2019 Insights

A collection of commentaries on the critical legal issues in the year ahead.

Editorial Board

Thomas H. Kennedy Head of Global Knowledge Strategy

Boris Bershteyn Adrian J. S. Deitz Victor Hollender Scott C. Hopkins Edward B. Micheletti

Robin Davidson Jenna Cho Marketing and Communications

This collection of commentaries provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates is for educational and informational purposes only and is not intended and should not be construed as legal advice. These commentaries are considered advertising under applicable state laws.

Contents

01 Corporate

02 Capital Markets 16 Corporate Restructuring 18 M&A / Governance

32 Litigation / Controversy

60 Regulatory

84 Financial Regulation

98 Index of Skadden-Authored Articles From 2018

Corporate

Capital Markets

US Capital Markets Face Uncertainty Entering 02 2019, With Volatility Likely to Continue

SEC Continues Steady Progress With 06 Regulatory, Enforcement Goals

New UK IPO Rules Encourage Independent 10 Research, Address Perceived Conflicts of Interest

New HKEx Rules Spur Bumper Year in Hong Kong Capital 12 Markets, but Lasting Impact Remains Unclear

14 Recent Trends in Renewable Energy

Corporate Restructuring

Second Circuit Adopts Secured Creditor Cramdown 16 Standard Based on Market Efficiency

M&A / Governance

2019 US and Global M&A Outlook: Despite Mounting 18 Headwinds, Potential Remains for the New Year

Latin America Trend to Watch: Representations 21 and Warranties Insurance

US and EU Antitrust Enforcers Remain Active 24 and Aggressive, With Some New Wrinkles

26 US Corporate Governance: Turning Up the Heat

29 Trending Topics in Executive Compensation 2019 Insights Capital Markets

Performance in the U.S. capital markets was mixed in 2018, US Capital with the equity new issuance market showing strength through Markets Face most of the year and the debt issuance markets softening. The initial public offering (IPO) market had its strongest year since Uncertainty 2014, though it weakened in the fourth quarter due to significant market volatility. In 2019, the U.S. economy is forecasted to Entering 2019, continue to grow, albeit at a slower pace, and most economic With Volatility indicators remain sound, with an unemployment rate of 3.9 percent and 312,000 jobs added in December 2018. However, Likely to ongoing concerns over interest rates, domestic and geopolitical Continue events, trade and the decelerated pace of global economic growth could cause further market volatility.

Debt Markets. The U.S. high-yield debt market ended 2018 42 percent lower by Contributing Partner dollar volume and 39 percent lower by number of issuances than 2017. The $191 billion in total issuance was the lowest since 2008 ($144 billion), and the number of issuances Michelle Gasaway / Los Angeles fell to 436, the lowest in two decades. (High-yield activity in 2018 was frequently replaced with term loan B issuances, which are more attractive to investors when interest rates are rising and provide borrowers with covenant packages that are increasingly bond-like in Counsel flexibility.) Proceeds from U.S. high-yield bond offerings were largely used for refinancings (67 percent of issuances), with only 16 percent used for M&A activity. For the first time since 2008, in 2018 there were no issuances in December — a period of over 40 days Benjamin K. Marsh / New York without an issuance that continued until January 10, 2019.

US High-Yield Corporate Bonds Associates Dollar Value Number of High-Yield Issues 378 369 359 billion Agnes N. Aniol / Los Angeles 326 billion billion 330 billion 287 billion Lilit Kazangyan / Los Angeles 273 billion billion 247 210 866 843 billion Jeremy A. Zucker / New York billion 808 758 191 billion 144 626 632 714 billion 493 436 563 578 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

U.S. investment-grade debt market volume in 2018 was $1.25 trillion (1,983 issuances), ending seven consecutive years of increases after a record volume of $1.42 trillion (2,346 issuances) in 2017. Increasing interest rates and market volatility combined with the December 2017 tax reform, which encouraged repatriation of overseas cash and reduced the tax benefits of issuing debt, caused the decline. The largest issuer by volume was CVS Health Corp., with $40 billion raised in connection with its acquisition of Aetna, representing the third-largest U.S. corporate bond transaction in history. Overall, investment-grade issuances related to M&A increased in 2018 by dollar volume, totaling $226 billion by year-end.

US Investment-Grade Corporate Bonds

Dollar Value Number of Investment-Grade Issues 1,424 1,321 1,351 billion 4,119 billion billion 1,249 1,193 billion 1,115 1,123 1,15 3 billion billion billion billion 937 890 billion 871 billion billion 2,402 2,267 2,346 2,120 2,188 2,191 1,983 1,833 1,833 1,912

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Bloomberg

2 Looking Ahead Equity Markets. After a volatile start to the year, the Dow Jones Industrial Average, The U.S. economy enters 2019 in its ninth S&P 500 and Nasdaq composite achieved record highs in the third quarter of 2018, driven by a strong economic backdrop and solid corporate earnings (fueled in part by the impact year of expansion, with stock markets on of tax reform, which led to a record $1 trillion of stock buybacks that boosted earnings per pace to eclipse the bull run of 1991-2001 share). Fourth-quarter volatility, however, erased the year’s gains, and the three indices as the longest in history. But whether the ended the year down 5.6 percent, 6.2 percent and 3.9 percent, respectively, from 2017, capital markets are capable of continued their worst annual performance in 10 years. Volatility soared in the fourth quarter, driven by concerns over slowing global economic growth, rising interest rates, U.S.-China trade strength depends on several factors. tensions and policy uncertainty arising from White House communications. Economic Growth. The U.S. economy Strong markets in the first three quarters helped make 2018 the best year for U.S. IPOs expanded at an accelerated pace in 2018. since 2014, with 199 IPOs raising $51 billion. IPO volume was 31 percent higher than 2017 and 168 percent higher than 2016. While aftermarket performance was mixed, U.S. gross domestic product grew 3.1 overall, IPOs significantly outperformed broader market indices. percent, marking the first year since 2005 that the economy expanded above US IPOs 3 percent. The strength was driven Dollar Value Number of IPOs by increases in government spending, 94 healthy corporate profits and increases billion 216 in consumer and business spending. The 277 199 163 167 138 152 U.S. dollar rose in value 4.3 percent in 130 59 103 62 billion 51 2018, according to the U.S. dollar index, 35 44 42 billion demonstrating positive sentiment toward billion 39 billion 39 billion 32 billion the U.S. economy. 27 billion billion 24 billion 19 billion 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Many economists expect the pace of U.S. economic growth to moderate in 2019. The leading sector for IPOs by volume in 2018 was technology, with a number of tech While a reduced economic growth rate unicorns completing highly anticipated IPOs. Other top sectors were health care and does not necessarily mean a recession consumer products and services. Special purpose acquisition companies continued to constitute a significant amount of IPO volume, with 43 deals, representing 19 percent is imminent, it could negatively impact of total IPO proceeds. In 2018, 33 China-based companies completed IPOs, raising $9.2 stock prices and corporate earnings, and billion, a 140 percent increase over 2017. In addition, music-streaming service provider reduce investor confidence. Nevertheless, Spotify garnered significant attention when it went public in April 2018 by means of an many economists have indicated that a unconventional direct listing, potentially leading the way for a select few others to follow recession in 2019 is unlikely, and invest- suit. (For example, messaging platform service provider Slack has discussed a possible direct listing.) Companies also continued to take advantage of recent Securities and ment banks remain generally bullish on Exchange Commission (SEC) accommodations, such as the ability for all issuers to confi- the near-term outlook for capital markets dentially submit draft registration statements and omit certain financial statements previ- activity. However, the longer the govern- ously required for interim drafts. (See “SEC Continues Steady Progress With Regulatory, ment shutdown lasts, the more pressure Enforcement Goals.” See also “New HKEx Rules Spur Bumper Year in Hong Kong Capital Markets, but Lasting Impact Remains Unclear.”) there is on some of these forecasts. Follow-on activity was relatively flat, both by dollar volume and number of deals. Block Corporate Earnings. Moderating earn- trades represented 28 percent of total follow-on offerings, down slightly from 30 percent ings growth could present challenges to in 2017 and down significantly from a record 49 percent in 2016. The decline in block trades is attributed largely to weaker aftermarket performance resulting from tighter capital markets activity, with a forecasted discounts to market price relative to marketed follow-ons. decline from 9 percent in 2018 to 7-8 percent in 2019. However, with S&P 500 US Follow-On Activity multiples at five-year lows, arguably the Dollar Value Number of Follow-On Offerings market already has adjusted prices in 794 732 anticipation of a slowdown. Stronger- 708 732 685 609 630 587 603 than-anticipated earnings growth could 492 improve investor confidence and slow 213 186 194 185 billion 170 billion billion 172 billion recent market declines, facilitating billion 149 billion 150 153 150 billion 135 billion billion billion activity as issuers seek to take advan- billion 257 tage of rising valuations. On the other hand, weaker-than-expected earnings

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 could contribute to market volatility and dampen capital markets activity. Source: Thomson Reuters

3 2019 Insights Capital Markets

Trade Uncertainty. The ongoing U.S.- in December 2018, from 2.25 percent to the government reopens, IPO companies China trade dispute could continue to 2.5 percent, and continued to pursue its with a calendar year-end would need disrupt activity. To date, the U.S. and plan to reduce the Fed’s balance sheet to price their offerings by February 14, China have imposed $250 billion and (most recently at a pace of $50 billion per 2019, if they want to go effective without $110 billion worth of tariffs, respectively, month). However, Powell more recently providing 2018 audited financial state- on the other country’s products. (See indicated that the Federal Reserve will be ments. A prolonged government shut- “Enhanced US Export Controls and patient with monetary policy as it watches down could have implications for the IPO Aggressive Enforcement Likely to Impact economic performance. From a capital market for the full year, as the SEC and China.”) Although a temporary “truce” markets perspective, higher interest rates issuers work through the pent-up backlog, was reached in December 2018 (includ- can reduce existing bond prices and make and could potentially have broader ing a 90-day pause on tariff hikes until new bond issuances more expensive for economic effects if it impacts business March 1, 2019), an array of challenging issuers. In addition, market volatility investment and consumer confidence. trade issues remain unresolved. Until a from Federal Reserve activity and policy Other elements of domestic politics may final resolution is reached, the existing statements may lead to tighter and more also continue to disrupt markets in 2019, tariffs and continued uncertainty over unpredictable windows of opportunity with a survey by a bulge bracket financial U.S.-China trade relations may nega- for capital raising. institution finding that individual inves- tively impact business investment and tors perceive the White House to be the consumer confidence. Moreover, other U.S. and Geopolitical Events. Political greatest source of market risk in 2019. trade matters, such as the effects of the uncertainty both in the U.S. and inter- Political uncertainty outside the U.S. also renegotiated North American Free Trade nationally has significantly impacted may impact the markets, including Brexit Agreement and tariffs on certain imported the capital markets in recent months. and trade disputes, in addition to changes products (e.g., aluminum and steel) could On the domestic front, according to to foreign direct investment rules across also weigh on the markets. The Washington Post, White House Europe (see “Foreign Investment Control tweets have moved markets by as many Reforms in Europe”) and sanctions (see Federal Reserve Activity. The monetary as 3 percentage points in a single trading 1“Key Developments in US Sanctions”). policy of the Federal Reserve impacted session, such as when faltering trade the capital markets in 2018 and could relations with China were revealed 1 Sources for the data in this article are: Bloomberg, continue to do so in 2019. Under the new on December 5, 2018. Meanwhile, the Business Insider, Dealogic, Deloitte, Moody’s, leadership of Jerome Powell, the Federal longest government shutdown in history Nasdaq, The New York Times, PitchBook, PwC, Russell Investments, Seeking Alpha, Thomson Reuters, UBS, Reserve increased the federal funds inter- effectively closed the IPO window in Vanguard and The Wall Street Journal. est rate four times in 2018, most recently January 2019. Additionally, even when

Equity Markets in 2019 Though fourth-quarter volatility disrupted strong equity markets in 2018, many equity capital markets and syndicate bankers across Wall Street believe 2019 could be another robust year for IPOs, as issuers look to take advantage of a Technology. After a very good year for U.S. economy that remains strong ahead of the anticipated next economic cycle. technology offerings in 2018, with 48 IPOs However, Wall Street is continuing to digest ongoing volatility and parse the compared to 26 in 2017, many anticipate the uncertain political and economic landscape. As a result, first-quarter issuance is momentum to continue, as companies feel expected to be muted (exacerbated by the longest government shutdown in U.S. increasing pressure to hit available market history, which has delayed the lineup of IPOs slated for January 2019 launches) windows. Significant activity is expected before a potential recovery for the remainder of the year. Several tech unicorns, from high-growth software and internet and e-commerce companies that have high including Airbnb, Lyft and Uber, have announced plans to go public in 2019, and revenue visibility and large addressable the pipeline in a number of industry verticals remains strong. However, if volatility markets. Additionally, a number of deals persists longer than anticipated, it could push some issuers toward quicker and by technology services companies (which more certain exits through mergers and acquisitions. Equity professionals will help businesses utilize and adapt to new watch market sentiment closely, particularly the appetite of hedge funds to buy technologies) are possible; however, activity new issuances, as many funds suffered negative returns in 2018. by systems and semiconductor companies is likely to remain subdued. Chinese and other offshore issuers continue to make up a significant portion of the IPO backlog, but recent mixed aftermarket performances could soften demand.

Continued on page 5

4 Continued from page 4

Health Care. Continued IPO deal flow by Financial Institutions. Issuances by financial Real Estate. Real estate issuance in 2018 biotech and life sciences companies, as well as institutions in 2018 were solid, driven by rising remained solid, despite market volatility and a a number of public debuts by medical technol- interest rates, the impact of corporate tax cuts challenging fourth quarter. Real estate invest- ogy (medtech) and device companies, meant and deregulation. Sentiment for 2019, however, ment trusts (REITs) led the way, accounting 2018 was another strong year for the health is mixed, with cautious optimism if recent for over half of the total issuance, followed by care sector. Heading into 2019, the deal pipeline volatility subsides, while recognizing that the lodging, gaming and real estate services compa- remains robust, although for biotech compa- economy may be in a late cycle and offering nies. In the year ahead, investors may look to nies it appears smaller than in past years. On windows could close. The financial technology the real estate sector, and REITs in particular, as the other hand, significant follow-on activity sector continues to be attractive — particularly a defensive sector that can provide more stable is expected by recently public biotech issuers, the payments processing space, where valu- returns in a rising interest rate environment. and a number of private biotech companies ations remain elevated. The market also looks With funds continuing to pressure managers appear to be exploring “crossover” financing attractive for midcap property and casualty to be more selective in allocating capital, issu- rounds to bridge to an IPO, thereby potentially insurers, as the subsector has outperformed ances from REITs with active growth opportuni- replenishing the pipeline. Meanwhile, a number broader market indices. The outlook for regional ties through either acquisitions or developments of medtech, health services and specialty banks, which suffered significant valuation likely will continue to garner investor attention pharmaceutical issuers are reportedly explor- degradation in 2018, and consumer finance and drive equity issuance. The alternative real ing IPOs, although for the latter, heightened companies, particularly those exposed to estate sector (such as retirement living, student political scrutiny around drug pricing could derail subprime borrowers, is less optimistic. All eyes housing and private hospitals) also may see issuance activity. (See “Trump Policy Actions will be on Federal Reserve activity and whether increased activity, as real estate investors seek Could Reshape Health Care and Life Sciences rate hikes will continue and, if so, at what pace. ways to generate higher returns relative to the Landscape.”) The trend toward increasing levels broader REIT universe. of “insider participation” in IPOs (whereby existing investors disclose nonbinding indica- tions of interest to buy shares in the offering) is expected to continue. Consumer. Despite a better-than-expected Energy. High expectations in 2018 for capital year for consumer equity offerings in 2018 markets activity in the energy sector turned out and a strong macroeconomic outlook for U.S. to be largely misplaced. U.S. crude oil prices consumers, expectations for 2019 are modest, reached $75 a barrel in July 2018 (their highest Industrials. Offering activity in the industri- particularly given the sell-off in retail names in level since 2014) before dropping sharply, als sector slowed in 2018, and the trend is the fourth quarter of 2018. However, despite ending the year at around $54 a barrel. Volatility expected to continue in 2019, driven largely a reset in valuations, cautious optimism exists in oil prices and concerns about slowing by skepticism toward issuers tied to the for new issuances in the general retail and economic growth and an oversupplied oil construction, manufacturing or housing indus- consumer discretionary sectors, with several market are likely to continue, causing uncer- tries, which can be more sensitive to economic sponsor-backed companies potentially eyeing tainty in the new issuance market. Some still downturns, and by continued trade uncertainty. public market exits. Conversely, significant see potential for deals driven by M&A financ- These companies instead may shift focus to issuance activity in the restaurant and specialty ing needs, particularly in the exploration and capital management strategies, which could retail areas is less likely. As in past years, production space, while others view dividend- lead to an uptick in stock buyback activity and technology-oriented consumer companies yielding stocks in the upstream and midstream recapitalization transactions. However, as with (companies selling consumer goods through sectors as an attractive place for investors to 2018, M&A activity may drive sporadic equity online or subscription models) continue to put money to work. While there is a substantial issuances across the sector. One potential generate significant attention, but many are still deal backlog in the oilfield services space (some bright spot remains in the automotive technol- pursuing midstage private funding rounds and of the pent-up supply began to emerge in 2018, ogy sector, with a number of companies — both need to prove their ability to grow revenues or but not at anticipated levels), volatile oil prices domestic and foreign — that offer solutions diversify product and service offerings before could suppress activity. for electronic or autonomous vehicles securing testing the public markets. late-stage private funding and appearing poised to pursue IPOs.

Click here for a full list of capital markets-related articles authored by Skadden attorneys in the last year.

5 2019 Insights Capital Markets

As the Securities and Exchange Commission (SEC) enters SEC Continues the third year of the Trump administration, its regulatory and Steady Progress enforcement goals remain largely unchanged. At the direction of Chairman Jay Clayton, the SEC continues to focus on With Regulatory, protecting Main Street investors, streamlining regulations Enforcement and encouraging capital formation. Despite some recent and expected turnover on the Commission, the agency has made Goals steady progress toward these goals thanks to the continuity of its leadership. All SEC division directors remain the same heading into 2019. Contributing Partners Commissioner Priorities among the commissioners. Clayton touted Brian V. Breheny / Washington, D.C. the withdrawal as an accomplishment that Elad L. Roisman, formerly chief counsel allowed for a wider discussion of the role Andrew M. Lawrence / Washington, D.C. for the Republican-led Senate Banking proxy advisory firms play and as a step Colleen P. Mahoney / Washington, D.C. Committee, joined the SEC in September toward his goal of modernizing the SEC’s 2018 as its newest commissioner, replac- rules. However, Jackson downplayed the ing Michael S. Piwowar. Roisman has move, saying, “The law governing inves- Law Clerk identified increasing capital formation tor use of proxy advisors is no different and instilling investor confidence as his Matthew A. Rowley / Washington, D.C. today than it was yesterday.” top priorities. To date, these differing opinions on how Although each of the commissioners has best to accomplish the SEC’s broader advocated similar regulatory priorities, goals has not impacted the advance- it is not clear that they agree with how ment of Clayton’s priorities. Indeed, those priorities should be addressed. rule changes under Clayton have often For instance, Commissioners Hester M. been approved unanimously by the SEC. Peirce and Robert J. Jackson Jr. have The differing views on the Commission, advocated different approaches to the however, could have a more significant regulation of investments in crypto impact on future progress. This may be assets. Peirce has urged the SEC to be even more relevant depending on who is less conservative in its approach to such identified to replace Commissioner Kara investments and has said she would like M. Stein. Her term concluded at the end to leave decisions about crypto assets to of December 2018, and thus far no one individual investors. Jackson, on the other has been nominated to replace her. hand, favors a cautious approach, citing investor inexperience and the current Regulatory Trends threat of fraud in the cryptocurrency market. (See “As Interest in Blockchain IPO Participation. In 2018, the SEC Technology Grows, So Do Attempts at continued to take steps to tackle the issue Guidance and Regulation.”) of companies delaying initial public offer- ings (IPO) and relying on private capital. The withdrawal by the SEC staff of two For example, the SEC sought to make letters issued to proxy advisory firms IPOs more enticing by expanding the Institutional Shareholder Services and scope of the nonpublic review program Glass Lewis that addressed conflicts of set forth in the JOBS Act. The agency interest and the ability of investment also increased its definition of “smaller advisers to satisfy their fiduciary duties in reporting company” to allow even reliance on the voting recommendations more issuers to use scaled disclosures. by the firms also was a point of contention Likewise, the SEC is continuing

6 to look for ways to modernize and policies related to cybersecurity. In public simplify disclosures to decrease the finan- statements and guidance, the SEC has Fiscal Year 2018 cial burden that comes with registration emphasized the importance of cyberse- and capital access. In late December 2018, curity disclosures in the material risks the SEC changed its rules to allow all section of mandatory filings, as well as public companies to rely on Regulation A, the importance of proper implementa- one of the exceptions from its securities tion and disclosure of board oversight 72.9% registration requirements. The SEC’s programs designed to avoid cyberrisks. increase in penalties efforts have been helped by positive market conditions, and the number of Risk Disclosures. Based on its actions IPOs has increased from 103 in 2016 to in 2018, the SEC is expected in 2019 to 163 in 2017 and 199 in 2018, according to remain focused on the obligations of Thomson Reuters. companies to ensure that all their public disclosures are complete and accurate, U.S. Proxy Voting System. The SEC and that investors are alerted to trends 8.8% 4% also has taken the first steps toward and developments that could impact the increase in SEC increase in pursuing long-requested changes to the company’s business and prospects. The enforcement SEC monetary U.S. proxy voting system. In November SEC brought a number of high-profile actions filed remedies 2018, the SEC hosted several roundtable enforcement actions in 2018 that signaled discussions that covered a number of its desire for companies to look beyond areas of concern in the proxy system. just the specific disclosure requirements Specifically, the roundtables centered on of SEC forms. There are a number of Focus on Protecting Retail Investors. the proxy voting process, the shareholder significant developments already expected While overall enforcement activity proposal process and the increasing role in 2019 that could trigger a requirement increased in fiscal year 2018, the SEC’s proxy advisory firms play. The discus- for updated disclosures, including Brexit focus on financial institutions has dimin- sion regarding proxy advisory firms and the end of Libor. The SEC staff has ished under the Trump administration. garnered the most attention. The SEC publicly stated its intent to track these Likewise, a November 2018 New York sought input on three main topics: proxy and other market developments and the Times article noted a significant decline advisory firms’ conflicts of interest; their responses made by companies. in actions against large public companies. effect on investor voting and industry Instead, the SEC continues to prioritize practices; and their regulation moving Enforcement Activity cases involving protection of retail inves- forward. What, if any, regulation will The number of enforcement actions the tors, with half of the 490 stand-alone emerge from the roundtable remains to be SEC filed in fiscal year 2018 increased enforcement actions brought in fiscal year seen. However, the growing importance by approximately 8.8 percent from fiscal 2018 involving allegations or findings of of proxy advisory firms, coupled with year 2017, and total penalties ordered wrongdoing that harmed such investors. the occurrence of the roundtable, signals increased approximately 72.9 percent, to that the SEC is considering regulations $1.44 billion, according to SEC statistics. in this area. Further, in unofficial state- Overall monetary remedies obtained by Stand-Alone Enforcement ments following the roundtable, Roisman the SEC (penalties and disgorgement) Actions in 2018 expressed an openness to regulations that increased by a more modest 4 percent, would create a rebuttal period following to $3.95 billion. (A significant driver of the issuance of a proxy firm opinion. the increase was a settlement in which a Brazilian company agreed to pay $933 Cybersecurity matters 245 Cybersecurity. million in disgorgement and an $853 will remain a key focus for the SEC in million penalty.) Half of the 490 actions involved 2019. In particular, the SEC is expected allegations or findings of wrongdoing to scrutinize company disclosures and that harmed retail investors

7 2019 Insights Capital Markets

Individual Accountability. The SEC also infraction that was the object of the Cyber Unit was involved in bringing a is focused on individual accountability, enforcement action. The goal of these cyber-related enforcement action against especially as it relates to senior corpo- injunctions is to require specific changes a technology company for allegedly rate officers and other prominent figures in offending companies that address misleading shareholders by not disclos- within organizations. We expect that the conduct at issue. The Enforcement ing a data breach in its public filings focus to continue. In fiscal year 2018, Division is expected to continue to seek for nearly two years. The $35 million 72 percent of the SEC’s stand-alone these types of narrowly focused remedies settlement was the first SEC enforcement enforcement actions involved charges in the coming year. action against a public company relating against at least one individual, includ- to the disclosure of a data breach. ing a U.S. congressman as well as the Cybersecurity. The SEC’s enforcement former CEO and chief financial officer staff also is increasingly focused on The SEC also is sending a clear message of Walgreens Boots Alliance, Inc. cybersecurity and related issues, including that it expects issuers to not only act the timeliness and accuracy of disclosures responsibly in the event of a cybersecurity Tailored Remedies. The SEC is tailoring of cyber-related issues and the need to incident but also to institute appropriate remedies, including ordering equitable implement sufficient internal accounting controls to mitigate the risks of cyber- relief in the form of specific undertak- controls to prevent cyber breaches. The related threats and safeguard company ings, to address particular misconduct. SEC announced the creation of its Cyber assets from those risks. In October 2018, This willingness to use a wide range of Unit in September 2017, and in fiscal year the SEC issued an investigation report remedial tools in novel ways to address 2018, it brought 20 stand-alone cases detailing the Enforcement Division’s misconduct was evident in the enforce- related to cyberfraud. By the end of the probe into the internal accounting ment actions against the CEOs of Theranos fiscal year, the Cyber Unit had more than controls of nine issuers that were victims Inc. and Tesla Inc. In its settlement with 225 ongoing cyber-related investigations. of “business email compromises,” a form Theranos, the SEC included undertakings It is notable that, in many of these inves- of cyber fraud. The SEC issued the report that required the CEO to relinquish her tigations, companies that were victims of of investigation, forgoing a traditional voting rights and guarantee that she would cyberattacks now find themselves under enforcement action, to communicate the not profit from a sale of the company investigation for how they responded to SEC’s view that this issue is problematic unless other investors were compensated the attacks. and to put issuers and individuals on first. According to the SEC, these require- notice that the SEC intends to pursue ments were meant to protect investors enforcement actions concerning similar from the CEO’s potential misuse of her conduct in the future. controlling position. In the Tesla matter, + the SEC was concerned about the CEO’s 225 Similarly, the SEC is sending the message communication practices and the alleged ongoing cyber-related to financial institutions that they also lack of sufficient oversight and control over investigations at must have sufficient safeguards in place those communications. The specifications end of 2018 by SEC to protect sensitive client information. in that settlement included that the CEO The SEC brought proceedings against resign as chairman of the company, and Cyber Unit a broker-dealer and investment adviser that Tesla add two independent directors related to alleged failures in cybersecu- to its board and establish a committee of rity policies and procedures following independent directors to oversee the CEO’s a cyberattack that compromised the public communications. The Commission is focused on public personal information of thousands of companies’ and financial institutions’ customers in violation of Regulations In addition to these types of customized policies surrounding cybersecurity, S-P (Privacy of Consumer Financial undertakings, the SEC is increasingly emphasizing the need for public compa- Information) and S-ID (Identity Theft imposing conduct-based injunctions nies to make prompt and accurate cyber- Red Flags). specifically calibrated to address the related disclosures. In April 2018, the

8 Also in the past few years, the number of Takeaways indicates that the SEC has relaxed its digital assets and crypto asset offerings, enforcement efforts against other market We expect the SEC to continue to stream- mainly initial coin offerings (ICOs), have participants. Rather, SEC enforcement line current regulations and focus its increased significantly. In response, the statistics from 2018 reflect a continued enforcement efforts on protecting retail Cyber Unit began to address miscon- robust enforcement program, particularly investors. This focus, however, should duct relating to digital assets and ICOs. in areas such as cybersecurity. not be interpreted by companies as a As of the end of fiscal year 2018, the signal that the SEC will be lax in enforc- Commission had brought over a dozen ing remaining regulations. Companies enforcement actions involving ICOs, Click here for a full list of SEC reporting and need to be careful to produce timely and compliance-related articles authored by Skadden focusing on allegations of fraud as well as accurate disclosures, especially when attorneys in the last year. compliance with the registration require- discussing risk factors and cybersecurity. ments of the federal securities laws. Companies also should not assume that Additional ICO enforcement actions are the focus on protecting retail investors likely in 2019.

9 2019 Insights Capital Markets

In July 2018, changes came into effect to improve the range, New UK IPO quality and timeliness of information available to the market Rules Encourage and to remedy certain perceived conflicts of interest during the U.K. initial public offering (IPO) process. The new rules have met Independent the U.K. Financial Conduct Authority’s (FCA) policy objectives Research, of ensuring the availability of information to the market earlier in the IPO process. Generally speaking, investors now have Address an additional week to review and consider the registration Perceived document and announcements that the issuer publishes before considering research reports, thus supporting a more Conflicts of meaningful investor education and price formation process.

Interest The new rules also have responded to As a result, the FCA was concerned that buy-side demands for the production of investor education and the price discov- independent, or unconnected, research, ery process were based in large part on while respecting the value that certain connected research that was potentially Contributing Partner market participants place on connected biased and prepared with a view to ensur- research. However, initial take-up by ing a successful IPO. Danny Tricot / London unconnected analysts has been low, and it remains to be seen if broader indepen- New Rules Associate dent research will become commonplace The new rules are aimed at: in the future. –– restoring the centrality to the IPO Richard Ho / London Past Practice process of an approved disclosure document; Prior to these changes, the FCA-approved prospectus was published by an issuer –– creating the conditions for independent late in the IPO process. The primary research to be produced during the IPO source of information available to the process by establishing a level playing investor community was research reports field for connected and unconnected published by analysts connected to analysts; and syndicate banks underwriting the IPO. –– addressing perceived conflicts of inter- Unconnected analysts generally were est relating to interactions between excluded and lacked access to the issuer connected analysts and issuers in the and information needed to produce inde- pitching and appointment stages of the pendent research. IPO process.

Additionally, perceived conflicts of inter- Under the new rules set out in the est arose because connected analysts FCA Handbook’s Conduct of Business often met with the issuer and participated Sourcebook: in pitching activities prior to the issuer awarding an IPO mandate. This resulted –– Syndicate banks must undertake an in concerns that connected analysts would assessment of the potential range of convey positive research messages to the unconnected analysts able to produce issuer in order to secure an underwriter research on the issuer and ensure appointment or a particular position that such analysts have the same within the underwriting syndicate. level of access to the issuer and are

10 provided with identical information as research during the IPO process has issuers have opted to publish a “pre- connected analysts without unreason- been limited. ITF” announcement on the date of the able restrictions; registration document, providing in it Registration Document context for the registration document and –– Issuers must publish an FCA-approved and Prospectus registration document or prospectus guiding the narrative for the poten- before the publication of any connected A prospectus can take the form of a tial IPO. The pre-ITF announcement research; single document or a compilation of contains a summary description of the three separate documents: a summary, issuer, its preliminary intention to carry –– Connected research may be published a registration document and a securities out the IPO and an invitation to uncon- one day after the publication of the note. The registration document contains nected analysts to register to receive FCA-approved disclosure document information about the issuer, including information, but it omits information if unconnected analysts are given business disclosure and risk factors, and specific to the offering. On the date access to the issuer at the same time the securities note contains information of publication of connected research, as connected analysts, or after seven about the securities and offering. issuers have published a further days if unconnected analysts are given announcement confirming their intention separate access to the issuer; and Although the new rules provide issuers to proceed with an IPO, providing details –– Connected analysts are prohibited the option to publish either an approved of the offering and any updates to the from participating in pitches and may registration document or a prospectus pre-ITF announcement. The bifurcation only interact with the issuer after the prior to the publication of connected of the ITF is expected to continue and appointment of the syndicate bank has research, it is not possible to produce a supports increased issuer engagement been confirmed in writing. full prospectus containing all required with the market. information at the start of the IPO Emerging Trends Under New Rules process. Issuers therefore have opted Conclusion Since the new rules came into effect, a to publish a registration document at Although notable trends and market prac- number of issuers have completed their the start. They also have opted to publish tices have begun to emerge, the number of IPOs, with notable trends and market a single, approved prospectus later in IPOs coming to market has been limited practices beginning to emerge. the process that contains all relevant due to market conditions and uncertain- information on the issuer and offering, ties surrounding Brexit. In addition, while Unconnected Analysts as investment banks have generally organizations such as the Association considered this preferable from a for Financial Markets in Europe have All issuers have opted to provide separate marketing standpoint. published guidance and process papers access for unconnected analysts after the on the new rules, each underwriting bank approved registration document has been Announcements may have its own internal compliance published. This practice is expected to policies for the new rules. As such, prac- continue, given the overriding concern Issuers have traditionally published tices are likely to continue to evolve. about maintaining the confidentiality of an intention to float (ITF) as the first the IPO before it is announced. Many public announcement of their IPO. The ITF contains summaries of the issuer’s issuers continue to seek to control — Click here for a full list of capital markets- business, strengths and strategies, manage- to the extent possible — the narrative related articles authored by Skadden attorneys around their IPO, which is easier to do ment, and key offering information. in the last year. when access to the unconnected analysts While no regulations require publica- is left until later in the process. tion of an ITF, the FCA indicated during In addition, despite the level playing the consultation process that it expected field resulting from the new rules, the issuers to publish the ITF on the date number of unconnected analysts who that connected research is published have registered to receive information (typically seven days after publication of and subsequently published independent the registration document). This would mean that the registration document is published in isolation. As a result,

11 2019 Insights Capital Markets

In April 2018, the Hong Kong Stock Exchange’s (HKEx) rule New HKEx Rules amendments permitting the listing of innovative, high-growth Spur Bumper companies with dual-class share structures and pre-revenue biotech companies went into effect. The long-awaited amend- Year in Hong ments also facilitated the secondary listing in Hong Kong of Kong Capital Chinese companies with an existing listing on another stock Markets, but exchange. As if on cue, Xiaomi Corporation, a considers sufficiently “innovative” to Lasting Impact leading Chinese technology company, list under the rules. Notably, Tencent filed its listing application a few days Music, the last major Chinese technology Remains Unclear later, to considerable fanfare. Xiaomi’s company to file an IPO in 2018, chose to eventual $5.4 billion initial public offer- undertake its $1.1 billion offering on the ing (IPO) in July 2018 was followed two New York Stock Exchange. months later by the $4.2 billion IPO of Contributing Partner Meituan Dianping, a leading Chinese e-commerce platform for services. These + Christopher W. Betts / Hong Kong were the two largest IPOs for Chinese 200 private technology companies in Hong companies Kong’s history. Meanwhile, leading Of Counsel biotech companies, including BeiGene listed on the HKEx in and Innovent, took advantage of the new Antony Dapiran / Hong Kong rules to complete $903 million and $421 2018 raised more than Paloma Wang / Hong Kong million IPOs, respectively, as part of the $ first wave of pre-revenue biotech compa- billion nies permitted to list on the HKEx.1 36

The HKEx’s data indicates that it led all stock exchanges worldwide in terms of Meanwhile, fewer than 10 pre-revenue IPO funds raised in 2018, with the more biotech companies, all of which have than 200 companies listing on the HKEx China-focused businesses, have taken raising a total in excess of $36 billion, up advantage of the new rules to list in Hong from approximately $14 billion in 2017. Kong (compared, for example, to the more But whether the new rules will lead to than 400 biotech companies listed on the a long-term increase in Hong Kong’s Nasdaq Stock Market), and questions competitiveness as a capital-raising venue remain as to whether Hong Kong can remains to be seen. More than eight develop the necessary market ecosystem months after the rules went into effect, — including expertise among investors, Xiaomi and Meituan Dianping remain the professional advisers, analysts and the only two companies with dual-class share regulators themselves — to support a structures listed on the HKEx, and the healthy long-term biotech market. exchange has made it clear that it intends to pick and choose which companies it At the same time, rules permitting the trading of companies with dual-class share structures through the Shanghai 1 Skadden advised all four companies and Shenzhen Stock Connect programs on their IPOs.

12 (which enable mainland China-based major equity index. The National Bureau More broadly, the March 1, 2019, deadline investors to trade directly in certain of Statistics of China announced that for the Chinese government to reach a HKEx-listed securities and Hong the nation’s official rate of gross domes- trade deal with the U.S. will loom large in Kong-based investors to trade directly tic product growth for the year through the early part of the year, and the outcome in certain Shanghai and Shenzhen September 2018 was 6.5 percent, down of the ongoing negotiations may very Stock Exchange-listed securities) are from 6.7 percent for the year through well play a significant role in determining yet to be promulgated, though the June 2018 and significantly down from the trajectory of the Chinese economy HKEx announced in December 2018 the more than 10 percent growth rates for 2019 and beyond. Should a deal be that it would formulate such rules by seen as recently as 2009 and 2010. If the reached, it would potentially remove mid-2019. The delay in rulemaking may Chinese economy continues to slow, it a significant overhang for the capital have deterred some companies — in could have a more sustained negative markets and boost activity. particular those that are already listed impact on Asian capital markets activ- on another exchange and not necessarily ity in the coming year. That said, China in need of a new fundraising channel — remains a developing economy, and Click here for a full list of capital markets- related articles authored by Skadden attorneys from pursuing a Hong Kong listing. there are still numerous rapidly growing in the last year. companies with ongoing capital needs Overshadowing the activity in Hong not being fully met by the largely state- Kong was the roughly 25 percent fall in controlled lending market in China that China’s domestic equity markets, which will consider using public equity markets saw the Shanghai Composite Index end to create a platform for raising capital and the year as the world’s worst-performing enhancing their profiles.

13 2019 Insights Capital Markets

The renewable energy sector has benefited in recent years Recent Trends from its growing cost-competitiveness, favorable climate in Renewable change-related policies, and significant new capital investment from traditional and nontraditional debt and equity financing Energy sources. The increased availability of capital since the last economic recession has supported the rise of renewable energy as a mature and cost-competitive asset class in many Contributing Partners power markets around the globe. These trends likely will Lance T. Brasher / Washington, D.C. continue in the coming year, as the sustainable features of well- Paul S. Kraske / Washington, D.C. structured renewable generation assets with contracted output, low operating costs, and predictable revenue and cost streams Associate remain attractive in the market.

