On March 29, 2017, Louisiana Governor John Bel Edwards released the broad outlines of his Louisiana tax reform proposal (the “Tax Reform Proposal”), which he promoted as a comprehensive plan to stabilize Louisiana’s budget and avoid future mid-year budget cuts. The Governor’s plan includes individual income tax, sales and use tax, corporate tax, and tax expenditure proposals designed to, if enacted, replace the revenue generated by the “fifth-penny” of sales and use tax (that expires in 2018) and generate revenue to sustain Louisiana’s current budget structure. Governor Edwards announced the proposal alongside Kimberly Robinson, Secretary of the Louisiana Department of Revenue, during a press conference at the Louisiana State Capitol. And, while he did not provide a draft of legislation proposed to implement the tax plan or discuss many specific details, he did provide an overview of the Tax Proposal.

The Governor made an effort to tie the Tax Reform Proposal to the Final Report issued January 27, 2017, by the Task Force on Structural Changes in Budget and Tax Policy (the “Task Force”), but many who have studied the report were unconvinced. Indeed, while some of the sales tax changes were discussed in the Final Report, the commercial activity tax, the most significant and controversial aspect of the Governor’s tax reform proposal did not appear in the Task Force’s Final Report. An overview of the Governor’s Tax Reform Proposal follows.

Corporate Tax Proposals

The Governor’s plan would implement a number of changes impacting corporate taxpayers, including: (1) phasing out the corporation franchise tax; (2) repealing the corporation income tax deduction for federal income taxes; (3) reducing the corporation income tax rate; and (4) enacting a commercial activity tax (i.e., a gross receipts tax). Essentially, the Governor proposes to eliminate the franchise tax, over time, and retain the corporation income tax, but also impose a gross receipts tax to serve as a type of alternative minimum tax. Until the franchise tax is phased out, a corporate taxpayer would compute its liability under all three taxes, but would only owe franchise taxes and the greater of the corporation income or the commercial activity tax.

Phase-Out of the Corporation Franchise Tax

Under the Tax Reform Proposal, the corporation franchise tax would be phased out over a ten-year period. The Governor did not provide specifics on the phase-out but, presumably, it would occur in equally incremental annual reductions over a ten-year period. The Governor Edwards was unsure of the cost of phasing-out the franchise tax. The effective date of this reform was not specifically mentioned, but, because it was discussed in conjunction with the proposed commercial activity tax (discussed below), the Edwards Administration is likely considering beginning the phase-out in the 2019 franchise tax year (2018 filing period).

Repealing the Federal Income Tax Deduction

Currently, corporate income tax filers may deduct their federal income taxes paid when computing their Louisiana taxable income. Because the federal income tax deduction is constitutionally protected, repealing the deduction requires passage of a constitutional amendment supported by (a simple majority of) voters. Governor Edwards indicated at his press conference that the reduced corporate income tax rates, discussed below, would be contingent upon passage of such a constitutional amendment.

In 2016, the Governor proposed to collapse the tiered corporation income tax brackets into a flat six-and-one-half-percent (6.5%) corporate income tax rate to help resolve the 2016 budget shortfall. That proposal was similarly contingent upon the repeal of the federal income tax deduction through a constitutional amendment, which Louisiana voters rejected by a fifty-six to forty-four percent (56-44%) margin. Governor Edwards did not indicate at his press conference when the proposed constitutional amendment would be put to voters, but the most likely date would be November, 2017.

Reducing the Corporation Income Tax Rate

The Tax Reform Proposal would reduce the number of corporate income tax brackets from five (5) to three (3) and would reduce the corporation income tax rate upon repeal (via constitutional amendment) of the federal income tax deduction. Currently, Louisiana has five corporate income tax brackets – four percent (4%), five percent (5%), six percent (6%), seven percent (7%), and eight percent (8%). The Tax Reform Proposal would reduce the number of corporation income tax brackets to three (3) brackets at three percent (3%), five percent (5%), and seven percent (7%).

The Commercial Activity Tax

The Governor suggested that enacting a commercial activity tax would offset the costs of allowing the fifth-penny (of sales and use tax, discussed below) to expire on schedule, reducing the corporate and individual income tax rates, and phasing-out the franchise tax. The Governor did not provide many details of the proposed commercial activity tax, but did indicate that the tax was modeled upon similar taxes in use by other states. Based on the details released by the Governor and information provided by Secretary Robinson in meetings with trade groups around the state, it appears that the commercial activity tax would be similar to the commercial activity tax levied by the state of Ohio.

The commercial activity tax would be assessed upon any legal entity doing business in Louisiana. The tax base would be the entity’s gross receipts after deductions for (1) cash discounts allowed and taken; and (2) returns and allowances that are attributable to Louisiana. The proposed tax rate is thirty-five hundredths of one percent (0.35%).

The proposed commercial activity tax would apply as follows:

Entities subject to tax Entities exempt from tax
Partnerships Non-profit organizations
Limited liability companies Governmental entities
Limited liability partnerships Certain public utilities
Corporations Certain financial institutions
Subchapter S corporations Certain insurance companies
Joint ventures Businesses with $1.5 million or less of taxable gross receipts
Disregarded entities

While not specifically stated, it appears that sole proprietorships would also be subject to the commercial activity tax.

The proposed tax would apply at the full rate to businesses with $1.5 million or more in gross receipts.[1] All other businesses would be subject to a minimum commercial activity tax. The proposed minimum tax rates and commercial activity tax computation follow:

Taxable Gross Receipts Minimum Commercial Activity Tax Commercial Activity Tax
Less than $500K $250 No additional tax due
$500K – $1M $500 No additional tax due
$1M-$1.5M $750 No additional tax due
$1.5M to $3M N/A (0.35% x Taxable Gross Receipts) – [5,250 x ($3M – Taxable Gross Receipts)/$1.5M]
Greater than $3M N/A 0.35% x Taxable Gross Receipts

As noted above, the proposed commercial activity tax would only apply to gross receipts attributable to Louisiana. According to the proposal, the determination of gross receipts attributable to Louisiana would be identical to the determination of the numerator of the Louisiana sales apportionment ratio (for purposes of calculating the corporation income tax). The Tax Reform Proposal notes that gross receipts attributable to Louisiana would include:

  1. Gross rents attributed to real property located in Louisiana;
  2. Gross royalties from real property located in Louisiana;
  3. Gross receipts from the sales of tangible personal property received by the purchaser in Louisiana;
  4. Gross receipts from the sales of all other services if the purchaser or recipient of the service receives the benefit in Louisiana.

