Business and Corporate

By: R. Chauvin Kean

Generally, a contract is the law between parties, which has long been the position of the U.S. Supreme Court. However, as most well know, this principle is not without limitation. On January 15, 2019, in New Prime v. Oliveira, the Court unanimously held that disputes concerning contracts of employment involving transportation workers engaged in foreign or interstate commerce cannot be compelled to arbitrate. 586 U.S. —, 4, 2019 WL 189342, at * — (2019). Also, despite strong, express language in an agreement ordering the parties to arbitrate any of their disputes, a court – not the arbitrator – is the appropriate forum to review and decide the applicability of the Arbitration Act to any contract.

The Federal Arbitration Act declares that an express arbitration clause in a maritime transaction involving commerce shall be valid and enforceable provided the Act does not further limit its application. 9 U.S.C. §§ 1 – 2 (West 2019). However, §1 declares that “nothing contained [in this Act] shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1 (West 2019). Specifically, the Court in New Prime resolved a longstanding issue of whether a “contract of employment” concerned any type of contract for work (such as one involving independent contractors) or only those contracts between an employee – employer. The Supreme Court affirmed the First Circuit’s ruling that in 1925, at the time of the Act’s inception, “contract of employment” was not a term of art; it was a phrase used to describe “agreements to perform work” and was not limited to agreements only between employees and employers as a modern jurist might first think.

New Prime provides two important lessons: first, no contract provision – however ironclad – is immune from court oversight and interpretation. Parties to a contract may attempt to limit their litigation exposure, but cannot be immune from all possibilities, especially when they try to contract around statutes. New Prime is a great example of limited application of a broad federal statute, which, even though is favored by the courts, is limited by Congress. Second, New Prime provides greater clarity in the realm of contracts for work relating to transportation workers. Any “contract for employment” concerning workers engaged in foreign or interstate commerce cannot be contractually compelled into arbitrations regardless of contractual provisions that state otherwise. New Prime, 586 U.S. at 15. It’s also worth noting that the type of workers engaged in foreign or interstate commerce has vastly expanded over time as our society grows further connected. Thus, companies should be mindful that even though contracts of employment might attempt to limit litigation through arbitration provisions, a court may not be inclined to order the parties into arbitration based on New Prime and the employee’s/independent contractor’s scope of work.

By Edward H. Warner

Yesterday (March 25, 2014), the Supreme Court heard oral arguments in Sebelius v. Hobby Lobby Stores, Inc. (“Hobby Lobby”) and Conestoga Wood Specialties Corp. v. Sebelius (“Conestoga”), two consolidated cases which challenge requirements under the Affordable Care Act (“ACA”). Specifically, each case involves private companies that challenge the federal health care law’s mandate that employee health plans provide no-cost coverage for birth control products. Why do they challenge the mandate? Because the owners’ faith-based beliefs are in opposition. While ordinarily corporations are separate entities from their owners, these owners will confront that theory by asserting that their personal religious principles shape their businesses. The Court will have the difficult task of determining whether profit-making companies are “persons” entitled to First Amendment Protections and the right to exercise religious freedom under the Religious Freedom Restoration Act (“RFRA”).

Why is business structure relevant?

One factor that the Court will likely consider is the business corporate structure. The corporate form offers several advantages to owners, not the least of which is limited liability. Fundamental to owner’s limited liability is that a corporation remains a separate entity, with distinct rights and obligations from the owner. This separateness has resulted in at least two U.S. Circuit Courts of Appeals decisions stating that the separate corporate entity is not a “person” capable of religious exercise in the sense that RFRA intended. These decisions will make it hard for the company’s lawyer to argue that the owner’s religious beliefs and religious exercise is the same as that of the company’s.

How is the Court likely to rule?

There are many moving parts in the case; however, the Court’s ruling ultimately depends on whether it is willing to grant an exemption and extend religious rights to for-profit corporate entities. The Supreme Court has already extended free speech rights to corporations in its 2010 decision in Citizens United. The two current cases before the Court represent the federal circuit split on the religious rights issue. If the Court agrees with the original Hobby Lobby decision from the Tenth Circuit Court of Appeals, then the Court will hold that even profit-making businesses can act according to faith-based beliefs, and these beliefs may control enforcement of the birth control coverage mandate. If, on the other hand, the Court agrees with the Conestoga decision from the Third Circuit, First Amendment religious rights of the owners will have no bearing on the company’s compliance with the mandate. The latter holding would confirm the narrow view that when owners choose the corporate form for their business entity, they create an entity that stands apart from their personal beliefs and interests.