Mark A. Schlackman / Houston Areas of the sector where much focus be located along the Northeast and and momentum will build in 2019 include Mid-Atlantic regions, primarily using the following: proven fixed-platform technologies. Key opportunities on the West Coast are Portfolio Transactions behind in development, and some require In the past several years, the renewable the use of newer floating technologies energy sector has been highly attractive as a result of the deeper waters — an to private equity, pension and infrastruc- additional challenge for developers to ture funds seeking to deploy substantial overcome. The offshore wind market in amounts of capital in increasingly large Europe is further ahead of the United portfolios of renewable generation assets. States, and several large European We expect the formation of funds serving offshore wind developers are pursuing the sector to continue to increase as new projects that may enter the markets demand from a variety of financial for financing and commence construction investors grows for portfolios of high- as early as this year. quality, renewable generation assets. We also anticipate that project sponsors Electricity Storage will continue to pursue the most competi- One of the challenges the industry faces is tive capital sources using innovative the potential for large-scale deployment of transaction structures at the portfolio renewable energy to raise grid reliability level to complement the wide variety of issues, since renewable generation assets construction debt, tax equity and other depend on the availability of intermittent more traditional sources of project-level resources to produce power (e.g., wind financing available in the market. or sun). Advancements in energy storage technology have made the development Offshore Wind of battery storage projects attractive The development pipeline for new opportunities that would help mitigate offshore wind projects in the United reliability concerns. As such, the number States has grown substantially in recent and size of battery storage projects is years, to approximately 25 gigawatts, expected to continue to grow. In order to according to U.S. Energy Information support the growth of storage, develop- Administration estimates. Most will ers and sponsors of renewable energy

14 projects are pursuing state policies similar with renewable energy portfolio require- will utilize substantial near-term efforts to renewable energy portfolio standards ments. In recent years, however, long- to satisfy construction commencement that would raise the minimum amount term PPAs have become more and more requirements and qualify assets for safe of electric storage generation assets in scarce in the market. Consequently, harbors, including through the repower- states’ power procurement efforts, or developers are increasingly relying on ing of existing wind projects. otherwise incentivize the development of alternatives, such as financial hedges with additional storage capacity. While storage banks and other counterparties, whether Climate Change and Clean technology continues to advance, revenue through contracts for differences, revenue Energy Initiatives models to facilitate broad implementation puts or synthetic heat rate call options. The renewable energy industry likely will are still in development and remain an continue to benefit from favorable climate obstacle to investment. Corporate PPAs change policies and other clean energy Corporations have become significant initiatives in 2019. Despite the stepping- Construction and Ownership procurers of renewable energy in recent down of key tax credits and certain by Regulated Utilities years, including many high-profile multi- policies within the federal government to Vertically integrated utilities have typi- national corporations such as Facebook, bolster the U.S. fossil fuel industries and cally owned very limited numbers of Google, Amazon, AT&T, Microsoft and lighten environmental and other regulatory renewable generating assets, relying Walmart. Corporate buyers view renew- requirements, renewable energy poli- instead on power purchase agreements able energy procurement as part of their cies continue to expand at the state level. (PPAs) with independent power producers. energy cost management strategy and California recently enacted a bill that will Within the last few years, however, several seek to benefit from a marketing stand- increase its renewable portfolio standard regulated utilities have been able to enter point in making a contribution toward to 60 percent by 2030 and move the state into arrangements for the acquisition and carbon neutrality. While corporate PPAs to 100 percent zero-carbon electricity by construction of renewable energy projects are generally structured as financial 2045. Several states are expected to follow and have gained the support of public hedges, some provide for physical deliv- this trend given the outcome of the recent utilities commissions for these invest- ery. As additional companies look to elections, and other state efforts to increase ments. Increased ownership of renewable take advantage of new opportunities in renewable generation capacity are well energy projects by regulated utilities has renewable power, demand for corporate underway, including through additional the potential to alter the market landscape, PPAs should expand. offshore wind procurement and increased as more regulated utilities choose to own public utilities commission support for renewable power generation assets rather Pending Expiration of Federal renewable energy acquisitions. than contract with developers to purchase Tax Incentives In sum, the renewable energy sector is power, but ultimately this could result in Federal tax incentives that have supported expected to remain strong in 2019 as it the deployment of more renewable energy. the development of the renewable energy continues to evolve in a robust environ- industry will be winding down in coming ment with many new opportunities. Financial Hedges years as the sunset provisions in current The explosive growth of renewable tax laws begin to take effect. As a result, energy in the U.S. has been facilitated developers will be keenly focused on Click here for a full list of energy and significantly by long-term PPAs with taking advantage of the remaining oppor- infrastructure projects-related articles authored load-serving entities seeking to comply tunities for available tax credits, and by Skadden attorneys in the last year.

15 2019 Insights Corporate Restructuring

In 2017, the U.S. Court of Appeals for the Second Circuit Second Circuit held in In re MPM Silicones, LLC that the appropriate interest Adopts Secured rate for replacement notes issued to secured creditors under a “cramdown” Chapter 11 plan must be a market rate if an Creditor “efficient market” exists. If no such market exists, however, the Cramdown formula rate (effectively, the prime rate plus 1-3 percent) must be applied. While the decision settled the question concerning Standard Based the applicable cramdown interest rate methodology in the on Market Second Circuit, it left unresolved a critical element of that Efficiency methodology: What constitutes an “efficient market”? A close reading of In re MPM and the discount rate playing such a central role precedent upon which it relied reveals in this calculation, the Bankruptcy Code that a practical, transaction-based is silent as to how to determine it, which Contributing Partner approach should be used in assess- has resulted in courts developing many ing market efficiency rather than an different approaches for determining the Paul Leake / New York economic theory approach (e.g., the discount rate in Chapter 11 cases. efficient capital market hypothesis).1 MPM Decision Associate Chapter 11 ‘Cramdown’ In April 2014, Momentive Performance Cameron M. Fee / Wilmington The Bankruptcy Code provides two Materials Inc. (MPM) filed for relief paths by which a Chapter 11 plan can be under Chapter 11. Under MPM’s Chapter confirmed — consensual or nonconsen- 11 plan, its senior lien noteholders could sual — depending on how creditor classes choose between (1) accepting the plan vote. If a class of creditors rejects a plan, and receiving full payment in cash, but a debtor can still confirm it if it does not without any make-whole claim; and “discriminate unfairly, and is fair and (2) rejecting the plan, preserving their equitable” with respect to the dissenting right to litigate the make-whole claim class. In the lexicon of bankruptcy practi- and “receiving replacement notes with tioners, this latter confirmation method is a present value equal to the Allowed colloquially referred to as “cramdown.” amount of such holder’s Claim.” The senior lien noteholders rejected the Under the Bankruptcy Code, a plan is fair plan, and consequently, MPM sought and equitable to a class of secured claim to confirm its plan by cramming down holders if such holders receive deferred these dissenting holders using the formula cash payments totaling at least the allowed rate. The bankruptcy court held that the amount of their claims. The central formula rate applies, and the district court inquiry under this present value calcula- affirmed, after which the senior lien note- tion is the appropriate interest rate, called holders appealed. the discount rate, to apply to the debtor’s deferred cash payments so that the sum of The Second Circuit disagreed that the these payments equals the allowed amount formula rate should always apply and held of the secured creditor’s claim. Despite the that a two-step approach must be used in determining the appropriate cramdown interest rate in Chapter 11. A market rate should apply in Chapter 11 cases where 1 This article was adapted from “Momentive and the ‘Efficient Market’: The Cramdown Saga Continues,” an efficient market exists; if an efficient published in Norton Annual Survey of Bankruptcy Law, market does not exist, the formula rate 2018 ed., with permission from Thomson Reuters.

16 applies. Relying heavily on the 2004 In In re MPM, the Second Circuit seems obtained offers from only three exit U.S. Supreme Court decision Till v. SCS to define an efficient market differently, lenders during its bankruptcy case, if Credit Corp., the court reasoned that this and substantially more narrowly, than has the bankruptcy court had given credit to two-step approach best aligns with the been assumed in the securities law context. the expert testimony regarding the exit Bankruptcy Code and relevant precedent. In describing what constitutes an efficient financing available to MPM, that testi- Ignoring efficient market rates would market, the Second Circuit explained that mony “would have established a market depart from long-standing precedent “courts have held that markets for financ- rate.” Thus, the Second Circuit implicitly directing that the “best way to deter- ing are ‘efficient’ where, for example, suggested that such facts — obtaining mine value is exposure to a market.” The ‘they offer a loan with a term, size, and exit financing offers (potentially as few as court observed that where some market collateral comparable to the forced loan three) — constitute an efficient market. valuation may be available, such valu- contemplated under the cramdown plan.’” ation should be favored over decisions The court found that a market is efficient The Second Circuit’s two-step approach untested by a competitive choice. The if it “generates an interest rate that is ... will likely result in lengthy and expen- Second Circuit ultimately remanded to acceptable to sophisticated parties dealing sive evidentiary hearings until the lower the bankruptcy court to ascertain if an at arms-length.” These descriptions of courts agree on how to assess market efficient market exists and, if so, to apply efficiency are substantially narrower than efficiency. Recently, the bankruptcy the market rate. the robust, open and transparent trading court in MPM conducted a two-day trial markets required by courts in the securities on whether an efficient market existed Implications law context. — and if one existed, what should be the market rate. The trial consisted of a In re MPM is a significant decision for the In relying on Till, the Second Circuit classic battle of the experts over how to secured lending community. A debtor in seems not to be seeking a sea change assess market efficiency. the Second Circuit — one of the largest to Chapter 11 practice. Till held that the forums for corporate bankruptcy cases formula rate should apply for calculating Although the bankruptcy court has not yet — now cannot force a secured creditor the cramdown interest in Chapter 13. ruled, the judge remarked at the trial that into below-market paper if an efficient In arriving at this conclusion, Till empha- courts applying a market-based approach market exists. Notably, the delta between sized that the method for determining have done so primarily based on what the formula rate and market rate can be the appropriate cramdown interest rate has happened in the case, as opposed substantial. For example, in In re MPM, should not be complex, costly or outside to extensive expert testimony on debt the first-lien noteholders estimated that the bankruptcy court’s area of expertise. markets and whether the parties were using a market rate (roughly 5-6+ percent) Moreover, in rejecting various other sophisticated and dealing at arm’s length. instead of the formula rate (4.1 percent) approaches, Till explained that these He further observed that a market-based would result in them receiving approxi- methods were complicated and imposed approach would be fairly easy to apply. In mately $150 million more in aggregate significant evidentiary costs, whereas the re MPM and Till both teach that just such a interest payments. formula approach involved “a straightfor- straightforward, less expensive and famil- iar approach should be used in evaluating But the question of what constitutes an ward, familiar, and objective inquiry, and market efficiency in Chapter 11. efficient market remains unanswered. minimize[d] the need for potentially costly Should market efficiency be tested in additional evidentiary proceedings.” the same manner as it is in the securi- The Second Circuit seemingly adopted Click here for a full list of corporate restructuring- ties law context under Rule 10(b)-5 of the related articles authored by Skadden attorneys in a similarly practical, objective approach Securities Exchange Act, for which there the last year. to determining market efficiency — one is a substantial body of case law evaluating consistent with Supreme Court precedent market efficiency, or some other method and squarely within the bankruptcy given that the relevant market is arguably court’s bailiwick. In dicta, the Second original issuance because specific debt is Circuit observed that while MPM being issued by a specific debtor?

17 2019 Insights M&A / Governance

Mergers and acquisitions activity in the U.S. and globally was 2019 US and again robust in 2018. Despite concerns early in the year that Global M&A activity could be dampened by emerging worries over trade, rising interest rates and global political uncertainties, deal Outlook: Despite activity remained resilient, facilitated by relatively stable equity Mounting markets and readily available financing that prevailed for a significant portion of the year. However, the pace of activity Headwinds, slowed over the second half, particularly in the fourth quarter as Potential market volatility grew and financing markets tightened. Remains for The value of announced transactions in 2018 increased substantially from 2017, Rise of ‘Megadeals’ the New Year with global transaction volume of over $3.5 trillion, and U.S. volume of approxi- at least mately $1.5 trillion, up roughly 11.5 percent and 15.4 percent, respectively, deals from 2017, according to Mergermarket. 36 Contributing Partners valued over $10 billion While not record-setting, these volume levels are close to the high-water marks of Stephen F. Arcano / New York 2015 and 2007. The number of “mega- Thomas H. Kennedy / New York deals” — the majority of which were Selected 2018 Trends announced in the first six months of the year — was notable, with at least 36 deals Seeking Scale. Many of the large trans- having a transaction value in excess of actions in 2018 involved expansion by $10 billion. The number of transactions companies in their existing industries, with an announced value greater than seeking to grow customer base through $5 billion increased substantially both horizontal transactions and to broaden globally and in the U.S., and accounted offerings to existing customers through for over a third of M&A value. Notably, vertical acquisitions. This strategy of while average deal values increased from pursuing revenue and margin growth the prior year, the number of transactions through scale is a perennial driver of was down. merger activity but was notable in 2018 because it drove a number of sizeable Activity was again driven primarily by transactions, as even large companies strategic transactions, as corporations sought significant deals capable of moving continued to be willing to make substantial the needle in industries as diverse as health investments to respond to the impera- care, technology, media and industrials. tives of growing earnings and enhancing competitive platforms by augmenting Impact of Disruption. Technology’s technological capabilities, product offer- potential to significantly alter business ings and geographic reach. Private equity models and reshape entire industries, (PE) activity picked up early in the year and its impact on the M&A market, was as financial sponsors sought to deploy one of the most significant trends to record levels of available capital into emerge in this M&A cycle. Acquisitions bigger transactions, although activity of technology businesses by nontechnol- moderated in the second half. ogy companies, and acquisitions of new

18 technology by technology businesses, M&A cycle. Coupled with increasing of sensitive acquisitions, have created contributed significantly to 2018 activity activist challenges to transactions (and greater uncertainty and increased the levels in the U.S. and globally. strategies seeking profit from transaction challenges associated with complet- withdrawal), this has caused transaction ing cross-border transactions in certain Activism. Activist funds continue to parties to tread more cautiously. industries. (See “Foreign Investment have a meaningful impact on corporate Control Reforms in Europe.”) strategic activity. Assets under manage- Private Equity. In recent years, private ment at activist funds remain high, the equity firms have struggled to find Looking Ahead number of campaigns and amount of attractive targets and compete with Notwithstanding the robust level of M&A capital being deployed continue to mount, strategic acquirers. In 2018, however, activity in 2018, cautionary signs have and the influence of large U.S. funds private equity seemed to once again find appeared in the market. Activity slowed beyond North America continues to grow. greater success in sourcing deals. Sitting meaningfully later in the year, with the 2018 saw numerous campaigns seeking to on more than $1 trillion of dry powder value of transactions in the second half pressure corporations to pursue strategic in 2018, these firms were willing to take being more than 25 percent lower than changes, most frequently including board on larger transactions, particularly in the the first-half value, and fourth-quarter change and M&A initiatives such as sale first half of the year. Globally, lever- value of approximately $700 billion of the company, or the sale or spin-off aged buyouts activity for the year was being the lowest level since 2013. The of businesses. Consistent with trends up by over 25 percent in value. Private decline in transaction volumes in the in recent years, a significant number of sources of capital in addition to tradi- second half of the year, particularly in campaigns were pursued by first-time tional PE firms such as family offices the fourth quarter, is a concerning sign, activists and “occasionalists.” Traditional and multifamily funds likewise were as is the decrease in number of transac- institutional investors took a vocal role, active players in the M&A arena. In tions compared to 2017. As we move providing their views through engage- 2019, private capital buyers may benefit later into the market’s current cycle, ment with both those in management and from opportunities created by equity there is a mounting sense of nervousness activists. Deal activism, in which activist market volatility. However, if challenges that what were once viewed as potential funds seek to renegotiate price (known in leveraged financing markets continue concerns have become issues of more as “bumpitrage”) or stop a transaction into the new year, that could affect the immediate importance. Some of these altogether, was pursued at both targets ability to take advantage of some of headwinds include apprehension over and acquirers. Continued market volatil- those opportunities. the duration of the economic cycle and ity provides both opportunities and the growing consensus that the rate of challenges for activist funds. Given the Regulatory. There has been significant economic growth will slow in the coming prevalence of activism and the potential focus over the past year on regula- year; trade and tariffs; increased equity for unsolicited activity on the part of stra- tory challenges to merger transactions, market volatility; rising interest rates; tegic acquirers, boards and management primarily involving antitrust/competi- and increased volatility in leveraged loan teams must be prepared, particularly in tion and national security approvals. In markets and tightening of borrowing the context of considering transactions. the antitrust/competition arena, regu- latory agencies have brought several conditions. (See “Enhanced US Export Controls and Aggressive Enforcement Decreased Acquirer Shareholder high-profile merger challenges in the Likely to Impact China” and “US Capital Support. Shareholders of target compa- U.S., Europe and China; however, it is nies have been less supportive of unclear at this point if these are attribut- Markets Face Uncertainty Entering 2019, transactions than they were earlier in able to changes in enforcement policy, a With Volatility Likely to Continue.”) the cycle, reflecting growing concerns function of corporations pursuing more At the same time, several factors suggest over strategic fit, asset prices and lever- aggressive transactions or other factors. significant M&A activity can continue in age levels. Excess returns for acquirer (See “US and EU Antitrust Enforcers the coming year. Most importantly, the shareholders upon transaction announce- Remain Active and Aggressive, With strategic imperatives to grow earnings ment have been in decline for several Some New Wrinkles.”) New or revised and optimize business platforms driving years, reversing the trend of positive regimes for national security review of corporate merger activity in the past few returns on announcement of these transactions in a number of jurisdic- years have not diminished. Furthermore, transactions experienced earlier in this tions, coupled with heightened scrutiny

19 2019 Insights M&A / Governance

activist funds are continuing to pursue remain anxious to deploy substantial platforms involving the sale of public capital. Absent meaningful deterioration companies or the disposition of their in fundamental economic conditions or businesses (reinforcing companies’ sustained disruption of access to deal pursuit of corporate clarity through the financing, these drivers should continue sale or spin-off of noncore businesses). to support significant transaction levels Corporate buying power remains high, in the coming year. with access to significant balance sheet cash and to the debt financing markets, Click here for a full list of mergers and although there have recently been chal- acquisitions-related articles authored lenges in leveraged loan/high-yield by Skadden attorneys in the last year. markets. Finally, private equity buyers

20 Over the course of the past year, we have observed Latin America a progressive increase in the frequency with which Trend to Watch: representations and warranties insurance (RWI) has been considered for Latin America M&A transactions. Representations The increase in private equity-led Latin America M&A and Warranties transactions likely has had an impact on the rising interest in RWI, in no small part as a result of the life expectancy Insurance of private equity funds. As more region-specific funds reach maturity and the return of capital to their investors becomes imminent, the pressure increases to seek clean Contributing Partner exits where a selling fund does not retain significant post-

Paola Lozano / New York closing financial risk through indemnity covenants.

Deal-makers also have been motivated represented a significantly larger pool of Counsel to find alternatives to traditional post- transactions than the period prior to 2011. closing risk allocation in Latin America Global demand for RWI policies also has Ralph E. Pérez / Chicago because of the increased complexity of more than tripled since that year, accord- deals, the number of regulatory or court- ing to reinsurance company Munich Re. mandated transactions and distressed Latin America deal-makers have been divestments, the increased sophistication paying close attention to this evolution. of passive investors that are unwilling to According to insurance brokerage and assume direct risk, and the more competi- risk management services firm Arthur J. tive nature of global auction processes. Gallagher & Co., AIG has noted at semi- nars that it alone has paid more than $100 The coming year is expected to bring million in claims. an uptick in deal-makers seeking to deploy RWI in Latin America’s complex Such favorable reports of claims being M&A transactions. paid and RWI carriers acting reasonably throughout the claims process, coupled Rise of RWI with increased recognition of the benefits RWI protects the insured party against of RWI for buyers and sellers, are luring financial losses resulting from unknown Latin America deal-makers previously on breaches by a seller or target of their the sidelines into the game. representations and warranties (includ- However, Latin America deal-makers ing litigation costs) in a transaction should proceed with caution and work agreement. As with other novel legal and with their RWI brokers as early as financial risk allocation structures and possible to confirm the insurance is avail- solutions that have been introduced in able to them and the cost is acceptable Latin America, RWI policies first took under the specific circumstances. While root elsewhere. RWI policies have been implemented in In the U.S., RWI has been around since a broad range of industries across Latin the late 1990s and gained meaningful America, not all countries are regarded as traction in 2011. RWI policies written equal by RWI carriers. It appears Chile by finance and insurance company AIG and — at least until the first quarter of between that year and 2016 (the last year 2018 — Mexico have had higher levels of covered by AIG’s most recent RWI report) RWI carrier interest than other significant

21 2019 Insights M&A / Governance

jurisdictions, such as Argentina, Brazil Implementation of RWI RWI can be a useful tool for a buyer and Colombia. As the region continues to in Latin America entering a Latin American market for the warm up to the concept of fronting some first time. Such a buyer often keeps much While there is no shortage of RWI guides costs for unknown risks that may never of the target business’ existing manage- for the U.S., such resources with respect materialize, RWI carriers also are being ment in place after the closing and may to Latin America are limited. The discus- cautious. Each market is different, and structure the transaction so the seller sion below of the main features of RWI in the common perception of higher politi- keeps an ownership stake, even if tempo- Latin America draws on our deal experi- cal and economic volatility — including rarily, in the target business post-closing. ence and on information that key RWI widespread corruption scandals, which Under those circumstances, the buyer’s brokers have provided us. tend to increase fears of fraud — may assertion of an indemnity claim could cause RWI carriers to be more prudent RWI Basics. A policy issued to a buyer, sour its relationship with its new employ- and increase prices in emerging markets. known as a buy-side policy, requires the ees and partner. A buy-side RWI policy Similarly, less deal flow and higher carrier to pay the buyer upon a verified might enable the buyer to avoid this perceived uncertainty on underlying claim. One issued to a seller, known as a awkward situation, since the buyer would applicable law of the representations and sell-side policy, requires the carrier to pay make the claim to the RWI carrier. warranties’ subject matter also makes it the seller following a verified payment by In a hotly contested auction, a prospec- more challenging to put a price tag on the seller to the buyer with respect to an tive buyer can make its bid stand out by unknown risks. indemnity claim. easing the seller’s indemnity obligations The Latin America M&A transactions RWI significantly reduces the scope of in reliance on a buy-side RWI policy. This that are likely to fare the best in terms of a seller’s indemnity obligations, as the is especially true in Latin America M&A, RWI coverage and cost have the following buyer looks mostly to the RWI carrier as RWI is not yet as common. characteristics: instead of to the seller for recovery in RWI also can benefit both sellers and the covered areas. SRS Acquiom’s 2018 –– a well-regarded ultimate beneficial buyers in an M&A transaction with Buy-Side Representations and Warranties owner of the insured party; multiple sellers, where sellers — whether Insurance Deal Terms Study found –– an insured party in the U.S. or other as a matter of policy or simple finan- that, where buy-side RWI is present, jurisdiction with high historical deal cial wherewithal — do not offer joint the median size of the seller’s escrow flow; and several liability for indemnities, expressed as a percentage of the purchase because RWI obviates the need to pursue –– a simple business model that is not price drops from 10 percent to just multiple parties for varying percentages heavily regulated; 1 percent. of losses and allows a single process with –– sophisticated counsel and accountants; Since the buyer looks to the RWI carrier the RWI carrier. –– an English-language acquisition agree- instead of the seller for recovery in the RWI policies that have been bound ment governed by U.S. or U.K. law; covered areas, RWI significantly reduces a for Latin America M&A transactions buyer’s exposure to the risks of seller credit –– a high-quality due diligence process have mostly been buy-side. It is unclear and enforcement of foreign judgments. The with a U.S.-style detailed diligence whether this is due to RWI carriers latter is of particular importance to a buyer report; and having less of an appetite for sell-side if, as is the case in many Latin America RWI policies or sellers not being willing –– arm’s length negotiation of representa- M&A transactions, the seller holds assets to cover the cost of the policy or accept tions and warranties. in multiple jurisdictions, and certain juris- the mechanics of the seller first fronting dictions in the region have complex foreign the indemnity payments and then getting judgment enforcement rules. reimbursed by RWI carriers.

22 Cost. Generally, RWI policies are more Policy Provisions. The deductible/reten- fraud by the insured party. Additional expensive in Latin America than in the tion for Latin America RWI policy often subject areas that RWI carriers typically U.S. For instance, premiums, which is in the 1-2.5 percent range, compared seek to exclude for Latin America RWI are one-time and usually expressed as to generally below 1 percent for a U.S. policies include bribery and corruption, a percentage of the RWI policy limit, policy. As for a policy limit, it is unclear money laundering, and expropriation risk. range at least 0.5 percent higher on each whether it is lower in Latin America than end for a Latin America transaction in the U.S. Some RWI brokers say that Among other issues, quantifying such than the 2-4 percent in the U.S. There Latin America RWI policies have lower risks is extremely difficult for RWI carri- is no difference in cost when it comes limits due to limited RWI carrier appetite. ers on the basis of transaction diligence, to RWI broker fees and taxes on the Others maintain that RWI policy limits in and although they may be perceived as policy (which typically are dependent Latin America tend to be higher because having a low likelihood of occurring, on the registered address of the insured of smaller deal sizes. Still others believe these risks have been more pervasive in party). Some expected cost differences the limits are comparable to those in the Latin America than elsewhere in the past also exist among different Latin America U.S., at 10 percent of the purchase price. couple of years. Furthermore, when the jurisdictions that may be driven by deal risk materializes, it tends to have a severe flow, legal certainty and the perceived Exclusions. Insurers protect against and long-lasting negative impact not macroeconomic risk (including currency unknown risk. Therefore, as is the case only on the target but also on the buyer. risk) in each locale. in other jurisdictions, RWI policies Separate, additional insurance policies typically do not cover known issues, to cover gaps in the RWI policy may be Time. Some brokers indicate that the RWI including those revealed in the diligence available at increased cost for some, but process in Latin America is only a couple process or identified in the disclosure not all, of these exclusions. of days longer than for a U.S. policy, schedule. There also are various subject while others suggest it’s an additional areas that RWI carriers will generally Conclusion three weeks. Other than taking slightly attempt to exclude from RWI policies, With its expected increased prominence longer to complete, the process for a Latin including data protection and cyberattack in the new year, now is the time for America RWI policy is no different than matters, compliance with certain labor deal-makers with roles in premier Latin for a U.S. one. The duration of the process and employee benefits laws (including on America M&A transactions to get up to may depend on whether the RWI carrier wages and pension matters), certain tax speed on RWI. is willing and able to rely on the buyer’s matters such as the ability or time frame diligence reports rather than require full- in which a target or buyer may utilize net blown diligence by its independent U.S. operating losses, open audits, transaction- Click here for a full list of mergers and and local counsel. related taxes and product liability, and acquisitions-related articles authored by Skadden attorneys in the last year.

23 2019 Insights M&A / Governance

Antitrust enforcement agencies in the U.S. and Europe US and EU were once again busy in 2018, particularly in the area of Antitrust merger review. In the U.S., despite new leadership at both the Department of Justice (DOJ) and the Federal Trade Enforcers Commission (FTC), the pace of and approach to merger Remain Active enforcement largely remained unchanged from the Obama years. The European Commission also was active in 2018 and Aggressive, and continues to explore new theories of potential harm.

With Some New US Enforcement Stays the Behind the curtain, we also are seeing Course, With Renewed Interest both agencies step up their scrutiny of Wrinkles in Vertical Mergers and standards for proposed remedies, even aside from the DOJ’s new policy Both U.S. antitrust agencies pursued on behavioral remedies. This does not vigorous merger enforcement agendas come as a surprise, as Assistant Attorney in 2018. The DOJ attracted the biggest Contributing Partners General Makan Delrahim, who heads headlines when it sought and failed to the DOJ’s Antitrust Division, and FTC enjoin AT&T’s proposed acquisition of Kenneth B. Schwartz / New York Chairman Joseph J. Simons promised Time Warner. It was the first time in 40 changes in this area during their respec- Ingrid Vandenborre / Brussels years that either agency requested to tive confirmation hearings. As a result, enjoin a vertical merger, and it represented parties should expect a lengthy and the DOJ’s first loss in a merger case in Associates onerous review process when proposing more than a decade. The AT&T case divestitures or other remedies to get a also reflected the most notable change Michael J. Frese / Brussels deal done. in the DOJ’s enforcement approach in Michael J. Sheerin / New York 2018: a complete unwillingness to accept We did not see any material changes to behavioral remedies (i.e., commitments the substance of merger review in 2018, by merging parties to engage in certain and we expect that to remain the case in behavior) as an alternative to structural the new year. Both agencies have demon- relief (i.e., divestitures). This is notable strated they will continue to scrutinize because Comcast’s 2011 acquisition of horizontal transactions in concentrated NBC Universal — which raised very industries in which the merging parties similar issues to those in the AT&T appear to be close competitors. In addition, deal — was resolved with behavioral following AT&T, both agencies seem to remedies without a lawsuit. The DOJ also have a renewed interest in vertical mergers, was very active in a slew of other deals, particularly those involving parties with a suing to block a consummated merger, significant presence at one or both levels of causing parties to abandon several deals in a supply chain (e.g., AT&T has a signifi- response to DOJ objections and obtaining cant presence in television distribution divestitures in several transactions. and Time Warner in producing television content for distribution). The agencies also The FTC was equally busy, obtain- have discussed issuing new guidelines for ing injunctions against two mergers in nonhorizontal mergers, but the timing and federal court and obtaining divestitures process for issuing such guidelines largely or behavioral relief in several other trans- remain unknown. While the agencies actions. (The FTC has not adopted the remain active, they have shown little appe- DOJ’s hard line on behavioral remedies.) tite to heed populist calls for enhanced As with the DOJ, new leadership (in the enforcement efforts, including revisions to case of the FTC, a completely new slate the antitrust laws, based on less traditional of FTC commissioners) has not appeared theories of antitrust harm (e.g., big data, to result in any drop-off in merger privacy, innovation, conglomerate effects). enforcement activity. These theories are gaining traction in the

24 academic community and in other jurisdic- Unless Commissioner Margrethe Vestager resale prices. But pricing is also central to tions, but as of yet little evidence indicates is reappointed, someone else will take the some ongoing investigations, both by the that they will meaningfully influence the helm of the European Union’s main merger Commission and national regulators. The outcome of U.S. merger reviews. and antitrust authority. Additionally, the pharmaceutical industry has been the main head of mergers within the Commission’s target of these investigations, which are New leadership at the agencies appears Directorate-General for Competition (DG based on concerns over “excessive pricing” open to applying their experiences from Comp), Carles Esteva Mosso, will move by a dominant company. Commission offi- private practice to improve the merger to the state aid directorate. He will be cials also have been focused on high prices review process. In September 2018, succeeded by Cecilio Madero Villarejo, in the area of merger control. On several Delrahim took the lead in this respect who will be vacating DG Comp’s top job occasions in 2018, DG Comp’s chief when he announced a series of potential for antitrust. economist stated that high profit margins reforms designed to “modernize the may increase the risk of anti-competitive merger review process” to avoid “unduly In terms of case practice in 2019, we leverage and should therefore be part of the long merger reviews ... [that] waste public expect a continuation of themes that review process. and private resources.” Among other characterized merger and antitrust activity promises, the DOJ has said it will resolve in 2018: online sales, pricing and margins, Innovation. Concerns around potential most merger investigations within six innovation, and big data. Digitization, reductions in innovation were another months, limit the scope of burdensome which comprises not only questions around driver of the Commission’s enforce- requests for information and afford parties big data but also various other implications ment agenda. In the area of mergers, greater access to key DOJ decision- of new-generation information technolo- the Commission has not shied away makers earlier in the process. Delrahim gies, may become a new focus area. from remedies to maintain premerger has been clear, however, that parties The Commission has appointed three innovation levels. Its investigation into should not expect faster results unless outside advisers to report on competition potentially collusive conduct with respect they are willing to do their part by being challenges associated with digitization. to car emission technology shows that transparent, providing information in a The report is due on March 31, 2019. the innovation agenda is not limited to timely manner and foregoing the alleged merger control. Other cases relating to gamesmanship that the agencies have Online Sales. Since 2015, the “EU new-generation information technolo- seen in some investigations (e.g., over digital single market” has been the gies may follow, depending on what the designations of privileged documents). Commission’s flagship policy, through digitization report concludes. which it has attempted to break down Although these are welcome promises, e-commerce barriers across the European Big Data. Another hot topic in competi- it remains to be seen when these poli- Economic Area using legislative initia- tion law circles across Europe was big cies will be implemented and to what tives and antitrust investigations. In 2018, data and platforms, and this is expected extent the DOJ will adhere to them. In the Commission issued two infringe- to continue in 2019, especially given the addition, it is unclear whether the FTC ment decisions, fining four electronic Commission’s interest in digitization. will follow suit. If not, there may be appliance manufacturers and clothing One of the key questions is whether, and substantial differences in the duration of company Guess for allegedly restrict- to what extent, access to and use of big merger reviews at the two agencies. This ing online cross-border sales. There are data can be considered to confer market is noteworthy, as the agencies appear to ongoing investigations in the areas of power in relation to particular goods or be fighting with greater frequency for pay-TV services, merchandising rights, services. This has become a thorny issue clearance to review major transactions. hotel bookings and video games. 2019 in the context of merger control. Another As a result, developing a comprehensive will be the year in which we will see the central issue is to what extent platform antitrust strategy in advance of signing a Commission’s attitude toward enforce- and network hosts can collect and make transaction agreement is crucial, includ- ment take shape, in particular regarding use of user data, including when host and ing how and when to engage with the whether it will seek fines. user offer competing products or services antitrust agencies. through the platform. We expect more Pricing and Margins. Pricing and margins clarity on these issues in 2019 as the A Steady Path in the EU Despite came under increased scrutiny at the German investigation into Facebook’s Leadership Changes at the Commission in 2018 as well. One of the data collection practices runs its course. European Commission electronic appliance cases mentioned above was the first case in which the The current European Commission’s term Commission took issue with pricing Click here for a full list of antitrust/competition- comes to an end on October 31, 2019, and algorithms — in that case, to monitor related articles authored by Skadden attorneys changes in leadership are anticipated. in the last year.

25 2019 Insights M&A / Governance

U.S. public companies face a wide array of challenges, US Corporate from greater market volatility and increasing economic and Governance: geopolitical uncertainty to disruptive technologies, artificial intelligence, social media and cybersecurity incidents. The new Turning Up year also began with a shutdown of the federal government the Heat and a divided government, reflecting deep societal schisms on numerous and varied questions that may impact the environment in which companies and boards operate.

Contributing Partner Public companies face traditional chal- The Role of Corporations, Business lenges regarding long-term financial Marc S. Gerber / Washington, D.C. Strategy and the Rise of ESG performance and earnings growth, as The level of ESG-focused investment well as newer ones presented by a range exceeds $20 trillion of assets under of topics that fall within the umbrella of management, and new ESG funds and environmental, social and governance, investment vehicles are being launched or ESG. The “E” and “S” topics include with increasing frequency. None of those items such as sustainability, climate factors changes the fundamental premise change, use of plastics, water manage- that investments are made to achieve ment, human capital management, financial returns. In its 2018 annual letter gender pay equity, diversity, supply to CEOs, titled “A Sense of Purpose,” chain management, political and lobby- BlackRock reiterated its request that ing expenditures, the opioid crisis and companies publicly articulate their gun control. For some, these issues raise strategic framework for long-term fundamental questions about the role of value creation, noting that a company’s corporations and businesses in society. strategy must include a path to achieving The common denominator among all of financial performance. these items is risk. The increased level The challenge companies, investors and of risk will result in investors seeking to policymakers face is to better under- better understand a company’s business stand and account for the nexus (if any) strategy; how the company manages and between various ESG matters and long- mitigates these risks; and whether the term value creation. As articulated in company’s board of directors is well-suited BlackRock’s 2018 letter: — including in terms of skills and experi- ences, diversity of viewpoints and fresh Society is demanding that compa- perspectives — to oversee management’s nies, both public and private, serve a execution of that strategy and mitigation social purpose. To prosper over time, of those risks. The questions investors every company must not only deliver pose will not be new, as many have been financial performance, but also show asked with increasing frequency over the how it makes a positive contribution to past decade. But with U.S. corporations society. Companies must benefit all of entering a period of increased risk and their stakeholders, including share- volatility, companies and boards should holders, employees, customers, and the expect these questions to be asked with communities in which they operate. greater frequency and urgency, and should expect lackluster responses to be met with Along those lines, in 2018, Sen. less patience and increased demands for Elizabeth Warren, D-Mass., introduced change — in strategy, management and the Accountable Capitalism Act, which even board composition. would require companies with more than

26 $1 billion in revenues to obtain a federal narrative rather than cede the space to as part of the board’s oversight of business charter stating the company’s “purpose of ESG raters and other third parties. strategy and risk management. In one of creating a general public benefit,” defined the latest manifestations of investor focus as “a material positive impact on society The ‘New’ Risks: Cyber, Human on these topics, in December 2018, the resulting from the business and opera- Capital and Company Culture New York City pension funds and New tions” of the company. While this legisla- As noted above, companies will continue York City Comptroller Scott M. Stringer tion is unlikely to be enacted, the bill to face all of the traditional business risks, called on portfolio companies to end reflects the larger debate regarding the including those relating to the economy, “inequitable employment practices” such role of corporations in society and calls trade issues, a competitive and dynamic as mandatory arbitration for employment- into question the fiduciary model marketplace, technological disruption, and related claims and nondisclosure require- of shareholder primacy that governs changes in consumer tastes and spending ments in settlement agreements relating to corporations organized under the laws patterns. In addition, less traditional risks claims of unlawful workplace harassment. of Delaware and many other states. continue to emerge and evolve. Company Culture Larger philosophical questions aside, Cybersecurity More broadly, various instances of investors are increasingly focusing on ESG alleged sexual harassment by senior matters as part of their investment theses, Varied forms of cybersecurity risk remain executives and alleged improper or whether seeking superior returns from an ongoing corporate issue. In addition unethical workplace or business prac- companies positively addressing environ- to cyber intrusions, hacking and theft tices have caused investors to focus on mental or social issues, factoring ESG into of confidential or personal information, the question of the board’s oversight of their analyses of risk-adjusted returns or the SEC reminded companies in October company culture. Beyond setting the divesting from sectors viewed as present- 2018 that many are victimized by cyber right tone at the top in terms of legal ing long-term risks that outweigh current fraud in the form of “business email compliance, many have recognized that returns. The increase in ESG investing compromises”: fraudulent emails that lack of a healthy corporate culture can has, in turn, resulted in a corresponding appear to come from a senior executive present a significant business risk. As a increase in ESG ratings and requests for to an employee or from a vendor to the result, the emerging expectation is that companies to increase and improve their company, and directing payment of funds boards will exercise increasing oversight ESG disclosures, including calls to comply to a particular account. SEC guidance to make sure that company culture is with the many frameworks developed earlier in the year, followed by enforce- aligned with and supports the company’s by assorted groups and a petition for the ment actions, also reminded companies long-term business strategy. Securities and Exchange Commission of the need to consider disclosure obliga- (SEC) to require ESG disclosures. tions in connection with cyber incidents and to consider closing securities trading Board Composition Importantly, in a December 2018 speech, windows for employees in the wake of Increased investor scrutiny of busi- SEC Chairman Jay Clayton reminded potentially material cyber incidents. ness strategy and risk oversight, as well companies and investors of two key as investor questions regarding board principles: that companies should focus Human Capital Management composition and, if problems arise, on disclosing material information that Consistent with an economy in which management competency, should be investors need to make informed invest- a corporation’s significant assets are in anticipated. Certainly, activist inves- ment and voting decisions, and that the form of people who can walk out the tors have not shied away from agitating investors should focus on each individual door, investors have increasingly focused for changes in management and board company’s facts and circumstances. on “human capital management,” which composition at targeted companies. In Although these principles represent includes topics ranging from employee addition, traditionally less vocal investors important guideposts, the level of ESG health and safety to workplace diversity also are adopting more activist strategies disclosures by companies has increased to employee training and development. for certain of their investments. Also, significantly, often in the form of sustain- Although many of these historically may index funds, which often view themselves ability or similar reports posted on have been viewed as topics for manage- as “permanent capital,” have increasingly websites and, to a lesser degree, in proxy ment and not the board, investors have focused on whether the “right” directors statements, annual reports and other expressed an expectation that boards of are in the boardroom — in terms of direc- investor presentations. All signs point to directors be engaged in oversight of a tor skills, diversity and tenure. the continuing growth of ESG disclosures company’s human capital management so that companies can better control the

27 2019 Insights M&A / Governance

Following the 2018 proxy season, the New many institutional investors. Vanguard urgency. On all fronts — business strategy, York City comptroller announced that describes its concern over this issue as an ESG, risk oversight and board composition his “Boardroom Accountability Project economic imperative, and BlackRock’s — companies and boards should be proac- 2.0,” launched in September 2017 to make voting guidelines state that it expects tive in analyzing the company through boards “more diverse, independent and to see at least two female directors on an investor lens, anticipating investors’ climate-competent,” had resulted in more every board. Proxy advisory firms Glass questions, and preparing to respond in a than 85 companies adopting improved Lewis and Institutional Shareholder way that reflects the board’s awareness and processes and increasing transparency Services will start recommending against attention to investor concerns. Investors regarding board quality, diversity and nominating committee chairs of all-male continue to expect direct engagement refreshment. The comptroller has contin- boards in 2019 and 2020, respectively. with directors (coordinated through the ued to advocate for such changes, sharing Companies headquartered in California company) where they have concerns examples of disclosures his office views face the prospect of fines if they fail to regarding items such as board refreshment favorably concerning board skills, diverse meet board gender quotas by the end or executive compensation. director candidate searches and board of 2019. Further, investors are looking self-evaluation processes. beyond the number of female directors Finally, companies should take a fresh to whether those women have leadership look at their various forms of investor Director tenure remains an issue in that it roles on the board, for example as lead communications, including for example feeds investor concerns regarding stale- independent directors or as commit- proxy statements, investor day presenta- ness of director skills and lack of board tee chairs. Investors also expect that tions and sustainability reports, to ensure diversity. Tenure can be viewed in various boardroom diversity will lead to C-suite that the company is articulating: its ways — as the average number of years diversity, and investors may be likely to business strategy, its oversight of risk, its directors serve on a board, the percentage inquire further where they see a lack of approach to relevant ESG matters, and of directors perceived as having “lengthy” diversity among the management ranks. the board’s active engagement on, and tenure or the amount of time lapsed since understanding of, these matters. the addition of new board members. Advice to Companies: Be Proactive, Engage and Communicate Although the number of all-male boards Click here for a full list of corporate governance- of directors continues to decrease, gender Similar to the questions from investors, related articles authored by Skadden attorneys diversity remains a top priority for the advice to boards of directors and in the last year. companies is not new but takes on greater

28 In 2018, a number of executive compensation issues made Trending Topics headlines, with trending topics including director compensation in Executive litigation, the impact of the recent U.S. tax reform on performance-based compensation, the influence of the Compensation #MeToo movement, persisting gender pay disparity issues and enforcement actions by the Securities and Exchange Commission (SEC) on executive perquisite disclosure. We Contributing Partners expect further developments on these topics in 2019 and Regina Olshan / New York beyond and encourage companies to consult with their legal Erica Schohn / New York advisers as needed in order to stay informed and prepare for new developments in the rapidly changing landscape of Counsel executive compensation.

