Introduction

When a lawyer is retained as counsel by the founders of a new business, it is fundamentally important that the lawyer determine who is—and who is not—the client for purposes of the engagement. And because the various constituents may reasonably have different views as to the identity of the client(s), it is also important that the lawyer communicate clearly to such constituents whether or not they are clients.

Lawyers should be familiar with Rule 1.13 (Organization as Client) of the American Bar Association’s Model Rules of Professional Conduct. Paragraph (a) of Rule 1.13 provides that a “lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.” But, as made clear by paragraph (g) of Rule 1.13, such retention does not mean that the lawyer cannot also represent other constituents: “A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7 [Conflict of Interest: Current Clients].”

Further, paragraph (f) of Rule 1.13 makes clear that “[i]n dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.”

This establishes a duty for lawyers who would represent both an organization and certain constituents to clearly disclose both the existence and scope of the lawyer’s representation. While a lawyer is permitted, under the Model Rules of Professional Conduct, to represent both the organization and certain constituents, the lawyer must be vigilant about conflicts of interest.

Start-Ups

The analysis as to the identity of the client becomes somewhat complicated when the organization or entity for the new business has not yet been formed. Can the lawyer have an entity that does not yet exist as a client? And, if not, does that necessarily mean that the founders must be the clients (at least initially)?

Business lawyers are often retained with the understanding that they will be the lawyer for the to-be-formed entity, and that the founders are not clients. As a practical matter, such understanding is defined by contract among the parties. However, this contractual agreement can be complicated by several factors. For one, the founders might not understand the nature of the engagement. For another, the entity might never be formed, or other procedural issues might preclude the contract from completing as intended. Therefore it is important that the lawyer clearly define who is and who is not the client(s), and perhaps when the lawyer-client relationship begins or ends.

Equity Ownership in the Client

Working with start-up or emerging entity clients, lawyers often are in a position to acquire an equity ownership in the client. This can occur through the lawyer’s participation in a fundraising round along with other preferred investors, or through the acquisition of stock or stock options in lieu of fees. Such transactions implicate Model Rule 1.8(a), which prohibits a lawyer from entering into a business transaction with a client unless certain conditions are satisfied.

The conditions on a transaction through which a lawyer acquires equity ownership in a client include: (1) the transaction and its terms are fair and reasonable to the client, and are fully disclosed in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel; and (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction.

In addition, if the equity interest is conveyed to the lawyer as payment for legal fees, the transaction can also implicate Model Rule 1.5, which prohibits a lawyer from charging or collecting an unreasonable fee. The fairness of any lawyer investment in a client will depend on the essential terms of the transaction: what value did the lawyer provide, and what value did the lawyer receive in return? This determination becomes more complicated when stock is provided as payment for legal services. The value of the stock is determined as of the time of the transaction, which means later success can create a situation where the value of the lawyer’s equity stake far exceeds the value of services originally provided. And there is the resulting potential issue that, if a lawyer continues to provide services to a client in which the lawyer has an equity interest, the lawyer’s self-interest may create a conflict of interest under Rule 1.7.

Working with Early-Stage Companies

When advising growth companies on equity financings and other transactions, the business lawyer must continue to keep the duties and interests of board members, shareholders and investors separate and distinct from the duties, obligations, and interests of the company as the client. Such situations also raise issues under Model Rules 4.1 (Truthfulness in Statements to Others), 4.2 (Communication with Person Represented by Counsel) and 4.3 (Dealing with Unrepresented Person). All of these become doubly complicated if the lawyer also represents certain constituents.

In addition, under certain circumstances, the lawyer may have an obligation to “report up the corporate ladder.” Paragraph (b) of Model Rule 1.13 provides that:

If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances to the highest authority that can act on behalf of the organization as determined by applicable law.

This obligation can create ramifications for the lawyer if the issues he or she must report are matters which he or she only encountered in the course of representing a constituent, or the client company.

Identity of Client in Exit Transactions

Exit transactions can also raise issues as to the identity of the client, and possible conflicts of interest for the lawyer. The crux of this issue is the type of transaction, and the identity of the parties to the transaction.

For example, a lawyer for a closely-held company may be retained to work on a transaction pursuant to which the company’s business is being sold to a third-party buyer. Such a transaction typically is structured as either an asset sale, a stock sale or a merger. When the company is a party to an exit transaction structured as an asset sale or merger, the lawyer’s role as company counsel is clear.

If, however, the transaction is structured as a stock sale, the lawyer’s role becomes more complicated. In an exit transaction structured as a stock sale, the stockholders are the parties to the transaction, and typically the company itself is not a party. As a result, the lawyer may be acting for the direct benefit of the stockholders, and not for the company. Working on such a transaction may create conflicts of interest for the lawyer, both during the transaction and for any post-closing work as well.

Conclusion

Lawyers must be able to identify who is, and who is not, their client in order to comply with their professional obligations. Clearly communicating this to clients is essential. Lawyers should be mindful of the ways their representation can morph during a business’s early phases, whether their contract is affected by the company’s failure to launch, or if they are called upon to handle exit transactions. The identity of clients—whether it be the company or constituents—affects other considerations, including a lawyer’s duties during representation. And unexpected factors, such as the nature of a stock sale transaction, can create perilous situations for business lawyers.

The Supreme Court decided a number of significant business cases in the 2019 and 2020 terms. To outside observers, the decisions are characterized largely by continuity and incrementalism—we did not see a swinging pendulum of opinions in these terms—though some may find some of the outcomes surprising. This term saw Justice Amy Coney Barrett join the Court, replacing the late Justice Ruth Bader Ginsburg, and it also saw continuing use of the shadow docket to shape the law.

At least three overall themes emerge. First: textualism. Justice Elena Kagan, eulogizing her friend Justice Antonin Scalia, remarked “[w]e are all textualists now.” Reading the Court’s majority and dissenting opinions in Bostock v. Clayton County,[1] this seems to be true. Although the Court’s 6-3 decision prompted vigorous dissents, all 9 justices adopted a purely textualist approach. Their disagreements turned instead on the type of textualism the Supreme Court should employ and how to apply it.

Regardless of the type of textualism, however, the high court’s trend seems to suggest much of our statutory interpretation courses of yore are obsolete. Bostock appears to focus narrowly on the bare language of a statute, almost without regard to historical context and common usage at the time of enactment. It is clear that accepting textualism does not eliminate disagreement.