Because the determination of gross receipts attributable to Louisiana would be identical to the determination of the numerator of the Louisiana sales apportionment ratio, it appears the guidance related to sourcing sales for Louisiana corporation income tax purposes would also apply to the commercial activity tax.

For a corporation or a limited liability company that has elected to be taxed as a corporation, the commercial activity tax would function similar to an alternative minimum tax. For those taxpayers, the amount of tax liability would be the greater of: (1) the minimum commercial activity tax; (2) the commercial activity tax; or (3) the net corporation income tax due after the application of all credit carryforwards, nonrefundable credits, and (available) refundable credits. For a pass-through entity that is not subject to the corporation income tax with more than $1.5M in taxable gross receipts, the amount of tax liability would be the greater of: (1) the top-tier minimum commercial activity tax (i.e.,$750); or (2) the commercial activity tax.

Governor Edwards also noted that the administration intends to present an additional plan that would mitigate the impact of the commercial activity tax on low-margin businesses. The Governor did not provide specific details on the low-margin business plan, but he indicated that it would create a separate calculation designed to ensure that a business does not pay more than its “fair share.” The Governor did not indicate when he would provide details on his low-margin business plan.

The commercial activity tax proposal is projected to raise approximately $800-900M in revenue, which taken together with the other tax reforms would replace the revenue from the expiring fifth penny. Because the commercial activity tax is intended to replace the revenue from the expiring fifth penny, the proposed effective date is July 1, 2018.

Tax Expenditure Proposals

The Tax Reform Proposal would make permanent the temporary reductions to certain credits and incentives enacted in 2015 and currently set to expire in 2018. The proposal would also allow certain credits and incentives to sunset or expire as scheduled. The reductions to credits and incentives are expected to raise $192.5M in revenue based on fiscal notes from other legislative sessions.

While the tax reform proposal does not discuss specific credits and incentives, legislation enacted in 2015 reduced several corporate income and franchise tax credits for tax returns filed on or after July 1, 2015, and before June 30, 2018. The reduced tax credits included the jobs credit, the corporation income tax credit and credits paid by economic development corporations, regardless of the taxable year to which the return relates.

During the press conference, there was no substantive discussion of the tax expenditure proposals, but the Governor did note that he anticipated changes to the motion picture tax credit in the future. Specifically, Governor Edwards indicated a desire to replace the $180 million/year cap on motion picture tax credit payments with a $180 million/year cap on motion picture tax credits granted. The intention of this proposal is to align the granting and payment of motion picture tax credits so that credits are paid in the same year they are issued. The Governor indicated these changes to the motion picture tax credit would likely be phased-in over time. In informal meetings, Secretary Robinson has suggested that some of the 2015 and 2016 cuts would likely be made permanent.

Sales and Use Tax Proposals

The Governor’s Tax Reform Proposal contains three substantial sales and use tax proposals: (1) removing the “fifth-penny” enacted in 2016; (2) “cleaning” the two remaining “dirty pennies”; and (3) broadening the sales and use tax base to include certain services.

For those unfamiliar with Louisiana’s current state sales and use tax regime, currently, the cumulative state sales and use tax rate is five-percent(5%) and consists of the following components:

  1. The “basic rate” (two percent (2%));[2]
  2. Additional tax (one percent (1%));[3]
  3. Additional tax (ninety-seven hundredths of one percent (0.97%));[4]
  4. Louisiana Tourism Promotion District Tax (three-hundredths of one percent 0.03%);[5] and
  5. Effective for the period April 1, 2016 through June 30, 2018, a one percent (1%) additional tax, referred to as the “fifth-penny”.[6]

At present, Louisiana only levies the sales and use tax on the sale of eight specific services, including, notably, repair and maintenance services and the furnishing of hotel rooms. In addition, the current Louisiana sales and use tax regime contains approximately two hundred (200) sales and use tax exclusions and exemptions. But many of those exemptions and exclusions only apply to the two-percent (2%) basic rate. Those portions of the overall state sales and use tax rate to which all exemptions and exclusions apply do not apply are often referred to as “clean pennies,” although that term is misleading since many exemptions and exclusions still apply.

Removing the Fifth-Penny

To resolve the most recent Louisiana budget shortfall, in 2016, the Louisiana Legislature enacted “La. R.S. Sec. 47:321.1, which increased the cumulative state sales and use tax rate from four percent (4%) to five percent (5%). The so-called fifth-penny is currently set to expire on June 30, 2018. The tax reform proposal would allow the fifth-penny expire, as scheduled, at a cost of approximately $880 million.

“Cleaning” the Two Pennies That Comprise the Basic Rate

As noted above, the two pennies that compose the basic rate are subject to approximately 200 exclusions and exemptions. Governor Edwards’ Tax Reform Proposal would “clean” those two pennies, such that the exemptions and exclusions that apply to those pennies would be identical to those that apply to the other two pennies (that comprise the remainder of the full four percent (4%) sales and use tax rate, after the fifth-penny expires).

As a result of this proposal, certain Louisiana businesses may see an increase in the sales tax they pay on utilities and other business inputs. However, Governor Edwards hinted that certain business inputs, such as utilities used to power manufacturing equipment and related facilities, may remain exempt from the two percent (2%) basic rate. He also indicated that sales and use tax would be imposed upon certain manufacturing machinery and equipment, but that a new rebate may be available for taxes paid on those purchases. Finally, the Governor noted that existing agricultural exemptions and exclusions would be retained.

Cleaning the two “dirty pennies” is projected to raise approximately $180 million in revenue. The permanent repeal of certain sales and use tax exclusions and exemptions to the two pennies would be effective October 1, 2017.

Broadening the Sales and Use Tax Base to Include Additional Services

The Tax Reform Proposal would expand the sales and use tax base by subjecting additional services to tax. According to Governor Edwards, this aspect of the proposal would expand the sales and use tax to services currently taxed in Texas (with the exception of internet access fees). Services currently taxed in Texas that are not subject to tax in Louisiana include cable and satellite television services; credit reporting services; data processing services; information services; insurance services; non-residential real property repair, restoration, or remodeling services; real property services; and security services.

Similar to cleaning the two pennies that compose the basic rate, this expansion of the sales tax base has the potential to levy sales and use tax on certain business inputs, particularly real property and non-residential real property repair services, data processing services, and information services. According to Governor Edwards, expanding the sales tax base to include additional services is expected to generate approximately $200 million in revenue and would be effective October 1, 2017.