What are the legal implications of this ruling?

One thing is for certain, if the Court rules that these companies are exempt from the ACA’s contraceptive mandate, it will be a profound constitutional shift. A corporation will no longer just be a separate entity; it will be a “person,” with its own religious beliefs. Such a ruling would further extend the Court’s holding in Citizens United.

If you wish to listen to the Supreme Court oral arguments online, you may do so once they are posted at the link here.
 

By Michael D. Lowe

On February 12, 2014, President Obama followed up on comments made during his State of the Union address and signed an Executive Order increasing the minimum wage for employees of federal contractors. The Order, which increases the minimum wage from $7.25 to $10.10 per hour, covers all employees who perform services or construction work under new contracts, subcontracts, and replacements for existing contracts. The effective date of the Order is January 1, 2015, and mandatory application will begin with solicitations for covered contracts issued on or after the effective date. However, the Order also “strongly encourages” all federal agencies “to take all steps that are reasonable and legally permissible” to comply with the Order prior to the effective date.

The minimum wage is set at $10.10 per hour for 2015 and will thereafter be adjusted by the U.S. Secretary of Labor to reflect inflation. Tipped employees of federal contractors and subcontractors must receive a minimum of $4.90 per hour and a guaranteed $10.10 per hour through the combination of tips and wages. The Order also requires covered employers to increase to $10.10 per hour the minimum wage of disabled individuals who, pursuant to a special certificate program under the Fair Labor Standards Act, receive less pay because of a disability that affects their productivity.

While the White House estimates that the Order will affect hundreds of thousands of people who work under contracts with the federal government, industry groups have noted that existing legislation already requires most federal contractors to pay a prevailing or negotiated wage that is often higher than $10.10 per hour. The Order is still seen as a major step towards an increase of the federal minimum wage and may very well put pressure on private employers. Legislation has already been introduced in both houses of the U.S. Congress to increase the federal minimum wage from $7.25 to $10.10 per hour over the next several years and to tie future increases to inflation.

The Order instructs the U.S. Secretary of Labor to issue more detailed regulations concerning the new minimum wage requirements by no later than October 1, 2014. In the meantime, employers who are parties to federal contracts or subcontracts should begin preparing for increased labor costs beginning in January of 2015.

By Andrew H. Goodman

For most startups and emerging companies, fundraising continues to be challenging. With the passage of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), Congress tasked the Securities and Exchange Commission (the “SEC”) with revamping federal securities laws to make fundraising more accessible for small companies in attempt to help create jobs. Recently, the SEC has implemented and proposed new and revised securities laws to achieve this mandate. While not all of these rule changes make life easier for small companies seeking to raise capital, some of the rules do potentially provide new fundraising alternatives for small companies. Companies and investors should also be aware that certain new rules impact established practices and, predictably, there are new pitfalls to avoid. This post briefly introduces some of the recent developments in unregistered offerings and provides some key takeaways for companies and investors to consider.

Background: The JOBS Act

As a reference point, the JOBS Act consists of the following five parts or Titles: Title I is the so-called “on-ramp” to the initial public offering (“IPO”) process for emerging growth companies that introduced certain relaxed disclosure and audit requirements (this topic is not covered in this post); Title II tasked the SEC to promulgate rules to lift the ban on general solicitation in effect under existing private placement exemptions; Title III created an exemption for crowdfunding offerings; Title IV tasked the SEC with improving the Regulation A offering exemption; and Title V increased the limit on the number of shareholders a company may have before it triggers public reporting requirements.

Traditional Regulation D Private Placements

Companies seeking to raise capital through the offer and sale of securities must either register the securities offered with the SEC under the Securities Act of 1933 (the “Securities Act”) or rely on an exemption from registration. Historically, when small companies raised funds from private investors in unregistered offerings, such offerings were generally conducted as private placements exempt from registration under Rule 506 of Regulation D under the Securities Act, which allows an unlimited amount of capital to be raised from an unlimited number of accredited investors (and up to 35 sophisticated non-accredited investors).(1)  One of the requirements of former Rule 506, now revised Rule 506(b), is that a company cannot engage in general solicitation or advertising in connection with the offering.