This term also saw Judge Barrett’s textualism debut with her majority opinion in Van Buren v. United States.[2] The case, like Bostock, is a good example of how the justices may disagree even within the textualism world. The majority adopted a narrow reading of the Computer Fraud and Abuse Act of 1986, stating that the Act “covers those who obtain information from particular areas in the computer—such as files, folders, or databases—to which their computer access does not extend,” not those who have “improper motives for obtaining information that is otherwise available to them.” Justice Thomas dissented, joined by Chief Justice Roberts and Justice Alito, in a very literal sense over the implications of the word “so.” Justice Thomas, looking to text and history, wrote that the law prohibits a person from exceeding his or her scope of authority when using a computer that belongs to someone else.

In Nestlé USA, Inc. v. Doe I,[3] Justice Thomas did not hesitate to apply textualism when writing for the majority in this case involving the Alien Tort Act of 1789 (“ATS”). The ATS gives federal district courts jurisdiction over “any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” In Part III of his opinion, Justice Thomas (joined by Justices Gorsuch and Kavanaugh) proposed “that federal courts should not recognize private rights of action for violations of international law beyond the three historical torts [previously] identified,” because “creating a cause of action to enforce international law beyond [the] three historical torts invariably gives rise to foreign-policy concerns,” warranting deference to Congress. Note that this textualist analysis did look to history, context and usage.

Bostock, Van Buren, and Nestlé suggest that the Court’s focus on textualism is here to stay. What the implications are remains to be seen. Is it possible that the Court’s insistence on following the precise words of a statute will stimulate Congress to draft more carefully?

Second, separation and limitation of powers under the Constitution. This continues to be a paramount concern of the Court. Three business-related cases illustrate the Court’s ongoing focus on the importance of separation of powers and of constitutional limits on government.

In TransUnion LLC v. Ramirez,[4] Justice Kavanaugh’s majority opinion provided a detailed historical analysis of Article III standing requirements, and critically emphasized that while Congress can create causes of action for what it identifies as injuries, it is for the courts to decide whether an alleged injury satisfies Article III’s injury-in-fact requirement.

In United States v. Arthrex,[5] the Court grappled with the Appointments Clause in the context of administrative patent judges (“APJs”) of the Patent Trial and Appeal Board. It ultimately held that the unreviewable authority of the APJs takes them out of any executive review and, therefore, conflicts with the Appointments Clause’s purpose of preserving political accountability.

Cedar Point Nursery v. Hassid[6] upheld property rights as a limit on government action. The Court held that under the Fifth Amendment’s Takings Clause, California’s regulation that required property owners to allow labor organizations to access their property amounted to an appropriation of private property and, thus, a per se physical taking.

Third: procedure. Finally—like any other Court—the Supreme Court cares about procedure. As always, arbitration continues to be a hot topic for this Court. In GE Power v. Outokumpu,[7] the high court unanimously held the New York Convention does not preclude a nonsignatory’s enforcement of arbitration agreements under the doctrine of equitable estoppel.

In the 2020 return trip of Henry Schein v. Archer & White[8] to the Court, the case was argued only to have certiorari dismissed as improvidently granted, and sent back down to the Fifth Circuit. In the context of class actions, Goldman Sachs v. Arkansas Teacher Retirement System[9] clarified the standards for class certification under Rule 23 in the context of 10(b) securities fraud. The Court focused on the need for truly common questions of law and fact.

In addition to the cases under the headers of the three main themes, the Court also decided two significant intellectual property cases. Google v. Oracle[10] clarified how “fair use” concepts apply to application programming interfaces under copyright law. PTO v. Booking.com[11] held that the combination of a generic term (“booking”) with a top-level domain name (“.com”) can be protected as a trademark even if neither alone could be protected.

[1] 590 U.S. ___ (2020).

[2] 593 U.S. ___ (2021).

[3] 593 U.S. ___ (2021).

[4] 594 U.S. ___ (2021).

[5] 594 U.S. ___ (2021).

[6] 594 U.S. ___ (2021).

[7] 590 U.S. ___ (2020).

[8] 592 U.S. ___ (2021). See also 586 U.S. ___ (2019).

[9] 594 U.S. ___ (2021).

[10] 593 U.S. ___ (2021).

[11] 591 U.S. ___ (2020).

We all pay taxes, and we all talk about them, especially how we wish they were lower. A surprising number of people also express tax opinions to others. Lawyers often speak with authority, but sometimes, they make tax comments that turn out to be less than accurate. Here are some of the more common tax fallacies I’ve heard, and why I think they’re mistaken.

1. “Putting the money in our lawyer client trust account isn’t taxable. It can’t be taxed until we take it out of our trust account.”

Actually, when settlement monies go into a lawyer’s trust account, it is treated for tax purposes as received by the lawyer and received by the client. It is actual receipt of fees to the lawyer, and constructive receipt of the client’s share to the client. If a case settles and funds are paid to the plaintiff’s lawyer trust account, both the client and the lawyer can be taxed.

2. “My client can’t be taxed on money in our trust account. It isn’t received by the client until I pay the client.”

This is a variation on #1. Taxes can often precede actual physical receipt. The IRS says a lawyer is the agent of his or her client, so absent exceptional circumstances, the client is treated as receiving funds when the lawyer does. It can create problems when settlement funds arrive in late December, but the client’s check isn’t dispatched until January. It may be possible to treat the funds as January income, and documentation can help. But if push comes to shove, the IRS can say it was payment in December.

3. “If a settlement agreement calls for payment in the future, the client has constructive receipt now.”

Actually, you can call for payment in the future in many common circumstances without triggering taxes before the payment is made. Suppose that a client agrees orally to settle a case in December, but specifies in the settlement agreement that the money will be paid in January. Is the amount taxable in December or January? The answer is January.

The mere fact that the client could have agreed to take the settlement in December does not mean the client has constructive receipt. The client is free to condition the execution of a settlement agreement on payment later. The key will be what the settlement says before it is signed. But if you sign the settlement agreement first and then ask for a delay in payment, you have constructive receipt.

4. “Don’t worry, the defendant won’t issue a Form 1099 for this.”

