative Kacsuta Edward U.S Tobacco Cooperative Kasper Richard Minn-Dak Farmers Cooperative Kautzman Patrick Eide Bailly LLP Kenley John Darigold, Inc. Khadavi Steven Dorsey & Whitney LLP Klinger Dustin Thede Culpepper LLP Krienert Eric Moss Adams Kroll Eric Baker Tilly Kutilek Bill Crosby Guenzel LLP Latham Peter Latham Shuker Eden & Beaudine, LLP LaVallee Dean Blue Diamond Growers Lawler Greg GROWMARK, Inc. Lensmire Mike CliftonLarsonAllen LLP Levine Jay Porter Wright Morris & Arthur LLP Lindsay Michael Dorsey & Whitney LLP Longinotti David Hanson Bridgett LLP Lundberg Mashenka CoBank Maloy Lisa American Crystal Sugar Company Mayhew Michael CliftonLarsonAllen, LLP McGovern Nicole Ag Processing Inc. McWatters Jay Dopkins & Company, LLP McWherter Jim Tennessee Farmers Cooperative Miller Todd Baker & Miller PLLC Mittelstadt Wade GROWMARK, Inc. Moss David Tennessee Farmers Cooperative Mott Daniel Fredrikson & Byron, PA Last Name First Name Company Munekiyo Richard NORPAC Foods, Inc. Nelson Sue Ann Fredrikson & Byron P.A. Nguyen Hong Eadie and Payne, LLP O’Connell Ian SMBSC Ondeck Chris Proskauer Rose LLP O'Toole Jill Shipman & Goodwin Otto Daniel Minn-Dak Farmers Cooperative Pieper Bill Land O’Lakes, Inc. Pollet Josh Herbein + Company, Inc. Posch Danny MKC Robinson John Foremost Farms USA Cooperative Roeder Brent Eide Bailly LLP Rosenau Steve American Crystal Sugar Company Rufener Ron AKT LLP Schenker Harold Sunsweet Growers, Inc. Simmelink Scott Ag Processing Inc. Skidmore Tim CHS Inc. Smith Rebecca CliftonLarsonAllen South Elizabeth Co-Alliance LLP Stamm Richard Ocean Spray Cranberries, Inc. Steinle Eric KFSA Stewart Sheilah Land O'Lakes, Inc. Stonesifer David Herbein + Company, Inc. Strathman Kevin Dairy Farmers of America, Inc. Strong Matt Pacific Coast Producers Sullivan Charles Bond, Schoeneck & King, PLLC Swanson Donald Central Valley Ag Cooperative Thomsen David Gardiner Thomsen CPAs Toonen Peter Foremost Farms USA Cooperative Tucher Sarah Fredrikson & Byron, P.A. Warne Teresa American Crystal Sugar Company Weber Rocky Nebraska Cooperative Council Weinstein Alan CoBank Werstak Joe United Producers, Inc. Whitt Karen The Equity Williams Caleb Saalfeld Griggs PC Wilson Randon Jones Waldo Holbrook & McDonough Zabaleta Frank Eadie and Payne, LLP Zappa James CHS Inc. Zovickian Stephen Law Office of Stephen Zovickian
LTA General Session I
MODERATOR BIOGRAPHY
Alan Weinstein Vice President/Tax CoBank
As CoBank’s Vice President/Tax, Alan Weinstein manages the staff and activities of the tax function, which includes tax planning, accounting for income taxes and tax compliance with over 5,000 filings annually for the $129 billion bank. He is also involved with new product impact analysis at the bank.
Prior to joining CoBank, Mr. Weinstein was a tax manager at Ocwen Financial, a merchant banking firm headquartered in West Palm Beach, FL. Earlier, Mr. Weinstein spent over 8 years in the tax departments of PwC and KPMG, where he serviced a number of cooperatives.
Mr. Weinstein graduated with honors from the University of Florida in Gainesville, Florida, receiving his bachelor’s of science degree in accountancy. He also earned a certificate of studies from the Graduate School of Banking at Colorado. He is a CPA and member in the tax division of the American Institute of Certified Public Accountants, a member in the Tax Executives Institute and a member in the National Society of Accountants for Cooperatives (NSAC). Mr. Weinstein has had articles published in the NSAC’s publication, The Cooperative Accountant. Mr. Weinstein has also chaired or vice-chaired several committees of the National Council of Farmer Cooperatives and is currently chair of their Legal, Tax and Accounting Committee. TAX REFORM IMPLICATIONS
TAX REFORM IMPLICATIONS FOR COOPERATIVES
Presenter Biographies George Benson Partner McDermott, Will & Emery LLP George is based in the Firm’s Chicago office; his practice focuses on federal income tax planning, tax controversy and tax litigation matters. George works with both public and private corporations (including S corporations), partnerships and limited liability companies and with individual taxpayers on a broad range of federal income tax issues.
In addition, George has done considerable work for cooperative organizations of all kinds, both exempt and non-exempt, engaged in marketing agricultural products, wholesale distribution of products (such as farm supplies, hardware, groceries, office products and hospital supplies), manufacturing, transportation, providing credit and other financial services, electricity and housing.
George has been particularly active in representing cooperatives involved in federal income tax controversies. He is a member of the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives and of the Tax Committee of the National Society of Accountants for Cooperatives (NSAC). He frequently writes and lectures on cooperative tax matters and is editor of the TAXFAX column in The Cooperative Accountant.
George is a member of the bars of the State of Illinois, the U.S. Tax Court, the U.S. Court of Federal Claims, the U.S. Court of Appeals for Federal Circuit and for the Seventh Circuit and the Supreme Court of the United States.
George received his bachelor's degree from Williams College in 1970 and his law degree from Harvard University in 1973.
Marlis Carson Senior Vice President and General Counsel National Council of Farmer Cooperatives
In addition to overseeing the organization’s legal, financial, and tax compliance issues, Marlis coordinates the activities of NCFC’s Legal, Tax and Accounting Committee on federal issues impacting farmer cooperatives. She also serves as NCFC’s corporate secretary/treasurer. Prior to joining NCFC, Marlis served as a tax manager in Ernst & Young’s National Tax Department in Washington, D.C.
Marlis grew up in Kansas and is a graduate of Sterling College (Sterling, Kansas) and of The George Washington University Law School. She is a member of the Virginia State Bar.
Robert Glass Tax Director Land O’Lakes, Inc.
Robert Glass has been employed at Land O’Lakes, Inc. for twenty years and has been their Tax Director for sixteen years. He holds a degree in Accounting and is a CPA (inactive) licensed in Minnesota. Bob is a past Chair of the Legal, Tax and Accounting committee of the National Council of Farmer’s Cooperatives and continues to be very active in National Society of Accountants for Cooperatives (NSAC) and TEI. Bob also was an auditor for the Minnesota Department of Revenue for twelve years and was Tax Manager at KPMG for five years prior to landing at Land O’Lakes. He can be reached at [email protected].
Eric Kreinert Cooperative Tax Director MossAdams
Eric has worked in public accounting since 1997. He is experienced in tax planning and consulting for large partnerships and corporations in the food and agriculture industries, but his specialty lies in cooperatives. He provides services related to patronage philosophy and formulating patronage allocation programs based on book, tax, and hybrid programs; equity planning; mergers and acquisitions, joint ventures, and other combinations; nonqualified equities; and domestic manufacturing deduction and taxation. Eric is currently the Vice-Chairman of the Tax Committee and a member of the National Board of directors for the National Society of Accountants for Cooperatives (NSAC).
He received his MBA from the University of Nebraska at Omaha and a BBA in Finance from Iowa State University. Tax Reform NCFC LTA Annual Meeting New Orleans 2018
George Benson – McDermott Will & Emery LLP Marlis Carson – NCFC Bob Glass – Land O’Lakes Eric Krienert – Moss Adams LLP
1
I. Introduction
Farmer coops went into tax reform seeking to preserve the benefits of Section 199.
2 Background
• Tax reform appeared focused on broadening the tax base by eliminating deductions and on reducing tax rates, particularly corporate tax rates. • Coops were concerned that they would be hurt by this trade‐off, particularly if it meant the elimination of the benefit of Section 199. • Coops sought to either preserve Section 199 as is or to obtain some comparable benefit under the new law.
3
II. Tax rate changes
Top corporate rate reduced from 35% to 21%.
4 Corporate rate reduction
• For fiscal years beginning after 12/31/2017, the corporate tax rate is reduced to 21%. • A blended rate will apply to fiscal year corporate taxpayers for the year straddling 12/31/2017. • As discussed later, the corporate alternative minimum tax (AMT) has been repealed.
5
Other rates
• Individual rates on wages and other ordinary income reduced somewhat, but there are still multiple brackets – 10%, 12%, 22%, 24%, 32%, 35% and 37%. • Business income from sole proprietorships and pass‐through entities is subject to somewhat reduced rates – new Section 199A. • Long‐term capital gains and dividends are still taxed at old reduced rates.
6 This represents a notable change
• The corporate rate is now significantly lower than the maximum rate applicable to individuals, something that has not been the case since the 1970s. • The tipping point – for ordinary income, for a married couple filing jointly, the individual marginal rate exceeds the corporate tax rate for income in excess of $165,000 (22%+ vs. 21%).
7
Implications
• This change and others are causing taxpayers to rethink tax strategies. • What are the implications for how patronage dividends should be paid? 21% tax rate vs. 20% cash requirement. Tax rates are only one piece of the puzzle. • Note: the corporate rate change is “permanent;” the individual changes sunset after 2025 unless Congress acts to make them permanent or to extend them.
8 III. Section 199A replaces Section 199
How Section 199A works, its impact on coops and members, and the prospect of change.
9
A. Section 199A
Description of Section 199A. How it compares to Section 199.
10 Repeal of Section 199
• Section 199 is repealed effective for tax years beginning after 12/31/2017. – For calendar year farmers, this means that the last year for claiming DPAD is 2017. – Fiscal year coops can claim DPAD on their returns for fiscal years ending in 2018, but cannot pass unused DPAD to farmers after 12/31/2017. • Many coops made one last DPAD pass‐through to farmers in December.
11
New Section 199A
• To provide a measure of rough parity between the treatment of business income earned by corporations and business income earned by sole proprietorships and pass‐through entities, Congress enacted new Section 199A. • Section 199A allows individuals to claim a 20% qualified business income deduction (“QBID”). • Section 199A is effective for fiscal years beginning after 12/31/17 (i.e., 2018 for calendar year taxpayers and fiscal years beginning in 2018 for fiscal year taxpayers). • Section 199A is scheduled to sunset for taxable years beginning after 12/31/25.
12 Application to coops and members • Both coops and members are entitled to claim the new QBID deduction. – Section 199A(g) applies to “specified agricultural cooperatives.” – Section 199A(a) applies to members of “specified agricultural cooperatives” and to certain other kinds of coops. • The computations are independent – it is not necessary (or possible) for a coop to pass a QBID deduction through to members. • The provisions of the two sections are coordinated – “qualified cooperative dividends” are counted only once, at the member level. • For members the key to claiming QBID will be the Form
1099‐PATR received from a coop. 13
“Specified agricultural coops”
• Corporations generally are not eligible to claim a 199A deduction. • However, there is an exception for “specified agricultural cooperatives.” • The definition of “specified agricultural cooperative” includes any Subchapter T coop engaged in: – Manufacturing or producing “in whole or significant part … any agricultural or horticultural product.” – Marketing agricultural products that its members have manufactured, produced or grown. – Providing supplies, equipment or services to farmers or to coops described above. This specific recognition is new.
14 “Qualified coop dividends”
• A key term in Section 199A is “qualified cooperative dividends.” • Qualified coop dividends include (but only to the extent included by a member in taxable income): – Patronage dividends paid in cash and qualified written notices of allocation. – Per‐unit retain allocations paid in money (PURPIMs) and qualified certificates (PURPICs). • Numerous private letter rulings under Section 199 confirmed that payments to members for crops qualify as PURPIMs, whether or not coops pool. That should not change under 199A. • “Qualified coop dividends’ do not include: – Nonqualified notices and nonqualified PURPICs. – Redemptions of qualified or nonqualified notices or PURPICs. – Deductible distributions of nonpat income by Section 521 coops. – Dividends paid by exempt or nonexempt coops.
15
Section 199A(g) ‐‐ coops
• Section 199A(g) allows a specified agricultural coop to claim a deduction equal to 20% of its gross income less qualified coop dividends. “Gross income means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources.” Treas. Reg. § 1.61‐3(a). • Treatment of “qualified coop dividends” under Section 199A is the opposite of treatment under Section 199 – members include, not the cooperative. • The deduction is limited by the greater of – 50% of W‐2 wages of the coop “with respect to its trade of business,” or – 25% of W‐2 wages plus 2.5% of the original cost of certain depreciable tangible assets. • The deduction may not exceed taxable income.
16 New 199A(g) vs. old 199(d)(3) Section 199 Section 199A
9% of QPAI/taxable income (including 20% of “gross income” less “qualified patronage dividends, PURPIMs and cooperative dividends” (i.e., patronage PURPICs) dividends paid in cash and qualified notices, PURPIMs and qualified PURPICs) Limited by 50% of wages related to Limited by 50% of wages “of the coop qualified production activities with respect to its trade or business” or by 25% of wages plus 2.5% of the original basis of certain depreciable assets Generally cannot create a loss Cannot create a loss Unused amounts can be passed through No pass‐through, but members can claim Section 199A in their own right IRS view: must do separate pat and Will the IRS take a similar view with nonpat computations; excess pat DPAD respect to 199A(g)? cannot offset nonpat income – this position is being challenged in court 17
Section 199A(a) – members
• Section 199A(a) allows individuals to deduct a portion of the income earned from business activities conducted through sole proprietorships, partnerships, LLCs or S corporations. • The deduction is for income tax purposes only. Like the Section 199 deduction, the Section 199A deduction does not reduce net earning from self‐employment for SET purposes. • Members of coops receive special treatment. • This special treatment is not limited to agricultural coops, but includes members of all Subchapter T coops. Also included are members of tax exempt and taxable rural electric and telephone coops.
18 Regular 199A computation
• For a person who is not a coop member, the Section 199A deduction equals 20% of qualified business income, but not in excess of 20% of taxable income (after subtracting capital gains and dividends). See, Section 199A(a)(1). • There are detailed rules for making this computation. • If the person’s taxable income exceeds a specified threshold, the deduction may not exceed 50% of the person’s W‐2 wages attributable to qualified business income (or 25% of W‐2 wages plus 2.5% of the original cost of certain assets). The wages limitation begins to be phased in when joint income exceeds $315,000 and is fully phased in when joint income exceeds $415,000.
19
Special coop member computation • The starting point for a coop member’s computation is the regular computation described above, except the member must subtract “qualified coop dividends” from both qualified business and taxable income. • For coop members, the regular computation likely will result in a 199A deduction of zero (particularly for farmers marketing crops through a coop). • But the computation does not end there. • The member is entitled to deduct 20% of “qualified cooperative dividends” received, but not more than his taxable income (after subtracting capital gains and dividends). See, Section 199A(a)(2). • This part of the computation is not limited by W‐2 wages no matter how much the member earns. 20 199A(a) vs. 199(d)(3)(A) Section 199 Section 199A(a) Members were entitled to deduct DPAD No pass‐through of Section 199A passed through to them. No W‐2 wage deductions. limitation at member level. Members generally did not earn DPAD in Members figure their own 199A their own right because they had to deductions. In many cases, a member’s subtract patronage dividends and per‐unit 199A deduction will equal the 20% of retain allocations in their own DPAD qualified coop dividends received, limited computation. by taxable income (after subtracting capital gains and dividends). The W‐2 wages limitation does not apply to the coop portion of the calculation. DPAD could offset all of a member’s The special 199A deduction can offset all taxable income, but could not create a taxable income (other than capital gains loss. and dividends). It cannot create a loss. Only specified agricultural coops could Members of all Sub T coops are eligible pass DPAD through to members. for the special 199A computation. 21
B. Discussion
What does Section 199A mean for cooperatives and patrons?
22 Discussion
• In what ways is Section 199A better or worse than Section 199 for coops themselves? • In what ways is Section 199A better or worse than Section 199 for farmers dealing with coops? • Does Section 199A upset the current competitive balance between coops and commercial competitors?
23
Discussion
• If Section 199A remains in the law unchanged, how are farmers and commercial competitors likely to respond in the marketplace? • What potential opportunities and problems does this present for coops?
24 C. Prospects
What are the prospects that Section 199A will be modified?
25
Discussion
• Who is interested in changing Section 199A? • What changes would they like to make? • What are the prospects for change? • If Section 199A is changed, when might it be changed? • What is likely to happen in the interim?
26 IV. Expensing
The new act contains generous expensing rules.
27
Expensing
• In general, taxpayers are permitted to expense 100% of the cost of new and used depreciable assets placed in service after 9/27/17 and before 1/1/23. • After that date, expensing is phased out by 20% each year (e.g., 80% in 2023, 60% in 2024, etc.). • Expensing is eliminated for assets placed in service after 12/31/26 (unless Congress acts to extend it).
28 Implications for coops
• Tax basis coops – may want to forego expensing to avoid impact on patronage dividends. Taxpayers can elect out of expensing just as they can currently elect out of bonus depreciation. • Book basis coops – expensing may very well lead to tax losses after patronage is paid. What can be done with the losses? Other considerations?
29
V. Interest deduction
The act contains a section potentially limiting a coop’s ability to deduct interest.
30 Interest deduction limitation • For taxable years beginning after 12/31/17, a corporation’s interest deduction is limited to the sum of its business interest income plus 30% of its “adjusted taxable income.” • For this purpose, “adjusted taxable income” is taxable income (after patronage deductions) before interest expense, NOLs, 199A deductions, and after adding back deductions for depreciation and amortization. • The add‐back for depreciation sunsets for taxable years ending after 12/31/21, at which point this provision could present a problem for many cooperatives. 31
Interest limitation
• Interest that cannot be deducted carries forward to future years and can be used subject to the same limitations. • Special rules for partnerships and S corporations effectively silo taxable income and interest of each partnership and S corporation for purposes of applying the limitation. • The rules will likely be applied on a consolidated basis for corporations included in a consolidated return.
32 Election out
• “Specified agricultural coops” are permitted to elect out of this provision. • However, if they elect out, they are not permitted to take advantage of the new expensing provisions for property with a recovery period of 10 years or more, but rather must depreciate that property under the alternative depreciation system. • “Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable.” – what restrictions are likely to be imposed?
33
VI. Other changes
There are many other provisions affecting corporations.
34 Corporate AMT repealed
• The corporate alternative minimum tax (AMT) is repealed for taxable years beginning after 12/31/17. • AMT has been a nuisance for many coops. • Existing AMT credit carryovers: – Can be used against any regular tax liability starting for the taxable year beginning in 2018. – 50% of any excess is refundable each year for taxable years beginning in 2018, 2019, 2020 and 2021. – Any amount not previously refunded is refundable in the taxable year beginning in 2022.
35
Treatment of net operating losses
• Net operating losses (NOLs) incurred in taxable years beginning after 12/31/17 can no longer be carried back, but they can be carried over indefinitely. • Most special categories of loss carryovers have been eliminated (e.g., specified liability losses). • NOLs may offset only 80% of taxable income. • Old rules continue to apply to prior year NOLs.
36 Like‐kind exchanges
• The like‐kind exchange provisions no longer apply to exchanges of personal property. • Unless a coop elects out of expensing, in the next few years the ability to expense should compensate for the loss of tax‐free exchange treatment.
37
Entertainment Expenses
• Repeals 50% deduction for entertainment activities and facilities (including membership dues), even if directly related to active conduct of a taxpayer’s trade or business. • Companies should review the general ledger accounts used to capture their M&E expenses for any potential new permanent differences. • Non‐calendar‐year‐end reporting entities should reflect changes to their permanent differences attributable to M&E in tax currently payable or refundable on estimated ordinary income for the currrent fiscal year.
38 Fringe benefits
• Repeals deduction for qualified transportation fringe benefits or for any reimbursement of employee commuting costs (except if necessary for employee safety). • Reduces deduction to 50% for meals provided at an employer‐provided eating facility for tax years after 2018 and before 2026. • Disallows employer deductions for meals provided for the convenience of the employer or at an employer‐ operated eating facility. • Generally effective for amounts paid or incurred after 12/31/17.