Continue Reading Jumper Cables: Recent Developments in Securities Laws Aim to Boost Small Company Fundraising

By Brian R. Carnie

On February 10, 2014, the Treasury Department released final regulations on the employer mandate provisions under the Affordable Care Act (a.k.a. Obamacare). While the final rules retain much of what was outlined in the proposed regulations issued in December 2012, the most significant news is the additional one-year delay for certain covered employers with respect to the potential penalties (the “no offer penalty” and/or the “unaffordability / lack of minimum value penalty”).

Here are some of the major takeaways:

  • Applicable large employers that have fewer than 100 full-time employees (including full-time equivalents) in 2014 will not be subject to either employer penalty in 2015 if they meet certain conditions. One such condition is that the employer is prohibited from reducing the size of its workforce, or the overall hours of service of its employees, in 2014 to qualify for this transition relief. There are also limitations on changes the company can make to its previously offered group health coverage for the rest of 2014.
  • All covered employers can avoid the “no offer” penalty in 2015 if they offer employer-sponsored coverage to at least 70% of their full-time employees in each calendar month in 2015 (and any calendar month during the 2015 plan year that extends into 2016 for non-calendar year plans). Beginning in 2016, the employer must offer such coverage to at least 95% of its full-time employees to avoid the “no offer” penalty. Notwithstanding the limited transition relief under this paragraph, the company still would be subject to the individual unaffordability / lack of minimum value penalty in 2015 if it has one or more full-time employees receive premium assistance on the exchange because either they were one of the ones not eligible for coverage, or such coverage was not affordable to them due to their household income, or the coverage did not provide minimum value.
  • The final rules contain additional transitional relief for non-calendar year plans. Most employers with non-calendar year plans now have until the start of their 2015 plan year, rather than January 1, 2015, to bring their plans into compliance to avoid assessment of the employer penalties, and the conditions for this relief are expanded to include more employers.
  • For employers who have not previously offered dependent coverage, there is also a delay in the requirement to offer coverage for dependent children to 2016 as long as the employer is taking steps to arrange for such coverage to begin in 2016.

Applicable large employers with 100 or more full-time employees or FTEs who are assessed a “no offer” penalty in 2015 will get the benefit of a reduction in the monthly penalty for 2015 and any applicable transition relief period into 2016, in that the payment is calculated by reducing the total number full-time employees by 80 (instead of just 30) multiplied by 1/12 of $2,000. If the employer is a member of a controlled group, the company will not get the entire additional 50 full-time employee deductible but rather the member’s allocable share of 80.

The final rules also contain exceptions for various categories of employees such as volunteers, adjunct faculty and seasonal employees, provide further details and guidance on the affordability safe harbors and the safe harbor for determining full-time employee status, and significantly shorten the length of the break-in-service required before a returning employee may be treated as a new hire for purposes of group health coverage.

In the coming months the IRS is expected to issue additional guidance about the employer reporting requirements, among other issues.

To read the full version of the IRS’ final rules, click here
 

By Matthew C. Meiners

In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, the Delaware Court of Chancery held that in a merger under Delaware law, privilege over the absorbed corporation’s communications with its counsel, including those relating to acquisition by the surviving corporation, pass to the surviving corporation.

The case arose from a suit filed by Great Hill Equity Partners IV, LP, et al. (the “Buyer”), alleging that former shareholders and representatives of Plimus, Inc. (the “Seller”) fraudulently induced the Buyer to acquire Plimus, Inc. (“Plimus”). Plimus was the surviving corporation in the merger.

After the Buyer brought the suit, a full year after the merger, it notified the Seller that, among the files on the Plimus computer systems that the Buyer acquired in the merger, it had discovered certain communications between the Seller and Plimus’s then-legal counsel regarding the transaction. During that year, the Seller had done nothing to get these computer records back, and there was no evidence that the Seller took any steps to segregate these communications before the merger or excise them from the Plimus computer systems. Additionally, the merger agreement lacked any provision excluding pre-merger attorney-client communications from the assets of Plimus that were transferred to the Buyer. Nonetheless, the Seller asserted the attorney-client privilege over those communications on the ground that it, and not the surviving corporation, retained control of the attorney-client privilege that belonged to Plimus for communications regarding the negotiation of the merger agreement.