Be careful: you never really know what IRS Forms 1099 will be issued unless the settlement agreement makes it clear. Do you know if the defendant has your law firm’s or your client’s tax ID number? If a Form 1099 is issued in January, you usually will not be able to convince the defendant to undo it without express tax language in the settlement agreement that negates a Form 1099.

If the settlement agreement is explicit and negates a Form 1099, you can say that the Form 1099 breaches the settlement agreement. In my experience, defendants always fix this quickly, issuing a corrected Form 1099. In contrast, if the settlement agreement is not explicit, you are out of luck. Forms 1099 are issued for most legal settlements, except payments for personal physical injuries and for capital recoveries.

5. “I have to pay tax on the lawyer’s fees I receive, so the IRS can’t possibly tax the plaintiff on the same legal fees. That would be unconstitutional.”

Both the client and the lawyer have to take legal fees into income, and that is not unconstitutional. In Commissioner v. Banks, 543 U.S. 426 (2005), the U.S. Supreme Court held that plaintiffs in contingent fee cases generally must recognize gross income equal to 100 percent of their recoveries. Even if the lawyer is paid separately by the defendant, and even if the plaintiff receives only the net settlement after legal fees, 100% of the money is treated as received by the plaintiff.

This harsh tax rule usually means that plaintiffs must figure out a way to deduct their legal fees. Of course, the legal fees are gross income to the lawyer, too. It may not seem fair, but this isn’t double taxation, and it isn’t unconstitutional.

6. “The defendant can’t issue a Form 1099 to the plaintiff for 100% of the settlement and issue another Form 1099 to the plaintiff lawyer for 100%. That would be double reporting of income.”

Wrong again. In fact, the IRS regulations on Forms 1099 expressly say that defendants should usually issue two Forms 1099, each for 100% of the money when the defendant does not know exactly how much each is receiving. If the defendant issues a joint check to the lawyer and the client, the plaintiff will usually receive a Form 1099 for 100%, and so will the lawyer.

7. If a plaintiff law firm receives an IRS Form 1099 for 100% of a settlement, the law firm must pay tax on 100%, even if it immediately pays out 60% to the plaintiff.

No, the plaintiff law firm merely pays tax on its fee—40% in this example. The confusion often centers on IRS Form 1099. Generally, amounts paid to a plaintiff’s attorney as legal fees are includable in the income of the plaintiff, even if paid directly to the plaintiff’s attorney by the defendant. For tax purposes, the plaintiff is considered to receive the gross award, including any portion that goes to pay legal fees and costs. See Commissioner v. Banks, 543 U.S. 426 (2005).

The IRS rules for Form 1099 reporting bear this out. Under current Form 1099 reporting regulations, a defendant or other payer that issues a payment to a plaintiff and a lawyer must issue two Forms 1099. The lawyer should receive one Form 1099 for 100 percent of the money. The client should also receive a Form 1099, also for 100 percent.

The lawyer’s Form 1099 will usually be a gross-proceeds Form 1099; gross proceeds paid to an attorney are currently reported in Box 10 of Form 1099-MISC. However, until 2020, they were reported in Box 14 of Form 1099-MISC; the change came when new Form 1099-NEC were created for independent contractors.

Lawyers should take note that gross proceeds reporting (Box 10 of Form 1099-MISC) is the best reporting for a lawyer. Money reported as gross proceeds paid to a lawyer is not classified as income by the IRS. That is, unlike Form 1099-MISC box 3 (other income) or Form 1099-NEC, the IRS does not match the taxpayer ID number for gross proceeds paid to an attorney with the lawyer’s tax return to be sure it is income.

A portion of the payment reported to the lawyer may be income to the lawyer. However, the amount could also be for a real estate closing or some other client purpose. The IRS does not track amounts reported as gross proceeds paid to an attorney on Form 1099 in the way it treats say “other income” on from 1099-MISC Box 3. Therefore, the lawyer should simply report whatever portion of the reported payment (if any) is income to the lawyer.

8. “Your damages are for pain and suffering so they are tax free.”

The phrase “pain and suffering” may mean something under state tort law. But this well-worn phrase doesn’t mean much in tax law. In fact, far from being a helpful phrase for tax purposes, the IRS generally treats it as code for emotional distress, and that is not enough for tax-free treatment. To be tax-free, compensatory damages must be for personal physical injuries or physical sickness (discussed further in the next section).

Stay away from ambiguous “pain and suffering” language in settlement agreements. Ideally, you want the defendant to pay on account of personal physical injuries, physical sickness and emotional distress therefrom.

9. “Emotional distress damages are not taxable.”

This fallacy remains surprisingly prevalent, even though Congress amended section 104 of the tax code back in 1996 to state that emotional distress damages are taxable. That’s right, emotional distress damages are usually fully taxable. Only if the emotional distress emanates from physical injuries or physical sickness are the damages tax free. That’s why you might commonly see the phrase “physical injuries, physical sickness and emotional distress therefrom” in settlement agreements.

That sounds simple, but exactly what injuries are “physical” turns out to be messy. If you make claims for emotional distress, your damages are taxable. If you claim that the defendant caused you to become physically sick, those damages should be tax free. Yet if emotional distress causes you to be physically sick, even that physical sickness will not spell tax-free damages. That is because the emotional distress came first; the sickness is a byproduct of the emotional distress.

In contrast, if you are physically sick or physically injured, and your sickness or injury itself produces emotional distress, those emotional distress damages should be tax free. It is a confusing and nuanced subject. In the real world, of course, these lines are hard to draw, and sometimes can seem contrived.

In fact, of all the tax issues facing litigants, this one is probably the thorniest. Plaintiffs often think that their headaches and insomnia should lead to tax-free dollars. But you need to have something more serious that is a real “physical sickness.” Post-traumatic stress disorder is probably enough to be physical, although there is no tax case yet that expressly so holds.

10. “If you lose money or property and sue to recover it but don’t have a net gain, you can’t be taxed.”

This fallacy sounds perfectly logical. If you lost something worth $1 million and only get back $500,000, how could you possibly be taxed? Unfortunately, you can still be taxed even if you don’t break even in the case.

In investment loss and property damage or destruction cases, taxpayers need to consider their tax basis in the property, as well as its fair market value. For example, suppose that you had a million-dollar stock portfolio that was churned by your investment adviser, dropping its value to $200,000. That sounds like an $800,000 loss, right? If you recover, say, $500,000, isn’t it clear that you can’t be taxed?