39
International
• The bill makes significant changes affecting the taxation of foreign activities of U.S. companies and U.S. activities of foreign companies – beyond the scope of today’s presentation. • There are many other changes we have not touched upon today.
40 LTA General Session II
MODERATOR BIOGRAPHY
David Antoni Managing Director, Tax KPMG LLP Dave serves as National Director of Cooperative Tax Services. Dave is responsible for providing tax consulting and compliance services to cooperatives and non-cooperative enterprises in our Consumer & Industrial Markets practice. Dave also serves on KPMG’s National FAS 109 Network and has significant experience in the application of FAS 109 and FIN 48 to both our cooperative and public company audit clients. Dave works with management and boards on tax considerations for capital and bylaws provisions and advises cooperatives on tax issues such as IRC section 199 and the new repair regulations.
Dave’s professional accounting experience with KPMG spans over 31 years and 27 years serving cooperatives as a focus area.
Education Dave holds a Bachelor of Science degree in Business Administration (cum laude) from La Salle University, Philadelphia, Pennsylvania, where he concentrated in Accounting and Computer Science and was a member of the Beta Alpha Accounting Society. Dave also has completed several graduate level tax courses in Villanova University School of Law’s Master of Science in Taxation program.
Professional Affiliations Dave is currently a national board member (and past treasurer) of the Capitol Chapter of the National Society of Accountants for Cooperatives (NSAC) and served as immediate past Chair of its National Tax Committee. He is also a member of the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives and serves as Vice Chair of Subcommittee on Overview of New Tax, Other Legislation and Implementation Issues Affecting Farmer Cooperatives, and is a member of the American Institutes of Certified Public Accountants.
Dave is a frequent speaker concerning tax issues related to cooperatives at annual meetings of the NSAC and contributes articles to the Tax Fax Column of NSAC’s The Cooperative Accountant publication. Dave author’s KPMG’s Tax News Flash – Cooperatives publication and hosts and facilitates discussions on cooperative tax topics at KPMG’s Annual Cooperative Roundtable. COOPERATIVE BYLAWS AND ARTICLES: TOP ISSUES FOR YOUR CONSIDERATION
COOPERATIVE BYLAWS AND ARTICLES: TOP ISSUES FOR YOUR CONSIDERATION
Presenter Biographies Teresa H. (Teree) Castanias
Teree has a tax consulting practice focused on cooperative issues and other business and individual tax matters. She retired from KPMG in September 2009 where she was the firm’s National Director for Technical Tax Services for Cooperatives and was responsible for providing tax consulting, compliance and tax provision services to Consumer and Industrial Markets, and Financial Services clients, including cooperatives and non-cooperative enterprises in food production, manufacturing, distribution and retail, rural electric and telephone, Farm Credit System agricultural lending, banking and financial services. Teree has had a broad range of experience with all types of cooperatives and non-cooperative businesses, but particularly with pooling marketing cooperatives. Teree’s professional accounting experience with KPMG spanned over 32 years and 29 years serving cooperatives as a focus area.
Professional and Industry Experience Teree has substantial experience leading and coordinating tax engagements. She has served as lead tax partner with responsibility for planning, budgeting, execution, and delivery of federal and state tax work to many clients. She has also provided subject matter knowledge and guidance on cooperative issues in her role as National Director of Technical Tax Services for Cooperatives. Teree hosted KPMG’s Annual Cooperative Tax Roundtable, which is a popular conference for KPMG’s cooperative clients each May. Teree started and maintained KPMG’s on-line publication “Tax News Flash – Cooperatives” which summarizes current tax developments affecting cooperatives.
Teree was a member of the Executive Committee on the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives (“NCFC”). Teree is also the immediate past Chairman and a member of the Tax Committee of the National Society of Accountants for Cooperatives (“NSAC”). Teree is also past board member of NSAC’s National board and Far Western Chapter. Teree is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants. Teree is also a frequent speaker concerning tax issues related to cooperatives at annual meetings of the NCFC and NSAC. In addition, she is a periodic contributor of articles on current developments in cooperative taxation for the NSAC’s “Cooperative Accountant” publication.
Relevant Experience • Assisted cooperatives with formulating patronage allocation programs including use of revolving and target equity plans for purposes of promoting the cooperative’s patronage capital requirements as well as fair and equitable distribution of capital ownership by members. • Formed a coalition of 12 cooperatives that successfully lobbied Congress for special rules for cooperatives in the Section 199 Manufacturing Deduction. • Assisted cooperatives with formulating suggested provisions for their bylaws, articles of incorporation, and membership agreements for purposes of their operations on a cooperative basis in accordance with federal and state tax laws. • Assisted cooperative clients in analyzing methods of computing patronage distributions, including book, tax and hybrid methods. This included review of tax accounting for these methods and other tax implications of the decision. • Assisted cooperative clients in analyzing their cost allocation methodologies to determine the best method for patronage vs. non-patronage purposes. • Assisted cooperative client in determining patronage/nonpatronage allocation of gain on sale of plant used in the cooperative’s business. • Assisted a cooperative client in the implementation of FIN 48 where there were significant cooperative issues in an IRS exam and the standard of “more likely than not” was a critical factor in the early adoption of FIN 48. • Assisted cooperative clients in determining and measuring their exposure to state income and franchise taxes for FIN 48 purposes. • Assisted cooperative clients in determining whether a foreign sales corporation (FSC) was a viable alternative, and then setting it up. Also worked with clients to properly determine their FSC deduction. • Assisted cooperative clients in analyzing their state tax situation to determine the best method of allocating and apportioning income among the states in which they do business. This included a review of nexus in the states and ways to set up the cooperative’s business structure to minimize state taxes, especially with respect to California. • Assisted a number of cooperatives in California tax matters - income tax apportionment, special deduction for cooperatives, sales and use tax issues, employment tax issues, property tax reviews and Franchise Tax Board exams.
Technical Skills Federal and state income tax, particularly related to cooperatives.
Todd Eskelsen Partner Schiff Hardin LLP
Mr. Eskelsen is a partner in the Washington, D.C. office of Schiff Hardin LLP. Mr. Eskelsen is a graduate of the Georgetown University Law Center and the University of Utah and is admitted to practice law in Maryland and the District of Columbia.
Mr. Eskelsen has extensive experience representing sole proprietorships, corporations, partnerships, limited liability companies and cooperatives in all phases of business organization, corporate and financial transactions and day-to-day operations. A significant portion of his practice involves the representation of cooperatives. As a principal outside counsel to a major grain processing and marketing cooperative for over 20 years, Mr. Eskelsen regularly advises the cooperative on all facets of its business, including state and federal corporate tax, antitrust, commercial and business issues. Mr. Eskelsen is currently advising other agricultural and purchasing cooperatives on corporate, securities, antitrust, executive compensation and membership issues. In addition to his work with cooperatives, Mr. Eskelsen is primary outside counsel to domestic and foreign business entities and to charitable organizations and trade associations.
Mr. Eskelsen currently serves as chair of the LTA's Subcommittee on Securities and was recently a member of the LTA's Antitrust Modernization Task Force. He also serves as chairman and a director of National Philharmonic Orchestra and Chorale in Bethesda, MD.
Daniel C. Mott Shareholder Fredrikson & Byron, P.A.
Dan has over 25 years of experience in the organization, governance, financing and operation of cooperatives and other business organizations, including work with complex organizations, mergers, acquisitions and other transactional matters. Dan leads the firm’s Cooperative & Agribusiness Group. Dan works throughout the country with both large and small cooperatives and other businesses. Dan also advises clients on securities, tax and anti-trust issues that are unique to cooperatives and other member- owned organizations. Dan is a frequent speaker on structure and governance issues affecting cooperatives, including the use of new cooperative/LLC hybrid statutes in place in a number of states.
Dan is an experienced “general counsel” and assists his clients in achieving their business objectives in the context of the increasingly complex legal environment in which businesses operate today. Dan counsels his clients by providing practical, business oriented advice that can be utilized in making decisions that have legal implications.
Dan is the past Chair of the Legal, Tax and Accounting Committee of the National Council of Farmer Cooperatives, and the Subcommittee on Venture Capital, Capital Formation and Financial Structures. Dan is a director and past Chairperson of the United Hospital Foundation in St. Paul and currently serves as the Chair of Innovative Quality Schools, an authorizer of public charter schools.
Charles J. Sullivan Member Bond Schoeneck & King
Charles has more than 22 years of experience in business and commercial law. He represents clients in connection with financing transactions, mergers and acquisitions, private equity transactions, business formations, business restructurings and contract negotiations. Charles also is a member of Bond’s Business Restructuring, Creditors' Rights and Bankruptcy Practice Group, and provides representation to both lenders and borrowers. He is a frequent speaker on a variety of business and bankruptcy law topics. Representative Matters:
Mergers and Acquisitions • Served as counsel to Dairylea Cooperative Inc. in its merger with Dairy Farmers of America, Inc. • Served as counsel to a laser manufacturer in its $230 million merger with a multinational technology company • Served as counsel to Consumer Credit Counseling Services of Central New York, Inc. in its merger with ClearPoint Credit Counseling Solutions • Represented a major copper products manufacturer in its bid to acquire the assets of a competitor in a bankruptcy section 363 auction sale of the competitor’s operating assets • Served as transaction counsel to a charter airline in the sale of its fleet of aircraft • Represented a regional airline in the purchase and sale of multiple aircraft
• Represented a custom manufacturing firm in its acquisition of a competitor’s assets from the competitor’s secured lender and multiple equipment financers and lessors through a coordinated secured party (UCC Article 9) purchase and sale transaction
Restructuring and Workouts • Served as counsel to a retirement community as borrower in its financial restructuring that resulted in a contingent write-down of more than $24 million in secured debt • Served as counsel to an aircraft manufacturer as borrower in its restructuring of more than $21 million in indebtedness to a local development corporation • Represented a charter aircraft company it its restructuring of a $15 million obligation secured by multiple aircraft • Represented a developer it its workout of a building loan obligation • Served as counsel to multiple lenders in many commercial loan workout and restructuring transactions
Chapter 11 Bankruptcy • Served as counsel for the debtor in a chapter 11 case filed by a specialty aircraft fastener manufacturer and represented the debtor in its sale of substantially all assets through a bankruptcy section 363 auction sale • Served as counsel for the debtor in a chapter 11 case filed by a not-for-profit nursing home and represented the debtor in its sale of substantially all assets through a bankruptcy section 363 auction sale that resulted in a sale price of more than 150% of the initial “stalking horse” bid • Served as counsel in a chapter 11 case filed by a large commercial farm producing more than 2000 acres of onions and soybeans • Served as counsel for an institutional investor in recovering upon a claim of more than $40 million in the chapter 11 case of In re: Refco, Inc. • Served as counsel to Securities Investor Protection Corporation as trustee in the liquidation proceeding of a securities brokerage firm • Served as counsel to a large distributor of consumer electronics in connection with litigation regarding prepetition claims and offsets in the case of In re: Eastman Kodak Company
Secured Lending/Corporate Finance Transactions • Represented a telecommunications company as borrower in connection with its negotiation and documentation of the terms of a syndicated $200 million asset-based senior secured credit facility • Represented a dairy cooperative as borrower in connection with its negotiation and documentation of the terms of a $37.5 million secured credit facility, including negotiating and drafting periodic amendments and extensions • Represented an agricultural lender as borrower in connection with its negotiation and documentation of the terms of a $75 million asset-based secured credit facility, including negotiating and drafting periodic amendments and extensions • Counsel to a regional airline as borrower in connection with its negotiation and documentation of the terms of a syndicated $33 million secured credit facility • Represented various lenders in numerous transactions, including asset-based loans, syndicated loans and letters of credit
February 8, 2018 How to Use the NCFC Sample Bylaws Project Materials
Teree Castanias National Council of Farmer Cooperatives Todd R. Eskelsen Annual Meeting Legal, Tax and Accounting Daniel C. Mott New Orleans, LA Charles J. Sullivan Background and History
• Discussion began at the tax roundtable during the 2015 LTA Conference about the importance of bylaw provisions to any cooperative, and the lack of good drafting guides available to cooperative leaders, managers and professionals.
• The idea for the LTA Sample Bylaws Working Group was hatched in a series of brainstorming emails among Teree Castanias, Marlis Carson and Charlie Sullivan during the early spring of 2015.
• Our mission was fairly simple – to create a reference work that would be useful to NCFC member cooperatives, and that would assemble in one place a series of sample provisions and accompanying explanations that would allow a drafter to develop her or his own set of organizational documents (or revise existing documents).
2 Background and History
• Our goal was to provide information that might assist drafters in improving the outcome for their cooperatives with respect to such important issues as: their cooperatives’ ability to claim limited immunity from the antitrust laws under the Capper-Volstead Act; the tax treatment of their cooperatives’ earnings; the property rights of members; and governance of their cooperatives.
3 Background and History
We decided early on that the Working Group would not focus on the laws of any particular state or the laws of all states, but would instead provide general information and guidance that can be adapted to laws of the state of incorporation of any particular cooperative.
4 NCFC Acknowledgment
This publication is a product of the National Council of Farmer Cooperatives (NCFC), a trade association established in 1929 to represent the interests of America’s famer-owned cooperatives. Farmer-owned cooperatives are central to America’s abundant, safe, and affordable food, feed, fiber, and fuel supply. Through cooperatives, farmers can better manage risk, strengthen bargaining power, and improve their income from the marketplace, allowing individual producers to compete globally in a way that would be impossible as individual producers.
Cooperatives share the financial value they create with their farmer-owners. They also create and sustain quality jobs, businesses, and consumer spending in their local communities. The majority of our nation’s more than two million farmers and ranchers belong to one or more farmer cooperatives. NCFC members also include twenty-one state and regional councils of cooperatives.
This publication is a product of NCFC’s Legal, Tax and Accounting (LTA) Committee. The all-volunteer committee is made up of professionals who work with or for NCFC’s member cooperatives. LTA Committee members graciously donate their time and expertise to many NCFC efforts, including legal, regulatory, and legislative endeavors. NCFC is grateful for LTA Committee members’ generous contributions.
5 Sample Bylaws Working Group & Special Acknowledgments
The names and responsibilities of the members of the Sample Bylaws Working Group are set out below. Additional information about the background and contact information for the Sample Bylaws Working Group members is included as an Attachment at the end of Volume II. Co-Chairs: Teree Castanias Todd R. Eskelsen Charles J. Sullivan Reporters: Marlis L. Carson Todd R. Eskelsen Executive Assistants: Marianne Marshall & Janet Peterson, NCFC Nicole Smith, Schiff Hardin, LLP Working Group Members: Teree Castanias, CPA* Marlis L. Carson, JD* William Covey, JD Principal Sr. VP and Gen. Counsel Sr. Assoc. Gen. Counsel Teresa Castanias, CPA NCFC GROWMARK, Inc.
Todd R. Eskelsen, JD* Robert Glass, CPA (inactive) Daniel Hall, JD Partner Tax Director Deputy General Counsel Schiff Hardin LLP Land O'Lakes, Inc. GROWMARK, Inc.
Eric Krienert, CPA Daniel C. Mott, JD* Ronald C. Peterson, JD* Director Shareholder Partner Moss Adams LLP Fredrikson & Byron P.A. Hanson Bridgett LLP
Charles J. Sullivan, JD* David Swanson, JD Member Partner Bond, Schoeneck & King, PLLC Dorsey & Whitney LLP
*members of Editorial SubGroup 6 Sample Bylaws Working Group & Special Acknowledgments
The Working Group also wishes to thank the following individuals for their review and valuable insights on the draft volumes:
Donald A. Frederick David M. Hayes USDA (retired) Bond, Schoeneck & King, PLLC
Jay W. McWatters, CPA Sue Ann Nelson, J.D. Dopkins & Company, LLP Fredrickson & Byron
7 Organization of Project
• Generic Cooperative Articles of Incorporation and Bylaws • Individual Working Group Members responsible for specific chapters • Peer Review Process • Primary Drafter; Reviewers – footnotes at beginning of Chapters • Reporter review and editing – review against other cooperatives’ Articles of Incorporation and Bylaws • Editorial Subgroup review and editing • Special Comprehensive Reviews • Working Group Final Review
8 Working Group Commentary Responsibilities
9 Working Group Biographies and Contact Information
10 Governing Assumptions
• Stock Agricultural Marketing Cooperative • Not State Specific – check applicable state law • Generic – need to revise to reflect actual state cooperative law and cooperative’s actual business practices • Starting Point – NOT MODEL BYLAWS • Common Numbering: Text Articles = Commentary Chapters
11 Two Separate Volumes – Side by Side Usage
• Volume I Overview of Cooperative Articles of Incorporation Sample Bylaws Commentary
• Volume II Sample Bylaws Text Appendix I – Working Group Biographies and Contact Information
12 Overview of Cooperative Articles of Incorporation
• The content of the Articles varies widely from state to state • Determining the state of incorporation is an important legal and strategic decision • Variability of state statutes resulted in this project focusing on “considerations” rather than sample language • Statutory requirements must be carefully reviewed • Confirm internal consistency between Articles and Bylaws
13 Types of Cooperative Statutes
• Traditional Cooperative Statutes – Incorporate traditional cooperative principles, including “operating on a cooperative basis” • Hybrid Cooperative Statutes – Combine cooperative and LLC principles – Typically permit Sub T or Sub K taxation • General Corporate Statutes – Corporate law with coop taxation provisions • The Commentary and Text focus on traditional cooperatives • But the Commentary and Text are adaptable, subject to statutory requirements
14 Considerations for the Articles
• Cooperative Purpose – specific or general • Selection of incorporators • Director provisions – in the Articles or Bylaws? • Limitation of director liability • Capital structure – in the Articles or Bylaws? • Dissolution provisions – in the Articles of Bylaws? • Special state law requirements
15 Sample Bylaws Commentary Page Highlights
16 Sample Bylaws Text Page Highlights
17 Sample Bylaws Text Page Highlights
18 Sample Bylaws Text Page Highlights
19 Sample Bylaws Text Page Highlights
20 Focus on Cooperative Matters
• Shortest Commentary Chapter: Chap. VIII Officers • Longest Commentary Chapter: Chap. IV Operation on a Cooperative Basis • Less Commentary on general corporate matters covered by other treatises, except where cooperative issues raised (e.g., Directors; Officers; Amendment; etc.)
21 Demonstration of Use Chapter I-Members • The Sample Bylaws reflect the dual relationship between a cooperative and a member Owners (members) (see Section 1.2) Suppliers of farm products (see Section 1.4)
• As discussed in the Commentary (see Chapter I) the relationship between a cooperative and its members is contractual in nature That contract is embodied in the articles, bylaws, any membership application and membership agreement (see Section 1.4) A cooperative’s bylaws usually make up the most important part of those contract terms
22 Demonstration of Use Chapter I-Members
• Cooperatives may amend the terms of their “contracts” with members by: Amending the articles in accordance with the requirements of state law; Amending the bylaws in accordance with the requirements of state law and the provisions of the bylaws; Adopting or modifying board policies as permitted by state law and the bylaws; and Changing the form of written agreements with members from time to time (typically such agreements are subject to annual renewal or non-renewal).
23 Demonstration of Use Chapter I-Members
Eligibility for Membership • Section 1.1 provides the general criteria for membership eligibility • The Commentary accompanying Section 1.1 walks the user through the important considerations in defining who may be eligible to become a member in a cooperative: – State law often dictates, in a broad sense, who may be a member – Each member must be a “producer” within the meaning of the Capper-Volstead Act – Membership may be further limited, such as to producers of particular agricultural products, or to producers within a particular geographic area
24 Demonstration of Use Chapter I-Members
• The Commentary cautions that membership eligibility must be applied uniformly to avoid possible adverse legal consequences resulting from arbitrarily excluding applicants for membership
• Membership should be conditioned upon the person entering into a uniform membership agreement with the cooperative
25 Demonstration of Use Chapter I-Membership Termination of Membership (Section 1.6). Termination occurs automatically upon: • Death of an individual member; • Cessation of business, commencement of an insolvency proceeding, dissolution, etc.; • The member becoming ineligible by reason of state law, or the terms of the articles and bylaws; • The member ceasing to be a producer within the meaning of the Capper- Volstead Act; and • Upon a finding of cause, subject to notice and an opportunity to be heard.