 Individual Income Tax Proposals

The Tax Reform Proposal would reduce Louisiana’s individual income tax rates for each of the three tax brackets from two percent (2%), four percent (4%), and six percent (6%) to one percent (1%), three percent (3%), and five percent (5%). However, like the corporation income tax proposal (described above), the reduction in individual income tax rates would be contingent upon Louisiana voters passing a constitutional amendment that would repeal the deduction for federal income taxes paid by the individual. According to Governor Edwards, this part of the proposal would cost the state approximately $42 million in revenue and would reduce the individual income tax liability for ninety-percent (90%) of filers. Nevertheless, Governor Edwards also noted that the inability to deduct federal income taxes would likely increase the Louisiana tax liability for individuals with incomes greater than $140,000.

It is not certain whether voters will approve a constitutional amendment to repeal the federal income tax deduction. As discussed above, in 2016, the last time such a change was put to the voters, the proposed constitutional amendment was handily rejected. Governor Edwards did not indicate when the proposed constitutional amendment would be put to voters but the likely date is November, 2017.

Going Forward

As with any legislative proposal, the “devil is in the details.” While the Governor announced at his press conference the broad outlines of his Tax Reform Proposal, detailed legislation has yet to be filed. Though non-fiscal bills must be pre-filed by March 31, 2017, the deadline for filing fiscal-related bills is April 18, 2017. Though it is likely one or more members of the Louisiana House of Representatives will author and introduce the Governor’s Tax Reform Proposal as a bill prior to the April 11, 2017 convening of the 2017 Regular Session, it is unclear at this time when that bill will be filed.

Implications

As noted above, the Edwards Administration did not provide copies of draft legislation or extensive details on the proposed tax reform package. Therefore, the implications of the proposal are not entirely clear. Nevertheless, it is possible to speculate on some of the most significant potential impacts of the tax reform proposal.

Implications of the Corporate Tax Proposals

The Edwards Administration, citing the Louisiana Department of Revenue, stated that, in 2015, there were 149,000 corporate tax filers in the state and that 129,000 of those filers paid no taxes to the state of Louisiana.[7] According the Governor Edwards, the commercial activity tax is designed to ensure that those 129,000 taxpayers with no corporate income tax liability pay their fair share. What the Edwards Administration did not discuss is the reason why certain taxpayers had no corporate income tax liability.

Due to the slump in the oil and gas industry and other factors, many corporate income tax filers are likely in net operating loss positions. Under the proposed tax reform package, those taxpayers would now pay the greater of: (1) the minimum commercial activity tax; (2) the commercial activity tax; or (3) the net corporation income tax due. It appears this proposal would allow the net operating losses of certain taxpayers, which are reflected as deferred tax assets on their financial statements, to expire unused. The expiration of net operating losses (or the proposed decrease in the tax rate) could reduce the value of deferred tax assets and immediately reduce a taxpayer’s earnings for financial statement purposes. A taxpayer with significant deferred tax assets should model the potential financial statement consequences of the proposed corporate tax reforms and determine the extent to which those consequences may impact its operations.

In addition, there is significant uncertainty in Louisiana about how the Department of Revenue will apply recent changes to the recently-enacted market-based corporate income tax sourcing rules for services. In October 2016, the Department issued proposed regulations related to the new market-based sourcing rules but, as of this writing, it has yet to issue final regulations. Therefore, it is not clear how gross receipts from services will be sourced for purposes of the proposed commercial activity tax.

The proposed commercial activity tax appears to rely on Louisiana’s ultimate destination rule for sourcing sales of services. Strict application of this rule would appear to benefit a corporate income taxpayer that manufactures goods in Louisiana for out-of-state export. In contrast, goods imported into the state for consumption, may be subject to multiple levels of the commercial activity tax. As a result, the proposed tax reforms appear to reallocate the tax burden among industry sectors. When modeling the proposed corporate tax reforms, a taxpayer should carefully consider its supply chain and whether its business inputs may bear one or more levels of commercial activity tax.

Finally, Ohio, upon which the proposed commercial activity tax appears to be modeled, attempts to mitigate commercial activity tax pyramiding by permitting certain related parties to eliminate intercompany transactions. The Tax Reform Proposal gives no indication that Louisiana intends to provide similar relief. Therefore, a taxpayer should assume that any intercompany transactions it engages in may be subject to commercial activity tax. This may result in a significant impact on certain supply chain structures, such as centralized procurement companies, leasing companies, and the reliance on other related parties.[8]

Implications of the Sales and Use Tax Proposals

As noted above, the proposed sales and use tax reforms have the potential to result in the taxation of a substantial amount of business inputs. The taxation of business inputs has the potential to result in tax pyramiding and may adversely impact certain business that cannot pass the cost of the tax through to consumers. Louisiana taxpayers should review the sales and use tax exemptions and exclusions that they rely upon and determine whether the tax reform proposal with repeal those exemptions and exclusions. In addition, a service industry taxpayer should determine whether the services it provides would be subject to tax under Texas sales and use tax law and, if so, how the proposed taxation of services, to be based on the Texas model, would affect their Louisiana business. Affected taxpayers may also want to consider whether they should be proactive and become involved in the legislative process at this time.

It should also be noted that the Governor did not propose streamlining the sales and use tax laws, or taking other action to make the laws more uniform, such as centralized collection for the state and its localities. Therefore, it does not appear that the proposals will remedy some of the most onerous features of the current Louisiana sales and use tax regime.

Implications of Considering Both the Corporate and Sales and Use Tax Proposals Together

At a minimum, the Governor’s proposals create significant additional compliance burdens for some taxpayers. Further, commercial activity taxes are sometimes referred to as “turnover taxes” because the tax burden is imposed on revenues generated by all transactions preceding the ultimate sale to the consumer. Turnover taxes tend to increase the costs of goods and services for businesses which, in turn, increases the cost of goods and services to consumers, and presumably sales and use tax collections on the final sales. As a result, the Governor’s commercial activity tax has the potential to make it more expensive to do business in Louisiana with whatever correlative impact that may have on economic development. Nevertheless, much is still unknown about the Governor’s plan. The Kean Miller State and Local Tax Team will provide additional information when more is known.

For questions or additional information, please contact: Christopher J. Dicharry at (225) 382-3492, Jaye Calhoun at (504) 293-5936, Phyllis Sims at (225) 389-3717, Jason Brown at (225) 389-3733, Angela Adolph at (225) 382-3437, or Willie Kolarik at (225) 382-3441.