Before you give a knee-jerk answer, we need to know your tax basis in the property. You had a $1M stock portfolio, and let’s say that you previously paid $1M for these investments. Thus, that was your tax basis and also the fair market value of the investments. In that event, you still lost money, so you would probably use the $500,000 to reduce your tax basis in the assets. However, what if your tax basis in the $1M portfolio was only $100,000?

In other words, you had $900,000 in untaxed capital gain before the mismanagement. You lost money when your investment adviser mis-stepped, but if you get back $500,000, with only a $100,000 tax basis, you have a big gain and taxes to pay. That is true even though you had a portfolio with a market value of $1M that was mismanaged, and even though you only got a portion of your money back.

The same kind of thing happens with other property cases, such as wildfire cases and many others. Where there are taxes to pay, in some cases there may be section 1033 involuntary conversion benefits possible.

Conclusion

Talking about taxes is natural, but be careful. There are many elements involved in resolving lawsuits and pre-litigation disputes. For lawyers and especially for clients, the situation can be difficult and emotionally charged. Extra tax uncertainties can add to the pressure, especially when they turn out to be big and unpleasant surprises later. Be careful out there.

Background

Recent global trends related to corporate governance include increased emphasis on the social and environmental responsibilities of businesses. As a result, the environmental and social affairs of a corporation are now a topic of great interest to all stakeholders of the corporation, including its lenders and shareholders.

Due to growing interest in the environmental and social impacts of business, the Equator Principles were formulated in June 2003 to establish a framework for managing these risks and impacts when financing projects. The Equator Principles have been periodically updated, with the most recent version—EP4—taking effect as of October 1, 2020. Under EP4, borrowers could potentially be subject to more stringent requirements with respect to environmental and social risk management compared to what is typically required under applicable laws.

The Equator Principles: What are they?

The Equator Principles apply globally to all industry sectors and are a risk management framework for identifying, assessing and managing environmental and social risks in development projects. Their primary purpose is to provide a minimum standard for due diligence and monitoring, and to support responsible risk decision-making.

Financial institutions (EPFIs) voluntarily adopt the Equator Principles and commit to implementing them through their internal policies, procedures and standards. By adopting this regime, adhering EPFIs agree they will not finance projects that do not comply with its requirements. Each EPFI is responsible for developing and implementing its own environmental and social policies and approach to implementing the Equator Principles.

The EPFIs will categorize projects based on the project’s potential environmental and social risks and impacts. Different requirements will apply depending on a project’s category. The most stringent are applied to Category A projects, which are projects typically with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible, or unprecedented. At the other end of the range, less stringent requirements are applied to Category C projects, which are projects with minimal or no adverse environmental and social risks and/or impacts. For instance, EPFIs may require borrowers to: (a) develop and maintain an environmental and social management system to identify, assess and manage risks related to the project on an ongoing basis, (b) create an action plan to minimize or offset any potential risks of a project, or (c) demonstrate ongoing engagement with local communities affected by the project.

EP4

EP4 includes significant changes from its predecessor, including new requirements related to assessing human rights and climate change impacts of a project, and enhanced requirements for projects affecting Indigenous Peoples. For instance, Free, Prior and Informed Consent from Indigenous Peoples—a specific right recognized in the United Nations Declaration on the Rights of Indigenous Peoples—may be required in certain projects, which goes beyond current United States and Canadian legal requirements to consult.

As mentioned, EP4 introduces new requirements related to climate change risks. As part of Principle 2 of EP4, EPFIs will require borrowers to conduct an assessment on the potential environmental and social risks and impacts of a proposed project in its area of influence. EP4 makes specific reference to the 2015 Paris Climate Change Agreement, so the assessment documentation for a project may now include requirements derived from the agreement. Some borrowers may be further required to conduct a climate change risk assessment, with the depth and nature of such assessment depending on the type of project and the nature of risks. This assessment is required for two sets of projects:

1. All Category A and, as appropriate, Category B projects. The assessment will include consideration of relevant physical risks resulting from climate change, which involve event-driven risks (e.g., hurricanes, floods) or longer-term (e.g., sustained higher temperatures) shifts in climate patterns.
2. All projects where greenhouse gas emissions from both (i) the facilities within the project boundary and (ii) the offsite production from the project combined are expected to be more than 100,000 tonnes of CO₂ annually. Consideration must be given to transition risks, which arise from the process of adjusting to a lower-carbon economy (e.g., imposition of carbon tax). An alternatives analysis evaluating lower greenhouse gas intensive alternatives must be completed. EPFIs must also require borrowers to report publicly, on an annual basis, on greenhouse gas emission levels and provide a greenhouse gas efficiency ratio where appropriate.

Another significant change in EP4 is the possible requirement for EPFIs to assess projects located in “Designated Countries”—countries deemed to have robust environmental and social governance and legislation systems in place, which includes, among others, the United States, Canada, the U.K., and Australia. Prior to EP4, projects in Designated Countries were deemed to be in automatic compliance with certain Equator Principles and were not subject to any evaluation separate from that of the relevant host country laws. With the development of EP4, that is no longer the case. EPFIs will evaluate specific risks of certain projects in Designated Countries to determine whether one or more of the International Financial Corporation Performance Standards should be used as guidance to address those risks in addition to the host country’s laws.

A survey of the loan documents for projects that have been financed by EPFIs since EP4 came into effect on October 1, 2020, reveals that the Equator Principles are typically referenced and form part of the environmental and social laws and standards governing the project. There may be reporting requirements in connection with EP4 and covenants for borrowers to comply with such standards. Non-compliance with EP4 could constitute as a material adverse effect or event of default under the loan agreement.

What should you do as a company?

As a consequence of the new requirements in EP4, the Equator Principles will play a larger role in domestic project finance transactions for projects in the United States and Canada and for American and Canadian borrowers and sponsors than previously. Borrowers should become familiar with EP4, and the standards and requirements that may apply to them when seeking financing. In some circumstances, EPFIs will decline to finance projects if they believe that risks cannot be adequately addressed.