26 Demonstration of Use Chapter III-Authorized Capital Stock and Equity
• Membership Stock: Because the Sample Bylaws have been developed for a cooperative organized with capital stock, Section 1.2 provides for the issuance of a single share of common stock to evidence membership. One vote is ascribed to the share of membership stock Other forms or classes of stock may represent other equity or investment interests • Non-Stock Cooperatives: While the Sample Bylaws reflect a cooperative organized with capital stock, Chapter III of the Commentary offers important considerations for cooperatives that are organized without capital stock Membership relationship is defined by contract (including membership and equity interests issued by the cooperative) Requires an express “one member-one vote” provision
27 Demonstration of Use Chapter III-Authorized Capital Stock and Equity
• No Transfer or Assignment. Transfer or assignment of stock or other interests is generally prohibited, except as may be approved by the board (Section 3.3) • Other Equity. Section 3.5 provides a cooperative’s board of directors with broad authority to create (in addition to common stock and preferred stock) non-stock equity instruments evidencing, for example, patronage interests in the cooperative.
28 Demonstration of Use Chapter IV-Operation on a Cooperative Basis • Commentary discusses the many issues that arise in the annual operation of the cooperative – Developments in operation of cooperative, GAAP accounting, and tax accounting have been significant since Subchapter T was first passed in 1962 – Many cooperatives’ bylaws have not been updated regularly to consider the impact of these changes on the cooperative’s patronage payments • Example - old Section 199 – DPAD • Example - new Section 199A – 20% deduction – decoupling cooperative and member’s deduction – Section 199 (DPAD) was instrumental in cooperatives understanding of what their patronage payments to members really were under the tax law • PURPIM – Milk check, beet check, almond check, grain check
29 Demonstration of Use Chapter IV-Operation on a Cooperative Basis
• Focus of Sample Bylaws – to provide basis for computation of patronage income – Provide Board of Directors with reasonable guidance in handling issues that arise without being too strict – Working Group does not subscribe to the view that Bylaws should be vague • Section 4.2 - Definitions – Includes a number of definitions of key terms – Net Proceeds is a key term in these Sample Bylaws • Section 4.10 – Base Capital Plan – Sample Bylaws assume the use of the Revolving Fund plan for patronage equities, but allow for the cooperative to switch to the Base Capital Plan if desired
30 Demonstration of Use Chapter IV-Operation on a Cooperative Basis
• Section 4.4 – Determination of Net Proceeds – Book vs Tax vs Hybrid method of paying patronage – recommendation is to clearly state the method in the bylaws with provision for Board of Directors to make changes as situations arise – Passage of the new tax law is an important time to look again at your bylaws to see if changes are warranted • For example, if you are on the Federal income tax basis for paying patronage, will you consider the new 20% deduction allowed for ag cooperatives to reduce patronage income for patronage dividend purposes? • Section 4.5 – Allocation of Net Proceeds – Provides critical language for “pre-existing legal obligation” for patronage dividend which is what gives the cooperative the tax deduction – Sample Bylaws suggest language to handle special treatment of unusual or extraordinary income or expense items • Loss due to settlement of lawsuit against cooperative • Gain on sale of plant held for many years
31 Demonstration of Use Chapter IV-Operation on a Cooperative Basis • Section 4.6 – Treatment of Patronage Losses – Sample Bylaws provide for all possible methods and include alternative approaches as well • Section 4.7 – Distribution of Net Proceeds – Sample Bylaws set out general principles and processes in sufficient detail and directed flexibility to assist the Board in consistently approving patronage distributions in amounts and forms consistent with the best interests of the cooperative and reasonable expectations of members • Qualified and nonqualified written notices of allocation • Preferred stock may be another form of investment equity – If dividends are payable on investment equity, then Section 4.9 provides for “Dividend Allocation Rule” language • Voting rights issues are also handled here and should correspond to Articles I and III
32 Demonstration of Use Chapter IV-Operation on a Cooperative Basis
• Section 4.8 – Capital Reserve (aka “Retained Earnings”) – Nonpatronage income and de minimus portion of patronage income will always go in this account – Discretionary reserve of patronage income is allowed as set by Board of Directors annually • Parameters are set on this discretion to preserve the “pre-existing legal obligation” • Section 4.9 – Allocation and Distribution of Nonpatronage-Sourced Income and Loss – Subsection (a) deals with cooperatives that pay a regular corporate dividend on Preferred Stock or other investment equity – Subsection (b) gives the Board the authority to allocate the nonpatronage sourced income to members • NB – this is not regularly done and should be carefully considered before implementing as there can be unintended tax consequences to the members if not done properly
33 Demonstration of Use Chapter V-Consent • Patron consent can be in one of 3 ways with the most common being the Bylaw Consent provision. See Section 5.1 • Sample Bylaws allow nonmembers to participate on patronage basis, and cooperative must use one of the other 2 ways to effect consent – Written Consent Agreement – Patron endorsing and cashing a qualified check • Effective dates for these various consents should be considered, particularly in the year a member first joins the cooperative – Section 5.2 deals with consent notification to member where cooperative uses a Bylaw Consent provision
34 Demonstration of Use Chapter X-Dissolution • This area does not always get a lot of attention because liquidation seems remote, but should it occur, this section needs to be well-written to protect and assist the Board in its decisions – If there are proceeds in excess of all liabilities and repayment of existing patronage equities, who gets it? • Former members/patrons – sometimes required by state law – but not popular with cooperatives or the current members • Allocation of excess to members of several years – perhaps 5-10 years – What do Bylaws say about unusual or extraordinary gains and losses? Section 4.5 • Sample Bylaws also recommend section discussing treatment of member’s rights in a merger, reorganization or consolidation
35 Continuing Project – Solicitation of Input
• Quarterly Review and Updates (as required – electronic, but not hard copies) Corrections Currently Known Updates – Section 199A New developments in cooperative law as affect Articles or Bylaws - statutes, decisions, IRS actions, cooperative usage, etc. Other Updates • Solicit Comments Missing subject matter Additional subject matter Greater detail on specific subjects • Additional Working Group members
36 Future Availability and Distribution
• Hard copy distributed at 2018 Annual Meeting • Currently posted to NCFC website for review and/or download without charge: http://ncfc.org/wp-content/uploads/2018/01/NCFC_SampleBylawsProject.pdf • Quarterly electronic updates, as required (update announcements distributed through regular LTA channels) • Updated current volumes maintained on NCFC website for review and/or download
37 ACCOUNTING AND AUDIT UPDATE
ACCOUNTING AND AUDIT UPDATE
Presenter Biographies David P. Burlage Chief Financial Officer CoBank
As chief financial officer for CoBank, Dave Burlage oversees the controller and treasury areas of the bank, which include the funding, asset/liability management, financial planning, capital, accounting, tax and reporting functions. He takes a leadership role in directing the financial affairs of the bank and the development of the bank’s overall financial position. Mr. Burlage is a member of the Management Executive Committee, and chairs the bank’s Asset/Liability and Disclosure Committees. He also serves as Chairman of the Board of Governors of the Farm Credit System Association Captive Insurance Company. Prior to joining CoBank, Mr. Burlage was the chief financial officer at Interlink Group, Inc., a privately owned IT professional services company in Denver, Colorado. As a key member of the executive management team, he directed all financial operations and network support functions. Earlier, Mr. Burlage was with VERIO, Inc. a subsidiary of NTT Communications; Titanium Metals Corporation; and Arthur Andersen & Co., where he began his career as an auditor. Mr. Burlage has over 30 years of financial experience.
Mr. Burlage graduated cum laude from Miami University in Oxford, Ohio, receiving his bachelor’s degree in accountancy and finance. He is a CPA licensed in the state of Ohio and a member of the American Institute of Certified Public Accountants. Mr. Burlage serves on the board of advisors for University of Colorado Denver Business School and as Chairman of Young Americans Center for Financial Education.
Eric Kroll Partner Baker Tilly Virchow Krause, LLP
Eric Kroll, partner with Baker Tilly Virchow Krause, LLP, has been with the firm since 2004. Prior to 2004, he gained four years of experience working with an international accounting firm. He has experience in serving both public registrants and private companies in the manufacturing and distribution industries.
Specific Experience • Performs accounting and auditing services for manufacturing and distribution clients including managing and coordinating numerous international audit engagements • Maintains client relationships and assists in providing technical guidance and consultation as needed • Assists clients with inventory costing including development of standard costs and product pricing • Develops recommendations for the improvement of accounting and financial reporting systems • Provides auditing services for employee benefit plans • Possesses knowledge of SEC reporting requirements and compliance • Industry specialization in agribusiness, food and beverage
Eric received his Bachelor of Science in Accounting from Loyla University (Chicago, IL).
Jay McWatters Partner, General Services Group Dopkins and Company
Jay joined Dopkins in 2003 after serving nearly 20 years with a Big 4 international tax and accounting firm. While at his previous firm, Jay served as managing partner of a practice unit and engagement partner on a number of large, publicly traded and privately held manufacturing companies. His experience includes the application of purchase accounting for acquisitions, due diligence assistance, cash management and financing programs, and, the coordination of and communication with foreign offices (including both affiliated and non-affiliated firms). Jay has worked on a significant number of financing, acquisition and restructuring transactions in addition to leading the provision of audit compliance services. He has also distinguished himself in serving cooperatives. Including the provision of technical accounting and tax services, he has consulted with cooperative management and boards regarding matters of and many other specialized cooperative-specific initiatives.
Principal areas of expertise Cooperatives • Cooperative governance • Financing • Capitalization, pool accounting methodologies, patronage dividend determination and distribution Internal audit / internal controls Manufacturing Risk assessment / management Sarbanes-Oxley
Designations Certified Public Accountant
Professional Affiliations National Council of Farmer Cooperatives Legal, Tax and Accounting Committee National Society of Accountants for Cooperatives American Institute of Certified Public Accountants New York Society of Certified Public Accountants
Education B.S. in Accounting from St. Bonaventure University
FEBRUARY 8, 2018
Financial Reporting and Audit Issues of Agricultural Cooperatives
2017 UPDATE
Presenters
• Dave Burlage, Chief Financial Officer, CoBank, ACB • Eric Kroll, Partner, Baker Tilley, Virchow Krause, LLP • Jay McWatters, Partner, Dopkins & Company, LLP Overview
• Summarize the 2017 report of LTA Subcommittee #1 • Relevant updates deemed both relevant and significant to agricultural cooperatives – Filtered out updates not meeting these criteria – Focused on updates impacting non-public companies – Focused on activities occurring in 2017 and known through early January 2018 • Intent is to briefly report and inform
Session Agenda
• Accounting developments: – Revenue recognition – Learnings from early adopters (Eric) – Leasing (Dave) – Other 2017 updates (Dave) – FASB technical agenda (Jay) • Auditing developments (Jay) • Wrap and Q&A (All) Revenue Recognition Lessons Learned Assessment Phase Crucial To Success
• Scoping exercise needed to evaluate revenue streams – Customer, Product, Service, Contract Type, etc. • Involvement of those outside of accounting/finance • Review of contracts based on scoping exercise • Do the facts support the understanding gained during the assessment?
Revenue Recognition Lessons Learned Areas Creating Difficulty
• Inconsistent or non-existent contracts – Non-standard terms – Verbal agreements • Lack of controls surrounding contract management • Difficulty identifying portfolios • Principal vs. Agent Considerations • Impact of restatement of prior period results on patronage Lease Accounting Standard Update
• Most significant impact will be to bring operating leases onto the balance sheet – Impact to debt covenants – Exclusion for operating leases <12 months • Effective in 2019 for public companies and 2020 for all others • In early 2018, the FASB issued a proposed ASU that would, among other things, simplify transition requirements by adding an option permitting an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements. • FASB may issue further clarifying guidance as the implementation date approaches
Accounting Standards Issued in 2017
• ASU 2017-01, Business Combinations: Clarifying the Definition of a Business – Adds guidance to assist in determining whether transactions should be accounted for as acquisitions or disposals of a business or merely acquisitions or disposals of assets. Effective 2018 for public companies and 2019 for all others • ASU 2017-03, Accounting for Changes and Error Corrections and Investments – Equity Method and Joint Ventures – For public entities, affects disclosure requirements regarding the impact of certain recently issued ASUs related to revenue, leases and credit losses on financial instruments. Effective 2017 • ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment – Simplifies process of determining whether an impairment of goodwill has occurred. Effective 2021 for public companies and 2022 for all others • ASU 2017-07, Compensation – Retirement Benefits; Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost – Requires employers to disaggregate service cost component from the other components of net benefit costs. Effective 2018 for public companies and 2019 for all others Accounting Standards Issued in 2017
• ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities – Shortens the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Effective 2019 for public companies and 2020 for all others • ASU 2017-11 Earnings Per Share; Distinguishing Liabilities From Equity, etc. – Several updates but relevant to ag coops is a provision allowing certain mandatorily redeemable financial instruments to continue to be included in equity. Effective 2019 for public companies and 2020 for all others • ASU 2017-12, Derivatives and Hedging; Targeted Improvements to Accounting for Hedging Activities – Makes more hedging strategies eligible for hedge accounting, simplifies application of hedge accounting and modifies disclosures. Effective 2019 for public companies and 2020 for all others
Pre-2017 Standards with Future Effective Dates
• ASU 2015-04 – Practical expedient to simplify accounting for defined benefit pension plans in situations where an entity’s fiscal year end is not a month end. Effective 2018 for non-public entities
• ASU 2016-01 – Various changes to accounting and disclosures related to equity investments and fair value accounting and disclosures. Effective 2018 for public companies and 2019 for all others
• ASU 2016-13 – Commonly referred to as CECL (Current Expected Credit Losses). Among other provisions, requires that allowances for loan losses, which includes losses on trade receivables, be based on estimates of expected losses over the full life of the instruments and no longer based on an ‘incurred’ loss model. Also will require use of more forward looking information and removes the ‘probable’ threshold when estimating losses. Effective 2020 for SEC filers and 2021 for all others. Impact of Tax Legislation on ASC 740
• Recognize full financial impact of enacted rate change on the enacted date. • Impact – significant adjustments to net income after taxes as of 12/31/2017 • Example: – Company recorded $35M deferred asset relating to $100M of NOL’s (based on 35% Rate) – New Enacted Rate is 21% – Company would revalue the $100M NOL at 21% ($21M) – $14m downward revaluation adjustment would impact net income after taxes.
FASB Technical Agenda
• Conceptual framework • Disclosure framework – Inventory – Income taxes – Fair value measurement – Defined benefit plans • Distinguishing liabilities from equity • Simplifying (?) consolidation/VIE guidance • Financial performance reporting - disaggregation Auditing Developments
• PCAOB-required revisions to auditor’s reports – ASB response • Use of audit technology/ data analytics/blockchain – Impact on pre-existing audit standards • The audit committee agenda – Assessing enterprise risk/disruptors – Technology/cybersecurity – Financial competencies/succession – Internal audit – Tone at the top CYBERSECURITY: PRACTICAL RISKS AND PROFESSIONAL DUTIES
CYBERSECURITY: PRACTICAL RISKS AND PROFESSIONAL DUTIES
Presenter Biographies Scott Blickenstaff Vice President, General Counsel & Secretary Amalgamated Sugar
Scott is an experienced transactional lawyer with more than 25 years of experience in mergers and acquisitions, debt and equity financings, restructurings, project development, finance and construction, securities law compliance, commercial transactions, real estate transactions and leasing, secured transactions and public-private joint ventures, corporate governance, commercial contracting, and IP licensing. Mr. Blickenstaff has also become an avid student of cooperative law, since becoming General Counsel of Snake River Sugar Company and The Amalgamated Sugar Company in 2014.
Frank Harty Director Nyemaster Goode, P.C.
Frank put himself through college and law school by playing football and working. He received a B.B.A. with honors in Industrial Relations from the University of Iowa School of Business. Frank graduated Order of the Coif from Drake University Law School where he was Editor in Chief of the Drake Law Review.
Frank has been inducted into the American College of Labor and Employment Lawyers. He is also recognized as a Leading Individual Labor and Employment Lawyer in Iowa by Chambers and Partners and is recognized by The Best Lawyers in America and Great Plains Super Lawyers. Frank is a fellow of the Iowa Academy of Trial Lawyers and the American Board of Trial Advocates.
Frank is chair of his firm's trial department, active in the cyber-security department, and has tried numerous jury trials involving technology in the workplace.
Sheilah Stewart Vice President & Deputy General Counsel Land O’Lakes, Inc.
Sheilah is Vice President, Deputy General Counsel at Land O’Lakes, where she has worked since 2012, and oversees the day-to-day operations of the law department. Prior to working at Land O’Lakes, she held inhouse roles in the law departments of Target Stores, Inc., and SUPERVALU, Inc. Prior to that, she held law firm roles at Fredriksen & Byron in Minneapolis, and Bond, Schoeneck and King in Syracuse, New York. Sheilah is a graduate of the University of Notre Dame Law School, and completed undergraduate work at Alma College in Michigan.
Cybersecurity Risks and Professional Duties: Preserving the Attorney-Client Privilege in the Technology Age
FRANK HARTY put himself through college and law school by playing football and working. He received a B.B.A. with honors in Industrial Relations from the University of Iowa School of Business and FRANK HARTY graduated Order of the Coif from Drake University Law School where he was Editor in Chief of the Drake T: (515) 283-3170 Law Review. Frank is a Fellow of the American College of Labor and Employment Lawyers. He is also F: (515) 283-3108 recognized as a Leading Individual Labor and Employment Lawyer in Iowa by Chambers and Partners and E: [email protected] is recognized by The Best Lawyers in America and Great Plains Super Lawyers. Frank is a fellow of the 700 Walnut, Suite 1600 Des Iowa Academy of Trial Lawyers and the American Board of Trial Advocates. He has taught trial advocacy Moines, IA 50309-3899 and employment law at the Drake University Law School. Frank is Past Chair of the Labor and Employment (515) 283-3100 Law Section of the Iowa State Bar Association.
Introduction
. The Privilege Under Attack
. The Forces at Work: . Flexibility of in-house lawyers . Technology advances . Changes in work patterns . The government . Clients!
. Know the Basics and Pitfalls Parameters of the Privilege
. Confidential Communication
. To an Attorney Acting as Such
. For Advice and Counsel – and Kept Secret
The Privilege in Model States CORPORATE CONSIDERATIONS
. Modified Control Group Test
. Elements . Advisor to top management . The opinion underpins a decision Privilege Pitfalls
. It is More Important than Ever
. Know the Fundamentals
Top 10 Mistakes That May Cost the Privilege
. Failing to Recognize the Fundamentals of the Privilege
. Failing to Act as “An Attorney”
. Forgetting Who “The Client” Is Top 10 Mistakes That May Cost the Privilege
. Representing Multiple Clients
. Squandering the “Attorney Client Privilege” . Stamping Too Much . The “cc” Pig
Top 10 Mistakes That May Cost the Privilege
. Technology, technology, technology . Forgotten data (Alpert v. Riley, S.D. Tex. 2015) . “Hidden” data (Amersham Bioscience v. Perkinelmer) . Indiscreet liaisons (Holmes v. Petrorich Dev. Co., L.L.C., 191 Cal. App. 4th 10 47 (2011))
. Sloppy Communication Top 10 Mistakes That May Cost the Privilege
. Designating Counsel as Corporate Representative
. Inadvertent Waiver
. Sloppy Investigations
. Signing Affidavits
The Attorney Client Privilege and Technology
. Clients Waiving the Privilege . “My lawyer says” ONE COMMON PROBLEM-EXACERBATED BY TECHNOLOGY- IS CLIENTS PURPOSEFULLY BUT NEGLIGENTLY WAIVING THE ATTORNEY CLIENT PRIVILEGE
. Using the Company System The Attorney Client Privilege and Technology
THE ETHICAL OBLIGATIONS . ABA 2012 Model Rules . Six broad areas of change aimed at technology . Lawyer duty to prevent disclosure by staying abreast of technological advances. R. 1.1 (comment 6) . Duty to “safeguard against unauthorized access by third parties” R. 1.6(c) . “Reasonable efforts” required
The Attorney Client Privilege and Technology
THE PROBLEMS WITH CLAW BACKS
. Federal Rue Change: Rule 502 . Parties may enter into “claw back” agreements . Courts may order that privilege is not waived
. Ethical Duty to Notify of an “Inadvertent” Disclosure The Attorney Client Privilege and Technology
THE PROBLEMS WITH CLAW BACKS
. Claw Back Terms-the problem . If the agreement requires “reasonable precautions” there are potential grounds for a fight. See Mount Hawley Ins. Co. v. Felman Prod. Inc., 271 F.R.D. 125 (S.D. W.Va. 2010) . Failure to Strictly Comply with Agreement Procedures . Unilateral Determination that the Production was Not “Inadvertent” may allow Sidestepping
10 Ways to Preserve the Privilege
. Know the Privilege
. Educate Your Client
. Segregate Legal and Business Functions 10 Ways to Preserve the Privilege
. Don’t Overuse the Legend
. Limit Communications
. Use the Magic Language … “At Your Request”
10 Ways to Preserve the Privilege
. Segregate Facts From Advice
. Know Who Your Client Is
. Avoid Serving as Corporate Designee
. Be Proactive Conclusion
QUESTIONS?
The Data Security Checklist: Quick Reference Guide The questions to ask yourself…and your business partners
By Frank Harty Nyemaster Goode, P.C. 700 Walnut St., Suite 1600 Des Moines, IA 50309 Telephone: 515-283-3170 Facsimile: 515-283-8045 E-mail: [email protected]
Interface security issues 1. Is there a security framework in place (NIST, COBIT, CSA)? 2. Is there someone “in charge” of security? 3. Is there a process in place to audit security and respond to a potential breech? 4. Is there a process for identifying and responding to security issues?
Hardware and Infrastructure 1. Are industry standards met? 2. Are assets audited and scanned on a regular basis? 3. Are audit results logs maintained? 4. Do audits aim to meet regulatory requirements? 5. Are there adequate internal firewalls in place (between zones)? 6. Is there a security perimeter (DMZ) for outside technologies?
Data Security 1. Will you separate and segregate data? 2. Is any data stored in a foreign country? 3. Are there limits on the ability to log in remotely? 4. Are there written data management policies in place? 5. Is data classified? 6. Are wireless network controls in use?
Disaster Recovery 1. Is there a disaster recovery plan in place? 2. Is it updated regularly? 3. Is it “real” or just a decoy?
Incident Response 1. Is there a comprehensive security incident response plan and checklist in place? 2. Will the plan create legally admissible forensic data collection?
© 2018 Page 1 Frank Harty
3. Are law enforcement and regulatory contacts maintained? 4. Are there effective monitoring tools in place (host and network intrusion detection-“IDS”)? 5. Is there a customer notification system in place?
Confidentiality 1. Is data encrypted in transit? 2. Is data encrypted while static? 3. Is a third party encryption provider used? 4. Is there a document protection policy in place? 5. How are subpoenas responded to?
Human Resource Issues 1. Is access limited-and how? 2. Are downloading controls in place? 3. Is security training provided? 4. Are there systems in place designed to monitor privacy breaches? 5. Are there adequate password protocols in place (minimum length, history, complexity, age)? 6. Are multifactor authentication options in use? 7. Is there an identity management system in place?
Dealing with Third Parties 1. Do you ensure third parties have an incident response system in place? 2. Is there a contract with indemnification obligations?
Risk Management 1. Do you regularly audit/scan facilities to ensure compliance with security landmarks? 2. Are there minimum annual audits? 3. Is there someone responsible for risk assessment? 4. Do your windows on the world such as websites look vulnerable or hardened?
© 2018 Page 2 Frank Harty
PREPARING FOR THE INEVITABLE: LAW DEPARTMENTS AND CYBERSECURITY
1. Create strong, effective partnerships and relationships with your key internal stakeholders on data security issues – your CISO and your Communications/PR business partners, at a minimum. Dealing with an incident is not the time to get to know them. 2. Identify your key external stakeholders, and especially your external data privacy counsel, if you do not have an inhouse SME on this topic (and maybe even if you do). Depending on where a data incident occurs, you may have a myriad of parties to notify, and given the very tight timeframes required in some cases, this is not the time to dust off the law books. The same is true for PR partners; if you will need a crisis communication company, identify them in advance. Anything you can do to familiarize these partners with your unique business needs may save valuable time if an incident occurs. 3. Don’t use the term “breach” until you have to – everything is an “incident” during the investigation. Make sure your business partners are educated on this point. 4. Work with business partners and IT on a response team and plan in case a security incident occurs. With respect to the plan, consider the following: a. Who is on the team? Who is their back up? b. Contact information for each member c. Internal and external communications plan, including what communications you want to be privileged, and how to carry that out. d. Roles and responsibilities for each, and in particular, who will be responsible for any necessary internal and external communications. The plan should be reviewed and updated no less than once per year. 5. Recognize that conventional legal thinking (privilege everything; say little to nothing) may be counter-productive in today’s environment. 6. Work with your procurement organization to ensure that your organization’s required level of security measures for new technology platforms and products are part of the RFP, and not left to Legal to negotiate in the end, after everyone has fallen in love with the product. 7. Review, or have reviewed, your privacy policies, especially any promises you make concerning how you will collect and maintain information. Even if the type of information you collect is not traditionally considered personal information – it may have equal sensitivity to your customers. Make sure your organization is living up to any promise it makes in those policies. 8. Get to know your regulators, especially if you will be responsible for communicating with them in case of an incident. 9. Encourage your organization to understand that data, so vitally important to every part of today’s business, has to be protected like any other asset. This means cyber-insurance; it means investing in IT infrastructure and security; it means training employees and vetting vendors. 10. Study the companies who get it wrong, to avoid repeating their mistakes. 11. Stay abreast of legal developments in this area. Important to be able to issue-spot, and react accordingly. LEGAL ETHICS AND CYBER SECURITY: PRESERVING THE ATTORNEY-CLIENT PRIVILEGE IN THE TECHNOLOGY AGE
Prepared for National Council for Farmer Cooperatives Annual Meeting Legal, Tax and Accounting By Frank Harty Nyemaster Goode, P.C. 700 Walnut St., Suite 1600 Des Moines, IA 50309 Telephone: 515-283-3170 Facsimile: 515-283-8045 E-mail: [email protected]
INTRODUCTION
The attorney-client privilege is under attack. There is no question that one of the lynch pins of the legal profession is under siege. The American Bar Association recognized the problem and formed a task force to address it. See http://www.abanet.org/buslaw/attorneyclient/home. Likewise, the Association of Corporate Counsel, U.S. Chamber of Commerce and other professional and business groups have joined forces to gather facts and take steps to preserve the privilege. See http://www.acca.com/Surveys/attyclient2.pdf.
There are several forces at work undermining the attorney-client privilege in the corporate context. Many in-house counsel are called upon to do far more than practice law. They are required to make strategic business decisions and wear many hats. When acting as a business leader, in-house counsel may be doing a great job … of losing the privilege. Advances in technology also serve to undermine the privilege. It is increasingly difficult to ensure absolute confidentiality of electronic communications. Finally, our own government has been hard at work attacking the privilege for over a decade for years the feds have taken steps to undermine the privilege. In 2006, United States Deputy Attorney General Paul J. McNulty announced revisions to the so called “Thompson memorandum” that had been issued in 2003. That guidance adopted a tiered approach to be followed by prosecutors. The Thompson memorandum had been roundly criticized by the profession as a blatant attempt to eviscerate the privilege. The McNulty memorandum was an attempt to “take the edge” off of the Thompson memorandum. Later, the “Filip Memorandum” went further in attempt to clearly communicate that the Department of Justice respects the privilege.
Waiver requests continue to be a hot button item. In-house counsel with international clients are painfully aware that this is not just an American problem. The
© 2018 Frank Harty European Union has held that the attorney-client privilege does not apply to attorneys who are employed as in-house counsel. See Joined Cases T-125/03 & T-253/03, Akzo Nobel Chems. Ltd. & Akcros Chems. Ltd. v. Comm’n, 2007 ECJ CELEX LEXIS 555 (Sept. 17, 2007).
In the face of these forces, it is more important than ever for corporate counsel and attorneys representing corporate entities to be familiar with the fundamentals of the privilege and the best ways to protect it. This article discusses the top traps for counsel and offers some practical suggestions for avoiding these pitfalls.
PRIVILEGE WAIVERS: THE “FILIP MEMORANDUM”
1. In August of 2008, Deputy Attorney General Mark R. Filip issued a memorandum entitled “Principles of Federal Prosecution of Business Organizations” (the “Filip Memo”). This replaced the McNulty memo as the Department of Justice’s corporate charging guideline. Of particular importance, the Filip Memo reconsidered corporate cooperation credit in the areas of privilege waiver, employee indemnification, joint defense agreements and employee discipline and termination.
2. The history of the Filip Memo dates back to 1999 with the issuance of the Holder Memo. The Holder Memo was the first in a series of charging guidelines memoranda. The Holder Memo instructed prosecutors evaluating the level of a corporate entities cooperation to consider the corporation’s willingness to waive the attorney-client privilege and work product protection, the decision whether to indemnify officers, directors and employees, the discipline or termination of culpable employees, and participation in joint defense agreements with employees. Shortly thereafter, the Securities and Exchange Commission parroted the Holder memo with the publication of its Seaboard Report. Later, the Thompson Memorandum was issued. It was essentially an updated version of the Holder Memorandum and was widely considered to be a final attack on the attorney-client privilege. The Thompson Memorandum led to a series of contentious court battles. See, e.g., United States v. Stein et al., 541 F.3d 130 (2d Cir., 2008) (affirming the lower court’s decision to dismiss indictments against thirteen former KPMG partners and employees on the grounds that the government had deprived defendants of their right to counsel; lower court did not err in finding that Thompson Memorandum, providing that advancement of funds to cover legal fees could be considered as negative factor, was a threat that accounting firm would be indicted unless it ceased advancing legal fees; KPMB’s response to Thompson Memorandum amounted to state action).
A few months after the Thompson Memorandum was issued, Senator Arlen Specter (the senior Senator from Pennsylvania) introduced the Attorney-Client Privilege Protection Act of 2006. That proposed legislation would prohibit government agencies from considering a company’s privilege waiver as a factor in granting cooperation credit. It also prohibited the government from considering whether the company indemnified its employees or entered into joint defense agreements.
© 2018 Frank Harty The McNulty memorandum was a direct response to the proposed legislation. The McNulty Memorandum was criticized for not going far enough. In June of 2008, more than 30 former U.S. attorneys expressed their dissatisfaction with the McNulty memo and their support for the enactment of the Privilege Act. Senator Specter reintroduced the Privilege Act. In July of 2008, hoping to prevent the passage of this legislation, the Filip Memo was issued. In addition, Filip wrote Senators Patrick Leahy and Arlen Specter describing the highlights of the Filip Memo.
• Cooperation will be measured by the extent to which a corporation discloses relevant facts and evidence, not its waiver of privileges. The government’s key measure of cooperation will be the same for a corporation as for an individual: to what extent has the corporation timely disclosed the relevant facts about the misconduct? That will be the operative question – not whether the corporation waived attorney-client privilege or work product protection in making its disclosures.
• Federal prosecutors will not demand the disclosure of “Category II” information as a condition for cooperation credit. To be eligible for cooperation credit, a corporation need not disclose, and the government may not demand, what the McNulty Memo defines as “Category II information” – namely, non-factual attorney work product and core attorney-client privileged communications. (Of course, attorney-client communications that were made in furtherance of a crime or fraud, or that relate to an advice-of-counsel defense, are excluded from the protection of the privilege by well-settled case law and will therefore continue to fall outside these principles.)
• Federal prosecutors will not consider whether the corporation has advanced attorneys’ fees to its employees in evaluating cooperation. The advancement of attorneys’ fees or provision of counsel by a corporation to its employees will not be taken into account for the purpose of evaluating cooperation.
• Federal prosecutors will not consider whether the corporation has entered into a joint defense agreement in evaluating cooperation. The mere participation in a joint defense, common interest, or similar agreement by a corporation will not be taken into account for the purpose of evaluating cooperation. The government may, of course, request that a corporation refrain from disclosing to others sensitive information about the investigation that the government provides in confidence to the corporation, and may consider whether the corporation has abided by that request.
• Federal prosecutors will not consider whether the corporation has retained or sanctioned employees in evaluating cooperation. How and whether a corporation disciplines culpable employees may bear on the quality of its
© 2018 Frank Harty remedial measures or its compliance program; it will not be taken into account for the purpose of evaluating cooperation.
The Filip Memo has been criticized. Both Senators Specter and former Deputy Attorney General McNulty raised concerns that the Filip Memo does not go far enough. Both indicated concern that there is still pressure to waive the attorney-client privilege in that “relevant factual information” covered by the attorney-client privilege will still be sought by the government. Additionally, the defense bar has raised questions with respect to the credit for disclosing “facts;” specifically, whether “relevant facts” will ultimately include work product and/or privileged communications. Mark J. Stein & Joshua A. Levine, The Filip Memorandum: Does It Go Far Enough? (September 11, 2008), available at http://www.stblaw.com/content/publications/pub740.pdf (last visited December 8, 2009) (“The thrust of the Filip Memo is that DOJ simply wants the facts. The obvious problem is that the ‘facts’ uncovered in an internal investigation are actually an attorney’s distillation of numerous interviews and documents and therefore work product”).
THE PARAMETERS OF THE PRIVILEGE
In most model code states, the attorney-client privilege applies when “legal advice of any kind is sought from a professional legal advisor in his capacity as such, the communication relating to that purpose, made in confidence by the client, are protected from disclosure.” Fischel & Kahn, Ltd. V. Van Straaten Gallery, Inc., 727 N.E.2d 240, 243 (Ill., 2000) (citing In re Himmel, 533 N.E.2d 790 (Ill., 1988)). For example, Illinois Supreme Court Rule 201(b)(2) provides, in part, “All matters that are privileged against disclosure on the trial, including privileged communications between a party or his agent and the attorney for the party, are privileged against disclosure through any discovery procedure.” The claimant of the privilege has the burden of showing the communication (1) was made in confidence that it would not be disclosed, (2) was made to an attorney acting in his legal capacity for the purpose of securing legal advice or services, and (3) remained confidential. See Consolidation Coal Co. v. Bucyrus-Erie Co., 432 N.E.2d 250, 257 (Ill., 1982); see also Rounds v. Jackson Park Hospital & Medical Center, 743 N.E.2d 561 (Ill., 2001) and Cangelosi v. Capasso, 2006 WL 1875368 (2d App., 2006); but see Hitt v. Stephens, 675 N.E.2d 275, 278-79 (4th App., 1997) (party seeking disclosure from an attorney has the burden of establishing an exception to the attorney-client privilege). The privilege encourages “full and frank consultation between a client and [counsel] by removing the fear of compelled disclosure of information.” Consolidation Coal Co., 432 N.E.2d at 256. The extent of the attorney-client privilege is limited. Illinois has a “strong policy of encouraging disclosure,” and, therefore, “the privilege, not the duty to disclose… is the exception.” Waste Management, Inc. v. International Surplus Lines Insurance Co., 579 N.E.2d 322, 327 (Ill., 1991); see D.C. v. S.A., 687 N.E.2d 1032, 1038 (Ill., 1997) (“privileges are an exception to the general rule that the public has a right to every person’s evidence”). Therefore, the privilege should be strictly confined within its narrowest possible limits. Sharp v. Trans Union, L.L.C., 845 N.E.2d 719, 726 (1st App., 2006) (citing Waste Management, 579 N.E.2d at 327), as modified on denial of reh’g
© 2018 Frank Harty (Mar. 1, 2006); see Western States Ins. Co. v. O’Hara, 828 N.E.2d 842, 847 (4th App., 2005).
In the corporate context, in addition to the proponent of the privilege asserting the three (3) elements identified in the above paragraph, the Illinois Supreme Court has adopted a modified “control group” test that must be satisfied in order for the privilege to apply to protect the communication. Consolidation Coal Company, 432 N.E.2d at 257- 258; see Sterling Finance Management, L.P. v. UBS PaineWebber, Inc., 782 N.E.2d 895, 900 (1st App., 2002) (noting Illinois law is clear that the modified control group test is used to determine whether the attorney-client privilege applies to a corporate communication). There are two (2) tiers of corporate employees whose communications with corporate attorneys are protected. “The first tier consists of the decision-makers, or top management.” Midwestco-Paschen Joint Venture for the Viking Projects v. IMO Industries, Inc., 638 N.E.2d 322, 325(1st App., 1994) (citing Consolidation Coal Company, 432 N.E.2d at 257-58). “The second tier consists of those employees who directly advise top management, and upon whose opinions and advice the decision- makers rely.” Id.; see Jackson Park Hospital and Medical Center, 745 N.E.2d at 567 (communication is privileged when (1) the employee is in an advisory role to top management, such that the top management would not normally make a decision in the employee’s area of expertise without the employee’s advice and (2) the opinion does in fact form the basis of the final decision). With respect to the second tier, the Illinois Supreme Court noted, “We believe that an employee whose advisory role to top management in a particular area is such that a decision would not normally be made without his advice or opinion, and whose opinion is such that a decision would not normally be made within his advice or opinion, is properly within the control group. Consolidation Coal Company, 432 N.E.2d at 258. However, the Illinois Supreme Court went on to note, “the individuals upon whom [the employees in the second tier] may rely for supplying information are not members of the control group.” Id.
Some states have adopted slightly modified versions of the model rule. See, e.g., Shook v. City of Davenport, 497 N.W.2d 883, 886 (Iowa 1993) (“Any confidential communication between an attorney and the attorney’s client is absolutely privileged from disclosure against the will of the client) overruled on other grounds by Wells Dairy, Inc. v. American Industrial Refrigeration, Inc., 690 N.W.2d 38 (Iowa 2004). Together with several traditional privileges such as the physician-patient privilege and mental health professional privilege, it is clearly recognized by Iowa law. The law provides that the privilege is owned by the beneficiary, not the professional. Iowa law sets forth a number of procedural specifics with regard to the coverage and waiver of the privilege. It does not, however, clearly define the parameters of the privilege.
The Iowa Supreme Court outlined the privilege with respect to corporate communications. Keefe v. Bernard, 744 N.W.2d 663 (Iowa 2009). In Keefe, the Iowa Supreme Court agreed with the U.S. Supreme Court that the corporate attorney-client privilege should not be limited to those in the control group. Instead, “the test must focus on the substance and purpose of the communication. If an employee of a corporation or
© 2018 Frank Harty entity discusses his or her own actions relating to potential liability of the corporation, such communications are protected by the attorney-client privilege.” Id. at *6. However, if “a corporate employee is interviewed as a ‘witness’ to the actions of others, the communication should not be protected by the corporation’s attorney-client privilege.” Id.
Both state and federal courts have adopted rules aimed at protecting the privilege in the context of modern litigation. See, for example, Federal Rule of Evidence 502. See also Rule of Evidence 5.502 addressing the disclosure of information covered by the attorney-client privilege and work-product doctrine in the context of electronic discovery. The Rule is substantially similar to the Federal Rule of Evidence 502. The Iowa Rule became effective on June 1, 2009.
PRIVILEGE PITFALLS
This outline is designed to identify the top traps associated with the attorney- client privilege. Every lawyer knows that the stakes are high when the privilege is at issue. Company secrets, litigation strategy and personal reputation are on the line.