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[1] According to Governor Edwards, there are approximately 414,000 businesses in the state. Of those businesses, 389,000 “make less than $1.5 million annually” and “would be assessed a flat $250 tax, rather than the calculation for gross receipts.” Gov. Edwards Unveils Reforms to Stabilize Louisiana’s Budget.

[2] La. R.S. § 47:302.

[3] La. R.S. § 47:321.

[4] La. R.S. § 47:331.

[5] La. R.S. § 51:1286.

[6] La. R.S. § 47:321.1.

[7] Gov. Edwards Unveils Reforms to Stabilize Louisiana’s Budget.

[8] When modeling the impact of intercompany transactions, a taxpayer should also consider whether the purchaser is located in a foreign trade zone because, under current corporation income tax sourcing rules, a taxpayer selling corporeal movable property to a customer who receives the property in a foreign trade zone may exclude the sales from the numerator of its sales factor.

The general rule under Louisiana law has long been that any activity that results in emissions of air pollutants must obtain an air permit from the Louisiana Department of Environmental Quality (LDEQ) unless a specific exemption applies. There are a few broad statutory and regulatory exemptions, such as activities conducted on residential property (with minor exceptions), the distribution or application of pesticides, and emissions from mobile sources such as automobiles, trucks, boats and aircraft, controlled burning of agricultural by-products in the field or of cotton gin agricultural wastes or controlled burning in connection with timber stand management, or pastureland or marshland in connection with trapping or livestock production. The most useful exemption for businesses and non-residential activities has long been the “Small Source Exemption” found in LAC 33:III.501.B.2.d, which exempts any source that emits less than the Minimum Emission Rate of any Louisiana Toxic Air Pollutant and less than 5 tons per year of any single “criteria pollutant” and 15 tons per year of all criteria pollutants in the aggregate.

Until this year, there was no specific requirement for sources exempt from permitting under this Small Source Exemption to document or keep records to verify they met the conditions of the exemption. On March 20, 2017, LDEQ published notice of a final rule amending the Small Source Exemption rule to require that either the owner or the operator of a source claiming exemption under this provision to: 1) make a written determination assessing its maximum potential annual emissions to show the exemption criteria are met; 2) keep such records available for LDEQ inspection; and 3) make a revised determination and document such any time there is a modification to the source or activity that could change the initial calculations, such as an increase in production rate or an increase in hours of operation. When determining the maximum potential emissions, the owner or operator may take into account any physical limitation on the capacity of a source to emit an air pollutant, including air pollution control equipment that is used.

Unfortunately, LDEQ made the rule effective immediately upon promulgation (the March 20, 2017 Louisiana Register publication date), and did not provide a time period for allowing facilities to prepare such documentation. Thus, sources relying on the Small Source Exemption should take steps to prepare such documentation as soon as possible.

A list of the Louisiana Toxic Air Pollutants and their Minimum Emission Rates can be found in Table 51.1, LAC 33:III.Chapter 51.[i] Criteria air pollutants are Volatile Organic Compounds (VOC), Nitrogen Oxides (NOx), Carbon Monoxide (CO), Sulfur Dioxide (SO2), Particulate Matter (PM10 diameter < 10 microns and PM2.5 diameter < 2.5 microns), and Lead. Many sources may need a consultant to assist with preparation of such calculations; however, a standard reference is the Environmental Protection Agency’s (EPA) publication AP-42, A Compilation of Air Emission Factors,”[ii] which provides standard emission factors for a wide variety of commercial and industrial activities and sources. LDEQ does have a Small Business / Community Assistance program which can help to address these requirements (without enforcement action in most cases).[iii]

It should also be noted that there are other specific exemptions from air permitting that may be applicable to individual circumstances. Also, if a source does not qualify for an exemption, there are a wide variety of potentially applicable types of air permits, including minor source permits, standard oil and gas minor permits, portable source permits, temporary source permits, general permits, regulatory permits, and major source permits. If an owner or operator of a source of air emissions determines that it does not qualify for an exemption, it should seek to obtain the appropriate air permit as soon as possible to minimize the potential for and/or magnitude of enforcement action.

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[i] Available at: http://www.deq.louisiana.gov/portal/Portals/0/planning/regs/title33/33v03-201703%20Air.pdf.

[ii] Available at: https://www.epa.gov/air-emissions-factors-and-quantification/ap-42-compilation-air-emission-factors.

[iii] See: http://www.deq.louisiana.gov/portal/tabid/85/Default.aspx.

A 2013 change to Louisiana’s revocatory action now exposes a secured lender’s collateral and guarantees to the risk of avoidance litigation for ten years, up from three years, after the closing date.

Start here if you just asked, “What is a revocatory action?” This post explains how the revocatory action effects multi-party secured loans, and how the 2013 legislative change has only become relevant since August 2016.

The Context

Below is a diagram of a common secured loan structure, where an existing family of organizations borrows money for a newly formed subsidiary to purchase assets.

The loan is supported by upstream and cross-stream security. The signatures and collateral granted by the subsidiaries are “upstream” security grants as they support the parent’s obligations. Each is a “cross-stream” security grant as it supports the other subsidiaries’ obligations. The parent’s obligations and collateral grants are “downstream” as they support the subsidiaries’ loan obligations. Downstream security grants are typically not at risk, because a benefit to one of the subsidiaries increases the value of the parent’s ownership interest in the subsidiary.

Upstream and cross-stream security grants can be annulled where, as in many transactions, the loan does not benefit all loan parties in perfectly equal proportions. Louisiana’s “revocatory action” allows a subordinate creditor to avoid, or “claw back,” an obligation or grant of collateral if it causes or increases the grantor’s insolvency.[1] In the example shown above, the economic value of the loan flows disproportionately to the parent and newly formed subsidiary. Under these circumstances, the upstream and cross-stream security grants increase the liability side of the existing subsidiaries’ balance sheet without a proportionate increase in the value of the assets of those entities. This disproportionate flow of value and liability subjects the upstream and cross-stream grants to annulment in a revocatory action if the grants caused or increased the existing subsidiaries’ insolvency.

Why is a Three-Year-Old Change Relevant Only Since August 2016?

Before August 1, 2016, Louisiana law limited a lender’s avoidance risk to, at most, three years after the closing date. After three years the Louisiana “revocatory action” expired without exception.