Thomas M. Asmar / Palo Alto Delaware Case May Shift Approach inequitably exercised. This is the case to Director Compensation even if the awards otherwise fell within the shareholder-approved limit. Rather, On December 13, 2017, the Delaware the court applied the more onerous entire Supreme Court issued an opinion in In fairness standard of review, under which re Investors Bancorp, Inc. Stockholder courts assess whether the decision is Litigation, which has caused companies to entirely fair to the corporation. (For rethink the shareholder-approved director more on In re Investors Bancorp, see our compensation limits in their equity plans. December 19, 2017, client alert “Boards This case involved allegations of self- Beware: Delaware Supreme Court Limits dealing and corporate waste due to exces- Application of Deferential Standard for sive director compensation. Prior to this Reviewing Director Equity Awards.”) case, courts typically applied the business judgment standard of review, which Companies should consider how to establishes a presumption that the board reduce their risk of director compensa- acted in good faith and in the best inter- tion litigation by, for example, retaining est of the company’s stockholders with any existing limits in their incentive respect to decisions relating to director compensation plans, ensuring there is a compensation. This presumption applies rigorous process for establishing director if the compensation was awarded pursu- compensation, working with a compen- ant to a plan that stockholders ratified and sation consultant to review grants by that contained “meaningful limits” on peer companies, carefully documenting director compensation. As a result, many the review of director compensation, and cases regarding these types of allega- providing enhanced proxy disclosure tions were dismissed at an early stage of regarding the process for determining the litigation process. In In re Investors director awards. Some companies also Bancorp, the court held that a decision to may want to consider a formula-based grant awards to directors was not entitled determination of equity grants, which, to the protection of the business judgment although currently uncommon, has been rule at the pleading stage if the plaintiff implemented by some companies. properly alleged that the discretion was

29 2019 Insights M&A / Governance

In response to the focus on excessive the award amount, regardless of whether “cause” under employment, severance director pay, Institutional Shareholder that discretion is exercised, unless the and similar agreements. In addition Services (ISS) introduced a policy in 2017 employee is entitled to the amount under to serving as an incentive to prevent that would potentially result in adverse applicable state law. This is a fact-inten- this type of behavior, specifically vote recommendations for directors sive and complex issue that should be addressing the issue in the definition of responsible for approving or establishing carefully considered. “cause” under these agreements may director pay that ISS determines fits an more clearly permit a company to avoid established pattern (two or more consecu- Companies should continue to assess the paying severance benefits upon a termi- tive years) of excessive pay levels without impact of the changes to Section 162(m) nation of employment of an executive a compelling rationale or other clearly on their compensation arrangements. The who engages in sexual harassment or explained mitigating factors. In 2018, ISS new rules may provide more freedom to sexual misconduct. announced that it will be revising its meth- design executive compensation programs odology for identifying excessive director that address pay for performance without In further response to the #MeToo move- pay and delaying the first possible adverse having to comply with the strict rules of ment, some companies are considering vote recommendations under the policy the performance-based compensation updating their compensation recovery until 2020. exception. In addition, companies may policy to provide for a clawback or consider alternative compensation designs forfeiture of previously paid compensa- Impact of Tax Reform on in an attempt to fit within Section 162(m)’s tion if an executive engages in sexual Performance-Based Compensation annual $1 million deduction limit. They harassment or sexual misconduct in the should review the terms of their incentive workplace. Recently, some also have been The Tax Cuts and Jobs Act that was compensation plans and arrangements asking newly hired executives to include enacted on December 22, 2017, amended with their legal advisers to determine an affirmative representation to the effect Section 162(m) of the Internal Revenue whether grandfathering may be available that they have not been the subject of any Code, which generally imposes a and, if so, exercise caution to avoid either sexual harassment or sexual misconduct $1 million annual deduction limit for inadvertently losing grandfathered status claim or otherwise engaged in any such compensation paid to covered employees. when contemplating any modification to behavior. It remains to be seen whether (See “US Tax Reform and Cross-Border pre-existing arrangements or otherwise these provisions will evolve into standard M&A: Considering the Impact, One risk jeopardizing the deductibility of practice, but we anticipate that more Year In.”) Statutory changes include compensation paid to covered employees companies will modify their executive eliminating the qualified performance- for current and future taxable years. compensation programs and agreements based compensation exception to Section in some manner to discourage sexual 162(m), expanding the definition of a #MeToo and Executive harassment or sexual misconduct in the covered employee and broadening the Compensation workplace as these issues continue to scope of companies that are subject receive attention. to Section 162(m). These changes The #MeToo movement has caused many companies to take a more active role do not apply to compensation under Gender Pay Disparity written binding contracts in effect as in preventing and responding to sexual of November 2, 2017, so long as those harassment or sexual misconduct in the Recent studies show that gender pay contracts are not materially modified. workplace. (See “Expanding Theories disparities continue to be a significant On August 21, 2018, the Internal Revenue of Liability in the #MeToo Era.”) In issue in executive compensation. In Service (IRS) issued Notice 2018-68, addition to re-examining the code of particular, a significant discrepancy in which provides guidance on this transi- conduct policy and other related policies the level of incentive compensation exists tion rule and the new rules for identify- and procedures, some have included or for men and women serving similar ing covered employees. One of the key modified specific terms in individual roles. In 2017, the Trump administration takeaways from the notice is the IRS compensation arrangements with execu- suspended the equal pay rule that was view that awards are not grandfathered tives to address the consequences of initiated by the Obama administration if companies are permitted to exercise sexual harassment or sexual misconduct, and would have required large companies negative discretion to reduce or eliminate such as with respect to the definition of to report pay by race and gender to the

30 government. Meanwhile, in the United and programs, and staying informed of perquisites by paying a $1.75 million Kingdom, 2018 marked the beginning of a regulatory and legislative developments civil penalty. The SEC also required regulatory requirement for U.K. compa- with the goal of eliminating the dispari- the company to hire an independent nies with more than 250 employees to ties. (See “Responding to the Call for consultant for one year to review and annually report the results of certain “pay Equal Pay.”) evaluate its policies, procedures and gaps” between male and female employ- controls regarding perquisite disclosure, ees on both a government website and the SEC Enforcement on Executive and implement the consultant’s recom- company’s own website. In the United Perquisite Disclosure mended changes. Companies should States, despite companies reaffirming Over the last several years, the SEC has review internal perquisite policies and their commitment to eliminate gender pay pursued several enforcement actions procedures as well as director and disparities, legal and regulatory efforts, against companies for failing to disclose officer questionnaires to help identify social activism and ongoing research executive perquisites in their public perquisites disclosable as executive indicate that more work needs to be done. filings. In the most significant enforce- compensation. Companies are encouraged to remain ment action, on July 2, 2018, the SEC vigilant in this area by reviewing internal announced that a company agreed to Click here for a full list of executive compensation processes, designing and implementing settle charges relating to the understate- and benefits-related articles authored by Skadden executive compensation philosophies ment of and failure to disclose certain attorneys in the last year.

31

Litigation / Controversy

34 2018-19 Supreme Court Update

37 Securities Class Action Filings Show No Signs of Abating

DOJ Policies Aim to Reduce Enforcement 39 Burden on Cooperating Entities

42 Expanding Theories of Liability in the #MeToo Era

45 Compliance Investigations in China Take On New Urgency

47 Key Delaware Corporation Law Developments

Significant Rulings Expected for Ongoing Mass 50 Tort, Consumer Class Action Issues

Trade Secrets Take Center Stage, and Contracts 52 Play a Lead Role

54 Preparing for Democratic Oversight Investigations

International Arbitration Community Turns 57 Its Focus to Cybersecurity 2019 Insights Litigation / Controversy

Much of the attention on the U.S. Supreme Court in the 2018-19 Supreme 2018 -19 term has concerned its composition or its handling of Court Update cases involving some of the signature initiatives of President Donald Trump’s administration. Less noticed is the Court’s extensive docket of potentially significant disputes relevant to

Contributing Partner businesses, including those involving administrative law, the First Amendment, antitrust, securities, arbitration and class Boris Bershteyn / New York actions.

Law Clerks Administrative Law “immoral” trademarks — also violates the First Amendment. The case is Iancu The doctrine of so-called Auer deference Lekë Badivuku / New York v. Brunetti, where the respondent is may, in the words of Justice Clarence attempting to register the mark “FUCT” Leonardo Villalobos / New York Thomas, finally draw its last gasp. On in connection with his clothing line. December 10, 2018, the Supreme Court granted certiorari in Kisor v. Wilkie to The respondent argues that the “scandal- determine whether courts should continue ous” clause at issue here should be treated to defer to an agency’s interpretation no differently than the “disparagement” of its own regulations when they are clause in Tam — both are unconstitutional ambiguous. For over 70 years, Supreme restrictions on speech. The U.S. Court of Court precedent has directed courts to Appeals for the Federal Circuit found in do just so, adding an important weapon his favor, but the government is defend- to federal agencies’ legal arsenal. But ing the law by arguing that the decision in several members of the current court — Tam does not apply because no rationale Chief Justice John Roberts and Justices for striking down the “disparagement” Samuel Alito, Neil Gorsuch and Thomas clause garnered the assent of a majority — have over the years called the doctrine of the court. And, in any event, the court into question. In Kisor, which involves in Tam said that the “disparagement” an interpretation by the Department of clause discriminates based on viewpoint, Veterans Affairs of its own regulation, whereas — according to the government the Supreme Court will finally resolve — the “scandalous” clause at issue here the uncertainty regarding the doctrine’s does not. The Supreme Court granted viability. The U.S. Chamber of Commerce certiorari on January 4, 2019. has argued in an amicus brief that Auer deference heightens regulatory uncer- The decision will either narrow or expand tainty and harms business interests. Tam’s holding and perhaps establish a clear rule regarding how the First Amendment Trademarks and First Amendment interacts with trademark law. In its 2017 decision in Matal v. Tam, the Court held that a provision of the Antitrust Standing Lanham Act prohibiting trademarks In 1977, the Supreme Court held in that “disparage” persons, institutions Illinois Brick Co. v. Illinois that only direct or beliefs violated the First Amendment. purchasers of a product can seek remedies Now, the Court will consider whether for federal antitrust violations. This term, a similar provision within the Lanham the Court will assess this doctrine’s appli- Act — one prohibiting “scandalous” or cability in a digital marketplace in Apple

34 v. Pepper — a dispute involving Apple Federal Securities Laws Arbitration and iPhone users who make purchases Federal Merger Litigation The Court took an opportunity early in from Apple’s App Store. Shareholder litigation concerning the the term to resolve two issues concerning iPhone users allege that Apple has adequacy of disclosures made in connec- the scope of arbitrable disputes under the created a “monopoly app store” that tion with a merger or acquisition has Federal Arbitration Act (FAA). Although overcharges for iPhone apps. They argue increasingly been brought through an both cases were decided unanimously, that they have standing as direct purchas- implied cause of action under Section one decision generally favored arbitration ers because they buy the apps directly 14(e) of the Securities Exchange Act. and the other did not. from Apple’s App Store, and Apple itself On January 4, 2019, the Court granted Delegation Provisions receives the payment. Apple, however, certiorari in Emulex Corp. v. Varjabedian argues that iPhone users are indirect to consider whether a defendant violates Courts generally decide gateway questions purchasers because app prices are set by Section 14(e) only if shareholders can about arbitrability, such as whether an third-party app developers, thus breaking prove that the defendant intended to arbitration agreement covers a particular the causal chain between Apple’s actions make a material misstatement or omis- controversy. Parties can agree, however, and consumers’ damages. The district sion — or (as the Ninth Circuit has held) to have arbitrators decide these questions court sided with Apple, but the U.S. Court if the defendant was merely negligent. by including a delegation provision. In one of Appeals for the Ninth Circuit reversed. As amicus in support of certiorari, the of the term’s first decisions, the Supreme Securities Industry and Financial Markets Court unanimously held in Henry Schein, At oral arguments presented to the Association argued that a lower standard Inc. v. Archer & White Sales, Inc. that Supreme Court, several justices ques- of liability would invite litigation against when parties contractually delegate the tioned Apple’s characterization of app the financial institutions that advise on a arbitrability question to arbitrators, courts developers as middlemen between itself merger or acquisition. Another amicus, must respect that decision, even when and iPhone users, with Justice Elena the U.S. Chamber of Commerce, asked one party contends that the argument for Kagan saying, “I mean, I pick up my the court to go further and decide that arbitration is “wholly groundless.” Issuing iPhone. I go to Apple’s App Store. I pay Section 14(e) does not provide for a his first opinion for the Court, Justice Brett Apple directly with the credit card infor- private cause of action in the first place — Kavanaugh wrote that the “wholly ground- mation that I’ve supplied to Apple. From a question the court has never addressed. less” exception is inconsistent with the my perspective, I’ve just engaged in a FAA’s text and “confuses the question of one-step transaction with Apple.” Material Misstatement Liability who decides arbitrability with the separate In 2011, the Court held that only the question of who prevails on arbitrability.” The justices questioned counsel for iPhone “maker” of a fraudulent statement is The decision reinforces the long-standing users about coherence of their theories of primarily liable under SEC Rule 10b-5(b). principle that arbitration is a matter of damages or monopolization. And Justice Persons who prepare the statement and contract and reassures contractual parties Gorsuch asked why the users did not seek do not retain the ultimate authority on that courts will be hesitant to override a more comprehensive revision of Illinois whether and how to communicate it are, provisions of arbitration agreements. Brick — a doctrine that has been expressly at best, secondarily liable. This term, in rejected by many states’ antitrust laws. Lorenzo v. SEC, the Supreme Court will Class Arbitration Indeed, a bipartisan group of 31 states filed consider whether the preparer, even if Does an arbitration agreement authorize an amicus brief arguing that Illinois Brick not primarily liable for a Rule 10b-5(b) class arbitration if it includes commonly was wrongly decided or no longer relevant violation, can be held primarily liable for used, broad language such as “arbitration in the modern economy. the same conduct under the fraudulent shall be in lieu of any and all lawsuits or Should the Supreme Court side with scheme provisions of the securities laws. other civil legal proceedings”? In Lamps iPhone users, online distribution plat- The Court’s opinion will be of interest to Plus, Inc. v. Varela, the Supreme Court forms may face increasing antitrust the business community for its guidance will consider the standard a court should exposure. No matter what happens, the on fraudulent scheme liability in general apply in determining whether an arbitra- decision will shed light on Illinois Brick’s and its overlap with false statement liabil- tion agreement authorizes class arbitration applicability in today’s markets. ity. (See “Securities Class Action Filings and whether the FAA constrains state law Show No Signs of Abating.”) interpretation of the issue.

35 2019 Insights Litigation / Controversy

The Supreme Court’s opinion may give of employment” refers to any agreement was argued on October 31, 2018, with the the business community greater clarity to perform work. He reasoned that the justices expressing skepticism of cy pres about the contractual language it should statute, construed against the background settlements and also questioning whether use to address class arbitration. But, of its enactment in 1925, evinced no the plaintiffs have standing to begin as so often happens before the Court, intent to distinguish between independent with. Should the Court reach the merits, procedural hurdles may interfere. At oral contractors and traditional employees in it could affect the distribution — and argument on October 29, 2018, some of the exemption. perhaps the likelihood and amount — the justices indicated that jurisdictional of certain class action settlements. questions may lead the Court to avoid Some of the amici in support of Oliveira reaching the class arbitration issue. had asserted that employers in trans- Equitable Exceptions portation industries might deliberately (See “Significant Rulings Expected for On November 27, 2018, the Court heard classify their workers as independent Ongoing Mass Tort, Consumer Class arguments for another class action case contractors to avoid the exemption and Action Issues.”) — Nutraceutical Corp. v. Lambert — compel arbitration when disputes arise. concerning the timeliness of a plaintiff’s But the Court’s decision means that the Exemption for Independent petition for permission to appeal an exemption’s applicability will not depend Contractors order decertifying the class. Rule 23(f) on whether a relationship is structured as The FAA does not apply to “contracts of the Federal Rules of Civil Procedure an “employer-employee” relationship or of employment” for any “class of establishes a 14-day deadline for such an “independent contractor” relationship. workers engaged in foreign or interstate petitions, and the plaintiff missed that deadline by several months. Yet the Ninth commerce.” On January 15, 2019, the Class Actions Supreme Court unanimously decided Circuit applied an equitable exception and in New Prime Inc. v. Oliveira that this Cy Pres Settlements accepted the petition because the plain- exemption (found in Section 1 of the In Frank v. Gaos, the Court will address tiff’s counsel told the trial court (before FAA) applies to independent contractors the permissibility of “cy pres only” the deadline) that he intended to seek working in transportation industries. settlements under the Rule 23(e)(2) of reconsideration. the Federal Rules of Civil Procedure, Dominic Oliveira, a truck driver who which states a court can approve a class The case may boil down to a distinction signed an agreement designating him as action settlement only if it is “fair, reason- between jurisdictional rules and nonjuris- an independent contractor, argued that able, and adequate.” Does a settlement dictional claim-processing rules. Whereas he could not be compelled to arbitrate that distributes none of the proceeds to the former require strict compliance, the because the “contracts of employment” class members, but rather allocates them latter are generally subject to equitable exemption encompasses independent among organizations related to the subject exceptions — unless expressly made contractors. New Prime, an interstate matter of the case, meet this standard? mandatory. The Court’s decision will trucking company, argued for a narrow Proponents argue that such settlements affect how diligently the parties must seek reading of “contracts of employment” can be more efficient than minimal mone- review of class certification decisions. that included only employer-employee tary awards to class members, and that relationships. The U.S. Court of Appeals nothing in the text or history of Rule 23 for the First Circuit sided with Oliveira, Click here for a full list of Supreme Court-related bars them. The Ninth Circuit agreed, but litigation articles authored by Skadden attorneys and the Supreme Court affirmed. certain class members contend before the in the last year. Court that awards to class members were In his opinion for the Court, Justice feasible and that class counsel should not Gorsuch endorsed the broad reading of have incentives to divert settlement funds the exemption, holding that “contracts toward causes of their choosing. The case

36 As anticipated, securities class action filings remained high Securities Class in 2018, with more than 400 filings in federal court, and Action Filings the number is expected to remain high in 2019. While the total number is slightly less than in 2017, it is still well above historical Show No Signs averages, and the chances of being named as a defendant of Abating reached an all-time high (in light of the continued reduction in the number of public companies). In addition to a significant number of cases brought by those objecting to mergers, which

Contributing Partners historically had been the province of state courts (most notably the Delaware Court of Chancery), filings in 2018 included a Jay B. Kasner / New York large number of more traditional stock- drop cases. We expect Scott D. Musoff / New York this trend to continue, particularly if the volatility in the markets Susan L. Saltzstein / New York extends into 2019.

Foreign issuers were far from immune to v. Beaver County Employees Retirement securities filings in 2018, and the plain- Fund that the Securities Litigation tiffs’ bar continued to target companies Uniform Standards Act of 1998 did not from Latin America and Asia. So-called authorize the removal of cases brought event-driven litigation also is on the rise. under the Securities Act, nor did it These cases typically are filed upon the strip the state courts of jurisdiction. disclosure of a negative event that was not As a result of Cyan, plaintiffs may be necessarily tied to financial statements, free to assert such cases in state courts such as stock declines following a Foreign throughout the country. And in December Corrupt Practices Act or other regulatory 2018, the Delaware Court of Chancery investigation, an environmental incident or rejected a forum selection clause in the even a plane crash. While we anticipate the articles of incorporation of a Delaware ever-increasing number of securities filings corporation that attempted to require to continue into 2019, the good news for the filing of such suits in federal courts. corporate America is that the number (See “Key Delaware Corporation Law of dismissals also appears to be increas- Developments.”) Not surprisingly, we ing. From experience, we have noted an have seen an increase in the number of increased receptivity to dismissals even state court filings as well as an increase beyond New York and California, where in parallel litigation — with dueling cases the majority of such cases are filed. filed in both state and federal courts. Parallel litigation creates inherent coor- State Court Filings dination difficulties because there is no One trend that began in the latter half defined procedural mechanism designed of 2018 and that we expect to continue for such coordination (such as the Judicial in 2019 is an increase in the number Panel on Multidistrict Litigation in federal of state court filings for claims under court) and often requires unique defense the Securities Act of 1933 following an approaches to ensure that both sets of initial public offering. In March 2018, the cases do not move forward independently. U.S. Supreme Court held in Cyan, Inc.

37 2019 Insights Litigation / Controversy

The increase in state court cases also has the contents of the statements, the U.S. a domestic transaction — a necessary resulted in litigation concerning the appli- Court of Appeals for the District of element for the federal securities laws cability of certain provisions of the Private Columbia Circuit held that he was not to apply — and whether that determina- Securities Litigation Reform Act of 1995 the maker of such statements under Rule tion creates individualized issues that (PSLRA) to state court actions. Through 10b-5(b). But the court held that this predominate (and thus preclude class the PSLRA, Congress afforded defendants did not prevent liability from attaching certification). As noted last year, the various protections that were intended to under other provisions, such as Rule U.S. Court of Appeals for the Second help weed out meritless cases and prevent 10b-5(a) or Rule 10b-5(c), which refer- Circuit in the In re Petrobras Securities the threat of facing a class action to force ence scheme liability. case remanded this issue to the district unwarranted settlements unrelated to court, vacating that court’s certification the merits. The plaintiffs’ bar appears Justice Brett Kavanaugh issued a strong of a class. The Petrobras class action was to be targeting New York state courts in dissent in the D.C. Circuit and has settled before the district court had an particular. Indeed, for the first time since recused himself from the Supreme Court opportunity to review the issue directly, the mid-1990s, the New York state courts deliberations, which could translate into although the settlement approval are grappling with questions that have a 4-4 decision. If that happens, the D.C. process, which is once again before arisen in Cyan’s wake, including whether Circuit decision would stand. Oral argu- the Second Circuit, may include rulings the PSLRA’s automatic stay of discovery ment was held on December 8, 2018, and on related issues. pending a motion to dismiss applies with several justices appeared receptive to equal force to state court actions. the lower court’s interpretation. Such a The U.S. Court of Appeals for the Fifth ruling presents a risk of opening a back Circuit had an opportunity to decide We anticipate that these and other related door of sorts to primary and secondary whether the statute of repose under the issues will continue to percolate as we liability and marks a change in tenor securities laws precludes the certifica- continue to experience an increase in from prior Supreme Court precedent, tion of a class after the statute of repose state court filings. which foreclosed aiding-and-abetting expired, but that case, too, settled before liability (Central Bank of Denver, N.A. v. the court could rule. And finally, the Potential Clarification First Interstate Bank of Denver, N.A.) and Second Circuit will again have an oppor- on the Reach of Janus precluded liability of secondary actors tunity in 2019 to clarify what defendants In 2019, the Supreme Court again will have upon which investors did not directly need to show on class certification to a chance to put its stamp on the securities rely (Stoneridge Investment Partners v. demonstrate that the revelation of the litigation arena. In 2011, the Court decided Scientific-Atlanta, Inc.). alleged misstatements did not have a in Janus v. First Derivative Traders that price impact on the security at issue. only a “maker” of a statement can be liable Class Certification Among others, these important issues under SEC Rule 10b-5(b). This term, the Class certification will continue to be will continue to make the class certifica- Court will have an opportunity to clarify a battlefield in 2019, with issues relat- tion stage a significant area of attack the reach of Janus in Lorenzo v. SEC. In ing to the domesticity of transactions, for defendants. that case, the defendant, an investment the applications of statutes of repose banker, purportedly copied and pasted and the contours of what needs to be Click here for a full list of securities litigation- alleged misstatements written by his boss demonstrated regarding price impact. As related articles authored by Skadden attorneys and emailed those statements to prospec- more cases are filed relating to globally in the last year. tive investors at his boss’ direction. offered securities, court scrutiny is likely Because the defendant did not control regarding the issue of what constitutes

38 The Department of Justice (DOJ) appears to be continuing DOJ Policies to revamp its approach to companies suspected of financial Aim to Reduce crimes, and emphasize the importance of prosecutions of individuals. In a number of speeches in 2018, senior Enforcement department officials, including Deputy Attorney General Burden on Rod J. Rosenstein (who reportedly will leave the DOJ upon confirmation of Attorney General nominee William Barr), Cooperating indicated that prosecuting culpable individuals can be a more Entities effective deterrent than corporate penalties. Consistent with that perspective, recent department policies have sought to reduce investigative burdens on companies, particularly those

Contributing Partner that seek to cooperate. However, setbacks to the DOJ in a number of notable 2018 trials may impact the DOJ’s bullishness Jocelyn E. Strauber / New York on individual prosecutions in this year.

Associate Policy Changes in penalties and disgorgement following a similar investigation of a different bank in In 2018, the DOJ continued to expand Micah F. Fergenson / New York which, according to the DOJ, the bank did the application of its 2017 Foreign not self-report or fully cooperate with the Corrupt Practices Act (FCPA) Corporate investigation at its outset. Enforcement Policy, applying it as nonbinding guidance in criminal cases The DOJ policy against piling on — when beyond the FCPA context. That policy multiple agencies investigate and punish expansion was announced in a March companies for the same underlying 2018 speech by John P. Cronan, then- misconduct — was announced in May acting assistant attorney general of 2018 and seems similarly designed to the Criminal Division, and Benjamin reduce the burden of enforcement activity Singer, then-chief of the Fraud Section’s on corporations, particularly when the Securities and Financial Fraud Unit, at entity cooperates. The policy encourages the American Bar Association’s white DOJ attorneys to coordinate, where possi- collar crime conference. ble, both within the department (where multiple components are investigating The speech seemed to encourage corpo- the same corporate entity) and with other rations to self-disclose in other types federal, state, local and foreign investigat- of investigations by highlighting the ing authorities, to alleviate the overlap- significant reduction in penalties that can ping demands multiple investigations can result, with Cronan and Singer pointing to place on corporations and eliminate “the a recent foreign exchange “front-running” unnecessary imposition of duplicative investigation in which a financial fines, penalties and/or forfeiture against institution received a formal declination the company.” That said, the DOJ contin- letter based on its self-reporting, full ues to emphasize in public statements its cooperation and enhanced compliance cooperation with other authorities as a program. The financial institution paid means of increasing available evidence $12.9 million in restitution and disgorge- and facilitating far-reaching investi- ment, compared to a deferred prosecution gations of wrongdoing, an approach agreement and payment of $101.5 million that naturally increases the burdens

39 2019 Insights Litigation / Controversy

on corporations under investigation, were “substantially involved in or respon- this time, and such cases typically take particularly in the cross-border context. It sible for” the potential criminal miscon- months, or even years, to build. Where therefore remains to be seen whether the duct. Moreover, the revised policy allows financial crime cases have been brought, so-called anti-piling on policy will in fact a company potentially to receive coop- the penalties are 72 percent lower than benefit such corporations. eration credit even where it is “unable to during the prior administration, accord- identify all relevant individuals or provide ing to a New York Times analysis. If the The DOJ’s recent revised guidance on the complete factual information despite its data holds, overall, corporations dealing imposition of monitors, which calls for good faith efforts to cooperate fully.” with potential criminal misconduct may doing so “only where there is a demon- be better-positioned to resolve investiga- strated need for, and clear benefit to be To be sure, these policies do not upend tions on more favorable terms than in the derived from, a monitorship relative the fundamentals of the DOJ’s approach past, particularly if they are willing to to the projected costs and burdens,” is to enforcement and corporate coopera- self-disclose or, at a minimum, provide another indication of the current depart- tion. But they do reflect a change in tone substantial cooperation. Companies ment’s sensitivity to corporate concerns. and a growing apparent recognition of the with robust compliance programs and In announcing the revised guidance in burdens companies face under investiga- the ability to track and substantiate their October 2018, Assistant Attorney General tion. They also encourage voluntary self- effectiveness may fare particularly well. Brian A. Benczkowski stated that moni- disclosure by increasing and clarifying tors should be “the exception, not the the benefits of and removing obstacles to While the DOJ appears committed to rule.” The so-called Benczkowski memo- obtaining cooperation credit. individual prosecutions, particularly randum strongly suggests that the DOJ those arising out of broader investigations is narrowing the set of circumstances in Recent Enforcement Actions begun in the prior administration in such which a monitor is required and limiting The DOJ’s approach to corporate areas as the FCPA, criminal antitrust, and the role of appointed monitors. Indeed, enforcement also is evident in actions fraud and market manipulation, the DOJ the policy seems to give companies the brought and declined in 2018. For suffered setbacks in 2018 that may impact opportunity to establish that a monitor example, under the FCPA Corporate its approach to individual prosecutions in is not required on the basis of factors Enforcement Policy and the pilot program the future. including the company’s investment in that preceded it, the DOJ declined The U.S. Court of Appeals for its own compliance program and internal prosecution in 11 of 13 cases where a Hoskins. the Second Circuit’s decision in United controls, as well as its ability to demon- company had voluntarily self-disclosed. States v. Hoskins limits the DOJ’s reach strate that those controls can detect and (The remaining two investigations were in FCPA actions against individuals, prevent misconduct. resolved with nonprosecution agree- particularly foreign nationals. Lawrence ments, and no monitors were imposed.) Finally, and most recently, on November Hoskins, a non-U.S. citizen charged with That said, the volume of FCPA actions 29, 2018, Rosenstein announced a revised conspiring to violate the FCPA, was an brought and the penalties in those actions policy concerning individual accountabil- employee of a U.K. subsidiary of a French remained relatively constant in 2017 and ity and cooperation credit for corporations. company and never entered U.S. territory 2018, suggesting that in circumstances A refinement of the 2015 memorandum during the period of the criminal scheme. where companies fail to self-disclose, by then-Deputy Attorney General Sally The Second Circuit held that Hoskins enforcement activity continues to be Yates on the same topic, the updated policy therefore fell outside the categories of relatively robust. takes a more practical, less burdensome persons generally covered by the FCPA, approach to the requirement that cooperat- Outside the FCPA context, cases against and because he could not be charged with ing corporate entities provide information banks and companies for financial a substantive FCPA violation, he could about culpable individuals. For example, it crimes appear to have declined in 2018, likewise not be charged with conspiring no longer requires that companies identify with fewer industrywide actions than or aiding-and-abetting violations of the “all relevant facts about the individuals in prior years. One year is likely too FCPA. (For more, see our September 4, involved” in order to receive cooperation short to define a trend. It is, of course, 2018, client alert “Second Circuit Curtails credit. Instead, companies need to provide possible that the DOJ has been involved Use of Conspiracy and Complicity relevant facts only about individuals who in nonpublic investigative activity during Statutes in FCPA Actions.”) While this

40 decision does not entirely foreclose the of statements he made to outside counsel Conclusion possibility that a non-U.S. citizen acting conducting an internal investigation of The DOJ’s consideration of the burdens outside the U.S. could be charged with the conduct of the bank’s traders involved its investigations and resolutions impose an FCPA violation — indeed, the Second in setting Libor rates. During the internal on corporations and financial institutions, Circuit expressly left open the possibility investigation, Black was interviewed and its messaging that it may seek to that Hoskins could be charged as an agent by outside counsel under threat of alleviate those burdens while continuing of the company’s U.S. subsidiary — the termination, and he claimed his state- to investigate and prosecute individual DOJ certainly will consider Hoskins when ments were compelled in violation of the misconduct, seem likely to continue into deciding whether to pursue an individual Fifth Amendment due to extensive law 2019. Depending on the circumstances, in similar circumstances. enforcement involvement in the bank’s some institutions may seek to benefit investigation, which had “federalized” from the DOJ’s current approach by Usher. In the antitrust context, the outside counsel. While the government voluntarily disclosing misconduct or at DOJ failed to obtain convictions after tried to moot the issue by opting not to least providing substantial assistance to a jury trial in United States v. Usher, a offer his statements at trial, Black has the government, including with respect prosecution of three foreign exchange moved, post-trial, to vacate his convic- to culpable individuals. Indeed, because traders charged in 2017 with conspiring tion and dismiss the case under Kastigar the DOJ remains committed to individual to violate the Sherman Act by allegedly v. United States, which bars the use of prosecutions, companies can expect the “bid rigging” in their trading of the euro/ compelled testimony, and evidence department to continue to seek their dollar currency pair. The defense argued, derived directly and indirectly there- assistance in investigating the conduct of among other things, that trading data from, on Fifth Amendment grounds. culpable employees. And while the DOJ’s showed in many instances that the defen- Judge Colleen McMahon of the U.S. 2018 prosecutions have not been entirely dants were not coordinating trades. District Court for the Southern District successful, its policies and public state- of New York stated in a recent order ments suggest it will continue to aggres- Connolly. A case arising out of global that the “Kastigar/outsourced investiga- sively investigate wrongdoing by corpo- investigations into the setting of Libor tion motion” is “where the Government rate employees into 2019. If anything, the rates, United States v. Connolly ended in should be concentrating its efforts” in DOJ’s 2018 setbacks may cause it to seek guilty verdicts for both defendants, but a terms of post-trial briefing. Should Judge even more information, evidence and pending post-trial motion raises signifi- McMahon find a Kastigar violation and assistance from cooperating corporations, cant questions about the implications of order a new trial or a dismissal of the in order to support its efforts to success- extensive law enforcement involvement charges, the ruling will have a significant fully prosecute culpable employees. in the relevant bank’s internal investiga- impact on law enforcement’s interactions tion. Before trial, one of the defendants, with outside counsel handling internal Gavin Black, challenged the admission investigations in future cases. Click here for a full list of government enforcement and white collar crime-related articles authored by Skadden attorneys in the last year.