As EP4 brings considerable new changes to project financings, there are several steps that borrowers can take to prepare themselves for upcoming projects that may be subject to the Equator Principles, such as:

1. Borrowers should start the conversation with EPFIs early and ask important questions to ensure that expectations are clear at the outset.
2. Borrowers should review and, if necessary, update their environmental and social governance regimes and proactively manage environmental and social risks and impacts in light of the revised standards under EP4.
3. Borrowers should review and ensure that they are aligned with the UN Guiding Principles on Business and Human Rights.
4. Borrowers should become familiar with the requirements under EP4 and review policies, procedures and standards of EPFIs that may act as lenders for their projects.
5. Borrowers lacking internal expertise in these matters should consider seeking guidance from external experts with experience with the requirements under EP4.

EP4 reflects a global trend towards increased focus on environmental and social governance and interest in sustainable development. Ultimately, compliance with the Equator Principles in connection with project finance and updated environmental and social governance regimes will not only assist borrowers in securing financing with EPFIs but will also have a positive impact on the overall reputation of the borrower in today’s market toward sustainable economic growth.

The Telephone Consumer Protection Act creates a seemingly endless list of compliance challenges and other headaches for companies determined to mitigate the financial cost and resource burden of TCPA litigation. This year brought welcome good news from the U.S. Supreme Court, with its unanimous decision in Facebook, Inc. v. Duguid establishing a narrow “autodialer” standard, applicable nationwide. We are on the cusp of another positive development with respect to TCPA compliance. On October 1, 2021, the Federal Communications Commission announced its interim fee structure for the new reassigned numbers database, which launched on November 1, 2021.

The TCPA compliance problem created by accidental calls to reassigned numbers began in 2015. At that time, the FCC issued formal guidance explaining that the consent required by the TCPA must come from the person actually called, not the person the caller intended to reach. The FCC conceded that this created a compliance complexity in the case of reassigned numbers. Specifically, a caller may have had valid consent to call a particular consumer at a particular phone number but, unbeknownst to the caller, the consumer had surrendered the number, which was subsequently reassigned to an unrelated third party. If the caller used an autodialer or a prerecorded message to reach the intended call recipient using a number that had been reassigned, that call would violate the TCPA: the caller would not have consent from the person actually called.

As a practical matter, callers had no way to avoid these inadvertent TCPA violations. The FCC responded to this difficulty by offering a series of unserious options purportedly available to companies to avoid these calls. These included periodically contacting customers to ask if their numbers had changed and contractually obligating customers to notify the company when their number changes. (Presumably, companies could sue their customers for breach of contract if they failed to provide this notice.) However, the FCC also acknowledged that companies needed a more effective solution on this issue, so it established a limited, one-call safe harbor. Companies who inadvertently called a reassigned number automatically used up this safe harbor in that one call, no matter the result. Every subsequent call to that reassigned number using an autodialer or prerecorded message would violate the TCPA.

In 2018, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FCC’s one-call reassigned number safe harbor as arbitrary and also vacated the FCC’s interpretation imposing TCPA liability for calls to reassigned numbers generally. In the wake of that decision, the FCC launched a new proceeding to create a reassigned numbers database, which would enable callers to verify whether a telephone number had been reassigned before calling that number.

Three years later, the FCC is ready to launch this comprehensive database containing reassigned number information from participating providers. After completing a beta test, the FCC opened access for paid subscribers on November 1. The FCC released an interim fee schedule for users ahead of the announced debut. The FCC explained that the current fee schedule is subject to change because it lacked an adequate record to determine on a more permanent basis how much it would need to collect from users to offset the cost of maintaining the database.

The interim fee schedule creates six categories of users, based on the number of database queries per subscription period, ranging from extra small to jumbo. Extra small companies can submit up to 1,000 queries per month; jumbo companies can submit up to 30,000,000 monthly queries. The fee schedule also includes three available subscription periods: one month, three months, and six months. The greater the volume of queries, the lower the per-query cost. Extra small users would pay $10 per month; jumbo users would pay $35,100 per month. The FCC’s interim fee structure also presents options for companies who use up their allotted number queries and want additional database access.

Notably, the FCC’s approach allows companies to work with a “caller agent,” who would access the database on behalf of one or more companies. This would allow smaller companies to work in cooperation with a vendor to qualify for the discounts available to larger-sized subscribers. This is in contrast to how the national do-not-call list’s fee structure works. The FTC expressly prohibits sellers from partnering with a vendor who accesses the do-not-call list on behalf of multiple companies. Here, extra small companies would pay one cent per query. Jumbo companies would pay about one-ninth as much. Small companies who want to take advantage of the reassigned numbers database to avoid inadvertent, and heretofore unavoidable, TCPA violations could see significant cost savings by working with a caller agent.

For more information, view the official webinar and slide presentation that accompanied the public launch of the FCC’s new reassigned number database on November 1, 2021.

In May 2020, just after George Floyd’s murder and as many across our nation were protesting social injustice and racial inequity, a large group of law firm leaders in Charlotte, North Carolina were thinking the same thing at the same time: what can we do to help with the resources we have? How can we drive the change that we want to see?

Two dozen of us gathered to brainstorm on how we could pool our strengths and resources to make a true difference. We discussed what we were doing within our own firms and how we could work together to do something even more meaningful. Those conversations eventually led to our forming the Carolinas Social Impact Initiative, an effort to foster a more inclusive community and reduce systemic barriers to social and economic mobility in the Carolinas.

More than a year later we are still going strong. With our joint efforts picking up steam, we are on our way to harnessing our collective resources to facilitate lasting change in our community.

As with many efforts such as ours, establishing a core mission is a crucial first step. We took that step by listening to community leaders. Many in Charlotte have been working to improve economic mobility in our minority communities in the wake of a 2014 study that ranked the city last in upward mobility among the 50 largest U.S. cities. Our county at large and many others across North and South Carolina also rank poorly in offering children the best chance to rise out of poverty. We decided we would align our strengths and address mobility and inclusiveness by establishing four separate focus areas:

1. Supporting minority-owned businesses and entrepreneurs
2. Advancing educational opportunities
3. Supporting family stability and social justice
4. Improving access to social capital and career opportunities

We selected these priorities because we felt they were a good match for our skill set as lawyers, and because we believe they give us the best chance to make a difference and assist with long-term solutions to long-standing challenges. Our goal is to make a generational difference that will benefit our community and citizens well into the future.