On August 1, 2013, the Louisiana Legislature created an exception to the three-year limitations period.  Under the new law, the three-year limitations period does not apply in “cases of fraud.”[2]  The phrase “cases of fraud” is not defined, and courts have thus far skirted the question by interpreting the 2013 legislative change as a substantive change, not procedural.[3] According to that interpretation, the fraud exception only applies to transfers closing after August 1, 2013. Since the three-year limitations periods on those loans began to expire on August 1, 2016, the meaning of “fraud” has become very relevant to bankruptcy trustees and unsecured creditors looking to expand the limitations period to attack loans that closed over three years ago.

As we get further from August 1, 2016, more loans will become subject to litigation over what is a case of fraud.

The Change Adds (at Least) Seven Years and Uncertainty to Avoidance Risk

In effect, the “cases of fraud” exception expands a three-year risk to a ten-year risk for secured lenders. If the three-year peremptive period does not apply in cases of fraud, the general prescriptive period rule in Louisiana provides that “[u]nless otherwise provided by legislation, a personal action is subject to a liberative prescription of ten years.”[4] Moreover, unlike the three-year limitations period which is a peremptive period (which for our non-Louisiana readers is similar to a “statute of repose”), the ten-year prescriptive period is subject to interruption. It takes no imagination to think of the changes that can occur in a borrower’s business over a ten-year period compared to a three-year period. And if that change is negative, a bankruptcy trustee or unsecured creditor will want to attack the upstream and cross-stream grants to the secured lender.

In addition to enjoying an expanded limitations period, bankruptcy trustees and unsecured creditors now enjoy a blank slate in litigating what the Louisiana Legislature meant by “cases of fraud.” Is this a constructive fraud concept or does the plaintiff need to show actual fraudulent intent? As the case law develops on this question, the uncertainty advantages the unsecured creditors and bankruptcy trustees in negotiations with secured lenders.

Extra Diligence to Consider

In light of the heightened avoidance risk in Louisiana, some diligence practices which may have been reserved for larger loan transactions now look more reasonable for smaller loans that involve multiple obligors.

For example, the lender may require a solvency opinion by a financial expert to establish that as of the closing date the upstream or cross stream guarantees did not create or increase the grantor’s insolvency. In addition, a fairness opinion is often used in other jurisdictions to establish evidence that the borrower obtained sufficient value from the loan to support its guarantee or collateral grant. Whether a debtor received equivalent value to its security grant is relevant in jurisdictions that follow the Uniform Fraudulent Transfer Act, but is not particularly relevant to the balance sheet test in a revocatory action. However, because we do not know how courts will interpret “cases of fraud,” a fairness opinion in addition to a solvency opinion may be warranted for transactions subject to Louisiana’s revocatory action for evidence that a particular grant was supported by the particular value of the loan flowing to the subsidiary.

The new exposure also warrants a re-examination of the secured lender’s standard loan documents to ensure that the credit departments understand and are actively conducting the solvency and debt-coverage tests provided in their forms.

More generally, the expanded reach of the Louisiana revocatory action warrants closer scrutiny and diligence expense that was not as critical to preventing transfer avoidance before the legislative change.

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[1] La. Civ. Code art. 2036.

[2] La. Civ. Code art. 2041.

[3] In re Robinson, 541 B.R. 396, 400 (Bankr. E.D. La. 2015); Cotter v. Gwyn, No. CV 15-4823, 2016 WL 4479510, at *12 n.102 (E.D. La. Aug. 25, 2016).

[4] La. Civ. Code art. 3499.

With less than one week on the job, newly-confirmed Secretary of the Interior, Ryan Zinke announced that BOEM will offer 73,000,000 acres of lease space located in the Gulf of Mexico for oil and gas exploration. Proposed Lease Sale 249 is currently scheduled for August 16, 2017, and will include all unleased areas of federal waters in the GOM. The sale will be livestreamed from New Orleans.

This sale is the first under the new Outer Continental Shelf Oil and Gas Leasing Program for 2017-2022 (Five Year Program). The plan includes two GOM lease sales each year, including all available blocks in the combined Western, Central, and Eastern GOM. It is estimated that there are approximately 211 million to 1.118 billion barrels of oil and 0.547-4.424 trillion cubic feet of gas available for production in those available leases. The available land for lease includes approximately 13,725 unleased blocks located between 3-230 miles offshore, and ranging in depth between 9-11,115 feet of water.

Excluded from the lease sale are blocks subject to the Congressional moratorium established by the Gulf of Mexico Energy Security Act of 2006; blocks that are adjacent to or beyond the U.S. Exclusive Economic Zone in the area known as the northern portion of the Eastern Gap; and whole blocks and partial blocks within the current boundary of the Flower Garden Banks National Marine Sanctuary. The full text of BOEM’s press release can be found here.

The current Five Year Program [2012-2017] will have its final lease sale today, March 22, 2017, which includes approximately 48 million acres off the coast of Louisiana, Mississippi, and Alabama comprised of 9,118 blocks. The sale will be livestreamed started at 9 am via BOEM’s website.

On October 26, 2016, the SEC adopted final rules that (1) modernize Rule 147, (2) create a new Rule 147A, (3) amend Rule 504, and (4) repeal Rule 505 (collectively, the “Amendments”). The adopting release can be found here. Several of the significant changes brought about by the Amendments are broadly summarized below.

Modernization of Rule 147 and Creation of New Rule 147A

Rule 147 was adopted in 1974 for the purpose of providing guidance to issuers conducting unregistered offerings under Section 3(a)(11). This section provides an exemption from registration for “[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, of a corporation, incorporated by and doing business within, such State or Territory.”

Rule 147 has not been substantively amended since its enactment. In light of this reality, the SEC noted: “[D]ue to developments in modern business practices and communications technology in the years since Rule 147 was adopted, we have determined that it is necessary to update the requirements of Rule 147 to ensure its continued utility.”[1]

In addition to modernizing the existing Rule 147, the SEC also created a new Rule 147A. The amended Rule 147 and the new Rule 147A “are substantially identical, except that . . . new Rule 147A allows an issuer to make offers accessible to out-of-state residents and to be incorporated or organized out-of-state.”[2]

Given the similarity of the Amendments (except as specifically set forth above) as they relate to existing Rule 147 and new Rule 147A (collectively, the “Rule 147 Amendments”), they will be treated together in this portion of the article. The Rule 147 Amendments can be divided under six headings:

1. Modification of “Doing Business” Requirements

Two significant changes were made to the “doing business” requirements of Rule 147.  First, the Rule 147 Amendments add an alternative “doing business” test based upon the location of a majority of the issuer’s employees.  Under the new “employee test,” an issuer can satisfy the “doing business” requirement by showing that a majority of its employees are based in the state where the offering is being made. This is a relatively straight forward test that, in many cases, will not require a significant amount of analysis.[3]