41 2019 Insights Litigation / Controversy

Alleged workplace harassment is not a new phenomenon, but Expanding in the wake of allegations of sexual misconduct in the corporate Theories of context, plaintiffs increasingly are targeting an expanded group of defendants, including public companies, senior executive Liability in the management and boards of directors. With the publicity that #MeToo Era has attended the #MeToo movement in recent years, allega- tions relating to sexual harassment have spurred the filing of derivative actions (claiming harm to the corporation) and securi-

Contributing Partners ties class actions (claiming a stock price reaction) purportedly due to executives’ and the board’s response (or lack thereof) to Susan L. Saltzstein / New York those allegations and related disclosures. Jocelyn E. Strauber / New York In early 2018, we noted that the plaintiffs’ allegations of sexual misconduct resulting bar was seeking opportunities to assert in purported financial and reputational these lawsuits, and, indeed, between harm to the corporation. Specifically, January 2017 and December 2018, derivative complaints may allege that approximately 15 to 20 such cases were directors or other executives breached filed against public companies. In some their fiduciary duties (duties of care/ instances, both derivative and securi- loyalty/good faith), committed corporate ties complaints have been filed against waste or were unjustly enriched by: the same company based on overlapping –– failing to establish and implement factual allegations. As publicity tends to appropriate controls to prevent the follow the often salacious tales of sexual misconduct; misconduct in the workplace, we believe that observable trends of follow-on –– failing to appropriately monitor the harassment-related litigation will continue business and properly investigate red in 2019. An understanding of the nature flags; and focus of shareholder suits in this –– willfully ignoring misconduct and context can assist public companies, their allowing a hostile culture to persist; executives and board members in deter- mining how best to avoid and manage this –– failing to sanction misconduct; emerging litigation risk. –– affirmatively condoning misconduct by settling lawsuits; Shareholder Derivative Claims: –– approving severance or other payment Allegations and Pleading to wrongdoers; or Challenges –– minimizing exposure or assuring the Investors assert shareholder deriva- public that nothing was wrong. tive actions purportedly on behalf of a corporation against corporate officers Pleading Challenges or directors (or other corporate insid- ers) for alleged harm to the corporation. Plaintiffs who bypass the procedural route Breach of fiduciary duty claims typically of making a demand on the target compa- are governed by the law of the state of ny’s board of directors to take action in incorporation. the wake of a workplace harassment-type claim may face a defense challenge to the Derivative Allegations assertion that a pre-suit demand on the board would be futile. Specifically, plain- In the workplace harassment context, tiffs are often required to plead demand derivative claims may allege a failure futility with particularity. Despite any to address appropriately underlying

42 pleading challenges involved, however, and boards’ alleged knowledge of any squarely found that certain statements the mere filing of a derivative claim actual misconduct within the company, — including statements that touted an against the corporation can magnify that contradict those policies. Plaintiffs inclusive and positive working environ- the issues on which the claim is based, generally claim that the stock price ment, the promotion of honest and ethical namely by increasing public exposure, declined as a result of allegations conduct, and a transparent and objective disrupting business and creating associ- of misconduct becoming public. compensation structure — were “imma- ated costs, including potential costly terial puffery” because a reasonable settlement of the suit. Pleading Challenges investor would not rely on such general As with derivative cases, plaintiffs must statements as a “guarantee” of particu- Moreover, these pleading hurdles are not clear a high pleading bar in order to lar facts. In 2017, in Retail Wholesale insurmountable, as demonstrated by a pursue claims predicated on Rule 10b-5 & Department Store Union Local 338 recent state court decision that denied liability. Specifically, Rule 10b-5 claims Retirement Fund v. Hewlett-Packard a motion to dismiss a derivative action are subject to the heightened pleading Co., the Ninth Circuit similarly found on demand futility grounds, finding the requirements under the Private Securities statements in a code of conduct to be complaint sufficiently alleged, among other Litigation Reform Act and Federal Rule of “inherently aspirational.” In 2018, in things, that the board knowingly failed to Civil Procedure 9(b). Often, these claims In re Signet Jewelers Ltd. Securities take action in the face of allegedly corrob- are met with challenges to the sufficiency Litigation, however, a court denied a orated reports of sexual harassment at the of the pleading, particularly in instances motion to dismiss, finding that represen- company. Furthermore, derivative claims where the claims target “soft” representa- tations contained in a code of conduct, relating to sexual misconduct allegations tions of corporate culture. Challenges to “which state, inter alia, that the company have been settled for payments of tens of the legal sufficiency of the complaint may ‘bases ... decisions solely on a person’s millions of dollars and the establishment include arguments that: [merit and]’ ... has ‘[c]onfidential and of corporate governance measures. anonymous mechanisms for report- –– codes of conduct or public statements ing concerns’ ... and that ‘[t]hose who It is therefore crucial that corporate exec- concerning corporate culture are merely violate the standards in this Code will utives and board members understand the immaterial aspirational statements or be subject to disciplinary action’ ... are developing legal landscape. By doing so, “puffery”; directly contravened by allegations in the company can position itself to address –– a duty to disclose the alleged miscon- the [complaint] ... .” As a result, the proactively both the underlying issues and duct does not exist; representations were actionable. Notably, the possibility of derivative liability. the latter decision described the case as –– the alleged facts fail to support a strong “a garden variety securities fraud suit.” Securities Class Actions: inference that the defendants acted with Accordingly, as with derivative cases, it is Allegations and Potential Hurdles an intent to mislead investors; crucial to examine the evolving case law Securities fraud class actions under –– statements about ethical conduct did in this area, even within the same juris- Section 10(b) of the Securities Exchange not alter the “total mix” of informa- diction, to address effectively and defend Act and Rule 10b-5 promulgated there- tion available to stockholders in their against these types of allegations. under are predicated on alleged mate- decision-making; and rial misstatements or omissions that SEC Regulations and Investigations –– the stock price declined due to factors purportedly rendered a statement false or other than a revelation that statements Corporate public statements in the misleading, and often are asserted along about ethical corporate conduct were wake of sexual misconduct allegations with control person (culpable participa- false. also could result in a Securities and tion) claims under Section 20(a) of the Exchange Commission (SEC) investiga- Exchange Act. However, with increased litigation tion or enforcement action based on the in this area based on disparate facts, purported failure to disclose material Securities Fraud Allegations courts have been tasked with reviewing information to investors. While we are In the context of underlying sexual harassment-related securities claims with unaware of any such actions to date, misconduct allegations, investors’ securi- more frequency, and the results have not companies should be mindful of the ties fraud claims typically concern public been uniform. risk that alleged public misstatements statements issued by a company with concerning corporate culture, and the respect to corporate values, integrity, and A comparison of cases demonstrates existence and adherence to company adherence to ethical standards and inter- the point. A 2016 decision, Lopez v. policies concerning workplace behavior nal policies, juxtaposed with executives’ CTPartners Executive Search Inc., and inclusion, could give rise to such

43 2019 Insights Litigation / Controversy

enforcement actions if and when allega- organizational level. Corporate counsel example, California requires that publicly tions of sexual misconduct are revealed. also ought to ensure awareness of, and held corporations whose “principal execu- Moreover, in some instances, private compliance with, rapidly changing local tive office” is located in California include plaintiffs may support a securities fraud requirements in this area. at least one female board member by 2019 material omission claim on the basis and either two or three by 2021, depend- of a failure to disclose SEC-required Nondisclosure Agreements. In some ing on the size of the board. In addition, information. jurisdictions, such as New York and several companies have announced various California, requiring nondisclosure agree- high-profile initiatives to support gender For example, Item 303 of Regulation ments (NDAs) in settlements pertaining diversity in both internal leadership and S-K requires a company to “[d]escribe to sexual harassment and discrimination external roles. any known trends or uncertainties that is limited or prohibited. Where they are have had or that the registrant reasonably permitted, carefully consider NDAs or Outward-Facing Statements. Take into expects will have a material favor- confidentiality provisions, recognizing account potential legal implications of able or unfavorable impact on net sales that such provisions may be perceived as the substance and tone of outward-facing or revenues or income from continu- silencing the alleged victim while shield- statements and any disclosures about ing operations.” In light of the current ing the alleged perpetrator. corporate values, policies and culture. environment, and to the extent that public revelations of sexual misconduct in the Internal Investigations. Consider proac- Additional Considerations. Review corporate context continue to increase tively conducting an internal investigation severance packages for adequate consid- and companies continue to experience to identify issues and facilitate improve- eration, consider the timing of termina- unfavorable consequences as a result, the ments before lawsuits and reputational tion and succession plans, and understand bounds of this regulation may be tested in harms occur. Companies can consider a directors and officers liability insurance future cases. comprehensive investigation in response and coverage. to complaints or other red flags, or a more Takeaways limited review in the absence of specific Associates Ella R. Cohen and Amanda reported issues. C. Strauss, and law clerk Chloe C. To ensure that any underlying misconduct Bootstaylor contributed to this article. is addressed, and that the response to such Board Considerations. Consider when to misconduct is as effective as possible, escalate allegations to the board, and the companies should consider the following: board’s role in preventing and respond- Click here for a full list of government enforce- ing to sexual harassment allegations. ment and white collar crime-related articles Strong Protocols, Policies and Training. authored by Skadden attorneys in the last year. Relatedly, companies ought to be mindful These should be reviewed regularly of the number of women in high-level and updated as necessary, provided at Click here for a full list of securities litigation- positions and on the board so as to ensure a regular intervals and enforced at the related articles authored by Skadden attorneys more inclusive environment at the top. For in the last year.

44 The ongoing trade tensions between the U.S. and China Compliance have caused some U.S. companies to become increasingly Investigations in concerned that the Chinese authorities may subject their local operations to closer scrutiny, leading these companies China Take On to conduct internal compliance reviews to minimize any New Urgency risks to their businesses. For their part, U.S. authorities have stepped up scrutiny of Chinese companies, as evidenced by the Department of Justice’s (DOJ) “China Initiative.” (See

Contributing Partners our November 29, 2018, client alert “DOJ Announces ‘China Initiative’ to Investigate and Prosecute Chinese Companies.” ) Bradley A. Klein / Hong Kong Prudent executives of multinational companies are right to Steve Kwok / Hong Kong be vigilant in ensuring that any compliance and employee misconduct issues in their China-based operations are promptly detected, investigated and remediated. U.S. companies doing business in China also should pay close attention to key areas of interest to the local authorities.

Be Mindful of Local Laws work-product doctrine that entitle the attorney to resist, on the client’s behalf, For U.S. lawyers, the instinctive response the Chinese government’s requests for upon being alerted to potential miscon- information. Because of the absence of duct is to gather all the relevant facts legal privilege in China, U.S. courts have — immediately, if possible. This instinct upheld subpoenas and discovery requests must be tempered with caution when the directed at communications between matter requires evidence-gathering in Chinese counsel and their clients. To China, as Chinese authorities, to avoid preserve the privilege under U.S. law, infringement on the country’s sovereignty companies should structure China-based and the privacy rights of its citizens, internal reviews — particularly those impose strict limits on the types of that may also implicate issues of U.S. law “investigations” that nongovernmental — under the direction of U.S.-qualified and unlicensed actors can conduct. China attorneys and memorialize this arrange- also has increasingly stringent laws relat- ment at the outset of the engagement. ing to data collection that, if breached, can expose a company to civil and crimi- Have a WeChat Policy nal liabilities in China. WeChat, an instant communications app Protect the Attorney-Client commonly installed on smartphones, has Privilege become so ubiquitous in China that it has largely replaced corporate email for many While Chinese attorneys are prohib- employees. Because a WeChat account ited from breaching client confidences, is tied to a phone number, unless an disclosing information to the authorities employee uses multiple phone numbers, is permitted — indeed, required — in he or she is likely to have only one various circumstances. Chinese law WeChat account for both personal and does not provide analogous concepts business use. to attorney-client privilege and the

45 2019 Insights Litigation / Controversy

This raises a host of challenging compli- to which it may otherwise be entitled. Another noteworthy area is training. ance and legal issues, but few companies None of this suggests Chinese labor law While easy-to-administer online train- have clear policies and procedures regard- considerations are secondary. However, ings have their place in a company’s ing WeChat use. The DOJ’s updated disciplinary decisions, once made, should repertoire, nothing can replace in-person, Foreign Corrupt Practices Act Corporate not be revoked lightly. impactful sessions utilizing local and Enforcement Policy, which has been incor- recent real-life examples delivered in porated into the United States Attorneys’ Cultivate a Robust the employees’ native language to small Manual, now conditions the award of Compliance Culture groups. Recent DOJ statements make it cooperation credit on the company Cultivating a robust compliance culture clear that companies relying on train- having a document retention policy that and a strong compliance tone from the ings that do no more than go through the “prohibit[s] employees from using software top is paramount but may be especially motions will not be entitled to much, if that generates but does not appropriately difficult for multinational companies any, credit from prosecutors and regula- retain business records or communica- in China. Depending on the indus- tors in the event of violations. tions” — a description that takes direct try, foreign companies may have no aim at communications apps like WeChat. choice but to partner with a Chinese Conclusion Companies should examine how employ- joint venture (JV) to enter the Chinese The enforcement landscape for U.S. ees use WeChat and devise policies that market, which may have a vastly different companies with operations in China may both comply with legal requirements and compliance culture. Moreover, as compli- prove challenging in the coming year. The take into account the realities of modern ance remains a relatively new business same may be true for Chinese companies electronic communications in China. concept in China, companies in China with a U.S. presence. To be prepared, very rarely have stand-alone compliance companies should ensure that they have a Stand Behind Remediation departments, much less ones with the robust compliance infrastructure in place Decisions stature and autonomy necessary to deter to detect and remediate issues in their China’s labor laws are among the most and investigate violations and change China-based operations and seek legal stringent in existence and impose a highly behavior. There is no magic formula to counsel in navigating different U.S. and demanding standard of proof. Hence, a inculcating a strong culture, but being Chinese legal requirements. company may devote significant resources prepared is a good starting point. to completing an investigation and arrive The authors of this article are not licensed at robust remediation decisions, only to Before entering into a JV relationship, to practice law in the People’s Republic of encounter substantial pushback from the companies may consider conducting China or provide legal advice on Chinese human resources department or Chinese enhanced due diligence to identify the laws. This article is for informational labor lawyers when they are asked to areas where improvements are needed purposes only; it is not intended to be legal execute the disciplinary recommenda- and get all parties to commit to a reme- advice. Local counsel should be consulted tions or terminate an employee. However, diation plan as part of the deal terms. on legal questions under Chinese laws. the failure to terminate “bad apples” or Consideration should also be given to structuring the reporting lines to enable implement remediation decisions poten- Click here for a full list of government the local compliance personnel to report tially exposes the company to further (and enforcement and white collar crime-related typically far more serious) violations of directly to company headquarters instead articles authored by Skadden attorneys in law and internal policies, and it may be of local business managers and supervi- the last year. regarded by U.S. regulators as a failure sors, thereby insulating them somewhat to remediate, jeopardizing the company’s from local business pressures. credibility and any cooperation credit

46 The Delaware courts issued a number of significant decisions Key Delaware in 2018 that are likely to have ripple effects throughout 2019. Corporation Law Among them were a series of cases that further developed the parameters of the Corwin and MFW doctrines, a case of first Developments impression invalidating a forum selection provision that sought to require Securities Act claims to be brought in federal court, the first-ever Delaware case approving the termination of a Contributing Partners merger because of a material adverse effect (MAE), and the Cliff C. Gardner / Wilmington finding of “fair value” in an appraisal proceeding based on the Edward B. Micheletti / Wilmington unaffected market price of a company’s stock.

Corwin’s Nuances Grow sale process run by management, and he Associate did not think it was the right time to sell The Delaware Supreme Court’s 2015 the company. Yet the recommendation Art Bookout / Wilmington decision in Corwin v. KKR Financial statement said only that the chairman had Holdings LLC granted a potentially abstained from the vote to approve the powerful litigation tool to corporate tender offer and had not yet determined directors and officers — irrebuttable whether to tender his shares. The court business judgment deference to decisions opined that “[i]t is inherent in the very idea approved by a majority of disinterested, of a fiduciary relationship that the stock- fully informed and uncoerced stock- holders that the directors serve are entitled holders (the so-called Corwin doctrine). to give weight to their fiduciaries’ opinions Among the questions left unanswered was about important business matters.” how the Delaware courts would measure whether stockholder approval was “fully Similarly, in Morrison v. Berry, the informed.” The Delaware Supreme Court Supreme Court reversed the Court of and Court of Chancery addressed that Chancery’s dismissal under Corwin based question in a series of opinions in 2018, on “‘partial and elliptical disclosures’ holding in several notable instances that [that] do not satisfy Corwin.” The action disclosures fell short of fully inform- arose from the acquisition of The Fresh ing stockholders, thereby rendering the Market (TFM) by an entity owned by Corwin doctrine unavailable. Apollo Management, L.P. through a two- step tender offer and merger. In its ruling, In Appel v. Berkman, the Supreme Court the court held that the proxy misrepre- reversed a pleading-stage dismissal under sented the agreement allegedly reached the Corwin doctrine because a plaintiff between Apollo and TFM’s founder and adequately pleaded that the stockholders’ his son, as well as the founder’s alleged decision to accept a tender offer was not preference to only deal with Apollo and “fully informed.” According to the court, his threat to sell his shares. the recommendation statement omitted why the target company’s chairman, who In In re Tangoe, Inc. Stockholders also was its founder and largest stock- Litigation, the Court of Chancery denied a holder, had abstained from supporting motion to dismiss under Corwin because merger discussions. The chairman, whom the target company, which had been in the court described as “a ‘key board the midst of a “regulatory storm” for member’ if ever there were one,” had some time, had failed to disclose when been disappointed in the price and the

47 2019 Insights Litigation / Controversy

long-awaited audited financial state- “entire fairness” standard. Under the MFW Delaware courts. This decision was subse- ments and financial restatements would doctrine, however, the business judgment quently codified at 8 Del. C. § 115, which become available. The court noted that rule will instead apply if, broadly speak- expressly allows forum selection provi- the company had been providing only ing, the transaction (1) was approved by sions to be included in the certificate of “sporadic and qualified” financial informa- a well-functioning, independent special incorporation or the bylaws of a Delaware tion to its stockholders, had failed to file committee of directors and (2) received corporation. In the years since, corpora- multiple Form 10 documents with the approval from a fully informed, uncoerced tions, practitioners, scholars and the media Securities and Exchange Commission, majority of the minority shares. Critically, all questioned how far the forum selection and had not provided stockholders with a these two procedural protections must be provision could extend. In December 2018, quality of earnings report it had commis- irrevocably put in place ab initio, or “from the Court of Chancery provided an answer. sioned. The court also held that informa- the beginning.” tion about the restatement process was In Sciabacucchi v. Salzberg, the Court of material “because the delisting depressed In Flood v. Synutra International, Inc., the Chancery invalidated a forum selection the amount potential acquirers were Supreme Court clarified that, for purposes provision that required any claims under willing to pay for Tangoe and stockhold- of MFW, “from the beginning” means the Securities Act of 1933 to be brought ers needed to understand whether the “before the start of substantive economic in federal court. Earlier in 2018, the U.S. delisting was likely to continue or whether negotiations.” This line of demarcation Supreme Court confirmed in Cyan, Inc. the Company had a legitimate prospect of serves “to have both the controller and v. Beaver County Employees Retirement completing the Restatement and regaining the Special Committee bargain under Fund that state courts have concurrent its listed status with NASDAQ.” the pressures exerted on both of them by jurisdiction with federal courts over these [procedural] protections.” Thus, “so Securities Act claims. Relying on the These cases illustrate how full and long as the controller conditions its offer Cyan decision as well as language in complete disclosure in connection with on the key protections at the germination Boilermakers emphasizing the limited a fundamental transaction can be highly stage of the Special Committee process, scope of a forum selection provision case-specific, how Corwin can be defeated when it is selecting its advisors, establish- for a Delaware company, the Court of at the pleadings stage without any finding ing its method of proceeding, beginning Chancery invalidated the provision that the underlying alleged facts are actu- its due diligence, and has not commenced because federal law, not Delaware law, ally true, and that the court will carefully substantive economic negotiations with the created the Securities Act claim. The review the challenged disclosures to controller, the purpose of the pre-condition court stated that the “state of incorpora- determine whether a shortcoming exists requirement of MFW is satisfied.” We tion cannot use corporate law to regulate that will prevent application of the Corwin anticipate that 2019 will further illuminate the corporation’s external relationships” doctrine. In 2019, we will be watching for when “substantive economic negotiations” and that a forum selection provision in further developments in Delaware disclo- begin — a topic of spirited debate among a company’s certificate of incorporation sure law as it applies to this doctrine. the academic community and Delaware or bylaws cannot govern Securities Act law practitioners. claims “because the provision would Clarification of Ab Initio not be addressing ‘the rights and powers Under MFW Securities Act Claims Cannot of the plaintiff-stockholder as a stock- In the 2014 case Kahn v. M & F Worldwide Be Governed by Forum Selection holder.’” (For more, see our December Corp. (MFW), the Delaware Supreme Provisions 21, 2018, client alert “Delaware Court of Court held that the business judgment rule In a seminal 2013 decision, Boilermakers Chancery Invalidates Forum Selection could apply to so-called “squeeze out” Local 154 Retirement Fund v. Chevron Provisions Regulating Claims Under the mergers, in which a controlling stock- Corp., the Court of Chancery upheld the Securities Act of 1933.”) holder uses an entity it controls to cash out validity of a provision in Chevron’s bylaws The Sciabacucchi decision is likely to or otherwise eliminate the minority stock- requiring “internal corporate claims” — be appealed, and the outcome of that holders in another entity it controls. Prior i.e., those claims subject to the internal appeal will be closely watched for its to MFW, this type of transaction would affairs doctrine, such as claims for breach potential implications for future forum be subject to Delaware’s most stringent of fiduciary duty — to be litigated in selection cases.

48 Delaware Allows First-Ever MAE,” the court stated that it “must The Aruba Appeal consider [the] ‘quantitative and qualitative Termination of a Merger Because Appraisal law has been a significant aspects.’” It then proceeded to find the of an MAE focus of the Delaware courts over the violations both qualitatively and quantita- Delaware’s first judicial finding of an past several years. In 2019, the Delaware tively material, finding for the latter that MAE in a merger transaction, Akorn, Inc. Supreme Court is poised to issue a the violations would require approximately v. Fresenius Kabi AG, went from filing to ruling in the appeal Verition Partners $900 million to remediate, equating to affirmance on appeal in less than eight Master Fund Ltd. v. Aruba Networks, roughly 21 percent of the total equity months. The case began in April 2018, Inc., an appraisal action where the Court value implied by the merger agreement. when Akorn filed its complaint seeking of Chancery held after trial that Aruba The court concluded that a remediation a declaratory judgment that Fresenius Networks’ most recent 30-day average cost of 20 percent of the total equity value could not terminate the parties’ merger unaffected market price was the best “would reasonably be expected to result in agreement. The Court of Chancery held evidence of “fair value,” even though that an MAE.” The court made clear that the that Fresenius, the acquirer, could validly price was more than 30 percent below facts presented did not produce a picture terminate the merger agreement with the merger price. The court reasoned that of a buyer simply experiencing buyer’s Akorn, the seller, because of the presence its use of unaffected market price was remorse, concluding that the buyer acted of two separate and independent MAEs. consistent with other recent noteworthy properly and in response to serious issues First, it found that Akorn’s business “fell Delaware Supreme Court appraisal deci- at Akorn. (For more, see our October off a cliff” right after the merger agree- sions — such as DFC and Dell — where 19, 2018, client alert “Analyzing Akorn: ment was approved by stockholders, and the driving valuation argument was that Delaware’s First M&A Termination Under that this decline continued for a “dura- the merger price (as opposed to an expert- Material Adverse Effect.”) tionally significant” period of time (five driven valuation analysis) was the best quarters), showed “no sign of abating” In December 2018, the Delaware Supreme evidence of appraisal value. and could not be attributed to general Court affirmed the Court of Chancery’s Companies, practitioners, scholars and industry decline or other MAE exceptions judgment because it found that the the media are closely watching the case, in the merger agreement. “record adequately supports” the Court and the Supreme Court’s decision is one of Chancery’s findings on both MAE The court also found “overwhelming of the most highly anticipated Delaware points. (For more, see our December 21, evidence of widespread regulatory viola- opinions of 2019. 2018, client alert “Delaware Supreme tions and pervasive compliance problems Court Affirms Akorn.”) Whether Akorn at Akorn” in violation of various covenants establishes any “thresholds” buyers must Click here for a full list of Delaware-related in the merger agreement. When evaluat- clear in order to prove an MAE or merely litigation articles authored by Skadden attorneys ing whether the regulatory violations provides data points on an evolving land- in the last year. and compliance problems here “would scape remains to be seen. reasonably be expected to result in an

49 2019 Insights Litigation / Controversy

In 2019, significant developments are expected on issues Significant that have been percolating in the mass tort and class action Rulings Expected litigation arena for several years. The U.S. Supreme Court is expected to rule on cases relating to arbitration, cy pres, for Ongoing preemption and personal jurisdiction, and resolve such Mass Tort, questions as whether a contract that is silent on class or Consumer Class collective arbitration still allows it. On the litigation reform front, efforts to Cy Pres. In 2013, the Supreme Court Action Issues combat abuses in class action and multi- declined to take up a challenge to a class district litigation (MDL) practices may action settlement utilizing cy pres — the stall under the now Democrat-controlled practice of distributing unclaimed class House of Representatives, and the changes action funds to third-party charities. Contributing Partners that had been implemented over the last Although the Court denied the petition couple of years may even be reversed. for certiorari in that case (Marek v. Lane), John H. Beisner / Washington, D.C. Chief Justice John Roberts issued an Arbitration. A case currently before Jessica D. Miller / Washington, D.C. unusual statement stressing that cy pres the Supreme Court, Lamps Plus, Inc. v. is a “growing feature” of class action Varela, raises an issue that has greatly settlements and that “in a suitable case, Associates divided the lower courts for years: this court may need to clarify the limits whether a contract that does not mention on the use of” that practice. In 2019, the Kara E. Cheever / New York class or collective arbitration neverthe- Supreme Court is poised to do just that Donald R. Munson / New York less authorizes it. The Court has decided in In re Google Referrer Header Privacy numerous cases involving classwide arbi- Litigation, a case involving an $8.5 Jordan M. Schwartz / Washington, D.C. tration issues in recent years, including in million settlement arising from alleged 2011 when it ruled in AT&T Mobility LLC privacy violations by Google. Apart v. Concepcion that the Federal Arbitration from attorneys’ fees, the money in the Act preempts state laws that condition settlement fund is to be distributed to the enforceability of arbitration clauses six charities — five of which were the on the availability of classwide arbitra- favored charities of Google, class counsel tion. Additionally, in May 2018, in Epic or both. The Ninth Circuit affirmed the Systems Corp. v Lewis, the Court rejected class settlement, holding that it would the argument that class action arbitration not have been economically feasible to waivers should not be enforced because distribute any money to the millions of they deny employees the opportunity to class members. While it is difficult to collectively litigate disputes in violation of predict how the Supreme Court will rule, their right to engage in “concerted activi- the questioning and statements from the ties” under the National Labor Relations justices at the October 2018 argument Act. Even if the Court agrees with the U.S. suggest that the Court might impose some Court of Appeals for the Ninth Circuit limits on the cy pres doctrine. That said, that the agreements involved in Lamps the case may not reach the merits of the Plus can be construed as authorizing cy pres arguments because the Court classwide arbitration under state contract ultimately may decide that the named law, that ruling may have limited practical plaintiff does not have standing. implications given the growing prevalence of explicit class action waiver clauses in Preemption. The Supreme Court is arbitration agreements, which the Court slated to clarify the standard set forth has repeatedly affirmed as enforceable. in the 2009 decision Wyeth v. Levine that pharmaceutical companies cannot

50 be sued for failure to warn when there Personal Jurisdiction. In its landmark Litigation Reform Efforts. The past is “clear evidence” the Food and Drug 2017 ruling in Bristol-Myers Squibb Co. couple of years provided litigation reform Administration (FDA) would have v. Superior Court of California (BMS), advocates with a glimmer of hope that rejected the plaintiff’s proposed warning. the Supreme Court held that state courts there would be changes to curtail what In Merck Sharp & Dohme Corp. v. presiding over nationwide mass tort they viewed as abusive class action and Albrecht, the plaintiffs alleged that the actions lack personal jurisdiction over MDL practices. Most notably, the House Fosamax warning label should have out-of-state defendants as to claims of Representatives passed the Fairness in included a notice about the risk of atypi- plaintiffs brought in a different state — Class Action Litigation and Furthering cal femoral fractures. Merck countered even when those claims are substantially Asbestos Claim Transparency Act of 2017 that it tried to add language address- similar to those of in-state plaintiffs in (FICALA), which addressed a number of ing the risk but was prevented from the same proceeding. Since then, most issues, including no-injury class actions, doing so by the FDA, which stated that courts have put an end to nationwide discovery practices and undisclosed the justification for such language was mass actions where plaintiffs have no third-party funding. The Senate ultimately “inadequate.” The district court granted connection to the forum state. However, declined to take up FICALA, and its fate summary judgment to Merck on these a handful of state courts in Missouri and is likely moribund with the end of the facts, finding that the failure-to-warn Pennsylvania have exercised jurisdic- 115th Congress. And with Democrats now claims were preempted under Levine tion over out-of-state manufacturers in control of the House, it is unlikely that because the “clear evidence” standard based on their use of entities in the forum reform packages like FICALA will see demonstrated that the FDA would not — state to help introduce a product into the the light of day in 2019. Indeed, the House and did not — approve of the proposed stream of commerce. Another recurring could even bring to the floor proposals label change. The U.S. Court of Appeals issue in the wake of BMS is whether the that would make it easier to certify class for the Third Circuit reversed, holding Supreme Court’s ruling applies to class actions or weaken prior reforms that that Merck had not demonstrated that actions and, if so, whether nationwide have expanded federal jurisdiction over the FDA would have rejected a “properly class actions can be brought against a interstate class actions. As a result, the worded” warning, which was a question defendant in a forum other than where the most likely avenue for legal reform in the for the jury. The Supreme Court not only defendant is subject to general jurisdic- upcoming year is the Advisory Committee granted certiorari but also invited the tion — i.e., its principal place of business on Civil Rules, an arm of the federal judi- solicitor general to weigh in on the case; or state of incorporation. So far, federal ciary that is actively investigating alleged the solicitor general sided with Merck district courts have been divided on abuses in MDL proceedings and the preva- in arguing that preemption should be this fundamental question, and it looks lence of third-party litigation funding. decided by a judge, not a jury. While a like the U.S. Court of Appeals for the win for Merck (and, by extension, phar- District of Columbia Circuit will be the maceutical companies across the country) first federal circuit court to delve into the Click here for a full list of mass torts, insurance and consumer litigation-related articles is by no means a foregone conclusion, the debate, after the district court certified for authored by Skadden attorneys in the last year. Supreme Court’s recent preemption juris- interlocutory appeal its prior ruling refus- prudence suggests that the Third Circuit’s ing to apply BMS to absent class members ruling is in doubt. in Molock v. Whole Foods Market, Inc.

51 2019 Insights Litigation / Controversy

The stars of intellectual property law have historically been Trade Secrets patents, copyrights and trademarks. Trade secrets have long Take Center been legally recognized but only recently have begun to share equal billing. The 2016 passage of the Defend Trade Secrets Act Stage, and (DTSA), the first-ever federal statute pertaining to trade secret Contracts Play law, was instrumental in paving the way for a growing body of law on trade secret enforcement, and that enforcement indicates a Lead Role that tailored agreements provide important protection against misappropriation of trade secrets.

Contributing Partners Trade secrets differ in important respects variety of ways in which minor adjust- from other forms of intellectual property. ments to nondisclosure agreements Douglas R. Nemec / New York For instance, the rules for what constitutes (NDAs), collaboration agreements and a trade secret are nebulous compared to the like can yield better protection for P. Anthony Sammi / New York those for patents, copyrights and trade- owners of valuable proprietary informa- marks; and unlike patents, they do not tion. Conversely, those poised to receive exclude commercially valuable subject proprietary information from third parties matter areas (such as business methods should bear in mind the lessons from and diagnostic techniques). This broad these examples. coverage comes with no examination delays, no acquisition cost and no expira- Defining Confidential Information tion date, provided the secret stays secret. When a trade secret misappropriation Trade secret claims also can be pursued issue arises vis-à-vis a party that first in state or federal court, and the general came into possession of information perception is that courts are more recep- through rightful means (e.g., a former tive to exigent relief (such as temporary employee or collaboration partner), restraining orders and preliminary injunc- there are typically contracts between the tions) in trade secret cases than in other parties. Ideally, those contracts contain intellectual property cases. For better provisions governing the handling and or worse, trade secret damages also can use of confidential information. Even reach gargantuan levels because a case of better, the contract or contracts will misappropriation may carry with it both contain something more than boilerplate the risk of lost revenues or sales and the confidentiality provisions recycled from loss of the intellectual property itself. an old template. Confidentiality provi- sions should supplement the protections Growing Emphasis on Contracts afforded by trade secret law, not merely With increasing attention on trade secrets duplicate them. In particular, NDAs often and a developing body of case law around exclude publicly available information DTSA claims, an emphasis on contracts from the scope of “confidential informa- also is growing. Breach-of-contract tion,” and the rationale is hard to dispute claims frequently have appeared along- — no one wants to commit themselves to side trade secret claims in lawsuits over keeping a secret that is not actually secret. the years and often materially impacted Defining “confidential information” in the results. But a contract should not be this way roughly aligns with the require- viewed as a mere alternative to trade ments for proving the existence of a trade secret protection. Properly crafted, and secret under the DTSA and most state if necessary properly litigated, a contract laws, which is to say that information can both strengthen and expand the reach available to the public cannot qualify of a trade secret claim. As the examples as a trade secret. below demonstrate, recent cases reveal a

52 This approach can be a missed oppor- A case in the U.S. District Court for the contractual restrictions on the handling tunity for a disclosing party, as evident Northern District of California under- of information may be the best or only in the recent dispute is which Freeman scores this point. In January 2018, Alta contemporaneous proof of such measures. Investment Management asserted trade Devices, Inc. sued LG Electronics, Inc. secret misappropriation and breach of for trade secret misappropriation and As one example, TLS Management contract claims on the grounds that breach of contract, alleging that LG recently secured a judgment for trade Frank Russell Company had misused had misused allegedly proprietary solar secret misuse to the tune of $4 million proprietary investment volatility data. In cell technology that Alta had originally against Mardis Financial Services in March 2018, the U.S. Court of Appeals disclosed to LG under an NDA. In the U.S. District Court for the Southern for the Ninth Circuit affirmed dismissal October 2018, Alta narrowly avoided District of Mississippi. In its August 2018 of Freeman’s case on both trade secret and dismissal of its trade secret claims in the opinion, the court specifically credited contract grounds. Central to the court’s face of an argument by LG that the term NDAs requiring the return of all business holding on the contract claim was the fact provision in the contract ended a duty to and customer information at the conclu- that the NDA in question was limited to hold the allegedly proprietary information sion of a business relationship as evidence “nonpublic information” and therefore in confidence. While the term limitation of reasonable efforts to maintain the essentially coextensive with what the law did not defeat the trade secret claim as a secrecy of trade secret information. will protect as a trade secret. matter of law, the record suggests that it will present a factual obstacle in the case On a more basic level, measures of this Nothing in the law precludes a contract- going forward. kind provide a benefit to both disclosing ing party from defining “confidential and receiving parties that justify any information” more broadly in agreements. If the term of a confidentiality obligation added burden because they decrease the For example, rather than excluding all must be limited, consider carving out trade odds that sensitive information will be publicly known information, one could secrets for indefinite protection. While misused or disclosed either deliberately exclude only what was already known to distinguishing trade secret information or accidentally. the receiving party when the disclosing from merely confidential information may party provided it. If an accused counter- add complexity at the time of disclosure, Takeaways party’s after-the-fact research reveals that the benefits of doing so will often outweigh In all likelihood, a party disclosing the alleged trade secret was available in the cost — particularly if the alternative is or receiving confidential information the public domain, contracts that define starting the clock to eventual disclosure of will not be able to negotiate every term confidential information in this fashion those trade secrets. highlighted above to its satisfaction. provide the disclosing party with an After all, contractual confidentiality added layer of protection. Maintaining Confidentiality provisions are the only form of intel- Disclosing parties are often reluctant lectual property that comes into being Term Limitations and Their Risks to take on onerous responsibilities for through a direct negotiation between the No matter how “confidential information” marking their confidential information, intellectual property owner and potential is defined, the definition almost certainly following up conversations with emails future infringer. Nonetheless, attention will encompass trade secrets, in addition to to confirm confidentiality and the like. In to how trade secrets and accompany- proprietary information that might not rise turn, receiving parties often balk at “need ing agreements fare in litigation should to the level of trade secrets. Accordingly, to know” restrictions, obligations to log encourage companies to put away the any limitations on the protection of confi- derivative works and the need to purge boilerplate, learn from the experience dential information in an agreement also their files at the conclusion of a relation- of others and tailor each new agreement will amount to limitations on the ability ship. But adopting measures such as these with the benefit of that knowledge. to protect trade secrets shared under that will pay dividends to trade secret owners if agreement. Term limitations in contracts they ever need to enforce their rights, even Click here for a full list of intellectual property are commonplace, but companies should against someone other than the contrac- litigation-related articles authored by Skadden take heed when those term limitations tual counterparty. This is because under attorneys in the last year. extend to confidentiality obligations. In the the DTSA and most state laws, proving extreme case, a closed-ended confidential- the existence of a trade secret implicates ity provision could put a shelf life on trade evidence that the trade secret owner secrets or even extinguish trade secret has taken “reasonable measures to keep eligibility entirely. such information secret.” In some cases,

53 2019 Insights Litigation / Controversy

Following eight years of Republican majorities in Congress, Preparing for Democrats took control of the House of Representatives Democratic in January 2019, thereby regaining the ability to control committee and subcommittee agendas, hold hearings and Oversight issue investigative subpoenas.

Investigations Companies can expect the new chair of the House Financial Services Democratic majority to employ these Committee, has stated that her priori- tools to vigorously pursue vastly differ- ties will include banking relationships ent legislative and investigative priori- with President Donald Trump and such Contributing Partners ties than Republicans, including issues consumer protection issues as deceptive affecting the health care industry (access sales practices. Waters also will focus Margaret E. Krawiec / Washington, D.C. to health care and high drug prices); on restoring the intensity of enforce- David B. Leland / Washington, D.C. the financial services industry (decep- ment and regulatory activities of the Ivan A. Schlager / Washington, D.C. tive consumer practices); for-profit Consumer Financial Protection Bureau. colleges (student debt issues); oil and gas (See “Despite Leadership Changes, No companies (relaxation or deregulation Pivot in Priorities Expected for Consumer of environmental protection rules); and Financial Services Enforcement.”) technology companies (election interfer- ence and data privacy issues). Companies Democratic Priorities in these industries should anticipate that Congress can broadly investigate any House Democrats will launch a number matter for which it can propose and enact of investigations that reach beyond the legislation. As a result, few companies activities of the Trump administration, or industries are beyond the reach of a and they should prepare a game plan for congressional subpoena. Democrats’ responding to a subpoena or other inquiry investigative priorities the past two years in the event they are affected by one of have been evident in the letter requests these investigations. they have issued to companies; reports they have solicited from the Government Chairs of key oversight committees Accountability Office (GAO) — an inde- have expressed an interest in pursuing pendent, nonpartisan legislative agency a range of investigations. Rep. Elijah that investigates federal spending and Cummings, chair of the House Oversight federal programs, and assists Congress and Government Reform Committee, in making effective policy and oversight has indicated that one of his highest decisions; investigations by Democratic priorities will be drug pricing. Rep. Adam state attorneys general; and oversight Schiff, chair of the House Intelligence letters issued by Democrats to the Trump Committee, has stated that he plans to administration. Further, Democrats likely reopen the Russia probe and likely pursue will use their oversight efforts to scru- angles that Democrats claim were not tinize those initiatives that Trump has fully explored by Republicans, including touted to date. gathering further information from social media companies and banking records Letter Requests. As the minority party, from financial institutions. Rep. Jerrold Democrats lacked subpoena power to Nadler, chair of the House Judiciary compel witness testimony and docu- Committee, has expressed an interest in ment production. Accordingly, they often Russian election interference issues as resorted to the issuance of letter requests well as drug pricing. Nadler also would in an effort to increase the visibility of lead impeachment efforts if Democrats issues and potentially convince the chair- pursue that path. Rep. Maxine Waters, man or majority members that a thorough

54 committee investigation was warranted. –– the mining and oil and gas industries pursued. Such letters include requests for With a House majority, Democrats in (e.g., oil and gas lease management, coal information regarding or relating to: committee chairs likely will issue legally mine reclamation, natural gas storage); –– loopholes in the Buy American laws; enforceable subpoenas demanding –– the financial services industry e.g.( , –– alleged malfeasance of federal agency similar information, particularly where lending to low- and moderate-income companies have not responded to or are heads (e.g., stock market trading activi- communities, large bank supervision, ties; conflicts of interest with private perceived to have otherwise mishandled workplace retirement accounts); and earlier informal requests. sectors, such as oil and gas companies, –– climate change (e.g., SEC requirements Russian investors and higher education Many of these letter requests — the for disclosures of climate-related risks, companies); recipients of which included pharmaceuti- Department of Defense climate change –– the approval and construction of oil cal companies, financial institutions and adaptation planning). pipelines; social media companies, among others — have been sent to multiple companies Democratic State Attorneys General –– alleged Russian interference in the 2016 within an industry, particularly when the Investigations. More than 20 Democratic election; state attorneys general have pursued issue being raised was an industrywide –– drug pricing issues; one. Congressional Democrats also have investigations and enforcement actions called on the Department of Justice, the that also may be useful in assessing the –– Americans’ access to health insurance Securities and Exchange Commission potential investigative interests of the new coverage information; and (SEC) and other federal regulators to House majority. –– health care enrollment issues. either investigate or provide information regarding a number of companies. New York has been particularly active, While the Democrats will no doubt focus using the state’s expansive anti-fraud on Trump himself — his tax returns, GAO Reports. Like letter requests, GAO law and other regulatory tools to pursue family businesses and alleged dealings reports often become talking points aimed investigations into and lawsuits against a with Russia, among other issues — at spurring a more thorough investiga- number of public companies. Among other they are expected to also follow up on tion or hearing. A review of GAO reports active matters during the past year are: outstanding requests that may have a wide issued over the 13 months starting with –– a New York state lawsuit against an reach beyond the Trump administration. November 2017 (see our November 7, oil and gas company for its disclosures 2018, client alert for a list of GAO reports relating to climate change; Trump Administration that Democrats in Congress requested Accomplishments and Priorities. during that time) shows that a substantial –– subpoenas issued to trade groups, Democrats are expected to use their number of these reports were issued solely lobbying firms and advocacy organi- control of oversight committees and at the request of Democratic members zations over allegedly fraudulent net subcommittees to scrutinize the policy of Congress and focused on the health neutrality comments; and initiatives of the Trump administra- care industry (e.g., the opioid crisis; open –– the pursuit of consumer protection tion. For example, Trump has repeat- enrollment outcomes in the Affordable issues across various industries, includ- edly touted the passage of the tax bill, Care Act health insurance exchanges; ing the financial services sector. which, among other changes, lowered profits and research-and-development the corporate tax rate from 35 percent to spending; and merger and acquisition Other examples include North Carolina’s 21 percent. He also has stated his desire activity in the pharmaceutical industry). and Massachusetts’ investigations into to further reduce the corporate tax rate. e-cigarettes and New Jersey’s settlements (See “US Tax Reform and Cross-Border Other topics that appear to be the focus of with oil and gas companies for alleged M&A: Considering the Impact, One Democrat-requested GAO reports include: environmental damage caused by a gaso- Year In.”) Democrats will do their best to line additive. oppose such efforts by shining a spotlight –– Trump administration programs and priorities (e.g., family separations at the on provisions of the tax code that they Oversight Letters to the Trump border, deregulation of environmental perceive as disproportionately benefiting Administration. Senate Democrats protection standards, implementation of large corporations. As part of their efforts, have sent a number of oversight letters recent tax cuts); Democrats may turn to corporations for to various federal agencies that appear information and set public hearings where –– education and student lending (e.g., to remain outstanding and could have CEOs are called to testify and disclose the federal student aid, public service loan implications on the private sector if amounts saved as a result of the tax cuts forgiveness, school accreditation); as well as how these savings were used.