“Tackling issues of race and equity is not easy but certainly necessary, especially after the events of last year and the continued impacts of the pandemic,” said Sherri Chisholm, executive director of Leading on Opportunity. Her organization is focused on improving economic mobility in the Charlotte area, and we have benefitted greatly from Ms. Chisolm’s guidance and the work of Leading on Opportunity in our organization and planning.

“The members of the Carolinas Social Impact Initiative have been intentional about their work in the community, speaking directly with community members and leaders to determine the best approach for their unique skills and network,” Ms. Chisolm said. “Leading on Opportunity is thankful to walk alongside the Initiative on this journey and looks forward to the lasting impact it will make on Charlotte for years to come.”

We were especially excited to launch the coalition’s first program in summer 2021: the Charlotte Legal Initiative to Mobilize Businesses (CLIMB), through which volunteer lawyers provide pro bono business legal services to low-income entrepreneurs in the Charlotte area.

CLIMB is an example of how the coalition firms are aligned and can combine resources to make a greater impact together. Both Moore & Van Allen and Robinson Bradshaw were independently brainstorming in the summer of 2020 about providing pro bono legal services to entrepreneurs in our historically under-resourced communities. Through the Carolinas Social Impact Initiative, the two firms combined their separate ideas to create a more meaningful, lasting, scalable program. The result is CLIMB, through which coalition firms apply our unique skills as lawyers to help entrepreneurs and small businesses. By volunteering those skills, we hope to help broaden economic opportunities and stability.

“The CLIMB model is one that will benefit our small businesses that often struggle to afford the legal protection and support needed to succeed in this economy,” said Charlotte Mayor Vi Lyles. “We are grateful to the Carolinas Social Impact Initiative—and Robinson Bradshaw and Moore & Van Allen in particular—for bringing this equity-based resource to our city and investing in the success of our business community.”

CLIMB has been up and running as a pilot program since June of this year. During the pilot phase, volunteer lawyers from Robinson Bradshaw and Moore & Van Allen coordinated the program and provided legal services. In the coming months, we expect a broad range of coalition lawyers—as well as lawyers from other firms and legal employers—to join this effort.

In the near future, the Carolinas Social Impact Initiative plans to expand CLIMB and launch additional programs to advance our other three focus areas. Planning is well underway, as are our conversations with community leaders. We will also work to expand our impact beyond the Charlotte region.

We are so proud of the community spirit exhibited by all of our law firm leaders and are thrilled that the Carolinas Social Impact Initiative remains a true team effort. The member firms are: Alexander Ricks; Alston & Bird; Bradley; Cadwalader, Wickersham and Taft; Hamilton Stephens Steel + Martin; Hedrick Gardner; Holland & Knight; Hunton Andrews Kurth; James McElroy & Diehl; Johnston, Allison & Hord; Katten Muchin Rosenman; King & Spalding; K&L Gates; Mayer Brown; McGuireWoods; Moore & Van Allen; Nelson Mullins; Offit Kurman; Parker Poe; Robinson Bradshaw; Shumaker; Troutman Pepper; Winston & Strawn; and Womble Bond Dickinson.

We would love for more firms and legal professionals to join and help us drive needed change in our communities.

If you are interested in joining our efforts, please contact Tom Griffin ([email protected]), Allen Robertson ([email protected]), and Tom Mitchell ([email protected]).

The Antitrust Division of the U.S. Department of Justice (DOJ) and several state Attorneys General are challenging the American Airlines Group Inc. (“American”) collaboration with a competitor, JetBlue Airways Corp. (“JetBlue”). Both sides of the dispute accuse the other of harming competition amongst airlines. On September 21, 2021, the DOJ and its state attorney general partners filed suit in Massachusetts federal court to block a series of agreements between the airlines called the “Northeast Alliance.” The plaintiffs argue this Alliance will reduce competition between American and Jet Blue to the detriment of consumers. On the other hand, American and JetBlue say that the Alliance allows them to better compete with other major airlines.

Background

The attorneys general of Arizona, California, Florida, Massachusetts, Pennsylvania, Virginia, and the District of Columbia have signed on to the DOJ’s suit. American is the world’s largest airline. In 2019, it flew approximately 215 million passengers and took in roughly $45 billion in revenues. JetBlue is a low-cost airline founded in 1998. In 2019, JetBlue flew over 42 million passengers and took in approximately $8 billion in revenues.

On July 15, 2020, American and JetBlue entered into a collaboration, memorialized in a series of agreements, including an umbrella agreement titled the “Northeast Alliance Agreement.” That agreement commits the companies to pool revenues and coordinate network planning at Boston Logan, JFK, LaGuardia, and Newark Liberty, including deciding together which routes to fly, when to fly them, who will fly them, and what size planes to use. The companies also committed to pool and apportion revenues earned on flights.

The Lawsuit

The lawsuit argues that consolidation, which the government contends negatively impacts consumers, has occurred rapidly in the U.S. airline industry. In 2000, the four largest airline companies controlled 55% of the market. Today, they allegedly control 81%. One of the ways the government claims consolidation harms consumers is that it allows airlines to reduce capacity—the industry’s term for the number of available seats—which inextricably raises prices.

The agencies’ complaint describes Jet Blue as a disruptive force in the marketplace, including acting as downward pressure on the prices of American and other airlines. The agencies also assert that the alliance operates as if the two airlines merged. The lawsuit argues that even though each airline is permitted to set its own prices, the Northeast Alliance will allow American and Jet Blue to coordinate important strategic decisions that will cost American consumers hundreds of millions of dollars in higher airfares and reduced travel options. “In an industry where just four airlines control more than 80% of domestic air travel, American Airlines’ ‘alliance’ with JetBlue is, in fact, an unprecedented maneuver to further consolidate the industry. It would result in higher fares, fewer choices, and lower quality service if allowed to continue,” Attorney General Merrick Garland said.

The complaint asserts a single claim under Section 1 of the Sherman Act, the federal antitrust law prohibiting unreasonable restraints of trade. To succeed under Section 1, the plaintiffs will have to show that the “Northeast Alliance Agreement” unreasonably restrains trade. Courts analyze agreements under either the “Per Se Rule” or the “Rule of Reason.” Under the Per Se Rule, agreements that always or almost always tend to restrict competition and decrease output are considered automatically illegal and condemned without further examination. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2283. The plaintiffs do not appear to be arguing that here. When using a Rule of Reason analysis, the factfinder weighs all the circumstances in the case to determine if the challenged restraint substantially suppresses or destroys competition. Am. Express Co., 138 S. Ct. at 2284. The goal is to distinguish between restraints with anticompetitive effects harmful to the consumer and restraints stimulating competition in the consumer’s best interest. Courts have developed a burden-shifting test where the plaintiff may show harm using either (1) direct evidence, like increased prices or reduced output, or (2) indirect evidence, like demonstrating the challenged restraint substantially harmed competition in a defined market in which the defendant has market power. If the plaintiff carries that burden, the defendant then must come forward with evidence of the restraint’s procompetitive effects, and the plaintiff must then show that any legitimate objectives can be achieved in a substantially less restrictive manner.

American and JetBlue’s Response

American and JetBlue seem undeterred. American Chairman and CEO Doug Parker argued the Northeast Alliance would increase, rather than harm, competition because the Alliance allows American and JetBlue to better compete with other airlines that currently dominate the New York airports. “Ironically, the Department of Justice’s lawsuit seeks to take away consumer choice and inhibit competition, not encourage it,” Parker said. “This is not a merger: American and JetBlue are—and will remain—independent airlines. We look forward to vigorously rebutting the DOJ’s claims and proving the many benefits the Northeast Alliance brings to consumers.” JetBlue CEO Robin Hayes similarly said JetBlue’s “commitment to competition and low fares remains as strong as ever. This is not at all like a merger with American—we have two different business models and are not working together on pricing.”

Takeaways

This matter raises a few interesting questions. If American and JetBlue stick to their guns and litigate this matter, how will the court resolve the parties’ conflicting claims of effect on competition? What role, if any, will post-Northeast Alliance price changes play? Of course, the agencies will view any price decreases with great skepticism, while the airlines will argue that they are one of the benefits of the alliance. Is this a one-off case, or does the DOJ intend to bring antitrust actions against other large competitors that form strategic partnerships with smaller competitors to better compete against larger competitors that enjoy the largest market share?

WHAT EXACTLY IS THIS PRIVATE TARGET DEAL POINTS STUDY, ANYWAY?

The Private Target Deal Points Study is a publication of the Market Trends Subcommittee of the Business Law Section’s M&A Committee. It examines the prevalence of certain contract provisions in publicly available, private target M&A transactions during a specified time period. The Private Target Deal Points Study is the preeminent study of M&A transactions and is widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.

WHAT TIME PERIOD WILL BE COVERED BY THE STUDY?

The 2021 iteration of the Private Target Deal Points Study will analyze publicly available definitive acquisition agreements for transactions executed and/or completed either during calendar year 2020 or during the first quarter of 2021.

WHAT INDUSTRIES WILL BE COVERED BY THE STUDY?

The deals in the Private Target Deal Points Study reflect a broad array of industries.  The healthcare, technology and industrial goods and services sectors together make up approximately 41% of the deals in this year’s study.

WHAT IS THE SIZE OF THE TRANSACTIONS OF THE STUDY?

The transactions analyzed in the Private Target Deal Points Study were in the “middle market,” with purchase prices ranging between $30 million and $750 million; purchase prices for most deals in the data pool were below $200 million.

WHERE ARE YOU IN THE PROCESS OF RELEASING THE STUDY?

Given the busier-than-ever M&A environment this year, our working group members had less than the usual amount of time to dedicate to their work on the study. The vast majority of our 10 issue groups have turned in their data, and the members are processing and analyzing it, and finalizing the slides.

CAN YOU SHARE ANY SNEAK PREVIEW DATA?

We shared a couple of sneak preview data points with attendees at the meeting of the Market Trends Subcommittee at the ABA’s M&A Committee meeting in September and encourage you to sign up for the M&A Committee and its various subcommittees if you haven’t already—at the following link on the ABA’s website.

We can give you a similar peek ahead (understand, however, that our process is still ongoing and thus these data points may not be final):

Consistently inconsistent COVID-19 representations 

• The sneak peek: For obvious reasons, measuring representations related to COVID-19 is a new data point for the 2021 version of the Private Target Deal Points Study. What we learned is that the global pandemic impacted representations and warranties in our selected data set,[1] but not in a consistent way. Nearly one-third of our selected data set contained a representation related to COVID-19. However, these representations varied dramatically, covering matters such as the Paycheck Protection Program, furloughs, and supply chain matters.
• What to watch for: Given the broad range of approaches to representations related to COVID-19 in our selected data set, we will publish an addendum containing the specific representations when we release the 2021 version of the Private Target Deal Points Study.

More RWI deals 

• The sneak peek: Representations and warranties insurance (RWI) has been a huge game changer in M&A deals. We measure whether a deal in our study pool utilized RWI by the closest proxy we can access: whether the purchase agreement references RWI. (Of course, RWI may have been obtained without such a reference in the purchase agreement.) The 2017 version of the Private Target Deal Points Study showed RWI references in less than one-third of the deals. The 2019 version of the Private Target Deal Points Study marked the first time a majority of the deals referenced representations and warranties insurance (RWI). The 2021 version of the Private Target Deal Points Study shows even more growth, to nearly two-thirds of the deals referencing RWI.
• What to watch for: Use of RWI in a deal impacts a variety of the negotiated provisions, as evidenced by our prior study data correlations. We are correlating even more data points with RWI references in the 2021 version of the Private Target Deal Points Study, so watch for those.

Please keep an eye out for our study and for an In the Know webinar to be scheduled, during which the chairs and issue group leaders will provide analysis and key takeaways from the results of the 2021 Private Target M&A Deal Points Study.

[1] We recognize that it is not helpful to include in our denominator deals that were negotiated before the effects of the pandemic were understood in the United States. Thus, because our data set includes deals from 2020 and the first quarter of 2021, we excluded deals from this data point if the agreement was signed before March 11, 2020, which is the date the World Health Organization declared a global pandemic.

The 2020 election brought many changes to Washington, DC, with the Democrats taking control of the White House and the United States Senate and continuing control of the House of Representatives. For businesses, the new political alignment in Washington provides policy opportunities and risks. Democratic control of Washington also creates new Congressional investigation risks for some businesses. It is imperative that an organization have a proactive governmental affairs strategy and implement best practices to establish an effective and compliant governmental affairs program.