Second, the Rule 147 Amendments change the relationship of the “doing business” requirements from conjunctive to disjunctive. That is, an issuer no longer has to meet all of the “doing business” requirements. Rather, the issuer now only needs to satisfy one of the “doing business” requirements. This is a significant change that greatly reduces the difficulty of satisfying the existing “doing business” requirements.[4]

2. Addition of “Reasonable Belief” Standard

The Rule 147 Amendments include a “reasonable belief” standard in connection with the issuer’s determination as to the purchaser’s residence. The necessity of the inclusion of this standard is highlighted in the adopting release as follows:

“Under current Rule 147(d), regardless of the efforts an issuer takes to determine that potential investors are residents of the same state in which the issuer is resident, the exemption is lost for the entire offering if securities are offered or sold to just one investor that was not in fact a resident of such state.”[5]

In connection with the inclusion of a “reasonable belief” standard, the Rule 147 Amendments require the issuer to obtain a written representation from each purchaser as to its residence. The receipt of the written representation, however, is not the end of the story. The determination as to whether the issuer has a “reasonable belief” as to the residency of a purchaser is determined on the basis of all the facts and circumstances.[6]

3. Revision of Entity Residence Tests

For both issuing and purchasing entities, the Rule 147 Amendments replace the “principal office” test with the “principal place of business” test for the purpose of determining residency. The “principal place of business” is the “location from which the officers, partners, or managers of the [entity] primarily direct, control and coordinate the activities of the issuer.”[7]

4. Six-Month Resale Limitation

The Rule 147 Amendments make two significant changes to the existing resale limitation in the context of Rule 147 offerings. The current resale limitation is triggered by the termination of the Rule 147 offering and lasts for a period of nine months. The resale limitation adopted by the Rule 147 Amendments is shorted to a six-month period and is now triggered by date of purchase by each purchaser.[8]

It is significant to note that securities issued in reliance upon Rule 147 and Rule 147A are not “restricted securities” under Rule 144(a)(3). Accordingly, the resale of such securities must, as a general matter, only comply with state securities laws.[9]

5. Addition of Bright-Line Integration Safe Harbor

The Rule 147 Amendments adopt a “bright-line integration safe harbor” which precludes the integration of offers or sales of securities made prior to the commencement of a Rule 147 or Rule 147A offering and certain specified offers and sales made after the completion of a Rule 147 or Rule 147A offering.[10]  Of particular note, the Rule 147 Amendments provide that an offer or sale of securities made more than six months after the completion of a Rule 147 or Rule 147A will not be integrated.

6. Disclosure and Legend Requirements 

The Rule 147 Amendments change the mode of the disclosure requirements by allowing the disclosures to be made in the same form that the offer is made.  Thus, if the offer is made orally, the disclosures can be made orally to the offeree at the time of the initial offer. However, every purchaser must be given a written disclosure a reasonable period of time before the actual sale in reliance on Rule 147 or Rule 147A.

The Rule 147 Amendments also provide specific language to be used in connection with the required legend (the existing version of Rule 147 does not provide specific language).

Finally, it should be noted that securities sold under Rule 147 and Rule 147A are not “covered securities” for purposes of the National Securities Markets Improvement Act of 1996 (“NSMIA”) and compliance with applicable state securities law is still required.

The Rule 147 Amendments will be effective on April 20, 2017.

Amendment of Rule 504

The Amendments increase the aggregate amount of securities that can be offered and sold in reliance on Rule 504 during any twelve-month period from $1,000,000 to $5,000,000. The last increase to the maximum aggregate amount under Rule 504 was in 1988 when the cap was raised from $500,000 to $1,000,000.  Further, the adopting release appears to express an openness to raise the cap higher (perhaps $10,000,000 as was suggested by a commenter) after having the opportunity to observe market activity with the new cap.[11]

Prior to the Amendments, Rule 504 did not include a bad actor disqualification provision. The Amendments incorporate by reference the bad actor disqualification provision of Rule 506(d).  The utilization of the same bad actor provision in the context of Rule 504 and Rule 506 is part of the SEC’s overall effort to create a “consistent regulatory regime across Regulation D” and simplify due diligence efforts on the part of issuers.[12]

Like securities sold under Rule 147 and Rule 147A, securities sold under Rule 504 are not “covered securities” for purposes of NSMIA and compliance with applicable state securities laws is still required.

The amendments to Rule 504 became effective on January 20, 2017.

Repeal of Rule 505

Given the increase of the Rule 504 threshold from $1,000,000 to $5,000,000, the SEC repealed Rule 505 because of its belief that it was no longer needed. Even before the amendment to Rule 504, only 3% of Regulation D offerings were made in reliance upon Rule 505.[13]

The repeal of Rule 505 will be effective on May 22, 2017.

Conclusion

As the adopting release noted: “The final rules will primarily impact the financing market for startups and small businesses.”[14]  The Amendments could potentially revitalize and expand the use of Rule 147 and Rule 504 in the context of intrastate and regional offerings, thereby giving smaller issuers more viable options as they seek to raise capital through securities offerings.

Additionally, the revisions to Rule 147 and the enactment of new Rule 147A will likely expand the utilization of intrastate crowdfunding offerings as “most states that have enacted crowdfunding provisions require issuers that intend to conduct intrastate crowdfunding offerings to use Rule 147.”[15]

__________________________

[1]  Exemptions to Facilitate Intrastate and Regional Securities Offerings, SEC Release No. 33-10238, 18 (Oct. 26, 2016). Of note, the release goes so far as to discuss particular disclosure requirements in the context of Twitter or like social media platforms with similar space limitations. Id. at 18-19.

[2]  Id. at 26. It should also be noted that new Rule 147A does not have a limit on the permitted size of the offering.

[3] The adopting release does anticipate potential complications that could arise given the ever-changing and mobile workplace: “[I]f an employee provides services in the Maryland, Virginia and Washington, DC metro area out of the offices of a company in Maryland, the employee would be based in Maryland for purposes of this test.” Id. at 33.

[4]  The SEC noted the onerous nature of the existing “doing business” requirements: “Given the increasing “interstate” nature of small business activities, we believe it has become increasingly difficult for companies, even smaller companies that are physically located within a single state or territory, to satisfy the issuer “doing business” requirements of current Rule 147(c)(2).” Id. at 30.

[5]  Id. at 36.