55 2019 Insights Litigation / Controversy

Trump also has taken steps to cut regula- Responding to Congressional in the event of a congressional subpoena. tions that he argues diminish the growth Inquiries Additionally, companies involved in of the U.S. economy. For example, he transactions should consider assessing the Congress frequently has used investiga- has moved toward expanding drilling risk of congressional oversight — which tions to force industrywide changes. For in the Gulf of Mexico and the Arctic. could impact the value of the acquisition that reason, companies that have received Democrats have strongly denounced the — as part of their due diligence. letter requests from Democrats in Trump administration’s environmental Congress, or whose industry has been the record and contend that changes at the subject of a GAO report or state attorney Environmental Protection Agency have Click here for a full list of government general investigation, should take steps not only harmed the environment but also enforcement and white collar crime-related to prepare for potential congressional articles authored by Skadden attorneys damaged how the U.S. is viewed around investigations. For example, companies in the last year. the world. Deregulation will likely remain should assess whether to make changes to a priority of the Trump administration, policies, procedures or business practices and Democrats are expected to devote that may be scrutinized. Companies also substantial oversight efforts to identifying might consider identifying and reviewing and publicizing any regulatory changes documents that may need to be produced with which they disagree.

56 International arbitration has long offered participants the International benefit of maintaining confidentiality in high-stakes cases. Like Arbitration virtually all modern activity, however, it has become potentially vulnerable to cyberattacks. The threat extends not only to the Community information of the disputing parties and their counsel, but also Turns Its Focus to the internal deliberations and draft decisions of the arbitrators themselves, which can be highly sensitive. Combined with to Cybersecurity reports of breaches in other contexts, this underscores the importance of maintaining the security of the information exchanged in the course of an arbitration, and communications Contributing Partners among arbitrators and with arbitral institutions. As a result,

Julie Bédard / São Paulo the international arbitration community has been increasingly Lea Haber Kuck / New York focused on the security of the information exchanged during Timothy G. Nelson / New York the arbitral process.

The need for cybersecurity measures in Protocol for International Arbitration in international arbitration is heightened April 2018. A final document is expected by the contentious backdrop, the high- to be released later in 2019 and will take value and high-stakes nature of disputes, into account input the working group has and the involvement of multiple actors received both at public workshops it has who are digitally interdependent. One held throughout the world and in written widely reported cyberattack occurred in form from a variety of bar associations July 2015 during the arbitration between and other interested organizations. the Philippines and China over disputed waters in the South China Sea. The attack, As explained by the working group when which some commentators claimed origi- issuing the draft for consultation, the nated from China, targeted the Permanent draft protocol “suggests a procedural Court of Arbitration in The Hague, which framework for developing specific cyber- was administering the arbitration; the security measures within the context of Philippine Department of Justice; and the individual cases, recognizing that what law firm representing the Philippines. constitutes reasonable cybersecurity will vary from case-to-case based on In late 2017, representatives of the a multitude of factors.” It recommends International Council for Commercial that cybersecurity be addressed in the Arbitration, the International Institute for international arbitration process as early Conflict Prevention and Resolution, and as practicable, ordinarily no later than the the New York City Bar Association came first case management conference and together to create the Working Group on before the parties begin their exchange Cybersecurity in Arbitration, which was of information. In some cases, however, charged with evaluating these issues and such as where the arbitration demand making recommendations.1 The working itself contains sensitive information, it group released the Draft Cybersecurity may be necessary for parties and arbitral institutions to address this issue at the 1 Lea Haber Kuck is a member of the working group, and very outset of the proceeding. associate Eva Y. Chan is its secretary. The draft protocol is available here.

57 2019 Insights Litigation / Controversy

Rather than advocate a one-size-fits-all the information; and whether and how passwords with multifactor authentica- approach to cybersecurity, the draft the information could be misused by a tion; guarding digital perimeters using protocol provides a framework for parties third party (e.g., politically, for extortion measures such as firewalls, anti-virus and and arbitrators to determine appropriate purposes, for insider trading purposes anti-spyware software, operating system measures in the context of each case. As or to obtain a competitive advantage). updates and other software patches; discussed in the draft protocol, factors making routine back-ups; and being that may influence the determination of The draft protocol also recognizes that mindful of public internet use. what measures are reasonable include: cybersecurity measures will necessarily need to evolve with changing technology Arbitral institutions likely will further –– the nature of the information expected and regulation. address this issue in their own infra- to be exchanged in the arbitration, structure, internal procedures, arbitral including any confidential commercial Additionally, because cybersecurity is a rules and the training of arbitrators they information and personal data; shared responsibility of all participants in appoint. Arbitrators will need to make –– the potential cybersecurity threat based the arbitration process who are digitally sure that they are conversant in basic on the identity of the parties, and the interdependent, the protocol recognizes cybersecurity practices in order to meet nature and size of their dispute; that the “security of information ultimately the expectations of parties that have long depends on the responsible conduct and been focused on protecting their confi- –– the resources of the parties, including vigilance of individuals.” As it notes, dential business information. the existing digital infrastructure of the “any individual actor can be the cause of arbitral participants and any potential a cybersecurity breach; [m]any security Best practices will continue to evolve technical impediments to implementing breaches result from individual conduct as developments in technology and the cybersecurity measures; and rather than a breach of systems or infra- regulatory landscape become increasingly –– the severity of the potential conse- structure.” Accordingly, the draft includes complicated. quences of a cyberattack, which may a schedule of “General Cybersecurity vary depending on the value of the Practices” highlighting steps participants, information to third parties; the nature, including parties, counsel, arbitrators and Click here for a full list of international litigation and arbitration-related articles authored by type and amount of personal data being experts, should consider taking to make Skadden attorneys in the last year. processed and whether it is legally sure that information in their possession regulated; potential embarrassment or remains secure. These steps may include damage caused by public disclosure of creating access controls through strong

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59

Regulatory

62 Foreign Investment Control Reforms in Europe

Trump Policy Actions Could Reshape Health Care 66 and Life Sciences Landscape

Enhanced US Export Controls and Aggressive 69 Enforcement Likely to Impact China

72 Responding to the Call for Equal Pay

Political Law: What to Consider When Providing Investment 75 Fund Services to US State and Local Government Entities

78 California Privacy Law: What Companies Should Do to Prepare in 2019

80 European Data Protection and Cybersecurity in 2019

US Tax Reform and Cross-Border M&A: 82 Considering the Impact, One Year In

Financial Regulation

Regulatory Relief May Generate Increased 84 M&A Activity Among Banks

As Interest in Blockchain Technology Grows, 87 So Do Attempts at Guidance and Regulation

Despite Leadership Changes, No Pivot in Priorities 90 Expected for Consumer Financial Services Enforcement

Significant Regulatory, Jurisdictional and 92 Enforcement Challenges Ahead for CFTC

95 Key Developments in US Sanctions 2019 Insights Regulatory

The geopolitical environment continues to drive reform of Foreign foreign investment rules in Europe, with government proposals Investment clarifying and tightening such rules in the interest of national security. Recent foreign state-backed investments in critical Control Reforms European Union infrastructure, in particular, have sparked in Europe concerns that the EU’s collective security is jeopardized by the lack of a harmonized foreign investment control framework.

The current focus on foreign investment investors in approaching European regula- Contributing Partners in Europe mirrors developments across tors and overall transaction management, the world, including recent CFIUS reform. such as advance planning to ensure foreign John Adebiyi / London (See our August 6, 2018, client alert “US investment and national security issues are Pascal Bine / Paris Finalizes CFIUS Reform: What It Means assessed early in a deal’s life cycle. for Dealmakers and Foreign Investment.”) Matthias Horbach / Frankfurt With incoming EU and U.K. regimes, as European Union Dmitri V. Kovalenko / Moscow well as recent developments in France, The European Parliament, Council Germany and Russia, long-standing and Commission reached an agree- CFIUS experience in the U.S. has the Associates ment in November 2018 on an EU legal potential to be a useful gauge for future framework for screening foreign direct Jason Hewitt / London developments (for example, the jurisdiction investments into the EU, which will apply expansion to noncontrolling investments). to investments by non-EU investors. The Mikhail Koulikov / Moscow centralized framework was formally The new CFIUS reforms instruct the unveiled in the EU during President CFIUS chairperson to establish a formal Jean-Claude Juncker’s September 2017 process for information sharing with State of the Union address, which placed allies and other U.S. partners, which may particular emphasis on foreign state- lead to cross-jurisdictional engagement backed acquisitions of European infra- by regulators becoming a more prominent structure and technology. The framework feature of global transactions (even where reportedly now has sufficient support reviews are not triggered). among member states, and the European Foreign investors doing business in Parliament is expected to vote on it in the Europe — particularly those from first quarter of 2019. countries that might be deemed a risk The framework focuses on investments — should be mindful of the changing that affect the EU’s collective security, landscape. Specifically, governments as highlighted by Juncker’s remarks: “If have expanded or are looking to expand a foreign, state-owned, company wants the industries deemed critical to national to purchase a European harbour, part of security, reduced the level of invest- our energy infrastructure or a defence ment required to trigger a review, or technology firm, this should only happen created new methods of review and/or in transparency, with scrutiny and debate. enforcement for national security issues. It is a political responsibility to know However, the increased tightening of what is going on in our own backyard so controls and scrutiny of the underlying that we can protect our collective security motives of state-backed investors has the if needed.” potential to free up investment opportuni- ties for those investors in countries less Key sectors that will be subject to the likely to be deemed a risk. framework are: critical infrastructure, critical technologies (e.g., artificial intel- Insight into the more mature CFIUS ligence (AI), robotics, semiconductors, process provides a valuable road map for dual-use, cybersecurity, space, nuclear),

62 critical inputs, sensitive information, investors are generally not reviewable, required to request a new authorization media, land and real estate, water supply except in specific sectors such as defense or unwind the transaction) and impose infrastructure, data processing and and information technology (IT) security new binding obligations on the investor, electoral infrastructure. The EU proposal for government classified information). including the sale of sensitive French also identifies control of a foreign investor Accordingly, Brexit may result in the assets to a third party. by the government of a country outside U.K. being subject to different foreign –– In certain circumstances, the French the EU, including through significant investment rules in relevant EU jurisdic- authorities also would be entitled to funding, as a potentially sensitive factor. tions beginning in March 2019. (1) suspend voting rights and dividend distributions with respect to a portion The framework stops short of creat- France ing a centralized review (i.e., approval/ of the French company’s shares held In June 2018, the French government rejection) mechanism but does provide by the investor, (2) appoint a special introduced a proposal to reform its for closer cooperation and coordination trustee in charge of preserving national foreign investment rules as part of the among member states. The screening interests at the French company level, PACTE Law (Action Plan for Business member state must notify other member and (3) restrict the investor’s ability to Growth and Transformation). The states and the European Commission of dispose of sensitive French assets. purpose of the reform is to strengthen any foreign investment under its review. –– The PACTE Law also would allow French foreign investment control and Other member states and the European the French authorities to apply more make the French clearance process more Commission may issue nonbinding effective financial sanctions against a efficient vis-à-vis foreign investors. The opinions to the screening member state if foreign investor in the following four PACTE Law was amended and adopted they believe the relevant foreign invest- situations: (1) if an investor fails to seek by the National Assembly in October ment may affect EU security or public prior authorization for a covered invest- 2018 but still requires Senate approval. order. The European Commission also ment, (2) if the French authorization is The bill is expected to be passed in the may carry out its own review of foreign fraudulently obtained, (3) if an investor first half of this year. investments that are likely to affect proj- does not comply with its commitments ects or programs of EU interest. Member Covered investments under French foreign vis-à-vis the French state, and (4) if an states retain final decision-making power investment law currently require prior investor fails to comply with an injunc- regarding foreign investments in their authorization by the French minister of the tion order from the French minister of respective territories. In light of this type economy. This authorization is gener- the economy. of coordination, investors should consider ally conditioned upon the foreign inves- Additionally, the PACTE Law reform national security implications across all tor entering into certain commitments would increase transparency by requiring relevant EU member states, not just the pertaining to the preservation of activities, the French government to publish annual primary jurisdiction of a target. resources and information that are sensi- statistics on the control of foreign invest- tive from a French national defense or Given the current uncertainty relating ments in France and establishing a parlia- security standpoint. The ongoing reform to Brexit — particularly after the U.K. mentary delegation on economic security would give the French authorities clearer Parliament rejected the draft withdrawal matters in charge of monitoring the French and broader remedial powers to enforce agreement on January 15, 2019 — it is government’s actions in this area. compliance with the prior authorization not clear how the proposed EU legal requirement and foreign investors’ national framework will apply to the U.K. The Pursuant to a decree dated November 29, security commitments: draft agreement generally provided for 2018, the scope of French foreign invest- the U.K. to continue to be treated as an –– If an investor does not submit a covered ment control has been expanded to cover EU member state (aside from rights to investment for authorization, the French the following activities: space operations, participate in EU institutions) until the authorities would be entitled to enjoin storage of sensitive data, operation of elec- end of the agreed transition period. If an the investor to request authorization ex tronic and IT systems required for public agreement is not ultimately approved, the post or modify or unwind the transac- security purposes, and activities relating U.K. will lose its member state status on tion at the investor’s expense. to equipment for capturing computer data, as well as research and development March 29, 2019. –– If, after completion of the investment, activities in the following sectors: semi- the investor fails to comply with its Some EU member state screening conductors, AI, cybersecurity, robotics, national security commitments, the regimes treat EU/European Economic additive manufacturing, and dual-use French authorities could, among other Area (EEA) investors differently than they goods and technologies. The new scope actions, withdraw the initial authoriza- do non-EU/EEA investors (for example, became effective on January 1, 2019. tion (in which case the investor will be Germany, where investments by EU/EEA

63 2019 Insights Regulatory

Lastly, the November 29, 2018, decree Economic Affairs and Energy to promote Russia allows a French target company to submit the production of battery cells for electric In June 2018, the Russian parlia- a request to the French authorities to vehicles in Germany and to support ment adopted a number of significant ascertain whether a proposed transaction companies active in the development of amendments to the Russian Strategic falls within the scope of the French prior artificial intelligence. In this context, Enterprises Law and Russian Foreign authorization regime. (That option was the ministry has even suggested that Investments Law. previously open only to foreign inves- the government create a state fund that tors.) The decree also extends the scope of could intervene and purchase entities that Russian Strategic Enterprises Law reasons the French authorities may validly undesirable investors may be seeking to consider in order to block a proposed acquire. While at this time the sugges- Effective June 12, 2018, the concept of foreign investment. tion is not being implemented, it appears offshore investors has been removed from realistic that the idea of a state fund will the Russian Strategic Enterprises Law. Germany be further pursued in the long term. This concept was added under amend- ments made in July 2017, which extended Effective December 29, 2018, the German In addition to the ordinance update, the the rules restricting the acquisition of government reduced the review threshold ministry has significantly intensified its certain interests in Russian strategic for foreign investments in companies in reviews of foreign investments, resulting enterprises by a foreign state or interna- certain industries to 10 percent of the in proceedings taking significantly longer tional organization (or persons controlled company’s voting rights. The previous than in the past — often between six by them) to any investor incorporated threshold of 25 percent remains applicable and 12 months, compared to one to two in an offshore jurisdiction or controlled for investments in companies outside those months previously. It also has taken more through an offshore entity. industries. Minority investors that have actions to intervene on possible foreign been exempt from foreign investment investments than it typically had. The rules that previously applied to review in the past will have to consider the offshore investors will now apply new threshold, which applies to industries When State Grid Corporation of China to foreign legal entities and foreign deemed of particular interest for national considered a 20 percent investment into unincorporated organizations (foreign security reasons, including defense and the German electricity network operator investors) that do not disclose to the IT security for government classified infor- 50Hertz Transmission GmbH in mid-2018, Federal Antimonopoly Service of Russia mation as well as critical infrastructure the German government found it could not their controlling persons, beneficiaries (e.g., energy, telecommunications, trans- rely on the foreign investment regime to (those individuals for whose benefit port and traffic, health, water and food intervene, given the 25 percent threshold the foreign investor acts) and beneficial suppliers, finance and insurance). The new requirement. However, it considered the owners (those individuals who, directly rules now also list as critical infrastructure Chinese entity’s interest a concern for or indirectly, have an interest of more media enterprises that contribute to the national security reasons and reviewed than 25 percent in the foreign investor formation of public opinion. other channels to stop the investment. or have the ability to control the foreign Ultimately, German government-owned investor’s decisions). The procedure The updated German Foreign development bank KfW entered into an for disclosure also was detailed in the Trade and Payments Ordinance arrangement with the majority shareholder amendments. (“Außenwirtschaftsverordnung”) comes of 50Hertz, Belgian corporation Elia at a time of intense public discussion System Operator. Under that arrangement, Under the rules, an acquisition by a over security concerns and the protec- Elia exercised its right of first refusal of foreign investor of control of a Russian tion of technology, resulting from high the 20 percent stake in 50Hertz that had strategic enterprise (generally, more volumes of investments from China as been offered to State Grid Corporation than 50 percent of the voting rights of a well as supply chain and, more generally, and sold that interest to KfW on the same Russian strategic enterprise, or 25 percent trade policy considerations. Significant terms. This move serves as an example of or more in the case of a subsoil user) foreign investments in key technologies the German government’s increased desire requires the prior approval of the Russian have spurred concerns that the security to become involved and was one of the government following a disclosure and and infrastructure of the country as well trigger points for the initiative to reduce is prohibited without such disclosure. An as the supply of German industry might the review threshold for critical infrastruc- acquisition by a foreign investor of more become dependent upon investors from ture to 10 percent. than 25 percent of the voting rights of a non-EU/EEA jurisdictions. Elements Russian strategic enterprise (or more than of trade policy are evident in recent 5 percent in the case of a subsoil user) initiatives by the Federal Ministry for

64 but less than control is permitted without United Kingdom influence or control” over an entity or prior approval so long as the foreign the acquisition of more than 50 percent In July 2018, the U.K. government investor makes the appropriate disclosure; of, or significant influence or control published a white paper in which it if the foreign investor does not make over, an asset) raise any national security proposed changes to the national security the disclosure, the prior approval by the concerns. Under the proposed regime, screening regime for public consultation. Russian government is required. the government would have the power The proposals represent a significant to clear notified transactions, require expansion of the government’s powers Russian Foreign Investments Law compliance with certain conditions or to intervene in transactions on national block transactions entirely. If the parties In July 2017, the Russian Foreign security grounds and, if enacted, could do not voluntarily notify the government, Investments Law was amended to permit bring about material changes to the but a transaction is subsequently identi- the Russian government to review any management of transactions in what has fied as raising national security issues, transaction entered into by a foreign historically been one of the world’s most the government would be able to review investor with respect to any Russian legal liberal and open economies from the the transaction for up to six months after entity if necessary for ensuring national perspective of inward investment. defense and state security. At that time, the it takes place. If necessary, it could take term “foreign investor” for the purposes Of course, given the importance of foreign remedial action, including requiring the of the Russian government’s review of direct investment to the U.K. economy transaction to be unwound. such transactions was expressly extended (the white paper notes that on average, The focus of the proposed regime is to apply to Russian nationals with dual between 2007 and 2017 the U.K. ranked on certain core areas of the economy, citizenship and organizations — including third among G-20 nations for flows of including national infrastructure (civil those incorporated in Russia — that are inward foreign direct investment) and the nuclear, communications, defense, energy, controlled by foreign investors. current uncertainties as to the impact of transport), certain advanced technologies, Brexit on the U.K. economy, these new critical direct suppliers to government While such a review regime is still appli- proposals come at a particularly sensitive and emergency services, and military or cable to this category of foreign investors time. The U.K. government has empha- dual-use technologies. However, the white in accordance with the procedure set out sized that it understands the importance of paper makes it clear that the potential in the Russian Strategic Enterprises Law, foreign investment to the U.K. but believes scope of the proposal is much wider and starting on June 12, 2018, the following that the reforms are needed to address the would extend to any proposed investments persons are no longer considered foreign challenging and changing national security in areas of the economy where the govern- investors for the purposes of the guaran- threats it faces. The white paper notes that ment deems it necessary to intervene to tees and protections provided under the the challenges raised by the activities of protect national security. Russian Foreign Investments Law: hostile states, technological advances and –– a foreign legal entity controlled by a developments in the global economy have The U.K. government is expected to Russian citizen and/or by a Russian led to other advanced economies, such report on its findings following its legal entity; as Germany, Japan and Australia, also review of public responses in early reforming their approaches to the review of –– a foreign unincorporated organization 2019. Investors should watch this space foreign investments, and that the govern- carefully. If the proposed regime is controlled by a Russian citizen and/or ment’s proposals are consistent with this by a Russian legal entity; and introduced, many of the techniques used global trend. A number of responses to the successfully in other jurisdictions with –– a foreign citizen who also has Russian government’s consultation have stressed long-standing national security review citizenship. the need for clarity and proportionality in regimes of a similar nature such as the the final legislation and its application so U.S. — particularly with respect to due Notably, the term “foreign investment” as to avoid any chilling effect on invest- diligence and transaction planning and has changed to include only those ment in the U.K. structuring — could be applied in the investments made by a foreign inves- U.K. to a much greater extent than before. tor “directly and on its own.” It appears The white paper proposes a regime that this amendment has been designed whereby parties to a transaction would notify the government if certain “trigger to make the guarantees and protections Click here for a full list of CFIUS-related articles provided under the law inapplicable to events” (such as the acquisition of more authored by Skadden attorneys in the last year. those investors who fall into any of the than 25 percent of the votes or shares in categories listed above. an entity, the acquisition of “significant

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In 2018, President Donald Trump and numerous executive Trump Policy branch agencies announced proposals that, if implemented, Actions Could will reshape the landscape for virtually every sector of the health care industry. Many of these proposals are consistent Reshape Health with the administration’s deregulatory agenda, from relaxation Care and of health insurance rules to a decidedly pro-business approach, to enforcement of federal health care fraud and abuse laws. Life Sciences Other proposals have enjoyed more bipartisan support and Landscape have been driven by the rapid introduction of big data and other digital technologies into the health care space. Still others, most notably the president’s proposals to reign in drug prices, are

Contributing Partners more in line with the views of many Democratic lawmakers. This creates a challenge for congressional Republicans and John T. Bentivoglio / Washington, D.C. some agency heads to do something about drug prices while Jennifer L. Bragg / Washington, D.C. staying true to the administration’s overall goal of driving Maya P. Florence / Boston economic growth through market-friendly approaches.

With major bipartisan health care legis- Despite the administration’s regula- lation unlikely in the newly elected tory efforts, much of the ACA remains Congress, those in the health care industry largely in place. The cost of coverage should closely follow the administration’s in the individual market for people who executive actions, which may be the most lack subsidies has grown substantially, accurate reflection of the future regulatory but marketplace premiums and insurer landscape. margins are stabilizing, and new insurers are entering some markets. The avail- Affordable Care Act ability of premium tax credits has been a Despite failing to repeal and replace balancing force that has offset the shocks the Affordable Care Act (ACA) in 2017, the individual market continues to absorb, the Trump administration continued to according to the health policy nonprofit take steps to weaken some of the ACA’s The Commonwealth Fund. The number requirements and push market-driven of uninsured individuals increased by approaches to health care reform. These 700,000, to 27.4 million in 2017, the first efforts began with an executive order increase since passage of the ACA in on the president’s first day in office and 2014, according to the nonprofit Kaiser have included the Labor Department’s Family Foundation. proposal to expand association health The December 2018 federal district court plans, which operate largely outside the decision in Texas declaring the ACA ACA framework; expanding the short- unconstitutional in light of Congress’ duration coverage rule that permits elimination of the individual mandate low-cost/low-coverage plans to operate makes the law’s fate even more uncertain free of ACA requirements; and allow- as the decision is appealed. The adminis- ing states to alter their essential health tration is likely to proceed cautiously in benefit requirements, reduce transfers its litigation strategy through the appeals among insurers under the risk adjustment process in order to avoid disrupting the program and diminish required insurer current ACA coverage for millions of medical-loss ratios. Americans, especially in the lead-up to the 2020 elections.

66 Digital Health Initiatives implement a novel digital health software involves lowering the regulatory barriers precertification (Pre-Cert) program that to entry in areas with a single or small In the past five years, an explosion in would exempt certain products from number of approved products. digital health innovation has prompted FDA premarket review and expedite the policymakers to address a number of process of getting others to market. Congress. For its part, Congress has regulatory issues, with technologies shown more appetite for investigat- emerging to encourage healthy lifestyles; Drug Pricing Receiving Scrutiny ing manufacturing pricing practices facilitate disease prevention; enable From All Sides than enacting legislation to lower drug early diagnosis; identify treatment prices. That may change in 2019, with Trump Administration. No sector of options; support disease management; Democrats taking control of the House the health care industry has drawn more and assist health care professionals, of Representatives. (See “Preparing for criticism from the president and his patients and caregivers in a wide range Democratic Oversight Investigations.”) administration than the pharmaceuti- of scenarios. These technologies promise House Democrats are likely to push cal industry. Continuing his comments better-informed decisions, new treatment proposals to bolster the ACA, expand from the 2016 campaign trail, Trump has options and more efficient services. They Medicare and target drug prices, but attacked drug manufacturers for high also involve new challenges, includ- these efforts may be focused more drug prices, in some cases calling out ing products that are ill-suited to the on framing issues for the 2020 elec- companies by name. He has asserted that Food and Drug Administration’s (FDA) tions than on enacting legislation that U.S. consumers pay more for the same traditional medical device regulatory can make it through the Republican- drugs than consumers in other developed paradigm, manufacturers and developers controlled Senate. Nevertheless, key countries. The administration’s drug that have not previously been regulated Democrats have promised to introduce pricing blueprint proposes three changes by the FDA, increased cybersecurity legislation that would allow the Centers to how Medicare pays for certain drugs risks, and interoperability demand. for Medicare and Medicaid Services (so-called Part B drugs): replace the to negotiate directly with drugmakers In July 2017, just two months after taking current model, where physicians buy and under Medicare Part D, the optional office, FDA Commissioner Scott Gottlieb bill for drugs, with a system of private prescription drug benefit under the announced the agency’s Digital Health pharmaceutical vendors; use a flat fee federal health insurance program. While Innovation Action Plan, which recognized in place of the current reimbursement the Republican-led Senate may not be that “digital technology has been driving price (which is average sales price plus willing to go that far, pressure from a revolution in health care” and outlined 6 percent); and implement international the House could force the Senate to do the agency’s “vision for fostering digital reference pricing. The proposals would be something about drug prices. Republican health innovation while continuing to implemented in stages beginning in 2020, senators have introduced legislation protect and promote the public health.” In but their success remains to be seen — to increase competition through faster the 18 months since, the FDA has devoted previous administrations unsuccessfully generic approvals and held hearings on significant attention to meeting these attempted the first two initiatives. proposals to loosen Part D coverage goals, including in many ways reimagin- mandates, and the Senate could take up ing its regulatory approach. At the same The Trump administration also could one or more of these plans to demon- time, it is clear that more change is in move forward with a proposal to rework strate action. store, as the FDA continues to evalu- the safe harbors under which drug manu- facturers provide rebates and discounts ate and amend its approach to meet the Health Care Enforcement Takes demands of the rapidly evolving digital to insurance plans and pharmacy benefit Pro-Business Turn health space, including with a request for managers, which critics contend would comment regarding regulation of apps to result in higher profits to middlemen The administration’s pro-business be used with prescription drugs. but would not result in direct discounts approach has been most pronounced in to consumers. the area of enforcement of health care The FDA’s creative approach to regulat- fraud and abuse laws. Two Department of ing this evolving space is not without FDA. The FDA, which historically has Justice (DOJ) policy initiatives already are its critics. On October 10, 2018, a group eschewed calls for it to regulate drug being implemented by federal prosecutors of Democratic senators sent Gottlieb prices, also has taken up the issue — albeit in the courts. The first announced that a letter seeking extensive information indirectly — by pushing for faster generic prosecutors could no longer use violations about the FDA’s regulation of digital drug approvals and promoting competi- of subregulatory guidance as evidence of devices and questioning its authority to tion. One focus Gottlieb has championed wrongdoing in affirmative enforcement

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proceedings, including actions under the including the diversion of DOJ health Meanwhile, actions by the White House civil False Claims Act (FCA). The second care fraud resources to opioid cases, the are more difficult to predict. The presi- policy stated that the DOJ will move administration’s more business-friendly dent likely will continue his criticism of affirmatively to dismiss nonmeritorious approach to white collar enforcement, and drug prices and will encourage executive FCA actions (rather than simply decline the Justice Department’s focus on violent agencies and Congress to take action, but intervention and allow the private qui crime and immigration matters. Despite a with Congress divided and a presidential tam litigator to pursue the case on his or coming change in leadership at the DOJ, election looming, major legislative action her own). In the final weeks of 2018, the the department’s less aggressive approach is unlikely. DOJ exercised this authority by moving to health care fraud enforcement against to dismiss 11 FCA cases alleging that the traditional industry participants is likely to The legislative and regulatory landscape operation of nurse educator programs by continue through at least 2020. will remain dynamic, and health care pharmaceutical manufacturers resulted companies and other stakeholders will in improper inducements to physicians. Conclusion need to keep abreast of policy develop- ments in this challenging environment. Rulings on one or more of the DOJ Health care will remain a key political motions are expected in early 2019. and policy issue in Washington, D.C., and the tone the House Democrats set More generally, DOJ enforcement actions Click here for a full list of health care and life will be closely watched. Expect executive against health care organizations have sciences-related articles authored by Skadden agencies to continue to push proposals to declined in the past two years, as reflected attorneys in the last year. bring more competition and market forces in the number of and amounts recovered in to the health care system, and foster more major health care fraud settlements. This innovation around digital health issues. can be attributed to a number of factors,

68 Tariffs targeting Chinese imports into the United States Enhanced US garnered headlines throughout 2018. However, during the latter Export Controls part of the year, the U.S. government more quietly initiated efforts that in 2019 and beyond could be more effective than and Aggressive tariffs in leveraging changes to Chinese behavior, particularly Enforcement with respect to intellectual property protection. These efforts also could severely constrain Chinese growth, thereby Likely to Impact preserving U.S. technological leadership. The moves are China particularly aimed at the business sectors that comprise the “Made in China 2025” initiative. While these quieter efforts could benefit U.S. companies engaging with China over the long

Contributing Partners term, in the short term they are likely to increase the regulatory burdens associated with a variety of business relationships Michael E. Leiter / Washington, D.C. with China, including collaborative research and development Ivan A. Schlager / Washington, D.C. projects or joint venture arrangements. Donald L. Vieira / Washington, D.C. Specifically, the U.S. government: enhanced reviews of foreign investment, Counsel (1) proposed that a wide array of emerg- the NDAA included the Export Control ing technologies be subjected to enhanced Reform Act (ECRA). The ECRA directed Jonathan M. Gafni / Washington, D.C. controls under the Export Administration the establishment of a formal, ongoing Regulations (EAR), which are adminis- interagency process to identify and review Daniel J. Gerkin / Washington, D.C. tered by the Department of Commerce’s “emerging and foundational technologies Bureau of Industry and Security (BIS); that are essential to the national security of Associate (2) initiated a comprehensive review of the the United States” and required appropri- Commerce Control List (CCL) under the ate export controls for these technologies. Nicholas A. Klein / Washington, D.C. EAR to assess current controls on items The process involves the Departments of to embargoed destinations, such as China; Commerce, Defense, State and Energy, (3) sanctioned a Chinese semiconductor along with other federal agencies as manufacturer under export-related authori- appropriate, and will identify “emerging ties without a corollary finding of EAR and foundational technologies” through violations; and (4) publicized significant publicly available and classified informa- enforcement matters pertaining to Chinese tion, as well as information derived from entities, including, in particular, Huawei Commerce advisory committees and the Technologies Co., Ltd. Committee on Foreign Investment in the United States (CFIUS). Treatment of Emerging and Foundational Technologies On November 19, 2018, BIS published an advance notice of proposed rulemaking On August 13, 2018, President Donald soliciting comments on the criteria to be Trump signed into law the John S. used to identify emerging technologies McCain National Defense Authorization that are essential to U.S. national security. Act (NDAA) for Fiscal Year 2019. A key Such technologies could include those focus of the law is the protection of U.S. that have potential uses in connection technological advances through closer with conventional weapons, intelligence scrutiny of technology transfers to foreign collection, weapons of mass destruction or persons and their implications for U.S. terrorist applications; or could provide the national security and foreign policy. United States with a qualitative military In addition to the Foreign Investment or intelligence advantage. In publishing Risk Review Modernization Act, which

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the notice, BIS compiled a list of existing export controls on items that Notably, the listing of Fujian Jinhua did technologies (e.g., additive manufactur- currently do not require an export license not appear to be based on any specific ing, artificial intelligence and machine and items destined for military end uses activity by the company in violation of learning, biotechnology, microproces- or end users. Commerce must implement the EAR. Rather, it appeared to be tied sors, robotics) for which export controls any changes to existing export controls by to the November 1, 2018, indictment by are only in place for comprehensively May 2019. This review is likely to result a federal grand jury of Fujian Jinhua, embargoed countries (such as Iran), in tighter controls on exports, re-exports among others, for alleged crimes related countries designated as supporters of and in-country transfers to China, in to a conspiracy to steal, convey and international terrorism (such as Sudan), particular with an emphasis on technol- possess the stolen trade secrets of Micron and restricted end users or end uses. BIS ogy with potential military applications Technology, Inc., an American semicon- says it will assess this representative list and with military or government end ductor company. This novel offensive use of technologies through the interagency users. As a consequence of this review, of the BIS Entity List, even in the absence process to identify any specific emerging BIS likely will, for example, require of a specific violation of the EAR, may be technologies that are important to U.S. licenses for items that currently do not a harbinger of how the U.S. government national security, for which effective require them or implement denial policies intends to punish alleged trade secret controls can be implemented without for license applications that otherwise theft in the future. negatively impacting U.S. leadership would have been considered on a case- in the science, technology, engineering by-case basis. The BIS Entity List listing and indictment or manufacturing sectors. Enhanced are consistent with the prior blocking of licensing requirements are likely to Addition of Fujian Jinhua Chinese-backed semiconductor-related inhibit exports of these technologies to to BIS Entity List transactions by Presidents Barack Obama and Trump in accordance with recom- China, thereby curtailing China’s ability Effective October 30, 2018, BIS added mendations made by CFIUS as well as to rapidly scale domestic development in Fujian Jinhua Integrated Circuit the increased focus on the protection certain key industries. Company, Ltd., a state-owned Chinese of U.S. semiconductor technology as semiconductor manufacturer, to the BIS Comments were due by January 10, 2019. embodied in the January 2017 “Report Entity List because the company “poses As a next step, BIS will publish further to the President: Ensuring Long-Term a significant risk of becoming involved proposed rules regarding the controls to be U.S. Leadership in Semiconductors,” in activities that could have a negative applied to specific emerging technologies, by the President’s Council of Advisors impact on the national security interests though there is no established timetable for on Science and Technology. The actions of the United States.” The BIS Entity List the issuance of these rules. also are consistent with the November 1, comprises businesses, research 2018, U.S. Department of Justice (DOJ) institutions, government and private orga- BIS is expected to publish a similar notice announcement of the “China Initiative,” nizations, individuals, and other types of soliciting comments regarding the iden- which will be dedicated to the aggres- legal persons subject to specific license tification of foundational technologies in sive investigation and prosecution of requirements for the export, re-export and early 2019. It has publicly suggested that Chinese companies for alleged trade in-country transfer of specified items that such technologies are likely to be drawn secret theft, economic espionage, Foreign are supplemental to those found else- from those that are currently subject only Corrupt Practices Act offenses and other where in the EAR. to unilateral anti-terrorism controls due violations of U.S. law. Taken together, to their removal from various multilateral As a consequence, a specific BIS license is these measures reflect a coordinated and control lists. required for any person — whether located sustained U.S. government response to Chinese economic development, particu- Comprehensive CCL Review in the United States or not — to export, re-export or transfer (in-country) any larly with respect to the “Made in China The ECRA also required the Departments commodities, software or technology that 2025” initiative — restricting Chinese of Commerce, State, Defense and Energy, are “subject to the EAR” to Fujian Jinhua. access to sensitive U.S. technology, either along with other federal agencies as The company is heavily reliant on U.S.- via export or investment, and aggressively appropriate, to conduct an immediate sourced hardware, and the impact of this pursuing alleged trade secret theft, which review of the license requirements for the action could cripple its ability to manu- will curb China’s ability to rapidly scale export, re-export and in-country transfer facture semiconductors. Any such license development in certain key industries. of items to countries subject to a compre- application will be reviewed in accordance hensive arms embargo (including China). with a policy of presumptive denial. The focus of this review is to assess

70 Notable Chinese-Related added to and subsequently removed from Export Enforcement the BIS Entity List and remains subject Tariff-Related Measures to a suspended denial order, Huawei is Bringing a notable U.S. export controls alleged to have engaged in re-exports Tariff-related measures targeting and sanctions-related enforcement Chinese imports into the United of U.S.-origin equipment to embargoed action to a close in early December 2018, States, including tariffs on more destinations, such as Iran. However, it is the U.S. Department of the Treasury’s than $250 billion in Chinese believed that Huawei will not be listed, Office of Foreign Assets Control (OFAC) imports as a consequence of primarily due to its much larger size and China’s alleged unfair intellectual announced that Yantai Jereh Oilfield the adverse economic consequences such property-related practices pursuant Services Group Co., Ltd. had agreed to a listing would have for U.S. suppliers. to Section 301 of the Trade Act of pay $2.77 million to settle the potential Nevertheless, the threat of such a listing 1974, were implemented through- civil liability stemming from viola- out 2018. The Section 301 tariffs may well be sufficient leverage to extract tions of the Iranian Transactions and were rolled out in three tranches, trade-related concessions from the Chinese Sanctions Regulations. Yantai Jereh was with the third targeting approxi- government. And Huawei is not likely to mately $200 billion in Chinese alleged to have exported or re-exported, escape entirely. Indeed, it has been widely imports. Currently, such imports or attempted to export or re-export, reported that BIS already has declined are subject to a 10 percent tariff, U.S.-origin goods ultimately intended to renew an export license required by but the tariff will be escalated to for end users in Iran by way of China. 25 percent on March 2, 2019 Huawei’s Silicon Valley research and Yantai Jereh also allegedly exported (as with tranches 1 and 2) if the development unit, and potentially substan- certain U.S.-origin items with knowl- governments of the United States tial penalties may yet be imposed. edge or reason to know that the items and China do not meaningfully resolve their various trade issues. were intended for production of, for BIS clearly is putting Chinese companies commingling with or for incorporation The Office of the U.S. Trade on notice that it will vigorously pursue Representative recently announced into goods made in China to be supplied, export-related violations, particularly transshipped or re-exported to end users the first set of products excluded those involving U.S.-embargoed coun- from the tariffs imposed on items in Iran. Yantai Jereh, which also appears tries, and has expressed a willingness covered by the first tranche but on the BIS Entity List, agreed to pay — as evidenced by the ZTE action — to has yet to respond to all pending $600,000 to BIS for the same conduct. choke off critical supplies of U.S.-origin requests pertaining to the first hardware, software and technology. U.S. and second tranches. There is Also in early December 2018, Canadian no corollary product exclusion suppliers should be especially mindful of authorities, at the behest of the DOJ, process for items currently subject this latter risk as well as of more aggres- arrested the chief financial officer of to 10 percent tariffs under the sive Chinese retaliation, including, for third tranche. Huawei, allegedly in connection with example, delays in processing regula- ongoing OFAC and BIS investigations into tory approvals and, as with the Huawei U.S. sanctions violations. Like its competi- matter, detentions of personnel traveling tor Zhongxing Telecommunications in China. Click here for a full list of international trade- Equipment Corporation (ZTE), which was related articles authored by Skadden attorneys in the last year.