Continue Reading Ownership of Attorney-Client Privilege Following Merger

By Matthew C. Meiners and Linda Perez Clark

The Supreme Court of Louisiana, in Ogea v. Merritt, 2013 WL 6439355 (La. 12/10/13), provided guidance regarding the personal liability of members of an LLC, reversing a lower court decision and finding a member of an LLC not personally liable for damages resulting from that member’s performance of a contract in the name of the LLC.

Travis Merritt, the sole member of Merritt Construction, LLC, signed a contract with Mary Ogea to build a home on an undeveloped parcel of land owned by Ms. Ogea. After problems with the foundation became apparent, Ms. Ogea filed suit against the LLC and against Mr. Merritt individually. Following trial, the district court rendered judgment against both Mr. Merritt, personally, and the LLC “in solido” for various items of damages. The district court found that Mr. Merritt personally performed some of the foundation work and failed to properly supervise the subcontractor who actually poured the concrete, providing grounds for Mr. Merritt’s personal liability. The court of appeal affirmed, but the Supreme Court then granted a writ to address the extent of the limitation of liability afforded to a member of an LLC.

Continue Reading Personal Liability of Members of an LLC – Louisiana Supreme Court Provides Guidance

By Michael J. deBarros

A few weeks ago, in a piece entitled “Thorny Roses: Interns and Potential Wage Liability”, I wrote about PBS talk show host, Charlie Rose, and his production company’s $250,000 settlement of a class-action lawsuit brought by a former unpaid intern who claimed minimum-wage violations. On Monday, the assault against unpaid internships continued when a former intern filed a putative class-action lawsuit against Warner Music Group and Atlantic Records, alleging minimum-wage violations. This new lawsuit comes fresh off the heels of a judgment in Glatt v. Fox Searchlight Pictures, Inc., which gave deference to the U.S. Department of Labor’s six criteria and held that Fox Searchlight Pictures violated minimum wage and overtime laws by not paying interns who worked on production of the movie “Black Swan.”

Although the recent spate of unpaid internship cases has been largely confined to the media industry, the cases set a precedent that could eventually ripple outward to other companies and fields – especially since the six criteria employed by the Department of Labor broadly apply to all “for-profit” private sector internships. As law firms representing the unpaid interns have indicated, more and more inquiries are flooding in from interns interested in filing similar suits. Accordingly, employers should take a hard look to ensure that their internship programs are in compliance with the law.
 

On April 11, Kean Miller’s Merger & Acquisition team will present a business briefing In Through the Out Door:  Preparing for Your Business Exit Opportunity.  The program will be held from 3:15 – 6:00 PM at the Baton Rouge office of Kean Miller LLP (II City Plaza, 400 Convention Street, 7th Floor, 70802).

The program will provide an in-depth briefing on closely-held, private company mergers and acquisitions.  Attendees will learn about business and legal challenges of an exit strategy, key issues to be aware of, and the risks and rewards in preparing for, marketing, structuring and executing an exit sale of a business.

Speakers include Kean Miller attorneys Dean Cazenave, Blane Clark, Linda Clark, Andrew Goodman, Ed Hardin, Matthew Meiners, Mark Mese and Carey Messina.

Click here for the invitation.

If you are interested in attending, please RSVP to rsvp@keanmiller.com or 225.389.3753.

By A. Edward Hardin, Jr.

“What is in a name? That which we call a rose. By any other name would smell as sweet . . .”

-William Shakespeare, Romeo and Juliet

Roses aside, classifying someone as an “employee” or an “independent contractor” (or rather misclassifying them) can have significant effects. The misclassification of employees as independent contractors is the focus of a U.S. Department of Labor Wage and Hour Division enforcement initiative. The DOL and the IRS have joined forces and signed a memorandum of understanding that will allow the sharing of information across the two agencies in an effort to improve compliance. More importantly, the Louisiana Workforce Commission has likewise entered into an agreement with the DOL to establish “a collaborative relationship to promote compliance…"  For more information on the enforcement initiative and other states who have signed similar agreements with the DOL click here

The potential cost of misclassification of employees as independent contractors can be high. For example, the DOL recently obtained a $1.3 million consent judgment against a technology company that had misclassified employees as independent contractors. So, what is in a name (or classification) can be very important.