[6] Id. at 37. The adopting release mentioned several data points that may be of particular importance: (1) an existing relationship between the issuer and purchaser, (2) recent utility bill, (3) pay-stub, (4) state or federal tax returns, (5) identification documentation such as a driver’s license, and (6) information obtained by the utilization of credible databases. Id. at 37-38.

[7]  One nuance of interest (particularly in Louisiana) for purchasing trusts is that a trust in a jurisdiction where trusts are not deemed to be a separate entity will be “deemed to be a resident of each estate or territory in which its trustee is, or trustees are, resident.” Id. at 40.

[8]  Id. at 43-47.

[9]  The adopting release did note the risk of being deemed an “underwriter” or as one participating in a “distribution” if securities are acquired with a view to distribution. Id.at 47.

[10]  Id. at 49-54. The post-sale safe harbors include offers or sales (1) registered under the Securities Act, except as provided in Rule 147(h) or Rule 147A(h), (2) exempt from registration under Regulation A, (3) exempt from registration under Rule 701, (4) made pursuant to an employee benefit plan, (5) exempt from registration under Regulation S, (6) exempt from registration under Section 4(a), and (7) made more than six months after the completion of an offering conducted pursuant to Rule 147 or 147A.

[11]  Id. at 77-78.

[12] Id. at 78.

[13] The empirical data behind this percentage was taken from Form D filings with the SEC from 2009 to 2015. Exemptions to Facilitate Intrastate and Regional Securities Offerings, SEC Release No. 33-10238, 11 & n.22 (Oct. 26, 2016).

[14]  Id. at 88.

[15]  Id. at 91. According to the North American Securities Administrators Association (“NASAA”), as of July 18, 2016, 35 states had enacted crowdfunding statutes. A link to NASAA’s intrastate crowdfunding update can be found here. A link to the NASAA’s Intrastate Crowdfunding Directory can be found here.

Social media use by employees, and employers’ social media policies, continue to appear in the legal headlines.  Much of the recent news coverage has touched on action by the National Labor Relations Board (NLRB) and its assessment of employer social media policies.  However, recent legal action in Pennsylvania does not address the NLRB and its actions, but returns to somewhat traditional litigation.  The Charlotte Observer recently reported on a lawsuit filed by two American Airlines flight attendants who claimed they were subjected to sexual and gender harassment through social media.  The plaintiffs alleged that they reported the conduct to human resources, but that American Airlines failed to take action, and failed to enforce its own social media policy.  Although the allegations include the use of technology as tools of alleged abusive behavior, the underlying employee conduct appears to be typical of the kind of conduct that leads to litigation.  For more on the suit, click here.

In In re Books-A-Million, Inc. Stockholders Litigation, the Delaware Court of Chancery dismissed a suit by minority stockholders (the “Plaintiffs”) alleging that several fiduciaries breached their duties in connection with a squeeze-out merger (the “Merger”) through which the controlling stockholders of Books-A-Million, Inc. (the “Company”) took the Company private.[1]  The decision, authored by Vice Chancellor J. Travis Laster, provides additional guidance regarding the utilization of the business judgment rule in the context of controller buyout.

The MFW Requirements

The default standard of review in the context of a controller buyout is the entire fairness test.[2]  However, the business judgment rule serves as the operative standard of review if the six requirements set forth by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp. (the “MFW Requirements”) are satisfied, namely:

“(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent [and disinterested]; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitely; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.”[3]

Bad Faith and the Second MFW Requirement

In Books-A-Million, the court concluded that all of the MFW Requirements were satisfied. In so doing, the court shed significant light on the second MFW Requirement; namely, that the Special Committee be independent and disinterested.[4]  The most significant contribution of the case was the court’s treatment of the plaintiffs’ allegation of bad faith as a basis for their claim that the second MFW Requirement had not been satisfied. The court acknowledged the novelty of the plaintiffs’ claim by stating the following:

“It is not immediately clear how an argument regarding bad faith fits within the M&F Worldwide framework. The Delaware Supreme Court did not discuss whether a plaintiff could seek to call into question the independence of a director by contending that although appearing independent, the director did not in fact act independently for the benefit of the stockholders but rather in pursuit of some other interest, such as to benefit the controlling stockholder.”[5]

The heart of the plaintiffs’ bad faith claim was the fact that a third-party offer existed that was greater than the controller offer. The third party offer was $0.96 more per share. The court summarized the plaintiffs’ argument as follows: “The Complaint contends that it is not rational for a director to take a lower priced offer when a comparable, higher priced offer is available. Because no one rationally would do that, the plaintiffs contend that the independent directors must have had some ulterior motive for not pursuing [the third party offer].”[6]

In rejecting the plaintiffs’ argument, the court quoted extensively from Chancellor Allen’s analysis in Mendel v. Carroll.[7]  In Carroll, Chancellor Allen distinguished a third-party offer and a controller offer on the grounds of a control premium:

“The fundamental difference between these two possible transactions arises from the fact that the Carroll Family [the controller] already in fact had a committed block of controlling stock. Financial markets in widely traded corporate stock accord a premium to a block of stock that can assure corporate control.”[8]

The court in Books-A-Million applied the control premium concept as follows in relation to the relative levels of the third-party and controller offers:

“On the facts alleged, one can reasonably infer that Party Y’s [the third party] offer was higher because Party Y was seeking to acquire control and that the Anderson Family’s [the controller] offer was lower because it took into account the family’s existing control over the Company.”[9]

In a footnote, the court cited several sources establishing recognized control premiums and signaled that control premiums falling outside of an acceptable range could potentially give rise to an inference that a company’s fiduciary duties acted in bad faith. [10]

Application of the Business Judgment Rule

Given the satisfaction of each of the MFW Requirements, the court utilized the business judgment rule as the operative standard of review. The utilization of the business judgment rule, as is typically the case, was the death knell for the plaintiffs. The court went so far as to say that: “It is not possible to infer that no rational person acting in good faith could have thought the Merger was fair to the minority. The only possible inference is that many rational people, including the members of the Committee and the numerous minority stockholders, thought the Merger was fair to the minority.”[11]

Conclusion

While Books-A-Million is helpful on several points, the case breaks new ground on the treatment of a bad faith claim within the MFW Framework.  Controllers and their counsel should take note of the importance of any control premium falling within the acceptable range cited by the court; namely, from 30% to 50%. Any premium in excess of the range cited could potentially expose a corporation’s fiduciaries to an allegation of bad faith, thereby triggering the entire fairness test as the operative standard of review.