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Over the past couple of years, heightened awareness of and Responding activism about pay inequity has resulted in public commitments to the Call for from major companies to take steps to address the issue, both Equal Pay in the U.S. and in Europe. In the U.S., the White House under Although no federal proposals in the U.S. President Barack Obama called for exist at this time for legislation requiring companies to publicly vow to take action similar types of analysis and disclosure, Contributing Partner to achieve equal pay when it launched and none are anticipated, a number of the Equal Pay Pledge in 2016. Over 100 states — including California, Maryland, David E. Schwartz / New York companies, collectively employing tens Massachusetts, New Jersey, New York, of millions of people, signed the pledge, Oregon and Washington — recently have Counsel which requires a commitment to review expanded their equal pay laws and placed pay practices (including conducting an stringent requirements on employers. Risa M. Salins / New York annual companywide pay analysis) and to Given the current climate and media atten- take steps to address any pay inequality tion surrounding the topic, we anticipate discovered. The Trump administration further developments and enforcement in Associate since has removed the Equal Pay Pledge this area. from the White House website, but that Hannah Fraley / New York has not stopped companies that signed State Law Expansion of Federal it from continuing to pursue equal pay Equal Pay Act policies and practices, and others from According to a September 2018 report focusing on equal pay issues. released by the Institute for Women’s Policy Research, women’s median annual Equal pay returned to the spotlight in the earnings were 80.5 percent of men’s wake of the #MeToo movement and the median annual earnings for full-time, Time’s Up initiative beginning in 2017. year-round workers in 2017, unchanged While known for their efforts to tackle since 2016. The report also highlights a sexual harassment, both movements also marked disadvantage for minority women, created a forum for women and their with Hispanic women earning 53 percent, champions to speak out about gender and black women 60.8 percent, of white inequality in the workplace and fight men’s median annual earnings in 2017. for fair pay. The momentum of these efforts, along with the considerable media attention that followed, have brought renewed focus to pay equity women’s median issues in many boardrooms. full-time annual In Europe, effective April 2018, the U.K. earnings in 2017 began to require employers with 250 or compared to men more employees to report to the govern- ment annual gender pay gap statistics. France adopted similar legislation in % September 2018 that, effective January 1 80.5 in 2019 or 2020 — depending on the number of employees — will require employers to report gender pay gap statistics and impose a potential fine of up to 1 percent of total payroll costs on employers that do not effectively remedi- ate reported pay gaps within three years.

Source: Institute for Women’s Policy Research

72 Currently, 47 states have pay equity laws a member of that protected class. The other circuits, including the U.S. Court in effect that typically are more employee- NJ EPA also includes a six-year statute of Appeals for the Seventh Circuit, which friendly than the federal Equal Pay Act of limitations — compared to the EPA’s have said salary history can be consid- (EPA). The EPA prohibits sex-based two-year cap — and therefore employ- ered to justify a pay disparity. A petition wage discrimination for “equal work” ers may be held liable for up to six years for writ of certiorari seeking the U.S. in the same establishment. Recently of back pay in addition to mandatory Supreme Court’s review of the Rizo enacted or amended state pay equity treble damages, attorneys’ fees, and costs decision is pending. laws generally have put more onerous and punitive damages (if the employer’s burdens on employers than the EPA, such conduct was willful). Takeaways as by covering other protected classes Shareholder and consumer activism in addition to women, extending the regarding equal pay will continue to call statute of limitations for bringing claims for companies and boards of directors to (and, likewise, the lookback period for 47 focus on these issues. Companies, and damages), making it more difficult for states have pay equity specifically general counsels, should be employers to satisfy affirmative defenses, prepared for mounting pressure to address increasing penalties for violations, and laws that are more pay disparities, including through an even making violations criminal offenses. employee-friendly equal pay audit. Given the increasingly One key difference between the EPA and than the federal Equal stringent state laws and heightened focus many state pay equity laws is the standard on pay equity generally, companies also applied for comparing employees. The Pay Act can expect, and should be prepared for, a EPA requires “equal pay for equal work” greater number of class actions as well as (i.e., work requiring equal measure of a renewed court focus on equal pay. skill, effort and responsibility), while a Salary History Bans number of states require equal pay for Employers should make equitable Stemming from the latest focus on equal “substantially similar” or “comparable” compensation practices a priority in pay, legislation banning salary history work. Moreover, a number of recent state 2019 by considering: inquiries also has been enacted in a law enactments or amendments, including growing number of states and locali- –– Conducting a thorough review of job in California, New Jersey and New York, ties, including California, Connecticut, positions to assess which employees provide that wage comparisons will be Delaware, Hawaii, Massachusetts, are performing similar or comparable based on wage rates in all of the employ- Oregon, Puerto Rico, Vermont and work across all operations and facilities. er’s operations or facilities. It remains to New York City. This trend is expected The review should take into account the be seen whether or not employers in these to continue. The goal of salary history skills, effort and responsibility required jurisdictions will be able to use cost-of- bans is to break the cycle of potential for each position, such as the amount living data across various geographic prior wage discrimination by prohibiting of revenue overseen and the number of regions to justify pay differentials. employers — including through agents employees managed. such as outside recruiters — from asking New Jersey’s Diane B. Allen Equal Pay –– Reviewing compensation practices to Act (NJ EPA), effective July 1, 2018, job applicants about their compensation ensure that only relevant nondiscrimi- is considered one of the most broadly history. Several jurisdictions, includ- natory factors, such as education or sweeping state equal pay laws in the ing California and New York City, also experience, account for pay differentials country and may set a trend for other prohibit employers from relying on an among employees performing similar states to follow. The NJ EPA protects applicant’s pay history to set compensa- or comparable jobs. If equally situ- employees from wage discrimination tion if discovered or volunteered. ated individuals who perform similar across 17 protected classes recognized jobs receive disparate compensation, Notably, consistent with this legisla- under the state’s anti-discrimination law, employers should work with legal tion, on April 9, 2018, the U.S. Court of including sex, race, national origin and professionals and human resources Appeals for the Ninth Circuit ruled in Rizo age. Unlike the EPA, the New Jersey to create and implement equitable v. Yovino that it is a violation of the EPA law creates a presumption of illegal compensation. for an employer to use an employee’s past discrimination whenever an employee salary, either alone or in combination with –– Reviewing and, if needed, updating of a protected class is paid less in wages, other factors, to justify pay disparities. application documents to eliminate benefits or other compensation than a This decision is at odds with rulings by questions seeking salary history similarly situated employee who is not

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information. Employers should set ensure that any merit-based pay system parameters for internal and exter- measures performance against uniformly nal recruiters to avoid disclosure of reviewed, legitimate, job-related criteria applicants’ compensation history and and that any seniority-based pay system implement procedures to be followed if does not reduce seniority for time compensation information is disclosed. spent on leave due to pregnancy, or statutorily protected parental or family –– Training human resources profession- als and other employees who will be and medical leave. making compensation decisions to –– Developing and implementing policies ensure they are knowledgeable of appli- that prohibit pay secrecy and eliminate cable equal pay laws. penalties for discussing pay.

–– Examining existing policies related to starting compensation, pay increases and bonuses to ensure such policies are Click here for a full list of labor and employment not negatively impacting a protected law-related articles authored by Skadden attorneys in the last year. class. For example, employers should

74 With heightened attention to investment and depository Political Law: rules as well as increased enforcement of federal and state What to pay-to-play rules, registered investment advisers (RIAs) and broker-dealers should address the unique legal considerations Consider When that may arise when a firm provides or seeks to provide Providing services to U.S. state and local government entities. Investment Fund Investment Rules Moreover, firms typically need to go through a formal application and review Jurisdiction- and government entity- process to become approved depositories. Services to US specific rules apply to firms that manage, hold or invest money for the government. Federal Pay-to-Play Rules State and Local A government entity with significant funds will often adopt a policy specify- Under these rules, political contribu- Government ing how the funds may be invested or tions made by a company or its covered what securities may be purchased — donors prohibit a covered company from Entities delineating the types of investments engaging in, or receiving compensation that are permissible (e.g., prohibitions for, certain business with state or local on swaps, equities, or investments in government entities. Importantly, federal certain countries and industries), how pay-to-play rules are strict liability in nature, meaning criminal intent is not Contributing Partner the government entity views risk, how a portfolio must be diversified and the needed to trigger their prohibitions. Ki P. Hong / Washington, D.C. standard of care required for managers. Current federal pay-to-play rules are: Agreements with investment advisers –– The Municipal Securities Rulemaking or broker-dealers may even incorporate Board’s Rule G-37, which covers Associate these policies by reference. Additionally, broker-dealers that underwrite munici- similar restrictions contained in a pal securities and municipal advisers Tyler Rosen / Washington, D.C. jurisdiction’s statutes or ordinances may who solicit investment advisory busi- apply to the investments of a particular ness for third parties, or provide advice government entity or to all government to or on behalf of a government entity funds in the jurisdiction. How restrictive or obligated person with respect to they are often depends on whether the municipal financial products or the money is designated for investment, held issuance of municipal securities. by a retirement system or dedicated for some other particular purpose. Although –– The Securities and Exchange government entities are less diligent Commission’s (SEC) Rule 206(4)-5, about alerting investment advisers and which covers registered investment broker-dealers to these restrictions, they advisers and exempt reporting advis- can in some cases impose direct liability ers that provide investment advisory on the firm if it invests government funds services to state or local government in a manner that is not permitted by the entities either directly (e.g., via a applicable rules. separate managed account) or through a covered investment pool. Covered Depository Rules investment pools include unregistered investment funds in which a govern- The laws of many jurisdictions specify ment entity invests directly, as well custodial requirements, such as that all as registered mutual funds that are government funds be maintained with selected as an option for a participant- approved depositories. In some jurisdic- directed plan sponsored by a govern- tions, this means all funds must be held ment entity. in banks rather than brokerage accounts.

75 2019 Insights Regulatory

–– The Commodity Futures Trading Lobby Laws, Placement Agent Placement Agent Policies Commission’s Rule 23.451, which covers Policies and Contingent Fee Separate from lobby laws, government swap dealers that offer or engage in Restrictions entities (particularly public pension funds) commodities-based swaps with state What Triggers Lobbyist have increasingly adopted policies with or local governmental counterparties. Registration respect to the use of placement agents –– The Financial Industry Regulatory In 31 states and many localities, attempt- by external investment managers. The Authority’s (FINRA) Rule 2030, which ing to obtain the award of government policies range from requiring investment covers FINRA members engaged in business meets the definition of lobby- managers to disclose who is soliciting soliciting investment advisory services ing and may give rise to an obligation to business to imposing outright prohibitions covered by the SEC rule from state or register as a lobbyist. These laws vary, on investment managers’ use of third-party local government entities. and many contain useful exemptions, such solicitors. The rules may apply even when as for formally responding to an RFP or a firm is using in-house marketing employ- State and Local Pay-to-Play Rules for in-house employees of the company ees to solicit business. Certain states and localities have laws that who act as salespersons. In addition, some Contingent Fee Prohibitions automatically prohibit a company from lobby laws have a threshold for trigger- having government contracts if a covered ing registration that may be based on Some lobby laws prohibit the payment donor makes a political contribution or the amount of time spent lobbying in the of contingent fees — any payment (such solicits one for a covered official or politi- jurisdiction (e.g., North Carolina’s thresh- as a commission or formulaic bonus) cal committee. Common categories of old is 5 percent of one’s working time in that is in whole or in part attributable covered donors include: a month), the compensation received for to a government decision (such as the decision to engage the firm). In addition, –– the firm itself; lobbying in the jurisdiction (e.g., Indiana’s threshold for executive branch lobbying some jurisdictions (e.g., Illinois, South –– any affiliate or the affiliate’s political is $1,000 per year) or number of contacts Carolina) prohibit contingent fees paid action committee; with covered officialse.g. ( , San Francisco’s for soliciting certain government busi- –– senior officers of the firme.g ( ., manage- threshold is five lobbying contacts in a ness, even if the solicitor does not trigger ment committee); month). In some jurisdictions, registration lobbyist registration. Placement agent may be triggered when gifts and entertain- policies also can prohibit contingent fees. –– members of the firm’s board of ment are provided to public officials and directors; employees. Importantly, some jurisdic- Gift Laws –– employees who solicit or manage state tions aggregate all firm activity for these When providing a thing of personal value or local contracts; and thresholds, so while a single action may to an official or employee of a government –– in some cases, the spouses and depen- not give rise to an obligation to register, it entity, one must consider the gift rules of dent children of the individuals listed could when combined with other activities that jurisdiction. These restrictions apply above. at the firm. to personal benefits such as meals, enter- tainment, travel and gift items as opposed These bans on business can, in some Requirements Once Registration to political contributions, which may cases, last for more than five years. These Is Triggered be subject to pay-to-play restrictions as laws also may impose disclosure require- If registration is triggered, the individual described above. Most jurisdictions have ments regarding political contributions. It lobbyist and/or company will need to some restriction on gifts and entertain- is very common for government contracts register and report on a periodic basis. ment for public officials, whether it be an and requests for proposals (RFP) in these These reports typically require the disclo- absolute ban regardless of value, a fixed jurisdictions to require a company to sure of gifts and entertainment provided to dollar limit per occasion or per month or certify its compliance with these laws. public officials in the jurisdiction, compen- year, or a prohibition on providing gifts sation for lobbying and the issues lobbied. that might reasonably tend to influence an Some jurisdictions impose training official. These gift laws often extend to requirements and special gift and political things of value provided to the official’s contribution restrictions on lobbyists. spouse or dependent children. In some

76 instances, state and local gift laws, such restrictions may apply. Conflict rules Takeaways as those in the state of New York, can frequently prohibit a government official In addition to the ever-increasing risk of an include gifts given to a third party, such from participating in a decision (such as enforcement action, potential legal viola- as a charity, at the request or behest of a that to award a contract) involving his or tions can bring negative media attention. public official. As noted above, lobbyists her private employer. In some rare cases, As such, broker-dealers and RIAs must and companies employing lobbyists often prohibitions can apply to contracts with continue to develop and refine compli- need to report the gifts or entertainment that government entity even if the official ance programs to address laws regulat- they provide. Government entities also fully recuses. Although legal liability ing government procurement activities. may have policies requiring vendors or for violations of these laws is typically Common elements among these programs contractors to disclose gifts they provide limited to the official or former official, include implementing tailored policies, to their officials. contracts that are entered into in violation preclearing certain activities, providing of these conflict laws may be void or void- protocols to ensure that registration and Legal liability for a violation of these able by the government entity. laws can attach to the donor, donee ongoing reporting requirements are met, or both, depending on the law. This is Post-Employment Rules offering training programs for certain especially important to keep in mind officers and employees, and establishing State and local laws typically restrict in light of the fact that government enti- procedures for keeping abreast of the latest former public officials from appearing ties increasingly require certifications developments in this area of law. before their former agency for a period of compliance with applicable gift laws. of time (often one or two years) after For example, the New York City comp- leaving government office and perma- Click here for a full list of political law-related troller requires firms managing city nently restrict someone from working on articles authored by Skadden attorneys in pension fund money to certify they have the last year. a particular matter (such as a contract or not given anything of value to employees procurement) that he or she personally of the comptroller’s office. worked on while in government. Thus, when vetting a prospective or new hire Conflicts of Interest who is a former government official, a Dual-Hatted Situations firm may want to consider whether the To the extent employees also hold posi- firm does or may seek to do government tions with a government entity (such business in the jurisdiction where the as serving on an unpaid government official serves or served. board), government conflict-of-interest

77 2019 Insights Regulatory

While debates about the need for a federal data protection California Privacy law continued to heat up in 2018, California enacted its own Law: What comprehensive privacy law, the California Consumer Privacy Act (CCPA), creating a de facto national standard for any company Companies that does business involving California residents. The law Should Do to effectively sets the floor for nationwide privacy protection, since organizations may not want to maintain two privacy frameworks Prepare in 2019 — one for California residents and one for all other citizens.

The CCPA generally gives consumers associated with, or could reasonably more information and control over how be linked, directly or indirectly, with a Contributing Partner their data is being used and requires particular consumer or household.” The companies to be more transparent in their CCPA provides a lengthy list of examples Stuart D. Levi / New York handling of it. While the law does not that includes standard items such as Social go into effect until January 1, 2020, and Security, driver’s license and passport some operative provisions were delayed numbers, as well as items such as purchas- until July 1, 2020, the requirements under ing history, internet activity, geolocation the CCPA should not be minimized, and data, professional or employment-related companies should take steps to prepare information, and inferences drawn about for compliance in 2019 while monitoring a California resident (that is, using what is ongoing rulemaking. otherwise personal information to create a profile of a consumer, such as preferences, Who Is Covered? intelligence or abilities). Publicly available In general, the CCPA applies to entities information is excepted where it is avail- conducting business in California that able through government offices. either directly or indirectly control the collection of personal information of resi- Issues Businesses Should Consider dents in that state and meet one or more The CCPA requires covered entities to of the following criteria: disclose, upon request from a consumer, a significant amount of information about –– have annual gross revenues in excess of $25 million, adjusted for inflation; that consumer’s personal information, including what is being collected, sold –– derive 50 percent or more of their or disclosed; the source of that informa- annual revenues from selling consum- tion; the business purposes for collecting ers’ personal information; or or selling it; and the categories of third –– annually buy, receive for a commercial parties with which the information is purpose, sell or share the personal infor- shared. The CCPA gives consumers the mation of 50,000 or more consumers, right to access a copy of their personal households or devices. information “in a readily useable format that allows the consumer to transmit What Information Is Subject [the] information from one entity to to the Law? another entity without hindrance.” In effect, this requirement gives consumers The CCPA defines personal informa- a data portability right, since they can tion very broadly as information about migrate their personal information from a California resident that “identifies, one service provider to another offering relates to, describes, is capable of being

78 similar services. Companies also must Enforcement –– The CCPA is expected to provide honor a consumer’s request to delete broader rights to request data deletion Although the CCPA does not provide their personal information absent certain and includes different exceptions to this for a private cause of action (other than defined circumstances. requirement; in data breach cases), the California Implementing processes and procedures attorney general can impose hefty fines –– The CCPA is expected to provide more to comply with the foregoing require- for violations that include damages of power for consumers to access personal ments — such as being able to provide a up to $2,500 per violation if not cured information and does not provide all consumer with information about their within 30 days. It remains to be seen how of the exceptions available under the personal data or delete it from the compa- California will interpret “per violation.” GDPR; and Enforcement actions may not be brought ny’s systems — can be time-consuming –– The CCPA includes more stringent and resource-intensive. Starting a compli- by the attorney general until the earlier of restrictions on sharing personal infor- ance process well in advance of 2020 is July 1, 2020, or six months after publica- mation for commercial purposes than strongly recommended. tion of the final regulations. does the GDPR.

The CCPA requires that companies The CCPA also makes it far easier for While companies that have become provide consumers with the right to opt consumers to sustain a data breach claim, GDPR-compliant may have an approach out of the sale of their personal informa- by not requiring a showing of harm from to data protection that will be useful in tion through a clear and conspicuous link the incident. Consumers’ inability to adapting to the CCPA’s requirements, on the company’s homepage titled “Do establish any harm has until now resulted GDPR compliance cannot be seen as Not Sell My Personal Information” as well in the dismissal of many data breach cases dispositive for CCPA purposes. as a link to the relevant privacy policies. for lack of standing. It remains to be seen For some companies, this will simply whether this aspect of the law will be Key Takeaways challenged. mean a change in their user interface. In Many companies underestimated the other cases, this will impact a company’s Will GDPR Compliance Also time and resources required for GDPR business model, since it likely will result Satisfy the CCPA? compliance and remained noncompliant in fewer consumers providing consent. when the law went into effect. Companies The CCPA forbids companies from While some overlap exists between the would be well-served to learn from that discriminating against consumers with CCPA and the European Union’s General experience and begin to implement CCPA respect to prices or services based on their Data Protection Regulation (GDPR) compliance programs a year in advance. exercise of their rights under the CCPA. (see “European Data Protection and The challenge companies will face is Cybersecurity in 2019”), they differ in that CCPA rulemaking is ongoing, and it Companies also will need to update their certain key aspects: remains to be seen how some provisions privacy policies, including by describing –– The CCPA’s definition of personal will be interpreted. the consumer’s rights under the CCPA and information is more extensive than that providing a list of categories of personal in the GDPR; information collected, sold to a third party Click here for a full list of cybersecurity and or disclosed for business purposes. privacy-related articles authored by Skadden attorneys in the last year.

79 2019 Insights Regulatory

Data protection laws in Europe evolved substantially in 2018, European Data with the implementation of the General Data Protection Protection and Regulation (GDPR) and the Directive on Security of Network and Information Systems (NIS Directive) becoming national Cybersecurity law at the member state level. These legislative developments in 2019 come on the heels of impactful international data breach and cybersecurity incidents. Together, they catalyzed calls for increased data protection and cybersecurity awareness through

Contributing Partner further proposed and enacted regulations. In 2019, the focus will transition from theory to practice, as implementation gives Ingrid Vandenborre / Brussels way to enforcement.

Counsel Far-Reaching Territoriality data subject in the EU and must target and Increased Data Protection the subject on the basis of it being in the Eve-Christie Vermynck / London Awareness EU. This standard excludes de minimis processing and thus insulates a company In November 2018, the European Data from liability in the case of a non-EU Associate Protection Board (EDPB) disseminated data subject’s incidental presence in the guidelines, subject to public consulta- EU (e.g., a U.S. mobile network company Shannon Togawa Mercer / London tion, on the territorial scope of the GDPR, will not have to comply with GDPR solely which brought long-awaited certainty to because a U.S. data subject is using its businesses outside the European Union. roaming services while in the EU). First, the GDPR applies to controllers Despite further clarity on GDPR’s reach, or processors with an establishment companies will need to consider what obli- in the EU that process personal data gations they may have under the myriad in the context of the activities of that new or revised national data protection establishment, whether the processing laws outside the EU (e.g., Brazil, India and happens in the EU or not (the establish- California as well as Japan, which awaits ment criterion). The EDPB clarifies that an EU adequacy decision). Data protection the applicability of GDPR to a non-EU awareness is a global trend to watch in the data controller is a fact-based evalua- coming year. tion and not automatic. For instance, if a U.S.-based company makes one-off use Impact of GDPR on Corporate of an EU-based processor, the processor Transactions, Investigations can comply with its GDPR obligations and E-Discovery without those obligations necessarily attaching to the U.S. company. Data protection legislation will, and in many cases already has, necessitated new Second, the GDPR applies when a control- steps in corporate transactions and litiga- ler or processor not established in the EU tion. Companies must now design and processes personal data in connection document more stringent methodologies with the offering of goods or services to and security measures in line with newly data subjects in the EU, or monitors data codified accountability and data minimi- subject behavior in the EU (the targeting zation principles. criterion). The guidelines clarify that for the GDPR to apply to an establishment In transactional work, the due diligence outside the EU, the establishment must and post-closing phases will inevitably demonstrate the intention of targeting a include new dimensions to address the

80 processing of personal data. Parties should In October 2018, the European Council as well as data collection and advertising pay special attention to data governance, called for the reform and improvement practices by two-sided platforms. privacy policies and notices, and cyber- of EU cybersecurity policy. In December security standards. Corporate litigation 2018, EU ambassadors approved a Greater clarity on how competition issues processes should be mindful of the nature proposed Cybersecurity Act that would involving the use of data are perceived by of data flows, prior information obligations enable the creation of a permanent the European Commission and authorities to custodians, and the data minimiza- EU Agency for Cybersecurity and an of the EU member states as well as in the tion principle applicable to collection and EU-wide cybersecurity certification U.S. is expected in 2019. review of personal data. scheme. Developments in 2019 will further illustrate that cybersecurity GDPR Enforcement While steps toward GDPR compliance and data protection go hand in hand, While administrative fines under the may seem onerous, investment at the especially in sectors such as health care GDPR (up to 4 percent of total worldwide outset will lead to more efficient internal and transportation. annual turnover) were one of 2018’s hot workflows and procedures. Especially topics, the regulation also introduces in markets with increasing appetites for GDPR and Competition Law another source of potential liability: data protection, companies are likely to Competition agencies are focusing increas- It grants any individual the right to continue streamlining data protection ingly on the value and use of personal compensation for damage caused by a operations and policies and may view data as a commodity with competitive data controller or processor’s breach of the GDPR as a standard-setting regulation significance, blurring the boundaries the GDPR requirements. Individuals who for data protection globally in 2019. between competition and data protection bring claims for data breaches have the laws. In 2016, the German Federal Cartel option of assigning their claims to a not- Security and Cyberrisk Office (FCO) began an investigation into for-profit, public interest group established The NIS Directive, which aims to protect Facebook for its alleged abuse of domi- to protect individual privacy rights. In critical national infrastructure, is a nance in its collection of user data through addition, individual EU member states cornerstone of EU cybersecurity. EU third-party apps and websites. The FCO’s may legislate to provide a mechanism for member states were required to transpose preliminary assessment is that Facebook is individuals to litigate via collective action it into national law on May 9, 2018, and abusing this dominant position by requir- complaints or class actions. Exposed to identify operators of essential services by ing users of its social network to allow it to both administrative and civil liability for November 9, 2018. limitlessly amass every kind of data gener- data breaches, the financial risk for compa- ated by those users’ third-party websites nies could be very high. The NIS Directive legislates the improve- and then merging it with the user’s ment of cybersecurity infrastructures at Facebook account, not only from services Within a short period after GDPR imple- the state and company levels, through owned by Facebook such as WhatsApp mentation in May 2018, enforcement “safeguarding obligations” (appropriate or Instagram, but also from websites and became a reality: France’s Commission safety measures) and “information obliga- apps of other operators with embedded Nationale de l’Informatique et des tions” (community sharing and notification Facebook application program interfaces. Libertés has multiple pending investi- obligations). It also requires EU member According to the FCO, Facebook’s terms gations and has mandated remediation states to implement structural changes, of service violate data protection provi- actions, and the U.K.’s Information including the designation of a competent sions to the disadvantage of its users, Commissioner’s Office has issued national NIS authority. The directive aims which in turn is deemed to constitute an warnings and small fines. Meanwhile, to create a culture of security through abuse of the company’s allegedly dominant the Portuguese Comissão Nacional de transparency and accountability. position based on the Facebook network. Protecção de Dados has imposed the first GDPR fine — €400,000 — on a hospital Another step toward a more robust cyber- In the U.S., the Federal Trade for noncompliance with GDPR. security infrastructure is the European Commission (FTC) is similarly focused Central Bank’s cyber resilience over- on data issues. The FTC held a two-day Enforcement actions in 2019 will reveal sight expectations (CROE), published hearing on the “intersection of Big Data, the contours of data protection legislation. on December 3, 2018, as part of larger Privacy and Competition” in November efforts to enhance cyber awareness and 2018. At issue for U.S. authorities is Click here for a full list of cybersecurity and resiliency throughout the financial sector. whether existing antitrust and consumer The CROE provides specific instructions privacy-related articles authored by Skadden protection rules are fit to address new attorneys in the last year. and clear expectations through a new challenges relating to big data and privacy framework for compliance.

81 2019 Insights Regulatory

Many of the core provisions in the Tax Cuts and Jobs Act (TCJA) US Tax Reform — including the corporate tax rate reduction and the funda- and Cross- mental reworking of the U.S. international tax regime — were geared toward addressing the uncompetitive nature of the U.S. Border M&A: corporate tax system and its perceived role in so-called inver- Considering sion transactions that had gained attention in the period leading the Impact, up to the enactment of the TCJA. With that background and a year’s worth The largest benefit, and the centerpiece One Year In of experience under the TCJA, we can of the legislation, was the reduction begin to assess the TCJA’s impact on the of the U.S. federal corporate tax rate structuring of cross-border M&A. The from 35 percent to 21 percent, bring- carrot-and-stick approach that the TCJA ing it more in line with the statutory Contributing Partners adopted with respect to inversion trans- rates of other member countries of the actions specifically, and cross-border Organisation for Economic Cooperation Brian Krause / New York business activities more generally, means and Development. The TCJA also Moshe Spinowitz / Boston that the incentives driving the structuring provided an exemption from U.S. federal of cross-border M&A are less certain that income tax for dividends received from under pre-reform law and certainly do not foreign subsidiaries. In addition, the point clearly in a single direction. foreign-derived intangible income (FDII) regime introduced a reduced rate of tax Ultimately, though, the TCJA’s ability on certain income from export sales and to fundamentally reshape the incentives the sale or license of certain intellectual driving the structure of cross-border property to foreign persons, as part of M&A requires a global view. These an effort to incentivize investment in the drivers are not simply a function of the United States and mitigate the incentives U.S. tax regime; they also reflect the to earn income offshore. attractiveness of the U.S. relative to other leading headquarter jurisdictions and their The sticks, or possible detriments, include tax regimes. In light of broader global the new global intangible low-tax income changes that continue to roil the inter- (GILTI) and base erosion anti-avoidance national tax landscape, we appear to be tax (BEAT) regimes. GILTI is in effect facing an ongoing period of instability that an annual minimum tax imposed on U.S. will continue to shape the tax planning parent companies with respect to much, priorities of multinational corporations if not all, of the earnings of their foreign and the structuring of cross-border M&A. subsidiaries. In concept, GILTI is intended to impose U.S. tax at a reduced rate of up Cross-Border M&A: The TCJA’s to 10.5 percent on foreign income subject Carrot-and-Stick Approach to low rates of foreign tax at or below 13.13 Several new features of the U.S. interna- percent. In practice, given the precise tional tax system introduced as part of mechanics of the regime, many U.S. multi- the TCJA were meant to act as “carrots national companies have come to realize and sticks” to encourage U.S.-parented that it can result in U.S. tax even on foreign multinational companies to remain U.S.- income that is subject to meaningfully headquartered and to locate business higher rates of local tax. activity in the United States.

82 BEAT is an alternative tax intended to but also the cost of goods sold with light of political divisions in the United mitigate erosion of the U.S. tax base by respect to purchases from those related States. Given these uncertainties, U.S. essentially imposing a minimum tax parties, potentially making BEAT far companies planning to combine with a on deductible payments made by U.S. more onerous for inverted companies. foreign company in a cross-border M&A corporations to related foreign parties. transaction will want to carefully consider Payments subject to BEAT generally Structuring Cross-Border M&A: which company should be the acquirer, include items such as interest, payments How Have the Incentives Changed? particularly in mergers of equals and other for services, royalties and depreciable If one of the goals of U.S. corporate tax deals that — with careful structuring — assets; they generally do not include the reform was to put an end to inversion can avoid inversion-specific penalties. cost of goods sold. transactions and make the U.S. more attractive for businesses, its track record Beyond the US: Creeping Global The TCJA also introduced a variety of is likely to be mixed, given the features Changes in Corporate Taxation changes intended to strongly discourage of the legislation noted above. In the face of U.S. tax reform and ongoing so-called inversion transactions (defined political dissatisfaction with the current technically for this purpose as acquisi- Many of the advantages that foreign- approach to taxation of cross-border tions by foreign corporations of U.S. parented multinational groups previously commerce, several countries, including corporations in which, following the enjoyed have been curtailed by the TCJA, the United Kingdom and other European acquisition, the former shareholders of the thereby reducing the incentives to relocate Union countries, are exploring new U.S. corporation own at least 60 percent to a foreign jurisdiction in the context of approaches to business taxation. These and less than 80 percent of the stock of a cross-border M&A transaction. The include special regimes to tax digital the foreign acquirer) by imposing new reduced U.S. tax rate and dividend exemp- commerce, an increased focus on taxation penalties on inverted companies. First, tion system make it less costly to remain that relies on market-based allocations of individual shareholders of newly inverted U.S.-parented, while the BEAT regime income, expansion of controlled foreign companies are permanently ineligible and new limitations on interest expense corporations and anti-base erosion regimes for the qualified dividend income rate of deductions reduce the benefits foreign- that resemble the new U.S. approach, and 23.8 percent on dividends received from parented companies previously had. In ongoing efforts to target perceived abuses such foreign corporations. Instead, those addition, the inversion-specific penalties of the current international tax structure. dividends would be taxed at ordinary can make transactions that fall within the How these regimes develop over the next rates. Second, if the TCJA’s one-time ambit of those rules cost-prohibitive. several years will drive the incentives (or transition tax on accumulated foreign lack thereof) for corporations to relocate earnings applied to a U.S. corporation But certain material advantages remain to new jurisdictions and to structure their and that corporation inverts within for foreign-parented companies — most M&A accordingly. 10 years after enactment of the TCJA, notably the ability to conduct non-U.S. the U.S. corporation’s transition tax is business operations outside the potentially The TCJA may represent a once-in- recomputed at a 35 percent rate, compared onerous GILTI regime. To the extent that a-generation rethinking of the U.S. to the reduced 8 percent and 15.5 percent one of the drivers of cross-border M&A corporate tax system, but the global rates that had otherwise applied. pre-TCJA was the desire to grow non-U.S. changes in corporate taxation appear businesses outside the U.S. tax system, the to just be beginning. The uncertainty Finally, the TCJA introduced new rules TCJA may have magnified that incentive surrounding the structuring of cross- that make it more difficult to engage in through the introduction of the GILTI border M&A appears certain to persist. post-inversion tax planning, even for U.S. regime. Furthermore, the stability of U.S. corporations that inverted prior to the tax reform, including the long-term viabil- TCJA’s enactment. For inverted compa- ity of the reduced 21 percent statutory tax Click here for a full list of tax-related articles nies, BEAT disallows not only deductible rate and the beneficial reduced rate for authored by Skadden attorneys in the last year. payments made to foreign related persons FDII, remains a concern, particularly in

83 2019 Insights Financial Regulation

In May 2018, President Donald Trump signed into law the Regulatory Relief Economic Growth, Regulatory Relief and Consumer Protection May Generate Act. Sometimes called the Crapo bill after its sponsor Sen. Michael Crapo, R.-Idaho, the act eliminated or eased a Increased M&A number of regulatory burdens on superregional, regional and Activity Among larger community banking organizations. Also in 2018, the appointment and confirmation process for Trump nominees to Banks lead the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was completed. Under their new leadership, Contributing Partners the regulators have begun implementing the Crapo bill and

Brian D. Christiansen / Washington, D.C. taking other administrative steps to provide some measure David C. Ingles / New York of regulatory relief to most types of banking organizations. Sven G. Mickisch / New York A general easing of the intense regula- In addition, the banking agencies have tory environment that has existed since taken parallel steps to ease regulatory the financial crisis is expected to lead to requirements. For example, one industry lower compliance costs, greater flex- criticism of the post-crisis system was ibility in managing capital and perhaps its imposition of a relatively uniform incrementally higher tolerance among package of significant additional require- supervisors for the risk-taking inherent ments on institutions that met the single, in the banking business. We expect that relatively low ($50 billion) asset-size these developments will result in greater threshold. To address this concern, in interest and willingness among banking October 2018, the banking regulators organizations to pursue mergers and proposed a framework that would instead acquisitions as a means of enhancing place the largest U.S. banking organi- shareholder value. zations into one of four risk categories based not only on asset size but also on Crapo Bill and Other certain other characteristics. Institutions Regulatory Relief in the lower-risk categories will see In the wake of the financial crisis, the significant relief from a number Dodd-Frank Act was enacted in 2010 of requirements related to capital and to impose stricter oversight and burden- leverage, liquidity, stress testing, risk some regulatory requirements on the management, counterparty exposure industry. Among other changes, the limits and other areas. Institutions in Dodd-Frank Act created new require- the highest risk categories will see only ments for banking organizations with minimal relief. The table on the next page $50 billion or more of total consolidated shows the risk categories, the institutions assets. This $50 billion threshold became within them and the degree of relief they a key break point for regional and can expect. superregional banks evaluating growth Banking regulators also are pursuing opportunities through M&A. The Crapo discrete areas in which the agencies can bill increased this key threshold to be more flexible. For example, they are $100 billion, effective upon the bill’s working on revisions to the Volcker Rule, enactment, and it will rise to $250 billion capital planning, resolution and recovery by November 2019. planning, and community bank capital