The United States Supreme Court raised the stakes when, on December 8, 2009, it issued its decision in Mohawk Industries v. Carpenter. In Mohawk, the plaintiff complained to human resources that the employer knowingly employed undocumented immigrants. Carpenter was told to meet with company counsel. Carpenter alleged that counsel pressured him to recant his allegation and he claimed that he refused. Carpenter sued claiming he was fired in violation of public policy and under false premises. The trial court granted Carpenter’s motion to compel discovery of information relating to his meeting with in-house counsel, on the ground that the employer had waived its attorney- client privilege through disclosures in another court case. The employer appealed from the order and the Eleventh Circuit held that it lacked jurisdiction because this was not the sort of order that was immediately appealable. The U.S. Supreme Court affirmed the Circuit, holding that disclosure orders adverse to the attorney-client privilege do not qualify for immediate appeal under the collateral order doctrine.
1. Failing to recognize the fundamentals of the privilege.
It may seem simplistic to suggest that the attorney who forgets the fundamentals of the attorney-client privilege is asking for trouble. Nevertheless, it seems that many of us forget the basics. To be privileged, a communication must: (1) be made by an attorney acting as such; (2) to a client; (3) in confidence. See Upjohn Co. v. United States, 449 U.S. 383 (1981). In Illinois, the protected communication is information sent from the client to the lawyer. See Consolidation Coal Company, 432 N.E.2d at 257. Every single communication must be analyzed with these fundamentals in mind.
Indeed, only by revisiting the fundamentals of the privilege can we make sense of some decisions. A recent Pennsylvania decision points out the importance of sticking to the fundamentals. A lawyer sent a communication to a regular corporate client
© 2018 Frank Harty explaining a new development in the law and warning the client to take a proactive approach. The communication was ultimately determined not to be protected by the attorney-client privilege. This is because the client had not asked for the lawyer’s input and therefore, the technical elements of the attorney-client privilege were not satisfied.
2. Failing to act as “an attorney.”
One need look no further than a colleague’s business card to identify problems associated with determining when in-house counsel is acting as an attorney. Many in- house attorneys perform important functions that cannot be described as the provision of legal services. Attorneys serve as assistant counsel and “director of governmental affairs.” Others might be designated not only as general counsel, but also “vice president”, “secretary” or “director of risk management.” It is common for in-house counsel to provide input on a number of issues, some of which may clearly be legal, while others are clearly business. It is when an in-house counsel renders advice that is a mix of both legal and business advice that problems develop. Our courts have attempted to formulate workable standards for determining if an attorney is acting as an attorney as opposed to a business leader. See In re Bieter Co., 16 F.3d 929 (8th Cir. 1994). Where roles may be intertwined, courts often require corporations to prove that they sought “primarily” legal advice from in-house counsel to avail themselves of the privilege. See, e.g. Sedco Int’l, S.A. v. Cory, 683 F.2d 1201 (8th Cir. 1992), cert. denied 459 U.S. 1017 (1982). Still other courts have held that, to be protected, the legal advice given to the client must be the “predominant element” in a communication. See United States v. Davis, 132 F.R.D. 12 (S.D.N.Y. 1990).
There are a number of areas of which corporate counsel should be wary. For example, in-house counsel acting as a human resource professional or risk manager may not be protected by the privilege. In Neuder v. Battelle Pacific Northwest National Laboratory, 194 F.R.D. 289 (D.D.C. 2000), the court held that an attorney’s communications were not protected by the attorney-client privilege. In that case, the attorney was serving on a personnel action review committee. The lawyer, together with the rest of the committee, reviewed terminations to determine if they complied with company policy and practices. When the plaintiff, a former employee, brought a discrimination claim, the court held that, although the attorney may have provided some legal advice during committee discussions, his role was primarily non-legal in that he simply served as another member of the committee determining whether the termination was consistent with company policy. Likewise, in Kramer v. Raymond Corp., 1992 Lexis 7418 (E.D. Pa. 1992), the court held that an attorney serving on a product liability risk reduction committee was not serving in a predominantly legal capacity. The attorney’s communications were therefore not protected by the privilege. See also Ga. – Pac. Corp. v. GAF Roofing Mfg. Corp., 1996 WL 29392 (S.D.N.Y. Jan. 25, 1996).
From a practical standpoint, in-house counsel should be extremely careful when serving on corporate committees such as affirmative action, personnel review, ERISA claim review, diversity, or product liability committees. If possible, it is essential for
© 2018 Frank Harty corporate counsel to segregate legal advice from non-legal business communications. This is really the only way to guarantee the protection of the privilege.
3. Forgetting who “the client” is.
A corporation acts through people. Corporate counsel should be aware of the tests that might be applied in a given jurisdiction when determining whether the persons with whom the in-house counsel is speaking are considered “the client” for purposes of the privilege. Courts use the “control group test” or the “subject matter” test when analyzing communications. See Upjohn Co., 449 U.S. 383; E.I. du Pont de Nemours & Co. v. Forma-Pack, Inc., 718 A.2d 1129 (Md. 1998). As corporate counsel deal with employees, former employees and others, they should be mindful of that employee’s role in the corporation, the subject matter of the discussion and the nature of any litigation, pending or threatened.
Attorneys should be aware that they might be seen as acting in a fiduciary capacity or that they might be representing someone other than a corporate entity. For example, corporate counsel conducting certain activities may in fact be acting on behalf of ERISA fiduciaries or claimants as opposed to the corporate entity.
The fiduciary exception prevents communications between a plan fiduciary and an attorney “in the execution of fiduciary duties” from being shielded against plan participants and beneficiaries. Wachtel v. Health Net, 42 F.3d 225, 226 (2d Cir., 2007). A fiduciary under ERISA is a person who: (a) exercises discretionary authority or control over an employee benefit plan; (b) provides investment advice; or (c) has discretionary administrative authority or responsibility over the plan. A fiduciary’s primary responsibility is to act in the best interests of the plan and its beneficiaries. An employer does not act as a fiduciary when it engages in plan design activities. Becher v. LILC, 129 F.3d 268 (2d Cir., 1997). On the other hand, if the employer is acting as a plan administrator, it is acting in a fiduciary capacity. Thus, if it consults counsel on matters of plan administration, the employer cannot claim the privilege against participants.
4. Representing multiple clients.
All lawyers are especially careful when representing multiple clients. See, e.g., Illinois Emcasco Insurance Company v. Nationwide Mutual Insurance Company, 913 N.E.2d 1102 (1st App., 2009) (discussing inapplicability of attorney-client privilege due to the “common-interest doctrine” when an attorney represents two different parties who each have a common interest) (citing Waste Management, 579 N.E.2d at 328). However, sometimes in the corporate context, it is not always obvious when a lawyer is doing so. A recent decision by the Delaware chancery court highlights the danger of providing privileged information in the corporate context.
In Ryan v. Gifford, 2007 WL 4259557 (Del. Ch. No. 30, 2007); 2008 WL 43699 (Del. Ch. Jan. 2, 2008), the Delaware Chancery court held that an investigative report of
© 2018 Frank Harty counsel to a special board committee lost its privileged status when it was disclosed to directors who were also defendants in a derivative action. In the face of an SEC investigation of alleged stock option backdating, Maxim Integrated Products, Inc. created a special committee of outside directors to investigate the allegations. The law firm representing the special committee ultimately presented a report to the entire Board of Directors, including those directors who were individually named as defendants in a pending civil derivative action. The court granted a motion compelling the production of the report. The court held that the privilege had been waived because the privileged material had been produced to the individual director defendants and their counsel and that the defendant’s interests were “not common with the client.”
The court’s decision in Ryan created quite a stir. While the court later tried to clarify its decision to limit its application, the decision nevertheless should be closely analyzed by anyone representing Delaware corporations.
5. Squandering the “attorney-client privilege.”
Any attorney involved in complex commercial litigation is used to receiving a number of documents in the discovery process that may be labeled “confidential” or “privileged.” Typically this occurs because the person creating the document really did not think about whether it was privileged. Many documents that may be designated as privileged have to be produced because they do not truly satisfy the elements of the attorney-client privilege.
Corporate counsel should remember that overuse of the “attorney-client privilege” legend may cause to cheapen it. It should be remembered that usually such documents are reviewed in camera by a court with a limited understanding of the facts years after the document was created. Saving the “attorney-client” designation for documents that are truly protected should ensure a greater degree of protection.
6. Technology and Sloppy Communication.
Confidentiality is the hallmark of the attorney-client privilege. Attorneys must take reasonable steps to ensure that their communications are confidential. Transmitting a communication to parties outside of the control group or management team may cause it to lose its privileged status. See Pritchard v. County of Erie, 2007 WL 3232096 (W.D.N.Y. Oct. 31, 2007) overruled on other grounds by 546 F.3d 222 (2d Cir., 2008); see also Sterling Finance Management, 782 N.E.2d at 905 (one document that would be subject to attorney-client privilege distributed to an individual outside of the “control group;” appellate court affirmed trial court’s rejection of privilege).
Counsel should be extremely cautious when acting as a “guest” on a “hosted” wireless internet. This is especially true if the internet is hosted by opposing counsel or a third party. Such sites typically require users to agree to terms and conditions when they log on. Counsel should pay particular attention to the conditions they are being asked to agree to. If they are agreeing that their messages may be monitored, they will not have
© 2018 Frank Harty an expectation of privacy and will therefore forfeit the privilege. See Scott v. Beth Israel Med. Ctr., 847 N.Y.S.2d 436 (N.Y. Sup. Ct. 2007).
In a recent Fair Housing Act lawsuit, the non-party’s attorney requested the return of privileged documents obtained through the plaintiff’s previous subpoena. The privileged information included e-mails sent to the non-party attorney from one of his clients via her work e-mail address. The plaintiff argued that any privilege was waived on account of the company’s privacy policy, which included the right to review and disclose all electronic messages created. Using a four-part balancing test that balanced the expectation of privacy against the lack of confidentiality, the court found that the company placed all employees on notice that e-mails would become the employer’s property. The court also noted that the client’s apparent lack of awareness of the privacy policy was unreasonable “in this technological age” and that the client’s e-mail address itself clearly put the non-party attorney on notice of a potential issue of confidentiality. Thus, the court determined privilege was waived with respect to the e-mails sent using the client’s work e-mail account.
Electronic communications continue to pose traps for the unwary. One must always remember the fundamental elements of the privilege, one of which is confidentiality. In order to protect a communication with the privilege, there must be an expectation that the communication will be confidential.
There is a growing body of law warning that someone who uses an email system with the advance knowledge that communications may be monitored cannot protect communication with an attorney. In Holmes v. Petrovich Development Company, the plaintiff-employee asserted the attorney-client privilege over email messages she sent her lawyer. See 191 Cal. at 4th 1047, 119 Cal. Reporter 878 (Third Dist. 2011).
In Holmes, the court rejected the privilege claim because the plaintiff used a company computer and email account to communicate with her attorney and the company’s employee handbook prohibited the use of the system for personal messages and clearly warned that the system would be monitored.
The Holmes decision is similar to the decision of the New York courts in Scott v. Beth Israel Medical Center. 17 Misc. 3d 934, 847 NYS 2d 436 (Sup. Ct. NYCTY 2007). In Scott, the court held that the plaintiff could not claim privilege over email correspondence sent on his employer-provided email account. The employer’s policy reserved the use of the account for business purposes and clearly warned that the account would be monitored. Interestingly, it appears that the validity of the privilege may actually turn on the precise language contained in the employer’s handbook or electronic communication policy. The key question seems to be whether the employee knew or should have known that the system would be monitored. See Long v. Maruvenian Corp., 05 Civ. 639, 206 WL 2998671 (SDNY Oct. 19, 2006). See also Stengart v. Loving Care Agency, 2001 NJ 300, 990 A.2d 650 (2010). The courts will look at whether the employee used an email address account furnished by the employer and whether the employer disclosed that it would monitor communications.
© 2018 Frank Harty Cases like Scott and Holmes pose concerns not just for employees, but also for independent contractors. Many companies provide independent contractors with access to their email systems. They often treat these contractors just like employees when it comes to electronic communication. The rationale of the Scott and Holmes decisions would apply in such instances.
A closer question arises when dealing with visitors who hosted wireless systems. In Stengart, the court looked at whether the employee truly had knowledge that the employer would monitor. In National Economic Research Associates v. Evans, 21 Mass. L. Reporter 337 2006 WL 2440008 (Sup. Ct. 2006), the court held that the employee was not warned that the communication in question would be monitored. The court stated “many computer users did not know that the content of [web-based] emails could be stored on their computer hard drives as temporary internet files.” In that case, the employee used the employer’s system to access a private email account while at work. The employer did not clearly warn that messages opened using a computer supplied by the employer may cause messages to be stored on the hard drive.
Perhaps surprisingly, lawyers are not the primary cause of waiver of the attorney client privilege when it comes to technology. In this age of social media, clients often prove to be the source of the waiver of the attorney client privilege. It’s not uncommon for someone to comment on Facebook or Instagram “my lawyer says.” In recent decisions courts have held that the privilege was waived where a litigant frequently commented to friends and relatives on the strategy behind legal maneuvers.
In other instances it is clearly the attorney at fault. For example, in Amersham Bioscience v. Percahnhelmer attorneys produced electronic documents that they couldn’t read. They figured that since they could not read the documents that there was no harm in producing them because the other side would not be able to read them either. While, the other side obtained the correct technology and read the documents. The court determined that this is not an inadvertent waiver and that the ignorant of the ability to use the appropriate technology to read the documents is not a reasonable approach. Likewise, the court held an Alpert vs. Riley that a lawyer who places confidential information on a computer server and then transfers the server forgetting to remove the confidential information has waived the privilege.
The next generation of cases may involve the ubiquitous wireless systems. Consider whether a visiting attorney has a legitimate expectation of privacy where, in order to use the system, he or she agrees to terms that clearly indicate that communications will be monitored. Attorneys should be very cautious. They should never “click through” user acknowledgement without carefully reading terms and conditions.
7. Designating counsel as corporate representative.
© 2018 Frank Harty Designating an attorney as a Rule 30(b)(6) witness is extremely dangerous. To be sure, most courts generally hold that merely designating an attorney pursuant to Rule 30(b)(6) does not waive any privilege. However, because an in-house attorney is an agent of the corporate entity, serving as a Rule 30(b)(6) witness may cause in-house counsel to unintentionally waive their client’s privilege. See Motley v. Marathon Oil Co., 71 F.3d 1547 (10th Cir. 1995). This is especially true if the attorney may be serving in a dual role. See Adler v. Wallace Computer Servs., Inc., 202 F.R.D. 666 (N.D. Ga. 2001).
Like signing a 30(b)(6) designation, in-house counsel should be cautious about authoring or signing affidavits or cover letters to governmental agencies such as the Iowa Civil Rights Commission or Securities Exchange Commission. Once again, while merely signing an affidavit does not waive the attorney-client privilege, all the pitfalls associated with serving as a Rule 30(b)(6) representative likewise accompany signing an affidavit.
8. Waiver; Scope of Waiver.
Once the attorney-client privilege applies, a communication is permanently protected unless waived. Exline v. Exline, 659 N.E.2d 407, 410 (2d App., 1995). Waiver of the privilege may be due to a voluntary/selective waiver, through a coerced or involuntary waiver, through an implied/at-issue waiver, or as a result of inadvertent production.
It is clear that the privilege belongs to the client, In re Marriage of Decker, 606 N.E.2d 1094, 1101 (Ill., 1992), but once voluntarily disclosed the privilege is waived. In Illinois, the mere act of disclosing confidential information outside of the control group waives the privilege. Sterling Finance Management, 782 N.E.2d at 905. Some holders of the privilege have attempted to disclose confidential information to one party, but reserve the confidentiality with respect to others. This is called a “selective waiver,” and is discussed in subsequent paragraphs.
Further, of late, many governmental agencies, including the Securities & Exchange Commission and the Department of Justice, have encouraged companies to “cooperate” in investigation and to do so by agreeing to waive the attorney-client privilege and work-product doctrine.
Counsel should also be wary of the “implied” or “at issue” waiver. A client may inadvertently waive the attorney-client privilege by asserting claims or defenses that put his or her communications with the legal advisor at issue in the litigation. See Lama v. Preskill, 818 N.E.2d 443, 448 (2d App., 2004) (“at issue” waiver occurs when a party voluntarily injects either a factual or legal issue into the case, the truthful resolution of which requires an examination of the confidential communications). The “at issue” waiver has been featured in the recent Securities and Exchange Commission/Bank of America litigation pertaining to Bank of America’s acquisition of Merrill Lynch. See Securities and Exchange Commission v. Bank of American Corporation, 09 Civ. 6829 (S.D.N.Y., 2009). In proposing a $33 million settlement, the SEC noted that its normal
© 2018 Frank Harty policy was to go after company executives who were responsible for fraudulent conduct but claimed it could not do so because “[t]he uncontroverted evidence in the investigative record is that lawyers for Bank of America and Merrill drafted the documents at issue and made the relevant decisions concerning disclosure.” Id. Claims could not be made against lawyers because “the Bank refused to waive attorney-client privilege.” Id. However, the judge noted “the S.E.C. never seriously pursued whether [the Bank’s defense that it relied on outside counsel] constituted a waiver of this privilege.” Id. Bank of America, after opening the door, subsequently entered into a Federal Rules of Evidence Rule 502(d) consent order in an attempt to protect disclosures made to the SEC.
With respect to the scope of any voluntary waiver, in-house counsel should be very clear as to the extent of any waiver he or she intends to authorize. In Illinois, while a disclosure does not waive all other non-disclosed communications, a voluntary disclosure does waive the privilege as to the remainder of the conversation or communication about the same subject matter. In re Grand Jury, 651 N.E.2d 696, 700 (1st App., 1995). Under Federal law, Rule 502 of the Federal Rules of Evidence may provide some protection. Rule 502, adopted September 19, 2008, in essence, limits the scope of waiver. The Rule specifically provides that when a disclosure is made in a Federal proceeding or to a Federal office or agency any waiver extends to an undisclosed communication or information in a Federal or State proceeding only if three (3) conditions are met. These conditions include that the waiver was intentional, the disclosed and undisclosed communications or information concern the same subject matter, and the disclosed and undisclosed communication ought in fairness to be considered together. Rule 502(b) governs inadvertent disclosures, while Rule 502(c) provides that if a disclosure is made in a State proceeding and is not the subject of a State-court order concerning waiver, the disclosure does not operate as a waiver in a Federal proceeding if certain conditions are met. Rule 502(d) authorizes the use of court orders to ensure privilege or protection is not waived by a disclosure, while Rule 502(e) impacts agreements regarding disclosure between parties, by stating that an agreement on the effect of a disclosure is binding only on the parties to the agreement unless the agreement is incorporated into a court order.1
However, Rule 502 does not change the law regarding “selective waiver.” In fact, proposed “selective waiver” language was included in the proposed Rule but was removed in the final enactment. A selective waiver occurs where a party attempts to waive the privilege with respect to one party but not all parties. At present there are
1 Careful drafting of such Rule 502(e) agreements and Rule 502(d) court orders are imperative as both use the term “disclosure” and not “waiver.” Rule 502(d) allows a federal court to “order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court – in which event the disclosure is not a waiver in any other Federal or State proceeding.” This provision contemplates where a party makes a “disclosure” of documents without making a “waiver.” In the absence of an order in accordance with Rule 502(d), Rule 502(a) says that when a disclosure is made in a federal proceeding or to a federal office or agency and waives the attorney-client privilege or work product protection, the waiver extends to undisclosed communications and information if the enumerated conditions are satisfied. See, e.g., Zach Lowe, Did Bank of America Mess Up Its Privilege Waiver?, The American Lawyer (October 20, 2009) (arguing Bank of America waived attorney-client privilege), available at http://www.law.com/jsp/article.jsp?id=1202434746211 (last visited December 10, 2009). © 2018 Frank Harty competing philosophies on such selective waivers. At one end of the spectrum, largely on policy grounds, is the Eighth Circuit’s holding that a selective waiver is possible. See Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1977). In Diversified Industries, the defendant provided privileged communications to the SEC. In subsequent litigation, an opposing party argued that the SEC disclosure waived the attorney-client privilege. The court held that although there was a waiver of the privilege, it was only effective for actions initiated by the SEC and that the corporation could assert the attorney-client privilege to protect those released documents in subsequent litigation against parties other than the SEC. This well reasoned approach may provide solace to attorneys practicing in Iowa.