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[1] C.A. No. 11343-VCL, slip. op. (Del. Ch. Oct. 10, 2016, available here.

[2]  Id. at 16 (citing Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997)).

[3]  88 A.3d 635, 645 (Del. 2014).

[4]  The plaintiffs did not contest the satisfaction of the third, fifth, and six MFW Requirements. The court’s analysis in the context of the first and fourth MFW Requirements do not advance any new ground and, therefore, are not discussed in this brief article.

[5]  Books-A-Million, C.A. No. 11343-VCL, slip op. at 23.

[6]  Id. at 25-26.

[7]  651 A.3d 297 (Del. Ch. 1994).

[8]  Id. at 304.

[9]  Books-A-Million, C.A. No. 11343-VCL, slip op. at 34.

[10]  Id. at 35 & n.16.

[11]  Id. at 42.

On February 28, 2017, the EPA received a petition from the “RMP Coalition” for reconsideration and a request for a stay from the amendments to the RMP rule. The RMP Coalition consists of several affected industry trade groups, manufacturing groups, and the Chamber of Commerce of the United States of America. The petition asserts that:

  • the Local Emergency Planning Committee (“LEPC”) disclosure requirements are open ended, will result in a significant security risk, and that EPA failed to give notice that it may alter the final rule being open-ended;
  • the EPA changed the third-party audit criteria to include an arbitrary trigger that is subject to the whims and imagination of an agency, and EPA did not properly notice or address this change;
  • the EPA did not include information on its cost-benefit findings as required by Michigan v. EPA, 135 S.Ct. 2699 (2015);
  • the scope of the three year audit was expanded to include all covered process without providing notice of the change or the rational;
  • the EPA failed to explain claimed statutory authority to expand the rule;
  • numerous supporting documents were not available during the comment period; and
  • the EPA should reconsider the amendment “in light of the revelations that the West, Texas, incident was an intentional act.”

On March 13, 2017, Scott Pruitt, Administrator of the EPA, convened a proceeding for reconsideration of the RMP rule amendments and signed a letter that administratively delayed the effective date of the rule for 90 days.

As with any change in administration, this is a time of uncertainty.  One example is the rights of transgender individuals to access certain restrooms in the workplace, which, based on recent events, will likely continue to be a source of uncertainty for many employers.

Federal law does not expressly prohibit discrimination based on transgender status.  Title VII is the federal employment law that prohibits discrimination based upon “sex” (among other protected characteristics).  The EEOC and some courts have interpreted “sex” under Title VII to include “gender identity.”  Under that interpretation, transgender individuals could be protected under Title VII.  Other courts have refused to adopt an expansive interpretation of “sex” and have left it to Congress to create transgender employee protections legislatively.

A case filed by a transgender male student against the Gloucester, Virginia school board over his use of the boys’ restroom, G.G. ex rel. Grimm v. Gloucester Cty. Sch. Bd., was on the trajectory to provide guidance on the issue of restroom access.  Grimm filed suit seeking to use school restrooms that aligned with his gender identity, rather than the restroom that corresponded with his birth sex.  Additional background information regarding the Grimm case can be found here.  Grimm is not a Title VII case, but concerns a different federal law, Title IX, which governs protections for students and employees in educational settings.  Although different laws, courts often look to Title VII to interpret Title IX, and, at times, vice versa.  Therefore, many predicted a decision in the Grimm case would have ripple effects into the employment arena and implications beyond restroom access issues.

However, on Monday, the Supreme Court announced it would not hear the case, and the case was sent back to the lower court.  That announcement came in the wake of a February 22, 2017 joint memorandum issued by the Department of Justice and the Department of Education, which revoked the Obama administration’s federal guidelines on transgender students’ use of restrooms.  As a result, the case law remains unsettled.  Employers should be aware of how the courts in their jurisdiction(s) interpret Title VII, as well as any state laws, regarding transgender rights and structure their policies and practices accordingly.

On March 14, 2016, Environmental Protection Agency (“EPA”) proposed changes to the Risk Management Plan Program (“RMP”) Rule . On January 13, 2017, the EPA published a new final rule.  This is the final article in a series that addresses five major changes: root cause analysis for near misses, third-party audits, inherently safer technology, emergency response, and availability of information. The subject of this discussion is the changes to the emergency response preparedness requirements.

In proposing extensive additions to §68.210, the EPA concluded that Local Emergency Response Committees (“LEPC”) and the public needed additional information about covered facilities and that rule should mandate automatic submission and posting of such information. Instead, the revised rule facilitates the transmission of information to those that request it.

During the comment period, LEPC’s insisted that they neither had the capacity to accept the mandated submission of information nor ever had difficulty acquiring the information they needed. As a result, as part of the emergency response coordination  revisions, LEPCs may request any relevant information. The discussion of relevant information in this section of the preamble pretty well follows the list given in the discussion of the emergency response section:

The LPEC or local emergency response officials may request such as accident histories, portions of incident investigation reports relevant to emergency response planning, incident investigation reports, records of notification exercises, field and tabletop exercise evaluation reports, or other information relevant to community emergency planning.

The EPA then adds:

For example, this may include requesting information on changes made to the facility that affect risk such as incorporating safer alternatives.

82 Fed. Reg. at 4667.

Similarly, rather than requiring that a faculty distribute specific chemical hazard information to the public, owners and operators must notify the public of the availability of such information. See 40 C.F.R. 68.210(c). Among the advantages touted for this approach was that the facilities would be informed about who requested the information (at least the initial recipient). The information available through such requests is limited to “only information that could improve community awareness of risk.” 82 Fed. Reg. at 4669. EPA explicitly rejected comments that Safer Technology and Alteration Analysis (“STAA”), incident investigations, and third party audit reports should also be available to the public.

The revised rule requires that facilities must hold a public meeting follow an incident that meets the accident reporting criteria found in §68.42 (five year update criteria). Information communicated during the public meeting includes the same information included in the five year accident history (e.g., on and offsite impacts, root cause, etc.), as well as the information listed in §68.210(b) that is already available upon request. This public meeting must occur within 90 days of such an incident.

Finally, the EPA also added a requirement that RMPs shall be available to the public consistent with 40 CFR Part 1400. This appears to be little more than a cross reference to notify the public that RMPs are available in federal reading rooms.

On January 26, 2017, the EPA delayed the effective date of several regulations, including these changes to the RMP rule. Whereas this rule is now expected to go in effect on March 21, 2017, this rule is subject to Congressional Review Act and could be undone by that process.