84 Proposal to Tailor Regulatory Requirements Based on Risk Category

Category I Category II Category III Category IV

Category criteria U.S. global systemi- ≥ $700B assets ≥ $250B assets ≥ $100B assets cally important banking OR OR organizations (GSIB) ≥ $100B assets and ≥ $100B assets and ≥ $75B cross- ≥ $75B short-term jurisdictional activity wholesale funding, nonbank assets or off-balance sheet exposures

U.S. banking JPMorgan Chase Northern Trust US Bancorp BB&T organizations within category Bank of America PNC Financial SunTrust Citigroup Capital One American Express Wells Fargo Charles Schwab Ally Financial Goldman Sachs Citizens Financial Morgan Stanley Fifth Third Bank of New York KeyCorp Mellon Regions Financial State Street M&T Huntington Bancshares Discover

Degree of relief Minimal relief; most stringent requirements Modest relief Significant relief from regulatory continue to apply requirements requirements. The OCC has led efforts Reserve is considering a more transparent, significant disincentive for M&A. Rarely to modernize implementation of the and perhaps less restrictive, approach for did two banking organizations each below Community Reinvestment Act, including evaluating “control” for bank regulatory $50 billion in assets merge as a company to better reflect technological innova- purposes, which would have broad impli- with combined assets above that thresh- tions and to move away from reliance on a cations for M&A and investment activity old, and market reaction to the few that physical geographic footprint. The FDIC involving banking organizations. did tended to be negative. The threshold has been looking for ways to make its increase under the Crapo bill lifts the application process for new banks faster Effect on Bank M&A Activity regulatory disincentive to growth through and more transparent, and it has expressed The segment of the industry likely to M&A for the approximately 80 banking a willingness to approve deposit insur- see the biggest boost in M&A activity is organizations with $10 billion to ance for newly formed industrial loan banking organizations with $10 billion $50 billion in total assets. companies, which are bank-like entities to $50 billion in assets. The increased Banking organizations with more than attractive to many financial services compliance costs and regulatory scrutiny $50 billion in total assets also may be in firms with nontraditional business plans that came with exceeding the $50 billion a better position to explore M&A or ownership structures. The Federal threshold under Dodd-Frank acted as a

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opportunities, to the extent that the arising from deficiencies in their compli- acquisitions of, and investments in, and market rewards these companies with ance infrastructure, particularly in the partnerships with providers of, technology higher trading values as a result of the areas of anti-money laundering, economic platforms to keep pace with these develop- relaxed regulatory burdens and reduced sanctions and consumer protection laws. ments. These industry shifts may affect the compliance and capital costs. Significantly, outstanding compliance buyer universe and valuation for multistate issues generally preclude a banking or regional banking franchises with broad The combined effect of these regulatory organization from pursuing substantial branch-banking footprints. developments should allow banking expansionary acquisitions or invest- organizations to consider and pursue ments, which reduces the universe of For a number of years following the finan- M&A transactions based on their busi- potential buyers. cial crisis, the regulatory environment ness and financial merits, rather than represented a significant challenge and being driven by somewhat arbitrary, Second, a historical driver of M&A source of uncertainty for M&A activity asset-size regulatory thresholds. activity among banking organizations among banks. Other than for the very was the objective of expanding scale and largest institutions, the Crapo bill and Competing Factors geographic footprint. However, banking other recent actions by the banking regu- Nevertheless, the regulatory environ- organizations are reconsidering the value lators will meaningfully ease the burdens ment is only one important factor for of traditional brick-and-mortar banking of the post-crisis regulatory environment. banking organizations considering M&A franchises. Many of the largest banking Although their near-term impact may be opportunities. Bank M&A activity is organizations are actively rationalizing muted by countervailing economic and significantly affected by environmental their physical branch networks and elimi- industry considerations, these regulatory considerations, including the general nating less profitable branches. In addition, developments will make M&A opportu- economic outlook, the interest rate yield technological advances have changed nities more attractive for many banking curve, market volatility and political the manner in which many banking and organizations. uncertainty. Two additional factors payments services can be delivered. present possible headwinds for a more Younger generations have moved away Click here for a full list of financial institutions- widespread wave of M&A activity from traditional branch banking toward related articles authored by Skadden attorneys among banking organizations. alternative delivery channels, such as online banking and mobile payment in the last year. First, many of these organizations remain methods. In lieu of acquiring traditional subject to regulatory enforcement action branch-based banks, many banking and ongoing remediation obligations organizations are more actively pursuing

86 In 2018, the number of blockchain-enabled projects increased As Interest in sharply as established companies sought to apply distributed Blockchain ledger technology to their existing business models and startups developed new and disruptive models employing Technology this technology. Projects have already been implemented Grows, So Do in the financial services, insurance and supply chain fields, and important developments are taking place in blockchain- Attempts at based identity services. As use of blockchain technology has Guidance and expanded, regulators from a range of geographic and legal jurisdictions have struggled to apply laws and regulations that Regulation were drafted for business activities involving a clearly identifiable service “provider” to autonomous, decentralized platforms where the actual “provider” is not evident. Contributing Partners For example, regulators responsible for and their advisers “to engage with Alexander C. Drylewski / New York securities, commodities, anti-money SEC staff,” according to Valerie A. Eytan J. Fisch / Washington, D.C. laundering (AML) and privacy all Szczepanik, the SEC’s senior adviser wrestled with blockchain issues in 2018. for digital assets and innovation. The Stuart D. Levi / New York Often, the cases brought and guidance creation of FinHub suggests that the offered raised more questions than they SEC is willing to work with develop- Of Counsel answered. Any company implementing ers regarding compliance rather than or investing in blockchain technology approach the issue solely from an Jonathan Marcus / Washington, D.C. will need to pay close attention to this enforcement perspective. evolving regulatory landscape. –– SEC Settlements. On November 16, 2018, the SEC announced that Counsel Securities Law CarrierEQ Inc. (aka AirFox) and Eve-Christie Vermynck / London A number of noteworthy legal devel- Paragon Coin Inc., which sold digital opments relating to cryptocurrencies tokens in initial coin offerings (ICOs), emerged in 2018, providing incremental agreed to pay penalties, register clarity for participants in this emerging under Section 12(g) of the Securities area of securities law. Exchange Act and offer voluntary –– Digital Tokens. On June 14, 2018, rescission rights to investors. These William H. Hinman, director of the settlements may provide a road map to Securities and Exchange Commission’s compliance for those who have already (SEC) Division of Corporation Finance, engaged in ICOs. suggested that digital tokens like Ether –– SEC v. Blockvest, LLC. On November 27, might initially be defined as “invest- 2018, Judge Gonzalo P. Curiel of the U.S. ment contracts” (and thus as “securi- District Court for the Southern District ties” under the federal securities laws) of California denied the SEC’s request but that their networks and decentral- for a preliminary injunction against a ized structures could evolve to a point company that had engaged in an ICO. where the tokens no longer constituted Judge Curiel concluded that the SEC securities. had not established that the Blockvest –– FinHub. On October 18, 2018, the tokens at issue were securities because SEC launched the Strategic Hub for there were disputed facts under the U.S. Innovation and Financial Technology Supreme Court decision SEC v. W.J. (FinHub), which was designed to Howey Co.’s “investment of money” and provide a way for technologists “expectation of profits” test prongs. This

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case may prove to be significant in that coins or tokens, in exchange for another many of its fundamental concepts clash the court suggested the Howey test may type of value that substitutes for currency with the requirements of the European not be met. is a money transmitter” and is therefore Union’s General Data Protection subject to corresponding AML require- Regulation (GDPR) requirements. –– SEC Guidance. On December 12, 2018, the SEC announced that it is develop- ments for money services businesses. The (See “European Data Protection and ing guidance for cryptocurrencies that Treasury Department, however, noted that Cybersecurity in 2019.”) ICOs vary in structure, and there could be it hopes to publish in early 2019. The In 2018, EU regulators began to focus on guidance is intended to help determine circumstances in which AML require- ments imposed by the SEC or Commodity this issue, with the French supervisory if a digital asset is a security. If it is, the authority, the Commission Nationale de guidance would detail what a busi- Futures Trading Commission (CFTC) would apply. l’Informatique et des Libertés (CNIL), ness should do to comply with securi- and the EU Blockchain Observatory ties regulations. (See “SEC Continues FinCEN Director Kenneth A. Blanco and Forum (the Observatory) publish- Steady Progress With Regulatory, echoed this view in an August 2018 ing initial reflections on this matter but Enforcement Goals.”) speech at the Chicago-Kent Block offering little definitive guidance. For –– Token Taxonomy Act. On December 20, (Legal) Tech Conference, stating that example, the reports acknowledged that 2018, Reps. Warren Davidson, R-Ohio, “[w]hile ICO arrangements vary and, with a blockchain platform, it is difficult and Darren Soto, D-Fla., introduced the depending on their structure, may be to determine the identity of the data Token Taxonomy Act, which seeks, in subject to different authorities, one fact controller (which determines the purpose part, to clarify that securities laws would remains absolute: FinCEN, and our and means of processing personal data) not apply to cryptocurrencies once they partners at the SEC and CFTC, expect and the data processor, since in many become a fully functioning network. businesses involved in ICOs to meet all blockchain platforms, multiple nodes hold Although we do not expect that this bill of their AML/CFT obligations.” It is the data without any single controller will be passed, it comes after a year of notable that Blanco did not specifically or processor. The reports acknowledge various congressional hearings on how reassert the view in the Wyden letter that this issue but simply conclude it must be current regulations apply to blockchain companies conducting ICOs generally resolved on a case-by-case basis. technology. We anticipate that Congress are money transmitters. The failure to do will remain focused on this issue in 2019. so raises some questions as to whether Similarly, a cornerstone of blockchain FinCEN viewed the reaffirmation as technology is the use of hashing to cloak FinCEN unnecessary or was backtracking on the and represent specific data sets. While many see these hashes as anonymous and Cryptocurrencies also have been the more categorical position. therefore not subject to privacy regula- subject of increasing focus by the FinCEN also is working with foreign tions, the GDPR narrowly limits anony- Department of the Treasury’s Financial governments to address risks related to mization to cases where it is impossible Crimes Enforcement Network (FinCEN), virtual currencies, including through the to reverse the encryption process or link which exercises AML regulatory func- Egmont Group of Financial Intelligence the encrypted data to an individual by tions. Dating back to 2013, FinCEN has Units and through the Financial Action studying usage patterns. Hashes may not issued several rounds of guidance on Task Force. Treasury Under Secretary meet this definition. Here, too, the reports the application of AML requirements to Sigal P. Mandelker has stated that, as part acknowledge the issue but leave it to case- businesses performing certain functions of this effort, the Treasury Department is by-case analysis. or providing certain services related “encouraging our international part- to cryptocurrencies. In 2018, FinCEN ners to take urgent action to strengthen The GDPR also provides individuals took additional steps toward answering their AML/CFT frameworks for virtual with a series of rights, including a right outstanding questions, including in the currency and other related digital asset in certain cases to have their data deleted context of ICOs. We expect FinCEN to activities.” We expect that efforts to align (known as the right to be forgotten). This issue further clarifying guidance in 2019. global approaches to cryptocurrencies principle conflicts with the immutabil- ity of a blockchain, where once data is In a February 2018 letter responding will increase in 2019. stored, it cannot be erased or modified. to questions from Sen. Ron Wyden, Furthermore, it is not clear who enforces D-Ore., the Treasury Department took Applying GDPR to Blockchain this right if a data controller cannot readily the position that “[g]enerally, under Platforms be identified. The CNIL’s preliminary existing regulations and interpretations, Blockchain technology has the potential suggestion is that encryption coupled with a developer that sells convertible virtual to revolutionize how personal informa- the destruction of the encryption key might currency, including in the form of ICO tion is stored and processed. However, satisfy this requirement.

88 Although the reports signal that regula- to derivatives markets by requesting GITEX Technology Week Conference that tors are beginning to focus on this issue, public input (RFI) on Ether and the the CFTC’s existing regulatory authority they may not issue any meaningful Ethereum network. The RFI illustrates may apply to smart contracts, encouraging guidance for some time. Developers of that the CFTC is relying on market innovators to engage with the commission blockchain platforms will need to glean participants and the public to help inform but also focusing on potential liability for what they can from these initial reports its understanding of, among other areas, coders whose smart contracts facilitate and keep compliance with the GDPR and how cryptocurrencies and their networks trading in products subject to CFTC juris- other privacy laws in mind during the operate, the technology they depend on, diction, such as options entered into with development process. their governance structures, the purposes retail customers. The SEC recently settled for which they are used, and their liquid- an enforcement action against Zachary CFTC/Derivatives Law ity and susceptibility to manipulation. Coburn, the founder of EtherDelta — a While the CFTC has actively used its This information is relevant to the CFTC smart contract-based market platform enforcement authority to police fraud and in deciding how to police cryptocurrency for trading digital tokens — for causing protect retail customers in the cryptocur- fraud and regulate derivatives contracts it to operate as an unregistered securi- rency markets, its formal guidance on based on cryptocurrencies. It is evident ties exchange. The CFTC may not be far how the Commodity Exchange Act (CEA) that the CFTC also is looking beyond behind in pursuing smart contract applica- applies to the blockchain and cryptocur- cryptocurrencies and closely monitoring tions that may not comply with the CEA or rency space has been fairly sparse. Aside the development of decentralized systems CFTC regulations. from a few short releases, the CFTC’s generally. For example, LabCFTC, the Associates Andrew R. Beatty, Jeongu Gim primary guidance in this area is its agency’s initiative to engage with the and Trevor A. Levine contributed to this December 2017 proposed interpretation of fintech innovation community, recently article. what constitutes “actual delivery” in retail issued a primer on smart contracts to cryptocurrency transactions. (The CFTC explain the technology and related risks and challenges. regulates leveraged or margined cryp- Click here for a full list of fintech-related articles tocurrency transactions involving retail Given the CFTC’s interest in block- authored by Skadden attorneys in the last year. customers where the cryptocurrency is not chain applications, one area to watch “actually delivered” within 28 days.) in 2019 will be the CFTC’s regulatory Near the end of 2018, the CFTC approach to emerging smart contracts. On demonstrated its continuing interest in October 16, 2018, Commissioner Brian cryptocurrencies and their relationship D. Quintenz stated at the 38th Annual

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Both the Consumer Financial Protection Bureau (CFPB Despite or Bureau) and Department of Justice (DOJ) initiated and Leadership resolved fewer fair lending and other consumer financial services enforcement actions in 2018 than in previous years. Changes, No Leadership changes at both agencies may impact agency Pivot in Priorities priorities in 2019, but the trend of fewer enforcement actions Expected for seems likely to continue. Meanwhile, we expect increased activity Prior to her appointment, Kraninger Consumer at state regulatory and enforcement agen- served as an associate director at the cies — in part a response to the slowdown Office of Management and Budget. Financial at the CFPB — to continue. Finally, the Her views on consumer protection are new Democratic majority in the House not well-known, and it remains to be seen Services of Representatives likely will exercise its whether she will continue Mulvaney’s oversight authority zealously and pressure emphasis on rulemaking rather than Enforcement agencies to increase consumer protec- regulation by enforcement, and the extent tion enforcement. (See “Preparing for to which she will fill political positions at Democratic Oversight Investigations.”) the Bureau with new individuals rather However, with Republicans still in control than holdovers from Mulvaney’s tenure. Contributing Partners of the Senate and the White House, we do As her directorship begins, however, not expect to see significant legislation Kraninger has considerable support from Joseph L. Barloon / Washington, D.C. enacted or a marked change in the regula- the financial services industry, and she tory landscape in 2019. has not indicated significant disagreement Anand S. Raman / Washington, D.C. with actions Mulvaney took. CFPB As a result, many of Mulvaney’s priorities On December 6, 2018, the Senate during his one-year tenure are unlikely confirmed Kathy Kraninger to a to change. In particular, the Bureau is five-year term as the new director of likely to continue its efforts to clarify, via the CFPB. Kraninger replaces Mick rulemaking, what constitutes “abusive” Mulvaney, who was appointed acting acts or practices. It also is possible that director of the agency in November 2017 the Bureau will issue a rule regarding after its first director, Richard Cordray, the disparate impact doctrine under the resigned. Consumer advocates were Equal Credit Opportunity Act. Finally, critical of Mulvaney, accusing him of the Bureau appears to remain on path weakening the agency’s enforcement to revise its payday lending rule, which team and de-emphasizing enforce- could have significant implications for ment as a general matter. Indeed, in the short-term, small-dollar lenders. approximately 12 months of Mulvaney’s tenure, the Bureau initiated 12 actions DOJ and Other Federal Agencies and settled 14, whereas during the previ- ous 12-month period, it initiated 47 new The DOJ also pursued limited consumer actions and settled 42. Mulvaney also financial enforcement under then- reorganized the Bureau’s fair lending Attorney General Jeff Sessions. In 2017 and student loan offices, reducing both and 2018, the DOJ filed four lawsuits and their profile and direct authority, as settled four suits alleging fair lending part of a broad effort to re-examine the violations — a marked decline from Bureau’s priorities and processes. the level of activity under the Obama

90 administration in 2015 and 2016, when enforcement, both by pursuing enforce- investigate activities of concern to the the DOJ filed 15 fair lending lawsuits ment of state laws and by exercising their committee. Whether such pressure will and settled 14 suits. We have no reason authority under the federal Consumer lead to increased CFPB enforcement activ- to expect that President Donald Trump’s Financial Protection Act. For example, ity, however, is an open question. nominee for attorney general, William in August 2018, the New York State Barr, would significantly expand fair Department of Financial Services Conclusion lending enforcement activity. announced that it would be increasing fair While a modest increase in the volume lending enforcement with respect to auto of enforcement activity is possible in The Department of Housing and Urban lending. Other states, such as New Jersey 2019 — especially at the state level — we Development (HUD), under Secretary and Pennsylvania, likewise announced expect it to be largely “more of the same” Benjamin S. Carson, likewise appears to efforts to create their own consumer this year, both in terms of the volume of have scaled back its enforcement activity protection divisions to protect consum- enforcement and the subjects of interest. significantly. In particular, HUD has filed ers. This increased focus on consumer In particular, regulatory and enforce- only two secretary-initiated fair housing protection at the state level should ment agencies likely will continue to take enforcement actions over the last two continue during 2019, particularly given action where they believe fair lending years, which is a notable decrease from that Democrats hold the majority of state violations or unfair, deceptive or abusive activity during the Obama administra- attorney general positions. practices exist, but at levels consistent tion in 2015 and 2016, when HUD filed with 2018. seven such actions. Meanwhile, the Political Climate federal bank regulatory agencies (the With split control of the House and Senate, The industry will keep a close eye on Federal Deposit Insurance Corporation, Congress is not likely to pass significant both the CFPB and the DOJ as they move Office of the Comptroller of the Currency, consumer financial services legislation forward under new leadership, and on National Credit Union Administration in 2019. However, Rep. Maxine Waters, the House Financial Services Committee and Federal Reserve), which are less who became chair of the House Financial as it puts pressure on the Bureau. As political in nature, have continued at a Services Committee in January 2019, has ever, financial institutions will be best relatively consistent pace in 2018, despite stated that one of her priorities is to ensure served by maintaining strong compliance changes to the leadership of many of that the CFPB operates without interfer- management programs and closely watch- these agencies. ence from the Trump administration. We ing for developments at these agencies. therefore expect the House committee to State Attorneys General exercise its investigative powers broadly, Click here for a full list of financial regulation- Some states increased their regulatory both to pressure the Bureau to increase related articles authored by Skadden attorneys and enforcement activity during 2018 its enforcement activity and to directly in the last year. in response to the decrease in federal

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In 2018, the Commodity Futures Trading Commission (CFTC or Significant Commission) began operating with a full complement of five Regulatory, commissioners for the first time since 2014. Soon thereafter, it held a rare open meeting to propose major revisions to its rules Jurisdictional for swaps trading. CFTC Chairman J. Christopher Giancarlo is and Enforcement the driving force behind this proposal, having long advocated for expanding swaps trading on self-regulating exchange-like plat- Challenges forms called swap execution facilities (SEFs). Whether Giancarlo Ahead for CFTC will see his handiwork through to adoption is unclear, however, as he has announced he will be leaving the agency once his term expires in April 2019 and his successor is confirmed by the

Contributing Partner Senate. The White House already has announced its nominee to replace Giancarlo — Heath P. Tarbert, currently the assistant Mark D. Young / Washington, D.C. secretary for international markets at the Treasury Department.

Of Counsel Whoever is at the CFTC’s helm in 2019 obligations and powers. The CFTC’s will face significant challenges. The current SEF rules were adopted under the Jonathan Marcus / Washington, D.C. European Union has indicated that it 2010 Dodd-Frank Act, which required the plans to adopt legislation that could regulation of swaps trading by the CFTC subject U.S.-based clearinghouses to for the first time. In his white paper, Counsel substantial EU oversight at a time when Giancarlo noted that all futures must by Giancarlo has been advocating for the law be traded on exchanges, while swaps Theodore M. Kneller / Washington, D.C. exact opposite — full or at least greater may be traded both on exchange-type Rachel Kaplan Reicher / Washington, D.C. deference to home-country regulators. platforms (such as SEFs) and, bilaterally, As for enforcement, a series of court in private, over-the-counter negotiations. Associates decisions has called into question some He urged the CFTC to revisit its swap of the Commission’s anti-manipulation rules to better recognize that swaps and Jeongu Gim / Washington, D.C. and anti-fraud efforts. If those decisions futures are different. remain the law, they will cut to the core of what must be pleaded under both the In broad outline, the proposed amend- Commodity Exchange Act’s (CEA) tradi- ments seek to increase swaps trading on tional anti-manipulation provisions and SEFs — an unambiguous congressional post-Dodd-Frank Act anti-manipulation goal — by (1) requiring additional entities and anti-fraud provisions. to register as SEFs (including interdealer voice brokers); (2) relaxing the methods Sweeping Amendments by which swaps may be traded and Proposed to SEF Rules executed on SEFs; and (3) expanding the number and types of swaps that must be The CFTC proposed major changes to traded on SEFs. its swaps trading regime in November 2018, following a comprehensive white The CFTC also proposes to allow a SEF paper Giancarlo wrote urging the CFTC to elect what types of market participants to revisit its 2013 swap rules. Those rules may access its markets. This change govern how swaps are traded on SEFs, would enable a SEF to offer a dealer- which are CFTC-registered, exchange- to-dealer market and to exclude direct type trading venues with self-regulatory participation by the buy side (asset

92 managers, proprietary trading firms and Giancarlo has proposed mutual and end users). Some have criticized these even-handed deference in a white paper Enforcement Activity arrangements as giving dealers undue on cross-border swaps regulation. For in 2018 sway on swaps pricing. instance, with respect to jurisdictions subject to comparable regulations, he Comments on the proposal are due has suggested expanding the CFTC’s 83 February 13, 2019. Whether the final rules use of its authority to exempt from its cases filed are adopted before Giancarlo’s departure requirements non-U.S. CCPs that do not remains to be seen. pose substantial risk to the U.S. finan- cial system. But the EU has thus far EU Derivatives Clearing Legislation not changed course, making it increas- $ After the 2008 financial crisis, the ingly likely that the EU legislation will 900million G-20 championed increased clearing of be enacted in 2019. That prospect has in penalties financial derivatives contracts as a means spurred Giancarlo to warn that the CFTC of reducing systemic risk. The U.S. and will be forced to consider a “range of EU, among others, responded by requir- readily available steps” to respond in ing more derivatives to be submitted for kind, including withdrawing existing clearing and by enhancing regulatory exemptions for EU-based entities serving 26 scrutiny. While many observers consider U.S. customers and delaying or withhold- cases alleging manipulation, spoofing or disruptive trading these developments to be positive, ing further regulatory relief. the international nature of derivatives markets has left one substantial and As the clock ticks toward the EU’s thorny clearing issue to be settled: How adoption of its proposed CCP legisla- should national regulators treat clearing tion, the threat of trans-Atlantic market disruptions looms larger on the horizon. 5 providers, called central counterparties whistleblower awards (CCPs), that offer clearing services to Between this clearing dispute and the totaling $75 million foreign market participants? risk of a hard Brexit, 2019 promises to be a momentous year. This question has become a highly But 2019 could be more challenging for contentious U.S.-EU battleground. In CFTC Enforcement and CEA Private both the CFTC and private plaintiffs, the U.S., the CFTC has taken various Litigation Developments based on recent and pending judicial deci- approaches to different markets. For As outlined in its annual report, the sions. CFTC v. DRW rejected the CFTC’s exchange-traded derivatives, largely CFTC’s Division of Enforcement was attempt to expand its traditional price futures, it has long granted full defer- busy in 2018 with 83 cases filed (third- manipulation authority to cover instances ence to foreign regulators applying highest in CFTC history); $900 million in where a trader merely intended to affect comparable regulations to foreign CCPs penalties (fourth-highest); 26 cases alleg- the price, even if there was another that clear transactions involving U.S. ing manipulation, spoofing or disruptive purpose for trading (such as hedging). persons. But for swaps involving U.S. trading (annual average for 2009 to 2017 Instead, the court reaffirmed that the persons, the CFTC has been less deferen- was six); and highest number and greatest CFTC must prove a trader intended to tial, subjecting at least some non-U.S. amount of whistleblower awards (five create an artificial price — that is, a price CCPs to CFTC regulation with respect awards totaling $75 million). Giancarlo that does not reflect the legitimate forces to clearing for U.S. customers. The EU, has made clear that a vigorous enforce- of supply and demand. Meanwhile, the by contrast, places exchange-traded and ment program to protect market integrity U.S. Court of Appeals for the Second other derivatives into one basket and remains a top priority for the CFTC, and Circuit recently heard argument in an now is considering legislation to subject the agency’s 2018 enforcement record appeal of a decision that the CFTC claims non-EU CCPs serving EU customers to bears that out. could restrict the reach of its cross-border considerable and aggressive EU regula- power to pursue price manipulation where tion, including major U.S.-based CCPs.

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the alleged misconduct occurs abroad. In Foods Group, Inc.). That case may go Conclusion Prime International Trading, Ltd. v. BP to trial in 2019. In dismissing a CFTC The coming year promises to be pivotal Plc, the district court held that the private action, another district court ruled that for the CFTC: a change in leadership amid plaintiffs’ claims impermissibly required the converse is true: The CFTC must a significant swaps trading rule-making, extraterritorial application of the CEA. prove not just fraud but also manipulation EU legislation with serious ramifica- The plaintiffs alleged that a number of (CFTC v. Monex Credit Co.). Monex is on tions for U.S. CCPs, and litigation by the companies involved in different sectors appeal to the U.S. Court of Appeals for Commission and private plaintiffs that of the oil industry engaged in overseas the Ninth Circuit. These decisions will go could have a major impact on the CFTC’s manipulation of a foreign benchmark for a long way toward shaping the scope of enforcement program. These develop- the price of Brent crude oil that affected the CFTC’s post-Dodd-Frank authority. ments warrant the attention of market the prices of the plaintiffs’ Brent crude participants. oil futures and other derivatives contracts Lastly, private plaintiffs that seek to use traded on the New York Mercantile the antitrust laws to bring claims against Exchange and ICE Futures Europe. entities regulated by the CFTC could face Click here for a full list of derivatives-related a more difficult task. In a first-of-its-kind articles authored by Skadden attorneys in The CFTC also faces challenges to its ruling under the CEA, a court rejected an the last year. authority to sanction “manipulative or antitrust claim against a CFTC-registered deceptive” schemes. One district court exchange on implied repeal grounds. ruled in a pretrial proceeding that to do That case, too, has been appealed, this so, the CFTC must prove fraud and not time to the U.S. Court of Appeals for the just manipulative conduct (CFTC v. Kraft Seventh Circuit.

94 In 2018, the United States continued to expand its sanctions Key programs and increase enforcement. While President Donald Developments Trump’s decision to re-impose nuclear-related sanctions on Iran has perhaps drawn the most attention, key developments have in US Sanctions taken place in other areas as well. Notably, the U.S. imposed sanctions on certain prominent Russian oligarchs, launched new sanctions programs with respect to Nicaragua and interfer- Contributing Partners ence in U.S. elections, implemented for the first time compli- Jamie L. Boucher / Washington, D.C. ance commitments in the context of a settlement agreement Eytan J. Fisch / Washington, D.C. with the Office of Foreign Assets Control (OFAC) and took its first sanctions-related actions in the digital currency space. Counsel The U.S. also has continued vigorous insurance; energy and petrochemicals; Khalil N. Maalouf / Washington, D.C. sanctions enforcement and appears shipping, shipbuilding and ports; automo- increasingly to be targeting individuals tive; semifinished and precious metals; for criminal prosecution. We expect that and certain software. Secondary sanc- Associate economic sanctions will remain a robust tions are a set of measures that principally central instrument of U.S. foreign policy target foreign individuals and entities for Joseph M. Sandman / Washington, D.C. in 2019. engaging in enumerated activities that may have no U.S. jurisdictional nexus. Iran Nuclear Sanctions Re-Imposed Unlike a violation of primary sanctions, a Trump’s announcement in May 2018 non-U.S. party that engages in conduct that that the U.S. was withdrawing from its is subject to secondary sanctions can itself participation in the Joint Comprehensive be subject to various sanctions by the U.S. Plan of Action (JCPOA) marked a split government. Although OFAC provided with the other P5+1 partners (China, 90- and 180-day wind-down periods, those France, Russia, the United Kingdom and periods have now expired, and the Trump Germany), which are still committed to administration has signaled that it will the 2015 agreement with Iran to limit that fully enforce the sanctions now in effect. country’s nuclear activities in exchange for sanctions relief. (See our May 14, 2018, Russian Oligarchs Sanctioned August 28, 2018, and November 13, 2018, On April 6, 2018, OFAC announced client alerts.) Russia-related sanctions against seven oligarchs, 12 companies they owned or Even under the JCPOA, the comprehen- controlled, 17 senior government officials, sive U.S. embargo against Iran remained and a state-owned weapons-trading in place, and with very limited excep- company and its bank subsidiary. (See our tions, U.S. persons remained prohibited April 11, 2018, client alert.) The sanctions from doing business with Iran or its were implemented under Ukraine- and government. As a result, from a primary Russia-related executive orders and give sanctions perspective (i.e., transactions rise to both primary and secondary sanc- with a U.S. nexus), the changes were tions risks. relatively narrow. The oligarchs that OFAC targeted are The U.S. also re-imposed the sweeping more integrated into the global economy nuclear-related secondary sanctions that than many other designated individu- previously targeted broad sectors of Iran’s als or entities, and OFAC issued general economy, including banking, finance and licenses and accompanying guidance

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to minimize immediate disruptions to institutions and the rule of law, its use of Digital Currencies U.S. persons, partners and allies as the violence and repressive tactics against On November 28, 2018, OFAC for the agency negotiated the terms of delisting civilians, and its destabilizing corruption. first time included digital currency with certain sanctioned companies. The The president issued the executive order addresses as identifying information when general licenses allow some otherwise less than a month after National Security it announced cyber sanctions-related prohibited transactions and activities Advisor John R. Bolton gave a speech in designations of two Iranian men who necessary to maintain or wind down which he denounced Cuba, Venezuela and allegedly helped exchange digital currency existing dealings with, or divest interests Nicaragua as the “Troika of Tyranny” and ransom payments into the Iranian rial on in, specific sanctioned companies. OFAC signaled a renewed U.S. campaign against behalf of Iranian malicious cyber actors. has revised and extended some of these left-wing authoritarian governments in In its announcement, OFAC emphasized authorizations several times. the Western Hemisphere. As of January 7, that regardless of whether a transaction 2019, OFAC had sanctioned Nicaragua’s is denominated in a digital currency or On December 19, 2018, OFAC notified first lady and vice president under the traditional fiat currency, OFAC compli- Congress that it plans to remove three new program. of the sanctioned companies from the ance obligations are the same. We expect List of Specially Designated Nationals On September 12, 2018, the president continued activity in this space, particu- and Blocked Persons (SDN List): En+ signed Executive Order 13848, which larly as malicious actors increasingly turn Group plc, UC Rusal plc and JSC created a sanctions program to target to digital currencies to evade traditional EuroSibEnergo. OFAC explained that individuals and entities that interfere with means of detection. it had added the three companies to the or undermine public confidence in U.S. Robust Enforcement Activity SDN List because they were owned or elections, including through the unauthor- controlled, directly or indirectly, by Oleg ized accessing of election and campaign The U.S. has continued robust sanctions Deripaska, who was sanctioned the same infrastructure or the covert distribution enforcement over the past year. Notably, day. In its notification to Congress, OFAC of propaganda and disinformation. On following the OFAC, Department of announced that it had reached a deal with December 19, 2018, OFAC used several Justice and Department of Commerce the companies to reduce Deripaska’s authorities to sanction individuals and enti- penalties in 2017 against Chinese technol- direct and indirect ownership stake, ties involved in interfering with political ogy giant ZTE Corporation related to along with other commitments. Unless and electoral systems, including the nine shipments to Iran and North Korea, the Congress intervenes, OFAC is expected Russian intelligence officers under indict- Department of Commerce’s Bureau of to remove the three companies from the ment in connection with interference in the Industry and Security (BIS) activated SDN List as soon as January 18, 2019. 2016 U.S. presidential election. its suspended denial order against ZTE “in response to ZTE falsely informing New Sanctions Programs Compliance Commitments the U.S. Government that it would or Launched in OFAC Settlement Agreement had disciplined numerous employees In recent months, the U.S. launched new On December 20, 2018, OFAC announced responsible for the violations that led sanctions programs with respect to both a settlement agreement with St. Louis, to the March 2017 settlement agree- Nicaragua and interference in U.S. elec- Missouri-based carbon fiber manufac- ment,” according to the Department of tions. These new programs, along with turer Zoltek Companies and its subsid- Commerce. Ultimately, BIS reached a increased sanctions on Venezuela and iaries involving apparent violations new settlement agreement with ZTE, Cuba (see our November 8, 2018, client of the Belarus Sanctions Regulations. and the company was required to pay an alert), are part of what appears to be a Significantly, the agreement is OFAC’s additional $1.4 billion in fines and submit broader, albeit uneven, trend of targeting first incorporating compliance commit- to monitoring, among other requirements. with sanctions individuals and entities that ments; they included those regarding Although substantially smaller in scale, threaten democracy and human rights. management, risk assessment, internal OFAC pursued thematically similar controls, testing and audit, training, and enforcement actions against non-U.S. On November 27, 2018, Trump signed annual certification. These commit- companies that exported or re-exported Executive Order 13851, which created a ments constitute a substantial and U.S.-origin goods to countries subject to list-based Nicaragua sanctions program lengthy undertaking, with compliance comprehensive U.S. sanctions. The past to address the violent response by the and reporting required for years into the year also saw the return of major sanc- Nicaraguan government to the protests future. Looking ahead, companies should tions enforcement actions against non-U.S. that began on April 18, 2018, as well consider the risk of being asked to accept financial institutions, with the November as the Daniel Ortega regime’s disman- similar compliance commitments as part 2018 settlement between various U.S. tling and undermining of democratic of any settlement with OFAC. authorities and Société Générale.

96 The U.S. also has continued to target actions may become more common in malign actors, and it brought compliance individuals for criminal prosecution in the years ahead as the U.S. increasingly commitments into its settlement process sanctions-related cases. Mehmet Hakan focuses on individual accountability for for the first time and emphasized that its Atilla, the deputy general manager for sanctions violations. (See “Enhanced existing sanctions programs and authori- international banking at Halkbank, US Export Controls and Aggressive ties extend even to novel areas, such as a Turkish state-owned bank, was Enforcement Likely to Impact China.”) cryptocurrency. We expect that the Trump convicted in January 2018 of conspiring administration will continue to favor sanc- to violate U.S. sanctions law, and he was Conclusion tions as a tool to implement U.S. foreign sentenced to 32 months in prison in May U.S. sanctions expanded considerably policy and that enforcement activity will 2018. Canadian authorities also recently over the past year. With respect to Iran increase in the year ahead. arrested Meng Wanzhou, the chief finan- and Russia, U.S. sanctions now target a cial officer of Huawei Technologies Co., broader range of individuals and entities, Click here for a full list of anti-money laundering Ltd., at the request of the United States, including through secondary sanctions. and economic sanctions-related articles and she likely faces charges in the U.S. OFAC simultaneously launched new sanc- authored by Skadden attorneys in the last year. relating to business with Iran. These tions programs to target new categories of

97

Index of Skadden- Authored Articles From 2018

To view any of the articles listed in this index, please visit skadden.com/insights.