As with any election, and particularly with elections where political power shifts from one political party to the other, there are policy implications for businesses. Proactive businesses should evaluate those policy risks and opportunities so they can develop an effective engagement strategy with the federal government. Businesses should also take the following initial steps to ensure their engagement is effective:

• Assess opportunities and risks
• Identify key stakeholders, including government officials, potential allies and opponents
• Identify the key opportunities to influence policy, including the nominations process and through legislation and regulations

When it comes time to interact with government officials and staff, there are best practices to keep in mind:

• Ensure compliance with lobbying requirements before engagement
• Establish internal compliance systems
• Engage early and do not wait for a crisis
• Do not assume they know your business and its issues
• Know your audience
• Engage constituents where possible
• Develop a concise presentation and leave behind documents
• Make a clear request for action
• Ensure no one is blindsided
• Thank them appropriately

Overview of the Federal Lobbying Disclosure Act

The federal Lobbying Disclosure Act of 1995 (“LDA”), as amended by the Honest Leadership and Open Government Act of 2007, is a federal lobbying statute administered by Congress that applies to legislative and executive branch contacts. The LDA does not cover state or local lobbying. State and local jurisdictions have their own lobby registration and reporting requirements.

The LDA requires entities employing in-house lobbyists, lobbying firms, and self-employed lobbyists to register and report certain lobbying activities—including matters lobbied, lobbyists, and lobbying expenses—with the Clerk of the US House of Representatives and the Secretary of the US Senate.

Registrations and quarterly reports are submitted by registrants (i.e., the registered entity), not individual lobbyists. In addition, the LDA requires that semi-annual reports and certifications are submitted by both registered entities and individual lobbyists.

Whether an organization must register depends on whether the entity employs any individual who meets the LDA’s definition of lobbyist. Under the LDA, a lobbyist is an individual who, for compensation, makes more than one lobbying contact and spends 20% or more of his or her time during a quarter on federal lobbying activities, as defined.

The LDA is important for any entity whose employees contact federal officials regarding covered matters. Understanding these requirements, best practices surrounding federal lobby compliance, and potential pitfalls is imperative for any organization that interacts with the federal government.

Necessity of Effective and Compliant Governmental Affairs Program

Any company or organization that is active in the political or public policy arenas should have a robust governance structure that includes an effective compliance management system created specifically to address these activities. Just as companies have compliance policies and processes to address laws designed to prevent bribery, discrimination, and privacy violations, a company that engages with government officials or advocates on political or public policy issues must build a political law compliance system designed to address the unique legal and reputational risks that may arise from such engagements. There is no one-size-fits-all approach, but each company that participates in the political or public policy process should carefully consider what foundational principles, policies, and processes are necessary for the company, not only to engage in a legal and responsible manner, but also to ensure a good governance structure for its decisions.

There are four key components of a political law compliance program. First, the detailed corporate policies should govern a company’s activities in the public policy and political arena. These policies need to be clear and concise. Second, the company must have strong, robust, internal processes and structures, including approval procedures for political contributions, gifts, and lobbying activities, as well as recordkeeping requirements. Next, a comprehensive compliance program needs to focus on what is communicated to both employees and the public. This includes an interactive training and communications program to ensure employees are aware of the requirements that govern their behavior. Additionally, the company should consider what elements of its compliance program it communicates to the public via its corporate website. Finally, a company must build audit and oversight mechanisms into its compliance program to detect potential wrongdoing and to determine whether the program is operating effectively and efficiently.

Rosenbaum v. CytoDyn Inc., C.A. No. 2021-0728-JRS (Del. Ch. Oct. 13, 2021) (Slights, V.C.)

In this memorandum opinion and following trial on a paper record, the Delaware Court of Chancery denied plaintiffs’ request for a mandatory injunction to compel CytoDyn Inc. (the “Company”) to allow plaintiffs’ dissident slate of directors to stand for election to the board at the Company’s October 28, 2021, annual meeting. The Court concluded that plaintiffs’ nomination notice, which was submitted on the eve of the notice deadline specified in the Company’s bylaws, was deficient and the board was justified in rejecting it, despite a nearly month-long delay in responding to the notice.

Plaintiffs, who had launched a proxy contest in July 2021 to replace five of six incumbent directors at the Company’s 2021 annual meeting, argued that the board wrongfully rejected the nomination notice, triggering enhanced scrutiny under Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).  Defendants argued in the alternative that the Court’s legal analysis should be “purely contractual,” with any fiduciary considerations analyzed under the deferential business judgment rule.  The Court declined to invoke Blasius review after concluding that the board did not act for the sole or primary purpose of thwarting the effectiveness of a stockholder vote.  The Court further concluded that the board’s failure to respond to the activist group in order to give plaintiffs an opportunity to cure “materially deficient disclosures” contained in the notice was not manipulative conduct.

Although Blasius did not apply, the Court recognized that board members tasked with enforcing bylaws against stockholders confront a “structural and situational conflict,” and the Court is empowered to address the inequitable application or enforcement of an advance notice bylaw.  In this instance, the Court found there was no inequitable conduct on the part of the board, which, upon receiving the deficient notice on the eve of the deadline specified in the Company’s bylaws, did not afford plaintiffs an opportunity to cure the notice defect.  Importantly, the Company’s advance notice bylaw did not impose an express duty on the board to reach out to stockholders to cure deficiencies or otherwise to provide a process to cure a deficient notice.

The Court noted that plaintiffs could have made a stronger case of manipulative conduct had they submitted their nomination notice “well in advance of the deadline,” as the board would have had more difficulty justifying its nearly month-long silence in light of its fiduciary duties if “ample time remained before the arrival of the notice deadline.”  On the record presented, however, the Court concluded that plaintiffs were required to submit a compliant notice given the last-minute nature of their submission, and their decision to submit the nomination notice on the eve of the deadline left no room for the Court to invoke equitable principles to override the decision made by the Company’s board.

Importantly, the CytoDyn opinion represents the first ruling on the merits by a Delaware court analyzing a board’s rejection of a nomination notice for disclosure deficiencies relating to information required by an advance notice bylaw.  As noted by the Court, “[w]here Plaintiffs ultimately went wrong here is by playing fast and loose in their responses to key inquiries embedded in the advance notice bylaw….”