Corporate counsel should, however, be aware of competing philosophies when it comes to waiver. The Eighth Circuit approach has generally been rejected by a majority of federal jurisdictions. These jurisdictions hold that a full and complete waiver of the attorney-client privilege occurred following the disclosure of confidential information to the government. See, e.g., In re Qwest Communications International Securities Litigation, 450 F.3d 1179 (10th Cir., 2006); In re Columbia/HCA Healthcare Corporation Billing Practices Litigation, 293 F.3d 289 (6th Cir., 2002); and Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981). In Permian, the court rejected the limited waiver theory as “wholly unpersuasive” and held that an express “reservation of confidentiality” contained in documents transmitting privileged information made no difference whatsoever. The court held that a corporate client should not be allowed to “pick and choose among his opponents” and reasoned that the limited waiver would frustrate, rather than promote, full disclosure.
There are numerous other pitfalls associated with a deferred prosecution agreement. This is especially true if the DPA includes a prospective waiver rather than merely a waiver regarding past misconduct.
Counsel should keep in mind that, although documents provided to third parties are clearly not protected by the attorney-client privilege, drafts of those documents may receive protection. See Klobluk v. Univ. of Minn., 574 N.W.2d 436 (Minn. 1998); see also SEC v. Beacon Hill Asset Mgmt. LLC, 2004 U.S. Dist. LEXIS 18390 (S.D.N.Y. Sept. 14, 2004). To protect documents in draft form from being swept up in an inadvertent disclosure argument, counsel should ensure that all drafts for circulation include an attorney, that the attorney is clearly asked to provide legal input, and that the documents are clearly labeled “drafts.”
9. Sloppy investigations.
There are a number of problems that can arise when in-house counsel is conducting an internal investigation. Counsel should take steps to uniformly use the “Upjohn” or “corporate Miranda” warning at the beginning of any employee interview. The warning typically includes the following elements: (1) the attorney represents only the corporation; (2) the interview is covered by the attorney-client privilege; (3) the privilege belongs to and is controlled by the company, not the individual employee; and
© 2018 Frank Harty (4) the company, in its sole discretion, can decide whether to waive the privilege and disclose information from the interview to third parties. The uniform use of the warning serves multiple purposes. First, it fulfills corporate counsel’s ethical obligation to refrain from misleading an employee with interests potentially adverse to those of the corporation. See Model Rules of Prof’l Conduct R. 1.13(f) (2007); Westinghouse Electric Corporation v. Kerr-McGee Corporation, 580 F.2d 1311 (7th Cir., 1978) (law firm for a trade association gave some individual members of association the impression that firm was also representing them when collecting information from the members; firm was required to withdraw from representation when matter arose for another client in which the information collected from the members might be used again them). In addition, the use of the warning should enable counsel to cloak the interview with the protection of the attorney-client privilege with respect to Federal action and/or states that do not follow the “control group” test. Finally, a failure to give the warning may result in the privilege being determined to be held jointly by the employee and the company. This would obviously forfeit exclusive corporate control over the privilege. See Adler, 202 F.R.D. 666.
Corporate counsel should be prepared to respond to questions from employees regarding whether they need to retain separate counsel. Counsel should not offer advice to the unrepresented employee, except the advice that the individual should obtain counsel. Giving any other guidance may result in a violation of corporate counsel’s professional duties.
10. Failing to control agents.
Corporate counsel regularly use staff to assist in investigations or other matters. It is important to remember that, unless they are tightly controlled, agents may cause a waiver of the privilege. Generally, courts scrutinize agency claims very closely. A court will only uphold the attorney-client privilege or work product doctrine in an agency situation if it is clear that that agent was acting under the direct supervision and control of counsel. See, e.g., Cuno, Inc. v. Pall Corp., 121 F.R.D. 198 (E.D.N.Y. 1988); Carter v. Cornell Univ., 173 F.R.D. 92 (S.D.N.Y. 1997).
To make it easier to establish the agency privilege, in-house counsel should follow some simple rules: (1) ensure the documents evidence the “agency” relationship on their face; (2) precisely define the role of the agent; (3) clearly document the legal purpose of the agent’s activity; and (4) make sure that in-house counsel is included in all communications, especially e-mail.
© 2018 Frank Harty PRESERVING THE PRIVILEGE
There are some simple steps that in-house counsel can take to avoid the pitfalls discussed above and to protect the privilege. In particular, in-house counsel should consider the following:
1. Consider the challenges posed by the pervasive use of e-mail and electronic communication.
2. Do not place the “attorney-client privileged” legend on every e-mail.
3. When writing, note the fact that the client requested the legal advice by writing words such as “in response to your request for legal advice.”
4. Segregate legal functions from those that are non-legal.
5. Segregate the facts in a document from legal advice.
6. Maintain separate legal and business files where permissible.
7. Educate your clients on the privilege.
8. Avoid serving as Rule 30 designee.
9. Don’t even consider a waiver without competent criminal counsel.
10. Know the corporate Miranda warning – “I REPRESENT THE CORPORATION, NOT YOU. THIS INTERVIEW IS COVERED BY THE ATTORNEY-CLIENT PRIVILEGE. THAT PRIVILEGE BELONGS TO THE CORPORATION – NOT YOU. THE CORPORATION MAY DECIDE, IN ITS SOLE DISCRETION, WHETHER OR NOT TO DISCLOSE THIS INFORMATION TO THIRD PARTIES, INCLUDING THE GOVERNMENT.”
11. Avoid using a business title when giving legal advice.
12. Don’t write what can be said.
13. Limit the number of recipients of communication.
14. Avoid being an affiant or 30(b)(6) designee.
15. Consider adding a “do not distribute or copy this document DIRECTIVE.”
16. If asked whether the employee should obtain counsel, the answer is always: “I cannot advise you on that matter” or … “yes.”
17. Control privileged material to reduce the possibility of a waiver – voluntary or otherwise.
© 2018 Frank Harty CONCLUSION
In this environment, it is extremely important for corporate counsel to make every effort to protect the attorney-client privilege. This is certainly one area of the law where being proactive may pay off.
© 2018 Frank Harty WASHINGTON UPDATE WASHINGTON UPDATE
Presenter Biography Lisa Van Doren Vice President and Chief of Staff for Government Affairs NCFC
Lisa Van Doren serves as Vice President and Chief of Staff for Government Affairs at the National Council of Farmer Cooperatives (NCFC). In this capacity, she oversees NCFC’s government affairs staff and directs NCFC’s public policy agenda. She serves as NCFC liaison to the Congressional Farmer Cooperative Caucus and coordinates the activities of the NCFC Government Affairs Committee.
Prior to joining NCFC in March 2008, Lisa served as Director of Public Policy for the National Corn Growers Association. She also served as Professional Staff for the House Committee on Agriculture. There she worked on the 2002 Farm Bill and managed numerous key legislative issues including food safety inspection programs, crop protection regulations, specialty crops, energy, clean air, and forest management.
Lisa also worked in the personal office of former Rep. Charles Stenholm (D-TX) as a legislative assistant and was an intern for former Rep. Ciro D. Rodriguez (D-TX).
A native Texan, Lisa was raised in Hondo, about 45 miles west of San Antonio, on a beef cattle and horse ranch. She graduated from Texas A&M University with a Bachelor of Science in Agricultural Development in 1998. Lisa also earned a Masters of Science in Environmental Sciences from The Johns Hopkins University in 2002. She lives in Washington, DC, with her husband, Terry, and their daughter, Amelia. Washington Update
Lisa Van Doren February 2018
NATIONAL COUNCIL OF FARMER COOPERATIVES NATIONAL COUNCIL OF FARMER COOPERATIVES Oops, they did again….
The Federal Government shutdown last night (temporarily) when Congress failed to pass funding legislation by midnight.
NATIONAL COUNCIL OF FARMER COOPERATIVES Today’s Discussion…
• A Look at the Political Landscape through the Lens of the 2018 Elections
• Focus on Key Policy Issues for NCFC • Yes…199A will be discussed…again….
NATIONAL COUNCIL OF FARMER COOPERATIVES NATIONAL COUNCIL OF FARMER COOPERATIVES Trump’s approval numbers are lower than any other elected president’s at this point in their respective terms
Gallup comparative presidential approval ratings
IN DECEMBER OF EACH PRESIDENT’S FIRST TERM
Source: Gallup, December 13, 2017.
NATIONAL COUNCIL OF FARMER COOPERATIVES How will the ongoing investigations circling the president coupled with his latest controversial tweet influence the election?
NATIONAL COUNCIL OF FARMER COOPERATIVES The greatest political question of this presidency—is it more important to broaden your support or to energize a diehard base?
Source: FiveThirtyEight.com.
NATIONAL COUNCIL OF FARMER COOPERATIVES The President’s approval rating might look bad until you look at…
NATIONAL COUNCIL OF FARMER COOPERATIVES …Congress’s 16% approval rating.
Source: Gallup.com, November 2017. NATIONAL COUNCIL OF FARMER COOPERATIVES NATIONAL COUNCIL OF FARMER COOPERATIVES How big of a swing? Control of the House will depend on how many seats Dems can take from the “lean Republican” column
Cook Political Report ratings
2017-2018 House races
■ Republican held seats (239) ■ Democrat held seats (193)
Solid Republican 175 The race for House control is a coin Likely Republican 26 flip. Lean Republican 21
Democrats should gain seats, but Toss-Up 15 4 unsure if they can net the 24 seats Lean Democrat 4 5 they need to win control. Likely Democrat 11
Solid Democrat 174
NATIONAL COUNCIL OF FARMER COOPERATIVES How big of a swing? Control of the House will depend on whether Democrats pick up all “toss-ups” as well as 5 “lean-Republicans”
Cook Political Report ratings 2017-2018 HOUSE RACES 4 ■ Democrat held seats ■ Republican held seats 26 21 15 5 11 4
Likely Democrat Lean Democrat Toss Up Lean Republican Likely Republican Sinema (AZ-9)* O’Halleran (AZ-1) Walz (MN-1)* Denham (CA-10) Valadao (CA-21) Carbajal (CA-24) McSally (AZ-2)* Nolan (MN-8) Walters (CA-45) Hunter (CA-50) Mast (FL-18) Crist (FL-13) Bera (CA-7) Shea-Porter (NH-1)* Handel (GA-6) Loebsack (IA-2) Royce (CA-39)* Rosen (NV-3)* Woodall (GA-7) Young (IA-3) Davis (IL-13) Peterson (MN-7) Issa (CA-49)* Knight (CA-25) Bost (IL-12) Hultgren (IL-14) Kuster (NH-2) Murphy (FL-7) Rohrabacher (CA-48) Jenkins (KS-2)* Walberg (MI-7) Suozzi (NY-3) Ros-Lehtinen (FL-27)* Coffman (CO-6) Yoder (KS-3) Gianforte (MT-0) Maloney (NY-18) Gottheimer (NJ-5) Curbelo (FL-26) Holding (NC-2) Schrader (OR-5) Kihuen (NV-4) Blum (IA-1) Barr (KY-6) Pittenger (NC-9) Cartwright (PA-17) Roskam (IL-6) Poliquin (ME-2) Budd (NC-13) Kind (WI-3) Trott (MI-11)* Bishop (MI-8) MacArthur (NJ-3) Lewis (MN-2) Paulsen (MN-3) Pearce (NM-2)* Bacon (NE-2) Lance (NJ-7) Zeldin (NY-1) Donovan (NY-11) LoBiondo (NJ-2)* Tenney (NY-22) Frelinghuysen (NJ-11) Katko (NY-24) • Excludes all seats marked as ‘Solid Democrat’ or ‘Solid Costello (PA-6) Faso (NY-19) Chabot (OH-1) Republican’ Meehan (PA-7) Vacant (OH-12) Culberson (TX-7) Stivers (OH-15) • Dems need to pick up 24 seats to win majority Comstock (VA-10) Fitzpatrick (PA-8) Dent (PA-15)* Renacci (OH-16)* Reichert (WA-8)* Smucker (PA-16) Vacant (PA-18) Taylor (VA-2) Hurd (TX-23) *Incumbent not seeking reelection Garrett (VA-5) Sessions (TX-32) Brat (VA-7) Love (UT-4) McMorris Rodgers (WA-5) Source: Cook Political Report. Grothman (WI-6) NATIONAL COUNCIL OF FARMER COOPERATIVES NATIONAL COUNCIL OF FARMER COOPERATIVES 13 NATIONAL COUNCIL OF FARMER COOPERATIVES NATIONAL COUNCIL OF FARMER COOPERATIVES BREAKING NEWS: Captain Obvious Predicts Economic Conditions will Impact November Election Results
NATIONAL COUNCIL OF FARMER COOPERATIVES Dow’s largest one-day point losses in history
DOW JONES INDUSTRIAL AVERAGE, (PERCENTAGE DROP IN PARANTHESES)
Feb. 5, 2018 -1,175 (-4.6%) On Monday, the Sept. 29, 2008 -778 (-7.0%) Oct. 15, 2008 -733 (-7.9%) index declined 1,175 Sept. 17, 2001 -685 (-7.1%)
points or 4.6%, its Dec. 1, 2008 -680 (-7.7%) Though it tops the list by points, the worst percentage Oct. 9, 2008 -679 (-7.3%) February 5, 2018 loss is still far short of the record-holder in percentage terms – the 22.6% “Black Monday” Feb. 2, 2018 -666 (-2.5%) drop in over six drop on Oct. 19, 1987 years. Aug. 8, 2011 -635 (-5.5%) Apr. 14, 2000 -618 (-5.7%)
June 24, 2016 -610 (-3.4%)
NATIONAL COUNCIL OF FARMER COOPERATIVES Implications for Agriculture and Farmer Co-ops
In a time of disruption and polarization, if progress on a range of issues is going to be made, we need to reinforce relationships with key allies and spur grassroots engagement to enlarge our coalition.
NATIONAL COUNCIL OF FARMER COOPERATIVES Ag’s Team
NATIONAL COUNCIL OF FARMER COOPERATIVES Yearly outlook: Agriculture Policy in 2018
Key considerations
Passage of Farm Bill on time The House included changes to cotton support in its latest
Higher disaster relief bill, and the Senate is likely to add changes Finalized renegotiation to the dairy MPP of NAFTA
Trump has threatened to withdraw from NAFTA if a better deal cannot be arranged and Modifying dairy and negotiations have met several cotton support programs sticking points in recent months Increasing funding for rural broadband The agriculture committees have Modifications to been working since mid-2017 on temporary worker
POTENTIAL IMPACT POTENTIAL an updated Farm Bill, but on- programs time passage by Sept. 30 does not seem certain
Finalized renegotiation of KORUS Lower
Less likely More likely LIKELIHOOD Sources: National Journal research, 2018. NATIONAL COUNCIL OF FARMER COOPERATIVES Key Issues to Discuss today Could be a smashing year!
Tax reform Immigration reform Preparations for the 2018 Farm Bill Trade policy Pension Relief
NATIONAL COUNCIL OF FARMER COOPERATIVES Tax Reform
NATIONAL COUNCIL OF FARMER COOPERATIVES NATIONAL COUNCIL OF FARMER COOPERATIVES CBO Deficit Projections with Tax Reform Passage Deficits & Tax Legislation (CBO) $1,600.00
$1,400.00
$1,200.00
$1,000.00
$800.00
Billions $600.00
$400.00
$200.00
$0.00
-$200.00 NATIONAL COUNCIL OF FARMER COOPERATIVES Deficit Tax Bill PAYGO Reforming Tax Reform
• Non-co-op grain companies point to a significant disadvantage. • NCFC and non-cooperatives to propose language to resolve the dispute. • NCFC working in good faith to seek agreement. • Small ‘p’ political problems of the provision.
NATIONAL COUNCIL OF FARMER COOPERATIVES Key NCFC Messages
• Creating an artificial deadline, without adequate time to assess the impact of the legislation, would only create more disruption and chaos. • Must ensures that farmers and their co-ops are not put at a disadvantage to corporations, who saw a 40% cut in their tax rate. • Must recognizes that co-ops are an extension of their members’ operations; co-ops give their member-owners the ability to extend their reach in the marketplace and capture more margins from further down the value chain. NATIONAL COUNCIL OF FARMER COOPERATIVES Immigration Reform
NATIONAL COUNCIL OF FARMER COOPERATIVES NATIONAL COUNCIL OF FARMER COOPERATIVES An Unfortunate Catalyst for Debate on Immigration Reform
DACA allows young people brought to the US There are • California (222,795) illegally by their parents to get a temporary approximately 800,000 • Texas (124,300) reprieve from deportation and to receive total recipients, a majority • New York (41,970) of them in: permission to work, study and obtain driver's • Illinois (42,376) licenses • Florida (32,795) In January, a federal district judge in The Department of Justice appealed the federal court California issued a preliminary injunction ruling and announced the Trump administration intends against the end of the DACA program and as to take the "rare step" of seeking direct review in the a result the USCIS announced they had Supreme Court to allow the DHS to move forward with resumed accepting requests to renew a the repeal of DACA grant of deferred action under DACA
June 2012 September 5, 2017 October 5, 2017 March 5, 2018 March 5, 2020
Deferred Action Trump chooses to DACA recipients with a DACA recipients The last DACA for Childhood end DACA, hands permit set to expire whose registration authorizations will Arrivals is created it over to Congress before March 5, 2018 expires after this expire by this date by the Obama to make into law were able to apply for a date were not able administration or get rid of two-year renewal if they to renew their applied by October 5 status DACA Timeline
Sources: National Journal Research, 2017; NYT, September 2017; Washington Post, September 2017. NATIONAL COUNCIL OF FARMER COOPERATIVES California and Texas have the most DACA recipients whose permits will expire soon
Approximate active DACA recipients whose registration expires between 9/5/2017 and 3/5/2018
NUMBER OF INDIVIDUALS
Analysis • The DHS did not release the number of pending renewal applications by state, but did release the number of individuals who will need renewals because their permit will expire before March 5, 2018 • While California has the highest number, it is also a sanctuary state, meaning state police are not required by the governor to cooperate with federal immigration officials
Sources: USCIS Office of Performance and Quality, “Approximate active DACA recipients as of September 4, 2017 whose DACA expires between September 5, 2017 and March 5, 2018,” September 4, 2017. NATIONAL COUNCIL OF FARMER COOPERATIVES Current Status – Addressing Agriculture’s Issues
• House Judiciary Committee in November marked up and approved a bill providing a guest worker program for agriculture—a major accomplishment!
• While the bill does have many provisions of concern to producers, getting a bill out of committee is an important step in this process.
• Senate will wait for House to move first.
• Despite rhetoric on enforcement, administration sympathetic to ag’s needs.
• Sec. Perdue publicly stated resolving our workforce issues is a top priority for him.
NATIONAL COUNCIL OF FARMER COOPERATIVES Key Messages to Congress
• Farmers, ranchers and growers across the country and across the country are facing a critical shortage of the skilled workers needed to harvest their crops or care for their animals.
• The Agricultural Workforce Coalition continues to push for a legislative solution to this problem that addresses both the current and future labor needs of agriculture.
• We oppose making the E-verify program mandatory for agricultural employers unless it is coupled with a solution that addresses agriculture’s labor needs.
NATIONAL COUNCIL OF FARMER COOPERATIVES 84.6% Farm Bill
NATIONAL COUNCIL OF FARMER COOPERATIVES Not much time: the 2018 midterms could delay Farm Bill
Key points to the 2018 schedule • Finish work on the Farm Bill before Republicans move to overhaul entitlement programs • A working draft of the Farm Bill already submitted to CBO Senate Conference House
• Delays may push the negotiations into the fall when campaigning will be Senate House the only issue • As midterms approach, it will be more difficult for fiscal hawks to vote for the Farm Bill and Congress will be in recess • Conaway is also leading the House Intelligence Committee’s Russia investigation
Chairman Mike Conaway’s ideal schedule February March June/July August Sept. 30 October Nov. 6
Farm Bill Floor Conference The House is 2014 House in Midterm out of votes committee in recess the Farm Bill recess Oct. 13 elections committees and final whole month expires until Nov. 13 votes
Sources: “2014 Farm Bill: A Timeline” FarmPolicy.com, Accessed December 15, 2017 NATIONAL COUNCIL OF FARMER COOPERATIVES Trump received a wave of support from non-urban areas, but how will he handle the upcoming Farm Bill debate?
2016 presidential election outcome
PERCENT OF COUNTIES WON BY POPULATION DENSITY ■ Clinton ■ Trump
50%
Urban cores 86.25 13.75
Suburbs 25.35 74.65
Medium-sized cities 25.5 74.5
Small cities 14.9 85.1
Very small cities 13.35 86.65
Rural 7.7 92.3
Sources: Washington Post NATIONAL COUNCIL OF FARMER COOPERATIVES Republicans are winning more in rural areas on a deregulatory platform, but they are increasingly against farm subsidies
The conservative wing of the Republican Party could again threaten the timely passage of the Farm Bill
NATIONAL COUNCIL OF FARMER COOPERATIVES Despite controlling all three branches of government, Republican approaches to the 2018 Farm Bill diverge
Mick Mulvaney Chairwoman Black Sonny Perdue Chairman Conaway Chairman Roberts OMB Director House Budget Committee Secretary of Agriculture House Ag Committee Senate Ag Committee “Revolutionize” “Evolutionize” • Eliminate major crop subsidy programs • Only cuts to spending due to down-turn in farm economy • Institute strict requirements on SNAP recipients or seriously • Add supports for cotton and dairy farmers reduce SNAP spending • Increase work requirements and limits to SNAP • The OMB’s FY2018 request and initial numbers desired by • Maintain nutrition and agriculture coalition House Budget Chair Black called for deep cuts to USDA
Where does the president stand? Entitlement reform • Trump has never spoken about the Farm Bill • Speaker Ryan has signaled that after tax • Trump’s cabinet maintained Renewable Fuel Standards reform, Congress will begin revising due to a Trump campaign promise, so he might be government support programs President Trump willing to maintain the status quo Paul Ryan Speaker of the House
NATIONAL COUNCIL OF FARMER COOPERATIVES
Sources: National Journal Research, 2017 An October event with attendees from the left and right hints at a potential alliance against the 2018 Farm Bill Co-hosts of the event Keynotes
Rep. Earl Blumenauer Sen. Jeff Flake Democrat – Oregon’s 3rd District Republican – Arizona
Other attendees (partial list) Result “Cut, cap and clarify” • Cutting subsidies to wealthy farmers • Developing a performance measurement • Creating more transparency in payments
NATIONAL COUNCIL OF FARMER COOPERATIVES Sources: Catherine Boudreau and Helena Bottemiller Evich, “Strange bedfellows united to push for subsidy reform in the farm bill”, Politico.com, November 15, 2017 The Farm Bill Coalition • Fewer than 50 House districts are majority ag.
• An urban-rural coalition—of agriculture, nutrition advocates and conservation groups—has been instrumental in passing the farm bill.
• Do not see a way to passage without a coalition this time.
NATIONAL COUNCIL OF FARMER COOPERATIVES What’s the most important factor in writing the next farm bill?
The amount of money the ag committees will have to work with, and what programs that money is currently in.
NATIONAL COUNCIL OF FARMER COOPERATIVES 6 We all know about nutrition 5 spending in proportion to the 5 4.5 rest of the farm bill and the 4.3 4.4 4 growing importance of crop 3.5 insurance. Less noted on is the 3 3 2.8 fact that conservation 2.4 2.5 2 2 spending has overtaken 2 1.8 traditional Title 1 spending, even in a low price 1 environment. 0 2014 2015 2016 2017 Oratio 1 Oratio 2 Oratio 3
NATIONAL COUNCIL OF FARMER COOPERATIVES Several Current Commodity Programs Need Fixes (some minor, some significant) to Ensure a Broad Safety Net
• Dairy
• Cotton
• ARC County
NATIONAL COUNCIL OF FARMER COOPERATIVES Trade
NATIONAL COUNCIL OF FARMER COOPERATIVES Results of the NAFTA negotiations could drastically alter the agricultural landscape of the United States
Key effects of NAFTA on the agriculture industry For agricultural goods, the US would If the administration withdraws from NAFTA, tariffs would revert see much higher tariffs without to WTO levels. Tariffs under NAFTA are 0% for most goods. The NAFTA, particularly with Mexico: average tariffs for exports to each country are: • United States: 3.5% Wheat 15% • Canada: 4.2% • Mexico: 7.1% Beef 25% Top agricultural exports to Mexico IN BILLIONS OF USD $2.6 Chicken 75%
$1.5 $1.4 $1.2 $1.0 Potatoes 75%
Corn Soybean Pork Dairy Beef
Sources: Ana Swanson and Kevin Granville, “What Would Happen if the US Withdrew From Nafta,” NY Times, October 12, 2017; “US agriculture exports to Mexico and Canada amounted to $41 billion in 2016,” Quartz, July 17, 2017; “NAFTA’s Economic Impact,” Council on Foreign Relations, Oct. 4, 2017. NATIONAL COUNCIL OF FARMER COOPERATIVES What do NAFTA (and possibly KORUS) renegotiations hold for ag?
“A Trump/Pence presidency will negotiate better trade deals for our manufacturing sector while continuing to protect and defend our vital agricultural export markets.”
Agriculture has an ally in Sec. Perdue.
NATIONAL COUNCIL OF FARMER COOPERATIVES On The Pension Front
• Bill would ease funding requirements for rural cooperative “multiple- employer” pension plans. Potential opportunity to include in the March Omnibus?
• H.R. 3596, Rightsizing Pension Premiums Act of 2017, led by Representatives Mike Kelly (R-PA) and Ron Kind (D-WI) will adjust PBGC premiums to better reflect the low risk of these plans.
• More than 400 farmer cooperatives across the country today participate, as well as for other small employers that sponsor their own
defined-benefit pension plans. NATIONAL COUNCIL OF FARMER COOPERATIVES Happy Mardi Gras!
NATIONAL COUNCIL OF FARMER COOPERATIVES Any Questions!?
NATIONAL COUNCIL OF FARMER COOPERATIVES ANTITRUST CASELAW DEVELOPMENTS: IMPLICATIONS FOR YOUR BOTTOM LINE ANTITRUST CASELAW DEVELOPMENTS: IMPLICATIONS FOR YOUR BOTTOM LINE
Presenter Biography Christopher E. Ondeck Partner Proskauer Rose LLP
Chris is a Partner in the Litigation Department and Vice-Chair of the Antitrust Group, resident in the Washington, D.C. office. He focuses his practice on representing clients in civil and criminal antitrust litigation, defending mergers and acquisitions before the U.S. antitrust agencies, defending companies involved in government investigations, and providing antitrust counseling.
Chris has handled antitrust matters for clients in a number of industries, including advertising, aerospace, alcoholic beverages, appliances, building materials, defense, medical devices, metals, mining, natural resources, oil and gas, packaging, pharmaceuticals, software, and telecommunications. He also has developed substantial experience advising clients regarding the application of the antitrust laws to the pharmaceutical industry, the agriculture industry, trade associations, and the energy industry.
Chris has particular experience with the antitrust issues involved with agricultural cooperatives. For 18 years he has defended the use and application of the Capper-Volstead Act's antitrust exemption for agricultural cooperatives, their members, and their agents in court cases, arbitrations, and government investigations, and he has published extensively on the topic. He currently represents clients in the nationwide antitrust class action litigations in the egg, potato, and mushroom industries. He also advises cooperatives on structuring and incorporation, governance, pooling issues, agency agreements, surcharges, labor issues, use of agents, and animal welfare practices
Chambers USA, which ranks him as a leading antitrust lawyer, called him a "rising star," noting that clients describe him as "our primary thought partner - he's very good at explaining the complex issues and making them easy to understand" and praise him for "his strong advocacy skills." He was also recognized by Law360 as one of the ten "rising stars" in antitrust law in 2010.
Chris is a frequent speaker on antitrust topics. He is the author of the Supply Control White Paper, published in 2009 by the National Council of Farmer Cooperatives. Chris moderated the 2012 Capper- Volstead Conference, and serves by appointment as the vice-chair of the Capper-Volstead Sub-Committee of the National Council of Farmer Cooperatives.
Prior to joining Proskauer, Chris was a former Vice-Chair of Crowell & Moring’s Antitrust Group and co- Chair of their Trade Association Group.
NCFC 89th Annual Meeting Legal, Tax and Accounting Conference February 9, 2018
Antitrust Case Law Developments: Implications for Your Bottom Line
Chris Ondeck February 9, 2018
Practical Takeaways: Issue-Spotting for a Cooperative
• Capper-Volstead immunity: a valuable legal asset provided to producers • New and increased focus on brighter lines for Capper immunity • Membership qualifications, intake, and record-keeping is critical • Responding to customer demands: building a record of the justification and support for the response • Use of indices and benchmarking services: procedures for data transmission, firewalls, reverse-engineering issues • Industry associations • Programs impacting production/supply
2 Wave of Antitrust Litigations Against Food and Agriculture
• Eggs • Potatoes • Mushrooms • Dairy • Cheese • Cranberries • Poultry • Seafood
3
Started By Class Action Lawyers, But Now Expanded Into Opt-Out Plaintiffs
• Sysco • Kroger • A&P • US Foods • Walgreen’s • C&S Wholesale Grocers • Kellogg's • Albertson’s • Associated • Winn-Dixie • Heinz Wholesale Grocers • Publix • HEB • SuperValu • General Mills • Hyvee • Meijer • Kraft • Roundy’s • Nestle • Safeway
4 Brand-Names Of Opt-Outs Have Several Impacts
5
Substantial Dollars For Settlements
Defendant Direct Purchaser Case Indirect Purchaser Opt-Outs Case Michael Foods $75 million Eggs Land O' Lakes $25 million Eggs Cal-Maine $28 million Press reports Eggs $50-80 million National Food $1 million $300,000 Eggs Midwest Poultry $2.5 million $750,000 Eggs UEP/USEM $500,000 Eggs Nucal $1.425 million $450,000 Eggs Hillandale $3 million Eggs All Defendants $19.5 million $5.5 million Potatoes Giorgio Foods $11.5 million Mushrooms Kitchen Pride $125,000 Mushrooms Creekside $250,000 Mushrooms All Defendants $52 million CWT Dairy Case Dean Foods $30 million Allen Dairy Case DFA/DMS $50 million (DFA/DMS) Allen Dairy Case Dean Foods $140 million Southeastern Milk SMA/Baird $5 million Southeastern Milk DFA/Keller $46 Million Cheese 6 Capper vs. Non-Capper
• Does it matter whether a producer group seeks to operate under Capper-Volstead? • Theories of the lawsuits are generally the same • Damages models generally the same (approx. 10-20% of gross sales) • Plaintiffs’ lawyers/plaintiffs’ experts generally the same • Opt-outs generally the same • What do the recent cases indicate about the pros and cons of operating under Capper-Volstead?
7
In re Processed Egg Products Antitrust Litigation, 08-md-02002 (E.D. Pa.)
• Allegations of a conspiracy to raise prices of shell eggs by reducing supply, through alleged sham animal welfare standards and certification process • Capper/Coop Issues: - Standard-setting - Supply control - Member qualifications - Bird ownership - Farm ownership/operation
8 In re Processed Egg Products: Practical Takeaways
• Practical Takeaways: - Membership intake and review process - Qualifying as a producer: who qualifies as a producer? - Bird ownership - Farm ownership/operation - Responding to customer demands – individually or as a group - Public statements of intent of coop policies
9
In re: Mushroom Direct Purchaser Antitrust Litigation, No. 06-cv-00620 (E.D. Pa.)
• Allegations that coop, members, and downstream distributors engaged in both: (i) a supply control scheme to purchase mushrooms farms for the purpose of permanently shutting them down; and (ii) a price-fixing scheme to sell mushrooms at minimum prices • Capper/Coop Issues: - Supply control - Membership qualification - Record keeping
10 In re: Mushroom: Practical Takeaways
• Practical Takeaways: - Review of members and their structure - Use of multiple corporate entities/affiliates/related companies - Inadvertent mistakes on membership lists - Record keeping by the cooperative of membership lists - Conduct that has an impact on production/supply
11
In re Fresh and Process Potato Antitrust Litigation, No. 4:10-MD-2186-BLW (D. Idaho)
• Allegations against agricultural cooperatives, growers, and marketer of potatoes regarding an unlawful supply-restriction conspiracy • Capper/Coop Issues: - Pre-planting controls - Good Faith Defense - Use of marketing agents in common - Info exchange versus coop handling marketing and sales
12 Potatoes: Practical Takeaways
• Practical Takeaways: - Supply control - Pre-planting vs. post-planting/production - Mandatory coop policies versus voluntary - Enforcement mechanisms - Use of agents - Good Faith Defense - Info exchange: record-keeping, who participates - Public statements of intent of coop policies
13
Edwards v. Nat’l Milk Producers Fed’n, No. 3:11-cv-04766 (N.D. Cal.)
• Plaintiffs allege that Cooperatives Working Together and its members coordinated to reduce to supply of milk through “herd retirements” • Capper/Coop Issues: - Member exit/retirement strategy - Sending product into different channels - Supply control/impact
14 Edwards/CWT: Practical Takeaways
• Practical Takeaways: - Internal/external statements of purpose - Voluntary programs - Membership exit/retirement strategies - Sending product into different channels - Vetting with government agencies - Impact on production/supply
15
Winters v. Ocean Spray Cranberries, Inc., No. 1:12-cv-12016 (D. Mass.)
• Allegations relating to pools of Ocean Spray cranberry growers. Plaintiffs sought damages derived from pricing at auction for “A pool” versus “B pool” • Capper/Coop issues: • Mutual benefit • Use of multiple pools • Treatment of all members vis a vis overall member governance
16 Cranberries: Practical Takeaways
• Practical Takeaways: • Member governance of the cooperative • Impact of multiple pools/justification • Member benefits/seniority versus all members receiving the exact same results and status
17
Allen v. Dairy Farmers of America, Inc., No. 5:09-CV-00230 (D. Vt.)
• Alleging a conspiracy among Dairy Farmers of America, Dean Foods, DMS, and H.P. Hood, which purportedly reduced the milk price to the dairy farmer class members. • Capper/Coop issues: - Members leaving cooperatives - Supply control
18 In re Southeastern Milk Antitrust Litigation, No. 08-md-01000 (E.D. Tenn.) (MDL No. 1899)
• Alleging conspiracy to lower price of milk to dairy farmers. • Capper/Coop issues: - Market consolidation - Closing plants
19
In re: Dairy Farmers of America Inc. Cheese Antitrust Litigation, No. 1:09-cv03690 (N.D. Ill.)
• Allegations of purchases of cheese and manipulating the price of milk futures to inflate the price of raw milk. • Capper/Coop Issues: - Using product in different channels
20 In re Broiler Chicken Antitrust Litig., 16-cv- 8637 (N.D. Ill.)
• Allegations of price-fixing and supply reduction in market for broiler chickens • Trade Association/Industry Issues: - Manipulation of price indices - Public announcements of pricing and supply decisions - Use of pricing indices (Urner Barry, USDA, Georgia Dock) - Use of benchmarking indices (Agri Stats)
21
In re: Packaged Seafood Products Antitrust Litig., Case No. 3:15-md-02670 (S.D. Cal.)
• Allegations of collusion to inflate the price of packages seafood products • Trade Association/Industry issues: - Use of industry trade group marketing programs - Use of bilateral co-packing agreements
22 Conclusion: Antitrust Issues to Flag at a Coop
• Capper-Volstead immunity: a valuable legal asset provided to producers • New and increased focus on brighter lines for Capper immunity • Membership qualifications, intake, and record-keeping is critical • Responding to customer demands: building a record of the justification and support for the response • Use of indices and benchmarking services: procedures for data transmission, firewalls, reverse-engineering issues • Industry associations • Programs impacting production/supply
23 DEFINED BENEFIT RETIREMENT PLANS: CHALLENGES, CHANGES AND BENEFITS FOR COOPERATIVES DEFINED BENEFIT RETIREMENT PLANS: CHALLENGES, CHANGES AND BENEFITS FOR COOPERATIVES
Presenter Biographies Michael Boland Koller Professor of Agribusiness Management and Director University of Minnesota
Michael Boland (Mike) holds the Koller endowed Professorship in agribusiness management and information technology at the University of Minnesota. He teaches classes in cooperatives (in the law school and agricultural school), farm management, and an MBA course in agribusiness management in the Carson School of Management. The Koller Professorship was funded by agricultural cooperatives (CHS, Land O’Lakes, CoBank, and Country Financial) and Koller friends, family, and colleagues.
Mike teaches educational modules on finance, governance, and strategic thinking in boards of director leadership programs for cooperatives. These programs are taught to more than 1000 cooperative senior employees and directors annually. In addition, he has worked with cooperatives and agribusinesses in more than 100 countries. Recent research by his graduate students includes occupational health and safety among cooperatives and understanding benefit issues in defined benefit and defended contribution programs in ag co-op mergers.
Mike is a member of Harvard’s Private and Public, Scientific, Academic, and Consumer Food Policy Group. Mike’s Ph.D. in agricultural economics is from Purdue University where he worked on programs in the Center for Food and Agricultural Business. He is the oldest of 12 children and was reared in Minnesota where he worked in local and regional ag cooperatives.
John Caragozian Vice President, Law & General Counsel Sunkist Growers, Inc.
John Caragozian is Vice President, Law, and General Counsel at Sunkist Growers, Inc. He received his J. D. from Harvard Law School and—prior to joining Sunkist—was a trial attorney with the U. S. Department of Justice in Washington, D. C. and then in private practice in Los Angeles. He was also an adjunct professor at Loyola Law School in Los Angeles and currently chairs the annual Bollens/Ries/Hoffenberg Lecture at UCLA.
Tim Goodman Dorsey & Whitney LLP [email protected]
Tim Goodman works with employers on medical plans, retirement plans, executive compensation, and a wide range of benefits. Tim works with a broad array of employers, with a special focus on assisting cooperatives, agribusiness companies, and hospitals and health care entities. Employers have Tim provide advice on health care reform (the ACA), wellness plans, and other welfare plan matters (ranging from cafeteria and health FSAs to severance and tuition plans). With respect to health care reform, Tim advises employers on the new fees (from the employer shared responsibility fee to the Cadillac tax), assists them in preparing for reporting on Form 1095-C, and explains the new requirements ranging from notice requirements to plan mandates. Tim recognizes the complex nature of the rules governing retirement plans and works with employers to review operations, address errors, and help employers maintain the tax- qualified status of their plans.
Professional Activities • Member, National Council of Farmer Cooperatives, Legal, Tax & Accounting – Employment and Benefits Law Subcommittee • Council Member, Employee Benefits Section, Minnesota State Bar Association • Past President, Midwest Pension Conference • Member, Minnesota State Bar Association, Employee Benefits Section and Taxation Section • Member and Past President, Board of Directors, Minnesota Justice Foundation (a non-profit corporation that promotes pro bono opportunities for law students) • Past Adjunct Professor, University of Minnesota Law School
Select Presentations • “Employee Benefits – Limiting Risks and Exposure,” Agribusiness Interactive Dialogue, August 2017 • “Health Care, the ACA, and the New Administration: Changes So Far and Looking Ahead,” National Society of Accountants for Cooperatives Annual Meeting, August 2017 • “The ACA and the New Administration: Changes So far and What to Expect,” National Society of Accountants for Cooperatives Webinar, May 2017 • “ACA and Benefit Developments: 2017 So Far and What to Expect,” Cooperative Business Issues Conference, Cooperative Network, March 2017 • “Giving the Tax Man His Due: Taxing Employee Benefits, Perks & Awards,” National Conference of Farmer Cooperatives HR Conference, October 2016 • “The Gig is Up: Taxes, ACA Penalties, and Employment Law Risks of Contractor Misclassification and Joint Employer Status for Leased Employees,” Minnesota Rural Electric Association, April 2016 • “ACA Reporting: Tackling Complex Form 1095-C Situations and Preparing for Form 1094-C,” National Society of Accountants for Cooperatives, February 2016 • “ACA Cadillac Tax,” National Conference of Farmer Cooperatives HR Conference, October 2015 • “ACA Reporting: Form 1095-C and Employer Shared Responsibility,” National Conference of Farmer Cooperatives HR Conference, October 2015 • “ACA Reporting: Preparing for January 2016, Form 1095-C, Form 1094-C, and More,” National Cooperative Business Association, October 2015 • “Affordable Care Act: Implementation and Challenges (Fees, Forms, and Mandates),” National Council of Farmer Cooperatives Annual Conference, February 2015
Ian O’Connell VP of Finance and CFO Southern Minnesota Beet Sugar Cooperative
Ian O’Connell is the Vice President of Finance and CFO at Southern Minnesota Beet Sugar Cooperative (SMBSC) and has spent the past nine years working in agriculture. SMBSC is owned by over 500 sugarbeet growers in approximately 17 counties in southwestern Minnesota. SMBSC, located in Renville, Minnesota and its wholly owned subsidiary, Spreckels Sugar Company (Brawley, California), collectively produce over 1.3 billion pounds of sugar annually. SMBSC also owns a sugarbeet processing facility under the name Holly Seed in Sheridan, Wyoming.
Ian leads the Finance, Treasury/ Insurance, Human Resources, Information Technology, Supply Chain and Purchasing functions at SMBSC along with SMBSC’s involvement in its joint venture sugar marketing company, National Sugar Marketing (NSM). Prior to SMBSC, Ian worked at CHS, Inc. leading financial activities as Controller for the North American Grain Marketing, Crop Nutrients and Wheat Milling businesses and Global Renewable Fuels and Processing and Food Ingredients businesses. He has also held roles in external audit/ reporting, transaction advisory services and consulting, including that for Ernst & Young.
Ian has a Bachelor of Accounting degree from the University of Minnesota Duluth, is an active CPA and sits on the Board of Directors for the Midwest Chapter of the National Society of Accountants for Cooperatives (NSAC), including previously holding the role of Chapter president.
Defined Benefit Retirement Plans: Challenges, Changes, and Benefits for Cooperatives
February 9, 2018 Michael Boland Tim Goodman University of Minnesota Dorsey & Whitney (612) 625-3013 (612) 340-2825 [email protected] [email protected]
John Caragozian Ian O’Connell Sunkist Growers Southern Minnesota Beet Sugar Vice President & General Counsel Vice President of Finance & CFO
Background
• In a pension galaxy, a long time ago… • Before 1978... • There were defined benefit plans…and… – Stock bonus, profit sharing, and money purchase pension plans – Tax sheltered annuities – But no 401(k) plans • Types of retirement plans – Single employer plans • Plan covers employees of one employer (one controlled group) – Multiple employer plan • Plan covers employees of multiple unrelated employers – Multiemployer plan • Plan collectively bargained and maintained by multiple employers (usually within same or related industries) and labor union Advantages of Defined Benefit Plans
• Advantages – Recruiting and retention in areas of low unemployment • Defined benefit plans can have longer vesting schedules and have benefits that increase with service, which encourage retention – Recruiting of senior management • Defined benefit plans offer added incentive in recruiting senior management for agricultural cooperatives located in rural area – Retirement readiness • Defined benefit plans and annuities provide for more certainty in retirement • Unless employees feel ready to retire, more likely to delay retirement – BUT… • Advantages may be less for millennials • Advantages may be less for coops in urban versus rural areas
Disadvantages of Defined Benefit Plans
• Disadvantages – Additional regulation • Subject to PBGC in addition to other agencies – Multiple employer plan complexities • Advantage of minimizing costs and spreading costs • Risks of employer withdrawal – Mergers and acquisitions • Often restrict transactions – Administrative expenses • Actuaries • Accountants • Management – Other challenges noted later Developments Shift to Defined Contribution Plans
• Single employer plans with 100 or more participants – Note that adoption of cash balance plans has slowed decline in number of defined benefit plans DB Plans DC Plans • Source 1975 18,016 8,350 – DOL, EBSA, Private Pension Plan Bulletin 1980 22,424 12,978 Historical Tables and 1985 22,619 23,279 Graphs 1975-2014 (https://www.dol.gov/sites/ 1990 17,521 33,035 default/files/ebsa/researche 1995 15,371 44,115 rs/statistics/retirement- bulletins/private-pension- 2000 11,866 56,621 plan-bulletin-historical- 2005 10,102 66,123 tables-and-graphs.pdf) 2010 8,741 74,199 2014 7,643 76,934
Developments PBGC Premiums
• Per capita (per • Variable rate premium participant premium) (underfunded plans) – 1990 – $19 per participant – 1990 – $9 per $1000 ($34 per p cap) – 2005 – $19 per participant – 2005 – $9 per $1000 (no cap) – 2006 – $30 per participant – 2006 – $9 per $1000 (no cap) – 2007 – $31 per participant – 2007 – $9 per $1000 (no cap) – 2010 – $35 per participant – 2010 – $9 per $1000 (no cap) – 2013 – $42 per participant – 2013 – $9 per $1000 ($400 per p cap) – 2016 – $64 per participant – 2016 – $30 per $1000 ($500 per p cap) – 2017 – $69 per participant – 2017 – $34 per $1000 ($517 per p cap) – 2018 – $74 per participant – 2018 – $38 per $1000 ($523 per p cap) – 2019 – $80 per participant – 2019 – $42 per $1000 ($523 per p cap) Per p cap = Per participant cap Developments Lump Sum Window Offers
• Lump sum windows offer terminated employees who have not yet commenced benefits (deferred vested participant) an opportunity to receive lump sum payment of their benefit – Recent background • 2012 – Ford offered lump sum window to 90,000 deferred vested participants (start of recent trend) and in-pay status participants • Other large windows include GM (2012 – 42,000), TRW Automotive (2012 – 21,000), NCR (2014 – 20,000), Alcatel Lucent (2015 – 74,000) • 2015 – IRS limits lump sum offers to participants in pay status (Notice 2015-49) – Variations • Limit based on benefit amount (benefit amount of $100,000 of less) – Concerns • Settlement accounting • Adverse selection (those with shortest lives take lump sum offer)
Developments Transfers to Insurance Companies
• Transfers of benefits to insurance companies offer employers way to reduce or eliminate risk – Recent background • 2012 – General Motors and Verizon made large transfers to insurance companies • Start of recent trend – Variations • Termination of plan and purchase of annuities through insurance company • Partial termination of plan by transferring certain benefits to insurance company Research
• Professor Michael Boland, Ph.D., University of Minnesota has been researching the impact of defined benefit plans on cooperatives
• These next slides are a result of that research
• Professor Boland was assisted by Anthony Quill, M.S., student in Applied Economics, who worked on this for his thesis with professor Boland
Research
• Transaction between cooperatives complicated by plans • Background – different retirement plan structures – UBG was started by co‐ops belonging to Farmland Industries – CPSB was started by Countrymark (co‐ops in IN, OH, and MI) – ABC was started by Farmer Grain Dealers (later called Agri Industries in Iowa) – UBG, CPSB, and plans offered by MFA Oil, Southern States, and GROWMARK are multiple employer plans – ABC’s defined benefit program is family of single employer plans (in between multiple employer plan and single employer plan) – Cenex and Harvest States Cooperatives (GTA) provided pension plan for local co‐ops (these were converted to cash‐balance plan in 1970s) – Co‐op 401k is defined contribution plan Research
• Different cooperatives in different plans in Minnesota – UBG and ABC Co‐ops: Remaining 140‐odd farm supply and grain / oilseed marketing co‐ops are in Co‐op 401k
Research
• Other issues to consider – Determining best type of plan to provide retirement benefit for all employees is important strategic decision with long‐lasting implications for employees – Moving to 401(k) type program is easier to budget and gives co‐op board more flexibility • Co‐op needs to be profitable! • Pension costs must be considered when looking at margins, etc. – Employee retention has been shown to be problem – As more general managers get hired outside of co‐op system, they lack full understanding of career paths that employees have used in past – Near future for increases in pension asset growth does not appear to be significant Research
• Exiting pension plan is not easy (nor should it be) – Challenges of managing pension plan or 401k‐type plan are many • It is difficult to perfectly match market value of pension assets with pension liabilities • They are heavily regulated by government – Difficult to project future administrative costs and other fees for both types of plans – Co‐ops in multiple employer plan pool risks and benefits from other co‐ops in that plan
Research
• What issues should board consider? – First and foremost, commitment to profitability is critical for success – Joint ventures are becoming popular – One issue is that because they are new entity, employees in that LLC can be on different benefit plan • Strategic issue is what happens if that LLC is successful enough that it leads to full merger in future or employees in that JV want to pursue career path in one of JV partners • Needs to be thought of as strategic decision and not just “what is easiest” Research
• What was learned from merger of WFS (defined benefit co‐op) and CVC (defined contribution co‐op)? – People who are not in defined benefit plan may have negative connotations about them, and it is big hill to get over in order to get buy in – Explaining withdrawal liability is very difficult – People have hard time understanding that only way liability becomes an issue is if you withdraw, and why would you do that at historically low interest rates – Key is to get management completely educated and understanding whole concept – Difficult for board to wrap their heads completely around defined benefit plan and likely will look to management for advice – If management is uncertain, then transaction is sunk
Challenges Time, Resources, Risk
• Maintaining defined benefit plan requires time and resources – Plan administration time – Investment committee time – Finance time (funding projections) – Actuarial work and time • Defined benefit plan funding impacts employer’s financial statements Challenges Freezing Plans and Replacements
• Freezing plan – Benefit accrual freeze • Freezes all benefit accrual factors (compensation and service) – Partial benefit accrual freeze • Freezes some benefit accrual factors (for example, service), allows others (for example, compensation) to reflect changes in subsequent years – Participation freeze • Freezes plan to new participants; existing participants continue to receive benefit accruals
Challenges Freezing Plans and Replacements
• Freezing plan (continued) – Pros and cons • Pros to freezing new participants – Gradual reduction in funding (if plan is underfunded) – Gradual reduction in PBGC premiums – More certain funding under 401(k) plans – Familiarity with 401(k) plans – Reduces defined benefit plan funded status volatility • Cons to freezing new participants – Loss of recruiting and retention tool – Potential HR difficulties – Workforce impact – Ongoing costs with less or no HR benefit – Short-term increase in retirement plan costs – Requirement of at least 50 participants (or 40% of employees) – Potential 401(k) plan restrictions Challenges Mergers and Acquisitions
• Mergers and acquisitions – “Stock” acquisition – buyer takes over seller and continues business or merges it into buyer (buyer assumes assets and liabilities of seller) – Asset acquisition – buyer purchases assets for cash • Successor liability – Stock acquisition – if seller participated in or contributed to defined benefit plan, buyer assumes liability – Asset acquisition – while normally seller would not assume liability, some courts have held that seller may assume liability with respect to certain benefits, including defined benefit plans • Courts have held that if buyer has notice of defined benefit liabilities and there is sufficient continuity of operations, buyer may be liable • Upholsterers' International Union Pension Fund v. Artistic Furniture of Pontiac, 920 F.2d 1,323, 1,327 (7th Cir. 1990) • Einhorn v. M.L. Ruberton Construction Co., 632 F.3d 89, 99 (3rd Cir. 2011) • Resilient Floor Covering Pension Trustees v. Michael’s Floor Covering, Inc., 801 F.3d 1,079 (9th Cir. 2015)
Challenges Withdrawal Liability
• Withdrawal liability – Multiemployer and multiple employer plans both have withdrawal liability risk – Risk arises in particular during business transitions and restructuring • Merger and acquisition, or other business restructuring • Disaffiliation of business (in multiple employer plan context) • Bankruptcy and insolvency • Multiemployer plans – ERISA contains rules governing withdrawal liability, including with respect to seller in asset transaction • See 29 U.S.C. § 1381 et seq. (ERISA § 4201) – Multiemployer plan itself will seek withdrawal liability from employer – PBGC can also intervene • Multiple employer plans – ERISA contains rules governing withdrawal liability • See 29 U.S.C. § 1363 (ERISA § 4063) – PBGC notice and possible intervention Challenges Facility Shut Downs
• ERISA contains requirements with respect to underfunded plans if there is facility shut down (substantial cessation of facility at location) – Either • Employer must contribute additional amount to fund plan based on portion of workforce being terminated, or • Employer must purchase bond to protect plan with respect to amount – 29 U.S.C. § 1362(e) (ERISA § 4062(e))
Challenges Funded Status
• Different measurements of plan funded status – ABO (accumulated benefit obligation) – present value of vested and non-vested benefit obligations as of present date – PBO (projected benefit obligation) – present value of vested and non- vested benefit obligations projected forward to take into account future compensation – Termination funding – funding necessary to terminate plan • Funded status changes over time even in frozen plans – Assets – value of assets fluctuates and contributions affect funding – Liabilities – mortality expectations – life expectancies have continued to climb over time, increasing plan liabilities – Liabilities – interest rate changes impact liabilities – Liabilities – expense changes (increases in PBGC liabilities and other expenses) – Liabilities – potential law changes • Highly technical area – Substantial consequences if funding falls below 80% Challenges Funded Status
• Termination funding status is almost always more expensive because of cost of purchasing annuities from insurance company (transfer of liabilities to insurance company) – Plans often anticipate future rate of return of 5%, 6%, or more – Insurance companies are more conservative and anticipate future rate of return of 2% to 3% – In addition, if there is lump sum option, there is potential for adverse selection (actuaries call this anti-selection bias) • Participants who do not anticipate living as long as life expectancy is projected are better off taking lump sum than an annuity • Thus, may want to avoid offering lump sum form of payment – These factors contribute to cost of terminating plan or transferring liability – There are times, however, where costs are not higher (depends on demographics, forms of payment available, and many factors) – Termination may be cheaper than continuing plan
Legal Notice
• This presentation is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created through this presentation. CRISIS MANAGEMENT: ARE YOU PREPARED FOR AN ACTIVIST ATTACK? CRISIS MANAGEMENT: ARE YOU PREPARED FOR AN ACTIVIST ATTACK?
Presenter Biography
Monica Massey Senior Vice President and Chief of Staff Dairy Farmers of America
As DFA’s senior vice president and chief of staff, Monica Massey is responsible for a wide range of duties related to the overall success of DFA. Monica joined DFA in 2006 and previously served as vice president of corporate communications and member relations. She serves on DFA’s crisis preparedness, strategic planning and policy, and Project One steering committee teams, as well as DFA’s Innovation Council. In addition, she serves on a number of industry committees, including the Innovation Center for U.S. Dairy’s animal care communications subcommittee, which she chairs, and is a director on the Center for Food Integrity’s board of directors. ATTENDEE LIST 2018 NCFC Annual Meeting LTA Attendee List
Last Name First Name Company Acord Kevan Bridge Builder Tax and Legal Services Antoni David KPMG Aufman Matt Welch Foods Inc. Barenys Josep Michigan Milk Prodcers Barnes Donald Porter Wright Morris & Arthur LLP Barrett David Barrett, Easterday, Cunningham & Eselgroth LLP Barrett Seleise Kansas State University/ACCC Bender Braden Sun-Maid Growers of California Benson George McDermott Will & Emery LLP Blickenstaff Scott Snake River Sugar Company Bostrom Brent GROWMARK, Inc. Boyle Larry Ocean Spray Cranberries, Inc. Brandenburg Jeffrey CliftonLarsonAllen LLP Brummel Andrew Dairy Farmers of America Burlage David CoBank Buss Linda Landus Cooperative Caragozian John Sunkist Growers, Inc. Cargin Gregory Gardiner Thomsen Castanias Teresa Teresa Castanias CPA Clippinger Lucy Baker & Miller PLLC Cody Kevin Dairy Farmers of America Condron Robert MFA Oil Company Cool Renee Dairy Farmers of America, Inc. Covey William GROWMARK, Inc. Cowell Jon Ocean Spray Cranberries, Inc. Currie Angela Sunkist Growers, Inc. Deeb Sam Dairy Farmers of America Duggan Christopher Dorsey & Whitney LLP Ellixson Ashley United Dairymen of Arizona Emmert Mitchell Saalfeld Griggs Eselgroth Carolyn Eselgroth LLP Eskelsen Todd Schiff Hardin Faries Gail D. Willams & Co., P.C. Feeley Kevin McDermott WIll & Emery LLP Feider Joseph Snake River Sugar Company Fontes Mike Sunkist Growers, Inc. Fredericks Bryanna Herbein + Company, Inc. Fuller Jo Ann Alabama Farmers Cooperative
Last Name First Name Company Gardiner Dennis Gardiner Thomsen, CPA Gardiner Mark Gardiner Thomsen, CPA Genetti Mike KPMG Glass Robert Land O' Lakes Inc. Guler Tara Baker Tilly Hall Daniel GROWMARK, Inc. Hallin Thomas Alabama Farmers Cooperative Hanks Craig Snake River Sugar Company Helme Morgan Dorsey & Whitney LLP Hendry Chip Florida's Natural Growers Hensley Robert Dorsey & Whitney LLP Heron Julian Tuttle Taylor and Heron Huff Shannon Tennessee Farmers Cooperative Huston Brett KPMG LLP Jacobsen Vanessa Eimer Stahl LLP Janzen Pete Land O'Lakes, Inc. Johnson Tina Alabama Farmers Cooperative Kacsuta Edward U.S Tobacco Cooperative Kasper Richard Minn-Dak Farmers Cooperative Kautzman Patrick Eide Bailly LLP Kenley John Darigold, Inc. Khadavi Steven Dorsey & Whitney LLP Klinger Dustin Thede Culpepper LLP Krienert Eric Moss Adams Kroll Eric Baker Tilly Kutilek Bill Crosby Guenzel LLP Latham Peter Latham Shuker Eden & Beaudine, LLP LaVallee Dean Blue Diamond Growers Lawler Greg GROWMARK, Inc. Lensmire Mike CliftonLarsonAllen LLP Levine Jay Porter Wright Morris & Arthur LLP Lindsay Michael Dorsey & Whitney LLP Longinotti David Hanson Bridgett LLP Lundberg Mashenka CoBank Maloy Lisa American Crystal Sugar Company Mayhew Michael CliftonLarsonAllen, LLP McGovern Nicole Ag Processing Inc. McWatters Jay Dopkins & Company, LLP McWherter Jim Tennessee Farmers Cooperative Miller Todd Baker & Miller PLLC Mittelstadt Wade GROWMARK, Inc. Moss David Tennessee Farmers Cooperative Mott Daniel Fredrikson & Byron, PA Last Name First Name Company Munekiyo Richard NORPAC Foods, Inc. Nelson Sue Ann Fredrikson & Byron P.A. Nguyen Hong Eadie and Payne, LLP O’Connell Ian SMBSC Ondeck Chris Proskauer Rose LLP O'Toole Jill Shipman & Goodwin Otto Daniel Minn-Dak Farmers Cooperative Pieper Bill Land O’Lakes, Inc. Pollet Josh Herbein + Company, Inc. Posch Danny MKC Robinson John Foremost Farms USA Cooperative Roeder Brent Eide Bailly LLP Rosenau Steve American Crystal Sugar Company Rufener Ron AKT LLP Schenker Harold Sunsweet Growers, Inc. Simmelink Scott Ag Processing Inc. Skidmore Tim CHS Inc. Smith Rebecca CliftonLarsonAllen South Elizabeth Co-Alliance LLP Stamm Richard Ocean Spray Cranberries, Inc. Steinle Eric KFSA Stewart Sheilah Land O'Lakes, Inc. Stonesifer David Herbein + Company, Inc. Strathman Kevin Dairy Farmers of America, Inc. Strong Matt Pacific Coast Producers Sullivan Charles Bond, Schoeneck & King, PLLC Swanson Donald Central Valley Ag Cooperative Thomsen David Gardiner Thomsen CPAs Toonen Peter Foremost Farms USA Cooperative Tucher Sarah Fredrikson & Byron, P.A. Warne Teresa American Crystal Sugar Company Weber Rocky Nebraska Cooperative Council Weinstein Alan CoBank Werstak Joe United Producers, Inc. Whitt Karen The Equity Williams Caleb Saalfeld Griggs PC Wilson Randon Dorsey & Whitney LLP Zabaleta Frank Eadie and Payne, LLP Zappa James CHS Inc. Zovickian Stephen Law Office of Stephen Zovickian
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