100 Skadden-Published Client Memos

105 Externally Published Thought Leadership 2019 Insights Index of Skadden-Authored Articles From 2018

Corporate SEC Solicits Comment on Modernizing the Rules Skadden- and Forms for Stock-Based Compensation / December August 2, 2018 SEC Requests Public Comment on Published Client Earnings Releases and Quarterly Reports / July December 20, 2018 Financial Reporting Council Publishes Revised UK Memos Corporate Governance Code / July 25, 2018 SEC Adopts Final Rules to Allow Exchange Act Reporting Companies to Use Regulation A / The JOBS Act 3.0: Regulatory Reforms Pass December 20, 2018 House of Representatives / July 23, 2018

HKEx Announces Stock Connect Program to SEC Eases Disclosure Threshold Under Rule 701 Open to WVR Companies / December 17, 2018 / July 19, 2018

2019 SEC Filing Deadlines for Calendar Year End Southeast Asian Competition Regulators Ramp Companies / December 3, 2018 Up Merger Control Enforcement / July 16, 2018

November SEC Expands ‘Smaller Reporting Company’ Matters to Consider for the 2019 Annual Meeting Definition / July 9, 2018 and Reporting Season / November 30, 2018 June Delaware Enacts Amendments to LLC Act and Impact of SEC Staff Guidance on Shareholder Delaware General Corporation Law – Insights: Proposals in the 2018 Proxy Season: Dead-End The Delaware Edition / November 29, 2018 Street or Road Under Construction? / June 20, 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act: Impacts on Investment May Companies / November 1, 2018 Public Market Advocacy Groups Release October Guidance / May 10, 2018 SEC Staff Issues Shareholder Proposal Guidance April / October 24, 2018 Hong Kong Publishes Groundbreaking New Rules Planning for Merger Reviews and Antitrust for Dual-Class Shares, Emerging and Innovative Inquiries in Case of a ‘No-Deal’ Brexit / Sectors / April 26, 2018 October 17, 2018 Bankruptcy Code’s Safe Harbor Defense How Can Boards of Directors Make Sense of the Eliminated by Supreme Court; Variant Defense Current ESG Landscape? / October 2, 2018 May Survive / April 26, 2018

California to Require Inclusion of Female Delaware Amendments Would Apply ‘Market Directors at Public Corporations Based in the Out’ Exception to Section 251(h) Back-End State / October 1, 2018 Mergers, Clarify Ratification Procedures / April 25, 2018 September Delaware Amendments Would Permit Divisions European Private Equity Thrives With Record of LLCs, Formation of Registered Series and Fundraising / September 25, 2018 Statutory Public Benefit LLCs / April 24, 2018 Bax Limits Standing to Pursue Derivative Claims Russia Adopts Rules for Governmental in Bankruptcy / September 25, 2018 Preliminary Review of Transactions Involving Reminders of Recent Updates for Upcoming SEC Foreign Investors / April 20, 2018 Filings / September 21, 2018 New Legislation Will Benefit Business August Development Companies While Closed-End Funds Remain in Limbo / April 9, 2018 SEC Proposes to Ease Disclosures Required by Rules 3-10 and 3-16 of Regulation S-X in Certain March Registered Debt Offerings / August 8, 2018 Reminders for Annual Meeting Proxy Materials / Delaware Enacts Amendments to LLC Act March 9, 2018 and Delaware General Corporation Law / August 2, 2018

100 February DOJ Announces Revisions to Yates September Memorandum Policy / December 10, 2018 Hong Kong Announces Groundbreaking New Inside the Courts – September 2018 / Rules for Dual-Class Share, High-Tech and Understanding the CLOUD Act’s Expansive September 28, 2018 Biotech Company Listings / February 26, 2018 Reach / December 10, 2018 New York’s Commercial Division Continues White House Infrastructure Plan – Perspectives Inside the Courts – December 2018 / Its Efforts to Increase Efficiencies / for the P3 Market / February 16, 2018 December 6, 2018 September 25, 2018

SEC Approves NYSE Rules to Facilitate Direct November Cryptocurrency Litigation Update: Court Allows Listings / February 8, 2018 Government’s Criminal Case Against REcoin DOJ Announces ‘China Initiative’ to Investigate Founder to Proceed / September 20, 2018 January and Prosecute Chinese Companies / November 29, 2018 Ninth Circuit Addresses Use of Doctrines of The Board’s Three ‘C’s’ of Corporate Governance: Judicial Notice and Incorporation by Reference Composition, Communication and Connection / Delaware Litigation Developments Impacting at Pleading Stage in Securities Cases / January 23, 2018 Financial Advisors – Insights: The Delaware September 6, 2018 Edition / November 29, 2018 Infrastructure Policy Developments in Year One Second Circuit Curtails Use of Conspiracy of the Trump Administration / January 23, 2018 From the Get-Go: Interpreting MFW ’s Ab Initio and Complicity Statutes in FCPA Actions / Requirement – Insights: The Delaware Edition / Asset-Based Lending: A Powerful Tool With September 4, 2018 November 29, 2018 Increasing Flexibility / January 23, 2018 August ‘Partial and Elliptical Disclosures’ May Preclude US Capital Markets Expected to Remain Robust Corwin Doctrine – Insights: The Delaware Edition Cross-Border Investigations Update – August in 2018 / January 23, 2018 / November 29, 2018 2018 / August 29, 2018 Positive Outlook for European Capital Markets / Can It Be Fixed? Further Judicial Guidance July January 23, 2018 Concerning Sections 204 and 205 – Insights: The Federal Circuit Denies PTO Attorneys’ Fees / Delaware Edition / November 29, 2018 Brexit: Much Discussed, Little Understood / July 31, 2018 January 23, 2018 Dieckman and Mesirov Highlight That Differences EU Fines Google €4.34 Billion for Alleged Abuse in Limited Partnership Agreements Impact Priorities Begin to Emerge for Trump’s SEC / of Dominant Position of Android Mobile System Aiding-and-Abetting Claims – Insights: The January 23, 2018 and Apps / July 30, 2018 Delaware Edition / November 29, 2018 As President Xi’s Power Grows, So Does China’s EC Fines Consumer Electronics Manufacturers Preparing for Democratic Oversight Presence on World Stage / January 23, 2018 for RPM / July 25, 2018 Investigations / November 7, 2018 Strategic Imperatives, Market Confidence Drive Latin America Dispute Resolution Update – New York’s Authorization of Fantasy Sports US M&A / January 23, 2018 The Latest Developments in Cross-Border Ruled Unconstitutional / November 1, 2018 Disputes Involving the US and Latin America / Europe Insights / January 23, 2018 ‘Reasonable Efforts’ Clauses in Delaware: One July 12, 2018 State of the Financial Restructuring Market / Size Fits All, Unless… / November 1, 2018 Inside the Courts – June 2018 / July 2, 2018 January 23, 2018 October The E-Discovery Digest – June 2018 / Novel Theories Emerge in Merger Enforcement / Analyzing : Delaware’s First M&A July 2, 2018 January 23, 2018 Akorn Termination Under Material Adverse Effect / June Litigation / Controversy October 19, 2018 Supreme Court to Clarify What Constitutes Spotlight on No-Poach Agreements Continues, December a ‘Registration’ Under the Copyright Act / Expands to New Industries / October 17, 2018 Delaware Court of Chancery Invalidates Forum June 29, 2018 Selection Provisions Regulating Claims Under the The Class Action Chronicle Midyear Update: 2018 Supreme Court Holds American Express Rule Is Securities Act of 1933 / December 21, 2018 / October 11, 2018 Not an Antitrust Violation / June 27, 2018 Delaware Supreme Court AffirmsAkorn / EU General Court Dismisses Parallel Trade China’s Antitrust Regime: Retooled, Retrenched December 21, 2018 Group’s Dual-Pricing Complaint Against GSK / and (Potentially) Ready for Battle / June 20, 2018 October 4, 2018 Failure to Report Adverse Events Results in Supreme Court Rules That Pending Class Actions Criminal Misbranding Settlement and Individual The United States-Mexico-Canada Agreement Do Not Toll Limitations Period for Subsequent Liability / December 14, 2018 Significantly Curtails Foreign Investment Class Actions / June 11, 2018 Protection / October 2, 2018

101 2019 Insights Index of Skadden-Authored Articles From 2018

The Class Action Chronicle – Spring 2018 / January ISS Delays Application of Excessive June 11, 2018 Nonemployee Director Compensation Policy Until US Supreme Court to Consider Degree of 2020 / November 21, 2018 May Deference Courts Should Give Foreign Countries’ Interpretation of Their Laws / January 25, 2018 CFTC Division of Enforcement Touts ‘Vigorous’ M&A Litigation Developments: Where Do We Year in First Annual Report / November 20, 2018 Go From Here? – Insights: The Delaware Edition / The Rise of Trade Secret Litigation in the Digital May 29, 2018 Age / January 23, 2018 CFTC Proposes Swap Execution Facility Rule Amendments and Seeks Comments on Post- Key Developments in Delaware Corporation Law Dell and Fair Value in Statutory Appraisal Actions – Trade Name Give-Up / November 20, 2018 Insights: The Delaware Edition / May 29, 2018 in 2017 / January 23, 2018 US Department of Commerce Solicits Comments Agencies Indicate Efficient, Targeted Delaware Appraisal Actions: When Does It Make Regarding Emerging Technologies That Are Enforcement Priorities That Rely on Self- Sense to Prepay? – Insights: The Delaware Essential to US National Security / Disclosure / January 23, 2018 Edition / May 29, 2018 November 19, 2018 2017-18 Supreme Court Update / Corwin Doctrine Ruled Inapplicable in Section CFTC Adopts Permanent $8 Billion Threshold January 23, 2018 220 Litigation – Insights: The Delaware Edition / for Swap Dealer De Minimis Exception / May 29, 2018 Growing Acceptance of Arbitration in November 14, 2018 International Commercial Financial Transactions / Implications of Walmart on Preclusive Effect New Guidance for Opportunity Zone Funds January 23, 2018 of Demand Futility Decisions – Insights: The Clarifies Important Issues, Leaves Door Open to Delaware Edition / May 29, 2018 ‘Home Country’ Arbitration Clause More Trouble Additional Guidance / November 13, 2018 Than It’s Worth? / January 23, 2018 April CFTC Proposes to Simplify, Modernize Supreme Court Rulings Signal Significant Securities Class Action Filings Reach Record Commodity Pool Operator and Commodity Changes to Post-Issuance Patent Reviews / High / January 23, 2018 Trading Advisor Regulations / November 13, 2018 April 30, 2018 The Rise of Trade Secret Litigation in the Digital US Terminates All Remaining Sanctions Relief Supreme Court Clarifies Standard of Age / January 23, 2018 Under Iran Nuclear Deal / November 13, 2018 Appellate Review of Creditor’s Insider Status / China’s Antitrust Regulator Ramps Up Scrutiny, April 26, 2018 Impact of Compensation-Related Litigation on Public Companies / January 23, 2018 Enforcement of Behavioral Remedies / Shifting Enforcement of No-Poaching November 12, 2018 Agreements / April 26, 2018 Mexico Signs ICSID Convention / January 16, 2018 Recent SEC No-Action, Re-Proposal for Security- Federal Court Rulings Growing in Favor of LGBT+ Based Swaps Focus on Comparability With Other Employees / April 26, 2018 Regulatory US Regulators / November 12, 2018 December March New Executive Order Authorizes the Imposition ISS Issues FAQ Related to 2019 US of Sanctions to Counter Corruption in Venezuela / Inside the Courts – An Update From Skadden Compensation Policies / December 20, 2018 November 8, 2018 Securities Litigators / March 27, 2018 Federal District Court Dismisses CFTC Price SEC Enforcement Division Issues Annual Report: Fifth Circuit Vacates Department of Labor’s Manipulation Claims and Resets the Standard of Increase in Enforcement Actions and Focus Fiduciary Rule / March 20, 2018 Intent Debate / December 14, 2018 on Main Street and Cyber-Related Fraud / November 8, 2018 Supreme Court Holds That Class Actions Brought 2019 Compensation Committee Handbook / Under Securities Act in State Court Are Not December 12, 2018 The Distributed Ledger: Blockchain, Digital Removable / March 20, 2018 Assets and Smart Contracts / November 7, 2018 Federal Banking Agencies Propose Updating Federal Judge Rules Virtual Currencies Are Calculation of Derivative Contract Exposure Privacy & Cybersecurity Update – October 2018 / Commodities Under the Commodity Exchange Amounts / December 5, 2018 November 1, 2018 Act / March 8, 2018 Privacy & Cybersecurity Update – November October The E-Discovery Digest – March 2018 / 2018 / December 4, 2018 March 2, 2018 Governance Implications of CFIUS Reform for US Investment Funds With Foreign Investors / November February October 30, 2018 FEC Begins Sending Requests to PACs and Third Circuit Holds Food Manufacturers Have Other Committees to Update Electronic Filing New Hampshire Moves to Require Corporations Standing to Seek Damages From Egg Suppliers / Passwords / November 30, 2018 to Register as PACs; New York Codifies February 8, 2018 Placement Agent Ban / October 30, 2018 FTC Invites Comment on Online Ticket Sales, Examines GAO Report / November 26, 2018 SEC Investigative Report on Cybersecurity Emphasizes Internal Controls / October 19, 2018

102 The Distributed Ledger: Blockchain, Digital US Finalizes CFIUS Reform: What It Means Russia Responds to Recent Foreign Sanctions Assets and Smart Contracts / October 16, 2018 for Dealmakers and Foreign Investment / With New Law / June 4, 2018 August 6, 2018 CFIUS Pilot Program Expands Jurisdiction to Privacy & Cybersecurity Update – May 2018 / Certain Noncontrolling Investments, Requires Opportunity Zone Funds Offer New Tax Incentive June 1, 2018 Mandatory Declarations for Some Critical for Long-Term Investment in Low-Income Technology Investments / October 11, 2018 Communities / August 1, 2018 US Steps Up Sanctions on Venezuela and Extends Limited Russia Sanctions Wind-Down CFTC Chairman Giancarlo Reaffirms Privacy & Cybersecurity Update – July 2018 / Relief / June 1, 2018 Commitment to Aggressive Enforcement Efforts / August 1, 2018 October 11, 2018 May July Recent Court Decisions Shine Spotlight on IRS Issues Notice on Payments Made in Scope of CFTC’s Dodd-Frank Anti-Fraud and Final Phases of Initial Margin Requirements for Exchange for State and Local Tax Credits / Anti-Manipulation Enforcement Authority / Uncleared Swaps Expected to Spark Additional May 29, 2018 Margin Compliance Efforts / July 26, 2018 October 1, 2018 DOJ Antitrust Division Names New Criminal Privacy & Cybersecurity Update – September California Enacts Sweeping New Privacy Law / Deputy Assistant Attorney General / 2018 / October 1, 2018 July 11, 2018 May 18, 2018 New Proposed Regulations Remove Obstacles Tackling the Challenges of Complying With September to Partnership Formation, Debt Capitalization FinCEN’s New Customer Due Diligence Rule / Employment Flash – September 2018 / Transactions / July 9, 2018 May 15, 2018 September 26, 2018 CFTC and SEC Approve Revised Memorandum of US Withdrawal From Iran Nuclear Deal Poses The Emergence of Utility-Owned Renewable Understanding on Information Sharing / Challenges for Companies / May 14, 2018 Energy Under Build-Transfer Agreements / July 9, 2018 September 25, 2018 OFAC Updates Two General Licenses, Issues Expanding the Scope of National Security- Additional Guidance Related to Recent Russia Data Protection in Japan to Align With GDPR / Focused Foreign Investment Reviews in Europe Sanctions / May 7, 2018 September 25, 2018 / July 2, 2018 Privacy & Cybersecurity Update – April 2018 / Tightened Restrictions on Technology Transfer June May 1, 2018 Under the Export Control Reform Act / September 11, 2018 Privacy & Cybersecurity Update – June 2018 / April June 29, 2018 US Imposes New Sanctions in Response Employment Flash – April 2018 / April 30, 2018 President Trump Tentatively Looks to FIRRMA to the Skripal Assassination Attempt / Increase in SIFI Threshold Should Spur More September 10, 2018 to Expand US Foreign Investment Reviews / June 28, 2018 Bank M&A Activity / April 26, 2018 Privacy & Cybersecurity Update – August 2018 / OFAC Issues New General Licenses, Guidance September 5, 2018 IBOR Global Benchmark Transition Report Finds Gap Between Awareness and Action / Related to Recent Russia Sanctions / April 24, 2018 August June 27, 2018 UK Plans to Maintain State Aid Regime Post- Employment Flash – June 2018 / June 27, 2018 US Imposes New Russia Sanctions Targeting Brexit / August 30, 2018 Oligarchs, Senior Government Officials and South Dakota v. Wayfair, Inc.: Supreme Court Entities / April 11, 2018 US Implements First Round of Iran Sanctions Overturns Physical Presence Test for Online ‘Snap Back’ / August 28, 2018 Retailers / June 22, 2018 New York State Responds to Federal Tax Reform / April 9, 2018 Recent Political Law Developments in Missouri The Ever-Evolving Cryptocurrency Legal and Maine / August 28, 2018 Landscape / June 20, 2018 Privacy & Cybersecurity Update – March 2018 / April 2, 2018 IRS Issues Anticipated Guidance on Covered US Tax Reform Update: Early Impact and Trends Employees and Grandfathering Rules Under Code / June 20, 2018 March Section 162(m) / August 23, 2018 FDA Strives to Adapt Regulatory Approach Federal Reserve Gears Up to Publish LIBOR Proposed Bonus Depreciation Regulations Clarify to Rapidly Evolving Digital Health Space / Alternative / March 28, 2018 Impact on Certain Transactions / August 20, 2018 June 20, 2018 Health Care Investigation Trends: Corporate MSRB Notes Compliance Risks of Issuer- Impact of US Tax Reform on Cross-Border Estate Integrity Agreements No Longer a Given / Solicited Charitable Donations / August 8, 2018 Planning / June 20, 2018 March 26, 2018

Russia Amends Foreign Investment Rules / European Commission Presents ‘Fair Taxation of June 12, 2018 the Digital Economy’ Package / March 26, 2018

103 2019 Insights Index of Skadden-Authored Articles From 2018

House Committee Holds Hearing on Export January US Tax Reform Enacts the Most Comprehensive Control Reform Bill / March 21, 2018 Changes in Three Decades / January 23, 2018 Employment Flash – January 2018 / Analysis of Executive Order Prohibiting January 30, 2018 New York Cybersecurity Regulations Could Broadcom’s Acquisition of Qualcomm / Affect Foreign Banks / January 23, 2018 Revised HSR Thresholds Announced / March 20, 2018 January 29, 2018 Impact of New US Tax Law on High Net Privacy & Cybersecurity Update – February 2018 Worth Individuals, Trusts and Family Offices / Fintech Deal Landscape to Remain Active in 2018 / March 1, 2018 January 23, 2018 / January 23, 2018 CFTC Updates on Virtual Currency Regulation, February Rise of Blockchain and ICOs Brings Regulatory Alternatives to Libor and Fallout From Brexit / Scrutiny / January 23, 2018 Reminder: New Jersey Pay-to-Play Form BE Due January 23, 2018 March 30, 2018 / February 28, 2018 Standards of Conduct for Investment Advisers, As Congress Struggles With ACA Repeal, Trump Broker-Dealers Under SEC Review / LDA Filers Using Method C Must Now Disclose Administration Moves Forward With Regulatory January 23, 2018 Local Direct Legislative Lobbying Expenses / Reform / January 23, 2018 February 26, 2018 Reform Proposes Sweeping Changes to CFIUS A Regulatory Reform Agenda for FERC / Reviews / January 23, 2018 SEC Issues Interpretive Guidance on January 23, 2018 Cybersecurity Disclosures / February 23, 2018 Trump Administration Rolls Back Climate Change Impact of US Tax Reform on Mergers and Initiatives / January 23, 2018 Impact of US Tax Reform on Insurance Acquisitions: New Opportunities and Pitfalls / Companies / February 20, 2018 Consumer Financial Protection Bureau Update / January 18, 2018 January 23, 2018 Political Contribution Disclosure Rules in Illinois, An In-Depth Look at the Impact of US Tax Reform Maryland, New Jersey, Pennsylvania and Rhode on Mergers and Acquisitions / January 18, 2018 Island / February 15, 2018 Addressing Workplace Sexual Harassment in the #MeToo Era / January 23, 2018 Tax Cuts and Jobs Act: Impact on Tax-Exempt CFTC and DOJ File a Flurry of Spoofing Actions / Organizations / January 17, 2018 February 6, 2018 Key Considerations to Protect Against Insider Threats in Cybersecurity / January 23, 2018 Section 162(m) After the Tax Cuts and Jobs Act: Privacy & Cybersecurity Update – January 2018 / What to Do Now / January 4, 2018 February 1, 2018 Trade Barrier on Solar Cells and Modules to Significantly Impact US Solar Industry / Privacy & Cybersecurity Update – December January 23, 2018 2017 / January 2, 2018 International Taxation in the Digital Era: The Rapidly Evolving European Perspective / January 23, 2018

104 Corporate The Current Reform of French Foreign Investment Control / LesEchos / September 17, 2018 Externally December Corporate Governance: Activist Funds Attack Italy The Proposed Extension of the French Minister Published / TopLegal / December 13, 2018 of Economy’s Powers to Apply Sanctions and Remedies Under French Foreign Investment Thought Building Blocks: Precedent in Bankruptcy Cases / Rules / La Semaine Juridique Édition Entreprise ABI Journal / December 1, 2018 Et Affaires / September 6, 2018 Leadership Non-Negotiated Provisions, Standard Form Latin America: Mixed M&A Outlook / Latinvex / Contracts and Provisions Deemed to Be Abusive: September 5, 2018 Unclear Consequences of the French Contract Law Reform for Company Law Practitioners Looking Ahead / Latin Lawyer / (translation) / Fusions & Acquisitions / September 4, 2018 December 1, 2018 Proposed Bonus Depreciation Regulations Clarify Regulatory Developments in Foreign Investment Impact on Certain Transactions / The M&A Control and their Impact on Cross Border M&A Lawyer / September 1, 2018 Transactions (translation) / Option Droit & Affaires Deposit-Guarantee Schemes in French Law and Magazine / December 1, 2018 in European Law (translation) / Osservatorio Del Diritto Civile E Commerciale / September 1, 2018 November ‘Reasonable Efforts’ Clauses in Delaware: One August Size Fits All, Unless… / Harvard Law School How Delaware Refreshed Its LLC Act and Forum on Corporate Governance and Financial General Corp. Law / Law360 / August 6, 2018 Regulation / November 22, 2018

The SEC’s New Shareholder Proposal Guidance July / Harvard Law School Forum on Corporate Capacity of Corporate Entities: Legal Security Is Governance and Financial Regulation / Back! (translation) / L’Agefi / July 19, 2018 November 12, 2018 Impact of SEC Guidance on Shareholder DOJ’s Revamped Merger Review Process: A Proposals in the 2018 Proxy Season / Harvard Little Bit of Give and Take / New York Law Journal Law School Forum on Corporate Governance and / November 9, 2018 Financial Regulation / July 4, 2018

SEC Guides on Tackling Shareholder Proposals / A Dilemma From America (translation) / IR Magazine / November 2, 2018 Frankfurter Allgemeine Zeitung / July 3, 2018

SEC Guides on Tackling Shareholder Proposals / The Trustee as a Shareholder (translation) / Revue Corporate Secretary / November 1, 2018 Des Sociétés / July 1, 2018

October Mid-Year 2018 Update – Part II / Turnarounds & Workouts / July 1, 2018 Making Sense of the Current ESG Landscape / Harvard Law School Forum on Corporate June Governance and Financial Regulation / October 18, 2018 The Prohibition for a Bondholder to Exercise Its Right to Vote (translation) / Revue Des Sociétés / The California Board Diversity Requirement June 8, 2018 / Harvard Law School Forum on Corporate Governance and Financial Regulation / Mid-Year 2018 Update / Turnarounds & Workouts October 16, 2018 / June 1, 2018

The Rise in ESG Investing — And What Boards May Can Do / Law360 / October 11, 2018 Conflicts of Interest: Corporate Law Premium (translation) / Capital Finance / May 14, 2018 September The Fight Against Fraud and Other Breaches Upcoming Uptick in Bank M&A Activity? of Probity in Companies and the Challenges / Harvard Law School Forum on Corporate That Companies Are Currently Facing Governance and Financial Regulation / (translation; subscription required) / La Semaine May 14, 2018 Juridique Édition Entreprise Et Affaires / September 27, 2018

105 2019 Insights Index of Skadden-Authored Articles From 2018

State of the Financial Restructuring Market / Considerations for the 2018 Proxy Season: Ongoing Denial of Voting Rights in U.S. Territories Bloomberg BNA’s Bankruptcy Law Reporter / Part 1 / Law360 / January 10, 2018 Incompatible With Our Founding Values / May 10, 2018 Harvard Civil Rights – Civil Liberties Law Review / Considerations for the 2018 Proxy Season: October 3, 2018 A Primer on Planning, Negotiating and Executing Part 2 / Law360 / January 10, 2018 Reverse Morris Trust Transactions / Transaction Julie Bédard: ‘International Arbitration Advisors / May 1, 2018 The Predictability of Contractual Sanctions in Professionals Work for Respect Between M&A Transactions / Business & Law Review / Cultures’ (translation) / LexLatin / October 1, 2018 April January 3, 2018 Long Live Predictive Coding / Practical Law / LNG-to-Power in the Emerging Markets / Project Future of Trusts as a Management (translation) October 1, 2018 Finance International / April 1, 2018 / Actes Pratiques et Stratégie Patrimoniale / January 1, 2018 Navigating Differences in Domestic Public March Bribery Laws in the USA, the UK, Brazil, and Modification of French Law on Bond Issuance / How Important Is U.S. Financing Latin Projects / France / Who’s Who Legal / October 1, 2018 La Lettre Des Juristes d’Affaires / January 1, 2018 Inter-American Dialogue’s Energy Advisor / September March 16, 2018 2018 Outlook / Turnarounds & Workouts / January 1, 2018 Further Ticket Sale (And Resale) Reforms Latin America Infrastructure: Good Outlook / Come to New York State / New Law Journal / Latinvex / March 8, 2018 Litigation / Controversy September 20, 2018

February December August Trump Infrastructure Plan: Perspectives for the Potential Outcomes of ‘Apple v. Pepper’ / New Latin America Litigation: Class Action Lawsuits York Law Journal / December 10, 2018 P3 Market / Law360 / February 26, 2018 Grow / Latinvex / August 29, 2018

SEC Enforcement Priorities in the Trump November Trends in Protection of Anonymous Online Era / Harvard Law School Forum on Corporate Decisions, Decisions: Leading Cases on the Speech / Law360 / August 13, 2018 Governance and Financial Regulation / Supreme Court’s 2018 Business Dockett / U.S. February 25, 2018 Risks Facing Directors & Officers /Financier News & World Report / November 30, 2018 Worldwide / August 1, 2018 New NYSE Rules for Non-IPO Listings / Harvard Skadden Discusses CFTC Division of Law School Forum on Corporate Governance and Our Duty: Create the Peace and Justice Enforcement’s First Annual Report / The CLS Financial Regulation / February 24, 2018 Whose Absence Is So Devastatingly Portrayed Blue Sky Blog / November 27, 2018 in the New National Memorial / Hospitality / Skadden Discusses Expectations for Robust U.S. An Imperfect Picture: Film Financings and August 1, 2018 Capital Markets in 2018 / The CLS Blue Sky Blog / Problems in Copyright Perfection / New York Law February 21, 2018 Journal / November 19, 2018 July Market Regulation and Consumer Protection / Insight: Supreme Court Cautions Courts on Skadden Discusses How Companies Can Prepare Osservatorio Del Diritto Civile E Commerciale / Deference to Foreign Governments / Bloomberg for U.S. House Investigations / The CLS Blue Sky February 1, 2018 Law / July 20, 2018 Blog / November 14, 2018 State of the ABL Market 2018: Challenges for The Preclusive Effect of Demand Futility / Harvard United States: Preparing for Democratic Lenders / The Secured Lender / February 1, 2018 Law School Forum on Corporate Governance and Oversight Investigations / Mondaq / Financial Regulation / November 14, 2018 January July 19, 2018

Rights Offerings Prove Popular With Both October Statement Announcing SEC Staff Roundtable Debtors, Distressed Investors / Turnaround Internet Data Scraping 201: A Refresher on the Proxy Process / Harvard Law School Management Association / January 26, 2018 on the Basics / The National Law Journal / Forum on Corporate Governance and Financial France Allows Blockchain as a Stock Ledger for October 30, 2018 Regulation / July 18, 2018 Unlisted Companies (translation) / LesEchos / The Evidentiary Hearing / Practising Law Skadden Discusses When It Makes Sense to January 25, 2018 Institute’s Arbitrating Commercial Disputes in the Prepay Appraisal Claims / The Columbia Law AMF Compliance Decisions on Public Takeover United States / October 19, 2018 School Blue Sky Blog / July 17, 2018 Bids / L’Agefi / January 24, 2018 Continued Efficiencies in the Commercial The Inapplicability of Corwin and Section 220 / French-Style Whistleblowing / Capital Finance / Division / New York Law Journal / Harvard Law School Forum on Corporate January 15, 2018 October 15, 2018 Governance and Financial Regulation / July 9, 2018 Considerations for the 2018 Proxy Season: Multi-Jurisdictional Anti-Corruption Investigation Legal and Practical Limits on Indemnification Part 3 / Law360 / January 12, 2018 and Enforcement Trends and Developments / The Review of Securities & Commodities Regulation / and Advancement in Delaware Corporate Entities Activist Investing in Europe – 2017 Edition / October 10, 2018 / Harvard Law School Forum on Corporate Harvard Business Law Reivew / January 10, 2018

106 Governance and Financial Regulation / Multijurisdictional Product Liability Claims / January July 2, 2018 Corporate Disputes Magazine / April 1, 2018 Is It The End of Deal Litigation as We Know It? / Cooperation and the Risk of Privilege Waiver in Shareholder Disputes / Corporate Disputes The Daily Journal / January 23, 2018 Government Investigations / Financier Worldwide Magazine / April 1, 2018 Holiday Season Gifts Practitioners With / July 1, 2018 Guest Post: Supreme Court Weighs Whether to Slew of Notable Opinions From Delaware 1st Circ.’s Uber Ruling Imposes Burdens on App Extend American Pipe Tolling / The D&O Diary / Courts / Delaware Business Court Insider / Design / Law360 / July 1, 2018 April 1, 2018 January 10, 2018

The Role of Contemporaneous Documents March Guest Post: Dell Strongly Reinforces Importance in EC Competition Law / Financier Worldwide / of Merger Price / The D&O Diary / July 1, 2018 Agencies Indicate Efficient, Targeted January 9, 2018 Enforcement Priorities That Rely on Self- June Disclosure / Wolters Kluwer Securities Regulation Inside France’s 1st Deferred Prosecution Daily / March 20, 2018 Agreement / Law360 / January 4, 2018 Limits on Indemnification and Advancement For Delaware Corporations / The D&O Diary / New Law in Cartel Damage Claims Changes Dell Strongly Reinforces Importance of Merger June 21, 2018 Rules (translation) / Börsen-Zeitung / Price / Law360 / January 3, 2018 March 17, 2018 Market Trends and Climate / Lexology / Court of Chancery Addresses the Effect of June 19, 2018 Recent Developments in State Action Immunity / Corwin and Garner in the Section 220 Context / New York Law Journal / March 12, 2018 Transaction Advisors / January 1, 2018 ‘Sole Discretion’ Provisions and the Implied Covenant of Good Faith and Fair Dealing / New Commercial Arbitration ‘2018 Annual Review’ / Court of Chancery Confirms MFW Applies York Law Journal / June 19, 2018 Financier Worldwide / March 1, 2018 to Controlled-Company Sale With Disparate Consideration / Transaction Advisors / China Agritech May Have Limited Practical Effect Risk Management and Compliance (translation) / January 1, 2018 / Law360 / June 15, 2018 Magazine des Affaires / March 1, 2018 Delaware Courts Continue to Define Appropriate No-Poaches and Non-Competes: Democrats’ Understanding Continuing Trends in M&A Valuation Methodologies for Statutory Appraisal / Proposed Legislation Places Employment Disclosure Litigation / Transaction Advisors / Transaction Advisors / January 1, 2018 Practices in Antitrust Crosshairs / New York Law March 1, 2018 Journal / June 11, 2018 What’s Law Got to Do With It? The Role of February Governing Law in International Commercial Why Widespread Use of Live Video Testimony Is Arbitration / Wolters Kluwer’s Arbitration / Ruling Provides Guidance on Demand Futility / Not Justified / Law360 / June 4, 2018 January 1, 2018 The Daily Journal / February 27, 2018 Identifying and Preventing Insider Threats / Skadden Discusses Pros and Cons of ‘Home Regulatory Financier Worldwide / June 1, 2018 Country’ Arbitration Clauses / The CLS Blue Sky December Blog / February 26, 2018 May Immigration in Flux / New York Law Journal / An Introduction to Smart Contracts and Their Beyond the Form: Using Jury Instructions December 6, 2018 Potential and Inherent Limitations / Harvard Law to Your Advantage / The Daily Journal / Annual Review 2018: Data Protection & Privacy School Forum on Corporate Governance and February 21, 2018 Laws / Financier Worldwide / December 1, 2018 Financial Regulation / May 26, 2018 Effective Use of Deposition Video Clips at Trial / Skadden on the Evolving Regulatory Landscape / Criminal Antitrust Enforcement Has a New The Daily Journal / February 21, 2018 Lawdragon / December 1, 2018 Leader / Law360 / May 21, 2018 Major Recent FCPA Developments and Their Market Manipulation on Forward Contracts SCOTUS Hears Arguments on Vitamin C Implications / Global Investigations Review / (translation) / Bulletin Joly Bourse / Conspiracy / New York Law Journal / May 7, 2018 February 16, 2018 December 1, 2018 Securities Class Action Filings Reach Record April The Responsible Corporate Officer Doctrine: High / Westlaw Practitioner Insights for Securities Show Us the Money / / Protections Are Needed Despite DOJ’s Cautious The Daily Journal Enforcement & Litigation / February 16, 2018 April 16, 2018 Approach / Update Magazine / December 1, 2018 Conditions Ripe for Increased Trade Secret A New Frontier for Solar: Utility Build-Transfer AT&T/Time Warner: How Judge Leon’s Litigation; Skadden IP Attorneys Explain Why / Experience in ‘Comcast/NBCU’ May Shape the Agreements / North American Clean Energy / Wolters Kluwer Intellectual Property Law Daily / December 1, 2018 Trial / New York Law Journal / April 9, 2018 February 16, 2018

Challenges When Enforcing Arbitral Awards / The Supreme Court Takes On Two-Sided Markets / April 1, 2018 Corporate Disputes Magazine / New York Law Journal / February 9, 2018

107 2019 Insights Index of Skadden-Authored Articles From 2018

November A Focus on Price: Antitrust in the Kavanaugh Era / Reversals of NLRB Precedent Have Significant New Haven Register / August 13, 2018 Implications for Employers / New York Law Does a Civil Penalty Time Bar Apply in the Tax Journal / April 6, 2018 Context? / Law360 / November 27, 2018 How Taxpayers Are Taking to Tax Reform So Far / Law360 / August 9, 2018 The Potential of Negotiated Tax Penalties (transla- Section 162(m) Limit on Compensation / tion; subscription required) / La Revue De Droit Thomson Reuters Practical Law / Opportunity Zones Abound but Investors, Tread Fiscal / April 5, 2018 November 20, 2018 Carefully / Law360 / August 7, 2018 Treat Mass Shootings the Way We Treated Skadden Discusses Merger Reviews and Supreme Court Review: Class Action Waivers, Terrorism / The Washington Post / April 5, 2018 Antitrust Inquiries in Case of ‘No-Deal’ Brexit / Whistleblower Protections / New York Law The CLS Blue Sky Blog / November 1, 2018 Journal / August 2, 2018 3 New Settlements Highlight DOJ Scrutiny of Device Makers / Law360 / April 4, 2018 October July Broadcom’s Blocked Acquisition of Qualcomm Utilities’ Build-Transfer Deals Spur Renewable New Antitrust Regulators and New Markets / / Harvard Law School Forum on Corporate Projects / Law360 / October 24, 2018 / July 9, 2018 New York Law Journal Governance and Financial Regulation / The Fight Against No-Poach Agreements Is Skadden Discusses Latest Legislation to Expand April 3, 2018 Expanding / Law360 / October 23, 2018 Foreign Investment Review / The CLS Blue Sky Recent Trends in Foreign Investment Control Blog / July 9, 2018 OPINION: Italy Has Set the Wrong Tone (translation) / La Semaine Juridique – Edition Generale / April 2, 2018 on Excessive Drug Pricing / Politico Pro / June October 16, 2018 What to Consider When Developing or Refining Selected Tax Issues Involving Blank Check Brexit and Cross-Border Reorganizations: German Your Cyber Incident Response Plan / Legal Tech Companies / Tax Notes / April 2, 2018 Tax Risks / Tax Notes / October 15, 2018 News / June 25, 2018 Transfer Pricing / Financier Worldwide / Midterm Congressional Legislative Wrap-Up: Energy Storage: Are We There Yet? / Law360 / April 1, 2018 Major Issues and Emerging Priorities / New York June 22, 2018 Tax-Efficient Supply Chain in Shadow of Tax Law Journal / October 5, 2018 The Futures Industry and Cybersecurity / The Reform / Tax Executive / April 1, 2018 Supreme Court Review: Agency Fees and Review of Securities & Commodities Regulation / National Security, Export Controls, and the Space Retiree Health Benefits / New York Law Journal / June 20, 2018 Economy / World ECR / April 1, 2018 October 4, 2018 10 Steps to Modernizing Corporate Integrity Venezuela-Related Sanctions: U.S. and EU Agreements / Law360 / June 20, 2018 March Developments and Compliance Challenges (trans- A Sea Change in Climate Change Disclosure? / A Look at US and EU Fintech Regulatory lation) / La Revue Trimestrielle De Droit Financier / The Daily Journal / March 21, 2018 October 1, 2018 Frameworks (translation) / La Semaine Juridique Édition Entreprise Et Affaires / June 14, 2018 The Rise of Blockchains and Regulatory Tightened Restrictions on Technology Transfer Scrutiny / Harvard Law School Forum on The EU, U.S. Russia and Ukraine Sanctions Under the Export Control Reform Act / WorldECR Corporate Governance and Financial Regulation / / October 1, 2018 Programs: Comparisons and Perspectives / March 9, 2018 Chronique: Revue Trimestrielle de Droit Financier September / June 1, 2018 Skadden Discusses Novel Theories Emerging in Merger Enforcement / The CLS Blue Sky Blog / State Attorneys General and Their Influence on May March 6, 2018 Merger Enforcement / New York Law Journal / New York Employers Face New Sexual September 12, 2018 Merger Review Maintains Its Trajectory / Harassment Legislation / New York Law Journal / International Financial Law Review / A Summary of Executive Compensation and May 31, 2018 March 5, 2018 Benefits Issues for Start-Ups and Emerging Antitrust Concerns About Big Data May Be Companies / Bloomberg Law’s Compensation Antitrust Compliance Tools for In House Lawyers Overblown / Law360 / May 3, 2018 Planning Journal / September 7, 2018 / ACC Docket / March 1, 2018 2018 Distinguished Service Award Recipient: Expert Q&A on Section 162(m) After Tax Reform FORUM: Managing Financial Crime Risk and Susan P. Serota / ABA Tax Times / May 1, 2018 / Practical Law / September 1, 2018 AML Processes With Technology / Financier Worldwide / March 1, 2018 August April Are Governmental Entity Non-Shareholder New Advance Payments Statute Raises Project Finance in the United States / Getting Contributions Income After the 2017 Tax Questions / Tax Notes / April 30, 2018 The Deal Through / March 1, 2018 Act? / Bloomberg BNA’s Tax Management Efficient Capital Raises by NOL Corporations / Memorandum / August 14, 2018 Tax Notes / April 23, 2018

108 February Impact of Compensation-Related Litigation on Intern or Employee? The New Federal Test / Public Companies / Wolters Kluwer Securities New York Law Journal / February 1, 2018 Rise of Blockchain and ICOs Brings Regulatory Regulation Daily / February 14, 2018 Scrutiny / Wolters Kluwer Banking and Finance January Law Daily / February 23, 2018 Strategic Perspectives – Skadden Attorneys Point Out New York Cybersecurity Regulations Could We Can’t Keep This Crucial Foreign Investment Legislation Proposes Sweeping Changes to Panel in the Dark / / January 25, 2018 Affect Foreign Banks / Wolters Kluwer Banking The Hill CFIUS Reviews / Wolters Kluwer Antitrust Law and Finance Law Daily / February 8, 2018 Daily / February 22, 2018 Market Trends: Say on Pay, Frequency, and Strategic Perspectives: As Congress Struggles Golden Parachute Payments / Lexis Practice Insights to the Trade Barrier on Solar Cells With ACA Repeal, Trump Administration Moves Advisor / January 23, 2018 and Modules / North American Clean Energy / Forward With Regulatory Reform / Wolters February 16, 2018 Will Life Sciences Companies Face More / Kluwer’s Antitrust Law Daily Wrap Up Scrutiny in 2018? / Law360 / January 9, 2018 A Look at US and EU Fintech Regulatory February 7, 2018 Frameworks / Law360 / February 16, 2018 Ineffective Stockholder Approval for Director Impact of US Tax Reform on Mergers and Equity Awards / Harvard Law School Forum on Acquisitions: New Opportunities and Pitfalls FERC Statutes and Regulations Newsletters, Corporate Governance and Financial Regulation / 595, FERC Statutes and Regulations Newsletters / Wolters Kluwer Securities Regulation Daily / January 7, 2018 / Wolters Kluwer’s Federal Energy Regulatory February 2, 2018 Commission Reporter / February 15, 2018

109 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates